Wednesday, December 27, 2006

Subscribers or CFBE - Which Carries More Weight?

December 27, 2006

Christmas has passed, and New Years is fast approaching. At this time last year all of the chatter was about how many subscribers Sirius and XM were going to announce at CES. In fact, there was also a lot of chatter about CES.

This year differs, and that could perhaps be very good news for the sector. The attention to subscribers and hype of new products has shifted to the financials, and is a sign of a maturing company.

Lowered subscriber guidance from both satellite radio companies took the shine off of that category, and expectations of investors seem to indicate that both equities will hit their respective ranges.

In the third quarter of this year both satellite radio equities were able to announce narrower losses, and it looks as though that may well be the beginning of a new trend for the sector. The fact that people are now anticipating this, as well as Cash Flow Break Even (CFBE) means that these companies need to perform well in these areas. Investors need to have confidence that the business model for satellite radio is not a cash drain, but a cash creator.

Both Sirius and XM have publicly announced that they anticipate reaching CFBE this quarter, but as with many things, there are differences in what the statement means.

Sirius anticipates CFBE with the inclusion of capital expenditures. XM anticipates CFBE with the exclusion of capital expenditures. True CFBE falls in the method Sirius is using, but that should in no way take away from what XM is stating. Part of XM's capital expenditures tie to payments for their recently launched satellite, and thus the CAPEX for XM has a substantial impact that will not be seen in future quarters or years. For their part, Sirius has plans of launching a satellite in a bit over a year, and there will be financial impacts as that date approaches. However, Sirius will have the benefit additional subscribers and revenue at that point, and thus should be able to maintain CFBE. Both companies are sitting in good positions in terms of CFBE.

Investors should be aware that CFBE does not mean profits. Profits typically follow CFBE by 12 months to 18 months. CFBE does mean that the company can operate without having to borrow money or dilute the stock. This should be a welcomed event for this sector, and goes a long way towards proving the viability of satellite radio. Whether you are invested in Sirius, XM, or both, these financial metrics will go a long way in showing that the sector as a whole can do well.

Does all of this mean that subscriber no longer matter? NO. The subscriber numbers will still be watched. There is a lot happening with satellite radio, and the financial metrics are closely tied to subscribers. It is very important that these equities continue to gather subscribers, and illustrate growth in this category. Subscribers mean quite a bit, but it is now that investors are beginning to look at what a subscriber truly means to these companies.

12/27/2006 09:13:00 AM

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