January 3, 2007

Cash Flow Break Even and Free Cash Flow positive seem to be hot topics, and there seems to be some confusion over what Sirius is reporting vs. what XM intends to report. This article is intended simply to clarify what each company is guiding to, and what that guidance means.

First to clarify what the two companies are reaching:

Sirius

Sirius reached Cash flow Break Even in Q4, and has guided to be CFBE for 2007. In simple terms CFBE, as the name insinuates, is a function of cash flow, and is the point at which a company is generating cash, and thus the need for additional debt or dilution gone.

CFBE includes all cash related activity on the balance sheet. It includes interest payments, marketing costs, capital expenditures, etc. After all the dollars are paid out, and all of the dollars are in, if you have a 0 balance you are at CFBE. If you have money left you are Free Cash Flow Positive.

Sirius reached true CFBE (including capital expenditures)

XM

XM has used a few terms, but they all mean the same thing. CFBE excluding capital expenditures is the same as Operational Cash Flow positive. XM Satellite radio recently launched a satellite, and as you might imagine, the costs associated with this activity are substantial. The launch of a satellite falls under the category of capital expenditures.

The launch of a satellite is not a typical event, and can skew a balance sheet very quickly. What XM is guiding to is that they will be Free Cash Flow positive with the exclusion of capital expenditures which included an out of the ordinary event of a satellite launch. While the statement I just made is long winded, it reflects what XM has guided to.

The fact that XM will be Free Cash Flow Positive From Operations or CFBE Excluding Capital Expenditures is very good news for the company and its investors. Should XM announce that they indeed reached this goal (which most everyone expects), it should be well received.

The point here is to offer clarity in what is being reached by these companies, in hopes that people better understand what is being referred to. It is quite easy for a satellite radio company to expend substantial money in capital expenditures, and were an investor to confuse whether or not capital expenditures were included could be a very bad mistake.

Now, there are some who state that reaching such goals is not a big deal. This could not be further from the truth. CFBE is a big deal, and maintaining CFBE is a HUGE deal (a lot of people place valuations of a company on cash flow analysis). As these companies progress into 2007, investors should look for narrower losses, and the maintaining of CFBE. There could well be a quarter where CFBE is missed (there are build cycles, and different quarters carry different expenses), but overall, if the companies are headed in the proper direction, things should continue on the road to profits.

There are many things to consider on the balance sheet that impact CFBE, and some wonder why Sirius is there with fewer subscribers than XM. There are several factors, such as debt and interest payments. XM has 1 billion in debt as compared to 500 million for Sirius. ARPU needs to be considered. The structure of content and OEM deals need to be considered. Revenue share needs to be considered, etc. At the end of the day however, you either have money left or you don’t.

After a tough 2006, SDARS investors should welcome Sirius's CFBE and XM's anticipated Free Cash Flow Positive From Operations.

1/03/2007 10:55:00 PM

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