By
Chuck Saletta
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More Articles
November 10, 2005
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Pardon my yawn at XM Satellite Radio's (Nasdaq: XMSR ) subscriber milestones. When you're starting from a low base, any growth looks phenomenal. What matters is the sustainability of the growth and the growth rate. Looking at the company's compound annual subscriber growth rate, those numbers appear significantly less impressive:
| Year |
Subscribers |
Y/Y % Change |
| 2001 |
27,733 |
N/A |
| 2002 |
347,159 |
1151.79% |
| 2003 |
1,360,228 |
291.82% |
| 2004 |
3,229,124 |
137.40% |
| 2005(*) |
5,034,602 |
100.10% |
(*) Through September. Comparison based against equivalent 2004 dates.
XM's growth rate is slowing. Its base of existing subscribers makes each additional subscriber less meaningful. It's only natural for a maturing company's growth to slow. The question is, now that XM is scaling up, can it convert its customer base into profits? The answer is a resounding "no" thus far. Take a look at some key data from this most recent quarter, compared to year-ago levels:
|
Q3 2004 |
Q3 2005 |
Y/Y % Change |
| Subscribers |
2,516,023 |
5,034,602 |
100.10% |
| Subscription Price |
$9.99 |
$12.95 |
29.63% |
| Operating Profit |
($100,580,000) |
($109,553,000) |
8.92% |
| Net Profit |
($120,143,000) |
($134,018,000) |
11.55% |
I'm not excited by a company that managed to double its subscribers, substantially raise its prices, yet still somehow increase its operating and net losses. Thanks in large part to the talent bidding war between XM and archrival Sirius (Nasdaq: SIRI ) , costs are out of control. No amount of growth can rescue a company whose strategy seems to be based on the old Saturday Night Live joke "We lose money on every sale, but we make it up on volume."
Pipeline companies like Kinder Morgan (NYSE: KMI ) (NYSE: KMP ) (NYSE: KMR ) have mastered the art of turning high-fixed-cost barriers to entry into cold, hard cash for shareholders. XM has not mastered that discipline. Until the economics start radically improving, my money is staying far away from XM's shares.
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At the time of publication, Fool contributor Chuck Saletta owned shares of Kinder Morgan Management. The Fool has a strict disclosure policy.
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