XM Marks the Soft Spot

XM Satellite Radio (Nasdaq: XMSR  ) is taking Howard Stern "Siriusly," and that has translated into a wider fourth-quarter loss and the defection of a director concerned about the company's direction.

XM shares opened 8% lower this morning after the fast-growing satellite radio service provider posted a loss of $1.22 a share. That was deeper into the red than the $0.93 per share it had lost in the final quarter of 2004, and the $0.92 a share deficit that analysts were expecting.

The top line was strong, though. Despite closing out the quarter with less than the 6 million subscribers it had projected this past summer, revenues grew 113% higher to $177 million. That was the result of an 84% spike in subscribers and a 30% price hike on new subscribers back in April. In sum, the top line came in $3 million ahead of Wall Street's target for the company.

Why did the company miss its mark? In anticipation of Stern's arrival at Sirius Satellite Radio (Nasdaq: SIRI  ) , XM ramped up its holiday marketing expenditures. It didn't necessarily work. Sirius still wound up signing up more new users this past quarter, despite having less than half as many subscribers as XM going into the period.

The company sees the higher marketing expenses, which resulted in higher customer acquisition costs, as a one-time event. Now that Stern has settled into his satellite radio home and is no longer the same kind of media magnet, XM expects to ease back down on the marketing front. It is committed to producing positive operating cash flow by the final quarter of 2006, targeting more than 9 million total subscribers by year's end.

That apparently wasn't enough to soothe Pierce Roberts, a director who sent out an email resignation on Monday after voicing his frustration at the company's fiscal shortcoming.

Pierce isn't alone. Chuck Saletta felt the same way back in November when he wrote, "Thanks in large part to the talent bidding war between XM and archrival Sirius, costs are out of control."

Terrestrial radio heavies like Clear Channel (NYSE: CCU  ) , Viacom (NYSE: VIA  ) , and Cumulus (Nasdaq: CMLS  ) may get a chuckle out of XM's predicament, but the continuing migration of the most rabid radio listeners to the satellite radio format is no laughing matter.

XM coming through on its promise to turn cash flow positive by the end of the year will help silence some of the critics. Last year, I recommended the stock to Rule Breakers subscribers, knowing that red ink was going to be the norm during the early days of the satellite radio land grab. I remember folks coming down on Netflix (Nasdaq: NFLX  ) a year ago when it was ramping up its marketing budget. It has paid off in the long run. Now is the time to forge the ties with loyal early adopters. With Stern spending much of late December and early January on an intensive media run, XM needed to remind consumers that satellite radio is still a choice between two providers.

If XM is still spending this much on acquiring new subscribers by the time the second quarter rolls around, despite having Major League Baseball as an effective selling tool and being a few months removed from Stern's publicity, then I would worry.

But not yet. Pierce may have had a fair point about keeping costs in check, but I think he bailed too early.

Netflix is a Motley Fool Stock Advisor pick. XM Satellite Radio is a Rule Breakers pick. Check out our suite of newsletters and take a free 30-day spin with the one that best fits your investing style.

Longtime Fool contributor Rick Munarriz is a Sirius subscriber, and he owns shares in Netflix. The Fool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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