XM Can't Catch a Break

As expected, XM Satellite Radio (Nasdaq: XMSR  ) produced another quarter of heady growth for the March period. Also as expected, XM keeps giving shareholders a few more reasons to worry.

In its first-quarter earnings, XM held up well. Revenue more than doubled to $208 million, but the quarterly deficit widened a bit. This quarter's $0.60 a share exceeded last year's $0.58-per-share showing, despite that period's smaller share base. The results were better than expected on the top line, but fell short on the bottom.

Last quarter's cause for concern -- soaring acquisition costs -- was thankfully reined in. The company's subscriber acquisition costs fell from $89 a head in the December quarter to just $62 in March. That was still above the $52 mark the company achieved a year earlier, but today's new listeners are also paying 30% more a month for their service.

That increase in fees helped the company grow revenue by 102%, despite having just 72% more total subscribers year over year. That figure also needs a little more clarification, since subscriber growth at XM has slowed significantly since rival Sirius (Nasdaq: SIRI  ) landed Howard Stern. During the first quarter, XM's net subscriber growth clocked in just 5% higher than the 541,140 satellite radio buffs it signed up in the March quarter of 2005.

Having Sirius sign up more new subscribers than XM for two straight quarters isn't a heartbreaker. Now that Stern is off terrestrial radio and firmly entrenched in the paying Sirius community, XM still expects to sign more new subscribers over the next three quarters than Sirius. XM has 6.5 million subs at the moment, and it's still looking to close out the year with 9 million accounts and positive operating cash flow.

As usual over the past few months, it wouldn't be XM without a little uncertainty. Yesterday, XM got a double whammy of gray clouds. First, the FCC announced that its tests of the Delphi XM SKYFi2 found that it wasn't in compliance with emission standards. Then the FTC chimed in with concerns over the company's billing and marketing practices.

XM can't seem to catch a break these days. It does something right -- like restructuring its debt to reduce its interest-expense exposure -- only to follow up a questionable move like syndicating the majority of its Opie & Anthony radio show to the same CBS (NYSE: CBS  ) Radio that it was so close to vanquishing.

Will XM catch a break? Even when it has its fingers in something promising, like a significant stake and programming alliance with international satellite radio player WorldSpace (Nasdaq: WRSP  ) , it gets bitten; the WorldSpace IPO tanked last year.

I recommended shares of XM to Motley Fool Rule Breakers newsletter service subscribers last year, and it hasn't panned out. There's still a great story here to tell, above and beyond the near-term hiccups. I just wish XM would get a little better in telling it.

XM is an active recommendation in the Rule Breakers newsletter service. The stock is trading lower, but that isn't the norm with the stock-selection service. The average pick is up 27.8%, while the S&P 500 has mustered a mere 6.7% average advance in that time. See for yourself with a 30-day guest pass.

Longtime Fool contributor Rick Munarriz has been a Sirius satellite subscriber since 2004, but he does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.