It's a pretty good sign that your stock has hit rock-bottom when the company reports bad news and the shares shrug it off and inch upward anyway.
That's how things went on Thursday for XM Satellite Radio
Sure, revenues soared 82% higher to hit $228 million when analysts were expecting only a 77% improvement. That number was mostly the result of year-over-year subscriber growth of 56% and the 30% price hike it instituted during the spring of 2005.
The losses continue, naturally, but XM is still confident that it will achieve positive cash flow on an operating basis by the final quarter of 2006. The trend should continue for 2007 on the whole.
So far, so palatable. No one is looking for satellite radio to grow into a fat-margin breeding farm for a few years. Cynics may argue that it will never get there. The rub in yesterday's report came with the announcement that XM is looking to close out the year with 7.7 million to 8.2 million subscribers.
To place that in its proper perspective, we need to take a three-minute tour of the company's growth trajectory in the past. No flash photography, please.
The ups and downs of XM
Through the summer of 2005, XM was growing at a torrid pace. Stepping up to the podium to discuss subscriber trends often meant ratcheting up expectations to higher user targets.
Momentum slipped over the holidays, just as Howard Stern was gearing up to start his five-year stint at rival Sirius
That's the reason yesterday's move to scale back subscriber targets didn't really catch the market by surprise. A few weeks ago, after Sirius posted more net subscriber additions than XM did for the third straight quarter, I was skeptical of XM's already lowered year-end subscriber target.
Here is what I wrote at the time:
Anyone with a calculator and a penchant for train wrecks can see that XM may let us down one more time. Back in May, XM announced that it intended to close out the year with 8.5 million subscribers. It had originally planned to end 2006 by lapping the 9 million mark.
On the other hand, Sirius expects to wrap up the year with 6.2 million subs. In other words, over the next six months, XM expects to land 1.6 million more net new users, with Sirius projecting just 1.5 million net new subscribers.
How? If the baseball-charged second quarter didn't do it, how will XM outmuscle Sirius when the playing fields of choice go from diamonds to gridirons? XM will have "its Oprah moment" in a few months, but that's a wild card, since Oprah's emphasis will remain with her syndicated television show.
What would it take for XM to avoid another heartbreak? Will next month's earnings report bring that 8.5 million year-end target to a round 8 million, or will the announcement come in early October instead?
Well, XM ripped the Band-Aid off sooner rather than later. Thankfully, it's been ripping other bandages off quickly to let the healing process start sooner. This past week alone, it made nice with ASCAP on the music side and let the market know that it's not afraid to rattle the executive ranks by stripping CEO Hugh Panero of one of his hats and naming Nate Davis president and COO.
Maybe it is different this time
I was probably at my harshest in taking XM to task on Monday in a somewhat scathing commentary. All I wanted, I guess, was five minutes in the XM boardroom. I wouldn't have said a single word. I just would have brought in a boom box, held it over my head Cusack-style, and let Twisted Sister's "We're Not Going to Take It" ring out. I was just sick and tired of watching XM let itself be bullied by competitors like Sirius or terrestrial radio without putting up much of a fight.
The way things had been going at XM over the past few months, any change would have likely been a change for the better. It had become a shell of its former self, no longer the first mover that was the early favorite. That favored status was back when it landed content-distribution deals through major outlets -- including Stock Advisor picks Starbucks
I'm not sure when XM jumped the shark, but this week has that twinkle of a spark behind a company that may have gotten its groove back. We're now fewer than two months away from Oprah's debut on XM, and the company has a realistic subscriber-acquisition target. I was brutally early in recommending XM to subscribers of the Motley Fool Rule Breakers growth stock newsletter service. But now that XM has lapped the 7 million mark, landing more than 100,000 new listeners in the sleepy month of July, 7.7 million net subscribers sounds awfully reachable as we head into the critical holiday selling season. Let's just hope that the reshuffled marketing department can be aggressive for a change.
It's time to rock, XM. Turn up the volume and stop letting us down.
XM is an active recommendation in theRule Breakersnewsletter service. The stock is trading significantly lower today. You're welcome to read the original buy report and participate in the active XM discussion board -- where Rick and his fellow Fools hang out -- with a free 30-day pass to access all of the newsletter's content services, including a lively subscriber-only discussion board.
Longtime Fool contributor Rick Munarriz has been a Sirius satellite subscriber since 2004 and an XM subscriber since this spring. 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 theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.