I'm going to shoot myself in the foot, but I won't be the only one hopping mad. I argued in favor of XM Satellite Radio
I could keep going, but why give my opponent, Adrian Rush, any more ammo? I'm starting this week's duel in the hole, and the one question that has to be burning in your throat is fairly simple: What does it matter if you shoot yourself in the foot, Rick, since you're only firing blanks?
Fair question. You're not going to believe my answer.
Mope is a four-letter word
With seven million subscribers (and growing), I'm not about to admit defeat in today's bout or last year's contest. In electoral terms, I'm the candidate who is well behind in the popular vote count but refuses to concede defeat.
It starts with the 14 million eardrums. It gets louder from there.
Sure, XM is losing a ton of money, but even pessimistic analysts expect the company's deficit to narrow this year with further improvement come 2007. Because a lot of that red ink isn't in the form of actual cash outlays, the more important milestone may be this December quarter, as XM is looking to turn cash flow positive on an operating basis.
I have to point to the future when talking about XM's potential, but you're already seeing some tangible improvements in the company's financial statements. The argument that I've made often -- because of XM's high fixed overhead and low variable costs, the profit-producing power on the other end of the break-even point is a more important time to focus on than these deficit-saddled days -- is starting to crystallize.
Investors didn't think much about the company's most recent quarter, but let's dig deeper into a few of the line items.
| Q2 2006 | Q2 2005 | % Change | |
|---|---|---|---|
| Revenues | $227.9 | $125.5 | 82% |
| Customer Care & Billing expenses | $26.4 | $18.5 | 43% |
| Satellite & Terrestrial expenses | $11.6 | $10.5 | 11% |
| Broadcast & Operations expenses | $14 | $10.3 | 36% |
Compare the first row (the company's top-line growth) to lower increases in the company's expenses in several key areas. If you think the disparity is becoming clear with 7 million subscribers today, imagine what it will look like in five to seven years when the company is looking to have more than 20 million paying customers.
XM's growth has slowed. Rival Sirius has the momentum over the past three quarters. However, Sirius commands more than $2 billion more in market cap than XM. Besides, it's not as if this is a battle to the death between these two companies that now command a collective audience of nearly 12 million subscribers. DirecTV
The sounds of sales, man
Naturally, consumers will pay a premium for televised content over digital audio, but where is the ceiling for satellite radio? It wasn't $9.95 a month for XM when it bumped its rate 30% higher last year. It's unlikely to be the current price of $12.95 in the future.
Last week, I also explored many of the other revenue streams that will flow stronger for XM in the future. Efficient gains in limited radio advertising and the wide open spaces of online advertising, content syndication, and value-enhancing initiatives like video feeds and e-commerce will break this story wide open. All of these things will factor into a top line that will easily grow quicker than the tripling of subscriber growth in a few years. A lot of XM's future is in higher-margin opportunities that will make the company's bottom line grow even faster.
It's not easy to tune into the XM that I'm streaming. There's too much static these days, especially from disappointed investors who have seen their shares decimated since peaking late in 2004, despite more than doubling its subscriber base in that time.
I'll be the first to agree that XM has been one of the more frustrating Motley Fool Rule Breakers newsletter recommendations. However, investing isn't about conceding defeat if a company remains fundamentally superior to other market alternatives.
These aren't blanks I'm firing. They're potent, timed charges just waiting to go off.
Think you're done with the Duel? You're not! Go back and read the other three arguments, and then vote for a winner.
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 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.
