From Better to Worse at XM

This morning's fourth-quarter report out of XM Satellite Radio (NASDAQ:XMSR) is a lot like listening to satellite radio as you drive through a tunnel or walk into the heart of a thick building. You get tiny earfuls of bliss wedged between big pockets of lackluster reception.

On the upbeat side for the quarter, losses narrowed, subscriber-acquisition costs dipped, and revenue moved 45% higher to hit $257 million.

Ready for the bad news? Well, it starts with the red ink. The company's bottom line for the quarter was a loss of $263 million. Even if a third of that amount is attributable to a series of one-time charges and preferred stock items, you still hate to see a company lose almost twice as much as it made on the top line, on the way down. The target for generating positive cash flow on an operating basis is now being bumped to 2008.

We can probably forgive XM its near-term losses. Short-term pain for long-term gain, right? However, there is a troubling trend developing, with XM looking to close out the year with between 9 million and 9.2 million subscribers.

As companies mature, growth rates are supposed to decelerate, but XM's net additions are falling on an absolute basis. The 9 million target also stings because it was the high end of the company's expectations for 2006, before the bottom fell out of the retail market.

Sirius (NASDAQ:SIRI) has proved to be a fierce competitor, but the problems run deeper than that. Keep in mind that XM continues to gain more automaker installations. General Motors (NYSE:GM) and Honda will combine to install 2.45 million XM receivers in new cars this year. Why is XM's target so much lower? Well, not all new-car buyers will keep the subscriptions going after their free trials run out. You also have the cancellations. In the ideal case, those are just satisfied XM listeners swapping an old GM car for a new one. In the more troubling cases, they're just folks who no longer see the value in paying nearly $13 a month for satellite radio.

The planned merger with Sirius should help on several fronts, though regulatory approval appears dicey. Come back on Thursday, when Tim Beyers and I will argue both sides of the proposed nuptials in a special Dueling Fools edition.

Until then, the real duel will consist of XM fighting for that elusive positive cash flow. After all, XM can't count on Mel Karmazin to be the answer to all of its burning questions.

XM is a former recommendation in the Rule Breakers newsletter service. To find out why it's been dropped from the list, take a free 30-day trial today. You'll also get access to the list of stocks that are still current picks, along with the research and analysis behind each one.

Longtime Fool contributor Rick Munarriz has been a Sirius satellite subscriber since 2004 and an XM subscriber since 2006. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.