This morning's uninspiring quarterly report from XM Satellite Radio
Thankfully, XM is still growing in popularity. Revenue climbed 20% to hit $287 million. The company closed out the quarter with 8.57 million subscribers, 19% more than the 7.19 million accounts a year ago. However, a look at that growth is telling.
The real growth for both XM and Sirius has come from automakers producing more cars equipped with satellite radio receivers. The number of subscribers coming from factory-installed systems has climbed 37% at XM over the past year.
That's a sharp contrast to the mere 8% retail growth spurt that XM is seeing in aftermarket sales. On the upside, someone who buys a new car and pays up for satellite service after the free trial ends is likely to stick around for a few years. Churn improved at XM during the period.
The downside to the automakers' dependence is that we still don't know how loyal these subscribers will be. When the time comes to trade in that car for a new model, will they just accept the satellite-radio receiver that comes standard with the new car? It's a bit more of a choice when someone walks into a consumer electronics store like Best Buy
A merger with Sirius won't necessarily perk up enthusiasm at the retail level, but lower costs definitely would help out XM's sickly bottom line. If someone told you several years ago that XM would have nearly 8.6 million subscribers and still not be profitable, you probably wouldn't have believed it. This was supposed to be a scalable business. With most of its operating costs fixed, it was supposed to be as easy to beam satellite radio to 10 million subscribers as it would be to 10,000. Incremental subscriber growth was supposed to drip to the bottom line like globs of chunky gravy.
It hasn't panned out that way. Programming costs are high. Carmakers aren't rubbing the tummies of XM and Sirius for free. Ad revenue on the commercialized channels has come in at paltry levels. In short, it costs a lot of money to run a satellite radio company. We're still waiting for the payoff.
XM and Sirius would have a combined base of more than 15 million subscribers. The annualized savings could be in the billions. If allowed to combine, the new company promises to have lower-priced plans. That could open up the market to radio fans who find it hard to justify a monthly $13 subscription when they have portable players that are fed fresh content by Apple
So how important is this merger? XM was starting to post narrower losses leading up to this morning's report. If XM is simply getting sloppy, complacent that the deal will be approved, we could view this costly quarter as a blip. However, if the deal is nixed, investors had better hope that XM is ready to mold itself into the stand-alone company that it should have excelled at being 8.6 million subscribers ago.
Tune into related Foolishness:
XM Satellite Radio is a former Rule Breakers stock pick. The newsletter recommended that subscribers sell the stock last year, sparing investors a precipitous drop since then. A free 30-day trial will shed some light on the rise and fall of the stock's potential. Best Buy is a Stock Advisor selection.
Longtime Fool contributor Rick Munarriz subscribes to both XM and Sirius but does not own shares in any of the stocks 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.