Stronger Signals for XM

The satellite-radio broadcaster reported a narrower fourth-quarter loss and said it achieved positive operating cash flow

Coming on the heels of the blockbuster merger agreement inked last week between XM Satellite Radio (XMSR) and Sirius Satellite Radio (SIRI), XM reported improved financials for the last quarter. On Feb. 26, XM announced a narrower fourth-quarter loss on a 45% jump in revenue. One other milestone: XM said it achieved positive cash flow from operations in the fourth quarter.

"2006 was a pivotal year for XM," said XM CEO Hugh Panero in a Feb. 26 press release. "The automobile market is emerging as a key catalyst for satellite radio's future growth", as the company expands its business with the big automakers who add its satellite radios to their vehicles as optional equipment. "Our financial metrics are heading in the right direction as marketing costs have declined and our revenues have increased."

XM's total revenue of $257.1 million for the quarter was significantly higher than the $177.1 million total a year earlier. XM reported an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) loss of $69.8 million for the fourth quarter of 2006, vs. an adjusted EBITDA loss of $172.9 in the 2005 period. The company chalked up the improvement in the EBITDA figure to the increase in subscribers, growth in subscription margin, and lower marketing costs. The company posted a net loss for the 2006 fourth quarter of $256.7 million, which included $79 million in non-cash items.

The company added 442,679 net subscribers in the quarter, down from 898,315 a year earlier. XM added 1.696 million new net subscribers in 2006 for a total of 7.629 million subscribers at yearend 2006.

Another bit of good news for XM: Lower costs for signing up new customers. Fourth-quarter subscriber acquisition cost was $70 compared to $89 in the year-earlier period.

According to XM's Feb. 26 release, XM and Sirius still expect the merger to be completed by the end of 2007. Investor hopes are high, as shares of both companies rallied on optimism that the transaction will result in lower costs and put the merged entity on a faster road to profitability. But regulatory hurdle remain, and well-financed competitors in other delivery formats loom (see, 2/21/07, "Satellite Static: The XM-Sirius Merger").

Analysts' opinions were divided on XM's Feb. 26 news. Standard & Poor's equity analyst Tuna Amobi lowered his opinion on the shares to sell from hold. He expects more softness in the company's retail channel, though he sees a "potentially major 2008" ramp-up of business to auto maker customers. Amobi still sees less than a 50-50 chance of regulatory approvals for the Sirius merger. "With a meaningful takeover premium likely unwarranted," the analyst cut his 12-month target price by $7 to $13. (S&P, like, is a unit of the McGraw-Hill Cos.)

But Cowen analyst Tom Watts was much more upbeat. In a Feb. 26 note, the firm found "better financial metrics on every front" for XM. "While merger controversy may hold back appreciation in the near-term, we expect 46% outperformance" of the stock over the next 12 months, he said.

Regarding the proposed merger, Watts thinks the Justice Dept.'s industry concentration issues are "addressable." Watts noted: "FCC concerns about concentration of spectrum holding should be able to be addressed by the alternative means of delivering similar programming, although this issue presents a higher hurdle."

Investors appear to be biding their time on XM and Sirius until the merger's fate becomes clearer. In Nasdaq trading Feb. 26, XM shares dipped 1.1% to $14.93. Meanwhile, Sirius shares stayed put at $3.74.

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