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A rough day XM wishes it could tune out

Investors punish the satellite radio service after it reports a big loss and loses a director.

Associated Press
Published February 17, 2006

NEW YORK - As rapidly growing startup businesses, no one expects XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. to turn a profit right away. But as the race between these bitter rivals drags on, investors' willingness to continue paying for their huge losses could be wearing thin.

On Thursday, XM delivered a double dose of bad news to Wall Street, reporting a bigger-than-expected loss because of mounting subscriber-acquisition costs and the abrupt departure of a director over disagreements on strategy. In his resignation letter, Pierce Roberts Jr. warned of a looming "crisis" unless major changes are made, saying: "I cannot be part of the solution, and I will not be part of the problem."

Investors, who had become less enamored of XM during the past year, punished the company's stock Thursday, sending the shares down $1.27, or 5 percent, to close at $23.98 in heavy trading on the Nasdaq Stock Market, where they touched a new 52-week low of $22.94. Sirius' shares fell 17 cents, or 2.9 percent, to $5.65, on the Nasdaq.

Roberts didn't go into detail about his concerns in the letter, and a representative said he declined to comment. But the company said Roberts had pressed for tighter cost controls, a position the company and others disagreed with, favoring instead efforts to continue XM's heavy cultivation of subscribers.

XM's chairman, Gary Parsons, said the company's directors and managers think "the balanced growth strategy that we have set for the company is the right one to ensure XM's long-term value."

In noting the departure of Roberts, Merrill Lynch analyst Laraine Mancini said in a note to investors that XM's cost management had been a concern of hers.

"We hope that an insider disagreement could force a shift in strategy," she wrote.

XM, which is the larger of the country's two satellite radio operators, lost $270.4-million in the fourth quarter, or $1.22 per share, after dividends for preferred stockholders. In the same period a year earlier, the loss was $190.4-million, or 93 cents per share.

Analysts surveyed by Thomson Financial had expected a much narrower loss of 92 cents per share. Revenue more than doubled to $177.1-million from $83.1-million. Unlike traditional radio companies, XM and Sirius make almost all of their money from subscription fees instead of advertising.

Investors were concerned with a big jump in the net average cost that XM incurs for adding each subscriber, which rose to $141 in the quarter from $104 in the same period a year ago. Those figures include marketing expenses.

Company officials said the jump was unusual, saying they expected those costs to fall significantly as advertising spending declines. In the fall, XM was going up against the imminent arrival of hugely popular shock jock Howard Stern at rival Sirius.

XM continued to spend heavily to pay for its expansion. Overall marketing costs almost doubled in the quarter to $196.5-million, and costs for programming more than tripled to $30.6-million.

XM and Sirius are locked in a fierce and expensive battle to line up listeners and programming for their pay-radio services, which cost about $13 a month and require a special receiver. Both offer dozens of channels of talk and news and commercial-free music.

Both have racked up significant financial losses, signing big-ticket contracts for programming with Stern, Major League Baseball, talk show host Oprah Winfrey and others.

Like Sirius, XM relies heavily on capital markets to pay for its aggressive expansion efforts, and analysts cautioned that any disruption to the willingness of investors to stay on board could have serious consequences.

"They have been in a startup mode for a very long time and have been in a negative cash flow mode for a very long time," said Heather Goodchild, chief media analyst at the Standard & Poor's debt rating agency. "If the capital markets became less receptive, you could envision the music stopping and not enough chairs being there."

The ratings company ranks XM's debt CCC+

, seven levels below investment grade. It rates that of Sirius CCC, one level below.

For the full year, XM posted a loss, after preferred dividends, of $675.3-million, or $3.07 per share, compared with $651.2-million, or $3.30 per share, last year. Revenue rose to $558.3-million from $244.4-million.

XM said it had more than 5.9-million subscribers at the end of 2005, up 84 percent from a year earlier, and said its total had risen to more than 6-million in the first week of January. Sirius has said it has more than 3-million subscribers. It is expected to report its earnings for the quarter today.

XM's chief executive officer, Hugh Panero, said the company expects to reach profitability from its operations by the end of this year, with subscription revenue reaching $860-million. He said he expects to have 9-million subscribers by the end of the year.

[Last modified February 17, 2006, 02:15:35]

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