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XM Satellite Radio Stock Falls 5 Percent

Posted on: Friday, 17 February 2006, 00:00 CST

By Richard J. Dalton Jr., Newsday, Melville, N.Y.

Feb. 16--XM Satellite Radio's stock fell 5 percent yesterday after the company lost more money than analysts expected and lost a director, too, over disagreements about the company's direction.

XM, the largest satellite-radio company, with 6 million subscribers, posted a net loss of $666.7 million in 2005, compared with a loss of $642.4 million the previous year.

The loss comes as revenues more than doubled to $558.3 million last year, up from $244.4 million the previous year. The fourth-quarter loss also rose to $268.3 million, up from $188.2 million a year earlier.

Part of the loss came from ramped-up marketing, especially in the fourth quarter as rival Sirius gained attention for last month's debut of Howard Stern.

"XM was aggressively trying to hold its own in the face of competition in the quarter," said James Goss, media and entertainment analyst with Barrington Research, a broker based in Chicago.

The large expenditures worried XM board member Pierce Roberts, who resigned yesterday, warning of a "significant chance of a crisis on the horizon."

"For some time I have made my analyses and observations known in an increasingly vociferous manner to the Board and a number of senior managers of the Company," Roberts wrote in his resignation letter to chairman Gary Parsons on Monday.

In a conference call with analysts and the media, Parsons said the board believes it's worthwhile to spend the extra money now to build up the subscriber base. "In essence, this is a balancing act," he said.

He said the company could reach positive cash flow "as soon as we pull back on the accelerator" and should reach it for the fourth quarter of this year and for all of 2007.

Parsons and analysts said the differences of opinion between Roberts and other board members were understandable -- more a matter of philosophy.

"From what we can tell, this is nothing more than a reasonable disagreement among reasonable people," said Craig Moffett, senior cable and satellite analyst for Sanford C. Bernstein, an investment research and management company.

Industry analyst Matt Kleinschmit, vice president of Ipsos, a market research company in Manhattan, said the spending is justified to lure subscribers. "It's a part of them ramping up and getting to an economy of scale where they can actually make money."

A more disconcerting issue, Moffett said, is that fewer car buyers with factory-installed XM radios are continuing to subscribe to the service after the promotional period ends.

Just 54 percent of customers retained the service last quarter, compared with 59 percent a year earlier.

"More than any one figure, that's the figure that's going to determine just how big this market is over the long term," Moffett said. "We're trending toward more and more of the industry coming from radios that are factory-installed in new cars. Are you going to get 60 percent of those customers to sign up as subscribers, or is the number going to be closer to 50, or is it going to keep going lower?"

XM shares closed at $23.98, down $1.27, or 5 percent, on Nasdaq.

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XMSR,

Source: Newsday, Melville, N.Y.

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