# XM director warns of crisis, shares plunge



## tsmacro (Apr 28, 2005)

XM Satellite director warns of crisis, shares plunge 



Thursday February 16, 11:37 AM EST 


By Franklin Paul

NEW YORK (Reuters) - A director stepped down from XM Satellite Radio Holdings Inc. (XMSR) and warned the company would face a cash crisis if it didn't cut spending, XM said on Thursday, as it reported a wider quarterly loss on higher expenses.

XM said in a regulatory filing that Pierce Roberts had disagreed with other board members over how to balance subscriber and revenue growth against profitability.

Just last week, XM signed Oprah Winfrey to host her own channel on the satellite radio service in a $55 million deal aimed at battling smaller rival Sirius Satellite Radio Inc. (SIRI), which in January launched a show by ribald radio host Howard Stern.




Analysts said the resignation highlights a key problem faced by subscription-based companies: whether to spend heavily to gain a critical mass of monthly subscribers, or to make profitability the primary goal.

"The resignation carries obvious headline risk -- the stock is down heavily," said Sanford Bernstein analyst Craig Moffett. "But (it) does not mean that the strategy chosen by XM management is incorrect."

Shares of XM were down $1.52, or 6 percent, at $23.73 in late morning trade on Nasdaq.

XM, which has almost twice as many subscribers as Sirius, reported its cost of attracting additional subscribers rose by 39 percent in the fourth quarter.

XM posted a fourth-quarter loss of $268.3 million, or $1.22 a share, compared with a loss of $188.2 million, or 93 cents per share, a year earlier.

Analyst had expected a loss of 92 cents a share, according to Reuters Estimates.

Revenue rose to $177.1 million, from $83.1 million. Wall Street, on average, had expected revenue of $174 million.

The results were hurt by higher programming and marketing costs. Weak sales of cars with built-in satellite radios, due to higher gas prices, also hurt results. 

CEO SAYS GROWTH STILL THE FOCUS

Both XM and Sirius are growing rapidly in a nascent market, but losing money as they spend heavily on technology and entertainment such as celebrity hosts to win new subscribers.

XM's three-year deal with Oprah pales next to Sirius' five-year, $500 million deal with Howard Stern.

Undeterred by Roberts comments, XM Chief Executive Hugh Panero told a conference call for analysts and investors that the company will move forward with its subscriber growth plan.

"Our overall focus in 2006 is to continue driving rapid growth in a cost-effective manner," he said. "The company has put in place all the elements necessary to reach profitability and at least 20 million subscribers by 2010."

XM said it added over 898,000 subscribers in the quarter and now has more than 6 million. It expects to reach 9 million users by the end of 2006.

XM said its subscriber acquisition cost rose to $89 per subscriber in the quarter, compared with $64 one year ago. Panero said the higher cost was an aberration.

"These increases were primarily due to higher marketing expenses to meet a one-time competitive event in the fourth quarter," Panero said in a statement.

Panero did not mention Howard Stern directly, but analysts had anticipated that XM would have to work hard to match Sirius' marketing push leading up to Stern's January debut.

XM is scheduled to launch the new channel "Oprah and Friends" in September and will include a weekly show hosted by the nationally syndicated TV talk show host.

Panero said XM expects a more routine market environment in the first quarter, now that the run-up to Stern's launch has ended, and projected subscriber acquisition costs will decrease in 2006. Overall, the company sees subscription revenue of $860 million for the full year, up from $503 million in 2005.

XM shares have fallen 19 percent since it reported third-quarter results in October. Over the same period, Sirius shares are nearly flat.

Sirius is expected to report its quarterly results on Friday.

Roberts, who had been an XM director since August 2000, is chairman of Telephia Inc. and a prinicpal at Mill Road Capital, according to XM's 2005 proxy statement. He was a managing director of AEA Investors from 1999 to 2003, and was previously the head of the telecoms investment banking group at Bear Stearns.


©2005 Reuters Limited.


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