XM Posts Wider Losses on Spending to Combat Howard Stern Threat
Pierce (Jack) Roberts’s resignation Thurs. from the XM board overshadowed impressive company gains in revenue and subscribers in Q4 and annual results. At the same time, as XM spent heavily in the quarter to counter Howard Stern’s Jan. 9 debut at rival Sirius, XM subscriber acquisition costs (SACs) and costs per gross addition (CPGA) took significant hits.
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For Roberts -- an outspoken fiscal conservative on XM’s board since 2000 and the former head of Bear Stearns’ telecom investment banking group -- the year-end results appeared to bring long-simmering frustrations to the surface. XM Chmn. Gary Parsons said as much when he told analysts Roberts resigned over “concerns” he had expressed “for some period of time” that the company was spending too heavily for rapid subscriber growth, at the expense of generating “more immediate positive cash flow.”
Not all XM board members shared Roberts’ frustrations, Parsons said. But disagreements within the board about the “balancing act” between spending for faster growth and holding the line on costs to improve cash flow typify “the differing opinions we hear when we visit investors at large,” Parsons said. “We clearly understand that the company can turn strongly positive on a cash basis as soon as we pull back on the accelerator. But we also understand that adding significant assets and enterprise value comes with every subscriber that we add” -- as long as it’s done on “economically rational terms,” Parsons said. He conceded that though XM grew its subscriber count strongly in Q4, “we failed to do so as economically as we had expected or planned to.”
XM added over 2.7 million subscribers in 2005, finishing the year with 5.9 million -- an 84% increase from a year earlier. XM expects to surpass 9 million subscribers this year and is on track to exceed 20 million by 2010, the company said. CEO Hugh Panero said subscription revenue is expected to reach $860 million in 2006, which would represent a 71% increase from the $502.6 million recorded in 2005. XM expects to achieve positive cash flow by year-end, Panero said.
XM’s quarterly net loss widened 43% to $268.33 million . EBITDA losses for the quarter also widened 43%. In a veiled reference to Howard Stern’s arrival at Sirius, XM said the SAC and CPGA increases were from higher marketing expenses “to meet a one-time competitive event” in Q4. XM said it expects “a more normalized market environment” in first quarter and projects that SAC and CPGA will fall in 2006.