XM Curdles as Churn Comes to Light

Investors are suddenly picking up some troubling signals from XM Satellite Radio (XMSR).

The Washington, D.C., pay radio broadcaster and 2003 market favorite posted seemingly solid first-quarter financial figures Thursday, including a threefold year-over-year sales increase. But Wall Street's enthusiasm was tempered by disclosure of a stealthy and unhealthy subscriber-departure trend.

There's little question that many drivers, particularly new car buyers, are willing to pay $10 a month for 120 channels of radio programming. XM, after all, expects to have nearly 3 million customers by year-end. The nagging issues for investors are how much cash it will take to keep subscribers coming in the door and, more pointedly, how many will stay after XM paid so much to attract them.

"It's a high top-line growth company," says Rodman & Renshaw analyst Dan Ernst. "I just don't know if it's worth $8 billion," he added, referring to the company's enterprise value, or market cap plus debt. Ernst has a sell rating on the stock and neither the analyst nor his firm has any XM investment position.

Shares of the radio broadcaster fell 8% Thursday, while satellite rival Sirius (SIRI) dropped 5%.

At first glance, subscriber losses seem like a nonissue at XM. After all, the company reported Thursday that, on average, a mere 1.35% of its subscribers canceled service each month in the first quarter.

But like the pro forma profit calculations of yesteryear, this so-called churn number can be a slippery critter. The number is calculated at the company's discretion and, as critics point out, can include whatever numbers executives choose.

This latest wrinkle was exposed on a conference call with analysts Thursday. XM executives, responding to a question, revealed for the first time in memory a gross subscriber-addition figure. That's a figure the company hasn't routinely disclosed, preferring instead to focus on the ever-rising net figure.