Sirius Suffers a Setback

Revenue surges, but investors worry about customer churn.
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Updated from 7:35 a.m.

Sirius

(SIRI) - Get Report

reaped the rewards of the Howard Stern sweepstakes in the fourth quarter, powering past revenue estimates as subscriber growth rocketed.

But shares fell 5% early Friday after the satellite radio broadcaster posted a wider-than-expected loss and warned that it will lose more customers this year as measured by monthly churn.

Sirius also matched rival

XM

(XMSR)

by saying it could start generating positive cash flow by year-end. But the company made no mention of the rumored

service price hike that Wall Street has been buzzing about.

For its fourth quarter ended Dec. 31, the New York pay radio company lost $311 million, or 23 cents a share, compared with the year-ago loss of $262 million, or 21 cents a share. Revenue rose to $80 million from $25 million a year ago. Analysts surveyed by Thomson First Call were forecasting a 22-cent loss on revenue of $75 million.

Sirius said it added 1.14 million subscribers during the quarter, while subscriber acquisition costs per gross subscriber addition were $113 for the fourth quarter and $139 for full-year 2005. Average monthly churn was 1.5%.

The news comes a day after XM posted a steeper-than-expected loss, due in large part to heavy ad spending aimed at reducing the impact of Stern's joining Sirius. XM said its cost per gross acquisition, a measure of the cost of bringing in new customers, surged 36% from a year ago even as the company's quarterly subscriber growth lagged behind Sirius' for the first time. The dreadful showing caused a longtime supporter of the company, former Bear Stearns telecom banker Jack Roberts, to quit the XM board, warning of a possible crisis ahead.

XM's cost questions are bound to intensify the debate over the sustainability of a business that has a perpetual need for new financing to support huge upfront and continuing expenses. But the tradeoff of deep losses for fast growth so far has been one investors have been willing to make.

"2005 was our best year ever and a major milestone for Sirius, setting new records in subscribers, market share and revenue," said Sirius chief Mel Karmazin. "We continue to be the fastest growing U.S. provider in this exciting new entertainment category, with strong growth driven by tremendous demand for our products and our programming, including the NFL, Martha Stewart and Howard Stern. In 2006, we believe this positive momentum will be further reflected in our automotive OEM channel, where we expect to more than double our subscriber base."

The company said it expects to have 6 million subscribers by year-end, up from 3.3 million at Dec. 31. Sirius said it expects monthly churn to rise to 1.8% for the year, though the company said it expects to push subscriber acquisition costs down to $110 per head for the year and lower after that.

The company said it expects to lose $540 million on an adjusted operating basis for 2006, on revenue of $600 million. Analysts were looking for revenue of $590 million.

"Sirius' first quarter of positive free cash flow, after capital expenditures, could be reached as early as the fourth quarter of 2006, and the company continues to expect to generate positive free cash flow for the full-year 2007," Sirius said. XM said Thursday it expected to reach cash-flow breakeven by year-end.

The company expects capital expenditures to be approximately $110 million in 2006, which includes investments for new revenue generating opportunities such as telematics, video and other data services, as well as network infrastructure expansion, including payments related to the previously disclosed contract to secure a slot for a possible satellite launch prior to year-end 2010.

Early Friday, Sirius fell 26 cents to $5.39.