Talk of fading satellite power and contested insurance claims compounded the pain Thursday at

XM Satellite Radio

(XMSR)

.

Seems investors, already disappointed by the second quarter's

sales-and-earnings shortfall, were in no mood to hear that some $400 million in insurance settlement claims are in dispute. Also coming to light in a Thursday conference call was the fact that the pay-radio outfit plans a costly acceleration of a spare satellite launch plans.

Reversing the long uptrend that has seen the stock more than triple this year, shares of the Washington, D.C., premium radio service fell $2.19, or 16%, to $11.08 in heavy midday trading.

The Degradation

On a conference call with analysts, there was much discussion of the insurance matter. The problem, according to XM officials, is that their satellites are losing power more quickly than planned -- but insurers don't want to pay. Unfazed, executives emphasized that the "degradation is real" and that their insurance claims are valid; they vowed to pursue a settlement "aggressively." Analysts had been monitoring the satellites' quicker-than-planned power fade, yet some were surprised that the insurers denied the company's reimbursement claims.

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The company says the fade won't impair radio service and that it has raised enough money to cover the cost of an early launch of its spare satellite. But investors are concerned that the company will have to find new cash to pay for a second spare in early 2005.

Hard-core fans say the satellite issue is merely a sideshow and that it has very little to do with the company's growth prospects and business plan. Investors in satellite-radio rival Sirius were also a bit miffed Thursday as they saw their shares fall in tandem with XM. Sirius defenders say power degradation is a XM-specific issue.

Still, both companies delivered weak second-quarter results this week, ending a strong run for the stocks. XM shares had been up more than 400% earlier this week as more investors warmed to the speculative growth story. Sirius shares had doubled from their 64-cent start of 2003.

Expectations

For the latest quarter, XM says it lost $164 million, or $1.38 per share, on sales of $18.3 million. Compared with the first quarter, that's an unchanged bottom line and 38% improvement to the top line. Analysts, though, had expected a loss of $1.24 per share on $18.8 million in revenue.

Given that the satellite-radio business is young and growing rapidly, investors tend to discount some of the traditional financial performance metrics in favor of trends like subscriber growth and customer acquisition costs.

On that front, XM managed to post respectable numbers. The number of total subscribers as of the end of June was 692,253, with 209,000 net adds coming in the quarter. The subscription radio broadcaster says it lowered customer acquisition costs to $80 per user, beating bullish projections of $83.

And despite promotions and other giveaways, XM's monthly average revenue per user stayed above the $10 that subscribers pay for the service. For the second quarter, XM's revenue per subscriber was $10.73, a 15% increase over the previous quarter, but down from year-ago levels of $12.32.

Company executives reaffirmed their business outlook for the year, calling for $295 million in losses on $85 million in sales and a total subscriber count of 1.2 million by year end.