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XM Shrugs Off Slowdown

Shares rise despite a sharp drop in subscriber growth.

XM's

(XMSR)

losses narrowed in the first quarter, but subscriber gains again fell well below expectations.

The Washington, D.C., satellite radio shop added 285,176 net new subscribers in the quarter ended in March. That's just half the 569,000 new users added in the year-ago quarter. Analysts had been at looking for the new subscriber gains to be in the 325,000 to 350,000 range.

Despite the sluggish growth pace, XM reiterated its subscriber goal of about 9.1 million users by the end of 2007. XM had originally expected to hit the 9 million mark last year.

The adjusted net loss for the quarter was $122 million, which compares with $149 million in the year-ago. The 40-cent-a-share pro forma loss was a penny better than analysts' estimates, according to Reuters Research.

Sales for the quarter were $264 million, up from $208 million for the year-ago period and in line with expectations.

Looking ahead, XM says revenue for the year should be around $1 billion; analysts were looking for $1.14 billion in sales for 2007. XM did reiterate that it will reach positive cash flow generation in 2008.

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Other measures did not improve for XM, including the monthly customer defection rate, or churn, which increased to 1.78% from 1.64% last year. And the conversion rate of customers buying the service after a free trial fell to 51% from 54% a year ago.

XM says subscriber acquisition costs grew to $65 per new user from $59 last year, and the costs per gross add also grew to $103 from $93 in the first quarter of 2006. Investors would prefer to see costs come down, especially as subscriber growth slows.

This is the second consecutive subscriber growth disappointment for XM and it adds to the concerns about the scale of pay radio's mass market appeal.

The news comes as some analysts see the proposed merger between XM and sole rival

Sirius

(SIRI) - Get Sirius XM Holdings, Inc. Report

failing to pass regulatory muster.

On Tuesday, Bank of America analyst Jon Jacoby cut the projected value of the two satellite broadcasters due to weaker subscriber growth and customer conversion rates. He also cut the chances of a successful merger approval to somewhere between 25% and 40%. His comments sent shares in Sirius down sharply.

On Thursday, XM rose 34 cents to $11.35 and Sirius rose a nickel to $2.88.