XM Expects To Meet 1st Quarter Financial Forecast

WASHINGTON— XM Satellite Radio told Wall Street analysts late last month that it expects to meet expectations for signing 70,000 new XM subscribers for the calendar first quarter.

Dan Murphy, VP/retail marketing for XM, said the company continues to see week-over-week growth and sign up new retailers while suppliers continue to face back-order due to higher than expected demand. The company announced earlier this year that it expects to sell 350,000 subscriptions for 2002.

Pioneer, which claims to have the largest market share in XM equipment, says it is continually fighting to keep out of back-order. Mike Townsen, Pioneer VP/marketing mobile entertainment, said the company hopes to "get caught up by April."

"We're selling everything we make," he said.

Sony has been in a sold-out position on its home kit this year, and Alpine said higher-than-expected demand in the fourth quarter caused it to be sold out of 2001 XM-ready receivers earlier than expected, which led to shortages through mid-March this year. Alpine also sold out immediately of its new FM modulator launched in mid-February, with more supplies expected by press time.

XM confirmed that product shortages slowed growth in January and February, but the company strongly refutes the end of the early adopter phase. "There's a lot of people asking for the Sony home kit who don't plan on using XM at all in the car," said Murphy. "They are music enthusiasts who live in cities like Los Angeles or Chicago and they want the programming for their home. These are urban early adopters we have yet to tap into it because of the lack of Sony home kits, and that situation should improve this month and going forward. Another situation is that Alpine head units were sold out in January and February and they are only now starting to hit retail shelves."

Alpine sales VP Glenn Ihrke said consumers are paying a premium to purchase XM-ready radios even if they don't plan on activating the service in the near term. "This was the first time we ran out of step-up units before the entry level. We sold out of $300 plus radios, while usually, what sells during Christmas are radios below $200," he said. "Even if a consumer is not willing to get XM right away, he's unwilling to buy a radio that is not XM-ready."

XM sales for February are all over the map, according to a TWICE poll of retailers that found per store sales ranged from 0 to 30 (see table).

Some retailers in the Midwest complained that sales are slower than on the coasts. John Brumbaugh, buyer for Brandsmart, Kansas City, Mo., echoed a half dozen other retailers, claiming, "My impression is the Midwesterner is a little slow in adhering to new technologies. I'm not getting the results I want. I have several sales reps who say XM is the single best electronics toy they have bought in 20 years other than CD. It's still an awareness problem. If you look at the East and West coasts, it's different. What I feel is our XM rep needs to come in and come up with a sales incentive program—a factory spiff program," he said.

Another Midwest retailer, Lance Munson, co-owner of Cartunes in Stillwater, Okla., explained, "Our town has about 40,000 people so we don't have any really long commutes. In Dallas, it takes an hour to get to work when work is five minutes away."

Murphy of XM said, I think it's very fair to say that our adoption rate on the coasts vs. the Midwest is very typical of other technologies. You do have a slightly faster adoption rate on the coasts than in the middle of the country, which has been very standard for the introduction of other new technologies, including DVD."

Best Buy said sales for XM slowed down in January but rebounded in February and Crutchfield reported strong XM sales for February. Several car stereo regional chains and independents reported a tougher February due to an overall slump in car audio.

Alan Binder, owner of Progressive Mobile Electronics, San Diego, and one of the first stores to carry XM, said that February XM sales "were definitely slower than in other months." He cited a general downturn in all retail. "It affected our business in total. We've been blessed the last three or four years because we haven't had a down month until February, and then it was like we hit a brick wall."

Daryl Jenkins, owner of Dashboard, Durham, N.C., said XM sales fell in February to an average of two to three units per store, down from about six to eight in November, 15 to 20 in December and eight to 10 in January. "It's the 10 percent rule," he said. "Once 10 percent of the public gets it, then everyone starts to want it." He also noted that store traffic overall was down in February and early March. "The Christmas money runs out and now your starting to get the tax money back," said Jenkins.

Late last month, XM auditors attached a note, as has been the case for the past three years, to XM's 10K warning that XM might not survive if it didn't raise new capital. Due in part to the Enron backlash, the company's stock fell $2, or 13 percent. In a strongly worded statement, XM said the caution regarding financing has been included in every XM 10K since it went public in 1999 and that "XM wishes to reaffirm the company's confidence in its ability to raise sufficient capital to fund its operations on an ongoing basis."