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XM Losses Narrow; Shifts to OEM-Centric Model

2/28/2008 12:33:00 PM Eastern

Washington — XM Satellite Radio posted narrower net losses for the fourth quarter, and a gain of 20 percent in revenue as total subscribers passed the 9 million mark.

For the quarter ending Dec. 31, 2007, XM narrowed its loss by $18 million over the prior year to a loss of $239 million. Revenue climbed to $308 million, compared with $257 million for the quarter last year.

XM’s net loss for the full year improved by $37 million resulting in an overall loss of $682 million. Revenue increased by 22 percent to $1.1 billion.

Confirming the trend of the past few quarters, XM stated it is shifting from a retail-centric business to an OEM-centric business as the retail market for satellite radio softens and OEM sales in new cars ramp up. 

In addition, XM said if it shifted to a more liberal accounting method, more closely resembling that employed by Sirius, then XM’s total subscriber base would total 10.3 million and the company would have added a record number of 4.5 million gross subscribers for the year. This compares with 4.2 million gross subscribers reported by Sirius earlier this week.

Specifically, XM does not include in its subscriber count XM radios in cars that are sitting on the dealer lot but are not yet purchased. XM estimates these radios during 2007 amounted to 1.255 million (double that of 2006). If they were reported, XM’s gross subscriber additions for 2007 would have reached 4.5 million and net subscriber additions would tally 2.0 million, president and CEO Nate Davis told investors in a conference call today. In addition, SAC (the cost of adding a new subscriber) would also have shown an improvement of over 10 percent, instead of rising about $10 for the year and the quarter.

“While we prefer our more conservative figures, it’s important to understand the continued strong OEM growth,” said Davis. 

Using XM’s more conservative accounting, total gross subscriber additions for the year were flat with 2006 and net additions declined to 1.4 million, compared with 1.7 million in 2006.

Davis said the declines were due, in part, to slower retail sales and competition with other consumer electronics devices such as the iPod and cellular phones. “Even FM radio has improved,” he said.

However, XM’s OEM sales this year were better than expected. Davis referred to the “transition of our business and, in fact, the whole satellite radio business, from a retail-centric business to an OEM-centric business.” He noted that XM was installed in 3.5 million new vehicles in 2007, which is 64 percent higher than in 2006.

But XM indirectly refuted Sirius’ claims to have taken a 68 percent share of the retail market, by NPD’s accounting, as stated earlier this week by Mel Karmazin in a Sirius conference call with investors. Davis said NPD measures only 40 percent of XM’s sales, down from 70 percent five years ago, as more of XM’s business is performed through direct sales or in retailers that do not report to NPD. XM said it no longer relies on NPD figures as a lead indicator of the satellite radio market and said the data is less relevant today than it was five years ago.

XM said it recently closed its mall kiosk locations, as more consumers are aware of XM, and more are buying direct from the Internet. Like Karmazin, this week, Davis noted that retail sales will continue to play an important, while lesser role in satellite radio as OEM subscribers seek out additional radios for other members of the family.

"XM substantially improved its business operations in 2007 as we grew our subscriber base and revenues and narrowed our loss, positioning us as a stronger and more focused company better positioned to meet the competitive challenges of the future," said XM president and CEO Nate Davis, adding, "XM has doubled its revenues in the last two years and our investment and robust performance in the new car market establishes a clear path for sustained future growth."

In other financial metrics for the fourth quarter, XM said SAC rose to $87 per subscriber, up from $74 for the period a year ago and the cost per gross addition (CPGA) for each subscriber rose to $140 from $128.

OEM gross subscriber additions grew to 766,000, up from 524,000 for the quarter a year ago, while retail gross subscriber additions fell to 364,000, down from 540,000.

In net new subscribers OEM sales for the quarter doubled to 361,000, compared with 172,000 for the year ago quarter. Retail net additions dropped to 99,000, down from 271,000.

Regarding the proposed merger with Sirius, Davis said he remains optimistic it will receive government approval soon, but in the event the merger does not go through, XM will remain fully funded.

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