The orbit of XM Satellite Radio Holdings Inc. wobbled yesterday as the nation's largest pay-radio service said its fourth-quarter and annual losses widened and a company director quit after warning of an impending crisis.
Shares fell 5 percent as investors learned of concerns raised by former XM director Pierce Roberts Jr. that the company may be spending too much to attract subscribers in its rivalry with Sirius Satellite Radio Inc.
Revenue more than doubled to $177 million and the company signed up more than 2.7 million new subscribers, bringing its total to more than 6 million. But the average cost of acquiring those customers rose to $141 - up from $104 in the fourth quarter of 2004.
That increased XM's fourth-quarter loss to $268.3 million, or $1.22 a share, up from $188 million, or 93 cents, the previous year. For the year XM lost $666.7 million, up from $642.4 million in 2004.
Increased costs played a role in Roberts' resignation after more than five years on XM's board.
"Given current course and speed there is, in my view, a significant chance of a crisis on the horizon," Roberts wrote in his resignation letter. Insiders said Roberts' departure was partially motivated by XM's recent decision to pay talk show host Oprah Winfrey $55 million to program an XM channel for three years.
Sirius, which has about half the subscribers of XM, recently began broadcasting shock jock Howard Stern. Although both companies have yet to turn a profit, they are spending hundreds of millions of dollars apiece to develop programming that will draw listeners willing to pay $12.95 a month.
Roberts did not return calls seeking comment.
Some analysts said XM is wise to trade short-term profits for rapid growth.
"Any young company is going to struggle to find the right balance between growing and conserving money," Sanford C. Bernstein analyst Craig Moffett said. "But if a new subscriber is going to eventually pay more than XM spends to sign them up, then the company is doing shareholders a favor by growing as fast as they can."
XM Chief Executive Officer Hugh Panero said in a conference call with analysts that he expected to achieve profitability by 2010.
Investors, though, appear to be losing patience. XM shares lost $1.27 to $23.98, off 36 percent from their 52-week high of $37.31 in July.
XM and Sirius hope to grow by persuading drivers to activate satellite radios preinstalled in new cars. Many think both will eventually find their audiences.
"Everyone is still trying to figure out how this market works," said Eileen Furukawa, a Citigroup analyst. "It's easy to throw stones. But one quarter of not doing things perfectly doesn't mean XM should be in the penalty box forever."
Charles Duhigg writes for the Los Angeles Times.