• by Erik Sass  @eriksass1, February 27, 2007

Shortly after executives announced a plan to merge with rival Sirius Satellite Radio, XM Satellite Radio Holdings posted its fourth-quarter results. They showed shrinking costs and a big jump in revenue, leading to smaller overall losses. However, the company is still in the red, as is Sirius--the driving force in their decision to merge.

XM's revenue grew 45% in the fourth quarter of 2006, compared to the same period in 2005--reaching $257 million. The company also benefited from more discipline in its marketing expenditures, helping bring down the average cost of acquiring each new subscriber from $89 a year ago to $70 in the most recent quarter.

Despite XM's improved performance over the last year, it's still posting losses--$256.7 million in the fourth quarter alone, down slightly from $268.3 million in the same period in 2005. Although expenses are heavily determined by seasonal variations (such as the rising cost of marketing during the holidays), the fourth-quarter loss failed to continue the trend toward significant cost reduction from the third quarter. XM's third-quarter loss was $83.8 million, down from $131.9 million in the same quarter last year. The company also posted a second-quarter loss of $229 million and a first-quarter loss of $149.2 million. XM's full-year net losses amount to $718.9 million.

Last week, rivals Sirius and XM agreed to a merger that offered greater variety to subscribers and reduced costs, which has kept both companies from profitability. Under the terms of the agreement, announced Monday, Sirius CEO Mel Karmazin will become CEO of the new combined entity, and XM chairman Gary Parsons will serve as its chairman. XM's CEO Hugh Panero is expected to step down after the merger is complete.

The new company, whose new name has yet to be announced, would have total assets worth about $13 billion and a shared debt of $1.6 billion. Combining XM's 7.6 million subscribers with Sirius' 6 million, the new company could have a total subscription base of more than 16 million by the end of 2007, if previous projections are accurate.

It's not clear how--or if--the merger will affect an ongoing lawsuit against XM brought by the Recording Industry Association of America, which alleges that XM's portable Pioneer Inno player allows consumers to engage in music piracy by recording up to a gigabyte of music from digital airplay.

The RIAA lawsuit, seeking $150,000 for every song thus recorded, came on the heels of threats of similar legal action against Sirius Satellite over its S50 player. This conflict was resolved in March 2006 by a deal between Sirius and four leading recording companies, in which Sirius paid them an undisclosed sum for each S50 device sold. The terms of the Sirius settlement included a redesign of the device to certain RIAA specifications, which reduced its recording capabilities. That's something XM has refused to do with the Pioneer Inno.

Finally, the departure of Panero after the merger is complete may pacify investors who are angry about allegations of earlier wrongdoing. In May 2006, XM investors brought a lawsuit disputing the sale of about $79 million of XM stock by Panero and four other XM executives in 2005. Panero and the other executives are accused of issuing false forecasts of overall subscriptions and the average cost of new subscriber acquisition to inflate stock prices in the six-month period before they sold their stock.