XM Gets A Boost

After months in the stock market doghouse, XM Satellite Radio's shares rose on Thursday when the company's rating was upgraded to "outperform" by Credit Suisse. The Credit Suisse news was the first good news for XM in almost a year. During this period, the company has been buffeted by lawsuits, the loss of key execs, regulatory troubles, and of course shock jock Howard Stern's move to competitor Sirius Satellite.

The Credit Suisse upgrade was due mostly to external factors--chiefly the falling price of gas, which analyst Bryan Kraft said will make consumer spending on things like satellite radio more likely. In terms of the company's own actions, the main reason for the upgrade was XM's reduction of its subscription goals to more modest figures, hardly cause for celebration: "Management's guidance now implies realistic assumptions for retail gross additions."

On July 27th, XM Satellite Radio cut its prediction of the number of subscribers it would have by year's end from 8.5 million to a range between 7.7 and 8.2 million. This was actually the second reduction in XM's forecasted subscription base--which began at 9 million in March but was reduced to 8.5 in May. The service currently has about 7.0 million subscribers, and continues to grow--announcing 398,000 new subscriptions in the second quarter.



Worse, the company also faces a lawsuit brought by stockholders over executive compensation related to this very issue. The lawsuit alleges that CEO Hugh Panero and other executives promised a subscriber base of 6 million by the end of 2005, while saying they would also lower the average cost of new subscriber acquisition--but knew that the latter would rise substantially. XM subscriber acquisition costs were indeed driven higher in that period by radio shock jock Howard Stern's move to rival Sirius Satellite.

XM recently received a request from the Securities and Exchange Commission (SEC) that the company voluntarily hand over documents detailing its subscription targets and the average cost of new subscriber acquisition in the second half of 2005. Overall, the average cost of new subscriber acquisitions remains high for both XM and Sirius, and presents a daunting challenge to satellite radio. In end-of-year SEC filings in February, Sirius posted an $863 million net loss for 2005 versus XM's net loss of $666.7 million. But while Sirius' net loss was far larger, its investment in acquiring new subscribers paid off with a fourth-quarter bonanza--and XM's flurry fell flat, as only 900,000 new customers signed on in the fourth quarter.

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