Washington's XM Satellite Radio Holdings Inc. has always been in a race against time. Could the subscriber-based service add enough customers quickly enough to offset its massive start-up debt and expensive operations? Or, put more bluntly -- would the cash last long enough for the service to have a fighting chance to establish itself?
The company spooked Wall Street during its third-quarter earnings call yesterday by reporting widening losses and saying it is in talks with General Motors Corp. -- XM's largest shareholder -- to defer as much as $200 million in payments to the automaker. Further, XM said, it must raise an additional $200 million, and it hopes to have such a deal in place by early 2003. The stock lost more than a third of its price in response, diving from $3.17 per share to as low as $2. It closed down 73 cents, nearly 24 percent, at $2.32.
"I think it's a great business now and will be in the long term, but clearly the company is focused on . . . the process of raising funds so shareholders can take advantage of the long-term upside," said Hugh Panero, XM's chief executive. "Four years ago, people were asking 'Would anyone pay for radio?' and clearly they are. Now, we're in the process of getting together the last financing."
XM reported a third-quarter loss of $109.7 million ($1.26 per share), compared with a loss of $65 million ($1.14) for the same period of last year. The company had $84.3 million in cash and short-term investments at the end of September, and it needs to make the money stretch through the end of this quarter, Panero said. In the meantime, the company estimates that it needs about $355 million to become fully funded in the next two years, which it would accomplish via the new capital and the payment deferral.
The service has attracted 201,544 subscribers in a little more than a year. It needs to grow to its predicted 1 million users by the end of next year to create a subscriber base large enough to command attractive advertising rates.
XM and New York-based rival Sirius Satellite Radio Inc. sell a monthly premium pay-radio service to cars and homes, creating something like HBO for radio. XM is the industry leader, having launched in September 2001, several months ahead of Sirius, and is well ahead of Sirius's approximately 14,000 subscribers. Both offer about 100 channels of news, talk and original music channels, mostly serving niche tastes, such as all-blues and all-heavy-metal channels largely unavailable on AM and FM.
XM's service has been acclaimed by critics and publications, which have called it a technological breakthrough. Sirius has experienced management and strategic setbacks during its ramp-up that XM has largely avoided, and Wall Street analysts have valued XM's stock higher. But Sirius recently completed a refinancing deal that eliminated its $1.2 billion in debt, making it more competitive with cash-strapped XM, which reported $413 million in debt yesterday.
The key to survival for either service is getting its radios installed in new cars. Currently, consumers must buy XM and Sirius radios as aftermarket units at Circuit City or Best Buy stores and have them installed. This limits the new-customer base to early adopters. But if a new car comes with an XM or Sirius radio and the cost of the service is rolled into a monthly payment, both providers predict their subscription bases will climb.
XM must pay for the right to have its radios placed in GM cars and to piggyback on the auto giant's marketing and advertising. The $200 million payment XM is seeking to defer is part of a 12-year compensation package XM signed with GM. Panero said GM will include factory-installed XM radios in 25 models in its 2003 lines, including Buick and Cadillac. Toyota has also agreed to offer optional XM radios in some of its vehicles, and the radio is available in some Honda, Nissan and Infiniti models.