By: roybean3
17 Apr 2007, 08:20 PM EDT
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XM burning through cash to catch Sirius
Dips into U.S. parent's credit line in bid to boost lagging satellite-radio retail sales
GRANT ROBERTSON
MEDIA REPORTER
John Bitove knew it would take a lot of cash to launch XM Canada, but the costly slugfest that has unfolded with rival Sirius Canada Inc. in the satellite radio market over the past year has forced the upstart company to hit up its U.S. parent for a loan.
XM Canada acknowledged yesterday that it is lagging Sirius in the race to add monthly subscribers, particularly in retail sales of its radios.
Each new customer is costing $53 in marketing dollars and incentives, and XM is now planning to dip into a $45-million credit line from its Washington-based parent, XM Satellite Radio Holdings Inc.
The move illustrates how much cash the industry is burning through as it attempts to establish a base of paying customers.
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Analysts have expected for months that XM Canada would find itself in a cash crunch. It had more than $45-million in cash last August, but that number has dwindled to less than $18.5-million in the face of rising marketing costs.
XM, which has been focusing mostly on the new car market, also plans to take "corrective" measures in the retail market in a bid to claim some of the ground it has lost to Sirius. "We're taking action to make sure we get a sizable share of the retail market going forward," said Mr. Bitove, chief executive officer of Canadian Satellite Radio Holdings Inc., the publicly traded company that operates XM Canada.
Those measures include cutting costs to free up more dollars and the recent addition of more channels to lure potential buyers away from Sirius.
Because Sirius Canada is privately owned and not required to report its financial data, it is difficult to compare the financial health of the two companies. Even the number of subscribers claimed by both is a matter of dispute.
Sirius says it has more than 300,000 customers who pay the full subscription price, but XM said yesterday that it can't figure out how its rival arrives at that number.
"I'm not discrediting their numbers at all, I'm just saying we can't reconcile them. So I think that a comparison is very difficult," XM Canada's chief operating officer, Stephen Tapp, told analysts. Despite the doubts expressed by XM Canada, a Sirius spokesman said yesterday it counts only subscribers who pay the full subscription fee.
XM Canada last month changed the way it defines a paying subscriber, which bolstered its numbers. It now counts radios installed in vehicles as soon as they roll off the factory floor, even if the car hasn't been purchased. The company says it collects revenue from the manufacturers, who subsidize free trials of the radios.
That allowed XM Canada to add an additional 18,200 subscribers to its books in the second quarter, and contributed to a 60-per-cent increase in customers over last quarter. Of its 237,500 subscribers, 136,400 are "self-paying" customers, while the remainder are on promotional deals.
Observers have criticized the industry for lacking a standard way of reporting subscriber numbers and the friction between the two companies appears to be increasing in the face of a potential merger of Sirius and XM in the United States.
That deal, if approved by regulators some time in the next year, would force consolidation in Canada. Though the U.S. merger has been called a merger of equals, ownership in the Canadian company would be divided based on the value of each business, meaning Sirius could walk away with a bigger chunk of the operation based on its higher subscriber numbers. "They're both jostling for position," said analyst Carl Bayard of Desjardins Securities.
Mr. Bitove said using the XM credit facility is cheaper than taking on debt. However the arrangement still carries an annual interest rate of 9 per cent. The company will borrow in the "single-digit" millions in the coming months, he said.
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Canadian Satellite Radio
Q4 2006 2005
Profit (Loss) ($27.1-million) ($44-million)
EPS (57¢) ($1.05)
Revenue $4.9-million $1.1-million
SOURCE: COMPANY REPORTS
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