XM Satellite Radio posted a wider loss fuelled by higher customer acquisition costs, and blew Wall Street estimates, but CEO Nate Davis expressed optimism that its merger with Sirius Satellite Radio (SIRI) would be approved in Q2.
“We believe this is the last quarterly report we will make as a standalone company,” Davis said on the conference call.
In the meantime, XMSR is busy showing that business as a standalone operation isn’t so good. The company reported a wider loss in the quarter ($129.3 million vs $122.4 million) on higher revenue ($308 million vs. $264 million). Subscribers numbers were up 18% to 9.33 million, but so was the cost of acquiring a new subscriber–up to $73 from $65 a year ago.
Much of the increased subscriber acquisition costs were attributed to subsidies passed on to auto dealers, which provide XM with the majority of their new subscribers. Also, the company is offering steep discounts to convert customers to multi-year and family plans, which reduce churn.
Notes from the conference call, which began @ 10:05 a.m:
Nate Davis, president and CEO, provides intro remarks:
He says he won’t be providing any guidance for the standalone company, given the pending merger. The Department of Justice effectively cleared our merger with SIRI. This merger is clearly in the public interest. Combined company will provide consumers more choice. We are now waiting to hear from the FCC. The process is protracted, but we remain hopeful.
“We believe this is the last quarterly report we will make as a standalone company.”
Decline in overall sales due to the big-box stores. Says this is being offset by higher OEM sales through the auto makers. Says 2008 installations in cars could reach 4 million–meeting previous guidance. “Clearly the auto industry likes what it sees in satellite radio.” Post-trial conversion rate was 53.3%–the percentage of those who pay for service after their one-year trial expires.
New car consumption of satellite radio remains a platform for growth for the combined company. Total subscribers were up 18% to 9.33 million, driven by automotive, which was up 49% y/y.
10:15 a.m. Davis going through the numbers. Bottom line: retail is dead, but automotive driving subscriber growth. Talks about Blackberry deal and XMSR channels popular on iTunes. Says Oprah Winfrey show will be available as a video download at iTunes. These are small businesses but offer significant value at low cost.
Goes through company achievements of the past few years. Says no new expensive content deals in the last two years. Cash flow and stock price “are not where I want them to be.” We all look forward to combining the two companies (SIRI) into a strong company going forward.
10:34 a.m Q&A starts:
Can you explain the increase in subscriber acquisition costs (SAC)?
Davis: SAC effected by reliance on OEM subs. XM has to pay for the radios, but doesn’t recoup unless the subscriber activates after their trial period ends in a year.
Can you give more clarity on conversion ratio when you are giving the service away (in cars)–what rate do the customers convert?
Davis: We don’t disclose the conversion rate for anyone but GM and Honda. Most car manufacturers have similar conversion rates. Its early to report on Nissan conversion rates. Higher-end cars tend to retain customers, as well as high-end trucks, than lower-end cars.
Chairman Gary Parsons: As we expand car installs we’re getting into lower-end cars. We’ve been pleased to be able to keep the conversion rates high even among lower-cost cars.
What percentage of gross sales come through retail?
Davis: No. Big declines at retail stores. We’ve been offsetting that online, some kiosks.
Can you talk about the benefits/risk of tiered pricing plans? An reaason this wouldn’t benefit the combined company?
Davis: the most honest answer is we don’t know. In reality we know there’s a risk. The risk is more people take the lower priced plan. The opportunity is more sign up for service. It’s a risk we can take in a merged company. The synergies are large enough we can take that risk and see if we can get some more customers.
Parsons: We are not seeing an impact on churn from softness in the economy. Davis: Part of this is we are selling more family plans which don’t churn as much as individual plans. Which is why we try to put as many people as we can on family plans.
Can you comment on chipset costs?
Parsons: We will continue to see decreasing cost of the chipsets we design. We tend to pass through those savings to drive down cost of radio to the consumer. We may pass on savings to OEM partners. We see that trend onging for the next couple of years.
Any change of control provisions in content or OEM contracts that offer potential opporunities or negatives?
Davis: In general no. Most contracts do not address a change of control. So most will not be impacted.
Parsons wraps up call: After 5 quarters of y/y declines of growth it has been great to see 3 quarters of increased growth, especially given weakness in economy. Says he hopes this will be the last XMSR conference call as a standalone company.
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