Trouble at XM

Cite this Article
Bill Sjostrom, Trouble at XM, Truth on the Market (February 16, 2006),

A week ago XM inked a three-year, $55 million deal with Oprah for a new channel called “Oprah And Friends.” XM shares rose 4.75% on the day the signing was announced, closing at $25.78 (article).

Today, XM announced that its net loss widened to $286.3 million in the fourth quarter from $188.2 million for the year-earlier period even though revenue more than doubled to $177 million from $83.1 (press release).

More ominously, on 2/13 Pierce Robers, an XM director, resigned. In a letter filed with the SEC he stated as follows:

I have been troubled about the current direction of the company and do not believe that it is in the best interest of the company’s shareholders. For some time I have made my analyses and observations known in an increasingly vociferous manner to the Board and a number of senior managers of the Company. I am not having any useful effect and I care too much and believe in my own views too much to just “go along�.

Given current course and speed there is, in my view, a significant chance of a crisis on the horizon. Even absent a crisis, I believe that XM will inevitably serve its shareholders poorly without major changes now. It is clear to me that I cannot be part of the solution and I will not be part of the problem.

I think this really casts a shadow on XM. A noisy resignation like this is quiet unusual. Directors presumably know that SEC regulations require the public disclosure of such a resignation and any related letter. As a result, the typical procedure is to cite something vague like “personal reasons.� Note also that Robert’s owns 122,000 XM shares and had to have known that his noisy resignation would cause XM’s share price to drop (XM shares are currently at $23.74, down $1.51 on the day).

Here’s XM’s spin on the resignation letter:

Although the letter does not explicitly state the nature of the disagreement, the Company believes the disagreement with Director Roberts primarily involves the strategic balance of growth versus cash flow. Director Roberts has historically favored more stringent cost control in the Company, specifically involving lower marketing, programming and promotional expenditures. While Director Roberts believed that expenses could be lowered without jeopardizing subscriber and revenue growth and/or market share, he was prepared to risk growth or market share impacts if they resulted, with the belief that positive cash generation would occur sooner, and the Company’s stock would be valued more highly as a smaller, but more profitable enterprise.

The Company and other Directors concur in Mr. Roberts’ assessment that lower programming and marketing expenditures, and a potentially lower growth rate, would likely result in earlier positive cash generation. The other Directors, however, believe that the Company’s high growth rate, market leadership and large base of subscribers are strategically important assets to ensure the Company’s long term value and can be sustained while also reaching positive operating cash flow later this year. These differing views of strategic direction and balance between growth and profitability have been voiced openly for a number of years, but Director Roberts states that he can no longer be effective given the ongoing disagreement with management and the other Board members regarding the relative importance, risks and priorities of these two common goals.