Sirius loss doesn’t dent Mel

Satcaster will cut costs to rein in huge loss

Success is expensive.

That’s the lesson for Sirius Satellite Radio, which beat subscriber growth expectations and more than quintupled revenue in the fourth quarter but saw its net losses shoot into orbit at over a quarter of a billion dollars.

Speaking in his first investor conference call, newly installed CEO Mel Karmazin also shot down rumors printed in the New York Post that Sirius was considering a merger with larger competitor XM. “I have not met with the chairman; I have not met with the CEO,” he said. “I have no idea where any of this is coming from.”

Company attributed the astronomical loss to the downside of rapid growth, citing increased costs for subscriber acquisition, marketing and programming, particularly the beginning of its $220 million NFL deal. But Karmazin admitted that reining in costs and turning around the net loss will be a key priority.

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“We are laserlike focused on controlling expenses,” he said. “We are a growth company. But all costs, and I mean all costs, are being scrutinized.”

CEO also promised that in an effort to protect current stockholders, company would be very discriminating before issuing more stock. Sirius issued $231 million in convertible notes and $90 million in stock in October to fund its continuing losses.

It ended 2004 with $759.2 million in cash.

In a bid to increase revenue, Karmazin said, Sirius will also invest heavily in building up its ad sales department, which will fall under entertainment prexy Scott Greenstein. Company’s 65 music channels are commercial-free, and it has made minimal revenue from ads thus far. But Sirius is hoping to up its revenue from ads, particularly as Howard Stern and his loyal cadre of advertisers join the satcaster in January.

“Advertising will be an important revenue contributor in the years ahead,” Karmazin said. “I love a business model that contributes two strong streams of revenue.”

Many analysts were disappointed by lower-than-expected revenue and a higher-than-expected net loss, but investors seemed mollified by an increase in guidance. Based on a strong start to the year, Sirius now is projecting it will end 2005 with more than 2.5 million subs and generate $210 million in revenue. Adjusted operating loss is expected to be $480 million compared to $456.2 million in 2004.

As a result, Sirius stock closed down just 1% Wednesday at $6.18.

For the fourth quarter, Sirius lost $261.9 million on revenue of $25.2 million, up 77% and 409%, respectively, from the same quarter a year earlier. Net sub adds were 480,969 — a 332% jump.

For all of 2004, Sirius increased revenue 419% to $66.9 million and saw its net loss more than double to $712.2 million.

In other good news for the company’s long-term health, Sirius kept monthly churn at just 1.6% in 2004, indicating extremely high customer satisfaction.

And company said that, based primarily on people who activated holiday gifts after the New Year, it has already increased its sub count to 1.24 million as of Monday.

With continued high costs and big losses projected throughout 2005, Sirius clearly is counting on significant acceleration in sub growth to help drive it toward profitability in 2006, when Stern comes on board. At the same time, though, it will be adding an extra $100 million per year in content costs for the shockjock.