XM Installs New President, COO


XM Satellite Radio is shaking up its top management just as the most popular satellite radio company is seeing its lead in the fast-growing industry under assault.

On July 24, XM (XMSR) named Nate Davis to the newly created positions of president and chief operating officer. The move comes as chief rival Sirius Satellite Radio (SIRI) is gaining ground in the all-important subscriber count, thanks in part to landing shock jock Howard Stern.

In a public announcement of Davis' hiring, Hugh Panero, XM's chief executive, said: "I know firsthand the kind of action-oriented business leadership that Nate will bring to his new role." Yet in public statements, the company gave few details of what exactly Davis will be responsible for.

An internal company memo, reviewed by BusinessWeek, reveals how broad Davis' responsibilities will be. The memo, from Panero to XM employees, makes clear that the CEO's responsibilities will be narrowed. Davis will oversee day-to-day operations of the company and take over direct responsibility for marketing, finance, customer care, information technology, and human resources. Panero will retain oversight of programming, advertising sales, business and legal affairs, and corporate communications, according to the memo.

MARKET-CAP BLUES. Analysts don't think the move portends major changes in business strategy, given that Davis has been on XM's board of directors for seven years. But XM management is obviously under pressure to find new momentum. "Any time a stock goes from $40 to $11, there's going to be a lot of pressure on management," says Stuart Kagel, an analyst at Janco Partners in Denver. "Clearly, given the amount of turmoil there, a number of solutions have been put forth, some of which would involve management changes."

And what turmoil it has been. In late 2004, XM's market cap was north of $8 billion. After close on July 24, it was south of $3 billion. While annual revenue has grown from $91 million in 2003 to $558 million in 2005, so have losses, from $584 million in 2003, to $666 million last year.

In Davis, XM is getting a president who has spent most of his time in the telecommunications industry, holding senior positions at companies like XO Communications, Nextel (NXTP), and MCI, among others. In late 2002, he became interim CEO of XO following that company's takeover by investor Carl Icahn and then resigned from the company in mid-2003. Since then, Davis has been executive-in-residence at Columbia Capital, a venture capital firm.

According to a filing with the Securities & Exchange Commission, Davis will receive annual compensation of $500,000, increasing to $550,000 next year and $600,000 the year after that. He also will be paid a signing bonus of $150,000 and receive 20,000 shares of stock. He'll have plenty of incentive to boost shareholder value. He's getting a 10-year option to purchase 400,000 shares of stock at $11.92 as well as 200,000 shares of restricted stock.

SUBSCRIBER SAG. Though it started out as the early market leader, XM has seen its momentum flag, while Sirius has been adding subscribers at a healthy clip. At last count, XM was still ahead, with 6.89 million subscribers, compared to Sirius' 4.6 million. Sirius grew faster in the most recent quarter, adding 600,000, vs. XM's 398,000. The comparison is somewhat colored by the fact that Sirius counts among its subscriptions factory-installed radios in unsold new cars—and XM doesn't.

In May, XM warned that it wouldn't meet previous guidance on subscriber growth, cutting its goal for the end of the year to 8.5 million, from 9 million. Some analysts believe that it could warn again, when it reports earnings on July 27. One factor is a regulatory issue with the FCC. Certain XM receivers have been delayed from the market because they don't meet FCC guidelines. "We believe those factors could extend into Q3 and could result in 2006 subscribers being closer to 8 million," wrote analyst Chad Bartley of Pacific Crest Securities.

Sirius had a similar issue with FCC compliance of certain radios but was able to fix the problem with a software update at the factories where the units were being made, and thus had less disruption of its supply.

According to Rob Sanderson of American Technology Research in San Francisco, XM's marketing has lost focus and the company has been plagued with customer-service problems, two areas for which Davis will have primary responsibility. "Panero has to be feeling a lot of pressure," Sanderson says. "Investors are pointing at management and saying there's been poor execution on Panero's part."


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