July 26 (Bloomberg) -- XM Satellite Radio Holdings Inc., the pay-radio company that agreed to be bought by Sirius Satellite Radio Inc., reported a narrower second-quarter loss as subscribers increased 20 percent from a year earlier.

The net loss shrank to $175.7 million, or 57 cents a share, from a loss of $229.1 million, or 87 cents, in the year-earlier period, Washington-based XM said today in a statement. Sales rose 22 percent to $277.3 million.

XM, the largest U.S. satellite-radio service, added 338,000 net subscribers, ending the quarter with 8.25 million. A slowdown in customers added through in-store sales was balanced by higher growth from radios installed by carmakers. XM and Sirius proposed a $3.82 billion merger in February to reduce costs and losses. A decision by U.S. regulators on whether to approve the deal is too close to call, analysts said.

``The retail adds were very light,'' April Horace, an analyst with Janco Partners in Greenwood Village, Colorado, said in an interview. ``But minus inventory charges and merger expenses, the financial results were in line with expectations.''

Horace rates XM stock ``market perform'' and doesn't own it. She had estimated XM would add 314,000 new subscribers.

XM shares fell in tandem with the broader U.S. stock market, declining 95 cents, or 7.9 percent, to $11.13 at 4 p.m. New York time in Nasdaq Stock Market trading. They have slid 23 percent this year.

Shares of New York-based Sirius, down 18 percent this year, dropped 18 cents, or 5.8 percent, to $2.91. Sirius is offering to exchange 4.6 of its shares for each of XM.

Subscribers

XM reported a loss, excluding a one-time impairment charge, of 45 cents a share, missing the average estimate of analysts in a Bloomberg survey by 1 cent. Sales topped the $275.1 million average estimate of 17 analysts.

The net number of new retail subscribers fell 74 percent from a year earlier to 43,000. The slowdown began last year when Sirius and XM had to stop shipping radios because they didn't meet U.S. Federal Communications Commission guidelines. The shipments have resumed.

``Continued competition from other audio devices caused sales to be down,'' XM President Nate Davis said on a conference call.

Net new customers who subscribed after buying cars with radios already installed rose 28 percent to 295,000. Analysts including Fred Moran of Stanford Group in Boca Raton, Florida, said this will be the primary means of growth for satellite radio. ``The results show an increasing dependence on auto distribution,'' said Moran, who rates the shares ``hold'' and doesn't own them.

New Pricing

XM Chairman Gary Parsons and Sirius Chief Executive Officer Mel Karmazin, who will keep those roles if the merger is approved, have tried to convince regulators that the combined company faces competition from new types of audio entertainment, such as iPods, as well as from traditional free radio. This week the companies announced a system of tiered and a la carte subscription pricing to be offered after the merger, an attempt to win favor with regulators.

The cost of adding a new customer rose to $75 from $67 a year earlier. Including marketing expenses, the cost to acquire a subscriber increased to $121 from $112. Executives said on the call the cost included a one-time $10 per customer charge for radios that have been replaced by newer models.

Cost Forecast

XM said today the subscriber acquisition cost this year will be on ``the higher end of the range'' of an earlier forecast of $111 to $114. There was no change in the forecast of 9 million to 9.2 million total subscribers by year end.

Churn, the monthly rate at which customers cancel their subscriptions, was little changed, rising to 1.84 percent from 1.83 percent. The conversion rate, which measures how many new- car owners choose to subscribe after free subscriptions end, rose to 52.7 percent from 51.5 percent in the first quarter.

On Tuesday, XM said Chief Executive Officer Hugh Panero would leave in August. He was expected to depart after the merger. Davis was named interim CEO.

``We remain confident we'll be able to complete the deal by year end,'' Panero said on the call.

(A replay of the company's conference call can be heard at +1-800-642-1687, passcode 6562974.)

To contact the reporter on this story: Don Jeffrey in New York at djeffrey1@bloomberg.net.

Last Updated: July 26, 2007 16:09 EDT