Probe News Pummels XM

The stock sheds 4% as the feds look into marketing practices.
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Updated from 11 a.m.

XM Satellite Radio

(XMSR)

shares gave up 4% Thursday on news of

wider than expected losses and word of a federal inquiry into the company's marketing practices.

The Washington, D.C., pay radio shop says the Federal Trade Commission is looking into its sales practices. The agency has asked the company for information about free trials, rebates, telemarketing, billing and customer complaints.

The inquiry revives long-standing concerns about how XM and rival

Sirius

(SIRI) - Get Report

count subscribers, say observers. The two broadcasters have different definitions of what constitutes a subscriber and a portion of the total customer count typically consists of non-paying users who are on promotional trials.

XM, for example, says 8.4% of its customers are freeloaders, down from 11% in the prior quarter.

"It is too early in the process to determine the significance, if any, of these matters to our businesss," XM said in a federal filing Thursday. XM says it received the FTC letter Tuesday.

On a conference call with analysts, CEO Hugh Panero said he wasn't aware of any "flashpoint" or particular complaint that may have triggered the probe. We are "a good company," Panero said. "Some companies could have held this."

Sirius representatives did not reply to calls and an email.

One analyst on the conference call asked if the FTC inquiry may be related to telemarketing efforts and violations of the national "do not call" list. Panero replied, "Don't assume anything. We just got the letter. We will comply" with the agency's requests.

For the first quarter, XM lost $149 million, or 60 cents a share, compared with a year-ago loss of $120 million, or 58 cents a share. Revenue rose to $208 million from $103 million a year earlier.

Analysts surveyed by Thomson Financial were looking for a 55-cent loss on sales of $201 million.

"With our first quarter subscriber growth, we remain on track to reach 9 million subscribers and positive cash flow from operations by year end," CEO Hugh Panero said in a press release.

The company added 568,902 net new users in the quarter, giving it 6.5 million subscribers at March 31. Subscriber acquisition costs fell to $62 per user from $89 in the fourth quarter, when XM spent heavily to counter the debut of Howard Stern at Sirius. Cost per gross addition fell to $94 from $141 in the fourth quarter but was higher than $90 last year.

XM's promotional free-for-all in the fourth quarter led to the

abrupt exit of board member Jack Roberts. He left in protest in February, saying the company faced a crisis if it didn't cut spending.

XM fell 76 cents to $21.25 and Sirius slid 9 cents to $4.72 in midday trading.