SEC Looks Into XM Subscriber Issues


XM Satellite Radio Holdings Inc. said last week that the Securities and Exchange Commission has launched an informal investigation into its subscriber targets and subscriber-acquisition costs, a move that appears to have stemmed from an earlier class-action lawsuit filed against the company claiming that it allowed some executives to sell stock ahead of bad news.

According to an 8-K filing with the SEC on Sept. 5, XM Satellite said that it received a letter from the regulator on Aug. 31, requesting documents regarding its subscriber targets, costs associated with attempting to reach those targets and related matters for the third and fourth quarters of 2005. According to the filing, XM Satellite said that the request “appears to pertain to matters similar to the issues underlying the previously disclosed securities litigation filed against us earlier this year. XM will cooperate fully with the SEC’s informal inquiry.”


That litigation, filed in U.S. District Court for the District of Columbia in May 2006, claims that XM knew it would miss its fourth quarter subscriber growth and subscriber acquisition cost targets, but still allowed CEO Hugh Panero and other executives to sell millions of dollars worth of shares ahead of the announcement of fourth-quarter results. XM has said it believes the allegations are without merit, and that it “intends to vigorously defend these matters.”

According to an SEC filing, Panero and several other executives sold XM stock on Dec. 5, with Panero reaping the biggest gains. According to an SEC filing on Dec. 7, Panero exercised his option for 413,334 XM shares on Dec. 5, buying the stock at prices of between $5.34 each and $9.52 each. He sold those shares the next day at prices ranging from $28.95 per share to $28.37 per share.

In the fourth quarter, XM reported that it added just under 900,000 new subscribers, ending the period with 5.9 million customers, just short of its 6 million subscriber target. SAC costs for the period soared to $89 per subscriber, up from $64 in the previous year, and costs per gross addition rose from $104 to $141.

That prompted Pierce Roberts, a member of XM’s board of directors for five years, to abruptly resign, stating in his resignation letter that the company was headed for a “crisis” if it did not keep costs down.

Since then, the company has pulled its growth targets back twice — first, reducing net additions from 3 million to 2.5 million on May 24; then reducing net-adds guidance on July 27 from 2.5 million to between 1.8 million and 2.3 million, during XM’s second-quarter 2006 results.


Analysts were split in their reaction to the latest regulatory problem for XM. In a research report, Oppenheimer & Co. analyst Thomas Eagan restated his “buy” rating on the stock, mainly because he saw the declining price as a buying opportunity.

The SEC investigation is the latest in what has been a litany of bad news for XM this year. After missing its subscriber metrics in the fourth quarter, the Federal Trade Commission launched an investigation into its marketing practices in April. That investigation is ongoing and XM is cooperating fully.

That same month, the Federal Communications Commission said that three of its hand-held satellite radio products were not in compliance with federal transmitter emission standards, halting production of the units. XM dodged that bullet when the FCC approved the radios in August, allowing the company to begin production in time for the holiday season.

The stock has reacted accordingly. XM shares are down about 56% ($15.83) since the beginning of the year, closing at $12.32 on Sept. 6.

In a research report, Merrill Lynch & Co. analyst Laraine Mancini said Wall Street has been focused on management actions at the company since the beginning of the year. And while it did get some breathing room after it resolved the FCC issue, Mancini wrote that “management needs to continue to execute to help rebuild investor confidence.”

Mancini maintained her “neutral” rating on the stock — she said the litigation claims are already baked into the price — but warned that more negative news could put continued pressure on XM shares.

She said some investors may prefer to wait on the sidelines until gaining comfort with the resolution.