Analyst Comments From Merrill Lynch This Morning
July 20, 2006
Here are Comments from a note to clients that Merrill Lynch distributed today:
SIRI confident in ‘06 guidance despite FM modulator uncertainty
Sirius filed an 8-K this morning revealing its confidence in FY06 guidance despite increasing uncertainty regarding the FCC’s intentions regarding FM modulator requirements and testing. In April, the FCC sent letters to SIRI radio manufacturers notifying them of non-compliant FM modulators (which were authorized by SIRI employees according to internal investigations) and a letter was sent to SIRI in June. While SIRI quickly implemented changes which it believes brings its radios into compliance, the FCC has yet to issue certification numbers since SIRI’s response on July 12. Given this delay, there is increasing concern that the FCC could modify either its FM modulator requirements, certification process, or both.
Newest plug and play still on market
The Sportster 4, SIRI’s newest plug and play device, remains on the market, suggesting the FCC is currently comfortable with its modulation specs under current testing standards. Sirius can continue to ship this product to its retail channel, helping it to meet its full year subscriber target. In our view, it is important that SIRI continues to have a plug and play product available as it is the easiest solution for a retail consumer to add satellite radio to the car. Other alternatives include an after-market hardwire install or cassette adapters, which are likely less attractive alternatives for potential retail satellite radio subscribers.
OEM radios unaffected
Factory-installed OEM radios do not use the FM modulator technology so are therefore unaffected by the delayed certification process or potential change inFCC requirements. These radios account for 30-40% of SIRI net additions and we do not anticipate downside risk to these net additions.
XM less confident regarding material business impact
XMSR also filed an 8-K last evening disclosing that the FCC “dismissed” (not denied) its new FM modulation device certifications, leaving the ability for equipment certifications to be reinstated if the radios are deemed compliant. Inthe 8-K, XM was less optimistic than SIRI, suggesting that XM could “provide noassurances at this time that our actions will be deemed sufficient by the FCC, or that this matter will not have material impact on our consolidated results of operations or financial position.”
Sirius continues to hold leading retail market share in June
June NPD data revealed that SIRI continued to lead in retail market share, with61% of the satellite radio market (MLe 57-58% adjusting for Wal-Mart), reinforcing our thesis that its marquee content platform will attract more consumers in the retail market. Sirius may have also benefited in June from lower inventory of XM retail products given the ongoing FM modulator issue.
7/20/2006 09:43:00 AM
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