Merrill Lynch On XM FCC Compliance
August 25, 2006
Satellite Standard Group Keeps You Informed.
Laraine Mancini issued a report today relating to XM's gaining certification on some hardware.
Report Excerpt:FCC grants 3 FM-modulator certificationsThe FCC has issued 3 new grants of authority for the Audiovox Xpress, DelphiRoadyXT, and the XM Sportscaster radios which all use FM modulators (1 unitstill not certified). While the FCC has 30 days to revoke the grants (like it opted to do with XM's previous grants), management is optimistic that the FCC iscomfortable with current test variability levels and feels that XM and the FCC haveworked closely to achieve the solution, making the FCC less likely to change its decision. Following receipt of the certification, XMSR notified its manufacturers toresume radio production, which XM expects to be in adequate supply for theholiday shopping season. Inventory disruptions in 3Q, adequate 4Q supply While 3Q06 inventory disruptions from stalled radio production are likely to resultin the lowest quarter of net additions (MLe 313k) since 3Q03, we believe the certifications were received early enough to replenish inventory in a cost effective manner (without expedited shipping which would increase SAC) prior to the holiday shopping season. We view this as a positive for both XMSR and SIRI as the removal of this overhang should result in higher growth to alleviate investor fears regarding long-term subscriber estimates. For XMSR specifically, the company should benefit from renewed focus on real business drivers (content,marketing, advanced products) since this issue was a time consuming distraction. We continue to believe that XMSR will be FCF positive in 4Q06 (MLe $32mm).New fix is in place, but FCC questions remain. The new FM modulator device relies on an additional third wire which is installed by the consumer directly to their car's antenna. Although this may complicate the installation process, XM suggested that it was a fix that would protect the sound quality of the transmission for a good consumer experience. The FCC, however, is still seeking the outcome of an internal investigation regarding the noncompliance
of FM-modulator devices from XM, something SIRI already provided.Remain Neutral. We are maintaining our Neutral rating on XM Satellite Radio. In our opinion, satellite radio is a viable business model and represents one of the few secular growth stories remaining in the media sector. Negative news overhangs concerning non-compliance with FCC regulations as well as the reported softness in the retail channel continues to affect the industry, yet our long-term outlook remains positive for the industry.
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8/25/2006 09:14:00 PM
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