SSG Preview of XM Q3 Call - Updated

November 2, 2006

Here at SSG we typically do a Conference Call preview of what to expect, and topics that may be on the table from the satellite radio companies when they report earnings. Bear in mind that SSG is not a financial advisor, and this is not an offer to by or sell this equity. This report contains both opinion and fact. Investors should perform their own research and consult a financial advisor.

The Q3 conference call for XM Satellite Radio is set for Monday, November 6th at 10:00 AM.

We feel that the importance of this call is very high, but not from the standpoint of what happened in Q3, but rather what the year end will look like, and what the longer term prospects are for XM Satellite Radio.

Q3 was not pretty in terms of subscribers, and a few other metrics, and people should be aware of this by now. We would like to see XM discuss the metrics of Q3, and face those head on, but we would like to see frank discussion about the future of XM, and the methods by which they will get there.

What to expect from the financials:

SUBSCRIBERS:

The NET subscriber number is already known. What will now be disclosed is the GROSS number, as well as the split between Retail and OEM. For XM, the retail number will not look pretty. It will likely bring questions of GROSS number vs. NET numbers, and that will ultimately bring about discussion of churn rate and deactivation rate (I will discuss this in the churn section in greater detail) XM should face the retail sub number head on, and outline why they fell Q4 and 2007 will see improvement. We estimate that the GROSS retail number was between 350,000 and 370,000 subscribers, and that the NET number will come in somewhere between 70,000 and 90,000 subscribers.

On the OEM front we believe that XM should clarify why they reduced the rental car fleet by 20,000 subscribers in the count. It has been reported that the reasoning behind this is that a portion of the rental car fleet is promotional in nature, and does not generate revenue. We would like to see XM clarify this Next, we would like to see clarification on how the OEM’s are counted. There still seems to exist some confusion on the issue. From what we understand, the cars that XM receives some revenue for during the promotional period are counted when sold. The cars that XM does not receive any revue for are not counted. This had very little impact on Q3, but going forward it will mean something. In our opinion, XM should simply go through the brands, and identify which cars fit into which category. We expect GROSS OEM’s to be between 520,000 and 540,000 units. We anticipate NET to be between 200,000 and 230,000 units.

We expect XM to announce an OEM Take Rate of 51%

On Family Plan subscribers we anticipate that XM will remain flat near 22% of the base.

Lastly, we believe that XM will offer some clarity on end of year subscribe guidance. Current Guidance is at between 7.7 million and 8,2 million, which is a wide range. We expect that XM will narrow that guidance but that it will still be a range rather than a specific target. We believe that the new range will be between 7.8 million and 8.0 million.

CHURN – DEACTIVATIONS

We expect XM to announce a self paying churn of 1.9%. We feel that XM should cover the promotional churn. XM does not count subscribers that decide not to keep the service after a promotional period as churn. With the gap between GROSS and NET being what it is (partly a function of a large subscriber base), investors will be looking for explanation. We feel it is better to address the issue straight on, and outline what measures are being taken to minimize Churn and deactivations. With several new managers now in place, it may be an opportune time to do this. We expect deactivations to be in the neighborhood of 600,000 subscribers.

SATELLITE LAUNCH

We expect that XM will give some flavor on the recent successful launch of XM 4. A quick update, followed by a synopsis of constellation life expectancy, and that the future is already being considered would be great.

REVENUE

We estimate that XM’s revenue should be in the area of $233,000,000. The street consensus currently stands at $235,000,000.

LOSS

We are expecting XM to announce a loss of 45 cents per share vs. a street consensus of 46 cents per share. We believe that Nate Davis has a focus on cutting costs, and was very judicious in that department during the quarter. We believe that the loss per share is a target that XM wants to insure the beat the street on.

UPDATE - In looking through the events of the quarter, XM Satellite Radio had some refinancing activities that we neglected to consider. These one-time events will add to the loss. We estimate that these events could add between 6 and 7 cents to the EPS loss. This would put the loss at 51 or 52 cents. Our apologies for the error. Many analysts do not have these costs calculated into their estimates. The danger here is that headlines will speak of a "miss", but fail to point out that the refinancing that led to the bigger loss was a prudent move on the part of XM.

SAC

The street consensus currently sits at $66 for SAC. We believe that XM has the potential to beat this slightly, and could announce SAC of $65. Rebates in the quarter were not heavy, and advertising and marketing was not over the top. We feel that this was another area of focus by Nate Davis.

CPGA

The street is looking for $108. This estimate seems realistic, but could easily come in $1 either way.

MARKETING

We would expect that XM will speak a bit about their latest marketing campaign, as well as the addition of their new Marketing Chief. XM certainly wont give away their plans, but I think we will get a statement about being conservatively competitive.

PROGRAMMING INITIATIVES

XM will likely discuss programming initiatives such as Oprah, Dylan, etc. They should give some flavor about the upcoming loss of NASCAR, and point out that they will maintain racing shows with some well known figures in racing circles.

OEM

Look for XM to speak a bit about their OEM deals, and what type of volume and penetration to expect going forward, how promotions work, and how they are looking to improve take rate.

DEALS

Watch for XM to give a bit of flavor on the Cingular deal, as well as what is happening with the Altel deal.

FCC

There are still some lingering FCC items that XM is in the midst of. They had previously filed an 8K regarding questions from the FCC on how their FM modulators got out of compliance. To date, the answer to this has not been made available to investors. After that, the issue with some 200 repeaters being out of compliance was also disclosed. XM is still operating some of those repeaters and has applications in place with the FCC for them. This whole FCC issue is a bit of a cloud hanging over XM. Some clarity would be nice, but I don’t think that much will be offered.

LAW SUITS

There is a Class Action Suit as well as the suit with the RIAA over the Inno and Helix devices. Once again, some clarity would be nice, but I do not see XM saying to much about it. It would be nice to know if the new SKYFI 3 will be a device that XM will not get sued over. In our opinion, the features that the RIAA took the biggest exception to seem to be absent from the device, but as yet no announcement of a deal between XM and the RIAA has been announced.

MANAGEMENT

Management has come under fire this year. It would be nice to see that the team has a clear mission and clear focus. From what we have seen, it is pretty clear that Nate Davis is running the Day to day operations of XM. It would be nice if the format of the call gave indication as to who the “chief” is, and let the “chief” take the reigns on the call.

QUESTIONS AND ANSWERS

Watch for these questions:

1. FCC FM modulator and how it impacted sales, and what the solution is
2. Competition from I-Pod and it’s impact on SDARS
3. Clarity on OEM subs and how they are counted.
4. Clarity on Churn vs. Deactivations
5. Clarity on Cell phone deals
6. Clarity on Sound Exchange 10% royalty proposal
7. Clarity on retail sales and if retail is weak
8. Clarity on CFBE
9. Clarity on Repeaters.
10. Clarity on the Board of Directors.
11. Questions about Internet Radio and how successful it is for XM

We feel that the XM should make a concerted effort to direct the attention to the future by acknowledging all issues, and in answering them discuss what the future holds for that particular issue. While Q3 is typically a weak quarter for SDARS, it is the launching pad for Q4. We don’t expect major surprises on the call, but feel that XM can set the tone of the call in a positive light by being concise and confident about the future.

11/02/2006 02:28:00 PM

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