Thursday, February 08, 2007

Cowens William Kidd Comments On Satellite Radio

February 8, 2007

William Kidd of Cowen issued a report today regarding the satellite radio sector. below are report excerpts:

With subs already pre-announced, the focus will be on 2007 guidance for net adds and cash flow. We expect the companies to set the bar low on subs in preparation for a steady beat and raise throughout 2007. We still expect positive cash flow from both companies, even on lower subscribers. As cash flow visibility improves, we expect >50% outperformance relative to the market over the coming 12-18 months.

Expect Low Sub Guidance. We expect both XMSR and SIRI to set the bar low on sub guidance, if they provide guidance at all. We are reducing 2007 YE subs to 9.3MM from 10.5 MM for XMSR and to 8.2MM from 9.0MM for SIRI. This implies net adds of 1.7MM for XMSR and 2.2MM for SIRI. New low estimates should enable steady beat and raise throughout 2007.

We're Also Reducing Out-Year Subs, but Still See Positive CF. We are also reducing out-year adds, based on slowing retail and higher OEM churn. Our cumulative changes reduce XM 2015 ending subs to 25.9MM from 36.3MM and Sirius to 22.1MM from 34.2MM. Even with this, both companies still generate massive FCF/s by 2009 of $1.36 for XMSR and $0.21 for SIRI, due to the high operating leverage of these businesses

Cash Flow to Drive Outperformance. Our DCFs indicate 63% outperformance for XMSR, which implies 17x 2009 FCF/shr; and 49% for SIRI, which implies 26x 2009E FCF/shr.

Merger Approval Likely, If Proposed. News reports have been confusing, but we now believe DoJ and FCC approval of a merger would be increasingly likely, given myriad competitors: broadcast radio, HD radio, MedaFlo, Modeo, wireless Internet radio, MP3s including iPOD.

Expected Q4 Results

We believe XMSR experienced shortfalls at both retail and OEM in Q4. On the retail side, XMSR market share of net adds was only 25% in Q3. For gross adds, we estimate XM captured share at 44% in October, 41% in November and 34% in December. Due to its churn on a higher base than Sirius, share of net adds would be lower than these figures. On the OEM side, we believe GM failed to meet its original install estimate in 2006 (1.55MM cars), due to market share losses in automotive sales and mix shifts from SUVs and trucks to smaller vehicles with lower XM install rates.

SIRI remains very exposed to retail, with 70% of its 2006 net adds coming from retail versus30% for XMSR. In Q4, we believe SIRI likely achieved more than 80% net add market share in retail, driving total net add market share to roughly 67%. Factoring in these observations for Q4, we assume XMSR produced 164K net adds, or 37% of its total at retail, and 278K through OEM and other channels, resulting in its pre-announced 442K net adds and ending sub count of 7.6MM. For SIRI, we estimate that 76% of its 905K net adds, or686K, came through retail, with 219K or 24% coming from OEM.

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2/08/2007 08:00:00 PM

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