Wednesday, February 28, 2007

Merrill Report

February 28, 2007

Increasing FY07 subs and EBITDA deficit

We are increasing our FY07 ending subscriber estimate to 8.17mm from 7.77mm as SIRI continues to gain retail and OEM market share of the satellite radiosubscriber base. We expect SAC to decline 17% Y/Y to $95 (new 4G chipset) and total churn (including OEM promotion subscribers) will increase to 2.3% from1.9% (self-paying churn of 1.5%). We forecast FY07 revenue of $1.01bb (+58.8% Y/Y), with slightly higher marketing costs (to allay consumer worries about the merger) and SAC (from raised subscriber estimates) increasing our operating expense to $1.58bb from 1.54bb and resulting in an EBITDA deficit of $263.3mm (up from $195mm). We forecast a free cash flow deficit of $30.3mm, near breakeven, a goal which we believe management remains focused on.

Cautious 1H guidance;

no FCF guidance given merger costs Despite indicating that 1H07 comps are difficult, reflecting the incremental HowardStern subs added in 1H06, management believes SIRI can add 2mm net newsubscribers in FY07 (>8mm ending subs). SIRI will advertise that no radio purchased from Sirius will become obsolete given the proposed merger; a move they hope could reduce confusion in the marketplace so that retail sales remain strong. Management estimates FY07 churn of 2.2-2.4%, and SAC of $95.

Revenue beats MLe, FCF modestly better than MLe

SIRI ended 4Q06 with 6.0mm subscribers. ARPU (less mail-in rebates andadvertising) of $10.39 was higher than expected (driven by lower rebate activity; MLe $9.95) while SAC of $103 was higher than MLe $98 (FM modulator issues added to SAC). Revenue of $193mm was $10mm ahead of MLe. Total operating expense (excluding non-cash expense) was $387.7mm, $19.2mm higher than MLe, largely due to SAC and sales & marketing, resulting in a ($166.8mm) EBITDA deficit – $11mm below MLe. SIRI generated $36mm of positive FCF

Labels: merrill lynch, sirius, xm