Wednesday, February 28, 2007

Morgan Stanley On Sirius

February 29, 2007

What's Changed
YE07E Subscriptions From 8.62 mm to 8.34 mm

FY07E Adj. EBITDA From ($365.2) mm to ($300.8) mm

Conclusion: We are reducing our FY sub growth expectations to 8.3 mm- still ahead of SIRIannounced guidance of 8.0+ mm. While we believe SIRI subscription guidance partially reflects the potential of a confusing consumer message in FY07, we believe the 8.0+ mm target is conservative. Our forecast currently assumes continued deceleration of retail growth in FY07
(estimated down 10%) and that net adds will be more back- end loaded during the year. We are not changing our OEM expectations for either gross adds growth (up 55%) or net adds (1.1mm). We forecast SIRI pre-marketing EBITDA margins will increase to 31% from 14% in FY06. This compares to our expectation of pre-marketing EBITDA margins of 28% for XM in 2007.
SIRI ended 2006 with roughly $400 mm in cash, and we believe it will burn through $170 mm in 2007.

What's New:

SIRI reported strong 4Q06 results with ARPU of $10.48 and SAC of $103 coming in ahead of
our estimates. Although subscriber results were announced in January, sub growth in the quarter was more heavily weighted towards OEM than expected. Retail gross additions declined 25% YoY in 4Q06 but were up roughly 20% YoY on a full year basis. We currently expect total SIRI gross additions to increase 13% from FY06 but retail gross adds to fall 10% YoY in FY07E.

Implications:

We believe a SIRI-XMSR merger could generate roughly $4- 5 bn in merger synergies. We note
that our revised forecasts following the merger announcement do not assume a price increase for either operator. We had previously expected SIRI to raise prices in 2007, leading to a one-time cash benefit from
pre-paid subscriptions

Labels: morgan stanley, sirius