Wednesday, February 28, 2007

RBC Weighs In On Sirius

February 28, 2007

Report Excerpt:

Event
Reports 4Q and Full Year Results

Investment Opinion

SIRI Trading Based On Probability Weighted Arb Spread And Synergies—

Sirius and XM agreed last week to combine, pending regulatory and shareholder approval, in a merger of equals. We believe Sirius is currently trading more in-line with expected synergy realization based on the
probability of the transaction closing. However, 2007 guidance indicates a muted sub outlook and higher than expected churn and SAC.

• Maintaining Sector Perform with new $3.50 price-target (from $4), reflecting reduced long-term retail channel sub growth in our model, higher long-term churn and SAC expectations, and non-merger economics though we believe a >50% chance of the merger closing implies $0.87 in additional synergy value per share.

• Still trading at a 24% premium to XM on EV/Sub basis despite having 11% fewer '07E ending subs.

4Q06 Basically In Line - Reflects Good Execution—

Despite lowering guidance (after raising it) to management's original 2006 guidance, SIRI has generally executed consistently with expectations. ARPU of $10.92 was ahead of our estimates and SAC was down 9% YoY. Subscriber growth of 905K was already pre-released in early January.

Primary Focus On Churn Guidance—

While management's FY07 >$8mm ending subscriber guidance was probably not too far from buy side expectations, SIRI's expected 2007 churn range is modestly higher than our 2.1% estimate, reflecting a maturing OEM channel as more OEM subs become paying subscribers. Our new 2.2% 2007 churn expectation incorporates 2.5% / 1.6% OEM / retail churn, respectively, and magnifies our longer-term subscriber projections. While we acknowledge solid execution thus far, we note that we see more downside than upside risk to our estimate given the limited visibility created by the rapidy ramping OEM channel.

2007 Sub Guidance Not Conservative or Aggressive—

Our new 8.1 mm (previously 8.2mm) ending sub expectation incorporates an estimated 20-30% decline in gross retail adds, which remains the largest question mark heading into the year, particularly given potential consumer confusion over merger implications. We are also raising our SAC p/ gross sub expectation to $95 (in-line with guidance) from $88

Labels: rbc, sirius