Wednesday, February 28, 2007

Wachovia Report

February 28, 2007


• FINANCIAL RESULTS IN-LINE WITH BETTER ARPU OFFSET BYHIGHER THAN EXPECTED COSTS--All-in subscriber monthly ARPU for Q4 was $10.39, nicely ahead of $9.59 consensus which drove revenue of $193M well above consensus of $172M and our estimate of $168M. This was offset by: 1)higher than expected costs to acquire subscribers (SAC) at $103 versus $98 consensus; and 2) higher than expected sales and marketing costs (+$11M) and programming and content costs (+$5M) which drove an operating cash flow loss of$167M (excluding stock expenses) slightly worse than our ($164M) loss andslightly better than consensus of ($180M) loss.

• WEAK 2007 GUIDANCE--SIRI provided guidance of revenues ''approaching$1B'' for 2007 (in-line). SIRI forecast net new sat radio additions of ''more than1,975K,'' materially below (-12%) our estimate (2,246K) and consensus (-18%) (2,405K). The lower than anticipated forecast is related to higher than forecast ’07monthly churn of 2.2 to 2.4%, vs. our 2.0% est. and consensus of 2.1%. The SAC per gross addition guidance was approximately $95 for 2007, which is higher thanboth our and consensus estimate of $90.

• REDUCING ESTIMATES--We are reducing our '07 sub forecasts materiallydriven mainly by increasing churn forecasts to be in-line SIRI’s guidance. We are also reducing our subscriber forecasts in 2008 and beyond. Our '07 OCF loss forecast increases from $247M to $297M. The changes cause us to drop the lowend of our wide valuation range (which is an attempt to capture the widening divergence between the merged value and SIRI as a stand-alone entity).

• WEAKENING FUNDMENTALS CREATE MORE DOWNSIDE RISK SHOULD AN XMSR ($14.32, MARKET PERFORM) DEAL FALLTHROUGH (50% CHANCE)--Continued weakening demand for sat radio bolsters our cautious fundamental stance on the group. We reiterate our belief that weak retail will inevitably begin to negatively affect OEM's appetite for sat radio,further pressuring the long term opportunity for sat radio. Highlighted by our new valuation range, we believe downside risk is increasing should an XMSR deal fail to materialize, while upside from a merger appears priced in the stock at theselevels. At current, SIRI valuation levels imply that SIRI will eventually reach the 20M+ level in subs vs. current 6M (which includes subs on promotions). Valuation Range: $2.5 to $4 Our range is based on a discounted cash flow. We use a discount rate of 11% and a terminal value of 55x 2010E free cash flow. Risks include slower subscriber growth, high content costs and the potential entrance of terrestrial wireless alternatives. Investment Thesis: We are cautious on the outlook for the satellite radio industry and Sirius. We remain concerned regarding continued weak demand for the satellite radio product.

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2/28/2007 05:51:00 PM

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