Friday, April 27, 2007

Bear Stearns Highlights on XMSR's Q1

April 27, 2007

Bob Peck issued a report on XM’s Q1 highlights:

In-Line Results Drive Relief Rally: Maintaining Outperform

• Investment Thesis. We believe extremely low expectations coupled with in-line results drove
the outperformance in the stock yesterday. Both satellite radio stocks have declined significantly since they announced the merger primarily due to uncertain merger outcome, limited visibility into the DOJ process, challenging retail environment, and OEM ramp only in 2H07/2008. As such, although we think the shares remain attractive for the long term investor with an appetite for risk, investor interest likely may remain muted until there is more visibility into the merger outcome or the YoY unit sales comps improve.

• In-Line Quarter. XM reported 1Q07 results that were in line with our expectations across every metric except gross adds (which were marginally weaker) and churn (which was better than our and street estimates).

• 2007 Guidance Reiterated; Higher CPGA and Adjusted EBITDA Losses Expected. Company reiterated sub guidance of 9-9.2 mn, subs revs of $1 bn, CFO to improve YoY in 2007, and likely positive in 2008; but increased CPGA expectation to $111-$114, and Adjusted EBITDA losses to $(170)-$(180) mn excl merger costs. Our 2007 projections: 4.2 mn gross adds, 1.47 mn net adds, 9.1 mn ending subs, self-paid churn 1.8%, SAC $68, CPGA $113, total ARPU $11.43, total revenues $1.1 bn, Adjusted EBITDA $(207) mn including $32 mn in merger costs, CF from ops $(120) mn.

• Valuation. While XM reiterated expectation of high-teens ending subs by 2010, we have a more conservative estimate of 12.9 mn at YE 2010. Given our more conservative stance with
respect to sub growth, we are tweaking our year-end 2007 target price to $15 from $17 previously, which is based on a DCF with WACC of 11%, and perpetual growth rate of 4%. We underscore that our valuation merely reflects the value of the standalone business; if the proposed merger with Sirius were approved, the potential synergies from the merger would drive valuations in the low-to-mid-$20/share vicinity