Lehman on XMSR - Long Term Story Intact

April 27, 2007

XM SATELLITE RADIO (XMSR: $11.01, 1:OVERWEIGHT): Updating Model, Long Term Story Intact

We are adjusting our 07E estimates to reflect in line 1Q07 results and incorporate data points from incremental company guidance. We expect 9.13MM YE07 subs, slightly lower than our prior estimate of 9.21MM due to fewer retail net adds. We now expect larger EBITDA losses for full year 07E, partially driven by higher CPGA. Shares could be range-bound over intermediate-term as the LT OEM fundamental story is not fully proved out yet and merger uncertainty remains. We are adjusting our 07E price target to $20 from $22 but remain constructive on the name.

Adjusting our estimates for actual 1Q07 results and additional company guidance data points.
Full-year 07 ests: 9.13MM YE subs, $113 CPGA, $1.02BN subscription revenue, $178MM EBITDA loss excluding merger costs and stock option expense, $400MM FCF loss.
2Q07 ests: 332k net adds, 958k gross adds, $65 SAC, $117 CPGA, churn 2.6%, subscriber ARPU $10.23. Revenue $279MM, EBITDA loss (w/ stock comp, merger costs) $71MM, FCF loss $70MM.

Continue to expect mix shift toward OEM but timing of OEM acceleration likely 2H07E, 2008E.
Company will likely be FCF positive in 2009E.

We are adjusting our estimates to reflect 1Q07 results, which were generally in line with our expectations, and revised company guidance on CPGA and adjusted EBITDA loss for full-year 2007. We now expect 9.13MM YE 07E subscribers, which remains in line with the company’s reiterated subscriber guidance (9.0-9.2MM at YE 07E) but is down slightly from our prior estimate of 9.21MM due to fewer retail net additions. Our revised estimates reflect 1.50MM total net additions for full-year 07E. We continue to expect shift in subscriber mix as OEM accelerates in 2007E and 2008E, with 75/25 OEM/retail mix of net additions for full-year 2007E. With 1Q07 results, the company provided additional details on full-year 07E guidance; guidance for CPGA is $111-114 and adjusted EBITDA (excluding merger costs) is $170-180MM. We are adjusting our EBITDA estimate to reflect larger loss, reflecting higher CPGA (partially due to write-down of obsolete hardware), and a higher estimate for merger-related costs. We are adjusting our YE 07E price target for XM to $20/share from $22/share. We continue to be constructive on XMSR based on the long-term OEM-driven fundamental story; stock may, however, remain range-bound in intermediate term as fundamental story is not yet fully proved out (OEM will likely accelerate in 2H07E and 2008E) and merger uncertainty remains.

Estimate Revisions.

We are adjusting our estimates to reflect 1Q07 actual results and revised company guidance. We have summarized our estimate revisions below.

Subscribers. Our YE 2007E subscriber estimate is now 9.13MM (vs. our prior estimate of 9.21MM), with 1.50MM net additions for full-year 2007E (vs. our prior estimate of 1.58MM). This is directly in line with guidance that the company reiterated, 9.0-9.2MM YE 07E subscribers. We expect 4.16MM gross additions in 2007E, down from our prior estimate of 4.21MM as our churn estimate remains unchanged at 2.6%. Our subscriber ARPU estimate is now $10.23, slightly below our prior estimate of $10.29.

SAC and CPGA. We now expect full-year 07E SAC of $66, flat YoY and vs. our prior estimate of $65. We are increasing our CPGA estimate to $113 (vs. our prior estimate of $110), due to a combination of lower gross additions and hardware write-offs.
Revenue. Our full-year 07E revenue estimates are slightly lower, driven by slightly lower subscriber ARPU. Our subscription revenue estimate ($1.02BN) remains in line with company guidance.

EBITDA. Excluding estimated merger costs ($44MM), we now expect full-year 07E EBITDA loss (excluding stock compensation) of $177MM, which is in line with company guidance of $170-180MM. We expect full-year 07E EBITDA loss (including stock compensation and merger costs) of $222MM (vs. our prior estimate of $185MM) due to higher CPGA and merger costs.

Free Cash Flow. We now expect XM to generate positive free cash flow (FCF) positive for full-year 2009E, vs. our previous expectation of 2008E, reflecting lower 08E EBITDA and deferred revenue.

4/27/2007 10:12:00 AM

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