Tuesday, April 24, 2007

Stanford On XM - More Detail

April 24, 2007

XM 1Q additions 250,000, rated HOLD $10 target

XMSR: Soft Q1 retail subscriber additions.

· XM will release first quarter 2007 results Thursday morning. We estimate XM may add 250,000 new net subscribers as retail additions remain soft. We are lowering our target from $18 to $10 to reflect the soft satellite radio subscriber growth.

· Management will host a conference call at 10am Thursday, April 26th. The dial-in number is 877-265-5808. We suspect “Street” estimates are calling for 289,000 net additions in the first quarter. Our estimated 250,000 net additions bring total subscribers to 7.9 million, up 21% year over year.

· Despite modest subscriber growth, XM could show decent financial performance. Revenue could be $248 million, up 19%, leading to an adjusted ebitda loss $4.5 million. EPS loss may be $0.34, an improvement from a $0.60 loss a year ago.

· XM struggled with weak retail sales in the face of increased competition. 2006 demonstrated Sirius’ market share advantage via retail, which we believe Sirius has maintained.

· XM and Sirius have proposed a merger of equals. XM holders will receive 4.6 shares of Sirius stock for each XM share they hold. While a satellite radio merger could uncover substantial cost savings, it may take six months to hear from regulators and well into next year to start unlocking merger synergies.

· The merger faces significant regulatory scrutiny from the Federal Communications Commission and the Department of Justice. Stanford policy analyst Paul Gallant believes there is a 60% chance the DOJ will sue to block the merger. The transaction is slated to close by yearend.

· For 2007, we project 1.2 million net subscriber additions (versus the “Street” at 1.5 million) bringing the total to 8.8 million, up 16%. Our 2007 revenue estimate is $1,038 million, up 11%, leading to adjusted ebitda loss of $3 million and an EPS loss of $1.32.

· XM’s stock currently implies a valuation of $530 for each 2007E subscriber and 5x 2007E revenue. By comparison, Sirius’ valuation implies $640 per subscriber and 5x 2007E revenue. But, Sirius is growing subscribers and revenue substantially faster. Our valuation is based on the present value of future subscriber growth and free cash flow potential. Our target price is $10 per share.

· We rate XM Satellite Radio a Hold.

4/24/2007 12:33:00 PM

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