Wednesday, April 18, 2007

UBS XM Q1 Preview

April 18, 2007

Comments from UBS on Q1 for XMSR:

XMSR 1Q07 Preview: Continued Sub Weakness Expected

Lucas Binder 212-713-4966 lucas.binder@ubs.com

- XMSR reporting 1Q07 on April 26
XMSR will hold its 1Q07 conference call at 10:00 AM on April 26. We expect weak subscriber growth with net additions of 284k (down from our prior estimate of 343k) and down 50% y-y. Weak subscriber growth is driven by our estimated 8.5% decline in gross adds and an increase in churn to 2.7% up 40 bps y-y. We believe XM will continue to improve customer service to help lower churn.

- EBITDA moving closer to break-even;
still some ways to go. We expect 1Q07 revenue of $264.5M, up 27.2% y-y and 2.9% q-q. Our EBITDA loss estimate of $(30)M is a 38% y-y improvement and 57% q-q improvement. However, we do not expect XMSR to report its first positive EBITDA quarter until 1Q09, which is our breakeven EBITDA year.

- Acquisition costs not expected to drop in 2007
We believe XMSR must work to lower its acquisition costs. We expect SAC of $67 in 1Q07 and CPGA of $100, which are both up y-y. We would expect better economies of scale from XMSR as it improves its chipset technology.

- Valuation:
Maintain Neutral 2; Lowering target to $13.50 from $15.50. We base our price target on a detailed DCF analysis. Our assumptions include a 3% growth in perpetuity and a 13% WACC. We have lowered our target to $13.50 from $15.50 on a lower subscriber outlook. We expect
SIRI to continue to gain market share from XMSR in 2007.

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4/18/2007 04:10:00 PM

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