Tuesday, April 24, 2007

Wedbush On Sirius

April 24, 2007

William Kidd of Wedbush published the following 1Q preview comments for SIRIUS:

BUY rating and $5 target:

• We are expecting retail demand to be weak for Q1, not only due to the prevailing retail downtrend but also because XM may have gained a couple points of market share back from Sirius. We believe that XM’s higher guided SAC spending for 2007 reflects the company’s active attempt to regain some market share through additional spending. In addition to such competitive factors, Howard Stern’s arrival in 1Q06 makes yoy comparisons difficult from the get go for Sirius. And unfortunately for Sirius, we believe NASCAR recent addition was not significant enough to making a meaningful impact. Even though improving OEM sales should help offset some of the weakness, we are concerned that demand could come in somewhat less than expected. Accordingly, we are lowering our Q1 gross additions (which include OEM) to 876k from 912k. The net result is that we are expecting a 35% yoy decline in retail gross additions, which also seems consistent with NPD data.

• Trimming Q1 and Q2 net additions. Because of XM’s market share gains and a smaller than expected NASCAR bump, we are now forecasting Q1 net additions of 496k, slightly lower than our original estimate of 532k. We think our revised estimate is in line with the consensus. Interestingly, we had some concern that some consumers would be confused by the merger and possibly reluctant to purchase satellite radio for the time being, but channel checks indicated that consumer confusion does not seem to be a serious issue. We also felt compelled to address our Q2 estimates for Sirius on the same rationale. For Q2, we lowered our net additions to 427k compared from 470k. The net result is that our 2007 net adds estimate now stands at 2.1 million down from 2.2 million. Due to these changes, our Sirius valuation declined by $449 million ($0.25 per share). However, because of rounding, our price target remains unchanged at $5.

• We are not expecting any changes to guidance or an EPS surprise. We believe Sirius is on its way to reaching its 2007 subscriber guidance of >8 million subscribers, up from 6.02 million at year-end 2006. We are at 8 million year-end subscribers for 2007. In terms of other key metrics: we are at $987 million for revenue, a bit more conservative than the company’s $1 billion guidance, and we are at $103 in SAC relative to the company’s SAC guidance of $95. Our Q1 EPS estimate of ($0.12) is a penny below the ($0.11) consensus.

• The merger approval process and a difficult first-half 2007 continue to overshadow the company’s valuation and a stronger second-half outlook. For now, we think concerns of a soft Q1 coupled with a bleak07E 2008E EPS($) ACTUAL CURRENT PREVIOUS CURRENT PREVIOUS merger outlook have put considerable pressure on the company’s shares. If there were a positive this quarter, it would be that much of the company’s negative news flow may be behind it. It would not be surprising to see another revision of negative revisions to long-term estimates in the aftermath of Q1 results. If capitulation does occur, we think it might finally be time to start for more investors to more seriously consider accumulating satellite radio equities, as the merger overhang and soft subscriber results probably won’t last very long.

• The merger decision, which we expect in the August/September timeframe, remains the largest milestone still ahead of the company. Either way, we see that date as a potential catalyst. If regulators deny the merger, which we think is likely, we believe investors would be willing to own Sirius, since they would no longer have to be concerned with how the merger process could drag on. Conversely, although we do not think merger approval is likely, we would imagine that the company’s outlook, and thus its share price, would be considerably brighter with merger synergies included.

• Risks to attainment of our share price target include shortfalls in subscriber growth; increased competition whether from XM; AM/FM radio, HD Radio, or streaming-media services; new/increased government regulation; a prolonged and/or failed merger attempt; an inability to renew key content and OEM contracts; satellite anomalies; and an unfavorable outcome in the ongoing arbitration process with record labels over royalty rates.

4/24/2007 12:35:00 PM

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