Tuesday, April 24, 2007

Wedbush On XM

William Kidd, of Wedbush, published the following XM preview comments:

HOLD rating and $15 target:

We are expecting XM’s Q1 results to be in line with relatively low expectations; consequently, we do not expect the results to rally much investor interest. Retail gross additions will likely be the story this quarter. We are expecting retail demand (e.g., gross additions) to be weak, though XM may have gained a couple points of market share back from Sirius. Improving OEM sales should help offset some of the weakness. For the quarter, we are making a minor adjustment to our retail gross adds estimate, lowering it to 328k from 333k. The net result is that we are still expecting a 36% yoy decline in retail gross additions, which seems to be supported by recent NPD data. By mid-year, we expect OEM sales to make an even greater contribution, which should help lessen the sting from soft retail sales. Having said that, OEM demand is likely still the positive force in Q1, but not of a sufficient magnitude to offset the retail woes. The challenge with the OEM side is that we have less visibility, especially compared to retail, making the potential positives in Q1 more speculative than the negatives.

• We are forecasting Q1 net additions of 294k, a touch lower than our original estimate of 303k. We believe the consensus to be in the high 200’s. We do not view the difference as material. Bear in mind, XM will likely continue to report dramatically lower net additions figurers compared to Sirius because of its larger replacement churn burden. We think this cosmetic difference will continue to be a marketing challenge for XM management.

• We are not expecting subscriber guidance adjustments to resurrect the quarter. We believe XM is on its way to reaching its 2007 subscriber guidance of 9.0-9.2 million subscribers, up from 7.63 at year-end 2006. Although we’re not expecting any positive guidance changes, we believe it is not inconceivable that XM could tighten/drop the high-end of its guidance range, though we are not counting on that. We are at 9 million year-end subscribers for 2007. In terms of other key metrics: we are at $975 million for revenue, a bit more conservative than the company’s $1 billion guidance, and we are at $117 in CPGA relative to the company’s flat-to-higher CPGA guidance (from 2006’s $105).

• Although our $15 price target remains unchanged due to rounding, we note that minor changes to our model have resulted in a decrease of $162 million ($0.48 per share) in our target valuation. FYE DEC 2006A 2007E 2008E

4/24/2007 12:41:00 PM

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