Wednesday, May 02, 2007

Merrill Lynch On Sirius

May 2, 2007

Decrease price objective to $5; Maintain 8.2mm YE07 subs

We are reducing our PO to $5 using a revised DCF with a lower ARPU from multi-subscriber discounts – data services/backseat TV should ultimately offset the blended ARPU impact from multi-user plans. While we maintain our 8.2mm YE07 sub forecast, we are increasing our 2Q07 estimate to 7.1mm from 6.9mm (482k net adds) given ongoing retail share gains and increased OEM penetration. Weexpect ‘07 SAC to decline 15.5% Y/Y to $96 (4G chipset) and churn to increase to 2.4% from 1.9% (self-paying churn of 1.7%). Our ‘07 revenue forecast is reduced $50mm to $950mm (+49%) given lower ARPU ($10.21 from $11.00), op ex is lowered $54mm to $1.5bb, resulting in a $348mm EBITDA deficit.

Increasing OEM penetration forecasts for 2007

SIRI is now available as a factory option in almost all DaimlerChrysler vehicles. Chrysler is targeting factory installation in >40% of MY07 cars, Mercedes isplanning 80% of its 2007 production (MLe 46% blended DCX penetration), and Ford seeks to double the number of autos shipped with SIRI in FY07 (MLe >1mm or 63% penetration). SIRI expects >35% penetration in ‘07 with its exclusive auto partners. Given these NY Auto Show updates, we increased our ’07 gross OEM adds to 2.3mm from 2.1mm. As OEMs manage inventory better, SIRI’s unactivated OEM subs as a percent of total trend below the FY06 level of <10%.

1Q Revenue short of MLe on lower ARPU

SIRI ended 1Q07 with 6.6mm subs. ARPU (less rebates/advertising) of $10.10 was below MLe while SAC of $104 was higher than MLe $85. Revenue of $204mm was $27mm short of MLe (ARPU and ad sales below MLe). Total op ex(excluding non-cash expense) was $339mm, $18mm above MLe, largely due to the higher SAC, resulting in an $84mm EBITDA deficit – $47mm higher than MLe

5/02/2007 11:28:00 AM

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