Morgan Stanley's Swinburne Issues Note On Sirius

May 11, 2007
Tyler Savery

Today a report was issued by Morgan Stanley. Report Excerpt Follows:

Sirius Satellite Radio - OEM Drives 1Q Sub Growth, Trimming FY07 Estimates

Conclusion: We are modestly lowering our FY07E subscription estimate from 8.34 mm to 8.26 mm, which remains above SIRI full- year guidance. As retail growth trends remain soft, we continue to expect OEM to become the more significant source of subscription growth throughout FY07. Although retail gross adds overall were weak, SIRI achieved a 76% retail share in 1Q07. By YE07, SIRI expects to penetrate roughly 34% of its OEM partners’ production compared to 23% in ’06, and 10% in ’05.

What's New: We look for SIRI to maintain a 54% retail market share advantage over XMSR in ‘07. Our current retail category forecast calls for 3.5 mm gross additions, implying a ~15% decline from FY06. SIRI reiterated its full year ’07 guidance of more than 8 mm subs and $95 SAC. 1Q results came in broadly in line with estimates led by better than anticipated OEM sub growth which offset weaker gross adds from retail (down 40% from 1Q06). Churn of 2.3% came in line with our estimates, while a shift in the % of subscribers on family plans and sub/ revenue recognition mismatch from OEM subscriptions drove ARPU of $10.30 below our $10.69 expectation for the quarter.

Implications: We believe SIRI could reach full year free cash flow positive (CFFO less capex) as soon ’08. Our model assumes that SIRI will benefit from a $2 monthly subscription rate increase in ’08 and material positive swings in working capital derived from subscription prepayments. By comparison, we have modeled in a $1 rate increase for XMSR during ’08 and we currently expect it to reach positive free cash flow (CFFO less capex) in ’09.

OTHER ITEMS OF NOTE:

Swinburne expects

Modelware FCF - ($459,800,000)
CFFO less CFFI - ($254,700,000)
Revenue - $986,300,000
EBITDA - ($479,900,000)

Position - Long Sirius, Long XM

5/11/2007 10:32:00 PM

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