Analysts Weigh in on Sirius Following Earnings

RBC, Cowen, and Merrill Lynch issued reports Tuesday on Sirius Satellite Radio (SIRI).

RBC analyst David Bank rates Sirius as sector perform with a price target of $3.00. REPORT EXCERPTS:

Event
1Q08 Earnings Mixed As FCC Keeps SIRI Waiting

Investment Opinion
Probability Of Transaction Completion High, But Conditions Unknown And Fundamental Upside Limited—SIRI continues to execute according to plan, but given relatively challenging environment (anemic retail demand, slowing auto sales, tough consumer economy), we don’t see much fundamental upside outside of merger arb trading right now. Given DOJ approval already granted, last remaining hurdle to merger completion is FCC approval process. While we believe probability of deal completion > 70% and NPV of synergies $4bn, we also think current stock price is discounting this and would remain on sidelines.

Furthermore, conditionality ultimately required by FCC could eat into synergy values. Maintain SP and $3 price-target.

Weakness Persists At Retail—Total net adds of 323k came in-line with consensus of 326k. Weak retail net adds of 2.5k (management attributed weakness to consumer macro and merger confusion) were offset by stronger than expected OEM net adds of 321k vs. our 236k estimate. Notably, we estimate that gross retail adds were likely down 30%+ y/y and SIRI narrowly missed delivering negative retail net adds, something we suspect is a possibility in 2Q/3Q—seasonally weak retail quarters.

Seasonally High Churn Exacerbated By Growing OEM Channel—SIRI missed our 2.6% churn estimate slightly at 2.7%. Management attributed higher churn to OEM channel growth relative to retail; because OEM churn includes conversion rate, it is naturally higher and as mix shifts, it has a greater impact on overall churn. Although growing OEM penetration is by itself positive, we’d expect this trend to continue in the near-to-intermediate term as OEM penetration continues to ramp (Chrysler 70%+, Ford expected 70% for FY09).

Held Hostage By The FCC—Having received DOJ approval for pending XMSR merger on March 24th, SIRI is now awaiting approval from FCC. Despite mobilization of multiple special interest groups to lobby FCC against approval, we believe the FCC will ultimately grant approval. However, “conditionality” could be onerous., i.e., FCC may force XM (XMSR)/SIRI to offer some spectrum to a 3rd party (and thus a competitor) or it may mandate installation of HD Radio chips in satellite receivers, etc. This could ultimately augur additional competitive forces counteracting merger synergy benefits. It’s unclear when FCC will rule and what pound of flesh it will extract.

Tom Watts of Cowen rates Sirius as Outperform.

REPORT EXCERPTS:

Sirius Satellite Radio Outperform (1)

2008 Q1: In-Line Results.

Waiting for FCC
SIRI’s solid Q1 matched us on subs and ARPU, and beat on EBITDA, SAC and EPS. OEM net adds eclipsed retail adds for the 5th straight quarter, while overall net adds continued to gain share vs. XMSR (Outperform, $12.30) for the 10th straight quarter. We expect the FCC to issue an Order for Circulation proposing approval of the merger, but timing is still uncertain. XM’s refi issue should be resolved via bondholder consent over the next few weeks. Maintain Outperform.

■Another Solid Quarter. Revs of $270MM nearly matched our $273MME and consensus of $276MM. In-line revs were driven by flat ARPU of $10.09 vs. our $10.10E and consensus of $10.25. EBITDA loss of ($40MM) vs. our ($57MM)E, reflected SIRI’s cost controls in Programming, Billing, and Marketing. SAC of $91 beat ours and consensus’ $95 by 4%. Higher churn of 2.7% came in slightly above our 2.5%.

■OEM to Dominate Sub Growth. OEM net adds of 321K vs. our 256KE dominated total net adds of 323K, eclipsing for the 5th straight quarter, retail adds which produced only 2.5K new subs. We expect increasing penetration of factory installs to drive solid sub growth, providing good visibility on FCF.

Merrill Lynch analyst Glenn Campbell upgraded Sirius Satellite Radio to Neutral. The analyst has a price target of $3.11 for Sirius.

REPORT EXCERPTS:

The clouds start to lift

We are raising our opinion to Neutral to reflect 1) an increase in our DCF value following better-than-expected 1Q08 subscriber growth; and 2) our view that the negative influences on the share price (declining expectations for growth, refinancing concerns and regulatory risks on the Sirius/XM merger) have passed their peak.

Subscriber results ahead of our estimates

XM and Sirius both reported better than expected subscriber growth with their 1Q08 results today: in aggregate, 627K vs. our estimate of 578K, down from 841K in the year-ago quarter. EBITDA losses were slightly larger than our estimates and consensus. For Sirius, we believe these results were good enough to support the stock, in our view; for XM, they were stronger yet.

We have revised our forecasts to reflect higher subscriber additions in 2008. We have also adjusted our long-term model to assume higher churn (2.5%, revised from 2.4%) and higher ARPU ($9.50, revised from $9.00).

DCF valuation increased: to $3.11 for YE08E - With our estimate/assumption changes, our YE08 DCF value increases from $2.89/share to $3.11/share. Our YE09E valuation increases from $3.07/share to $3.37/share.

Position - Long Sirius, Long XM

Comments

[kels]

Sirrius is falsifying it's new subscribers. The company is including the radios already installed in new vehicles...so it's REAL subscriber base is much lower and may even be a negative value.

[DisappointedAmerican]

Thanks Tyler for another informative article!

I' like to say one thing to the FCC:
To FCC;
You all should be embarrassed, and fired! You have lied and stalled enough. 180 day clock =a scam, by the end of the year=a Lie, by the end of the first quarter=another Lie. DOJ has proven this is not a monopoly! Allow the licenses to be combined and stop pandering to every group out there! They have no right trying to get my Company for free, I paid for shares of my company and you have no right to give anybody anything that I own. If the minorities want more radio exposure let them go buy a radio station with their own money. This is a free country, not a socialist state. So allow the combo with no concessions other than what the companies agreed to begin with. I hope you are all investigated for this disgrace, you are going far beyond what the FCC was intended for and now you are using this unassigned power to destroy American confidence in our government, and any company you choose to destroy. Your stalling of this decision has cost me personally and many more I am sure, I hope the companies file suit for your stall tactics, the empire state building was built in less time. And both companies have now lost the Millions/ Billions due to your indecision. You have no right to cost companies so much. This is America, free market capitalism, remember? This is not a necessity it is a pay luxury service. Mr. Martin do you have a Boss that oversees you, or are you a free-bird with no one to answer to? I would like to speak to your boss because no common sense decision can take over a year to make. I don’t know of any company, employee, or anybody that can take so long to do a job and still have a job after showing this amount of incompetence. I want you and you group all fired. Here is a link to a video that shows how irrelevant you group is; www.youtube.com/watch?......
So in ending you appear to be protecting your buddies at the NAB, and pandering to any special interest group wanting something for free. How about the Americans you supposed to be protecting? By the length of time you have been taking means one thing to this American and that is you are saying FU to ME. And I want you Fired. I will be sending this to anyone that will read it, the sad thing about that is that unless it is accompanied with a check, I assume no government official will read it.

Signed; One disappointed American.

[DisappointedAmerican]

The link didn't work here it is again.
www.youtube.com/watch?...

[RvHauler1]

The only answer for the people to control government is term limits at all levels. How can we do this? I would love an answer that makes sense.

[cos1000]

Tyler .....Thanks again for your timely reporting. Its all up to the FCC now. Also I thought Mel was pretty clear and reaffirming in his closing remarks in the conference call in that he has no intention of giving away the farm in getting this deal done. Go Mel..

Disappointed American....Well Said!!!! Let's not fire them before they approve the merger though... Can You Imagine What The Next Bunch of Appointees Would Do? And How Long It Would Take...?

[163888]

kels, you are wrong As amatter of fact the 900,000 parking lot subs has come down how much is the question. Tyler thinks that number may be arround 860,000 now. As for how each company counts it's subcribers it is the same when they get paid is when they count they. Dont blame SIRI because their main OEM deals are structured so that they get paid by the OEMs, while the cars sit on a lot. I find it to be a great deal for SIRI.

[163888]

cos1000, I like what Mel said to, but he had to do a little back tracking after saying several months ago he would do whatever it takes to get this merger done. I think a couple of the people on the FCC board took that to mean he was willing to give them the cow along with the milk.

[163888]

P.S. Kels dont count on GM being to willing to do the same kind of deal with SIRI as they have with XMSR.

cos1000, in that same conference call Mel said he doesn't think the OEM deals or penitration rates will change after the merger. So much for the OEMs being different after the merger hea. So I guess Tylers OEM information is still inportant. You know what I mean?

[ITS ASIRIUS WORLD]

If the FCC would let them merge there will be tremendous subscriber growth. I have been waiting for the merger to go through before subscribing. I wonder how many others the doing the same. One year after the merger clears these regulatory hurdles, this company will be a cash-cow!!!

[User 192753]

WOW DISAPPOINTED AMERICAN. I HOPE TYLER READS THAT AND FOWARDS IT TO THE NEWSPAPERS AND THE FCC. THAT WAS WELL WRITTEN AND NO ONE COULD HAVE SAID IT BETTER. I COULDNT AGREE MORE AND IM SURE 99% OF AMERICANS WOULD ALSO . LETS HOPE PEOPLE WITH POWER CAN READ THAT AND START THINKING, THANKS

[cos1000]

163888....I didn't think the deals could change until the current ones expire, or are mutually renegotiated by the parties. The merger is one event and the agreements with OEM's by the companies is another. I find Tyler's info useful but as I have said before and I believe Tyler would agree, as all raw data finds itself, "it's meaningless until intelligently applied". You have to do the work.

David Frear repeated Mel's commitment to not "selling the cow along with the milk", 163888's comment not Frear's at the Morgan Stanley Communications conference today. His comments reiterated doing no deal "that's going to adversely impact, and would not be to the benefit of, current subscribers, our future subscribers, and our shareholders." he also said " It's all got to make sense". Sounds to me that they have put their last cards on the table and it's now up to the FCC. As an example of the FCC process Frear called it a "tortured path" these comments were posted on the DOW Jones newswire today, at 12:29(ET)

[163888]

cos1000, I was talking about what porcelain alter had to say about the OEMs changing dramatically when the merger gos through.

[Merger Mania]

Kels ...why do you think SIRI is falsifying the sub numbers?

[cos1000]

163888...I thought you were.. I didn't want to resurrect Porc...Alt's negativity. I didn't find his comments useful to moving the conversation forward. His comments were speculative, yours came from hard work and research.

[163888]

cos1000, yea thats why I put it that way at first.

[163888]

But then I saw you might have thought I was talking about you.

[163888]

Merger Mania, He thinks that because SIRI counts in its subcribers numbers cars that are not sold to people yet, hence the term "parking lot subsriber". The problem with his theory is SIRI does get paid for them but the money is counted as defered revenew and then when is is sold, that money that was in defered revenew is switched to revenew. So lets say a car comes off a Ford factory line with a satellite radio in it, it is counted as subcriber at that time. Then lets say it takes 4 months to sell it, The fees are paid to SIRI for the 4 months by Ford. at the time of sale.

[Brian R.]

Not to mention, I am sure those funds go into some sort of interest bearing account.

XM in their conference call stated that if they were to include parkinglot subs, it would increase thier total subscriber count to 10.8 million. The problem is that they are including all cars on lots, not just ones that they have or will be paid for.

They are going to have to come up with an efficient and transparent method of counting subs once they get together or else this could get very confusing.

[Dirk Diggler]

Someone mentioned the 'firing' of FCC/Martin. I would not be surprised to see it happen as a last-ditch effort to stall the merger. I think there is NO limit to what the opposition will do to stop this merger, and based on what has already happened, the FCC does not care who knows.
So, Kevin Martin will be thrown to the dogs, and a press release will be put out stating the merger is delayed until new Chairman is in place.
Watch and learn how money in the right pockets and politics works.

[163888]

Newman, I think they will do it the way SIRI has been doing it. SIRI will count the cars that XMSR is getting paid for (the few there are), And not count the others. Lets not forget SIRI does not count cars for Kia, and others that are on the parking lots of the other OEMs. Why, well it is simple they dont get paid for them.