Robert Peck of Bear Sterns issued a report on XM's Q4 and full year operations.


XM Satellite Radio (XMSR-$12.11-Outperform)

In-Line Quarter -- Looking Forward to DOJ Decision

• 4Q07 results about in line. Ending subs, gross and net adds, churn, and revenues were in line with our projections. SAC and CPGA were higher. Adj EBITDA came in lower, primarily due to 1x items. If XM included vehicles in dealer lots (like Sirius does), '07 gross adds would have been 600k higher, and ending subs 1.255 mn higher (at 10.3 mn vs currently reported 9mn).

• Several 1x items impacted the quarter, including (i) $37 mn music royalty catch-up costs, (ii)$20 mn Starbucks termination fee in SBC, (iii) $9 mn merger-related expenses, (iv) $13 mn settlement costs for recording labels lawsuits.

• Focus on OEM. XM stated that it was working with OEM partners to ramp deployments tothe 60%-70% of production by MY '10 from the current 40%, while maintaining conversion rate at the current low-50% vicinity. XM also mentioned increased adoption of value added services as well as bundling multi-year subscriptions in the vehicle sticker price.

• "Fully funded" but drew down on credit facility. XM drew down $188 mn of the $250 mn credit facility given several large payments coming up in 1H08, including $60 mn to MLB, $37 mn music royalties, as well as continued satellite capex. In addition, XM is in discussions to potentially refinance debt with change of control provision (likely impacting $600 mn9.75% notes, $200 mn floating rate notes, and $231 mn satellite sale & leaseback debt), should the merger be approved.

• Fundamentals have taken a backseat to the merger outcome. While the DOJ decision is anticipated virtually any day now, we view the fact that XM hasn't met recently with the DOJ as a positive. We have consistently believed that the DOJ will approve the merger. As such, when/if the DOJ approves the merger, we expect the FCC process to focus on concessions. We reiterate our Outperform rating.

Tyler Savery Position - Long Sirius, Long XM