Tom Watts of Cowen issued a report on XM's Q4 and full year operations.


XM Satellite Radio Outperform

Q4: OEM Subs light.

1x Items Cloud Cost Improvements.

Conclusion: Q4 results emphasized XM's transition to an OEM business model. We expect OEM subs to surpass retail subs in Q1, as OEM net adds eclipse retail. Nevertheless, soft OEM markets resulted in weaker-than-expected net adds inQ4. We expect auto sales to decline Y/Y in 2008 and are revising our estimates for both XM and SIRI. Opex improvements which were clouded by 1x items, should drive XM's FCF pot'l in 2008 and beyond, even without a merger. Maintaining Outperform.

?Solid Financials Before 1x Items. Revenues of $308MM beat our $305 by 1% and consensus of $304MM. EBITDA loss of ($117)MM came within 8% of our ($108)MM despite numerous 1x items including payments to SoundExhange, Starbucks, and record labels. EPS loss of ($0.78) included $0.25c of merger and settlement related charges. $77MM of 2007's $80MMin merger and settlement charges are not expected to recur in 2008.

?Net Adds Reflect OEM Focus. Total net adds of 460K missed our 521KE and consensus of 515K due to weaker-than-expected OEM adds. OEM adds of 360K vs our 494KE resulted from a weak auto sector, but demonstrated XM's OEM-driven subscriber growth potential.

?Sub Metrics OK. Seq. flat ARPU of $10.14 beat our $10.05E and consensus of $10.00. Calc'd Churn of 2.54% beat our 2.60%E, while reported churn of 1.72% was lower Y/Y vs. Q4:06's 1.79%. Reported SAC of $87, and CPGA of $140 reflected 1x items incl. XM's termination of its deal with Starbucks. Calc'd SAC of $79 was generally in line with consensus of $77, but better than our $83E. Calculated CPGA of $120 was better than our and consensus of $125E. Both figures suggest continuing cost improvements.

?Lowering Subscriber Forecast. We are lowering 2008 and outyear net adds to reflect lower OEM production

Tyler Savery Position - Long Sirius, Long XM