Cowen issued a report on XM Satellite Radio, updating projections, and citing that merger sentiment is improving.
XM Satellite Radio - Outperform August 22, 2007
Model Update. Merger Sentiment Improving.
Conclusion: With this note we are publishing our updated XMSR model. Summary changes reflect a mix shift in net adds favoring the OEM channel. However total net adds do not change significantly. We are also raising FY07E CPGA to $119 from $113 vs guidance of "high end of range" ($111-$114). Our changes reflect XM's growing OEM base and mgmt comments suggesting higher SAC costs due to FY07's OEM ramp. We continue to believe XM's merger with SIRI has a better than 50/50 probability of receiving approval. Maintain Outperform.
- Updated Model. Our revised XMSR model reflects updated Q2 financials and new subscriber and CPGA projections. Our changes mostly reflect XM's solid Q2 results which underscored XM's strong OEM potential and H2 ramp.
- Adjusting Subs, Raising CPGA. We are adjusting FY07E net adds to reflect a mix shift favoring OEMs. We are reducing retail adds by 50K to 250K, and raising OEM adds by 113K resulting in a total net add increase of 63K to 1.47MM vs 1.42MM previously. We are also raising FY07E CPGA to $119 from $113 to reflect a higher component of OEM costs ($10 in Q2). This compares to guidance of the "high end of range" of $111-$114.
- Merger Sentiment Improving. Last week, a federal judge in the WholeFoods-Wild Oats merger blocked an FTC request to narrowly define the two co's market as natural/organic foods. Many believe this ruling supports XM/SIRI's broad market definition of "all audio sources" and not just satellite radio. A broadly defined market should increase liklihood of merger approval.
- Maintain Outperform. We believe current valuations discount XM's FCF potential, better OEM positioning, and potential merger synergies. XM's 17% arb spread should narrow if merger sentiment improves further, boosting its existing outperformance potential.
Tyler Savery Position - Long Sirius, Long XM