Credit Suisse analyst Bryan Kraft issued a report on XM today.

Bullish On Merger; Cautious On Fundamentals

- We are publishing our reconstructed financial model, which better projects SAC, gross adds, and churn based on the OEM model being employed with XM’s newer OEM partners – Nissan, Toyota, and Hyundai. As a result, we are lowering our 2007 and 2008 EPS estimates to -$2.27 and -$2.05,respectively, versus -$2.09 and -$1.73 previously.

- We are publishing our reconstructed financial model, which better projects SAC, gross adds, and churn based on the OEM model being employed with XM’s newer OEM partners – Nissan, Toyota, and Hyundai. As a result, we are lowering our 2007 and 2008 EPS estimates to -$2.27 and -$2.05,respectively, versus -$2.09 and -$1.73 previously.- We forecast the company to remain free cash flow negative through 2010, then becoming marginally positive in 2011.

- The economics of an OEM subscriber are inferior to those of a retail subscriber due to stranded SAC, higher natural churn, and revenue share with OEMs. As the company’s subscriber mix becomes significantly more weighted toward OEM (vs retail) over the next few years, this fact comes to bear, allowing for only gradual margin expansion and a slow FCF ramp.

- Our analysis highlights the need for XM and Sirius to combine in order to rationalize their cost structures and facilitate a profitable business model within a reasonable period of time. If they are prohibited from merging, then we believe both companies will initiate price increases during 2008.

- We continue to believe the merger has a >50% chance of being approved and that XM’s current stock price embeds a free a call option on it closing.

- We value XM today at $12.50/share on a standalone basis and $18 assuming the merger closes, or $14 and $20 12 months out. We are lowering our 12-month target price to $18 (from $19) to reflect the expected value of XM assuming a 60% probability that the merger closes.

Position - Long Sirius, Long XM