Mark Wienke of Goldman Sachs Issued reports on XM and Sirius Satellite Radio today. The analyst sees XM as a sell with a 12 month price target of $11.50. Wienke sees Sirius as a sell with a price target of $2.25.
REPORT EXCERPTS FOR XM
XM: In-line 1Q08, but long-term industry concerns unanswered
XM’s 1Q results fell modestly short of our financial estimates owing to higher than expected costs, though the top-line and subscriber metrics were essentially in-line. Specifically, XM’s 1Q net adds of 303k essentially matched our estimate, SAC was slightly worse than expected at $73 (GSe $68), while CPGA was $99 vs. our $100 estimate. Encouragingly, conversion ticked up to 53.3% versus 51.5% a year ago, while churn and ARPU were essentially flat yoy at 1.77% and $10.36, respectively. We are lowering our 2008 – 2010 LPS estimates to ($1.75), ($1.20), and ($0.85).
Trends and management focus has shifted to an OEM-centric model, and the cost structure, as expected, is following the transition. Specifically, as OEM penetration increases, revenue share and royalties (+45% yoy in 1Q08) are, and will continue to, ramp in lockstep. Furthermore, for the second quarter, net retail adds were negative at (-51)k vs. +60k a year ago. 2008 financial targets were again not provided, citing the pending deal approval, upon which we would expect an aggressive integration plan with an improved combined profitability profile, save for the cost of compliancewith deal conditions. In the even the merger does not happen, we would expect fairly dramatic cuts in the overall expense base, owing to the continued losses (-$129)mn at XM in 1Q08 and higher yoy. As a note, XM ended 1Q08 with $425mn in available liquidity, down $300mn yoy. Absent a merger and given continued losses, any significant deviations from internal targets may exacerbate future funding requirements.
We are maintaining our Sell rating and 12-month price target of $11.50 based on our DCF and the expected value upon a merger.
Upside risks include ‘clean’ merger approval and accelerating net adds
REPORT EXCERPTS FOR SIRIUS
1Q2008 performance…depends on the metric; 1Q2008 review
Sirius’ 1Q2008 results were mixed, with most financial metrics largely improving yoy, but with core business metrics weakening. On the financial metrics, slower subscriber growth resulted in lower-than-expected revenue, but expense controls led to an improved, and slightly better-than-expected, EBITDA loss. Reported 1Q adjusted EBITDA of -$39.5 mn improved by $44 mn yoy owing mostly to a 10% yoy improvement in SAC. On the core business metrics, the trend in net adds (only 2.5k net retail additions), churn (up to 2.7% from 2.3%), and ARPU (down yoy) confirm our Cautious view on the industry and Sirius’ equity valuation, given the market opportunity. Total 1Q2008 revenue increased 33% yoy to $270 mn, below our $275 mn estimate, while total OpEx rose 6% to $359 mn. Lower-than expected SAC of $91 (vs. $101 a year ago) led to adjusted EBITDA of -$62 mn vs. our -$71 mn estimate. This resulted in EPS of -$0.07 vs. our -$0.08 estimate. ARPU of $10.42 was below our $10.52 estimate, while churn of 2.7% rose 40 bp yoy from 2.3% a year ago.
Sirius saw 190k lower retail net adds in 1Q2008 vs. 1Q2007, with only 2.5k net retail adds out of the 323k total net adds, confirming the channel deterioration. OEM net adds fell 43.5k yoy to about 321k, but the penetration story looks to largely play out in 2008. As a result, the net change was about 234k fewer net adds in 1Q2008. We think this will continue in 2008, and expect just 1.8 mn net adds vs. 2.3 mn in 2007 and 2.7 mn in 2006. Sirius is still moving toward EBITDA breakeven, but the worrying sub trends, rising churn, and falling ARPU seem likely to make realization of free cash flow—sufficient to justify the valuation—challenging at best.
We maintain our 12-month $2.25 price target, using our DCF valuation.
“Clean” merger approval, superior execution, financial outperformance
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Position - Long Sirius, XM.