Janco issued a note on XM Satellite Radio today. The report discussed XM's upcomming Q2 conference call as well as the proposed A La Carte Pricing. The firm has a $15 price target on XM.
A La Carte Offering Could Be Good & Bad
- XM 2nd Quarter Forecast:
XM will report its second quarter results on July 26, 2007 at 10AM EST. The dial in number is 877-265-5808, and conference ID is 6562974. Beginning in 2007, XMSR no longer pre-reports quarterly subscriber net additions. We are forecasting that XMSR will have total net additions of 314,000, which is in line with consensus. In addition, we are forecasting a strong contribution from the OEM channel of 220,000 subscribers. We expect XM to generate $270 million in total revenue, and incur an EBITDA loss of $41 million. With regard to retail churn, we are forecasting 1.8%, which is slightly higher due to the anticipated Fathers Day upgrades. In addition, we are also forecasting Cost Per Gross Addition (CPGA) to increase to $116, up from $103 in Q1, due to higher OEM additions.
XM/SIRI Announce A La Carte Update Pricing
Yesterday, XM and SIRI announced the future merged programming offerings to consumers. They are clearly using all the right buzz words (i.e. a la carte and family friendly) in order to gain regulatory approval. Yesterday’s announcement outlined pricing ranging from as low as $6.99 to a high of $16.99. In addition, the companies stated that consumers could purchase channels on an a la carte basis at $0.25 per month. The Super Premium packages for XM are $3.00 to $6.00, and for SIRI they are $5.00 and $6.00. We assume the super premium packages are for Howard Stern, NFL, MLB, Martha Stewart, or Oprah Winfrey. While the proposed pricing plans may help get the merger approved, we think there is risk that the consumer may get even more confused with too many choices (see page 2 for pricing plans). We also have some hesitation about existing customers downgrading their service plans from the $12.95 to the $6.99. Alternatively, the bulls would say the $6.99 pricing plan could entice more customers. We believe this increases the risk to the business models due to the uncertainty on consumer demand and elasticity. Unfortunately there is not enough data to try and model the combined companies with this type of pricing plan.
Valuation and Ratings
We continue to rate XMSR and SIRI as Market Performs primarily as a result of the proposed merger uncertainties, and concerns regarding retail sales growth. XMSR and SIRI shares have essentially been trading in tandem since the announcement of the merger, and recently both companies’ shares have been inching up. We believe they have inched up due to the hard sell that SIRI is making with the FCC. SIRI’s shares closed at $3.21, which implies that XMSR should be valued at approximately $14.76. If one values XMSR on a stand alone basis, taking into consideration higher SAC and our EBITDA loss of $194 million, our DCF model would indicate a price target of $15
Tyler Savery Position - Long Sirius, Long XM