Janco issued a report on Sirius today. While they do carry some interesting points, they also miss some factors that I found a bit of a surprise. For example, they have the FCC comment total at 75 comments thus far, and the totals are actually approaching 5,000. Also the comments relating to subscriber numbers are interesting. They are anticipating an announcement from Sirius prior to the earnings call. I do not see Sirius making such an announcement. Likely, at this point, sub numbers will be delivered in the conference calls. Also, some of the OEM comments are peculiar to me. Mercedes, or Sirius for that matter, has not announced a take rate as yet, but have announced intended installation rates.
SIRI’s Second Quarter Forecast
SIRI hasn’t formally announced when they will release earnings; however, we estimate that it will be sometime in the third week of July. We have updated our model for SIRI’s most recent $250 million debt funding. As stated previously, we were not surprised that SIRI raised additional cash, as cash looked a tad tight for 2008. For the quarter, we are expecting SIRI to have net additions of 450,000, which is slightly below consensus of 466,000. We expect that SIRI will have net OEM subscribers of 293,000 and net retail additions of 158,000. As stated in our report dated June 6,2007, there could be upside for the OEM group if the penetration rate remains at 28%. The wild card is the conversion rates of Ford and Chrysler. We assume they are well below Mercedes, and below XM’s overall conversion rate of 52%. For the quarter we expect SIRI to generate $228 million in revenue, and incur an EBITDA loss of $71 million. We also estimate that SAC will remain at $104, as we are forecasting Q2 to be consistent with Q1 OEM additions being at 65%.
Mercedes Recently Stated they were at an 80% Conversion Rates
Mercedes also stated that they still plan to be at a 90% penetration rate by 2009. While we think this is good news, Mercedes is only about 8% of SIRI’s total OEM opportunity.
Consensus About Merger Still Appears to be 50/50
In just 25 days into the comment period, we note over 75 comments have been filed with the FCC. It appears that the companies are focused on finding a broad range of supporters including; the League of Rural Voters, FamilyNet Radio, National Council of Women’s Organization, etc. Most of the opposition filings are from local broadcasters like North Carolina and Alaska, with the largest association being the National Association of Broadcasters (NAB). While it appears nice thatXM/SIRI has a wide range of support; it’s unclear how much these comments are factored into the FCC’s decision-making process. (i.e., more diversity, or just volume).
Hoping For a 7 million Subscriber Press Release Soon
SIRI reports its subscriber information with their financial results. However, they usually will issue a press release when they obtain certain subscriber milestones. As stated above, we expect SIRI to add 450,000 subscribers in the quarter, and end the quarter with just slightly above 7 million. Therefore, investors should be on the lookout for a press release, which would indicate that they are on track for the quarter.
Valuation and Ratings
We continue to rate XMSR and SIRI as Market Performs primarily due to the proposed merger uncertainties, concerns regarding retail sales growth, and SIRI’s softness in advertising revenue. We have made some minor changes to the model for the new debt, subscribers, SAC and advertising revenue and maintaining our price target of $3.20. If SIRI’s share price remains in the $3.00 neighborhood, it would imply that XMSR should be valued at approximately $13.80. We don’t believe the shares of XMSR and SIRI will significantly appreciate based upon business fundamentals, but will trade based upon regulatory sentiment.
Tyler Savery Position - Long Sirius, Long XM -IMOJB-