Lehman analyst Vijay Jayant issued the following note on Sirius.
Sirius Satellite Radio (SIRI – US$ 3.04) 1-Overweight
Earnings Review/Sales Analysis
Results Show Spending Discipline
Investment Conclusion Sirius’s 4Q07 exhibited strong cost controls, with operating expenses below our forecasts across the board, leading to above-forecast EBITDA and FCF. As the company moves increasingly to an OEM-driven model, spending on consumer marketing has been materially ramped back, resulting in a material YoY decline in fixed marketing spend and variable marketing costs, resulting in lower-than-expected SAC. EBITDA also benefited from a lower-than-expected CRB true-up payment ($13MM vs. $30MM forecast). ARPU was well below forecast, due to a material YoY increase in rebates, which appear to have become a more popular marketing tool for the company than promotional spending. We expect the stock to react modestly positively to the company’s spending restraint in the quarter, although we believe investors remain primarily focused on the outcome of the proposed XMSR-SIRI merger.
Subscriber Mix Continues to Shift Toward OEM. Sirius had previously reported 654k net additions. SIRI added 212k net retail subscribers in 4Q07 (vs. our 313k estimate) and 444k net auto OEM subscribers (vs. our 313k estimate). Sirius generated 1.19MM gross adds in 4Q07, in line with our 1.19MMk estimate. Monthly churn was 2.25%, up modestly from 2.05% in 4Q06.
ARPU Below Forecast. Subscriber ARPU (incl mail-in rebates) was $9.64, below our $10.13 estimate and down from $10.39 in 4Q06 due to subscriber mix shift toward OEM and more rebates.
SAC and CPGA Below Expectations. Subscriber Acquisition Cost (SAC) was $90 vs. our $100 estimate, down YoY from $103, as lower unit costs YoY were partially offset by a higher proportion of higher-cost OEM gross adds. Cost Per Gross Add (CPGA) was $134, well below our $165 estimate.
Revenue Below Forecast. The company recorded $250MM in 4Q07 revenue, below our $271MM estimate due to lower ARPU.
EBITDA Loss (Net of Option Expense) Better than Expected. Sirius reported a ($107)MM 4Q07 EBITDA loss net of option expense, better than our ($160)MM estimate. The loss included a $13MM charge for the CRB true-up, the cash for which will be paid in 1Q08.
FCF and EPS Better than Expected. Sirius reported an $82MM FCF gain, better than our $76MM estimate, driven by below-forecast cash from operations ($90MM vs. our $94MM estimate) offset by better than expected capex ($7.4MM vs. our $18.0MM estimate).
EPS loss at $0.11 was better than our expectations.
Valuation. Our YE 2008E price target of $4.90 is based on a stand-alone Discounted Cash Flow (DCF) valuation. Our key assumptions include risk free rate of 5.0%, an equity risk premium of 4.8%, levered beta of 1.0, cost of debt at 8.5%, target debt-to-capital of 40%, and unlevered free cash flow (FCF) growth rate in perpetuity of 3.0%, yielding a 7.9% weighted average cost of capital (WACC) and 21x multipleon terminal year unlevered FCF.
Position – Long Sirius, XM