Morgan Joseph issued a Q2 preview note on XM Satellite Radio Today. Report Excerpts below:
XM Satellite Radio Holdings Inc.
2Q07 Preview: Should Finally Meet or Exceed Low Expectations
- Reset expectations create an opportunity.
During the past year, XM's struggles to meet expectations have led us to ratchet down our numbers to a point we believe is very achievable. We now forecast 293,800 subscriber additions vs. 398,000 last year. We expect 2Q07 revenue and EBITDA of $279.5mm and ($41.7mm) vs. $227.9mm and ($165.5mm) in 2Q06. Our EPS forecast is ($0.29) vs. ($0.66) last year. We expect SAC (subscriber acquisition cost) of $62.95 and CPGA (cost per gross addition) of $107.93 vs. $63.99 and $112.00 in 2Q06. In our view, the satellite radio sector should benefit in 2H07 as the OEM (original equipment manufacturer) channel begins to drive the business. However, despite our belief that additional merger-related downside is limited, we maintain our Hold rating on XM.
- Retail segment continues to struggle; momentum shift underway.
According to NPD data, total retail market sales remain weak. Total sales fell 22% in April and 23% in May (vs. a 28% decline in March). XM's sales fell 27% in April and 26% in May (vs. a 23% decline in March). The company's share remained at 45% in April and May. We note that the rate of decline in retail sales has improved in recent months, which may signal a shift, however small, in the trend for the retail segment, which would certainly be a positive.
- Looking for an OEM channel update.
We believe the company's OEM partners hold the key to its future success given that they should begin to ramp in 2H07 and 2008 as new 2008 vehicles carry increased numbers of XM radios as factory-installed features. We believe XM's future success rests on the efforts of partners like General Motors (GM - $35.12 - NYSE), Toyota (TM - $123.19 - NYSE), Hyundai (HYMLF.PK - $57.64 - OTC), and Nissan (NSANY - $21.59 - NASDAQ).
- Despite the companies' confidence, we see merger approval as unlikely.
The companies remain confident they will obtain DOJ and FCC approval and close the deal by year-end. However, we believe the probability for merger approval remains small. In the end, XM's positioning relative to Sirius (SIRI - $3.21 - NASDAQ - Buy; see our report published June 25, 2007) makes approval more important for XM, in our view.
Tyler Savery Position - Long Sirius, Long XM