RBC analyst David Bank issued the following on Sirius' Q4.
SIRI Is Actually Executing According To Plan, But Given Merger Arb Related Trading And Limited Longer-term Visibility, We Don't See Much Fundamental Upside—Trading largely dictated by outcome of pending merger with XMSR (management indicated they would give guidance "following approval of the pending merger"). We think given relatively challenging environment (anemic retail demand, slowing auto sales, tough consumer economy) SIRI is executing reasonably well, but we just don't see material upside from here. Maintain Sector Perform rating. New $3 probability weighted price-target (assuming$4bn total synergies and 70% probability of completion).
Few 4Q07 Results Surprises—YE07 subscribers of 8.3mm were in line with pre-announcement. While SIRI's subscription ARPU ($9.64) versus our $10.38 estimate, churn and SAC were better than expected (2.3% and $90 versus our prior 2.4% and $100 estimate). Despite OEM ramp up cycling through, churn remained relatively stable. However, ARPU was reduced on increasing prevalence of in-store rebating. Rebates are contra-revenue item. While the number of rebate offers on aftermarket products hasn't really increased, the policy of mailing in rebate requests has migrated toward more in-store rebates. As a result, take rates on rebate offers has jumped to virtually 100% versus much lower mail-in follow through.
Penetration Rates Ramping, But Outlook For Auto Manufacturing Is Weak And Retail Is Tepid, Potentially Limiting Near-term Upside To Numbers—SIRI installs will approach 70% of manufactured cars at Chrysler/Ford by YE09 with penetration in other models such VW/Audi approaching 80%. In FY08, expect blended penetration across models 50%. But outlook for auto sales is soft and retail (despite increased SIRI share) category demand is anemic, so near-term upside to sub estimates is probably limited.
Waiting For Merger To Clear Or Fail—We've long been of the opinion SIRI and merger partner XMSR have made every requisite efforts to alleviate DOJ/FCC regulatory concerns through ala-carte pricing initiatives, program tiering and generally constructive tone regarding conditionality. Additionally, we believe market definition of satellite radio competition goes beyond the category. That said, now that we've moved past one year since transaction was announced, the longer it takes, probability of completion declines. Also, merger "walk away" date (3/1/08) is now approaching.
Position - Long Sirius, XM