David Bank of RBC issued a report on XM's Q4 and full year operations.


XM Satellite(NASDAQ: XMSR)So Tired...Tired Of Waiting...For The DOJ

Sector Perform Above Average Risk

Investment Opinion

XMSR Trading Will Likely Remain Event Driven, With Minimal Fundamental Upside—Despite mixed 4Q07 fundamentals and continued tepid outlook for retail, XMSR will likely continue to trade around resolution of pending merger with Sirius and probability weighted value of synergies that could emerge from proposed transaction. We are surprised that it has take the Department Of Justice (DOJ) this long to opine the transaction. While we believe probability of deal completion is greater than 50% and NPV of synergies $4bn,we also think current stock price is discounting this and would remain on sidelines throughout likely merger development volatility. Maintain SP rating and$14 price-target.

4Q07 Fundamentals Mixed, Netting To Basically In-line Quarter— Revenues($308mm versus $303mm consensus and our $307mm estimate) and churn(1.72% versus our 1.81% estimate) and 53.9% conversion ratio upticked over 100bps sequentially and YoY (versus 52.5% estimate) all beating our expectations but adjusted EBITDA (negative $117mm versus our negative$110mm estimate), SAC ($87 versus our prior $82 expectation), net adds (460kvs. 524k consensus) all missed expectations. Gross retail additions were abysmal at down 33% over 4Q06.

We're Skeptical Retail Demand Will Materially Improve Near-term— We continue to see anemic retail category demand we don't expect XMSR to reverse its trend of share loss anytime soon. That said, we believe that XMSR is selling the majority of it's aftermarket radios through either Wal-Mart or directly, potentially understating market share (NPD doesn't capture either of these categories) and category demand trends.

No New Merger News—
Management confirmed that all necessary documents have been filed and XMSR/SIRI are simply waiting for regulatory agencies responses. Walk-away date of March 1 but will almost certainly be extended by both party's Boards, if necessary.

We Continue to Think Odds are >50% for Merger Approval but Think That Business As Usual Probably Needs To Change In The Event The Merger Doesn't Occur— XMSR has successfully executed its OEM distribution business. But we believe that as a stand alone company, its retail strategy must, in some way be overhauled. We aren't sure how we'd impact such a change, but we don't see how things will improve without some major action on the part of management.

Tyler Savery Position - Long Sirius, Long XM