Lucas Bookbinder of UBS issued a note today on XM satellite Radio. The firm seems to fall pretty much in line with consensus, and outlines a ramping up of OEM happening at XM. As we have stated prior, and this note confirms, a slight bump in SAC and CPGA should be expected due to the structure of the OEM deals and how subscribers are counted from Toyota, Nissan and Hyundai.
OEM Ramp Expected to Drive 2H07
2Q07 Preview: Q-q sub growth brings us closer to y-y net add growth
XMSR will announce its 2Q07 results before the open on July 26, with a 10:00am conference call that morning. We expect XMSR to announce net additions of 300K, which is up 5% q-q but still down 25% y-y. We believe OEM penetration is picking up and this will be the largest driver in 2Q07 results. Additionally, we continue to expect 315K net adds in 3Q07, which will be up both on a q-q basis and for the first time in five quarters up y-y.
Inflation in acquisition costs due to growth in factory installs
As we have discussed in the past, with the new OEM agreements (i.e., Toyota, Nissan, and Hyundai), SAC and CPGA will be inflated as these new vehicles are added with a subsidy, but not as a subscriber. As a result, as the penetration builds with these partners, the near-term impact is higher SAC/CPGA. Over time, this will normalize as subscribers from these OEMs will be added without a subsidy.
Updates on merger progress expected during the call
The first round of comments for the FCC have been submitted. The deadline for reply comments from XM and SIRI is July 24. While the process for the merger continues to move forward, we believe the next key milestone will be comments from the DOJ on competition. We do not expect a decision until late 3Q/early 4Q.
Valuation: Maintain Buy 2 and $15 target
We base our price target on a detailed DCF analysis. Our assumptions include a 3% growth in perpetuity and a 13% WACC.
Position - Long XM -IMOJB-