Wedbush morgan analyst William Kidd issued a note on Sirius today. Kidd has increased the Wedbush Sirius subscriber guidance for Q2 from 432,000 to 460,000. This move brings Wedbush more in line with concensus on subscribers which currently sits at about 470,000. Kidd also raised XM subscriber guidance from 235,000 to 295,000, in line with street concensus.

Report Excerpts Sirius:

We expect the merger process to continue to overshadow operational results. That said, we believe Q2 results should reflect the positive transition to an OEM-driven mix from retail. We are raising our Q2 net adds estimate to 460k from 423k. Our prior OEM gross additions estimate was too conservative at 419k. Our revised estimate now stands at 526k. We left retail essentially unchanged, with our revised gross adds estimate of 387k almost matching our prior estimate of 395k. Bear in mind, we expect retail sales to continue to be soft, as mid-quarter NPD data suggested that retail sales were down roughly 20% yoy and that XM was holding its recentmarket share gains at 45%. We believe our revised net additions estimate is essentially in line with the consensus. Note: we expect Sirius to release its Q2 results in early August, though it has yet to make a formalannouncement.

A slightly more aggressive Q2 rebate should put SAC near the high end of the range. Sirius ran a hardware rebate promotion, labeled “Dad’s Best Friend” (ranging from $20 to $100), from 4/22 to 6/30, whereas thecompany’s current promotion, “The Summer Offer”, caps out at $30 and encompasses fewer eligible units. Wealso believe that the company has been continuing to aggressively promote to its existing subs for second and third receivers. Consequently, we increased Q2 adjusted SAC per sub to $155 from $144 (our estimate for reported SAC is $100). The higher Q2 promotion level, along with our increase in gross additions, is driving ourhigher quarterly EPS loss.

We are not expecting any material changes to guidance. We believe Sirius is on its way to reaching its 2007subscriber guidance of >8 million subscribers, up from 6.02 million at year-end 2006. We are at 8.2 million year-end subscribers for 2007. In terms of other key metrics: we are at $943 million for revenue, a bit more conservative than the company’s $1 billion guidance, and we are at $99 in SAC relative to the company’s SAC guidance of $95. Our Q1 EPS estimate of ($0.10) is in line with consensus.

Merger process meanders on. With the public comment period on the merger now closed, the FCC is considering a proposed change in rule making, which would reverse the license provision that now prevents the two companies from merging. Although comments from this first phase were overwhelmingly in favor of the merger, the most notable response came from 72 members of Congress who came out jointly against the merger.We continue to think that the issue of market definitions will dominate the regulatory thought process, with regulators having to decide whether or not substitutes, like mp3 and free radio, could serve to restrain a monopoly’s pricing power. Secondly, regulators have to determine whether or not consumers would benefit fromthe combination. Given that we perceive satellite radio to be a fairly price inelastic service, particularly in its sub-$20/month range, we remain skeptical that regulators will conclude that sufficient competition exists, particularly for satellite radio’s unique role as a provider of coast-to-coast audio programming.

The merger proposal has served as an investment overhang since its announcement, which we believehas likely kept many investors on the sidelines. Accordingly, we expect Sirius shares to benefit from theend of the merge process, regardless of the outcome. If regulators deny the merger, which we think is likely, we believe investors would be willing to own Sirius, since they would no longer have to be concerned with how the merger process could drag on. Conversely, although we do not think merger approval is likely, we would imagine that the company’s outlook, and thus its share price, would be considerably brighter with merger synergies included.

Reiterate BUY. Our $4 price target is based on a DCF analysis and does not incorporate any merger premium/benefit, consistent with our view that the transaction has less than a 50% likelihood of approval and thus, will likely be denied within 12 months.

Risks to attainment of our share price target include shortfalls in subscriber growth; increased competitionwhether from XM; AM/FM radio, HD Radio, or streaming-media services; new/increased government regulation; a prolonged and/or failed merger attempt; an inability to renew key content and OEM contracts; satellite anomalies;and an unfavorable outcome in the ongoing arbitration process with record labels over royalty rates.

Report Excerpts XM:

XM seems to have sustained its Q1 market share gains, leading us to positively revise our Q2 net additions. We increased our Q2 net additions to 295k from 235k on a stronger than anticipated retail showing. Although retail sales for both companies continue to be anemic, we believe XM has rebuilt much of the marketshare lost to Sirius in 2006. Our revised net adds estimate is almost entirely driven by higher retail gross adds, which we increased by approximately 30k to 322k.

A strong OEM result could push XM ahead of forecast. In spite of the fact that our revised Q2 net adds estimate of 295k is presently below the consensus of 300-310k, we believe the incremental direction from Q1 is positive. OEM sales for both Sirius and XM should show progress throughout the remainder of 2007. However, relative to our estimates for each company, we believe XM has a greater potential to positively surprise. Havingsaid that, we stress that OEM sales naturally have less visibility than retail sales, given (1) the absence of a party like NPD tracking volumes, and (2) new model-year cars (which should generally incorporate more satellite radios than the year prior) arrive at dealers at varying times and quantities, reducing visibility.

We are not expecting any material guidance changes. XM guided to 9.0-9.2 million subscribers, up from 7.63at year-end 2006. We are at 9.1 million year-end subscribers for 2007. In terms of other key metrics, we are at$987 million for revenue, a tad more conservative than the company’s $1 billion guidance, and we are at $115 inCPGA relative to the company’s updated CPGA guidance of $111-114.

We’re doubtful that a competing bid for XM will emerge, particularly before this merger process has run its course. In recent weeks, speculation has surfaced in the press that a competing bid could emerge for XM,which has lent price support to both SIRI and XMSR. Although we’re skeptical that such a bid will emerge, we believe CBS and Clear Channel (traditional radio) would be among the likely theoretical candidates. Given the low probability of regulatory approval that we assign to the current merger proposal, we naturally question why a competing bid would emerge now, given that the bid would be essentially forced to compete with the existingoffer, irrespective of the existing offer’s low likelihood. In other words, we would think that a competitive bid wouldlikely have to incorporate a meaningful premium on top of the already proposed merger premium. Based on merger proposal, XM shareholders would receive 4.6 shares of Sirius for each XM share, valuing each XM share at approximately $13-14 based on recent prices.

We are maintaining our HOLD rating and $14 target based on our DCF analysis. Our valuation does not incorporate any merger premium/benefit, consistent with our view that the transaction has less than a 50% likelihood of approval.

Risks to attainment of our share price target include shortfalls in subscriber growth; increased competitionwhether from XM; AM/FM radio, HD Radio, or streaming-media services; new/increased government regulation; a prolonged and/or failed merger attempt; an inability to renew key content and OEM contracts; satellite anomalies;and an unfavorable outcome in the ongoing arbitration process with record labels over royalty rates.

Tyler Savery Position - Long Sirius, Long XM -IMOJB-