Thursday, August 10, 2006

Calls of Note Part 1

- Deutsche Bank traveled with SiRF (NASDAQ:SIRF) management yesterdat. Firm continues to believe that the long-term outlook for SIRF remains intact. On its most recent conf call they stated their belief that the wireless segment would begin to grow later this year with revenue ramping in 1H07. This is the most definitive statement yet from them over the timing of demand for GPS in the wireless sector.

A trip to Costco reveals that the Magellan PND products now use SiRF Star3. With Magellan now a customer SiRF has wins with all the top PND OEMs as welll as new entrants. They also expect growth in consumer demand as PND ASPs drop below $300. Firm expects to see bundled GPS/Bluetooth and GPS/DVB-H product ins 2007. Views these offerings as good niches for the company.

With demand beginning for the Christmas and (Street-centered) concerns over competition dwindling they think SIRF shares remain undervalued. Over a 2-3 year horizon the firm believes the company can maintain a 40% growth rate as GPS penetration into wireless and consumer electronics increases (although we are currently modeling only 20% growth). Maintains Buy rating.

Notablecalls: Not actionable but good to know category.

- Banc of America notes that both XM Satellite (NASDAQ:XMSR) and Sirius (NASDAQ:SIRI) should soon begin to resume manufacturing 'plug-and-play' radios for retail, but firm's concern is that neither company will be able to find a FCC approved solution that will appeal to consumers - there is risk to our retail subscriber estimates, as they believe up to half of the retail market could 'vanish'. Firm's discussions with industry contacts have led them to believe that the products that might be shipped could result in HIGH RETURNS/CHURN. The options for XM & Sirius seem to be boiled down to 2 poor solutions: 1) a more cumbersome installation - requiring a wire into the car's antenna (XM might lean this way) or 2) producing units with FM transmitters that are fully FCC compliant, but that have a weaker signal (e.g., Sirius' Sportster4). Notes that both companies continue to look for more viable consumer solutions. But the clock for 4Q is ticking.

Firm's 'worst case' retail scenario implies limited downside risk for XMSR but 55% downside potential for SIRI shares. They estimate that roughly 50% of retail units rely on wireless FM transmitters (not hardwired or directly connected) - and thus, they estimate that up to half of the retail market could 'vanish'. If this were to happen, they est. that XMSR & SIRI would be worth ~$11 and $1.75, respectively.

They do not think a liquidity crisis is imminent for either company under even the 'worst case' retail scenario. XM can tap $400M in credit facilities to meet funding needs ($250M from a group of banks and $150M from GM). And both companies could encourage subscribers to prepay by offering discounts or look to engage in sale-leaseback financing with existing satellites. A greater % of subscribers from the OEM channel likely means slower market penetration and slightly lower profitability.

Sat radio group could remain under pressure until there is more clarity regarding the FCC issue - still prefer XMSR / lowering SIRI px tgt. to $4. Firm believes SIRI's premium valuation is unwarranted - the company is simply behind XM in the churn "curve" and will see a spike in 2007, as current OEM promo subs convert or churn - also 8% of SIRI subs are simply "accelerated / not yet active". Furthermore, SIRI has set lofty goals for investors, in firm's view (e.g., positive FCF in '07) - they prefer XMSR in an environment where the viability of the satellite radio model is increasingly questioned.

Firm's call today in a nutshell: The "solution" to the FCC issue could damage retail demand. If they reduce their retail gross add estimates for 4Q06 and beyond by 50%, they estimate that downside to fair value estimate for XMSR is limited but downside to fair value estimate for SIRI is 55% - they continue to recommend the XMSR/SIRI pair.

Notablecalls: Not actionable but good to know category. Think SIRI may see some additional downside pressure today but shorting a sub-$4 stock...

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