Sirius Satellite Radio Rating: Buy

Transcription

1 SATELLITE, CABLE & BROADCASTING David B. Kestenbaum Company Update / Estimates Change February 8, 2006 Key Metrics SIRI - NASDAQ $5.76 Pricing Date 02/07/2006 Price Target $ Week Range $7.98-$4.36 Shares Outstanding (mm) 1,331.5 Market Capitalization ($mm) $7, Mo Average Daily Volume 50,369,216 Institutional Ownership 28% Debt/Total Capital 1.9% ROE NM Book Value/Share $0.43 Price/Book 13.4x Dividend Yield NM LTM EBITDA Margin NM EPS($) FY: December Prior Curr. Prior Curr. 2004A 2005E 2005E 2006E 2006E 1Q-Mar (0.12) -- (0.15)A -- (0.13)E 2Q-Jun (0.11) -- (0.13)A -- (0.12)E 3Q-Sep (0.14) -- (0.14)A -- (0.14)E 4Q-Dec (0.21) -- (0.23)E -- (0.20)E FY (0.57) -- (0.65)E (0.51)E (0.59)E P/E NM NM NM Revenue($mm) Prior Curr. Prior Curr. 2004A 2005E 2005E 2006E 2006E 1Q-Mar A E 2Q-Jun A E 3Q-Sep A E 4Q-Dec E E FY E 572.6E 592.7E 1 Year Price History for SIRI Q1 Q2 Q Created by BlueMatrix Company Description: Sirius Satellite Radio ( is one of two licensed providers of satellite-delivered radio programming content in the United States. Along with XM Satellite Radio, Sirius transmits over 120 channels of mostly commercial-free programming nationwide consisting of talk, news, sports, and interruption-free digital music. While satellite radio content is generally delivered to the automobile, Sirius does make radio receivers available that can be used outside the car Sirius Satellite Radio Rating: Buy 4Q05 Preview; Updating Forecast and Introducing 2006 Quarterly Estimates Investment Highlights: On January 5, 2006, Sirius Satellite Radio announced that it ended 2005 with 3.3mm subscribers and now expects to end 2006 with over 6.0mm subscribers. This is in line with our updated 2006 year-end subscriber estimate of 6.04mm. We believe the company had a very solid holiday season in tandem with a seamless debut of Howard Stern's show and related programming on January 9, In addition, we believe momentum-to-date in 2006 has been strong on the heels of carry over demand from the solid holiday season and the demand for Howard Stern. We expect Sirius to report 4Q05 results in mid-february. Our 4Q05 expectations include revenues of $76.4mm, an EBITDA loss of $275.4mm, and a per-share loss of $0.23. We expect 4Q05 monthly churn of 1.5%, total SAC (subscriber acquisition cost) of $150.3mm, and SAC per subscriber of $ We are introducing quarterly estimates for 2006 and updating our full-year 2006 projection. We expect Sirius to report 1Q06 revenues of $131.0mm, an EBITDA loss of $138.1mm, and a per-share loss of $0.13. For the full-year 2006, we are adjusting our revenue and subscriber estimates higher to $592.7mm from $572.6mm and 6.04mm from 5.87mm, respectively. In addition, we are raising our SAC-per-subscriber estimate for 2006 to $ from $ As a result, we are increasing our loss-per-share estimate to $0.59 from $0.51. We reiterate our Buy rating and $8 price target. Our price target is based on DCF analysis, assuming a 12.7% discount rate and a terminal growth rate of 6.5%. Using a beta of 1.5, we generate a WACC of 12.7%. Discounting the cash flows in our seven-year DCF model by the theoretical WACC, with the assumption of a 6.5% long-term growth rate after 2011, supports an $8.00 price target. However, we note that due to traditional seasonal weakness in Sirius' share price, we would not be surprised if the stock traded lower or remained range-bound for the next few months. The Disclosure section may be found on pages 8-10 of this report. The Valuation section may be found on page 8 of this report.

2 In advance of Sirius' 4Q05 earnings report, which we expect sometime in mid-february, we are providing a preview of our expectations as well as a discussion of several of the issues currently surrounding the company. These include the supply of radios and next-generation radio launches, the health of the OEM channel, the launch of service in Canada, potential share sales by Howard Stern, the RIAA, and piracy of Sirius programming (especially Howard Stern's morning show). We believe Sirius remains well positioned heading into 2006 given the growing popularity of its service and the incredible response that Howard Stern's show has gotten in its first month on the air. We believe that Sirius' exposure to the OEM channel is set to explode over the next year and believe the technological gap that plagued the company in its first few years has narrowed and will close this year as consumers choose between providers based mostly on content. For 4Q05, we are expecting revenues of $76.4mm, an EBITDA loss of $275.4mm, and a per-share loss of $0.23. We believe the company will report 4Q05 monthly churn of 1.5% and total company-wide subscriber acquisition costs of $150.3mm. In introducing 2006 quarterly estimates, we have updated our full-year 2006 estimates. Our 2006 revenue and subscriber estimates move higher, to $592.7mm and 6.04mm from $572.6mm and 5.87mm, respectively. In addition, we are raising our SAC-per-subscriber estimate for 2006 to $ from $ As a result, we are increasing our loss-per-share estimate to $0.59 from $0.51. Some Sirius Issues During the holiday period, our checks indicated that supplies of radios was extremely tight, with the end of the quarter seeing many locations sold out as the launch of Howard Stern's show drove substantial subscriber additions. We believe supplies were especially tight in the New York City area, given that this is Stern's home market and that marketing for both satellite radio services was substantial. In our view, the radios with the tightest supply have included the S50, the Sportster, the Starmate Replay, and the similar devices produced by other manufacturers. In addition, our checks indicate that the company's high-end radios (beyond those selling at the $49.99 price point) were the hottest sellers in the quarter, a positive given that this indicates the customers Sirius is signing up may not be those who are prone to high churn levels. During the Consumer Electronics Show last month in Las Vegas, much was made of the announcements out of XM Satellite Radio (XMSR - $ NASDAQ - Buy; see our report published on January 9, 2006) about a number of new portable radios that provide live radio listening. These new devices included the Samsung ( KS - W706,000 - KSE) Helix ($399.99) and Samsung NEXUS ($ $249.99); the Pioneer Inno; and a line of products based on a new technology the company is calling XM Passport. While these products were indeed impressive, XM will not make them available until late 1Q06 or early 2Q06. In our view, Sirius will launch a similar device at some point this summer that we believe will be a companion, or even a replacement, to the S50. We believe the company did not want to release or announce the device before it was ready for sale. This should move Sirius very close to narrowing, or even closing, the technological gap that has plagued it since the two companies launched service, and we believe its upcoming device will do just that. In our view, 2006 is a very important year for Sirius in terms of the strength of its OEM channel. We believe 2005 set the stage for a vital months for the company when many of its OEM relationships begin to hit. Importantly, the Ford Motor Company (F - $ NYSE) will make Sirius radios available on up to 21 models by the end of 2006, up from the current level of only four models. We believe the company's signature 2 MORGAN JOSEPH & CO. INC.

3 DaimlerChrysler (DCX - $ NYSE) relationship will continue to grow and expect Toyota (TM - $ NYSE) to expand as well, which should reflect on the company's ability to generate new subscribers. In addition, we believe XM's heavy reliance on troubled car maker General Motors (GM - $ NYSE) will give Sirius the chance to narrow the OEM gap. On December 1, 2005, Sirius Canada began broadcasting 100 channels of music, entertainment, and sports programming to Canadian subscribers. The service also includes 10 Canadian-based and Canadian-produced channels, including CBC Radio One, CBC Radio 3, Iceberg Radio, Hardcore Sports Radio, Première plus, Info plus, Bande à part, Rock Velours, Energie(2) and RCI plus. The service now includes, as of February 6, 2006, Howard Stern on Howard's channels 100 and 101. We believe Sirius Canada, while not encompassing a huge addressable market, should drive additional revenue for the company. In addition, we believe the capital investment in the Canadian market is minimal, given the lack of needed repeaters (Sirius needed to install only five terrestrial repeaters to cover the entire country vs. approximately 100 for the US). Finally, on January 9, 2006, Sirius granted Howard Stern and his agent, Don Buchwald, 34,375,000 shares of common stock for reaching a subscriber milestone set in the initial contract, which we believe was 3.0mm by the end of Subsequently, on January 11, 2006, Sirius registered these shares for sale with the SEC. Stern, at the time of the filing, controlled 31,250,000 of the shares and Buchwald controlled 3,125,000. The filing gave Stern and Buchwald the ability to sell shares at will without further disclosure. Given that the share grant was in restricted shares, the tax consequences were immediate and would have saddled Stern with a tax bill of approximately $80.0mm-$90.0mm. We believe that Stern will likely sell some of these shares in the near-term to cover his tax bill. Given the average daily volume of Sirius shares, such share sales should have little effect on the market. RIAA Royalty Dispute Sirius and XM have been locked in a dispute with the RIAA (Recording Industry Association of America) over royalty payments for music the two companies air on their commercial-free stations. Under the current regime of royalty payments within the music industry, terrestrial and satellite radio providers pay royalties to four organizations: ASCAP (American Society of Composers, Authors, and Publishers), BMI (Broadcast Music, Inc.), SESAC (SESAC, Inc., formerly known as Society of European Stage Authors and Composers), and the RIAA. Under current payment terms, the terrestrial radio providers pay low-single-digit percentage royalties to only ASCAP, BMI, and SESAC, which collect payments for song lyrics and music. XM and Sirius pay the same royalties, but are also forced to pay a royalty to the RIAA for the recording of the song. The two providers are currently working to renew their contract with the RIAA, which expires this year, but are saying that the $20bn per year terrestrial radio industry does not have to pay the RIAA, and they believe they should not as well. We expect a compromise to be reached which should only slightly raise the royalty level. Piracy a Major Issue Illegal recordings of Howard Stern's shows are now widely available for download from a number of popular peer-to-peer file sharing Internet sites not long after the show airs on Sirius. This comes on the heels of an illegal terrestrial re-transmission of the program in New York and New Jersey on the first few days the show was on the air. In an ironic twist, the RIAA is siding with Sirius to help put an end to the illegal recording of Stern's show. 3 MORGAN JOSEPH & CO. INC.

4 We highlight Sirius' warning about this issue in its filings with the SEC. In the company's annual 10-K filing with the SEC made on March 16, 2005, Sirius said "individuals who engage in piracy may be able to obtain or rebroadcast our satellite radio service without paying the subscription fee. Although we use encryption technology to mitigate the risk of signal theft, such technology may not be adequate to prevent theft of our signal. If signal theft becomes widespread, it could harm our business." This indicates the challenges the company faces in maintaining the proprietary nature of its programming and the challenges new technologies like digital recording and file sharing over the Internet pose to thieves who are determined to steal signals and programming. 4 MORGAN JOSEPH & CO. INC.

5 Quarterly and Annual Revenue Support E ($ in millions) 1Q04 2Q04 3Q04 4Q Q05 2Q05 3Q05 4Q05E 2005E 1Q06E 2Q06E 3Q06E 4Q06E 2006E Revenues Total Ending Subscribers Net Adds , , , ,719.0 Gross Adds , , , ,846.8 Overall Churn 1.7% 1.5% 1.5% 1.5% 9.0% 1.3% 1.4% 1.8% 1.5% 1.5% 1.5% 1.5% 2.0% 1.4% 18.7% Gross Adds , , , , Annualized Churn 6.9% 5.4% 5.6% 5.1% 20.4% 5.1% 4.9% 6.8% 7.2% 21.6% 5.1% 4.9% 6.8% 7.0% 21.6% Churned Subscribers , Net Adds , , , , Beginning Subs , , , , , , , Ending Subs , , , , , , , , , Average Subs , , , , , , , , , Months ARPU/Month $11.34 $11.72 $12.07 $9.00 $8.38 $12.55 $11.45 $12.15 $9.10 $8.79 $12.50 $11.25 $12.00 $9.15 $10.42 Total Retail Subscription Revenues $7.8 $10.7 $14.4 $16.8 $49.7 $33.3 $39.9 $53.2 $58.3 $184.7 $110.8 $116.1 $140.4 $128.2 $495.4 Gross Adds (16.908) Annualized Churn 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Churned Subscribers Net Adds (16.908) Beginning Subs Ending Subs Average Subs Months ARPU/Month $6.40 $6.75 $7.00 $6.75 $6.73 $6.80 $6.75 $6.75 $6.75 $6.75 $6.80 $6.75 $6.75 $6.75 $6.75 Total OEM Subscription Revenues $1.0 $1.8 $3.1 $5.1 $11.0 $7.8 $8.9 $10.3 $11.8 $38.8 $12.4 $13.3 $14.3 $15.3 $55.3 Gross Adds (0.319) (0.976) (0.718) (0.320) Annualized Churn 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Churned Subscribers Net Adds (0.319) (0.976) (0.718) (0.320) Beginning Subs Ending Subs Average Subs Months ARPU/Month $5.17 $6.75 $7.00 $9.28 $5.00 $9.50 $9.00 $9.50 $9.25 $4.66 $9.50 $9.00 $9.50 $9.25 $9.00 Total Rental Company Sub Revenues $0.4 $0.5 $0.5 $0.8 $2.2 $0.8 $0.7 $0.8 $0.8 $3.1 $0.8 $0.8 $0.9 $0.9 $3.4 Total Subscription Revenue $9.202 $ $ $ $62.88 $ $ $ $ $ $ $ $ $ $ Year/Year Change NE NE NE NE NE 355.4% 283.2% 256.6% 212.1% 260.4% 195.8% 162.3% 142.0% 103.9% 144.5% Sirius Advertising Revenue $0.020 $0.130 $0.249 $0.507 $0.91 $0.534 $1.052 $1.508 $3.000 $6.094 $6.000 $7.000 $8.000 $ $ Percentage of Revenues 0.2% 1.0% 1.3% 2.0% 1.4% 1.2% 2.0% 2.3% 3.9% 2.6% 4.6% 5.0% 4.8% 6.4% 5.2% Total Activation Revenue $0.000 $0.000 $0.000 $0.000 $0.00 $0.000 $0.000 $0.000 $0.000 $0.000 $0.000 $0.000 $0.000 $0.000 $0.0 Other Revenue $0.02 $0.0 $0.0 $0.121 $0.17 $0.011 $0.017 $0.020 $0.020 $0.068 $0.011 $0.017 $0.020 $0.020 $0.1 Equipment Revenue $0.05 $0.14 $0.82 $1.885 $2.90 $0.77 $1.50 $1.03 $2.50 $5.80 $1.00 $2.00 $1.50 $3.00 $7.50 Total Revenues $9.291 $ $ $ $ $ $ $ $ $ $ $ $ $ $ Source: Company reports and Morgan Joseph & Co. Inc. estimates 5 MORGAN JOSEPH & CO. INC.

6 Quarterly and Annual Income Statements E ($ in millions) 1Q04 2Q04 3Q04 4Q Q05 2Q05 3Q05 4Q05E 2005E 1Q06E 2Q06E 3Q06E 4Q06E 2006E Subscriber Revenues Activation Revenue Equipment Revenue Net Ad Sales Revenue Other Total Revenues $9.3 $13.2 $19.1 $25.2 $66.9 $43.2 $52.2 $66.8 $76.4 $238.6 $131.0 $139.2 $165.1 $157.5 $592.7 Y/Y Change in Revenue 484.1% 538.1% 349.0% 409.4% 419.4% 365.1% 294.5% 249.6% 202.9% 256.9% 203.1% 166.7% 147.0% 106.2% 148.4% Q/Q Change in Revenue 87.7% 42.4% 44.5% 31.9% NA 71.4% 20.8% 28.0% 14.3% NA 71.5% 6.3% 18.6% -4.6% NA Cost of Revenue Satellite & Transmission % of Total Revenue 97.1% 61.9% 39.9% 27.5% 47.5% 15.8% 12.8% 10.8% 9.8% 11.8% 5.8% 5.5% 4.7% 5.0% 5.2% Programming and Content Customer Service & Billing Customer Service/Gross Add $35.48 $30.79 $25.72 $16.53 $22.69 $26.76 $17.88 $20.24 $13.85 $17.44 $19.77 $16.97 $19.35 $15.17 $16.64 Cost of Equipment Total Cost of Revenue Gross Profit ($12.8) ($11.1) ($13.9) ($18.2) ($55.9) $1.4 $19.7 $25.2 $12.8 $59.2 $57.9 $68.5 $76.4 $47.8 $250.6 Gross Margin NA NA NA NA NA 3.35% 37.72% 37.69% 16.82% 24.80% 44.19% 49.20% 46.30% 30.36% 42.28% Sales and Marketing Subscription Acquisition Costs SAC $248.0 $235.9 $227.2 $124.5 $176.4 $189.2 $158.8 $147.6 $112.4 $137.0 $127.1 $127.3 $148.4 $95.6 $114.4 General and Administrative Research and Development Equity granted to third parties and employees PreMarketing Cash Flow ($25.8) ($28.5) ($53.9) ($118.7) ($226.9) ($61.9) ($47.4) ($35.5) ($53.1) ($198.0) ($11.1) ($2.5) $4.4 ($25.2) ($34.4) PreMarketing Cash Flow Margin NM NM NM NM NM NM NM NM NM NM NM NM NM NM NM EBITDA (excludes Equity Grants) ($87.8) ($104.6) ($125.7) ($155.2) ($473.3) ($127.1) ($108.8) ($105.4) ($238.5) ($579.7) ($95.6) ($86.0) ($108.1) ($199.7) ($489.4) % of Revenues NM NM NM NM NM NM NM NM NM NM NM NM NM NM NM EBITDA ($87.8) ($104.6) ($143.4) ($234.3) ($570.1) ($165.8) ($150.0) ($142.4) ($275.4) ($733.5) ($138.1) ($128.5) ($150.6) ($242.2) ($659.4) % of Revenues NM NM NM NM NM NM NM NM NM NM NM NM NM NM NM Depreciation and Amortization Non-Cash Stock Compensation Impairment of Goodwill Operating Income (expense) ($119.5) ($133.0) ($167.2) ($258.6) ($678.3) ($190.3) ($174.6) ($166.9) ($301.4) ($833.2) ($164.1) ($154.5) ($177.6) ($270.2) ($766.4) Operating Margin NM NM NM NM NM NM NM NM NM NM NM NM NM NM NM Interest Expense (26.0) (5.3) (5.3) (7.2) (41.4) (7.3) (7.2) (13.7) (13.7) (41.9) (14.0) (14.0) (14.0) (14.0) (56.0) Interest Income Other Income (expense) (6.9) 1.0 (5.9) Pretax Income ($143.8) ($136.2) ($168.9) ($261.3) ($708.0) ($193.1) ($177.0) ($179.9) ($306.4) ($856.4) ($170.6) ($162.0) ($186.1) ($279.7) ($798.4) Pretax Margin NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA Income Tax Net Income ($146.4) ($136.8) ($169.4) ($261.9) ($712.2) ($193.6) ($177.5) ($180.5) ($307.0) ($858.7) ($171.2) ($162.6) ($186.7) ($280.3) ($800.8) Preferred Stock Div. Requirements Accretion of Div. & Special Charge Net income (loss) ($146.4) ($136.8) ($169.4) ($261.9) ($712.2) ($193.6) ($177.5) ($180.5) ($307.0) ($858.7) ($171.2) ($162.6) ($186.7) ($280.3) ($800.8) EPS ($0.12) ($0.11) ($0.14) ($0.21) ($0.57) ($0.15) ($0.13) ($0.14) ($0.23) ($0.65) ($0.13) ($0.12) ($0.14) ($0.20) ($0.59) EPS Growth Shares (fully diluted) Source: Company reports and Morgan Joseph & Co. Inc. estimates 6 MORGAN JOSEPH & CO. INC.

7 Annual Income Statements E ($ in millions) E 2006E 2007E 2008E 2009E 2010E 2011E Subscriber Revenues , , , ,269.7 Activation Revenue Equipment Revenue Net Ad Sales Revenue Other - - (0.4) (0.4) Total Revenues $0.0 $0.0 $0.805 $12.9 $66.9 $238.6 $592.7 $957.3 $1,337.5 $1,717.3 $2,073.0 $2,420.5 Y/Y Change in Revenue NM NM 419.4% 256.9% 148.4% 61.5% 39.7% 28.4% 20.7% 16.8% Q/Q Change in Revenue NA NA NA NA NA NA NA NA NA NA Cost of Revenue Satellite & Transmission % of Total Revenue NM NM 253.3% 47.5% 11.8% 5.2% 3.3% 2.4% 1.9% 1.6% 1.4% Programming and Content Customer Service & Billing Customer Service/Gross Add $82.24 $22.69 $17.44 $16.64 $9.42 $9.41 $9.39 $9.14 $9.15 Cost of Equipment Total Cost of Revenue Gross Profit ($18.4) ($47.5) ($69.1) ($73.9) ($55.9) $59.2 $250.6 $632.9 $998.1 $1,362.2 $1,701.6 $2,032.0 Gross Margin NA NA NA NA NA 24.80% 42.28% 66.12% 74.62% 79.32% 82.08% 83.95% Sales and Marketing Subscription Acquisition Costs SAC $176.4 $137.0 $114.4 $89.7 $87.7 $85.7 $81.8 $80.5 General and Administrative Research and Development Equity granted to third parties and employees PreMarketing Cash Flow ($102.1) ($123.8) ($129.9) ($129.5) ($226.9) ($198.0) ($34.4) $342.9 $703.1 $1,062.2 $1,396.6 $1,722.0 PreMarketing Cash Flow Margin NM NM NM NM NM NM NM 35.8% 52.6% 61.9% 67.4% 71.1% EBITDA (excludes Equity Grants) ($473.3) ($579.7) ($489.4) ($77.1) $268.1 $612.2 $931.6 $1,242.0 % of Revenues NM NM NM NM 20.0% 35.6% 44.9% 51.3% EBITDA ($116.1) ($145.4) ($238.2) ($330.8) ($570.1) ($733.5) ($659.4) ($247.1) $98.1 $442.2 $761.6 $1,072.0 % of Revenues NM NM NM NM NM NM NM NM 7.3% 25.7% 36.7% 44.3% Depreciation and Amortization Non-Cash Stock Compensation (7.9) Impairment of Goodwill Operating Income (expense) ($125.6) ($168.5) ($313.1) ($437.6) ($678.3) ($833.2) ($766.4) ($356.1) ($12.9) $329.2 $646.6 $955.0 Operating Margin NM NM NM NM NM NM NM NM NM 19.2% 31.2% 39.5% Interest Expense (33.6) (89.7) (106.2) (50.5) (41.4) (41.9) (56.0) (56.0) (8.5) (0.9) Interest Income Other Income (expense) 5.3 (8.4) (5.9) Pretax Income ($134.7) ($235.8) ($422.5) ($226.2) ($708.0) ($856.4) ($798.4) ($403.1) ($15.8) $333.8 $652.2 $960.6 Pretax Margin NA NA NA NA -1.2% 19.4% 31.5% 39.7% Income Tax Net Income ($134.7) ($235.8) ($422.5) ($226.2) ($712.2) ($858.7) ($800.8) ($403.1) ($15.8) $333.8 $652.2 $960.6 Preferred Stock Div. Requirements (40.7) (42.2) (46.0) (88.2) Accretion of Div. & Special Charge (8.3) 0.0 Net income (loss) ($183.7) ($277.9) ($468.5) ($314.4) ($712.2) ($858.7) ($800.8) ($403.1) ($15.8) $333.8 $652.2 $960.6 EPS ($4.72) ($5.30) ($6.13) ($0.38) ($0.57) ($0.65) ($0.59) ($0.27) ($0.01) $0.18 $0.36 $0.52 EPS Growth NM NM 44.4% Shares (fully diluted) Source: Company reports and Morgan Joseph & Co. Inc. estimates 7 MORGAN JOSEPH & CO. INC.

8 Required Disclosures Rating and Price Target History for: Sirius Satellite Radio (SIRI) as of /26/05 Buy:$ Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q Created by BlueMatrix Price Target Our price target is $8.00. Valuation Methodology Our price target of $8.00 is based on DCF analysis, assuming a 12.7% discount rate and a terminal growth rate of 6.5%. Using a beta of 1.5, we generate a WACC of 12.7%. Discounting the cash flows in our seven-year DCF model by the theoretical WACC, with the assumption of a 6.5% long-term growth rate after 2011, supports an $8.00 price target. Risk Factors Sirius' valuation can be considered rich compared to the more established DBS (direct broadcast satellite) operator, EchoStar (DISH - $ NASDAQ), given that EchoStar has over 12.0mm subscribers compared to only 3.3mm subscribers for Sirius. Further dilution is possible as Sirius continues to raise cash. Subscriber growth may slow, which may cause the stock to react negatively. Sirius will have to demonstrate that the widely-held view that satellite radio generates exceptionally high profit margins is true. When the DBS companies began rolling out service, many expected profitability at 3mm subscribers, while it took more than double that figure for EchoStar to turn a profit. Sirius is still number-two in a two-company industry, remaining well behind XM in subscribers, despite recent advances in programming and equipment. 8 MORGAN JOSEPH & CO. INC.

9 Rating and Price Target History for: XM Satellite Radio Holdings Inc. (XMSR) as of /22/05 Buy:$ Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q Created by BlueMatrix I, David Kestenbaum, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. intends to seek or expects to receive compensation for investment banking services from the subject company within the next three months. Investment Banking Services/Past 12 Mos. Rating Percent Percent BUY [B] HOLD [H] SELL [S] Meaning of Ratings A) Buy means reasonable outperformance relative to the market over months. B) Hold means market-type risk adjusted performance; potential source of funds. C) Sell means expected to underperform the market. Other Disclosures The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to be all inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securities mentioned herein, and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own accounts or for the accounts of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed are our present opinions only and are subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updates to the opinions or information provided herein. Additional information is available upon request. Copyright 2006 by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. 9 MORGAN JOSEPH & CO. INC.

10 600 Fifth Avenue, 19th Fl New York, NY Tel Fax Sales and Trading New York Tel Fax Pittsford Tel Fax MORGAN JOSEPH & CO. INC.