Sirius XM Holdings Inc (SIRI) 2002 Q1 法說會逐字稿

Good morning. My name is , and I will be your conference facilitator. At this time I would like to welcome everyone to the XM Radio Satellite first quarter earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a question and answer period. If you would like to ask a question during that time, simply press star, then the number one your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question, press star, then the number two. Thank you.

At this time I would like to turn the conference over to Mr. Joe Titlebaum. Mr. Titlebaum, you may begin your conference.

Good morning. My name is Joe Titlebaum, SVP and General Counsel with XM Satellite Radio.

Before we begin, I would like to remind everyone that certain information on this call may contain forward-looking statements. Due to a number of factors, our actual results may differ materially from those projected in such forward-looking statements. Those factors include uncertainties associated with the demand for the company's service, the company's dependence on third-party vendors, its continuing need for additional financing as well as other risks described in XM Satellite Radio Holding, Inc.'s current 8-K filed with the Securities and Exchange Commission on April 8th, 2002. Copies of the filing are available upon request from XM Radio's Investor Relations department.

I will now turn the call over to Hugh Panero, President and CEO of XM Satellite Radio.

Good morning.

This is Hugh Panero. I'd like to thank you all for joining us on the call to discuss the quarterly business results for the first quarter of 2002. On the call with me are Gary Parsons, Chairman; Joe Titlebaum, SVP-General Counsel; Greg Cole, Treasurer and acting CFO; and Steve Cook, EVP of Sales and Marketing.

I intend to focus my comments this morning on three areas: subscriber for the first quarter of 2002 and the rest of the year positive product service reviews; expanded retail distribution and marketing initiatives, particularly in the new car or so-called sector; and finally, hardware cost reductions and ease of installation made possible by continuing technical development and product enhancements on the part of our engineering group.

Greg Cole, our Treasurer and acting CFO will then discuss our operating financials and activities.

Through March 31st 2002, XM Satellite Radio is reporting 76,242 ending subscribers, representing a net subscriber ad of 48,509 for the quarter, a 175 percent increase compared to ending subs for Q4 2001. This result exceeded our own growth projections and most Wall Street analysts' expectations. The company remains on track to hit its Q2 ending sub-target of 130,000 subscribers, Q3 ending subs at 200,000, and our year target of 350,000 subscribers. It should be noted that in the late third and most of the fourth quarter we expect a significant increase in subscribers from new car sales as General Motors will roll out XM Radio in 25 2003 car models.

Subscriber churn remained lower than expected at less than one percent per month. More over the trend of customers paying in advance by credit card has continued with approximately 70 percent paying on a quarterly basis, and another 18 percent paying on either an annual or semi-annual basis, encouraging to our cash flow over time.

XM products and services enjoyed exceptional positive reviews during the quarter. The February issue of Entertainment Weekly, the popular Oscar award issue, awarded XM an "A" rating in a review of our service. The writers said about XM, "It may be the fumes talking, but I think I'm in love." , Business Week's technology critic writing about satellite radio said after experiencing XM in a GM Cadillac he found the service a delight.

In brand awareness we reached a media cultural milestone two weeks ago when XM was the question to this Jeopardy answer, the answer to this Jeopardy question, "In the fall of 2001 this satellite radio service offering drivers an alternative to AM and FM was launched." The contestant correctly answered XM. You can't be more mass market than Jeopardy.

And it is indicative of the rising consumer awareness we are achieving through our media and public relations efforts. XM also received awards from three top electronics and auto trade publications during the quarter.

Our distribution expanded in both OEM and electronic retail sectors during the quarter. General Motors recently announced it will expand the number of 2003 car and truck models offering XM as a factor installed option from 23 to 25 models. XM only launched as a factory installed option in the Cadillac Deville and Seville towards the end of last year.

We currently are getting approximately an 80 percent penetration rate on the initial small quantity of XM factory installed Cadillacs sold. GM also said XM will be available in Cadillac 2003 models including the CTS and Escalade family of vehicles as well as the 2004 XLR luxury roadster and an all new entry in the mid-luxury utility sector, the Cadillac SRX. GM brands offering XM later this year now include Cadillac, Buick, Chevrolet, GMC, Oldsmobile and Pontiac.

We also announced in Q1 that XM service will be available in select 2003 model Nissan and 50 division vehicles later this year including the Infinity Q45 Performance Luxury Sedan, the Infinity G35, the Infinity I35 Luxury Sedan along with the Nissan Pathfinder's sport utility vehicle and the newly issued Nissan Murano crossover SUV.

Exxon and Isuzu Exxon's availability of the dealer installed option on the Isuzu Rodeo and Axiom models beginning as early next month.

Finally, XM announced it has reached agreement to offer XM on Volkswagen and Audi cars. Volkswagen and Audi will separately announce specific models and availability dates in the future.

Also, by the end of Q1, XM had entered into arrangements with more than 150 independent auto dealerships selling the product to various automakers. These dealers have committed to install XM radios in new and used cars and to package the radios as part of the overall sale. You may have seen or heard local promotions on this project.

During the coming quarter, we expect activities on the dealership front and with additional car makers to continue. Clearly, the automotive industry has taken note of the tracks and sell our radio has gotten with consumers and wants to ensure that they are an integral part of the marketing and the distribution of the product.

In addition, XM is expanding its presence at all major truck stops and continues to work with nationwide distributors specializing in the truck center. And we are implementing a series of specific marketing initiatives directed at the trucker market.

In the after market retail sector, building on our strong base of national regional electronics retailers, we are pleased to announce that we have begun a relationship with Wal-Mart Stores where they will be selling both Pioneer and Sony product lines. XM proudly has a point of purchase presence in approximately 5200 retail outlets and expects to have over 6,000 outlets by the end of the second quarter.

These include continued roll-out in Wal-Mart Stores and auto specialty and expansion into the rural areas through participating Radio Shack franchises and our distribution agreement with , a leading equipment distributor to independent satellite TV retailers. These stores contribute fewer average per store sales compared to the national retailers, but expand our overall nationwide retail platform.

XM also announced a joint marketing agreement with Direct TV to work together to harvest XM customers from the existing base of Direct TV subscribers, because if you like satellite TV you'll love satellite radio.

Finally, our sustained technical innovation, product enhancement, and cost reduction efforts, are yielding solid gains resulting in lower radio hardware prices and greater ease of installation. In fact, on May 1st retailers will begin offering the popular Pioneer Universal Receiver with a suggested price of $199 reduced from 249. The antenna is an additional $49 to $79. This radio enables any car stereo system to receive XM. In addition, purchases of a Pioneer XM capable head unit can now add the Pioneer XM receiver unit with a suggested price of 149, also a $50 reduction. This price reduction requires no additional subsidy or cost to XM and is the direct result of cost savings on radio components.

In other radio manufacturing news, Alpine began rolling out its own universal receiver in Q1. And Sony AM, FM, XM radios will begin shipping to retailers in the late second quarter. XM antenna manufacturing partners are also introducing new and smaller second generation antenna designs that consumers will find appealing, including both roof mounts and glass mount configurations.

Finally, we recently unveiled the details of our state of the art digital sound technology featuring customized audio encoding with audio optimization. The combination provides superior sound quality, remarkably close to the compact disk.

Our initial chip set design incorporated all these capabilities, and we've been pleased with the customer response. Over the last several months we have implemented various enhancements culminating with the final audio enhancement, which were executed just a few weeks ago. We are extremely pleased with the combination of these technologies, and feel that XM offers a combination of network signal coverage and sound quality that is unsurpassed by any existing or proposed music technology period.

In the programming area we continue to get rave reviews for our service. In the studio recently we have had a number of celebrities come to visit us, including Bill Joel, Aaron Neville, Crosby, Stills, Nash, and Young. Elvis Costello was here yesterday and actually performed for us in our studios. And I believe that the recent announcement that National Public Radio was abandoning classical music has become another good reason to turn to satellite radio.

We are also pleased with the technology evolution of our chip set. Our first generation proven chip set technology went into production early last year. Our engineering group's primary effort has been to cost reduce the XM chip set technology and other components of the XM Radio Weapons Platform.

Our second generation lower-cost chip set is on target for production in the fourth quarter. And we have completed and design on our third generation chip set that will further reduce cost next year.

Reduction in chip set cost and other components have a direct impact on lower prices at retail. We plan to be out of the hardware subsidy business in three years, which will significantly reduce cost.

Our current basic radio configuration includes a head unit, antenna and receiver unit located in the trunk. We have recently been demonstrating to our technology partners and radio manufacturing partners, technology enhancements that will enable the chip set technology to be miniaturized and integrated into the head unit, thus eliminating the second receiver unit in the trunk.

The elimination of the receiver box in the trunk could represent a substantial cost reduction of harness wiring, power supply circuitry, mechanical and connector parts. In addition, it will result in an easier and faster installation.

We demonstrated our prototype at the Consumer Electronics sales in January and are now doing extensive testing and validation of the technology with our partners. We expect that the first products utilizing these technology enhancements will reach the market in the fourth quarter.

The company is also working on an advanced application platform to enable data applications to the car. We designed our simple protocol with future data applications in mind and have been working with both Honda and GM on specific implementations.

In summary, XM has now been available nationwide for six months. Our business has many moving parts and significant one-time start up costs. For example, our nationwide retail distribution network required many months of pipeline product sales, development and distribution of point-of-purchase marketing materials, installation of demonstration radios and sales training.

Similarly, the city-by-city, site-by-site build up of our involved extensive time and money as did the one time start up efforts associated with our broadcast operations system. It's important to know that the majority of these one time costs are now behind us and our available funds can be focused on constantly improving our products services while building our subscriber base using the most cost effective marketing efforts, which will become even more refined as we learn more about our customers.

I would now like to turn the call over to Greg Cole, and focus on the specific results of our first quarter operations.

Thank you, Hugh. XM has not only shown solid subscriber growth in the first quarter, but we also met key financial objectives. In April we completed a public offering of 13.4 million shares of common stock resulting in gross proceeds to the company of $154 million. XM currently has $300 million in cash and short-term investments, which 51 million in restricted cash relating primarily to the interest hold back on our high yield debt. Our cash takes us into the first quarter of 2003.

We were pleased with our operational performance of the first quarter. Our net revenue, earnings per common share, EBITDA, and ,in fact exceeded consensus analysts' expectations.

First let's talk about revenue. Revenue consists of monthly subscription fees of 9.99, one-time activation fees of either 14.99 or 9.99, which are amortized across 40 months, and advertising underwriting revenue. We recorded 1.8 million in net revenue for the first quarter, approximately 1.4 of which represented the subscription activation revenue, and .4 million in advertising revenue.

Our net was $9.29 per month. Net takes into account a recent opinion effective January 1st of 2002, and recent FCC accounting policies. As such, we deduct services promotions, such as a free month of service, and billing credit adjustments from gross revenue.

Net advertising revenue represented an additional $2.61 per subscriber per month during the period, or 22 percent of total net revenue. This is consistent with our long-term business model.

During the first quarter operational expenses totaled 77.7 million excluding depreciation.

EBITDA was a negative 75.9 million and our loss per common share was $1.56.

Overall our expenses fit into three basic categories. First, fixed costs. Fixed costs were $32 million, representing our personnel and overhead, system operations, , and R and D costs, which will remain relatively constant over time. We estimate our annual fixed cost at around $130 million.

Next variable costs, variable expenses were under $2 million, representing primarily customer service and billing, performance rights payments, and revenue sharing, which will grow with our subscriber base. Lastly, marketing costs were $44 million, excluding headcount. And I will talk about this area in more detail in just a moment.

I'd like to now go through some of the individual lines on the income statement in order. programming and acquisition expenses for the quarter totaled $9 million, including approximately $7 million in personnel and overhead.

As you know, the majority of our concept is produced in house. These programming costs are fixed and should stay relatively flat over time. The remainder represents third-party costs and royalties of approximately seven-and-a-half percent of gross revenue to the rights holders including the performing rights organizations.

During the quarter we signed a performing rights agreement with and are in negotiations with the other rights organizations. These costs are inline with our business model.

System operating costs for the quarter totaled 11.7 million, including 5 million in personnel and overhead costs which encompassed broadcast operations, our uplift and our repeater network operations. The last being the most significant expense. System operating costs are also relatively fixed in nature and we expect these to represent a smaller percentage of revenue over time.

Customer care and billings operations totaled 2.6 million for the first quarter. Approximately 50 percent represented the cost of personnel and overhead. The remainder were third party billings to our customer care support vendors.

Q1 sales and marketing expenses totaled 47.5 million including personnel and overhead. Included in sales and marketing are retail product rollout costs, our costs, distribution expenses and advertising. Retail product rollout costs that were approximately 9 million represents a startup cost of establishing new product sale locations and training and associated with manufacturing subsidies that we paid for radios destined for the distribution pipeline.

We will incur additional point-of-sale retail costs as we complete the product phase of our distribution network. After which these costs will decline.

Subscriber acquisition costs were $123.00 per subscriber for the first quarter. Under our expectation for year-end of $130.00 per subscriber. includes radio manufacturing subsidies, sales activation and installation commissions and subscriber product for hardware incentives.

Lastly, media and advertising market and operations costs were approximately $29 million reflecting our initial Q1 brand awareness efforts which will reap benefits later this year based on its compounding impact with consumers.

Moving to G&A expenses. These were 4.3 million for the quarter compared to 6.4 for the same period last year. We emphasize that because G&A costs have declined year-over-year and continue to be less than 10 percent of our expenses. We will continue to manage these costs closely.

R&D expenses of 2.8 million reflect the ongoing engineering development activities spearheaded by our team in Florida. These efforts have allowed XM to be first to market, and now first to implement a hardware price reduction at retail. Our ongoing R & D activities enable XM to pursue its plan to exit the hardware subsidy business in three years.

We have no updates to our 2002 projections as we still expect revenue of $20 million. cost of $130 per subscription, and an EBITDA loss of approximately 275 million. These are all in line with analyst expectations.

I will now turn this call back over to Hugh Panero.

Thanks, Greg. I'd like to summarize XM's key strengths and successes thus far. We continue to demonstrate demand for XM Radio, which has been embraced by consumers and the press. The majority of our initial one-time start up costs our behind us, and the variable cost of acquiring and servicing customers is tracking nicely with our business model expectations.

We remain on target for GM's roll out in 25 2003-model year car lines. We made significant progress on new distribution agreements with Isuzu, Nissan Infiniti, and Volkswagen Audi. On May 1st, XM will introduce its first lower cost radio product, the 199 Pioneer universal receiver, the result of successful cost reduction efforts without requiring additional hardware subsidies.

Our engineering team and a number of our manufacturing partners are assessing the recently completed XM Radio module designed to support in-dash installation as part of the radio head unit for the future. We obtained critical funding in a difficult financing environment to continue our drive to build our subscriber base. We are on target for the second quarter and for the remainder of the year. That concludes our presentation, and I would now ask the operator to open the call for Q and A.

At this time I would like to remind everyone if you would like to ask a question, please press star and the number one on your telephone key pad. Well pause for just a moment to compile the Q and A roster.

Your first question comes from of Deutsche Bank.

Thanks, I had two questions. Here in comments about the next generation chip set, can you talk about what you think over the next couple of years the implication will be both for the number going down as well as the consumer price point from 299 today?

Well I think that, I think as we have explained in the past that the, a large portion of the cost relates to equipment subsidy that's associated with the chip set. And since the chip set cost is almost a commodity item based on the amount of geography you pick up on the silicon. As we miniaturize that chip set and also as we produce more chips and get a volume reduction in cost that it will relate very specifically to lower prices at retail. Because as you know, what occurs after you figure out your bill of materials at the manufacturing side is that the radio manufacturer that builds his margin product sells it to the retailer and the retailer builds his margin on.

So we are prepared to exit the hardware subsidy business in approximately three years. That's our plan and we believe that the radios which will generally have fewer components and lower chip set prices will work towards that goal.

OK. And then on the GM rollout later this year. Do you have a sense of what percentage of those 25 models will have XM pre-installed?

Well, General Motors has not released that. What they intend to do is take each brand and they have estimated a certain percentage that they will make available on each of the brands.

One General Motors' executive was quoted in the Journal who we talked to regularly as you know, these are 2003 model year cars that are introduced in August and September but then run for 12 months and he projected that he expected that 300 to 400,000 XM customers associated with that rollout.

And we are working right now with General Motors advertising agencies and also the individual vehicle line executives that if you understand car companies, they're really responsible for the on that to ensure that we are going to hit aggressively those sub-targets and try to exceed them.

Can you say what the current 400,000 is a subset of in terms of targeting cars that will have XM installed?

?

Well, that's I really think he was referring to that's the number of enabled vehicles that they're predicting they'll build as part of the 2003 model line. But I will add that there are a number of car models that are looking to add XM as part of a premium option package, you know, which sort of gets into a part of a question here will it be sort of packaged in with some models? And yes, it will.

And actually, has XM made I'm sorry has GM made a decision as to how they will promote the service, I guess? Are they some things that they've done with the Cadillac models in terms of promotion?

Yeah, I think , what is doing is right now he's working with these the marketing groups for these various vehicle line executives who are basically responsible for specific brands to work on what is the right packaging scheme and promotional scheme that works with the demographics that are associated with that car line. So what works in a Cadillac may be different than how it's packaged in another car brand, and obviously, you know, what GM will do is experiment with different promotional packages as they learn more about, you know, the best way to sell XM and package it in cars. And also if you , you know, General Motors is a pretty conservative company, but if you look in their annual report that just came out there is a page dedicated to XM Satellite Radio, which is actually for General Motors is a pretty profound signal of their commitment, along with the announcement of these factory installed models that will come out in the late, in the third and the fourth quarter.

Great, thanks.

Your next question comes from .

you think consumer offers being provided by Best Buy and where they're giving you federal rebate on 9550 to $95. Can you explain on who's dime that's going out on, and why they're doing this?

Sure, . Yeah, we do have a couple of promotions that we've initiated that actually the retailers themselves are sort of paying in the case, in some cases their giving a discount on the hardware, or in some cases they may be waving the installation cost. I think what were finding is that several of the retailers are wanting to work with us under the premise that if we drive business to their retailer, you know, they're going to give the customer a special deal. So a lot of the promotions we've run to this point that have been, targeted certain segments are in fact funded predominately by the retailer.

OK. In terms of the trucking market, can you give us any sense of where we stand on the adoption, and pit stops, and so forth, and how that's coming along?

Yeah, let me just talk generally about, you know, our approach there. There's sort of three main areas where we want to attract trucking customers. One is have a retail presence at truck stops. Another is working through dealers that sell the new trucks. And then the third area is approaching the fleet and seeing if we can work out programs to get adoption at the fleet level. And we really don't want to comment on the specifics of each of those, but we are pursuing all of those mentioned, and we continue to believe that the, you know, that the long-haul trucking market is some of the lowest of low hanging fruit. These people, you know, really need our service, and once they get it, they become big advocates for the service, and we expect that to be a, you know, continuing a growing portion of our customer base continuing.

Two quick final questions. One, Hugh, I mean, from what we thought, that the price points on the chip set would only sort of decline in 12 to 18 months, what's really happened that has expedited that at this point that you can bring such price points to the market?

Well, what's happened is is that, you know, first of all, we, you know, our chip set technology went into production early last year, and we have been our engineering team has also been working very closely with the radio manufacturers on watching some variable prices that occur with regards to certain components costs, and then actually, the price reduction on other specific components in the radio. And what we're able to do is take advantage of that and translate it into a lower bill of materials that therefore translates into a lower price at retail.

And finally, on CFO, can you give us any sense on an announcement?

Sure. We've been I have been interviewing a number of candidates. Since the, you know, public announcement that was conducting a search, we have actually been inundated with candidates. And is screening them for us, and what we are getting is a very high caliber of seasoned CFOs who have operating experience that will help us to, you know, take XM to the next stage. Probably what is the good news/bad news story is there is that the caliber has gotten so high that it's making the decision more difficult. But we anticipate having someone in place by the end of the second quarter if not sooner.

Great. Thank you.

Your next question comes from Robert Peck of Bear Stearns.

Hey, guys. Congratulations on the quarter. Just a couple quick follow-ups here. First of all, as far as competition, could you talk about what competition you're seeing from and the markets they've rolled out in?

Al commented on it generally, and I don't think that anything I say is surprising. I mean, they currently have a limited amount of product in the field from a limited amount of manufacturers, and they have a building retail presence that and they're obviously targeting a, I guess, a July, August ramp-up, so they are, you know, processing through that.

What's sort of interesting about their presence is that in the markets where we are both available, we have actually seen our sales rise. And that, I think those two are very traditional experiences in markets when you're driven awareness for new product that when there's two players working towards that goal, that both boats will rise. And but right now we're focused on our own, our own, you know, kind of drive towards subscriber and we will just be watching their presence as a competitive entry in the market place, but right now we believe that we clearly have a significant lead to market, at least now we believe that we're a generation ahead on the technology as well.

Along those lines of the rising tide, do you have any clear feel as to when you may be making announcements with other OEMs such as maybe Toyota or Honda?

Well we are working with both of those companies right now, and actually we do those in conjunction with because they are part of the unaligned automaker world where we work together on those. And I think all those companies in the auto sector have been extremely sensitized to the aggressive roll out of General Motors, and also what's interesting is that there are actually dealers in the market place that are selling, there's one ad out that I've seen recently where it's called the satellite addition where they package in an XM Radio that they have bought at retail into whatever the car is that they're selling and sell it as a package. So there is a ground swell of demand for satellite radio that is coming from the dealerships, it's obviously GM is out there, so the rest of the car companies are, think very highly of it and are working towards closing on various agreements.

And as far as the ground swell are there any supply shortages or could you maybe give us some numbers as to how many radios are in the market right now?

Steve, you want to?

Sure, I would say that there really aren't shortages per say to date. There, we are still expanding distribution to some of the, you know, the independents and different niche distribution opportunities, and so pipeline is, or product is flowing into those pipelines. But in terms of the, you know, sort of broad national retailers and regional retailers that you'd be familiar with I think there's a good supply of product. Sony is shipping. There's plenty of Pioneer. Alpine has had their, you know, head units and tuners out there now, and now they're starting to ship the, you know, the universal radio. So I think we're in good shape from a product supply standpoint.

Great. Last question, and I'll let somebody else go. I've been getting a bunch of questions on interference with some of the wireless stuff. Could you give us any sort of color there as to what exactly is going on and maybe how you see that playing out?

Sure. Well, there's, you know, one or two things going on which is all part of the world of, you know, regulated and unregulated companies that work with the FCC that make sure that when they when they run their businesses using spectrum allocated by the FCC, that they should not interfere with people who are contiguous to them.

And actually, the FCC this year, in 2001, on its own initiative, you know, began a proceeding to revisit its rules that governed unlicensed devices in light of the proliferation of wireless devices, including, you know, and Bluetooth. And they are they have been reviewing some rules on these devices that were established in, like, 1989. So they are looking at them, and they will work towards a situation whereby those particular devices that were kind of put in a spectrum which no one anticipated them using at such a high power level, that they're willing to with us, and it's just part of the regular process that one goes through as new businesses evolve, you know, that use spectrum.

OK. Great. Well, thanks guys. Great quarter once again.

Your next question comes from Marc Nabi of Merrill Lynch. Mr. Nabi, your line is open.

Hey, guys. How you doing?

Good.

Just a couple of questions. One relates - Hugh, maybe you can talk about the - been getting some questions related to the health of the satellite fleet and, you know, what's happening with respect to the on-ground spare. That's my first question.

Well, the we have been informed of a faster degradation of the power on the, I guess, on the solar arrays than had been initially projected. The satellites were delivered to us above their specification when they were delivered to us, so we had obviously some room there. Based on the calculations that we've made, we don't see the satellite, if at all, you know, affecting our signal or service coverage until, like, the second half of the decade. The satellites that they have that they have identified, you know, this anomaly are satellites that were launched, you know, one was actually launched like I guess 18 months before ours, so they are tracking that issue for us. We have, you know, retro fitting the spare to have that available, and then we obviously have insurance on the satellite and various contingencies should we need them.

But as far as capital expenditure needs go, I mean, the satellites are already insured so you're not going to see a significant lift in capital expenditures. I just want to make sure that's clear to everyone, because I don't, I think some people are confused about that.

No, that's exactly right.

OK. Also, trust repeaters, I mean, could you just give us an update as far as how many you have today, and you know, when are you going to, do you feel you'll be complete, you know, and what time is that going to happen?

Well, we have a good I guess 800 repeaters right now, and the primary, I mean, the network is basically completed except for a few repeaters that are hung up in some, you know, zoning issue or construction delay that is typical in a build schedule. And so it's basically done. And we think that our repeater network is one of our greatest strengths, as we have always stated.

And is what has allowed us to provide us the great coverage that we get that obviously is a result within these, in this very positive feedback from the press. What we will do is, so basically the majority of that capital expense is behind us, and I believe the only capital associated with the repeater you'd need is when, you know, there's some construction in some city where a new skyscraper goes up and we would have to go in and just re-evaluate the timing of the network. But basically that's behind us.

OK. And also, Hugh, I just wanted to get your opinion on the cross over between when after market sales are not going to be the primary driver of XM and/or products, but more the OEM channels. When do you think that cross over happens? Is it a second half of '03? Beginning of '04? Is it actually before that. I'm just trying to figure out, you know, when you guys have forecasted it and how you look at it.

I, well we look at it is, well first of all just to everybody correctly is that, you know, the fact that we have, you know, 76,000 customers or people who are, you know, driving over to a, you know, consumer electronics store, you know, buying a radio, having it installed, you know, getting it activated, paying a monthly fee, is pretty amazing, a pretty amazing. When you look at our service and that people are doing that in this, in some of the timing that what I'm saying is the fourth quarter was obviously difficulties with September 11th, we find this to be an amazing growth of the service.

We believe that that will continue and build as we get lower priced products and there's more awareness about XM. And then I believe, in more of the second half of 2003, when the 2004 model year cars start to come over, is when you'll start to see the OEM sector start to flex its muscle in terms of its impact on satellite radio.

Actually, one last question relates to just the number of stores you're going to sell this in by the end of the year. You said about, I think, 6,000 by the end of the second quarter. How high does that number go up to by the end of 2002?

Well, the, you know, we'll continue to see some expansion at retail, but I think where we where we really expect to see the expansion is in the OEM market. You start getting a lot of dealerships automotive dealerships out there, and some, you know, some other niche distribution like the marine market and that sort of thing. So we haven't forecasted a specific number, but we do expect to see some continued growth above that 6,000. And we'll update you on that on future conference calls.

OK. I am sorry. One there is one last question I guess. I think it's important. It relates, Hugh, to the whole concept of DIRECTV and EchoStar and this whole equipment subsidies. And it took them many more years than three years I believe what you're talking about two or three years to kind of wean them off of the subsidy. How do you how are you going to go about doing that if, you know, in that short period of time? I think it's great, I just I'm trying to think about, you know, what they went through, and maybe they have given you some input, particularly at DIRECTV, but I think it's going to be very difficult to do.

Well, I think that you're I think that there's a difference in the businesses. First of all, when DIRECTV and EchoStar were coming out, they were selling a device that did nothing else besides get DIRECTV and EchoStar. And it actually inhibited you from getting your local TV channels. So it was a single-purpose item. We are working in the car stereo business where our radios get, you know, AM and FM, and they get XM, and there's a whole market structure associated with that.

The second thing is a lot of their cost wasn't, you know, there was some hardware cost reductions that they had had, but a lot of their cost was built into a different competitive model at retail where DIRECTV and EchoStar used to used to basically give to have exclusive presence at some retailers. And so there was a lot of cost in that was something there.

With our costs, I believe that since the radio components themselves are lower priced and that the chip set costs are going down, but we have a better pathway to the lower prices than those companies did when they first started to introduce their product. We also directly control our underlying IT and technology through out innovation center in Florida and the patents that we have either in hand or rights to utilize.

Perfect, that's exactly what I wanted to hear. Thanks so much.

OK.

This concludes the Q and A portion of today's conference call. Mr. Panero, do you have any closing remarks?

No, we obviously have now had two quarter of a new business of satellite radio, and we've been hitting our targets, and we plan to hit our targets going forward. And we thank all of our shareholders for their continued confidence in our company.

Thank you for joining today's XM Satellite Radio first quarter earnings conference call. You may now disconnect.