Sirius XM Holdings Inc (SIRI) 2002 Q2 法說會逐字稿

Good morning, my name is [Yumiki], and I will be your conference facilitator. At this I would like to welcome everyone for the Sirius Satellite Radio Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star then the number 2 on your telephone keypad. I would now like to turn the conference over to Jim Collins, Vice President of Corporate Communications for Sirius Satellite Radio. Thank you. You may begin.

Good morning and welcome to our second quarter 2002 conference call. Today our President and CEO Joe Clayton will give you an update on various aspects of Sirius Satellite Radio's financial structure and operations. This will include the status of our funding activities, the company's efforts to reduce product costs and operational expenses, a brief report on our distribution strategy including our OEM relationships and second quarter subscriptions and second half sales acceleration. Then Guy Johnson, our Executive Vice President of Sales and Marketing will provide details on our OEM relationships, car stereo manufactures production and availability including our newest partners Panasonic and Audiovox and marketing activities for the full selling season. Finally, John Scelfo, our Chief Financial Officer will review our financial performance. At the conclusion of the call, Joe, Guy, and John will be available to answer your questions. Before we start, I would like to remind everyone that certain statements made during this call might be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act, 1995. These and all forward-looking statements necessarily depend upon assumptions, data, or methods that may be incorrect to emphasize. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those currently anticipated. We caution listeners not to rely on forward-looking statements and disclaim any attempt or obligation to update these forward-looking statements. Now I would like to introduce Joe Clayton.

Thanks Jim. Good morning. As you all know the economy in the financial markets continue to be unsettled. We have created a difficult business environment for everyone. Like all companies, we too are experiencing the effects of this challenging economic situation. Now, you all heard the old sports saying, "when the going gets tough, the tough get going." I have maintained that in times such as these, you can serve cash and you raise cash to fund your core business. This is what really matters. Who knows, how long the financial markets will remain tight. So in this regard, Sirius has engaged UBS Warburg to assist us in arranging several transactions to raise additional equity and to reduce our indebtedness. As part of our plan, we are currently in discussions with two of our financial partners, the Blackstone group and Apollo Management regarding an additional investment in our common stock. Also as part of this plan, the company is seeking capital from both new and existing stakeholders. We are also in discussions with our bondholders regarding voluntarily exchanging debt for equity. Given the economic environment, the company is seeking to significantly reduce its indebtedness. However, we have not yet reached an agreement with any of the debtholders regarding the terms of such an exchange. I do want to stress that these are important steps in solidifying our finances and in supporting our future growth. In addition to our financing plans, there are two other key serious initiatives to narrow our funding gap. These are aggressive product cost reductions and operational expense containment. Just last week, we announced the introduction of our second-generation chipset. Manufacturing qualities are expected to be available in the fourth quarter of this year. The new chipset represents a significant leap in technology. For example, it utilizes industry leading 0.13 micron, 6 layer metal technology to integrate all digital portions of the receiver circuitry excluding memory into a single chip; that is called a Digital Baseman Processing chip. This effectively reduces the entire component dimensions to the size of a credit card compared to a videocassette size footprint today. In addition to the dramatic reduction in size, the operating part will be decreased by 50 percent. But most importantly, the generation II chipset design will allow Sirius to lower its total component system cost by nearly 50 percent. This will allow us to reap major benefits in terms of cost, performance, and efficiency. As John will cover later in his financial report, we are also pursuing aggressive measures to lower costs and to improve cash flow in the following areas, renegotiation of existing agreements and payment terms. Head count management in terms of full-time employees and consultants, and reducing the costs of our facilities. Also with the completion of our repeater network, and with our satellites fully operational, of course, excluding our spare four satellites, our capital expenditures are expected to be lower going forward. Lastly, we've maintained our marketing and sales expenditures. However, we have significantly shifted the mix from brand awareness to distribution focus, therefore quickly drives customer subscription. This includes marketing initiatives like installed displays, personally used programs for retail sales personnel, sales incentives, and factory rebates. Now, I would like to briefly discuss distribution and sales.

First of all, we've kept our commitment to launch our nationwide service on July 1st. Today, listeners around the country can now tune in to our 60 channels of originally programmed commercial-free music and our 40 channels of news, sports, and information. We started advertising our service for the first time with radio, print and TV advertisements in selected markets, but we decided to hold back the bulk of that advertising until our product pipeline becomes more robust, starting later this month, and rapping up into the fall selling season. Guy Johnson will take you through the product availability aspects, a little later in this call.

Our relationships with our car manufacturer partners continued to be strong. In June, Daimler Chrysler announced that Sirius satellites radios will be available as a dealer-installed option through their parts and service division in 16 models this fall. As you know in 2000, BMW selected Sirius as its sole supplier of this new technology. I am pleased to confirm today that BMW plans to offer Sirius through its retail centers before the end of 2002, and to also confirm that [Mini-USA], a division of BMW-North America plans to offer Sirius in its mini product line later this year. As we've stated in the past, concerning the Ford motor company, we are working with them to identify their launch plans, and when completed Ford will be making an announcement. We are very pleased with the exclusive partners on board with Sirius. And we are in the process of working closely with them in the launch of our joint marketing programs.

Now, we believe that the car dealership distribution channel also holds great promise for satellite radio. We are in the process of signing up car dealer expeditors and installers nation-wide. We've already completed soft launches with [Bernard Motors] and IDS in short dealer services both in Phoenix, and with Travis and Associates in Houston. With our Audiovox product hitting the market over the next 45 days, we expect sales velocity in the dealer channel to increase dramatically. We will keep you all informed of our new agreements as they happen.

Now in the specialty market segment, we continue to sell products to major truck dealers and truck staffs across the country, and we are looking for factory installs to begin in early fourth quarter. Also to help raise awareness in the specialty segment, Sirius sponsored the [Flight liner race] for the pikes [indiscernible] setting a new world record, and in the Sterling Race, our Sirius driver won the year's honors. In the boating market, West Marine is now selling Sirius at over 200 stores nationwide, and this month, Boaters World is starting to ramp up their stores and Internet sales as well. Formula Boats is also installing Sirius at their factory and their dealers are eager to start selling to the after market as well. We are also in discussions with other marine manufacturers in order to capture more of this niche segment.

In the RV channel, we recently announced that [Monica Coach], one of the America's largest RV manufacturers is starting to incorporate Sirius into their vehicles. [indiscernible] dealer network will also be selling Sirius. And lastly [John Deers] is currently finishing their test of Sirius equipment, and it plans to begin factory intalls in the fall of this year. We planned to continue to expand this important audio limited segment of the market. Now, we will report on these efforts in future calls.

In terms of our retail after market penetration, we recently signed an agreement with Sears that will add 850 storefronts to our distribution list. We are now on over 4000 retails floors with more than 2000 [indiscernible] throughout the country. Now, we've planned to be on over 7000 storefronts by the end of this year, including Wal-Mart. We have also ramped up our partnership with [DSF] to market Sirius to their 3000 to 5000 independent satellite retailers in the United States. We believe that the independent dealers are an untapped source for additional subscriber growth for Sirius. Now, while we continued to see good news on many fronts, our subscriber number for the second quarter, ending on June 30th, came in at 3347. If you all recall, I stated in our first quarter conference call that I expected second quarter subscriptions to be several thousands. Given limited product availability minimal national advertising and only regional coverage through June, this about what we expected. Today our subscriber number is close to 7000 units, so while this is still modest we do believe that our products constraints and limited advertising contributed to these numbers. However, we are beginning to see sales acceleration in all distribution segments with the increase in product availability this fall national advertising expanding and the beginning of OEMs installations we have a plan in place capable of achieving around 75,000 subscribers, which will be heavily weighted to the fourth quarter. Now I would like to turn it over to Guy Johnson, who will take you through the OEM agreement in more detail, update you on our brand and product assortment, highlight certain consumer demographics and review our fall selling season marketing plan. Guy.

Thanks Joe and good morning everyone, as Joe previously indicated we are pleased that our OEM relationship remains firmly in place. BMW for one has been a big supporter of Sirius for some time now. The 2002 introduction plans now include one of the hottest cars in American [the Mini]. The addition of the Mini with their attention grabbing product line up and cutting edge marketing will help to extend that reach that is already in place with BMW.

BMW customers have consistently scored the highest in research measuring our ability of satellite radio and Mini will sure add to that. BMW and Mini are right on track to meet their previously announced introduction timing of this year to offer Sirius its BMW centers and now many dealerships. Now I would like to turn over your attention to our car stereo manufacturing partners. As we mentioned in our last call product availability has been a continuing challenge for us as we launch nationwide and when we felt that we had sufficient products to go forth with our national launch in July, there have some spot shortages in a number of markets. In view of this we feel that it was prudent not to push too aggressively with our advertising plans.

However, going into the third and fourth quarters we have begun to fill that pipeline with more products and more choices. First of all Kenwood, has already begun shipping its FM modulated unit to stores this month, we believe that this unit will be a popular item in our fall line up because of its attractiveness, ease of use, affordability and feature package, especially remote control. Audiovox has also joined the ranks of Sirius providers and it has begun shipping products to stores this month as well. This will be the first time that Audiovox will be available in [circuit] cities stores nationwide. Now as we have announced in July Panasonic will start delivering products around the September time frame. Panasonic is a great brand and we believe that it will help drive consumers to satellite radio and in particular to Sirius. So come this fall we will have five major brand names on retial store selves. Kenwood, Clarion, Jensen, Audiovox and Panasonic. Jensen also plans to have its plug and play unit out in the market this fall as well. We believe that a combination of pipeline [fill] and this increased choice of major brands will strongly position Sirius or sales in the fall leading up to the holiday selling season.

Now looking at our marketing strategy we are targeting certain consumer demographics. One is the mobile audio enthusiasts, these are the 20-27 year-old males who are passionate about their cars, their music and entertainment. These young consumers care a great deal about reception and the sound quality of their car radio. Number two are what we call the sophisticates, this group is on average 31 years old and is dissatisfied with traditional radio, this demographic also has a higher income base. Number three are the [commuters] there are 29 million of them in this country most of them males 32 years or older, who spend two or more hours a day in their cars, make at least $50,000 a year listen to car radio and want control over in their in car entertainment. We are targeting all of these demographics directly, using sampling opportunities through our rhythm of the road tours at local events at the retial level and at our NASCAR sponsorship. In terms of NASCAR we believe that this relationship can help us significantly raise the awareness level for Sirius. Since we began this relationship earlier this year, we have seen significant media impressions in print and television valued at over $20 million and over 400,000 demonstrations on site at the rhythm of the road tour anyone who watched the Sirius sponsored race at [indiscernible] this past weekend could attest to the enormous amount of television coverage we received. Sirius logo was everywhere to be seen and repeatedly appeared on national television. Now while it is difficult to qualify just how much this exposure in awareness translating to actually subscribers, we believe that in time it will. We must also emphasize that we believe that NASCAR has also helped to solidify our relations with our OEM partners and we will continue to closely monitor our return in investments in NASCAR. Another initiative we have announced this month is our consumer rebate offer. This $75 Maryland rebate being introduced in recognition of the fact that the satellite radio entry price point maybe a little intimating for some consumers. For example this rebate effectively lowers the cost at a popular priced FM modulated Sirius satellite radio units from $200 to $125. The total cost for an FM modulated unit, antenna and insulation can now net down as low as $250. That's a great deal. Rebate offer takes effect August 15th and it will last until the middle of November. An added benefit of this program will not interrupt the dealer-retailer revenue stream and it will put more dollars back in the consumers' hands. Over the next six months we will continue to aggressively improve Sirius awareness across all distribution shareholders as production and availability expense. And we will target our advertising campaign to coincide with this increased product selection especially this fall. During the next few months we will also move aggressively to support our OEM partners with our own product introductions. Joe, back to you.

Thanks Guy. Now John Scelfo our Executive Vice President and CFO will take you all through our financials. John.

Thanks Joe. This morning I'll take us through our second quarter financial results and share with you some of our forecasts for the remainder of the year. I'll also touch upon our future funding requirements and current cost cutting initiatives. Before I talk about our second quarter results let me take you through our balance sheet. We ended the second quarter with $327 million dollars of cash and marketable securities including long-term restricted investments. Today's cash position excluding restricted investments is just under $300 million. We continue to expect that this will be sufficient to support our operations into the second quarter of 2003. The total book value of our debt at June 30th was $669 million. This balance included 70.6 million in differed payments and accrued interest [indiscernible]. So book value of our preferred stock was $508 million. The dividends on this preferred continued to be paid in additional shares of preferred stock. With regards to our second quarter operating results the company reported an EBITDA loss of $67.3 million. EBITDA is not a defined term under GAAP. We define EBITDA as earnings before interest, taxes, depreciation, amortization and non-cash stock compensation. We reported a net loss applicable to common stockholders of $124.6 million, or $1.62 per share. For comparison in the first quarter our EBITDA loss was 45.3 million and our net loss applicable to common stockholders was $90.1 or $1.22 per share. The higher EBITDA loss in the second quarter was due to higher sales and marketing expenses associated with preparing for July 1st national launch. We had description revenue of $50,000 and advertising revenues net of agency commissions at $20,000. Satellite and transmission costs were $8.5 million versus the $8.8 reported in the first quarter. We expect this cost to remain stable going forward with the exception of our satellite insurance premiums, which are difficult to forecast. We extended the [in orbit] insurance policies on our first and second satellites in November 30th of this year to coincide with the policy on our third satellite. From December we are confident that we will be able to obtain a new insurance policy on our satellites. The current rates however, are about 50 percent higher than original contracts. At the current rate a full year policy for all three satellites will cost about $17 million. Programming content costs were $4.1 million. These costs increased only slightly from the 3.8 million incurred in the first quarter due the cost for acquiring new contracts. Programming expenses should increase in the future as our subscriber base ramps up for two reasons. First, due to our advertising revenue share agreements with certain content providers, and secondly due to the higher royalty payments to the record companies and publishing organizations. Customer service center and billing expense total 1.9 million. This was essentially unchanged versus the first quarter as our minimum payments required regardless of our subscriber base. Going forward as we acquire our distant subscribers these costs will increase and aggregate, but decline on a per subscriber basis. Also greater customer activations through our web sites should further reduce our per subscriber customer service costs. Direct marketing expenses total 30.9 million and included our sales and marketing overhead, advertising and media expenditures, cost associated with our retail distribution partners, subscriber acquisition cost, any one-time non-cash charge of $2.7 million. This charge is associated with the redesign of our web site. When we re-launched our web site in June we did away with the portion of the creative and some of the functionality for which the cost had been previously capitalized. Increase of 15.9 million from the previous quarter represents higher head count marketing and advertising cost associated with a national roll out. This includes subsidies paid to receive a manufacturer's production and area advertising campaign and expansion of our point-to-sale in the retail after market and automotive dealerships. [indiscernible] sales and marketing expenses were slightly below our plan owing to the scale back in national television advertising explained earlier by Joe. To give a more complete picture for subscriber acquisition cost, we will start to report the cost to acquire subscriber on a total sales and marketing expense per gross add basis. This definition is consistent with other subscription based service companies. For the second quarter, a fully loaded cost per gross add was around $11,000. This cost should decline significantly beginning in the fourth quarter as we grow our subscriber base and the subscriber mix and the automotive dealership and OEM channels increase. Our goal is to alternatively reduce the pay back period on a subscriber under one year. We are following the fine SAT of the equipment subsidies, commission stage retailers, and programming centers. On this basis, our SAT during the second quarter was around $170 down from $178 reported in the first quarter. Going forward, this figure will exclude rebate offered directly to consumers. Per GAAP such rebates will be accounted for as an offset for revenue rather than a marketing cost. General administrative costs at 8.6 million include rent and occupancy cost, corporate overhead at general and [indiscernible] headcount. These costs increased by 14 percent versus that in the first quarter. Going forward we expect these costs to stabilize as we intend to hold our head count relatively flat over the next few quarters. Research and development cost per second quarter were $13.4 million, 5.7 million higher than last quarter. This reflex cost associated with the last stage of development of our generation two chipset and payment through receiver manufacturing partners. Included in the 13.4 million, is the 8.1 million one-time payments of Panasonic as per our mandate production agreement. Under this revised agreement, we will release some approaches commitment, which could average $70 million. We expect our research and development cost will decrease in the future because R and D will mainly consist of modification to our existing chipsets rather than entirely new developments. We expect R and D expenses to total around 5 million in each of the remaining two quarters of this year. Next year R and D cost should decline to about 10 million in total. As expected depreciation expense increased to $22 million this quarter, up from 14.5 million in the first quarter. The second quarter was our first full quarter operation; as a result we had high depreciation expense on our inorbit satellite terrestrial repeated network. In addition consistent with our view that our four satellite RS system we began depreciating our fourth satellite when it was delivered in ground storage in April. Interest and investment income of $1.5 million relates to interest earned on investments in marketable securities. Interest expense was 24.9 million and shown net of $1 million in interest capitalized on our spare satellite. For 2002, the full year projected interest expense is about $106 million including 9.6 million of expenses in connection with induced conversion of 83.25 percent convertible notes. The total cash interest expense for 2002 is $42 million. Cash interest includes a $14.5 million payment and 14.5 percent note, which is paid out of the funded reserve in May. This payment fully utilized remaining funds in the reserve. As we announced, we re-negotiate our term along with Lehman brothers, we will be paying down $15 million in principal this year. We have the option to defer payment up to 90 days. We therefore plan to make our June payment of 7.5 million in September and our 7.5 million September payment in December. Finally, during the second quarter, we incurred capital expenditures of approximately $21 million. The largest item was the 11.1 million paid upon delivery of a fourth satellite in April. Also included in this quarter's CapEx was the development and launch of our website in June. For 2002, we expect total capital expenditure to be around $35 million. We expect CapEx to decline to about half this level over the next two years. Future plan CapEx will allow for digital repeated of being necessary further enhancement store subscriber management system and cost associated with improvements to be made in space and broadcast system. Before I turn the mic back to Joe, I would like to immediately discuss both our future fund requirements and our continued focus on cost containment. We now expect that our EBITDA loss for full year 2002 would be just under 300 million previously advised. Before [CAP] that our first EBITDA, positive year of operations will be in 2005. Our current cash fund should be sufficient to get us into the second quarter of 2003. Thereafter we forecast that we will need up to an additional 300 million in 2003 and then another 300 million to bring just the cash flow breakeven. The health container funding GAAP were pursuing various initiatives to control our cost and improve our cash flow. These initiatives include facilities management by which we eliminate one of the three floors of Rocket [indiscernible] centre, we are in the midst of consulting our remaining staff within the two floors. The reduction of equipment subsidies by negotiating with key suppliers and accelerating the adoption of Gen2 chips and receivers. The reduction and programming cost by renegotiating contract with [indiscernible] providers. The reduction and working capital requirements by renegotiating payment charge to suppliers by better managing the ratio of receiver inventories to expected sales. The reduction in CapEx including renegotiating our contract with the development of our subscriber management system. Finally driving subs the multiyear prepayment offerings. The above initiatives help us identify in excess of a $100 million in cash savings versus the plan we put in place in January of this year. With these savings we should be able to extend our existing cash into May of 2003. Furthermore excluding debt service, we can now become cash flow breakeven on an operating basis with as few as 2 million subscribers. Our monthly cash burn this year excluding [SAC] is estimated to be about $22 million. This should remain stable to 2003 as well. Furthermore, despite a ramp up of our business, our monthly cash burn excluding marketing and SAC expenses should remain at about $15 million in both 2002 and 2003, slightly below the 17 million experienced in 2001 before we started operations.

I'd like to close by commenting on our financing activities. As Joe stated, we have hired the investment banking firm, UBS Warburg to assist us in raising equity and deleverging our balance sheet. Blackstone and Apollo have both indicated that they may be interested in investing new moneys into the company. The bondholders have also indicated willingness to both swap at least a portion of the debt into equity and to invest in the [firm]. As both the Apollo and Blackstone hold seats in our board of directors, our board has created a special committee of independent directors to prove any transactions with affiliates. Special committee has retained [indiscernible] Louis and Company to advice them. Discussions with our key stakeholders are ongoing and we will appraise you when and if any definitive terms agreed to. Joe back to you.

Thanks, john, so to review the key points of this call, we have taken positive steps towards obtaining additional financing, strengthened our cost position with our generation II chipset development, taken action to control operational and capital expenditures, kept our commitment to launch nationally on July 1st, firmed up our car manufacturer relationships, further solidified our car dealership and specialty market initiatives, broadened our product availability, the five major brands with the addition of Audiovox and Panasonic, and focused our advertising and promotional funds to accelerate subscriptions through every distribution channel. We recognize that we still have a long way to go, the economic environment is fragile at best, but we firmly believe that we are operationally and financially on the right course for the future. As the new Sirius team, we have met our milestones to date and we will deliver on our future commitments. And given sufficient time and an improved economy, we believe that Sirius satellite radio will be a premier entertainment company for the 21st century. We will now open up the call for your questions.

At this time, I would like to remind everyone, in order to ask a question please press star then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q and A roaster. Your first question comes from Robert Peck of Bear Stearns.

Hey guys, just wanted to ask you a couple of quick questions here. First of all on the funding, congrats, it looks like you are making a little progress there, but could you walk us through the funding scenarios a little bit more? What happens if Blackstone and Apollo decide they don't want to invest in equity, where would the company turn then? Do you have any strategic partners that are possibly lined up? Is there any sort of timing on which we should expect a sort of announcement on future funding? And John, the 600 million you talked about, fund to be raised, was that EBITDA positive or was that free cash?

Hello Bob, Hi good morning, it's John.

Good morning.

With regard to your first quick question was, if Blackstone and Apollo were not willing to put money in. Right now, we have engaged with various stakeholders; you know, our major bondholders which include one or two large equity holders as well as Blackstone and Apollo. So we are right in the midst of discussions with all of them and Blackstone and Apollo are not the only the entities that have indicated perhaps an interest to put money in, so it's too soon to tell you, we are working the issues now, as we get more information, as we sign some definitive agreements, we will appraise you at that time.

Okay, so sort of in your timeframe?

Yeah, you know this Bob, I mean you have seen this happen. This is a series of discussion and we are everyday, work 24/7 on this. It's my group's priority and as well as Joe's and the management team and we are working it everyday including today.

Okay, great.

This 600 million, actually bring us the cash flow.

That was EBITDA you mean?

Cash flow.

Not free cash flow?

Yeah.

Okay great. The other question I have is on your chipset. Could you give us a little more color around the chipset? First of all, could you talk about, at some point you said in the call today that the chip replaces all previous six chips now, and [chop] out the cost reductions there and at the end of the day, who owns the intellectual rights to the chips, is that you or is that [indiscernible]?

Alright, Bob this is Joe Clayton, the key technical move here really is the digital-based broadband processing chip which replaces five ICs and two memory chips in generation II, alright? And that has the majority of the digital processing capability within it. So that's the big deal; that leaves two ICs for RF tuning which is really just the retrieval of the audio signal and one IC which basically is the analog to digital convertor. There is two memory chips left, one is for the four-second buffer that's if you run into [indiscernible] it keeps you engaged in terms of the signal and the last memory chip is for flash memory for security part of our encryption system and for programing aspects so those are the four IFCs and two memory chips that make up generation two, which goes from eight IFCs and four memory chips previously. Now in regard to size and to efficiency, generation one was 0.25 micron and the new chip set, that used technology to take 0.13, that is 50 percent reduction in size and that gives a significant productivity and efficiency going forward, it also has allowed us to take the power down by 50 percent and will also give us a significant cost reduction in the receiver technology, of course the chips makes up a large portion of the total receiver cost, I don't know if that had everything, but I tried to go through the whole thing for you.

Yeah, in the intellectual property, intellectual rates.

Sorry Bob, the majority of the intellectual property is owned by a gear.

It is, okay, I just want to clarify and I guess, one of the question on the chips would be, would your radio manufacturers be waiting for that second generation to be available. What slow, the output of radios are expecting radios to still [indiscernible] off shelves.

Well, I think, it will depend upon the individual manufacturer, some of the car stereo manufacturers that were in queue and were earlier probably will be the one's that will be the first to grab this since they have already had some development time and some production time. I would expect, may be Panasonic to be a little behind because they are just starting now with generation two. So it is a matter it will be different for each individual brand or car stereo manufacturer.

Okay.

And that is just the after market, obviously Delphi, Visteon, Alpine, and some of the others will also have varying degrees when they ramp up.

Okay, could you also give us a little color on how many radios you have actually got now out this store shelf, how many actually are in shelves versus you just named the distribution pipeline?

Well I think the above, we mentioned last time when the call we had, we expected to have around 60,000 units that would be in the pipeline by the end of the second quarter, I think we have come pretty close to meeting that target; in terms of units better out there in the field we estimate there is probably 20 to 25,000 units that are sitting at retail, whether that is in distribution centers or on the shelves right now.

Okay great and last question on [indiscernible]. Some guidance for the year, you said you are comfortable now with 75,000 through the end of the year.

That is correct we have an operational plan to do a little bit better, but that is the number that we are putting forth today.

Okay guys, thanks again.

Your next question comes from John Stone of [Ladenburg Stylum].

Good morning guys, my first question is related to the issue of satellite insurance, is that insurance mandatory, if it is unavailable, thinking in terms of some of the terms that have been offered for insurance and we are seeing where [Charlie Ergan] for example over a [indiscernible] deciding to self insure, did the [indemnitures] on your paper permit you guys to do that?

No John, you had a good point, we must insure prior covenant and we don't think we will not get it as I said it is a question of the cost and right now, we believe as we mentioned that you would see about a 50 percent increment in that premium cost. Yes we do need to have the insurance.

Okay. My next question is on somewhat different vain. Visteon had a press release in early August about having receivers that as I read the press release, could be hooked up to tuners from either Sirius or its competitor XM and some people have suggested that this is a reflexion or perhaps a weakening of your relationship before, can you guys comment on this?

Yeah, I think that there was a lot of confusion in that announcement in the way it was worded simply is interoperable head set - head unit and that is all was defined and there is plenty of manufacturers out there, who will be developing interoperable head units for some of interoperable that are in the market today whether that looks needs on and so forth so it has got nothing to do with the receivers, got everything with the head unit, just head unit that will facilitate software for either XM or Sirius.

Right, but in terms of reflecting on your relationships with Ford can

you comment on that?

Yeah, no I don't think, it has any impact whatsoever on the

Ford relationship irrelevant.

Okay, last question is that, Sirius has been an innovator

in terms of coming out with a discount for, in order to entice people

to go for longer term subscriptions, can you give me some idea on what

the take rate you are getting for your 12 month subscriptions as

opposed to be for just choosing to go monthly and whether you will be

expanding that to perhaps a longer term and life term subscriptions?

Yeah I think the answer to the second part of the question is yes, we

will be expanding, looking for opportunities to extend subscriptions as

of this time about 56 percent of our subscribers are taking the one

year up.

Thank you very much.

Thanks John.

Your next question comes from [Tyh Corr Michael] of CSFB.

Good morning, I just wanted to talk a little about the rebate that you

may have addressed this early in the call, I have a

done a little bit late, but can you talk about who is absorbing that

$75 cost and what the catalyst was for that was it just, you didn't see [indiscernible] equipment that channel to really make a proper determination for the nature of customer demands. So was it the dealers coming back to you and say you need to reduce the [upfront] price just given that 12 bucks you are charging per month relative XM or with the dealers [indiscernible] based on the experience they have had with XM with the catalyst there and also, you know, who is absorbing that cost?

On the first part of the question who is absorbing it, its us for the most part its Sirius absorbing the cost. The real issue was the upfront cost to the consumer and we felt that, you know, $400 was a bit was a very [indiscernible] entry for some consumers and we wanted to find out if lowering that [indiscernible] entry will create more subs so, there's also been, you know, much competitive activity out there with free [indiscernible] offers and various rebates. We had to be competitive as well. So, I think it's combination of two things, one is make sure that our part is competitive. Two is, make sure that we have the part available as you mentioned earlier saying that why to worry if there is no product where there will be product out there. And there's a lot of products moving now to get out of the shelf. So we expect that will be the issue. Then three is, the most important issue is to lower the [indiscernible] entry and get consumers the opportunity to get this product installed at about $250 price point.

Let me add Guy two points, Tyh we've also registered with every major retailer in America and indeed, this is the [indiscernible] of some feedback we're getting from them and secondly, the market research we've done through our regional rollouts tell us that the content of the programming is [spicy] and elastic, not so with the hardware, very price sensitive. So we've already learnt that that lesson from experience from our research.

And, just is it, I mean [indiscernible], is demand in the upper market little bit slower than you would have anticipated? [indiscernible] said that will be logical conclusion and you are saying that just the fact the [indiscernible] by the higher [front] price?

I think our constraint has been product availability.

Product availability, okay. And on the OEM front, if you could just talk about your expectations or contributions to sub growth [indiscernible] in '02 and also in '03, and then last question would be with regard to your projections for the amount of capital that you need to purchase-to-purchase cash flow break-even. We've seen that implying that guidance is really significant contribution from Morgan Capital. Just talk about dynamics theory because we just got the income statement [indiscernible] tough to reconcile your expectations with too many capital, you need to get cash for break-even with the income statement, thank you.

Let me, [indiscernible] this is John. [He will] make you clear with the working capital question first. Yes, it is very significant, that's [indiscernible] one most significant way for us to reduce the cash flow requirements of the company and yet you manage it two ways. One, you manage it by a manager at inventory level. We don't own the receiver, but because a large part of sac right now is paid before we see results and before subscription revenues receive. In my mind, we have the financial working capital and the way you reduce that is one, you negotiate better terms, which we are in the midst of doing with our suppliers and trying to match more payment that we make to when we are receiving the revenue. Secondly, what you wanted to do is operationally manage down your inventory levels. As opposed to having to one multiple, we brought the multiple of inventory to expect the sales down and will watch that very carefully. So, yes working capital requirements is a key to our cash flow.

And as part of that, you are also anticipating significant upfront payments for when your contracts [indiscernible]

Well, to me, I, in that's [indiscernible] look at that actual which is [indiscernible] look at that separately. [indiscernible] as Guy had mentioned by having that three month [indiscernible] close to 60 percent that paid annually and over 70 percent that paid beyond one month. We will continue to do that going forward as you see a shift to the OEM in dealer side is also the propensity to prepay and that is the key aspect of our business model as well, so yes.

Can you - is this the expectation within your guidance stays at 60 percent or what are you expectations with regard to prepays, one year, quarterly, or monthly?

Well, actually in a very short term, as we remove that program that offering that should come down, perhaps, somewhat going forward. It does not inconsistent with what we see going forward. I think XM had reported about 90 percent was beyond one month payment.

We will use our call centers as selling opportunities to when people sign up to extend that contract and even on a call back basis, for those who haven't signed up for multiple [indiscernible] programs?

Okay, thank you.

Your next question comes from [Vijay Jain] of Morgan Stanley.

Good morning, couple of questions. One, with the evolution of your chip set, you know, one of the things XM states is that they are generation ahead. How would you characterize your evolution on the chip set relative to XM in terms of size, cost and effectively given [indiscernible] with [gear]. What is it meant to your sac?

Well, this is a significant leap as we've gone from, you know, the 0.25-micron middle layer to a 1.3. Now, I do not know what their second-generation product will be, but I doubt if its ahead of 0.13 because that's state of the art.

And given the fact that the IP is controlled by [indiscernible] the cost savings fall directly to you or let's try and keep some of the prospects generated from this cost reduction.

Vijay, this is John, basically as Joe mentioned there is about a 50 percent total system reduction and cost and of that what we assume is 35 percent comes to us and about 15 percent goes on to the retail price reduction.

Thanks, the second question is on Ford. I am little confused what is the arrangement that Sirius has with Ford at this point, I mean is it inclusive, I am not sure what it you know sure what it is - prior 10 k then it has changed a little on what the arrangement is. Could you just give us an update on that please?

I think [indiscernible] that the relation with Ford now has been unchanged since the second quarter than the first quarter. We continued to work with Ford to arrive at - an exclusive agreement with them and that exclusivity is being worked on as we speak now.

Final question again, John is that any color on that, I thought [indiscernible] increased when they saw some scale last quarter. Can you give some us color there?.

It is just based basically in line with - we had assumed that the [indiscernible] at about 1.5 percent per month and it is about that and again with the numbers that we have so far, we are really looking forward towards the third and fourth quarter to determine but it is close to that 1.5 percent that we had assumed that we had assumed in model and most of that has been due to that quality instillation.

Okay, thanks very much.

Right Vijay.

Your next question comes from [Todd Mitchell] of Solomon Smith Barney.

Hi, could you flush out some more detail on the 100 million in cost savings specifically how much comes from operating cost savings and how much might come from lower internal growth forecast. Also does that include the - an increasing insurance payment where any change in your capital structure that hasn't been announced.

First of all, none of that had - they were all operating when I talked about the 100 million, nothing to do with financing. Secondly, is we talked about a large part of fact had to do with the working capital. Your question specifically did it have to do with a down in the subs, the answer is really no because as I mentioned we pay the subsidies largely before the revenue comes in, so we are back loaded this year and whether or not it gets activated the equipment will be out there by the end of the year and the subsidies will already be reflected, so it had no really very little impact in that regards. So what one its working capital, two we talked about, things are simply as getting rid of a [floor] at Rockefeller Center, we are doing a lot of other things that you see when you come and visit us, product cost are big ones and I won't go into specifics, but we have gone through with out various suppliers working some additional deals, content providers we have got on the non music side. We have a lot of deals that are out there and we worked with some of those content providers to bring down the cost. Our subscriber management system, we have substantial cost there, which we have worked with them, very cooperatively to bring those costs down. So it is - except for the working capital issue that we just went at a great length and talked about. There is no one single item. It is [indiscernible] items.

Okay, and it does not include any change in financial expenses.

No, no.

Also I am sorry, but did you guys give an [RPO] number.

I did not but I have it $11 and 71 cents for the second quarter.

And you expect that to be stable.

Actually, I expect that over time long term to go up as we look at various ways to bring some [indiscernible] and premier services to the mixture but for - one point let we bring up with regards after I made a comment saying for example [indiscernible] rebate that is out there. Accounting rules require that you offset that against revenue. So we are going to [primarily] reporting in the future and [indiscernible] without that rebate and then [often] with that rebate.

Okay, thank you very much.

Welcome.

Your next question comes from William [Keith] of [Lehman Brothers].

Good morning, a question with respect to the EBITDA stands for year the prior times was 300 million. Now that your expecting fewer subs and you have said - you said that you [somehow] constrained your launch campaign. How much materially lower is that number today?

Willy, I just - I actually just mentioned that that because the inventory levels going to the year is not changing that much where the question of whether 75 thousand activates 50 or 100 thousand, really doesn't change our cash outflow. So it doesn't affect that number very much, the drop that I indicated will be just below that - below the numbers we indicated before had to do with some of the cost containment initiatives we have in place.

And with which respect to the 2 million, sub cash flow break even, that's quite different from our model. Can you detail, I guess, other than working capital with which you have already went through, we can look at that off line. What else is in the key operating assumptions to drive 2 million, sub cash flow break event? Can you give us some idea of how, what's your fixed marketing budget in that year as well as particularly your [SAC] assumptions?

I think first of all this is something really we should take off line and go through with the great detail with you, but again aside from the working capital we have just talked about you have your prepaid assumptions and will go through - we have assumed going forward on that you have got the product cost initiatives we have just talked about we have got I just mentioned that there was a couple of content providers as well as the subscriber management system will produce cost on both of that side, there was all the things I just mentioned actually, but we would be very happy as you noted to sit down at great detail with you.

Next, last question with respect to your current products shortage and availability issues, you know I have realized your substantial improvements whether it would be Kenwood, Jensen, Panasonic or Audiovox that is expected in the coming quarter. When do you think it will be a fair comparative period for Sirius and in terms that when do you think you will have your adoption relevant? When should we start really looking for Sirius to make decent relative progress?

We have got you, I think you know September, October volume, where you can see the Panasonic products that are moving into the market in late September, the Kenwood, FM product should be in good supply in September though I would say in September, October timeframe.

Great, thank you so much.

Our next question comes from [Mark Tenoby] of Merrill Lynch.

Hi, [indiscernible] how are you? Just a couple of questions, one, may be can just talk about the, I am just curious that you have this information which you will do. At different points of time in July for example when you went from your 3300 subscribers at the end of the second quarter up until the 6500 subscribers until August, how much availability of the equipment, you said 60,000, but it wasn't in the supply chain that you know, I am curious to know, because the number is a little weaker than I would have anticipated now?

That's because we really only had a couple of brands in debt Jensen and some Kenwood head units and the Clarion in small numbers.

Okay, also you know you did mention [turn] - and John had said actually turn was about 1-1/2 percent per month, a large portion of that for that faulty installations, I look back at you know the ramp that occurred and actually John you know very well that if you look at the turn trends for satellite television, turn was less than 1 percent and also I am just confused about it is that if 56 percent of your subscribers are signing on it for one year that is an extremely large number of subscribers that are turning off on the less than one year promotions and it is very confusing that they love the product that much, they told that would be high, any explanations further than just about the installation?

Number one with the satellite television, I had little some to do it that the turn was indeed initially higher at the 1 percent and also remember that was only one service, so I am not sure those numbers are accurate but they will take a look at him. I don't see any indication here that the turn levels have some to do with dissatisfaction, its more the learning curve with indeed how the product operates and what kind of expectations the customer had. Most of turn I said in fact installation, but people have sold the cars, that they have been sold it, believe it or not, and a million of I think insignificant in items that really won't have a major bearing on a long term.

Okay, other question relates to this 75,000 subscriber estimate you said it it's really going to be heavily weighted in the fourth quarter, I mainly talking on October as it we are really that how are they selling. Obviously, you have experienced from satellite TV. Would you anticipate it is going to really happen to get to the 75,000 subscribers you are talking about in 2002?

We will understand this is 12 volt, so it does have a little difference sales cycle, but in the consumer electronics we are on the 40 percent of the sale that have done in the last four months of the year and we think we will be right in the sweet spot of the selling especially on a new category like satellite radio, though you know, would I like to good [indiscernible] absolutely, but I do believe with 5 brands in debt, we are in good shape for the fall selling season and in the holiday selling season in really November to Christmas it starts on October, I think it retail.

Right and just last question from me is have you done anything different, do you seem both satellite TV and you have seen satellite radio, are you doing anything different at serious that you can discuss that you have said, they shouldn't have done that within the satellite TV industry and they make sure I don't do that to either enhance sales or enhance customers service something that was very apparent to you to ensure that the product is very valuable to the customer?

I think if I had to look back those two points, one the raised prize above 69,995 for the early adopters, but we were under contract to do that because the market, the man was so great. Secondly, there was some confusion in the advertising between direct TV and USSB at the time, remember direct TV was basically running pay-per view movies and our friends at [Hurbert] broadcasting but focused on the cable channel, that caused a little confusion, so I think may be we could use dollars more efficiently, but outside of that I have got to tell you Mark, I am basically working on, I am taking some of my own ideas and recycling because the dynamics here are exactly the same, this is about variety and choice and selection, it is about nation-wide coverage, it is about a better-listening experience, listening and video with satellite It's about product that's easy to use and it's about product that lacks commercial [indiscernible], so I'd fire anybody tell me that's not the same in both categories.

For those Joe, would you say though that if you hear [indiscernible] best five in their shortfall there, is there anything, you know, that from the standpoint of the consumer rolling off, it could really affect sales of satellite radio and obviously in satellite TV as well, but again, you are in more of a new product, you have the timetable to get, you know, you need capital at the second quarter of '03. So that - obviously that's going to have a big indication of how you fare in the next several months. Anything I mean, best buy is saying that sales were really bad across the board, so I don't know how you re-invigorated customers; were those customers getting weaker?

Well, there is a big lucky strike [excur] in satellite radio that we didn't have in satellite television. If you go back to direct TV, I mean, it was like pure satellite radio, no one ever heard of direct TV before or USSB. I believe it was the RCA brand credibility that helped them into the market place and there was only one brand at that time. In this instance, we have the car manufacturers behind the launch of this product and I think that is the significant difference, because they will bring brand recognition and credibility to the product category. So you know that is still a little in front of us, but I am positive that will have a major impact that we didn't see in satellite television.

Okay. Thank you very much.

All right Mark.

Your next question comes from [Tom Watts] of S.G. Calen.

Hi. Good morning Joe and everyone.

Hi, Tom.

Could you - where are you in developing in integrated head unit, that would also have the receiver incorporated in it, so we wouldn't have a separate receiver in the trunk, are you or any of the vendors looking at that?

Yeah Tom, I would say that most of the vendors are looking at it; well, somebody is looking at it especially based on the new chipset that we are developing and I would expect something in the second half of next year.

Second half of next year, okay. And are there are any - on DaimlerChrysler, are there any updates there or any progress there you can report?

Well, I would just say that we are putting together marketing plans now and getting ready to execute for their launch in the fourth quarter.

Okay and then on the BMW, any idea of how many units are we likely to be looking out for the BMW and in [mini] agreements?

I think Tom, I can't give you exact numbers, but they sell about 200,000 cars a year, you can take the models we have announced and do the math and figure which one of them are the 35 series, X5 and so forth and the mini, but it's a dealer installed product and I think you just have to do your own math on it. I don't think they know yet.

Okay, you say its dealer installed, as I understood, originally the BMW was actually going to be installed at the dealer prep size at the import location, is this a change to their approach?

No.

So it was actually installed here in the US and not at the dealers or they just putting compatible head units down at the import site and then the dealers will actually install receivers and antennas.

Tom. I can get back to you on the answer to that, but my assumption is that there will be both.

Okay.

They will pre-load some of the cars and then the dealer once when installed has an option for the consumer if doesn't have a preloaded program, he will select that option as well.

Okay and then on just repeating on the Ford deal, what sort of timing should we look for some clarity on that?

I just have to give you an answer, the best answer I can give you Tom is very soon.

Okay, in Vijay's question, you mentioned that you are continuing to work with them for [Rivet] exclusivity?

We have exclusivity with Ford and we continue to look for ways to have an negotiation with Ford and allow it in the ramp up and drive the market I mean there you are there is significant players in the market obviously we are looking at the ways to increase penetration within as rapidly as possible.

Okay. Some reports I heard suggested that the original Ford agreement that some of the tiny milestones were made on that so that the original [indiscernible] was no longer in force and could you just clarify that and before the exclusivity comes from?

I can't get in the specific for that Tom, I wouldn't say that there is a variety of different ways that we have exclusivity provisions in our agreements and some of those may have lapsed and some of those are still in effect.

Okay. Well, thanks very much and good luck.

Thanks.

The next question comes from [Steve] [indiscernible] of [Sandra Morris and Harris].

Hi. Good morning. Just one question regarding [sac], we have got a few data points on the car, you know regarding the [rebate] going towards the discount revenue, but can you also comment you mention 170 for sac. Is that include all of the equipment subsidies, or really that number will be coming down every time?

The 170 sac that you heard which was down from 178 in the first quarter was indeed the equipment subsidies and retail commissions and yes, we do expect that to come down and as we talked about we would expect sac to come down. The equipment subsidy aspect of that by perhaps now 35 percent even Gen II type of equipment coming out next year.

Okay that's fantastic and then that I mean since that is far well to know that 35 percent meaning that you have to pay that for each piece of equipment that's already on the shelves, but not yet sold; so then as your level of inventory is you know ultimately reduced, then?

It's a definition but I just may clarify the definition of the sac as we did you there which is our definition is, includes; it actually includes all the payments made, so you are right. Anything that's out there in terms of inventory includes the current receiver.

I see. Okay, fantastic. Thank you.

The next question comes from [Joe Hayward] of Radio and Records.

Hi good morning. Joe. Could you elaborate little bit on what the head count management initially going to be you looking at the lay off some full time employees or you mentioned also contractors I mean if you can, just maybe elaborate on what exactly you guys are looking at doing.

Well. Today we have about 314 full time employees that may be half couple and about 50 USA part time consultants and indeed that's about where we will freeze the number we may have some additional performance base head count reductions, but long-term we will need I think there is roughly around 360 people to get this job done. We have let some focus [scope].

Do you have that some focus scope, like in recently?

Last week recent enough for you?

That's pretty recent. Like, you can tell me how many0?

No.

Okay. Thanks a lot.

Thank you Joe.

Ladies and gentlemen. We have reached the end of the allotted time for questions and answers. Mr. Collins are there any closing remarks?

No, Thank you very much.

This concludes today's Sirius satellite radio conference call. You may now disconnect.