Sirius XM Holdings Inc (SIRI) 2002 Q3 法說會逐字稿

Good morning. My name is Jeff, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the XM Satellite Radio Third Quarter Earnings 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 that time, simply press star then 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 introduce Joe Titlebaum, General Counsel of XM satellite radio. Please go ahead, sir.

Good morning. I'm Joe Titlebaum, General Counsel of 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, continual need for additional financing, as well as other risks described in XM Satellite Radio Holding Inc.’s filings on form S-3 filed with the Securities and Exchange Commission on June 21, 2002. Copies of that filing are available on request from XM Radio's Investor Relations Department. I will now hand the call over to Hugh Panero, President and CEO of XM Satellite Radio.

Thanks, Joe. Good morning, everyone. This is Hugh Panero. I'd like to thank all of you for joining us to discuss XM's [business] results for the third quarter of 2002. On the call with me are Gary Parsons, the Chairman, Joe Euteneuer, the Chief Financial Officer, and Joe Titlebaum the General Counsel along with Steve Cook, the Executive Vice President of Sales and Marketing.

This morning, I'd like to focus on two major areas critical to the future of the company. First, the status of XM's fund-raising and our cost control actions to stretch existing cash through the first quarter of 2003. Second, the continued positive execution of our business plan from a marketing and operational standpoint. This includes the widespread rollout of factory installed XM Radios in a broad range of General Motors cars, dealer- installed plans for Nissan Infinity, Honda, Acura and others, and the strong early market success of our second generation radios, specifically the retail after market introduction of the SKYFi product from Delphi Electronics. Following my comments, Joe Euteneuer will discuss the operating results for the quarter, and we will open the line to take questions.

First XM's funding status. Over the past several months, XM has established a solid record of meeting marketplace projections and accomplishing the business objectives it has communicated to the street. My personal objective was to have a substantial funding package in place at this call. We have made progress in that effort but are not able to announce a completed financing transaction at this point. We know that you as investors are anxious to see a successful conclusion to this effort, and frankly, funding concerns continue to overhang the company even in the face of consistently positive operational performance.

While obviously we cannot discuss our progress in great detail, let me give you a current status. In past financings, we have only funded about 12 months of forward liquidity. Our goal in the current financing round is to fund the company as closely as possible to positive cash flow. XM is seeking $200 to 250 million in new funding. In combined with restructuring of certain existing obligations, which I will discuss shortly, and other actions we are taking should fully fund the company to positive cash flow. To facilitate the overall financing package, we have been in discussions with General Motors regarding nonbinding term sheets for the deferral of up to $200 million in payment obligations with approximately half relating to the 2003 to 2004 time period, and exchanging these payments for certain debt and convertible securities as well as introduction of an arrangement permitting certain payments to be made in either stock or cash. XM's ability to execute any arrangement regarding deferral of payments to General Motors is contingent upon certain modifications to XM's capital structure and the company securing at least $200 million in new financing. We have not finalized any terms or reached final agreement with General Motors and cannot assure you we will do so. But believe that agreement could be reached broadly on the terms currently under discussion or similar terms should we be successful in raising the required additional funding sought.

To attain at least $200 million and up to $250 million in new financing, XM and its investment bankers are in discussions with potential outside investors as well as current major financial and strategic shareholders. Any resulting transactions will be evaluated by our independent board of directors. While we have no assurance, the current overtures will become binding deals, I am confident we will develop the necessary funding to maintain and grow our business. Due to our current stock price, and the existing financial marketplace, these transactions will, of necessity, be at prices lower than those paid by many of our investors in the past. But the precise terms cannot be known until the transactions are finalized. At this stage, the most important consideration to me is to obtain adequate capital so our current shareholders have an opportunity to realize the long term upside of their investment. Obviously, it is always difficult to predict accurately the timing on complex financing packages. I currently expect to be able to announce funding terms by mid December, but would not anticipate the documents and necessary approvals to be finalized until early 2003. To that end, XM is taking the necessary steps to reduce expenditures such that our existing cash of $84.3 million as of September 30 will last through the first quarter of 2003. We believe these reduced expenditures will not prevent us from continuing our positive subscriber ramp. In fact, we began pulling back on numerous discretionary expenses during the quarter just completed, and we're still able to hit our subscriber projections, demonstrating the attractiveness and the pull of the product. At this point, we have confidence in our current year-end subscriber targets and will definitely show continued improvement in EBITDA performance as well.

Now I'd like to discuss our efforts to accelerate cash flow break-even. Continued improvement in our operational performance is a significant economic key to turning the market acceptance of XM product into financial success for the XM business. We have learned a tremendous amount during our first year of commercial service, a year highlighted by exceptional subscriber ramp-up in a challenging consumer electronics market and the development of next generation XM Radios. Based on that learning, XM has refined its business plan, focusing more on the OEM vehicle market to take full advantage of XM's relationship with automobile manufacturers, introducing new lower-priced and more user-friendly radios in the retail aftermarket, and concentrating on the most productive distribution channels, thus improving revenue-expense ratios and accelerating cash flow.

As a result of this positive progress and market repositioning, as well as the potential impact of refinancing proposals currently being discussed, XM expects to reach cash flow break-even by mid to late 2004, and to do so with much lower number of subscribers than previously forecast. During the quarter, XM met its subscriber forecast despite a generally soft consumer electronics market. As it has done every reporting period since commercial rollout in the fall of 2001.

As of September 30, XM's satellite radio is reporting 201,554 ending subscribers, a net subscriber add of 64,836 for the quarter. This reflects a 47% increase in subscribers from the number of subs at the end of the second quarter. We continue to watch the retail markets and consumer confidence and remain encouraged about the coming holiday season, which traditionally accounts for 40% of consumer electronics sales. Moreover, the positive subscriber metrics we observed in the first half of the year are being sustained, even as the subscriber base expands and the service evolves with refined program offerings. Subscriber churn remains low. In addition, the positive trend of subscribers paying in advance by credit card has continued with approximately 83% paying on a quarterly, semiannual or annual basis.

As was discussed on the second quarter conference call, XM continues to execute in the retail aftermarket by demonstrating strong consumer demand for XM Satellite Radio, building a national distribution pipeline of consumer electronics retailers and filling that pipeline with hundreds of thousands of XM Radios from leading manufacturers, Pioneer, Alpine, Sony, and now Delphi Electronics. In its first year, XM Radio has grown almost exclusively through aftermarket retail sales. By educating consumers that satellite radio is a compelling product, and then working to assure that retailers are prepared and equipped to sell XM Radio to those consumers. XM's next generation products are also selling today, and they are a big hit.

As promised in our last conference call, the SKY Fi radio by Delphi is on aftermarket retailers' shelves today featuring a significantly reduced price. Only $199 at retail for a complete home or car unit including the antenna, and providing consumers with the most advanced user interface of any satellite radio available today. SKYFi includes a large screen, enhanced realtime artists' profile information, 20 channel presets, and more flexible channel navigation. The device can be freely moved among the car, home and office, and most importantly, this low-cost, high-appeal product carries XM's lowest equipment subsidy, thus accelerating our ability to drive unit sales with lower acquisition expense. Thousands of SKYFis are already in the hands of consumers with some 120,000 to 150,000 expected to be manufactured by year end.

Early indications suggest that SKYFi, already being featured[in the gift guides] in ”Rolling Stone”, “Maxim” and ”Fortune”, among others, will be a huge holiday item. SKYFi has already opened up the home market. According to a recent review, the SKYFi is, "a category killer that promises to revolutionize the industry, sparking great consumer interest and sending competitors scrambling." The SKYFi product line includes user-friendly home and car accessory kits, and soon a SKYFi audio system or boom box which will be shipped in December with limited availability by Christmas. The after-market radio has a sharply lower retail price, resulting from XM Innovation Center's ability to drive down component costs and achieve attractive retail price points with minimal equipment subsidies. Candidly, the SKYFi and similar low-cost, low subsidy, high appeal products in the pipeline are critical to meeting our subscriber and cash flow breakeven projections and meeting them in an economically rational manner. I would expect in the fourth quarter call that we would talk about other new products that our Innovation Center is developing. XM's OEM expansion is also in full gear.

During the quarter, XM's market emphasis began shifting from the aftermarket retail distribution to the expanded availability of XM as a factory-installed option on new cars. During the quarter, GM began its major rollout of model year 2003 vehicles equipped with XM Satellite Radio. Backed by a GM media campaign highlighting the XM Satellite Radio in vehicles ranging from the entry level Cavalier, Sunfire Grand Am, to high volume trucks like the Siverado and Sierra as well as the popular S.U.V. like the Yukon and GMC suburban. These cover 6 GM divisions, 25 vehicle lines, all product category, and all price points.

Also during the quarter, GM hosted an XM Radio Investor Day at GM world headquarters in Detroit, providing insight into their production and subscriber projections, sales and marketing efforts, dealer awareness campaign, and specific initiatives of large volume vehicle brands such as Pontiac and Chevrolet. For those in the investment community who were unable to attend the event, the presentations and an audio recording of the event are available on the XM Radio website.

In the 2003 model year, production volume of XM equipped GM vehicles is estimated at 350,000 to 400,000 vehicles. This represents an average 15% penetration on those vehicle models currently offering XM Radio. Over the next model year, GM intends to expand the number of vehicle lines with factory-installed XM significantly and to increase the penetration by five percentage points per year. For example, at least 20% in ‘04, 25% in 05 and so on. GM is on target to produce 168,000 vehicles with XM factory installed by year-end. Clearly, the OEM subscriber base will become a much more significant percentage of our overall subscriber base in ‘03, ‘04 and beyond.

Key elements of success in the OEM distribution channel will be XM and GM's ability to education and create a buzz among the 7,500 GM dealers across the country. To this end, GM is providing extensive and ongoing sales support and training, has established a dealership vehicle demonstration program, provided in dealership kiosks and points of sale kits to bring live XM programming into the showroom. XM Radio is also featured in 2003 GM brand catalogs and GM provides dealer incentives for selling extended service agreements plus a variety of ad hoc dealer or salesperson incentives. Separately, XM continues to pursue the dealer installed market with initiatives at additional auto manufacturers and dealers. Nissan Infinity is currently introducting a port installed solution in the Pathfinder and will follow with offerings for the Nissan Murano and Infinity Q45 follow by other vehicles. Likewise, Honda will be offering dealer-installed solutions on the Accord, Pilot and Acura MDX. Isuzu is offering dealer-installed XM solutions in the Rodeo and Axiom. Volkswagen and Audi also has extensive plans for introductions later in 2003. Clearly, the momentum in the entire new car marketplace is building for XM satellite radio.

With regards to our subscriber forecast, right now the fourth quarter looks very positive for XM. SKYFi is off to a hot start in major retailers. GM XM activations are ramping and we'll have good product flow through the retail and OEM channels for the upcoming holiday season.

Recently, we had our first 2000-plus activation day. XM reconfirms its projection of 350,000 subscribers by year-end 2002. As for content, our subscriber base has responded enthusiastically to the new channels announced in August, an audio book and audio,classics channel, plus channels dedicated to Electronica, Folk, Easy Listening, Neo soul and Urban Hip-Hop. And continuing the evolution of our service offering, we will be adding CNN to the channel lineup on December 2, as well as a new Alternative Rock and a channel dedicated to live music. In addition today, we have over 6,000 subscribers on our first premium channel Playboy Radio in just over two months of service.

Before I turn it over to Joe Euteneuer to cover the financials in detail, let me simply summarize by saying from a programming, Operation and marketing perspective, XM continues to hit on all cylinders. From a financing perspective, we clearly need more fuel in the tank to continue this positive performance, but we are heartened by the indications of support from General Motors and the interests from new and existing investors. I will now turn the call over to Joe Euteneuer, XM CFO.

Thanks, Hugh. I'll discuss operating ruts for the third quarter of 2002. As discussed last quarter, the company in 2002 transitioned from building its network to the operational activities of selling XM Radio subscriptions and entertaining its listeners. Therefore, a comparison of cost with the third quarter 2001 is not meaningful. Instead, we will focus our comparisons on third quarter versus second quarter 2002. The company reported consolidated revenue of $5.6 million, an increase of approximately $1.8 million from the second quarter 2002 reported revenue of $3.8 million. XM's EBITDA loss decreased 15% to $67.1 million, from the reported loss of $79.3 million in the second quarter of 2002. The increase in revenue is primarily due to third quarter net subscriber additions of 64,836 from the 60,476 reported in the second quarter of 2002.

The average revenue per subscriber increased to $9.68, excluding advertising revenue, from $9.31 in the previous quarter. This reflects less service promotions in the third quarter. Net advertising revenue decreased $96,000 to $603,000. This decrease related in large part to an expected seasonal decline. On a year-to-date basis, net advertising revenue represents 15% of total revenue, which is in line with our expectations. Total expenses for the third quarter of $72.8 million, excluding depreciation and amortization, decreased 12% from second quarter expenses of $83.2 million. This decrease was primarily driven by an $11 million reduction in sales and marketing expense, resulting from the maturation of our retail distribution network, the initial positive impact of lower radio manufacturing subsidy cost, and a shift in advertising focus from one of building brand awareness to a strategy based on consumer education and leveraging of XM's strategic relationships such as GM cross-marketing efforts. As compared to the second quarter, XM experienced modest increases in system and operating costs of $1.2 million. Customer care operations of $360,000, and research and development costs of approximately $266,000. The increase in system operating cost was primarily related to charges for broadcast operating enhancements in 3Q versus 2Q. The increase in customer care operations was related to the growth in subscribers during the third quarter and opening up of a second call center.

Research and development charges reflect an increase in activities relating to the development of our future generation of products. Including SKYFi. For the third quarter, our total marketing expense, which is a combination of sac, media and sales and operation expense per gross add was $486 as compared to $722 per subscriber in the second quarter. This represents a decrease or an improvement of 33%. We expect to see a similar dramatic improvement in the fourth quarter.

Acquisition costs were only $120 per subscriber for the third quarter. Under our expectations for year-end of $130 per subscriber. Sac includes radio manufacturing subsidies, sales activation and installation commissions and subscriber promotional incentives. Thus far, we have been able to drive our subscriber growth while beating our subscriber acquisition cost projections. Finally, as has been repeatedly reported in our public documents, Boeing Satellite Services advised XM Radio in September of last year concerning a progressive degradation problem with the solar [array] output power of the 702 class satellites, including XM Rock and Roll. As we have continued to note, the output power of the solar [arrays] and the broadcast signal strength are above minimum acceptable levels and expected to remain that way at least through the end of 2005.

Further, we should also note that even after 2005, each satellite in a collocated configuration is expected to provide service for two or more years to one half the XM channels and to be used in conjunction with our spare satellite, thus providing full nationwide coverage of all channels from both our orbital locations. XM's management continues to monitor this situation very carefully, and based on the best analysis received from Boeing Satellite Services, management has determined it is appropriate to adjust the estimated useful life of XM Rock and Roll to approximately 6.75 years, or through the first quarter of 2008. At the end of the third quarter, XM had $84.3 million in unrestricted cash to fund its operations. As Hugh noted, management is taking steps to reduce cash burn so as to extend the available cash flew the first quarter of -- through the first quarter of 2003. These steps, which began in the third quarter, include minimizing discretionary spending, negotiating deferrals or reductions of existing obligations, reducing our work force, and reducing our capital expenditures along with other related efforts.

Finally, on a subscriber growth and operating performance basis, as Hugh noted earlier, we are very pleased with the performance seen to date of the retail aftermarket channel and are very optimistic, based on early results, about the factory and dealer-installed new vehicle sector. Our cost containment efforts have lowered expenses but have not diminished our ability to drive the product successfully to the market. We have continued to hit our subscriber revenue expenses and EBITDA targets and prospects look favorable for a continuation of that trend in the coming quarter. As Hugh noted, we are reconfirming our prior guidance of 350,000 subscribers by year-end 2002, and can now provide guidance for 2003. We expect to have 1.2 million subscribers by the end of 2003. Clearly, a dramatic ramp from a very successful 2002. Obviously we will need to complete our funding efforts in a timely manner to achieve this, but with proper funding, we see a clear path of accelerating subscriber growth and an early cash flow break-even. I'll now turn the call back over to Hugh.

Thanks, Joe. Let me summarize our main points today. We continue to work aggressively to raise the necessary capital to maintain and accelerate our positive subscriber growth record. We expect our financing package to come together during the November/December time frame but it may not close until early 2003. We are reducing our cash burn to ensure we can maintain effective operations through the first quarter of 2003. Based on market experience to date, the current aggressive OEM market penetration by General Motors and a flow of new, lower-priced, richly-featured products from our Innovation Center in Florida, we have revamped our market strategy and believe we can reach cash flow break-even earlier than previously predicted. We continue to deliver on our promises in market penetration and expense management, and confirm our guidance of 350,000 subscribers by year-end. We are now able to project 1.2 million subscribers by year-end 2003. This is a major acceleration of subscriber ramp and demonstrates our conviction that XM is becoming a truly mass market product across the car, home and boom box sectors. Finally, our strong management team executing on schedule, Gary and I are devoting all of our energies to raising the necessary capital to enable this great business to reach its full potential. We have a great product. We will do everything within our capabilities, and those of our advisors, to accomplish this critical task over the very near term. Gary Parsons and I and the rest of our team here are pleased to answer any questions you might have.

At this time, we would like to remind everyone, in order to ask a question, please press star 1 on your keypad. We'll pause for just a moment to compile the Q and A roster. Your first question comes from Robert Peck with Bear Stearns.

I wanted to get a little more clarity around some of the funding. Can you give us a little more color as to why we're seeing a delay, and after that, is there a structuring definitely needed, is it dependent on converting some debt or preferreds over?

The delay in putting the deal together simply probably relates to the fact that any complex deal, I think, has its own timing, that as I said on the call, I probably would rather have had a substantial financing transaction done by this call, but these deals tend to have a life of their own and don't necessarily neatly fit into the timing schedule that all of us would like. We are currently evaluating a number of different structural alternatives. I mean, we're not particularly looking at a serious [alike] recapitalization that you've seen in the past because our debt structure is very different than theirs.

Okay. And as far as the revamping of the model, one of the concerns out there was that you have to cut your sac or advertising back, which would therefore maybe limit some growth in the future. It sounds like you'll not be touching your sac or your advertising. Should we keep our current estimates there?

With regards to sac and advertisings, I think what the last year of actual operations have taught us is that we are able to achieve subscriber targets with actually lower media spending and our sac costs which basically go down because of the lowering cost of the subsidies that we've been paying on radios and the introduction8 of new devices like the SKYFi which actually in the retail distribution channels where it now exists is accounting for about 45% of our sales, and actually expanding the pie of people buying the radios. So we're going to see a different mix of products which will lower our costs. Also, because of the rollout of factory-installed XM Radios in GM cars, we are able to leverage off of the enormous marketing power of General Motors, which itself will spend about $12 million in the fourth quarter on advertising of its cars which will highlight XM Satellite Radio, which I think you've soon some of the ads already that have appeared. So what we do, we have a natural decline in sac because of the lower subsidy costs, and we're able to leverage off of General Motors' enormous mower in the marketplace and have been able to reach our subscriber growth with less spending as we [basically]just saw in the third quarter.

Okay, great. Can you give us a current sub number where subs are to today and also what effect you're seeing from [Cerius] now entering the market more competitively?

We obviously have more than the 200,000 subscribers that I reported on September 30, and we have seen no impact of Cerius’ presence in the marketplace. Our SKYFi devices just simply sell very well along with devices we have from Pioneer and Alpine.

How many SKYFi are actually on shelves for Christmas?

They've actually been selling very well and every bit of feedback we've gotten from both the retailers and from the reviewers is that is going to be a huge holiday gift item.

I agree ,I mean, we love the unit, but do you know how many you are out there on shelves?

Yeah, this is Steve. Between now and mid December, they will have produced about 120,000 units. That number sits at about 50,000 units currently that have been produced and shipped to the U.S..

Okay. Great. Thanks a lot, guys.