Sirius XM Holdings Inc (SIRI) 2002 Q4 法說會逐字稿

Good afternoon. 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 fourth quarter 2002 earnings conference call. All lines have been placed on mute. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during that time, press star, then the number 1 on your telephone keypad. If you'd like to withdraw your question, press star-2 on your telephone keypad.

I would like to introduce your speaker for today, Joe Titlebaum, EVP and General Counsel. Please go ahead, sir you.

Good afternoon. My name is 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, as well as other risks described in XM Satellite Holdings filing on form 8K filed with the Securities and Exchange Commission on December 24, 2002. Copies of that filing are available upon request from our XM Radio’s investors relation department.

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

Thanks, Joe, and good afternoon, everyone.

I would like to thank you for joining us to discuss the business results for the fourth quarter and full year 2002. On the call with me, as is our practice, is Gary Parsons, XM's Chairman, Joe Euteneuer, the CFO, Joe Titlebaum, and Steve Cook, the EVP of Sales and Marketing.

This afternoon, we're going to focus on four major areas. First, we're going to review the recently completed financing package and its impact on XM's future.

Second we're going to talk about XM's subscriber base as we enter 2003 and our projected subscriber growth.

Third, we're going to talk about XM's momentum in the OEM market, our continued retail expansion, and the rollout of innovative new products, thus expanding our leadership position far beyond the car audio after-market.

And finally, we're going to take a look at XM's ultimate differentiator, the company's innovative and constantly evolving programming.

Following my comments, Joe Euteneuer will discuss our operating results for the full year as well as provide specific financial information and operational guidance for 2003, and then we'll open it up for your questions.

First, let me have Gary Parsons review XM’s recently completed $475m financing package. Gary?

Thanks very much. During the last quarterly conference call, Hugh stated that our goal was to put in place a substantial financing package, which would fund XM through cash flow break-even. And obviously as you're aware, we all pleased to say that on January 28, 2003, we did close on financing arrangements totaling over $475m.

Funding XM's business through a cash flow break-even, and more importantly, removing a major roadblock to XM being valued on its marketplace progress, plan execution, and economic potential, all of which are clearly exceptional.

Most of you know, the package consists of $225m in new funds from strategic and financial investors, as well as $250m in payment deferrals or related credit facilities from GM. The financing is truly watershed event for the company. We received major support from the existing shareholders, including, of course, General Motors, Honda, DIRECTV, and Eastbourne Capital. In fact, nearly 80% of the total $475m financing package came from the current shareholder groups.

XM is also pleased to welcome several new investors, including the Hearst Corporation.

Concurrent with the financing, XM made an exchange offer for its outstanding 14% senior secured notes, which were due 2010, in exchange for new 14% senior secured discount notes due 2009, along with warrants and cash. The exchange offer was well received and garnered support from 92% of XM bondholders. This exchange shifts out to later years approximately $105m in interest payments, otherwise due through December, 2005. Further contributing to our ability to reach cash flow beak-even without requiring additional external funding.

Needless to say, we are extremely gratified to have closed this financing, which funds the company for continued positive success while protecting the interest of our bondholders and common shareholders alike.

Related to these financings, XM held a special meeting earlier today in which our stockholders approved an amendment to the restated certificate of incorporation, increasing the number authorized number of shares to provide coverage for the convertibility securities which XM had issued, as well as future flexibility for stock splits, acquisitions, or other financing opportunities.

With this financing in place, we feel like XM is now positioned to ensure that XM's attractiveness as an entertainment service or product, is now matched by the attractiveness as an investment. Within the past few weeks, even, we've begun to see some reflection in the marketplace of the improved financial condition and as we continue to execute and deliver results throughout the year, the market will hopefully reflect that continued positive performance as well.

Now, let me turn it back over to Hugh.

As an early-stage company, there's clearly a lot of focus on XM subscriber growth, so I'd like to take a little time and talk with you about our subscriber growth in 2002, and also our growth in 2003.

In early January of 2003, during the consumers electronics show in Las Vegas, the company announced that it signed over 360,000 subscribers, well on our way to over a million subscribers by the end of 2003.

This accelerated subscriber growth is being fueled by what we refer to internally here, and externally as the second launch of XM Radio in new vehicles from General Motors and Honda, and our third launch into the home and the portable markets with next-generation SKYFi receivers, including XM’s first portable radio, the SKYFi boom box which many of you have seen.

As of December 31, 2002, XM reported $347,159 ending subscribers, a net subscriber add of 145,605 for the quarter. That is reflecting a 72% increase in subscribers from the end of the third quarter.

The fourth quarter of 2002 highlighted the seasonality of XM's business by accounting for over 40% of the entire 2002 net subscriber additions. During the month of December alone, XM Radio added 79,000 subscribers, demonstrating that XM was a hot holiday item and a bright spot in the somewhat disappointing holiday selling season for a number of retailers.

As we reach the end of the first quarter for 2003, we are pleased to announce that XM will add more than 130,000 net subscribers for the period, or roughly two and a half times the number of subscribers added in the first quarter of 2002. This performance is particularly encouraging, given that the first quarter of the year is typically a challenging time for consumer electronic sales following the very active holiday selling season.

We are seeing continued strong growth in the OEM channel, as GM accelerates its product rollout. We also expect net subscriber additions to grow steadily, as they did last year during the second quarter and third quarter, then to rise steeply again into the fourth quarter holiday selling season as 2004 model year cars reach dealer lots and as we enter the 2003 holiday season, with a full portfolio of attractive versatile products.

Ending subscriber guidance for the full year 2003 remains unchanged at 1.2m subscribers, or more than triple the number of subscribers at year-end 2002.

Given the troubled world and marketplace dynamics, particularly softness in the consumer electronics and auto industries, some of you have inquired whether we would revise our guidance downward. However, with our current quarterly performance and consumer satisfaction levels, we continue to believe that 1.2m subscribers represents a challenging but achievable objective, and we are going to work to execute getting those subscribers this year.

With cumulative subscribers well over the 1m mark and a much broader range of after-market and OEM product available to consumers, XM should end 2003 with a firmly established mass market entertainment service and be in a solid position to reach cash flow break-even in late 2004.

I'd like now to focus some attention on the momentum in our OEM distribution channel. During the fourth quarter of 2002, and even more strongly in the first quarter of 2003, XM has worked with GM to increase customer acceptance of XM Radio as a factory installed option across 25 GM 2003 vehicle lines. By year-end 2002, XM had signed over 50,000 GM subscribers, a number which has nearly doubled to approximately 100,000 to date.

The increasing success of this rollout is in part attributable to GM and XM's cooperative advertising and marketing efforts. This campaign includes both TV and print advertising for vehicles ranging from the Chevy Cavalier to the Cadillac Escalade. We are at the very beginning of this marketing collaborative process.

As a result of the positive market acceptance to date, GM has announced the availability of XM Radio as a factory installed option in 44 of 57 models, beginning in the summer of 2003 for the 2004 model year, that represents 77% of GM models, Accelerating one of the fastest new technology rollouts in GM or any other automobile company's history.

XM is also resonating with GM new car buyers. When announcing in mid-January the expanded rollout of XM in GM cars, Group VP of GM vehicle sales, Services and Marketing, John Smith, commented that our early research among GM vehicle owners with XM revealed that over 90% would either only buy a vehicle with XM, or would prefer to buy with XM when they next shop for a vehicle.

In addition, a GM initial quality study conducted in January 2003 concluded that 95% of XM subscribers purchasing new GM vehicles would recommend XM to their family and friends. XM is fast becoming a critical and integrated component of GM’s sales presentations at dealerships across the country. GM is interested in selling cars and things that help them sell cars like XM are valuable products, and we have become one of those valuable product.

In early January, Honda announced XM Radio will be available this year on several key Acura and Honda models. Last week, Acura began shipping the 2004 Acura RL, features XM Radio as standard equipment to its dealers throughout the U.S. This will be followed in the fall by the all-new 2004 Acura TL sedan for Honda, dealer installed option will also be available in spring on the 2003 Accord and Pilot. Most importantly, Honda expects to have XM Radio factory installed on specific 2004 models beginning with the 2004 Accord, a model, which represents, as you know, about 40% of the total US Honda volume.

Furthermore, Honda, in connection with its current investment in XM will work with XM in the development of next-generation [telematics] applications for the automobile. So just as GM helped spark XM with regards to the adoption of satellite radio, Honda and XM will collaborate on the development of innovative [telematics] and data services.

Lastly, Toyota will offer XM Radio as a feature on the new youth-oriented [Sign] brand vehicle arriving at US dealerships this June. It will carry an MSRP below $16,000, targeting clearly the youth market and will be marketed through participating Toyota dealers.

Across last year, XM established leadership in the car radio after-market. With this expanded rollout of GM and the addition of Honda and select Toyota vehicles, XM has also now established its leadership in the OEM market as well.

The Company has built a reputation for executing on our distribution plans, and we're now building a similar reputation for our ability to introduce new and innovative products.

First, XM launched in the car stereo after market, and then the new car market with GM, more recently we moved aggressively into the home and portable markets with the innovative SKYFi and SKYFi boom box. SKYFi represents a compelling value proposition to customers. In essence it has a great price point, $199 for retail for a complete home or car unit, including the antenna, and has an advanced user interface highlighted by a large screen, 20 channel presets, real time artist program information, the ability to view artist and song titles playing concurrently on different channels, and portability from the car to the home to the boom box.

In fact, in a January review of XM Radio's products, the well-known and often critical "Wall Street Journal” technology writer, Walt Mossburg (ph) wrote "the SKYFi is simply the best satellite radio around today." There was another review recently on MSNBC where the writer summed it up by saying about SKYFi, "wow, what a great product." These are obviously things we give a lot of credit to our innovation center and their collaboration with Delphi.

As of the end of the fourth quarter, Delphi had sold approximately 100,000 SKYFi units to retailers. Moreover, in late December, the Delphi SKYFi boom box began arriving at car audio shelves at Best Buy and Circuit City. A little late for the holiday selling season, more setting up first quarter growth and sales. Now, Circuit City and Best Buy, and many others, have decided to expand SKYFi merchandising to the home stereo and portable audio sections of their stores. This is a major step moving it beyond car audio and into the attractive home and portable audio markets. In essence, many of us have been focused on 200m licensed vehicles on the road today, but now we're opening up a very large home and portable marketplace, which really has not been factored into people's estimates.

Delphi's commitment to ship some 80,000 SKYFi boxes to retailers in the first half of 2003 simply supports these retailers' actions in moving XM into the home and the portable sections.

SKYFi pricing and versatility is also enabling us to expand our distribution to include all 2,800 Wal-Mart stores nationally in a phased rollout, beginning now and reaching all the stores in both the car audio and the home electronics department by the end of May.

One thing I would like to point out is this is not a situation where somebody clicks in 2800 stores and immediately starts calculating how many units are produced out of that. We have a phased rollout, but when it's all setup Wal-Mart is clearly a significant retailer, the leading in the United States, and we think this is an enormous step forward for XM, because with the addition of Wal-Mart, we're going to offer consumers in many small and medium-sized markets the same easy access to XM Radio that consumers in more urban markets have enjoyed with stores coming from Best Buy and Circuit City and many of the regional retailers.

With the innovative SKYFi and new products to come, XM continues to drive down price points. We have to enhance the user functionality, and open attractive new market segments from the vehicle to the home, to the office, to boom boxes and portable devices, the combination of all these things has created a situation where XM is everywhere.

We have great products now that look good, that are priced right that are distributed in great locations, but at the end of the day, it's the content that is the ultimate attraction. It is the killer application, and we're seeing that now as we are building a base of customers who are clearly recommending it to other people. Our ability to deliver diverse and unique programming is driving the sub-base through word of mouth. We are differentiating our service and creating a lasting bond with these listeners. We've established XM as an outstanding provider of radio content. We've created fans who are (evangelizing XM. We just had a special shareholders meeting that Gary mentioned, where we had about 50 shareholders there who were all subscribers who came over to the facility after the meeting, who couldn't talk enough about the quality and what XM has meant to them as an entertainment option.

To make all of this happen with regards( to content, we support a talented group of music directors, producers, and on-air personalities that create an interactive and compelling programming on a daily basis. As you know, the majority of our programming is original content, done in-house and unavailable through any other medium. XM provides this talent with leading state of the art, all-digital radio facilities. We have 80 studios here in D.C., including a 2,500 foot performance studio space, and additional studio space in mid-town Manhattan, and at Nashville at the country music hall of fame.

Finally, with regard to our content, XM partners with the very best media content developers and select radio content brand names to bring and round out our offering to our listeners, so we can satisfy their needs on a nationwide basis.

We take our programming commitment very seriously, and provide the necessary and personal funding to ensure that we maintain the finest and most compelling content around. As evidence of XM's success in the content area, we have established an ability to serve our listeners' changing needs. XM is a service that's valuable in good times, and it's become an absolute necessity in bad times, demonstrated by what has happened during the recent war in Iraq. A recent survey of our listenership shows more than a 50% increase in subscribers tuning to our news broadcast, ranging from the patriotic news coverage of Fox News, and then spanning CNN, ABC, Bloomberg, CNBC, and C-span, all the way to the BBC, which clearly carries a more European view of what's happening, with their different perspectives and in-depth coverage.

On a personal note, I basically don't like turning on the coverage of the war at home, I have small kids. What I do when I get into my car, I basically flip to CNN and Fox News, and we have extended all that coverage into the car, which as you know, many markets around the country don't even have a 24-hour news channel.

We also have established a dialogue with our customers. For the first quarter, we have been averaging about 50,000 telephone calls per month from subscribers, eager to interact with our on-air talent. These people either want companionship, they're requesting a song, they're asking questions about artists, and they're engaging with us. We also have a relationship with performing artists. There have been more than 700 visits logged to our performance studio and other facilities in New York and Nashville, including named talent like Billy Joel, Melissa Etheridge, Wynton Marsalis, Snoop Dogg, J.Z., and Tony Bennett.

Also, the broad appeal of XM has extended to our NASCAR channel, where recently a popular Busch series driver lost his sponsorship and was interviewed by XM reporters, after which listeners began sending in donations to allow this driver to compete at Daytona. In return for all of this love, he actually put on the hood of his car, it said "XM Nation," providing an enormous brand awareness for us. But there clearly is a connection happening with our listeners.

These are the kind of things that do not appear on a balance sheet, but for those people looking to track changes in popular culture, they focus on them.

The next thing I'd like to talk about is regarding an issue a that, if Gary and I were to count the top five things that are asked of us when we are doing road shows or speaking publicly, one that always comes up, is when will you have a family plan? And I'd like to address that. Right now, XM has a large consumer appeal, we have a number of subscribers who have purchased a second or third XM Radio subscription. These listeners are significant influencers for additional sales for new customers. To reward and expand this group, XM is introducing a family plan in April. The way it works is after your first primary subscription of, you know, $10 a month, each additional subscription will be reduced to $6.99 a month. The plan is going to be introduced in April. The details and the limitations will be articulated on our website, and we'll be aggressively rolling that out.

Offering the family plan is a step we have always planned to take, but one which could not reasonably be done until the costs of our chip sets and hardware subsidies had faller to more moderate levels. This action will reward our most loyal listeners, but stimulate those customers to be XM's best salespeople, reaching even more potential customers.

I'd like to turn the call over to Joe Euteneuer our CFO to talk about the business results for the fourth quarter and 2002.

Thank you, Hugh. I will discuss the financial and operational results of XM Radio for 2002.

2002 represented our first full year of commercial operations. With that experience, we have re-categorized our 2002 statement of operations to better reflect the revenue and expense drivers of our business. Accordingly, my comments are based on these new categorizations, which are included in the financial attachment to our press release. We think it will make it easier for investors to understand and analyze our business and to track our financial performance trends.

In addition to our discussion today, a detailed analysis of XM's performance is contained in the MDNA form 10-K to be filed on March 31, 2003.

The company reported consolidated 2002 annual revenue of $20.2m, an increase of $19.7m compared to 2001 reported revenue of $533,000.

Fourth quarter revenue increased by $3.4m over the third quarter, a 63% increase.

Total subscribers at year end 2002 were 347,159. In the fourth quarter alone, subscribers increased more than 70% from the third quarter totals.

XM's EBITDA loss for the year totaled $318m. $25.3m of this loss represented charges associated with our $475m financing, a non-cash impairment charge, and costs associated with the recently finalized performance rights royalty agreement. The 2002 EBITDA loss increased compared to the $238.8m loss in 2001, as the company conducted it's first full year of commercial operations in 2002.

As I just mentioned, we recognized an impairment charge of $11.5m during 2002, in accordance with the provisions of SFAS 142, Goodwill, and other intangible assets. SFAS 142 requires a comparison of fair value to the carrying value of goodwill on an annual basis. As a result of XM's market capitalization falling below book value, we recognized an impairment charge in the fourth quarter.

Let me move to revenue. The sharp increase in revenue during 2002 is due primary to growth in subscribers across our first full year of commercial operations. Fourth quarter subscriber growth represented over 40% of total subscriber additions in 2002. Average monthly subscription revenue per subscriber was $9.50 in the fourth quarter. For the year 2002, net advertising revenue was $2.3m, representing slightly more than 10% of our total revenue.

In moving to expenses, in addition to the $25.3m in charges we have discussed, and depreciation and amortization charges, XM's other operating expenses for the year 2002 increased by $75.6m or 32% to $315.1m. These same other operating expenses for the fourth quarter of 2002 increased $9m from the third quarter, or 12% to $81.6m. This increase in recurring operating expenses was driven primary by rapid growth in subscribers, in essence, success-related expenditures.

Let me review some of the major expense categories with you. Customer care and billing cost increased $9.9m in 2002, representing higher call volumes, driven by our subscriber growth, for a full year of business operations as compared with 2001. Fourth quarter 2002 call center expenses increased $1.1m over third quarter 2002, representing a 27% increase.

Total subscribers during this period increased over 70% from the third to the fourth quarters. The increase represents the additional expenses of our second call center that was opened during the third quarter, and that has improved volume efficiencies.

Satellite and terrestrial operating costs declined $17.8m in 2002 versus 2001. This decrease primary resulted from a lower charge of $4m in 2002, compared to a charge of $26.3m in 2001 both relating to the terrestrial repeater sites no longer required by the company. Exclusive of this charge, we incurred increased operating expenses in 2002, compared to 2001, as our satellites and terrestrial repeater networks performed for a full year of operation.

Programs and content expense was $25.4m during 2002, compared with $17.6m during 2001, an increase of $7.7m, or 44%. The increase reflects a full year of operations for 2002. These costs are expected to remain stable in 2003.

R&D charges declined $2.8m or 21% during 2002, with the initial higher cost of designing XM chip sets behind us. While our R&D expenses declined in 2002, we continue to achieve tremendous technological and product benefits from our internal engineering efforts. And we expect to deliver a strong R&D performance again during 2003.

From a marketing standpoint, subsidies and distribution expenses primary reflect the element of subscriber expenses or SAC. The increase in 2002 aggregate SAC expenses of $44.9m is attributable to our subscriber ramp in 2002, offset by quarter to quarter improvements in the per-unit SAC costs. Subscriber acquisitions costs were $96 per subscriber for the fourth quarter. The average SAC for the full year 2002 was $116 per subscribers, significantly under our year-end expectation of $130 per subscriber. A major contributor to this decrease in SAC was the introduction and successful rollout of SKYFi, with it's lower cost subsidy during the fourth quarter of 2002, we were able to help achieve this reduction in SAC.

SAC includes radio manufacturing subsidies, sales, activation and installation commissions, and subscriber promotional incentives. We have been able to drive our subscriber growth while significantly reducing or subscriber acquisition costs and beating our own cost projections.

Advertising and marketing expense increased by $15.7m to $90.5m in 2002 as compared to 2001. The increase is attributable to a full year of marketing operations, and subscriber acquisition activities.

Fourth quarter marketing expenses increased only $4.1m from the third quarter to $17.8m, despite the large increase in our subscriber growth.

To help investors better understand subscriber acquisition economics, from this point forward, we will report a marketing cost metric commonly tracked in other subscription businesses, referred to as cost per gross ad, or CPGA. CPGA is designed to reflect the total cost of acquiring a new subscriber, including advertising, media, and most marketing expenses, in addition to the SAC costs, which include equipment subsidies, sales commissions, and subscriber promotions. In our financial statements, SAC costs are captured in the subsidies and distribution line, while CPGA costs are captured by combination of the subsidies and distribution line, the advertising and marketing line, plus the margin achieved from equipment sales. Note that CPGA does not include marketing staff and subscribers communication costs found in the retention and support line, or the amortization of the GM guaranteed payments found in the amortization of the GM liability line.

While CPGA is not a measure of GAAP rules, we believe tracking the trend of this metric has proven valuable in comparable industries. XM's CPGA in the fourth quarter totaled $240, down from the $380 in the third quarter. For the full year, CPGA was $430. We expect CPGA to continue to decline sharply throughout 2003, as we gain leverage from our advertising and marketing expenditures, further reduce chipset cost, and drive higher subscriber volumes through our established distribution infrastructure.

At the end of the fourth quarter XM had $42.8m in unrestricted cash to fund its operations. The financing completed in January 2003 had added approximately $225m in gross financing to the cash balances, and put in place a $100m credit facility, and another $150m in financial support arrangements with GM. This funding is expected to carry the company through cash flow break-even in late 2004.

Now, let me move to 2003 guidance. Subscribers. In our third quarter 2002 earnings call, we provided initial guidance of 1.2m subscribers by the end of 2003. With our fourth quarter 2002 and first quarter 2003 performance to date, that guidance remains our objective for the full year of 2003. During the first quarter, as Hugh mentioned earlier, XM added more than 130,000 net subscribers. The second and third quarter net subscribers additions will exceed the first quarter numbers and we expect again a very sharp upturn during the fourth quarter.

During 2003, we expect the OEM market to contribute more than 40% of our increase in net subscribers, a major shift from 2002, primary due to the full year of the OEM sales and the increasing penetration of manufacturing vehicle product lines as previously mentioned.

From a revenue perspective, we expect revenue to more than quadruple in 2003 to approximately $85m for the year.

From an earnings perspective, the company anticipates an EBITDA loss of approximately $295m in 2003. This loss for 2003 may including up to $100m in expenses that will be financed by General Motors. Thus the EBITDA loss that will contribute to our cash burn will be approximately $200m instead of the $300m. The up to $100m in financing expenses is a major contributor to our ability to reach cash flow break-even in late 2004. The specific items making up this $100m of non-cash expenses include the following.

GM guaranteed payments of approximately $40m in 2003, which are covered by the new $89m GM note-paying interesting at 10% annually. The principal on this instrument is due in 2009.

Up to 60m in GM revenue sharing, installation and subscriber commissions will be covered under the combination of the $100m GM credit facility and ability to pay up to $35m of obligations to GM in stock, as opposed to cash. The credit facilities carry interest at 10% plus LIBOR, and mature as late as 2009.

Let me move to one accounting change that will take place as a result of this refinancing with GM. It is also important to know that in 2003, an amendment to the distribution agreement will cause us to straight-line the full $397m obligation to GM. We previously had straight-lined amounts due to GM within the first five years of the contract. This adjustment reflects our judgment given GM's accelerated XM ramp-up that GM has demonstrated it will satisfy its minimum installation targets over the full term of the contract and be an integral part of our business. The annual non-cash charge will approximate $40m in 2003. This is approximately $25m greater than the annual charge in 2002. The projected EBITDA for 2003, net of the increased annual straight will have line impact would be $270m.

Let me turn the call back over to Hugh.

Thanks, Joe. Clearly XM has gained enormous benefits from being first to market, but it comes with great responsibility. We were the first to introduce the concept to consumers in the United States. We have basically broken into the initial markets in the after-market and OEM markets, and now the home market. As you can see from all of the information that Joe has just provided you, is that we've clearly taken the responsibility to articulate how the business functions as well, and we will continue to provide you information and will provide you more information when we have our first quarter earnings call, which will be, obviously in late April.

But from today's discussion, I think you can see that all the pieces are in place. We have funding, a management team that's been together for a while, we have attractive hardware and products. We have compelling content that seems to be valuable in good times and bad times. We have distribution that's expanding. We have OEM partners that are real partners and they continue to execute, and we believe we'll have a very successful 2003.

We also have ambitious subscriber and revenue growth targets for the year. Our management team is focused on executing this business plan with day-to-day achievements of objectives, with tight cost controls, and enormous personal energy.

We're on a march to the millionth subscriber, and that started at the beginning of this year, and as you know, hitting a million subscribers will be a very significant milestone event for the industry.

This concludes our prepared remarks, and my team and I and Gary will be pleased to answer any questions that you have.

At this time, I would like to remind everyone in order to ask a question, press star, then the number 1 on your telephone key pad. We'll pause for just a moment.

Your first question comes from William Kidd with Lehman Brothers.

I'm wondering, with respect to the 2003 guidance, if you can provide some additional data on what the marketing campaign looks like in there, and what does that mean in SAC?

And I guess relatedly, you provided a figure of break-even EBITDA, can you give us a figure of what you think the total capital is necessary is to reach free cash flow break-even

Let me hit a bit of that, and then I'll call on Steve Cook to talk to the marketing pieces of that. I'm not sure how much he'll reveal his hand on his plans and strategies.

Relative to the amount of cash required for break-even, we do feel we are fully funded at this point. That's not to say we may not at some point opportunistically add to our reserves in order to either pursue additional expansion ideas or add cushion to it, but basically we have what we need to get there in the latter half of next year.

I would also make sure that everybody catches a little bit of a subtle point in here, because you mentioned we would reach EBITDA break-even in '04. Actually we would see our EBITDA break-even occurring in '05. The cash flow break even before that, since because we have so many of the charges to General Motors and others that are Non-cash charges, since they have previously been rolled into a facility and wiped off the books, we still have to show them as an expense. So therefore we actually reach cash flow and positive cash generation significantly before EBITDA break-even.

Speaking to the free cash flow point, is an important part of free cash flow break even also the unearned revenue side that GM subs pay in advance, that some of your regular subs pay a quarter in advance?

I'm glad you mentioned that one, because that one also significantly adds to it. We are continuing to see the positive things that we really saw from the very first quarter when we started commercial service with up to four months of advanced cash coming in when a subscriber signs up, since 80% or so are paying by credit card quarterly semiannually or annually in advance, and that does provide us a very nice up-front cash hit before you can even book the expenses.

What about the OEM number? On the cash in advance.

You get a similar type thing, because once again the preponderance of those tend to use credit of those, and also they go to the multi-year one year, two year three-year and sometimes three years, too.

And as General Motors integrates -- even more so they are now, integrates the bundling and packaging of XM into their sales, that will clearly be a component of that cash you're talking about.

I'll comment on your marketing question. Of course, I don't want to reveal too much about our specific plans, but I will say that you can probably expect to see more of the same from what we saw work so well with us in the second half of last year. And I will also say regarding the SAC costs, we ended the fourth quarter of '02, we were in sort of the mid 90s on a SAC basis, we're not giving specification guidance ‘03, but we're expecting continued significant declines there throughout the year. So we're report that on a quarterly basis.

Just to follow up on that, I had two expectations. One was you would definitely spend material less on general promotions, but also on the variable SAC, side that you were hoping to see considerable process there, whether it's Delphi-driven or your OEM relationships that are less inexpensive.

Is that true to think that's correct on both points, that there's going to be a generally less fixed kind of broad-based promotion, one, but two, on variable SAC, you'll see noticeable improvements on there as well?

I think that's reasonable to expect. I also want to reinforce in what Joe talked you through in terms of how you're going to report the metric of CPGA, which includes most of the fixed marketing expense, the advertising the media, those things. so you'll be able to see As we start growing additional subscribers through some of our fixed marketing costs, you'll see the efficiency come down with our CPGA and to an extent the SAC number --

Also, clearly the SAC number was in the fourth quarter when you saw the huge introduction of SKYFi, which clearly will be --

Just get better and better

Much appreciated.

Thanks a lot, William.

Your next question coming from Robert Peck of Bear Stearns

Hey, guys, congratulations. I wanted to flush out a couple more things. Could you give us the churn rate and what your gross adds, first of all, what you expect for '03 and what it was in the fourth quarter.

Well, generally our churn is between 1 and 1.3%, and we believe that we're going to continue to have relative low churn for 2003.

One of things, Robert, you can pick up as well from what we'll be reporting, you'll be able to calculate gross add numbers and compare those, so you'll be able to calculate those numbers in the future. Actually, that is one point I wanted to make before we left the call, is I hope you guys will have a chance now to spend some time with the actual layout of the new financial reports that we put down. I have got to compliment Joe Euteneuer and the entire finance staff here who have worked -- really labored hard to put down a level of significant detail that, for all of the investors to be able to see what we've done here.

We think the layout is not only far more understandable and helps you analyze the business better, but we thought it was time now that we had enough detail to give you the individual line items so you get full transparency and visibility into how the company was going.

And as far as SAC and the guidance there, you said somewhere around $94. Could you break out what's in SAC, and how much is hardware subsidy, how much is [spiffs] to Circuit City, and compare retail to [inaudible] OEM SAC?

Just remember the one thing to remember on the SAC calculation, the majority of the OEM side, although we're recording the expense is free to us because of the GM financing, so when looking at your model to trying to determine when we do cash flow positive, basically it's free for us this year.

On the retail side, however, we are paying the commissions as we use Circuit City and Best Buy and currently we're experiencing sort of a 40% that will come out of the OEM side, versus 60% of the growth will come out of the retail side.

Just to clarify, one other point, is XM fully funded, meaning you don't think you need to raise any money to free cash flow?

That is correct.

Could you comment on why you had to share authorization and why the numbers -- I think it was in the 600 range or so?

Actually I think I've seen some folks getting confused on that as well, too. We had 225 previously authorized, and even though you only saw 90-something million shares outstanding of common shares, there were clearly on a fully diluted basis, with all of the convertibles and things like that, there were about 132m shares fully diluted prior to this funding that we did.

And so with the funding, when it came through, the common shares outstanding didn’t go up very much. I guess there's a little over a $100m at this point right now, but if you looked at the potential that could occur -- in other words, the GM facilities, even though they convert between $5 and $20 per share, if you do it at the $5 per share end, you can get upwards to 275m as a fully diluted number. So we saw this amount of dilution as a 50% dilution. In other words, you went from a 132 up to 270 type on a fully diluted basis, so it was clear that we were going to have get additional shares authorized to cover that.

Frankly, as a matter of flexibility, I always like to have, no major cap on that on that sort of thing, for stock splits, acquisition opportunities, any other flexibilities, so it seemed like a reasonable thing

Great. One last question. Could you tell us how we should think about advertising revenue, what sort of guidance we could get there? We were sort of off in our number. And what are the activation rates you're seeing on the GM cars?

Okay. I'll touch on those quickly. On the ad revenue size, we finished '02 with a little better than 10% of our revenue being related to the ad revenue. I think looking ahead to ‘03, it will be in that range, slightly higher.

On the GM activation question, we've talked in the past about 70% activation percentage, and that's what we're seeing in general.

Great, guys. Congratulations.

Year next question comes from Ty Carmichael of CSFB.

Thank you. I have just a couple of quick questions. On the churn, I was hoping for insight to why you're seeing customers actually churn? Was it voluntary? Were there in essence not satisfied with the service? Or do you encounter some element of involuntary churn? Bad debt customers?

Bad debt is a component, probably the largest component, even though we're only $10 a month, there are still people who gets into a pinch, so there is some amount of bad debt related to the churn.

And then in terms of the voluntary, there are no big elements. There's just very small numbers related to everything from the radio was stolen from the car, to little things like that. Nothing coverage related, none of the things you would want to look out for.

I think there is a functional you know, churn factor that even exists in monopolies like cable television just because of move and mobility rates. Clearly, in this, it doesn't have some of those specific characteristics, but they're just people that churn out for whatever reason, you know, their own personal economic status or whatever. Obviously these are very low churn rates. So we obviously watch it pretty Closely.

And do your assumptions anticipate that staying leaving staying where it is? Or take it up as you further penetrate the mass market?

Churn rate gradually increases over time.

The first time you broke out a retention and support cost, marketing cost. Can you go into a little bit better what you're actually spending that money on?

Sure. What's included in that bucket, it does have headquarter marketing stats, salaries and benefits, as well as things like costs related to any kinds of customer-based communication, website expenses that are primary related to customer base communications, market research, those sorts of things.

Is that different from customer care?

It's basically the overhead costs of the marketing department. All of the direct costs associated with our employees that we have driving sale at Circuit City or any of our car manufacturers, they're all charged to the individual line items

So that number should remain pretty flat?

Yeah.

And the costs that are directly related to sales are picked up CPGA number.

And then on the customer care how is that cost set up on a per sub basis? Can you give maybe a total in Q4 versus Q3? And then what your expectations are going forward?

You're talking right now that number is dramatically dropped over the year. When you started the year, it was up over $14, and we've gotten it down to around $6, and it will continue to dramatically drop during 2003.

And what are your assumptions for '03? Where do you expect to end the year?

We're in the process of renegotiating a contract right now, and to increase the number of facilities and stuff. So I will commit that it's going to dramatically drop, but not committing to a number yet.

Once you get into a more steady state situation, you're looking at a 10% level for customer service and billing, so when you're fully fleshed out, you can find the billing and customer numbers are about 10% of your revenue.

You say you're generating $10 in revenue, so it will be a buck a month?

For all of your billing and customer service and other items like that.

I think it's lower. It's below a dollar.

That's not a 2003 projection, by the way, that's a more steady state situation.

Okay. And then just on the free cash flow break-even guidance, it seems these costs -- when you say they're free to you from GM, they're deferred costs, right? At some point you do have to pay them. That's correct, right? They're not just going to wipe these off --

Some actually fall into what you would show as wiping off, in other words, those they're accepting in stock directly. Obviously, it's not a paid-back situation. It flows into the equity and therefore is considered dilution. Frankly, a large portion of the convertibles facility would likely then be converted, one would assume, and therefore --

So there's still an economic cost

There's absolutely an economic cost, and I think that cost is more captured in the total share dilution that I mentioned rather than like an operating cost.

And just going forward on that, so you defer $100m, or you can pay it in non-cash stock in '03. Does that extend into '04 as well? Do you have that type of capacity in '04?

Going forward, is it basically a $100m a year? How do you look at that relationship?

If you look at the three parts of the GM facilities that were put in place, one of them extends all the way through 2006. All of the fixed payments are guaranteed payments were eliminated through 2006. Others will basically be used up in the 2004 time frame going into 2005, so what you'll find is in the latter part of 2004, you are positive cash flow there. And as you go into 2005, it's really with our without the GM facilities you would be generating positive cash.

And then is it too soon the pro forma cash number was about $268m at year end? Is that about right, given the, you know, the 225 --

Not if you include out deal expenses, maybe $15m less than that, something like that.

Okay.

If we want to hit the specifics, I encourage you to talk to Greg Cole.

The $253m, if you burn through $200m, is that right? $200m EBITDA burn, in '03, roughly, not including any financings costs, that brings you down to $50m at year-end. So you're implying that in '04, your cash burn drops dramatically. I'm just trying to see -- if you have better insight to the driver there?

You are dramatically dropping the cash burn as you start getting into the fourth quarter and certainly into the first quarter, and you'll start generating revenue --

The other think, Ty, is our subscribers are going up dramatically. Once we hit 1 subs, you're talking about generating $2m a month in cash, so we do have that as well.

And if you continued your growth, though, if you continued to grow churn and accelerated.

Now that we have this new phase of the financials out and given you all this disclosures, we will be going out to try to explain more to everybody what's going on.

We can walk through the specifics then.

Okay. Thank you

Thanks so much.

Your next question coming from Neil Gagnon (ph) of Gagnon Securities.

Thank you very much. Can you describe in a general sense whether one kind of subscriber will be better than another? In the sense of how much money it costs you to get that subscriber, and then what you expect the ultimate profitability to be?

Yeah, sure. I'll take a shot at that. I mean, certainly we look at channel profitability analysis, look at sort of the differing costs to acquire customer us through different channels. The revenue from the subscribers is all basically the same, except for commercial subscribers, so the cost side is what to focus on. And there are some minor differences through looking across the different retail channels, they're not too significant.

Then you look at the automotive, and I think we have disclosed a lot of the elements of the GM deal in the past, that is somewhat more expensive than some of our other OEM partners, but that really has helped the OEM market to get kick started for us. So on a weighted average basis, we believe the profitability of the OEM subscribers will end up approximating that of the retail down the road.

It gets pretty close. It's obviously more attractive to sell a SKYFi at a lower subsidy cost than a different device that might have a higher subsidy cost

And remember, for right now, the things we're doing in the OEM marketplace are highest profitability customer from a cash perspective. And because we just got financing and we want to get to cash flow break even, we’re going to try to drive that channel as much as we can.

Because we have the GM deferrals on a cash basis, they're actually a very efficient distribution channel for us right now.

And really allows you to put the throttle down heavy on that channel without suffering any near-term impacts.

It sounds like the ultimate profitability will be higher in the other channels.

Um, it's steady state, slightly more, but not terribly.

Basically it also depends on how quickly we're ramping down the pricing and the subsidies of the after-market radios, because you have factory-installed product, you have after-market radios, which continue to drive down, so what we have done is actually broken things down into channel distribution, and we obviously have found some significant profitable channels in the after-market, but it actually depends on what product is being sold.

So if it's a SKYFi device, that can be an effective product for us. If we're doing a factory installed in general motors, it is, because the cash is not part of that equation right now, because the payments are being deferred, and as we introduce new product, maybe another distribution outlet will become more profitable, because the cost of the third-generation radio will be the next outlet the one that’s the most attractive

Super. Thank you.

Your next question coming from Jeff Shelton from Deutsche Bank.

All the after market sales seem to be doing very well. [Inaudible] Can you comment on the sort of the shortfall? Was it slower than expected start? Lower than expected activation rates or something else?

I'll take some of this and if I screw up, Steve Cook will jump in, but I think basically what it was, was that, what we probably underestimated somewhat was the amount of training that was needed at at the dealerships, and so what happened was while we were, rolling out some of the materials in terms of marketing materials and GM was clearly enabling or factory installing enough radios, when we got to the dealerships, there obviously was a learning curve that was going on there in the midst of what was a very aggressive selling push in the fourth quarter with zero percent financing and some other things.

So what happened was I think beginning in the fourth quarter, general motors had a training effort where they had a specific training, a vendor go to the dealerships and train them, and we have actually followed behind them with our own training facility, as you know, there's what, about 7,500 dealers or so.

So the same efforts that we had to had to apply to the retail universe, we basically had to do in the automobile universe, which in essence was even a bit bigger. So that is the main reason why there was somewhat of a slowness. Clearly there were a number of events that occurred, macro events that had an impact.

Did I screw anything up, Steve?

No. Just to add, we are seeing continuing acceleration with GM, as I think we noted in Hugh's discussion, and so we're looking for, of course, GM contributing the lion's share of our OEM this year, which is a pretty strong number for us. So it was just a few months there where it got off to a bit of a slow start on the training front, but that's really resolved itself, we think.

So in your guidance for this year, it's about 40% from the OEM channel. What do you think it ultimately get to?

Well, just to put it in the context -- you mean, ultimately down the road?

Yes.

I think in the out years it approaches 50%.

Okay. Thank you

You're talking about the split of our sales going forward?

Correct

I think what you'll have happen is the OEM market will continue to increase up to more the 50% level, and then what will be interesting for us to watch is as we continue to develop new and innovative products for the after-market, you know, both for in car and home use and mobility, there's a whole slew of possibilities of what can happen there. I think we'll be looking at it differently going forward.

Your next question comes from April Horace of Janco Partners.

Can you give a health report on the 702 satellites?

And then two, any color or take rates with respect to the AVIS deal?

With the AVIS deal, we're still in the process of finalizing that deal, so we don’t have any take rates, so none of our subscriber numbers actually have any AVIS numbers in them. We anticipate an AVIS rollout later this year.

With regard to the satellites, both the satellites continue to provide quality coverage across the nation as they are expected to do so into 2005. They'll provide minimal acceptable coverage through the year end 2005, and then partial coverage as we co-locate the satellites with one half of the channels for each satellite through 2008. And we continue to have a proxy of the other 702 bird that is about what, 15 to 17 months behind us to just follow and track the degradation of the satellite.

So have you filed a formal claim with the insurance carriers?

Yes, we filed a proof of loss in February.

Okay. Thanks.

Do we have additional questions?

I'm all done. Thanks.

Thanks a lot, April.

I don't hear our operator back on, but we are running about ten minutes past the hour on the thing, so that must have been the last question that they had.

So if there's anybody still there, we thank you for getting on the conference call, and clearly we want to provide you information on a timely basis. We will have a first quarter earnings call of 2003 in late April -- April, May, whatever time frame, and try to get you the best information we can. Thank you very much and have a good afternoon.