Sirius XM Holdings Inc (SIRI) 2003 Q1 法說會逐字稿

Welcome to the Sirius Satellite Radio Q1 financial results conference call. All participants will be able to listen only until the question answer session. At that time you'll be instructed on how to ask a question. This call is being recorded. If you have any objections you may disconnect at this time. I would like to turn the call over to Mr. Jim Collins, Vice President of Corporate Communication. Sir, you may begin.

Good morning, welcome to our conference call. Today our President and CEO, Joseph P. Clayton will start off the call with a brief update on our operational progress. Mary Pat Ryan, our Executive Vice President of Marketing will highlight our merchandising and programming efforts. Then Ed Webber, our Vice President and Chief Accounting Officer will review financial results for the quarter. And then Joe, Mary Pat, Ed, Guy Johnson, our Executive Vice President of Sales and Marketing and Doug Wilsterman, our Senior Vice President of Automotive OEM, who are calling in from the West Coast will take your questions.

Before we start, I'd 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 of 1995. These and all forward-looking statements necessarily depend upon assumptions, data or methods that may be incorrect or imprecise. 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 intent or obligation to update these forward-looking statements. Now I would like to introduce Joseph P. Clayton.

Thanks, Jim, and good morning. Before providing you with some details on our operations, I want to emphasize some key points that our relevant to today's call. One, our subscriber activations more than doubled in the first quarter of this year over the fourth quarter of last year, hitting the target that we internally set. Two, our plug and play product retail rollout is on schedule for June. Three, our market position continues to strengthen at retail. Four, our OEM car manufacturer programs are proceeding according to plan, including Ford. Five, our consumer awareness has doubled since we launched our new brand advertising campaign in February.

Six, we're introducing a multiple subscription preferred plan, and a lifetime plan today. Seven, we further enhanced our programming with out Q, the NBA and additional programs from NPR, National Public Radio. Eight, our successful financial restructuring, completed in the first quarter, has significantly de-levered and strengthened our balance sheet. Plus it has substantially improved our liquidity. And nine, we continue to exercise tight fiscal control over fixed costs, particularly our broadcast and satellite infrastructures. That's a brief summary of today's topics.

Let's start first with our subscriber count. I'm happy to report that we ended the first quarter of 2003 on the high end of our projections with 39,704 new activations. On our last call, we had projected between 35 and 40,000 new subscribers, so we are very pleased with these results. This figure is more than double the number of activations acquired during our last quarter. This is indeed a reflection of the traction that we're beginning to experience, despite the soft economy and our lack of a transportable plug and play product. Therefore, as of March 31st, 2003, we had approximately 68,000 subscribers, which is a 127% increase over last year's total number. We fully expect to exceed 100,000 subscribers this quarter and we're on track to reach our previously stated goal of 300,000 gross additions by the end of this year. Now, we believe that most of these new activations will be back loaded in the third and fourth quarters as we roll out more plug and play and in-home products into the retail marketplace. And our OEM car manufacturers' marketing efforts kick in.

So now lets move on to product. Sirius and our retail and OEM car stereo manufacturing partners are on track for the production release of our second generation chip sets and new products. The chip sets have been fully verified and production quantities have been shipping to our partner's production facilities since April. Yes, our lower costs, smaller size, generation 2 products is on schedule. The Sirius product expansion is led by the Kenwood transportable plug and play model. This product will reach retail shelves in June, next month. The Audiovox transportable model is also on schedule. It should be widely available at retail by mid-July. Both Kenwood and Audiovox will offer car and home accessory kits with pricing similar to competitive products. So we will have two popular brands with differentiated transportable product to help drive market share at retail.

Now, how do I know that this product expansion will move the needle for Sirius? In addition to being an attractively designed product, feature laden product, retailers be able to hit attractive retail price points. This should most certainly generate exceptional retail advertising, store traffic and Sirius sales during the summer months. It is not surprising that our retail partners have responded very positively to the new Kenwood and Audiovox plug and play products. They have placed preorders of over 50,000 units. So this is an excellent start.

And by the end of the year, we also expect to increase our product portfolio with additional plug and play products from other brands. Our Sirius in home receiver product continues to be on schedule for delivery to retailers late in the third quarter. The first two models will be from Audiovox and Kenwood and other portal products are anticipated late in the fourth quarter. Continuing with retail distribution, it's no secret that the overall first quarter sales in most consumer electronics outlets were down from last year. Mobile electronics, our 12 volt sales, were off over 15% in the first quarter, as reported by NPD. That's the bad news.

The good news is that satellite radio was the only positive growth performer. As awareness continues to grow, overall acceptance of satellite radio by retail salespeople and their familiarity with Sirius improved dramatically. According to our estimates and data compiled by NPD, Sirius captured 26% of the satellite radio retail aftermarket in the first quarter of this year. If you eliminate the plug and play factor, our market share is even higher. This is why we believe that the addition of Kenwood and Audiovox plug and play units will boost sales and market share for Sirius across all retail outlets. Therefore, we not only expect that our market share will increase, but we also believe that sales for the satellite radio category in general will expand significantly, especially once the industry surpasses the magic 1m unit mark.

In our OEM car manufacturer distribution channel, progress continues on all fronts, as we announced yesterday, Ford is on track to offer Sirius as a dealer installed option beginning this fall on ten 2004 model year products, including Ford, Lincoln and Mercury vehicles. The Ford Thunderbird, Mustang, Explorer, Sports Track and Expedition, the Lincoln Navigator, Aviator and LS, plus the Mercury Mountaineer. Sirius is also expected to be offered in the Lincoln Town Car in December of this year. It is important to emphasize that the radio head units involved in these programs are Sirius ready and they are dedicated to working with a Sirius device. Ford also plans to expand its vehicle lineup offering of Sirius at a later date and it will announce its pricing plans shortly. Also the new 2003 Dot 5 Mazda Speed Protégé will include a factory installed, Sirius ready Kenwood head unit. Ford and its brands have been entrenched with consumers for 100 years. We're pleased to join Ford in offering Sirius to its new car buyers. This now rounds out our exclusive OEM programs, and we're eager to work with Ford in the coming months to roll out this new plan.

With Daimler Chrysler, Sirius is currently available as a dealer option for Mopar, for 16 Chrysler vehicles which represents all of the company’s vehicle lines. Sirius is currently standard on the PT Dream Cruiser II, bundled with a 1 year pre-paid subscription, and it is a factory installed option on the 300M series, also available with a bundled subscription. As they announced at the New York auto show in April, Mercedes Benz will pre-wire almost every 2004 model for Sirius, and beginning this summer with the E class and followed this fall with the C Class, the F Class, M Class, CL Class, SL Class and the CLK class vehicles. This means that all that the dealer has to do is to quickly and easily mount the Sirius receiver and antenna and the customer is ready to be activated.

With BMW, the Sirius is now available on most 2003 model year vehicles, including the 3 series, 5 series, X5 vehicles, plus the mini-cooper and the mini-cooper S.

Audi has announced that Sirius will be available as a dealer installed option on nearly all 2004 model year vehicles beginning next month. Here again, all automobiles will be fully pre-wired for Sirius with antennas from the factory beginning with the A4, A6 and the All-Road Quattro in June. The A8L will follow this year.

Volkswagen is expected to announce plans later this year to offer Sirius in their vehicles. With Nissan and Infinity, Sirius is now available on the FX45 as a factory and dealer option. As with all Nissan and Infinity models, the FX45 is also factory pre-wired for Sirius. Infinity is expected to announce its program for Sirius later this spring to also include the G35 sports sedan and the sports coupe as well as the I35, M45 Sedan and the Q45 Performance luxury sedan. Nissan currently offers Sirius in the 2003 Pathfinder and the new 2004 Maxima and it is expected to be available as a dealer option in other models beginning later this spring.

Again, on the automotive front, our relationship with Hertz continues to move forward, with our recent announcement that Sirius will be available in 33 Hertz markets across the country by the end of July. Sirius is currently available in 21 major Hertz markets, up from just two introductory markets a few short months ago. Also, Sirius will be available in 21 Hertz vehicle models by the end of July. This is up from 14 models today.

Expanding our position in the non-automotive OEM markets, we have reached and agreement in principal with JENMAR (ph) holdings, the world's largest manufacturer of recreational boats to offer Sirius systems bundled with a one-year subscription as standard equipment. We expect that Sirius will be offered on as many as 20,000 model year 20042004 JENMAR boats. As part of the agreement for Winds, JENMAR’s flagship recreational boat brand, is expected to offer Sirius as a standard feature on every 2004 model. So that's the progress on the sales, product, and distribution side of our business, since our last analyst review.

Now it's my pleasure to turn the call over to Mary Pat Ryan who will give you a brief update on several of our marketing and programming initiatives. Mary Pat?

Thanks, Joe. On the sales marketing programming fronts, we've continued to make significant progress and we have a few accomplishments I'd like to highlight today. First, we see improvements in our market share of retail sales, supported by third-party data from NPD, as Joe mentioned. This bodes extremely well for our most competitive product introductions yet, the plug and play unit from Kenwood and Audiovox.

Second, we have had great success with our prepaid subscriptions. The results show that 65% of our retail subscribers are now paying up front for multiple monthly or yearly subscriptions, which is up from 60% last quarter. And already over 90% of our OEM subscribers are also paying up front. This success, plus our very high loyalty and satisfaction rate among current subs, leads us to announce today a new subscription plan. We call it ‘Lifetime of Music and More,’ for only $399.99. That is a lifetime subscription, good for the life of the radio when paid up front.

Today we are also pleased to announce in anticipation of our home units and our plug and play products a monthly $6.99 Preferred Plan. That is for our most valued customers who have more than one subscription with us. After an initial Sirius subscription of $12.59 per month, an additional subscription for that subscriber is $6.99 per month. We believe that these plans will be well received by our existing and new subscribers.

In February of this year, we introduced our first ever major brand advertising campaign, featuring print, television and outdoor advertising. Last quarter, I reported on a positive response in the music and press community. I would like to give you an up update on the numbers. Since we launched the campaign, our aided brand awareness has more than doubled. These results are based on a category brand monitoring study conducted by Diagnostic Research Incorporated, and it was conducted only two months into the six-month campaign. This third party study also shows that Sirius has now reached parity with our satellite radio competitor in unaided brand awareness. That is, those consumers who are informed about the category have an equal chance of knowing the Sirius brand as they do our competitor.

A few other quick updates. Satisfaction remains extremely high and we actually see it increasing among subs, the longer they experience our great commercial free music, news, sport, and talk content. Similar to our previous research waves, the majority of the time they spent spend in the car is listening to Sirius. That is, 76% of the time they are listening to us. Important also to note that will positively impact our support from the music community and (inaudible) our place in pop culture is that 83% of our subs have heard a song or artist on Sirius that they have never heard before and they really liked it. Also this quarter we made a successful transition to a new subscriber management system.

On the programming front, our programming mix and initiatives continue to generate positive feedback. Just last month, we introduced out Q, our original stream designed specifically to cater to the Gay, Lesbian, Bi-Sexual and Trans-Gender community. This affluent and underserved community comprised approximately 10% of the population and continues to grow in influence. Out Q has been praised by the press and the public in general, and we believe that this industry first initiative on our part will yield significant returns for Sirius in the coming months.

We also started broadcasting nearly all of the NBA games to our nationwide audience and as announced last week, we added two quality music programs from National Public Radio, NPR. We believe our that programming continues to be a key differentiator between Sirius and our competitors and we will continue to focus on providing the best mix and quality available. Finally, we're truly gratified and excited about the marketing interest and support we're get getting from our retail partners around the launch of our plug and play products. And on the OEM side, look for us this spring and summer at things like Camp Jeep and the Mercedes C Spot driving events. Let me turn the call over to Ed Webber who will take you through our financial results.

Thanks, Mary Pat. As Joe said, the biggest event on the financial side in the first quarter was the closing of our recapitalization which de-levered the balance sheet and significantly improved our liquidity position. Before I run through operation results for the first quarter, I'd like to touch on the impact of the recapitalization. In addition, I'll spend some time reviewing the accounting treatment.

Our recapitalization consisted of three transactions. We exchanged $635.7m of our debt, leaving $61.2m of debt remaining. This resulted in elimination of approximately $1.1b in future principal and interest payments. We retired all of our preferred stock, and we raised $200m of capital through the sale of common stock. In combination, these transactions have significantly improved our balance sheet and reduced our capital requirements to approximately $100m until we are expected to reach cash flow break even in early 2005. The debt restructuring resulted in a one-time gain $256.5m. Reported gain includes two components. The gain recognized on the exchange of our senior debt and term loans and the loss recognized on the exchange of our convertible notes. The gain on the exchange of our senior debt and term loans was calculated as the difference between the market value of the common stock issued in the transaction and the book value of our debt including accrued interest.

The reported gain is net of the loss reported on the exchange of our convertible notes. This was calculated as the difference between the market value of the common stock issued in the transaction and the market value of the common stock that would have been issued under the original conversion ratio. The reported gain was adjusted for direct cost associated with the transactions and unamortized debt issuance costs. The exchange of our preferred stock resulted in one-time charge of $79.5m. You'll see this charge classified as a dean dividend on our statement of operations. This was calculated as the difference between the market value of the common stock and warrants issued in the transactions and the market value of the common stock that would have been issued under the original terms of the preferred. The dean dividend was adjusted for direct costs associated with the transaction and unamortized issuance cost.

Now let me move on to discuss the results of our operations for the first quarter. As I discuss the results, I'll focus my comments on the comparison of our first quarter results with those of the fourth quarter of 2002. I believe this comparison provides the most insight into our current operating trends. As of March 31st, we had cash, cash equivalents, and marketable securities of $289.7m and working capital of $263.3m. This compares to cash, cash equivalents and marketable securities of $173.7m and working capital of $151.3m as of December 31st, 2002. We reported first quarter revenue of $1.6m an increase of 134% over the $685,000 revenue reported in the fourth quarter of 2002. Our adjusted EBITDA loss for the first quarter was $75m, compared to $66.7 reported for the fourth quarter of 2002. The adjusted EBITDA loss for the first quarter excludes the previously discussed gain on the exchange of our debt. The increase in revenue was directly attributable to the subscriber ramp. Also, during the first quarter of 2003 and the fourth quarter of 2002, we paid mail-in rebates directly to our subscribers. These rebates had a negative effect on our revenue, as accounting standards required that we record these rebates as a reduction in revenue, rather than an expense. Average revenue per subscriber or Rpu for the first quarter was $10.94 as compared to $10.82 for the fourth quarter of 2002, including the effects of the rebate.

On the expense side, we continue to exercise control over our fixed costs which include satellite and transmission, programming and content, general and administrative, and research and development. Fixed costs remained relatively constant and totaled approximately $28.5m for the first quarter. Our low fixed costs are attributable to the design and structure of our broadcasting system and to the implementation of cost savings initiatives. Satellite and transmission costs were $7.9m for the first quarter, compared with $14m for the fourth quarter of 2002. The fourth quarter 2002 included a 1-time charge of approximately $5m, associated with the optimization of our terester (ph) repeater network. Satellite and transmission costs for the first quarter consisted of $4m for satellite, telemetry tracking and control. $2.9m for the operation of our terester repeater network and $1m to operate our broadcast studio and systems.

We are able to maintain a low level of fixed costs related to our terester repeater network due to the design of our satellite system. This design enables us to limit the number of terester repeaters required to enhance coverage. We expect the majority of our satellite and transmission costs to remain relatively constant with increases or decreases in the future, depending on the cost of in orbit satellite insurance and any additional repeaters we roll out.

We incurred $6.6m in programming and content costs during the quarter compared to $10.6m for the fourth quarter of 2002. Programming and content costs consists of broadcast royalties, programming acquisition, on-air talent, in-house production and programming personnel. We have entered into broadcast royalty agreements with performing rights organizations which require fixed and variable payments. We record the cost of our fixed payment agreements on a straight line basis over the term of the agreement, which required an adjustment in the fourth quarter of 2002. Future costs will be heavily dependent on our decisions to acquire additional programming, modify or streamline up, or produce additional streams in-house.

We incurred $9.1m in general and administrative costs for the first quarter as compared to $6.4m in fourth quarter of 2002. The increase in cost was principally due to the litigation with the provider of our subscriber management system. We expect that G&A costs in the future will not increase materially as compared to the fourth quarter of 2002. Research and development costs were $5m for the quarter, compared to $6.4 for the fourth quarter of 2002. Research and development costs relate primarily to the enhancement of our current chip set and the development of future generations of chip sets.

Customer service and billing costs were $2.2m for the quarter, compared to $2.3 for the fourth quarter of last year. Included in these costs are subscriber management, customer service, and billing. During the quarter, a significant portion of costs consisted of minimum payments under our subscriber management contract. In April we terminated our relationship with the company that operated our subscriber management system and transitioned to a new system which is effectively managing our subscribers. We will continue to evaluate our new system and implement enhancements to the system as required.

As expected, our marketing expenses increased for the first quarter. Sales and marketing costs were $45.3m for the quarter, compared to $28.5m for the fourth quarter of 2002. The increase in costs during the quarter was the result of several marketing and distribution initiatives. We launched our first ever national ad campaign which significantly increased brand awareness. We continue to strengthen our relationships with our retail and distribution partners, and finally, we incurred costs under agreements with auto makers, including Daimler Chrysler, Ford and BMW. Sales and marketing for the quarter included subscriber acquisition costs of $11.9m. Subscriber acquisition costs include incentives for the purchase, installation and activation of Sirius radios, as well as subsidies paid to manufacturers of Sirius radios. This includes equipment subsidies and commissions paid to all of our retail, receiver manufacturer, and automotive partners.

It is important to note that Sirius records certain subscriber acquisition costs in advance of acquiring a subscriber. The timing of these payments had a significant impact on our subscriber acquisition costs during the quarter. As a result, we caution that dividing subscriber acquisition costs by the number of gross adds for the quarter, which equates to $299 does not give an accurate picture of Sirius’ incremental costs to acquire a new subscriber. On this basis, our SAC appears relatively high and reflects our older generation 1 products, the early stage of our subscriber ramp and some inventory billed as we introduced generation 2 products. We estimate that approximately 35% of subscriber acquisition costs for the quarter related to advance payments for inventory billed and sales of receivers which had not activated as of quarter end. With more cost effective gen 2 products, and a growing subscriber base, we expect to cut this number in half by year end.

To summarize, we close our recapitalization during the quarter and improving the company's balance sheet and liquidity position. We continue to control our fixed cost structure as management remains focused on cost containment. We launched our national ad campaign to improve brand awareness and going forward we plan to dramatically reduce our subscriber acquisition costs as we grow our subscriber base and introduce lower cost second generation projects products. I'll now turn the call back to Joe.

Thanks, Ed. Given that it is early spring and I am a native Kentuckian, I felt it might be appropriate to close with a comparison between Sirius and the great sport of horse racing. You are probably not aware that the betting favorite in the Kentucky Derby rarely wins. This only verifies the fact that just because you break from the starting gate first or as the favorite, this does not ensure that you win the race. Now, Charlie Irvin (ph) has proven this to be true in the satellite television world. The satellite radio industry has just begun and it is a long, long way to the finish line. I believe that Sirius is a good bet.

We have substantially quickened our pace since the beginning of the year. We are positioned for significant subscription growth in both the automotive and retail distribution channels. At the same time, we're driving product costs down. These actions will get Sirius to the winners circle with customers, strategic partners, employees and investors. Now we would be happy to take any of your questions.

If you would like to ask a question, please press star 1 on your touchtone phone. To withdraw your question, press star 2. Once again, as to ask a question, press star 1. Our first question comes from Tom Watts from SG Cowen.

Congratulations on a strong quarter.

Thanks.

In terms of the Ford deal, what are the total number of Ford models out there how many does 10 represent? And also will it be every single one of those cars produced that will be Sirius ready or will it just be a select number?

Tom, I'm going to turn that over to Doug Wilsterman, who just happens to have all of that information. Doug, pick it up.

To answer the second question first, it will not be every model. It'll be select models based on the head unit that's configured. There’s a majority of these that are available --

So in terms of the Thunderbird, it won't be every Thunderbird, but it'll just be a select number of those?

Yes, but it's a number of those vehicles that utilize this very popular head unit.

Is that a Vistion (ph) unit?

Yes.

And overall for the coming year, how many cars will be Sirius ready across all of your OEM?

We're not giving that number out at this time, but in total, I think a good way to look at this is that there are 65 different models that will be available with Sirius programs by the fourth quarter. But in terms of unit volume, we are not providing that number.

Okay, when you say there are 65 different models, how many of those are Sirius ready, meaning they have a head unit and just require satellite receiver and an antenna? It sounds like there are a number of different configurations that are coming, versus how many of them are a dealer doing an aftermarket type install?

Well, first of all, all of those 65 models will be Sirius ready head units. And then you are correct, there are a couple of different ways to bring the product to market. There's factory authorized dealer accessory programs, which Joe pointed out utilize dedicated product, Sirius ready head unit. It’s a very simple quick and easy installation of the receiver and in some cases the antenna. There are factory options and there are some standard equipment programs that we've already announced.

Then also, Vistion in one of their press releases earlier this year mentioned being XM and Sirius compatible. I understand that was a bit of a misnomer. Could you clarify that a little bit?

The head units that we're talking about, the programs that we're talking about with Ford and Lincoln Mercury that were announced yesterday are Sirius dedicated. Ford is an exclusive partner with Sirius, and these units are designed to operate only Sirius receivers.

And on a different topic, could you update us on your CFO search, when we might see someone appointed there, and do you expect different guidance or different financial metrics with a new CFO coming on board?

Well, we're at the -- we've rounded the corner and heading for home to stay with the horse racing analogy. We're down to the final candidates and we'll be announcing a new CFO here within a couple of weeks. That's number one.

In terms of the metrics, I think the metrics will change somewhat as our business plan solidifies and our market base grows. But right now, I don't see any major changes, at least in the short term.

Thanks a lot, and it was a nice quarter.

Thanks, Tom.

Our next questions comes from Marc Nabi from Merrill Lynch.

How are you doing today?

We are doing just fine, Marc.

A couple of questions, Joe, related to Hertz. Of the 68,000 subscribers, I know you don't want to give the exact number, but order of magnitude maybe, what percent came from Hertz number one. And what type of – in the market that you are in today, take rates have you been seeing on the -- I know when I was in Tampa, you could get it for $5 per day. What kind of take rate are you seeing on the Sirius product? Second area relates to churn. Could you talk a little about what you've been experiencing on a monthly churn for your service? And the last is, maybe you can talk about the fast start program and just, you know, if there is any more information you can provide to us on that.

Okay, I'll try to take them in order, Marc. First, the Hertz rollout is going exceptionally well. I'm not going to give you a percentage because you can easily come up with that number and Hertz if they want to provide that information, it will be up to Hertz to do so. The take rate, once again, varies by market and that is not in our purview to provide with you that information, but I will tell you that you should get a pretty good indication of it by the fact that they are rolling out additional markets and adding additional vehicles to the mix.

In terms of churn, it continues to follow the same guidance that we gave you previously. It's less than 1.5%. In fact, that shouldn't be surprising because churn rates are normally fairly low the first couple of years with most major new technology introductions. And in terms of the fast start programs, obviously, we incurred some expenses in the first quarter. You see some marketing numbers higher as we are in the process of rolling out the BMW and the Daimler Chrysler product which we did just the tail end of the first quarter. And also some advance payments to Ford to facilitate their initial rollout. So, I think that's about as much as I'd want to say on the fast start agreements, but obviously, we have agreements with all three of our major exclusive partners.

As far as on the OEM side, Joe, again, we only have a limited number of subscribers here of the 68,000, but what percentage are coming from the OEM side that you've already -- you have actually in fact launched?

The majority of our numbers continue to be retail Marc, and will be so until we get into the third and fourth quarters.

But as far as you said, the 68,000, I want to go back to this Hertz thing. Would you classify that as a retail aftermarket purchase or in other words, would you say 50% are coming from Hertz and the other 50% are coming from the --?

We would consider it an in-between but also part of the automotive market for us. So, I'm not going to give you a specific number.

Okay. And as far as EBITDA losses are concerned, you did about $75m of an EBITDA loss in the first quarter. What -- just trying to model it out or anticipating as we progress through 2003, you say you're free cash flow positive by 2004 including the money you need to raise in addition.

I'm going to turn this over to Ed, but I want to try this myself. We see the EBITDA loss somewhere around $300m, which is tied into the $300,000 subs that we've publicly stated for the year 2003, and Ed, any other color you want to proceed provide?

No, that's consistent with previous guidance.

So you had $300m and so you're doing roughly $75m per quarter? Are you saying that's not really going to change based upon the information, even though -- I mean, the 300,000 subs is a pretty big ramp, I would have thought that sales and marketing would go up a little more than where we are today.

We spent a fairly significant number to help launch the brand in the first quarter, so, and we will also have a fairly substantial number here in the second quarter as we launch our plug and play product, both with Audiovox and Kenwood. Then I think it falls into more traditional numbers going forward.

Joe, have you slowed down any way from a sales and marketing side, in the first quarter, as you were going to through the capitalization? In other words, I know you are saying you're going to spend more in the second quarter, I'm trying to figure out the dynamic that's going on here.

If the question was, would I like to have spent more money in the first quarter prior to the completion of the restructuring, the answer would have been yes. But we were very fiscally responsible in terms of trying to make the money stretch as far as possible. I would have liked to have used a little more broadcast, but I think we got the results that we intended, in fact we exceeded our expectations with the monies that we spent.

Okay. Thanks very much.

Thank you, Marc.

Our next question, Robert Peck from Bear, Stearns.

Congratulations on the quarter. I have a couple of questions I want to go over here. First of all housekeeping, what's the number of fully diluted shares Sirius has now?

Ed, why don’t you take that?

Sure, fully diluted is about 1.03b.

Okay, great. As far as the autos, I want to clarify some terminology here. Going through your 10K, we noticed that you don't see the word "exclusive" anywhere, whether it's Chrysler, Ford or BMW, and I guess our question is, as far as an exclusive agreement with them, do you have a direct exclusive agreement or is it more just exclusive because of the interoperable agreement keeps XM from dealing with those companies?

Doug, do you want to take that that?

Joe, I missed the first part of the question. Do you mind repeating it?

Sure, we didn't see the word "exclusive" in your 10-K with your OEMs. And we’re just curious, we've heard Joe say today that you have exclusive relationships with Ford and Chrysler. Is that because of a direct agreement you have with these OEM’s Ford and Chrysler? Or is it more that XM can’t get in there because of the interoperable --?

No, they are our exclusive partners, Ford Motor Company, Daimler Chrysler and BMW. We have exclusive agreements with them through actual agreements.

OK. And I see that the agreement’s good through 2007 for both those guys, for Ford and Chrysler, but there is a clause there that says their agreement could be terminated earlier. Could you talk about who has the right to terminate and for what reason? Is there any sort of guaranteed period that they can't terminate through?

Yeah, we haven't put that information out. It would be up to Ford to decide whether to put that out or not. We feel very comfortable with the relationships that we have. Obviously, this announcement that they've just made, the fact that they are introducing the product, the fact that Daimler has introduced the product is a very good indicator of where their direction is.

As far as the agreement to talk about revenue shares and SAC related to hardware costs for both of those companies, can you give us guidance on what is the revenue share number and what is the FAQ through the OEM channel?

Doug, I’ll take that. Obviously we're not going to provide you with contractual information that we have with each of the car manufacturing exclusive partners. Quite honestly, Bob, it's different for each one of the car manufacturers, depending upon volume and the certain situations.

Okay. On the Hertz side, you talk in the K about Sirius owning the radios through the Hertz program. Where do we see that SAC coming through? Is that in CAPEX somewhere? Is that hitting the income statement? How does that relationship work?

Yeah, that's actually -- the total value of those units are capitalized and depreciated. So it does not come through the marketing line.

OK, great. Also, I want to touch on the satellites and the satellite health. We noticed in the K that the K talks a little bit about if one of the satellites should fail, that Sirius would have to suspend service for six months or so, even with the spare on the ground. Could you give us an update as to how the satellites are doing, have there been any more anomalies recently? Has the estimated life been reduced or are the satellites chugging along fine?

There has been no change of the estimated life, I think it's a 15 year in the K, and there has been no major changes to that guidance since the last time we talked.

Okay, great. And your insurance for the satellites when does that expire?

August of this year.

On the repeaters, can you tell us how many more repeaters you are planning on laying down and what that may cost?

We currently have approximately 96 repeaters, you know, spread geographically across the United States. We will probably add some low power repeaters over the next, you know, probably couple years. For example, just to make sure the signal is very robust in the airport markets that we serve Hertz in. We may find some spots, you know, in the hinter lands that may need additional capability for improved service, but we don't see a large number, you know, going forward. I think our capital is somewhere between $15 and $20m going forward. So will we get to 8 or 900? The answer is no. Will we over the course of the next couple of years add 50 or so, probably yes.

Okay, great. Quick questions on the radios. We're excited to see the plug and plays coming out this summer. I guess what we’re curious about is, can you give us any sort of clarity around volumes of those plug and play units and boom boxes and will you be doing any sort of sky-fi type of product?

Well, I'll try to take the last one. We're doing our own product. These are transportable units that can be used in vehicle or in home. They have different types of aesthetic designs and feature capabilities. Secondly, in terms of the numbers, they are going to be big as witnessed by the original pre-orders that we currently have, and they are going hit very attractive retail price points in the marketplace during the summer months. And in terms of the in-home units, they will arrive in late third quarter, but in advance for the Christmas selling season. I'd say those numbers remain to be seen, but if you like it in your vehicle, you're going to like it in your home, is my expectation. And last, but not least in, terms of the boom box, they will come late in the fourth quarter as I indicated earlier, and I'm not just talking about a boom box, I'm talking about other portable products as well, whether they are mini-or Midi systems. It's still too early to give product description or color on that.

Okay, and as far as second gen chips, I think you said something like 50,000 have sort of already been distributed. Have you given a number as to how many will be distributed by the end of the year?

It will be determined by the amount of the demand, but we have the capability to do, you know, hundreds of thousands.

Okay, great. I notice that your competitor announced getting into Wal-Mart recently. Is that something that Sirius has on the horizon?

Yes, we're in discussions with Wal-Mart as well, with the Audiovox brand in particular. You know, I will point out that obviously Wal-Mart is the largest retail in America. It's a very important position to be in. But like most new technologies for mass merchants, it takes a while to kick in. How much volume they will do in the first year or two of satellite radio still remains to be seen. But we, too, will be in Wal-Mart and we have discussions going on currently.

Okay, great. I know you answered Marc's question. You didn't give the OEM percentage so far, do you have any guidance as far as OEM's percentage of gross adds for '03 and ’04?

We just now started. So I think it’d be premature do that, but I've stated many times, as the pyramid is going to inverse itself over the next 12, 24 months to 3 years, from being retail driven to be more automotive driven. So, it's still too early for us to give you any further guidance on that.

Okay, last question, as far as trying to model out the advertising dollars spent for the year, could you give us guidance maybe for ‘03 and '04 as to what you think advertising dollars will be?

I'm not prepared to give that number at this time. I'm sure XM would like to know it.

All right, thanks for all of the answers and great numbers this quarter.

Thanks a lot Bob.

Our next question is Steve Mather from Sanders, Lawrence, Harris.

Thank you, good morning. Just two questions, one, looking at Ford and Chrysler, can you share any info on percentage pre-wired in '04 model year?

Doug, do you have any detail on that?

I don't have a percentage for you, Steve, sorry. I think as we have talked in the past, there is a number of ways to bring the product to dealership and many of the vehicles come pre-wired. The definition of pre-wired is pretty loose, but what it means in real world terms, it's a very quick and easy way to install the receiver and in some cases the antenna.

Okay, thanks. Just secondly, you targeted new plug and plays this summer using second gen chip sets. I was wondering now that some time has passed can you put into perspective any of the past engineering problems regarding chip sets?

Oh, Steve, I think trying to atone for, you know, the past is not what we're all about. I think we've done a remarkable job moving from generation 1 to generation 2 in less than 12 months. Being an old consumer electronics veteran, you don't see that happen very often. I'm very pleased with the progress we've made not only in the size of the receiver platform coming down, the power coming down, which gives you a greater reliability, the size and the cost. We've met all of our objectives in moving to generation 2 and I feel very good about it, and we're well on our way to the next generation of product.

And just one more thing, you mentioned SAC declining pretty dramatically over the next couple of quarters. Could you just kind of frame a little bit, that's a function of equipment subsidies, putting product on shelves, you know, kind of the front loading of that -- the subsidies to the OEMs? Are those some of the components that make SAC look higher today and lower tomorrow?

It's all of the above, Steve, but in terms of trying to accelerate our move from generation 1, which for any new consumer electronics product is never about cost, it's about making sure that the product works, to generation 2 which had feature functionality and lower cost, is what we've been doing both with our car stereo manufacturing partners. And indeed, we have put some investment to accelerate the car manufacturers adoption of Sirius Satellite Radio into the vehicles. Those are the major drivers, in addition to building some IC inventory to make sure that the car manufacturers move quickly from the transition from gen 1 to gen 2 product.

Fantastic, thank you.

Thank you, Steve.

Once again to ask a question, press star 1 on your touchtone phone. To withdraw your question, press star 2. Once again to, ask a question, press star 1 now. Our next question is Ava Lawrence (ph).

Hi, I was wondering, what kind of take rates do you think you're going to see with respect to the new lifetime offering? And over how many months are you going to amortize that lifetime fee?

I'll start with that and then I'll let Ed talk about the amortization. As I've mentioned, we've seen great penetration of the annuals. We also have subs that are on two-year plans and three-year plans already. So we haven't projected out where we see that, but we suspect it'll just support the annual numbers that we’ve given you guidance on. Ed, do you want to talk about amortization?

On the amortization, we currently anticipate the amortized period to be 3.5 years which is consistent with our activation revenue.

Okay. Great. That's all I had.

Thank you.

Our next question is Jeff Shelton.

Thanks --.

One moment, sir. Mr. Shelton?

Yes?

Your question?

Yes, you indicated that SAC was a bit higher in the quarter for inventory build. Is there adequate inventory in the channel now? Is that a limiting factor for your subscriber additions in the second quarter or is it a brand awareness or demand factor?

Well, I'm going to predict that even though we have large quantities planned for shipment late this month and into the month of June with the new product, I believe that the demand is going to exceed supply, at least in the first several months. That being said, I think it will be sufficient to get us to what our expected subscriber number will be at the end of the first half. That's over 100,000 subs. How far over we go will be fully dependent upon how many new units of the plug and play product we get into the marketplace, on the retail shelves and turn into sales and activations

And are you where you want to be in terms of retail distribution, or is that still ramping? I know you mentioned Wal-Mart.

Our plug and play product will be in -- I predict all of the major retail outlets by the end of this year.

Thank you.

Thank you.

Our next question is Matt Karnes.

Quick question regarding the rebate program. Can you give us some insight as to how long the program will go on for, and also, are you recognizing or reducing the revenues upon activation or just upon receipt of the coupon?

I'm going to take a part of it. We're using the rebates to help us move through generation 1 inventory, in particular with brands like Clarion, Panasonic and Audiovox. You know, I don't want to limit ourselves saying we'll never use them again, but that's the primary focus as we move product through the second quarter. Mary Pat, do you want to pick up the other piece of it?

Sure, in terms of the rebate and Rpu, the numbers Ed reported was including on the rebate, our Rpu excluding the rebate for first quarter is about [1103].

Okay, but the mechanics of how the accounting works, is it upon activation or is it just upon receipt of a coupon? In other words, are you going to rebate $100 if somebody doesn't activate?

Because we're in our in infancy, right now accounting standards require that we take that contra revenue charge upon activation.

Upon activation?

Yes.

Okay, thank you.

But I will tell you, Matt, that there is always some breakage in any type of rebate program.

Sure. Okay. Thank you very much.

Thanks Matt.

Our next question is Tom Fulitz (ph) from Paulson Investment (ph).

Congratulations on a nice quarter. Can you update on me on when dual compatibility chips are scheduled to come into existence?

Yeah, Tom, as mandated by the FCC, interoperable radios that handle both services are required, but there has not been a -- by a certain date. What has taken place, both XM and Sirius have developed a team or hired a team of folks that work on interoperable capability. Now, the ICs, custom ICs are going to take two to three years at a minimum, so that's pretty far down the line, but what we are working initially on is a common antenna, a common front end, so progress is being made as we speak, but for the customized C portion which would allow the capability to take advantage of all of our assets of both companies, that's pretty far down the road.

Okay, thank you.

Thank you.

Our next question is Bill Wright (ph) from Unicom Capital.

Hi, guys, could you go over the sub numbers and how many of those subs, the 68,000, come from Ford, Chrysler and how many you expect this year as well as the plan you have to get the dealers familiar with the product?

First of all, we do not break down our subs by car manufacturer. They don't want to do that. So I can't provide you with that type of detail. Can repeat again the second part of the question?

Repeat your plan on rolling it out and getting them familiar with the product.

Joe, I can help on that one.

Go ahead.

First of all, where you have a comprehensive program in place. It touches all of the cornerstones that you would expect, including training of the salespeople, promotional material, brochures, kiosks. It varies by make and by dealer in terms of the participation level, but across the board, you can say that there is a very comprehensive program in place through each manufacturer. We coordinate our efforts with their marketing teams, and it's it involves pretty much every aspect of a typical rollout program that you would expect brochures, POP, training.

When do you expect that program to be fully implemented so that all of the dealers are familiar with the product?

Well, in the case of BMW and in the Daimler Chrysler situation through the Chrysler group, which is Chrysler, Dodge and Jeep, it's already in place because we've launched with them. With Ford, it'll be rolled out in advance of, and Lincoln Mercury, it will be rolled out in advance of the introduction of the 2004 model year. We're working closely with our partners, Nissan and Infinity and Volkswagen already on their plans.

Going back to the original question, my question is of the 68,000, are any of those included -- any of those subs included from Ford Daimler?

There are some subs from Daimler Chrysler, from Nissan, from BMW, but the numbers are relatively small compared to the retail mix at this particular point in time since we just started.

Last question, do you anticipate a reverse split?

You know, we will look at the flexibility of doing something like that, but quite honestly, with us hitting our milestones as we move forward, and we had a fairly good first quarter, I think we'll have a good second quarter as well. We'll let the market decide how strong an effort they see coming from Sirius. But we won't do it just for a listing on NASDAQ. I think worrying about that, those days are over.

One more question, if you don't mind, the signal strength, is it the same as XM, can you just go over that and also in regards to coverage?

Well, I think it's going to vary by where you are at. Our infrastructure has three high elliptical orbit satellites which we think give us a very good high angle footprint around the United States. They have more repeaters in some of the metro markets because they have geostationary satellites. I think it's going to come down to where you are at and given the circumstances, but I will tell you the service for both companies, I think, are very robust, and far exceeded my expectations when I first came into this company, and into this industry.

Thank you.

At this time I'll turn the conference back to Mr. Mr. Joseph Clayton.

Okay, well, we appreciate you taking time to join us today. As I said earlier in my opening comments, we've hit a lot of milestones in the first quarter. We're up and running. Our new product is about ready to hit the retail marketplace. Our car manufacturers are engaged and now it's time to ramp the volume and to execute on our operational plan, and that's indeed what we intend to do. So thanks again for joining us. We'll see you and update you on our next call.

Thank you for participating in our conference today. You may disconnect.