Sirius XM Holdings Inc (SIRI) 2003 Q2 法說會逐字稿

Good morning. My name is [Tyhunna], and I will be your conference facilitator. At this time I would like to welcome everyone to the XM Satellite Radio Holdings Incorporated second quarter 2003 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer period. If you would like to ask a question during this time, then press star and then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two on your telephone key pad.

I will now turn the call over to Mr. Titlebaum, General Counsel of XM Satellite Radio. You may begin, sir.

Good morning. My name is Joe Titlebaum, General Manager 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 future demand for the company's service, the company's dependence on technology and third party vendors, the potential need for additional financing, as well as other risks described in XM Satellite Radio Holdings Inc.'s form 8-K filed with the securities and exchange commission on June 3, 2003. Copies of that filing are available upon request from XM Radio's investor relation department.

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

Thank you, Joe and good morning, everyone. I would like to thank all of you for joining us to discuss XM's operational and business results for the second quarter of 2003. On the call with me are Joe Titlebaum, General Counsel; Gary Parsons, Chairman; Joe Euteneuer, Chief Financial Officer; and Steve Cook, Executive Vice President of sales and marketing. This morning I will discuss XM's continued successful execution of its business plan, and then Joe will follow with a review of the company's financial results for the quarter including our liquidity position and guidance information. We will then open the line to take your questions.

Simply put XM rocked the industry in the second quarter and is marching to a million subscribers. This was a record quarter for the company in terms of new subscribers even exceeding the holiday season of 2002. July results continue this strong second quarter pattern. During the quarter XM added 209, 178 net new subscribers and ended at 692, 253 total subscribers. Second quarter subscribers represent a 43% increase from the end of the first quarter 2003 and 5 times the subscribers for the same period last year. These exceptional second quarter subscriber results reflect the expected it second quarter seasonal up turn in the car audio business. As we experienced last year, there is a definite level of seasonality in our business characterized by a slower first quarter, positive up take in the second quarter, flat to modest growth between the second and third quarter and then a very, very strong holiday-oriented fourth quarter. Growth in the third quarter is consistent with and reinforces these expectations. An extremely positive aspect of our strong second quarter subscriber growth is the strength being demonstrated across all distribution channels and product categories.

In that regard let me focus for a minute on the significant growth in XM's OEM business. No satellite radio company can be successful without a meaningful factory-installed OEM business, and we are pleased to note that as expected, XM's OEM business is representing an ever increasing percentage of our total subscriber base. In fact, just today our partner, GM, announced the 500,000 mark for production of GM cars with XM factory-installed. Accomplishing this goal in 21 months of production over the 2002 and 2003 model years. GM also announced that with the availability of XM in more than 40 GM models beginning next month, it actually expects to surpass the 1 million XM factory-installed production mark by March 31 of next year, only 8 months from now. This ramp is running ahead of the original GM plan and is driven largely by strong dealership orders and clearly customer acceptance of the product. During the quarter, XM's OEM partners added 80,000 subscriptions to XM Radio. This represents nearly 40% of our net subscriber additions during the quarter, an increase in 5 percentage points from the first quarter of 2003. GM is aggressively driving this increasing percentage through innovative packaging and attractive promotions making it easy for the automobile customer to enjoy the XM experience. Our other OEM partners will follow similar strategies as they ramp up with the 2004 model year. GM's also implemented a comprehensive marketing campaign to differentiate GM vehicles while creating consumer awareness for XM Radio. Cadillac has taken the lead by offering up a its new car buyers the opportunity to experience XM Radio. During July, Cadillac offered buyers of XM equipped vehicles free XM Radio hardware and one year free service. For those who choose to purchase a vehicle not equipped with the radio, they offer aide SKYFI boom box and one-year subscription. This is a promotion initiated by Cadillac at its experience designed to energize the Cadillac brand and stimulate XM Radio subscribers, and it is just one example of how one GM brand has embraced XM as a powerful sales tool and product differentiator.

Another example of this on going campaign is the GM sponsor two-page print advertisement, many of you you might have seen, running in national newspapers including Fortune, USA Today and The Journal it highlighted the vehicles and prominently featured XM Radio, saying, "GM gets a tune up." We are strongly encouraged by GM featuring XM as a product differentiator. Honda, another major automobile partner should contribute strong OEM sales with radios with the introduction of its 2004 year model cars. Acura incorporates XM as a factory-installed feature on the Acura RL on sale today and the Acura TL available in October of this year. Acura has also begun to integrate XM into the national advertising campaign including its own two page print varied on the Acura RL titled, "You are not alone clearly with 100 channels of XM Radio," currently in national publications. Honda is also installing XM Radio at the factory on certain trim levels of the popular Accord beginning this fall. We expect further announcements regarding the 2004 Accord as the vehicle goes on sale in the near future. Overall, Honda's rapid adoption of XM Radio on a factory-installed basis is on track, and we look forward to rapid production as we enter the fall.

Finally, Toyota has launched XM Radio as a dealer-installed option on the Scion. It debut owed the west coast in June and was recently featured in The Journal and other newspapers as n early success targeting the generation y consumers. Toyota is expecting the Scion to be available nation-wide by next year in the 600 Toyota dealerships across the country. In addition, Toyota has begun offering XM as a dealer-installed option on the new Toyota Camry Solara coupe. It's an important point to note that led by GM, Honda and Toyota, XM will be available this fall in approximately 78 car models, clearly demonstrating the rapid acceptance of XM in this critically distribution channel. The most important thing to note is that XM will be factory-installed in 65 of those models. XM also has a dealer-installed solution on select Nissan and Infinity brands as well as the promising prewired solutions for Audi. However, it is the factory-installed installations that really make this business hum.

Equally impressive with the OEM penetration was the performance in the retail markets in the quarter. XM subscribers addition to retail represented 60% of our subscriber growth in the quarter, continues strong with automobile after market sales, boom box sales, and home unit sales. Best Buy and Circuit City, the two major market leaders, sharply increased sales during the quarter, including a very successful Father's Day weekend. Wal-Mart is wrapping p the merchandising of the XM products in its stores nationwide and should become a more significant factor in subscriber growth during second half of the year. And just last week Delphi announced that its entire line of XM SKYFI receivers and attachments would be carried in Sears stores beginning later this month. Further expanding our nationwide distribution of the SKYFI product line. Two other elements of our subscriber growth during quarter worth mentioning is the XM family plan introduced in April is off to a good start and is generating positive results from both current and new subscribers. And of the approximately 40,000 family plan subscriptions to date, about 20,000 of them are newly activated radios. Our recently introduced Avis rental fleet program is now available in 30 markets across the country. At June 30th, there was over 7600 Avis-related XM subscriptions. As we have learned over the first 21 months of offering XM Radio, it is a service that you really just can't hear about. You actually have to hear it. And Avis provides an opportunity for people to experience XM Radio while also providing some revenue opportunities for us.

Turning now to new products, in the first half of 2003, XM introduced a number of breakthrough products including the Delphi XM SKYFI, the SKYFI boom box and the XM PCR. And the SKYFI line of products delivered a major new benefit which is portability. You can take the radio from your car to your boom box to your home, and consumers really wanted that flexibility. In the third quarter XM and Delphi will once again lead the industry with the introduction of another segmented breakthrough product that we call the XM Roady. Targeting a younger demographic, this important 18 to 26 year old market segment is more price-sensitive and focused on enjoying XM in the car. Roady is an extremely compact satellite radio system for cars and trucks combining small size, ease of installation, a color display, plus other cool features, making it the most affordable XM Radio yet and perfect for this young market segment. The Roady system includes a new state of the art microantenna, interchangeable face plates, and seven different screen display colors, enabling our youthful target audience to customize and personalize the look of their Roadys. Roady also features tune select, which is built in software that will alert the listener to favorite songs playing on any of the XM channels. Roady will have an initial MSRP of under $120 for the complete system including an antenna, the tape deck adapter, and a power plug. And it is designed to be easily installed by the consumer without professional help. This makes Roady easy and affordable for the important youth demographic to experience XM. Roady will be available at retail by mid-September, and later in the year we will add a wireless FM maud version for vehicles without tape cassettes. It is important to note that the SKYFI obviously has been an enormous hit for us. It retails for about $199. It provides all this portability. But now our marketing discipline has progressed that we will actually segment the youth market and provide them with a very attractively priced product at $120 that is easy to install, that people can use in the car, and we think it is going to be a big hit and tap in a pretty significant market. During the third quarter, XM will make all XM Radio products even more attractive with the introduction of a microantenna across our entire product line. I believe we mailed out a number of samples of the microantenna to a number of people on the streets. Just to give you an idea of the size of it which is difficult to describe on the phone, but the microantenna is about the size of an Oreo cookie or belt buckle, whatever metaphor you want to use. And it is 1/9 the size of the shark fin antenna released in September of 2001, and it is the smallest antenna on the market today. The microantenna also reduces the installation effort. It is very low profile. It is barely noticeable on the car roof and it is offered at a very, very low price. We will also make available a wireless FM modulator, receiver that will allow users of the popular SKYFI receiver to adapt to any existing car stereo.

These products extend XM's lead in satellite radio technology by providing listeners with a broad range of feature rich devices at a range of different price points and targeting different consumer segments. It is all part of the maturation of our marketing and product development teens. All these product developments are in keeping with the hardware subsidy guidance we previously provided and in fact we're only available to do it effectively because of the -- because of these reductions in our subsidy costs. We work towards achieving these breakthroughs by, you know, basically just having good engineering work by our team in Florida and our partners around the world.

While XM's array of innovative, user-friendly XM Radio receivers and broad distribution effort contributes strongly to the growth we have been describing. It clearly is XM's diversified creative contact that binds the customers to our service and ultimately determines our long-term success. Content is XM's ultimate attraction and the industry is recognizing our excellence in this area. In June we won four world medals during the 2003 New York festivals competition for excellence in radio programming, competing against radio programming from around the world. XM was the only satellite company recognized for achievements in programming. Building on this success, XM was proud to be the exclusive national broadcaster of Willy Nelson's 30th anniversary, 4th of July family picnic concert, an annual event. It features an all star lineup including the Dead, Merl Haggard, Leon Russell, Ray Price, Neil Young and of course Willy Nelson. This is one of the many original specials and live programming events that have come to define XM. Our most dedicated and passionate supporters are those who have the product and who understand that XM is not just 100 channels of regular radio, nor is it a bland jukebox, but rather a unique package of music and information delivered in a compelling and creative way. XM Radio subscribers rapidly become passionate and dedicated XM fans. We see and hear this every day. According to a recent Arbitron study, XM Radio subscribers spent 23 hours listening to our contact each week. We intend to continue providing them the best possible listening experience across all of our channels for the years to come.

Looking toward the rest of the year subscription growth is developing as expected and we anticipate a very strong second half as 2004 model year cars reached dealer lots and we entered a holiday selling season with an expanding portfolio of attractive XM products. We are pleased to reconfirm our guidance of 1.2 million subscribers at year-end. On the way we expect to hit the 1 million subscriber mark early in the fourth quarter. On the infrastructure side, our systems continue to perform with high quality and handle efficiently the subscriber base. To match this demand we have enhanced our information technology capacity, expanded our customer service capabilities, and we continue to experience excellent performance from our repeater network.

Next I would like to provide the updates on the satellite, the launch of our ground spare, XM 3, construction of a new ground spare, XM 4, and the status of our insurance claim. As you know, XM satellites, while providing excellent performance to date, continue to experience progressive solar rate power degradation, consistent with other Boeing 702 satellites in orbit including one launched over year before XM's first satellite. There has been no meaningful change in the previously predicated rate of degradation. To ensure seamless quality service to our expanding customer base over the medium to long-term, we have now put in place firm contractual arrangements to launch our spare satellite, XM 3, during the fourth quarter of 2004 and for Boeing to construct a new ground spare, XM 4, to be available by the 4th quarter 2005. XM is also entered a contract with Sea Launch to provide an XM 4 launch as needed in the future. Once XM 3 is launched and operating in orbit, we will co-locate XM 1 and XM 2 into the other orbital slot where each would transmit one half of our channels. XM 4 will then become our new ground spare, available as a back up for XM 3 and eventually to replace the co-located XM 1 and XM 2, likely in the 2007 time frame. As reported in our first quarter call, we now have insurance claims in process to the power degradation on the satellites. We filed for constructive total losses on both satellites since we believe the power degradation trends are definitive and our satellites will cease to provide required performance long before their originally expected useful lives of 17.5 years. A group of insurers recently denied these claims asserting that the satellites are still performing above their insured levels and the power trend lines are not definitive. The group also alleges that XM failed to comply with certain policy provisions regarding material change in other matters. We disagree with this group's position. We will respond promptly to these points and proceed to settlement discussions, arbitration, or litigation as needed in order to recover our insured losses. To provide a liquidity cushion against the uncertainties and timing associated with insurance recovery, we raised additional capital during the quarter, which Joe Euteneuer will discuss in a moment. And finally from a timing of cash flow standpoint it is important to note that under the contract arrangements recently executed with the satellite providers, XM's major cash outlays to launch XM 3 will not arise until the fourth quarter of 2004 and those to construct XM 4 will not occur until the first quarter of 2005. The recently raised funds are sufficient to launch XM 3, but we will need to secure additional funding in 2005 through insurance recovery or other sources to meet the 2005 XM 4 payments.

I will now turn the call over for Joe Euteneuer for discussion of XM's recent financing and our financial results for the second quarter, 2003. Joe?

This was a fantastic quarter. With our record breaking net additions of 209,000 GM accelerating its production of XM-enabled vehicles, stable fixed costs, along with improving CPGA demonstrates our strongest performance to date. This performance couple wed our enhanced disclosures should give all of you a better understanding of our business.

So now let me give you my remarks on two key areas. First, XM's current liquidity position including the effects of all fundraising activities during the quarter. And second, the financial and operating results for the second quarter of 2003. I will compare second quarter 2003 results with those from the second quarter of 2002. However, because of our very significant growth rate, I will also highlight sequential quarterly trends as appropriate. Let me start by discussing our liquidity position. As of June 30, 2003 XM had total cash and short-term investments of 346 million. And an undrawn credit and equity facility of GM of 114 million. In July, we raised an additional 10 million related to the green shoe option exercise on our recently issued senior secured notes resulting in pro forma total liquidity position of 470 million. During the quarter and to date, XM strengthened its liquidity position with gross proceeds of 230 million. Primarily from two sources. First, on June 17, 2003, XM issued 175 million principal amounts of 12% senior secured notes due 2010. As I previously mentioned in July we exercised an over allotment option with the underwriter for an additional 10 million in gross proceeds. This brings the total gross proceeds on this issue to 185 million. We also issued approximately 6.3 million of new common shares for 46 million in gross proceeds under our direct stock purchase plan. This amount includes 30 million of proceeds raised in April and disclosed in the first quarter conference call.

In addition to strengthening our liquidity position, XM retired or otherwise converted approximately 142 million face amount at maturity of debt, preferred stock, and warrants to purchase approximately 3.7 million shares common stock during the first half of 2003. As a result of these retirements and conversions, the company will avoid approximately 220 million of future interest, dividend and principal repayments over the life of the securities including the potential for 7.6 million shares of future common stock dilution. This is over a 15% reduction of our future debt outstanding. These deleveraging trends results in a significant economic gain for the company. However, for accounting purposes, we will take a noncash accounting charge of 19.4 million during the quarter, which is reported in other expenses and it is included in EBITDA. This noncash charge results primarily from the write off of debt discounts and deferred financing fees. We also recorded a 2.2 million credit to equity from the retirement of preferred stock, which is not included in EBITDA. Of course, no one likes to show these one time accounting losses on the book, but the substantial positive we gained in reducing debt, gain p gaining a stronger balance sheet, and reducing future dilution, are obviously well worth the effort. We may incur future accounting charges as we continue to pursue opportunistically deleveraging our balance she through the retirement and conversion of various securities.

Now let me discuss our financial and operating results for the quarter. Excluding the above noncash charge for deleveraging activities and a $6 million noncash compensation expense charge, our EBITDA loss was 70 million for the second quarter of 2003 versus the EBITDA loss of 79 million in the second quarter of 2002. The major contributor to the 9 million dollar improvement in the EBITDA loss as adjusted for the noncash expense items is the significant increase in revenue associated with the greater base of subscribers and a declining cost for gross ads. This adjusted EBITDA tracking to the expectations for the full year. EBITDA loss for the quarter including the noncash accounting charge is 96 million compared to the EBITDA loss of 79 million for the second quarter of 2002. From a cash perspective, our cash burn of 60 million in the second quarter of 2003 was 30% lower than our stated GAAP EBITDA loss of 95 million over the same period. This is primarily due to GM financing facilities put in place in January 2003, which covers all GM activity costs and also due to the non-cash charges and positive deferred revenue receipts from our subscribers paying in advance. On average our subscribers are paying approximately four months in advance. This contributed to the growth in deferred revenue on the balance sheet which increased to 24 million as of June 30, 2003.

We continue to improve our financial position year over year as we move toward our goal of self-sustaining cash flows. We will continue to demonstrate our ability to accomplish these goals through driving revenue growth at an accelerated pace, keeping fixed costs stable over time, and reducing cost per gross addition through eliminating subsidies as a result of technological improvements and continued efficiency in the use of marketing dollars.

Let's now discuss the component parts of EBITDA beginning with revenue. The company reported consolidated 2003 second quarter revenue of $18 million. Almost a four time increase over the second quarter 2002 revenue of 4 million. The increase in revenue during the second quarter of 2003 is due primarily to the continuing subscriber rate, a record breaking 209,000 additions in the quarter. Recurring subscription revenues increased 350% to 16 million for the second quarter as compared to the same quarter in 2002. Average monthly subscription revenue per subscriber was $9.32 in the second quarter of 2003. This is compared to the $9.14 for the second quarter of 2002. Reflecting a tempered use of promotional incentives.

On the expense side, XM's total operating expense is for the second quarter of 2003 increased by 27 million or 25% to 135 million over the second quarter of 2002. Net additions for the period were over four times greater during the same period last year. This growth shows that although expenses are up on a total dollar basis, our efficiency in obtaining subscriber growth has dramatically improved. Now let me describe the component parts of the improvement. Variable expenses include the cost of equipment sales, revenue share and royalties, customer care and billing, and ad sales. These expenses were 13 million for the quarter ended June 30, 2003. An increase of 8 million as compared to the 5 million for the quarter ending June 30, 2002. This increase is directly a result of the growth in revenue and subscribers. During this period we started the transition to our new outsource customer service organization, which will allow us to bring customer service costs per subscriber on a fully loaded basis close to $1 per month per subscriber by the end of '02 -- end of 2004 beginning in 2005. Fixed expenses, which include satellite and terrestrial, broadcast and operations, programming and content, research and development, general and administrative, and marketing retention and support were relatively flat at 37 million for the second quarter 2003 compared to the 36 million reported for the quarter ended June 30, 2002. Renegotiation of contract and better efficiency has allowed XM to stabilize its fixed cost at approximately a $12 million per month or $140 million per year, just as we have been estimating. Marketing includes the cost of certain retention and support subsidies and distribution, advertising and marketing, and the amortization of our liability to GM. These combined costs were 53 million during the second quarter 2003 compared to 46 million during the second quarter 2002. An increase of only 15% or 7 million dollars. Since these expenses are driven by subscriber growth, the size of the increase is relatively small compared to the 400% increase in subscribers. Thereby demonstrating the improved cost effectiveness of our media spending. Over the first six months of the year, XM spent only 28 million in advertising and marketing versus 59 million in the first six months of 2002. This is a reduction of 50% or 31 million dollars. Our marketing spend reflects the efficient use of partner media and strategic placement of ad and marketing support dollars.

Cost per gross addition, CPGA, is the per unit measure of our fully loaded acquisition costs and includes subsidies and distribution, advertising and marketing and the negative margin on equipment sales. CPGA for the second quarter was $160 per subscriber as compared to $591 per subscriber in the second quarter of 2002, a 73% reduction in CPGA. We continue to be very pleased with a reduction in the cost trend per gross sale. We are on track to sustain this lower CPGA trend into 2004. CPGA will continue to improve as a result of our continued efficient management of advertising and marketing expenses, as I have just previously discussed, and the accelerated ramp of subscribers. In addition, the introduction of next generation products with their reduction in overall subsidies will be a major driver of the overall positive trend in reducing CPGA and SAC costs. Subscriber acquisition costs, or SAC, are a subset of CPGA expenses and reflect the direct subsidy and distribution expense per unit. Our SAC for the second quarter of 2003 was $80 per subscriber as compared to $132 per subscriber for the same period last year. This is a 30% reduction in SAC. These expenses will also follow a general downward trend into 2004.

With respect to our guidance for the year, XM maintains all previously stated guidance including the 1.2 million subscribers by year-end, revenue of 85 million and an EBITDA loss of 295 million. And this excludes the impact of the deleveraging transactions I just previously discussed. So at this point the XM team continues to execute on every front, revenue, subscribers and cost control.

Just to summarize, our message is pretty straight forward and consistent. I mean, we basically have, you know, innovative, attractively priced products and new ones coming out. We have rapidly expanding OEM penetration -- more models in more units, factory-installed. We have continued strength and expansion at the -- in the retail sector. Our content is still considered excellent and we have won some awards and we continue to execute. What I would like to do now is open it up for questions and respond to any inquiries you might have.

At this time if you would like to ask a question, please press star then the number 1 on your telephone key pad. We'll pause for just a moment to compile the Q&A roster. Your first question is from Robert Peck of Bear Stearns.

Hey, guys, congratulations on the quarter. It was in line with most of our estimates there. Unfortunately it looks like everyone is focusing a little more here on the satellite issue. I want to get a little more clarity around that. First of all, 1 is, why are you launching the satellite a little earlier than expected at the end of '04? Boeing had previously said they had guaranteed to help the satellite through '05, making us think of an 06 launch or something. And number two on that is could you talk a little about what the insurers are squabliing about, and what does it mean when it says XM didn't comply with, I guess, the rules?

Well, first of all about the launch, the basic reason to launch in 04 is just to have some cushion with regards to preparing for and have some lead time with regards to, you know, not coming up too close to when you think that the satellite degradation would actually impair service. So you basically do that as a precaution, which I think is a smart one. I guess your other question, you know, with regard to the satellite insurance, it -- it's basically that -- It is affecting the whole 702 fleet. Basically what we are in a position to do right now is we have insurance that we pay for. We basically are in a position where we will pursue this aggressively through settlement talks, arbitration or litigation if necessary and insurance companies are not quick to payoff claims particularly when you have an industry that is affected by this. So we are just going to pursue this as aggressively as we need to.

Can you talk about what the cash impact is for the launch at the end of '04 as well as the cost of building the satellite and launch if you get zero dollars from the insurers?

Let me pick up some of that. A lot of that was even disclosed in the prior things that we had put out. The ground spare satellite we add up to a total of something like $190 million to get launched, insured, in orbit, completed, and all that sort of stuff. It is really not that high, but what we do is lump in a repayment of the $35 million existing Boeing loans that's on our books. Whiles that kind of a deleveraging activity we go ahead and put it in as part of this because it would take place as part of that. So, you know, from the finances that we have in place and the high yield offering we did a few months ago, we have the cash necessary to go ahead and actually launch and put in place the spare satellite, and as you are aware, the spare satellite combined with the co-location of the other two actually carries us into the 2008 time frame. If gives us I think a pretty good cushion on that front. And if that's the situation, then obviously you really don't have to look at the cost associated with actually launching the other ground spare. You simply have the ground spare construction itself, which is mostly a 2005 type of event as far as cost is concerned. We'll have -- I mean, the specifics on that as far as numbers and details on dollars will come out in the Q when we put it out next week. But, you know, you are not looking at a $200 million type number because that would be an insured launched in orbit type of situation.

Thanks, I just wanted to clarify two housekeeping items here. Did you give out churn for the order?

I don't think we put out anything specific, but it is staying where we were in the low ones.

In the 1.2% range, somewhere in that range?

Yeah.

As far as Serius Radio and some of their aggressive promotions, could you talk about maybe how it has had an impact, if at all, as far as your SAC and SPIFs to retailers and sort of what impact you are seeing from Serius now starting to roll out its new products.

I'll take that and then Steve will jump in. We haven't really seen much of an impact at all. I mean, clearly, we obviously all listen to each other's calls, and their growth from the first to second quarter was relatively flat and ours was up considerably. So we don't really see much impact at all. Do you want to comment on that?

The only thing I would add is that we have been on a path towards profitable growth. I'm not sure we really understand the strategy of giving hardware away. It is the -- the retailers don't like it, and frankly, you know, it just doesn't seem to be something we need to do to stimulate our growth. We have been achieving great growth numbers and managing our cost of of acquisition down. So that's kind of the path we will stay on.

In all fairness to Serius in this thing, because I know on their call a lot of people will look at it and say it is just a year behind. You really should not try to compare this year's growth of XM and this year's cost per gross ad and SAC to a Serius this year. It really is more instructive, I think, to look at last year's growth. And in that case it is more indicative -- obviously we were on a much steeper ramp at that point in time, too. I guess we had 60,000 or so in the second quarter versus the 37 from them and our SAC was about half of theirs. So the numbers don't become so dramatically different when you look at last year's, but clearly even at that point we are on a steep ramp.

Okay last question and I'll let somebody else go. Could you give us data around your subscriber clarity? I know you throughout 7,000 from the rental side. Could you break out anything else? Are there subscriptions GM has bought or are there subscriptions that are suspended or not activated or is there any further clarity you could give us around subscriber numbers?.

I don't think there is any other clarity. I think we were actually pretty aggressive about disclosing a lot of information. There has been a lot of questions asked about the whole rental business and we just felt that we wanted to describe exactly what components of our sub base that meant. As you could see in the RPU number it is a small number because we launched it at the end of the quarter. We think it will contribute incremental revenue going forward, but, you no know, in our other, you know, family plan, these are just areas of our subscriber growth that we had -- you know, in the last call we said we would introduce a new family plan and ramp up Avis. We said the OEM business would increase, and -- in its growth and we felt like breaking those things out for you.

Bob, I know when Joe and I have been out on the road over the last two or three months or so, we have had people ask us specifically, how many family plans people have you added and stuff like that? We said, gosh, let's go ahead and put it out in as much detail as we possibly can. One of the things we prided ourselves on in the past and we are trying to really layout is, you know, a tremendous amount of clarity and transparency relative to all of the numbers so you can actually see how many and the new metrics phase we added to the back of the, you know, press release, gives not only this quarter's bought also the prior quarter so you can see how it breaks out with, you know, with family plan, with Avis and retail and other things like that. We will try to continue to do that and show you the components of rpu that add up and you can see those and add them yourself.

Great. Thanks again, guys.

Our next question comes from Marc Nabi from Merrill Lynch.

Thanks, guys. How are you doing today?

How are you doing?

A quick couple questions, could you give us an update on Honda if you don't mind? I came in at the close of that and don't know if you addressed it. We'll see what's going on there. There are differences between the Honda relationship and also from General Motors. Second, of the 80,000 subscribers that you added on the GM side, how many of them are initial trial subscribers? In other words, just from the promotions you have today. And also I want to get a sense from your Cadillac SKYFI promotion, you know, with the Cadillacs that weren't equipped, I guess, you gave away a free SKYFI with -- you gave a free SKYFI, and I wanted to see if you incorporate those as far as subscriber or not.

Okay. I'll go ahead and touch on those. With respect to Honda, they announced in the past that they are doing factory installs and actually standard equipment on the Acura TL, the RL and certain trim levels or options levels of the Accord. So when you add up the volume that they are projecting for the '04 model year, it is looking like they are going to install in excess of 200,000 vehicles with XM, factory-installed as part of the '04 model year. So we are seeing good acceleration and good performance by them. With respect to the 80,000 GM subscribers, what we're finding is with the OEMs, really all of them, sort of the best way to get to showcase the benefits of satellite radio is to give them a trial period, and so I think of those 80 thousand OEMs, the vast majority, you know, initially experienced a 90-day trial. And then we're seeing about a 75% conversion rate at the end of that trial period to ongoing paying customers.

And I think your question was specifically about the Cadillac promotion was that those are counted as subscribers, but included in our promotional subscriber category.

Hey, but Marc, one thing you didn't take the wrong view of, because how you phrased it may have indicated it. These are not ones we are giving away or several months away free or something like that. That is all, for example, the Cadillac thing, a completely Cadillac sponsored, Cadillac paid for promotion and we are receiving the cash on those just like we do from any others. It is paying from that standpoint, but they package it in various way.

I knew that though, thanks, Gary. Sorry.

Your next question comes from Steve Mathers of Sanders Morris Harris.

Thank you. Just two things on the spacecraft real quick. Hugh, you mentioned total constructive loss. Can you bound the maximum amount that you think you might get? Is it based on pro rated or based on the initial cost all in?

The satellites insured for 400 million, but what you do is in the insurance process or whatever the settlement to the arbitration would be is calculating a certain amount of salvage value for the satellites because we are going to continue to utilize them for a period of time. So whatever the calculation is, it is what would be a major part of the discussions with the insurance industry.

A little more thought or just backdrop on that for you, if you want to look, the only existing 702 party or operator that has settled to date, and again they settled a couple months ago was [Saria]. And the [Saria] had a claim for like 360 or something and settled for like 250. They got basically a 68% settlement out of that. And that is specifically what Hugh was addressing. That is because they actually continued to use the satellite for a period of time, and so it figures into that calculus. Look for something similar on that front.

Okay. I understand the salvage value as an adjustment to the number you calculate prior to salvage. But in the -- to start with, do you start with a -- this year's space craft lasted half of the 15 years, do you start with half of that or do you start with --

No -- normally the process begins from when they pay the claim to how long you continue to use them. So it is normally a much smaller period than that. If you were to look at, you know, ours and try to recalculate back. If we get a fairly quick claim settlement, and we continued to use them into the first portion of 2008 in a co-located fashion, you will probably arrive at something like 300 million, 320 million settlement or something like that. Once again, that just giving you the math associated with how the calculations work. I'm not trying to lay out there where settlement discussions would be.

Okay. And second, a little more pointed, the 190 you threw out for the XM 3, I understand it includes the 35 and insurance and things like that, but that must imply that you have not paid off the construction cost. In fact, it looks like 75% of the actual --

No, actually it is only -- the only modifications we are making some modification to put an optimized antenna on it for the specific orbital slot it is going into and that costs extra. All the other modifications to fix the anomaly and other things like that, those are borne by Boeing. But you still have the launch cost so you have to have a launch vehicle itself, and then you have the insurance cost, which when we try to calculate and boost it up to the 190, we don't know what a launch insurance will be because you don't place launch insurance until a relative few months before launch, but our guess is 40 and 50 million dollars and we included 50 in the 190.

Okay. That helps out. And just moving over to the OEM side. The microantennas, they are fantastic and a nice catalyst for other OEMs besides GM to, you know, finally hop on board, but it seems like there is sometimes an unusually large lag between the creation of the microantenna and the incorporation on a factory install. Do you see the -- today's microantenna making it to July 1, factory installs by all the OEMs?

Well, certainly not by July 1. The OEMs are migrating toward smaller and smaller antennas, but it is true, you can introduce new technology quicker into the retail after market. But the OEM'S get on board as quickly as they can get things validated through their pros these cease.

By the way, I mean July 1 of next year, actually. Because I recall last year there were -- you know you had smaller antennas on the market then, you know, the boot, if you will. But yet they still use that. I am just projecting nine months from today. Are they all going to be microantenna or still looking SR 2 type mouses?

Actually the antenna GM is using is currently smaller than the Turk SR 2's. So they already made advancements. You will see additional advancements, but I can't see you will see the exact configuration.

I think what will happen is you will see them come out first on the retail side, clearly in the third quarter. And they are going to be present there, and actually that's a group of people who are actually going and retrofitting their car where it is actually a significant issue. On the car side it is all packaged in. the car buyer has been willing to use the shock fit antenna and use the SR 2 and now they are using the smaller one. So I would see the smaller antennas coming about on OEM at a later stage, probably with the 2005 model year cars. Probably more likely. And I think that as the after market starts rolling out with them, I think that the OEM groups will obviously get more aggressive with, you know, having a lower profile antenna. They just happen to go through a much longer validation process.

Okay. I understand. Thanks.

Your next question comes from Jeff Shelton of Deutsche Bank.

Thanks. I was hoping you could talk a little more about the promotional OEM offers. You have had a couple quarters of experience now, so what have you been seeing in regards to churn once the promotional period is over. Do you expect to see turn increase as the OEM channel becomes a bigger portion of your sales mix? And lastly, is XM still responsible for the dealer commissions and activation payments if the subscriber turns if it is a GM model? Thanks.

I will address that. First of all, when we move an OEM customer onto a trial period, if they elect not to take the trial we don't consider that churn. But our churn, as we look at channel churn and look at OEM among the on going customers that have been paying us, the churn from the OEM side of the business is mirroring the retail maybe even a little less than that. So it is running, you know, around 1% or so.

The way to look at it and the reason we provided the additional disclosure is to give you two buckets of information. One is we have the phenomenon going on that GM is so pumped that XM is a differentiator in how they sell cars that they are coming to us and buying subscriptions of 90 days in length or a year in length or some period of time. So since these are paying subscribers, and they are paid for, we do count that. And there by we are looking at sort of what is the take rate at the end of that paid subscription. Right now that is running between 70 and 80%. From a churn perspective, once they are paying for the subscriptions by themselves, we have been running in the low 1%, 1.2, 1.3, somewhere in there. The stick rate by the subscriber who's are paying their bill by themselves the majority of which pay in a quarter of advance is very, very great.

So the cars leaving the GM lots, let's say 90% of those are either customer subscribes right away or there is a promotional period, and then your 70% calculation is taken after the promotional period expires.

Actually we are in the process of moving with general motors and frankly also Honda. Because as Honda rolls out the 2004 they will be extremely aggressive on this front as well, too. And earlier during the year, you know, a lot of folks were pushing for us to do a factory activation type process, and we're really in the process of moving towards that so that we would like in the future to have a situation where, yes, every car that is on the lot at either a GM dealership or a Honda dealership or something like that, all of the channels are active at that point in time. Now, obviously we don't count them as subscribers when's they roll off the factory, you only count them when they leave the dealership and have the activated radio and GM puts the billing information into our database so that we are aware of that and can then consider that a customer.

We are only counting customers from whom we are receiving cash.

Okay. Thanks for the clarification.

Sure enough.

Your next question comes from Tom Watts of SG Cowen.

Hi, everyone, just on a clarification point, should we look at the 190 million being paid in Q4 of '04?

Yeah, you get pretty close to that, Tom. Most of those things if you think about I described, the actual launch, the insurance, the repayment of the loan that was on books, all those are effective at the launch time frame or shortly before that. And frankly, depending on where we stand with the various things we have looked at the end of '04 or early '05 with the launch horizon or window that we would open up. So that time frame we would see those expenses. And by the way have I to mention for everyone who joked about it on these calls, our obligatory siren sound in the background was coming through. Hopefully you saw it as it went by.

Just to clarify you, you mentioned for the construction of XM 4 that it was not a $200 million expense, there is no launch included. So was would that put it in the 130 million range?

I think, yeah. You look at the numbers and that's about what it looks like.

That would be spread out over '05?

Yeah. Just to give a little more clarity on that, obviously we have had an on going competitive bidding process, you know, with the satellite manufacturers and also the launch people that have come up with what we think are pretty satisfactory terms so that we are securing our satellite infrastructure going forward.

Yeah, and actually one of the things quite frankly is part of the competitive bidding process we have been having for a extended period now was looking for extensive financing. And that's what you see in this in the fact that most of the dollars are being cared for a significant period of time out into the future.

Secondly I know with Nissan and Infinity that you are in a prewired or XM-read mode. If you did well for the factory-installed mode for the prewired mode, what sort of reaction have you seen on that? Are there a problems in sending the car salesmen to sell the the service? Do you have any sense of how you are doing relative to them?

I would -- I was using somewhat. I think we are competitive in that market as anyone. But I think it would be it wouldn't be fair to compare the whole factory-installed environment to the OEM factory-installed environment. The reason the car companies are moving to a factory-installed environment is because there is a lack of efficiency, let's call it, when you are relying on the dealer solely to sell the car -- you know, sell the car, sell the dealer-installed option. So we believe we have a very attractive price point of hardware and packaging that will work well in that environment. But in terms of what you would call the anticipated penetration or stick rate you clearly have to have a very active and aggressive factory-installed market. Like, for example, this year with our growth to a million two, I mean, General Motors has been working on this whole factory-installed effort for almost 2 1/2 years, I would guess. So that last year when we were projecting how we were going to perform this year it was based on, you know, 12 months of meetings prior to launching it to get to the point where we could have 40% of our growth coming from the OEM sector.

And, Tom, a little other piece of evidence is, almost all GM radios are XM ready. But you don't get the same motivation along those lines. Now we're very helpful, obviously. It is a great way in with Audi and Nissan and Infinity. And obviously we are going to be pumping as well as we can. But we provided guidance that we don't expect massive numbers coming from that. The split between moderate share and moderate share is still pretty moderate.

Until they get to factory-installed and that when we see the big jump. When the car manufacturers start to dot factory install.

My belief what the car company do is with the -- with a company like GM who has been involved in the process for a number of years, a lot of the car companies, what they like to do is, you know, get experience with it with regards to the installation and how it works and the communications and the learning. s that what these companies are doing with the introduction of factory-installed which is a precursor to going factory.

And really 90% of the issue is the installation of the antenna.

Okay.

That is really what both the consumer impact, the dealer not sure exactly how he wants to do it and things like that. The biggest hurdle you have to overcome there is getting the dealer to go in with convincing a customer to put an after market type antenna on.

And then also on CPGA and SAC we saw sequential up ticks from Q1. Were you doing anything differently, or what should we read into that?

If you remember from the first quarter conference call, I told you that the first quarter CPGA of $154 was artificially deflated as a result of us signing a new contract that now allows us to pay subsidies at time of activation versus at time of manufacturing. And I basically had sort of this free period going on for all of the first quarter and actually a portion of the second quarter. But in essence if you look at the 214 that was in the fourth quarter 2002 it will drop down to the $125 at the end of '04.

And a final question, it is a general sense that it is the take off phase for the product being popular. Do you have market research results of awareness or interest that shows a change I'll say over the last three years or six months?

Yeah, we have been tracking awareness on a quarterly basis and we are seeing incremental pick ups in consumer awareness around satellite radio. I still don't think we have seen the hockey stick of awareness either. I think there is a lot of growth acceleration ahead of us.

The two things that are interesting, if you look at our -- I'll give you some anecdotal information. If you look at our marketing spend for the first six months of last year compared to the first six months of this year, we actually are spending about 50% less but we are actually having this much greater subscriber growth, and that is because number one, the money we spend in the first six months of last year which is probably around 60 million compared to the 30m in the first six months of this year, actually laid the groundwork. And what's happening now is that our partners, General Motors and Honda are basically, you know, supporting the marketing with their own dollars that is creating this affect. I also think the new device that we have coming out which is the Roady which is I think going to be a terrific product and a very attractive price point of $120 and be obviously very, very competitive. It is very small. It is going to go after this young demographic, and it will also increase awareness as well.

Okay. Thanks very much.

Your next question comes from April Horace of Janco Partners.

Yeah, I wanted to say thanks for all the new improved disclosures on subscribers. With respect to the OEM subscribers you had an average RPU of $6.74. Where do you see that trending over time along with, do you see the Avis rental car volumes increasing?

Yeah, April, two things, one is the 660 price basically shows you are in the 90-day range. You know, it is a little higher than that as a result of the fact that the Cadillac promotion that was there, they are basically buying year long subscriptions whether it was for factory-installed cars or the boom boxes they were giving out for cars that weren't factory-installed. So it is really that number will fluctuate as a function of how GM or Honda come to us and buy subscriptions. So that really sort of -- that number will probably tend to go up if they start buying longer period of times.

And the RPU on the Avis, it is basically $2.99 a day, and clearly since we just launched it at the end of the quarter that we just wanted to show you what the RPU was and it was small because of the end and it will grow incrementally.

There weren't many days at the end of the quarter.

That was us being true accountants and showing you the real calculation even though they have actually -- you know the actual number of days of rental were very, very small.

If the program was in place for a full quarter, what do you think that number would come in at?

It is too early to tell, but I will say that as we move into the '04 model year purchases which they are looking to do between 15 and 20,000 additional purchases in the second half of the year, they will track close to $10 a month. Because their plan is just to pay us the $10 a month and then they will use it as a vehicle and try to upsell to a premium vehicle.

Okay. And then it maxes out at $10 a month to you guys?

Not on a current relationship. What we have going out there right now if needs a revenue split. It will clearly trend up, as we get more days of rental going on up there, but it is too early to predict. Although we have confidence that the number is going to trend up.

Yeah, the biggest issue is simply -- as we experienced in every one of these markets, or distribution channels, whether it be retail or OEM is that there is a period of time where you have to get out there and train the -- and train the rental offices, and you got to get up the material and we have been working pretty aggressively on that. I think we will have a better idea over the next two months, but what we'll be able to do then is show you in the worksheet that is attached to the press release kind of how we are progressing and you can make your own judgments on where it is going to go or where it has been.

Okay. And a couple questions on the satellites. You mentioned that it was a group of the insurance carriers. Is that all of them or is that just maybe two of the underwriters that are objecting to your claim?

No, they have actually a claims committee which is not all of them, but it is a substantial portion of them. Actually the letter we received was not even from the claims committee. It was from a counsel to a group subset of the committee challenging that. You know, frankly, we said all along we think this will be a protected type of process. It was with [Saria]. We think the PanAmSat and TeleSat will be going through similar type negotiations back and forth. It is one of the things you have to count on. Nobody wants to fork out the money for nothing.

So it wasn't necessarily a surprise to receive this letter.

Not necessarily a surprise.

Have they denied PanAmSat's claims as well?

We don't know anything about the any of the other groups because that is something that, you know, you don't discuss back and forth with them outside of the process.

Okay. Thanks and a great quarter.

Thanks.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Gentlemen, are there any closing remarks?

I'm sorry. No, there are no closing remarks. We had a great quarter, and I think what we are really looking forward to is in the third quarter having another pretty good quarter and really building to what we think is a very significant milestone is that hitting the million subs and also introducing some of the new products which are again next generation products. So with that I thank you all for joining us on the call.

Thank you for participating in today's XM Satellite Radio Holdings Incorporated second quarter 2003 earnings conference call. You may all disconnect.