Sirius XM Holdings Inc (SIRI) 2003 Q4 法說會逐字稿

Good morning, my name is Emetrius (ph) and I will be your conference facilitator today. At this time I would like to welcome everyone to the XM Satellite Radio fourth-quarter and full-year 2003 results. All lines have been placed on mute to prevent any background noise. (Operator Instructions). And now I would like to turn the call over to Mr. Joe Titlebaum, General Counsel of XM Satellite Radio. Sir, you may begin.

Good morning. This is a Joe Titlebaum, General Counsel of XM Satellite Radio. Before we begin our prepared remarks 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, and the potential need for additional financing as well as other risks described in XM Satellite Radio's Holdings Inc. form 8-K filed with the Securities and Exchange Commission on January 14, 2004. Copies of this filing are available upon request from XM Radio investor relations department. I will now turn the call over to Hugh Panero, President and CEO of XM Satellite Radio.

Good morning, everyone, and thanks for joining us. On the job call with me are Joe Titlebaum, from whom you just heard; Gary Parsons, the Chairman; Joe Euteneuer, CFO; and Stephen Cook the EVP of Sales and Marketing.

Today I will begin by reviewing XM's major accomplishments during 2003. Next, Joe Euteneuer will discuss XM's improved balance sheet and liquidity position and the Company's strong operational performance during the fourth quarter and the full year 2003. Then, I will comment on the XM outlook for 2004 and beyond, and then we will take your questions.

Let me begin with a look back at 2003, undeniably an incredible year for XM. Highlighted by dramatic success in growing the XM business, including extraordinary consumer acceptance with over 1 million new subscribers added during the year.

Solid business execution, as demonstrated by substantial acceleration in revenue growth, and careful control of subscriber related costs, and he continued introduction of innovative retail products at attractive price points, and brought OEM penetration across numerous vehicle models.

As of December 31, 2003, XM reported 1,360,228 ending subscribers compared to the 2002 ending subscriber number of 347,159 -- nearly a threefold increase during the year. During the fourth quarter of 2003, XM added 430,580 subscribers -- more than the total net additions in the full year of 2002. And triple the 145,605 subscribers added in the fourth quarter of 2002. As a comparison, DirecTV reported 405,000 net new subscribers in the fourth quarter of '03. A Company that is a household name. Equally exciting was signing more than 100,000 subscribers during the last seven days of December, including over 23,000 subscribers signed up on Christmas Day -- our largest single day of activations in history. And it was an exceptional holiday selling season for us.

As you can see, with just about 30 months of operational experience, XM has proven that satellite radio is a real business, and like our counterparts in satellite television, will continue to redefine our respective industries adding many millions of new subscribers, and establishing the Company's growth potential to exceed 20 million subscribers by 2010.

Both major XM distribution channels, the retail aftermarket led by Best Buy, Circuit City and Wal-Mart, and the new car market led by General Motors and Honda, contributed strongly to 2003 performance. Each segment exceeding our expectation and collectively enabling XM to outpace our Wall Street guidance of 1.2 million subscribers by more than 160,000 subscribers.

During 2003, XM executed on every front. Not just in subscriber acquisition. The Company experienced a 350 percent increase in revenue for the year, while carefully controlling fixed and subscriber related costs.

Revenues for 2003 totaled 91.8 million, up from the 20.2 million reported for the full year 2002. And EBITDA loss, excluding the impact of deleveraging activities, improved to 294 million from 318 million reported in 2002. This trend in EBITDA is a significant accomplishment for XM as it marks the first-time EBITDA has improved on a year-to-year basis.

Equally important as our subscriber growth ramps significantly, our costs of capturing a new subscriber, or CPGA, decreased sharply to $125 per subscriber for the fourth quarter of 2002 -- one full year ahead of the guidance we previously provided the street. We expect to see continued improvement in CPGA during 2004.

XM raised over 800 million in new equity debt and financing facilities during 2003. This fund-raising and our prudent use of cash resulted in cash and cash equivalents of $418 million at December 31, 2003. And as of year end, XM's total liquidity position including cash, cash equivalents and undrawn facilities from GM, totaled half $1 billion.

Our consistent business execution during the year also enhanced shareholder value dramatically, XM's stock price increased more than fivefold during the past 12 months, from $3.75 the closing price on February 11, 2003, to $23.45 the closing price as of yesterday. XM's management takes Seriously its responsibility to drive not only subscriber growth but also the underlying economics of this great business in order to enhance shareholder value into the future.

Joe Euteneuer will now expand on these areas in the moment.

2003 marked the introduction of new products, complementing our leader ending industry-leading XM's Sky Fi (ph) plug and play radio. In August, XM introduced the Rhody (ph) device, the first complete satellite radio solution for the car priced under $120. Business week named Rhody one of the best products of 2003, and it was one of the most sought-after mobile electronics gifts on bestbuy.com during the 2003 holiday season.

In October, we enhanced the aftermarket car stereo product line with the introduction of the XM Commander, which works with any AM/FM car stereo. The XM Commander is expected especially attractive to consumers who own luxury cars and want a sleek, elegant looking system for only $160.

Alpine, Pioneer and Sony continue to carry a broad selection of XM radio car stereo products. And in December, Alpine unveiled the industry's first car stereo head unit with XM fully integrated. This new Alpine unit was named a consumer electronics show 2004 innovations award winner.

2003 was the year XM became widely available as a factory installed equipment across more than 80 automobile models, including 43 General Motors brands and as well as the Honda Accord, Acura RL and Acura TL. XM also became either a factory or dealer installed option in vehicles manufactured by Toyota, Audi, Infiniti and Lexus. There is no need to elaborate on a model by model basis, since our subscriber numbers speak for themselves with approximately 45 percent of 2003 subscribers coming from the OEM universe.

While we will not go model per model during today's call, you can expect continued announcements from various automobile manufacturers regarding new or expanded XM availability on their vehicles. A quick example of this would be last week's announcement by Volkswagen of this special additions satellite blue XM radio deal. Anyway you look at it, both operationally and financially, XM had a spectacular year in 2003.

I will now turn the call over to Joe Euteneuer for a detailed discussion of the XM's recent financing, and our operational performance for the fourth quarter and full year 2003 and I will then return to talk about prospects for 2004.

Thank you. I would like to discuss the following topics this morning. Our 2003 financial results and operational strategy going forward, our improving operating margins and effective cost containment efforts, while simultaneously ramping subscriber growth.

Our dramatic reduction in the cost to acquire each new subscriber, our progress reducing cash burn and increasing liquidity through renegotiation of payment terms and reduced interest rates for GM and Boeing commitments. And finally, our fund-raising and opportunistic deleveraging activities which have eliminated (technical difficulty) future cash outlays, while minimizing shareholder dilution and a strengthened balance sheet.

First I would like to comment on the makeup of XM's subscriber universe and refer you to the financial attachment to our fourth-quarter and year-end 2003 press release

XM's 1,360,000 subscribers at year-end fell into three categories. Over 74 percent of these were self-paying subscribers, that is, not only -- not on a prepaid promotion. We expect this group of aftermarket, OEM and other subscribers to grow to nearly 90 percent of our total subscribers by the end of 2004.

Our second category, OEM prepaid promotional subscribers, totaled 320,000 at the end of 2003, and should stay in the 300,000 to 400,000 range throughout 2004. The conversion rate of our OEM prepaid promotional subscribers to self paying subscribers upon conclusion of the prepaid period was 73 percent during the fourth quarter of 2003. Last week, the balance of our total subscriber base reflects nearly 20,800 Avis rental cars. Avis is in the process of transitioning from its 2003 models to new 2004 cars which will result in XM having approximately 20,000 Avis rental cars in 2004.

The average revenue per subscriber, or ARPU, from each is categories is detailed in the financial attachment to the press release. And many of you have indicated to us that this is very helpful in your analysis of modeling of XM.

I will now review the 2003 financial highlights, beginning with revenue. Revenue increased over 350 percent to 92 million for calendar year of 2003, as compared to 20 million in 2002. This increase in revenue is due to the significant growth of our subscriber base. Fourth quarter 2003 revenue was 33 million, as compared to 9 million in the fourth quarter of 2002.

The recurring subscription revenue run rate at the end of 2003 grew to approximately 127 million annually. The recurring 2003 subscription ARPU on our 1 million plus self-paying subscribers was $9.59 per subscriber, consistent with our 2002 ARPU of $9.54. This consistency was achieved through the efficient use of service promotions, and includes the impact of family plan subscriptions and discounts given to subscribers buying multiyear prepayment plans.

The family plan program has been very effective, growing to over 7 percent of our earnings subscribers. We believe these customers paying 6.99 for each additional radio beyond the first subscription are XM's most loyal and highest total revenue customers and a strong indicator of customer satisfaction.

Multiyear prepayment plan subscriptions also answered contributed significantly to our cash flows, and represented an impressive 8 percent of our total subscriber base.

Overall, XM subscribers continue to prepay their subscriptions through a variety of prepayment plans, paying on average 5.3 months in advance -- a significant increase over the 4.5 months in advance that we experience of the beginning of the year, and this amount is also up from the five months prepayment that we experienced in the third quarter 2003.

As a result of these prepayments, deferred revenue, which consists of prepaid subscriptions and activation fees paid in advance of monthly revenue recognition, has increased over 54 million at the end of 2003 -- as compared to 12 million at the end of 2002. The increase of over 40 million in deferred revenue is a result of subscriber growth and the increasing frequency of subscribers signing up for multiyear prepayment plans.

Now let me move into expenses. Variable expenses, which include the cost of equipment sales, revenue share and royalties, customer care in billing and ad sales, increased by 33 million to 65 million in 2003, as compared to variable expenses of 32 million in 2002. This increase directly results from the growth in revenue and subscribers.

The gross margin on our subscriber business, which equals subscription revenue minus revenue share and royalties and customer service cost, has improved to 36 percent of revenue as of the fourth quarter of 2003 -- a significant increase from what was a negative margin in the fourth quarter of 2002. We expect this positive growth in our subscription gross margin to continue throughout 2004.

(technical difficulty) expenses, which includes satellite and terrestrial, broadcast and operations, programming and content, research and development, general and administrative, and marketing retention and support, declined by $7 million or 5 percent, to 130 million for 2003 as compared to fixed expenses of 137 million for 2002, and our guidance to Wall Street of 140 million. Fixed expenses will increase in 2004, but largely driven by new business initiatives -- including XM instant traffic and weather channels, as well as expanded research and development activities.

I would now like to comment on our continued improvement in the cost to gain each new subscriber, which is measured by subscriber acquisition costs, or SAC, and cost per gross edition, or CPGA. Which is becoming the metric by which economic performance in the satellite radio industry is being judged.

Subscriber acquisition costs are a subset of CPGA expenses and reflect manufacturer's subsidy costs, distribution expenses, promotions, and the negative margin on direct equipment sales. XM SAC for 2003 was a modest 75 dollars for gross edition, as compared to $116 per gross edition for 2002. A 35 percent reduction in SAC year-to-year. SAC represents the direct cost of adding each new subscriber, which is only a portion of the fully loaded costs to add a new subscriber. I highlight this distinction between SAC and CPGA because some investors and analysts have confused the two metrics when reviewing the results of the Companies in the satellite radio industry. Making potentially incorrect comparisons with providing false picture of relative Company performance.

The broader measure of costs per gross edition is the fully loaded per unit measurement of the costs to gain each new subscriber. CPGA includes SAC, which we just discussed, as well as all discretionary, advertising and marketing costs. CPGA for the full year 2003 averaged $137 per gross edition as compared to $425 per gross edition in 2002. And improvement of over $288 or 68 percent. Our CPGA trended lower during the year, beginning in the first quarter of 2003 at $156 per gross edition and ending at a low of $125 per gross edition in the fourth quarter of 2003. Down from the $238 in the fourth quarter of 2002. As Hugh noted, this fourth quarter performance is 12 months ahead of the guidance we have previously given you.

These dramatic improvements during the past year and year-over-year result from XM's in-house engineering and product development efforts, our management of hardware rebates and incentives, as well as our controlled spending of discretionary advertising and marketing dollars. As many investors continue to remind us, product attractiveness and subscriber growth are only part of running a successful business. It's proving that growth can be achieved economically with a reasonable payback -- that is the ultimate test. XM made significant progress in this area during 2003 and we expect even more improvement throughout 2004.

In 2003, we were very disciplined in the discretionary use of media and advertising dollars. XM spent 64 million on advertising and marketing in 2003 versus 92 million in 2002. This is a reduction of 28 million or 30 percent. XM's ability to reduce these costs, while the same time dramatically accelerating subscriber growth, is due in large part to the coordinated effort and support of our OEM partners and the strong word-of-mouth marketing provided by existing XM subscribers.

GM and Honda continue to support XM's marketing effort through their multimedia advertising campaigns. From this point forward, CPGA will continue to improve. But will also, at a more moderate rate and may fluctuate on a quarterly basis due to seasonality of the business, product mix and distribution channel mix. We expect to see continued chipset, antenna and component cost improvements from our innovation center in Florida. Our third generation chipset was completed last October and is scheduled to ship to radio manufactures this quarter to support an array of new products to be released later in the year.

Next, I would like to comment on our significant progress during the year in reducing net cash burn from operations. For the full year of 2003, XM's negative operating cash flow was reduced to 245 million as compared to 294 million in 2002. More importantly, our cash burn from operations was reduced 90 million in the first quarter of 2003, to 51 million in the fourth quarter of 2003. We expect further reductions to our operating cash burn to continue throughout 2004 and the first half of 2005, as we approach and reach cash flow break even. These operating results reflect the improvement in operations associated with the continued growth and recurring subscriber revenues, ramping gross margins, manageable fixed expenses, and a reduced CPGA along with the impact of deferred revenue, which contributed to over 40 million in positive working capital in 2003 and non-cash financing from GM of over 50 million during the year.

In the financing area, I would like to touch on XM's liquidity position and highlight actions taken during the year to strengthen our balance sheet. At the end of 2003, we had total cash and short-term investments of 418 million and undrawn facilities from GM of 82 million. Taken together, the total liquidity position of XM as of December 31, 2003, is a half $1 billion. Representing adequate funding to execute our business plan and achieve cash flow breakeven in the first half of 2005.

During the fourth quarter, we renegotiated payment terms with Boeing for the completion of XM 3 and XM 4. With XM 3 to launch in late 2004, and XM 4 being completed in 2005 but not likely to be launched until 2007. The end result of these negotiations is that we will advance certain payments into early 2004 and extend other payments due in 2005 into early 2006.

We also reduced our interest expense to Boeing on deferred payments by 200 basis points. These adjustments have provided significant additional flexibility to our cash flow and improved our interest rates consistent with our improved credit profile.

And to further strengthen our balance sheet, we opportunistically deleveraged the balance sheet during the year through the removal of over 280 million in future value of debt, convertible notes and preferred stock. In fact, eliminating a total cost of approximately 430 million of future interest, dividends and principal payments through the maturity of various instruments.

These deleveraging activities were achieved through 17 million in cash payments and the issuance of a net 8 million shares of common stock.

It is important to note that while these deleveraging transactions provided a significant economic gain for the Company, they resulted in non-cash charges of 25 million during 2003. These charges, consisting of the write off of debt discounts and deferred financing fees, are reported in the other expense category which is included in EBITDA.

Also during 2003, we renegotiated certain terms of our credit facility with General Motors. Carving 200 basis points off of our interest rate and restructuring the measurement to be a true revolver versus a one-way facility.

We saw another deleveraging opportunity in the first quarter of 2004, and this led to the January equity offering of 7 million primary shares. This offering was minimally diluted because we only issued 7 million primary shares to retire over 5 million shares likely to be issued if the GM $89 million convertible note was allowed to mature over the next three years. Therefore, a net increase of fewer than 2 million shares. We are also using the funds from displacement to retire the $89 million convertible note.

Related to the January equity offering, we have also provided notice to holders of our 7 3/4 percent convertible notes that we intend to call these notes on the first call date of March 3, 2004. Conversion, or retirement of these notes, will eliminate 46 million of debt and 7 million of future interest through their 2006 maturity. And over the next several weeks, we will evaluate the retirement of a portion of our 12 percent senior notes, which we have in equity call back feature.

All these deleveraging transactions will reduce future value of gross debt and preferred stock by 514 million, and have done so with minimal dilution. These financial transactions strengthen XM's balance sheets, increase our financial flexibility and involve minimal future shareholder dilution.

To summarize, XM finished 2003 with 1,360,000 subscribers, 160,000 ahead of our guidance of 1.2 million subscribers by the end of 2003. We achieved revenues of 92 million -- an increase of 3.5 times as compared to 2002. And ahead of our guidance of 85 million for the full year. And achieved an EBITDA loss of 294 million, excluding the impact of deleveraging transactions, as compared to our EBITDA guidance of 295 million. Thus achieving and EBITDA guidance while exceeding our subscriber projection.

For calendar year 2004 guidance, XM is expected to exceed 2.8 million subscribers by the end of the year with the timing of our subscriber growth having seasonality trends similar to prior years, with lower subscribers in the first quarter, building through the year, to a very strong fourth quarter. And, we will generate 220 million in subscription revenues and we will reduce our EBITDA loss to 265 (ph) million excluding the impact of any deleveraging activities. Our continuing challenge will remain excellent execution. Back to Hugh.

Thanks, Joe. 2003 was a year of execution and proving the XM business. During the year, as we have said, we added a million subscribers, fully funded the business through a watershed financial deal, reduced outstanding debt and preferred stock by 280 million, expanded retail sales and OEM factory installs sales through General Motors, Honda and Acura, and continued to light the way of this young satellite video industry radio industry by providing subscribers with innovative and award-winning content for just under $10 a month.

2004 will be a year in which XM accelerates subscriber growth and achieves a number of important milestones on its way to positive cash flow. During 2004, we expect to grow our subscriber base by more than 1.4 million subscribers, ending the year, as Joe said, exceeding 2.8 million subscribers -- doubling our subscriber base that we had at the end of 2003. Earlier this month, XM surpassed 1.5 million subscriber mark. And during 2004, XM will also achieve other subscriber landmarks, signing our 2 million subscriber later in the year, and approaching nearly 3 million subscribers by year-end.

XM will continue to drive this rapid subscriber growth by differentiating itself from terrestrial, Internet and other satellite radio alternatives. XM has been called the HBO of satellite radio. We offer the ideal destination for music lovers with our 68 commercial free music channels, the most commercial-free music available anywhere, and as importantly, live and interactive music channels with our DJs and music directors providing unequal depth, breadth and sound quality.

In addition, XM continues to enhance its broad array of talk, sports and entertainment channels with the recent additions of MSNBC -- that includes Chris Matthews hardball, Keith Oberman's countdown, as well as Dennis Miller and Laura Abraham talk shows. And XM will introduce on March 1st what we think is a blockbuster service, or a killer application for satellite radio, and that is XM's instant traffic and weather service, providing real-time and up-to-date traffic and weather information for 15 cities, growing to over 20 by year-end. These cities include New York, Los Angeles, Chicago, Washington D.C. and many others.

Offering the best music programming with leading talk personalities and a sports comedy and entertainment you want, XM is clearly the best consumer value at under $10 a month.

In 2004, we will continue to build our brand recognition. XM's content is currently extended into some 20,000 Avis vehicles, and we recently announced agreements to take XM to the skies with Jet Blue Airways and Air Tran Airways flights beginning in the fall. These airlines serviced over 20 million passengers in 2003.

XM is also carrying its 2003 momentum in the new car market into 2004. During the 2003 model year, GM factory-installed XM radios in over 400,000 vehicles. GM factory installations are expected to increase to over 800,000 vehicles for the 2004 model year, and 1.5 million vehicles -- 1.1 million vehicles in the 2005 model year.

Later this year, GM will add 12 new vehicles to its list of GM models that factory install, XM including the Corvette and the Hummer II, bringing the total number of GM vehicle lines offering XM factory-installed to more than 50 for the 2005 model year.

As part of the XM sales and marketing program, with new cars, GM conducted over 30 million demonstrations of XM products in 2003. Research shows that the response from GM vehicle owners with XM has been overwhelmingly positive, with nearly all GM customers recommending XM to friends and family. Almost 80 percent of current GM vehicle owners said they would only consider or would prefer a vehicle with XM when they shopped for their next car. About a quarter of those people said they would only consider a vehicle with XM when buying. These are customer preference levels GM has not seen since the introduction of power windows.

This positive consumer reaction has led to ever-increasing percentage of GM vehicles factory installed being ordered by dealers.

Honda's momentum continues to build as well, beginning in the fourth quarter of 2003, Honda began to offering XM as standard equipment in select Honda Accord EX vehicles, while at the same time, Acura introduced XM as a standard factory-installed feature in the RL and the TL. Honda expects to produce over 200,000 XM factory-installed vehicles for the 2004 model year and look for expansion of XM into other popular models for 2005.

And we just announced at the Chicago (indiscernible) show our 2004 dashboard concert series promotion for Honda and Acura dealers, along with Audi, Lexus, Sign (ph) and Toyota dealerships. The promotion automatically enters buyers of these vehicle brands during March through May 2004 into a sweepstakes to win a private concert at our state-of-the-art performance studio featuring a performance by either BB King, Leanne Rhymes, Everclear or Michelle Branch.

GM and Honda are two of the largest advertisers in the U.S. and both car manufacturers featured XM in a variety of media, including print and TV advertisements in 2003 and this will continue in 2004. The most recent examples being the Acura TL television ad featuring XM which ran in 50 major media markets during the Super Bowl and the GM Escalade television swap that recently hit the airwaves.

In the retail aftermarket, XM will continue to drive down costs, introduce new and innovative products and expand distribution. Our first plug and play radio, introduced in 2001, retailed for $300. Today we offer second generation plug and play radios with enhanced functionality to consumers for as low as $120. More importantly, XM has been able to reduce the subsidy on our current plug and plays from $130 per unit in 2001, to just under $20 per unit in 2003.

New products rolling out in 2004 include XM wireless transmitters for the Rhody and Sky Fi, ensuring that XM can more easily be adapted to any vehicle with an FM radio. The Rhody home adapter unit will be available next month, allowing users to play Rhody on their home stereo system or through a set of powered speakers. Other home and portable products rolling out this year include the first integrated Delphi boom box, featuring XM along with AM, FM, CD and MP3 functionality. You can look for new home products and portable products coming out later this year as well.

Most importantly, XM is extending its technology lead with the integration of our third generation chipset technology into radios that will be available in new products hitting in the second quarter of 2004, and the first samples of our fourth-generation chipset technology in late 2004, early 2005.

Some of these technology advancements will result in further reductions of CPGA a while others will improve consumer price points, products configurations and functionality. Utilizing this technology, XM will begin to introduce a variety of new data services and functionality into our plug and play radios, and lay the groundwork for enhanced data services that can be integrated into OEM and aftermarket data platforms currently under development.

In closing, during 2004, we will continue to execute our business plan. Look for new announcements to be made during the year as milestones are achieved and accomplishments occur. Just as we did in 2002, with the launch of the Sky Fi radio and in 2003 with our Wal-Mart distribution announcement, and the rollout of Rhody in time for the holiday season. So you should stay tuned. That ends our prepared remarks, and now we are ready to take your questions

(Operator Instructions). Marc Nabi, Merrill Lynch.

Couple of questions. One, Joe, I was trying to calculate your -- and just looking I want to make sure maybe my calculations are proper. We have churned to be 1.3 percent when you take out your promotional subscribers. And I just want to make sure that that was the right calculation when we're doing that. If you look at it on a total basis -- obviously that's not the way you like to talk about it -- it's like 2.7 percent per month. I just to make sure that that's right, number one.

Number two, I wanted talk about the announcement today with RadioShack and EcoStar (ph) and Serious Satellite radio. You know, we've seen a lot of selling occur from DirecTV, and I want to get a better sense of -- is there anything maybe on the horizon where you could actually see a combination of the DirecTV and XM satellite service to come together on their channels?

And the other point, I wanted to just get maybe a -- Hugh's view, or if Gary is there as well and your self -- I want talk about the whole -- going forward you always make breakeven cash flow 2005 time-frame. I wanted to better understand the razor, razor blade issue. And what I mean by that is, over the next several years as you guys have done a very good job of declining the costs of the actual unit, is your anticipation to effectively get -- giveaway the radios for free? And then just charge for that service on a monthly basis? Or is it -- give the investors, the shareholders, just a lower stack, so actually it will be even more profitable on an ongoing basis? So let me hear those views, and I might have one follow-up. Thanks.

(laughter). I'll be quick on the answer to your first question. Churn is actually was more like 1.4 percent for the year. It's a little higher than (inaudible).

That was for the fourth quarter right? I was asking

For the fourth quarter it was a little higher than actually when you look at it, it was probably just over 1 5. Really as a result of our lack of some treatment on calls on non-paid. So, little bit of an anomaly. But overall for the year was like 1 4.

My turn? The next question was on the RadioShack announcement today?

Yes RadioShack and also the combination, Hugh, of the Ecostar Serious alliance we will call it.

The alliance?

Or partnership.

Partnership? I think the deal is good for the satellite radio category. I think each of us has developed our own distribution strengths or outlets. I think that what happens is is that people will be exposed to satellite radio in a RadioShack store. We're the brand leader. People traditionally comparison shop for products. And I think a lot of them will be driven into Best Buy and Circuit City. I think that on the economic basis, I mean I think one has to better understand the expenses associated with this deal. RadioShack is a great Company. There are a Company that both Companies did not focus a lot of attention on in the first couple of years, because they have a certain demographic that may not have been at the focal point of where we were -- both Companies were going. And I think potentially Serious has moved towards them more aggressively because maybe a slowness in their OEM business. But overall, I think it's a good deal, and for the satellite radio industry and as it relates to the economics for Serious, (indiscernible) I think you guys will have to analyze that.

I'll feel the third one since we're doing it in sequential order here. I think your question really was -- it's great that we're focused on breakeven cash flow in early '05, in and driving down the cost of acquiring these new subscriber. But there is an alternative thought that -- hey, razor blades and razors -- why don't you give the radios away and make it off of the revenue from the recursion. I think there -- it's always just a balance.

We've obviously showed that we're capable of driving some pretty strong growth numbers. As long as we continue to grow at the rate we want to, we think that we can essentially do both. I think that as we do continue the product innovations and make more attractive form factors and sizes and prices of the units, and we have shown an ability to that pretty strongly as well too, you may see some bundlings, where you offer a bundle of a new radio plus 6 months of service or something like that, which would then facilitate someone to purchase it as a gift and then deliver both the radio and the service together. I think you will see those sort of innovative packages, but right now we like the combinations we've got going.

By the way, is there a magic sack number that you or Joe -- or someone has -- that you feel comfortable with on a longer-term basis?

On, the magic sack number is less than what we have today, and enough to get a very rapid payback on -- that's the real key, is how quickly so you pay it back. That is really where the business is driving towards, making it economic get a very rapid payback on each new subscriber. Therefore, you can ramp down your revenue and growth without sucking down a lot of extra cash. And that's, I think in a long-term, shareholder best interest. And it's key that when you do that you really look at the fully loaded costs of adding each new subscriber, not just simply the direct cost there, and I think that's where right now Serious still a significant challenge ahead of it.

Just one very quick follow-up. I was trying to figure out ARPU on, you know, say 2004 basis versus the 874, Joe, that you had calculated. I would anticipate that ARPU would actually would go up this year, because you're over 9 dollars, because of the fact that your promotional base will diminish overtime as yours paying subscriber base gets larger. Is that the appropriate assumption?

You are exactly right. That's why I tried to show -- why I tried to say that our promotional basis is pretty much going to stabilize and by the end of the year, you'll see that ARPU will have consistently grown over quarters.

Good, thanks very much, guys.

Bob Peck, Bear Stearns.

I just have a couple of follow-up questions here. One -- is you sort of give us this peg number out in 2010 of about 20 million subs or so. Joe, could you give some more clarity there, as far as far as what percent of your subbase you see coming from the OEM at that point? And sort of where could ARPU sort of trend up there -- maybe what margin do you sort of see are freezable out in those outer years?

Clearly, two things, one is -- as we've always talked about -- right now, we are sort of at this 50-50 depending on what new products we're launching in the retail market versus what's going on in the OEM sector. So that will continue to fluctuate somewhere 50-50 60-40 40-60 percentage.

From a gross margin basis, our gross margin basis will grow through '04 and into '05 to where we'll cross the 60 percent mark. And then from an EBITDA margin basis, which is probably your other question, is we will get it to a point in the not too distant future, where we will get over 40 percent. From an EBITDA margin basis.

Okay. Great to hear. It's good to have some extra data there. Touching on Mark's question before RadioShack -- is XM available right now in certain RadioShack franchisees? And how exactly does that work versus the announcement you've seen today?

Up to this point we have been available in the RadioShack franchise locations, which are typically in more of the rural locations. And we will see going forward if they continue to offer too, or if they move over to Serious.

But again, we've got lots of other distribution in those rural areas -- particularly with Wal-Mart and some of our small specialty retailers. So, we don't expect any impact there. And what we're doing is, we continue to -- when we look to expand distribution levels and what we think are underserved consumer sectors, we're very comfortable with the breath of our distribution now and we've also learned that merely proliferating additional distribution outlets is not necessarily an effective strategy, and really you have to look at the SAC and the CPGA associated with adding that next subscriber. And so we've been growing rapidly and we're pretty comfortable with our distribution that we have with some of the big players like Best Buy, Circuit City, Wal-Mart and the regionals.

Could you maybe talk about how Wal-Mart's ramped up over this last quarter? I understand they sort picked up their volume in the fourth quarter? And do you have anymore on your radar screen -- potentially maybe at target or something?

I will speak to the ramp up. No doubt about it. I mean, Wal-Mart had tremendous growth force in the fourth quarter, and is already off to a fast start in the first quarter, and we're going to expect that to continue. The -- I would really rather not comment on any of the other specific retailers we might be adding in the future, but we are certainly looking at adding additional distribution. And as Hugh pointed out, we're always going to be evaluating that distribution, trying to add very cost-effective distribution.

Could you maybe also talk about distribution via the OEM market, and maybe how your conversations with Toyota have gone?

Well, we continue to have conversations with Toyota, and we are pleased that they are dealer-installing it in the Psion (ph) and a few other brands. And they're methodically evaluating their plans for satellite radio, and we will see what happens with that as the year goes on.

Okay, last question, I'll let somebody else go. Could you give us an update on the 702's how they are helping stabilizing? And if you had any further contacts since November on -- with your insurers?

Yes, I will do that there, Bob. The numbers on the 72's are kind of just as boring every quarter, we say they are exactly as projected, and they continue to be exactly as projected. It's following as exactly the track that we laid out, or expected two years ago or so when we first found out about this.

Yes, we are in constant communications with a variety of the insurers. I think the only updates really to provide on that front are things that are already out in the public notice. It's very clear that beyond the Syria (ph) settlement which did occur initially -- I guess earlier this year, Pan Am set announced their settlement. That leaves Telesat and ourselves, and I think progress is being made on those fronts, and we really have no changes in the fact that we do in fact expect to get an appropriate settlement.

Thanks guys.

April Horace, Janco partners.

I had a quick question on GM. In some previous presentations you showed dealers ordering vehicles with XM in it in excess of the 20 percent. I was wondering -- do think that number, the 800,000 cars for GM in '04, could go higher than that if GM dealers are ordering a 30 percent take rate? Is that sustainable or could it go north?

Yeah, what we do each year, working in conjunction with GM, we forecast what the production is going to be. But what we've seen in last couple of years is that, due to the strong dealer orders, that number has increased. And so it's hard to say today how much that might increase, but it is very possible it will increase of the year.

Yes, I think April what the numbers are is that in the projections for '04 and '05, I think we have them in at 20 percent for '04 and I think we were always a couple of percentage points above that, and 25 for '05. And we had budgeted, basically, I think increasing about 5 percent a year. And we're clearly ahead of that projection, so your assumption is correct. They are running a little bit right now.

Okay, great. And you also mentioned that you had -- were going to reduce some of the 12 percent debt and you said some portion. Could you elaborate on that amount possibly?

Yeah. We're still studying that as we look at it. You may note, if you actually dig into the indentures on the 12 percent notes that we have an equity call-back that is allowed for 90 days after we do any equity placement. So we will have to do that during that period.

We have to leave, under that, at least 100 million outstanding, so that we keep the trading amount liquidity out there for them. So that would put the absolute capped at like 85 that we could potentially reduce, but we're certainly looking at that right now.

Okay and then -- do you have a specific date as to when you hit the 1.5 million subs? Because I'm just trying to calculate a quarterly runrate.

Everybody else is too. It was before today. We've been off to a good start. We just really -- we don't normally do this mid quarter but we passed a particular milestone and we were having the release today, so we thought we would go ahead and note that as well.

Okay and last question -- how many Honda subscribers did you have at the end of the year?

I think we had about 45 or 50,000 -- 45,000 is probably close.

Okay, great.

Steve Mather, Sanders Morris Harris.

Gary, regarding the 20 million sub target you mentioned, can you share anything regarding, let's say the timeline for product offerings -- can I assume it will be well beyond boom boxes and plug and plays by then?

Well I think it will clearly be a wide variety of different availabilities beyond that. I think really we're putting that out there to open people's eyes to the fact that this is a very large business and we're finding out it's a lot larger market and even we thought was when we first started into it. It's a number that I think resonates and is also realistic. We think very strongly those of the sort of numbers we can shoot for.

It's actually is grounded in our technology development path which constantly has our chipset and our technology getting smaller cheaper and more efficient where you can actually then have it and see it being embedded in new technologies and new environments, but it is something that you really couldn't talk about a couple of years ago, till you got to the point where we are right now with our technology where we can see the future and we actually have been in advance conversations with a variety of players who also see that potential.

Well, Hugh, regarding your -- this different environment, near-term more like Q4 this year? You already mentioned the wireless Rhody and Sky Fi and then AM/FM XM CD and the rest of this Rhody home. Do you creep into this new environment this year with the next gen chipset?

I think you're going to start to see the beginning of some of the advanced features or functionality, and maybe even some new products. But we will -- we were at the consumer electronic show. I think the point we were making earlier was that at the consumer electronic show last year, we did not announce the roadie device, because we didn't have it all baked. And the year before that, I don't think we announced -- we didn't announce the Sky Fi. So with our normal standard operating procedure is is that when we have all the pieces together, then we will let people know what the product is and how it's being marketed and packaged and we will continue to that this year and then next year.

I think thereto, we do try to. I know we reiterate this when everybody tries to get us to commit to announcing things pre before them becoming a reality. But we really want to stick with that pattern that we have. If you look at it, that has been. Serious makes announcements and we make results or numbers. So, we will stick to that sort of an approach, right now. And candidly, I agree with Hugh on Serious announcements today. I think that was a good announce for them. Probably good for the industry and gives more visibility. If you look at history on those of announcements, the pop a big announcement out there and then immediately follow it with a stock offering so we'll have to wait and see what happens.

Just one more follow-up to the 20 10 references. Can you just give us a minute on your philosophies regarding some of the expense line items out then? Specifically, what do you think might be happening with the SAC and discretionary advertising, CPGA, listener care, these kind of things? Well, I know you can't define it real specifically, but can you add anything?

Look, Steve, I think what you'll see happening is we will continue to reduce the total cost to add the next new subscriber. It's just going to be more at a moderate rate, not as the same dramatic rate that we've done to date. We will, as I said earlier, we are going to get to an EBITDA margin that will get and cross over the 40 percent mark. So this is going to be a very large cash generating business as the ears grow out, and it's going to come through our ability to continue to control our costs as we have done so successfully to date.

That's great, thank you.

Peter Friedland, WR Hambrecht.

Couple of questions. With respect to future announcements from automakers, assuming there are future announcements from automakers excluding GM and Honda regarding factory installs, should we expect them to make volume commitments similar to what GM and Honda have done? Or would we expect them really to let demand kind of play out and have them be more full announcements or full programs? And then secondly, can you provide any additional penetration or take rates for your non-GM or non-Honda automaker programs?

Let me capture all of these things. First of all, since we don't have the announcements, I don't think that I can project with any volume commitments might be. And what you tend to do with these car manufacturers is that there is a learning curve period where they start to educate their dealers and get their corporate functions in tune with satellite radio. And it's only after a certain period of time that they then can put out more definitive volume estimates. I think as was the experience with Honda, who only recently came out with their 200,000 vehicles that would be manufactured for '04 -- so that's the best that I can answer that question. Then the second question was about --

Penetration rates -- Joe mentioned that in the fourth quarter we achieved about a 73 percent stick rate at best after the ninety-day promotional period. And that's really a consolidated number for the OEM channel. I think that you are asking about not-GM cars as well? Is that what you are asking about?

Yes. So for Toyota and others?

It's a very low penetration, because it's still a dealer installed option and as we've always said, that the real strength in the XM being packaged into the new cars when it's factory installed.

Yes, the difference, by the way, there is -- in those cases you don't really have this conversion rate or stick rate situation that Steve was talking about, because in those dealer-installed situations, it's a person that actually decides he wants to ask for it, have it installed on the spot -- so you nearly get a one-for-one relationship there. Unfortunately, you just don't get too many numbers. So that's more the issue there.

So really, for modeling purposes, I guess that second question was -- should we assume that the penetration rates in dealer-installed -- is it sub 5 percent -- is it that low?

At this point.

I would assume like you're saying -- minimal volume from the dealer-installed basis, and the majority of our volume will come from factory-installed.

Okay, great, thanks a lot, guys.

Shalam Vidid (ph), Lehman Brothers.

Just a couple of quick questions. First one relates to churn rates. If you could elaborate a little more? You said it was 1.5 percent in the fourth quarter and just wanted to get some more color on that as well -- what you expect it to be for 2004? And maybe if you could also touch on the split between the churn rate in the retail channel versus the OEM, I know you usually don't disclose that, but I wanted to see if we could get some information on that? Thank you.

Sure. I will speak to that -- in terms of the -- I think the pertinent points were made regarding the fourth quarter churn. It did come in around the 1.5 percent level. I think the important thing to keep in mind though is that our voluntary churn -- that component of it, has been very constant really all year long at about 0.85. You know, the balance is made up by nonpays. And the only reason it crept up in the fourth quarter was because we got away from a few of our practices of following up on nonpays due to the high fourth quarter volume in the call centers. But we're getting those processes put back in place, so I expect that to come right back down again.

And then the next question was about the split between retail and OEM which is about 50-50 or I think, 50-50 --

The question there was sort of the churn (multiple speakers) once they become self paying, they really fall into the same sort of pattern. We don't see material difference between the two.

Okay. My last question is just relating to the market share at the retail channel between you and Serious. Could you give us some more information on that, please, for the last quarter?

Well, I will mention a couple of things. I know that Serious referenced about a 32 percent share in the aftermarket through NPD panel data. I will point out that that data does not include Wal-Mart or Best Buy. And those were two of our very large channels during the fourth quarter.

In addition, that was dated through November. So, we really don't agree that they have gained that much traction. We're still performing very well at retail.

I think the best way of looking at it is -- in two months we will both be releasing first quarter numbers. The one good thing about having to face numbers, you actually have to face them and talk only goes so far. So, I guess we added, one year ago, about 137,000 subscribers. Of a year ago type of a total -- we will see how that matches up.

Okay. Thanks much.

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

Are there any closing remarks? My closing remarks are just that we had a great year. We're off to a great start in the first quarter. We really are about executing the business plan. And we will continue to do that throughout 2004. So, just look for our results, and we'll talk about them on our calls that are upcoming during the year. Thank you very much.

Thank you for participating in today's XM Satellite Radio fourth-quarter and full-year 2003 results. You may now all disconnect.