Sirius XM Holdings Inc (SIRI) 2004 Q1 法說會逐字稿

Good morning. My name is Tashiba and I will be your conference facilitator.

At this time I would like to welcome everyone to the XM Satellite Radio first quarter 2004 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the star, then the number two on your telephone keypad. Thank you.

Mr. Titlebaum, you may begin your conference.

Good morning. This is 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 Holdings, Inc.'s form 10K filed with the Securities and Exchange Commission on March 15, 2004. Copies of the 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.

Good morning everyone and thank you for joining us. On the call with me are Joe Titlebaum, whom you just heard from, Gary Parsons, Chairman; Joe Euteneuer, Chief Financial Officer; and Steve Cook, the Executive Vice President of Sales and Marketing.

This morning I will begin by reviewing XM's business and operating results for the first quarter of 2004. Next Joe Euteneuer will discuss XM's strong financial performance during the quarter, and the company's successful efforts to improve its balance sheet and liquidity position. Finally, we will answer your questions.

Let me begin with a review of the recently ended first quarter. During the period XM continued the sharp execution of its business plan and built on its tremendous momentum from 2003. Highlights of the quarter include the continued rapid growth of XM subscribers, an acceleration in revenue growth, careful control of subscriber related costs, and prudent use of cash, expanded broad OEM penetration and increased production across numerous vehicle models, strong performance in the after market, and the introduction of compelling new content and services, which complements our already outstanding channel lineup, now 100% commercial free on all 68 music channels, reaffirming XM as the choice for music lovers.

As of March 31st, 2004, XM reported 1,681,903 ending subscribers, compared to the first quarter of 2003 ending subscriber number of 483,075, nearly a 250% increase across the year. During the first quarter of 2004, XM added 321,675 subscribers, more than double the 135,916 subscribers added in the first quarter of 2003. At the end of the quarter, XM subscribers represented 83% of all satellite radio subscribers, virtually no change from XM's 84% market share at the end of 2003. Moreover, XM continued to maintain a leading position in the retail after market with more than 70% market share of net new retail subscribers added during the first quarter of 2004.

XM is accelerating the rapid subscriber growth experienced during 2003, and making solid progress towards our previously stated 2004 guidance of exceeding 2.8 million ending subscribers. As our overall market share suggests, both the retail after market and the new car market contributed to XM's strong subscriber performance during the quarter. Each segment exceeded our expectations and collectively enabled XM to outpace average Wall Street subscriber estimates by nearly 55,000 subscribers. This is a very strong indicator of the ramping demand for XM satellite radio, given our past experience that the first quarter of any year is usually the least productive due to the post holiday season buying slow down that is traditionally experienced.

XM's business focus is about more than adding subscribers. During the quarter XM was equally successful in dramatically increasing revenue, controlling fixed costs, reducing the cost to acquire the next subscriber, and retaining our existing subscribers. All of these elements are critical indicators of progress as XM moves towards positive cash flow and continues to enhance shareholder value. Revenues for the first quarter of 2004 totaled $43 million. Fixed expenses during the quarter were $37 million. This represents an important milestone for XM. The first time revenues have exceeded fixed expenses in any quarter.

XM's fully loaded cost of capturing a new subscriber decreased, or the Cost Per Gross Add, CPGA, decreased to $106 per subscriber for the first quarter of 2004. Subscriber Acquisition Costs, or SAC, reduced to $67 per subscriber over the same period. XM subscribers proved to be very loyal during the quarter and our churn was a modest 1.3%, even better than our full year 2003 churn. XM's low churn rate reflects our commitment to the highest level of programming quality.

XM has been called the HBO of satellite radio and for good reason. We offer a compelling home for all radio listeners with live and vibrant music channels offering the most commercial-free music anywhere, and like HBO, we will soon move into a phase of original productions. During the quarter XM successfully raised $177 million in net new equity proceeds, and in April of this year XM completed a $200 million offering of senior secured floating rate notes due 2009.

Turning to the channels of distribution, XM availability as factory installed OEM equipment is expanding to more than 80, 2005 automobile models, including over 50 General Motors brands and 7 Honda and Acura models, such as the Honda Accord, Acura RL, and Acura TL. With Honda recently announcing it will double production of Acura and Honda vehicles featuring the XM radio for the 2005 model year, an increase from 200,000 vehicles to 400,000 vehicles. During the 2004 model year, GM and Honda combined are manufacturing over 1 million XM factory equipped vehicles. This number is expected to increase to 1.5 million vehicles during the 2005 model year.

In addition, XM has announced it will be either a factory or dealer installed option on select Volkswagons, AUDIs and SAABs during 2004. With the introduction of XM as a factory installed option on the brand new SAAB 97X SUV, XM will be on every name plate manufactured under the General Motors umbrella for the United States market. Further highlighting the commitment of the world's largest automobile manufacturer to drive XM radio as a main stream entertainment feature.

Finally XM is enhancing its OEM promotional programs with both GM and Honda, streamlining the process by eliminating most of the manual activities required at the dealership and at the same time, it will result in more new car buyers to XM' s - being exposed to XM's 121 channels of commercial free music, news, sports and information programming. Joe Euteneuer will discuss these changes in a moment .

On the retail side, XM is extending its technology lead with the integration of our next generation chip set, which will be available in new products beginning early this summer. These new products will incorporate features such as a built in wireless FM modulator, the ability to stream personalized stock quotes, and other enhanced functionalities.

XM continues to drive increased productivity through our large network of retail partners, including Best Buy, Circuit City and Wal-Mart. For example, the number of radios sold per store per month across the major consumer electronics retailers has increased substantially, with Best Buy alone increasing per store sales by over 50% during the last year.

To complement our OEM and retail efforts, XM launched a new national ad campaign this past Monday. This campaign highlights the attractiveness of XM's extensive commercial-free music line up through spots on network and cable television. We will not be on the "Friends" episode tonight, but you will see us on a number of finalities that will be occurring in the next week or so for network TV. The campaign is timed to coincide with the strong seasonal demand usually experienced in consumer electronics in May and June, highlighted by Father's day and Graduation day.

In the long run, the quality and attractiveness of content will determine the sustainability of XM's market leadership and how huge this business can become. To this end, the first quarter saw the implementation of major refinements to XM's content strategy. First in February, XM launched its new 100% commercial-free music programming line up featuring 68 commercial-free music channels, the most anywhere in satellite radio.

Also beginning in February, XM expanded and pioneered it's content offerings by launching radio's first advanced instant traffic and weather service. 21 dedicated audio channels of traffic and weather information continuously updated to the nation's most traffic congested metropolitan areas. This service has proven popular in the first 16 cities rolled out, and we expect a similar response as additional cities are rolled out later this year.

On the data services side, XM NavTraffic, a ground breaking new satellite data and navigation information service was unveiled at the New York Auto Show in April with our strategic partner, Honda. XM NavTraffic is the nation's first satellite traffic information service combining traditional GPS navigational systems with current traffic information. Allowing drivers to see in real time traffic patterns and problems, construction zones, and alternate routes, including the difference in travel times to destinations with and without traffic congestion. So in the past, you would use a navigation system to tell you how to get from point A to point B. Now we can tell you what's happening along the route to help you with your driving experience.

Honda will introduce XM NavTraffic this fall as a standard feature on all -- on its all new 2005 Acura RL as a premium service on its Acura Lynx(ph) communications system. This service is a key link in Honda's overall in-vehicle data services platform strategy, of which XM is a big part.

Later this year, General Motors is expected to offer XM NavTraffic as an option on select 2005 Cadillac CTX vehicles as well.

So in addition to providing the best music programming available, XM is now offering innovative premium data information services, further integrating XM into our listener's daily lives. Both operationally and financially, XM had an outstanding first quarter in 2004.

I'll now turn the call over to Joe Euteneuer for a detailed discussion of XM's operational performance during the first quarter, as well as our recent financing activities. Joe?

Thanks, Hugh.

I'm pleased to say that our great execution during the first quarter has been reflected in our financial results as well as our subscriber growth. Today I will provide an update on our subscriber growth and its make up, our progress in increasing recurring revenue as we approach the 2 million subscriber mark, our growth in contribution margin after variable expenses, our control of fixed expenses while launching new initiatives, our continued reductions in the cost to acquire each new subscriber, and finally our progress in strengthening our balance sheet, lowering our cost of capital and increasing liquidity through minimal dilutive financing.

I would like to begin by commenting on the makeup of XM subscriber universe and refer to you the financial attachment to our first quarter 2004 press release. XM's 1,680,000 subscribers at quarter end can be separated into three categories, over 80% of these were self paying subscribers. That is those not on a prepaid promotion. We expect this group of after market, OEM, and other subscribers to grow to nearly 90% of our total subscribers by the end of 2004.

Our second category, OEM prepaid promotional subscribers, totalled 311,000 for the first quarter of 2004 and should stay in the 300,000 to 400,000 range throughout the year. Lastly, the balance of our total subscriber base reflects 19,100 AVIS rental cars.

Now I would like to spend a moment discussing XM's OEM promotional programs. Our initial OEM three-month promotional program required new car buyers to agree to participate in the promotion before an XM equipped vehicle was activated. Through March 2004, approximately 70% of these promotional subscribers converted into self paying subscribers within 90 days of the conclusion of the three-month trial period. The scale of the program was limited because it required significant manual effort at the dealerships, as well as an activation process at our customer service centers.

In cooperation with GM and Honda, XM has recently begun an enhanced OEM promotional program to activate XM equipped vehicles automatically before they arrived at the dealerships. Thereby creating a very large number of vehicles with XM's compelling programming line up available for test drive. Under this program, which should be fully implemented by September 2004, all new car buyers purchasing an XM equipped vehicle from GM or Honda become prepaid promotional subscribers the day they purchase the XM equipped vehicles. As a result, the total number of subscribers generated from our promotional program should increase, however, the conversion rate initially will decline for the next few quarters as this rate now will be calculated based on all XM equipped vehicles sold.

The main objectives of the new program are to enable more GM and Honda buyers to experience the richness of XM's content before they purchase the vehicle and during the three-month trial period thereafter. The car buyers ability to experience XM during test driving, and the three months subsequent to the purchase of the vehicle, gives us confidence that the conversion rate under the enhanced program, should, over time, approach the conversion rate experienced during the initial program. Even with the larger volume base of vehicles included in the calculation. This evolution in XM's OEM promotional program demonstrates the level to which GM and Honda are embracing and integrating XM into their design, manufacturing, and marketing efforts.

Now let me move to revenue. Total revenue in the first quarter increased approximately 230% to $43 million, as compared to only $13 million in the first quarter of 2003. This increase in revenue is due to the 250% growth in our subscriber base.

Quarterly revenue for the first quarter also grew approximately 30% from fourth quarter 2003 revenue of $33 million. With 1,680,000 subscribers at quarter end, our annual recurring run rate revenue is approximately $172 million. This is a significant milestone toward reaching cash flow break even as our revenue run rate now exceeds the fixed expenses of our business. The recurring subscription RPU our 1 million plus self paying subs was $9.39 per subscriber as of March 31st, 2004. This is slightly lower than the RPU of $9.61 in the first quarter of 2003.

This change reflects the success of attracting subscribers to discounted multi year prepayment plans, family plan subscriptions and the impact of service promotions. The family plan program continues to be very successful, growing to 8.6% of our ending subscribers, an increase of more than 1 percentage point from year end 2003. As we've said before, these family plan members paying $6.99 for each additional subscription beyond the first are XM's most loyal and highest total revenue customers and a strong indicator of customer satisfaction. Multi year prepayment plan subscriptions also contribute significantly to our cash flow and represented an impressive 11% of our total subscriber base at the end of the first quarter, an increase of 2 percentage points from the fourth quarter. Overall, XM subscribers continue to prepay their subscriptions on average of 6.2 months, an increase over the 5.4 months we experienced at the end of last year and the 4.5 months reported in the first quarter of 2003. (Audio interruption of speaker) Thank you for calling in. These prepayments are reflected in deferred revenue, which had increased to $73.3 million at the end of the first quarter 2004, as compared to the $53.9 million at the end of 2003.

Let me move on to variable expenses. Variable expenses, which include the cost of equipment sales, revenue share and royalties, customer care and billing, and ad sales, increased by $14 million to $25 million in the first quarter 2004. This compares to the $11 million for the first quarter of 2003. This increase directly results from the growth in our revenue and our subscribers. The gross margin on our subscriber business, which equals subscription revenue, minus revenue share, royalties and customer service costs, has improved to 43% of revenue in the first quarter of 2004, a significant increase from the 22% margin in the first quarter of 2003. We expect this positive growth in subscription gross margin to continue throughout 2004.

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 $37 million for the first quarter of 2004. We expect that fixed expenses will increase for 2004 as compared to 2003, largely driven by new business initiatives we have already discussed, including XM instant traffic and weather channels as well as expanded research and development activities.

Let me comment now on our continued improvement in the cost to gain each new subscriber, which is measured by Subscriber Acquisition Cost, or SAC, and Cost Per Gross Addition, or CPGA. Subscriber Acquisition Costs are a subset of Costs Per Gross Addition and reflect the manufacturer's subsidy costs, distribution expenses, promotions and a negative margin on direct equipment sales. XM SAC for the first quarter of 2004 was $67 per gross addition. As compared to $74 per gross addition for the first quarter of 2003, nearly a 10% reduction in SAC year to year. We also reduced our SAC as compared to the $73 per gross addition reported in the fourth quarter of 2003.

Cost Per Gross Addition, or CPGA, is the fully loaded cost to gain the next subscriber. CPGA includes SAC, as well as discretionary advertising and marketing costs. CPGA for the first quarter of 2004 averaged $106 per gross addition, as compared to the $156 per gross addition in the first quarter of 2003. This is an improvement of $50 or 32%.

CPGA in the first quarter of 2004 is also lower than the $125 per gross addition in the fourth quarter of 2003. And because we have successfully managed our CPGA to date, CPGA is currently below our target level of lower than $110 CPGA for the year 2004. This will allow us to have greater flexibility in our marketing and promotional spending during the remainder of the year.

These improvements result from XM's continued in-house engineering and product development efforts, our management of hardware rebates, promotions and incentives, as well as our controlled spending of discretionary advertising and marketing dollars. In 2004 we expect to see even further chip set, antenna and component cost improvements from our innovation center in Florida. Our third generation chip set was completed last October and is shipping currently to radio manufacturers. Our fourth generation chip set is expected to be completed later this year. These generational improvements will significantly enhance the functionality of the radios, an area we will discuss in depth as we move closer to the roll out.

In the first quarter 2004, we were disciplined in our use of discretionary media and advertising dollars. XM spent $15 million on advertising and marketing versus the $12 million in the first quarter of 2003. XM's ability to maintain these spending levels, while at the same time dramatically accelerating subscriber growth, is due in a large part to our attractive product, compelling content and the strong word of mouth marketing provided by existing XM subscribers. We are particularly pleased that our continued management of CPGA will allow XM to improve the pay back on each new subscriber addition. We currently employ, on average, just over $55 of net cash on each new subscriber. This reflects our $110 target CPGA, net of the six months of revenue on average we are currently collecting in advance from each new customer. This will result in a continued rapid pay back.

Next I would like to comment on our progress during the year in reducing net cash used in operations. For the first quarter of 2004, XM's net cash used in operations was reduced to just $32 million, as compared to $90 million in the first quarter of 2003. This is also favorable to the $51million net cash used in operations during the fourth quarter of 2003. We expect further reductions to this metric throughout 2004 and the first half of 2005 as we head towards cash flow break even.

In the first quarter of 2004, we spent over $100 million in satellite capex to prepare XM 3 for a launch later this year. We continue to execute our launch plans for XM 3 and the completion of XM 4 in 2005.

XM reported an EBITDA loss for the first quarter of 2004 of $78 million as compared to a loss of $63 million for the first quarter of 2003. This change in EBITDA is a direct result of the 250% growth in our subscriber base over the period. However, we are adding subscribers at a much more efficient rate than we were at the same time last year. The net loss was $170 million as compared to $126 million in the first quarter of 2003. This change reflects the costs associated with the growth in our subscriber base and also includes a one-time noncash charge of $25.6 million, a provision for deferred income tax associated with our intangible assets. Going forward, this noncash charge will be approximately $2 million to $3 million per year.

In the financing area, I'd like it touch on XM's liquidity position and highlight actions taken during the quarter to the strengthen our balance sheet. Through April 2004, we completed several financings, all of which are in line with our objective to minimize future shareholder dilution, delever the balance sheet, lower our cost of outstanding debt, improve liquidity and stabilize the shareholder base. At the end of the first quarter 2004, XM had total cash and short-term investments of $385 million, and capacity under our revolver from GM of $50 million. Taken together, the total liquidity position of XM as of March 31st, 2004, was $435 million.

In January 2004 we completed a primary offering of 7 million shares of common stock for the purpose of redeeming our $89 million convertible note with GM Onstar and some of our outstanding 12% senior secured notes. The Onstar note was convertible into just over 5 million shares of common stock at a price of $5 per share. We were able to use stock issued at $26 to retire debt, convertible at prices as low as $5, reducing future dilution to our shareholder base and significantly strengthening our balance sheet. Both of these refinancing transactions are now complete.

We also improved our cost of debt with a $200 million floating rate note offering in April 2004 at a rate of LIBOR plus 550 basis points. The proceeds of this offering will be used to replace other more expensive debt on our balance sheet, such as the GM credit facility, and to provide incremental liquidity that will be available for future deleveraging activities and operating reserves. Including deleveraging activities completed through April of 2004, we have retired an impressive $344 million in future value debt and preferred stock by converting several instruments into common stock and by redeeming others with cash and 2.4 million shares of additional common stock. These transactions eliminated a total cost of approximately $496 million of future interest, dividends and principal payments through the maturity of the various instruments.

In addition, just this week, we initiated the process to delever an additional $150 million of debt on a future value basis from our balance sheet. We will be using cash to repay approximately $75 million of our GM credit facility, our $35 million note to Boeing, $17 million of our 14% senior secured discount notes, and $20 million of our 12% senior secured notes, reducing gross debt to approximately $800 million.

Lastly in April, we received approximately $32 million in cash proceeds in connections with GM's exercise of a warrant to purchase 10 million shares of XM's Class A common stock. As a result of these transactions, and the elimination of $150 million of debt, XM's pro forma March liquidity position was approximately $530 million, and XM will incur an EBITDA charge of approximately $30 million in the second quarter related to these transactions.

In accordance with the terms of the XM's January 2003 financing, the company agreed to register the associated securities. We also will register the recently issued 200 million floating rate notes, allowing the notes to trade publicly. In the next few days we will be filing the appropriate registration documents with the SEC.

So let me summarize. XM finished the first quarter of 2004 very strong with 1,680,000 subscribers, revenues of $43 million, which now, our revenue run rate exceeds fixed expenses for the first time. CPGA of $106, SAC of $67, and an EBITDA loss of $78 million excluding the impact of our deleveraging transaction,. We remain committed to the excellent execution in order to continue the rapid growth of our business and to begin generating positive cash.

Back to you, Hugh.

Clearly, the first quarter of 2004 was highly successful for XM, and we are equally encouraged by what we experienced across the first month of the current quarter. With enhanced content, expanded distribution, exciting new hardware products in the near term, and enormous momentum in both the retail and the OEM sectors, XM is poised to reach 2 million subscribers this quarter. After hitting 1 million subscribers just seven months ago. We are on a solid path to exceed our 2.8 million subscriber guidance and expect 2004 to be a very good year.

What I would like to do is now move to the more spontaneous Q and A period. So we are welcome to take questions now.

At this time I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. Your first question comes from April Horace of Janco Partners.

Good morning. Congratulations on a good quarter and continuing to deleverage the balance sheet. A couple of quick questions.

The revenue share line item was a little higher than I had anticipated. I was wondering if you could give a little color on that or tell us how many GM subscribers you have?

April, I guess maybe there was a slight increase in the volume from our OEM channel, which resulted in the jump of the activity on that line item, but maybe what we should do is get with your model and sort of take a look at it. I mean it's truly nothing unusual.

Okay. And then any new news on GM potentially increasing its production if the dealers are taking at a higher rate than GM is producing?

Yes, I think that the movement to this, you know, upgraded OEM promotional program where we're streamlining the process, has the potential to lead to increased production by GM. So I would basically, cautiously optimistically say that, you know, we probably see some up side in that area but, you know, we would be in a position more at the end of the second quarter to give a view of where we want to go with OEM numbers or other numbers in general.

And then, last but not least, can you give us any update on the insurance with satellites?

Hi, April, this is Gary. Really no update at this time. We are continuing discussions and I'll have to say getting, you know, pretty in depth with the discussions now with the entire insurance community. You know, there is obviously already the settlements from Pariah (ph) and PanAmSat (ph), and now TeleSat (ph) coming along, and we're confident that ours as well too. If it gets into a -- you know, an arbitration process, then certainly that pushes it off into '05. And we'll probably have to make that determination as to whether it goes into that arbitration versus the negotiated settlement in the next couple of months.

Okay. And then have you determined anything more as it relates to how the pricing might be for the Honda new data services?

No, we haven't as yet, or we have thoughts about it, but we obviously need to talk to our partner about that. And as we're ready to roll it out, we'll announce what kind of pricing that might present to the marketplace.

Great. That's all I got. Thanks, guys.

Your next question comes from Robert Peck of Bear Stearns.

Hey, guys. I just wanted to clarify a couple of different things. One is could you talk about your market share and how you calculate your market share differently than your competitors, if we can get some clarity on that issue?

Sure. You know, we are --

Numbers.

We actually look at the numbers, actually. But we actually have, you know, over 70% market share. We basically calculate our numbers based on what we think is relevant in the subscription business, which is the number of activated subscriptions that we have.

I think what you're referring to is data that our competitor put out ,which described that they had a 41% hardware sales mark. And if you just looked at their numbers last quarter, I think they said that they -- or the last quarter they said that they had 90,000, you know, ads and I think 24,000 came from OEMs and some other markets. So that left about 70 -- 66,000 that were after market, you know, retail sales. And, you know, if you believe their -- this 41% hardware number as being something that's really relevant to subscribers, they should have reported a lot higher subscribers for that quarter.

So I think they, you know, were basically a little sleight of hand trying to show some movement in their hardware sales. It didn't really quite correlate to subscriptions, but I think that what you will find though is is that, you know, they will -- most likely they will increase their effectiveness in that marketplace and we think the market is big enough for both companies. But I think we're all a little careful about the data we put out and what it really means, and how relevant. I think CBS Market Watch actually did a piece on it, which kind of clarified it for a lot of people.

Thanks. Steve can you comment maybe on some rumors out there about supply shortages, particularly on the Delphi units?

Yeah, sure thing. We see no product shortages out there. I think what may be happening though, when you realize how many retail locations we have out there now, periodically certain locations may run short of product. We're working with the retailers to address that situation and try and ship product and that sort of thing. But looking forward, product supply looks fine. I will say that the dynamic that's happening is we've got -- you know, we've got OEM dealers ordering more than they had anticipated. We've got retailers doing the same thing. So occasionally a retailer might not be able to get all of the upside to their orders that they'd like, but we've got our manufacturers scrambling to meet all of those upside orders, so we don't see an issue there.

Also, you know, Bob, we're excited about is, you know, as we mentioned is that we had this next generation chip set and products that will begin to come out over the next couple of months. And we're pretty excited about that and it reaffirms our, you know, kind of technology lead and where we're going with making these devices, you know, cheaper and more attractive.

Thanks and one last question. Joe, if you wouldn't mind sort of talking about churn and how we can calculate that number. I was walking through some numbers and getting to about 1.35 or so. If you maybe should tell us how we should be looking at churn going forward?

You know, I think as we told you in the fourth quarter we had that slight blip because of our phones and we did do exactly what we told you we told you guys that we'd do, is get churn down to 1.3%. And we continue to believe it's going to stay in this low 1% range throughout the year. So, I feel pretty confident that it will stay down in that sub 1.5% range.

Thanks, guys. Appreciate it.

Your next question comes from Marc Nabi of Merrill Lynch.

Thanks, good morning everyone. Question for Joe first. Joe, the CPGA, you said you've already met your 2004 metric of trying to be below I think it was like $110, in that range, and you came in at $106. With the third quarter production of your new chip set in the marketplace, how much lower are you expecting your CPGA to go in 2004 and have you revised that range? That's the first question.

Second is, there was an issue right with respect to the "do not call" registry in the first quarter as you changed the way you were able to handle the customers on the GM side. A: has that been resolved and what are you seeing then with respect to your conversion ratio?

Maybe if you can, give us month by month I guess I won't anticipate that to increase. You know, sequentially in the first quarter. And I'll ask one more question when I'm done.

Is there anything else, Marc? You're probably not going to get your month by month here, Marc. Okay?

Marc, on -- this is Hugh. On the CPGA, basically, you know, obviously we have been able to reduce it, you know, below what had, you know, our year end number. I think it's going to stay pretty steady. And with CPGA, I think what we want to do is have some flexibility in how we want to use whatever savings we have managed to get earlier than we anticipated, just to be competitive in the marketplace. So I would say it's -- it could stay pretty flat but, you know, we have some flexibility on how we can use it for marketing purposes, so that's the answer to that. Joe, do you want to take the second one because I didn't quite get the whole question?

Yes. The issue is now that we've moved to this auto activation process going on as far as being able -- our ability to be able to contact GM customers. To the extent that customers do have blocking as far as no telemarketing, GM is working ways with us now and they're actually sending their dealers to help us make contact -- excuse me, make contact to those people, which will actually increase our overall net adds as we work through the process.

Also, Joe, I might have missed it, but did you say how many gross subscriber additions you added in the first quarter?

No I did not. But I mean, obviously if you took the, you know, total costs to gain the next sub and you divided it by the $106 bucks, you know, you would get -- you would calculate around 475,000.

There you go. Okay. Just curious. Also, Hugh, from a person that's been in programming world, I'd love to get your thoughts on all this stuff that's going on with respect to indecency and Howard Stern, and other types of we'll call them shock jocks? And what it means for XM and what you would want to do maybe potentially on a going forward basis with some of these people?

Well, I think that much of what's happening in the indecency area is maybe a result of the political environment we're in. I think that the rules that apply to broadcast radio - free over the air radio are appropriate in some cases. I think that there are different set of rules this apply to satellite or subscription services, which I know a little bit about. Basically because you have people who are choosing to pay a subscription, we have the ability to block out channels. We can offer things as a premium service. So I think we are a more appropriate medium in some ways than free over the air radio because of those attributes.

With regards to people like, you know, Howard Stern, obviously he has been a major force in radio for 25 years. He's a great talent in that world. He has -- he is currently under contract to Infinity. I think that, you know, people like Howard Stern, you know, who could be balanced against other voices that we have, which could be Christian music or religious programming, really it's what makes satellite radio, you know, so unique as cable television is somewhat unique. So therefore, you know, if Howard became available, I would love to talk to him, you know, about coming on to XM. And the issue would be simply what is the cost of a talent like that to come on to satellite radio, and how does it work into our business model to, you know, push the company forward and maybe even push the category forward.

Great. Thanks very much.

Your next question comes from Steve Mather of Sanders Morris and Harris.

Thank you.

Hugh, the new GM promotion with 100 percent activation, of course that was a deliberate effort. Can you just discuss a little bit about what you might have seen this quarter and how you see that impacting the sub adds through the year end?

Well, it's hard to predict that right now. I think that the major, you know, positive of the program was that under the old program, there would be a number of GM vehicles that would be equipped with XM and they would be shipped to the dealership. And then what would happen is that at the dealership, because it involved a manual process, if you guys follow the automobile industry, the dealerships are very focused on selling cars. So they may have neglected to aggressively activate all of those vehicles.

So by auto activating, which was something that was encouraged very heavily by the auto makers because they like to have this streamlined process that eliminates this manual activity by the dealers, they believe that the -- that the total volume of XM equipped activated vehicles is going to increase, because now you eliminate that manual input. And that therefore you will have more cars on the lot where the customers can experience the product and take advantage of the promotional period without a car leaving the lot that's not activated.

So whenever you have a hockey stick ramping subscriber growth business and you, in mid term switch to a new program, we're going to have to let this program settle in, and then basically see how quickly the penetrations increase and how quickly the volumes increase. So I can't give you a specific number on that, but we think that over time it's going to be dramatic improvement in how we operationally handle this very important distribution network that we have.

That's a good answer. How about the -- you teased us with original productions. Any more you'd like to say on that area?

Well, I -- you know, again, you know, I have a -- you know, obviously an experience in the cable industry, so I have great respect for people at HBO and the cable companies where I grew up. And I think that there's a point in our development, which we are reaching quickly, where we can move to, you know, original productions, which we would, you know, announce when they're ready, that really enhances our presence in the music industry and creates the same aura about XM Satellite Radio that have you with other services like, you know, HBO or even Discovery Channel as a basic service.

Hi, Steve, this is Gary as well too. And while Hugh was talking about probably some more major types of elements, one of the things that often gets overlooked is the fact that all of our channels right now, we have a very heavy amount of specials, and unique type things that we do on a daily basis. And what we tend to find out is, that while those don't get a lot of visibility or publicity because they're small specials, if you will, not some big name brand special. It's tremendously adding to the satisfaction levels and interest in the richness of the content and that reflects itself in very low churn rate and customers really loving the service. So it's something we've been cutting our teeth on now for several years and are feeling pretty proud of already and now we want to take it to another level.

That's great. Last but last - not least, next gen chips we're actively anticipating that turning into new product this summer as you mentioned with the built in FM mod. Is that simply a roadie with a built in FM mod?

Well, you'll have to wait to see the products as they come out. I think clearly some of our existing products that we have will be improved by the feature sets and capabilities, and size and power consumption and everything else that we will get out of the new chips that are now shipping. And then throughout the year I think you will see more and greater varieties of forum factors and capabilities .

I look forward to that. Great. Thanks.

Your next question comes from Schlome Edi of Lehman Brothers.

Thanks. Just a couple of questions on capital structure.

In terms of further improving the balance sheet, can you call back the 10% convertible notes, the '09 or are there certain indentures that prohibit early redemption? And similarly, can you redeem the remaining 14% senior discount notes?

The answer is no.

No, they have call protect. And occasionally we have negotiated an individual type transaction where we pulled some in because somebody needed to convert, and gosh we'll love to do it every time we get a chance. What we're kind of doing right now is pruning and tweaking the capital structure. We've made some very big hits with knocking out, you know, $200-300 million at a time. This week kicking off the $150 million pay back on some of that. We've hit a lot of the big ones.

Most of the rest of them have some call protect features that don't make it as easy to do. But you can continue to look for us to opportunistically either do conversions to equity, direct in the market buy backs for cash, anything else we can do just to continually improve those ratios.

Thanks and just my second question relates to Wal-Mart. If you could give us a little more color on how things are progressing there when you compare to to the results of Best Buy or Circuit City? Thanks.

Well, Wal-Mart continues to ramp. We had a good first quarter and they're forecasting a strong second quarter as well, and then of course the back half of the year. Nobody merchandises quite like Wal-Mart heading into the fourth quarter so, I think we will have a very strong year for Wal-Mart. As are the traditional consumer electronic retailers, at that point. Hugh mentioned that we have seen a 50% increase year over year in Best Buy store productivity, so we're seeing growth everywhere.

Thanks. Finally, if you could just discuss a little bit any progress with your marketing alliance with DirectTV, if there's any data can you share with us there? Thank you.

Yeah, we have no progress to report in that. We continue to talk,, as you know, as DirectTV is going through its own experience of adjusting to its new management structure. And clearly, as was reported I guess just recently, obviously had a fabulous quarter. So we look forward to exploring various things with DirectTV as their resources become available, as their management structure settles in. But they're off to a great start and we look forward to working with them on various things.

Okay. Thank you very much.

Thanks.

Your next question comes from Ben Altman of Skyway Research.

Hi, guys, great quarter. We're trying to develop a model for the used car market. And our estimates are that it will be about 500,000 certified GM and Honda vehicles coming to market this year and but almost 6 to 8 million privately. We want to know a couple of things.

One, have you derived your own estimates for this market this year and the years to come? Also, do you have a comprehensive plan in place to identify, notify and capture this potential low SAC customer and what promotions might you apply to that?

And have I two other thoughts on that. What data do have you have for the subset for this year? And do you anticipate any large agreements with the -- I'm sorry, any agreements with the large used car national sellers for this year? If you could answer that, I have one short question after that.

Yeah, go ahead, Hugh.

Well, first of all, we obviously, you know, give some thought to this area. And I mean, you know, we're not prepared to unveil the details of this particular program. But I mean, this is a competitive environment. So I would have to leave you to your own devices to, you know, build your Skyways report to model this business. I think it's something that obviously has some long-term, very positive impacts but, you know, we're very comfortable right now with the progress we're making in subscriber growth in some of the areas that we have. You bring up a good point. We're working on it but we're not prepared right now to sort of break down in that kind of detail --

And obviously as you point out, what is happening right now and the number of used cars that have -- say for example, either XM radios unactivated in them or else head in units that are XM ready, and would be a low cost type of a SAC acquisition, that is obviously an interesting element. And what you will see though is it's a moderate number of vehicles right now that are coming reavailable that way. But during the coming years you start to getting to '05 and '06, it's appropriate that you start looking at that because it starts getting to some pretty big numbers..

Thank you. Yes, we're estimating that there may be as many as a million coming to market by '06 and perhaps more than that after that. As far as your new chip set and equipment, can you give us a general idea if the equipment costs will be going up or down to the general consumer? Especially with the built in XM modulator.

Let me say this generally, obviously as we said, we are already at the SAC and CPAG levels that we would like to hit. There are some cost reductions on a cost basis for the building of the new generation products. But we're not going to forecast or project at this time how that manifests itself into street price or, you know, MSRP at retail.

That's great. Just knowing that that's a reduced cost, rather than increased cost should help with costs to the consumer. I think that bodes well. Thank you again.

Thank you.

Your next question comes from Peter Freidland (ph) of Fulcrum Partners.

Hi, guys. Could you just give a break down of after market versus OEM for net adds and for total subscribers?

Just a little better than 50/50. I mean, as we said, in our fourth quarter call, that we thought the remainder of 2004 would be basically 50/50 and when you look at the quarter, it was 52, 48, something like that.

52 on after market or OEM?

Yeah, retail OEM.

Okay. And anymore color on the relationship with Toyota?

Not at this time.

Okay. Great. Thanks.

Thanks.

Okay. I think that was our last call. Last question. Hugh, any closing remarks?

Closing remarks. I go back to my spontaneous prepared remarks. I just want to emphasize that, you know, we obviously had a good fourth quarter. Our first quarter was good and this is slow and steady and we really are working toward --

Or fast and steady.

Or fast and steady, as much coffee as we can drink. But we're working towards hit our year end goals or exceed them and we have -- we're very pleased with what happened in the first quarter and we expect great things for the coming quarter. So thank you very much for participating in the call.

Thank you for participating in today's conference call. You may now all disconnect.