Sirius XM Holdings Inc (SIRI) 2004 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the XM Satellite Radio second quarter 2004 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Caller Instructions] Thank you and now I would like to turn the call over to Joe Titlebaum, General Counsel. Sir, please go ahead.

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: 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 10-K filed with the Securities and Exchange Commission on March 15th, 2004. Copies of this filing are available upon request from XM Radio's Investor Relations 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, you just heard from; Joe Euteneuer, Chief Financial Officer; and Steve Cook, Executive Vice President of Sales and Marketing. Gary Parsons, XM's Chairman who normally participates in these calls is currently on vacation. This morning I will begin by reviewing XM's business and operating results for the second quarter 2004. Next, I will comment on XM's outlook for the second half of 2004. Joe Euteneuer will then discuss XM's financial performance during the quarter and finally we will be pleased to answer your questions. I'd like to comment first on significant accomplishments during the quarter and then focus on major content enhancements, marketing alliances, and new hardware products being introduced in the months ahead.

During the second quarter, XM continued its rapid growth, and in June surpassed the 2 million subscriber mark. In addition to our strong subscriber numbers, XM also accelerated revenue growth, reduced the cost to acquire each new subscriber, sustained our strong performance in the retail aftermarket and expanded our already broad penetration of the new car market. As of June 30th, 2004, XM reported 2,100,352 ending subscribers compared to the second quarter 2003 ending subscriber number of 692,253 subscribers, an increase of over 1.4 million subscribers across the past 12 months. During the second quarter, XM added 418,499 subscribers, more than double the 209,178 subscribers added in the second quarter of 2003. At the end of the second quarter, XM maintained an 81% market share of the satellite radio subscribers. I'll now give a brief overview of XM's financial performance for the quarter.

Revenues totalled 53 million, this represents the second consecutive quarter that revenues covered fixed expenses, which were approximately 39 million for the quarter. XM's fully-loaded cost of capturing a new subscriber, or CPGA, decreased to $101 per subscriber for the second quarter. Subscriber acquisition costs, or SAC, a component of CPGA, fell to $57 per subscriber over the same period. In both of these metrics, XM has made improvements year-to-year and quarter-over-quarter. Our subscribers also remained loyal and dedicated resulting in the industry low churn rate of 1.1% during the quarter, slightly improved from the first quarter of 2004. XM's leadership in developing next-generation products and offering the best programming continues to pay dividends. XM is clearly recognized by consumers as both the best value and the leader in satellite radio. Consistent with XM's efforts over the past year to strengthen our balance sheet and improve liquidity, XM closed in April a $200 million offering of senior secured floating rate notes due 2009. This new financing replaces more expensive debt on our balance sheet as well as providing incremental liquidity for future deleveraging activities and operating reserves.

Finally, XM recently settled its long standing satellite insurance claim with most of the insurers. Joe will discuss our financial results and the insurance settlement in more detail shortly. On the marketing front, I am particularly pleased with our retail aftermarket performance during the quarter, 7 out of 10 net new retail satellite radio subscribers chose XM Radio. This is little change from the 71% retail market share XM enjoyed in both fourth quarter of 2003 and the first quarter of 2004. XM offers a diverse portfolio of attractive products, led by the SKYFi and the Roady products, available in leading retail outlets including: Best Buy, Circuit City and Wal-Mart. Overall, XM continues to be consumers’ overwhelming choice for satellite radio. Complementing our retail efforts, General Motors and Honda continued to lead the way in the new car market. In fact, during the second quarter, more than 50% of our new subscribers came from the OEM market. During the 2005 model year, XM will be offered on over 100 vehicle models with more than 75 of those being factory installed.

In addition to GM and Honda, Toyota recently expanded its XM Radio dealer-installed program for 2005, to include the Toyota Camry and Land Cruiser, the Scion tC and the Lexus ES 330 and the LX 470. We recently added Porsche to our list of new car distribution partners and beginning this summer, XM will be available on all versions of the 2005 Porsche Cayenne. Now I'd like to talk about some of the recent announcements we have made about XM's programming and marketing efforts.

Beginning this fall, XM will broadcast Atlantic coast conference and PAC-10 college football and men's and women's basketball to listeners across the country. Alumni and sports fans will have access to many of the most intense college football and basketball rivalries as part of XM's basic service. XM has added college football and basketball to an already impressive sports lineup that includes NASCAR, ESPN Radio, ESPN News, Sporting News Radio and Fox Sports Radio. The best in college sports and -- and talk has found its home on XM Satellite Radio. We also recently signed Bob Edwards, the award-winning public radio newsman to host a new morning interview program, the Bob Edwards show, exclusively on XM. Bob hosted National Public Radio's Morning Edition for about 25 years attracting more than 13 million listeners weekly. The Bob Edwards Show will be the feature program on our new public radio channel, XM Public Radio. XM Public Radio will showcase outstanding programming produced by Public Radio International, Minnesota Public Radio, and Boston Public Radio station- WBUR. XM Public Radio will debut September 1st, and The Bob Edwards Show will premiere on October 4th and we have received enormous positive press regarding this announcement.

Also joining the XM family are two additional proven radio personalities, Opie & Anthony. The O & A show, formerly the number 1 afternoon radio show among male listeners between the ages of 18 and 34 in New York City, Philadelphia, Boston, Dallas, Cleveland and Buffalo, will premiere as a live weekday program on XM in October, with Opie & Anthony bringing their unique and outrageous outlook on life exclusively to XM subscribers. We will carry the show on a premium channel for an additional fee. For our Spanish-language listeners, XM has added two new Spanish language music channels, Alegria, featuring Latin hits and Aguila, a channel featuring regional Mexican and Tejano music. XM's lineup now features the best in Latin hits, Mexican music, tropical sounds and also Latin jazz. Finally, we have also added five new instant traffic and weather channels serving Minneapolis-St. Paul, Seattle, San Diego, Atlanta and Miami-Ft. Lauderdale; bringing the total XM offering of 21 dedicated and continuously updated traffic and weather channels.

As you can see, we continue to focus considerable resources on presenting a wide array of diverse programming ranging from college sports, to Bob Edwards to Opie and Anthony. We believe content is the ultimate driver of consumer loyalty in satellite radio and, to that end, XM is regularly refining and expanding its entertainment offerings. Our updated channel lineup is available on the XM website, XMradio.com. As we announced earlier in the week, XM and the Starbucks Coffee Company have entered into an exclusive multi-year strategic marketing alliance. As part of the agreement, the Starbucks Hear Music channel, featuring music program from Hear Music, the voice of music at Starbucks will debut this fall for XM Radio's more than 2.1 million subscribers. The Starbucks Hear Music channel will be included in our -- in a new music-channel neighborhood called XM Lifestyles.

And beginning in 2005, millions of Starbucks customers will be able to listen to the Starbucks Hear Music channel programming and be exposed to XM in more than 4,000 Starbucks locations nationwide. XM's presence at Starbucks locations will greatly accelerate awareness of our popular satellite radio service, among a very desirable demographic. This is an exciting marketing alliance matching Starbucks, one of the world's best-known and respected brands, with a huge and loyal customer base, with XM Radio, one of the hottest entertainment products to launch in the last 20 years.

On the product side, XM introduced the Delphi XM Roady2, and announced a new plug-and-play satellite receiver from Audiovox called the XR9. The Roady2 is significantly smaller than the competition's plug-and-play models, enables the listener to display up to 20 stock quotes, and includes a wireless FM adapter for easy connection to any car or home radio. PC Magazine recently gave the Roady2 five stars calling the unit a brilliant device and naming it as one of its editor's choice. The Audiovox XR9 is scheduled to arrive in retail stores in October, in time for the holiday season and includes a built-in wireless FM modulator, can display personal stock quotes as well, and comes with a remote-control device. Our listeners regularly tell us that boomboxes and other accessories add great value and appeal to our plug-and-play products, so XM has joined with Cambridge Soundworks to produce the PlayDock XM, the first-ever portable audio system for the Delphi XM Roady and the Roady2 receiver I just spoke about.

The PlayDock XM is a high-performance audio system, outfitted with a flexible docking station, a rechargeable battery providing over 10 hours of play time and an extra speaker for outstanding bass response. XM is dedicated to aggressively developing new products and technologies designed to offer subscribers state-of-the-art features, attractive price points and compelling designs. XM will be rolling out a number of additional new products over the coming months as well. As a result of our subscriber momentum, the improving outlook for both the retail and the new car business in the second half of the year, our new content lineup and attractive consumer products, XM is increasing -- increasing its subscriber guidance from 2.8 million subscribers to 3.1 million subscribers by year-end. I will now turn the call over to Joe Euteneuer for a detailed discussion of XM's operational performance during the second quarter. Joe?

Thanks, Hugh. Today I'll provide an update on our subscriber growth and its makeup; our progress in increasing recurring revenue and contribution margin after variable expenses as we approach the 3 million subscriber mark; our continued management of fixed expenses; our continued reductions in the cost to acquire each new subscriber; our progress in strengthening our balance sheet, lowering the cost of capital, and increasing liquidity; and finally, our updated guidance for full-year 2004. I'd like to begin by commenting on the makeup of XM’s subscriber universe and refer you to the financial attachment to our second quarter 2004 press release. Over 81% of XM's 2.1 million subscribers at quarter end were self-paying subscribers, or those subscribers not on a prepaid promotional program. We expect this group of aftermarket OEM and other subscribers to grow to 85 to 90% of our total subscribers by the end of 2004. Our second category, OEM prepaid promotional subscribers, totalled 375,000 for the second quarter 2004. Lastly, the balance of our total subscriber base, reflects approximately 20,000 Avis rental cars.

During the first quarter 2004, XM and our partners, GM and Honda, worked together transitioning to a fully automated factory activation promotional program. As explained during our first-quarter earnings call, the automated factory activation promotional program applies to all OEM vehicles equipped with XM radios while our prior program only included those XM-equipped vehicles where the purchaser elected to participate in the promotion. The main objective of this expanded activation program is to enable more GM and Honda new car buyers to experience the richness of XM's content for a trial period. We are very encouraged that during the quarter, nearly 6 out of 10 promotional subscribers under the expanded program elected to become self-paying subscribers. This conversion rate is comparable to our experience on the prior promotional program, when evaluated against all XM-equipped vehicles sold. Overall, with GM and Honda sales of XM equipped vehicles increasing substantially, the expanded promotional program actually delivered 50% more self-paying subscribers than during the first quarter this year. We expect to continue to increase the total number of subscribers coming from our OEM distribution channel throughout the year and the conversion rate will increase as we refine our marketing programs to these promotional subscribers. Our churn rate on aftermarket OEM and other subscribers improved this quarter to 1.1%, as compared to 1.3% per month for the first quarter of 2004.

Now let's move to revenue. Total revenue in the second quarter nearly tripled to 53 million as compared to 18 million in the second quarter 2003. This increase in revenue is due to the strong growth in our subscriber base. Quarterly revenue for the second quarter also grew approximately 23% from the first quarter 2004 revenue of 43 million. With 2.1 million subscribers at quarter end, our annual recurring run rate revenue is approximately 213 million. As we show on our operating metrics attachment to the press release, XM's total recurring subscription ARPU for all subscribers was $8.63 for the second quarter 2004, as compared to $9.32 in the second quarter 2003 and $8.66 in the first quarter 2004. The recurring subscription ARPU on our 1.7 million plus self-paying subscribers was $9.26 per subscriber as of June 30th, 2004, as compared to $9.84 in the second quarter 2003 and $9.39 in the first quarter 2004. The year-over-year and quarter-over-quarter differences in ARPU are attributable primarily to the success of our discounted multi-year prepayment subscriptions and family plans, as well as the impact of service promotions.

Multi-year prepayment plan subscriptions contribute significantly to our cash flow and represented an impressive 13% of our total subscriber base at the end of the second quarter; an increase of 1 percentage point from the first quarter 2004. The family plan program contributes to be very successful, growing to 9% of our ending subscribers, a slight increase from the first quarter 2004. We expect total recurring subscription ARPU for all subscribers to remain relatively flat for the remainder of 2004 as we manage carefully our multi-year prepayment and family-plan programs. Overall, XM subscribers continue to prepay their subscriptions on average 6.6 months, an increase over the 4.8 months reported in the second quarter of 2003 and the 6.2 months reported last quarter. These prepayments are reflected in deferred revenue, which increased to $93 million at the end of the second quarter 2004 as compared to 24 million at the end of the second quarter 2003.

Our variable expenses, which include the cost of equipment sales, revenue share and royalties, customer care and billing and ad sales increased to 23 million in the second quarter 2004 as compared to 13 million for the second quarter 2003. This increase directly results from the growth in revenue and subscribers. The contribution margin of our subscriber business, which equals subscription revenue minus revenue share and royalties and customer service cost, improved to 60% of revenue in the second quarter 2004, a significant increase from the 32% margin in the second quarter 2003 and from the 43% in the first quarter 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 39 million for the second quarter 2004 as compared to 36 million for the second quarter 2003. We expect that fixed expenses will increase for the remainder of 2004 as compared to the second quarter 2004 run rate, largely driven by new programming initiatives as well as expanded research and development activities.

I will now comment on our continued improvement in reducing the cost to gain each new subscriber, which is measured by subscriber acquisition costs, or SAC, and cost per gross addition, or CPGA. SAC is a subset of CPGA, and reflects manufacturers' subsidy costs, distribution expenses, promotions, and the negative margin on direct equipment sales. XM SAC for the second quarter 2004 was $57 per gross addition as compared to the $80 per gross addition for the second quarter of 2003; a 29% reduction in SAC year-to-year. We also reduced our SAC by more than 15% as compared to the $67 per gross addition reported in the first quarter of 2004. CPGA is the fully-loaded measurement of the cost to gain each new subscriber. CPGA includes SAC as well as all discretionary advertising and marketing costs. CPGA for the second quarter 2004 averaged $101 per gross addition. This is in comparison to the $160 per gross addition in the second quarter of 2003, an improvement of $59, or 37%. CPGA in the second quarter 2004 has also fallen from the $106 per gross addition in the first quarter of 2004.

Our third-generation chipset began shipping with the recently launched Roady2, and we expect additional new products featuring the next-generation technology to launch later this year. We will continue to manage our CPGA very carefully throughout the remainder of 2004. We expect our full-year 2004 CPGA to be better than our previous $110 cost per gross addition projection for the full year of 2004. In the second quarter of 2004, we continued to be disciplined in our use of discretionary media and advertising dollars, spending only 20 million on advertising and marketing versus 17 million in the second quarter of 2003; while doubling our net additions over the same period.

XM reported an EBITDA loss for the second quarter of 2004 of $108 million as compared to the loss of $96 million for the second quarter of 2003. These EBITDA figures include deleveraging charges in the second quarter of 2004 and 2003 of 35 million and $19 million, respectively. Excluding these charges, the EBITDA loss for the second quarter of 2004 was 73 million compared to an EBITDA loss of 76 million for the first quarter of 2003.

Next I would like to comment on our progress during the year in reducing net cash used in operations. For the second quarter 2004, XM's net cash used in operations was reduced to $26 million, as compared to 59 million in the second quarter 2003 and the 32 million of net cash used in operations during the first quarter 2004. We expect net cash used in operations to increase during the third quarter as the result of our decision to make cash payments of approximately 20 million to GM instead of issuing additional common shares under our GM equity facility.

In the financing area, I would like to touch on XM's liquidity position and highlight actions taken during the quarter to strengthen our balance sheet. At the end of the second quarter 2004, XM had total cash and short-term investments of 377 million and capacity under the revolving credit and equity facilities from GM of an additional 126 million. Taken together, the total liquidity position of XM as of June 30th, 2004 was 503 million. After the end of the second quarter, XM reached settlements with insurers covering 80% of the sum insured under its satellite insurance policies. These insurers have agreed to settle XM's claim for 142 million in aggregate, most of which should be collected by the end of August. The cash from this settlement is not included in the 503 million liquidity position I just discussed. XM will initiate third-party resolution procedures for collecting the remaining 20% of the sum insured. Further details about XM's insurance settlement can be found in the company's 8-K filed earlier today.

In April 2004 XM completed a floating rate note offering for 195 million in net proceeds. This new financing replaces more expensive debt on our balance sheet, such as the 71 million of our GM revolving credit facility and 50 million of our 12% notes. We have also prepaid our $35 million Boeing note. Finally, we received approximately 32 million in cash proceeds in connections with GM's exercise of warrants to purchase 10 million shares of XM's class A common stock, the cash from which was used to retire some of our 12% and 14% notes. As a result of these deleveraging activities, we eliminated 235 million in future-value debt with interest at 285 to 735 basis points higher than our floating-rate notes.

I'd like to close by discussing guidance. Our updated guidance for the full-year 2004 is as follows: we are increasing our subscriber guidance from 2.8 million to 3.1 million subscribers. Our subscriber revenue guidance will remain unchanged at 220 million and we are increasing our EBITDA loss from 265 million to 300 million excluding deleveraging activities. Hugh, back to you.

Thanks, Joe. Well, the first half of 2004 has been a pretty great ride. We reached and exceeded 2 million subscribers, GM produced its 1 millionth factory-installed XM-equipped vehicle. We have great content that was given to our subscribers and we have more great content coming onboard. We have next-generation radios that continue to be introduced with new radios on the way. And the second half of 2004 has started with even greater promise. During the coming months, we are looking forward to surpassing 3 million XM Radio subscribers with GM on pace to produce its 2 millionth XM-equipped vehicle. We're offering even more attractive and diverse programming, ranging from Bob Edwards to the best in college football and basketball to Opie & Anthony. We're going to start work with Starbucks on our new marketing alliance and we're going to be introducing next-generation hardware products to the retail aftermarket. Thanks a lot for all your support and we are ready to answer your questions.

[Caller Instructions] We'll pause for just a moment to compile the Q&A roster. Your first question comes from Bob Peck with Bear Stearns.

Hi, guys, a couple just sort of housecleaning questions. First of all, good quarter. We were calculating your gross adds to be somewhere around 558,000, is that number sort of right?

Right. If you basically take our total marketing cost plus the negative margin on equipment sales, divided by our $101 of CPGA, that's about the approximate number you get.

Okay. And then taking that number and leading into churn, is there a way for us to back into the churn number of 1.1%? We've done some raw numbers over here, just looking at raw disconnects over prior-period total subs and we see your churn rates falling about 100 basis points, is that right? And can you tell us how to calculate to that 1.1?

Well, yes, our churn has been reduced. And as you know, we do look at our subscribers in a couple of buckets. First, our self-paying subscribers, as we reported, did have a reduced churn rate of 1.1%. And then you really -- your add-on question is the fact that if you looked at total disconnects, which is basically the people not converting from our promotional programs, you would have a total disconnect rate of south of 2.5%.

Okay. And on ARPU, how should we think about modeling ARPU? You gave guidance sort of for the rest of the year. How should we look at that sort of '05, '06, '07?

Well, basically what will happen, for the remainder of this year we're going to try to hold ARPU relatively flat. But as the result of additional programs that we'll be putting in place and initiating this year, including the launch of Opie & Anthony as a premium service, you will see ARPU over time continue to rise.

And on the Opie & Anthony, have you disclosed how much you're paying them and what their daily number of listeners are?

No, we have not disclosed any of those numbers.

Alright, last question and I'll let somebody else go. Are you fully funded and do you still sort of adhere to your free cash flow positive in 1H '05?

We continue to work hard every day, Bob, to reach our mid- '05 goal of cash self-sustainability. And as you know as we get throughout the remainder of the year we'll give better guidance of what that will be, but we have not changed our mark.

Okay. And you are fully funded?

And it’s from a fully-funded basis, yes indeed.

Thanks a lot, guys, great quarter.

Your next question comes from April Horace with Janco Partners.

Good morning everybody, great quarter. Glad to see that all the numbers are just hitting on all cylinders. I had a quick question on Opie & Anthony. What percentage of your subscriber base today is in that 18 to 35 age range? And do you have any anticipated take rates when it comes to Opie & Anthony?

No, we're not prepared to articulate any of those rates right now. I mean, we're just very excited that we have, you know, these proven radio personalities that obviously were number one in a number of those markets that I mentioned earlier and what's sort of interesting, even if you look at the talk radio internet results on how many hits go to a variety of different sites for these talk talents, is that Opie & Anthony, hasn't been on in two years, still ranks I think in the top 10 of activity on their sites. So we're pretty excited about it and, um -- and we'll obviously give, you know, more clarity to -- to the whole -- the whole premium, you know, product as we -- as we develop it.

Okay. And then you mentioned that, um, now that you have the factory activation, that it delivered 50% more subs. Could you walk me through the math on that?

Yeah. I mean, basically a way to look at it, April, is when you think about the conversion rate that we have and the number of vehicles actually delivered to us, you know, as you've seen in our prior presentations, we continue to get better and better dealer order rates. And as a result of that, you basically had, you know, somewhere in the 80,000 range of net adds in the prior quarter versus somewhere in around the 130,000 range in this quarter.

Oh, okay. And then, um, with respect to the paying off GM and the 20 million in cash, how many shares did that eliminate with respect to dilution?

1 million.

1 million shares?

Yeah.

And then last question. Um, as it relates to GM, GM said that they were going to produce 1.1 million vehicles for model year '05. Is that 1.1 million guaranteed regardless of whether they sell 5 million or 4.6 million?

Hi, April. It's not guaranteed, but I can tell you that they have -- each year thus far they have exceeded their production estimates because the dealers keep ordering stronger than their plan anticipates. So --

Actually, in fact, July was GM's largest sales month of the year. And as you know because of the inventories that have -- the large inventories that have existed on the dealer lots, the car companies, you know, GM specifically, are putting out some very aggressive sales offers of 0% financing and discounts, so we anticipate that GM will continue to perform above expectations in this area.

Yeah. Because I was kind of getting a take rate more in the range of 28, 30% as opposed to the 25%. So that's great news. Thanks, that's all I got.

Thank you, great.

Your next question comes from Barton Crocket with J.P. Morgan.

Hi. I wanted to ask you one question about one of the numbers and then a broader one about product plans. First, in terms of one of the expense lines, revenue share and royalties, it seemed to be down a lot as a percentage of revenues to about 20%, a little less than that in the second quarter, from 36% in the first quarter. I was just wondering, what's behind that and how sustainable that is? And then the second question is, I was just wondering if you could update us on the integrated wearables you guys talked about, you know, an MP3 satellite radio device potentially out this year or early next year or at some point next year. And I was just wondering if you could update us on where those stand, is there any chance of something in the holiday season and what you think the prospects are for this going forward? Thanks.

In regards to your first question, as you recall on the first-quarter phone call, I did talk about the fact that we would see this planned increase in our gross margin and that it would be sustainable, uh, on a going-forward basis. And -- so that is the case.

On -- on the wearable product, I think we have always said that we -- we think a wearable product would be terrific for our industry and as has been our practice, that when we are ready to announce and introduce a product, we will do so. And we're not prepared to do that at this time.

Okay. I mean, even just general guidance, is this something that's likely over the next year?

I'd like to state we've basically been doing this for a couple years and we have a history of announcing products, for example, at the consumer electronics show, but we only announce the products that are actually available at that time and then the several months later for example, we announced the SkyFi. But we are obviously very focused on a wearable device and we think it would be terrific to the industry, but at this point we're not prepared to lay out any -- any arrival dates or specifics on it, but we will when we're ready.

Okay. Great and then, I guess, one last question here. In terms of the ARPU guidance, you know the idea that that should be going up over the longer term. Is the only driver of that--or is the principal driver of that the premium services, or do you also get a little bit in terms of maybe your ability to roll back some of the multi-year discounts over time?

All -- all of those could contribute to the growth of -- of the ARPU.

Okay. Great. Thanks a lot.

Your next question comes from Steve Mather with Sanders Morris Harris.

Thank you. Hugh, by any standard, sub growth would be defined as strong or even better than expected, and of course you're raising guidance. You do have an ability to adjust the growth rate based on marketing. I'm just wondering if you can share anything on how you guys determine the sweet spot, you know, whether you want to really super charge it now or, you know, throttle it back? It's been, you know -- I think an interesting debate for the last year. How do you determine that sweet spot?

Well, I think it's determined by a number of things. I mean, first of all, there's an overall goal of the company to reach cash flow breakeven. We tend to balance our desire to grow the sub base very strong with the desire to hit cash flow breakeven and, obviously, those two things are connected in a large way. So what we will do is we will continue to evaluate various, you know, marketing opportunities that we have and, um -- and adjust that perspective if needed. But right now, we are pretty happy with the growth pattern that we have been on and that we have executed on and we will try to achieve both those goals that I just articulated, which is the desire to continue growing the subscribers rapidly but also managing our -- our goal to hit cash flow break even in 2005.

That's great. Yeah, your numbers were in line to slightly better, really no--I don't have any other questions on anything. Thanks.

Thanks, Steve.

Your next question comes from Alissa Goldwasser with William Blair & Company.

Hi. Thank you. I was wondering if you could give us an update on the timing of the XM 3 launch?

Um, well, as we -- I think as we articulated in the 8-K, is that our -- our plan is to have XM 3 launched in the latter part of 2004 or the early part of 2005.

Okay. And talk a little bit about GM factory installs in 2000 --for the 2005 model year. Do you have an update from Honda about how many factory installs they plan to do?

Yes, we do. They had -- in fact I think we previously announced, that they are doubling their number of factory installs from 200,000 in the '04 model year up to over 400,000 in the '05 year. So that's great support from the Honda Acura group.

Great. And then lastly, just wondering whether you have programming lined up to rollout the Opie & Anthony premium channel.

I'm sorry, could you repeat that question?

Sure. The premium channel that will be anchored by Opie & Anthony, have you started to secure other programming for that channel?

Um, no. Basically what we're really marketing is the Opie & Anthony show, which we are going to -- it'll be a four-hour show that we are going to repeat in several segments so that we hit both the drive time in the morning and also in the afternoon. And then repeat it in the evening, which is something that can't be done on terrestrial radio. And then we will explore other opportunities in that area as -- as they present themselves.

Great. Thank you very much.

Thanks.

Our next question comes from Sean Butson with Legg Mason.

Thanks, good morning everybody. A couple of questions. I suppose the first one is, I was -- you know, the overall numbers were great but I was too particularly impressed with the SAC dropping ten bucks sequentially. I mean, what's the -- what's the minimum here? How low can that number go and how fast do you get to some sort of steady state where it either stays there or it runs higher. And then secondly, um, with the guidance, is it fair, you know, just kind of crunching some numbers here while we're talking, you know, if I plug flat ARPU into my model for the rest of the year, it looks like the 220 revenue guidance might be a little on the conservative side, is that fair? Thanks.

Well, Steve, why don't you answer the SAC question first.

Sure. Yeah. On the -- on the SAC front, you're right. We're going to continue to, you know, pull the levers that help us bring that down gradually. But -- but it gets back to the question of balance that was asked earlier, and we're going to -- you know, that's one of the things that we're going to balance based on some of our growth objectives and hitting cash flow break even, but our trend over the -- over the near term the next six months is to continue to, you know, bring that down gradually quarter-to-quarter.

Okay. Is there a minimum level that you just can't go below?

Yeah. I'd rather not comment on that. I mean --

Yeah. I mean I think, look, we will continue to do as we said, one is for the remainder of the year, try to manage our CPGA because, remember, you know, 55 to 60% of our subscriber growth is coming in the last half of the year. And then on the technology front, uh, you know, our innovation center down in Florida continues to work to take care of chipsets, antenna design, etc., to help take costs out of the model. So it's a balancing of all those components that help us continue to reduce that cost.

And our performance allows us some flexibility in the marketing area so that we can respond to competitive issues and -- and, um -- and continue to be effective in adding subscribers. And on the revenue question --

On the revenue question, you got to remember that because a -- a good portion of our subscriber base comes on in sort of the last month, and as a result of giving one month free in the OEM promotional periods and the timing of when those subscribers come on in the last month, it does have a little --

Delayed effect.

Delayed effect on it as far as the impact on revenue.

Okay. Thanks.

Your next question comes from Jessie Wlodarczak with Wachovia.

Uh, Jessie? How are you guys doing?

Great.

A question about churn. I mean, obviously it's great, sequentially down from 1.3 to 1.1. Also in your, um -- including promotional plans it was also down sequentially. Can you talk about what drove that? Was that retention marketing? You know, sort of what was going on there?

If you recall, back in the fourth quarter, our churn rate was up and we said that we needed to, uh, you know, put on the right amount of CSR reps and stuff to work our non-pays, et cetera; and as you saw in the first quarter, we brought the churn down and as we continue to refine our processes we continue to try and control and manage that number.

I mean, do you think you can get much below that? That's a pretty extraordinarily low churn.

That's a pretty good number, I mean, we're not complaining.

Yeah, exactly. And then you've also got this effect from the -- the GM channel where you're getting 50% take rates. Doesn't that also push churn higher? And did that affect this quarter, or is that more going to be in the coming quarters?

No. Actually, what you should see is our conversion rate, which is I think what you're referring to --

Yeah, exactly.

-- will continue to increase as we refine our marketing programs. I mean, you know, we went out with this fully automated activation program really to deliver more vehicles.

Okay. And then one other question about ARPU. When do you expect that to sort of turn higher?

I think you won't see ARPU turn higher until the beginning of '05.

Okay. Thank you.

Your next question comes from Johnathan Jacoby with Banc of America Securities.

Morning. Nice quarter. Just two questions here. When you look towards the back half of the year, obviously we've seen that your competitor's going to try to heavily promote its NFL package. Are you guys going to do anything special? Obviously you can't give us all the details, but something on sort of how you're going to try to sort of maintain growth, you know, with -- with heated competition? And on the Opie & Anthony, not to beat this thing to death, but can you explain the premium decision, was it FCC-based or is it sort of just the fee incentive to the entertainment?

Well, there's two questions there. I mean, the first one is, you know, doing anything special in the fourth quarter. I mean, we -- you know, we're clearly going to be responsive to what happens in the marketplace, but we -- we believe that our -- our compelling hardware products, which we believe are superior, combined with our, you know, 9.99 rate and then with this content that we have been providing and been adding over time; we believe we have a very attractive product in the marketplace. Clearly, you know, Sirius has some -- has their own package and will attract, you know, customers to it and as long as XM is growing effectively and there's lots of people that love satellite radio and we both can grow, that's fine. But I think we're just very comfortable with our product mix but we will respond to the marketplace.

With regards to the -- to the premium channel, um, it's simply that I think that our infrastructure provides the perfect platform for edgy, you know, radio talk personalities and I think that, like HBO, which I liken us to in many ways, we can also provide a certain amount of freedom to these artists and then also protect people from, you know, what is the spillover effect of controversial speech so that the people that want to hear it can hear it and the people that don't want to hear it won't hear it. But I think these guys are proven talent that have generated enormous listenership in the markets they've been in and now I think they have an even more exciting platform to do what they've been doing for a number of years.

Thank you.

Thanks, John.

Your final question comes from Tom Watts with SG Cowen.

Hi, guys. Very nice quarter. Can you just comment on the 57% conversion rate after the factory automation program. Some of the specific programs that you're going through to -- to raise that? And what sort of progress you'll be looking at in that number in the next couple quarters.

Yeah, I'll comment on that, Tom. We do have a number of initiatives where we market to the -- to the trial customers towards the end of the 90-day trial period and we've seen quite a bit of success with both direct-mail and telemarketing-type programs and we're coordinating with both GM and Honda to -- to also market through some of their vehicles, for example, OnStar communicates with a lot of their customers on a monthly basis. So we're working programs there as well. And we -- we have seen some near-term success month-over-month and we expect that to continue over the next several months.

Okay. And then just secondly, I know that you -- achieved most of your automotive success through GM and Honda and the factory install programs. Particularly with Toyota coming on on a dealer-installed basis, how are the dealer-install programs doing and are we seeing -- do you expect Toyota to have much of a contribution there?

I would think that generally the company’s, you know, focus or basic belief system has always been that the factory-installed programs where the cars that are factory equipped are being pushed down from the corporate marketing groups or sales groups is the most effective, with the dealer-installed options being clearly less effective. But, uh, what's important is that all these companies are getting experience in the category. We're very pleased that, for example, Toyota has signed up to do these dealer-installed programs but we believe that the productivity out of them is -- is much less compared to what we think is the real driver of the business, which is the OEM factory-installed program.

And is there any prospect for Toyota going to a factory-installed basis?

Well, Toyota's still in the process of evaluating their strategy with regard to satellite radio. I think that all the car companies eventually are moving towards a factory-installed program. I just think they're doing it on different time frames and based on what their strategic initiatives and timing is.

Good. Well, thanks very much and a great quarter.

Thanks.

Okay. Operator, thank you very much.

Thank you, ladies and gentlemen for participating in today's teleconference. You may now all disconnect.