Sirius XM Holdings Inc (SIRI) 2004 Q3 法說會逐字稿

Good morning, my name is Beth and I will be your conference facilitator. At this time, I would like to welcome everyone to the XM Radio third quarter 2004 conference call. All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone key pad. If you would like to withdraw your question, press star then the number two on your telephone key pad. Thank you. Mr. Titlebaum, you may begin the conference.

Hello, everyone. 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 demands of 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 15, 2004. Copies of this filing of 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 Gary Parsons, Chairman; Joe Euteneuer, Chief Financial Officer; Steve Cook, Executive Vice President of Sales and Marketing; and Joe.

I think this is our eighth holiday season we're entering as a management team, four of which have been as an operating company. We think it's going to be one of the best so far.

This morning, I will begin by reviewing XM's business and operating results for the third quarter 2004. I will then comment on some of XM's recent accomplishments, including our major programming enhancements and content acquisitions and the introduction of several new XM Radio products, all positioning the company for an outstanding year-end performance.

Joe Euteneuer will discuss the company's financial performance during the quarter and finally, we'll take your questions.

As of September 30, 2004, XM reported 2,516,023 ending subscribers compared to the third quarter 2003 ending subscribers number of 929,648. During the quarter, XM added 415,671 subscribers, a 75% increase over the 237,395 subscribers added in the third quarter of 2003.

At the end of the third quarter, XM maintained a market share of approximately 80% of all satellite radio subscribers.

There are good reasons for XM's leadership position in this terrific new industry. We have the most compelling content across the board in music, information, and particularly with the recent addition of major league baseball in sports.

We are the industry's technology leader, from the original Plug & Play to the sleek Roady 2 to the ground-breaking MyFi, we stand virtually alone in the OEM market with our thriving partnership with GM and Honda. And at retail, where our competitor has placed most of its emphasis, two out of three new subscribers chose XM during the quarter. With XM experience, even higher market share in outlets where we compete directly.

This retail market leadership is attributable to our excellent distribution channels, at Best Buy, Circuit City, WalMart, our numerous regionals and independents who are all offering new products from Delphi, Audiovox, Polk Audio, Cambridge; partners that will feed our hardware needs in the Plug & Play boom box and stereo component categories.

So, with all these marketplace drivers in full gear, XM anticipates a strong fourth quarter and remains on pace to exceed 3.1 million subscribers by year end.

Now let's turn to XM's financial performance for the quarter. XM recorded revenue of $65 million for the third quarter, an increase of over 140% compared to the third quarter of 2003. With 2.5 million subscribers and 65 million in revenue at quarter end, our annualized revenue run rate exceeds a quarter of a billion dollars. XM's fully loaded cost of capturing a new subscriber, or CPGA, decreased to $89 per subscriber for the third quarter, down nearly 30% from the third quarter of 2003 and subscriber acquisition costs or SAC, a component of CPGA, were $57 per subscriber for the quarter or -- which are four times more efficient than our competitors.

XM subscribers remain loyal and dedicated during the quarter resulting in an industry-low turn rate of 1.2%. XM continues to be recognized by consumers as the best value and the best and most recognized satellite radio service. Joe will provide additional details on our financial results later.

XM continues to deliver satellite radio's premier programming to our subscribers, building an outstanding channel lineup that features innovative and unique content created in-house, leading personalities such as Bob Edwards and Opie & Anthony, popular consumer brands like Starbuck's and NASCAR, the best in college sports, and of course major league baseball in 2005. XM now offers the most commercial-free music and live sporting events in satellite radio.

XM is about creating original programming that provides unique insights into the great artists and songs of our times. It is about allowing musicians to connect directly with listeners and finally, it is about demonstrating a continued commitment to offer the best programming available anywhere in radio.

Beginning in September, XM debuted a slate of exclusive innovative music series for the fall, 2004. This is content that cannot be heard anywhere else and clearly establishes XM as the place to experience original music programming.

The lineup includes Artist Confidential, an original series offering one-hour live performances and candid one-on-one interviews with today's most popular artists, featuring the likes of Bonnie Raitt, Don Henley, Rush, and Phil Colins, who recorded these sessions all here at XM Satellite Radio before a live audience.

Then...Again...Live, another series where celebrated artists recreate their most acclaimed albums from today's vantage point with the benefits of 21st century technology. Alice Cooper, Cheap Trick, and Lynard Skynard have highlighted this series to date. These were all recorded here, as well.

From BeBop to Hip-Hop, with Quincy Jones, a seven-part mini-series in which Quincy walks listeners through the time line of contemporary music from his unique perspective and in his own words. And other original programming, including series from hip-hop legend Snoop Dog and Rock 'n' Roll hall-of-famer Tom Petty, among others.

In addition to our original programming, XM has been very busy over the last seven weeks launching new channels and shows. On October 4, we launched two very different shows. The Bob Edwards Show premiered on XM Public Radio 133, offering listeners a daily one-hour morning program featuring conversations with newsmakers, journalists, entertainers and other notable people. Edwards has interview over 75 people already, including Walter Cronkite, author Joyce Carol Oates, Pulitzer Prize-winning historian Arthur Schlessinger, folk music greats, Peter, Paul, and Mary, and former President, Jimmy Carter. This weekend, Bob Edwards will be inducted to the Radio Hall of Fame as well.

From a very different perspective, Opie and Anthony, formerly hosts of the number-one afternoon radio show among male listeners between the ages of 18 to 34 in New York, Philly, Boston, Dallas and other cities, launched their live morning talk programming exclusively on XM's High Voltage Channel 202.

Also in October, the Starbuck's Hear Music Channel 75 premiered, a mix of the best of new and old music from a wide range of musical genres representing the Starbuck's lifestyle. As you know, Starbuck's has one of the top-ten selling albums in Genius Loves Company with the departed Ray Charles.

And beginning in the first quarter 2005, Starbuck's customers will be able to enjoy this programming when it is rolled out in more than 4,100 Starbuck's locations nationwide, which will raise awareness for XM Satellite Radio and this channel.

On the sports programming front, during the quarter XM added Big-10 College Football and Basketball to its already outstanding lineup, featuring the ACC and PAC 10. When it comes to college sports, XM offers the most teams and the leading conferences on satellite radio.

Finally, in October, during the dramatic postseason baseball playoffs, XM and major league baseball announced an 11-year agreement enabling XM to broadcast games of every major league team nationwide beginning with the 2005 regular season. XM is proud to join the most recognized sports frame in the country by becoming the official satellite radio network of major league baseball. Many of you may have seen our ads behind home plate during the Red Sox/Yankee game and later, during the World Series games.

MLB is the crown jewel of sports programming for satellite radio and the deal we've been waiting for. Baseball is America's national pastime, with the broadest appeal of any major sport. During the 2004 regular season, over 73 million people attended a major league baseball game, an all-time record and the largest attendance of any major sport. Major league baseball provides over 2400 games, ten times more than the NFL, spanning eight months of the year and offering baseball fans entertainment every day of the week, morning to night, depending on the originating time zone. And MLB is the most natural sport for radio by far.

In addition to broadcasting live games, XM will create a major league baseball radio channel featuring original content and classic major league baseball games broadcast. XM will also broadcast select games in Spanish.

When we polled our subscribers, they responded in large numbers that baseball was the sport they wanted to hear above all others on satellite radio and come 2005, XM Radio will be there live beginning with spring training. Baseball will now join NASCAR and college sports in our sports lineup.

The breakthroughs have not been limited to programming, as we continue to extend our technology lead in satellite radio hardware. XM recently launched the Roady 2 and the Sky-Fi 2 next-generation plug-and-play radios. The XM Delphi Roady 2 has a built-in wireless FM adaptor for easy connection to any car or home radio, a sleek new body design, seven different back light color selections and the ability to display up to 20 customized stock quotes.

The Delphi XM Sky-Fi 2 takes Sky-Fi, the top-selling satellite radio receiver and makes it even better by adding several exciting new features, including the first-ever pause and replay function for satellite radio. Utilizing leading-edge technology, the 30-minute replay function continuously and automatically saves the last 30 minutes of programming from multiple XM channels.

In addition, listeners can pause the program they are listening to, with the option to play back the programming within 30 minutes. The unit also features a built-in wireless FM adapter, allowing for easy installation like the Roady 2, provides personalized stock, ticker, and sports scores as well as tune select by song and artist.

Just last week, XM and Delphi announced a major milestone in consumer electronics; The Delphi XM MyFi, the first personal, portable XM to-go satellite radio that works in home, car, and now, on the go. The hand-held MyFi gives users the personal freedom to enjoy XM two ways: a live listening mode or a time-shifting memory mode.

The MyFi's live mode enables users to listen to all of XM's 68 commercial-free music channels plus our premiere news, sports, talk, traffic, and weather channels. MyFi's memory mode, called MyXM, allows users to store a minimum of five hours of XM's outstanding content with the press of a button, even when the unit is not in use.

The MyFi comes with all of the accessories needed to enjoy XM at home, at work, in a vehicle or on the go and will be available at major U.S. retailers such as Best Buy, Circuit City, Crutchfield and online sites in early December.

And to support the launch of MyFi, superstar Elton John will be featured in a national TV advertising campaign.

MyFi continues and extends the leadership of XM in technology development, from the SkyFi plug-and-play, giving listeners access to XM at home, in the car, and on the road with a boom-box, through the low-cost sleek Roady, to now the ultimate hand-held MyFi, which you can take and play anywhere you go.

And to support purchasers of XM Radios for the holiday season, XM is implementing an XM gift card program, whereby consumers can purchase the cards in denominations of 30, 50, 80 or $140 for use toward the XM Satellite Radio subscription service. XM gift cards will be available at select retail locations as well as online at xmradio.com. Now when you give someone an XM Radio, you can also give them the subscription they need to enjoy the XM's critically acclaimed programming right out of the box.

XM stands virtually alone in the new car market, and our OEM distribution continues to expand rapidly. For the 2005 model year, XM is being offered on over 110 vehicle models with more than 80 of those being factory installed in General Motors, Honda, Audi, and Volkswagen vehicles.

In addition, all 2005 RLs will feature a one-year subscription XM Radio and XM NavTraffic, the nation's first satellite radio traffic information service, combining traditional BPS navigation systems with XM's current traffic information.

New 2005 model year vehicles available with XM Radio as a factory installed feature now include the Acura TSX and MDX, the Honda Odyssey, Element, and Accord Hybrid, the Saab 97 X, Volkswagen Passat, and the Audi A8 and TT.

A number of vehicles that were available in the past with XM as a dealer installed option are now transforming into an XM factory installed option for the 2005 model year, such as the Volkswagens and the Audis. This is an emerging trend that we find very encouraging and it reflects the strong and expanding relationships we have with automobile manufacturers.

In early October, XM also launched XM Online, our premium Internet radio service supported by Dell and Microsoft. Subscribers to XM Online will have access to all of XM's 100% commercial-free music channels as well as the Bob Edwards show, Opie and Anthony, and our exclusive comedy and kids' programming.

The bottom line is this: XM, the market leader in satellite radio has put in place the programming, hardware products, and distribution channels to drive a very successful holiday season. We are looking forward to an outstanding finish to a great year for XM, our shareholders, and the overall satellite radio industry.

I will now turn the call over to Joe Euteneuer for a detailed discussion of XM's operational performance during the third quarter.

Thanks, Hugh.

The third quarter was highlighted by continued strong execution of our business plan and positive financial performance. This morning, I will focus my remarks on our subscriber growth and makeup, our progress in increasing recurring revenue, and improving the contribution margin after variable expenses as we approach the 3 million subscriber mark, our continued management of fixed expenses and our continued reduction in the cost to acquire each new subscriber.

I'd like to begin my commenting on the makeup of XM subscribers and refer you to the financial attachment to our third quarter 2004 press release.

As Hugh mentioned earlier, we believe the company is well positioned for the fourth quarter holiday selling season and on track for its targeted year-end of 3.1 million subscribers. Over 83% of XM's 2.5 million subscribers at quarter end were self-paying subscribers or those subscribers not on a prepaid promotion. As we indicated at the beginning of the year, we expected this group of after-market OEM and other subscribers to account for 85% or more of our total subscribers by the end of 2004.

Our second category, OEM prepaid promotional subscribers, totaled 399,000 for the third quarter.

Lastly, the balance of our total subscriber base reflects approximately 24,000 Avis rental cars. We continue to be pleased that during the quarter 60% of new car buyers participating in the expanded OEM promotional factory installed radio program elected to become self-paying subscribers. This conversion rate represents an increase of 3 percentage points over our comparable experience last quarter.

Our churn rate on self-paying, after-market, OEM, and other subscribers for the quarter was 1.2% per month as compared to 1.1% per month for the second quarter 2004.

Now let's move to revenue. Total revenue in the third quarter more than doubled, to 65 million as compared to 27 million in the third quarter 2003. This increase in revenue is obviously due to the continued strong growth in our subscriber base.

XM's total recurring subscription RPU for all subscribers, which excludes activation fees, was $8.64 for the third quarter 2004 as compared to $8.84 in the third quarter of 2003 and $8.63 in the second quarter 2004.

The recurring subscription RPU on our 2.1 million self-paying subs was $9.24 per subscriber as of September 30, 2004, compared to $9.51 in the third quarter 2003 and $9.26 in the second quarter 2004.

The year-over-year and quarter-over-quarter differences in RPU are attributable primarily to the success of our discounted multi-year prepayment subscriptions and family plan as well as the impact of service promotions. Multiyear prepayment plan subscriptions contribute significantly to our cash flow and represent an impressive 14% of our total subscriber base at the end of the third quarter, a slight increase from the second quarter of 2004.

The family plan program continues to be very successful, growing to 10% of our ending subscribers, approximately a 1 percentage point increase from second quarter 2004.

We expect total recurring subscription RPU for all subscribers in the fourth quarter to remain consistent as compared to the third quarter, as we manage carefully our multiyear prepayment and family plan programs.

Overall, XM subscribers continue to prepay their subscriptions on average 6.8 months, an increase over the 5.2 months reported in the third quarter of 2003 and the 6.6 months reported last quarter. These prepayments are reflected in deferred revenue, which increased to $111 million at the end of the third quarter 2004 as compared to $33 million at the end of the third quarter 2003.

Variable expenses, which include the cost of equipment sales, revenue sharing royalties, customer care and billing, and ad sales increased to 25 million in the third quarter of 2004 as compared to 19 million for the third quarter of 2003. This increase directly results from the growth in revenue and subscribers. The contribution margin of our subscriber business, which includes subscription revenue minus revenue share and royalties and customer service costs, improved to 65% of revenue in the third quarter of 2004, an increase from the 38% margin in the third quarter 2003 and from the 60% margin in the second quarter of 2004. This improvement in margin is the result of our growth in revenue, better than anticipated bad debt expense, and one-time adjustments received for customer service and other charges.

Fourth quarter margin will be in line with guidance given at the beginning of the year of approximately 60% as we accommodate the holiday selling season.

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 $41 million for the third quarter of 2004 as compared to 32 million for the third quarter of 2003, which excludes a one-time credit associated with the cancellation of a warrant valued at $8 million.

While we continue to manage the growth of our ongoing fixed expenses, we have planned for specific increases during the fourth quarter 2004 and into 2005, largely driven by new programming initiatives including MLB as well as expanded research and development activities.

I will now comment on our continued improvement in reducing the costs to gain each new subscriber, which is measured by subscriber acquisition costs, or SACs, and costs per gross addition, or CPGA.

SAC is a subset of CPGA and reflects manufactured subsidy costs, distribution expenses, promotions, and the negative margin on direct equipment sales. XM SAC for the third quarter 2004 was $57 per gross addition as compared to $76 per gross addition for the third quarter of 2003, a 25% reduction in SAC year to year.

SAC is consistent with the second quarter 2004. We plan for SAC to increase somewhat in the fourth quarter, reflecting holiday sales promotions and other activities.

CPGA is a 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 third quarter 2004 averaged $89 per gross addition as compared to $127 per gross addition in the third quarter of 2003, an improvement of $38 or 30%.

CPGA in the third quarter 2004 was less than $101 per gross addition in the second quarter of 2004.

As discussed previously on prior calls, we planned for our CPGA to increase in the fourth quarter as a result of advertising and promotional support for the upcoming holiday selling season. Nevertheless, our full year 2004 CPGA will end up significantly better than our previous guidance of $110.

At our current rate of CPGA and SAC, we are comfortable with the economic efficiency of our sales distribution channels and our subscriber payback periods.

XM reported an EBITDA loss for the third quarter of 2004 of $63 million as compared to a loss of $64 million for the third quarter of 2003, which included deleveraging charges of 4.4 million.

For the third quarter 2004, XM's total net cash use in operations was approximately $15 million as compared to 45 million in the third quarter 2003 and 26 million of net cash used in operations during the second quarter of 2004.

We expect cash used in operations to increase slightly in the fourth quarter as a result of our initial payments to Major League Baseball. The MLB deal creates an invaluable strategic relationship with exceptional upside to our business plan over the long term. As a result of the near term cash flow requirements of this deal, we do expect cash flow break even to move into 2006.

Moving on to satellite insurance. In July 2004, XM reached agreement with its satellite insurers, covering 80% of the aggregate sum insured at a settlement rate equal to 44.5% of the proportionate amount of the sum insured covered by each of the insurers.

Total recovery of approximately 142 million of these insurers included waved insurance premiums. As of the end of the third quarter, we had collected these settlements and we are in the process of seeking to collect the remaining 20% of the sum insured, utilizing third party dispute resolution procedures under the policy.

At the end of the third quarter 2004, XM had total cash and short-term investments of $448 million and capacity under our revolving credit and equity facilities from GM of 135 million.

Taken together, the total liquidity position of XM as of September 30, 2004 is $583 million. Consistent execution by XM and constant creation and acquisition, technology development, and expanded distribution, allows us to grow the business in a cost effective manner and to capitalize on the growth opportunities in the fourth quarter and beyond.

Before I turn the call back over to Hugh, I want to remind everyone that we will be releasing year end subscriber numbers at CES, as we did last year. Hugh, back to you.

Thanks, Joe. Obviously a number of watershed events have occurred in the satellite radio industry over the last several months and we believe that the signing of Major League Baseball and the launch of ground-breaking products like MyFi and the continued performance, you know, on the economics of our business in regards to SAC and CPGA, we've made the right choices and executed our plan the right way, both to impact short-term growth and obviously long-term success.

So with that, I would like to open it up for your questions.

At this time, I would like to remind everyone, if you would you like to ask a question, press star, then the number one on your telephone key pad. We'll pause for just a moment to compile the Q & A roster. Your first question is from Barton Crocket with J.P. Morgan.

Okay, great. Thank you very much. I wanted to talk a little bit about the outlook for next generation chip set, and a couple of questions related to that.

First, are you still looking for that Gen 4 chipset to be out in January?

And secondly, I was wondering if you could talk about the imbedable opportunity? In other words, do you expect with that chipset to be able to talk about or look for deals where you can put XM into other companies' cell phones and mp-3 players? Give us some sense of the prospects for, you know, potentially some products emerging late next year or early in '06. I realize you don't want to talk about specific product plans but generally, strategically, whether that's an area you're interested in and whether that timeframe, you know, is something that's plausible? Thank you.

Sure. Appreciate the question. Obviously, we will provide the caveat to our answers that we always do on the fact that we tend not to project precise timings or particular product innovations, just as we did not with the Roady 2, Sky-Fi 2 and MyFi that came out. That's just been our habit and I think it's worked well for to us do it that way.

Regards the next generation chipset, though, everything is still on the same plan that we've pointed towards. I think we do, you know, see sampling those chips in the time frame you are looking at. They will then migrate into products during that period but later during the year, and clearly that does provide improvement just as we've seen in the prior generation of improvements that we've made in form factor, capability, imbedability, power drain and other features in that nature.

Okay, great. If I could just switch gears with a separate question here. Could you clarify, in terms of the Major League Baseball expense. Is that going to be recognized just in terms of [inaudible] during the season or will it be, you know, rateably over the term of the deal? Thank you.

Barton, this is Joe. It's going to be ratably over the term of the deal.

Okay, great. Thank you.

Your next question is from Bob Peck with Bear Stearns.

Hey, you guys. Congratulations with getting the costs down. I just had a couple quick questions. One being, could you disclose what your gross ads is? Gross ads are? And then also, Joe, could you talk about how you get to your churn number?

Sure. Two things. One is the total gross ads if you use our total expenses and our CPGA provided, is around 616,000. And then in your second question, is really, when you do your calculation where you take the inverse of our conversion rate and try to calculate a total churn, that number's around two eight, two nine.

Okay. Also, I wanted to ask on funding. As far as replenishing your cash cushion after the Major League Baseball deal, would the company lean more towards debt or equity? Do you think there's any sort of funding opportunity to be had here?

Bob, obviously, on those we look for opportunistic things. We don't have particular schedules or timings that we go off on. Relative to the types of securities that we would look at, as you know, because we've gone over in the past, we've clearly done a good bit of delevering whenever it was opportunistic to do that and were able to do swaps and other sort of elements of that nature. But I think we'll just leave it.

We've had a good history of being respectful of our common shareholders and the interest of the shareholders overall and we expect to continue to do that.

Last question, then I'll let somebody else go. Your OEM conversion rate seemed to go up from last quarter. Can you tell us what's going on there as far as improvements and where that conversion rate may be going over the next couple quarters?

Yeah, hey, Bob. This is Steve. I'll comment on some of the things we're doing. I think one of the things we've seen is that the thing that impacts conversion rate the most is the performance at the dealer level and the extent to which they educate the consumer and make sure they get a full trial experience during the trial period we provide and so that's what we've been doing. A lot of blocking and tackling at the dealer level. That has been working.

In terms of where it might go in the future, you know, I think Joe has said in the past that we think we can continue to improve performance and kick it up incrementally over time but we really haven't given any forecast.

Thanks again. Good quarter.

Thanks, Bob.

Our next question cops from April Horace of Janco Partners.

Good morning, and congratulations on a good quarter and a lot of accomplishments. I was wondering if you could provide any additional color on the demand for the MyFi at the Circuit City and Best Buy and how you see the product mix going forward? Between the the Sky-Fi, the MyFi, and the Roady 2?

Well, I think that, you know, we're basically going to be introducing the MyFi in the early part of December. The real impact of the MyFi is going to be in 2005. I mean, I would just say off hand right now, we have a web site up where people can leave their E-mail addresses, you know, in a section that basically asks them if they're interested to leave some contact information. And we've already got about 15,000 indications of interest that we'll be following up on.

I just think that we now have a MyFi product that's in the 349 MSRP range. We have obviously a very well-positioned Sky-Fi and then a lower-end Roady 2. Each one of them are attacking a certain market segment, so we're pretty happy with the mix of products we have at different price points.

And can you describe what kind of road blocks you're encountering as it relates to adding MP3 functionality?

Well, I don't think we're having any road blocks, to [inaudible]. As Gary mentioned, and has been speculated, I guess, in a variety of different places, you know, in publications or on the Internet, is that, you know, both the XM and various other players were all in the music space, and you know, clearly we're all looking at different ways to improve our products and make them more useful to consumers. As we see those opportunities arise, you know, we'll evaluate them and proceed with the announcements on products or changes in our strategy or partnerships as we have in the past as we've introduced products previously.

Okay. And then lastly, can you talk a little about your Canadian initiatives as it relates to you move forward with GM. You've got two new partners. Is there any way we can gauge what kind of incremental subscribers that might add, or what the break even point would be, with respect to the Canadian opportunity?

Hi, April. This is Gary.

I think the issue there is that is a separate company. We will be a minority share holder in that company. So they have their own business plans. They are responsible for raising the funding that's necessary to carry that forward and build out the repeater network and sell and market the product.

You know, clearly, a lot of our existing partners are anxious to support that entry up there as the Canadian hearings that are going on this week at the CRTC. As a matter of fact, I was up there Monday and Tuesday as well for those hearings. General Motors of Canada, supported us in those hearings. Honda of Canada also supported in those hearings and indicated they were prepared to roll out their product very aggressively if it were in fact licensed.

So it's something that we watch and support and are very, you know, pleased with. But it's something where it is, in fact, a separate company that's responsible for the financial burdens of taking that home.

So when you say minority interest, is that something like in the 49% or more in the 30 or 20%?

It's a carried interest which by Canadian statute is limited to 30%.

Okay. Thanks. That's all I got. Thank you.

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

Good morning. A few questions here. What do you think as you go into '05 will be the right level of promotional support? Will there be any changes in your strategy to sort of increase market share or to increase consumer demand? Also, when you look to retail for the fourth quarter, what do you think the appropriate sort of market share between you and your competitor will be, in terms of just the product that you shelled up for the fourth quarter? Those will be my two questions.

Do you want to answer the promotional spending one or --

go ahead.

Yeah, I mean, looking ahead, Jonathan, the, I mean, certainly the, you know, we're not going to disclose specific promotional spending. We, you know, we do see that ticking up as I think we've said on the call in the fourth quarter. You fish when the fish are biting. It's going to be a huge holiday selling season for us.

Looking ahead into '05, we think we've been very successful at growing the whole category at the spending levels we've been spending. As we said, we think we're comfortable now with the levels of SAC and CPJ we've achieved.

Actually, let me address the SAC and CBC a little bit here, because clearly when we indicated I think at the first of the year that we would have our overall costs down to the 110 range and it's going to come in materially under that and our SAC component of that is in the $57 range, we're comfortable with where that stands currently.

As a matter of fact, as we say, fourth quarter could go up a little bit and then come back down, depending upon what particular promotions we're doing.

The bigger point there, though, really is anywhere in that range, whether it's $57 to $75 to $80 on SAC or whether the CPJ's in the 100, or 110, or 120, it's all kind of in the right range to make an economically attractive model.

It's very difficult to make an economically attractive model at ratios that are materially above that sort of a number. So we tend to focus not so much on precise market share on an ongoing basis as we do to growing at a very rapid rate in a very economically attractive manner, and that's in the best interest of our shareholders.

Which we're able to do because we have fairly equal distribution in getting subscribers, both from the after-market and from the new car market, which has been very good to us over the last couple years.

Thank you.

Thanks, Jonathan.

Our next question comes from Sean Butson with Legg Mason.

Good morning, guys. Nice quarter.

Couple of questions. I suppose the first one is, you know, regarding the content wars with Howard Stern, NFL, and Major League Baseball, kind of all wrapped up here, is there anything else out there on the content side that you can see being a major deal? And then kind of related to that other than content, is there anything else out there, other than, say, maybe Toyota, that you think we might see these half-a-billion-plus dollar deals? Thanks.

Well, nobody likes to see half-a-billion-dollar-plus deals, but -- except when they are really meaningful, I think, like a baseball deal. I think that, you know, when you start off in the business and, you know, we can do a lot of research or, you know, you people as analysts can count on your hand, you know, from your experience in the TV world and some others, like what are the five things that you want to go after that are of significant importance that obviously will have some significant cost implications that are really going to add to a subscription business. I think we kind of run through those investments. Both companies, I believe have. So I don't think you're really going to see really much more of that.

The other thing is that, you know, on the content side what I've seen some people do or even our competitors is going out and using maybe stock or maybe expensive dollars to sign up people, you know, who have certain celebrity brand names, which I think maybe is meant to have a public relations push but really doesn't resonate with listeners. You can look at some of the experience of a John McEnrow on cable television and just see that name recognition and even having a big distribution platform doesn't really transform well into content.

So I think where our focus is, to sort of build content in-house, look at some of these kinds of opportunities but not to get sucked into, you know, paying a lot of money or a lot of stock to basically sign somebody up who is going to commit ten minutes a week to some voice-over track on your system, because eventually this is all be content based. So I don't really see that.

I mean, on the Toyota front, I think you mentioned, is that, you know, we have a good relationship with Toyota. They dealer installed several models for XM. But Toyota is a very large, profitable company. When you are in that position, even if you are interested in satellite radio, you sort of make decisions on your own time frame and, you know, we'll basically participate in any information that they desire to have about satellite radio and XM and we're hopeful that they would, you know, see us as a good choice to have as a partner in satellite radio. But they'll make the decision on their own time line.

Okay, so other than, say, Toyota on the distribution side, is there anybody else out there that we should be thinking about a potential deal down the road or are they pretty much all locked up at this point?

I think they're pretty much locked up. I think that what you start to look at, however, is even with the companies that you have relationships with, where there's some some hope that comes out about you signing up, you know, certain car companies and say that you have all these lines and it's actually the volume or the percentage of the production that really means something in terms of getting subscribers. Clearly GM and Honda have committed significant percentages of their total production to this.

We will continue to see that grow with our partners over time and I think that's why today we have such a significant position in the OEM category.

Okay, thanks.

You're next question is from Alden Mahabir with Vintage Research.

Good morning, gentlemen. I have two questions. First, I was wondering if you could give us some color on what the take rate was for Opie and Anthony thus far.

Second question, I was wondering if you could also give us a preview of the type of promotions you will be having for the service and hardware for the upcoming holiday season? Thanks.

On Opie and Anthony, we haven't traditionally, you know, released what our -- what are called -- what our premium numbers are and it's a new programming, and we will, you know, continue to hold to that. With regards to our, you know, promotions, you know, for the fourth quarter, I mean, we'll obviously tell you what we have out there right now. Steve, do you want to just elaborate on some of that?

Yeah, we, you know, right now, we don't have any specific promotion running, per se. We've got new products coming out hitting the marketplace. We've, you know, we've got, you know, our MSRPs where we want them to be. We made some minor adjustments in the last week or so. And we've got gift cards that are going to be, you know, hitting in the fourth quarter, take advantage of the gift-giving season, so --

Yeah, we're really excited about the gift-card program. It's going to start to roll out in some retailers because I know many of you investment bankers and analysts have enjoyed giving away this gift and then having the recipient actually pay the subscriptions.

Now this is all going to cost you a little bit more money, where they're all going to know that this is a gift card and you're now going to have to buy the hardware and the subscription and give it as a gift, which has been a huge part of our sales effort in the fourth quarter as with other consumer electronics devices is that giving XM as a gift is very big in terms of our sales effort, particularly with an embedded base of, you know, approaching 3 million subscribers by that time frame, who people love the service, they want to give it as a gift.

Your next question is from Niraj Gupta with Salomon Smith Barney.

Thank you, good morning. Couple questions. One, I was hoping that maybe, Hugh, you could give us an update on NavTraffic in terms of pricing and availability hopes for the market. I noticed the other day that Pioneer is introducing the first after-market version of that product.

And then, I just have two quick questions for Joe. One was, do you have handy how much the adjustment was for one-time customer service that benefited you in terms of your contribution margin? And then I have one more thing.

Well, on the XM NavTraffic, which I think there was -- there has been a lot of press in the journal and other places about it, and people are excited about it. The car companies will obviously have a car, the XM NavTraffic which is in the Acura, which we are going to bundle all of the RLs with XM Radio and the XM NavTraffic.

Really, Acura --.

Acura has elected to do that working with us. Then at the SEMA show, which is going on over the last, you know, over the last, you know, yesterday and so on basically, Pioneer announced an after-market NavTraffic service. So, you know, we don't have any specific, you know, targets to hit right now, but we think that it is one of these, you know, businesses that you invest time and effort in, which we've done over the last year, and that it's something that will produce, I think, you know, subscribers and revenues as it matures and as these devices end up getting into more and more cars on an OEM distribution platform and also at the after-market.

So we base -- it's one of those things you invest a lot of time and resources in now, which I think is going to become meaningful in the out-years.

The answer to your other question is it's fairly insignificant. It's just a couple million. So, it's pretty --

And Joe, you said R&D would be up next year. Can you put some parameters on how much it might be up?

Haven't given any guidance out yet for 2005. As always, we'll do that at the CES show.

Thank you, guys.

Your next question comes from Alissa Goldwasser with William Blair.

Thank you. Revenue share and royalty [inaudible] as a percent of revenue declined under 17% in the third quarter. Was there anything unusual on that? Should we expect to continue to see a downward trend in that ratio?

That was part of what we were talking about in customer service and in revenue share, we had sort of one-time little adjustments that happened here in the quarter that gave us the better overall margin. That's why we've given the guidance going into the fourth quarter that we'll still be close to our guidance of the 60% range.

I'm sorry, the revenue share to royalty?

Yeah. It was just like the customer service that there was, you know, some adjustments here in the third quarter that we were able to take, but on an ongoing basis, we'll still be operating around the 60% gross margin level overall.

Got it. Okay. That was a couple million you said for the last question?

Yes.

Also curious, last year at this time, I think you had about 700,000 nonOEM subscribers, some of whom I assume were on a one-year plan. What has your experience been with renewal rates for people who prepaid one year?

Actually, we have almost no one-year terms with the automakers on an OEM basis. Almost all of ours are right now the three months. I think we have some one-years that will be coming up as we indicated with the Acura RL and a few others. The vast preponderance is the three months.

If you are referring to the KLX Summer Jam program, that's already been in our conversion numbers and reflected.

No, I'm sorry, I realize that. It's the non-OEM subscriptions from last year. So one-year subscriptions you entered into at this point last year. What has been your experience on renewals?

Actually, we don't disclose that, but what we do find is obviously the people who sign up for multiyear tend to be our highest and best subscribers and they tend to have, you know, the lowest churn rate that is out there. The other thing I will note though of importance, while these are parties who may do multiyear type subscriptions, it's not like in the cellular business or something where you sign someone up to a contract for a multiyear situation where it's a big huge decision at the end of that time frame, are they going to re-op? If somebody left midway in that term, they get, you know, their money back for the remaining term on it.

So it isn't the same sort of a situation where you have a major, major decision because you are under a big, long contract.

Yeah, we tend to see that they just roll right over into the next term.

Yeah, remember, we do not have currently a one-year prepayment. I mean, someone can pay us for one year, but they are paying for full rate. There's no discount associated.

Lastly, just curious what your experience has been with the online product to date?

We've -- we've had a pretty good experience with it. It's a terrific marketing opportunity for us.

We've had some combination of people who are subscribing who are existing subs and new subscribers and consistent with our policy by some of our premium numbers, we're not going to release any of the details of it, but whatever we do do, it will have some contribution to RPU because it's a service that people pay for at different levels depending on whether you are a subscriber or not a subscriber.

Thank you.

Your next question comes from Kit Spring with Stifel Nicolaus.

Good morning. First, can you give out what the GM churn was? And then secondly, when do you think it makes sense to raise prices, given the incredibly high customer satisfaction levels and the fact that your main competitor is three bucks higher?

And then finally, what do you think about the portable subscription music model such as the new Napster-To-Go? Do you see this as a material competitor, the potential for material competition? Is that a business you need to be in -- just want on your comments on that. Thanks.

I think I'll do three of those. One is that the, you know, the GM churn is part of our overall churn of the company, which is 1.2%. The -- what was the other question?

Are we go going to raise.

Oh, the raising prices. We're happy with our price point right now, and you know, we clearly evaluate that every single year. We're happy with it right now.

And then the third thing, on these portable music models. What I've always sort of described, when I've been asked about this question is, you know, there's people who will enjoy and like to spend a lot of time, you know, searching for music, figuring out what it is, downloading it into the various files, taking it with them and spending a lot of time on it.

I look at our service as more of a cable television or satellite television-like service where there's people who have limited time and a lot of tradition in entertainment products as they want to, let's say, drink from the fountain of entertainment and not have to spend a lot of time going out and searching for it and owning it. I think ours is a very mass market product.

I believe some of these services will continue to attract people who enjoy spending all that time, but, you know, in the world that I live in, that, you know, people do enjoy having people provide the entertainment. I think that's the kind of trust that we have been developing with our service, where people enjoy going to our various channels and having people introduce them to this new music.

And now with the MyFi and some of the, you know, pause and features that we have on the Sky-Fi, people can now even take it to places they couldn't take it before. So I think that they will have some, they will continue to have interest. I think ours is a mass market product.

I would also say on the retail front, those types of products are what we'll be driving in the future continued significant retail growth. I mean, we talk about obviously the continuing very rapid adoption in the OEM new car marketplace. It's the retail driving very rapidly forward that keeps us at the sort of 50/ 50 split, and in fact this past quarter was almost identically on a 50/50 split between -- very close to it -- between retail and OEM. We see that going on. Probably a little heavier retail in the Christmas season, but overall.

Actually, on the OEM churn, what I was wondering is, what is the percentage of OEMs that are renewing their service once the free subscription runs out and how is that trended?

Yeah, that's our, I think Joe mentioned, our conversion rate at the end of that trial, was 60% in the third quarter.

Okay. Thank you.

Your final question is from Jim Goss with Barrington Research.

Thank you. I had a couple of questions about the subcount metric. It seems to me that with the -- there's sort of a changing meaning of a subscriber with the family plan, the Internet plan, this kind of multiyear prepaid plan. Each of them have different revenue implications.

I'm wondering first, do you think you'll have to get to a point where a sub -- subs are counted in different ways. Multiple groupings.

What do you see as the impact in the subcount mix, RPU and SAC, in terms of gaining subs that have different values.

And then separately, with Major League Baseball, are you getting any more comfortable with the notion of projecting what the impact would be on your subcount growth from that in terms of how many would be taking it specifically for that or that's part of their decision, and what the incremental impact would be? And do you also have any thought on the new break-even points for cash flow and EPS with Major League Baseball, which you indicated earlier would be put off a little bit now?

There's a lot of information there. I'll try to answer with Joe's help.

On baseball, you know, what we describe to people is that if you look at the $120 service, you know, $10 a month and at maturity, a 70% contribution margin, you need about 700,000 subscribers to just generate revenue to offset that cost on an annual basis. We're not comfortable right now or will we actually attribute x number of subscribers to the deal going forward, but at our size and our revenue generating capability is that this is the kind of deal we can absorb. We'll give out that and other information when we tell everybody what our, you know, our forecasting is for 2005.

On the subscriber number, you know, we haven't changed anything at all in how we're reporting. This is the way we've been reporting it forever. I'm not quite sure the question of --

Yeah, right now, all we do, Jim, is we count audio subs and all subs that we do count are revenue generating. So for us to count a sub, it has to be revenue generating, somebody has to be paying us. For now, all we are are counting audio.

So the question is -- I get it now. So the online subscribers are not counted as additional subscribers, nor are NAVTraffic subscribers because we are in the fourth quarter.

So online subs are not counted at all? When you get into that?

We don't have any since we started this service.

Well, they're not counted, we're not lumping those on to our subscriber count. The subscriber count we have is the OEN after-market subs that we have. And we will evaluate, you know, going forward, you know, how we're going to break those out as either, you know, add them on to our subcount or count them as a separate category, you know, based on the RPU they contribute going forward as that business grows.

That's all I mean. It's going to get more complex if you get $4 or $8 or $9 or $7. So it's a little bit different.

You're absolutely right. We may end up having sort of a premium service category, a generic category, we put it in. As you can see on our reporting, [inaudible] we're the first to break out a lot of those RPU costs. We're going to have to figure out something to do with those subs as they mature in terms of their impact on the business.

Thank you very much.

Thanks, Jim.

Mr. Panero, are there any closing remarks?

No, I just want everybody on the call to go out and buy an XM Radio with a gift card program and give it to somebody and they'll enjoy XM just the way that the 2.5 million subscribers enjoy it today. Thank you very much for joining us on the call.

Thank you for participating in today's teleconference. You may now disconnect.