Sirius XM Holdings Inc (SIRI) 2004 Q4 法說會逐字稿

Good morning. My name is Rodney and I will be your conference facilitator today. At this time, I would like to welcome everyone to the XM Satellite Radio fourth quarter and 2004 earnings conference call.

[Operator Instructions].

At this time I would like to turn the call over to Mr. Joe Titlebaum, General Counsel of XM Satellite Radio. Thank you. Mr. Titlebaum you may begin your conference.

Good morning. This is Joe Titlebaum, General Counsel of XM Satellite Radio. Before we begin our prepared remarks, I would like to remind everyone that certain information on this call may contain forward-looking statements.

Due to a number of factors our actual results may differ materially from those projected in such forward-looking statements. Those factors include future demand for the company's service, the company's dependence on technology and third party vendors and the potential need for additional financing as well as other risks described in XM Satellite Radio Holdings Inc. Form 10-K filed with the Securities and Exchange Commission on March 15, 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 thanks for joining us. On the call with me are Gary Parsons, the Chairman of XM; Joe Euteneuer, the Chief Financial Officer; Steve Cook, the EVP of Sales and Marketing, and Joe Titlebaum you just heard from. Today I will begin with a review of 2004 another exceptionally successful year in XM's corporate history including a discussion of XM subscriber growth and financial performance as well as many of our major accomplishments achieved during the year with a focus on our programming acquisitions, the expansion of our OEM distribution channels and introduction of several new XM radio devices. Then I'll spend some time discussing XM's plans for 2005. Joe Euteneuer will then detail the company's financial performance and then we will finish up with Q&A.

Satellite Radio is an extraordinary new industry and XM is one of the few media companies with a strong growth story. Only a year ago people questioned whether 20 million subscribers by 2010 was a realistic forecast and now these same people are asking if 20 million is too conservative.

XM had an outstanding 2004 and is the clear leader in this new industry. A year ago XM led its only satellite radio competitor by one million subscribers. Today that lead has grown to two million subscribers and if both companies achieve their stated subscriber targets by the end of 2005 that lead will increase further to three million subscribers.

In addition throughout 2004 XM maintained significant market share advantage in both retail and OEM distribution channels generating roughly two thirds of all retail net additions and three fourths of all OEM net addition.

XM exceeded its 2004 year end guidance of 3.1 million subscribers by more than 125,000 subs ending the year with 3,229,124 subscribers as compared to the 2003 ending subscriber number of 1,360,228. This represents an increase of 1.8 million subscribers or a 137% year-over year growth. It's interesting to note that when we launched -- from when we launched the service in September of 2001 that it took us about two years to hit our one million subscriber. It then took us eight months to reach two million subscribers and only six months to hit three million subscribers. That's growth.

During the fourth quarter alone XM added 713,101 net subscribers a 66% increase over the 430,580 subscribers added in the fourth quarter of 2003. And on Christmas XM had its single best day of activations with over 50,000 subscribers joining the XM Nation. While the fourth quarter is always strong in retail, this past fourth quarter was particularly robust with approximately 491,000 of our new subscribers coming from the retail channel and approximately 222,000 coming from the new car and car rental channels.

Interestingly our strong retail performance has continued into the first quarter resulting in a larger than normal split in favor of retail. And the increased availability of XM MyFi devices, which we'll talk about later, this quarter, appears to be having a positive impact on this trend. These strong subscriber numbers are reflected in our financial results for the year 2004. XM recorded revenue of $244 million for 2004, an increase of a 166% compared to the nearly 92 million reported in 2003. At the end of 2004 XM's annualized revenue run rate grew to more than $315 million. XM's fully loaded per unit cost of capturing a new subscriber or CPGA was $100 for 2004, an improvement of 27% from the $137 in 2003 and better than our previous guidance of a $110 for the full year 2004. In addition subscriber acquisition costs or SAC, which is a component of CPGA was a modest $62 for 2004, improving 17% from $75 in 2003. XM subscribers remained exceptionally loyal during the year, resulting in an industry low monthly churn rate of 1.2%. XM continues to be very successful, not only in attracting new subscribers but maintaining a high level of listener satisfaction. These low churn and high satisfaction levels are reflective of XM's compelling programming, XM's digital technology and strong network coverage, and customer satisfaction with a look and feel of XM's innovative radios and hardware devices.

During 2004 XM continued to improve liquidity and de-lever its balance sheet. As of December 31, 2004, XM had a total liquidity position of $853 million. And just last month XM added a $100 million in gross proceeds through the exercise of the over allotment option associated with the sale of our 1.75% convertible notes. During the year XM continued to actively reshape its balance sheet successfully eliminating over $900 million in future interest, dividends, accretion and principal payments. In December XM's financial visibility increased when the company was included in a NASAD 100 index, which lists many of the leading technology companies in the world, an indicator of how far XM has come in its five plus years as a public company. Joe will provide a more detailed look at our financial results later.

Ultimately it's XM's outstanding and unmatched content that drives Satellite Radio and has enabled us to accelerate subscriber growth and expand our market leadership. XM offers the most compelling content in Satellite Radio, more than a 130 digital audio channels of sports; talk music, with the deepest and most diverse play list in radio provided across 68 commercial free music channels.

XM has the most live sports programming in Satellite Radio and offers the best comprehensive traffic and weather channels covering 21 metro areas nationwide with each city having its own dedicated channel, waiting for traffic on the 8s or being led through traffic information for a city you're not interested in or inconveniences of the past. It is XM's content that convinced Billboard to name XM as the 2004 best radio service of the year. And why? Because during the year nearly three out of four satellite radio subscribers chose XM over the competition and they love our content.

In October XM signed a long-term deal with major league baseball to broadcast the games of teams beginning this spring and available only on XM. Last season major league baseball experienced a record-breaking year with over 75 million fans attending MLB games. With over 2,400 games spanning an eight-month season, strong team loyalty and lots of displaced fans, major league baseball is the perfect addition to our sports programming lineup. XM looks forward to broadcasting major league baseball on satellite radio. XM's strength and diversified its sports lineup even further during the year by adding college football and basketball from the ACC, the Big Ten and the Pac-10, complimenting our season long NASCAR coverage.

NASCAR was XM's first major sports programming partner and our NASCAR channels continue to appeal strongly to the rapidly growing millions of dedicated NASCAR fans. Also during the year XM premiered a number of exclusive talk and music channels. The Bob Edwards show debuted in September to the joy of long-time NPR listeners who have become XM subscribers. Bob attracted more than 13 million listeners every week as the host of Morning Edition and it can now be heard exclusively on XM Radio-- radio's public radio channel called XMPR.

Also in September XM welcomed back to the airwaves controversial talk radio super stars Opie and Anthony. I should note that all of XM's exclusive talk shows including the Bob Edwards show and O&A as well as our acclaimed music content can be heard over the Internet on XM online, which also launched during 2004. In addition, XM has become the Satellite Radio home for national talk radio personalities like Dr. Laura Schlessinger and G. Gordon Liddy.

Dr. Laura, one of America's most listened to radio personalities, hosts a daily program on Ask Channel 165 offering her unique brand of advice to callers from across the country. And G. Gordon Liddy, the outspoken political commentator, makes his return to radio with a new show on Extreme XM Channel 152. These talk radio stars join XM's stellar lineup of talk talent including Sean Hannity, Al Franken, Michael Reagan, Alan Colmes, and Michael Savage, which span both the left and the right of the political spectrum. In October XM and Starbucks collaborated to launch Starbucks Hear Music Channel.

This channel offers XM listeners music from Starbucks whether at home or on the drive to work. In addition during 2005 millions of Starbucks customers will be able to listen to the Hear Music programming in more than 4,300 Starbucks locations in the US. Other in-store marketing initiatives include take our music 2go marketing brochures that incorporate the XM messaging, which are now making their way to Starbucks locations nationwide. The integration of the XM brand at Hear Music coffee houses and other personalized in-store messaging. There is a demographic harmony between our two great brands.

During the year XM expanded its original music programming with two groundbreaking series. “Artist Confidential,” which offers, live performances and candid one-on-one interviews with today's most popular artists and “Then … Again… Live!” where celebrated artists recreate the most acclaimed albums from today's vantage point using modern technology. Participating artists have included Rush, Bonnie Raitt, the Allman Brothers, Don Henley, Bob Weir, Emmylou Harris and Ani DiFranco. For 2005 XM will host an equally impressive roster of artists who have helped define the musical landscape of the 20th and 21st century and are noted for their creative contributions to Pop, Rock, and Jazz music including Lenny Kravitz, Al Jarreau, Wynton Marsalis, Phil Collins, Randy Neumann and Brian Wilson.

We also welcome two music icons, Snoop Dogg and Tom Petty, to the XM family. A film star and hip-hop celebrity, Snoop Dogg hosts an XM show where he welcomes friends to airways direct from his home in ph) LA. And Rock-n-Roll Hall of Famer Tom Petty, another on-air host, pulls together little known musical delights and classic musical tracks on his show that he puts on for us. What is clear is that artists from every music genre are seeking out XM as a place to showcase their music and reconnect with fans. XM's passion for music, musical breadth and intensity have not been lost on XM subscribers. When we first launched the service over three years ago we spoke often of building a base of fans, not just listeners. We have achieved this objective, delivering the compelling content that music fans expect.

Moving from content to sales and distribution. Both of XM's major distribution channels, the automotive market where XM is factory installed in new cars led by General Motors, Honda, and soon Toyota and the consumer electronics retail after market led by Best Buy, Circuit City and Wal-Mart had outstanding years as well. For the 2005 model year XM is being offered on over a 125 vehicles with more than 80 of those factory installed in General Motors, Honda, Audi, and Volkswagen cars.

In addition, GM announced in January that certain 2005 Cadillac CTS models will feature XM Radio and XM NavTraffic, the nation's first satellite traffic information service combining traditional GPS navigation features with XM's current traffic information. And Honda recently announced that select models of its critically acclaimed Ridgeline Truck will come standard with one year of XM and XM NavTraffic. In addition to all the 2005 Acura RLs that include a one-year subscription to XM's and NavTraffic already.

In December Toyota and XM made major news in satellite radio with Toyota choosing XM and XM alone to provide factory installed radios for its vehicles beginning in 2006. The company's also entered into a long-term partnership to provide data services for Toyota vehicles. Toyota had a record year in 2004 selling 2.1 million new cars and pulling within striking distance of Chrysler as the nation’s third largest automaker. Meanwhile General Motors achieved a major milestone in December by signing up its one millionth XM subscriber.

In addition, GM recently announced it added SAAB to its lineup of vehicles featuring XM, offering car buyers who pre-order its new SAAB SUV, the 97X, three free years of XM radio service. Going forward, GM has plans to produce more than 1.5 million XM equipped vehicles in 2005. And Honda is aggressively ramping its XM offerings, planning to build in excess of 400,000 XM equipped vehicles in model year 2005.

Honda's percentage of vehicles equipped with XM radio will match General Motors in this year. What's interesting to note is in the after market where our product sells itself and consumers see our ads and go buy the hardware at retail stores like Best Buy and Circuit City, the car market is a little bit different and has more predictability. Because we know that when a car is factory installed with XM, that car is going to get sold. It may take 60 days, it may take 90 days, it may take a 120 days based on how the car market is going, but we know it's going to get sold.

So by the end of 2004 XM extended our already commanding advantage in the OEM factory installed distribution channel with GM, Honda, and Toyota representing nearly 50% of the 16 to 17 million new vehicles sold in the U.S. each year. And just last week Nissan North America chose XM to supply satellite delivered data and telematic services such as in-vehicle messaging and XM Nav traffic based on XM's superior technology. Nissan joins Honda, GM And Toyota as data service partners positioning XM as the exclusive or preferred provider for data services to approximately 55% of the OEM market.

I had mentioned earlier that content drives satellite radio but the steering wheel is our technology and our hardware, which is available first in the retail after market. XM's new products have created a number of firsts in satellite radio. The first plug and play radio, the first portable boom box, the first satellite radio to offer pause and reply play and most recently the first portable wearable satellite radio the Delphi MyFi. And XM plans to keep the first coming, steering XM into new markets and growth.

Despite recent claims by our competitor that retail market share has, now "jumped ball", XM during the fourth quarter accounted for 58% of the net total satellite radio subscriber additions in the retail after market. Further preliminary results for January indicate a continuation of XM's strong fourth quarter market share trend at retail. As we have previously noted, the NPD data, which is a sampling of, retail sales often cited by our competitor does not include the nation's largest retailer Wal-Mart, many of our regional and independent retailers, or XM's independent kiosk and direct sales channels.

XM's technology and product advantages in the retail market are not only reflected in the year’s subscriber results and market share, but also in excellent product reviews from leading publications. Fortune magazine cited XM's market leadership and technology. USA Today and Business Week chose MyFi as one of the best tech products for 2004. And Popular Science named SciFi2 and XM Nav Traffic to its best of what's new list for 2004.

During the year XM brought to market the satellite radios that are setting the standard for innovation, functionality, size, and design, including the Roadie 2, the smallest satellite radio available today. The SKYFi2, offering the first pause and replay feature, as well as personalized stock quotes and score stores. The Audiovox XR9, a new plug and play radio and most recently the Delphi XM MyFi. The MyFi, the first portable wearable satellite radio, is a new product category we call XM2go. It took top orders at the 2005 Consumer Electronics Show winning “Best of Innovation” award for the best new portable audio product, one of an unprecedented 13 awards XM won for its satellite radio products.

In addition to the MyFi, two more XM2go products will debut this year. Pioneer Electronics will introduce its Airware XM2go satellite radio this spring and later this year Giant International will launch its ownXM2go product under the all new Tao electronics brand. Each of these XM2go products will have its own unique look and feel. You can listen to XM live or you can store and play back up to five hours of XM content. The memory mode gives you the freedom to listen to XM at the gym, in the subway or anyplace se. You get all of XM's 130 channels broadcasting the ultimate play list of 80,000 hours of fresh programming every month, and the device works in your car, in the home or the home cradle, on your belt, and anywhere in between. An XM2go portable products open advanced new addressable market for satellite radio, targeting individuals on the move who value mobility, flexibility and functionality. More than 275,000 XM2go devices have been manufactured to date. And we expect that number to climb substantially through 2005 as Delphi, Pioneer, and Giant ramp production to meet expected strong demand. Also this year XM is introducing an exciting technology called XM Connect-and-Play.

This tech knowledge is designed to integrate XM into a broad range of home electronics and entertainment products. For a very low cost consumer electronics manufacturers can now add the Connect-and-Play chip to their consumer electronics product, instantly making any device XM ready. The new Connect-and-Play integrated antenna receiver enables any of these XM ready devices to receive XM. The connect-and-play antenna has an MSRP of $49.99 and no other hardware installation is needed. XM has developed alliances with a number of major consumer electronics manufacturers to launch XM ready products with the Connect-and-Play technology in 2005 and 2006.

All the consumer has to do is look for the XM ready logo on the products and simply plug in his Connect-and-Play antenna. XM Connect-and-Play is part of a long-term strategy to open the broad consumer electronics market to XM by integrating XM into a variety of popular home consumer electronics devices. The first XM Connect-and-Play products will be available from ECON at retail in 60 days. This month XM launches the nation's first 24-hour major league baseball radio channel called Home Plate featuring baseball news, call-in shows, classic games and other exclusive content. XM has assembled an all-star team of on-air talent for Home Plate including baseball veterans Ron Dibble, Kevin Kennedy and Larry Bowa.

Today XM kicks off the 2005 NASCAR racing season with live broadcast from the Daytona International Speedway leading up to the Daytona 500 on February 20, the first major NASCAR event of the year. XM is also the title sponsor of the XM Satellite Radio Indy200, an Indy racing league event in Phoenix on March 19. The event will be carried live on ABC television and XM. This sponsorship is part of a multi-year marketing agreement with the International Speedway Corporation, a leading promoter of motor sports events in the U.S. providing XM with an on-site presence at 35 ISC track events across the U.S. featuring both IRL and NASCAR races. And XM has taken to the skies with AirTran Airways and later this year with Jet Blue airlines and hits the road with National and Alamo who joined Avis as car rental companies offering XM collectively enabling many more people to experience XM which all of our research shows is the best way to motivate them to subscribe to XM. I will now turn the call over to Joe Euteneuer for a detailed discussion of XM's operational performance during the fourth quarter and the full year for 2004.

Joe?

Thanks, Hugh. 2004 was a terrific year by any measure for XM radio. We continued to build a solid business by exceeding our expectations for total lending subscribers with lower than expected CPGA costs. As we look ahead to 2005 and beyond, we have put in place a solid financial foundation to expand the business. This morning I'll focus my comments on three primary areas. 2004 results with specific year-over-year comparisons of key metrics, fourth quarter of 2004 trends and key metrics and finally a look at 2005. First I'd like to comment on the makeup of XM’s subscriber universe and refer you to the financial attachment to our fourth quarter and year-end 2004 press release. XM's 3.2 million total subscribers at year-end fall into three categories.

First, XM ended 2004 with 2.8 million self-paying subscribers making up approximately 87% of our total subscriber base. Second, OEM prepaid promotional subscribers totaled 402,000 at year-end 2004. Both statistics are inline with our expectations. We continue to be pleased at the conversion of our OEM prepaid promotional subscribers to self paying subscribers is still approximately six out of ten new car buyers converting to self paying buyers after they experience XM. Lastly the balance of our total subscriber base reflects over 26,000 rental cars from Avis and our newly announced rental car partnerships with National and Alamo. Our churn rate on self-paying, after market, OEM and other subscribers for the full year 2004 was an industry best, 1.2% per month.

Now let's move to revenue. Total revenue increased 166% to $244 million for 2004. That's from $92 million in 2003. This increase in revenue was due to the significant growth in our subscriber base. Recurring subscription revenue for 2004 increased 183% to $221 million from the $78 million for 2003. Recurring subscription run rate revenue at the end of 2004 moved to more than $315 million annually. XM's recurring subscription ARPU for all subscribers was $8.68 for 2004 compared to $8.97 for 2003. This ARPU reflects the impact of greater participation in multi-year prepayment plans and family plans subscription.

Multi-year prepayment plan subscription contributed significantly to our cash flow and represent approximately 14% of XM's 2004 ending subscriber universe. That's compared to 8% of 2003 ending subscribers, a significant increase year-over-year. The family plan program continues to be very successful growing to 12% of our 2004 ending subscribers, up 5 percentage points from the 7% of our 2003 subscribers. Overall, XM subscribers continue to prepay their subscriptions on average 6.9 months, an increase over the 5.3 months reported at the end of 2003. These prepayments are included in deferred revenue. Deferred revenue was $152 million at year-end 2004 compared to $54 million at the year-end 2003. This is $100 million increase.

Variable expenses which include the cost of equipment sales, revenue share and royalties, customer care and billing, and ad sales excluding CPGA expenses were $109 million in 2004, up from the $65 million in 2003. Changes in variable expenses are the direct result of 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 costs increased 26% percentage points to 59% of revenue for the fully year 2004 compared to the 33% for the full year 2003.

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 $158 million for the full year 2004, up from $130 million for the full year 2003. This increase in fixed expenses was due to the investment in new content initiatives including XM instant traffic and weather, college sports, XM online, the Bob Edwards show, Opie and Anthony, and major league baseball as well as a continued investment in research and development and other activities.

I will now address subscriber acquisition costs for SAC and the fully loaded costs for gross ad or CPGA, both of which are calculated on a per unit basis. The bottom line, XM continues to demonstrate very cost effective growth.

Subscriber acquisition cost is a subset of CPGA and reflects direct manufacturers subsidy costs, distribution expenses, promotions, and the negative margin on equipment sales. XM SAC for the full year 2004 was a modest $62 compared to the $75 in 2003, an improvement of $13 or 17%. The broader measure of cost per gross addition is the fully loaded measurement of the cost to gain each new subscriber, EPGA. EPGA includes SAC, which we just discussed as well as all discretionary advertising and marketing costs. EPGA for the full year 2004 was $100 compared to $137, representing a $37 improvement or 27% year-over-year. This also compares favorably to our previous EPGA projection of $110 for the full year 2004.

XM's EBITDA loss for the full year 2004 is $388 million including $77 million in non-cash deleveraging charges compared to a loss of $319 million in 2003, which included non-cash charges of $25 million from deleveraging activity. This 6% increase in EBITDA loss excluding the impact of the deleveraging activities is in the context of 137% increase in our subscriber base over the same period, a 26-percentage point improvement in our subscription margin, and a 27% reduction in our CPGA costs quite a year. For the full year 2004, XM's total net cash used in operation declined 65% at $86 from the $245 million in 2003.

Capital expenditures totaled 170 million in 2004 as compared to $20 million in 2003. Much of this increase is attributable to the payments relating to XM3 and XM4. XM3 is scheduled to be launched next week, February 16. At the end of 2004 XM had total cash and short term investments of $718 million and an undrawn credit and equity facilities from GM of $135 million. Taken together the total liquidity position of XM at December 31, 2004, is $853 million, representing adequate funding to execute our business plan and achieve cash flow break even in 2006. As part of this business plan we will fund our $120 million escrow arrangement with MLB in the first quarter. And in early 2005 we also added cash reserves when we received and exercised the additional allotment associated with a greenshoe of a $100 million associated with the November 2004 issuance of the 1.75% convertible note. It should also be noted that in December 2004 we completed a debt for equity exchange of $98 million in future value of our 14% notes due 2009 in exchange for 2.7 million shares of equity.

This debt for equity exchange saves XM 55 million in future cash and interest payments through 2009. Finally, XM is nearing the conclusion of its 2004 audit and Sarbanes-Oxley activities and we are very pleased with the progress so far. Since the fourth quarter is such a significant part of our business, I just want to touch on some of the highlights from the fourth quarter. First, our 4Q revenue was $83 million up from the 33 million in 4Q 2003, an increase of a 152%. Our fourth quarter subscription ARPU was $8.74, which was the same as fourth quarter 2003 but an increase of $0.10 over the third quarter of 2004, and this was primarily based on increased premium subscription.

And interestingly, our total ARPU, which includes ad sales and activation fees, was $9.98 in the fourth quarter. This happens to exceed our competitor's comparable total for ARPU for the first time. XM increased the subscription margin to 61% of revenue for 4Q from 36% in 4Q 2003. That's a 25-percentage point increase. XM SAC declined to $64 from the 73 in 4Q 2003. And XM CPGA declined to a $104 from the $125 in 4Q, 2003. As discussed on the last call, XM achieved significant savings in SAC and CPGA throughout 2004 and in the first fourth quarter as we previously discussed XM applied a portion of these savings to support the important holiday selling season.

Cash used in the fourth quarter of operations was 12.7 million. A significant improvement from the 50.8 million of cash used in 4Q 2003 and better than third quarter 2004 cash used of 14.6 million. And finally, churn remains stable in the fourth quarter at 1.2% per month. Let's summarize the full year of 2004. We finished the year with 3.2 million subscribers, more than 125,000 ahead of our guidance of 3.1 million subs; our subscriber revenues for the year were 221 million, just ahead of our guidance of 220 million.

Our EBITDA loss of 388 million approximately 12 million higher than our $300 million guidance and excluding the deleveraging activities but primarily attributable to the additional subscriber growth we achieved during the year. And our full year CPGA cost of $100 was well under our full year projections of a $110. Let's look ahead to 2005. XM expects to see continued acceleration of our subscriber base with a projected 5.5 million ending subs. That's a 70% increase over 2004. This growth is a result of our continued belief in the growth of our subscriber base along with improving contribution margins in 2005 and moderate reductions in SAC and CPGA.

XM will expect to achieve subscription revenue for the year of 2005 of 480 million and an EBITDA loss of 360 million, which excludes the impact of any deleveraging activities. This growth will include the full year impact on our fixed expenses from our 2004 investments in content including Major League Baseball, our continued development of research and development, and our expansion of our back office capabilities enabling rapid subscriber growth in 2005 and beyond. And finally 2005 leads us into achieving cash flow breakeven in 2006. Hugh, back to you.

Hugh Panero; Thanks, Joe. XM radio had a great 2004. XM expanded its dominant position in satellite radio by adding over 1.8 million subscribers and ending 2004 more than two million subscribers ahead of our competitor. XM opened and currently stands unchallenged in major new addressable markets for satellite radio including the portable electronics market with the introduction of the XM2go and the broader consumer electronics market to its recently unveiled XM Connect-and-Play technology.

Finally, XM added strategic programming partners including Major League Baseball and Starbucks that will help us aggressively grow our business to 20 million subscribers and beyond by 2010. XM has also learned the number of valuable insights that can be applied to the coming year. First, the potential market for satellite radio is far greater than previously thought or currently modeled by most analysts. With over 110 million households and 231 million registered vehicles in the US, the potential for satellite radio is barely touched with just over four million subscribers.

And we have conducted quarterly tracking studies since the third quarter 2002 that measures satellite radio interest. The results show consistent growth in purchase intent over that extended time frame. Second, XM is uniquely positioned to attract strategic content, distribution, and technology partners. XM combines a sustainable technology lead and product innovation with the broadest, deepest, most compelling programming available on radio today. There is magic in great radio and our senior management team together now for six years has brought together the best and brightest to create an indispensable entertainment and information service for millions of consumers, a universe that grows every day.

Thank you and we are ready to answer your questions.

[Operator Instructions].

And your first question will come from Jonathan Jacoby from Banc of America Securities.

Good morning. Congratulations on a great year. Just three quick questions here. One, the conversion rate sort of flattish. Is there anything you're working on in particular to keep moving it up as you had done from -- you know, as you started the program?

The second question, obviously very nice sequential ARPU. How should we look at it in '05? Is it you know more on the premiere programming, premium services, could you give us any color on that? I know you've also sort of taken down the discounts in the multi-year plan, so if you could sort of give us a little bit of color there. Lastly, everybody is talking about advertising and where that can go. You did about $4 million this quarter. It's a little bit higher than I think some were expecting. Can you give us some thoughts there?

Hi, Jonathan, this is Steve. I'll start with the conversion rate question. You know it has been a fairly stable this last quarter. We've actually seen a bit of a tickup, about 60% in January, which is encouraging. And we do have a series of programs in place. A lot of them focused on improving the initial selling experience at the dealer level. We find that when a dealer does a better job explaining satellite radio we get a much better take rate at the end.

And so John, on the ARPU question, you know we continue to believe that we will do things that will make the ARPU go up over time. And your third question was on multi-year plans?

No, no, it was on advertising.

Yeah. Okay. On advertising, we don't break out our projections, but I mean, we're pretty satisfied with the growth of ad sales. We think it's going to grow significantly in '05. And I think that when you look at our base of subscribers, which is going to grow from 3.2 to 5.5 is that ad sales obviously, as the company with the largest number of subscribers, have some great opportunities for us.

Thank you very much.

Thanks, John.

And your next question will come from Matt Carnes from Bear Stearns.

Good afternoon or good morning still. Congratulations. Just was wondering if you could tell us how much of the churn is involuntary? Also, I was wondering if your cash balance is already inclusive of the payment to Major League Baseball of about a $120 million?

No, the -- the last question, the $120 million will get paid here in the first quarter. And your first question, I mean the majority of our bad debt is really you know from non-pay and it goes through the collection process.

Yeah, I mean, most all of the churn is in fact involuntary. It's a disconnect for non-pay. But you know our experience has been you can't read too much into that because some people, they have other reasons. You just cut them off anyway.

Right. And finally, just a housekeeping question. Do you have any idea of where your CapEx will be next year? It's probably somewhat light because of the Boeing that's -- XM3 this year but is there any additional CapEx you expect next year?

Yes, we continue to build out XM4; we'll have additional CapEx associated with that. But what I'll call the non-satellite CapEx will continue to be in the ranges that we have previously given.

Okay. Thanks very much.

And your next question will come from Sean Butson of Legg Mason.

Thanks. Good morning, guys.

Hi.

I guess two questions. The first one is in your press release you talk about potential alliances that you're working on with consumer electronics companies. Can you just talk at all about what you're working on, the timing, the issues? I mean, as you're looking at additional portable products, what are the major hurdles here? Is it battery life, is it coverage and quality of the signal or are there other things?

And then secondly, regarding the satellite launch next week, if for some reason the launch is not successful due to weather or technical issue or something else, what's the backup plan? Would it get rescheduled a month or two later and then you just put up XM4 and then -- and what's the deadline for when you have to have a satellite up there to prevent any disruption in service? Thanks.

Well, the first thing is if there's any problems with weather, they just move the -- they'll just move the satellite launch out a week or two where it happens. With regards to your question about what are all the competitive, you know, partnerships working on so that I can explain them all to Sirius is I know you want to have some insight into it, but you know, clearly we're looking at a lot of the spaces where you would logically think that there are some convergence opportunities and looking at a lot of the technology issues that you've mentioned which is, you know, how does it impact the price of devices or the power drain on those devices.

We're looking obviously at the MP3 capability that anyone has out there. But with the major goal, whether it's in the cell phone space, whether it's in the MP3 space, whether it's on the Internet is that we're looking to proliferate XM's content and technology across a lot of different platforms, and when we're ready to announce something, we'll tell it to you.

Okay. Can you -- can you at least maybe comment on the news that your competitor had said regarding Apple that Steve Jobs is not interested in this time in doing satellite radio, can you say what your relationship with Apple is right now?

Yeah, actually, I had spoken to Steve as well. I didn't really announce it in front of a media analyst conference of some kind and I actually know some of the people there personally, too. And I had some exploratory conversations, but they are a business that's really based on driving the price of their radios down. They're very focused on an onslaught of competition that's coming from a variety of different sources and, you know, they have a certain confidential air about their product.

But they have basically said that on these convergence issues they feel that they're happy where they are, but as Steve said to me was that, you know, he's willing to be wrong and time will tell. I think the fact is that both satellite radio companies have a dialogue going with some of the key players and some of the key spaces that are out there and we'll see what happens.

Okay. Thanks.

And your next question will come from Gunal Mendokaur (ph) Lehman Brothers.

Hi. You touched upon the data opportunity. How is it that we could see monetization, how is it that you could gain market share from the current 55% levels and what are the kind of opportunity that we are really looking at?

Well, I'll start off and then Steve Cook will jump in. Basically the data services is really one of the more exciting parts of the car industry who's very focused on these telematic solutions. Clearly what they do is they build in the service, and it's marketed as a premium service. However, what they do is package it into some of their higher end feature sets they have. And over time what is going to happen, is that clearly when you have a data service what comes also is the XM radio service. So you sort of monetize it by providing the car company something they want, which is another competitive advantage.

What comes with it is XM Satellite Radio because it's part of the technology and then we will begin to take advantage of the fact that these are premium services with a certain amount of revenue that returns back to us. But in the initial stage, as it's being introduced it will be packaged as a standard feature as we have announced today on some of the high-end cars. So I think it really is a long-term strategy where even the services we are offering today are not going to be the ones that are going to be really the killer applications, the ones we have are the first ones. But they're going to be services that we probably haven't even thought of that are going to be introduced over the next couple of years.

And frankly, one of the reasons that XM has been, I think, so successful with the car companies is in fact that we do think in the longer term and we design and build technologies way in advance to meet their cycles of development to get them what they need and want to have and that's what makes their very rapid deployments once the service actually hits.

Thanks. And so in terms of like really monetizing it and in terms of, you know, you getting a revenue stream or an additional revenue stream from the telematic services, would that be say 2006 or 2007 opportunity or would that be more towards the end of the decade?

I think it's more of a 2000 -- late 2006, 2007 because what you do is you'll begin to have whatever the percentage of these higher end cars with the car companies that we have relationships with which include GM, Honda, and Toyota, which will be coming on in '06 and those -- the growth of the inclusion of this technology, you know, occurs incrementally every year. So I think you're actually right. It's more of a late 2006, 2007 contribution and we'll have more to talk about that as that service becomes more significant part of our revenue stream.

Great. Thank you.

And your next question will come from April Horace of Janco Partner.

Good morning. A couple of quick questions. Are you going to provide any more color or could you give us some color on 2005 SAC, CPGA, and/or fixed costs going forward?

Yeah. I think, April, what we said to date is we that we are very happy at being sub $100 total cost all in for to gain a sub and, you know, what we will do is continue to have a moderate reduction in our CPGA cost which will allow us to reinvest some of the continued savings we'll continue to get during the year. So I think you'll see it come down a little bit. But we -- under the coverage there is that we're reinvesting some of the savings to continue to drive subscriber growth.

And then, could you give us some additional color on what's the status of the remaining 20% of the insurance claim and then kind of a quick update on Canada?

Yeah. The arbitration is going forward. You know, those sort of things tend to run into 12 to 18-month type of a time frame. But we feel very comfortable with how it is going to far. The Canadian situation, as you may be aware, they've completed all the hearings up there and they're now in the mulling it over to come out with license awards. And when that occurs obviously we don't have total visibility into it, but hopefully within the next few months.

And then should we expect continued deleveraging activities in Q1 and Q2 or you just dribble throughout the year?

I think that's really an opportunistic issue. It's not designed to be in a particular quarter or dribbled through a year. It's more designed to be when the marketplace presents an opportunity that looks good for us, we take advantage of it.

Great, that's all I've got. Thanks, guys.

And your next question comes from Jeff Wlodarczak of Wachovia.

Hey, guys. Joe, I just want to confirm, you said $480 million in revenue in '05 and $360 million operating capital loss?

Correct.

Can you give us any visibility on ARPU? Are we thinking flattish this year?

Yeah, just to -- 360 was our EBITDA loss for next year.

Yeah, just making sure. What about ARPU? It looks like flattish ARPU, similar churn to this year?

No, what you should see is the ARPU slightly increasing in the next year. You saw the $0.10 increase from the third quarter to the fourth quarter.

Okay. And then XM2go, how many subscribers did you get in the fourth quarter from that MyFi?

We don't break it out by the product type, but, I mean, basically what we put out there got sold.

And then I apologize, somebody asked this. I got on a little bit late. Is there any update on the Gen 4 (ph) chip?

No, not so much. I think that was asked last quarter as well. We feel comfortable with the progress and where it's going. It's still on the same sort of time frame that we've generally indicated before, but we tend not to try to project that out until you actually see the products.

Okay. Thanks.

And your next question comes from Peter Friedland of Fulcrum Global Partner.

Hey, guys, a couple of questions. First is housekeeping. Can you give the breakout of net adds for the full year between retail and OEM?

Peter, actually for the first time on the attachment to the press release in footnote 2, you see the breakout of retail, OEM, and rental car.

Right. I thought you just had in there the fourth quarter so the question is the full year.

Yes. Oh, we do not break out the full year.

Okay. Does that mean you can't do that?

Since it was just an introduction of a new disclosure, we chose to only give it for the fourth quarter.

Okay. And then --

And we will continue to give the disclosure on a going forward basis. So I think this is the introduction of something new. So we gave the information for the quarter and we'll continue to give it on a going forward basis.

Okay. Then regarding the satellite launch, the question was asked before but in the case of some kind of failure, what is the contingency plan?

The contingency plan is that XM4 is under construction and we would have it prepared and ready for launch by the end of the year.

Okay. And then presumably you'd have to build another?

Yes.

Okay. Lastly, the MyFi --

Although obviously we should mention, obviously there's a full insurance on XM3 as well, too.

Okay. Regarding the MyFi or the XM2go, any plans on the next generation to improve the reception, stronger antenna, better signal reception?

I think overall technologically you'll see on next generations of all of this wearable type category significant improvements on a number of fronts.

Okay. Is that an area of focus?

Well, I think there's a number of areas that are obvious from product reviews or things that we would like to have MP3 capabilities, greater memory, things of that nature. I think across the board you'll see numerous improvements.

Okay. Thanks, guys.

Yep.

And your next question will come from Niraj Gupta of Citigroup Smith Barney.

Good morning. It's Niraj Gupta, a couple of questions. One is following up on data services and NAV traffic specifically. I know catalogue announced in the last few days on CTS that they will debut XM real time traffic. And up until now the discussion seems to have been that data services and even NAV traffic is going to be more on the high-end automobiles. I was curious if, you know, here you could give us your perspective on when you might think that NAV traffic, if you think it will be, when this kind of service will be a more standardized feature over time. I know the pricing I think has been talked about as $9.99 stand-alone, $14 bundled curiously.

Actually I might take this one. This is Steve. First I think it's important to realize that when we talk data services with the OEMs, NAV traffic is the first implementation and it's a great one and that will continue to expand. But there are other data services that they are very interested in. I think the way the car companies view it is they think getting information to the vehicle, and our pipe is an excellent way to do that, is something consumers want.

And there are a wide variety of other applications in terms of just other information sources, messaging to the vehicle, etc., which we're going to be pursuing. And let's not also forget on the after market side we'd announced both Pioneer and Alpine announced navigation units sold in the after market that have the NAV traffic services and we're looking at data services for them as well.

Right. The other question I have is a housekeeping item. I know you reported the churn. Can you give us the churn just on the self-paying actually not the self-paying but the aggregate churn as well.

Yeah. The way when you try to do that back end calculation it's 2.5% which is down from 2.9% in the third quarter.

Thanks, Joe.

I think we have time for one more question.

And your last question will come from Steve Mather of Sanders Morris and Harris.

Hello, Steve.

Yeah.

Sorry about that. Good quarter, guys. Hey, you have good product and, you know, there's a lot of multi-home households already in terms of your units and people are prepaying at a pretty high rate. So it seems if you can increase awareness subs will come and I guess that's how you get to numbers that approach 20 million shortly. But to that end, can you share any perspective on how you can go about increasing awareness?

You know, I'm thinking about balancing ad dollars with recurring partnerships with airlines and Starbucks and auto-manufacturers. Seems like there's a lot of leverage you can pull. But the goal is to really increase awareness and if you're successful there, by spending, you know, prudently, you'll really get a nice return on these subs that will come. So can you share any kind of broader perspective on that particular challenge?

Sure. First of all, we track awareness pretty carefully and basically both satellite services are now over 50% awareness. And I think that's only going to grow. I think that what grows it quite significantly is the embedding of the whole XM branding in a lot of the car advertising which we've talked about in the past. And obviously I think the launch of Major League Baseball which is going to be done fairly broadly, particularly for XM, is something that, you know, with a fan base of 75 million and people who, you know, experience a product like that over eight months, that promotion and the promotion that's going to be associated with that is going to increase that awareness.

So, you know, basically the data we have is that there is growing awareness of the service. It's going to increase with the advertising what the car companies do, with the advertising we do, particularly around these new products like the portable device around the new content we have which is Major League Baseball.

And can you just add one more thing which is the balance between let's say spending dollars to -- with a recurring partner, maybe that's an airline or Starbucks etc. versus kind of a TV or print dollar that you spend today? How do you see that?

Well, those are decisions that we make and I have a marketing background and obviously I work closely with Steve who runs this part. But basically national television is very expensive. There are points there in the season, you know, or the year that, you know, promoting it on television makes a lot of sense and it's cost effective for us based on how many eyeballs it reaches. We find that radio is an effective way to tell people about a radio service. We do modest print advertising.

We have this very unique marketing relationship with Starbucks, you know, which has, you know, a lot of people going in to buy coffee every single day where we have a partnership with them which is sort of a unique and differentiated marketing vehicle that we have. And then clearly we try to maximize the ability to get subscribers and kind of close the deal with some of the relationships we have with NASCAR. I think what we have to do is blend in some national advertising with some local advertising but then basically go after various niches which is something I think we're getting better and better at doing.

The one other thing that would be kind of interesting based on your point of how much is it cost effective to pay airlines to show your service, it's actually important to understand that in the AirTran or Jet Blue type situations and certainly in the Avis, National Car Rental and Budget, those are actually revenue opportunities. Fairly small but revenue opportunities for us that add visibility and awareness and build brand preference, not actually cost centers for us.

We don't pay for any of their advertising. Those companies, like if Avis runs an ad, they're doing it because they feel it really helps sell their product.

And then you anecdotally is that I travel a lot and I have to tell you if I have an XM cap on or some sort of premium item that it basically makes up my complete wardrobe most of the time, but is that I can't tell you the number of times that you now in an airport or a rental car place or just out living your life where people stop you and say I have that in the car and I have seen that evolve over the last couple of years.

But particularly over the last 12 months, you know, as we start getting into the millions of subscribers that that word of mouth has really turned into awareness and clearly some of the big announcements that have been made in the category, whether it be by us or our competitor, has taken this whole category where I think both companies can be very successful. I think we have lots of product to offer people. And we are being talked about in the same breath as many other of these platforms that have grown up over the last, you know, two or three years.

Good points. Thanks, guys.

Thanks so much. We appreciate it.

That concludes the conference call for today. Thank you very much.

Thank you for participating in today's XM Satellite Radio fourth quarter and 2004 earnings conference call. You may now disconnect.