Sirius XM Holdings Inc (SIRI) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the SIRIUS Satellite Radio first-quarter 2005 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Michelle McKinnon, Senior Director of Investor Relations. Ms. McKinnon, please go ahead now.

Good morning, everyone, and thank you for participating on this morning's call. I would like to remind everyone that certain statements made during this call might be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based on the current beliefs and expectations of our management and necessarily depend on assumptions, data or methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. More information about those risks and uncertainties is contained in SIRIUS's filings with the Securities and Exchange Commission. We caution listeners not to rely unduly on forward-looking statements and disclaim any intent or obligation to update these forward-looking statements.

Now let me turn the call over to Mel Karmazin, our Chief Executive Officer.

Thanks, Michelle. Good morning, everybody, and thank you for taking time today to join us. With me is Jim Meyer, President of Sales and Operations, who will update you on our exciting new products, retail promotions and rapid OEM ramps, that along with our superior programming initiatives will be driving our dynamic subgrowth; also, Scott Greenstein, President of Entertainment and Sports, who will update you on our programming initiatives and highlight why SIRIUS is considered to have the best programming in all of radio, and David Frear, our CFO, who will take you through the details of our great first quarter.

But first I would like to begin by congratulating everyone at SIRIUS for delivering this great blowout quarter. We overdelivered on all of our key metrics. I would like to discuss with you this morning all of the elements we focus on in running our Company.

First and very importantly is our subscriber growth, which was great in the first quarter. In Q1 '04 we added approximately 91,000 subscribers. In Q1 '05 we added 305,000 subscribers, an increase of 230% from a year ago. If you were to add up the net adds that we had and the net adds that our competitor had and create the Satellite Radio market, we had 36% share of the total Satellite Radio market in Q1, up dramatically from Q1 '04 where we had 22% market share. We are the fastest-growing company in this rapidly growing sector.

The subscriber growth we experienced came from across the board. SIRIUS is getting amazing support from retailers. The number of SIRIUS model selections at all major retailers has grown exponentially from a year ago. We added approximately 175,000 subs at retail in Q1, an increase of about 166%. With our strong retail offerings in Q2, new Gen3 products in the second half of the year, combined with Howard Stern joining us no later than January, you should expect continued strong retail growth and importantly market share. We estimate that for the full-year '05 at retail we will have approximate parity with our competitor.

Even more important and more exciting was our very strong OEM and special markets growth in the first quarter, which was an astounding 449% increase to our prior year. We added 130,000 subscribers from this channel with most coming from OEM. In the quarter, in spite of strong retail growth, OEM and special markets accounted for 43% of our net additions. We also project that this channel will have very dramatic growth and be a very major contributor to our sub growth for the remainder of '05 and beyond.

Further, on our subscriber growth today for the second time this year -- and it is only April -- we're raising guidance for year-end subs from our current guidance of over 2.5 million to over 2.7 million subs.

Next, our great sub growth translated into very rapid revenue growth. Our revenue for the quarter exceeded $43 million versus 9 million a year ago, a whopping 365% year-over-year growth with very good growth in ARPU as well.

Turning to churn, we experienced the lowest monthly churn since our service was launched, 1.3%. When you combine this great churn number with our high awareness level and 94% Q1 '05 customer satisfaction, all bodes very well for our future growth, and subscribers really love our product.

Moving to SAC, we're committed to lowering this cost and are executing very well on this front. We brought the SAC per gross add down 23% from a year ago, and we are on track to bring SAC per gross add down to below $145 for the full year with further reductions anticipated in 2006.

I would like to spend a couple of minutes on costs. Our business model calls for negative EBITDA in the early years. We are a high fixed cost business. Our satellites are up, our top-quality programming is running on our 120 channels, our advertising and promotion costs, and our general and administrative costs will only grow modestly as we increase our number of subscribers to two or three times what they are today. When that revenue growth is recorded, to reflect that growth our EBITDA will improve very quickly, reflecting the great operating leverage in our business.

The other cost that negatively contributes to EBITDA is SAC, and I previously reported to you how SAC per gross add is going to drop significantly in the future. Our SAC includes subsidies for chipsets and radios and commissions at the retail level. In general, each generation change improves our SAC by about 30%. As the accounting works, you record the majority of the SAC before we even get the subscriber. The revenue stream begins later, and we have been adding lots and lots of subs, thus the impact on EBITDA.

Let me assure you that we are totally focused on all of our costs. There is nothing at SIRIUS more important to me than making this Company not just profitable but a very profitable company, which gets us to the final metric which I would like to comment on, and that is our cash position which is very strong.

We confirm again today two previous commitments we have made on cash. They are that we have a fully funded business plan, and we expect to turn free cash flow positive in 2007, a time I'm really looking forward to. I believe free cash flow is what creates value for shareholders. It is free cash flow that enables companies to pay down debt, make acquisition, buyback your stock. SIRIUS will be free cash flow positive in 2007.

Satellite Radio is a hot category, and we are the hottest company in that category. Consumers love our products and are increasingly recognizing our superior programming. We are executing very well and are excited about the strong growth prospects for SIRIUS.

And with that, I would like to turn it over to Jim Meyer.

Thank you, Mel. I would just like to touch on five key areas that drive a big chunk of our success going forward. First, I would like to just give a little color on the overall retail situation as it exists today.

Number one, we just got the first-quarter final sell-through numbers for the satellite industry, and I must say the overall volume growth in the first quarter was very exciting, consistent with what we believe and I think bodes very well for the volume for the remainder part of the year.

As it comes to us, I would like to point out that first and foremost our very strong Christmas sell-through coupled with the fact that we were introducing a new product in the first quarter of '0, caused us to be out of stock in many locations in the first quarter. In spite of that, we have what we felt was a very good strong first quarter at retail. More importantly, I am now happy to report that our product is now available in very good supply at all retail locations. We are fully restocked, and we expect a very strong second quarter at retail.

Which leads me to my second point I would like to touch on, and that is I would like to give you some color on our second-quarter retail promotion, which we are announcing formally today. Beginning May 2 through late June, which as you know obviously covers the very important Father's Day promotional period, we are launching a major promotion which offers the consumer a $50 rebate on any of SIRIUS' products.

Why are we doing this? We have spent a great deal of time on consumer research that we did with the Odyssey Group and two others to verify what drives the industry, and the research is very clear. The biggest barrier for consumer adaptation to Satellite Radio is the retail price point. We think this offering, which is promotional in nature and eases the retail price burden, is good for the satellite radio industry and should expand the size of the pie. Under this promotion, if you buy two of our Star Mate products, you effectively get one free after rebate. Our retailers are very excited about this promotion and so are we.

Let's talk for a little bit now on product status and then our Gen3 chipset. Regarding new product, I'm pleased to report that we started production this week of our new Sportster replay product, which features 44 minutes of memory buffer and allows the consumer to do pause, rewind and fast forward. This product will be introduced at $169 retail or $119 after rebate, and be in good supply for the Father's Day promotional period.

Our research tells us that the recordability and pause controls are key features the consumer wants in satellite radio, and you should expect to see more of this as the rest of our new products roll out later this year.

Now I would like to give you a quick update on our Generation 3 chipset. In April, in fact last week, we determined that both new chips in the Gen3 chipset, the baseband and the RF chip, are now design validated, and I'm pleased to report that ST, our supplier of these products, has now begun wafer production. This is quite a significant milestone for us, and we will now ramp up the volume to support new products beginning in late summer.

Our number one objective for the Generation 3 chipset is to significantly reduce our product cost. This new design allows us to reduce our product cost by anywhere between approximately 20 and 30%. Our immediate focus is rapid rollout of this chipset across our product line to ensure and protect our cost position. The Gen3 chipset, however, also allows us to offer some exciting new products and features which we will introduce later this year.

Let me touch a little bit now on our important OEM business. First, I would like to make a few comments on DaimlerChrysler. As Mel reported earlier, our DaimlerChrysler volume was very strong in the first quarter and exceeded our expectations. Frankly, we expect this to continue for the rest of the year, and we are very pleased with the progress that we have made with DaimlerChrysler. We got this program now rolling.

Now let's talk about Ford for a moment. In January we announced -- Ford announced a major commitment to deploy SIRIUS Satellite Radio at the factory level in over 1 million vehicles between the middle of '05 and the end of '07. This program I'm happy to report is on schedule and will launch this summer.

BMW. In May BMW launched the high-volume new 3-Series. SIRIUS is available on that as a factory option. After the 3 launch, SIRIUS is now available as a factory option on the BMW 3, 5, 6 and 7-Series. We're extremely pleased with the progress that we have made with BMW, and we are also very pleased to participate with BMW on the launch of the new 3-Series and their promotional activity in April and now in May.

Mercedes-Benz is also a great story. The new M-Class SUV launched this spring now provides SIRIUS as a factory option. Virtually every high-volume Mercedes model now offers SIRIUS as a factory option. I think you will agree that we are beginning to make real progress in the OEM field.

With that comment, I would now like to turn it over to Scott Greenstein.

Thanks. I would like to touch on three areas today -- programming, advertising and marketing. You have seen our deals with Howard Stern, Martha Stewart, the NFL, NASCAR and other brands that have extraordinary followings and loyalties that have worked well in improving capacity in other and in some cases multiple media. We all know that content is king. It has been said many times, but rarely explained in the context of satellite radio. It is applicable to satellite radio, and more importantly, it is working here at SIRIUS.

Why? SIRIUS has the content -- it has the best content in all of radio, and content drives the following things. Awareness. It drives programming. It is also a marketing strategy. It grows off incredible PR as you have seen on Howard Stern, Martha Stewart, NASCAR, the NFL and others. It saves advertising dollars. So our content works as content and it works as marketing. It has led to better subscriber retention, lower churn. It is a differentiation factor for consumers when they go into retail and OEM programs. It gives us a competitive advantage, and it creates programming that leads to maximum advertising revenue, which we will return to later. These drivers are working for and differentiating SIRIUS.

Let's look at what our exclusive content lineup has accomplished. Awareness. Our brand awareness has grown substantially in the last quarter. According to research conducted for SIRIUS, 39 million more people are aware of SIRIUS now versus six months ago. Total brand awareness has grown from 32% to 58% in the past six months, more than double the increase of our competitor over the same time period.

In an independent study, respondents expressing a preference for a satellite radio provider favored SIRIUS over our competitor by almost 2 to 1.

Our subscriber loyalty has increased substantially. Our subscriber programming satisfaction is at an all-time high of 96%. We have increased the amount of time that subscribers spend listening to SIRIUS channels by a full five hours per week. The majority of that increase is to our talk, sports and entertainment programming which will drive increased advertising revenue. Churn is at an all-time low of 1.3%.

We have clearly differentiated ourselves from all of radio programming. We have not just one or two key properties, but a broad, deep and compelling lineup of content. The world has noticed this. Reviewer after reviewer has said SIRIUS lineup is superior. The list would be too long to mention, but just a few in recent time. The Wall Street Journal, New York Magazine, Time Magazine Online, Edmunds.com, Cargo, etc. have all acknowledged SIRIUS' leadership in programming.

How is that translated to ad sales? Our ad sales opportunities are dramatically enhanced. We focused on brands that in addition to providing exclusive content drive ad revenue, have proven to drive ad revenue in the past. Martha Stewart, the NFL, Maxim, NASCAR, even our own brand of (inaudible) has led to increased advertising. These brands have a proven track record of attracting advertising. They continue to do so and will do so more here at SIRIUS.

Most importantly, Howard Stern, the king of the most valuable ad sales real estate, Morning Drive is exclusive to SIRIUS in content and for advertising. We brought our ads sales in-house. It is now a core competency under our control. It will lead to increased profitability. In the future, we are expecting ad sales to increase substantially.

Our competitive advantage is furthered by our content. There is only one Howard Stern, Martha Stewart. Radio has never really had extensive programming for women. We now have that. NPR, NFL, NASCAR, NDA, Elvis Presley, Lantz Armstrong, Tony Hawk, Eminem, over 25 of the nation's top colleges and I could go on and on. The exclusive programming lineup cannot be duplicated. As all of you know in media and content, there are certain brands or certain things that matter. We have the brands that matter that cannot be duplicated.

Marketing. We have always supported our content and our retail promotions with inventive marketing. This Father's Day will be no different. We will continue to mine our content for successful and inventive ways to market our retail programs.

Now, most importantly, while we will continue to look at new programming assets, we will do so very opportunistically. We are confident that the programming lineup we have already assembled, which we and as I noted before many others feel is the best in all of radio, is sufficient as it stands right now to maintain our leadership position for years to come. Thank you very much.

Okay. Just running through the numbers a little bit further. As you have heard from everybody, this is a great quarter for SIRIUS. Total subscribers have quadrupled. Net adds more than tripled. Churn was at a historic low. Revenues also grew by more than four times, and SAC per gross add was down over 20%.

We ended the first quarter with 1,450,000 subscribers, up 312% from a year ago and have since exceeded the 1.5 million subscriber mark. We added approximately 305,000 net subscribers in the first quarter, 237% more than in last year's first quarter. Our results were driven by solid performance at retail as you have heard, and despite first-quarter product shortages at retail following the very strong 2004 holiday season, I would like to emphasize again, as Jim mentioned, that our key retail partners are again well-stocked with SIRIUS radios as we approach the second-quarter dads and grads gift season.

We also continue to show accelerating growth in the OEM and special markets distribution channels, ending the first quarter with almost 450,000 subscribers in this channel. Approximately 386,000 more than we reported at the same point last year. This strong performance reflects availability in 13 Chrysler 2005 model year lines, as well as acceleration by our other OEM partners including Mercedes-Benz and BMW.

I think, as you all know, Ford will begin factory installations in just a few months and expects to contribute 1 million paying subscribers to SIRIUS in the 24-month period from mid-2005 to mid-2007.

As Mel mentioned, high customer satisfaction resulted in historic low churn rates for an average of 1.3% per month, down from 2% per month in the year ago quarter and down from 1.5% in the fourth quarter of 2004.

We continue to average about nine months of prepaid revenue per subscriber based on our 12.95 standard monthly price point. This has been a very consistent performance for a very long period of time now and I think, as many of you know, is important to us from a cash-flow perspective. As of March 31st, almost two-thirds of our subscriber base was on annual or longer plans.

Now the strong subscriber growth in the quarter drove total revenue to $43.2 million, more than 4.5 times higher than the 9.3 million reported last year. ARPU for the quarter came in at $10.72, up from $9.94 principally as a result of lower impact from mail-in rebates in the two comparative quarters.

Our adjusted loss from operations, which we in shorthand refer to as EBITDA, widened by $49 million from 78 million to 127 million, primarily as a result of the 40 million in additional SAC required to support the 226% increase in gross subscriber additions in the quarter.

As you heard from Mel on a per gross add basis, SAC for the quarter was $190, down 23% from 248 in the first quarter of 2004, reflecting lower cost to produce our Gen2.5 products offset by costs to restock inventory for the first and second quarters after essentially selling out at retail following the holiday season.

Our decision to invest in unique and compelling content, as Scott described, continues to pay dividends by driving our subscriber growth. Programming and content expense increased from 8.7 million in last year's first quarter to 24.5 million this year due primarily to increases in music royalty payments on our higher revenue base, costs incurred in connection with the NFL, the NCAA tournament and other sports programming, the traffic service that we introduced very late in last year's first quarter, as well as great new channel offerings such as Elvis Radio, Faction, Shade 45 and Maxim Radio.

Customer service and billing expenses were 9.5 million in the first quarter, up from 3.9 in 2004. Customer care cost per average subscriber declined 42% from $4.16 a year ago to $2.40 per month in the first quarter of this year.

Our sales and marketing expense in the first quarter was 36.7 million, 11 million higher than last year's first quarter. This increase -- 43% increase supports a 312% larger subscriber base and includes increased sponsorship and marketing costs, increased OEM revenue shares on our significant increase in our OEM subscriber base, as well as somewhat higher distribution costs to support an expanded retail distribution platform.

We incurred 14.8 million of G&A expense in the first quarter, up from 7.9 million of G&A reported in the same period last year. This increase resulted from additional headcount recorded to support our growth, the expansion to a third floor in our New York City headquarters, and again somewhat higher bad debt expense associated with a significantly larger subscriber base.

Engineering, design and development expenses increased by 4 million from 5.7 to 9.8 in 2005. This increase was primarily attributable to additional personnel-related costs to support our research and development efforts, as well as costs associated with tooling and manufacturing upgrades for SIRIUS factory installations by DaimlerChrysler and Ford offset in part by continued improvements in chipset development costs.

Equity granted to third parties and employees for the first quarter was $38.7 million, down 40.4 million sequentially from the 79.1 reported in Q4 of last year. Approximately 20 million of the sequential reduction can be attributed to the variant and mark-to-market adjustments from changes in our stock prices between the two quarters. The remaining sequential decrease was primarily due to media milestones achieved in Q4 associated with our NFL agreement, as well as the occurrence of specific employee and other third-party milestones again in Q4 which did not reoccur in Q1.

Our net use of cash, defined as cash used in operating activities plus CapEx and purchases of restricted investments, decreased to 130 million from 159.8 million in the first quarter of '04. This improvement was due to a reduction in advanced payments under certain programming agreements, offset in part by the additional SAC required to support the growth in our subscriber base.

As of March 31st, SIRIUS had approximately 630 million in cash, cash equivalents and marketable securities. As Mel said, this is sufficient to reach cash-flow breakeven in 2007 under our current plan.

Just a couple of comments on full-year guidance, and I will turn it back to Mel. As Mel mentioned, we are increasing guidance on subs from 2.5 million to 2.7 million and are increasing our revenue guidance from 210 million to 215 million.

Jim mentioned the rebate. Please remember that the way that the accounting works for rebates is that that is treated as an offset to revenue. And so as you look at the second quarter, the performance of our rebate offer in the marketplace will be felt in ARPU and revenue. We do believe that these rebates are structured to be very attractive to consumers. The retailers love to market them. People love to get a deal when they go through the doors of the big box retailer. And from our perspective, they are very efficient from a SAC perspective because of the breakage for people who don't turn their rebates back in.

Now in light of our low first-quarter churn, we are also improving our guidance on churn to the 1.5 to 1.6 range, down from 1.6 to 1.7% provided earlier. We continue to expect SAC per gross add for the full year to be below $145. And as we have said before, you should expect SAC per gross add to remain relatively consistent in the first three quarters. And then in Q4 with the effect of lower prices on Gen3 products, and the inventory sell-through and the holidays, you end up with significantly lower SAC per gross add in the fourth quarter.

Given the SAC associated with our 200,000 subscriber increase in guidance, we would expect our EBITDA loss to expand from 480 million to 510 million. And lastly, cash uses will expand from 350 million to 375 million principally as a result of advanced payments under our new agreement with NASCAR.

And with that, let me turn it back to Mel.

Thanks, David, Scott and Jim. As you just heard, our first quarter was terrific. Our product is very well-positioned for the Company to have a great remainder of 2005 and beyond. Satellite radio is in a very rewarding marathon, and the race has just begun with great financial returns coming for our sector and more importantly for SIRIUS.

And with that, we would like to turn it over to questions.

(OPERATOR INSTRUCTIONS). Robert Peck, Bear Stearns.

Congratulations on a very strong quarter. We were very impressed. I have a couple of quick questions.

Mel, first of all, could you talk a little bit about how the analyst investment community should look at promotions longer-term? You know, should XM go with something such as a standard offer of buy one get one free, would SIRIUS consider going more standard with this offer? How do you look at promotional seasonally?

Okay, so thanks. The way we look at it is that we are in a great growth period. And as Jim pointed out, the research definitely indicates that the price point at retail is important for subscriber growth. And obviously we want to capture at this stage as many subscribers as we can. So we believe our costs are coming down, particularly at retail. So that there is the flexibility that we have to continue to have a very competitive offering with our product, but again we are focused on this profitability as I mentioned to you, and it is not an attitude that says get subscribers at any cost, nor do I think our competitor has that viewpoint.

So you should assume that we are going to be very consumer friendly, and that we are going to make our product available at a price point that is going to drive them to SIRIUS.

The second question here on the OEMs, your OEMs as a percent of net adds was very strong this quarter. It was very impressive. Is there anything going on there that you can tell us it is maybe driving that as a percent of net adds? Why was it greater than 40%? It was stronger than we had expected.

Well, I think, and David and Jim could pop in, I think what has happened is that obviously the base was small. We have told you that you are going to see that channel really ramping up. DaimlerChrysler has obviously contributed to it, and we are really pleased with that kind of performance. We probably for the year, the percentage might be lower, but let me have David or Jim comment.

You know, Bob, when we get around to the fourth quarter and the whole holiday juice gets going in retail, I think you're going to end up with a shift in the mix back towards retail. So we should run a little bit higher than the average mix on the OEM side for the first few quarters of the year, and then it should swing back the other way in the fourth quarter just with the way the holidays work at retail.

And Mel, you have been instrumental in focusing on advertising in the non-music channels. We saw a recent interview with you in AdAge talking about 100 million of ad revenues in '07. Is that what the analyst should be sort of thinking of? And where ultimately do you see ads becoming as a percent of your rev?

So I think you have got to be careful about what you read. I am very comfortable on what I say. We think that as we ramp up our sales operation as we have begun to, so we have a meeting in New York on Monday with our entire sales team. We have added people in Los Angeles. We have added people in Chicago, as well as beefed up our New York operation from when a year ago where we really had no full-time people and we outsourced sales.

We think that Howard is going to be huge, mainly because it is sort of primetime. You know, it is 52 weeks a year. It is morning drivetime, and we believe that that is going to be a huge driver.

The guidance that we sort of have, and again we don't know for sure, but we believe that we should be able as we mature and as we add significant subscribers as we are doing, that 10% of your subscriber revenue could be for advertising. We are not there today because the levels are still relatively low, but the growth is sort of dramatic.

You know, I think in our earnings release we showed you within the ARPU number what contribution advertising did. I don't have the numbers exactly here, but I think it was 2% -- $0.02 last year to $0.13 this year. And remember the first quarter is the lowest quarter seasonally for advertising.

So we think this business will be principally a subscriber-driven business, having the benefit of two streams of revenue with advertising as well, and we think that we are best positioned to capitalize on it with having something as big as Howard Stern.

Last question and I will let somebody else go. While we're talking about Howard, have there been any recent conversations with Viacom about bringing him over before January?

No. We are assuming that -- Howard is employed by Viacom until the end of the year. We would love to have Howard Stern begin with us whenever he became available, but certainly it won't be any later than January.

Jason Helfstein, CIBC World Markets.

Two questions. The first kind of an easy one. What can you tell us at this point about the timing of a wearable product, and then any color you want to give around that or the launch of that?

And then number two, what do you think is the right way to look at your sales and marketing or basically your CPG&A (ph). There is not a number you guys put in the press release. Obviously there is a SAC number. What do you think the right way is to look at it if it is we are aggregating sales and marketing and rebate?

And then under the same lines, clearly I think you are all very confident about your programming as far as having the lead there. Given where you are as a Company and where XM is, it would seem for the foreseeable future that they are just financially going to be able to offer more aggressive promotions and more aggressive discounts.

So I guess my question is, at what point do you rely upon your content to say, we have in our opinion better content, hence we don't need to be as aggressive on promotions even if they believe that? I'm not saying you should not match this year, but I would think at some point you would want to say we've got confidence in our programming, let's let it speak for ourselves.

Okay. So let's have Jim answer the first one, David answer the second, and if there is anything left, I will jump in.

In regard to our product plan, first and foremost, and I will be clear with you, I'm not ready to tell you what our product plan for the fourth quarter is yet. And obviously as we get closer, we will review what we're doing.

I will tell you that the Generation 3 chipset does allow us to do a lot of things that the Generation 2.5 chipset does not allow. I want to focus, though, on the number one thing it does is significantly lower our cost. And our first and foremost priority is implementing a rapid deployment of that new chipset across our product line to take advantage of those cost reductions to certainly achieve or even drive more aggressively SAC as we go into 2006. That is our first objective.

The second is, the chipset does allow us to do a lot of other things. We will have some that I think are pretty interesting and new products in the fall timeframe. I'm not going to give any details other than that.

I'm also going to tell you that implementing all this stuff is a challenge, and we have not figured out what is going to come first and when.

Okay. The right way to look at cost per gross adds is, Jason, we have been pretty consistent in our view on this. We just don't see cost per gross add as, in fact, being anything more than just kind of a statistical measure than on a growing subscriber base you can say, "Hey, it is getting better every quarter."

SAC is, in fact, a true variable expense per subscriber that you add. But if you look back at our quarterly results, you will find that the sales and marketing line does not grow at anywhere near the same rate as the top line does. We have three or four times growth in top line measures, and you have 20 or 30 or 40% of growth in underlying cost in the business to support that.

If Mel and I felt that by doubling our ad budget, we could double next quarter's ads we would do that in a heartbeat. But that is not the way the world works. Advertising and marketing is, in fact, a period cost. You make your choices as to how many circulars you're going to be in at Best Buy and how many pages you are going to buy in USA Today, and how many ads you're going to run on the cable and broadcast networks, and then you use that as part of your overall marketing strategy. But it is definitely not a variable cost.

You know, in terms of sort of some of the talk that has been running around about hardware price wars and stuff like that, I don't see anything that anybody in this category is doing that I would characterize as ruinous price competition. The facts are that for everybody in the category costs are dropping, that we are certain that XM has the same kind of research that we have that would indicate that consumers are significantly more likely to subscribe to Satellite Radio if there is a lower hardware price point.

So what I think you see in the promotion is lots of good market testing that is going on as to what motivates and incentivizes consumers, who as Jim said earlier, grow this category to a much larger pie than it is today. So I don't think there is anything about, again, the discounting that is going on that is either ruinous or where there is an advantage of one guy or the other has. It is just good normal competitive behavior in testing out a growing market.

So, the only thing I want to add to it, I just want to echo what Scott said on the importance of programming. So the importance obviously of programming gives us a tremendous advantage we believe vis-a-vis our competitor. We know from research that we have done that we have elasticity on our monthly revenue.

You know, we are at 12.95; our competitor was at 9.95. They have now come up to us. So we were the premium priced company before we got Howard Stern, before we got the NFL, before we got Martha Stewart. So we know that there is price elasticity.

What our focus today is on growing the category. It is a relatively small number of people that are currently subscribing to satellite radio. We want that number to grow huge, and we think that being attractively priced at retail, providing great content at good value is the way we grow the market.

Thank you very much.

Barton Crockett, J.P. Morgan. (technical difficulty). Lucas Binder, UBS.

I have a couple of quick questions. First of all, with the factory-installs are you finding that you are seeing that you're becoming more of a part of factory-installed packages? And then have you had any discussions with your dealers as far as your OEM partners as far as going to a standard installed practice? Then, I have a couple of follow-ups.

First of all, on the OEM we -- and I think we're probably finding what XM found out when they begin to roll out with GM that the take rates are better than we thought, and the incorporation in the vehicle lines -- once you start this thing rolling, we're certainly more pleased with it. And obviously becoming part of other standard kind -- other kinds of feature pacts is a great effective way to roll out satellite radio, and we are always striving for that.

Of course, we are always having conversations with how to increase the penetration with our OEMs and certainly talking about the word standard. Do we have any plans for that today? No. Do we continue to always have those conversations? Sure. And it comes down to a balance of what does it cost to get those subscribers in a standard mode and a rollout versus how many are you going to retain at the end of that period and the value of the subscriber, the customer, you know, attaches to satellite radio.

Okay. And with regard to the rebates, I know a number of the big box retailers, Best Buy and Circuit City, are exploring internally about limiting use of rebates and using more in-store reductions of price. How would this -- would you maybe take a different approach to offering promotions either doing a get one free type of product, although this effectively does that, or essentially giving the full benefit to the customers at point of purchase? Is that something you would consider?

Well, I mean, first of all, Best Buy and Circuit City and RadioShack are extremely important to us, and so whatever the mode of merchandising they decide is most effective to reach their customer base, we are clearly going to be in synch with them.

While Best Buy has clearly indicated where they want to go with rebates, they have also said that they are targeting this for quite a bit out.

Obviously this really isn't aimed at the satellite radio industry. It is much more aimed at the PC industry where rebates have been a mainstay of merchandising for several years.

We don't see any change certainly this year in the way we merchandise. Our research tells us the consumer -- and by the way, consumers like a deal. They like promotional periods, they like to come in and feel like they are getting something, and we think that is just a good part of effective marketing. Obviously as Best Buy and Circuit move forward, we will stay completely aligned and match whatever it is they think they need.

And the good news for us is that it is a more sort of longer-term issue. And the longer-term issue plays well for us because our cost of our product are coming down so great. So that we will be able to deal with whatever the needs of the consumer and our retail partners are a whole lot better if, in fact, they were to eliminate the idea of rebates, and our costs are down dramatically at the time they do that.

Okay. And the last question you were just discussing the elasticity of the product and really focusing on being the premium service. How do you look at the possibility of price increases given how subscribers have reacted to what XM has done?

Okay. So anybody who is listening that is a subscriber should not be paying any attention to what I'm going to say. I don't want to give you any information. But our general sense is we know that we have the ability to increase our price. The research that we have indicates that because of the value that we offer that we could increase our price and still hit our subscriber numbers and have churned about where we are because of the differential of content and between us and our competitor.

Having said that, our interest as a Company is in growing subscribers. The last thing that we would like to do is to send a message to potential subscribers that this is like the cable industry was when they first started, coming in at a relatively lower price and then every three months or six months raising your prices.

So what we would like to do is to keep our price where it is offering value to the consumer, but recognizing that we have the ability to increase our price. Obviously, as we continue to ramp up the subscribers, the price increase becomes more and more significant as we have larger and larger numbers. So no current plans to do it. But we sort of had that card in our pocket.

Barton Crockett, J.P. Morgan.

I wanted to ask you a question about the retail outlook that you had which was quite interesting and that you see yourself selling near parity for the year. First, I just want to make sure I understand that view. Are you saying that you expect by the end of year you would sell near parity, or over the course of the year you would sell near parity?

Okay. So let me tell you what we think. If you took a look at our numbers in the fourth quarter, we were -- some months we were over 50% according to NPD. But I think that the quarter sort of finished at 47% for us. We had big product shortages in the first quarter, so we are really not paying any attention. We know that we just did not have product on the shelves. That we believe that when we look at the year, and again remember Howard Stern is going to have a huge huge impact we believe based on our research at retail, that when you look at the final NPD numbers, you are going to see us at around, close in the area of 50-50 between us and our competitor.

Okay. So it's really on the NPD basis. Because on the sub-basis, when you guys did 174 retail, XM reported 319 retail in the first quarter. Do you expect that to get near parity perhaps by the end of the year or into '06?

We think we are going to have, and David could pop in because I don't think we have given any guidance on specific numbers, but we're expecting that we're going to sell an awful lot of product at retail which would translate into that 50% share.

I do think that there is an apples and oranges comparison as well, but it (inaudible) where the sort of truck and marine market is recorded for the two companies. My understanding is that the truck and marine is in the retail numbers that XM reports, so that would be on a different basis than we report. So we tend to use NPD only because we think one, it is independent, and two, it is the most comparable source that we think exists in terms of what is happening at big box retail.

I think one point I would like to make, and I'm not 100% because I have not had a chance to read all the NPD data for the first quarter and detail into it today, but I will just remind you if you rely on the NPD data, which is the world I grew up in and I rely on it heavily, and obviously I understand it needs to be adjusted, for instance, for Wal-Mart. But if you rely on it, the difference -- and I read everything you all write, and we act very finite like there is a huge difference between 41 and 47%, and there is. But I will remind you the difference between 40 and 50% marketshare in the first quarter at the retail level of the retail data probably is somewhere between 25 and 30,000 units.

Is that significant? Sure. Is that strategic? I don't think so. That is why I reiterate what Mel said. That is what we're striving for, and that is what we think we can do. And that is what our plan is.

Okay. Then shifting gears here slightly and then I will let you move on, in terms of Stern, to what degree are you going to be able to market him in the fourth quarter if he is not formally an employee until, let's say, the first part of '06? Are you going to be hamstrung there, or do you think you will be able to get a good push even if he is not an employee at that point?

We have not disclosed exactly what our marketing plans are. Scott and his people have put together a very extensive plan that we will roll out. What I can assure you is that if we were to describe the Howard Stern universe of 12 million potential subscribers, or he has 12 million current listeners, there will be none of them that will not know that he is coming to SIRIUS in January.

Sean Butson, Legg Mason.

Great numbers, guys. I just had a couple of things there. First off, on the churn number, I kind of do my own calculation based on the daily average weighted subs, and it looks like at least my number that you came in even lower at 1.2%. So the first question is, did I get that right?

You know I honestly cannot comment as to how you are calculating the number. I know that what we're trying to do is maintain a consistent method of calculating the number over multiple quarters. And so as you look at the 1.3% over the last five quarters, starting with the first quarter of last year, it was 2%, then 1.6, then 1.5, then 1.5, then 1.3. So the trend is pretty clearly improving.

I cannot emphasize the importance of that churn number for us. You know, all of the people in this Company's bonus has a factor of what churn is and because we think that that is something that crosses across all of our Company and our programming. We are real proud of where our churn number is today.

Agreed. I guess the second thing is, did you do any polling with potential subscribers in terms of how many adds -- I know it's a tough question, but how many gross adds do you think you might have lost in the first quarter because of the product shortages?

I can answer the question. This is Jim. I won't tell you how I calculate it because I don't want to give you our mix by retailer, but I can tell you pretty easily we lost somewhere between 20 and 25,000.

Okay.

And we were out of stock at one important outlet, which is pretty important to us, that we just blew through in Christmas, and we sold everything there was. I'm not pleased it took us as long as it did to reload, but I'm pleased that we are reloaded and ready to go.

I had a very lousy January as I was spending weekends visiting stores and disappointed that our product was not there. But I think we still delivered in spite of that an extraordinary quarter on growth.

Great. And just quickly the last thing, is there an update on Canada? It seems early in the year there was talk that it might be kind of late second quarter that we get a decision.

The latest public comments have been made by the CRTC would indicate that they are pointed towards a decision by the end of June. You know, it is a governmental process, so exactly what the timeframe will be is very difficult for us to predict. But one of the commissioners was quoted in the papers a few weeks back as saying that they were targeting a decision by end of June.

Great. Thanks. Nice job.

Jonathan Jacoby, Banc of America Securities.

Nice quarter. I want to talk about a little bit -- most of the questions have been answered -- but if you can give us sort of what your OEM sub numbers at Chrysler are right now and any metric? What I'm curious is, as you go towards next year, what type of programming are you going to implement to try to retain these subs as they hit their first-year anniversary?

I don't think we're going to reveal our sub numbers by manufacturer.

In terms of marketing to that base, we do obviously keep very close track of the subs that we gained through the automotive channel as a whole, and our subscriber marketing group has very proactive campaigns to reach out and touch those subscribers and make sure they are aware of SIRIUS, the value, the kinds of things we're doing on the programming side. And they have kind of a multi-touch program they go through with our OEM subscribers.

Then as a follow-up, how should we model ARPU for the second quarter? What is the absolute number or what percentage do you think will be a take rate on this promotion so we can adjust our ARPU accordingly?

Well, the promotion is available across all of our products, and so broadly at whatever you have got for the retail split, it is available for all of retail.

You know, the long history in consumer electronics rebates tends to be that it is a number around 30% give or take is the break (inaudible) 70% of the people don't turn in their rebates. So it varies a little bit from one promotion to the next whether it's a little bit below 30 or a little bit above 30, but it does not tend to vary from that mean all that much.

Maurice McKenzie, Friedman Billings Ramsey.

Congratulations on the quarter. Can you discuss your demographic breakdown? Any shifts you are seeing, particularly as you are picking up more subscribers through the OEM channel, and I have one follow-up?

Yes, I think the glaring demographic is that the female market is generally underserved. You know a lot of the research when you sort of take the information from who the subscriber is tends to be male. We know that there are over two people listening to each of our radios. So obviously we think that the female number is underserved, but we also think that in this rapid growth period we have been focusing first on sports. Scott and his people did a great job of beefing up sports, and we knew in the fourth quarter an awful lot of subscribers came on because of our NFL package. We believe that there will be a great deal of interest for Mother's Day and beyond for buying the radio for Martha Stewart. We are certainly seeing it be across incomes.

But I think it is definitely across the board. You're seeing satellite radio. You saw Hyundai, which is a very low-priced car, saying that they wanted to do it as standard because they think that the product is appealing. Satellite radio is appealing to everybody. We certainly -- you would expect that the Mercedes customer would and all of the higher price, but we think it is a product that is universally going to be acquired and universally listened to.

And what we feel good about right now is that no matter what the demo is, we have programming right now as we stand today that will be attractive and available to any demo right now.

Yes, and a lot of the ethnic programming we have we will be marketing to them as well. I am being signaled that we have time for one more question.

David Bank, RBC Capital Markets.

Congratulations on nice numbers. Two quick questions. The first one is maybe for Mel. Can you talk a little bit about what your strategy is in terms of potentially partnering with Internet radio providers, as well as cellphone radio providers so that it constitutes a programming the next platform of audio entertainment distribution?

And the second question is, on the programming side, can you talk a little bit about where you are garnering the most listeners? Which of your channels is there sort of a top five most popular, and what percentage of listeners are on those stations? Thanks.

Okay. So I truly believe what Scott has said and others have said that we have the best content in all of radio. Remember we have these 120 channels in every single market in the country, and we believe we have it not just satellite radio but all of radio.

So if other people are interested in radio and having whether or not it be radio coming through the cellphone or radio coming through the Internet or radio coming through any type of device, obviously we have been approached, and we have had conversations, and we continue to look at a smart business model. We are not just interested in getting out a press release, but we want something that we truly believe is going to be best for our shareholders and best for us.

So there is the potential of us doing something on the Internet. There is the potential of us doing something with cellphones and other types of devices. These conversations are fluid. They are ongoing. They are interesting. And we continue to look at it and make sure it is the right thing.

Regarding listening, it is very very much like satellite television and cable. We have cable television. We have 120 channels. Each of our customers probably are listening to 5 to 10 different channels a week. Everyone's 5 or 10 tend to be different.

So there are people like me who are listening to news content and CNBC, and then there are hipper people like Scott who are listening to all of the music. And then we have David, who is a cross between us, and Jim listens to everything.

So I don't think that there is anything that glares out. I think you will see a huge difference obviously when Howard comes because of just his huge popularity. I think you'll see in the fourth quarter the answer to that question would be the NFL Would sort of pop-up.

But the reason that we're willing to give the bandwidth to the channels we are giving it to, is that we believe every single channel is driving subscribers to us. So whether it be our bluegrass channel, or our various forms of rock channels, each of them are driving subscribers, and each of them have listeners as well.

So with that, I thank you all for joining us and look forward to talking to you some more soon.

Ladies and gentlemen, this does conclude today's SIRIUS Satellite Radio first-quarter 2005 earnings conference call. We do appreciate your participation, and you may disconnect at this time.