Sirius XM Holdings Inc (SIRI) 2005 Q2 法說會逐字稿

Good day everyone and welcome to the Sirius Satellite Radio second quarter 2005 earning conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Michele McKinnon, Senior Director of Investor Relations. Ms. McKinnon, please go ahead.

Thank you and good morning everyone and thank you for participating on this mornings call. Today Mel Karmazin, our Chief Executive Officer; joined by Jim Meyer, President of Operations and Sales; and Scott Greenstein , President of Entertainment and Sports, will review our recent achievements and business outlook. David Frear, our Executive Vice President and Chief Financial Officer, will then walk you through our second quarter 2005 financial results and update our 2005 guidance. At the conclusion of the prepared remarks Mel, David, Jim and Scott will take your questions.

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 managements current beliefs and expectations and necessarily depend on assumptions, data on 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' 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 call this -- turn the call over to Mel Karmazin.

Thanks, Michelle. Good morning. Satellite radio continues to be a red hot category and Sirius is delivering or over-delivering on all of our commitments which is why we are the fastest growing company. Our second quarter was a real blow out, Revenue up 295 percent. Net subscriptions, additions, up 184 percent; a 32 percent improvement in sack per gross add, and an amazingly low 1.4 monthly churn. Even more important than our first half results is our enthusiasm and expectation for Sirius for the remainder of 2005, for the remainder of '05 and beyond. So today for the third time this year we are increasing our year-end guidance to include year end subscriber count to be 3 million and revenue for the year to be 225 million, up 237 percent from '04. What greatly adds to our confidence about our future is our very high customer satisfaction, 94 percent, our high subscriber usage information. When a subscriber has Sirius they spend 86 percent of the time in the car listening to our service and the remainder to either traditional radio or their MP3 player or CD. So 86 percent of the time they're in their car our subscribers are listening to Sirius. And all of this gets captured in our very low churn rate.

David will go into detail on the excellent second quarter so I'd like to focus my comments on the future. Jim will also fill you in with more specifics on our products, OEM and retail activity but I want to make a few points.

One, we said you should anticipate that we will have parity at retail. For the second quarter of 2005 we had 48 percent share in NPD with our share in June being 53 percent, the largest monthly and quarterly share in our history. Second quarter share '04, 40 percent, second quarter '05, 48 percent. And if you really want to see NPD growth rate just take a look at our history. In the second quarter of '02 Sirius had 7 percent market share. We increased that in 2003 to 23 percent, in 2004, 40 percent. and in 2005, 48 percent. Whether you look at the trend or the absolute share, Sari -- Sirius is delivering at retail. We are on track to achieve parity for the year with our new product offering, generally superior content, with the second season of the NFL, Martha Stewart and Howard Stern coming, we will have an extraordinary fourth quarter.

Our gen three products will be introduced this fall as well in time for the busy holiday selling season. Our products will be smaller, lighter, require less power, will be less costly to produce and will be feature rich. Jim will also brief you on our OEM progress and it's dramatic. We had a 375 percent increase in OEM sales growth in Q2. You will see very dramatic growth coming from this channel as Ford factory installed programs kick in alongside DaimlerChrysler, Mercedes, and BMW. Our OEM growth ramps up significantly in the second half of this year and in '06. By the end of 2005 Sirius will have 72 factory and 93 dealer programs cranking out subscribers.

Turning to programming, and Scott will fill you in on specifics, we continue to upgrade what is already today the best programming in all of radio. And we will continued to this. We have a number of additional programming initiatives planned for the second half of this year to go along with the exciting additions we made last quarter. As we have previously said, there is no missing piece to our offering. So the only additions to our robust programming will be very cost efficient and value-added, not just value-added for our subscribers but also for our shareholders as well.

As you may know we and our partners have been granted a license to operate satellite radio in Canada. There is currently the appeals process going on at the regulatory agency. We anxiously anticipate entering the lucrative Canadian market as soon as practical at the conclusion of the regulatory process and the finalization of our agreement with our Canadian partners.

I would like to conclude my introductory remarks with some comments about our balance sheet and cash flow estimates. We ended the quarter with over $575 million in cash on hand. We continue to believe that we have enough cash on our balance sheet, based on our current business plan, to get us the to free cash flow positive which we expect to achieve in '07. Significantly, we are highlighting today that as early as the fourth quarter of next year we could be free cash plo -- positive, free cash flow positive for that quarter and then for the full year of '07. We continue to look to the debt market as an -- on an opportunistic basis as we have said in the past to add to our balance sheet and to provide our equity investors with the benefit that prudent leverage offers. This morning we also announced that we are launching a $400 million unsecured debt offering. We will shortly file a universal shelf registration which can be used for debt or equity securities but you should assume it is only being done because it is a good idea to have a shelf offering in place. And as I have prevulus -- previously stated there is no need or no plan to visit the equity market. We are on a roll, excited about our growth prospects and I'd now like to turn the call over to Jim so that he can fill you in and give you more color on our operations.

Thank you, Mel. And let me start with the retail channel first. Probably most important is that demand for the category is extremely strong. Industry growth, as measured by NPD, showed 100 percent growth for the month of June and 85 percent growth year-to-date. We see no reason why those growth rates won't continuity into the second half of this year. We were quite pleased with our second quarter results in the retail channel. Virtually all our retail partners enjoyed strong results. Radio Shack had a particularly strong second quarter after getting inventory back in stock. As Mel said, our NPD market share in June was 53 percent and for the quarter was 48 percent. As we have said before we expect to achieve parity and market share in the retail channel and the second quarter results certainly back that up. Most importantly, retailers continue to expand shelf space and advertising dollars to the satellite radio category. This bodes very well for the holiday selling season.

On August 7, to coincide with the start of the football pre-season, we will launch an NFL themed national promotion. As part of this promotion, Starmate, our number one selling model, will be repositioned from $99 retail price point, to $79 retail price point. In addition, a $30 consumer rebate will be available on most of our models including Starmate. This will offer the consumer, in the third quarter, a vel -- a variety of Sirius products and price points, $49 retail to $139 retail after rebate. The promotion will run through September and will be supported extensively with both broadcast and print advertising.

Let me switch now to the OEM channel. Strong performance, 122,000 net sub edition, 375 percent growth versus last year. Let me give you a brief update on each of our OEM partners. Let's start with the Chrysler group. Very strong second quarter, which exceeded our internal projections. With the start of the '06 model year, which is underway right now, Sirius is now available as a factory option on virtually all vehicle lines. Chrysler group remains solidly on track to mark their 500,000th -- 500,000ths Sirius subscriber milestone during the '06 model year. Our relationship with the entire DaimlerChrysler family remains very strong and we are enjoying success across all of their brands including Mercedes Benz.

Let's now talk about Ford. As you know, in June we signed our agreement with Ford to extend our exclusivity through 2011 with an option for renewal through 2013. This important agreement also covers all of the Ford brands: Ford, Lincoln Mercury, Land Rover, Volvo, Jag, Astin Martin, and Mazda. The Ford factory program launchings this month and Sirius will be available as a factory installed option first on the number one selling F150 pick up, the Explorer, the Mark LT and Mountaineer during the 2006 model year. Ford fla -- Ford planned factory programs and up to 21 vehicle lines for the 2006, 2007 model years, generating up to 1 million subs during that period. By the 2008 model year, Sirius will be available as a factory option in nearly 90 percent of all the Ford and Lincoln Mercury cars. Great progress here and we're really excited about our factory launch later this month with Ford.

BMW. Sirius is now available as a factory program on the new 3 series. This, as well as the 5, 6, and 7 series, give us a particularly strong lineup at BMW. Things are going well here and our second quarter results were very strong.

Let's switch over and talk about product briefly. First our 3G chip set we developed with ST Microelectronics is now in full production. We will be hosting a press briefing in late August in New York to highlight our new products which will be introduced this fall in time for the holiday selling season. These new products will be sleeker, smaller and lighter but, most importantly, significantly lower product cost. Several of these products will feature the record slash replay capability. Our research continues to indicate that this is a very strong feature which most importantly consumers actually understand and value. Now it's my pleasure to turn things over to Scott Greenstein, our President of Entertainment and Sports.

Thank you, Jim. I want to touch on briefly the highlights in the programming, marketing and advertising areas. First is a -- a brief overview. At a greater pace than ever before in Sirius history superior programming continues to be a driver of subscribers, a source of advertising revenue and the attending publicity of such programming, a substitute for marketing dollars. In the words of one major magazine, Sirius is a hands-down winner with a better mix of music, talk and sports. Sirius continues to maintain the highest customer satisfaction rate in satellite radio. We continue to attract new subscribers with the mix of host shows and events that cannot be heard anywhere else on satellite radio or terrestrial radio. Our subscribers are growing and our old and new subscribers are extremely satisfied with Sirius' service. We not only attract and create the best in traditional radio programming but also continue to reinvent what listeners can expect from radio. Bringing talent to the air that should have been in radio long ago but needed the emergence of satellite radio and more specifically Sirius to find their calling in radio. From Howard Stern and Cousin Brucey on the traditional side to Lance Armstrong and Tony Hawk on the newer members, Sirius audiences now know their favorite hosts can only be heard on Sirius. By setting the programming bar high from the absolute best in commercial free music to unrivaled sports coverage, exclusive live performances to the biggest names and brands in radio Sirius created a new standard for what is expected from both satellite and terrestrial radio.

Now some specifics. Programming on the music side: we launched Jimmy Buffet's radio Margaritaville channel this past quarter, it added to do Sirius music lineup. Starting in June it features the music from Buffet as well as similar artists, exclusive live broadcast, promotions for Sirius at those shows and as well as a marketing tie-in with his successful restaurant chain. We added BDC's highly action claimed Radio One, the premiere UK music channel that will launch in August. It now completes our British programming lineup that includes the BBC, Wimbledon and English Premiere Soccer League. We announced a Radio Korea that will launch in August . A Chinese language channel will follow in 2006. We became the official satellite radio partner of the Rock and Roll Hall of Fame. We have Sirius gold and classic vinyl channels broadcasting daily from the museum. It also complete another sampling opportunity for long-time music fans as they have extensive traffic throughout the season. We also added on air legend Cousin Brucey to Sirius in June, one of the most well known DJs in the New York area as well as around the country.

On the talk and sports side we had one of the true exclusives in -- in recent radio history, Lance Armstrong while performing in his -- his seventh tour to France victory frequently as he got off the bike at the end of each day did reports exclusively for Sirius and created a show Lance in France, Off the Bike and On the Mike. Martha Stewart Living radio is now being prepared for its fourth quarter debut and ready to go on that. Most importantly on the talk side we are awaiting the arrival of Howard Stern. We are prepared for the most exciting launch in radio history with expested -- expected positive impact in the fourth quarter as well as into the first quarter. We launched Adam Curry's PodShow to be the leader in Podcasting combined with satellite radio, Senator Bill Bradley's American Voices show and we are awaiting the launch for the book world of action claimed publisher Judith Regan Show. In taking a step to show that satellite radios unique capabilities we recorded the first radio drama in recent years called Theater of the New Era that was produced by the Cone brothers and Charlie Kauffman starring Meryl Streep, John Goodman and others that will premiere this Labor Day weekend. The previews have been subject to extensive critical acclaim. Season two of the NFL begins. We saw demand for the NFL in fourth quarter last year, we expect more of the same and just as a reminder NASCAR begins in 2007.

On the add sales front. As promised in the last call we have assembled an in-house staff including sellers in Los Angeles, Chicago and New York, and now add sales is an in-house core competency of Sirius. Add sales are increasing at a rapid pace and the diverse demos hit by our programming will certainly lead in the future to advertising opportunity seen in multiple demos.

On the marketing side, brand awareness reaches an all time high right now. So we've had a successful Father's Day radio campaign that was voiced by Desperate Housewives' Eva Longoria. Our fall marketing campaign will be an organized blitz of radio, newspaper and TV. As Jim mentioned our third quarter we'll have an NFL campaign and the fourth quarter will lead into the holiday. As I said before programming continues to be a driver here at Sirius. In the words of New York magazine a few months ago, you have a choice of two major providers, most of you will want to choose Sirius, the programming is superior. With that note I turn it over David.

Thanks, Scott. As you've heard already this is another great quarter for Sirius. Total subscribers more than tripled, net adds significantly exceeded our previous guidance, churn remained low at 1.4 percent. Our annualized revenue now exceeds $200 million. Sack per gross add was down more than 30 percent year-over-year and our EBITDA loss came in well below the Street expectations as we continued solid execution of our business plan. We ended the second quarter with 1,814,626 subscribers, up 278 percent from a year ago. We added approximately 366,000 net subs, nearly tripling last year's second quarter performance and also reported approximately 433,000 gross adds, again tripling last year's performance. Our second quarter subscriber growth reflected solid performance at retail as Jim has discussed where according to NPD our Starmate and Sporster -- Sportster products were the top two selling satellite radios as well as continued acceleration from our OEM channel. You'll notice in the subscriber numbers starting this quarter that we have reclassified our special market subscribers from OEM to retail since they are predominantly served through retail distribution. You can download a reclassified historical quarterly subscriber table from the Investor Relec -- Relations section of our web site.

Now on to a little more detail on subs. In the retail channel Sirius added approximately 245,000 net subs, a 137 percent increase from the prior year quarter, and a sequential quarter increase of 23 percent. We saw a considerable pick-up in retail market share in May and June as both Mel and Jim have mentioned, after launching our $50 rebate program for the dads and grads season. And again as Jim discussed this weekend we will launch our third quarter retail promotion which will include lowering the retail price of Starmate to 79.99 and offering a $30 replate on select plug-in-play products including the Starmate. We continued to see a pick up in the automotive channel additions. The company added 121,664 net subscribers from this channel, a 375 percent increase over the second quarter of 2004, and again a 13 percent sequential increase over OEM net adds in the first quarter. Q2 represented the fifth consecutive quarter of increased net additions in this channel. We now close to 500,000 automotive OEM subs with factory programs in 7 -- 70 total models increasing to 72 by this year end.

As Mel mentioned, high customer satisfaction with our service resulted in continued low churn and an average rate of 1.4 percent per month, down from 1.6 percent per month in the year ago quarter. Strong subscriber growth in the quarter drove total revenue to $52.2 million, an annualized rate of over 200 million. Year-over-year, revenue increased roughly four times from the 13 million reported in the second quarter of '04. Advertising revenue was just over $1 million in the quarter, exceeding total advertising revenue reported for the full year of 2004. With respect to RPU, it came in for the quarter at $10.50 with a $0.37 impact from mail-in rebates. The Hertz program was accretive to RPU, representing its seventh consecutive quarter of improvement and advertising revenue contributed $0.22 to RPU this quarter.

Our adjusted loss from operations, which we generally refer to as EBITDA, widened by only $11.5 million from 97.3 million last year to 108.8 this year despite a $34 million increase in sack required to support a 190 percent year-over-year increase in gross adds. The $39 million increase in revenue more than covered our non-sack operating cost. This, let's call it pre-sack EBITDA, which improved buy over $20 million from last year's second quarter, is worth watching going forward. We expect consistent year-on-year improvement in this metric as we march to positive cash flow. Finally our EBITDA loss declined sequentially from the first quarter of '05 as programming and content customers, service and billing and sales and marketing expenses all declined sequentially from the first quarter.

Now let me take a couple of minutes to just run through the expenses. As Mel discussed, sack for the quarter was $160 on a per gross add basis, down 32 percent from last year's quarter. The strong response to our Q2 promotion resulted in a larger sell through of product as well as a higher mix of retail gross adds than we had expected. Both factors contributed to sack per gross add being much lower than we had expected. Programming and content expenses increased from 10 million in last year's second quarter to 16.1 million this year, primarily reflecting the cost of additional sports programming initiatives, expansion of our on air talent to support the broader programming lineup, and increased variable broadcast royalties resulting from the 278 percent increase in our su -- subscriber base year-over-year. However, programming expenses declined sequentially from the first quarter reflecting the absence of NFL related programming expenses in Q2 which of course will re -- return in Q3 as Sirius kicks off its second full season of NFL coverage this month.

Customer service and billing expenses were 7.7 million in the second quarter including a $600,000 non-recurring credit from the renegotiation of a contract related to the operation of our subscriber management system. Even without the credit second quarter customer service and billing expense was still down sequentially from the first quarter of this year due to the spill-over of 2004 holiday season customer support efforts into the first quarter and other cost reduction programs. Excluding the credit in the second quarter customer churn cost declined to $1.73 per average sub per month, a 53 percent improvement from the $3.69 a year ago and a 28 percent improvement over the 2.40 reported in the first quarter of this year. Our second quarter sales and marketing expenses were $33.9 million, 1.2 million lower than the 35.1 million reported in the year ago quarter. The year-over-year improvement reflects costs incurred in 2004 for our initial Radio Shack launch and the roll-out of our first NFL season marketing campaign. Lower yea-over-year sales and marketing expenses were mitigated by increased OEM revenue share on the retail residuals in the second quarter given our larger subscriber base and higher personnel related costs to support the continued growth of our business.

We incurred 14.1 million of G&A expense in the quarter, up from 11.3 million reported in the same period last year. This increase resulted primarily from overhead expansion to support our growth requirements. Engineering, design and development expenses doubled from the same period last year to 11.8 million. This increase was primarily attributable to costs associated with product design for the Company's next-generation products and tooling and manufacturing upgrades for our OEM factory programs. Equity grand to third parties and employees for the second quarter was $41 million, up from 12 million in the year ago quarter and 39 million reported for Q1. Q2 expense primarily represented accruals for performance by employees and certain distribution partners towards specific milestones and the impact of a higher Sirius stock price in the second quarter of '05.

Our net use of cash, defined as cash used in operating activities plus CapEx and restricted investments activity, decreased to a use -- 57.6 million in the second quarter of '05, down from 70.7 million in the year ago quarter and down from 130.3 million in the first quarter of 2005. Net loss adjusted for non-cash items increased primarily as a result of the higher sack to support the growth of our business. As I mentioned earlier, revenue increases of 39 million, or 295 percent more than offset the increases in other operating expenses. The impact of net working capital changes on cash flow increased from po -- positive 36.7 million in the 2004 quarter to positive 45.7 in the second quarter of '05, reflecting increases in accounts payable and accrued expenses as well as higher deferred revenue from customer prepayments, somewhat offset by increases in accounts receivable and inventory. We placed funds in escrow to support our obligation to Ford for various costs incurred in the connection with the launch of Ford's factory programs in prior periods and these funds were released back to us from the escrow in -- in June.

So Sirius ended the quarter with approximately 577 million in cash, cash equivalents and marketable securities which is sufficient to reach cash flow break even under our current business plan. As Mel mentioned earlier, Sirius could report its first quarter of positive free cash flow as early as the fourth quarter of '06 which further underscores our expectation to be free cash flow positive for the full year 2007 under the current business plan.

Now for just a few minutes on guidance. Reflecting the strong first half of '05 and our expectation for continued strong subscriber growth in the second half we've raised our guidance to 3 million, up from 2.7 million suggested by previous guidance. We expect third quarter net sub additions to be roughly flat with the second quarter as the Christmas season will continue to deliver a large portion of our adds for the year. Estimated average monthly churn is expected to be 1.5 percent for full year '05 as compared to previous guidance of 1.5 to 1.6 percent given continued high levels of customer satisfaction with our service. The Company continues to expect sack for gross add to be under $145 for the full year with further declines expected in '06. We are raising full year revenue guidance to 225 million, up from previous guidance of 215. And we would expect our EBITDA loss to expand from a $510 million loss to 540 million given the additional sack associated with the 257,000 increase in year-end subscriber guidance. And lastly total operating cash uses are expected to be approximately 375 million. Again, in line with previous guidance.

Now, as Mel mentioned, we will bring a $400 million debt deal today. It's a senior unsecured eight-year offering. A portion of the proceeds will be used to call out our existing 14.5 and 15 percent debt with the balance of the proceeds available for general corporate purposes. As we said in the spring we've been interested in raising money opportunistically and are taking -- taking advantage of currently available market conditions to do so now. I -- I know that some of you will have questions on the offering and I'll tell you in advance, we can't answer them. The -- what we've said here, what you read in the press release is as much as we can say until the offering is closed. Lastly, we will also file a 500 million universal shelf this week. We have no additional financing plans. That would be no additional financing plans. We have -- but we have consistently maintained shelfs in the past and we are simply refreshing our self -- shelf capacity with this filing. So with that let me turn the call back to Mel.

Thanks, David. Jim mentioned during his comments that we would be having in late August a day for press to be able to review our exciting new products. Institutional investors as well as analysts will be hearing from Michele McKinnon and giving you information for you if you'd like to join us on that day as well. So just in closing, we estimate that there will be over 9 million subscribers to satellite radio by year end. With over two listeners per subscription there will be over 20 million listeners to satellite radio at year end. Sirius will outperform the growth of satellite radio and significantly pick up market share in this very fast growing category. We are firing on all cylinders and believe that the best is yet to come. So, I'll turn it over to the operator to handle any questions.

Thank you. [Caller Instructions]. We'll take our first question from Bob Peck with Bear Stearns.

I'd like to ask you a bigger picture question. Could you tell us a little bit more, give us a little more color on your view of the wearable market, where you see that developing over time and would Sirius have any plans to maybe tap into the WCS spectrum?

Okay. So I think I missed your -- the beginning of your question, I think you were looking for bigger picture and then you narrowed it down to these issues? Is -- you -- you want to comment on wear --

Generally, the wearable product, and your integration to iPod, cellphones, maybe increasing capacity through WCS, that type of stuff.

Yes, I -- I think I'll take a shot at it and then Jim, if you want to add on please do. So obviously the way we currently are making our money is that we are selling subscriptions at about 12.95 a month. So we are obviously, when we sell a Starmate radio at $12.95, that's the equivalent of selling a radio for $200 and getting 12.95, a subscription price. We obviously -- if the audience is interested in buying a wearable product you should assume that Sirius will have a wearable product. We don't pre-announce dates in which --when we will have our products. We will have our products at the appropriate time for us. So the only viewpoint that I can give you on a wearable product is that you will see it from Sirius. On WCS spectrum, we are a believer that with the overlay modulation that we announced that we have spectrum enabling us to do all the satellite radio that we've committed to be able to do telematics, to be able to do video and that when there is a business plan where the additional spectrum would be beneficial for our shareholders then we would obviously consider acquiring additional spectrum. But right now we clearly have sufficient spectrum to be able to deliver all of what have we see are needs to be in the future. Jim?

Yes, I'd just like to make two more comments. First, I absolutely believe that the ability to store content and take that content with you is going to be a huge feature in satellite radio. And, obviously, I think you can expect that capability in a lot of our products as we role them out to common and particularly making that experience as seamless as possible. I also believe that the -- that the wireless world and in particularly because of the ubiquitous distribution of cellphones in the United States is an interesting vehicle to evaluate music as well as other services. I think that what's not clear yet is what will be the business model and what networks will those services use to get to the end consumer. As you know, we've announced a relationship with Sprint the timing of which will be unveiled later this year to introduce a service over their network. Obviously, also we're in conversations and continue to look at other ways through the cellphone to deliver that -- that -- to deliver our service to the consumer in other ways.

A quick follow up for David. David, have you released what the use of the proceeds will be of the offering? And number two, as your OEMs increase penetration of their cars, installing the radios more into cars, will there be an additional equity component to compensate them for that?

On the use of proceeds what the press release says this morning, seeing -- seeing as my remarks will -- will again use a portion of the proceeds to cull out the remnants of the old high yield debt from years ago that at 14.5 and 15 percent coupon and then the balance, Bob, is just for general corporate purposes. With respect to our OEM contracts, the -- there have been no new equity issuances. With those we've recently extended the forward contract. There is no equity component to it. I can't speak to deals that aren't din -- done but we do hold our equity very dearly. The Company is at a different stage of development now than when it originally entered into its -- its OEM contracts. So I wouldn't expect the terms of the original contract to necessarily be repeated as we move into this next phase.

Thanks, guys. Congratulations.

Thanks.

Moving on to Amelia Wong of Sanford Bernstein.

We're interested in a bit of an update with regard to Howard Stern, specifically we're interested in the terms of his existing contracts with Infinity. Do they allow them to be available for marketing and promotional activities with Sirius in the fourth quarter and could you just outline any plans you have with him for marketing in the fourth and when you might expect additional subscribers to hit that are related to him just in the fourth and the first quarter '06 or also into the remaining quarters of '06? And secondly do you ha -- have you guys made any decision about your on ground sphere and whether or not you'll be launching them in the near future? Thanks.

Okay. So on the subject of Howard Stern. He is under contract to Infinity through the end of this year. I heard his show this morning where he talked about a rumor that he was going to be taken off the air on -- the end of September. We have not heard anything. With certainly have no interest in interfering with Infinity's contractual relationship with Howard. That we are excited to have Howard start with us as quickly as he can start with us. So that when he is free of his contract and if that's at the end of the year we will start with Howard on January 1st. If that's sooner we will start sooner. And you can be assured there will be nobody in the United States that will not know that Howard Stern will be on Sirius Satellite radio. So the market will be very aggressive and part of our existing business plan. And regarding any promotion and when the subs come, whether or not we receive some already whether or not we're going to get them in the fourth quarter, that we really can't pin down exactly when a Howard Stern subscriber is going to subscribe but I can sure you -- I can assure you that he has 12 million or more listeners and hopefully a large number of them will follow him to Sirius when he starts. Scott, anything else?

No, I -- I -- I echo the thought of everyone will know. And most importantly I just wanted to reiterate that Howard is on roughly 40 or so markets in -- in America and there are about 290. So what we're most excited about is the markets obviously that he's in but the newer markets where he'll have an opportunity to be heard for the first time.

And regarding our satellite we continue to look at it. We currently have it as a brown spare. We are looking at alternatives of readying it for the potential of a launch to where it would be a fourth satellite that would be launched. We have not made a decision on that. We also look at other alternatives on stellite and whether or not we would consider a high powered fifth satellite, Sirius 5, to be launched. But we have not made any decisions at all on what to do with our satellites and we're in what we consider to be very good position with three satellites that we currently have up there with an expected life of well into the next decade.

So just to clarify on Howard Stern, I'm sorry, under the terms of his existing contract we wouldn't expect to see him available for per -- promotional activities until the first quarter of '06?

Yes, I -- I think that we really are unable to comment on Howard's existing contract with Viacom. You'd have to get the terms and conditions of his existing contract from them. We're not comfortable talking about what he can and cannot do. All I can tell you is that when Howard starts, America will know where to find him.

Great. Thanks very much.

Laraine Mancini from Merrill Lynch has our next question.

I have a couple questions. First, when did the rebates from Q2 expire, is there going to be spill-over to RPU in 3Q on top of some RPU impact from new rebates? And second, if your OEM adds are actually added to your nut -- net add number when the car is sold from the manufacturer to you, what type of impact do you think that has on your net subscriber additions quarter to quarter? Does it equalize at some point?

David.

So on -- on the rebates we -- we accrue for the rebates, needless to say the customers buy the radios and activate them and they fill out the paperwork and the paperwork can come in weeks later. So we've had -- there's been a pretty consistent history in our different rebate programs that the -- the claim rate on those being around 30 percent. And so we accrue to that level and then we finally true up. There are in some quarters a -- a -- effects, either positive or negative in the quarter following the -- the end of the rebate activity. And I'm sure the same thing will be -- be true here but we do try and accrue for it within the quarter.

On the OEM adds, I'm not quite sure I understand the -- understood the question so let -- let me do it this way. That -- the -- the -- for our bundled subscription subscribers in the OEM channel, that we record those as subs when they ship from the factory and that's also the point at which we recognize the deferred revenue associated with the -- the payment -- payment we get associated with the bundled sub as well as the sack that is associated with that -- that subscription. And then we -- we actually begin to amortize the revenue after the car has been sold through to -- to the end consumer. So there's a little bit of a lag there from, for a revenue recognition perspe -- perspective. Does -- does that answer the question?

Somewhat. I guess if you're shipping them earlier than you're actually adding the subscriber and you're paying the sack earlier does that impact sack for the -- a following quarter and does it impact your sub number to for the next quarter? I guess is what I'm getting at. Or does it equalize within a quarter and you -- you wouldn't feel any impacts in the numbers?

Well, again, the -- we recognize the -- the automaker pays the -- the subscription to us when it's shipped and we owe the sack when it's shipped. So that you've got the three things, the subscription, the incurrence of the sack and the receipt of the payment all occurring at the same date. The only thing that -- that changes is when the car actually sells through to an end customer which generally I'd say most of that rolls through in sort of 90 to 120 days. The -- and -- and then the -- the -- we begin the revenue recognition. So it's just a delay in -- in moving it from deferred revenue into the P&L.

Okay, but if most cars are sold within 90 days and it's -- it's within -- and a lof of cases it's within the same quarter anyway.

the Yes. And -- and I think these -- just over time as base builds I -- I -- I think the -- it's just going to sort of even itself out.

Okay. And then one quick follow up on Howard Stern. If he were to come early would you anticipate that there would be a change to his contract or would it just shift forward or no thoughts yet on that?

We've had no conversation with Howard Stern about coming early because we do not want to in any way, shape or form be interfering with Viacom's relationship with their performer. So we're not able to comment on anything regarding Howard Stern.

Thanks a lot.

Moving on to Sean Butson from Legg Mason.

[INAUDIBLE - no audio] everybody. I guess the -- the first thing is on -- regarding the reclassification of subscribers can you just remind us what those special market subscribers are? And then secondly, regarding the -- the guidance, everything looks real good, obviously. I was just curious how you're able to keep your cash uses guidance if a number of the other items are changing? Thanks.

The -- with respect to the -- to the special market subs, is their predominantly truck subscribers and an awful lot of them coming through o relationship with Pana-Pacific which uses the -- a product that looks -- looks a lot like the -- the Sportster. And it is -- it has all of the same economic characteristics and the same distribution characteristics as retail. So that's why we -- we put it there. In terms of cash uses it's really it's got to do with two things. It's the -- the size of the prepaids that is the -- as we've been talking about as we drive sack down and the weighted average prepay remain -- remains relatively constant we just end up with less capital deployed per sub than -- than would have been expected otherwise and so the improvements you've seen in sack so far have -- have yielded positive benefits. We also just have a little bit more favorable timing with respect with respect to when the payments and with respect to that underlying growth go off. So the -- a little bit higher growth tends to result in higher payables at the same time. So those-- those be the two reasons for it.

Okay. So then your EBITDA loss gets bigger but your cash uses, you're be able to keep flat and the difference is the -- maybe the working capital change

That's exactly right.

Okay. Great. Thanks. Nice job, guys.

Thank you.

Next up is Jason Helfstein from CIBC World Markets.

Thank you. Three questions. The first, without giving away your strategy on the satellites and -- and Mel you did already did give some color on this, can you talk, if you did choose to go, hypothetically, with a higher power satellite, what would be the benefits of -- of that? Number two, David, can you give us some more elaboration on what's the prepaid now as far as average month per subscriber and then-- and then if you've got any stats on percent in the family plan? And then lastly sack was obviously much better than expected this quarter but you did not change your full year sack guidance. So should we expect sack to pick back up in the third quarter or should we expect kind of a similarly better than expected number for the third quarter? Thanks.

Okay. So I'm going to turn it over to David but let me just say again about satellites that there has been no change in our plans. We're looking at alternatives and if in fact we were to launch Sirius 5 as a high powered satellite there would be benefits and at the time we decided that we would tell you what those benefits would be. So, David?

Okay. So with the weighted-average prepays they continue to stay around nine months. The family plans continues to be around, our multi-receiver plan, continues to be around 10 percent of our subscriber base. And the fact -- one of the things I mentioned in my comments is that we have stronger sell through of product as a result of the -- the rebate activity in the second quarter and so we ended up with little bit less inventory build in the sack number than we would have expected. We also had a higher mix of retail in the overall adds. Retail does have lower sack now than OEM. So it's a little bit of a mix issue. We've got to make sure that we've got sufficient inventory in the stores for holiday season. So again I think we've been saying all the way along that you should expect sort of this $190 level of sack for the first three quarters and -- and then expect that the full year to be somewhat under 145. And we -- we still look at all the numbers, everything going on in the marketplace and believe that those are -- are good numbers.

Okay. And just one quick follow up. Do you guys have any audience data yet? And -- and I know you guys have a contract with Arbitron and when will have you that data and will you be releasing that?

Yes. We have audience data that we look at regularly. Obviously, we are constantly surveying our subscriber base. We know what channels they listen to. We know what they like about our channels. And regarding Arbitron, those of you that follow terrestrial radio know that there's a huge debate going on about changes that Arbitron wants to make in its methodology., we think that their methodology is archaic in this world and that our salespeople have sufficient information to be able to work with advertisers particularly focused on return on invested capital as compared to tradition Arbitron numbers for audience. We -- if in fact we believed that we needed numbers from Arbitron we would subscribe to Arbitron and provide our sales department with those tools. We are involved in the budgeting process for 2006 right now. We are looking at a humongous growth in advertising revenue anticipated for '06 and we're able to accomplish that with just our internal numbers and, again, at the time that we need syndicated numbers our advertisers will get those.

Thank you.

April Horace of Hoefer & Arnett has our next question.

Hi, good morning. Speaking of advertising can you give us a little color as to how many bodies you've added, what markets you're targeting, what type of advertisers, as well as what channels have more interest in the advertising area?

Scott?

Sure. We've added approximately seven or eight people to the advertising staff, mostly to cover the logical geographic areas of Los Angeles, Chicago and New York where we feel we're fully staffed for where we need to be right now. The goal is, obviously, the music side will always remain commercial free and the news talk and sports will be the opportunities. We believe that given that our news talk and sports channels cover literally every demo and in some cases sub and sub demos that the advertising return will be, as Mel said, advertisers will look at it as they will get exactly the right demo they're looking to reach either on a particular channel or group of channels that we will either assemble for them or do on an ad hoc basis. So, we feel really good about that trend of looking for both alternatives to advertising in the traditional way as well as exact demos for that advertiser.

Yes, I can tell you that right now we are seeing a very strong demand for NFL related content today. There is great anticipation for Martha Stewart from a lot of advertisers who have been disappointed in their ability to reach women on traditional radio. I can tell you that Howard Stern will be a very big driver of advertising revenue in 2006. And when we announced NASCAR we also announced that there would be a clean feed and that we would have all of the advertising inventory, so in 2007 we anticipate that NASCAR will have great demand. Our cha -- OutQ. channel is doing very well with advertisers and we continue to offer a targeted medium which is right up what advertisers are looking for.

And then a quick follow up. On the third party equity non-cash expenses can you give us any color as to who might be earning more warrants with respect to dish, UHE or the NFL?

The -- I -- I I don't think I can run through all that this morning. The -- we've got the tables that you'll -- you'll see in the Q for one who's got warrants and then two we provide the detail of the third party expenses that -- that are incurred. As you know, April, it's a -- it's an area that is fraught with a whole lot of estimates and -- and it has a lot of variability into it, especially as we get into rapid changes in the stock price. So it's just -- it's a -- it's a squirrely thing to -- to wrap your hands around.

And then last question. Can you describe -- I know that you were looking to raise debt back in March and now you're going to raise it 400 million. Can you tell us what's happened in the debt market and why now versus last March?

Well, as we said last -- last March and April when we went out that if -- this was an opportunistic effort by the Company that we thought having some additional capital would be a good thing that we thought calling out the -- the high coupon notes would be a good thing and so if rates and terms were offered to us that we thought were attractive that we thought it would be a good thing for the Company to do it. The -- in the wake of the downgrade of -- of GM back in the spring as well as continued outflows, of funds from the high yield -- high yield market, it -- it got pretty choppy and a rate that we were interested in wasn't available to us in -- in April and since we didn't need the money we -- we took a pass on it. That has -- seems to have changed in the course of the -- the last couple of weeks, that conditions would appear to be more favorable and so we're back in the market to do exactly what we said we were willing to do in the spring.

Yes, I -- I guess, I don't know if I'm going to get in trouble by saying this, but I think at the time that we went into the market we believe that it would be opportunistic if we were able to do a deal with a coupon that was under 10 percent. And when we started there seemed to be a market for that and then because of the General Motors and other issues we were unable to get the market where we wanted it so we walked away. And again without getting into any more specifics that we believe that if in fact we can raise this $400 million, opportunistically, we think it's great for our equity shareholders to be able to get that benefit of that leverage and we would do that. And if in fact the market isn't there then we won't do it. We have time for one more.

Time for one more question.

Our final question comes from Jonathan Jacoby, Banc of America Securities.

Good morning. Thank you for taking my question. First part is some modeling question. You've had a successful kick off of Chrysler, Ford's coming on line. Can you give us your expected churn rate for 2006 or -- or how we should think about that on a time line? What is your fourth quarter retail share expectation? And then ear -- any early estimates for advertising in 2006? The second part is on product development. Chip set three, you guys have been talking about. We're just curious on a time line if they've shipped to the consumer electronics manufacturers and any more details you would share with us on gen three products? thanks.

Okay. So -- let -- let me do a couple of these, Mel. So on --we've very consistently said that you should expect the long-term churn rate to be in the 1.5 to 1.6 percent range and we continue to believe that. We don't provide guidance as to retail share. We have given you guidance as to how we expect the number to come out -- come out for the year in terms of total subs and we have yet to provide any guidance with respect to 2006. So I don't think we'll do so today. Just quickly on the gen three chips, we have said that gen three chips are -- are coming out of FP and going to the radio manufacturers. Now they are being integrated into products and so those gen three products will be on retail store shelves and as we come into -- to the fall, and as I believe Jim mentioned, we have a launch of our retail products coming up later in August where those will be available for the press as well as -- as the analysts to -- to review.

And I think that the guidance that we've given today, which is the same guidance that we gave at the beginning of the year, was that you should expect that by year end for the year we will have retail parity and once again the advertising revenues for 2006 will be just dramatically up over 2005 and that's a function of the adding Howard Stern to it plus the fact that we just will have a far bigger subscriber base and we'll see where it goes. But I know many of were you sceptical about what the advertising potential was on the Internet and I think that you'll see that the advertising potential on Sirius Satellite Radio is even greater than many people think it is. So with that I'd like to thank you all for participating in our call and talk to you soon.

That does conclude today's conference. We thank you for your participation. You may now disconnect.