Sirius XM Holdings Inc (SIRI) 2005 Q3 法說會逐字稿

Welcome to the Sirius Satellite Radio third-quarter 2005 earnings conference call. As a reminder, today's conference is being recorded. At this time I would like to turn the conference over to Michelle McKinnon, Senior Director of IR. Ms. McKinnon, please go-ahead.

Good morning, everyone, and thank you again for participating on this morning's 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 provide an update on our recent initiatives and business outlook. David Frear, our Chief Financial Officer, will then provide commentary on our third-quarter results as well as an update on our annual 2005 guidance. At the conclusion of the prepared remarks Mel, David, Jim and Scott will take your questions.

As is typical, we have allocated approximately 1 hour for this 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. Even old forward-looking statements are based on management's current beliefs and expectations 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' 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.

Thanks, Michelle. Good morning, everybody. Sirius' third quarter was a record quarter and we are delivering on our business plan. Satellite radio is very hot and Sirius is the hottest company in the category. We continue to pick up market share in this fast-growing market. Satellite radio is on track for over 9 million subscribers by year-end and almost 20 million listeners.

Sirius ended the third quarter with over 2.17 million subs, up 97% from a year ago. This 97% sub growth is more than double the growth rate of our competitor. Our revenue was up 250%, and this was almost double the growth rate of the other company. Also, our third-quarter revenue was greater than our full-year '04 revenue. Our growth rate at retail exceeded our competitors in Q3 and we finished the quarter with an NPD market share of 48% which is tied for the highest quarterly share in our history.

To illustrate our progress on growing share, in Q3 '02 we had 13% of the market; in Q3 '03 it increased to 35%; in Q3 '04 that share was 41% and now it is 48%. Significantly in the most recent month available, which is September, our NPD share was 56% which is the best ever for Sirius.

Now there's been some noise to that NPD does not include Wal-Mart, so we adjusted the numbers to approximate Wal-Mart and Sirius' share is 54% for September '05. What is even more important than the actual number is the directional trend; there is no question that the satellite radio company growing faster and picking up market share is Sirius.

Our current growth and future growth in OEM is even more impressive than our dramatic growth at retail. Our third-quarter OEM growth was 230%, approximately five times the growth rate of our competitor. And our major partners, Daimler Chrysler, BMW and Ford, have introduced exciting new models and we are pleased that their numbers are running above expectation.

On the cost side I'm happy to report that we had a 35% improvement in our cost for acquiring subscribers and are on track to deliver on the guidance we provided for the full year which is a significant improvement over last year. Consumers love our product and that is contributing toward our average monthly churn for the year also on target at approximately 1.5%.

Our ARPU was up and higher than our competitors'. So you can see why we are so pleased with our third quarter and, more importantly, our prospects for the future. Looking forward we are anticipating a blowout fourth quarter. Many of our next generation products are in the stores now and others will be hitting the shelves by Thanksgiving. We are very enthusiastic about our prospects for the important holiday season.

The indications are that Howard Stern is going to significantly contribute toward our picking up market share in the most important months of the year. We also believe our momentum will continue into '06. We will obviously take advantage of the interest in satellite radio for the holiday season and will very, very aggressively be promoting Sirius and Howard Stern on television, radio, newspapers, magazines, movie theaters and the Internet during this period and into '06. We will have Howard Stern available to us starting in January, so you should anticipate an aggressive campaign in Q1 for Howard Stern as well.

Since this is our last earnings call in '05, and I know that you'll be much more interested in hearing about '06 during our next conference call, I want to take this opportunity to reinforce what we have been saying to you over the last year so you can see how we've delivered on our promises. We said the satellite radio industry will be very big and very profitable and it will be.

We today reiterate our guidance of being free cash flow positive in '07 and possibly even in the fourth quarter of next year. We told you that our relationships with our OEMs were excellent and you should assume we would enter into extensions of our existing partnerships, we delivered.

As you saw yesterday with our extraordinary announcement with DaimlerChrysler, we have now extended our exclusives OEM deals with Ford, BMW, DaimlerChrysler and Mercedes for long-term and financially very beneficial relationships. Our exclusive partners account for approximately 40% of all cars manufactured for sale in the U.S. and we continue to have other opportunities with companies like Toyota, Volkswagen, Audi and Penske for them to deliver subscribers to us as well.

Sirius brand awareness is up dramatically from a year ago and consumer satisfaction is very high. Our top line revenue is way up and will continue to grow significantly. Our SAC has come down and will continue to come down. We have cooler products available now including our first wearable device and even cooler ones in our pipeline. We raised sub guidance this year three times and today I'm pleased to announce that we are raising it once again to over 3 million subscribers by the end of this year.

Our balance sheet is in great shape; we have over $900 million in cash which is obviously more cash than we need to get to '07 when we will be generating free cash flow. We announced that we will be expanding our bandwidth through overlay modulation and that will allow us to offer additional features and services. We are on track to deliver video to the car as soon as next year. Our technology team is working on a number of very exciting projects. Stay tuned.

We have also accelerated our telematics activity. We put a national advertising sales organization in place, which is today and will more significantly in the future, deliver the second stream of revenue we have been talking about. We already have advertisers in on the books for Howard Stern next year. We continue to add innovative and desirable content at costs that benefit our shareholders. We, without question, have the best content in all of radio.

I urge you all to check out Bruce Springsteen on our exclusive E Street radio channel, Sirius Radio 10, which will sign on at noon today. We will begin servicing the desirable Canadian market next month and that will add value to our shareholders as well.

All year we told you how much we valued our equity and that we did not need to issue any additional shares into our float in '05. We didn't and have no plans to in the future. So in summary, we have executed our plan very well in '05 and are laser light focused on delivering full year '05 results and beyond. Consumers love our product and they are driving our business; I believe that is the best business model. Without question Sirius is the fastest-growing company in satellite radio.

I want to thank our shareholders for their support and will turn the call over to Jim, Scott and David for more details. Jim, why don't you kick it off?

Thank you, Mel. I'll first start with some comments as they relate to our retail sector and start with the third quarter. Industry satellite radio sales in the third quarter remained very strong running approximately 70% -- resulting in year to date sales running 70% higher than 2004. Sirius Satellite Radio retail year to date sales are up 105% resulting in year to date market share improvements. As Mel said earlier, third-quarter NPD market share was 48% with September at 56%, our highest monthly share ever.

Let's talk a little bit about the fourth quarter. First, and most importantly, we expect a very strong fourth quarter in the retail channel. Because of lower retail price points, increased merchandising and Howard Stern coming, we expect industry sales in the fourth quarter to run somewhat higher than the 70% year-to-date growth rate. We also expect our NPD market share to be at least 50% during the fourth quarter.

As far as product supply is concerned, production ramp up for our new products is now well underway. We are taking a very aggressive position regarding supply and, unlike last year, we don't expect supply to limit our fourth-quarter sales opportunities.

Regarding one of our new products, the S50, we think the S50 is the most exciting new product and will be the coolest product available in the satellite radio category in the fourth quarter. Feedback from retailers and others is very strong. We're quite excited about the S50 and it will be available in good supply for the crucial holiday season.

Now let's focus on our fourth-quarter promotion. First, both our Sirius 1 and Visor products are now available at retail and will be promoted during the holidays at $49 through the promotional season. We have also launched an exciting $50 consumer rebate promotion which kicks off this week. This promotion applies to our new Star Mate record product, taking it from $129 to $79 for the holiday period. It also applies to our number one selling Sportster record model, moving it from 149 to $99. And finally, yes, the $50 rebate will also apply to the S50, making this exciting new product available at 279 after rebate during the holiday period.

In addition, Sirius Satellite Radio will be featured heavily in all major retailers' weekly inserts. RadioShack will also run three new TV spots solely focused on Sirius Satellite Radio. And finally, we will promote heavily in the fourth quarter with our own national advertising which Scott will comment on in a moment. If you stop and think about it, for as little as $49 to as much as let's say $99 satellite radio represents an outstanding gift giving value and we expect a very strong holiday performance.

Now let me move to the OEM sector. And all I can say here is outstanding progress in the third quarter. First, strong sales of over 149,000 subscribers, our best quarter ever in the OEM sector. Second, all -- and I underline the word "all" -- of our exclusive agreements renewed with long-term deals which both improve our penetration rates at each of the car companies as well as consistently improving our economics.

Let me take a few minutes and comment on each of our partners and let me start first with DaimlerChrysler. Outstanding third-quarter sales with Sirius available as a factory option now in 14 vehicle lines; exclusivity extended until September 2012; and finally, DaimlerChrysler targeting 750,000 units for the 2006 model year for the Chrysler Group alone, representing over 30% penetration in the '06 model year. We're very excited about the progress we've made at Chrysler and we think there's more to come.

Let's talk about Ford for a moment. In August Ford successfully launched our first two factory vehicle lines, the F150, the number one selling truck in America, in the Mark LT. The factory order rates for these models with Sirius are running above our expectations and we expect good results for the year. Two additional models that offer Sirius as a factory option will launch late this year, the high-volume Ford Explorer and the Mercury Mountaineer. By the end of '06 calendar year we expect approximately 19 vehicle lines to be available from Ford with Sirius as a factory option.

By the way, in September we also launched, with Mazda, five models with Sirius as a port installed option. We are working closely with Mazda to make this a factory program in the near future.

BMW, exclusivity extended until August '08 and increased penetration planned on the four model lines that are now available with Sirius as a factory option.

And finally, Mercedes, exclusivity extended until September 2012, and again here very optimistic projections for penetration. I think you'll agree in the third quarter in OEM we wrapped up with good success. And I'd now like to turn it over to Scott to talk about our marketing and promotion.

Thanks, Jim. As many of you have anticipated, we are preparing for an unprecedented and multifaceted launch on Howard Stern. This will be unprecedented for either a radio personality or a radio campaign and I will get to that in a moment. But I do want to take a few brief moments to talk about programming in general before turning it over on marketing.

Over the past few months our programming and marketing has never been stronger. The critical acclaim in both areas is out there for all of you to read. In addition to Howard's channel's launching, which we'll come to in a moment, our programming assets continue to grow and be as impressive as ever. We are in our second year of the NFL and the NFL 24-hour channel which continue to research as one of our most desirable channels. The NBA kicks off, we have a full slate of NBA games coming up.

As Mel mentioned, we launched Bruce Springsteen radio today. It has unprecedented cooperation from Bruce Springsteen featuring exclusive interviews with him as some material never before released. In preparation for our holiday season, Martha Stewart's radio channel goes and will launch Thanksgiving weekend. We're adding compelling new music and, among other things, we're adding and changing our programming lineup continuously to reflect consumer demand.

This programming not only differentiates us in the mind of listeners from our satellite competition but from any and all of radio. As I've continued to maintain, our content continues to work in multifaceted ways. It makes our customer satisfaction and our low churn be a primary factor in that equation and, in addition, it continues to feed public relations and critical acclaim as a low-cost effective complement to our marketing.

On the programming side, let's talk about some of our new programming. The Howard Stern channels -- we have launched Howard Stern 101 and 100 our preview channels; Howard Stern 100 news, a news concept focusing on all things Howard has met with critical acclaim both from his fan base and many others out there. Howard's studio is on target for completion in the fourth quarter and will be ready for his arrival in January.

As I mentioned, Martha Stewart Living Radio is ready to go and will be launched Thanksgiving weekend. Our Sirius Stars channel, which was put together at the request of our listeners to consolidate many of the personalities we have that do less frequent shows than daily. Those such as Sen. Bill Bradley; Adam Curry, generally thought of the Godfather of broadcasting; Jay Thomas; Hollywood producer Robert Evans; Cousin Brucie and others are now all on one channel where everyone can find them at any time during the day.

As I mentioned in our last call, we were going to embark on a women's programming initiative to respond to consumer demand. We've done that with force and gusto. In addition to Martha Stewart Living Radio, Cosmopolitan radio with Cosmopolitan magazine and the Hearst Magazine Group, will launch in January. We signed Sue Johanson of Oxygen, one of the highest-rated shows on Oxygen, to do her radio show with us. We have the Richard Simmons show going all of which have met critical acclaim. So we will continue to look at women's programming and marketing, but we have already taken the steps we promised to address that need.

In light, unfortunately, of recent emergencies and national disasters out there we set up the Sirius Emergency System and the Sirius weather and emergency channel to give key FEMA, Red Cross evacuation and shelter information. In the area of foreign programming, we again stressed to you we would be active in this area to tackle demand. We launched Radio Korea, we have China on schedule for the first quarter and, of course, in the Spanish and Latin area, we're a force in that area and about to announce more things in that space.

On the music side, where we continue to dominate and get unprecedented customer satisfaction and critical feedback, we launched Rolling Stone Radio as an exclusive channel with the Rolling Stones including complete cooperation with the band featuring exclusive interviews, live performances and concert giveaways of tickets to each and every show provided by the band.

As Mel mentioned, E Street radio goes on today, that I urge all of you to listen to. It's a unique presentation with Bruce Springsteen and the E Street band that will continue now through January 31st. We launched BBC Radio 1; it's the flagship music channel of the UK and it's the diamond in the BBC music family; it's now on 24/7 here in all of America to be played as if you were in London.

Our 80s channel, which continues to research as high as any of our channels, has now had all of the original MTV VJs put on that. It continues to be one of our most popular and now it's distinguishing characteristic has all VJs in place.

NFL radio began its second season as mentioned. We have 14 NFL head coaches committed to doing weekly shows, most of the major stars of the league are either regulars or sporadic guests on the show. The Breeders' Cup aired exclusively on Sirius this past weekend. So horse racing, football, English soccer, the NBA, any kind of college sports is all here on Sirius and in most cases exclusive.

Let's turn to marketing where, most of you know, we target our marketing based on coordination with retail. So while we were very heavy on fourth quarter -- on Father's Day rather, we are gearing up for fourth quarter. But a moment now on third quarter.

In third quarter we launched our channel backtrack campaign. This was to feature our best in radio content. As most of you have seen, whether it was in a double truck ad in USA Today or other placers, we featured our channel guides highlighting our exclusive content. We then kicked off with a series of campaigns for television launched this year on the NFL season kickoff on Thursday, September 9th featuring our campaign which features and highlights our programming.

In addition, we complemented the third quarter with a print and newspaper and retail campaign featuring Tom Brady and John Madden. So in the third quarter we spent judiciously and in coordination with our key assets and highlighted our key assets. The fourth quarter we will come out with as much artillery as we need to highlight our programming.

In the fourth quarter, before we get to Howard, we will do a national campaign to continue our channel assets and our Best in Radio campaign. We will also feature two spots that highlight those. In addition to the spot you've already seen that's running now and I mentioned ran on the NFL, we will have two other spots -- one a young male audience spot featuring music, the NFL and Howard, and the other geared to our female audience with a focus on our new women's programming of Martha Stewart, Cosmo and Sue Jo. Those will also air in the fourth quarter.

As for Howard -- most of you have wondered where will the launch be and how will it be done. Well, as you know, some of it has already begun. We started with a viral campaign on the Internet where if you go to HowardStern.com or you search generally under Howard Stern the first thing you see is HowardStern.com. When you plug into that you will see a campaign that unveils in a most unique way in a form of a 60 second movie that is now circulating widely on the Internet.

Within a week on almost all of the digital R screens in the theaters in America across the country you will seek another version of this playing out for all the theater audiences to know that Howard is coming. Following will be a series of billboards, newspapers and some television advertising to support it in addition to Howard's continuing presence on regular radio which continues to highlight his presence here.

No one will not know that Howard is coming to Sirius and that Sirius Satellite Radio has not only Howard Stern but the best programming in all of radio. We continue to garner tremendous public relations and press reports on both our program and a lot of the features on our product that Jim mentioned.

Finally, one point to highlight on our advertising sales. As Mel mentioned, we built the staff as promised. We've now got blue-chip advertising coming in on our existing roster pre Howard. We have companies such as Diageo, U.S. Navy, U.S. Postal Service, Campbell Soup and others already as part of our advertising line-up and we've already booked advertisers in addition to that for Howard Stern.

So I'm most pleased with the results of the last quarter both in terms of our programming and our marketing and greatly look forward to continuing the programming growth, but more importantly the launch of Howard Stern. Thank you very much and I turn it over to David Frear.

Thanks, Scott. As you've already heard, this is another great quarter for Sirius. Total subscribers more than tripled, SAC per gross add was down 35% and our adjusted operating loss came in well below Street expectations as we continued solid execution of our plan.

We ended the third quarter with just under 2.2 million subscribers, up 228% from a year ago. We added approximately 359,000 net subs, doubling last year's third-quarter net adds. Further, gross subscriber additions of approximately 465,000 were more than twice last year's level and represented a sequential increase over second-quarter 2005 gross adds. Our third-quarter subscriber growth reflected continued acceleration from our OEM channel and solid performance at retail where, as you've heard, achieved 48% retail share for the quarter and a record 56% share for the month of September according to NPD.

In the retail channel Sirius added approximately 210,000 net subs, a 56% increase from the prior year third quarter. We saw a considerable pickup in retail market share from July through September with the launch of a $30 rebate program on August 7th, the kickoff of our second NFL season on September 8th, and increasing anticipation for the arrival of Howard Stern in January. We continue to see acceleration in automotive channel additions and welcome the launch of the Ford factory program in the third quarter. The Company added 149,000 net subs from our OEM channel, a 230% increase over the third quarter of 2004 and a 22% sequential increase over approximately 122,000 OEM net adds in Q2.

Mel and Jim highlighted our accelerating OEM numbers and the recent extensions of our exclusive agreements with DaimlerChrysler, Ford and BMW. In calendar 2006 we expect Sirius to be available in nearly 130 vehicle models with 120 of those having factory programs.

Churn continues to track to our 1.5% guidance for the year. For the nine months churn has averaged 1.5% per month and, as expected, churn increased in the third quarter reflecting the impact of the 15 months or $155 offer we ran from February to April of 2004. Given the 15-month length of the subscriptions renewals were effectively shifted from the second quarter to the third quarter. If you blend of the churn rates across Q2 in Q3 you'd come out with 1.6% churn.

Strong subscriber growth in the quarter drove total revenue to $66.8 million, 250% higher than the 19 million reported in the third quarter of '04. Advertising revenue was just over 1.5 million for the quarter, exceeding full year 2004 ad revenues by 66%. ARPU came in at $11.15 in the quarter including a $0.25 negative impact from mail-in rebates and a $0.26 contribution from advertising revenue.

Our adjusted loss from operations, which we generally refer to as EBITDA, was $105.4 million compared to 125.7 last year, an improvement of $20 million despite a $22 million increase in total SAC required to support the 125% increase in gross adds year-on-year. Our pre SAC EBITDA loss improved by 42 million from last year's third quarter from $79 million to 37 million. Our non SAC expenses, excluding depreciation and equity charges, grew only 6% over last year for the quarter or $6 million on a $48 million increase in revenues. We've made the investments in our operating infrastructure and are clearly beginning to see the operating leverage in the business model as we march to positive cash flow.

As Mel discussed, SAC for the quarter was $149 on a per gross add basis, down 35% from last year's third quarter due to lower hardware subsidy rates as the Company continued to reduce manufacturing and chipset costs for our receivers. SAC per gross add was significantly lower than our expectations and Street consensus as certain product shipments planned for late September actually occurred in early October and will be reported as fourth-quarter SAC expense. We continue to expect SAC per gross add to be below $145 for the year.

We're maintaining our SAC guidance and maintaining great performance at retail despite aggressive hardware pricing by our competitor. We have long said that we won't lead hardware pricing but we will respond and respond strongly.

Our net use of cash, defined as cash used on operating activities plus CapEx and restricted investment activity, decreased to a use of 83 million in the third quarter down from a use of 117 million in the year ago quarter. Capital expenditures declined by $5 million from last year and cash used by operating activities improved by $24 million.

We added over 1 million new subscribers in the first nine months of the year and expect to almost do it again in the fourth quarter as the strength of Christmas demand for Sirius will drive net adds to exceed 825,000. So we have raised our year-end 2005 target to over 3 million subscribers. We continue to expect to generate 230 million of total revenue in 2005, report an adjusted loss from operations of approximately 540 million, and report churn of approximately 1.5%. Total operating cash uses, capital expenditures and restricted investment activity will remain in line with previous guidance of $375 million.

Augmented by our extraordinarily successful $500 million debt offering in the third quarter, Sirius ended the quarter with approximately 934 million in cash, cash equivalents and marketable securities. We remain fully funded with considerable strategic flexibility as we approach what could be our first quarter of positive free cash flow in the fourth quarter of '06 and will be our first year of positive free cash flow in 2007.

Lastly, as we discussed in our recent press release, we are excited to have Paul Blalock join Michelle McKinnon in leading our Investor Relations effort starting this week. Many of you know Paul from his ten years with Nextel and we believe he will be a great asset to Sirius. So with that, operator, we'd like to open it up to questions.

(OPERATOR INSTRUCTIONS). Bob Peck, Bear Stearns.

Great numbers across the board. I wanted to start with a couple of questions about Howard. Actually Scott addressed a lot of our marketing questions. But Mel, I was wondering if you could maybe address some of the comments being made by Terrestrial Radio about his rankings dipping and some of the current status of Howard in his various markets?

Howard Stern I think is the biggest radio personality of all time. I can't think of another radio personality that will generate the kind of revenue that he will generate in the fourth quarter of '05. That a lot of his numbers are a reflection of him being taken off of more stations. So as an example, I think he went into the year on 53 stations. I think he's now on 37 stations. So obviously the total audience would be down. There are tremendous fluctuations between book-to-book, that's part of the reason that Arbitron is talking about changing its methodology is because of it.

So whether you to the Howard's ratings when they were at an all-time high, you take it now in many markets he's at an all-time high. His numbers are still the biggest numbers in all of radio. So I think Howard is as hot financially as he has ever been and I think he is as hot with his audience as he's ever been. And our indication from the research that we're doing in the market today is that an awful lot of people plan to follow Howard to Sirius.

And Mel, you've made a couple of comments before about ramping up your ad sales team. Are you able to give us any more data points there as far as maybe rates you're getting for Howard now versus what he's getting on Terrestrial? Or even just maybe longer-term future numbers, whether it be a dollar amount you see Sirius achieving or a percent of revenues?

I think the fact is that the ad sales, obviously starting out from a very low base, is growing significantly. We really believe that that second stream of revenue is something that is going to be very important for our shareholders, particularly as the years go on and we continue to get so many some more subscribers and therefore can monetize those subscribers.

We're selling Howard very differently than he has been sold in Terrestrial Radio. First of all, he will have significantly, significantly lower commercial load. If you listened to Howard this morning, he was complaining about the fact that his current company has been cramming more and more commercials into his show and that there are now over 20 minutes of commercials per hour in his show. We're not going to go anywhere near that.

We also are offering advertisers something that they've never had before which is the ability to reach Howard on a national basis, since he'll be able to be received anywhere in the country. So we have a number of advertisers that are in. Again, I want to caution you that we're still saying that the advertising revenue will probably be in 2006 less than 10% of our total revenue. So if you take a look at what number you have for revenue for next year and just take 10% of it, you'll see that that is a humongous growth over this year. But the business model is still principally subscriber driven with advertising being a nice add-on.

One other thing I just want to add. Unlike Terrestrial Radio with Howard where he had simply a four or five hour show, here he has two channels all of which obviously will have advertising. And if you look at what's going on with the critical acclaim on the news channel and other things, it's just a question of, as Mel said, it needs to grow, but there is far more opportunity for advertisers to be with Howard than ever before.

Thanks, guys. Good quarter.

Craig Moffett, Sanford Bernstein.

Good morning. guys. Two questions if I could. First, a question for David and then I'll have a follow-up for Mel. David, churn kicked up a little bit and you attributed much of that to last year's 15-month promotion. Have you seen any slippage in conversion rates among OEM subscribers? And similarly, have you seen any changes in the churn rates among paid subscribers?

The OEM subs -- obviously the numbers are so small at this point that they don't have much of an impact on churn. And so the answer on conversion rates would be no, there's nothing that we've seen. We don't expect to see these numbers come through in large enough quantities to merit separate comments on until probably the late first quarter of '06.

With respect to the rest of the churn rate, honestly everything looks to be pretty much in line. There's been a pretty long consistent -- sort of statistical consistency among the subscriber base out there, so we don't see much moving in churn either in terms of category or in terms of absolute amount.

And when we had a lower than 1.5% churn rate through the second quarter we didn't change our guidance. So clearly we were anticipating that third quarter would be higher and therefore we -- to be able to be consistent with that 1.5 for the year.

Okay, thanks. And Mel and I guess Jim, a question. I'm sure you saw your competitor's announcement earlier last week I guess on their GM relationship. So that GM is hovering around low thirties in penetration of their production. You've hit that already on your DaimlerChrysler relationship in just two years. I'm wondering, Mel, looking out what kind of penetration limits do you think you see in your OEM relationships with DaimlerChrysler and Ford? And how close do you think you'll get to ubiquitous availability of Sirius down the road?

Certainly one of the great advantages of being in a growth mode as we are is that we have lots of years ahead of us we think for that penetration to increase. Our conversations with our partners -- Jim and I are going to Detroit to meet with senior management of one of the automobile companies next week to reinforce the fact that we think that Satellite Radio enhances the driving experience for their customers. We think that the more vehicles that they can put satellite radio in, the better the consumer will like it.

You'll be seeing some announcements from the Company in the weeks ahead regarding different models and their viewpoint. So I think it will range -- and Jim, you can pile on -- I think it will range from some models being standard to where every car that they make will have a satellite radio into certain other models where the penetration level will be low. But our job on the OEM front is to continue to provide Satellite Radio to as many of the OEM customers so that they don't have to buy it in retail. Because if you look at these retail numbers, there's an awful lot of people who want Satellite Radio in the car, so why on earth wouldn't the OEM people want to put it in there rather than let them go to Best Buy or Circuit City to buy it.

Mel, do you have any concern that your OEM partners might want to bundle Sirius into expensive trim packages that make it less accessible to your consumers?

This is Jim. I think in fact they will bundle with a variety of trim packages because that's a fundamental merchandising tool they have for selling automobiles. I don't expect that to limit our ability to increase penetration. And again, I will comment -- I think XM and GM with several years of experience have shown that from a push standpoint a third penetration is certainly very doable and, as you noted, we're going to get there quickly with Chrysler as they target their rollout for the '06 model year. And we have, I'll remind you, a lot of work to get to that penetration rate with Ford still ahead of us which I think gives us a lot of opportunity for growth in the next 12 to 24 months.

Ultimately where the penetration rate ends up -- I think it's going to end up by as opposed from push as opposed to pull. And there I'm very optimistic. And by that I mean as the awareness of satellite radio continues to grow and as the market for satellite radio continues to grow, and as the personalities and the things that are available that make satellite radio unique, I think the business in OEM will migrate from a push business to a pull business. How long that takes and ultimately where it ends up I don't know.

Thank you.

(OPERATOR INSTRUCTIONS). Laraine Mancini, Merrill Lynch.

A question on Stern subscribers, do you have any indications yet on if some of the retail market share that you gained in the third quarter was impact from Stern subscribers? Are they coming from any of the avenues that you've got earmarked for him? And then second, on the sales and marketing in the last two years fourth quarter was about 20 to 40% higher than 3Q. You've got a lot more going on particularly with the Stern campaign this year. Is it reasonable to assume that the differential would be more like 60 to 80%?

On the Stern issue, I think that we clearly are picking up in the third quarter some Stern subscribers. When we surveyed why people were subscribing to Sirius in the third quarter in addition to our commercial free music, obviously the NFL was a big factor, and Howard Stern was also mentioned as a big factor. I could tell you that the buzz around retail -- we just finished a mystery shopper program and when we walked in or our people walked into the stores and asked about the different products, clearly the salespeople are talking about Howard Stern as an important advantage that Sirius has.

So, again, we are happy with our subscriber growth and our projected subscriber growth, whether they come from Howard or from Martha Stewart or anyplace else, but we truly believe that Howard will be a huge, huge driver for us in the fourth quarter.

And on your question on the sales and marketing spend, by maintaining the 540 million of EBITDA lost guidance for the year, it is pretty clear that both SAC and sales and marketing will increase substantially in the fourth quarter.

That was part of our plan when we entered into the budget process for '06. Scott said it, that we think that Howard is such a big deal and there won't be a single person in this country that will not know that Howard is starting on Sirius no later than January 9th.

One quick follow-up on Howard. Do you have any specific campaigns targeting the markets where Howard was not available on terrestrial radio to try and grow awareness there?

We do, and that's why -- Scott, go ahead.

What I was going to say is all our campaign for Howard, no different than our programming or our previous marketing, are going to be based on a national basis. So, for instance, where as Mel mentioned where he went from roughly 50 markets down into the 30's, that is just where he has been on. Obviously, we will be there, but we will also be in every market where he hasn't been on with all our ads but will be targeted in one way or another to a national basis. Obviously, the Internet campaign that launched already got there, the national theaters are in every market, and also in conjunction as Jim mentioned with RadioShack. As you know, RadioShack is in every small market in America. So they are also going to be getting the awareness of Howard. So the long answer is he will be everywhere.

We heard that there is a market that Howard is currently in that on or around November 7th, our intelligence tells us that they may be taking him off. It is not a top-10 market, but they may be taking him off. You should assume that there will be a full-page ad in that local newspaper that day telling people to subscribe to Sirius Satellite Radio.

Great, so you are coupling local campaigns with your national where it makes sense.

We are. There are markets like Atlanta where Howard has never been in. They've seen him on Letterman. They've read his book, they've seen his movie, they've heard about him, he's never been in. And once Howard starts in January and once we have the ability to use him specifically in the advertising we'll have campaigns there telling them that Howard is now available for the first time in their markets.

And you'll see individual marketing in the top ten markets and in some cases you see there's a top 20. Whether it's newspaper, Internet or theater it will depend on the actual market. And the other thing I do want to stress as Mel brought up about Atlanta. Remember there is a life after Howard starting January 1 and really after January 9th when he's on the air where we'll have full use of him as a personality and a salesperson for Sirius and its programming which we do not have right now. So I think that's an exciting thing to look forward to for first quarter that he'll be full-blown marketing joining us. Right now we feel very confident with our marketing efforts we have for fourth quarter, but it will be doubled up with Howard's presence in the first quarter.

We're even very happy to help his current employer because we'd like to buy a whole bunch of advertising on his Terrestrial Radio show in November and December and that will help their revenue as well.

And have they taken those ads?

They haven't yet accepted it.

Thank you.

Jason Helfstein, CIBC World Markets.

First, Mel, if you could follow up. Can you talk about where your awareness levels are now, perhaps how they compared to fourth quarter a year ago because I think that was the last peak in your awareness levels?

And then secondly, maybe Jim, if you can just dig into -- the mix this quarter was more OEM than we would have expected. I am wondering how much Ford impacted that if it impacted it at all or that was DaimlerChrysler?

And then retail was a bit -- not for you guys, but for the industry overall was a bit weaker than we would have thought. Can you discuss perhaps how the marketing of the new products may have impacted consumer decisions to wait for let's say the S50 and your competitor's wearable and perhaps that hurt the September sales? Thank you.

Jim will talk about that last part, but we were right on target with where we told you we would be in the third quarter from a point of view of our subscriber growth. Our growth rate was very strong in September and by no means were we disappointed, but I'll leave the rest to Jim. So I'll give you some statistics.

We have 94% customer satisfaction. Ask people if they like our product, 94% are satisfied. 88% of our subscribers recommend Sirius to a friend, 92% listen to us in their car, 86% of the time people spend in their car they will spend listening to Satellite Radio. Our brand awareness in September of 2004 was 32%, our brand awareness in September of '05 jumped to 61%. So there is -- clearly we are and have the highest brand awareness in satellite radio. So that's really the good news.

I think the better news is that there's still -- when it gets to unaided awareness there still is a significant number of people who don't know about us. We think that our marketing in the fourth quarter will help and I think that just talks a lot about what the upside is of the category. It's not like this is "everybody knows about it". There's still a significant number of people that can't name a company when asked about satellite radio on an unaided basis. So great progress and excited about the prospect. Jim?

First to your particular question on Ford. Obviously since we had zero Ford subscribers leading up to the third quarter the launch of Ford in the third quarter helped our third-quarter number and we expect that to provide a little bit of win for us in the fourth quarter as well.

In terms of your comments on the retail industry, I do agree with you, the third quarter, in my opinion, while we still had very strong growth was not at the same rate that perhaps the first or second quarter were. I wouldn't worry about that. I think number one, a lot of retail in the third quarter was a little bit slow. More importantly though, retailers are telling us, and they're speaking with their wallets by the amount of ad space that they're designating and putting aside for Satellite Radio, that they really, really do believe that Satellite Radio is going to be one of the top five hit products in the fourth quarter.

And with my 20-something years of experience in the CE business I absolutely concur. I really do think the fourth quarter will be a blowout for Satellite Radio. What growth rate? I don't know, but I do know that when you look at the amount of retail shelf space that's now been dedicated to satellite radio, whether it's Sirius or XM, and the amount of linage you're going to see in their fliers which has a huge impact on what people buy. And then finally, the national promoting by both of us and then clearly the buzz of Howard Stern, I think the fourth quarter is going to be great.

Okay, thank you.

April Horace, Hoefer & Arnett.

Congratulations on the Chrysler announcement. I was wondering if you could give us a little bit of an update on the satellite and launch of the ground spare or what you're doing with that along with an update on the proceeds from the recent debt offering. And then I've got a follow up.

You cut out a little bit there, April, but you're asking for an update on the satellite and ground spare?

Yes.

No change. We continue to look at what our options are and what might be best for the experience of our subscribers. We continue to look at whether it makes sense to put Sirius 4 up into one of two orbits or consider the investment in a new generation of satellite. And so it's an ongoing process much as it has been for the two and a half years that I've been here, so there's really no change there.

And then you've got 30% penetration with respect to Chrysler, do you have that same kind of thought process -- in a two-year period do you think Ford could go to that same level over the next 24 months?

Remember that Ford has already publicly stated that they're targeting a million cars for the '06/'07 model years. I think if you extrapolate that run rate I think you'd find in the latter half of that agreement that 30% is the right target penetration rate.

And then could you give us a little bit more color on your plans for video as well as mass traffic?

Before we do that, just on the Ford thing. Remember, April, that they've got 17 more models to launch and they won't get through those additional 17 models until midway through the '07 model year.

Okay, great.

To make sure you heard what I said in the latter half of the '07 model year. Great question. First on traffic -- and by the way, you reminded me of something I forgot to note and that is in late November/early December we'll be launching the first satellite radio combination real-time traffic product available in the aftermarket. You've seen in the past XM making a lot of noise about real-time traffic and their progress with Acura and Honda, etc., you'll actually see us launch an aftermarket product yet this year which I think will be pretty exciting.

Clearly I can tell you all of our OEMs have a very active interest in traffic and we're working very closely with them on the time frame implementation that matches their schedules. As far as video goes, we're quite excited about the video to the rear seat of the car. We are working very hard on the technology. The exact timing as it relates to our OEM partners will be up to them to announce.

Okay, great. Nice quarter.

Lucas Binder, UBS.

Real quick, a couple of follow-up questions. On the car deal that you guys extended, are there any improved economics as far as your revenue shares are concerned or should we expect that that's going to remain pretty stable going forward? And then one other quick follow-up.

I can tell you unequivocally that in the extension of our car deals the economics for us improved sequentially over each period as we moved through those deals. The deals of the car makers are complicated, as you know, and so I won't comment on any specific piece of the economics, but I will tell you that we expect those economics in total to improve as we work through those extended agreement.

And as you obviously should be aware because we didn't file anything to the contrary, that none of these extensions involved any equity either.

Which of course (indiscernible) with what you've been saying in the past as well. And then lastly, on the family plan, David, could you give us some sense of what percentage of your base is in the family plan now?

I think it continues to run in that 11 to 12% range. So pretty consistent with where it's been.

Thank you very much.

Jonathan Jacoby, Band of America Securities.

Just two questions here. You guys have been very careful in disclosing how you actually count the OEM subscriber at the time of production. I'm curious when you book the SAC against that OEM sub? And then the second question is just that you've been consistent with your guidance for churn to be at 1.5% for the year, I just want to get a sense of a back of the envelope. It looks like fourth-quarter churn has to come in at about 1.7%. I want to know if that's again related to the 15-month promo from last year or does it really show us, perhaps, -- I'm just curious on your thought -- that as you expand these services and you increase your sub base you get some lower hanging subs that are less sticky?

Okay. So on the OEM sub accounting, we report the sub at same time as we recognize the SAC as well as the subscription payment from the automaker. So it all happens at the same time. When they ship the car, we own the SAC, they owe us the subscription payment and we record the subscription as part of the base. So it's all at the same time, Jonathan. I think that I'll trust your math on the fourth quarter. Our guidance is for 1.5%. If the way that it works out on your calculation is 1.7 I'm sure that --.

It could be 1.6, but somewhere in the range.

Yes. So we -- again, we expect to be at 1.5% for the year.

There were some numbers -- metrics that we urge you -- everybody can look at numbers anyway they want to -- that we talked about on an annual basis. So when we talk about our SAC we urge people who look at it to look at it on an annual basis. The guidance we gave was it will be below $145 or less than 145 at year-end, we're still there. The same thing on churn is that we urge you -- we think that our churn, when you take a look at any subscription business, is at the very low end of it and we urge you to just look at it (multiple speakers).

Mel, no question about that. I guess what I'm really curious is because some of this is coming from that 15-month promo, is it that as you build a service and you get into some of these perhaps "lower hanging subscribers" and expand the base that those new types of subs are less sticky or should we not think that? That's what I'm trying to get at.

I don't think it's that so much, Jonathan, I think it's other factors. Think about how many subscribers come in the fourth quarter and so you know that when you get to November and December you have massive renewal numbers in November, December and January. And as well as we're beginning to as we move into the very late part of the fourth quarter and then into the first quarter we begin to see some of the conversions from the OEM side. So I don't think really it's got anything to do with reaching down to let's say a less sticky subscriber at this point. I think it's just kind of the math of how subs distribute across the year for us.

Thank you.

Maurice McKenzie, FBR.

Congratulations on the quarter. Just a couple quick questions. First is, in light of the noise in the market surrounding DRM, or digital rights management, can you touch on the RIAA in other content owners and the impact on the upcoming launch of the S50? And also can you discuss your sales expectations in the fourth quarter for the S50? And Mel, if you could just drawn on your experience from the radio industry.

The way we look at the S50 is that it is a time shifted product. And that the functionality of the product is no different than PVRs or Tivo. So if you want to be able to record something for your own use, it allows you to do it, it wants you to hold it. If I want to record Law and Order and I want to keep all these Law and Orders I can do it.

So I think that consumers have been making both analog and digital recordings of copyrighted music including radio forever. Our belief is that the S50 is a legal device that complies with the Audio Home Recording Act. Distributors a the S50 pay royalty fees which have been established by Congress under the Act to compensate for it. We also have designed the product that people cannot upload it to the Internet.

So we obviously as a company respect our partners', our music company partners' intellectual rights. We have a great working relationship with the labels and members of the creative community. We've had discussions with the industry and the RIAA about the S50. These discussions have been constructive and we will continue to have them. Regarding a quantity of them, I don't think that we have any plans to disclose any specific quantity unless Jim is in the mood to give you some information that I'm not.

Thank you. And just a quick follow-up on your Canadian launch?

Canadian launch starts next month. We're excited about it. We have a team in place. Advertising is set, content is set and we're excited about it and we'll be in Canada in December.

Thanks, congratulations again.

Tom Watts, SG Cowen.

Congratulations again on the great quarter. Could you just comment a little bit (indiscernible) excellent product coming out with the S50. You commented a little bit more on your hardware strategy going forward, how much you'll be working with recognized electronics manufacturers, but for developing you'll be doing internally and how we should think about R&D for the Company?

I think that we have told you that we needed to drive our R&D investment both in chipset development as well as product development significantly harder. We told you that a year ago and in fact that's what we've done in 2005. And you're going to see that continue in 2006 that we close this product gap once and for all and this perceived silicon roadmap (ph) gap once and for all. And as I've told you many times, it's going to get closed just like Ecostar and Direct TV, closed up. It's just a matter of time.

We'll be investing and continue to invest heavily. I can tell you that while the portable products have in the last three or four months been less than around 6% of the industry at least in the two months. That is what MiFi has kind of run. I think on a year-to-date basis, it is around -- it is low double-digits, 11 to 13%. I do believe that number will rise in 2006. I believe the portable offerings will grow. To what percent, I don't know. And I think you should assume that the S50 is one -- is the first of many more cool products that you'll see over the next 12 months in that category.

As far as the rest of our product line, we're going to do just what I told you last call, we're going to concentrate very heavily on getting our SAC lower and driving our product cost down while still maintaining competitive features at very attractive price points.

This is Michelle, I'd like to wrap up the call. Thanks very much to everyone for their participation.

That does conclude today's conference. We do thank you for your participation.