Sirius XM Holdings Inc (SIRI) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the SIRIUS Satellite Radio second quarter 2007 financial and operating results conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Paul Blalock, Senior Vice President of Investor Relations. Mr. Blalock, please go ahead, sir.

Thank you, Matt. Good morning, everyone, and thank you for your participation. This morning, Mel Karmazin, our CEO, joined by Jim Meyer, President of Operations and Sales, will review our second quarter 2007 operations and our outlook for 2007. David Frear, our Chief Financial Officer, will then discuss our financial results and our guidance for 2007 as outlined in our press release this morning. Scott Greenstein, President of Entertainment & Sports, is currently traveling and will not be joining us this morning. At the conclusion of our prepared remarks, management will be glad to take your questions.

I would like to remind everyone that certain statements made during this call might be forward looking as that term is defined in the Private Securities Litigation Reform Act of 1995. These and all 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's SEC filings and we caution listeners not to rely unduly on forward-looking statements and disclaim any intent or obligation to update them. I'll now hand the call over to Mel Karmazin for his opening remarks.

Thanks, Paul. Good morning and thank you for joining us. Second quarter financial and operating results were once again very solid and continue to demonstrate strong customer demand for our service, as well as excellent execution by our team. Healthy subscriber growth of approximately 561,000 net additions in the second quarter topped first quarter subscriber additions and drove a 53% increase in our ending subscriber base from last year's second quarter. SIRIUS now has approximately 7.14 million subscribers. In first half of 2007, we added slightly more than 1.1 million net new subscribers and while third quarter should reflect seasonal slowness, we are well on our way to meeting our 2007 outlook for more than 8 million subscribers at year end.

In the second quarter, SIRIUS added 62% of total satellite radio net segment additions. This is the seventh consecutive quarter where SIRIUS has attracted the majority of the satellite radio segment subscriber net additions and the third consecutive quarter where SIRIUS has attracted the majority of gross subscriber additions as well. I will let Jim take you through more details in a few minutes, but I would like to highlight our continued progress in the OEM channel.

During 2007, numerous announcements have been made by our automakers. Last week, Chrysler announced that SIRIUS will be installed in more than 70% of their production, dramatically exceeding previously established installation targets and, in my view, this represents a very positive signal for continued growth towards standard installation of SIRIUS. Chrysler's 70% installation rate is the highest public commitment among the big automakers toward satellite radio.

The emergence of stronger growth in the OEM channel is an important development for SIRIUS. During the first six months of 2007, OEM subscriber growth continues to be stronger than expected and represent in excess of 70% of our year-to-date subscriber growth. Jim will discuss some of the implications this has for our business while investors should view this as a big, positive development for the long-term growth of our business.

On the retail front, SIRIUS continues to capture greater than the majority share, albeit in a softer than expected retail environment. During the second quarter, SIRIUS represented 75% of the satellite radio net segment subscriber additions and we continue to believe that the retail and aftermarket channels are an important indication of the strong consumer preference for SIRIUS. OEM gross adds, OEM net adds, retail gross adds, retail net adds, no matter how you look at it, SIRIUS has the majority of the additions to satellite radio.

On the programming front, we launched The Foxxhole, Jamie Foxx and SIRIUSLY Sinatra during the quarter. And for all you deadheads out there, we are very excited about the upcoming launch later this summer of our Grateful Dead channel. I reiterate what we have been saying for years, and that is we have the best radio on radio.

On the financial front, second quarter results demonstrate that SIRIUS is scaling the business, managing our costs, and accomplishing our goals with more than $226 million in second quarter revenue and over $430 million in the first six months, SIRIUS is well positioned to approach $1 billion in revenue this year. We will achieve $1 billion of revenue faster than any company in the history of radio. It is also apparent that we are focused on controlling costs relative to our growth. Second quarter revenue grew 51% when compared to last year. However, our total operating costs, excluding stock-based compensation and depreciation, grew only 6% while our net loss decreased 44%. The monthly customer churn rate fell to 2.1% all-in in the second quarter, down from 2.3% in the first quarter. And we are very pleased with the progress we are making on consumer satisfaction.

SAC per gross subscriber addition was $108, down 17% from last year's second quarter figure of $131. We now expect our full-year SAC per gross subscriber to approach $100 due to the greater proportion of growth from OEM. Overall, SIRIUS had a solid second quarter. It is important to realize that demand for SIRIUS continues to be strong, our financial performance is on track, and we are executing very well on our business plan. I will now hand it over to Jim.

Thanks, Mel. The second quarter 2007 was another very successful quarter for SIRIUS. As you know, our goal for 2007 was to maintain our market leadership position and we accomplished that goal capturing 62% of total satellite radio segment net add share. As Mel said, this marks the seventh consecutive quarter for net add leadership and also the third consecutive quarter of gross add leadership.

During the second quarter, SIRIUS added just over 1 million gross adds, an increase of 21% over gross adds one year ago. On a net add basis, second quarter results were also impressive, adding 561,000. So far this year we have posted just over 1.1 million net adds, which obviously puts us well on our way toward accomplishing our target of ending 2007 with more than 8 million subscribers. Second quarter net additions of 561,000 were comprised of approximately 435,000 net adds from our automakers and 130,000 net additions in the aftermarket.

One of the highlights of the second quarter was our all-in or total churn rate of 2.1%. This was a decrease from the first quarter churn of 2.3% and just below our guidance for full-year churn at 2.2% to 2.4%. We have historically mentioned our self-paid churn is in the 1.6% to 1.7% range. And I can tell you that we've been hitting the low end of that range, which is a very positive sign of consumer satisfaction. As you know, we have been focused on developing an organization and the strategic management tools necessary to understand and implement effective customer relation management. And I can tell you that the investment and efforts are now beginning to pay off.

Turning to the aftermarket channel, the 130,000 retail net additions for the second quarter are clearly below last year's strong momentum. However, our share of satellite radio segment retail growth was 75%. Overall, I'm quite satisfied with our aftermarket share position and particularly satisfied with the trends, particularly when you realize that our average selling price is significantly greater than other satellite radio products. We are very focused on this key channel of distribution and continue to work with our retail partners to achieve our share objectives. I would also like to mention that retail inventory is in good shape and we are preparing for the launch of some new aftermarket products, including a new wearable product, Stiletto 2, and a new Sportster, FT5. Stay tuned for more details on these exciting new products next month. We now believe that SIRIUS has reached market share parity in the wearable category and we expect to be the leader with the introduction of the new Stiletto 2 this fall.

Lastly, while we continue to believe that the aftermarket channel will remain an important long-term contributor, our assumptions for the future are grounded in the reality of the softer, aftermarket results. And we are not assuming a near-term reversal of recent aftermarket trends. It is abundantly clear that satellite radio competes with an increasingly broad spectrum of entertainment and consumer electronics options. Our long-term challenge is to continue to innovate so that we can leverage our outstanding content in today's increasingly competitive entertainment environment and we will meet that challenge.

Now, let's turn to the OEM world. In second quarter 2007, we added a record 435,000 OEM net additions, capturing 61% of total OEM net adds. As the numbers attest, during the second quarter SIRIUS, in conjunction with our OEM partners continued to execute extremely well on all fronts. Much of the second quarter success can be attributed to greater penetration rates, as we are exceeding initial projections and gaining both customer and dealer demand pull for SIRIUS. We believe that these results speak volumes about an exciting, evolving strategy with our OEM makers. Through our program and our technology, SIRIUS has emerged as a key marketing differentiator to the vehicle buyer. In fact, over the past year, strong consumer preference and demand combined with excellent OEM execution has rewarded us with a 60% share of OEM net additions, a reality that some of you might find surprising.

As you should be aware, our automakers are confidently stepping up their rollout now of SIRIUS, with packaging and bundled strategies, including multi-year and lifetime subscription offerings. We will continue to explore additional opportunities for consumers at the point of vehicle purchase. We were also very pleased to inform you last week Chrysler announced it is now targeting a 70% plus installation rate for model year 2008. This is a major milestone.

In the second quarter, Mercury ran an impressive two-month promotion featuring a three-year subscription to SIRIUS in a number of their models. This nationwide event was supported by extensive TV advertising as well as print and electronic media. This is the second year that Mercury has used SIRIUS in a nationwide campaign to help drive vehicle sales. I'm pleased to say that both Mercury and SIRIUS are very pleased with the results of this promotion and the confidence Mercury has in SIRIUS to help drive dealership traffic. Also, as a reminder, Ford Motor Company's Lincoln product line will install SIRIUS as standard equipment on virtually all of their models beginning with the '08 model year, right around the corner. Additionally, Mercedes-Benz is hitting their stride with over an 80% penetration rate and going higher. Volkswagen and Audi have recently begun a number of standard equipment offerings in various 2008 models. And just last week we added another marquee name plate as Aston Martin announced the launch of SIRIUS with lifetime subscriptions.

Backseat TV. We are now preparing for the launch of aftermarket backseat TV products, which will complement the current OEM rollout happening now with the 2008 model year Chrysler, Dodge, and Jeep vehicles. SIRIUS Backseat TV is not just a product. It is a very exciting new service, offering passengers a live broadcast of Nickelodeon, the Disney Channel, and Cartoon Network, the biggest names in family TV. Through SIRIUS our automotive makers are able to differentiate their vehicles and create unique marketing messages by offering new levels of programming, which make it clear that SIRIUS continues to become more important above customers and to our OEM partners.

In closing I would like to say we are very optimistic about reaching our goals in the second half of the year, but let me remind you there are reasons to temper near-term expectations. And each year that goes by gives us a better understanding of the seasonality in this business. The third quarter typically has softer net and gross subscriber additions, in part because there is a pause in auto production or a summer shutdown as the automakers implement changes to accommodate new model builds. In addition, the third quarter does not contain a key retail selling period. In conclusion, SIRIUS continues to execute well in both the OEM and aftermarket channels and we will continue to focus on reducing our per-unit costs and economically growing our business. Now let me turn it over to Dave Frear.

Thanks, Jim. SIRIUS added over 1 million gross adds in the second quarter and a very strong 561,493 net subscribers, well above consensus estimates. Total revenue in the quarter was up 51% to $226 million, an annualized revenue run rate that is now in excess of $900 million. All of our key financial metrics are improving. SAC per gross add, customer service and billing cost per sub, contribution margin, fixed cost as a percentage of revenue, and, most importantly, free cash flow.

As mentioned earlier on the call, SAC per gross add continues to improve and add $108, or 17.6% better than the year-ago quarter. Because of continuing strong performance in the OEM channel, as Mel mentioned, we now expect SAC per gross add to approach $100 for the full year. Total churn, which includes self-paid churn as well as nonconversions of bundled subs was 2.1% in the quarter, below our guidance range for the year of 2.2% to 2.4% and a sequential decrease from the first quarter's 2.3%, bringing us to the low end of our guidance range for the year to date.

Our operating results are scaling and continuing to show solid gains. Our contribution margin, revenue less customer service and billing, revenue sharing, royalties, and cost of equipment continues to exceed 70% of revenue. Our total operating expenses in the quarter, excluding depreciation and stock compensation, were up only 6% compared to the 51% growth in revenue. As a result, about $0.61 of each $1 increase in the revenue turned into an improvement in pre-SAC EBITDA, which was positive $29 million for the quarter. When you add to that the improvement in subscriber acquisition costs, our second quarter adjusted loss from operations improved by $47 million.

On the non-cash side, stock compensation expenses fell 75% versus the year-ago quarter as we continue to move away from historical contracts with significant equity components. These operational and non-cash improvements together drove a 44% reduction in net loss. All of the operating improvements in the quarter benefited our free cash flow, which improved by over $53 million year-over-year, about $0.70 for each $1 of additional revenue. We promised you cost-effective growth and we have delivered on that promise, but we have done so while continuing to make investments in the business.

As Jim discussed, we are investing in the customer relationship management function, to increase retention and drive down churn, keeping the subscribers we have worked so hard to win. As Mel discussed, we continue to invest in programming like NASCAR and Jamie Foxx's Foxxhole to drive subscriber demand. In fact, in the second quarter we increased gross adds by 20% over the prior year and did so with lower total SAC. And we continue to drive product development, delivering exciting new products and services like Sportster 5, Stiletto 2, and Backseat Video this fall.

Turning to the financing front, during the quarter we raised $250 million through a secured 5.5 year term loan at LIBOR plus 2.25. Fantastic execution, and as we've all seen incredible timing with respect to the market. We ended the second quarter with roughly $429 million in cash and cash equivalents and have plenty of liquidity for our business plan. We also filed our rebuttal case last week with the Copyright Royalty Board in the royalty proceeding and we do expect to get a decision in this proceeding by the end of the year.

Lastly, we have contracted with Space Systems/Loral to construct the SIRIUS 6 Satellite. An option contained in our SIRIUS 5 contract allowed us to acquire it on very favorable terms and at a cost similar to SIRIUS 5. SIRIUS 6, which will be completed in 2010, has been designed as a HELOS satellite, but may also be flown as a GEODE satellite is, in the event we decide to change the constellation. Like SIRIUS 5, it will carry double the power of our existing satellites, providing a path to continuing service improvements for our subscribers. Payments under the program are somewhat similar to the SIRIUS 5 program, with a significant portion of the payment due in the final year of construction and after launch.

To conclude, the second quarter was another important period in the growth of SIRIUS as we added a strong number of net new subscribers in a very cost-effective manner, continued to enhance the best radio in radio and made significant strides in furthering our OEM deployment. As we disclosed in our press release, we are reiterating our subscriber and revenue guidance for 2007, including revenue approaching $1 billion for the year, ending subscribers of over 8 million, and average monthly churn of approximately 2.2% to 2.4%. Additionally, we now expect SAC per gross add to approach $100. With that, let me turn it back to Mel.

Thanks, David, thanks, Jim. Now I would like to take a few moments to update you on our pending merger with XM. We are very pleased with the diverse public support that our pending merger has received. Last week reply comments were filed with the FCC and a number of organizations and business leaders have expressed their support. It is clear from the reply comments that there is widespread confidence that competition will be preserved in the audio entertainment marketplace following the merger of our companies. Last week, we also announced a la carte offerings and new packages, which illustrate the many benefits of this merger.

In an increasingly competitive environment, this transaction will strengthen satellite radio's position within the marketplace while maintaining robust competition for consumers. We also continued to respond to the second request from the DOJ. We anticipate certifying that we are substantially compliant by the end of the summer. The bottom line is this -- the merger of SIRIUS and XM is good for consumers and good for shareholders. The efficiencies created by this merger will be extraordinary. We believe they exist on every line item of the P&L. These efficiencies will allow us to offer more choices and lower prices, which we believe will attract more subscribers. A prominent third party recently independently confirmed there are billions of dollars of long-term merger synergy, which translates into hundreds of millions of dollars of estimated efficiency annually. So we remain confident that the regulatory authorities will carefully weigh the merits of the transaction and conclude that this merger is not anticompetitive and is in the public interest. We continue to expect that we will close the merger by the end of the year, but in the meantime we are running the Company as if the merger will not happen.

So let me say -- let me close by saying that SIRIUS is executing very well, continuing to scale our business, attract new subscribers, and meet our financial objectives. Thank you for listening. We're now ready for your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) We'll go first to Ben Swinburne with Morgan Stanley.

Thank you, good morning. A couple of questions. One for Mel on the a la carte decision and the pricing scheme. What research could you share with us that you guys have done on customer appetite for tiering and for price points? Trying to understand from a long-term perspective how you think this impacts both the addressable market as well as your ARPU and cash flow trends over the long-term? And then maybe some color on how you put the tiers and the packages together. Second, just for Dave, on the deferred revenue line on the cash flow statement continues to grow nicely year over year. Could you just give us a sense for the average prepaid trends and if you expect that benefit increase to continue through the remainder of this year? Thanks.

So let's take the second one first.

So average prepaids continue to be pretty much in a pretty consistent range. They've been in the between eight and nine months using a 12.95 standard. We expect them to sort of stay in that range. They've been working their way down a little bit as the mix of Ford subscribers has been rising and I think, as you know, that Ford includes a six-month bundled prepay in their numbers. So we don't really expect any significant changes in the weighted average prepays so the movement in deferred revenue just becomes from that point on a mathematical thing. Based on the way you run your model, how many gross adds you have, and what the amortization rate is on the active subs that are out there just produces the result. From an input perspective, nothing really is going to change in the weighted average prepay.

Thanks. Ben, the idea of lower prices for us is a no-brainer. Anybody who likes the service that they're currently getting, they're paying $12.95. What we said, we're going to continue to offer that service and nobody will have to pay more. You have to remember that we're competing with free. So the fact that we are able to capitalize on the synergies of the merger and be able to offer people more choice has been the original premise of the merger. What we've said is that this merger is in the public interest because it's going to offer the consumer more choices and lower prices. And we believe that the a la carte option that will start at $6.99 as well as the packages that we offered live up to exactly what we said about more choice and lower prices.

We also believe that at this early stage of development of Satellite Radio, where we're not a mature cable company. What we are is a very growing company that having a lower price point is going to enable us to pick up substantially more subscribers so that the consumer is going to be able to pay $6.99 or $9.99 or $12.95, or if they want the best of both services, the $16.99 and then we have some family plans. So we've really considered the pricing of this merger and we feel that we're going to get a significant number of people who are going to want to get the best content from both services and pay more than our ARPU. There will be people who will want to avail themselves on our lower prices and we believe that we will make up so many more subscribers to offset any concern that might even exist on the subject of ARPU.

Great. Thanks a lot.

We'll go next to Laraine Mancini with Merrill Lynch.

Two questions for you. Your churn in 2Q was lower than your guidance range. Is there a reason that we should expect that the range for the year isn't at that lower end, especially since XM has said that they think that they can keep their churn flat for the rest of the year. So we should expect more likely the 2.2 than the 2.4? And second, since you've got a big pickup with Chrysler's commitment and Mercedes, when's your view that this could be standard equipment in the car, or do we even get there in.

Jim, why don't you take the second one first.

I think we have to be careful with the term standard. I think there are some cars we'll never get to and there are some parts of the sales for the car makers that we still have to work on the economics, things like fleet sales and those kind of things. But I think the 70% with Chrysler is, I think Mel stated very well, approaching standard. We've got to swallow this increase first, but I certainly would expect in '09 we would increase the penetration rate some more. In terms of Mercedes, I think at a 90% penetration, we're effectively at standard and we're very pleased with that. One thing we didn't say is, and I won't give the exact number, but we are very pleased also with the penetration in Ford. It showed a very nice increase from what we had modeled and I see no reason to believe why that also is not good news on the horizon.

Laraine, on the churn performance relative to guidance, I think the range is still the best guidance, as you know, the churn rate is just for math. So fairly small changes in either the number of gross adds in the second half or the number of accounts that can churn if you get two of those moving in the same, right direction or the same wrong direction, it's easy to move that churn number a couple of tenths. So I think it's just best to stick with the range.

One follow-up, if I could. Your customer account billing came down sequentially, your competitors did not and they seem to be spending to manage their customer satisfaction. Your customer satisfaction has been strong without that. What do you think is the difference there?

Can't speak to what's going on within their organization. I do know that we've spent a lot of money and a lot of time over the course of the last couple of the years and the last 12 months in particular in really build up our customer relationship management team. We believe that we have a fantastic team in place now. They are supported by very good IT systems as well as business practices. We believe we can do better than we have been doing and are just spending money in what we think is a prudent fashion.

I think, Laraine, you really have to factor in our branding and our content. We think that that obviously impacts consumer satisfaction in a very significant way.

Great. Thank you. We'll go next to Bob Peck with Bear Stearns.

Just revisiting Ben's question for a second here. Back to the pricing structure changes. Because they're predicated on the synergies you would get from a merger, Mel, is it therefore fair to assume that your own internal models would show it NPD negative or NPD neutral? How should we look at that?

I think that we're going to have to wait and see. There are very, very substantial synergies of this merger. We have not been able, for antitrust reasons, to be able to do the kind of work with each other's companies as we would both like, right? We can't go through their contracts and they can't go through ours and we're not allowed to talk about some of these business situations. So we hired a third party, a very prominent third party who was able to review all of the SIRIUS documents, all of the XM documents, met with SIRIUS management, met with XM management and they identified what the synergy and efficiencies of the merger would be. And they were very, very substantial. Probably on the high end of any analyst number that is out there for synergy and they had the benefit of reviewing documents, which most of the analysts did not. We are unable to opine on it, because we have not been able to see those same documents that they've looked at. So we have to take it at the face value that there are tremendous synergies. Because, again, I mentioned earlier that we would like to have everybody be a subscriber to Satellite Radio. And one of the issues continues to be that people say, gee, I'm not going to pay for radio.

Now, there's an awful lot of people, there's over 15 million people that have found it worthwhile to pay for radio. And we know that by offering some lower prices, we'll be able to improve conversion rates. We believe that we'll be able to tap into subscribers who haven't felt that it's worth the $12.95 and that it would be worth a lower entry point. We also think, as I mentioned earlier, that there's the upside opportunity, whereas we'll be able to offer some of the select content from XM on some of our receivers. So I think at this point we're not able to give you any more information than what we have given you to date on the merger efficiencies, on our pricing, on our viewpoint going forward. But we absolutely see the Company's benefiting from this merger financially, particularly our shareholders, in a very substantial way.

And two quick questions for David, if I can. David, what number or percent of the OEM gross adds are these cars still on the lot? Second of all, can you also give us an idea of when you expect to turn free cash flow positive?

On the second one, Bob, as you know, in January in the call we said that we weren't going to be providing guidance with respect to free cash flow. We want to see how the merger settles out and then we'll consider coming back with that. On the percentage of OEM gross adds that are sitting out on the lot, it hasn't really changed much over the course of the last year or so. It's one of these things where I would have to double check, but even if you go back 18 months, I just don't think the percentage of the total base has changed very much. It's a number that's been bouncing around 9 to 10% and it seems to stay pretty consistently in that range. It can go up a little bit some weeks and then it comes down a little bit other weeks.

Thanks, David.

We'll go next to Bryan Kraft with Credit Suisse.

Thank you. Assuming the merger is approved, first, what will be the time line for commercial availability of an integrated chip set and how would you expect the cost of that chip set to compare to your current costs? Then secondly, how long do you expect it to take to get the integrated chip sets into the vast majority of your OEM stock?

I'll let Jim answer your question on chip set, but I will tell you that we believe we will begin to offer our packages that we have identified that we're going to do within six months. So our hope would be, let's assume as an example that we close by the end of this year. We believe that by father's day, dads and grads, we would be selling and offering our services with all of the packages. We also would expect that by Christmas we would be offering the a la carte service. So on the subject of the chip sets and things that are in the development--?

Right. I think you need to be careful. It's not a given assumption that we need an integrated chip set to offer any of the things that Mel just talked about. I want to reiterate what Mel said. The packages will be available by father's day of next year. More importantly, they will be retroactive to virtually all of the products that are in the field. So there is not a risk of obsolescence with any of those. And then the a la carte will take more work and will require a new radio which will be in the market to support the Christmas selling season of next year. That said, if the merger goes through, I'm very positive that we will very, very aggressively go after a integrated chip set. The timing of that chip set is probably somewhere between one year and two and a half years, depending on what we decide to feature in it. We won't be able to begin that work until it's clear that the merger's approved.

And the -- Jim, again, mentioned on father's day is premised on the fact that the FCC would approve the merger by year end. And what we've said is that we would not be able to have as many choices as we're offering, particularly the a la carte, but for the efficiencies of the merger. So all of this is conditioned on the merger.

So if it's one to two and a half years to actually have the integrated chip set, as far as getting them into the OEM production, what kind of additional time do you think it takes to get there?

Number one, one of the things I've learned the hard way in this business is everything takes longer in the OEM world than you would like because they are very careful about how they make changes across mass volumes and in particular I'm talking about the big auto makers. I don't know the answer to your question yet.

We would provide the auto manufacturers with what they need as quickly as we can possibly commercially do that and then we're at the mercy of what the OEMs do on timing and integrating it into the vehicles.

I think one thing that's clear is we think that both the packages and the a la carte option are very exciting for consumers and I believe the OEM car makers care very much about incorporating exciting features in their products. So once the chip sets are available, it will be up to them how quick they go. I think they're going to want to go fairly quick, but I can't guarantee you that.

Our experience with the OEMs has been that clearly they don't want to lose business to the aftermarket, so that if in fact there's new cool features that are out there, they're going to want their customers to get them, so we're going to accelerate as fast as we can to get them what they need and we're at their mercy for when they put it into the vehicles, but we think that they'll be responsive very quickly.

Thanks very much.

And we'll go next to Vijay Jayant with Lehman Brothers.

Food morning, it's James Ratcliffe for Vijay. Couple questions on the OEM segment. First of all, what portion of the OEM customer base at this point is still under the subscription that originally came with the car? Secondly, for new OEM customers, how long is the average included subscription over the entire gross add base? And how is that trending? Are you seeing changes in that? Thank you.

The second question, James, is what's the average length of the OEM bundle?

Yes, exactly.

Okay. I don't have a precise number for you. I can tell you that for the most part Chrysler and Mercedes vehicles run a year. For the most part, BMW runs a year. For the most part, Ford runs six months. And those are the ones that have real volume out there. So figure it's between six months and a year. And in terms of the number of subscribers that are under the promotional plans, that's not a number we've been providing to the Street. It's obviously something that we do track internally. I can tell you that we track much more closely than what the total is, we track the number that are coming up for conversion in any particular point in time so that we can focus our CRM team in on the renewal and conversion efforts.

Got it. Can you give us any guidance on how those conversion levels are going, at least how they're trending?

Well, we're pleased with the level that they're going and they're incorporated in our all-in churn rate of 2.1% for the quarter.

Got it. All right, thank you.

And we'll go next to Eileen Furukawa with Citi.

Hi. Thanks for the question. I have a couple. First on SAC, you saw a slight lift in the first quarter SAC. I'm just wondering if you could quantify how much of the increase in SAC is due to the increased production in OEM compared to the $10 that XM contributed to their increase in OEM production? And then also, regarding your Chrysler deal, I was just wondering is the 70% installation a specific percentage penetration that you were really pushing for and a number that you internally calculated as the financial optimal in storage date, is this a decision that came from Chrysler's side because it is the 70% what they expect for that?

I'll take the second one first. This is a decision that came from Chrysler. I don't think we're still at the optimum rate yet. I think there's still more room for some growth. As I said earlier, the dynamics that we have to particularly optimize are a big factor in conversion rate, clearly, is the percentage of fleet and rental vehicles that go into that base. So we're learning a lot and watching that closely. We're very pleased with the 70%. It's a number that came from Chrysler, but it was a goal that we had set to try to be certainly in that range. I will say we got there quicker than we thought we would.

What do you -- you do think the optimum number for you is higher than 70?

Well, I don't know yet what the optimal number is. I don't think 70 is the optimal number. I think there's room to go higher. There are companies that have obviously committed to total standard. We also have Mercedes, which is committed to be over 90% in future years. So I think it has a lot to do with the mix of the vehicles. Again, important is how many of the vehicles being manufactured are going into fleets and going into rental, but we don't feel that the 70% represents any optimum number, it just represents a huge improvement and something that we're very pleased with.

On the mix impact on SAC, I think the way that you should think about it is that as you look at the -- as we look at the underlying cost associated with SAC that we're at or better than we expected to be in our different channels. And so the change in our guidance is due to the change in mix associated with the outperformance of OEMs this year and a little bit softer performance at retail than we had been looking at. So I think your answer lies in the guidance.

Okay. Thanks.

We'll go next to James Dix with Deutsche Bank.

Good morning, gentlemen. Two questions. Your merger filings last week included some data showing that Satellite Radio you could generally have higher penetration in markets served by fewer terrestrial signals. Do you consider this one of the strongest pieces of evidence in your case that you're part of a larger market. And if there are other facts or pieces of evidence you think are particularly compelling, what would they be? And then secondly, what do you think of the accounting for the softer than expected retail environment that you're seeing right now and do you expect Satellite Radio as a category to grow at retail next year? If so, what would drive that change?

So, Jim will do the second part and then I'll do the first.

I think all you have to do is walk into a Best Buy store and it's pretty obvious how much competition there is. We're working hard on understanding the softness at retail right now. I got to be very honest we were disappointed that we didn't see a closing of the gap more rapidly for the father's day period. We haven't concluded yet. We're working hard to temper our fall plans. I will tell you that one of the things I think seems pretty obvious to us is that there's quite a bit of confusion, still, on buying Satellite Radio and we need to simplify that process even more in the aftermarket and we're working hard on making sure that that process is very, very simple as to how you get the product in the aftermarket, more importantly, how you get it installed so it works very, very easily and very, very quickly and how do I have my service right away after I buy it with simple options. I think that's all we can say right now.

I think one other thing on that point, I think the merger will be a great stimulant for retail sales. Because I think there is indecision on the part of people about buying Satellite Radio now. We think that there is some noise in the market on the merger, so we think that there are some people holding off on that. We also think that offering these new packages and ultimately a la carte is going to stimulate some sales. We know the retailers will be happy to have some new products there. We think that things will pick up, certainly, as a result of the merger as soon as the merger is approved, about the end of this year. We think that will be a factor for next year.

Regarding our reply comments, they were extensive. They hint upon every area that you can imagine. Certainly, our competitor, the terrestrial broadcasters were filing lots of comments, many of which were just not true about the merger and we responded to that. We cleared the air so that there's no confusion that this is not a DISH, DirecTV scenario and we pointed out the differentiation between our market and the television market. We also pointed out there was some points made that said that we didn't have the technical ability to deliver on what we were saying and we filed comments that proved that. We talked a great deal about the efficiencies. We talked about the number of cars that have AM/FM radio, over 240 million vehicles on the road that have our competitor in them. We talked a lot about HD radio. We talked about Internet radio that was coming. We talked about telephones that were competitive. We talked about how robust the market was. We demonstrated from economists as well the fact that there are such great efficiencies of this merger that they'll result in lower prices and that's good for the consumer. So it was a very extensive filing that addressed any potential issue.

It's hard -- again, I'm very close to it and again, I'm biased, I'll tell you that up front, but it's very hard to believe that you can look at the audio entertainment market or the radio market and sit there and say there's not a whole lot of competition so that two companies that have a total of 3.4% of the audience share together, that that combination would be anticompetitive. So I think that you got to see that we should be able to achieve and win that argument. And then the other argument at the FCC is this in the public interest? And that gets back to the choice and that gets back to the lower prices. And that's why we feel that our a la carte offering and our packages -- I had somebody do the math and I don't know -- I can't even give you the exact number of choices, because the number is so big. But if you wanted to estimate that before the merger, consumers have one choice. They can pay $12.95 and get Satellite Radio afterwards. There are billions of choices--?

I actually thought it was a billion. One of our guys came to -- you guys can check out the calculation -- and told us that the number of permutations is 1.5 times 10 to the 55th.

I don't even understand that, I'm just a radio guy. But certainly by us having all of these choices and having lower prices serves the public interest. So we think our reply comments fulfills making all the arguments that we need to make for the merger.

Thank you very much.

We'll take our final question from David Bank with RBC Capital Markets.

Thanks very much. Morning. Just a couple of merger, regulatory follow-up questions. The first question is, the SEC filing process has been a pretty public one versus the DOJ process, where we don't have quite as much transparency. Can you give us a little bit of insight in terms of what you're communicating to the DOJ to help make the point that you guys should be able to merge. If there's any different message or any other different key themes than what you've put in the SEC filings? The second issue is, in your joint filing you addressed a tremendous amount of issues I think pretty effectively. The one issue that you probably didn't address because it's in a separate NPRM is the prohibition of joint ownership in the original DARS license grant. So could you give us a sense of time frame when you expect to react to that issue and then just a -- I'm sorry, last question, if you could give us anymore update on the overall time frame and how you see things developing?

Okay. So the DOJ process is a less transparent process. They sent us a second request. That second request asked for substantial amounts of information. I can't tell you how many gigabytes worth of data that we sent. I think since most of our stuff was electronic, I think we paid a little bit over $1 million just for photo copying the material that we had to send them. And that doesn't include any of the electronic stuff. The two main areas that the DOJ will focus on, one would be what's the market and obviously they'll look at a lot of material in making the definition as to is the market the Satellite Radio market. And if somebody believes that there is a Satellite Radio market, that would be one viewpoint. And the other one is what we believe and what most of the people who file believe that there is this audio entertainment market and that we do compete with AM and FM radio and iPods and the jacks that are in the vehicles and the Bluetooth for cell phones.

So the one big area that the DOJ focuses on is the definition of market and then the second one that is equally -- I shouldn't say equally important, it's up to the DOJ to say whether it's equally important or not -- but the other one that's important is the efficiencies. Because the government wants to make sure that the consumer benefits as a result of merger and not get hurt and if there are efficiencies of a merger, the belief is that those efficiencies will be passed along to the consumer, and that's good. And that would be pro-competitive. So we think that our filings are on those two messages about the market and as well as on the efficiencies.

Regarding the issue that came up as to whether or not there is or is not a rule, what we have said is that back in 1997 when we got our licenses, there was a public policy statement that said that the intent was that one company would not own the two licenses. There's some disagreement that says whether or not there is a rule or there isn't. The FCC has issued a notice of proposed rule making on that subject. I believe our comments are due on August the 13th, which is when we have to respond to that issue. We will respond that says that we believe that a policy statement or even a rule that was made ten years ago that didn't contemplate the competition that exists in the marketplace today is something that should be changed if there is a rule or it should be just taken as a policy statement. The Chairman of the FCC has stated publicly, that when they issued the rule making -- the notice of proposed rule making, is number one, if there is a rule, should we change the rule, is a question. So at this point if there is a rule, then we think it should be changed and if in fact there's not a rule, then it will be addressed that way.

Regarding timing, I've mentioned that we are hoping to certify that we're substantially in compliance by the end of the summer and therefore the clock starts ticking at the Justice Department and again we have responded to the reply comments. On August 13th we'll reply to that second piece that's out there and that pleading cycle or the official pleading cycle will have been completed. We hope that the regulators will deliberate and conclude as we feel that the merger is in fact not anticompetitive and in the public interest.

Thanks very much.

With no further questions, I would like to turn the call back to management for any additional or closing comments.

Thank you very much for listening today.

That does conclude today's teleconference. Thanks for your participation and have a good day.