Sirius XM Holdings Inc (SIRI) 2007 Q4 法說會逐字稿

Good morning; my name is Sim and I'll be your conference operator today. At this time I'd like to welcome everyone to the fourth-quarter and full-year financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Joseph Titlebaum, General Counsel of XM Satellite Radio. Sir, you may begin your conference.

Hello, everyone. This is Joe Titlebaum, General Counsel at XM Satellite Radio. Before we begin our prepared remarks I would like to remind everyone that certain information on this call may contain forward-looking statements. Due to a number of factors our actual results may differ materially from those projected in such forward-looking statements.

Those factors include -- future demand for the Company's service; the need to meet competition or address changing marketplace conditions; the impact of the merger; any litigation results or settlements; and the potential need for additional financing as well as other risks described in XM Satellite Radio Holdings' Form 10-K filed with the Securities and Exchange Commission on February 28, 2008. Copies of that filing is available online and upon request from XM Radios' Investor Relations department. Now I will turn the call over to Nate Davis, President and CEO of XM Satellite Radio. Nate?

Thank you, Joe. Good morning, everyone, and thanks for joining us. On the call with me today are XM's Executive Vice President and Chief Financial Officer, Joe Euteneuer, who will give you an update on our financial results; and Chairman of XM's Board of Directors, Gary Parsons, who will provide an update on the pending merger. Several members of my management team are also present and may participate when we get to the Q&A section of this call.

Let me start by addressing the state of our business. I have four major objectives and areas of operational focus during this past year. First was to minimize the distractions and negative operational impacts that normally occur when two companies announce a merger and to focus this company to hit the subscriber and financial guidance we provided investors at the start of the year.

Second was to manage the transition of our business and, in fact, the whole satellite radio segment from a retail centric business to an OEM centric business, while at the same time sustaining our growth and our path towards profitability.

Third was to clear away a number of the legal, regulatory, arbitration and litigation overhangs that the Company encountered in 2006 prior to my joining the management team.

And finally, along with Gary and our legal team, I wanted to obtain the necessary regulatory approvals and to close the announced merger by the end of the year.

Well, on the merger approval front, obviously we are still awaiting regulatory approval. And while the process has taken longer than everyone anticipated, we continue to look forward to a positive resolution to this matter soon. Given the pending merger we will not be issuing guidance for 2008 and beyond at this time. So I will focus my remarks today on the Company's stand-alone operational performance for 2007 and Gary will provide some additional merger-related comments a bit later.

Looking at the other objectives for 2007, we delivered solid performance. Even with the distractions of a pending merger, the XM team delivered positively on the operational guidance we provided. We met our subscriber guidance, we met our revenue guidance and, with the exclusion of the merger-related and settlement charges, we met our adjusted operating loss guidance. And while we don't provide specific churn or conversion rate guidance, we believe the continued positive results on both of these core metrics reflect solid performance from both our customer service and our OEM teams.

We were also effective in bringing to conclusion a number of problematic legal and regulatory issues that sometimes required management's attention when I wanted this team 100% focus on the core business operations. Well I'm happy to report the securities class-action law suit was dismissed outright. Both the SEC and the FTC completed their investigations with no actions recommended. We settled our litigation with three of the four major record labels and we completed the year long CRB arbitration of music performance rights with the recording industry.

Resolving some of these, such as the recording company agreements, resulted in some charges and related accruals. While others such as the SEC, the FTC and the class-action suits involve no payments whatsoever, we certainly incurred legal expenses associated with these matters. Between legal settlements and other charges there were roughly $77 million in expenses that we do not expect to be repeated in 2008. Obviously we feel very good about the outcomes and are pleased to have put these issues, other than the merger, behind us as we entered 2008.

And on the final objective, managing the Company's transition to the OEM centric business model, great progress is being made and more on that in a few minutes. First, a quick overview of our subscriber growth.

For the full year 2007 XM had 3.89 million gross adds, essentially equal to 2006 when we had 3.87 million gross adds. In the fourth quarter we improved to 1.13 million gross adds compared to 1.07 million in the fourth quarter of 2006.

Shifting to net adds for a minute, our net adds declined from 1.7 million in 2006 to 1.4 million in 2007. This decline was due to fewer retail gross adds coupled with churn from a larger subscriber base, which stood at more than 9 million subscribers at the end of 2007. And in the fourth quarter we saw net adds grow slightly from 443,000 in the fourth quarter of '06 to 460,000 in the fourth quarter of '07.

A deeper look into the OEM segment shows that the transition to an OEM driven business is in full force. XM Satellite Radio was installed in 3.5 million new vehicles in 2007 and that's 64% higher or 1.4 million more vehicles than in 2006. We are working with our OEM partners to increase penetration while maintaining conversion rate in the low 50% range. Our current penetration is roughly 40% and collectively our auto partners have advised us that they intend to ramp penetration to 60% to 70% of the total production by the 2010 model year.

With increasingly large percentages of gross and net additions coming from the OEM sector rather than from the retail channel, one element of our subscriber reporting has received greater and greater investor focus. As you know, XM does not report promotional subscribers when a new vehicle is manufactured, but only counts them as a subscriber when the vehicle is sold and when we have a paid subscription. So investors often ask for the number of XM equipped vehicles that have been manufactured and shipped to dealers but not included in our subscriber numbers. This is the so-called parking lot subs number.

Now with the accelerating ramp in XM equipped vehicles, our partners reported that number to be 1.255 million at the end of 2007, an increase of nearly double the 665,000 that existed at the end of 2006. In essence then, if XM included these unsold vehicles in its subscriber totals, then we would have a subscriber total of roughly 10.3 million, gross additions of roughly 4.5 million, net additions of roughly 2.0 million, and an improvement in all-in churn and in fact slightly over 10%.

Now while we prefer a more conservative reporting convention, it's probably important for all investors to understand the continued strong growth being generated out of the OEM channel, even as retail has weakened over the past few years. This OEM growth story is true for both satellite radio providers.

In fact, with Sirius reporting 4.2 million gross additions in 2007 and XM having 4.5 million gross additions on a comparable basis, each company would have added the largest number of yearly gross additions in the history of either company. The prospects for 2008 point to similar accomplishments as the mix continues to shift heavily towards the new vehicle channel.

In the area of OEM partnerships, our growth in the new vehicle market continues to exceed expectations, reflecting general consumer demand for XM Radio and the strength of our OEM partnerships. In the OEM sector the entire satellite radio category is growing in demand, even as we fight for attention in the car with MP3 players, cell phones, HD radios, video units and other devices. Of our total 3.89 million gross adds in 2007, OEM gross adds were 2.6 million or 67% of our total, that's an increase of 26% over 2006. In the fourth quarter alone OEM gross adds were 766,000, that's a 46% increase over the fourth quarter 2006.

As you know, building this OEM channel requires an upfront investment, but over time the OEM channel will deliver significant long-term revenue growth. Importantly, as OEM production increased and expanded into more models our conversion rate remained stable. The 2007 conversion rate was 52.7% and while fourth-quarter conversion was up to 53.9%, an improvement over the third-quarter rate of 52.5%, we continued to work with our OEM partners to balance increased penetration with maintaining conversion in the low 50% range.

We continue to deploy multiple tactics to accomplish this -- from ongoing dealer engagements and promotional programs to various incentives to drive direct sales such as proactive telemarketing that reaches OEM trial customers more quickly and more frequently. Some of our OEM partners have begun to bundle one- to three-year XM subscriptions into the purchase of a vehicle and this approach positively impacts our cash flow, customer retention and total churn.

The XM package of services is also being integrated deeper and deeper into the dash, which is becoming the center of infotainment, as more and more vehicles are equipped with large screen GPS navigation systems. Just this month Hyundai announced the integration of XM Radio into the 2009 Sonata's touch screen navigation display.

In addition, our OEM partners are integrating XM data services like XM NavTraffic and XM NavWeather into new vehicles. We expanded and increased our weather service for aviation, marine and ground responders to deliver real-time personalized weather information for vehicle specific locations. XM NavWeather is integrated into the vehicles' navigation system as an easy to read graphical map. It displays real-time weather conditions and warns of weather threats. This month Acura announced that its 2009 Acura RL will offer XM NavWeather.

We also enhanced XM NavTraffic which delivers real-time traffic information for a driver's personal route. In 2007 NavTraffic was offered in 18 vehicle models from six OEM brands and will be expanding to 50 models from 14 brands in 2008. Now available in 80 major U.S. markets XM NavTraffic feeds data on the Internet, such as accidents and road construction, directly to a vehicles' GPS navigation system alerting the driver in sufficient time to route around the incident.

In summary, we've been successful in growing the OEM business. Delivering significant growth in factory installed production, boosting penetration rates and expanding the range of integrated XM services while at the same time maintaining a stable conversion rate. And through the remarketing campaigns we've described on previous calls, our OEM growth will continue to benefit by having more and more used cars with factory installed XM Satellite Radios.

Let me turn to retail now. In 2007 we had retail gross adds of 1.3 million and net adds of 185,000. In the fourth quarter of 2007 we had 364,000 gross and 99,000 net retail adds and, as you know, the retail satellite radio segment has been declining. This softness in retail reflects growing competition from a myriad of audio entertainment sources like iPods and MP3 players, cell phones, Internet radio and other new devices. Competition from satellite radio has even made FM radio better.

Nevertheless, and you've heard me say this before, the overall retail sector will remain a key for XM. Now I say that for good reason -- the synergy between the retail and the OEM channels continues to drive family plan subscriptions and positively impacts our OEM conversion rate. So our goal is to optimize retail sales opportunities while containing costs.

A key focus of the retail side is to grow our direct sales volume via Internet sales including XMradio.com and through customer service sales. Direct sales through customer service allows us to optimize our marketing dollars. For example, we found that cross selling promotions with OEM partners through listener care and through direct mail are a much more focused and less costly way to reach potential customers.

And just as XM called the early trend in retail was starting to decline, we're letting you know now that the NPD data is less relevant than it was five to three years ago. We no longer use NPD as a lead indicator in the aftermarket. We estimate that when we launched our service, satellite radio business in 2001 to 2002, NPD measured over 70% of XM's retail sales. In 2007 we estimate that NPD represents less than 40% of XM Satellite Radio's retail sales.

Roughly 60% of our sales come from direct or non-NPD reporting channels. XM has consciously worked to grow these more cost-effective means of retail distribution, which is one of the important reasons why our retail SAC charges are well-managed and why our quarterly retail gross adds are consistently higher than NPD reporting outlets would suggest.

Further, in 2007 we moved much of our advertising from broadcast to online which again is a more cost-effective way to gain new subscribers. Our greater focus on direct sales via online can deliver improved SAC performance and provides the accountability and tracking that simply doesn't exist with broadcast advertising.

And we're taking additional steps to achieve cost efficiencies. In the fourth quarter we eliminated the XM Radio kiosks located in many shopping centers and scaled back on our in-store [repro banner]. And late in the year we restructured our relationship with Starbucks eliminating the subscriber marketing aspects but keeping the branding relationship with the Starbucks XM Cafe channel. We're evaluating all other similar marketing relationships to ensure they are aligned with our new strategies. So we're focused on allocating resources to the growth drivers in our business.

Now Listener Care -- I'm really proud of the Listener Care team. The Listener Care is one of our most effective resources for retaining subscribers, converting OEM customers and for driving direct sales. As I told you in late 2006, our 2007 goal was to improve the Listener Care operation and we're delighted to have delivered on that objective. The strategic investments we made in training and systems capability and new technology and tools are paying off. Customer satisfaction with Listener Care rose from 74% in January of '07 to 81% in the fourth quarter.

Direct sales are growing as Listener Care drives new family plan subs and proactively reaches out to OEM promotional subscribers. Conversion and churn rates remain stable. And in 2007 self-pay churn was 1.75%, essentially flat to the 1.77% in 2006. Fourth-quarter self-pay churn was 1.72%, down from the fourth-quarter 2006 churn of 1.79%. All of this, high customer satisfaction and stable conversion and churn, is the product of our focus on good service and diverse programming.

2007 was an outstanding year for XM programming. In addition to our third season of major league baseball XM broadcasted more than 5,000 sporting events in 2007 and marked our first year to broadcast college sports from all six major conferences - the ACC, the Big East, the Big 10, the Big 12, the Pac 10 and the SEC.

We introduced a number of new channels including XMX, which delivers XM's exclusive programming on a single channel. Music icon Bob Dylan launched the second season of his renowned XM exclusive radio show and we aired landmark events such as Live Earth concerts from seven continents. We expanded across new platforms delivering free podcasts of select XM programs via XM Radio and Apple iTunes' store. And I might add that two of our podcasts consistently ranked in iTunes' top 10.

Perhaps most notably we launched the nation's first free to air non-stop coverage of the 2008 presidential campaign. this public service channel, "P.O.T.U.S. '08", was named one of the 10 most important voices to listen to in this year's election by the best Life Magazine.

On the customer radio front we refreshed the Xpress line of radios. In fact the XpressRC plug-and-play radio took top honors in 2007 year-end product reviews by WIRED Magazine, Popular Science Magazine and Men's Health. Finally, XM received four 2008 Consumer Electronics Show Innovation Awards for outstanding products.

So in summary, we are very focused on executing our business plan and improving operations and overall we're pleased with our accomplishments this year. We met our primary operational, subscriber and revenue goals and at the same time we resolved numerous pending arbitration and legal matters. XM ended 2007 as a stronger, more focused firm, better prepared to handle the future, whether that future is a stand-alone firm or as a merged firm. Now to review the financial performance I will turn the over to Joe Euteneuer. Joe?

Thanks, Nate. Good morning, everyone. As Nate said, from a financial standpoint we have concentrated on hitting our 2007 numbers, clearing away a number of long-standing legal issues and positioning ourselves for positive progress as either a stand-alone or a merged company.

Allow me to start by pointing out a few of our key metrics. First, a look at our performance against our 2007 subscriber and financial guidance. Our ending subs of just over 9 million subscribers passed the low-end of the range resulting in 18% growth over 2006. Subscription revenues exceeded the $1 billion guidance range growing 22% over 2006 and more than double over 2005.

Subscription revenue as well as our overall revenue is tending to track to subscriber growth as our monthly subscription ARPU has remained very consistent at $10.14 for the fourth quarter compared to $10.05 in the fourth quarter of 2006 and $10.15 for the full year 2007 compared to $10.09 for the full year 2006. Overall ARPU, including advertising revenue and activations, was $11.71 in the fourth quarter of 2007 and $11.48 for the full year, giving the Company an additional $1.57 and $1.33 per sub respectively of average revenue per month from each subscriber.

We guided towards high teen CPGA for 2007. Our actual CPGA of $121 was impacted by a $4 non-cash charge due to the late December termination of the Starbucks deal which was an opportunity that arose in the year and was not contemplated in our guidance.

Reported adjusted operating loss of $238 million included merger and settlement charges of $80 million which we had previously advised were excluded from our guidance range of $170 million to $180 million. The full-year impact of these charges are -- a $37 million incremental charge from music royalty rates payable to Sound Exchange above the interim 2007 contractual rate. This charge was for royalties due for music broadcasts since the beginning of 2007 at the 2007 rate set by the CRB in December 2007.

The $37 million was expensed in the fourth quarter of 2007 in revenue share and royalties category on the P&L, but will be paid in the first half of 2008; $13 million in settlement expenses for recording label lawsuits regarding advanced recording functionality. This expense, which includes certain related accruals, was booked in the revenue share and royalties in the fourth quarter. And $30 million in merger-related expenses that was recorded throughout the year in the general and administrative category on the P&L. And remember, due to the structure of the merger, XM expenses these charges while Sirius capitalizes them.

So from a subscriber revenue and loss perspective we achieved our 2007 operational objectives by keeping our company focused on running the current business. I would also note that the 2007 financial results included a number of elevated legal expenses. As your heard earlier, we successfully resolved a number of legal and regulatory issues from prior years including SEC, FTC inquiries, the CRB performance right arbitration and a security class-action lawsuit that was dismissed.

Even though these resolutions were successful, the resulting elevated legal expense cost us $28 million in 2007. They are included both in G&A and an adjusted operating loss. G&A therefore should normalize in 2008. Without that $28 million in elevated legal costs we would have further improved our adjusted operating loss compared to 2006. As Nate indicated earlier, with other merger-related and settlement charges there is a total of $77 million of charges net expected to recur in 2008 -- not expected to recur.

Turning now to cash and liquidity -- XM ended the year with total available liquidity of just under $557 million which was comprised of approximately $157 million in cash and $250 million in secured revolving credit facilities with a group of major banks and a $150 million credit facility with General Motors.

The terms of the $250 million revolving credit facility are fairly favorable. I would point out that we first put this facility in place in 2006 when we last refinanced our debt from secured to unsecured. The intention of the bank revolver structure was to avoid the negative carry of keeping an additional $250 million of debt on our balance sheet. The bank facility has served this purpose both in providing standby liquidity as well as saving considerable interest payments during the past two years.

To ensure we maintain this low-cost facility in the future, earlier this month the facility was amended to allow it to be available following consummation of the merger. While it was not necessary to tap any of these available credit facilities during 2007, there are several lump sum cash payments which are due in the first half of 2008 including our $60 million annual payment to Major League Baseball, the Company's record label settlements and the 2007 incremental payments of $37 million to the recording industry under the CRB ruling last December.

Therefore, earlier this week the Company drew down $187.5 million, or 75% of our $250 million revolving credit facility. The interest rate on our first draw is 4.75% based on nine-month LIBOR. As a result of drawing 75% of the amount available under the revolving credit facility, the Company now has full access to the $150 million credit facility provided by General Motors which may only be used for GM payments.

Fortunately, as our operational cash burn decreases, we will also be seeing significant reductions in our capital expenditure needs in 2008 and subsequent years. Of particular note, our nearly $700 million investment in our new satellite constellation is largely complete. We have two fresh and fully functional satellites, XM3 and 4, already in orbit, each available to provide full service for at least 15 years. These are currently backed up by our earlier satellites, XM1 and XM2, along with our Ground Spare, XM5, which is soon to be complete. This provides an unparalleled level of redundancy and system service continuity to the XM satellite system.

As I just mentioned, the construction of our Ground Spare is almost complete. We have only $63 million in satellite construction and launch vehicle payments remaining on the XM5 program scheduled evenly between 2008 and 2009. XM's lack of future capital requirements for satellite construction greatly smoothes our path to sustainable free cash flow going forward.

So in summary, we certainly look forward to the opportunity to complete the merger and capture significant synergies from a combination with Sirius, but we also are well positioned to go forward on a stand-alone basis. We have demonstrated in 2007 clear momentum in our OEM channel, improvements in customer satisfaction, growth in revenue and improved cost controls excluding the items I've previously discussed.

And with past legal distractions now behind us and the majority of satellite infrastructure already built, we will continue to keep the Company focused on operational execution until we receive regulatory approval. With that let me turn the call over to Gary Parsons.

Thanks, Joe. As Nate mentioned at the start of the call, we certainly had hoped to have obtained regulatory approval for our merger with Sirius by this point in time. Frankly, the shareholders of both companies approved the transaction in November last year and we've continued to provide the Department of Justice and the FCC with timely responses to any of their questions and any additional materials that they've requested.

While we obviously cannot provide any assurances relative to either timing or outcome, we expect and we continue to look forward to a timely and positive resolution of the regulatory approval process. In the meantime, in the unlikely event that a merger does not go forward, we are fully funded for a stand-alone business and we expect XM to deliver solid growth, improved operational performance, outstanding customer satisfaction and to remain well positioned with or without a merger.

Also, I would mention that consistent with what Mel noted for you on the Sirius conference call two days ago, you can certainly assume that the two Boards of Directors are aware of the current merger termination date and that the companies will provide an appropriate update on the merger agreement prior to that date.

Regarding prospects for the merger approval itself, we feel as strongly today as when we announced the deal over a year ago, that the merger holds positive value both for shareholders and for consumers. A combined XM/Sirius will offer consumers more programming choices and lower prices, including best of both music pack -- best of both packages as well as music only packages, a la carte offerings and family friendly programming with credits for consumers who would prefer not to receive adult oriented programming.

I would also note, even more so than a year ago when we announced the merger, the nature and the magnitude of the competitive alternatives that are available to consumers are readily apparent, with new announcements and competitive initiatives coming forward on a regular basis. This competitive reality in the digital age is apparent to media industry observers and analysts, the consumer benefits of a combination are readily apparent to a large number of parties who have filed in support of the merger.

And that is not only consumer groups, academics, public officials, former regulators, but frankly also programmers, car companies, retailers and other businesses that see the combined company as both pro competitive and pro consumer. And certainly from a financial standpoint the synergies from combined operations are substantial.

As we've noted on a number of these calls before, until we have DOJ approval neither XM nor Sirius will be able to examine the details of the other's operation. But independent third party consultants have reviewed those potential synergies, the synergies of the combined entity, and they have prepared estimates for the Department of Justice regarding the level of synergies.

Suffice it to say that the companies' managements, as well as virtually every investment analyst that's on this call, can reasonably project that material synergy opportunities are available across all of the line items of our operating scale. With that we'll go ahead and call for the close of prepared remarks and open it up for your questions.

(OPERATOR INSTRUCTIONS). Robert Peck.

Just a couple quick questions here if you don't mind. First of all, Mel said on their call a couple days ago they basically had gone radio silent with the DOJ over the last several weeks. Can you confirm that as well for XM? And when is the last time they've requested any information from XM?

I would never contradict Mel. He's absolutely right. As you know, obviously they run that process on their schedule and on their needs in a professional manner and they communicate with us when they need additional information. It frankly has been a material period of time since they have requested any additional information. There was some that we had sent to the SEC more recently. But, yes, it is a point right now where we are waiting to hear either for any other information request or a decision.

And Gary, as far as the March 1st deadline here as both Boards meet on that, is there anything else that changes along with that decision besides just the fact of extending that deadline a month, two months or whatever need be?

No.

And maybe for Joe, Could you go over your fully funded status? First of all, do you see XM fully funded as a stand-alone company? And if so how much cushion do you think XM has and what sort of impact are you accounting for there as far as a prolonged recession?

First off, yes, we are fully funded. Second off, we have not really talked about our 2008 plans yet just because we don't know whether we're going to be a stand-alone entity. So what I would tell you is based on where we are and what we think we're going to do on a going forward basis we are fully funded and let us come back to you at a later date with more specifics.

Bob, one additional gear, and it's more just to the last part of your question relative to a prolonged recession or something like that, the one thing that I will have to say has been quite a positive feel for me over -- and frankly it's the results of both satellite radio companies, but I know ours specifically.

During the time when there has been a drop in consumer confidence, worries about a slowing of consumer discretionary spending, if you'll notice our churn rate is rock solid, even actually a little improved. Our conversion rate among the new cars that we are seeing sold has been rock solid as well and of course our ARPU is rock solid. So that means we're not having to discount things to keep people onboard.

So there does appear to be, certainly at least for the existing subscribers of the Company, and for those promotional subscribers who are experiencing the product for the first time and deciding to convert, the value proposition appears to be just as strong in today's current let's say wobbly times I think was how the Fed reserve described it this morning or yesterday as opposed to it was last year.

Thanks again.

David Bank.

A couple of questions. The first one is, you talked about the $4 charge on the Starbucks deal termination. Can you just review why the deal was terminated and are there any expense or positive impacts in 2008 where we might see cost savings?

The second question is, Joe, you outlined over $100 million of kind of non-recurring expenses. Can you just clarify line items in terms of any major buckets of where those non-recurrings are coming out of, assuming they're mostly coming out of G&A?

The third question, Gary, we haven't talked a whole lot about iPod on the last couple of calls. Can you just review the -- are you having any active discussions at this point with iPod and trying to partner with iPod?

And the last question -- I'm sorry for so many of them -- is we've also talked in the past as the conversion ratio has slipped that there was some suspicion that the increase in price of gas may have been an impact. You guys have really made nice progress in terms of the conversion ratio in light of gas prices that sort of continue to go up, but there probably hasn't been a lot of relief there. Any thoughts on why that is?

This is Nate speaking. A couple things. On the Starbucks relationship, the Starbucks relationship -- two parts of it. One part was to generate subs and one part was a branding relationship. We weren't getting what we thought we wanted to get out of one part of the relationship, but the branding wasn't working very well. So we had an opportunity to save some money in 2008 and beyond by changing the nature of the relationship and making it only a branding relationship and we chose to do that. That opportunity came to us late last year and, yes, it does save money going forward. In fact what we did is we accelerated some of the payment and paid them off, but we're going to save money in 2008 and part of 2009.

Can quantify that?

Did we disclose the amount from Starbucks? So that's been something that we've agreed that we would not disclose the specifics. But you know from the amount of the shares that were sold that it was in the $20 million range, but we've not disclosed the particulars of the deal.

Okay.

On the iPod front, as you know, we've begun to podcast some of our regional content through the iPod relationship. And we have talked with Apple on a number of fronts of additional things we can do. I would not call it a strategic relationship; I would simply say we have a good marketing relationship and we continue to talk to them about additional things we can do.

So, yes, we have ongoing conversations. No, they're not strategic, they strictly center around making sure that more people can get XM content not only on XM radio, but also get that content through the front page of iTunes.

And the conversion ratio -- I think the reason why the conversion ratio remained strong and in fact ticked up a little bit is because, candidly it's one of those mundane things that's called focus. The management team really focused on it. We contacted customers earlier, we contacted them with telemarketing calls, we contacted them with good mailers, we got the OEM partners involved in that, we made sure people were trained and engaging the customer when they bought the car so they got pre set sets.

And the more of those things you do the more people understood the service. And candidly what we find is when people engage they tend to stay. If they don't engage they don't stay. If they've never tried the service then they sort of ask the question why should I pay. But if they try it and they're aware of all the content and they've done their presets they're excited. So we found that focus is really what's helped us improve the conversion rate. Joe?

And then lastly, in regards to the non-recurring items. The two locations you'll see them are, one, in the revenue share and royalties and in G&A expenses.

Can use kind of split them proportionately?

Yes, sure. So roughly you have just over $60 million in G&A and roughly around $50 million give or take in rights and royalties.

And those include merger-related expenses as well?

Yes, exactly right because we don't capitalize the merger cost.

Great.

Vijay Jayant, Lehman Brothers.

This is Sabora Bhuta for Vijay. I had a couple questions for you. First, are you seeing variability in conversion rates between the OEM manufactures and what's driving those variances. And secondly, regarding your 2009 convert, have you given any thought into how you plan to refinance that? Thanks.

I'll deal with the conversion rate; Joe, you deal with the conversions. The conversion rate, yes, varies by OEM. As you know, we don't disclose the individual OEM differences. But there are two main factors that cause the conversion rate to vary by OEM partner. Number one is the mix of cars, the more SUVs you have, the more high-end cars, you have the higher the conversion rate, the lower the low-end car is the less it is. And so each manufacturer has a different mix that causes their conversion rate to be different.

The second, candidly, is the engagement level. Each has a different way that they deal with their dealers and as the relationships mature we get better and we are able to get them to work on more joint promotional programs. And so those that are more mature in terms of how they work with us tended to have better conversion rates. So that's it.

And actually on the 2009, late 2009 convert on the thing -- frankly right now since that's two years away or something we're not looking at it that closely, whereas what we're focused on is with the expectation of the merger going through we have a more immediate issue which would be simply dealing with the change of control elements of some of our existing debt securities that would then need to be refinanced associated with the merger.

So quite frankly, most of our treasury oriented financial time working with bankers is looking at the various alternatives that we would have upon a successfully consummated merger to make sure that those debt instruments that have put rights and 101 control provision elements of it are handled.

Great, thanks.

Mark Wienkes, Goldman Sachs.

Operationally with the retail subs nominally higher year-over-year, just wondering if you could talk to where the churn is that you're seeing in that channel. So is it skewed toward any particular sub bucket like those on annual plans from a year ago or perhaps it's lower for the family plan subs, etc. Where are you having the success and what's your focus for '08?

Mark, this is Nate. On the retail channel, first of all the churn by segment really varies by time of the year. When we have -- as you know, we had a couple of years ago a rate increase, we had a number of customers who signed up for annual plans at that time. When they reach the end of their annual period we do see a little bump up in churn. And other times when we're sort of in the middle of the year and there's not much happening then churn tends to dip down some. And so it's really more generated by certain times than it is by segment.

Certainly customers who are on longer-term plans obviously have less churn, those are the customers that tended to -- bought in to the proposition earlier, they believed in it, they wanted a three-year subscription, obviously the churn is lower there as well than those customers who go on monthly plans, and the ones who are on monthly plans are more subject to think about it every month.

And by the way, those that are on invoices tend to also have a little higher churn because every time they look at the invoice they think about it. Those that are on credit card bills and over a longer period of time they tend to have less churn.

And the final one that you asked about was family plan. Yes, when there are multi-unit subscribers, those also tend to be the more dedicated subscribers and have a slightly lower churn level.

And then just a follow-up in then one modeling question. You talked about hitting your operational targets for 2007 despite the distractions of the proposed mergers is I think how you phrased it. So as you look to 2008 and being a more focused company now, I'm just wondering what's different now that the constraint to providing targets ex the merger for the year?

Are you asking why we're not giving guidance now? Is that what you're asking?

Yes, because you gave -- last year with the proposed -- the merger on the table as well, so --?

I think the reason we did it last year is because the anticipated approval of the merger was a year away, whereas right now -- I mean I'll stay optimistic on it. The anticipated approval of the merger is hopefully something that we'll know in the fairly near-term. And so if there were negative into that then we would obviously provide guidance on a stand-alone basis and as a positive middle then we'll have a combined company synergy's analysis and guidance. It just didn't seem reasonable to do it with this pending so close.

Okay, understood. And then just one quick modeling follow-up. I was looking at your 10-K, the annual cash flow commitments here. And Joe, you talked about the major league baseball payment and there's a satellite payment due in there as well of $32 million. I'm just wondering, can you talk to the quarterly cash flow commitments? Like when is the satellite payment due, the $60 million? And then what's the nature of that credit support that keeps the $120 million escrow payment as a payable? Do you have to keep that much available on the credit lines or is it something different?

So major league baseball is due in March, the $120 million you're seeing there is a result of a surety bond that matures in July that we'll go for renewal for and then -- what was your other one?

The satellite payment.

The satellite payment is -- I think it's the last half of the year. I can't remember if it's the third or fourth quarter.

Okay. And other big buckets of expenses like with your normal CapEx through the year -- $50 billion to $60 billion would be spread ratably?

Other than the interest payments that we have, those are on a semi-annual basis so we'll have those.

Okay, that's great. Thank you.

Eileen Furukawa, Citigroup.

Maybe I missed it, but can you give us a little bit more color on your increase in SAC and CPGA to 140? Was your promotional strategy this holiday different than what we've seen from you in the past? And also Sirius, you remarked that they transitioned over to instant rebates from mail-in rebates and that caused a higher, more costly redemption rate and was that part of what was going on?

And then on a different topic, if the merger doesn't take place should we expect some major cost cuts from you as you right size your platform to operate on a stand-alone basis? And of so, what kind of magnitude of cost cuts do you think you might be able to take? And specifically on programming, would you consider trimming your current content offering? Thanks.

Eileen, actually let me hit one thing very specifically because Nate hinted at it a little bit when he was doing some of the analysis of the ramp in the OEM sector and how much of that is cars that are being manufactured that we have not yet booked as a new subscriber, since we're obviously paying that as a SAC charge when it's a (inaudible) manufacturer. To be frank with you, the $75 SAC charge for this year, if in fact all of those units that are out there where we've already paid the SAC charges on there, if we were booking those to subscribers that falls to $63.

So you actually would have seen our $65 last year number on SAC go down this year if we were booking those subscribers the same way. So candidly, the increase in SAC is 100% due to simply the fact that we were accelerating so much the OEM subscriptions and their manufacturing it so much. I would also note that the Starbucks settlement, that $22 million Starbucks settlement is also in that CPGA category. So you've got that big lump occur in the fourth quarter and that's the $4 difference.

And we want to stay consistent on the message here about we're not going to give guidance for 2008 given where we are with the merger. But to answer your question, if there's no merger and there's a stand-alone company we will come back to investors and we'll identify all the actions we'll take. We always look at and we will continue to look at with a very -- a magnifying glass the cost structure of the Company whether it's in programming or other areas of the business.

Certainly there are always opportunities to be more frugal and to be smarter about how you do things. And we've talked about before the programming costs remaining flat. So I don't think you're going to see increases in programming cost. But yes, we will continue to look at opportunities to reduce the cost structure. We'll come back at the end of -- if there is no merger, but we remain optimistic there is, so these will get dealt with as a merger issue.

And just one final modeling question really. On the royalty revenue share line, I just wanted to make sure that that was all royalty, of course there wasn't any revenue share bump up. And also, looking ahead how should we be looking at that line item as a percentage of revenue? Or is that something you're not going to talk about?

The realities are, yes, there was a slight bump up in the revenue share just from the overall growth of our business, so that just comes naturally. And as far as where you go on a consistent basis going out, just remember that now that we've settled the CRB, if you look at the overall margin you're probably in a better position.

But recognizing that the CRB elevated charges -- the rulings of the CRB did move up that percentage. And so you're going to see that flow through on an ongoing basis. Those charges are not one time, the one-time catch-up charges for the year hit the fourth quarter, but you are going to see elevated CRB or music performance (multiple speakers).

That's what I'm trying to decide, what is one time and what is --?

Just remember that CRB was worth basically 400 basis points to you coming out of the margin. So that's why I said because the charge appeared in the fourth quarter and it impacts the entire year, looking at the full-year margin is more representative of where we'll be going on a going forward basis.

And we'll try to help you off-line on that if you want to go through the model more specifically.

Okay, thanks a lot, guys.

Lucas Binder, UBS.

Thank you very much. A couple of questions. I know the question earlier on conversion rate -- can you talk a little bit about what has been happening with your standard programs, specifically Hyundai? You've been in Hyundai's now for over a year. Can you talk about what the adoption has been like following the three months free and where you've been focusing on that in particular? I know you can't talk Hyundai specifically, but just in general about standards?

And then in addition, Nate, you said that you've been very focused on conversion. Does that mean we should see conversion rates continue to grow? And then lastly, you mentioned you took kiosks out of retail locations, you were (inaudible) a lot of cost-saving opportunities. Does that mean you're giving up on retail or did you just find that you weren't getting enough bang for your buck for that money spent?

Let's go in reverse order. On the kiosk issue, as we looked at the Starbucks relationship, the kiosks and any other way that we're selling in the retail market, what we're looking at is what's the amount of money we're paying for the number of subscribers we're getting. And as people began to buy more radios in cars, as they go online more and buy it through online sources, our site and other sites, as they buy it more in direct, what's happening is you don't want to pay the same amount of money and then get more of your subscribers through those other channels.

So kiosks were exactly that. We weren't getting as many people walking around in malls buying radios, we're getting more people going online. As we get more visible in the marketplace, more people are aware, more people are willing to go on line and buy. They get a better price and we get a better cost structure. So that's why we made that change.

On conversion rate going up, I don't anticipate that it's going to go significantly up. Instead, as I said in the notes, I anticipate the conversion rate staying in the low 50% range. I use the word low 50% range because that obviously gives us a little range here. I think you'll see it tick up in a quarter, you may see it tick down slightly in a quarter, but I think we're going to stay in that range that's the low 50% range.

Steve Cook is here, he's in charge of the automotive segment. And for those cars that have standard XM -- XM radio standard in the car, I think Steve is best prepared to talk about how that's been working.

Yes, I think the interesting thing we've seen is, even in brands like Hyundai, we're seeing them follow the same basic pattern we see in the more mature vehicle brands. Meaning that the SUVs and the more premium models convert at a higher rate. The lower sort of economy models convert at a little bit lower rate, but they're following the same basic trends. That's why we have confidence saying that we think we can see it staying in the low 50% range.

Great. Thank you very much.

Kit Spring, Stifel Nicolaus.

Just wondering if there was any impact in the increase in the OEM conversion rate with counting of gross and net subs with Hyundai and Toyota. Some of these guys who don't initially count as a gross sub but -- until they're a net sub. Is there any impact from that or is that just a -- is the increase just a pure increase? Thanks.

The increase is just a pure increase. There's no change in the way we count, there's no impact, as a matter-of-fact, from those small volumes and the new manufacturers coming on. It really had no impact at all. The conversion rate tick up was strictly a matter of focus.

Okay, great. And then is there anything you can discuss about your satellite launch plans? I know you don't want to give stand-alone guidance, but just how are you as far as satellites go?

Well, actually happy to give guidance because there's none of it. The best possible real take away, and I know Nate and Joe walked through that in the cash analysis. But the pure and simple fact is that's been a very big capital expenditure for this Company over the last three years. We spent nearly $700 million in putting up this new fleet of satellites. And so -- and for the very first time, as we indicated, we also have hot standbys in orbit. And that's something -- any satellite company likes to get to that level of comfort and risk mitigation and it's an important, very solid position to be in.

Right now we are in the final stages of completing the XM5, that's a ground spare, but we have essentially included in those going forward costs of 8 and 9 prepaying for a launch or a launch provider on the thing. Exactly when we would launch it is the question because as long as we have two brand-new satellites in orbit and two hot standbys in orbit as well backing those up there is less requirement to launch another one for another odd standby. So we feel very good about that.

And I also would mention, because I think we have mentioned this before, we had a little bit of foresight I guess, at least in the design and construction of the XM5 satellite so that we proactively designed that one to be able to address the entire satellite radio spectrum. And so it covers the Sirius spectrum as well. And therefore I think on a combined basis there is an opportunity to take a little bit of the satellite CapEx that Sirius is now facing over the next couple of years and minimize that through using the XM5 bird as a spare for that as well, too.

Great, thank you.

There are no further questions.

Thanks very much and we look forward to hopefully having a call after a successful merger or we'll see you on our next quarterly call. Thanks a lot, everybody.

This concludes today's conference call. You may now disconnect and have a great afternoon.