Sirius XM Holdings Inc (SIRI) 2008 Q1 法說會逐字稿

Good day, everyone. Welcome to the Sirius Satellite Radio first quarter 2008 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Paul Blalock, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for your participation. This afternoon Mel Karmazin, our CEO, joined by Jim Meyer President of Operations & Sales, and Scott Greenstein, President of Entertainment & Sports, will review our first quarter financial results, and operational accomplishments. David Frear our EVP and CFO will then discuss our financial results as outlined in our discussion this afternoon. At the conclusion of our prepared l remarks, management would like to take your questions.

First I'd 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 belief and expectations, and necessarily depend upon assumptions, data, and 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. For information about those risks and uncertainties, more information is contained in Sirius's SEC files. We caution listeners not to rely unduly on forward-looking statements, and disclaim any intent or obligation to update them.

I will now hand the call over to Mel Karmazin, for his opening remarks.

Thanks, Paul. Good afternoon, and thank you all for joining us today. Once again, Sirius had another quarter of very good subscriber growth, strong revenue growth, and solid cost control. That's the good news. The bad news is we are still awaiting regulatory approval for our pending merger with XM. I'll have more to say about the merger at the end of the call, but I'd like to now focus on the first quarter results.

Sirius continues to execute very well on our operating plan. In the first quarter of 2008, Sirius achieved our financial goals, and continued to grow revenue dramatically with only modest expense growth. Highlights of the first quarter results include, a 33% increase in revenue, to $270 million. Results were driven by record gross subscriber additions during the first quarter, of over 1 million. First quarter 2008 growth of 322,000 net new subscribers, drove a 31% increase in our ending subscriber base, to more than 8.6 million subscribers, up from 6.6 million a year ago. We believe this growth of over 2 million net subscribers is very strong in light of the prolonged merger approval, and its impact on retail sales, lower production from auto makers, and a challenging economy. The ability to add over 2 million subs from Q1 '07 is a reflection of our strong content, consumer acceptance of our brand, and exceptional execution by all of our partners. First quarter 2008 results, also demonstrated excellent cost control, with cash operating expenses increasing only 8%. Again, 33% revenue growth, with 8% growth in costs, demonstrates the leverage we have in our business. Further, the adjusted loss from operations improved 55%, as compared with first quarter of 2007.

Turning now to the auto sector. Only three years ago in 2005, Sirius production penetration rate was approximately 10% of our exclusive OEM's total production. That figure is expected to grow to over 50% this year, and is poised to rise even higher over the next few years. In particular, we are excited about the upcoming increase in production penetration at Ford, going from 40% to approximately 70%, starting with the 2009 model year. We expect to see the beginning of the impact of this very significant increase in penetration, in the third quarter of this year. As you know, we have long-term agreements with our OEMs that will ensure substantial sub growth for many years to come.

In future years, just doing the simple math, Sirius's partners share of total U.S. auto production, which we will assume after this year is 16 million. This year we're expecting it to be below 16 million. We're assuming going forward a 16 million number. Times our blended, forecasted penetration rate, you get over 4 million gross OEM adds per year. We believe this to be a very realistic number, and one that demonstrates the strong future prospects for Sirius.

On the retail front, Sirius continues to outperform, albeit in a softer than expected environment. Contributing to this softness, is the merger related confusion, which our after-market partners are telling us they are seeing. We also continue to invest in growth strategies in the after market, by working closely with the certified pre-owned programs of our auto makers, and with large used car dealers. Beginning in Q4 2005, and continuing for ten consecutive quarters, Sirius has attracted the majority of the growth in total Satellite Radio subscribers. And according to NPD group, Sirius achieved a 63% share of satellite radio after market sales, during the fourth quarter of 2008 up from 62% one year ago. Sirius is continuing to increase market share.

We also have a strong marketing program, currently underway, to stimulate our after-market sales. The campaign is focused on TV and newspapers, and is designed to enhance consumer awareness of the best radio on radio, and drive traffic into retail stores, as well as to our own DTC store. We believe the best way for consumers to spend their government stimulus package rebate check, is to buy Sirius.

In summary, Sirius continues to execute extremely well. We are growing subs, growing revenue, controlling costs, and continuing to pick up market share. We think that's a real good story. I'd like to turn it over to Jim now, and I'll return to say a few additional words, before we take your questions.

Thanks, Mel. We are pleased with Sirius first quarter results, and we are well positioned for the remainder of the year. As Mel discussed, we reported 322,500 net additions in the first quarter, bringing our total subscribers to over 8.6 million, a 31% increase from the same point last year. Net additions were driven by OEM growth, and we are pleased with our gross addition performance, which saw an increase of just over 1 million in the quarter. On the after-market side, we met our share goals for the quarter, which according to the NPD Group was 63%. However, the overall Satellite Radio market continues to be soft. Overall Sirius subscribers increased 10% in the after-market, to 4.6 million as compared with last year's 4.2 million.

We see some evidence in the marketplace, that the prolonged merger approval is impeding consumer purchase decisions. While we maintain realistic models through the after-market channel, we continue to believe a significant opportunity to innovate in growth in the long run, exists in the after-market business.

We recently launched our second quarter 2008 retail promotion, which includes the Father's Day period. With the purchase of a $50 subscription card, consumers can obtain a discount on their radio purchase. They're also eligible for an additional discount on professional installation. This basic structure will serve as the model for our future promotions, requiring the purchase of a prepaid subscription to obtain the benefits of hardware and installation discounts. We believe this strategy will enable a more profitable and stable subscriber.

In the OEM channel, Sirius performed well in a very difficult and challenging auto production environment, with ending OEM subscribers up 72% over the last year. As you know, we recently extended several of our OEM relationships, and are excited by the production penetration targets of 70%, at both Chrysler and Ford. Chrysler's actual 2008 model year production has been running above 70%, beginning with the 2008 model year, which began in the third quarter of 2007. Ford should reach a similar level with its model year 2009 vehicles, in this year's third quarter.

While we are excited about these higher penetration rates, and those of our other partners such as Mercedes at 90%, and Audi VW at 80%, this isn't to say the first quarter was without challenges. Chrysler in particular, lost market share and significantly reduced its production to more efficient levels. Both of these factors, negatively impacted us in the quarter. Ford and other auto makers, largely performed in line with our cautious expectations.

In addition to new car production, we are also excited about the opportunity that certified pre-owned, or second owner vehicles will offer to our business. Having just launched the Ford certified pre-owned program, we look forward to rolling out a CPO program, with most of our key partners throughout the year. At this point, the number of gross adds that we generate through these programs is limited, however, the opportunity to capture at very attractive economics, significant numbers of subscribers in this category, will grow over the near term, as many vehicles are now entering the second owner population.

I believe there is also some good news in overall inventory positions, which are in good shape, in both the after-market and OEM channels. The auto makers are generally not carrying excessive inventories, and we, along with our retail partners, are running very cleanly in the after-market channel. All else equal, I believe this is good for both net subscriber additions and sat per gross ad trends going forward.

Our churn performance in the first quarter was 2.7%. The increase in rate was largely attributable to a significant increase in renewal opportunities, driven by our rapid OEM growth over the last year. While overall OEM conversion rates were relatively unchanged, churn from conversion increases significantly due to volume. Self pay churn was also impacted by the high number of annual renewal opportunities in the first quarter, particularly in January. We are very focused on churn. Let me say that we are investing in several churn reducing strategies, and expect to continue to see improved self pay churn, benefiting from these programs later this year.

Another important metric in the business is overall SAC, which despite the significant mix shift towards OEM growth, still improved 10% over last year to $91. Both after-market and OEM SAC continue to improve, due to lower costs and proven inventory management. Thus we expect further improvement in SAC in the future. With that, I'd like to turn it over to Scott for additional remarks.

Thanks, Jim. All right. In the first quarter, Sirius enhanced its standing as the ultimate destination for the best music, talk, and sports audio entertainment. With new and returning artist branded take over channels, and unprecedented coverage of the biggest cultural and sporting events, Sirius is clearly the home to the most distinguished audio content, offering our growing subscriber base a programming lineup they simply cannot get anywhere else.

In the music area, we proudly welcome the return of Rolling Stone Radio in conjunction with the release of the Martin Scorsese film, Shine A Light. Our music lineup was also deepened, with the week long radio REM, and a limited engagement channel Neil Diamond Radio, currently on the air now, hosted by Neil Diamond. By working directly with the artists, these one of a kind channels deepen our already powerful lineup, and help to make Sirius the ultimate destination for music fans, providing a unique forum for music lovers, to connect as a community from anywhere in the country. This was never more clearly evident than most recently on E Street Radio, Sirius's exclusive 24/7 Bruce Springsteen channel, where after the tragic passing of long time E Street band member, Danny Federici, noted music critic and Springsteen biographer Dave Marsh hosted a live tribute special on the channel, and featured stories from callers all over the country on the impact of Danny's music on their lives. Sirius became their community for that moment.

Sirius was also the ultimate destination for the most comprehensive coverage of the first visit by a Pope to the U.S. since 1999. When Pope Benedict arrived last month, we devoted three entire channels devoted to broadcasting all the major papal events, and key moments, including Sirius's own, the flag ship for that broadcast, the Catholic channel, created exclusively for Sirius in partnership with the archdiocese in New York. We added to that, two special occasion pop-up channels, the papal archives channel, and papal play back. The highlight of our programming came on Saturday, April the 19, when Pope Benedict delivered a special radio message, exclusively on the Catholic channel, acknowledging Sirius and the channel.

Next month Sirius will officially launch an important and ground-breaking new channel, Doctor Radio powered by NYU Langone Medical Center. The first of its kind, Doctor Radio is a 24/7 health channel, hosted by world class doctors, a true breakthrough, not only in talk radio, but in all media. Sirius makes it possible for dozens of experts in their fields, to be part of a radio channel, on which real-life medical matters are explored candidly with experts, and listeners can call in and ask the question that matters to them most. We will be launching a targeted marketing campaign around this exciting channel launch, utilizing national newspaper, and major online health resources.

In addition, we are planning a significant national publicity outreach. Covering the election, during one of the most publicized presidential elections, Sirius has created Indie Talk, to compliment our existing offering of news coverage, and left and right talk. Indie Talk features shows hosted by political mavericks like Ron Silver, and innovative blog news updates. Indie Talk is the first political talk radio channel for the independent voter.

On to sports. As the sports leader, Sirius continues to deliver every important game, race, and event. Sirius NASCAR Radio kicked off its second year of unparalleled 24/7 coverage of everything NASCAR. For the Daytona 500, Sirius NASCAR radio featured 15 hours of live broadcast from Daytona international speedway, and we are thrilled to welcome Tony Stewart back for his second season, as the host of the critically acclaimed Tony Stewart Live.

As always, there is no off season on Sirius NFL Radio, which offered the most in-depth coverage of events, including the Pro Bowl, the Senior Bowl, the Combines, and the 2008 NFL Draft. For 52 weeks a year, it's the definitive destination for NFL fans, and will continue to be so.

Sirius has already been carrying every game of the NBA playoffs, but now with the start of the conference semifinals, fans will be able to hear both the home and away broadcasts, for every game. During this heated time of the season, Sirius is also broadcasting live from the showcase window of the NBA store, on Fifth Avenue in the heart of Manhattan, with special guests throughout the two weeks, including signage up for the entire month on the window in Fifth Avenue. The key show will be the reunion of key members of the '72 to '73 NBA Champion, New York Knicks team, Willis Reed, Earl Monroe, and Bill Bradley, together at the store for one show. The strong press attention that that will gather, among all the other things Sirius does, will continue to have Sirius programming generate on a daily basis, to serve as a substitute for marketing dollars. More than 3,000 print stories appeared in the first quarter, with audience impressions of more than 1.2 billion.

Our marketing efforts, as Mel mentioned, will continue. They will continue to serve as a significant public embodiment of the company, and our latest targeted campaign will reinforce Sirius's superior programming lineup of exclusive artist branded channels, and celebrity hosted shows, and the incredible listening experience we offer as a result. We've already launched a TV campaign which started running May 5, putting Sirius out in the market, earlier than in years past. Thousands of spots are currently running on major cable networks, emphasizing several touches to our potential consumer. In addition our new print campaign will begin in major markets at the end of this week, and run through mid June.

Advertising. Ad sales. In an environment where terrestrial radio is seeing dropping revenue from ad sales, ours have continued to grow. The first quarter of 2008 ended 25% ahead of the same quarter last year. Our roster of blue chip advertisers has also grown, with the additions of Anheuser-Busch, Toyota, Craft, Wal-Mart, Unilever, Nationwide Insurance, BF Goodrich, and Wachovia in the first quarter. As we continue to attract the biggest names in entertainment and sports, and cover the most significant social and sporting events, like no other broadcaster, Sirius will maintain its position, as the ultimate destination, for the best audio entertainment available. I'd like to turn it over to David Frear.

Thanks, Scott. Sirius' first quarter continued a consistent trend of delivering a combination of solid expense management, with strong revenue growth. Adjusted EBITDA in the quarter improved at a rate of $0.67 for each dollar of increased revenue. Off the back of record first quarter gross adds, Sirius added 2.1 million net new subscriptions in the last 12 months, driving a 31% increase in subscribers and driving total revenues in the first quarter to $270 million, up 33% compared to last year's first quarter. Advertising revenue of $8.4 million was up 25% year-over-year.

Jim already hit the churn rate, but let me do it one more time. Our first quarter OEM churn rate of 2.7%, reflects changes in mix as our OEM subscriber base grew nearly 72% the last year, as well as historic seasonality, related to holiday season renewals. Looking deeper into the underlying facts, OEM conversions have actually improved slightly, and self pay renewals remain consistent, with past experience, or said differently, the increase in the OEM rate is a function of math, not a change in underlying performance.

Total operating expenses before non-cash depreciation, stock comp $310 million, up just 7.6%, despite the absorption of higher music royalties, and despite increased litigation costs. Cash Op ex exclusive of revenue share and royalties, was up just 2.5% in the quarter from last year. ARPU was $10.42 essentially unchanged year-over-year, and our SAC per gross add improved by 10% to $91 per gross add, despite the mix shift away from retail. The improvement was driven primarily by lower product costs, higher average retail selling prices, and better efficiency in our OEM channel. We also continued to see improvements in customer service and billing, with a 9% decline to $1.05 per subscriber, per month.

Total SAC was $90 million, down 9% year-over-year despite achieving a record gross adds of over 1 million new subscriptions in the first quarter, sales and marketing cost was $33 million, down 6% versus last year. The robust revenue picture combined with solid cost management, drove an improvement in our adjusted operating loss of 53% to $39 million. Our pre-SAC adjusted EBITDA climbed 175% to $52 million, and our premarketing adjusted EBITDA climbed 66% to $85 million. Contribution margin was about 72%, approximately in line with last year's figure, and within our long-term guidance range, with a lower customer churn billing margin partially offsetting the higher OEM revenue share of music royalties.

Consolidated net loss improved 28% to $104 million or $0.07 per share, compared to $145 million or $0.10 per share, a year ago. First quarter 2008 free cash flow of negative $187 million, reflects not only a seasonal trend you've seen in prior years in the business, but also $34 million of increased CapEx for new satellite construction and merger costs, and the payment of the true-up from the music royalty decision, as well as increased payments for litigation costs. Excluding these latter two items, net cash used by operating activities improved by roughly $25 billion or $0.38 for each dollar of increased revenue in the quarter.

In previous years, the first quarter has seen seasonally higher cash outflows than other quarters, reflecting the payment of subsidies and commissions associated with the fourth quarter additions, in the new year. For all of 2007, free cash flow before satellite merger costs, showed significant improvements over previous years, and you should expect that 2008 will do the same. The company ended the quarter with $253 million of cash equivalents, with another $56 million of restricted cash. With that I'll turn it back to Mel for his final remarks.

Thanks, David. I think you all heard that the first quarter of 2008 was really a very strong quarter for Sirius. This is our fifth quarterly conference call, since we announced the merger, and I want to begin by saying that I share the sentiment I hear from many of you, regarding the length of time it is taking to complete our transaction.

As I'm sure you know, on March 24, the DOJ announced that they concluded their investigation of our merger, and but for the FCC approval, we would be free to close. They concluded it, we now have to wait for the FCC. The DOJ spent well over six months, had approximately 30 lawyers and economists reviewing the merger. They received from Sirius and XM, over 12 million pages of documents. There were several dozen subpoenas issued and responded to, by interested parties. Major players like content partners, OEM, and retail partners, competitors, and even bloggers were interviewed. The DOJ said in their final press release they interviewed scores of industry participants. There were also over a dozen depositions taken. The review was extensive, and concluded the merger would not substantially reduce competition.

So now we move to the FCC, where we need to demonstrate that the merger is in the public interest. We believe there is nothing that is more in the public interest, than committing to offer the American consumer more choices, and lower prices, which is exactly what we have done. Our merger has received widespread support from thousands of consumers, prominent individuals, members of Congress, former FCC chairmen, public interest groups, diversity organizations, retail and OEM partners, content providers, religious leaders, and more. We filed our application at the FCC over 400 days ago. It is almost 350 days on the FCC clock, from when it was put on public notice. The FCC historically tries to review deals within 180 days.

We share the reasonable frustration that many of our investors feel, regarding the time it has taken. We also share the outrage that some have expressed to me, regarding press reports of opportunistic parties, trying to take advantage of the process, and extract value for themselves, that properly belongs to Sirius subscribers, and shareholders. I can assure you we will work with the regulators on any conditions they feel should be attached to an approval. I can also assure you that we will not do anything that is not in our subscribers, future subscribers, or shareholders, best interests. The benefits of the merger to shareholders and consumers are extraordinary. The efficiencies created will be very substantial, and we will be able to capture a very material amount of them immediately.

As a large shareholder myself, I know how owning the stock that is in deal limbo, is not very rewarding, but I believe now more than ever, that this merger is so beneficial, that it is worth waiting for. We will constructively work with the FCC. I am optimistic that we are getting close to the finish line, and will be able to close the deal. As I have said before, and I repeat today, Sirius is executing very well as we continue to scale our business. We are very well positioned whether we combine with XM, or continue as a stand-alone company. We are a company uniquely positioned in the media space, very strong top line revenue growth, while managing our expenses very well, and having a great deal of growth ahead for many, many, years to come. Thank you all for your support. We are now ready to take your questions.

Thank you. (OPERATOR INSTRUCTIONS). We'll pause a brief moment. We'll move to Benjamin Swinburne, with Morgan Stanley.

Thank you. Good afternoon, guys. Mel, you talked about confusion in the market in the retail channel over the merger, and I'm wondering if you had any research that told you conversion ratios, or self pay churn, after promotional periods on the OEM side, have also been impacted by any confusion around the merger and long-term obsolescence, of radios or programming? Obviously as the mix continues to skew more, OEM conversion ratio becomes an even more critical piece of the economics going forward, and along those lines, I'd love to hear in your better dealers, or better OEM partners, how do the conversion ratios compare? In other words, how wide is the range relative to the mean in terms of your better performing, and your lower performing dealerships, in terms of converting promotional subs, into long-term subscribers?

So, Ben, the-- your question about are we seeing the merger changing anything in the OEM side of the house, and really the answer is no. And I'll certainly give David and Jim an opportunity to chime in. This seems to be clearly a retail issue. We've said -- Dave had said in his remarks that our conversion rate are about the same, or slightly improved, and the only thing that we're really seeing on our self pay churn, is the seasonal difference from what we normally do, because of the significant number of retail customers that we have that become, due for renewal in January and at the beginning of the year. You know, some of them, from the original Howard Stern signing on.

So, on conversion, I don't think that we have historically given conversion by a line of vehicle. You know, it's something that we look at, certainly things that we monitor, and you wouldn't be surprised that, the more expensive the car, the higher the conversion rate tends to be, but that doesn't mean that there is not good economics in our dealings, with some of the less expensive cars, and based on our prepaid and-- our prepay and subsidy that are going out to them. So, you know, I mean all in all, you know, we think that the OEM business will continue to be strong for us, with or without the merger, and that the retail market is where there's the uncertainty.

And if I could ask one unrelated follow-up. David, you talked about the free cash flow from operations in the quarter. It looked like the biggest swing was in the accounts payable in accrued expense line. Is that where the one time, as you mentioned, are booked?

Yes. That's where they would be, Ben. Both the litigation costs would have been, accrued up there as well, as the accrual for the final CRV decision.

You said it was a $25 million positive year on year, if you crossed out that stuff?

Yes, roughly.

Okay. Thanks a lot.

We'll move to Tony Wible, with Citi.

I was hoping you could comment on the linear progression you've seen on the sub base, post quarter end. Have you seen the same metrics kind of hold up with churn and gross-- ?

We have kind of a normal seasonality to churn, and as I said, we've seen it in years past, we've seen it again, this year that our churn rate tends to be higher in the first quarter, because you have all of those renewals from Christmas, after Christmas, after Christmas, that pile up on one another and most of those turn on in the kind of the last week of December into January, and so they tend to mathematically impact the first quarter, where you also tend to have, you know, less growth than you do coming out of the fourth quarter, right, so -- and then that tails off as you, work through the-- work through the years. So, you know, yes, we see the same seasonal pattern this year that we've seen in prior years.

We obviously don't have April numbers yet completed, but you-- we sort that the numbers on churn, were higher in January, than they were in February, than they were in March. So you're seeing it trending downward.

Got you. And with the ramp in OEM penetration rates, where does that leave you on retail, as far as your thoughts on marketing and SAC, and that channel, versus the OEM channel. Do you see a need to change?

Let me deal with part of it and then Jim can pipe in. We think that the after-market will always be an important channel for us. You know, not just in the form of a second sub, because obviously the more OEM customers we get, the more opportunity it is to convince them that they would be happier if they had a radio in their home, or in their office, or in their second car, or any other place. So we think that it's always going to be important.

We also, you know, believe that once the-- if the merger happens, we think that there will be some really good opportunities for us to span in the retail market as well. We'll wait until after the approval before we get into any specifics in that regard, when we talk with XM, but we think that with the merger, there's even more opportunities, but without the merger, we think that's still going to always be an important channel for us.

Just housekeeping questions. What was the percentage of subs on annual plus plans, the multi plans?

Multis are around 15%, and the annual plus plans, continues to exceed 60%.

And we have some programs that we're currently working on, particularly in the multi sub plan, to get that number up beyond where it is today.

Great, thank you.

We'll move on to James Ratcliffe, with Lehman Brothers.

Thank you. Good afternoon, guys. Couple of questions, first off, looks like G&A was up somewhat materially as a percentage of revenue. What was driving this? Was any merger cost in there?

Litigation expenses.

Litigation expenses entirely?

Yes. It's all-- well, some compensation, but the primary driver of it is litigation costs.

Okay. And for after-market customers who are churning off, do you see any change in where they're going? Are they still-- are they primarily people leaving satellite radio entirely, or are you seeing an increase in portions switching from provider to another?

No, we don't see any -- hardly any of the latter. What we've said to the Department of Justice, when we were talking to them about our competition, we get our subscribers from people who never subscribe to satellite radio, and if for any reason they decide to no longer keep satellite radio, it's that they're going back to old-fashioned terrestrial radio.

Got it. Thank you.

Next we'll move on to Glen Campbell, with Merrill Lynch.

Thanks very much. I was wondering if you'd be willing to talk about what your expectations are for ARPU, once you've introduce the tiered and ala cart programming?

Our feeling on-- after the merger, we'll have hopefully on approval, as soon as we get approval, we'll sit down and talk to you all about what we see. But we believe that there will be some people who might find ala cart radio, ala cart offerings attractive. We also think that there are some people who might find some of the packages that we might offer, for $9.99 to be attractive. You know, those things might be particularly useful in areas of retention, but one of the things we think is a very exciting opportunity for us after the merger, would be the package that would give a XM subscriber, sort of the best of Sirius. So hypothetically, XM has-- I think their last numbers were 9.3 million subscribers, so we think that there are an awful lot of their 9.3 who would like to have some of the content that is on Sirius, like Howard Stern, and some of our other stuff.

So there's a real opportunity for us based on the packages that we propose to the FCC, where we would get an additional $4, or so in ARPU, from some of those 9 million subscribers. So, you know, we're not convinced that the ARPU will go down, after the merger, you know, just as a result of people wanting to get some more packages, but we'll have to wait and see how that plays out.

As we model the business, we think about there being, discounts for term commitments and so on with the current packages. Should we think in terms of those discounts also being available on the lower end, ala cart, and $9.99 packages as well?

We have not finalized our arrangement with the FCC on, where they may want us to be on ala cart, based on what we have submitted in our application. We assume that what we have put in our application at some point, might be a condition as part of the merger, and we have not concluded what those conditions would be, including any specifics on pricing.

Okay. Thanks. And one last one, the used car program, can you give us any sort of early indications, as to how it's going?

Yes. We're quite excited and particular with the-- first with the certified pre-owned programs, and I think as all of you know, those are cars that are coming back to the auto companies, and the auto companies are adding a lot of things to the package, including a warranty to sell them among their own dealers. The great news there is, it allows us to market those customers in the same way that we market them as new customers, and yet avoid the SAC investment a second time, or at least a subsidy investment a second time. So I've got to tell you, I'm quite excited about the early results, albeit still small, but clearly the trend is it will grow significantly.

And percentage sort of take rates on those. We would assume they'd be lower, but are you saying they're not a lot lower?

I'm saying that I think they're going to be lower, but I don't think they're going to be a lot lower, no.

Okay, super, thanks.

Next we'll move to Kit Spring, with Stifel Nicolaus.

Question for David on the revenue shares and royalties. Is the 16% where it was at this quarter a good run rate for the rest of the year? And then just anything you can tell us about your confidence in your ability to refinance XM's (inaudible) bonds upon FCC approval. Thanks.

On the rev share royalties, we now finally have the-- effect of the CRV decision fully baked into the rate. So, you know, increases in-- or changes in that rate will have, more to do with the mix between OEM and retail, than anything else. So you should expect it to nudge up a little bit as the OEM basis subscribers, and therefore revenue base continues to grow.

On the refinancing, it's a tough credit market out there. So-- the XM is in discussions with its bondholders about what to do once the merger comes along. I think we're cautiously optimistic that, the one on one offer that is reported to be made on some of their debt, isn't going to be an impediment to the merger.

I think you ought to refer any questions or all you have on XM, I think you ought to refer to that company.

Thanks.

We'll take our final question from April Horace with Janco Partners.

Hello. Thanks for taking the question. You said you're going to be at a 4 million car penetration rate, assuming a 16 million car production rate. If it goes to 15, can you give us any indication as to what kind of penetration rate that would be? And then also, with respect to the certified market, how many vehicles are out there, that would be in that particular market opportunity? And then I have a follow-up.

Okay. So, you know, you can run-- the description was trying to give you an estimate, or a demonstration that shows that in a model where there is about 16 million of production, that we're going to wind up with over 4 million. If, in fact, there's less production, you should assume we'll have less and if, in fact, there is more production, you should assume we'll have more, but at this point, we were just trying to give you a sense, long-term investors who are interested in seeing where the company would be adding subscribers over the years to come, demonstrates that each year, whether or not, they manufacture 15 million cars for the United States, or 17 million, Sirius will be getting gross subscribers in the millions every single year, just based on the new car sales. And on the certified pre-owned--

On the certified pre-owned, we've actually put in place some pretty sophisticated metrics now, that tell us when these cars are going to come back that have factory radios in them. I will tell you the opportunity in 2008 is relatively small, but in 2009, it's worth talking about, and certainly worth getting our head around. I think as you can guess, it just gets bigger and bigger every year after that.

Start thinking about when Sirius started to ramp up on its OEM side in 2005, well four years, five years after those cars have been in the hands of the consumer, they're going to find their way back in the market, and we think as you get further and further away from when we started ramping up, you're going to see a significant increase in the opportunities we'll have in that marketplace.

Okay. And then lastly, on the merger, is there at any point in time where you throw in the towel, and just go on a stand alone basis, or are we just going to continue to wait for the FCC, and is there any catalyst to move the FCC forward, on a decision?

Yes, I think the sense is that what we have said, is that the efficiencies that are created by this merger, though it certainly is difficult from a stock point of view, but the efficiencies creating this merger are very substantial, and we think that there are great benefits to the consumer about having content from both services and our ability to drive down costs based on those efficiencies. So, you know, we're going to continue to-- we believe in the merger, Sirius believes in the merger, more so than we did, even when we were announcing it, in spite of the debt market, going the other way, but we believe that the synergies are important, and if, in fact, we can get the FCC to move sooner, which we've been asking for, that's the better.

And if, in fact, it turns out that the conditions are such that they're so egregious, that they're not in the shareholders, or subscriber's best interest, then we won't do it. But we're doing everything we can to bring this to a successful conclusion and we really are looking forward to working with the FCC to complete the last hurdle remaining, on getting the deal done.

Great. Congratulations on a good, solid quarter.

Thank you very much. That concludes our call for today.

Thank you. That concludes our question and answer session in our conference call. We do thank you for your participation.