Sirius XM Holdings Inc (SIRI) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the Sirius XM Radio conference call. Today's call 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.

Thank you. Good morning, everyone, and welcome to our first post-merger Sirius XM Radio conference call. Today, Mel Karmazin, our CEO, joined by David Frear, our EVP and CFO, will review SIRIUS' standalone second-quarter financial results and discuss some of the questions we have been receiving. At the conclusion of our prepared remarks, management will be glad to take your additional questions.

First, I would like to remind everyone that certain statements made during the call might be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based on management's current beliefs and expectations, and necessarily depend upon 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. For information about those risks and uncertainties, more information is contained in SIRIUS' SEC filings. We caution listeners not to rely unduly on forward-looking statements and disclaim any intent or obligation to update.

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

Thanks, Paul.

Since the merger was approved, I have been pleased with the response that I've received from customers, automakers, retailers, employees, and talent who understand the enormous opportunity the combined company has as the second-largest pure-play radio company with the fastest growth rates in all of subscription-based media. The superior programming we will make available to consumers across the entire US makes the combination of Sirius XM a significant value-creation opportunity for all stakeholders.

In fact, the only group that should not be pleased so far are our shareholders. We know we have a great deal of work to do to have shareholders feel the same way as our other stakeholders feel, and we take that responsibility very seriously.

Early this morning, SIRIUS released its full standalone second-quarter operational and financial results. Those results continued our tradition of strong revenue and subscriber growth while also maintaining clear cost control.

I will let David take you through the highlights of SIRIUS' second-quarter results, and then I will comment on the prospects of the combined company and address some of the questions we have been receiving. David?

Thanks, Mel. I know you are most interested in what you can expect from the combined company, so I'm going to spend a few moments talking about SIRIUS] standalone results for the second quarter as a way of illustrating what we believe is possible with SIRIUS XM radio.

A 25% increase in revenues and no growth in operating expenses delivered adjusted EBITDA of a loss of $24 million in the quarter. That was an improvement of $0.98 for each dollar of increased revenue. If you've been following the Company over the last several quarters, you seen that we've been very consistently delivering this kind of performance.

How close are we to positive EBITDA? We have told you we will realize $400 million of synergies in 2009, and we expect those synergies to continue growing. If the merger had been approved a little bit earlier, which would have been great for everybody, and we had delivered only half of the synergies that we had committed to delivered, the quarter would have had positive EBITDA. So we feel very confident with the guidance that we've given you so far.

There's a lot of chatter in the marketplace about how satellite radio demand will be affected by competition, a struggling economy and falling auto sales. It's a good question, and it's a "today" issue. This isn't an issue of out somewhere in the future. So, despite facing all of those challenges in the last couple of quarters, SIRIUS delivered record first-quarter gross adds and then did it again in the second quarter, again delivering record second-quarter gross adds.

We've added 1.8 million net new subscriptions in the last 12 months, driving the 25% increase in subscribers and a similar increase in revenues to $283 million. This is clearly a product that people want.

Our OEM subscriber base grew 53% in the last year and has tripled in the last two years. Along with that phenomenal growth comes a higher mix of bundled plans and ultimately, as most of you know, the non-conversions from those plans show up in our total churn rate. Our all-in churn rate of 2.8% in the quarter simply reflects this effect. Most importantly, we continue to expect self-pay churn to remain in the 1.6% to 1.8% range.

Total operating expenses before non-cash depreciation and stock comp were $307 million, up well under 1% despite the absorption of higher music royalties from the CRB decision back in January. Cash OpEx, exclusive of revenue share and royalties, not only improved as a percent of revenue, as every cost line items declined in those terms, but the total dollars spent were actually down 7%, driven primarily by lower subscriber acquisition costs.

Our SAC per gross add improved by a very strong 27% to $78 per gross add. This improvement was driven primarily by efficiency gains in the OEM channel where we benefited from a shift to more cost-effective, integrated head units. Our pre-SAC adjusted EBITDA climbed 105% to $56 million, and our pre-marketing adjusted EBITDA climbed by 44% to $103 million.

Contribution margin was about 72%, in line with the first-quarter figure and consistent with our long-term guidance that we've been discussing with you. With continued improvements in customer churn, billing costs, which are only running at $0.86 per sub, per month, now those have partially offset the higher revenue share and royalty costs that we've experienced.

ARPU of $10.49 is down slightly from last year as subscribers grew faster than advertising revenues, but was essentially unchanged on a subscription revenue basis.

Lastly, consolidated net loss improved 38% to $84 million or $0.06 per share, compared to $134 million or $0.09 per share a year ago.

So if you add it all up, solid demonstrated demand, over $18.6 million votes are in on product now, and they are all favorable. Low, stable self-pay churn, stable ARPU all adds up to solid revenue growth. When you combine it with strong cost controls, you've got great, incremental margins and a clear path to positive cash flow and positive EBITDA.

With that, let me turn it back to Mel.

Thanks, David.

Going forward, I am truly excited about delivering on the combined company's 2009 guidance that we have given -- $300 million in positive EBITDA and $400 million in combined-company first-year synergy, as well as positive free cash flow, before satellite capital expenditures, for the first full year of the combined SIRIUS XM operations. With a run rate of combined revenues of $2.4 billion in annual revenue, SIRIUS is the best-positioned radio company in the US with the fastest growing topline. Today, only Clear Channel has higher revenue than we do in the radio industry.

We anticipate being the largest-revenue radio company in the US very shortly, as our topline growth is dramatic. In the meantime, we're working toward long-term improvements in the merger that should bring in subscriber economics, improved financial performance through the realization of significant cost synergies, accelerated EBITDA, increased advertising reach, and the opportunity to further improve conversion and churn rates and, mostly importantly, generating a significant amount of free cash flow.

As we begin the work of moving the two separate brands of SIRIUS and XM closer together, let's take a closer look at where we really are. First, the combined operations of SIRIUS and XM now have over 18.5 million subscribers, second only to Comcast in total subscribers for a subscription-based media company. The combined company has a five-year compound annual growth rate in subscribers of 97%, which is faster subscriber growth than cellular, satellite TV, or even CD players experienced in each of their first five years. In fact, the long-term growth potential for satellite radio remains very strong with over 200 million cars on the road, over 100 million households, and a large market opportunity for wearable products.

Today, after decades of growth, roughly 90% of homes are paying for television service. Today, satellite radio serves less than 20% of households after only six years of service. So, we see a large market opportunity ahead.

The fact that all automakers continue to embrace satellite radio is expected to lead to a continued increase in production penetration of satellite radio into new-car production. Although any slowdown in auto production could impact us, the increase in the production penetration rate is very good for the long-term business model of satellite radio.

I also want to give you my perspective on the process of combining the two companies and realizing $400 million in first-year synergies. On a combined-company basis, XM and SIRIUS spent approximately $2.5 billion in combined operating costs in 2007. So the $400 million in synergy represents approximately 15% of annual costs. That's a very reasonable figure for synergy from combining two identical businesses.

Let's be specific. We have already started realizing synergies, and we expect to realize synergies from each major line item on the income statement -- advertising, SAC, sales and marketing, G&A, and R&D.

So now let me address some of the questions that we have received. First, many of you have asked about our 2009 maturities and our current liquidity position, so let me have David address that one.

Okay, so SIRIUS XM ended the quarter, the June quarter, with pro forma cash and cash equivalents of approximately $442 million. So in 2009, there are three maturities to focus on. At the parent level, there are the $300 million in 441 converts that are due in February. If the stock doesn't clear the 441 conversion price before then, we will look to refinance them through a combination of use of our existing cash, bank or high-yield debt and, if it makes sense, perhaps additional converts as well, or replacement converts as well.

At the XM subsidiary level, there is $350 million of bank debt that is due in May. The banks have been very supportive, consistently very supportive of the efforts to merge the companies. In fact, the bank climate was actually increased by $100 million in late June.

The credit profile of the Company for the banks will improve dramatically over the course of the next year, making this loan even more attractive than it is today. I have every reason to believe the banks will extend the maturity at market rates next spring.

Then lastly, the XM sub also has $400 million of converts due in December of 2009. As you know, we've provided guidance of pro forma EBITDA exceeding $300 million and growing next year. We will be effectively at the precipice of delivering that at the time that we look to refinance those notes. I like the odds of entering the fall of next year with a radically improved credit that is beginning to show normalized leverage ratios and taking that issuer to the debt markets to refinance the December '09 converts.

Then lastly, both companies have consistently made full funding statements in their public filings, and those statements remain true today.

Thanks, David. So you can see how we feel highly confident about the Company's liquidity position.

Secondly, we've received numerous questions regarding the financing activities which took place the night of the merger approval and closing. While the financial markets have been very unattractive, SIRIUS and XM were very successful in raising $700 million in new high-yield debt. It was oversubscribed from the $400 million we initially targeted, and $550 million in a new exchangeable note offering.

We also entered into a share-borrow facility in order to assist the convertible arbitrage necessary to market the deal. That facility did not represent new proceeds to SIRIUS, nor will it be dilutive for accounting purposes. Not many high-yield companies have recently tapped the markets, and we are pleased that we were successful in getting our transaction financed.

We needed to close the transaction as soon as possible for several very important reasons. First, regulatory approval to too long, and we did not want to add to any further delay for the process. Second, we had very good reason to believe that some that opposed the merger might run to court and seek a stay, and the last thing we wanted was to not close. So we took the best deal available to us to get the transaction closed in spite of the difficult terms. We obviously could have waited; we could have seen if the market would have improved. We thought that it was in our shareholders' best interest to close the merger because they waited too long to get this transaction done.

We are well aware that the stock price has suffered. I am not pleased with the market reaction.

You've all seen my own public purchase of 2 million shares this week. I had been restricted from buying SIRIUS stock from the time I began merger discussions, which was over two years ago.

The bottom line is this. SIRIUS received FCC approval, accomplished the financing, and closed the transaction. We intend to work very hard to deliver on the value of this merger and meet our objectives.

Third, we have no plans for a reverse split. It's hard to see how that would add any value to our company.

Fourth, we are working on combined company's fourth-quarter offerings at retail. You should anticipate that the best of both packages will play a very large part in those plans, which should stimulate aftermarket demand. Stay tuned.

Fifth, satellite radio will continue to be important to the automakers, regardless of their individual company issues, primarily because we are a source of revenue and an important cool factor to help them sell cars. We expect the production penetration rate to continue to climb, regardless of how many cars are produced.

But let's take the hypothetical auto production scenario of only 12 million cars sold in North America. That's the lowest number that we've seen anybody forecast for this year. Assuming satellite radio is installed in approximately 50% of those, SIRIUS' penetration rate currently is slightly higher than XM's, but let's use 50% for both. That is a 6 million cars equipped with satellite radio will leave the factory and then assume a conversion rate that's approximately 50%. That's slightly higher than SIRIUS today, and slightly lower than XM today. But if you take 50%, that gets you 3 million new subscribers to satellite radio in a horrible auto-production scenario.

Then use the ARPU of about $10 a month. You get to $120 per subscriber, which means we would be getting over $350 million in new revenue annually, just using those very tough assumptions. So you compare our model to any company in the auto entertainment industry, and you see the benefits of our business model as compared to those that rely principally on advertising.

Lastly, I promised to keep you updated on what's happening with the integration and our merger, so let's start with the senior executives that I have appointed so far. Dara Altman will be Executive Vice President and Chief Administrative Officer. Pat Donnelly will be Executive Vice President and General Counsel. David Frear will be Executive Vice President and Chief Financial Officer. Scott Greenstein will be President and Chief Content Officer. Jim Meyer will be President of Operations and Sales. Them, along with me, will make up the executive group of the Company. This will be an executive committee that will be responsible for running your company.

In addition, we have announced a new world-class Board of Directors. We should be in a position, within the next couple of weeks, to identify the next level of management that will be leading the Company.

You should also expect we will be very active in our communication to shareholders. We will provide you with greater detail on our progress in integrating these companies after Labor Day.

Also, over the coming months, you should also look for new programming announcements, new radios, as well as Making the best of XM content available to all existing SIRIUS radios and vice versa, as well as our la carte radios. These near-term opportunities for customers to get enhanced content are very real and will help us add subscribers in the '08 holiday season.

In closing, while the FCC approval took considerable time and attention, the billions of net present value of synergies resulting from this merger are very large and are already in progress. You have seen our strong financial guidance, and we intend to deliver on a strong full year of combined-company operations.

I usually say getting a deal done is the easy part; making it work is the tough part. With this combination, the tough part is over. We will now capture for shareholders what we have all been looking for, and that is a profitable company.

Thanks for listening. We are now ready for your questions.

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). Tony Wible, Citi.

Mel, I was hoping you could comment on what your thoughts are on the big three automakers. I've never really considered there to be an opportunity to redo those revenue shares. But in the current environment that they are facing, do you see any opportunity to have a lower revenue share in exchange for a smaller upfront payment? Is that something you would even be open to?

So, let me just talk about just our agreements with all of the automakers. There are long-term agreements in place. We believe that those long-term agreements enable us to have a contribution margin, as David points out, of over 70%, we think, at SIRIUS. We believe that those deals are very good deals for our shareholders. Our intent is to obviously honor of those deals, because they are good deals, but to continue to work with our partners on opportunities that will exist for the combined company going forward.

We also, prior to the merger, did not have an opportunity to review any of the XM agreements, so we closed the merger ten days ago. David and I were down in Washington the next day. Clearly, we reviewed a couple of those significant contracts.

The XM agreement today with General Motors is one that is set to expire in a few years. It would be appropriate to have discussions about extending a relationship with General Motors. I called Rick Wagoner last week and told him that we would be in touch with his team very quickly about talking about what we would do together going forward. He is very committed to satellite radio; we are very committed to General Motors. We look forward to, sometime in the near future, announcing a new, long-term agreement with General Motors. What the terms might be, I'm not going to comment on or speculate, but we will communicate with you about that General Motors agreement at the appropriate time.

Great. Then, any guess as to what percentage of XM subs that you feel will want to upgrade to get back some of the sports content (inaudible) [Howard]?

I think it will be both. We haven't really announced very much insofar as what the specific (technical difficulty) content would be in the best of packages, but we've done a little bit of work on what percentage of the 9 million customers or subscribers that XM has today would want Howard Stern and some other desirable content from SIRIUS. If it's $4 a month, then you think about that as being about $50 a year. For every 1 million of their 9 million subscribers, we would add $50 million. You should assume that that addition is all very profitable revenue for us, so we are very excited about it.

I was in Washington yesterday talking with the team about what our retail package would be this fall and how we are going to go to market in selling the best of packages. We have some really interesting ideas that we are going to have to finalize very quickly to put them into place for the fourth quarter, but we think it's a real big opportunity for us.

So will the XM upsell be included in the $400 million of synergies, or is that incremental?

I think, at this point, what we have given you is really enough information. If you take the value, the net present-day value of that $400 million, it is more than the market cap of the Company today, combined.

So before we try to talk to you about numbers in excess of the $400 million, we think that the $400 million is a good number for you to work with. As we give you and we work through finding even additional opportunities, we will talk to you about it. But I've seen a whole bunch of mergers done, and rarely does the efficiency from the merger equal more than the market cap of the Company. So we are going to stick to the $400 million, even though we are very enthusiastic of what we've learned.

I guess it is relevant for me to tell you that, in the last ten days or so, where we've really had a deep dive of our teams, XM and SIRIUS' teams together, the information that we found has been really positive for the merger. There hasn't been anything that we've discovered that would make us feel less optimistic about achieving the synergies than we were before the merger.

Thank you. Congratulations on closing it.

Benjamin Swinburne, Morgan Stanley.

Thank you. Good morning, guys.

Mel, you've talked about the confusion at retail during the merger, the pending merger process, and both at the retailer level and salesperson level, and at the customer level. I'm wondering if you could take that analysis over to the OEM side, if you think that the -- you had the same issue there. Because if you look at your OEM net adds, they are down year-over-year. I would like your opinion on whether you think that is partly a function of conversion ratios coming down because people didn't really understand what the product was going to be over the long term.

Then along those same lines, one of the things you guys did well and XM did not do as well was build in long-term pre-pays on the OEM side to really help fund the subscriber growth. Can you pretty quickly move their partners over to those more attractive terms from a cash flow perspective on the OEM front?

Yes, so thanks for the question. Let me hit one point and then let me turn it over to David to answer it.

The confusion at retail was tremendously problematic for us. My conversations with the CEOs of our major retail outlets clearly pointed out that they were seeing it in their customers that were walking in the door. They made the analogy that it was like the HD DVD business. You know, you had HD DVD and you had Blu-Ray DVD, and when there were these two products out there, the customer was sort of frozen; they just didn't buy anything. They are optimistic in their estimates as to what we might be doing at retail in the fourth quarter of this year.

You know, the idea of what radio might be obsolete, are they going to have to get new radios? The sales people didn't quite understand; we weren't communicating maybe as well as we should have. So it was really there.

Regarding the situation in the OEM scene. you know, we don't think it was the confusion of the merger. We think it was just the number of gross adds that were added and what that happened at a time when the retail net adds. But David, why don't you add onto that and talk a little bit about the prepaid stuff?

I'm going to take your question in two parts because there's the bundled portion of the question and then there's what kind of a plan do the subscribers that convert through ultimately adopt to.

As it relates to the bundled part or promotional period, or whatever you want to call it, those are set by the contractual terms that exist between us and the auto makers. If the automakers or we want to reopen the contract for one reason or another (inaudible) negotiations (inaudible) you know, throw lots of things into the pot to try and make it better for both sides. But I think you should actually think a little bit more about what happens outside of those contracts, that each of the independent companies are taking over 1 million calls a month at the call center. They've had different approaches.

SIRIUS' weighted average prepay in the past has been a little bit more than $100, whereas talking with the XM guys on their side, it's been a little over $60. So there's sort of that $40 gap between the two.

Kind of the neat thing about the two companies having had different approaches is it's like two huge test tubes. We get to go out and look at what we've each done and really kind of look at the total impact on the business. If you spent less time on the call and got -- and therefore had a more effective cost structure but got people in at a lower price point and you can look at how they churn, well, how does that all add up holistically in terms of the contribution makes it to the business? Then you can look at the other side and say, okay you did it differently, that you spent more time on the call doing a longer sell. That cost you more but what did you get in return for it?

Right now, the operating teams are taking a look at what those different approaches have yielded and we will have the opportunity to, in essence, adopt best practices without having to guess about the results, because we have this millions upon millions of customer experiences to tell us how people behave when you alter the approach. So we will pick the best one.

Thanks a lot.

Jessica Reif Cohen, Merrill Lynch.

A couple of things -- Mel, you've alluded to the fourth-quarter promotion, a big promotion. I'm just wondering if you can elaborate on the marketing plans. It sounds like there's a best-of programming that you'll introduce as well as some kind of marketing to the retail market. Is it one national campaign or multiple campaigns? How much of a target will the used car market be?

Thanks, Jessica. So our marketing plans and have not been finalized; we have not been allowed by the Department of Justice to have any of those discussions until after the merger close. We have a team of people who are together in XM today. I was there yesterday and working on those specific plans.

The one thing we do know, as part of the synergy, there is a significant amount of money, which you can obviously see, that comes from the advertising and promotion of the combined companies. You know, the combined companies have spent historically about $200 million a year in national advertising. You should assume that part of the synergies which will be very easy to capture will be reductions of that.

We want to make sure that, when somebody goes into a Best Buy or a Circuit City, that they are not going to be confused at all and that they are going to know that buying what radio is in stock that we have available -- and there's a couple of new products that we have which are also pretty exciting. So, we will have more information to you. We think that the first people we ought to be talking to about that, Jess, would be the retailer, so that they know exactly what our plans are. As soon as we do that, we will talk to the investment community and the public about what we're going to offer.

Then, with respect to the used-car market, with the OEMs, we are in an early stage of launch and operationalizing how you approach the used-car market. While I would say it's not a -- it doesn't have a significant impact this year on our subscriber base, it's going to grow rapidly that these kind of initial cars that were factory-enabled by all of the OEMs are really now just beginning to show up in size in the used-car market.

So we are getting the CPO programs, Certified Pre-Owned vehicle programs in place with the automakers. We are doing more customized programs in the used-car market that is outside of Certified Pre-Owned. I think we will have more news on that for you as we come into next year.

Yes, longer-term, that market, which already has the SAC there -- you know, the radio is already in the car, and our ability to get a new subscriber using that same radio is very attractive to us. That will be a very significant aftermarket channel for us in the future, but not short-term.

Barton Crockett, JPMorgan.

First, I was wondering if you could tell us, at this point -- and I know it's very early -- are there any kind of notable one-time merger-related charges that we should expect in the third or the fourth quarter? On the other side of it, can you point to put any type of broad parameters around what kind of synergies -- you know, the $400 million you see next year -- what portion might we get in the back half of this year?

You know, I think, Bart, for as smart as we are today, ten days into operating the merged company, we really don't have any greater granularity for you than we've already given. I think, as you know, under the merger accounting, that we have a year to finalize the merger accounting so that one-time costs that are incurred at the XM sub level will of course be capitalized as part of the merger if there are one-time costs incurred at the SIRIUS level, as I think you know, under the accounting rules, that those will be expensed.

As we are able to get deeper into the implementation, I think we get into the post-Labor Day period. Mel has promised we will be back to you with somewhat regular communications about our progress. As we know more, we will be sure to let you know.

That's all quite fair. This other question again may be a little bit unfair, but do you have any view on what the level of cash balance might be at the end of the third and/or the fourth quarter, to what degree up or down from what you guys (inaudible) pro forma in the second quarter?

No, the only guidance that we've provided at this point, as you know, is the pro forma EBITDA exceeding $300 million next year and the $400 million of synergies growing. For today, I think that's as much as we will say.

Okay. Then shifting from these kind of micro-questions, can you talk about what happens to your OEM deals when a manufacturer goes through a meaningful change? Meaning perhaps a sale of a line of cars to another manufacturer, like a Tata Motors, or a change in their business -- or articles that are discussing potentially Chrysler changing (multiple speakers). What happens with your deals to get into their production (multiple speakers)?

Yes, all of our agreements provide for successors and assigns, so that you should assume that, contractually, whoever were to acquire a company in that hypothetical scenario would acquire the contract. But you should also understand now, more importantly, every car company has committed to putting in satellite radio and every single company is increasing penetration. No one is going the other way.

So satellite radio is very important that, if in fact there were a new car company today -- let's assume somebody decided it was a great business and that we really want to start a new car company -- they would come to visit with us because they, too, would want to put satellite radio in their cars and make that driving experience better, even though there's a lot of competition for audio entertainment, but satellite radio is still one of the most important ones. That car company is going to want to have some form of revenue share. Obviously, we would be in a position, if there weren't a contract, of probably having an even stronger position to deal with that new company. But I don't see that happening. I see if, in fact there was some division sold, that it would go with -- the contract would go. So you saw what happened when Daimler sold Chrysler; all of those agreements were in place and nothing changed.

Okay, that's great. Thanks a lot.

Mark Wienkes, Goldman Sachs.

I'm just wondering, if it's too soon to provide a range for year-end adjusted EBITDA and cash on hand today for the year-end, then are we going to get that in September? Could you provide your cash balance today and then what the capitalized merger costs are?

Let's see. So for cash balance, I did say earlier in the call that pro forma as of June 30 for combining the companies, as well as for the securities offerings, was $442 million. And the (multiple speakers)

June 30?

Yes, June 30. The capitalized merger costs I believe were $48 million, which you will ultimately find in our Q.

Okay. Then the conversion ratio that you've now provided, are there significant differences in the definition relative to how XM does it, or is that a good proxy? Then just an update on car lot subs, and then finally what, if you can provide it, an expectation, sort of best-case scenario in that the retail confusion clears up, so your expectation for the retail market for the year?

Okay, so on the conversion rate definition, we actually have teams of people from both sides who run both subscriber reporting systems who are getting together to comb through the business rules by which these subscriptions are classified, so what constitutes a gross add or a deactivation or conversion or a non-conversion. Again, with the Justice Department restrictions, we haven't been able to have any of those conversations, so we've just started them in the course of the last ten days. We will kind of sort through that. I think we think they are reasonably close but we will have a better sense of that over the course of the next several weeks.

Regarding any other projections that you are asking for, I think we've made it very clear. We are providing an awful lot of information. We are talking about this company that is showing this dramatic growth in revenue. We are getting to the point now where you can look at our earnings and you can take a look at what our EBITDA is and you could say, well, gee, that EBITDA has been improving every year, so let's assume that EBITDA, without any efficiencies, improved next year. You could then see how we've been running the Company based on our revenue growth and our expense growth, and assume that kind of management focus is also going to be effective going forward with the new company.

So I think that, getting to where your questions are, I think you could see a path that this company gets to, having that free EBITDA. Then it gets to free cash flow further out, and then it gets to a lot of free cash flow. I'm really looking forward to delivering it. When we can give you more information about it, we will give you that information.

Mark, on your question on our prepaid unactivated subs, the bundled subscriptions that are not yet sold through to customers, that hasn't been varying very much by quarter. It's been right around 10% of the sub base for quite some time now, and it hasn't really appreciably changed.

That's great. Thank you very much for the questions.

James Ratcliffe, Lehman Brothers.

I wanted to go back to the conversion rate again. When you started reporting on the SIRIUS side, I was surprised to see that it was lower than what XM had been running. Since the SIRIUS contracts on average are longer, I would have seemed it would be higher. So what's driving that? Is it a difference in the OEM vehicle mix? Is it conversion techniques? Can you talk through that a bit?

We can talk to our numbers, and we have not had a thorough analysis of what the differences are between the companies. Our penetration rate is higher, so one would maybe say that it possibly could be that. XM has been at conversion a whole lot longer than we have because they've added more OEM's subs faster than we did, so they may have learned a whole lot more about what works than we have.

So I think the idea is that there may be, in fact, a difference in conversion as to how a 3-month bundled sub converts as compared to a 12-month bundled sub converts. So there's just a whole number of moving pieces.

But the good thing about the merger is that we are going to be able to get into best practices. We are going to see what XM has done that has worked, that enables them to have the 53%. We are going to put that best practices in. So we think our content is good. We also believe XM's content is good. We believe that there is no difference that we are seeing, based on some of the models that the conversion rate is there.

We are seeing a big difference between how the customer is engaged before they leave the show room and the impact that has on conversion -- that the soon and the better that the buyer of the car is engaged in using satellite radio, the better the conversion is. XM currently has more field people working with the dealers than SIRIUS does. We are looking at how we are work with that going forward, so if in fact the dealers are putting the presets in, in talking to that customer, they convert better.

So we are going to have a stronger organization throughout. We are going to take the best practices and we think that will have a positive effect on our conversion rate.

I got it, thanks. I am also wondering. On interoperable radios, you've got the FCC deadline for retail. When should we expect to start seeing those popping up in OEM vehicles?

So let's talk about when we will first see them. So we have an FCC deadline. You should assume we will be a lot closer -- a lot faster than that deadline. We think, today, an interoperable radio is something that we would like to see at retail. We would like the ability of having customers have that one radio there. We can decide on how many other radios we would have, but if you think about it, having an interoperable radio that gets both services might certainly eliminate any confusion at retail and give us an ARPU opportunity to upsell regarding. So you should assume that will be in a number of months sooner than we committed to the FCC.

On OEM, that's going to be up to the car company as to whether or not the car company has an interest in it. They control the dashboard, so they can decide if they want it or they don't want it. If they do want it, you should assume it will probably take about three years for them to integrate it, since that's the lead time that most of these options take before the car companies are willing to put it into production.

Thank you.

Kit Spring, Stifel Nicolaus.

It looks like your SAC was down quite a bit, year-over-year, to 78. Was there anything one-time in there or is that sustainable? How do you see SAC evolving over the next couple of years with the move to interoperable radios? Is that something that temporarily increases SAC or not necessarily? Then maybe could you discuss some of the other major tech challenges that you see of integrating the systems?

Okay, so nothing one-time about the fact that -- I think everybody knows that we have the two channels of distribution. They have different SAC,. Within OEM channel, we now have actually a mix impact within that.

Some of the automakers are moving more rapidly to lower costs, integrated head units from the sort of first-generation black boxes that were installed under the seats or in trunks. That has lower cost, so we had a bigger swing than certainly we had expected, in terms of mix of cars with integrated head units. That really sort of drove it below our internal expectations.

You know, I think that's a trend that's likely to continue, just in terms of there being a higher mix of integrated head units. Virtually all the automakers are on a path over the course of the next couple of years to move to that platform. It's why we provided you with the guidance in the past that we see no reason why, over the longer term, our SAC per gross add shouldn't get to XM's level of $60 to $65. That remains true. I think, for now, you should think that the combined company will be kind of driving ultimately towards that sort of mid $60 SAC level and then we will get a look as to whether or not there's further improvements that we can make beyond that.

I don't expect interoperable radios or a la carte radios to move back the other way. I think, if we are going to provide to consumers enhanced functionality, that the cost of delivering that enhanced functionality is something that consumers will be willing to pay for. So, I do expect that we will be able to continue to make improvements.

Lastly, in terms of major technical feats, you know, engineering consolidations, just like IT integrations or any other platform, is a time and money concept. You run into -- sometimes you run into tough issues that take a little more time and a little more money to resolve, but we've committed to continuing to operate two separate satellite systems for quite some time because we need to, in essence, provide continuing service to the tens of millions of radios that are out there today that hear only one system or the other.

So in the time frame that we have, I think there's actually great opportunities to look for best practices in the engineering platforms and in fact to put together what are reasonable migration plans to adopt those best practices across the two platforms.

You know, we have been very conservative on our synergy estimates, so you should assume that, in the $400 million that we gave you for 2009, it did not include IT or anything significant in the engineering or technical area, because of the fact that we need to look at it. So the synergies are exclusive of those kinds of major areas.

David Bank, RBC Capital Markets.

Good morning. This question comes from sort of an investor as well as a subscriber perspective.

On a practical level, how will the la carte product of Howard Stern work with respect to existing XM subscribers? In particular, if I don't -- will I be able to buy the la carte products that were not available to me before if I have an existing, say, XM platform, and particularly in the OEMs, at what point will I be able to buy the la carte products, I guess on either side, without needing new equipment?

I got it. So, first of all, on la carte, you will need a new radio. We've said that from the time we first proposed la carte, that la carte would only work with a brand-new radio. Whether or not la carte will ever be adopted by the OEMs is something that is up to the OEMs. In other words, certainly we will spend time with them, we will show them what we have in our aftermarket. If they decide that's going to enhance the driving experience or enhance their business model, that would happen. But that's many years away.

The idea of an la carte radio, an la carte radio will hit stores this fall. So as part -- without getting into too much detail about our packages and what we're doing for the fall, is that we will have an la carte radio -- the first la carte radio at retail this fall. You will just have to wait, as a subscriber, to see the details of that.

Okay, thank you.

April Horace, Janco Partners.

A couple of things -- could you give us a little bit of a hint as to where you think the biggest synergy is in 2009 with respect to cost savings? Then, you also stated that you were going to be free cash flow positive, excluding satellite payments. I was wondering. Are we going to have to go back to the market to fund those payments or what's your game plan there?

So the answer to the second part is no, that the payment that we have due is for our FM 5 satellite which we are expecting to launch in 2009. We have a final payment that is due, and we've said that the Company will be free cash flow positive after interest expense, after everything else, after normal maintenance CapEx, free cash flow positive, but for that piece. So I think that addresses that issue.

The first part of your question? The biggest synergy was -- we mentioned every line item. You should assume that, in areas of programming, we are currently -- as an example, both services have a 70s channel. We want the subscriber to have the best the 70s channel, so we are going to make that channel available and not produce two.

I mentioned earlier that the companies spend a significant amount of money in advertising. You should assume obviously there's no cost of achieving that synergy, but that we have already notified the advertising agencies that both companies work with that they should put all of their plans on hold until they hear from me.

So every single line item -- you know, we have RFPs out in certain areas to where we are going to capture it. We've already taken a lot of steps. We will report to you after labor day on some of those.

But again, we are very excited about satellite radio. We think that there's an awful lot of people who have agreed to pay for radio but there's still a huge opportunity ahead of us. Everything has been accomplished but for us making money, and we are laser-like focused on being able to generate an awful lot of free cash flow.

So I think that's it. We promise you that we will communicate regularly with you. Everyone have a good rest of the summer. You can be sure that we will be working on achieving the synergies over the next few weeks.

Thanks. That's all I've got.

Thank you very much.

Thank you. That does conclude today's SIRIUS XM Radio second-quarter conference call. We would like to thank you all for your participation. You may now disconnect.