Sirius XM Holdings Inc (SIRI) 2010 Q1 法說會逐字稿

Good day, everyone and welcome to SIRIUS XM Radio's first quarter 2010 earnings conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to William Prip, Senior Vice President Treasurer Investor Relations. Please go ahead.

Thank you. Good morning everyone and welcome to SIRIUS XM Radio's earnings conference call. Today Mel Karmazin, our CEO, will be joined by David Frear, our CFO and EVP, they will review SIRIUS XM's first quarter 2010 financial results. At the conclusion of the prepared remarks, management will be glad to take your questions. Jim Meyer, President Operations and Sales, and Scott Greenstein, President and Chief Content Officer, will be available for the Q&A portion of the call.

First I would like to remind everyone that certain statements made during this call might be forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based on managements current beliefs and expectations and necessarily depend upon the 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 more information about these risks and uncertainties, please see SIRIUS XM's SEC filings. We caution listeners not to rely unduly on forward-looking statements and disclaim any intent or obligation to update them. As we begin, I would like caution our listeners that today's results may include discussions of both actual results and pro forma results. Listeners are cautioned to take special care to insure the accuracy in looking at today's reports. I will now hand the call over to Mel Karmazin.

Thanks, Will. Before I review our quarterly results I would like to cover a few broader issues. Last week, we regained NASDAQ compliance, very importantly, we gained -- regained it organically. We have told you in the past, that the Company would continue to be listed on NASDAQ. We had a hearing scheduled the day after we actually regained compliance. We believe very strongly that at that hearing, they would have granted us another six months, even if in fact we didn't get that waiver. We certainly had the ability to do a reverse stock split to continue to be listed. We can debate the benefits of reverse stock splits and whether or not that's something that is good or bad for the Company, and our Board of Directors do that. But it was our determination that we did not want to have to do a reverse stock split through gained compliance. And we are very pleased that we regained compliance -- listing organically and there is absolutely no plans at this time to do a reverse stock split. So we are glad that issue is behind us.

We also, a couple of weeks ago were added to the NASDAQ Q-50, that's the list that's right behind the NASDAQ 100 of the most valuable companies and we are very pleased about that. Today based on our current market cap, we are more valuable than 92% of all of the Company's listed on NASDAQ. Our stock price, because there are just a significant number of shares outstanding doesn't sort of make it appear that way. If you take a look at the shares outstanding for the largest loaded companies, Microsoft, Microsoft has about 8.8 billion shares outstanding, Cisco has 5.7 billion shares, Intel 5.5 billion, Vodafone 5.3 billion, Oracle 5 billion, and SIRIUS XM 3.885. So clearly, we have a very valuable company. There are just a significant amount of shares outstanding. In addition to having a broad investor base, we are one of the most liquid securities on NASDAQ. As a matter of fact, in the first quarter of 2010, SIRIUS XM was the most heavily traded stock on NASDAQ.

Another issue I want to talk about is the fact that we have gone through the worst recession that most of us have ever seen. SIRIUS and XM started adding subscribers in to 2002 and the economy was very strong during that period and up until 2008. So we now have seen how satellite radio performs in what was this terrible recession. It was a great experience for us, and what we found is that consumers love our product. They stuck with us in spite of the 10% unemployment, and again I think that bodes very, very well for our future. There's clearly an economic turn, car sales are increasing, we are seeing improvement in retail sales, and in advertising, and all of these economic indicators really are very strong for SIRIUS XM. And very importantly, not only are our financial metrics strong, we are now back to growing subscribers at record levels. Last week, the number of subscribers that we currently have exceeded the December 2008 level of 19.003 million. So we are back to now having record number of subscribers, and we will continue to grow our subscribers.

Turning to the first quarter, we delivered 171,000 increase in our subscribers as compared to negative 404,000 in the first quarter of the year ago. Our revenue increased 11%, GDP was up about 3%, and our revenue was up 11%. Because of our strong control of expenses, our adjusted EBITDA was up 45%. Our ARPU was up 10%, our churn improved from 2.2 to 2.0. And also very importantly, our conversion rate improved from 44.6 to 45.2. Advertising revenue, which represents a small percentage of the Company's total revenue, but it too grew 18% in the first quarter and is pacing for the second quarter to be up in the mid 20% range. So, all in all, it was an extraordinary quarter.

Automobile sales were better than anticipated. For the first quarter, car sales were up 16%, and yesterday, the star number for April was released, and it showed that the levels were from 9.2 million last year to 11.19% -- 11.19 million in April, which was up 22%. So, we feel very good about this year and where we stand. We are also making great progress on used cars, our trials in these vehicles are growing, and even more importantly, our gross ads are growing up significantly. The levels are low, but we are showing continued growth and this will be an important part of the Company in the year's ahead. Currently, we have over 1.1 or about 1.1 million peak customers, paying for best of. As you know, this was our first experiment into tiered pricing and we are learning a great deal about it. And a lot about our price elasticity.

Expanding our growing services business has been a priority for us. We are in aviation weather, we are in marine weather, realtime traffic as well as traveling. Currently we are providing drivers with gas prices, and movie times and other really cool features and we will continue to introduce new service offerings in the months ahead.

So we are very optimistic for the remainer of this year, for both sub growth, revenue, adjusted EBITDA, and free cash flow growth. We have not yet made any changes in guidance for 2010. We are being cautious about modifying it this early in the year, but we are very, very encouraged by our current performance, and what auto makers are telling us about auto sales for the rest of 2010. We are reviewing our current business trends with our model, so stay tuned.

On the balance sheet, we have been extending maturities, we have been getting greater flexibility, we are aimed at reducing our interest expense and improving free cash flow. As you know we tapped the strong high yield market in the first quarter, to raise debt, that matures now in 2015. We paid off nearly $750 million of near term debt. As a consequence, our maturity profile is the best it has been in SIRIUS XM history. This will be reinforced by the early redemption of the $114 million of pick notes due in 2011, which would have cost us 12% to 14% per annum in interest expense if we keep it outstanding.

So if you look at our borrowing costs over the past year or so, it has declined from roughly a 15% secured rate in the first quarter of 2009 to a 12% secured rate in the second quarter of 2009, to less than 10% secured rate in the third quarter of 2009, and all the way down to an unsecured rate of below 9% in the first quarter of 2010. Clearly market conditions played a significant role in this evolution of our borrowing rates, but our improved operating performance had an even greater impact. Importantly, strong cash generation ultimately provides the Company an opportunity to reward shareholders over time. Given the nature of the business and diminishing near term demands on our cash driven by lower CapEx and lower interest expense as we reduce debt over time, it wouldn't be unreasonable to expect an increase in shareholder value simply from deleveraging our balance sheet.

We continue to improve our content and I would like to take a couple minutes to cover this important area. Our world class content is what distinguishes us from the competition that we have in the audio entertainment marketplace. Satellite radio offers over 65 channels of 100% of commercial free music, covering every genre that any music fan would want. We differentiate even more with our very special music offerings like E Street radio, Elvis radio, Jimmy Buffets Margaritaville, the Grateful Dead channel, Seriously Sinatra and Metropolitan Opera channel. Satellite radio also offers everything a sports fan would want, all NFL games, all major league baseball games, all NHL and NBA games, as well as every NASCAR race. In addition to the music and the play by play on satellite radio, while in your car or anywhere else, you can get Fox News, CNBC, CNN, MSNBC, NPR and the BBC. We also have the most compelling and exciting personalities doing shows on satellite radio like Howard Stern, Rosie O'Donnell, Chris Mad Dog Russo, Barbara Walters, Opie and Anthony, Martha Stewart, Oprah and Jamie Foxx.

When you compare our content offered on satellite radio with that of terrestrial radio or the hundred of thousands of internet companies, such as Last.fm, Slacker, RealNetworks, AOL, Pandora, Live365, Yahoo Music, et cetera. You can see why SIRIUS XM is by far the best place to get audio content regardless of technology. Our content is amazing and consumers can get any anyway they want it, they get it in their car through OEM installed vehicles, through our plug and play products, as well as on the internet and on SmartPhones. We have announced that we have applications out there for the iPhone, BlackBerry and most recently Android, as well as having a really cool table top IP product for your home if you have wireless in your home. So again our content is really the differentiator as compared to all of these other choices.

I also want to highlight, once again, for you the uniqueness of our business model, which is this subscription service. If you take the audience, the cum audience of terrestrial radio and you take the revenues, the total revenues that terrestrial radio generates, you see that they monetize their audience, somewhere between $10 to $20 per year. If you do the same thing to the internet users, and take a look at the number of people they have using their service, and take a look at where their revenue is, you will see that they are only monetizing it to the tune of about $2 per year per user. Sirius Satellite Radio has 19 million subscribers, we have over 35 million listeners. You take our revenue, and you divide it by those 35 million listeners, you see that we are generating $70 per listener per year. Again, as compared to $10 to $20 for terrestrial, and $2 for internet users. So I think that you see the strength longer term of our business model.

We also have a long way to go. We certainly are not in anyway shape or form maxed out. Terrestrial radios revenues are $17 to $18 billion, Satellite Radios is $2.7 billion, internet somewhere just under a billion dollars. So the audio entertainment space is delivering roughly $21 billion worth of total revenues. Which means that our company is doing about 13% of that audience size. When you factor in our content and all of the advantages we have, we think that 13% share is apt to increase in the years ahead.

So all in, I am very pleased with the performance of SIRIUS XM and how it has grown. The SIRIUS XM team will continue to strive to improve the service, customer care experience, and the scope of our product offerings, all for the purpose of growing our top line revenue with the same vigor we have applied toward integrating the two companies, and driving out expenses over the past several quarters. I believe SIRIUS XM's future is bright and expect we will continue to deliver strong operating and financial results in the quarter ahead. Now I would like to turn the call over to David Frear.

Thanks, Mel. In the course of the year end earnings season you heard a lot about -- a lot of concern about the sustainability of cost cut driven earnings. [Hunded's] question, the quality of earnings that weren't growth driven, but SIRIUS XM has been consistently delivering improved operating performance with both growth and cost controlled components. This quarter continues that trend. Revenue performance was outstanding in every way, on the volume side, a recovering auto sector led to strong growth in gross additions and more effective retention efforts in an improving economy led to both lower self paid churn, and an improved trial conversion rate. On the pricing side, ARPU improved with improving ad sales, higher multi-subscription pricing, increasing penetration of our $2.99 internet streaming packaging, continued growth in our best of subscription packages, and the roll out of the US music recovery fee.

Self pay subscriptions increased nearly 337,000 over Q1 of 2009, bringing total self pay subscriptions to nearly 15.8 million. Paid and unpaid trials increased 250,000 over last year's first quarter, bringing the funnel of promotional trials up to nearly 3.8 million. Total paid subscriptions increased 345,000 over the year ago period. The increase in subscriptioners combined with the dollar increase in ARPU drove total revenues up by 11% to $671 million.

Our contribution margin, which is revenue less revenue share, royalties, customer service, and billing, and cost of equipment was 72.1%, a record high for our Company, and a 3.3 point improvement over the prior year quarter. Fixed costs, which are satellite and transmission programming, sales and marketing, G&A and engineering design and development declined by $5 million and improved as a percentage of revenue by 4.4 points to 32.6%. Pre-SAC adjusted EBITDA improved by $72 million on a $65 million improvement in revenue, and improved by 7 percentage points to 38.5% of revenue. With the strengthening auto sector, we reinvested if growth this quarter in a very cost effective manner, the 29% growth in growth editions over the prior year was matched with a 4% improvement in SAC per gross ad despite absorbing the inventory effect of increasing automotive production. Subscriber acquisition costs increased $23 million, or 28% over the prior year's quarter, but increased as a percent of revenue by only 2 percentage points. As a result of the strong revenue growth and tight cost control, adjusted income from operations improved by nearly 45% to $158 million, or to 23.5% of revenue from 18% in last year's first quarter.

Since year end we have taken several steps to improve the Company's balance sheet. In March we repaid to GM $61 million of payments owed to them pursuant to monthly deferrals that we took from January to November of last year. Those deferrals bore interest at 15% and were repayable from April 2010 to March 2011. With our strong cash flow in the fourth quarter of 2009 in the continued growth in the business in the first quarter of this year, it made sense to repay the deferrals early, eliminating the 15% interest component. Also in March, we upsized an oversubscribed bond offering from $550 million to $800 million and priced the unsecured five year notes at 8.75%. This is the lowest rate bond yield in the history of the Company. We used the proceeds to retire $750 million of secured and non-secured debt obligations due in 2012 and 2013. The call of the 9.625% notes was completed in April. You will note the balance sheet this debt is shown in current liabilities, and the cash to fund the redemption is shown if restricted cash. We also announced on April 28 that we are calling the XM holdings 10% secured pick notes due May 2011. In addition to the 10% cash coupon, these notes have a 2% pick component that would increase to 4% on December 1. Once again, our cash position and strong operating performance allow us to repay this debt early, thus reducing our debt service requirements. Following the call, these notes are only debt maturity through the middle of 2013, is our $230 million, 3.25% convert due October 2011.

On a trailing four quarters basis, our debt to EBITDA ratio is now 5.9 times and our EBITDA to interest coverage is 1.5 times. Free cash flow for the quarter declined $121 million from the prior year. There was a $49 million improvement in adjusted operating income that nearly -- nearly doubled net income plus non-cash operating adjustments to $93 million in the quarter. This was offset by the repayment in the GM deferral, which accounted for $76 million of the change, $61 million repaid with interest in the current quarter, while the prior year quarter had $15 million worth of deferrals. We also had a payment programming provider in advance of the season that had been paid over the course of the season in 2009, and in the first quarter of this year, the 2009 bonuses were paid in cash as opposed to those bonuses being paid in stock during the course of 2009 for the 2008 year. Capital expenditures also increased approximately $28 million in the quarter related to satellite spending.

Although we continually look at the business performance and we will provide an update to the market as conditions warrant, our guidance remains unchanged. Over 500,000 net ads for the year over $2.7 billion of pro forma revenue and approximately $550 million of pro forma adjusted EBITDA. We expect free cash flow to remain positive for the full year. We continue to actively watch auto sales, general economic indicators and internal company metrics for signs about where the business is heading. The first quarter obviously gave us great momentum in hitting our operational and financial targets and we hope to provide an update within the next quarter to this guidance.

As a reminder, we expect to spend approximately $212 million on satellite capital expenditures this year as we launch the already completed XM 5 satellite in the fourth quarter, and continue building the SIRIUS 6 program. Next year we anticipate we will spend approximately $111 million on satellite CapEx as we launch SIRIUS 6 late in the year. These amounts are in addition to the $50 million to $60 million of annual ground base maintenance CapEX that would be typical. As we complete the replacement cycles on both constellations in 2011, we expect satellite CapEx to be de minimis for several years beginning in 2012. This means we will have a roughly $100 million improvement in our free cash flow in 2011 from declining CapEx alone, and another approximate $100 million improvement on top of that in 2012, again from lower CapEx. All in all, we are pleased with a very strong first quarter for SIRIUS XM, and with that we can turn it over to the operator for questions.

Thank you, sir. (Operator Instructions) We'll take our first question from Lev Polinsky with JPMorgan. Please go ahead.

Yes. Hi. Thank you for taking my question. I just wanted to ask a question to better understand the guidance. So if I look at $2.7 billion in revenue, which is sort of the low end and 550 in EBITDA, and I back out the first quarter, then I get about 120 basis points of margin compression through the rest of the year compared with last year, on an EBITDA margin basis, in Q1 you saw pretty good expansion of the EBITDA margin. And obviously that's assuming that you come in at the low end of revenue guidance. I just wanted to understand if there's spend coming up that I should be thinking about or sort of how I should think about that implied margin guidance. And then one quick clarification question, is do you have the number of the unpaid promo subscribers? Thank you very much.

Okay. So, now let me take the first one. We mentioned during our opening remarks about not at this time raising guidance, there is nothing that we are anticipating in the course of 2010 that's going to change the way the Company has been operating and looks as it did in the first quarter. The issue that could change is that if in fact we are going to add significantly more subscribers, then obviously our SAC costs would go up, something that we would be very happy see occur. We understand the issue on our guidance, we understand if you annualize the EBITDA from where it is now, we understand everything that you have raised and all we could say is that we are looking at the guidance, there is no concern about the rest of the year for the Company, but you should anticipate -- still early in the year, we just got the April car sales numbers yesterday. So, just have to be a little bit patient before we do anything on guidance and David.

I think on the margin compression side, that to the extent that you are using $2.7 billion, that in your guidance is over $2.7 billion, that will buy us your, your margin comparison along the way. Remember that the SAR for automotive through the month of April is only 11 million. And so the industry is estimating, obviously, numbers significantly higher than that for the full year. To accomplish that they have to have a pretty steep pick up in sales in the course of the last eight months of the year, and with the way they build inventories and the way the accounting works for us on SAC, there would be a lot of inventory loading that would go into subscriber acquisition costs, if in fact the estimates of the high 11s, maybe getting to 12 come through.

On the trial.

Sorry, the update trial is between 600,00 to 700,000.

Great. Thank you very much.

Our next question comes from Barton Crockett with Lazard. Please go ahead.

Great. Thank you for taking the question. I was wondering if you can update us on the copyright royalty fee, some color on the percent that we are paying it in the quarter. So we can help back into the revenue trend there, and then, also on revenues, the ARPU up 10% year to year, can you break that down a little bit for us in term of a little bit more in terms of the constituent parts that drove the increase there since you are capped by the Government on a like for like basis on pricing, but obviously the premium is helping and some other things. If you can detail that contribution that would be great.

Okay. So on the -- the statutory rate, I am going forget I can't remember now whether we are at 7.5% or 8% this year. I think it is 8%, isn't it? Okay. So but, we will follow up with you, Bart. It is publicly available.

On revenue components, we have got -- we have got the effect obviously of more in essence premium load coming through the numbers, right. We are doing better on penetration of both best of, as well as the $2.99 internet service. So that certainly helping to drive ARPU that the -- the multi-receiver discounts are -- the increase in those prices a year ago are helping to drive ARPU as is the US music recovery fee. I think the components of it are all pretty well detailed in the tables that are attached to the release.

You do have some things that are sort of mix related, that help retard that -- the growth in ARPU a little bit, that as there are different pricing packages available to consumers, as they convert there are different OEMs with different pricing packages that vary a little bit form the companies, retail price points for the promotional l trials, and we have gotten pretty good at winning back customers and finding effective promotional offers to win back. So we do have a rising proportion of customers on win back plans. There are a lot of elements moving -- moving the number around, I think the best thing I can suggest is that you look at the -- start with the table.

When we first announced that we were going to pass on the copyright royalty fee to subscribers, there was some concern on the part of what the impact that would have on our Company's children. We are fortunate that our subscriber satisfaction level is very high, still over 90%, and that we managed to pass along those fees, with churn being as it was in the first quarter, because as of right now, a very significant portion of our subscribers, as we cycle the calendar, are currently paying the MRF fee. So we haven't been permitted to raise our price. So the ARPU has gone up a little bit with some advertising in this quarter, advertising revenue grew higher than our total revenue. So there was some growth there, as well as the MRF.

Okay. And then, I will follow up on off line on some that, but a little bit more color on some of the -- how to think about the seasonal trend from here for churn and SAC. Normally churn would be rising in the first quarter over the fourth quarter, and it was flat. How do you think about the self pay churn over the next few quarters, just the seasonal variations. And SAC also, nice decline here quarter-over-quarter, how do you think about that for the balance of the year?

This is Jim. In terms of the self pay churn I have to tell you we are pretty pleased with the first quarter. There's a lot going on, and clearly I think the macro economic environment is improving, which helps. As Mel said though, we had a big chunk of subscribers who their bill came due on the MRF in the first quarter and we were pleased with those results, and we have initiated quite a few, what I would call best practice, initiatives across learnings from both companies as we put the cultures together on how to improve self pay, and I think that we are seeing a lot of progress there. So I would say we are cautiously optimistic about self pay for the rest of the year.

Okay. And then any thought about SAC from here? Does the seasonal trend argue for something up or down for the balance of the year?

Well, Barton, as you know, it is entirely related at this point to the shape of the auto recovery.

Okay. All right. And then, one final thing, any more color you can provide on the used car contribution, the sub growth in the quarter. Is it just going be left promising but small. Is there anymore number you can put around that?

I wouldn't -- certainly wouldn't characterize it as less promising. I think it is a great opportunity for the Company and for long term sustained growth that we are just beginning to work through the process of industrializing the transfer of information about second owner sales, whether it's from our automotive partners or whether it is by virtue of acquiring third party list information and then crossing it against our data base of radios in the field to determine whether or not cars have changed hands. It is very promising. I will tell you that there is nothing in the numbers that you would see where -- we get questions for instance about the effect of returning of activation fund on SAC for gross ad, is that helping to subsidize the SAC, and what I would say to you is that the effect of it in this quarter is no different than it was in the prior year's quarter on a proportional basis. So, it is a promising area for the Company. We look forward to growth there.

If you think about the fact that our penetration rate is just over 60% of all of the cars and manufactured this year, that means that as years roll out, 60% of all of the vehicles that become used cars, are going have satellite radio already installed. So we see these percentage increases each month, and the percentage increases are very, very significant, but again, the levels remain very low, and probably will remain very low for this year. So, we will continue to talk about it because it is important for the future, but it is not something many thaw is going to dramatically impact our subscriber growth this year.

Okay. All right. Thank you very much.

Our next question comes from David Bank with RBC Capital Markets. Please go ahead sir.

Thanks. Good morning. A little bit of a follow up on Barton's question, I think you actually put in pretty helpful disclosure into the press release, on the -- on the music royalty fee. If I am reading it right I think you are saying that you generated about $48 million from music royalty fee and perhaps some other revenue, but let's assume take that number as a high, if you assume that it is $48 million, and you divide it by three months in the quarter and divide that by $2 per month, it is about 8 million is the number, which would sort of imply about 8 million subs are currently paying the royalty pass through. Can you kind of sanity check me there and give a sense of how you think it develops? Is it, why is it 8 million right now, and will it ramp?

Well, so I think that, that the US -- the fee has been rolled out at this point to substantially all of the people that it is going be rolled out to in the existing base. So we have new additions comes on, new people convert from promotional trials, it will of course be assessed to them, but that's part of the growth. There really isn't much left to do it to, to apply to. So we started in August and obviously all of the monthlies, all the quarterlies, all of the semi-annualies have been through it. And that substantially all of the annuals, the overwhelming proportion of the annuals have been through it, lots of the two years and three years have been through it. So you have got a, sort of a stub base that of those annual two years and three year that still have to come through, but there aren't that many subscribers in the two years and three years. The lifetimes won't get it and it doesn't apply to -- we don't apply it to the paid promotional trials with the -- with the OEMs, so that there's that component that only gets it once they come through to the self pay side.

The -- your $2 average is probably a little too high because we do have the multi-subscriber components you should be looking at a number that's below $2. I think in the past we have said think of it as something that's sort of on a blended basis, the $1.60 to $1.70 range. Other than growth in business I don't think it is going to grow a lot. It will grow a little bit from here, but not a huge amount. I think most of it is in the number now.

Okay. Just one quick follow up then, assuming the $1.60 same numbers, it is still -- it is a little north of half of the self paids. And so is the short answer just that a little north of half of the self paids are either multi-years or family plans? It just seems like a pretty wide gap for everyone having been rolled through for something like 60% of the sub base.

Why don't we take you through it off line.

Sure. Okay. Thank you very much.

I think there are probably some faults in your -- just sort of the off the top of your head math. Let's just take it off line.

Thank you very much.

Our next question comes from Matthew Harrigan with Wunderlich Securities. Please go ahead.

Good morning. Great job on both the revenue and the cost side. I was curious that the SAR number, the 11.9 wasn't all that impressive in the context of the incentives that are in place. Nobody expected the economy to turn down to the extent it did in 2009. But if we did get some fall out going the other way, do you think your business would behave somewhat differently, presumably some of your softest customers were probably washed out in 2008, 2009 and you show more resiliency and I assume also that some of the free cash flow characteristics, with respect to the auto makers, would actually reverse out, as well. So I know that the issue is just, how much upside there is rather than down side. But if we did get get an [exogess] in the event that forced the economy back down, what do you think you have learned and how do you think things might behave differently?

I think that gets back to the point of what we were saying about our guidance, wanting to be conservative. We are not the ones making the cars. Our car partners that we speak with regularly are telling us that they expect that for 2010 the number will probably be somewhere between 11.5 million and 12 million vehicles. Our business model is not predicated on that. We have a much more conservative forecast, and that's where our guidance was derived from. So the 500,000 subs and $2.7 billion, over $2.7 billion and the over $550 million of adjusted EBITDA was predicated on the lower SAR. So everybody remains optimistic. Our information very current from talking to the OEMs. There was less promotional activity by the car companies, in April than there was in March. And everybody remains, again, optimistic that the number is going be significantly higher than the April number was.

Thank you.

Our next question comes from Mike Pace with JPMorgan. Please go ahead.

Hi. Thank you. I apologize if I missed this first one from earlier, but to follow up on a SAC question from earlier, although the OEMs are going to drive total SAC on a SAC per unit or the unit economics, what is driving that lower and what may continue to drive that lower or increase that going forward? That's one. Two for David, what's left in the capital structure or covenants in order to collapse the two restricted groups and what financial or operational benefits might you see from that? Thanks.

Taking the last question first. We meet all of the ratios so we, under all of the debt agreements, could collapse to companies now that there are a lot of contracts, and a lot of them date back a number of years. So we are taking a careful look at all the contractual arrangements just to satisfy ourselves, that if we were to go ahead and merge the two entities we don't have to create an undesired outcome for any of our contracts. We are working through that. We have all, we have said for a long time that there's no inherent operational efficiency associated with merging the two entities. So there isn't a cost efficiency driven imperative to go ahead and get it done. So we will get it done in due course.

And on the SAC side, since automotive drives a big part of the gross additions, that is also drives the majority of the SAC per gross ad, that Jim's team still is doing a great job driving cost down on the retail side of the business, and we have had -- we continue to have this year, as we have for many years now, significant improvements in SAC per gross ad on the retail side. And on the OEM side, it tends to be driven more by the various contracts, and mixes of gross additions between the contracts, but overall you should think that we are moving down a more cost efficient path, that as each year goes by we have more and more auto makers that go to more advanced generations of radio modules, which is have lower costs to them. And so we do expect SAC per gross ad to be coming down year by year for just good basic manufacturing and technology development practices.

David, I would like to add one point on the SAC question. I would like to reiterate what David said earlier, I am pretty sure that inventory, and the car makers inventory, at the end of the first quarter was as low as it's been in long time. And every auto maker is struggling now, not only to recover their inventories, but to get parts and rebuild and get these part supplies back on line. We are not just facing a build in SAR over the second half, or the remaining nine months, we also have an inventory build, which is really tricky to fully understand as we look at SAC. So it is pretty dynamic.

Okay. Great. Thanks. I guess just someone needs to ask it for Mel, the Howard contract, any update there and if not, when should we expect to hear something.

Yes, nothing new to report on Howard. As you know, I mentioned at the last quarterly earnings call, that we would probably make the announcement during Howard's show, and if you want to hear about what Howard's plans are, you should just listen to Howard and as soon as we have something to announce, you will hear about it.

Thank you.

We will take our final question from Jim Goss with Barrington Research. Please go ahead.

Thanks. I have a couple if that's okay. I think the conversion rate has been a very important metric and I am wondering how all of you are thinking of that. Is it leveling off at current rates? Can it go any higher again? Or is there a risk of it going lower, and I guess a related area to that would be if the penetration is now 60%, have you maxed out or will that go higher as well? You might also think about the conversion rate in terms of certified preowned, I don't know if you have giving trial subscriptions in that area, that might be an interesting thing to learn about as well.

So in terms of conversion rate, again I was really pleased with the first quarter, and there's a lot going on there. And as you look at it, we obviously have the overall impact of the economy. We had a bunch of vehicles that were sold under cash for clunkers programs late last summer that came through with the trials expanding in the first quarter, which was at least in our findings and from talking to other people in the subscription business, that were dealing with car makers are more value conscious that had some impact. And then we had some really impressive gains with some of our car makers that were driven by best practice. At the same time, we have some new auto makers who are rapidly increasing their penetration rate, and I think you can guess who that is.

I can tell you conversion is a two edged sword. We do a lot of work on conversion, we need the auto maker to help us quite a bit with conversion, and there's a learning curve there. And so, where is conversion? I am not quite sure be honest with you. I think that we are in a range where we are comfortable with it and I think you should stay tuned as we go through the year. In terms of the certified pre-own, we are out testing a lot of things right now. We have free trials, we have -- certainly the way to drive that business is to make it as easy as possible for that trialer. And we are out there doing a lot of things to learn on that right now.

And I think the idea of the conversion being as strong as it is as we have penetrated deeper into the lines of the OEMs is very significant. So if you were to look back at some of the early conversion numbers, they would appear to be higher, but they were really only in the most expensive vehicles. So as we had penetrated into more and more of the vehicles, having this conversion rate in the mid to high 40s and approaching 50 is certainly our target, and not only are we pleased about the conversion rate in this quarter, we are also very, very pleased overall with how the Company performed during this per of time.

If I might one last thing, just maybe theorize about a year from this July, when you are free once again to determine an overall pricing structure, I wouldn't expect there to be any just absolute jumps in prices, but it certainly would seem that you could begin a lot of tiering or options or perhaps a second pay isolated just music or just sports at a lower price, or something of that nature. How are you thinking of the whole pricing structure as you approach a time when that is going be more up to you?

So the department of justice when they reviewed the merger, they made it clear, that there should be no restrictions, and they approved the merger clean. The FCC got us to agree to holding the price points until 2011, I think is the date some time in July. I think that those price points -- that price freeze should go away. If in fact it goes away then the Company will have a whole lot of flexibility, it doesn't necessarily mean that the Company will go out and raise prices, but we believe that we offer great service, we offer great value, and having that restriction hopefully go away enables us to have another arrow in our bag that we can do to drive free cash flow, and EBITDA, and revenue for our shareholders and we will use every tool available to do those things. Thanks very much.

Thank you.

That concludes today's conference call. Thank you for your participation.