SIRIUS XM Radio Q4 2008 Earnings Call Transcript

 |  About: Sirius XM Holdings Inc. (SIRI)
by: SA Transcripts


(Operator Instructions) Welcome to the SIRIUS XM Radio Fourth Quarter 2008 Earnings Conference Call. At this time, I would like to turn the conference over to Mr. Paul Blalock, Senior Vice President of Investor Relations.

Paul Blalock

Welcome to SIRIUS XM Radio's Earnings Conference Call. Today, Mel Karmazin, our CEO will be joined by Jim Meyer, President, Operations and sales along with David Frear our EVP and CFO and review SIRIUS XM's fourth quarter and full year 2008 financial results. Scott Greenstein is traveling today and will not be joining us. At the conclusion of our prepared remarks, management will be glad to take your questions.

First, I would like to remind everyone that certain statements made during this call might be forward looking as that term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward looking statements are based on management's current beliefs and expectations and necessarily depend 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 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 began, I would like to caution our listeners today, that results may include discussions of both actual results and pro forma results. Listeners are cautioned to take special accuracy ensuring that they’re looking at the correct results.

I'll now hand the call over to David Frear.

David Frear

SIRIUS XM’s first full quarter as the combined company demonstrated the rapid progress we made toward integrating the businesses and obtaining the very significant synergies we outlined when we proposed the merger. Our strong Q4 performance under very difficult economic conditions underscores the strength of our business model and is at the core of the investment opportunity Liberty Media saw enabling us to achieve a very positive refinancing result for all of our stakeholders in the midst of what has to be viewed as an incredibly unhealthy credit market.

The results I will discuss today will be based on pro forma combined company figures without any purchase price accounting adjustments as if the companies had been combined as of the beginning of 2007. We believe this represents the best way to observe the core trends underlying the business. Additionally, I’m going to focus my remarks primarily on the fourth quarter since the prior quarter and full year pro forma’s precede obviously the merger and therefore the synergy initiatives that we have begun.

As you’ll see in our fourth quarter figures these post merger efforts have rapidly and demonstrably transformed our financial performance. Total subs grew 10% or 1.7 million for the full year despite fourth quarter growth additional falling approximately 27% due to an absolutely awful automotive and retail environment which both Jim and Mel will comment on later. SIRIUS XM added 83,000 net subscriptions in the quarter.

Our fourth quarter self pay churn rate of 1.8% remained consistent with our historical range of 1.6% to 1.8%. ARPU at $10.60 was up 2% from the fourth quarter 2007 due to the introduction of our new Best Of programming packages and a lower impact from rebate activity in the marketplace. Top line revenue growth rose approximately 16% or $87 million versus the same period a year ago bringing revenues to $644 million for the quarter, primarily driven by 13% growth in average subscribers and the 2% growth in ARPU.

For the first time, SIRIUS XM had positive adjusted EBITDA reaching $32 million compared to a negative $224 million in the fourth quarter 2007. We are happy to have delivered such a strong number despite being so early on in the process of integrating the companies. The adjusted EBITDA improved by $256 million not only as a result of the $87 million increase in revenue but really driven by cash operating expense improvements of 22% versus the fourth quarter of last year.

Our SAC per gross add improved by 16% to $70 driven primarily by efficiency gains in our OEM channel where we saw improved economics arising from cheaper integrated head units as well as improved equipment margins in the after market. We continue to see improvements in customer service and billing costs with a 9% improvement to $1.18 per subscriber per month.

Cost efficiencies are a big part of the operating story for this quarter. Total operating expenses before non-cash depreciation and stock comp were $612 million down 22%. The fourth quarter of 2007 included a $52 million one time catch up in the royalty costs excluding the effects of that total cash OpEx is still down 16% in the quarter. Variable costs again adjusting for that prior year one time royalty charge were down 3% despite the strong increase in revenues, fixed costs which include everything but SAC and variable costs, were down 19% in the fourth quarter versus the prior year.

Within fixed costs, sales and marketing costs was $82 million down 34% from last year as we realized merger efficiencies and curtailed media spending in an economic environment where we did not think it made sense to spend it. SAC as reported on the income statement was $133 million down 27% year over year driven by lower per unit costs and the lower gross add figures discussed earlier.

Summing it up, revenue improved by $87 million, contribution margin improved by $145 million as we reduced variable costs, pre SAC EBITDA improved by $208 million as we reduced fixed costs and adjusted EBITDA improved by $256 million a multiple of three times the revenue increase. Consolidated net loss also improved 39% to $248 million compared to $405 million a year ago.

I’d like to take a moment and discuss the recent refinancing transactions and our balance sheet. On Friday we closed phase two of our Liberty Media agreement and I want to give you some highlights of these transactions. Phase one, which closed on February 17th included a $250 million senior secured loan and a $30 million purchase money loan facility both maturing in 2012. Proceeds were used to repay the remaining $172 million of our 2.5% convertible notes with a balance available for working capital and general corporate purposes.

Phase two, which we concluded on Friday, saw us extend our $350 million of May 2009 bank maturities at XM with $100 million amortized in 2009, $175 million due in 2010 and $75 million due in 2011. Phase two also included a credit agreement for $150 million second lien loan that XM can use for repayment of the notes due in December. Finally, upon closing of Phase two we delivered to Liberty 12.5 million shares of preferred stock convertible into 40% of our common.

SIRIUS XM ended the fourth quarter with $380 million of cash and equivalents and another $141 million of restricted cash. The increased cash balance from the third quarter is primarily attributable to the $26 million of positive free cash flow the company saw in the fourth quarter. Note that since year end, restricted cash on our balance sheet for the benefit of Major League Baseball and NASCAR was released to those parties in satisfaction of obligations that would otherwise be paid from cash on hand. In the case of baseball this means we have pre-paid all of our obligations through March of 2011.

Also, yesterday we implemented a $2.00 increase in our multi-subscriber price from $6.99 to $8.99. Many of our subscribers are taking the opportunity to lock in the old price by signing up for longer term plans. In the past six month the world has changed dramatically and as we all know, the credit crisis has shaken economies around the world. On our third quarter 2008 conference call I told you that we believed the business was fully funded absent the 2009 maturities.

Given that no company with our credit rating had issued debt since the bankruptcy of Lehman Brothers, completing the 2009 refinancings was anything but assured but we are now happy to say we have put our 2009 liquidity issues behind us, we can now focus on maximizing synergies, growth in the business and improving our EBITDA and cash flows as we continue to integrate the businesses.

Given the extraordinary uncertain surrounding the economy, many many companies are no longer providing guidance for investors. We have no better insight then anyone else regarding what auto sales might be or when the consumer may resume spending. We are no longer providing subscriber or revenue guidance. However, we can tell you that the operating efficiencies associated with the merger are truly extraordinary and that EBITDA for 2009 will exceed $300 million.

With that I’ll turn it over to Jim.

Jim Meyer

During the fourth quarter we added 1.7 million gross subscriber additions. The OEM channel gained 218,000 net additions and the retail channel lost 131,000 for a total net add figure of 83,000. SIRIUS XM ended 2008 with over 19 million subscribers. While there was a lot of distraction on the corporate side due to the refinancing our operations team remained focused on integrating the business and turning in a successful fourth quarter performance.

Since the merger closed we have accomplished a tremendous amount in a very short period of time. More specifically, we were actively involved in integration efforts, putting together product development, OEM, after market, and customer care organizations into single integrated teams. This has resulted in broad efficiencies across the organization and we continue to be pleased with opportunities for further cost savings.

In the after market segment we also aligned our product offering and moved to a new retail distributor, Audiovox which will result in significant long term cost savings. I’m also pleased to announce that our first truly interoperable after market radio called Merge is now available for sale. Another major accomplishment in the fourth quarter was our introduction of tiered services. We successfully introduced Best Of packages and are gaining real traction on selling a tiered offering for the first time.

At the end of 2008 we had nearly half a million subscribers on our new packages and the vast majority of these were at higher price points then our standard offering. Introducing tiered pricing is a new and exciting development for SIRIUS XM and took a great deal of effort to implement. It was successful in that we are now selling new and existing subscriber packages which are new meaningful contributors to our revenue streams.

We also have ramped up our efforts to secure new subscribers from second owners of cars equipped with factory installed radios. This is a large and growing population that provides a unique channel for new subscribers. Our primary efforts so far have been focused on certified pre-owned programs with most major OEMs. We are now expanding those efforts to other marketing partners to efficiently receive customer data to effectively offer trialing opportunities.

On another exciting front, we have been testing a number of initiatives to make the SIRIUS XM content and experience more ubiquitous. As noted during our shareholder meeting in December, SIRIUS XM has been working on an application that will allow subscribers to stream our internet content to their iPhones and iPod Touch devices. When released, this application will permit an estimated 7 million US iPhone users, and additional iTouch users to access SIRIUS and XM internet content.

This will allow existing subscribers with a paid streaming subscription to access our content. This will also allow new customers to subscribe to our service without having to buy a radio. This is a large and interesting opportunity that will maintain our subscription based economics while providing customers easier access to our content through means other then our traditional satellite based platform. We are currently in rigorous applications testing and plan to launch in the second quarter.

We have also expanded the number of home devices that can receive our content through the internet including an easy to use table top radio that is now sold through our website and major retailers.

Before I turn it over to Mel I want to make some comments about trends we saw in the fourth quarter. Industry auto sales experienced sharp declines beginning in late October and fourth quarter automotive sales fell to a 10 to 10.5 million annual sales rate. Unfortunately this trend has gotten worse. So far through the first two months of 2009 the sales rate has dropped to the 9 to 9.5 million range with no improvement in immediate sight.

It is important to note, however, that during the fourth quarter we did improve overall penetration rates of new car production to approximately 52%. We are pleased with this improvement and expect further improvements later this year when Toyota increases its penetration rate. I believe this positions us well when the auto industry recovers.

The poor economy also hurt our after market business. Lower then expected overall electronic holiday sales, couple with Circuit City’s bankruptcy significantly dampened the seasonal bounce we normally see in December. While the recession and macro economic climate did have some impact on our churn in the fourth quarter it did not significantly impact our self pay churn rate. However, the financial hardship deactivation reason code placed on accounts by our retention team did spike in December so its certainly something we are watching closely.

Overall, conversion rates for trial subscribers did show year over year reductions but primarily due to higher penetration rates and lower price models as well as lower price trim levels. When we compare like models or trim packages we do not see any erosion in conversion rates year over year.

With that I’ll turn it back over to Mel for additional comments.

Mel Karmazin

I have three main points that I will cover on today’s call. First I want to highlight how well we are executing on our plan especially when you factor in the current economic environment that we are operating in. Our country is facing high unemployment, low consumer confidence, horrible auto sales and very poor sales at electronics retailers. This would all lead to the expectation of SIRIUS XM having a terrible fourth quarter but not only did we not have a terrible quarter we had a very good fourth quarter.

Our revenue grew, correct, grew 16%. Full year revenue of $2.44 billion was an increase of 18% and represents one of the strongest revenue growth rates in all of media. The fourth quarter was the first full operating quarter since our merger was completed. We demonstrated one of the benefits of the merger for investors and that is to reduce costs which we did reporting a 22% reduction in our cash operating expenses in Q4.

The combination of strong double digit revenue growth with even stronger operating expense reduction resulted in positive EBITDA. The fourth quarter of 2008 was the first time that satellite radio was EBIDTA positive. The turn around is very dramatic. SIRIUS and XM had a loss from operations totaling $224 million in the fourth quarter of ’07 as compared to the fourth quarter of ’08 where the company had positive EBITDA of $32 million.

We expect to see this turn around continue through 2009 and beyond as we deliver not only the very obvious and immediate cost savings but also act on some of the structural ways we can change the company to deliver on the benefits of the merger for our stakeholders.

The second point I’d like to touch on is how the company managed to navigate and solve our 2009 liquidity issue. Beginning in the summer of 2008 around the same time we closed the merger, the financial markets deteriorated significantly. We obviously knew where the markets were before we closed on the merger but decided rather then walk away from the combination we should close and deal with the refinancing.

The synergies and benefits were so substantial that even though there were significant financing costs as a result of putting the companies together the alternative of not doing the merger would have been far worse for the enterprise. On September 15th when Lehman Brothers filed for bankruptcy the financial markets went from difficult to closed. SIRIUS XM needed to refinance approximately $1 billion of 2009 maturities with the first being February 15th then followed by May and December maturities.

We immediately began work on this refinancing after the merger closed. We spoke with current lenders, new potential lenders as well as numerous shareholders, private equity companies and investment bankers about ways of financing our debt. We had the promise of the benefits from merging the companies but not the actual operating results.

There was a great deal of interest but when it came time to write checks the risks, the weak economy, the very challenging auto market and the complicated SIRIUS XM balance sheet, outweighed the returns that we were willing to give these investors and lenders. In this environment when cash is king and liquidity issues are something to avoid we were not in a great position.

Rather then take the time here to review all the trials and tribulations of having to raise money in this environment I just say that we got it done. Many, many companies did not get it done. We exchanged equity for some of our debt; we extended maturities on other debt into 2010 and 2011 and raised $530 million of new money. In the process we brought in a very strong strategic investor in Liberty Media.

We would have preferred a lower coupon on our debt but we paid current market rates. Remember, GE and Goldman Sachs raised money at 10% coupon so relative to them 15% was required. Had we not accomplished this refinancing I assure you that no one involved with our enterprise would have liked the alternative. We hate to give us some of the synergies of the merger, the higher interest expense, but it was in the best interest of our shareholders to do so.

Liberty Media received 40% of the equity in the company for making their significant investment and commitment of $530 million. That means our shareholders still own the majority of our company. This is also a far better outcome then most predicted as a result of SIRIUS XM needing to deal with its liquidity issue in 2009.

Accomplishing our financing is a reflection of the confidence that very smart lenders and investors have in our company. They see a strong future and long term benefits to the enterprise as a result of the merger and executing of our business plan. Our operating results were impressive and we solved our 2009 liquidity issue.

Now my third and final point to discuss is our focus on growing the business. Two thousand nine will be a terrible year for auto sales. We obviously anticipated that in our operating plan. We assume that churn will increase because consumers are facing challenging times. Our budget also reflects the difficulties that consumer electronics retailers are having bringing customers into their stores. We have a plan that tackles all of these issues.

The driver of our financial results in the short term will be extracting all of the benefits from the merger. As you saw in the fourth quarter of ’08 results, financial discipline gets us through the short term. When auto production goes from 9 to 10 million cars produced to 12 to 13 million cars produced we will see substantial benefits. We are not budgeting that car production will return to historic levels of 16 to 17 million for years to come.

We are getting smarter about managing ARPU, conversion, and self pay churn. Our strength is that consumers love our product. Our programming and product will get even better in the future and at the same time we will continue lowering our operating costs. We have a great product, its priced right, and our competition, especially Terrestrial Radio is getting weaker and we will capitalize on this.

We have initiatives with used cars. We will have an application available shortly for iPhones. We are expanding our direct to consumer efforts and all of this will help us navigate through these difficult times. Things will get better with OEMs. I can’t predict when but the demographics of the population work to our advantage as more people will want automobiles.

We have the very best audio content offering available. We make our content available in ways that consumers want whether in the car, online, wearable, mobile devices, home audio systems and all at a very low price. We, unlike most companies, have a clear ability to cut costs dramatically in 2009 without harm to the long term business as a result of our merger.

So 2009 will be the first year of our merger. It will be our best year in our history for EBITDA and free cash flow. Exactly how good will depend upon the overall economy, the number of cars sold and how well we execute on our plan. Our past performance should provide you confidence that we will execute very well.

Thank you very much for joining us today and we’ll be happy to take a few of your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from David Bank - RBC Capital Markets

David Bank - RBC Capital Markets

Can you give some clarity as to the structure of the preferred shares that are going to Malone? Why was it structured as preferred as opposed to common? What kind of exchange ratio do we use is it based on price or just a fixed number of shares? Does it have some sort anti-dilutive provisions of always 40% of your shares?

On your last call you said I think you have 400,000 subscribers that had signed up for the Best Of package that $16.99. Can you give us greater clarity on how many subscribers are signed up today and how that’s accelerating?

Mel Karmazin

On the first question about the details of the Liberty transaction its in our 10-K and if in fact there’s anything more specific that you’d like to know I’d suggest that you follow up off line. The basic deal is that it is 40% of the company and that it is getting a 15% coupon and I could tell you that we are thrilled to have them as a partner and we believe based on everything we discovered in the market that it’s a very good deal for Liberty. They obviously did a good deal for their company and a very, very good deal for our company considering where some of you had us going.

On the subject of the packages and the tiers, we continue to grow it. We’re adding subscribers all the time. The majority of the subscribers that are choosing tiers are opting for the $16.99 package. About three quarters of them right now are opting for Best Of SIRIUS so its XM subscribers who are choosing to get the SIRIUS content.

We are hopeful to work with Major League Baseball to be able to get the games. All of our content partners so far but for Major League Baseball we have been able to work it out and we’re having discussions with Major League Baseball about getting the games and we think that will also drive more of the SIRIUS subscribers toward getting that content.

A number of people have opted for the $9.99 package but not a particularly large number of people on the mostly music and mostly talk and news. That $9.99 package is something that our call centers are going to be working with from a point of view of helping retention. Something that we’re looking forward to those numbers continuing to grow.

David Bank - RBC Capital Markets

I know that you stated that visibility particularly in the auto market is virtually impossible right now. If you go back to what you were just talking about in terms of ARPU, could you venture a guess or some sort of range of what percent of subscribers you think by the end of the year would be taking the Best Of package to give us a sense of what ARPU could head because that’s really where so much of the up side came from in the fourth quarter and we just wonder can you give us a little bit more clarity there?

Mel Karmazin

I think it’s a very fair question but the answer is that we really cannot give you any information. I get a report everyday on the numbers that we are adding. We have the information, we just think that the environment today is so difficult to predict. Wall Street and investors, and I’m not saying wrongly, just kill companies for missing numbers. It’s foolish for us where we are today with the growth that we have coming from our financial performance to throw a number out there and be optimistic.

It’s a great offering; we have a number of our automobile partners who as part of the trial program are interested in taking the Best Of because obviously it makes the experience even better. If when you buy a new car and you were able to get the Best Of your conversion rate should be higher because you’re getting better content. Being a user of Best Of should help you with our churn, you should like the service better but to give you any indication of numbers I just don’t think that we want to make a forecast of it.


Your next question comes from David Joyce - Miller Tabak & Co.

David Joyce - Miller Tabak & Co.

Liberty has made some mention of they think that perhaps your product could be bundled with DirecTV. What would your take be on that? Are you in a position to have some vision on that?

Mel Karmazin

We think that there are a number of opportunities that exist for us to be working together. Remember these are two distinct separate publicly traded companies. DirecTV which Liberty I think has a minority interest in and SIRIUS XM which Liberty has a minority interest in. We have an excellent working relationship with Chase Carey, the CEO of DirecTV. We’ve had discussions with Chase Carey over the last few days as we have with Greg Maffei of Liberty.

We think that there are opportunities right now on an arms length basis, obviously because we have different shareholder bases but we think that there are opportunities to work with lots of partners including DirecTV on ways of adding subscribers for both companies. It wouldn’t be hard to think about the fact that DirecTV might be able to have a special package to many of their subscribers to be able to get SIRIUS at an attractive price.

These are all opportunities that exist for the future in this environment it behooves us to consider every possible way that we can grow our profitable subscriber base and our revenue. David talked about the confidence that we have in the over $300 million of EBITDA and that alone in 2009 is an extraordinary turn around in the most miserable year I’ve ever experienced in my life. We sort of have that bottom line under control now we’re focused on growing our top line and if working with DirecTV or any other Liberty company is going to help us do that we’re open for it.

David Joyce - Miller Tabak & Co.

Could you go through some of the expense categories that still have the most opportunity for cutting this year?

David Frear

It’s really across the board that we only have a few months of integration behind us. Certainly every single line item is going to enjoy the benefit of more full year impact of synergies in 2009. There are some areas that we won’t get to in 2009 that’ll continue into 2010 so that things like migrating onto a single subscriber management platform and being able to conform the front ends of the system that display the call centers for the agents.

That transition really won’t take place until next year so there’ll be efficiencies associated with call center operations some will come in 2009 but more will come in 2010. The same is true with IT spending. We have programming contracts that roll up each year and come due to there’ll be an opportunity to revisit those. I think you should expect to see meaningful improvement in all of the line items in the P&L through 2009 into 2010.

Mel Karmazin

Let me give you just one example. If you take our total cash operating expenses for full year 2008 they were down 2%. If you take a look at our total cash operating expenses in the one quarter that reflects the merger they were down 22%. You could see what the impact had in the fourth quarter of our operating the combined company. We will have the next three quarters where we have not had the benefit of that synergy and we fully expect that the costs even in the fourth quarter when we have comparables will continue to go down for the reasons David said is that we’re continuing to find efficiencies to operate in.

David Joyce - Miller Tabak & Co.

If you could give some more color about the retail and that decline during the fourth quarter. Could you tell if there was more of a concern over confusion from either merged entity and the different products out there or how much of the decline would have come from the general economic pull back by the consumer?

Mel Karmazin

I’ll give you bluntly what I think the issue was. There was so much being written about our company going bankrupt and all of those doom and gloom stories that I believe, I can’t quantify it for you that had a tremendous impact on the consumer and their interest in buying the product.

Jim Meyer

I fully agree with Mel. It was a combination of three things. One, certainly the doom and gloom associated with the financial condition and the amount of how public that was dampened consumer confidence. While I’ll note though it did not dampen our churn which I think is a great sign of consumers who have our service how much they like it.

Second, the Circuit City bankruptcy really did hurt us. Circuit City was a very, very strong supporter of satellite radio and where those shoppers went particularly if they went to more mass merchant kind of distribution has been less of a supporter in satellite radio and that’s something we’re going to address in the second half of this year.

Finally, overall store traffic in the fourth quarter was poor. There’s no question about it and frankly has not improved in the short term.


Your next question comes from Tuna Amobi - Standard & Poor's

Tuna Amobi - Standard & Poor's

One of the questions that I’ve encountered is the idea that you had an alternative offer on the table from EchoStar and Dish and one of those questions is what was the consideration in your determination that the Liberty offer actually is better for shareholders if you can put some color on that that would be helpful.

Mel Karmazin

We had a lot of companies that had expressed an interest in doing transaction with us. Our Board reviewed what options were available to us; they were concerned about the entire enterprise when they were making their decision at that point. It was obviously our shareholders but it was obviously also the entire enterprise. After many conversations, an awful lot of deliberations our advisors and our Board unanimously believed that doing the transaction with Liberty was in the enterprises best interest and we’re very pleased that we got it done.

Tuna Amobi - Standard & Poor's

Are there any specifics you can put around that? Those considerations that would help us to understand that position a little better?

Mel Karmazin

No, I don’t think that there’s anything that you need to understand better because I’m not sure you understand, unless you have some specifics about proposals that I’m not aware of. If you’re asking my why I took ‘a’ over ‘b’ if I understand what you think ‘a’ was versus ‘b’ is I’m happy to consider it. We had only one interest and that interest is in doing what was in the enterprises best interest and Liberty clearly had a proposal that was in that best interest and we were able to close it.

Tuna Amobi - Standard & Poor's

When you said that you are discontinuing your guidance which is understandable and yet you reconfirmed your adjusted EBITDA guidance for 2009 so the question here is are you implicitly withdrawing the former long term guidance for subscriber growth that you had provided which I think now implies for 2009 that you were going to add 1.6 million subscribers which is looking optimistic or were you merely stating that those numbers are still current but that you were disclaiming any responsibility for updating them. Which is it?

David Frear

We’re withdrawing guidance for everything other than the EBITDA statement.

Tuna Amobi - Standard & Poor's

Which the EBITDA remained the same but are you still expecting 1.6 million subscribers which I thought was predicated on?

David Frear

We are no longer providing any guidance with respect to revenues and subscribers for 2009 and for any future year. The only guidance we are providing to investors is that we will exceed $300 million in EBITDA for 2009.

Mel Karmazin

That is not the same as it was. We originally said we would do approximately $300 million and now what we believe we will do is over $300 million in EBITDA.


Your next question comes from Joe Stauff - CRT Capital

Joe Stauff - CRT Capital

Restricted cash at $141 million, $100 million at least as of the end of the year was escrow from Major League Baseball. Can you help me understand that a little bit more? You were able to pay that out and therefore satisfy the Major League Baseball payments for 2009 and 2010?

David Frear

$120 million of the restricted cash was for the benefit of Major League Baseball and about $20 million for the benefit of NASCAR. Those funds have been released to those organizations in satisfaction of 2009 and in the case of baseball 2010 obligations under the contract.

Joe Stauff - CRT Capital

You’re not required then to refund escrow for Major League Baseball in particular?

David Frear

No. We are not.

Joe Stauff - CRT Capital

About CapEx this year, obviously it’s kind of a moving target with respect to how non-aggressive you want to be especially in this environment. Any guidance you can help us with, with respect to your CapEx possible this year or next year?

David Frear

The only guidance we’re providing is to exceed $300 million in EBITDA for this year.

Joe Stauff - CRT Capital

The Loral un-drawn credit revolver, I guess its about $80 million at this point, you’re only allowed to obviously draw down on that to the extent you’re going to take those proceeds and invest it obviously in your CapEx, is that accurate?

David Frear

There are a variety of drawing conditions and use of proceeds to the Loral Credit Agreement. It tends to be for the purposes of satellite payments, construction payments.

Joe Stauff - CRT Capital

You had said something in your introductory remarks about the $8.99 plan or $6.99 plan in terms of subscriber’s ability to lock that in. Could you reiterate that or clarify my understanding? By locking in ‘x’ number of subscribers that would help your working capital, is that accurate?

David Frear

We have a multi-subscribers price for your second, third, fourth subscription you can pay $6.99 a month for it. In late January we’ve started informing the subscriber base that we intended on March 11th to increase the price of that by $2.00 a month to $8.99. We gave them the opportunity to sign up for longer term contract, I believe at any time prior to March 30th to lock in the old price. We’ve had a very good response rate from the subscribers, quite a number of them are coming in and signing up for longer term plans at the old price. Because they prepay that in advance it does give us a working capital benefit.

Joe Stauff - CRT Capital

To be clear, you’re unable to raise rate on the $6.95, $12.95 and $16.95 plans but this one I guess is the Family Plan?

David Frear

On the multi-subscriber plans we can raise prices there that if we wanted to we haven’t chosen to but as you know we give discounts for our long term plans, one year, two year, three year, lifetime. We could increase prices on those if we wanted to. At this point in time what we’ve gone forward with is an increase in the multi-subscriber price.

Mel Karmazin

What we’ve committed to the FCC was that for three years we would not raise our a la carte price of $6.99 nor would we raise the $12.95 price for that period of three years.


Your next question comes from Ned Zachar – KLS

Ned Zachar – KLS

Somebody mentioned the penetration figure 52% versus the 44% figure that’s in the press release. Can someone clarify what the difference is between those two figures?

Jim Meyer

The 44% is the average for the year. My comment of 52% is what the going rate was as we exited 2008 which I think is a more relative number for predicting 2009.

Ned Zachar – KLS

That was for all three months?

Jim Meyer

I don’t have the exact number on hand I just know that December was 52%.


Your last question comes from Barton Crockett – Lazard Capital

Barton Crockett – Lazard Capital

I was wondering if you could talk a little bit about an overview of what happened to your business trends with conversion rate and what churned as we went through the past four months whether there was any particular changes because we obviously know the consumer was really affected by the news flow and just the trauma of everything that was happening. I’m wondering how sensitive your business was in December and November to these events and then what’s happened since then in January and February.

Jim Meyer

It’s a tough question to answer because we’ve never seen an economy like this, at least in the history of our business satellite radio and certainly for 30 years or longer. There’s no doubt in my mind, I’ve been in consumer business for a long time that there was definitely a tank. We’ve worked hard. One of the things I’m so excited about is getting the refinancing done is that we can now assure consumers of our future and being on steady financial ground. That bodes well for us in the second quarter and moving forward.

There certain were headwinds associated with both the confusion of putting the two companies together and the overall unbelievable amount of news and press that we’ve seen really in the fourth quarter and continuing in January and February on the financial condition and refinancing of our balance sheet.

Mel Karmazin

Particularly sensitive for us because people prepay their subscriptions in large part. The idea of all of the noise in the market certainly when you’re asking somebody to prepay and buy a year in advance or something like that obviously has an impact.

Wrapping it up, all I’d like to tell you all is that this is a very difficult period for all of us. We are thrilled with the outcome. As I said in my remarks I wish the coupon was lower and I wish that the stock price was better obviously, speaking as a large shareholder myself.

Now that we have gotten that part of it behind us we are laser like focused for growing our business and it’s a good cushion because there aren’t many companies that are going to be able to show going from a negative EBITDA in 2008 full year to over $300 million of positive EBITDA in 2009. We’re excited about this year even though there are a lot of issues that we have around us. Appreciate you all joining us and looking forward to staying in touch with you.


That does conclude today’s teleconference. We thank you all for your participation. Have a great day.

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