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Executives

William Prip – SVP, Treasurer, Investor Relations

Mel Karmazin – CEO

David Frear – EVP and CFO

Jim Meyer – President, Operations and Sales

Analysts

Barton Crockett – Lazard Capital Markets

Leah Pilla – Knight Capital

Lev Polinsky – JPMorgan

David Bieber – Morgan Stanley

Murray Arenson – BGB Securities

Martin Pyykkonen – Janco

Jim Goss – Barrington

Matthew Harrigan – Wunderlich Securities

Sirius XM Radio Inc. (SIRI) Q2 2010 Earnings Call Transcript August 4, 2010 8:00 AM ET

Operator

Good day everyone. And welcome to SIRIUS XM Radio second quarter 2010 earnings conference call. Today's conference is being recorded. (Operator Instructions)

And now, at this time, I would like to turn the conference over to Mr. William Prip, Senior Vice President, Treasurer, Investor Relations. Mr. Prip, please go ahead.

William Prip

Thank you, Lisa. 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 EVP and CFO, they will review SIRIUS XM's second quarter 2010 financial results. At the conclusion of our 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 also 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 management’s 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 adjusted results. And all discussions of adjusted results excluding the fact that stock-based compensation concerning of timing adjustments. Financial measures and metrics previously reported pro forma have been renamed adjusted.

I’ll now hand the call over to Mel Karmazin.

Mel Karmazin

Thanks, Will. Good morning, everyone. Today we announced financial results that compliment the very strong subscriber metrics we previously released for the second. We are very pleased with our financial performance, which is a continuation of the momentum of the past few quarters.

Our operational and financial metrics demonstrate the strength of our business model. We are taking full advantage of the marginally improving economy and current growth being experienced by the auto sector.

Our adjusted revenues were up 16% versus the same quarter last year. That is dramatic top line growth resulting in the second quarter adjusted revenue of over $700 million, which is a record revenue quarter for the company.

By continuing to focus on costs, we increased our adjusted EBITDA by 17%. Our total cash operating expenses would have been up only 2% if we exclude the subscriber acquisition costs related to adding almost 800,000 more subscribers than the second quarter of 2009, revenue share and royalty costs, which grow as our revenue grows and our discretionary increase in core advertising.

Most impressively our free cash flow jumped to $108 billion in the quarter, up from $13 million a year ago. These stunning financial results when married to the 580,000 net subscriber additions, our 47% conversion rate and 1.8% self-paid churn rate clearly show we are growing our business. We are not just growing but we are delivering a profitable (Technical Difficulty).

Our current contact line up is our strongest ever and we are doing it with lower costs than a year ago. That is a great accomplishment that was enabled by the merger two years ago.

I want to briefly reflect on the last couple of years. In July 2008, we closed the merger. So the first half of the year, we were in regulatory limbo. Concurrent with the closing of the merger in July, we had a refinancing that needed today be done and there was an additional overhang for some additional debt coming due following the financial markets collapse in the fall of 2008.

Operationally, we integrated the two companies very effectively and capturing significant synergies, but the cost of the refinancing issues, 2008 was a mixed year for us. In 2009, the combination of the overall economy, General Motors and Chrysler bankruptcies and you will recall that Chrysler did not produce any vehicles while in bankruptcy and our refinancing needs made the first half of 2009 very difficult to demonstrate the benefits of our merger for our shareholders.

We began to show what we can do in the second half of 2009. So 2010 will be our first full year where investors will get a real indication of how good our business can be. We offer up our second quarter performance as a preview of that.

Our strong revenue performance is a reflection of our unique business model, which is principally driven by subscription revenue. We are able to monetize our subscribers better than terrestrial radio and numerous internet audio services are able to monetize their audience.

In addition, to the 98% of our revenue that comes from subscribers, we have a secondary revenue stream from advertising. As a result of adding more advertisers we delivered 25% more advertising revenue in the second quarter, as compared today the second quarter of 2009.

We have a stable contribution margin of approximately 70%. So as we scale subscribers and revenue, our adjusted EBITDA margin will improve significantly in the years ahead. At maturity, whenever that is, we anticipate an operating margin of over 35%, dramatically up from the approximately 20% margin today.

We are also pleased to once again raise guidance for the full year of 2010. We now expect adjusted revenue and free cash flow to approach $2.8 billion and $150 million, respectively. We are very bullish about our company's performance, but are operating in an environment where the outlook for SAR is unclear as to how much it will improve and what the overall economy in the U.S. will look like, so we are being prudently cautious.

Subscribers will grow by 1.1 million and we will end 2010 with a record number of subscribers. This is most impressive when you consider all the other choices the consumer has for audio entertainment. Our top line will grow over 10% to a record level. Our adjusted EBITDA for the year will grow approximately 25% and will also end at a record level. Our adjusted EBITDA will be over $700 million better than it was just two years ago.

As you can tell I feel really good about our future prospects. We are confident that our 60 plus percent penetration into new cars will continue for the years to come. We believe SAR will increase in years ahead and we are making progress in previously owned vehicles.

We – subscribers in approximately 15% of the households in the U.S, free radio is in 100%, cable and satellite television is in 90%. We know we can penetrate significantly more households than we have today. We are very excited about the large upside we have for growing our business in the next few years.

Sirius XM is very committed to continue to innovate. Satellite radio was a great example of that innovation and satellite radio 2.0 where we believe take it to a new level. While we have been reducing costs and making the organization more efficient. We continue to invest in R&D.

Our next generation of satellite radios are expected to offer significantly more choices for the consumer and contain functionality that does not exist today in our radios. There will not be any significant increase in our costs, to bring these radios to consumers and we expect to have the first satellite radio 2.0 products in retail stores by the holiday season in the fourth quarter of 2011.

We will obviously be rolling this out to OEMs, as soon as they're able to incorporate it into their production schedule. We are very excited about this new opportunity, so stay tune. Focusing on the company's capital structure, we have taken significant steps in the past year to improve our maturity profile.

Our liquidity position is the best it has ever been. We have no debt coming due this year, a modest 230 million due next October and then nothing due in 2012. In the meantime, we will be building cash from our operations. I’m confident the company does not face any material near to medium-term refinancing risks.

Our strong operating performance has resulted in lower borrowing costs. In February of 2009, we were borrowing money at 15% secured plus giving the lender significant warrants in the company. In June of '09, the cost was over 11% secured debt. In August of '09, our debt cost about 10% secured and in our most recent borrowing, March of this year it came down to 8.75% unsecured. What a difference a year makes.

Moreover our growth trajectory combined with the expectation of paying down debt overtime through cash generation will dramatically improve our leverage ratio in the next handful of years. This should improve our credit ratings and lower our borrowing costs.

In long run our higher adjusted EBITDA plus lower interest expense and lower capital expenditures as we enter a long period of not spending for satellites after 2011 will result in very significant free cash flow growth.

As I step back from the details of our quarterly results and I think generally about the next several years, I can't help but be very optimistic about our future. We offer subscribers a great product at a great price, which has translated into a fantastic value proposition to consumers. So we look forward, we are confident that the combination of great content, a strong business model and increasing financial flexibility driven by free cash flow growth will collectively drive long-term shareholder value.

And now, let me turn the call over to David to go through some more information for you.

David Frear

Thanks Mel. We enjoyed a nice boost from the 17% improvement in SAR to 11.2 million vehicles from 2009's first half of 9.5 million vehicles. But more than half of the increase in SAR was related to fleet volumes, the increase in consumer sales is still healthy but more modest 9% in the first half. This helped drive total subscriber additions to 1.1 million in the last year bringing total subs over 19.5 million.

We finished the quarter with more than $4.2 million paid and unpaid trials in our funnel and we’re just under $16.1 self-paid subscribers. This growth in self-paid subscribers more than 650,000 is great. In the face of continuing economic uncertainty, seeing self-paid churn rates drop and conversion rates improve is testimony to the attractive value proposition of our service and great working relationships with our automotive partners.

SIRIUS XM had record revenues in the quarter in our best ad revenue performance since late 2008. Our improvement increased by $1.15 to $11.81 as the full effect of various price actions taken in 2009 have worked away through the subscriber based and as we have improved our take of the national advertising market.

Nearly every operating expense line in the P&L is down as a percent of revenue from 2009. Our contribution margin expanded nearly 2 points over the prior year from 69.8% to 71.7%. As a result, pre-tax adjusted EBITDA came in at a record 38.9% of revenue, a highest ever and an improvement of more than 4 points over 2009. The $64 million growth in pre-tax adjusted EBITDA over 2009 represented an improvement of $0.65 for each dollar of revenue growth.

For the seventh straight quarter, programming and content expense decline for the prior year as we continue to renew, replace and expand our unparalleled content offering on a cost effective basis.

For the sixth straight quarter, customer service and billing expenses decline from the prior year, as we continue to seek efficiencies in serving our growing base of customers. Engineering also declined cost also decline from the prior year. G&A cost declined to 7.2% of revenue from 7.5% in the prior year, as increased litigation costs offset other cost reduction initiatives.

Sales and marketing costs increased slightly to 8.1% of revenue in part due to increased cooperative marketing spending with our OEM partners. Subscriber acquisition costs are higher than 2009, as a result of significant increase in automotive sales. Growth ads are up 46% over 2009, in fact per gross ad increased slightly from $57 to $59.

In the depth of 2009's automotive crisis, SAC per growth ad in the prior year, benefited from a draw down of automotive inventories as OEMs severely curtailed or stopped production for a period of time.

While current automotive sales remain well below prerecession level, they are up substantially from 2009 and SAC per gross ad is effectively burdened with the rebuild of auto inventory.

All if all, adjusted EBITDA came in at 21.9% of revenue despite absorbing a more than 5 percentage point increase in SAC. Free cash flow is a percentage of revenue, free cash flow expanded to $108 million from $13 million in the second quarter of 2009, the sharp increase of adjusted EBITDA combined with an increase in deferred revenue from increase in subscribers with increased in ARPU, increases in trade payables with the growth of the automotive sales more than offset a $14 million increase in capital expenditures primarily associated with our satellite programs.

The launch of the XM-5 satellite is expected to take place this October, while the launch of SIRIUS 6 is expected in the fourth quarter of 2011. As a reminder, following the launch of SIRIUS we do not anticipate commencing a new satellite build for several years. In the quarter, we recently completed the early call of $114 million of XM 10% senior PIK notes and have just called the $5 million of – that's a small issue outstanding of XM 9 in three quarter percent dealt.

Our leverage ratio is now approximately 4.6 times to June 30th with our expected growth in EBITDA and declining capital expenditures we will continue to look for opportunistic ways to improve our balance sheet.

Thanks for your time and operator, let open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Barton Crockett with Lazard Capital Markets. Please go ahead.

Barton Crockett – Lazard Capital Markets

Thank you for taking the question. And a couple of questions if I could. First, I was wondering if you could talk a little bit about what's happening in the retail market. You guys had fewer net less – a lower net loss than retail sub in this quarter, you had really in any quarter since 2008. And I was wondering if you could talk about what is driven the deceleration in the declines there, if it’s perhaps tie to some of your internet subscription offering. And then also I wanted to clarify, you are talking about the new generation radio coming out. I just want to clarify, you’re saying that comes out of retail this Christmas and later in cars and if there's any way to elaborate on thematically what's going to be important in this next generation product?

Mel Karmazin

So, the aftermarket radio will be in retail stores hopefully for the fourth quarter of 2011. And as I mentioned, it’s going to provide for us to have more capacity, which would mean more channels and more offering as well as more functionality as well. Beyond that, we’re currently in the process of talking to our OEM partners and retail partners about product, so I really don’t want to go into anymore detail prior to us discussing it with them.

Regarding the aftermarket, we continue to believe that it is an important part of our business. We certainly have not by any means given up on that channel of distribution. As we add more OEM subscribers, we believe that there's an opportunity for us to continue to grow that business as well, as people want to have their radio in different positions. So I don't think there's anything fundamental we continue need to add online subscribers as well. You know, from our various offerings with both RIM and apple, as well as Android. So, we think that it’s fair, we’d like to see grow. We think that 2.0 will be an opportunity for us to demonstrate more effectively. Do you have anything to add on that?

David Frear

No, I just, the only comment I would make is also we were very encouraged in the quarter that for the first time in a lot of quarters in the aftermarket, we did see an improvement over the prior period. And so, I’m cautiously optimistic that the things are turning, but I fully agree with Mel that the biggest driver, I believe, of return growth for any kind of magnitude is going to be SIRIUS XM 2.0, the redefine of the features that makes it unique.

Barton Crockett – Lazard Capital Markets

Okay. Great. And then if I could ask one other question. Have you guys have raised your revenue guidance but you have not raised your EBITDA guidance. I was wondering if you can talk a little bit about the thinking behind that?

Jim Meyer

Barton, it’s, very sensitive to what you’re assuming for, the shape of the auto recovery, alright. And so there – when you listen to the OEMs as we talk about results, that Mel always comment solid in the important call, you really had a wide range of possible outcomes for SAR in the second half and certainly going into 2011. So the second half SAC is going to be significantly impacted by what the auto company built for in 2011, as opposed to really the sales level, in the second half. So, you know, in there, we’ve got, provision that assumes that this sort of relatively weak consumer growth that underpins automotive sales today is going to be picking up in 2011 and we’ve got to make sure that there are provisions for the subscriber acquisition costs to go along with that.

Barton Crockett – Lazard Capital Markets

Okay. Great. That helps. Thank you.

Operator

Our next question comes from with Leah Pilla with Knight Capital. Please go ahead.

Leah Pilla – Knight Capital

Good morning. I guess my first question was, kind of, similar to the previous question in terms of why the EBITDA guidance was left unchanged, given the margins that you were able to achieve in the first half and the fact that you’re guiding for subscriber growth in the second half of the year that, that’s you know less than the first half. And that should kind of help you on the SAC costs, but I guess you sort of, explained it a little bit by the fact that it doesn't necessarily depend on sales, but also builds. But if you could provide a little bit more color around that. And then just my second question is, it seems like revenue share and royalties as a percentage of revenues if you exclude other revenues is up a little bit this quarter and I was wondering if you can provide a little more color around that?

Mel Karmazin

Okay. Again on the EBITDA, to get to the net growth, that is in the guidance, the gross ads are going – it have to be pretty healthy, because with – we have got 450,000 more paid promotional trials at the end of Q2 this year than we had in the prior year. And so what that means is that you’re going to have more promotional in the VX in the second half of the year. So the gross ads are going have to be higher which is going to drive more SAC, so that that also helps to explain it. On revenue share and royalties, that the royalty rate for music increases year-to-year, so that’s going have a sort of constant upward, upward pressure. The mix of business continues to tilt toward our automotive partners, right, so on the retail side of our revenues; we don't have a revenue share to pay. So between rising music royalties, year-to-year and then an increase in mixed OEM revenues you should expect to see that that percentage taking up over time.

David Frear

And it’s nothing in any way shape or form defensive about our EBITDA guidance, okay. You know, you take a look at it, it looks to be a little bit over 25% this year and that in spite of having very significant SAC growth for year and for the rest of the year. As I said in my opening comments, we think that it would be prudent for our company to continue to be cautiously, to look at these things and not be running ahead of ourselves. And we would be very happy and you can be unhappy but we be happy is the fact we’re able to exceed our guidance when we deliver our third and fourth quarters.

Leah Pilla – Knight Capital

Thank you very much.

Operator

(Operator Instructions) We’ll take our next question from Lev Polinsky with JPMorgan. Please go ahead.

Lev Polinsky – JPMorgan

Yes. Hi. Thank you for taking my question. One question, I was wondering, if you could give any updates on your initiatives to take advantage of sort of the fairly large install base of radios out there that are not currently your customers? I think this quarter; you gave some people a free listen so maybe, between that and the used car stream, any sort of update? And are you able to put any kind of numbers on it, maybe give us some indication of those kinds of activations are up some range compared to the year ago quarter just so that we have some idea of how that’s progressing. Thank you very much.

Mel Karmazin

So we’re clearly are making progress as we mentioned in the opening remarks. We are not prepared to give any numbers on it. That’s something that we certainly are working on breaking out so that in the few future, we’ll be able to distribute of more and more information. But I’m going to let Jim talk to you a little bit more about some of the progress we are seeing.

Jim Meyer

So first of all, on the used car side, we think of completed signed deals and cert fived pre-own with virtually every car maker. There are a few that we were in the process of completing now we’ll have that channel of distribution I think locked up solidly here as we kind of move into 2011. We’ve also made progress non on the noncertified are with at least two of our key OEM partners and we’re finding that data to be very frugal in term of identifying accurately second owners and being able to speak to them. We need to speak to them more timely then we are today, but we’re working on that. And then, finally we’re working with a variety of partners including insurance companies to acquire, this is all about getting accurate, name and address to go with a VIN so that we know it’s a second owner. As we do that I think we’re making progress. We certainly have a lot of work to do and I don't think we’re ready to disclose any numbers there. In terms of the free trial, we’re very pleased with the second quarter, I think this time in the second quarter we implemented probably as well as we have since we’ve merged the companies and by that I mean, we opened up the free trial, but along with that I think we had a very effective communication strategy between email and mail to a variety of customers and we were real pleased with so many customers we were able to add in the second quarter with that initiative.

Lev Polinsky – JPMorgan

Great. Thank you very much.

Jim Meyer

Clearly – I am so sorry. Clearly, we’re adding more customers there than we were a year ago.

Lev Polinsky – JPMorgan

Thank you.

Operator

Our next question comes from David Bieber with Morgan Stanley. Please go ahead.

David Bieber – Morgan Stanley

Morning, guys. Thank you for taking my question. I had one on churn. We’ve talked about the strong subscriber additions and clearly the OEM channel is doing very well. And on the gross ad side, we’re clearly seeing some shrink for our improves are, but I was just curious if you can give us any color around the improvement in churn, it seem like despite the fact you guys said, many more than a million subs in the quarter, deactivations were actually down pretty substantially. Anything change there in terms of retention efforts or other ways of reducing churn that you guys can…?

Mel Karmazin

Yeah. And one of the benefits, we talked about the merger, was that we would implement best practices and certainly in working with both the XM call centers and the SIRIUS call centers, we’ve activate, it’s a lot of blocking and tackling. We got a full line better in it, Jim is responsible for that areas as well. So, let me turn it over to Jim, to give you small color on it.

Jim Meyer

Yeah. I couldn't agree more with Mel. The one thing we’ve learned is that it’s, there's no one big answer that gives you a big boost and so, we’re working really, really hard on just the basics and I think by being able to integrate the cultures, is kind of take the best of what both companies is doing has certainly given us a boost. I think David may want to comment. You also need to be careful on kind of the timing of the promotional churn is as David mentioned earlier, in his comments which we benefited from, in the second quarter that, obviously in the second half of the year we will catch up with this.

Mel Karmazin

If you look at how the promotional deactivation year-on-year, they were down in the first quarter and down in the second quarter by about 140,000 and down in the second quarter by about 70,000, which is largely related to just the lag effect of the falloff in auto sales. All right, so. We absolutely had improvements in the underlying conversion rate that was part of the change, but just having – coming off a lower period of auto sales was promotional DX,

You look at this healthy side and you have substantial improvement. And those are real changes in how the consumer is feeling that things got pretty bleak, coming out of the '08 into the first part of '09 and while everyone is cautious about the consumer they're clearly feeling better and we are seeing that in our results.

Jim Meyer

And not to take away anything from what was said. I think what drives the churn also has been the job that Scott and the programming people have done to just continuously upgrade our content offering. And by offering new channels and by doing a better job of communicating to people and letting them know about all of the great things there here on the service, we think has also moved the needle on churn as well.

David Bieber – Morgan Stanley

Great. Thank you very much.

Operator

(Operator Instructions). We would like to remind everyone to ask one or two questions. Our next question comes from Murray Arenson with BGB Securities. Please go ahead.

Murray Arenson – BGB Securities

Thank you and good morning. So I do have two questions if I may. One is, David, you mentioned the impact or you mentioned fleet volumes as a component of overall SAR. And I wondered if you talk about what that means to you as you’re looking at the trends there. And secondly, I wondered if you say a few words about long-term pricing strategy and I have a cup a couple of things in mind. One is additional features that you’ve alluded to and second is additional flexibility that you have in pricing, as you head into next year.

Mel Karmazin

So let me do the second one. This is Mel, okay. So we really have no comment on any pricing changes. We obviously are growing our business, we are growing our ARPU. We expect to continue to add subscribers and we continue to also grow ARPU. As you know we are currently constrained by the FCC order where we agree to not increase the basic pricing for a period of three years. That goes throughout August of 2011. We believe that when the SEC looks at all of the choice that is are available in audio entertainment, that they would see no reason to further restrain us, but we will have to wait to see what happens there. And then we will take a look at what our decision will be on any changes that we want to make going forward in offering additional pricing alternatives.

David Frear

Mel, you are right. We are going to continue to try and sale new services to customers. And so our telematics and entertainment initiatives will continue to do that. We want to – like everybody in the subscription management business, we want to drive better yield per customer out of that and so we have got all of these, different services that Jim and Scott will focus on selling in and we believe we will be able to and also drive ARPU up by driving up additional services.

For fleet volumes – fleet for the most part – don’t have a conversion rate. Right, so, for us what does fleet volume mean to us? Certainly, it is nice to have, are scrolling inputs and more colors out there and fielding more trials of our service, but there isn't, we convert those at the same rate we do the conversion of the consumer products. So for the most part, we focus on how consumer sales are doing. They were up 9% in the first half.

We are coming into a second half, where the comparisons are going to be very tough to the prior year, that cash for clunkers a year ago was largely a consumer, not a fleet offering. And so I think that from our perspective, July was an encouraging sign. It was nice to see, SAR up 3% in the month over the prior year. But as we go through the rest of the quarter, it is going be very tough comparisons.

Murray Arenson – BGB Securities

Great. Thank you.

Operator

Our next question comes from Martin Pyykkonen with Janco. Please go ahead.

Martin Pyykkonen – Janco

On free cash flow, two things kind of interrelated, with regard to Q3 that we are in Q4, anything unusual timing line that we should factored and modeling either, positive or negative in terms of influence. And then even in broad-brush, consuming the CapEx of what you have beyond 2011, regarding the satellite situation which is obviously positive and the general EBITDA trend, which has broad-brush and free cash flow conversion for next year and even towards 2012, just going directionally where that might go?

Mel Karmazin

Well, we expect also – First of all for the second half of the year, off top of my head, the only thing I can think of that that you should remember that launch in October. The insurance premium associated with launches, they will be paid in the days coming into the launch and actually it kind of depends on the exact date of the launch, whether the premium is going hit the third or the fourth quarter. I don't know it’s coming here today, but it will be pretty close to around October first.

So I think if you really see the only thing we’ve got in CapEx, is going to be large and lumpy that could, that you should think about. In term of free cash flow growth going forward, setting aside the growth that comes from declining capital expenditures, as I think everybody knows at this point, as our business grows that we don't have to invest working capital, that on average our subscriber has an advanced seven or eight months.

So you should expect in the modeling, a continuation of cash flow being driven from expansion of deferred revenue as the business continues to grow. So in addition to the cash flow that generated in the P&L, we generally are generating cash flow from working capital as well.

David Frear

And we expect that to continue.

Martin Pyykkonen – Janco

Okay. Thanks.

Operator

Our next question comes from Jim Goss with Barrington. Please go ahead.

Jim Goss – Barrington

Thank you. I will focus on the conversion rate a little bit. I think there’s positive ticking up in that conversion rate has been very impressive and I am wondering if you are still thinking in terms of 65% to 70%, as the maximum availability in terms of name plates and what is it right now? And how does – You just talked about – maybe the timing of promotional churn being good in the second quart and it might catch up with you a little bit in the second half. Is that a seasonal issue or just the auto flow – auto sales flow issue?

Mel Karmazin

Let me take a shot at the first one. This is Mel. Obviously, it varies by car company and model vehicle. I mean there are some vehicles that we want to be standard in and be in every single one of them. And then there are other vehicles that our experience indicates that they don't convert as well and are not as profitable for us to do.

We were just looking to drive subscribers, if that were the only metric then we would continue to increase the penetration, but since we are focused on profitable growth, we really want to hit that sweet spot as being in the right vehicles. Currently, our thinking is that number will be in the low 60s. Again, reflecting some car companies that will have substantially higher than that.

And we continue to review and we continue to work with our auto partners, about that and they have expressed great flexibility on that subject as well. Both in increasing penetration where it is appropriate and working with us in winding down some of the models where we just don't feel we want to be in. So low 60s I think is where you would like to be thinking about it in the next few years, okay.

David Frear

So on the promotional churn, if you ran back through our quarters and kind of looked at what we had previously reported is paid promotional trials and also the promotional deactivations. The pattern that you will see is that roughly around the second quarter of '08, right, which was when the auto sales started to fall apart we reached the peak and paid promotional trials.

And about six months after that, in fourth quarter of 2008, we reached a peak in terms of promotional deactivations but you have this sort of couple of quarter lag that goes on. If you kind of follow the promotional subscriptions across, they actually hit their low right about the middle. They fell from $3.7 million to just under $3 million by the middle of ’09. And so which you’ll also notice is that the proportional deactivations are they are climbing along the way.

Well, with the recovery in automotive sales we are now back up to little bit of more than $3.4 million pay trials. Again, as you follow that curve within 6 months or so lag that you’re going to find an increasing number of promotional deactivations going forward. So if you just follow the quarterly numbers I know that you’ve all got it, they will pick up that pattern in about a six month lag.

Jim Goss – Barrington

Thanks very much.

Operator

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

Matthew Harrigan – Wunderlich Securities

Thank you. Can you see there very much slogs in the conversion rate for individual OEMs, as a result of or efficacy of the marketing or possibly different demographics among car owners responding to the economy differently, or do you think at that the price value proposition is so good or compelling that you just get a lot of momentum across the board and everything just kind of moves as pack.

David Frear

We see more of the latter, but certainly there are new launches. You could get a vehicle that's a very low priced vehicle that somebody spends an awful lot of time on the road and in their car and finds radio as important necessity, as maybe the steering wheels are. So even though that vehicle was a low priced vehicle, that customer is sort of locked into us because satellite radio is really important to them.

So we get great amounts of data, when you absolutely look at it, we are constantly doing research on it. And sitting there and making sure that we are, again, allocating our resources where we should and we are inclining to think that more people, as time goes on and as we continue to improve our content offering, want satellite radio as you can see from our subscriber growth are having a whole lot more choices out there than have ever been for the consumer.

We are going to be very close to $20 million subscribers from the year end and it’s all coming from people wanting to have the service. And it is not just the early adopters. It’s people who were buying less expensive vehicles as well.

Matthew Harrigan – Wunderlich Securities

Thank you.

Operator

We will take our final question, a follow-up from Leah Pilla of Knight Capital. Please go ahead.

Leah Pilla – Knight Capital

Thank you for taking another question. I just wanted to see if you had an update on potentially collapsing the capital structure? And then secondly I know you have pretty manageable debt maturity profile over the next two and a half years, but wondering about your strategy to adjust, to address your 2013 maturities? Or at least refinance at least a portion of those given the current attractive rates out there?

Mel Karmazin

Last question first, we do feel like the company’s got a pretty robust cash flow profile going forward, that we will look to retire debt as early as we feel is prudent and we want to be opportunistic about doing it. I think that given the cash flow and profile of the company and seeing what the rates are out there in marketplace, I don't think that there's any fundamental need for the company to raise capital. So if we could raise capital at attractive rates and deploy that capital in a way that makes sense for our shareholders we will certainly look to do that.

In term of collapsing the capital structure, we are clearly inside of all the tests and we are able to do that when we want. I think as we’ve mentioned before, that we want to make sure that we eventually will do it. We want to make sure there are no adverse contractual outcomes from doing so. So we are just working our way through where there are awful lot of different contracts in the company to make sure that there aren't any unintended efforts consequence.

David Frear

There is one more question from inside the room. Scott Greenstein asked what about how it’s done, so I thought I would take the opportunity to answer that one. We hope that prior to the third quarter earnings call, we will be able to have an announcement as to what is going on with Howard. So with that, I think it wraps up all of the questions.

Mel Karmazin

Thanks, everyone.

Operator

And that concludes today's teleconference. Thank you for dialing in.

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Source: Sirius XM Radio Inc. Q2 2010 Earnings Call Transcript
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