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Here’s the entire text of the Q&A from XM Satellite Radio’s (ticker: XMSR) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator

Operator Instructions Our first question comes from the line of Jonathan Jacoby.

Q - Jonathan Jacoby

Good morning. Two real questions here and then maybe a follow-up. The first is on the MP3 product delay. Can you go through the core issue, and is any of this related to the RIAA and their recent sort of posturing for incremental fees? The second question on the total churn number, core churn very nice at 1.4%. How should we look at this going forward? Is it related to the conversion rate? Obviously, earlier this year you had a step up in sort of pull-forward auto OEM, promo subscribers. Or is it perhaps more related to the April rate hike? And then lastly, should we expect that 49.99 is the bottom price in the fourth quarter for retail product? Is there a chance that product pricing goes below that level?

A - Hugh Panero

I think I will answer the first part of the question and then, Steve, you'll take the second part. On the Samsung devices, we had always planned to have significant volume of the device in the first quarter. We were trying to get some of the devices in the fourth quarter, but our numbers and our projections for the year did not encompass having that to be any significant portion of our subscriber growth. With regards to the other issues, Steve, do you want to address those?

A - Steve Cook

Sure. I think you had a question about the conversion rates, and we were at about 58% for the second quarter. That ticked down to 56% for this quarter. Remember, this is the first quarter where we are seeing the full impact of the rate increase, because we measure conversion rates 90 days after the trial period. So, we lost a couple of points. I think over the next couple of quarters, you will see that tick back up as we refine our programs. So, I'm not too concerned about that. And then I think you asked about the $49 a price floor that we've got out there for the Roady now. I'd really rather not comment on some of the upcoming price moves we might make, but we feel really good about our product lineup and the prospects for fourth quarter.

A - Gary Parsons

I think the final question was the 1.4% churn. And there, obviously, that has been remarkably stable over three quarters in a row. And frankly, with the rate increase in the middle of that, that was, obviously, quite heartening. But a lot of people locked in their one year or longer year things at that timeframe. So, that keeps it stable just for that basis.

Q - Jonathan Jacoby

Great, thank you so much.

Operator

Your next question comes from the line of Robert Peck.

Q - Robert Peck

Hey guys congratulations on another good quarter. I wanted to focus quickly on the OEM side for a second. The guidance coming out yesterday of GM doing 1.55 for the upcoming year, a million cars up from about 1.4, should we be thinking of that more as their previous guidance for last year was 1.1? So is there a potential outperformance here? How should we be thinking about GM's production?

A - Hugh Panero

GM's production. GM will do 1.4 this year. They were aggressive. I think at the beginning of the year they had -- when we started the year, I think they had said they were going to do about 1.1; then they upped it to 1.5, I think in February, I think, prior to some of the challenges that they have been facing. And they are still going to end the year at a very healthy 1.4. And actually, during that same period, Honda had projected that they were going to do about 400,000, or probably do about 500,000. Now, for 2006, GM has upped its projected guidance for their factory installation to 1.55. I think that Honda has announced that they are going to do about 550,000 for the model year, so there's obviously some upside on that as well. So, I think that our whole strategy is to have relationships with the biggest automobile companies and some of the fastest-growing so they can balance out certain shifts that happen in the marketplace. And then what we are really looking forward to is basically the 2007 model year, where we start to have Hyundai and basically Toyota start to really kick in with their reduction, which will bump up OEM during that period of time.

Q - Robert Peck

Actually, that was going to lead right into my next question. With Toyota, can you give us any sort of feel as far as volumes for factory install?

A - Hugh Panero

Not at this time. We have basically been deep in the planning process with Toyota. But I think that you will see most of their activity coming with the 2007 model year, 2008. And clearly, Toyota is one of the biggest car companies in the world and growing, and they're going to be a very significant part of our future over the next couple of years.

Q - Robert Peck

One last question and I'll let somebody else go. Could you give us a little more color around the 4G Radios, the My-Fi2 that's coming out? When should we start to maybe see product announcements and volumes on shelves and impacting sales?

A - Hugh Panero

As we always do, we reserve the Consumer Electronics Show to unveil new products. And I think, and I know that most of you or some of you attend those shows. And that's when we would give you a preview on all of those new products that we expect going forward.

Q - Robert Peck

Okay, thanks guys.

Operator

Our next question comes from the line of Sean Butson.

Q - Sean Butson

Thanks good morning. I just wanted to first follow-up some on what Bob was talking about regarding the GM numbers. I'm just a little confused. I thought the original GM 1.1 million was related to the model year '05, and the 1.5 was for calendar year '05. And then the 1.4 they put out yesterday was also for calendar year. So, I guess I'm just confused about the 1.1 going to 1.5 initially, because I thought those were apples and oranges. And kind of related to that, based on the press release yesterday, it looks like there is a pretty significant deceleration in the calendar year factory installs from 230,000 this year to 150,000 next year. So I just wanted to check all those numbers first off. And then kind of secondly, if that deceleration is correct, then going forward then should we expect continued reductions, which are a little surprising at least to me this early on in the penetration cycle? Thanks.

A - Gary Parsons

Let me address a little bit of that. When you are saying, you're looking at an individual automaker there as opposed to the industry-wide. I think that industry-wide, obviously, you're going to see a continued acceleration of the growth. And it's important to remember that that is also growth. So, we expect to see from General Motors, or they are certainly protecting to this point in time that even if their total volume production is, maybe fluctuates year-to-year, their actual penetration of model-over-model becomes heavier and heavier each year. But the big numbers that you see each calendar year to go forward will tend to be with new manufacturers coming on who are at like zero production now that will, obviously, just be hitting their first models coming in. Steve, do you want to address that?

A - Steve Cook

Just to add to that, we are currently in about 95% of the GM models. And we do continue to see an increase in the penetration in those models. We're up over 35% now, and we were at about 28% penetration a year ago. So, we are seeing continued positive progress and don't see that trend changing.

Q - Sean Butson

Okay. Do you have any comments at all on GM's 8-K that they put out, it was either late yesterday or early this morning, regarding their investigation from the SEC regarding their relationship with Delphi? And if the investigation continues, what sort of impact could there be, not so much on radio production, as you said, Delphi does it overseas, but I suppose the real risk here regarding the Delphi bankruptcy and the GM 8-K is that auto production could be impacted. So, even if you have the radios, still the auto supply could be impacted.

A - Hugh Panero

You would have to address those issues with General Motors. By us having relationships with a broad array of car manufacturers -- ranging, again, from General Motors to companies like Hyundai and Toyota and Honda, we are able to cover fluctuations in the market that are either caused by issues that are going on now, or even just changes in market share. So, you would have to address those issues with General Motors.

Q - Sean Butson

Okay, thanks.

Operator

Our next question comes from the line of Lucas Binder.

Q - Lucas Binder

I just wanted to, I guess, get a little bit more clarity on two items that were discussed. With regard to the comments out of some of the numbers of the RIAA, can you discuss a little bit about what your take on royalties are, how you look at them going forward, and what kind of changes we may or may not see as far as the royalty payments are concerned? And then, I just wanted to get a little more clarity on the churn number again. When you look at just pure gross additions less net additions, it looks like churn was up sequentially. I am getting a number closer to about 2.7% versus the 2.5 last quarter. I know this isn't consistent with what you guys look at as far as non-promotional churn, but you are still seeing a sequential increase. How should we see this going forward? Should we see this start to come down again as we have seen on a year-over-year basis?

A - Hugh Panero

I will address the rights issue. Basically we pay a percentage of gross revenue to a variety of copyright holders that range from the labels to the publishers and so on. Those are all rights that under federal law we are required to negotiate with those rights holders as part of the agreement that we have, which also basically requires them to deliver us the content as part of a compulsory license. Those deals we struck and arrangements we struck several years ago -- and what occurs is, as has been my experience in other businesses that I have been in, is that as those arrangements end or the term of those arrangements ends, is what happens is you go through a renegotiation of those rates. You try to do it outside of an arbitration process, but if there is an arbitration process they, the arbitration board will set the rate. This is what happens with many other people who are in the same situation. Right now, we believe that we are a significant contributor to what is a new revenue stream to these parties that didn't exist prior to satellite radio becoming available. It's a ramping revenue stream for them. We believe that the current rate structure that we have now is adequate. And, clearly, that is the argument that we will go into in our negotiations. And we feel pretty confident about that process going forward.

A - Joe Euteneuer

In regards to your second question, for those of you who like to take the inverse of our conversion rate and add it to our churn rate, although we don't agree with that calculation -- that number is 2.6% and is up from the 2.4% in the previous quarter.

Q - Lucas Binder

Thanks guys.

Operator

Our next question comes from the line of Jeff Wlodarczak.

Q - Jeff Wlodarczak

A quick question. Can you talk about what gives you confidence that the conversion rate is going to tick back up given, I guess, the higher price point, higher fuel costs sort of worries about a weakening consumer? And do you think we have bottomed out in the conversion rate in the third quarter? When do you think we're going to bottom if it's not in the third quarter? Thanks.

A - Steve Cook

I would rather not comment on whether it has bottomed out. We will see. We don't see it. It stays very consistent. It stayed pretty consistent quarter-over-quarter, except for this last quarter where it ticked down a little bit. I think what gives me confidence that over the long-term it is going to increase is that our content keeps improving, the awareness of the service is improving. All of those factors sort of tend towards higher acceptance rate at the end of the trial. We are also constantly refining our processes to contact the customers. And we have seen -- we have got a number of initiatives in place to improve those numbers. And we have got strong automotive support from both GM and Honda and some of the others in working those issues. So, I do see our ability to improve the rate over time.

Q - Jeff Wlodarczak

Okay, thank you.

Operator

Our next question comes from the line of Vijay Jayant.

Q - Vijay Jayant

Thank you. Can you just comment about what kind of funding the Canadian opportunity and your sort of come along rights with wall space can impact your liquidity over the next two or three years? What is the magnitude of those two things? Thanks.

A - Gary Parsons

This is Gary. I will address those. Those really are not a liquidity impact, or certainly there's no -- the way we have the deals structured there's no demands on the Company at all for cash infusions for XM into that. Canadian Satellite Radio has indicated they intend to take their company public shortly. John Vitoff, the entrepreneur who heads that, who has been working with us for a number of years on the pursuit of this license, has put a significant amount of his cash into it. And certainly that is where the funding for that entity will come from. We do have the positive advantage -- I think this is all public within the CRTC proceedings that went forward in our disclosures. We do have the opportunity to take a significant share of that company at a nominal $1 value. And once it goes public we would expect to do that. But once again, that is an asset value that is built for us, and we do get a portion of the revenue as a kind of royalty sort of treatment. So, all of those are positives. But there's not a cash impact liquidity issue on either of those.

Q - Vijay Jayant

Thanks.

Operator

Our next question is from the line of Steve Mather.

Q - Steve Mather

Thank you, with expenses relatively predictable, let's focus on initiatives for just a little bit. I call WCS Spectrum maybe one of your more interesting enablers. Hugh, can you just give us any kind of framework around that now that a few months have gone by?

A - Hugh Panero

We're not prepared as yet to discuss the modeling for that. We are right now going through the process of having our engineering and our marketing teams kind of work through some of the issues. And I think that as we have expressed in the past, when we have a story to tell, we will find a forum to explain what our plans are in that space.

Q - Steve Mather

Can we at least think second half '06?

A - Gary Parsons

Yes. I think, certainly, that sort of a timeframe is something that you would see it by. The real key right now, as we expressed on the last conference call and as I have indicated in all of the investor forums we have gone through, it's still in a regulatory process right now. It's still in front of the SEC for an approval. And until that question mark and issue is behind us and it's actually a completed transaction, we won't be -- we will probably in the next year timeframe be coming out with more clarity.

Q - Steve Mather

How about I try another initiative that is a little closer to home? DirecTV starts in a few weeks.

A - Hugh Panero

We will be providing a significant number of amounts of our content on DirecTV. They reach, as you know, approximately 15 million subscribers. There is a real terrific crossover in people's interest in satellite radio who are also interested in satellite television. We have worked with DirecTV in the past on a number of initiatives and we are looking forward to having that opportunity help build awareness for our product as we go into the holiday season and, of course -- and beyond. We have been working with Chase and David Hill and the rest of the team there. And we're pretty happy with that relationship.

Q - Steve Mather

One final one, the Connect-and-Play chip. I've been carrying mine around for a little bit. And I'm just wondering if you can maybe give us an update on that? You mentioned earlier, of course, that they're getting into some of these home receiver units, etcetera. But is there a bigger, broader picture regarding this Connect-and-Play?

A - Steve Cook

We talked about the fact that it is expanding across a wide range of different home electronics products. And you will see a bunch of those at retail this fall and on into '06. And then as we look ahead to some of the player products and other products that we have spoken about, I think that it is the technology that really helps enable a lot of flexibility in some of the upcoming products as well.

Q - Steve Mather

Okay, that’s it, thanks.

Operator

The next question comes from the line of Barton Crockett.

Q - Barton Crockett

Okay, great. You guys seem to have stepped up the level of rebating for your radios going into the holiday season. We haven't seen you guys be a significant rebater for much of this year. What could that do -- can you give us some sense of your early outlook on what that could do for ARPU, what the likely uptake is, and whether this is kind of a switch in strategy for you guys more towards rebating and less towards other ways of spending on subscriber acquisition? So, that is my main question right now. Thank you.

A - Steve Cook

Sure, I'll handle that. It really won't affect ARPU at all because we don't tie the rebate to a service commitment. It's really a hardware-only rebate. And really our intent there is we're reaching the point where we can start to hit lower and lower price points to really penetrate the mass-market. Because this is -- we do see this as a gigantic business as we're shooting towards 10 million by -- or 20 million by 2010 and that sort of thing. So, we can maintain our SAC at very reasonable levels and still hit some of these attractive consumer price points. So -- and Christmas -- the gift-giving season is the perfect time to do that. So, that is really what you are seeing.

Q - Barton Crockett

Just to clarify, you're saying because you're not requiring people to sign up for a six-month or one-year, you're not going to have this in ARPU, but it's going to be recorded where -- in subsidies and distribution?

A - Steve Cook

It will be reflected in the SAC.

Q - Barton Crockett

Okay, alright, great. Thank you.

Operator

Your next question comes from the line of Craig Moffett.

Q - Craig Moffett

Good morning. I wonder if I could return to the General Motors release from yesterday again. Are there meaningful differences between the bundling and options package strategies of your different OEM partners? Can you talk about how General Motors, at least to your understanding, views satellite radio? Is it a stand-alone product that they want to sell or are they using it to sell larger bundles of, say, sound systems or even other unrelated features in bundles?

A - Hugh Panero

It's a combination of many things. First of all, obviously, between the different car manufacturers -- and, obviously, some of them have different size portfolios of vehicles and handle their marketing differently. Hyundai has decided that they want to put it standard on all their cars. And that's one strategy. Honda, which has fewer models that fall into the Acura or Honda family, have basically put it standard on some of their higher-end cars like the RL and TL, and will move that into others as well. Toyota when they come out will have a very specific strategy that is customized to their portfolio of products. And General Motors handles -- has handled it differently because they're such a -- they have such a broad portfolio in terms of how they package it in different car lines. So for example, in the Cadillacs, they sometimes package it as a standard feature. On other car lines, it is packaged in as part of a kind of a sophisticated audio sound system. In others it is done differently. So, with each of the car companies, it tends to be customized to the kind of characters -- the character of each one of the companies as it relates to the size of their portfolio and what market they are going after.

Q - Craig Moffett

I guess I'm wondering is -- with it being around the low 30s again as a percentage of their availability for their total fleet, is that in any way sort of a ceiling for them, or are they constraining supply in order to push options packages? Or do they believe that in some way it might be constrained by demand in the 30% for their fleet?

A - Hugh Panero

No, I think that they see growth in that percentage. I think that GM clearly has some challenges that they have been facing just over the short period of time. But they are going to basically produce 1.55 million next year. So, I think that there's just growth ahead of them. And clearly, as the rest of the automobile industry -- when you have a Hyundai that's going to go standard, and you have Honda and Toyota coming out, GM is going to want to even increase it more, just so they can be competitive in those particular segments of car buyers that are determined by those kinds of vehicles.

A - Gary Parsons

You will also, by the way, just see some fluctuations that will occur due to mix. In other words, there are sometimes higher concentrations of satellite radio packaging in SUVs and full-size trucks. And so, when those sag a little bit, sometimes it goes down slightly. But as the new ones come out next year, it goes back up. So, you will always have some amount of fluctuation. The general trend line is denser and denser and denser penetration across all of those model lines.

Q - Craig Moffett

Great, thank you.

Operator

The next question comes from the line of Jason Helfstein.

Q - Jason Helfstein

Okay. Three questions. First, can we discuss third quarter a bit more? Perhaps you can discuss the GM impact on the quarter. So, just taking a look at what -- with second quarter last year, by our estimates, OEM was like 23% of the year. And then in the second quarter this year it jumped up to 26. And then this year, obviously, it's a smaller percentage than last year. Can you talk about just kind of how we should think about that? Second, we had heard that during September, the wearables fell as a percent of the total retail. So, my question is, given you guys started marketing or effectively started talking about your wearable products in August, do you think that hurt the sale of wearable products in September? And then I have one follow-up. Thanks.

A - Hugh Panero

You asked a lot of things there. First of all, some of the percentage growth in OEM from one quarter to another quarter was also pulled forward, let's say, in the June/July timeframe because GM had an enormously aggressive employee discount program that you're probably familiar with; you get the deal that they have, the employees have. And that caused our growth to be very high in that quarter. And then it returned to a more normal level. So, I think you have to look at the various promotions out there which can occur in the auto industry, depending on where people are in terms of their promotional campaigns or strategies. With regards to the portable devices, I mean, first of all we haven't given out any numbers, I don't believe, on the breakdown of those. But there is nothing that has impacted the percentage of those sales, you know. I think you were sort of implying that our player announcement was somehow impacted. That is not the case. And in fact, these are very different markets. I think that the XM2go device that we have right now is going after a certain demographic and the player device is going after probably a younger demographic.

Q - Jason Helfstein

So, on your data you're showing that XM2go devices did not decline as a percent of sales in September versus July and August?

A - Hugh Panero

We don't break down our percentage of sales by each one of these devices, so I don't know how much I can help you in this thing, on this issue.

Q - Jason Helfstein

And then just last follow-up. Do you guys -- can you talk about, perhaps, headcount levels in the programming department, and perhaps how that's broken down between on-air and non-talent, and how that compares against a year ago? I'm trying to think about -- is there a way to think about how you're investing in the programming department?

A - Hugh Panero

Actually, the headcount -- we have always had a real focus on having the right people in the right places in our programming area, different than some of the other companies out there that have used freelancers to do this. Actually, our programming headcount has increased because of just some of the initiatives that I talked about before. Just on the talk side, we launched a whole women's initiative. So, there's people associated with that. We launched a Spanish initiative; there's people associated with that. We, obviously, during the year when we -- for baseball we basically have the Home Plate channel. We are, obviously, getting very involved in college sports with Coach K. So, there's a lot of investment in making those programming initiatives work. And, clearly, you need that. On the programming side, we have also changed our management in that. We have brought in new people, more expertise, because we really think that the commercial-free music is important. I mean, you just could have seen some of the reports from the radio sector just over the last week or so -- is that I think people are migrating to wanting to have the kind of service that we offer and other companies offer. And that's why I think that there is a real upside for satellite radio between both of the companies that are out there, both XM and Sirius. I mean, right now both of our companies were to bet at about 2% penetration of a pretty big market. So, our growth is all ahead of us. And I think content is very important. And I think you'll see both companies investing in that, because the real upside is the rest of the universe that we haven't really touched yet.

Q - Jason Helfstein

Thank you.

Operator

The next question comes from the line of Mark Wienkes.

Q - Mark Wienkes

Great, thanks. I'm interested in the momentum in your family plan subscriptions, which has sort of quietly crept up to about 16% of the sub base. How high do you think that number can go over the next 12 months? How elastic do you think the 6.99 price point is? And what -- if you could sort of describe your marketing plans around driving that number higher.

A - Hugh Panero

Well, I think some of the marketing plans -- and Steve will comment on this as well -- is as our base get bigger and the greatest strength of our service is people actually having it and experiencing it -- that as we move from 5 million to 6 million to 7 million, and our prices of our radios go down, is that you will see growth in the family plan just based on people wanting to give it as a gift and extending it. I think it happens very naturally. And there isn't necessarily a huge promotional plan other than various friends and family plans that we have out there to drive it. So, I think it's just part of the organic nature of the service that when as people, as people experience the product, that they would want their friends and relatives to have it because that's how much confidence they have in it.

A - Gary Parsons

I think the final element, by the way. that is just intrinsically built into that that will continue to drive it as Hugh mentioned at the very beginning, we have both the automotive new car channel and the retail channel both hitting very solidly. And as long as you have a very strong OEM channel where that particular radio is not portable, that does not move into the home like a plug-and-play does, then you're always going to have somebody that loves it in their new car and is looking to get something than that they can maybe get it in other venues too.

Q - Mark Wienkes

Great, thank you.

Hugh Panero, President and CEO

I think that concludes our conference call. We thank you for attending and we look forward to a great fourth quarter where we're going to grow the business and hit 6 million and exceed 6 million subscribers. So, thank you very much.

Operator

This concludes today's XM Satellite Radio conference call. You may now disconnect.

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