Sirius Satellite Radio Q3 2007 Earnings Call Transcript

| About: Sirius XM (SIRI)

Sirius Satellite Radio Inc. (NASDAQ:SIRI)

Q3 2007 Earnings Call

October 30, 20078:00 am ET


Paul Blalock – IR

Mel Karmazin – CEO

David J. Frear - CFO


Brian Kraft – Credit Suisse

Robert Peck - Bear Stearns

Kit Spring- Stifel Nicolaus

Lucas Binder - UBS

Sabora Bhuta - Lehman Brothers

David Bank - RBC Capital Markets

Benjamin Swinburne - Morgan Stanley

James Dix - Deutsche Bank

Eileen Furukawa - Citigroup


Good day everyone and welcome to the SIRIUS Satellite Radiothird quarter 2007 financial and operating results conference call. Today'sconference is being recorded. At this time, I would like to turn the conferenceto Paul Blalock, Senior Vice President of Investor Relations. Mr. Blalock, pleasego ahead, sir.

Paul Blalock

Thank you, Katie. Good morning, all and thank you for joining us for our third quarterconference call. This morning, Mel Karmazin, our CEO, will review our thirdquarter 2007 operations and outlook; David Frear, our Chief Financial Officer,will then discuss our financial results and our guidance for 2007 as outlinedin our press release this morning. At the conclusion of our prepared remarks,management will be glad to take your questions.

I would like to remind everyone that certain statements madeduring this call might be forward-looking statements as that term is defined inthe Private Securities Litigation Reform Act of 1995. These and allforward-looking statements are based on management’s current beliefs andexpectations, and necessarily depend on assumptions, data or methods that maybe incorrect or imprecise. Such forward-looking statements are subject to therisks and uncertainties that could cause actual results to differ materially.More information about those risks and uncertainties are contained in SIRIUS’ SECfilings. We caution listeners not to rely unduly on forward-looking statementsand disclaim any intent or obligation to update them.

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

Mel Karmazin

Thanks, Paul. Goodmorning and thank you all for joining us today. Third quarter financial andoperating results were very strong and demonstrate the demand for SIRIUS aswell as excellent execution by our team. I encourage you to focus on ourimproving fundamentals and the overall scaling of our business that is evidentin our reduced net loss and improved EPS.

Jim Meyer and Scott Greenstein will not be participated inthe call today. Jim's mother-in-law passed away over the weekend and Scott isin L.A. helping shoot an exciting newTV commercial we plan to introduce later in this quarter.

So David and I will address third quarter results, and thenI will comment on the pending merger. Following that, we will be glad to takeyour questions.

Let me begin by saying continue to expect that the mergerwill close before year end. While I cannot guarantee merger approval, thirdquarter results should give you even greater confidence in SIRIUS' ability toachieve our financial goals.

Now for the third quarter results. Record third quartersubscriber growth of approximately 525,000 net additions top last year's thirdquarter by 19% and drove a 50% increase in our ending subscriber base comparedwith a year ago. SIRIUS now has approximately 7.7 million subscribers and weare solidly on pace to exit 2007 with more than 8 million subscribers.

In the third quarter, SIRIUS added 63% of the totalsatellite radio net additions. This is the eighth consecutive quarter whereSIRIUS has attracted the majority of the satellite radio subscriber netadditions and the fourth consecutive quarter where SIRIUS has attracted themajority of gross subscriber additions as well.

SIRIUS share of total satellite radio net subscriberadditions remained extraordinary, even though many analysts believed that theleadership first seen during the arrival of Howard Stern would not be sustained.Some called it, at the time, “The Stern Factor” and said we would only see abenefit in 4Q05 and 1Q06. We said that was nonsense, and that we would see thebenefit of our strong content, including Howard Stern, for years to come; andwe were right.

Looking at the big picture, SIRIUS' 36% rise in grosssubscriber additions led satellite radio's total gross additions to a 22% gainover last year and points to a healthy future for satellite radio. So far in2007 we have posted approximately 3 million gross additions, 20% better thanthe 2.5 million year-to-date gross additions last year.

Third quarter net additions of 525,000 were comprised of approximately461,000 net additions from the OEM channel and 64,000 net additions from theafter-market channel. 3Q07 was the biggest OEM quarter in satellite radiohistory and SIRIUS had the majority of both gross and net additions. In fact,Q3 was the fourth quarter in a row where SIRIUS had a majority of gross OEMadditions and SIRIUS' 461,000 OEM net additions represented 58% share of thetotal satellite radio OEM net additions in the quarter.

During 2007, automakers have made several positiveannouncements about greater production penetration levels of satellite radio.You may remember that on our second quarter conference call, we told you aboutChrysler's plans to install SIRIUS into approximately 70% of their autoproduction, joining Mercedes at 90% production penetration rate and VW Audi at80%; and standard equipment on the Lincolnbrand. We also expect to have an exciting announcement regarding Ford shortly.

All of this is a positive signal for the continued,long-term growth in the OEM channel. With approximately 16 million cars made inAmerica eachyear, having production penetration rates moving significantly higher is verypositive for our long-term future.

Only two years ago in 2005, SIRIUS' production penetrationrate was approximately 10% of our exclusive OEM partners’ total production.That figure is expected to grow to over 50% next year and is poised to riseeven higher over the next few years.

On the retail front, SIRIUS continues to out-perform, albeitin a softer than expected retail environment. Our NPD share for the thirdquarter was 64%. If you take a look at where it was in the third quarter of2004, which was the quarter before we announced Howard Stern, we had a 30%, and37% NPD share. That 37% increased to 48%; it increased to 61% in 2006 and inthe third quarter of 07, it went to 64%.

During the third quarter, SIRIUS represented all of thegrowth in retail for satellite radio and with our eighth consecutive quarter ofrepresenting the majority of retail gross additions, we continue to believethat this channel is an important indicator of the strong consumer preferencefor SIRIUS.

We also look forward to the upcoming holiday season with newproducts such as Stiletto 2 and the Sportster 5 beginning to hit the shelvesnow, and some exciting new advertising planned for this important promotionalperiod.

SIRIUS' focus on customer satisfaction drove continuedpositive results in customer retention. The monthly all-in churn rate was 2.1%in the third quarter; the same as in second quarter and down from 2.3% in thefirst quarter. These results put us on track to be at the low end of the fullyear guidance that we have given you of 2.2% to 2.4%. Our self-pay monthlychurn rate remained approximately 1.6% in the third quarter, a very positivesign of continued customer satisfaction.

In Scott's absence, let me briefly mention a few programmingdevelopments. In the third quarter, SIRIUS built on its claim of being the bestradio on radio. We are in our fourth season with the critically acclaimedSIRIUS NFL radio channels which continues providing news-breaking coverage ofthe NFL season. In addition, we have had a great first season with NASCAR asour Chase for the Cup draws to a close in the next few weeks. The combinationof our unique driver channels, along with the tremendous coverage generated bySIRIUS NASCAR radio has made our first season with NASCAR a great success.

Among the many new programs launched this year, SIRIUS alsoadded two innovative music channels which you may have already read about orlistened to. E-Street Radio, coinciding with the start of Bruce Springsteen’s2007 Concert Tour and new album; and the Grateful Dead channel featuredunreleased concert recordings and rare current and archival interviews withband members. Lastly, we announced that we will be turning over our reins toone of our five country music channels to create country music star GarthBrooks Radio for a two-week period.

16 million subscribers to satellite radio now feelterrestrial radio does not satisfy them enough. Penetration is still only about5% of the population or 15% of the homes in the United States, so there is opportunity forsignificant growth. I believe that the best is yet to come.

Last and most importantly, on the financial front, we expectto once again generate positive free cash flow for the fourth quarter. SIRIUSis executing extremely well.

Now I'd like to turn it over to David Frear.

David J. Frear

Thanks, Mel. SIRIUS set third quarter records withapproximately 1 million gross adds and 524,938 net additions, well aboveconsensus estimates. Total revenue in the third quarter was up 45% to $242million; an annualized revenue run rate now in excess of $950 million andrapidly approaching $1 billion. Our operating results are scaling andcontinuing to show solid gains. All of our key financial metrics continue toimprove.

First, SAC per gross add at $103 was 10% better than the year-agoquarter and improved from $108 in the second quarter.

Second, customer service and billing expenses per averagesubscriber were $0.95 per month in the quarter, a new record low for SIRIUS andimproved by 17% versus last year's third quarter.

Third, our contribution margin – which is revenue, lesscustomer service and billing costs, revenue share and royalties, and cost ofequipment -- continues to exceed 70% of revenue.

Fourth, fixed costs grew less than 6% on a nearly 45%increase in revenues. As a result, about $0.62 of each dollar increase inrevenue turned into an improvement in pre-SAC EBITDA which was positive $46million for the quarter compared to breakeven in last year's third quarter.

Now despite a healthy 36% growth in gross additions and the25% growth in subscriber acquisition costs resulting from the growth in grossadditions, our third quarter adjusted loss from operations improved $26 millionyear over year. On a year-to-date basis, our adjusted loss from operations has improvedby $126 million, or 36% compared to the same period last year.

On the non-cash side, stock compensation fell 48% versus theyear ago quarter as we continue to move away from historical contracts with significantequity components. These operational and non-cash improvements together drove a26% reduction in net loss.

All of these core operating improvements in the quarter,combined with reduced capital expenditures and improved working capital flows,benefited our free cash flow which improved by over $165 million year over year.This reduced our free cash flow loss in the third quarter by 71% as we drivethe business closer to sustainable positive cash flow.

We ended the third quarter with roughly $362 million incash, cash equivalents and marketable securities, in addition to our restrictedinvestments.

You've heard a little bit about the royalty proceeding andthat royalty proceeding covers the period from January 1, 2007 to the end of 2012. The trial associatedwith that came to a close about two weeks ago and we expect the copyrightroyalty board judges to reach a decision in mid-December.

To wrap it all up, the third quarter was another key periodin the growth at SIRIUS as we added a strong number of net new subscribers in amore cost-effective manner, continued to enhance the best radio on radio and madesignificant strives in furthering our OEM deployment.

As disclosed in our press release, we are reiteratingguidance for 2007 including ending subs of over 8 million, revenue approaching $1billion, SAC per gross add approaching $100 and average monthly churn at thelow end of approximately 2.2% to 2.4%.

With that, let me turn it back to Mel.

Mel Karmazin

Thanks, David. Now I'd like to take a few minutes to updateyou on our pending merger with XM. We are pleased with the public comments thatvarious and diverse organizations and business leaders have filed in support ofour pending merger. Ford, Toyota,RadioShack, Circuit Cityand interest groups such as the NAACP and many others have filed in support ofthe merger. Virtually all of the opposition to the merger has been directly orindirectly generated by those who fear enhanced competition.

We believe that we have made the case that the merger willstrengthen satellite radio's position within the audio marketplace whilemaintaining robust competition for consumers. We believe that followingapproval of the merger, we will offer consumers more choice and lower prices. Thatis why the merger serves the public interest; offering true a la carte pricing,programming packages and family-friendly options including a credit for thosewho do not wish to receive adult content is the strong benefit that the merger offers.

The bottom line is this: the merger of SIRIUS and XM is goodfor consumers and great for shareholders as well. The efficiencies created bythis merger will be extraordinary. They will allow us to offer more choices andlower prices which we believe will attract more subscribers.

I'd like to take this opportunity to remind everyone that onNovember 13 we are scheduled to host a special meeting of stockholders toapprove the merger. It is important to note that we need your vote. So pleasevote. If you do not vote, it'll be counted as a “no” vote so please follow theinstructions on your proxy card and vote online or by telephone as soon as youcan.

We remain confident that the regulatory authorities willcarefully weigh the merits of the transaction and conclude that this merger isnot anti-competitive and is in the public interest. We continue to expect thatwe will close the merger by the end of the year.

Let me end by saying that SIRIUS is executing very well. Wecontinue to scale our business, attract new subscribers and meet our financialobjectives. The future looks very bright for our company.

Thank you for listening and now we are ready to take yourquestions.



(Operator Instructions) Your first question comes from BrianKraft – Credit Suisse.

Brian Kraft – CreditSuisse

Thanks. Can you comment on the success that you have seen sofar with the video product, and also whether you are getting additionalinterest from your OEM partners?

Mel Karmazin

The video product is new. Obviously you can see the Chryslervehicles in the showrooms. The early reaction has been very positive. We don'thave enough subscribers to have conducted any research yet to determine whatthey like and don't like, but they are getting Nickelodeon, Cartoon Network,and Disney, live television in the backseat of the car.

From everything we are hearing from Chrysler, they are happywith it and they believe their customers are happy.

Brian Kraft – CreditSuisse

What kind of ARPU liftare you getting from that product?

David J. Frear

Brian, the numbersare too small at this point to be measurable across over 7 million subscribers.I think that's probably a question that would better fit sometime next year. Thecars are shipping and they are selling through to customers, but out of 7.6million subscribers it's just not material.

Brian Kraft – CreditSuisse

On an individualcustomer basis, is there a pricing lift?

David J. Frear

Well yes, they pay for the video products so on anindividual customer basis there's a lift; but again, in the overall resultsit's very small.


Your next questioncomes from Robert Peck - Bear Stearns.

Robert Peck - BearStearns

OEM was obviously very strong. David, I was wondering if youcould maybe give us a little more color around the OEM gross adds and maybeacross the sub base as well. What percentage of gross adds and subs today arestill on the dealer lot?

David J. Frear

It's an inventory concept so it's probably easier to answerit from the total sub perspective. If you look at last year, you generallyfound that number in 2006 inthe 8% to 9% of subscriber range. As the OEMs accelerated their penetration aswe've gone through 2007 it has been working it's way up a little bit. It wasaround 10% of the base at the end of June and it's a little bit more than 11%at the end of September. So, we've picked up about another 1% in the quarter.

Mel Karmazin

Bob, obviously all of these become subscribers. It takes 90to 120 days for these vehicles to find their ways into the hands of a consumer.

Robert Peck - BearStearns

Should we think about that having any sort of seasonality asfar as the gross adds component?

David J. Frear

Not really. Only to the extent that it's going to vary withthe shipping cycle of the OEMs and so there is a little seasonality in thatwhen they close plants down for summer work in July, that you are going to havefewer that go in, in that month, but then they resume production and beginshipping in August and September.

You have the same thing occur in December where a lot of theOEMs tend to close plants down in the last couple weeks of the month. So thereare just a couple periods in the year where it comes out. But on aquarter-to-quarter basis, I don't think there's much seasonality.

Robert Peck - BearStearns

You obviously beat The Street expectations for the quarter asfar as net adds, but yet you are leaving your guidance unchanged. The low endof that would be 300,000 or so net adds. Any reason for not taking up the guidancefor the full year?

David J. Frear

I think we're havinga pretty good year so far and we're thrilled with the results. We think thecategory is doing very well overall. But it's the fourth quarter and sopredicting the holiday season has always been dicey. It can be pretty volatileseries of results, as we saw last year. We certainly expect to exceed the 8million subscribers but don't see much cause to sharpen the pencil beyond that.

Robert Peck - BearStearns

In the XM 8K this morning, they talk about their marketshare components, their agreement with GM and GM could opt out in November, Ithink this is old verbiage that has been recycled, but the real question I amgetting to is, would it ever make sense or is it even feasible for SIRIUS topursue that type of relationship or are the companies so integrated with theOEMs right it is really not too feasible?

Mel Karmazin

I am not sure I understand your question. To explore whatrelationship?

Robert Peck - BearStearns

Could you explore a relationship with GM?

Mel Karmazin

Sure. There is nothing that would stop us from exploring arelationship with GM.

Robert Peck - BearStearns

Is it feasible though?

Mel Karmazin

Again, it would require them to either make a decision tohave us as an alternate service so that they would have an assembly line thatwould be putting in two different radios. Most of the OEMs have resisted that,but there's certainly nothing that would stop it, though it's very unlikely.Obviously, the OEMs have not been switching around.


Your next question comes from Kit Spring - Stifel Nicolaus.

Kit Spring - Stifel Nicolaus

Can you talk a little bit about where you think thelong-term SAC can go? I think we've been seeing it tick up at your competitor.Are you confident that it could come down at least to where XM is and perhaps more[inaudible] over time?

Maybe mention what you expect out of Ford. We haven't heardfrom them. We've seen Chrysler go to 70%. What do you think is holding Fordback?

Mel Karmazin

Let me do the second part and David will talk to you aboutthe SAC. I mentioned in my remarks that you should expect that there will be anannouncement from Ford sometime in the future. We have been greatly ramping up ourrelationship with Ford. They have been adding a whole lot more vehicles. Theyhave not made an announcement on what their penetration is. That was a Forddecision for their competitive reasons.

I can tell you that they are very committed to satelliteradio. The volume that we're getting from Ford obviously is reflected in our extraordinaryperformance in OEM and we'll have a quantifiable number for you in the future.

David J. Frear

On the SAC front, I don't know a whole lot about what's inXM's number and what moves it around from one period to the next, so I reallycan't comment relative to what you're seeing over there.

What I can say is that on the SIRIUS side, we've beendriving SAC per gross add down consistently in each of our respective channelsof distribution, so retail continues to decline and automotive continues todecline as well.

You see a lower percentage decline in the overall numbersthan we are experiencing in the individual channels because of the mix effect.With the mix shifting over to OEM, you’ve got a much higher mix of higher SACelements than you’d seen in the past.

We talked in previous calls about how on the OEM side, weknow that it’s going down over time, that we’ve got multi-year contracts withour OEM. OEMs tend to call for reducing levels of subsidies each year. Thosetend to be tied -- they’re not directly contractually tied but they tend to betied to the expectation of operational changes on their side where they aremoving to lower cost products to be installed into the car. So for instance,migrating from a black box in the trunk to an integrated head unit that justslides into the dash. Those have tremendous cost savings and as a result, wehave lower subsidies as well.

We’ve always said that there’s no technical reason why ourSAC can’t be equivalent to what XM has reported and they’ve generally reportedsomething in the $60 to $70 range, and that continues to be the case today. Itwill simply take us still another few years to get there.


We’ll go next to Lucas Binder with UBS.

Lucas Binder - UBS

Good morning. Two questions I had; one was with regard tothe merger, David, you mentioned just a second ago how the different ways thatXM and Sirius calculate some metrics are different between the two businesses.What’s your sense on when the merger closes, assuming it does, that when youwould have a good sense of what the combined business would look like for totalnumber of subs and sort of the combined outlook for the two companies? Do youhave any sense of how long that would take?

The follow-up was just on timing and update on the launchesright now -- how far along you are, how much more you owe for Sirius 5.

David J. Frear

Lucas, if I said that we calculate things differently, Imisspoke. I just don’t know exactly what’s driving their SAC changes.

Look, when we merge the companies and after we’ve got theapproval and after the respective management teams are no longer barred by lawfrom looking at each other’s confidential information, then we’ll get into itvery quickly and come to an assessment as to what the combined enterprise willlook like and what the opportunities are there but at the moment, we arefocused on working our way through the regulatory process.

Mel, is there anything you want to add to that?

Mel Karmazin

Obviously I have a great deal of experience in integratingcompanies. I merged Infinity into CBS and merged CBS into Viacom and have doneit and look forward to doing this as well and don’t think it will be overlycomplicated to get our arms around the combined company so that we can giveinvestors a look as to what they should expect to see happening if in fact weclose by the end of ’07, so that they’ll have an idea as to what we think ’08will look like.

David J. Frear

And then on the Sirius 5 program, we’re about halfwaythrough the program and so I’d say we’re about halfway through the money aswell.

Lucas Binder - UBS

Great. Thank you very much.


We’ll go next to Vijay Jayant with Lehman Brothers.

Sabora Bhuta - LehmanBrothers

Hi, this is [Sabora Bhuta] for Vijay. I was wondering, canyou talk about your plans for retail in the fourth quarter? Are you taking adifferent approach this year in terms of marketing or products build-up than inpast years? And also, can you give us an update on how the family pack istracking? Thanks.

Mel Karmazin

As far as our retail plans, we are very excited about theproducts that we have. We are very excited about the prices that we will haveand we are very happy about our displays and we are very happy about ourcontent. And as you can see, for the last eight quarters, we have beenexecuting real well at retail and we fully expect that to continue in thefourth quarter of ’07.

David J. Frear

In terms of promotional activities in the marketplace thatyou should -- we’ve been very consistent now for the last four years in the waythat we go to market and present price points to the consumer. So you shouldexpect to see more similar promotions. This year there are some modificationsbecause of some of the retailers eliminating mail-in rebates, so you will seeinstant rebates at lower values, but again, consistent economically with whatyou’ve seen in prior periods.

The family package continues to run between 15% and 16% ofthe base. It hasn’t really changed very much in the last sort of four quarterends, sort of right around the mid 15% range.

Sabora Bhuta - LehmanBrothers



We’ll go next to David Bank with RBC Capital Markets.

David Bank - RBCCapital Markets

Thanks. Good morning. Just a quick question, I thinkprobably for David on the R&D spend this quarter. You guys had a -- youcame in a lot lower than we were expecting. We didn’t expect to see kind of asignificant -- really significant decrease over the third quarter of ’06. Yougave a little bit of detail in the press release but could you give a littlemore color on why the R&D spend was down $12 million year over year?

David J. Frear

I think as we were going through last year, one of thethings that we were talking about, the fact that we had a lot of productlaunches at the OEMs going on and so in order to get that done to get thoselines up and running, that there was a significant amount of non-recurringengineering dollars that were expended with the different automotive partners.And with that fundamental building activity done across the OEMs, you simplynow have a lower level of spend.

It wasn’t a -- it tended to come through lumpy in the past,right, and when they got to a line, if they got to several lines in onequarter, you had several of them that you paid for. But fundamentally, thereason is that the production capability is now built.

David Bank - RBCCapital Markets

I know it’s kind of a hard question answer, but could yougive us a sense of an appropriate run-rate, given the lumpiness?

David J. Frear

I don’t think that there’s -- there isn’t more of that to bedone at this point, really. Substantially all of the OEM partners are nowcompleted with getting their lines ready, so at this point, R&D spendingwill vary based on new initiatives that are undertaken by us. So if we were,for instance, to change nothing about what the engineers are working on now,the number would remain relatively consistent. If we simply replaced some ofthe projects they are currently working on as they finish them with newprojects that don’t expand the calendar of activities, the spending would stayabout the same.

In the future, it really comes down to what kind ofinitiatives [we get underway].

David Bank - RBCCapital Markets

Thanks, guys.


We’ll go next to Benjamin Swinburne with Morgan Stanley.

Benjamin Swinburne -Morgan Stanley

Good morning, guys. Thanks for taking the question. Mel,could you comment on how you think the OEM penetration growth impacts theretail after-market, if at all? On one hand, I would think it would help drivesecond radio subscriptions as more people get that installed into their car andlike the product. On the other hand, you could argue that people who maybe usedto walk into a Radio Shack and buy a radio now are getting them in their newcars, so they have a negative impact on new subscriptions. Any commentary fromyour front on research you’ve seen or what you think is happening in thebusiness as you look at those levers?

Mel Karmazin

I agree with everything that you just said and basically, whatwe’re looking at is exactly the same thing. We have a very high customersatisfaction level, so as people get exposed to Sirius in their car, it’s ourbelief that they are going to want to have that product wherever else theylisten to radio, and whether or not that be in their second car or whether ornot that be in the home or in a wearable model. Obviously an awful lot ofpeople now are able to get Sirius as a factory-installed product in their carand obviously that’s where we compete with terrestrial radio the most, is inthe car, and that’s an important market for us.

We are a little bit perplexed as to why the retail is asslow as it is. Our conversations with our retail partners are such that theyare expecting to have a good Christmas. We hope that they are right. Wecertainly will have product in the stores, anticipating that there will be verygood demand for the holiday season. Again, as I mentioned earlier, we have goodproducts there and our content continues to improve and our marketing is gearedup. We have what we think will be a very exciting television campaign that willair in the Black Friday through the holiday season.

So we are sort of executing and plan on having a strongfourth quarter and hopefully we’ll be right.

Benjamin Swinburne -Morgan Stanley

If I could ask one follow-up for David; is the OEM mix, asyou move with the retail down, or see retail sort of pull back a bit, are youseeing pre-pay levels increase? I’m just trying to think about how the cashflow statement is going to look as this mix shift accelerates on us.

David J. Frear

It really hasn’t changed a whole lot. It moves a tenth or acouple-of-tenths of a month from time to time, but it’s actually remainedpretty consistent. Some of that has to do with the plan mixes in the OEMsthemselves, right? So Chrysler is at about -- is at a year, Mercedes is at ayear on most of their cars, Ford is at six months, BMW tends to be at a year,some of the OEMs run longer promotions from time to time that they’ll -- Fordran a three-year promotion on some Lincoln models back in the spring.

So when you put it all in the mix and shake it up and thencombine it with the up-selling that gets done at the call center, it justdoesn’t seem to change the weighted average pre-pay all that much.

Benjamin Swinburne -Morgan Stanley

Great. Thanks a lot, guys.


Thank you. Before we go to our next question, I would liketo let everyone know that due to time constraints, we will have time for twomore questions. We will go next to James Dix with Deutsche Bank.

James Dix - DeutscheBank

Good morning, gentlemen. Just a couple of questions onmerger timing; is your current expectation that the FCC will complete itsreview according to its informal 180-day clock and that that clock is not goingto be told or paused? And then, how quickly could you close after gettingregulatory approvals? Do you think that could be affected by any third-partylegal challenges to the approval process?

Mel Karmazin

We believe that the FCC will make their decision before theend of the year, which would certainly be consistent with their 180 days butobviously we can’t commit to that because it’s not in our control. But we’veheard comments from the chairman that he said publicly that he had hoped to getit done within that timeframe.

And regarding when we will close, assuming we get anapproval on a Monday, the assumption will be that the transaction will beclosed on Tuesday.

James Dix - DeutscheBank

Okay, and one follow-up just in terms of liquidity; are youessentially fully funded to cash flow break even now, with or without a merger?

David J. Frear


James Dix - DeutscheBank

Okay, great. Thanks very much, guys.


Thank you. We will take our final question from EileenFurukawa with Citigroup.

Eileen Furukawa -Citigroup

Thanks for taking the question. I was just wondering, as afollow-up on the retail sub conversation, do you think that you could actuallysee a retail sub base begin to shrink in the near-term, like we saw XM thisquarter, as your OEM channel continues to grow?

And just a question on churn, like XM, we saw your churnstay at a nice low level. I’m just wondering, are there any particularinitiatives you put in place that you think are really starting to pay off? Assuch, do you think that churn in ’08 can look similar to churn in ’07? Thanks.

Mel Karmazin

Regarding things that we put in place, Jim has mentioned onour call a number of times that we brought in a new chief retention officer,who has a great deal of Sprint experience in subscription business and we aredoing many, many more things than we have ever done before, both on the frontend when the consumer is buying the car and first getting used to it, so thatwe are doing things at the dealer level and we are also doing smarter andbetter follow-ups in communicating to our subscribers during the period of timethat they are subscribers, and making sure that when the period of time thatthe prepaid is expiring, they’ve heard from us a number of times and know thebenefits of subscribing.

Simple things like getting the consumer to preset theirchannels we find has a very positive impact on churn. The more that they areengaged with the radio, the more that they enjoy and use the service andtherefore continue on.

We’re doing an awful lot. I think that our churn numbers, asit exists today, reflects the job that we are doing and we again expect that tocontinue. We have not given you a guidance yet for 2008, so I really don’t wantto go there as to what our churn level would be.

Regarding our plan, and all the people that work for us inthe retail area know that we are looking to continue to add net subscribersfrom that retail channel and we are doing every possible thing that we can doto make sure that that number is as big as it could be.

I mean, you’ve raised something that -- is there apossibility and obviously there is always a possibility but that certainlyisn’t where we want to see the business go, nor are we doing anything that isgoing to contribute toward that occurring.

Eileen Furukawa -Citigroup

And just really one last question; when do you guys -- justan update on when you think you’re going to start giving more color on your OEMconversion rates, and should we expect that to be in the same range as we’vebeen seeing with XM? Thanks.

David J. Frear

We’ve talked about in previous calls, I don’t expect that wewill give a conversion rate. The reason for it is I don’t know how I can giveyou a series of numbers that would actually be helpful to you in your modelingwithout going into a level of detail that I don’t believe to be constructive.

We’ve got a mix of plans among our OEMs that varies ratherbroadly. We’ve got some that are on year plans, some on six months, some onthree months, some on longer than a year. So the real question is how many ofthe plans that are coming up where the subscription is coming up for conversionin any given month or quarter, do you convert? And so in order to make thatnumber useful to you, we’d have to provide you with information about theconversion opportunities and it just kind of goes too far I think into thedetails.

We’ll continue to provide you with guidance on total churnfor the year. We’ve been reporting that consistently in the four-plus yearsthat I’ve been with the company and we’ll continue to provide you that guidancein the future.

Eileen Furukawa -Citigroup

Okay. Thanks a lot.


Thank you. At this time, this will conclude today’s SiriusSatellite Radio third quarter 2007 conference call. On behalf of ourpresenters, I would like to thank you for your participation on today’sconference. At this time, you may now disconnect.

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