Sirius Satellite Radio Inc. (SIRI)
Q3 2007 Earnings Call
October 30, 2007 8:00 am ET
Executives
Paul Blalock – IR
Mel Karmazin – CEO
David J. Frear - CFO
Analysts
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
Operator
Good day everyone and welcome to the SIRIUS Satellite Radio third quarter 2007 financial and operating results conference call. Today's conference is being recorded. At this time, I would like to turn the conference to Paul Blalock, Senior Vice President of Investor Relations. Mr. Blalock, please go ahead, sir.
Paul Blalock
Thank you, Katie. Good morning, all and thank you for joining us for our third quarter conference call. This morning, Mel Karmazin, our CEO, will review our third quarter 2007 operations and outlook; David Frear, our Chief Financial Officer, will then discuss our financial results and our guidance for 2007 as outlined in 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 made during this call might be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based on management’s current beliefs and expectations, and necessarily depend on assumptions, data or methods that may be incorrect or imprecise. Such forward-looking statements are subject to the risks and uncertainties that could cause actual results to differ materially. More information about those risks and uncertainties are contained in SIRIUS’ SEC filings. We caution listeners not to rely unduly on forward-looking statements and disclaim any intent or obligation to update them.
I will now hand the call over to Mel Karmazin for his opening remarks.
Mel Karmazin
Thanks, Paul. Good morning and thank you all for joining us today. Third quarter financial and operating results were very strong and demonstrate the demand for SIRIUS as well as excellent execution by our team. I encourage you to focus on our improving fundamentals and the overall scaling of our business that is evident in our reduced net loss and improved EPS.
Jim Meyer and Scott Greenstein will not be participated in the call today. Jim's mother-in-law passed away over the weekend and Scott is in L.A. helping shoot an exciting new TV commercial we plan to introduce later in this quarter.
So David and I will address third quarter results, and then I will comment on the pending merger. Following that, we will be glad to take your questions.
Let me begin by saying continue to expect that the merger will close before year end. While I cannot guarantee merger approval, third quarter results should give you even greater confidence in SIRIUS' ability to achieve our financial goals.
Now for the third quarter results. Record third quarter subscriber growth of approximately 525,000 net additions top last year's third quarter by 19% and drove a 50% increase in our ending subscriber base compared with a year ago. SIRIUS now has approximately 7.7 million subscribers and we are solidly on pace to exit 2007 with more than 8 million subscribers.
In the third quarter, SIRIUS added 63% of the total satellite radio net additions. This is the eighth consecutive quarter where SIRIUS has attracted the majority of the satellite radio subscriber net additions and the fourth consecutive quarter where SIRIUS has attracted the majority of gross subscriber additions as well.
SIRIUS share of total satellite radio net subscriber additions remained extraordinary, even though many analysts believed that the leadership 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 a benefit in 4Q05 and 1Q06. We said that was nonsense, and that we would see the benefit of our strong content, including Howard Stern, for years to come; and we were right.
Looking at the big picture, SIRIUS' 36% rise in gross subscriber additions led satellite radio's total gross additions to a 22% gain over last year and points to a healthy future for satellite radio. So far in 2007 we have posted approximately 3 million gross additions, 20% better than the 2.5 million year-to-date gross additions last year.
Third quarter net additions of 525,000 were comprised of approximately 461,000 net additions from the OEM channel and 64,000 net additions from the after-market channel. 3Q07 was the biggest OEM quarter in satellite radio history 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 OEM additions and SIRIUS' 461,000 OEM net additions represented 58% share of the total satellite radio OEM net additions in the quarter.
During 2007, automakers have made several positive announcements about greater production penetration levels of satellite radio. You may remember that on our second quarter conference call, we told you about Chrysler's plans to install SIRIUS into approximately 70% of their auto production, joining Mercedes at 90% production penetration rate and VW Audi at 80%; and standard equipment on the Lincoln brand. 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 in America each year, having production penetration rates moving significantly higher is very positive for our long-term future.
Only two years ago in 2005, SIRIUS' production penetration rate 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 rise even higher over the next few years.
On the retail front, SIRIUS continues to out-perform, albeit in a softer than expected retail environment. Our NPD share for the third quarter was 64%. If you take a look at where it was in the third quarter of 2004, which was the quarter before we announced Howard Stern, we had a 30%, and 37% NPD share. That 37% increased to 48%; it increased to 61% in 2006 and in the third quarter of 07, it went to 64%.
During the third quarter, SIRIUS represented all of the growth in retail for satellite radio and with our eighth consecutive quarter of representing the majority of retail gross additions, we continue to believe that this channel is an important indicator of the strong consumer preference for SIRIUS.
We also look forward to the upcoming holiday season with new products such as Stiletto 2 and the Sportster 5 beginning to hit the shelves now, and some exciting new advertising planned for this important promotional period.
SIRIUS' focus on customer satisfaction drove continued positive 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 the first quarter. These results put us on track to be at the low end of the full year guidance that we have given you of 2.2% to 2.4%. Our self-pay monthly churn rate remained approximately 1.6% in the third quarter, a very positive sign of continued customer satisfaction.
In Scott's absence, let me briefly mention a few programming developments. In the third quarter, SIRIUS built on its claim of being the best radio on radio. We are in our fourth season with the critically acclaimed SIRIUS NFL radio channels which continues providing news-breaking coverage of the NFL season. In addition, we have had a great first season with NASCAR as our Chase for the Cup draws to a close in the next few weeks. The combination of our unique driver channels, along with the tremendous coverage generated by SIRIUS NASCAR radio has made our first season with NASCAR a great success.
Among the many new programs launched this year, SIRIUS also added two innovative music channels which you may have already read about or listened to. E-Street Radio, coinciding with the start of Bruce Springsteen’s 2007 Concert Tour and new album; and the Grateful Dead channel featured unreleased concert recordings and rare current and archival interviews with band members. Lastly, we announced that we will be turning over our reins to one of our five country music channels to create country music star Garth Brooks Radio for a two-week period.
16 million subscribers to satellite radio now feel terrestrial radio does not satisfy them enough. Penetration is still only about 5% of the population or 15% of the homes in the United States, so there is opportunity for significant growth. I believe that the best is yet to come.
Last and most importantly, on the financial front, we expect to once again generate positive free cash flow for the fourth quarter. SIRIUS is executing extremely well.
Now I'd like to turn it over to David Frear.
David J. Frear
Thanks, Mel. SIRIUS set third quarter records with approximately 1 million gross adds and 524,938 net additions, well above consensus estimates. Total revenue in the third quarter was up 45% to $242 million; an annualized revenue run rate now in excess of $950 million and rapidly approaching $1 billion. Our operating results are scaling and continuing to show solid gains. All of our key financial metrics continue to improve.
First, SAC per gross add at $103 was 10% better than the year-ago quarter and improved from $108 in the second quarter.
Second, customer service and billing expenses per average subscriber were $0.95 per month in the quarter, a new record low for SIRIUS and improved by 17% versus last year's third quarter.
Third, our contribution margin – which is revenue, less customer service and billing costs, revenue share and royalties, and cost of equipment -- 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 in revenue turned into an improvement in pre-SAC EBITDA which was positive $46 million for the quarter compared to breakeven in last year's third quarter.
Now despite a healthy 36% growth in gross additions and the 25% growth in subscriber acquisition costs resulting from the growth in gross additions, our third quarter adjusted loss from operations improved $26 million year over year. On a year-to-date basis, our adjusted loss from operations has improved by $126 million, or 36% compared to the same period last year.
On the non-cash side, stock compensation fell 48% versus the year ago quarter as we continue to move away from historical contracts with significant equity components. These operational and non-cash improvements together drove a 26% 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 drive the business closer to sustainable positive cash flow.
We ended the third quarter with roughly $362 million in cash, cash equivalents and marketable securities, in addition to our restricted investments.
You've heard a little bit about the royalty proceeding and that royalty proceeding covers the period from January 1, 2007 to the end of 2012. The trial associated with that came to a close about two weeks ago and we expect the copyright royalty board judges to reach a decision in mid-December.
To wrap it all up, the third quarter was another key period in the growth at SIRIUS as we added a strong number of net new subscribers in a more cost-effective manner, continued to enhance the best radio on radio and made significant strives in furthering our OEM deployment.
As disclosed in our press release, we are reiterating guidance for 2007 including ending subs of over 8 million, revenue approaching $1 billion, SAC per gross add approaching $100 and average monthly churn at the low 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 update you on our pending merger with XM. We are pleased with the public comments that various and diverse organizations and business leaders have filed in support of our pending merger. Ford, Toyota, RadioShack, Circuit City and interest groups such as the NAACP and many others have filed in support of the merger. Virtually all of the opposition to the merger has been directly or indirectly generated by those who fear enhanced competition.
We believe that we have made the case that the merger will strengthen satellite radio's position within the audio marketplace while maintaining robust competition for consumers. We believe that following approval of the merger, we will offer consumers more choice and lower prices. That is why the merger serves the public interest; offering true a la carte pricing, programming packages and family-friendly options including a credit for those who 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 good for consumers and great for shareholders as well. The efficiencies created by this merger will be extraordinary. They will allow us to offer more choices and lower prices which we believe will attract more subscribers.
I'd like to take this opportunity to remind everyone that on November 13 we are scheduled to host a special meeting of stockholders to approve the merger. It is important to note that we need your vote. So please vote. If you do not vote, it'll be counted as a “no” vote so please follow the instructions on your proxy card and vote online or by telephone as soon as you can.
We remain confident that the regulatory authorities will carefully weigh the merits of the transaction and conclude that this merger is not anti-competitive and is in the public interest. We continue to expect that we will close the merger by the end of the year.
Let me end by saying that SIRIUS is executing very well. We continue to scale our business, attract new subscribers and meet our financial objectives. The future looks very bright for our company.
Thank you for listening and now we are ready to take your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Brian Kraft – Credit Suisse.
Brian Kraft – Credit Suisse
Thanks. Can you comment on the success that you have seen so far with the video product, and also whether you are getting additional interest from your OEM partners?
Mel Karmazin
The video product is new. Obviously you can see the Chrysler vehicles in the showrooms. The early reaction has been very positive. We don't have enough subscribers to have conducted any research yet to determine what they 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 happy with it and they believe their customers are happy.
Brian Kraft – Credit Suisse
What kind of ARPU lift are you getting from that product?
David J. Frear
Brian, the numbers are 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. The cars are shipping and they are selling through to customers, but out of 7.6 million subscribers it's just not material.
Brian Kraft – Credit Suisse
On an individual customer basis, is there a pricing lift?
David J. Frear
Well yes, they pay for the video products so on an individual customer basis there's a lift; but again, in the overall results it's very small.
Operator
Your next question comes from Robert Peck - Bear Stearns.
Robert Peck - Bear Stearns
OEM was obviously very strong. David, I was wondering if you could maybe give us a little more color around the OEM gross adds and maybe across the sub base as well. What percentage of gross adds and subs today are still on the dealer lot?
David J. Frear
It's an inventory concept so it's probably easier to answer it from the total sub perspective. If you look at last year, you generally found that number in 2006 in the 8% to 9% of subscriber range. As the OEMs accelerated their penetration as we've gone through 2007 it has been working it's way up a little bit. It was around 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 90 to 120 days for these vehicles to find their ways into the hands of a consumer.
Robert Peck - Bear Stearns
Should we think about that having any sort of seasonality as far as the gross adds component?
David J. Frear
Not really. Only to the extent that it's going to vary with the shipping cycle of the OEMs and so there is a little seasonality in that when they close plants down for summer work in July, that you are going to have fewer that go in, in that month, but then they resume production and begin shipping in August and September.
You have the same thing occur in December where a lot of the OEMs tend to close plants down in the last couple weeks of the month. So there are just a couple periods in the year where it comes out. But on a quarter-to-quarter basis, I don't think there's much seasonality.
Robert Peck - Bear Stearns
You obviously beat The Street expectations for the quarter as far as net adds, but yet you are leaving your guidance unchanged. The low end of that would be 300,000 or so net adds. Any reason for not taking up the guidance for the full year?
David J. Frear
I think we're having a pretty good year so far and we're thrilled with the results. We think the category is doing very well overall. But it's the fourth quarter and so predicting the holiday season has always been dicey. It can be pretty volatile series of results, as we saw last year. We certainly expect to exceed the 8 million subscribers but don't see much cause to sharpen the pencil beyond that.
Robert Peck - Bear Stearns
In the XM 8K this morning, they talk about their market share components, their agreement with GM and GM could opt out in November, I think this is old verbiage that has been recycled, but the real question I am getting to is, would it ever make sense or is it even feasible for SIRIUS to pursue that type of relationship or are the companies so integrated with the OEMs right it is really not too feasible?
Mel Karmazin
I am not sure I understand your question. To explore what relationship?
Robert Peck - Bear Stearns
Could you explore a relationship with GM?
Mel Karmazin
Sure. There is nothing that would stop us from exploring a relationship with GM.
Robert Peck - Bear Stearns
Is it feasible though?
Mel Karmazin
Again, it would require them to either make a decision to have us as an alternate service so that they would have an assembly line that would 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.
Operator
Your next question comes from Kit Spring - Stifel Nicolaus.
Kit Spring - Stifel Nicolaus
Can you talk a little bit about where you think the long-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 heard from them. We've seen Chrysler go to 70%. What do you think is holding Ford back?
Mel Karmazin
Let me do the second part and David will talk to you about the SAC. I mentioned in my remarks that you should expect that there will be an announcement from Ford sometime in the future. We have been greatly ramping up our relationship with Ford. They have been adding a whole lot more vehicles. They have not made an announcement on what their penetration is. That was a Ford decision for their competitive reasons.
I can tell you that they are very committed to satellite radio. The volume that we're getting from Ford obviously is reflected in our extraordinary performance 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 in XM's number and what moves it around from one period to the next, so I really can't comment relative to what you're seeing over there.
What I can say is that on the SIRIUS side, we've been driving SAC per gross add down consistently in each of our respective channels of distribution, so retail continues to decline and automotive continues to decline as well.
You see a lower percentage decline in the overall numbers than 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 SAC elements than you’d seen in the past.
We talked in previous calls about how on the OEM side, we know that it’s going down over time, that we’ve got multi-year contracts with our OEM. OEMs tend to call for reducing levels of subsidies each year. Those tend to be tied -- they’re not directly contractually tied but they tend to be tied to the expectation of operational changes on their side where they are moving 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 just slides into the dash. Those have tremendous cost savings and as a result, we have lower subsidies as well.
We’ve always said that there’s no technical reason why our SAC can’t be equivalent to what XM has reported and they’ve generally reported something in the $60 to $70 range, and that continues to be the case today. It will simply take us still another few years to get there.
Operator
We’ll go next to Lucas Binder with UBS.
Lucas Binder - UBS
Good morning. Two questions I had; one was with regard to the merger, David, you mentioned just a second ago how the different ways that XM 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 you would have a good sense of what the combined business would look like for total number of subs and sort of the combined outlook for the two companies? Do you have any sense of how long that would take?
The follow-up was just on timing and update on the launches right 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, I misspoke. I just don’t know exactly what’s driving their SAC changes.
Look, when we merge the companies and after we’ve got the approval and after the respective management teams are no longer barred by law from looking at each other’s confidential information, then we’ll get into it very quickly and come to an assessment as to what the combined enterprise will look like and what the opportunities are there but at the moment, we are focused 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 integrating companies. I merged Infinity into CBS and merged CBS into Viacom and have done it and look forward to doing this as well and don’t think it will be overly complicated to get our arms around the combined company so that we can give investors a look as to what they should expect to see happening if in fact we close by the end of ’07, so that they’ll have an idea as to what we think ’08 will look like.
David J. Frear
And then on the Sirius 5 program, we’re about halfway through the program and so I’d say we’re about halfway through the money as well.
Lucas Binder - UBS
Great. Thank you very much.
Operator
We’ll go next to Vijay Jayant with Lehman Brothers.
Sabora Bhuta - Lehman Brothers
Hi, this is [Sabora Bhuta] for Vijay. I was wondering, can you talk about your plans for retail in the fourth quarter? Are you taking a different approach this year in terms of marketing or products build-up than in past years? And also, can you give us an update on how the family pack is tracking? Thanks.
Mel Karmazin
As far as our retail plans, we are very excited about the products that we have. We are very excited about the prices that we will have and we are very happy about our displays and we are very happy about our content. And as you can see, for the last eight quarters, we have been executing real well at retail and we fully expect that to continue in the fourth quarter of ’07.
David J. Frear
In terms of promotional activities in the marketplace that you should -- we’ve been very consistent now for the last four years in the way that we go to market and present price points to the consumer. So you should expect to see more similar promotions. This year there are some modifications because of some of the retailers eliminating mail-in rebates, so you will see instant rebates at lower values, but again, consistent economically with what you’ve seen in prior periods.
The family package continues to run between 15% and 16% of the base. It hasn’t really changed very much in the last sort of four quarter ends, sort of right around the mid 15% range.
Sabora Bhuta - Lehman Brothers
Thanks.
Operator
We’ll go next to David Bank with RBC Capital Markets.
David Bank - RBC Capital Markets
Thanks. Good morning. Just a quick question, I think probably for David on the R&D spend this quarter. You guys had a -- you came in a lot lower than we were expecting. We didn’t expect to see kind of a significant -- really significant decrease over the third quarter of ’06. You gave a little bit of detail in the press release but could you give a little more 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 the things that we were talking about, the fact that we had a lot of product launches at the OEMs going on and so in order to get that done to get those lines up and running, that there was a significant amount of non-recurring engineering dollars that were expended with the different automotive partners. And with that fundamental building activity done across the OEMs, you simply now 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 one quarter, you had several of them that you paid for. But fundamentally, the reason is that the production capability is now built.
David Bank - RBC Capital Markets
I know it’s kind of a hard question answer, but could you give 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 be done at this point, really. Substantially all of the OEM partners are now completed with getting their lines ready, so at this point, R&D spending will 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 of the projects they are currently working on as they finish them with new projects that don’t expand the calendar of activities, the spending would stay about the same.
In the future, it really comes down to what kind of initiatives [we get underway].
David Bank - RBC Capital Markets
Thanks, guys.
Operator
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 the retail after-market, if at all? On one hand, I would think it would help drive second radio subscriptions as more people get that installed into their car and like the product. On the other hand, you could argue that people who maybe used to walk into a Radio Shack and buy a radio now are getting them in their new cars, so they have a negative impact on new subscriptions. Any commentary from your front on research you’ve seen or what you think is happening in the business as you look at those levers?
Mel Karmazin
I agree with everything that you just said and basically, what we’re looking at is exactly the same thing. We have a very high customer satisfaction level, so as people get exposed to Sirius in their car, it’s our belief that they are going to want to have that product wherever else they listen to radio, and whether or not that be in their second car or whether or not that be in the home or in a wearable model. Obviously an awful lot of people now are able to get Sirius as a factory-installed product in their car and obviously that’s where we compete with terrestrial radio the most, is in the car, and that’s an important market for us.
We are a little bit perplexed as to why the retail is as slow as it is. Our conversations with our retail partners are such that they are expecting to have a good Christmas. We hope that they are right. We certainly will have product in the stores, anticipating that there will be very good demand for the holiday season. Again, as I mentioned earlier, we have good products there and our content continues to improve and our marketing is geared up. We have what we think will be a very exciting television campaign that will air in the Black Friday through the holiday season.
So we are sort of executing and plan on having a strong fourth quarter and hopefully we’ll be right.
Benjamin Swinburne - Morgan Stanley
If I could ask one follow-up for David; is the OEM mix, as you move with the retail down, or see retail sort of pull back a bit, are you seeing pre-pay levels increase? I’m just trying to think about how the cash flow 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 a couple-of-tenths of a month from time to time, but it’s actually remained pretty consistent. Some of that has to do with the plan mixes in the OEMs themselves, right? So Chrysler is at about -- is at a year, Mercedes is at a year 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 -- Ford ran 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 then combine it with the up-selling that gets done at the call center, it just doesn’t seem to change the weighted average pre-pay all that much.
Benjamin Swinburne - Morgan Stanley
Great. Thanks a lot, guys.
Operator
Thank you. Before we go to our next question, I would like to let everyone know that due to time constraints, we will have time for two more questions. We will go next to James Dix with Deutsche Bank.
James Dix - Deutsche Bank
Good morning, gentlemen. Just a couple of questions on merger timing; is your current expectation that the FCC will complete its review according to its informal 180-day clock and that that clock is not going to be told or paused? And then, how quickly could you close after getting regulatory approvals? Do you think that could be affected by any third-party legal challenges to the approval process?
Mel Karmazin
We believe that the FCC will make their decision before the end of the year, which would certainly be consistent with their 180 days but obviously we can’t commit to that because it’s not in our control. But we’ve heard comments from the chairman that he said publicly that he had hoped to get it done within that timeframe.
And regarding when we will close, assuming we get an approval on a Monday, the assumption will be that the transaction will be closed on Tuesday.
James Dix - Deutsche Bank
Okay, and one follow-up just in terms of liquidity; are you essentially fully funded to cash flow break even now, with or without a merger?
David J. Frear
Yes.
James Dix - Deutsche Bank
Okay, great. Thanks very much, guys.
Operator
Thank you. We will take our final question from Eileen Furukawa with Citigroup.
Eileen Furukawa - Citigroup
Thanks for taking the question. I was just wondering, as a follow-up on the retail sub conversation, do you think that you could actually see a retail sub base begin to shrink in the near-term, like we saw XM this quarter, as your OEM channel continues to grow?
And just a question on churn, like XM, we saw your churn stay at a nice low level. I’m just wondering, are there any particular initiatives you put in place that you think are really starting to pay off? As such, 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 on our 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 are doing many, many more things than we have ever done before, both on the front end when the consumer is buying the car and first getting used to it, so that we are doing things at the dealer level and we are also doing smarter and better follow-ups in communicating to our subscribers during the period of time that they are subscribers, and making sure that when the period of time that the prepaid is expiring, they’ve heard from us a number of times and know the benefits of subscribing.
Simple things like getting the consumer to preset their channels we find has a very positive impact on churn. The more that they are engaged with the radio, the more that they enjoy and use the service and therefore continue on.
We’re doing an awful lot. I think that our churn numbers, as it exists today, reflects the job that we are doing and we again expect that to continue. We have not given you a guidance yet for 2008, so I really don’t want to go there as to what our churn level would be.
Regarding our plan, and all the people that work for us in the retail area know that we are looking to continue to add net subscribers from that retail channel and we are doing every possible thing that we can do to make sure that that number is as big as it could be.
I mean, you’ve raised something that -- is there a possibility and obviously there is always a possibility but that certainly isn’t where we want to see the business go, nor are we doing anything that is going to contribute toward that occurring.
Eileen Furukawa - Citigroup
And just really one last question; when do you guys -- just an update on when you think you’re going to start giving more color on your OEM conversion rates, and should we expect that to be in the same range as we’ve been seeing with XM? Thanks.
David J. Frear
We’ve talked about in previous calls, I don’t expect that we will give a conversion rate. The reason for it is I don’t know how I can give you a series of numbers that would actually be helpful to you in your modeling without 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 rather broadly. We’ve got some that are on year plans, some on six months, some on three months, some on longer than a year. So the real question is how many of the plans that are coming up where the subscription is coming up for conversion in any given month or quarter, do you convert? And so in order to make that number useful to you, we’d have to provide you with information about the conversion opportunities and it just kind of goes too far I think into the details.
We’ll continue to provide you with guidance on total churn for the year. We’ve been reporting that consistently in the four-plus years that I’ve been with the company and we’ll continue to provide you that guidance in the future.
Eileen Furukawa - Citigroup
Okay. Thanks a lot.
Operator
Thank you. At this time, this will conclude today’s Sirius Satellite Radio third quarter 2007 conference call. On behalf of our presenters, I would like to thank you for your participation on today’s conference. At this time, you may now disconnect.
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