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Executives

Joseph M. Titlebaum - General Counsel, Secretary

Nathaniel Davis - President and CEO

Joseph Euteneuer - Executive Vice President and Chief Financial Officer

Gary Parson - Chairman of the Board

Analysts

James Ratcliffe - Lehman Brothers

David Bank - RBC Capital

April Horace - Janco Partners

Glen Campbell - Merrill Lynch

Mark Wienkes - Goldman & Sachs

Kit Spring - Steifel Nicholas

XM Satellite Radio Holdings Inc. (XMSR) Q1 2008 Earnings Call May 12, 2008 10:00 AM ET

Operator

Good morning my name is Koman and I will be your conference operator today. At this time I would like to welcome everyone to the first quarter 2008 financial results conference call. (Operator Instructions) I will now turn the call over to Mr. Joseph Titlebaum, General Counsel of XM Satellite Radio. Sir you may begin your conference.

Joseph Titlebaum

Good morning. This is Joe Titlebaum, General Counsel at XM Satellite Radio. Before we begin our prepared remarks, I would like to remind everyone that certain information on this call may contain forward-looking statements. Due to a number of factors our actual results may differ materially from those projected in such forward-looking statements. Those factors include future demand for the company's service, the impact of the merger, any litigation results for settlements, and the potential need for additional financing, as well as other risks described in Radio Holdings Inc. Form 10K file with the Securities and Exchanged Commission on February 28, 2008. Copies to these filings are available online and upon request from XM Radios investor relations department. Now I will turn the call over to Nath Davis, President and CEO of XM satellite radio. Nate

Nathaniel Davis

Thank you Joe and good morning everyone. Thanks for joining us. On the call with me today are Joseph Euteneuer, Executive Vice President and Chief Financial Officer, and Gary Parson XMs Chairman of the Board.

The purpose of our call this morning is to provide you a brief update on our first quarter 2008 results. Now I want mention right upfront that giving our pending merger, we believe it is not appropriate to provide future projections or guidance about the standalone financials. So this call will focus on first quarter 2008, financial and recent trends only. Recognizing the merger as top of mind for everyone, let me speak to that first. As you know the Department of Justice effectively cleared our merger with SIRIUS, when it announced on March 24, and ended its investigation without taking action to block the transaction.

This merger is clearly in the public interest. The combined XM-SIRIUS will offer consumers more choice in Audio Entertainment, particularly in Radio programming with the tiered pricing, ala carte and Family Friendly program packages that we file with the FCC nearly a year ago. We are now waiting to hear from the Federal Communication Commission as you know.

Let me just say that while the process has clearly been protracted one, we remain hopeful that we are nearing into the process and this will be the last standalone quarterly earnings call we will have. Given that I am pleased to note that solid operational performance of the first quarter. Now, I want to start by expressing my appreciation to XM’s management team, to all of our employees, and our partners for their continued focus on day-to-day operations.

As you know, it is always challenging to manage day-to-day operations, particularly so when there is merger pending Throughout the 14 months, since this proposed merger was announced, the XM team has continued to focus on the fundamentals and drive improvements in our core business. First quarter results reflect that focus. Let me first give you some of my overall observations and then I will get into some more details on quarterly results.

From a negative standpoint, extraordinary merger and legal expenses and substantially increased record level royalties as well as the subsidy cost associated with the rapidly growing OEM installations kept us from narrowing our year-over-year first quarter loss. In addition, while we have successfully increased direct retail sales to our website and to all call centers that increases, not offset the continuing decline in overall retail sales through the big box retailers. However, offsetting this retail weakness, however, is a continued acceleration of our OEM growth. Even with the relative softness in the US auto-market, XM delivered the largest number of OEM growth additions in the history of satellite radio with just over 800,000 gross additions and roughly a million factory installed XM radios manufactured and delivered to dealers in the quarter. That is a 48% year-over-year quarterly increase. Our first quarter 2008 run rate is $4 million annual installations with increased penetration expected during the later half of 2008, as the 2009 models began production, XM 2008 installations could well exceed 4 million units close to the long range estimate we provided a number of year’s ago. Now this impressive ramp in OEM production continues even in the phase of annual North America automobile projection expected to be the weakest an over decade. The penetration rate amongst automobile partners, our automobile partners currently stands at 40%, and it is expected to rise to 60% to 70% over the next few years.

Clearly the auto industry likes what it sees in satellite radio and is driving implementation across all product line. The new car consumers continue to respond with favorable adoption rate following their promotional trail period. The post trial conversion rate at XM for the first quarter was 53.3% compared to 51.5% in the first quarter 2007.In contrary to the decline some analyst had projected, XM's conversion rate remained solid in the low 50. Even its gross additions have accelerated, penetration has deepened and frankly even its overall economic concerns by consumers have emerged.

As we look forward to an improved content line up and the multiple pricing plans associated with this merger, one fact is clear. New car consumer adoption with satellite (inaudible) radio remains a strong growth platform for the combined company to build upon.

Now getting into the more detail, we had 1.034 million gross ads in the first quarter. That is 19% higher than the first quarter 2007 gross ads of 868,000. Total net ads were 303,000 compared to 285,000 a year ago quarter. All of our growth is coming from our OEM sector. While our retail basis remained essentially flat over the last year, and as our retail disconnect offset to retail gross ads.

In fact the first quarter 2008 OEM gross ads grew 49% year-over-year and comprised 78% of total growth ads for the quarter. OEM first quarter totaled net ads where to be 355,000 up 58% year-over-year. We have always maintained that it is the business shifted from a retail driven business to an OEM driven business. XM is well positioned because we team with OEM partners who represent approximately 60% of the US market for new cars.

In addition, our OEM partners are expanding XM’s reach by installing XM equipment in more than 140 vehicle models for model year 2008, and across all of our OEM partners, XM penetration rate was roughly 42% in the first quarter and is ramping towards 60% to 70% by the 2010 model year. Now think about that that means for those consumer buying cars and trucks from an XM partner in the first quarter, four out of ten drove out of the dealership with a factory installed XM radio.

Within just a few years, we expect that the number to be seven out of ten. Now as you recall, XM does not report promotional subscribers when a new vehicle is manufactured but rather only account to subscribers when the vehicle is sold and when we have a paid subscription. As I meet many investors and analyst have asked for the number of XM equipped vehicle that have been manufactured and shipped to dealers but not included in our subscriber account.

This is the so called parking lot sub-number. At the end of the first quarter there were an estimated 1.5 million of these vehicles. In assets, if XM included these unsold vehicles in the first quarter results, we would have reported an ending subscriber total of roughly 10.8 million, growth additions of roughly $1.24 million, net additions of roughly 5000 and an improvement ensuring from 2.7% down to 2.3% and the subscriber acquisition cost improvement of roughly 15% below the reported $73 per subscriber.

Let me turn to retail now, at the end of the first quarter 2007, our retail base was $4.457 million subscribers. Now at the end of the first quarter 2008, our retail basis $4.5 to $ 9 million subscribers, essentially flat year-over-year. So while our OEM channel is driving our growth, the stable base of about $4.5 million subscribers in retails provide a steady revenues stream.

First quarter retails growth ads were 233,000 compared to 331,000 in the first quarter 2007. So we had a net lost of 51,000 net retail subs in the quarter compared to a net gain of 60,000 in the first quarter 2007. As you recall, the first quarter 2008, we reclassified 18,000 commercial subscribers out of our retailed base and in to a separate category of subscribers called commercial outsourced.

For sometime now XM has highlighted the shift in satellite radio from the after market plug and play radios. It is a fully integrated in-dias system with our OEM partners, increasing the listener's likely experience in the car. They also what access to satellite radio in many locations from their home, not just their car, into their office and beyond. Therefore we are expanding XM across more platforms to reach even more listeners. A number of new partnerships including Mobile product offerings will help meet that demand. In the first quarter for example AT&T and Alltel subscribers to XM Rado Mobile more than doubled year-over-year. On April 1, we announced a new partnership with QuickPlay Media Incorporated and with BlackBerry, the leader in US smartphone market. NVIDIA delivered with us 20 channels of XM content to any US blackberry device regardless of the end users carrier.

As I mentioned on the last call, XM’s exclusive content is one of iTunes most popular podcast downloads and we made xmradio.com, the exclusive on line portal for live XM programming. Today, we are announcing that Oprah Winfrey sole series broadcast which originated exclusively on XM satellite radio, will now be available as a video podcast on Apple's iTune. Of course, those people watching the video broadcast will be reminded that Oprah's content will still be created exclusively on XM Radio and they will be offered the opportunity to buy an XM radio or XM on line subscription. These initiatives expand and enhance the XM brand and it gives us multiple points of customer content.

While these are relatively small businesses, they offer significant value at low cost. These partnerships provide up sale opportunities, as we generate incremental revenue, and create a new stream of new sales leads and we capture these benefits of the relatively low cost as we leverage existing asset. So, we are expanding our reach to more devices, so listeners can hear us, when and where they want to. Early results, particularly in the XM mobile products, are strong and growing.

One last key metric, first quarter self pay turn was 1.77%, essentially flat with the 1.78% a year ago and continuing to meet our expectation. This is one of my best examples of the XM team staying focused on performance and shows why I am so proud of this team.

This quarter XM delivered new channels of programming, while programming cost remained essentially flat quarter-to-quarter from 2007. Our Limited run micro channels and podcasting strategy demonstrate the innovative way to reach more listeners. In the first quarter XM's 24/7 POTUS channel provided radio coverage of the most watched presidential campaign in decade.

The POTUS channel has won number of acclaim including being named "one of the 10 most important voices" in its election by Best Life magazine. We also launched number of XM's popular micro channels including XM Thriller. Of 30 days dedicated channel to the music entity of Michael Jackson and a 30-day dedicated channel for the music entity of country music star George Strait. These channels are not only winning acclaim and appreciation of process subscriber base, but also from the music entity itself.

Our coverage of the college conferences keeps XM phenomenon to college sports. In the first quarter, we covered Mens Basketball Tournaments from the six major conferences. Finally, we launched our fourth year Major League Baseball in showing XM subscribers can hear every game through this summer and throughout the World Series.

So in summary, the XM team is executing effectively and delivering benefits and improved operation, cost efficiencies, robust OEM growth and expanded menu of XM services.

Today is also two years since I moved from an independent Board Member at XM to a member of the management team, first as Chief Operating Officer and subsequently as Chief Executive Officer. Now, where there are always some ups and down, I do believe that we have made significant progress in these past three years. As an executive I always believe, that when you have issue, you just got to take them straight on and you got to get them behind you.

Two years ago there were a numbers of issues overhang in this company. We had everything from governmental enquiries that is a Securities and Exchange Commission, the Federal Communications Commission, the Federal Trade Commission, to Class Action Lawsuit to a Record Label Lawsuit, self-pay churn that is escalated to nearly 2%, our retails segment that is weakened leading to appear at a to five straight quarters of lower year-over-year growth.

Now, nearly all of these concerning trends have been reversed or issues at least resolved. Five quarters of decreased growth have now given way to three straight quarters of increased growth. Self-paying churn has then reduced and stabilized at a more moderate level of under 1.8%. A declining conversion rate has been showed up and has remained rock steady, even as new installations in low-end vehicles have accelerated.

The FTC and FEC enquires have been completed with no actions required, which is the testament to the solid customer service and accounting practices of the company. The litigation with the recording industry has been substantially resolved allowing the company to move forward with the development marketing of creative new consumer recordable devices.

Now, we will develop devices incorporation with rather than in confrontation with our [end skew] partners. We have ended or greatly reduced our marketing alliances that were not being productive. We have streamlined our retail product offering, and we closed down less desirable inventory. We work with our Canadian partners to significantly improve their operational performance as well.

We strengthened our programming in our content line up, which is reflected in improved customer satisfaction and strong list ratings. I heard your concerns; we did this without the addition of expensive new programming deals within the last two years. Also while there has been a quite burden on our capital expenditure budgets over the last two years, we have successfully launched two new Satellites -- positioned our prior satellite as in-orbit spares, providing not only extraordinary signal coverage and service continuity protection, but also dramatically reducing future capital demands on the company forward.

In summary, our cash flow and the current stock price are not yet where I want it be. However, numerous operational and financial improvements have been completed and the company brings us strong platform of network, products and performance to the combined company. We all look forward to the potentials of combining the strength of the two companies in to a single highly successful entity going forward.

Now, with that let me turn this over Joe Euteneuer, our CFO for review of our financial performance for the quarter. Joe?

Joe Euteneuer

Thank you, Nath. Good morning, everyone. We are pleased our first quarter results continue the trends we saw in 2007, including solid revenues and subscriber growth as well as consistent churn in conversion rate performance. We ended the first quarter with 9.33 million subscribers up 1.4 million or 18% year-over-year.

Please note that effective in the first quarter, XM outsourced the management of its 18,000 commercial subscribers. We have broken commercials subscribers out separately, but they continue to be counted as part of our total subscriber count. We receive net revenue from this arrangement now captured in the other revenue line item rather than in subscription revenue. This reclassification of commercial subscriber revenue had a slight negative impact to subscription revenue in ARPU in the quarter, but no impact to total revenue.

First quarter 2008 revenue grows to $308 million, up nearly 17% over first quarter 2007. First quarter 2008 subscription revenues rose to nearly $276 million, up nearly 17% over first quarter 2007 subscription revenue of $237 million. As Nath said, our robust OEM business which continues to ramp was a key growth driver in the quarter.

While revenue growth was strong, elevated royalty payments negatively impacted our gross margin percentage. First quarter, gross margin was 62.3%, down from 63.3% in the first quarter of 2007. The decrease in gross margin was impacted somewhat by increased OEM revenues share but was mostly driven by increased music royalty expense, as result of December 2007 Copyright royalty board arbitration.

These expenses are recorded in the revenue share and royalties line item. First quarter 2008 revenues share and royalties’ expenses were 25% of subscription revenue, up 5 percentage points from 20% of subscription revenue in the first quarter of 2007. The year-over-year comparisons on this metric will be particularly difficult during the first three quarters of this year. As you may recall, we expensed in the first quarter of 2007, the entire difference between the old rate and the new CRB arbitrated royalty rate for all four quarters of 2007.

Consequently, the quarterly royalty expense for the first quarter, second, and third quarters of 2007 do no reflect the full expense on a comparative basis, and should therefore be adjusted for 2008 comparisons.

Non-variable cost were $136 million in the first quarter, slightly below the $137 million recorded in the fourth quarter of 2007. However, $11 million higher than the $125 million recorded in the first quarter of 2007. The main drive of the year-over-year increase in non-bearable cost was programming and content expenses, which grew due to renewals of some long-term contracts.

First quarter G&A cost fell to its lowest level since the fourth quarter of 2006, despite $3.5 million of merger related expenses and $7 million of elevated legal expenses mostly in connection with the settlement of Inno device litigation. During the first quarter, we continued winding down a number of long standing cost issues that negatively impacted G&A.

Our discretionary marketing expenses were down. However, our direct subsidy costs associated with OEM installations which are book as SAC expense before recognizing a subscriber continues to negatively impact SAC. First quarter SAC was $73, compared to $65 in the first quarter of 2007 but largely in line with SAC charges for the past several quarters.

This year-over-year increase was driven largely by 48% increase in OEM installations compared to first quarter of 2007. Please not as well that first quarter 2007 SAC was inflated due to $5 of inventory related charges in the cost of merchandised line item. Of course as Nate mentioned earlier, if we included so called parking lot subs in our gross addition numbers, SAC would have improved dramatically.

Advertising and marketing expenses of $27 million were the lowest since 2004, reflective of decreased reliance on the retail sales channel and decreased resource allocation to that channel. This lower level of discretionary marketing expenses allowed cost per gross ad or CPGA to fall below a $100 to $99 for the first time since the third quarter of 2006 and also reflects a favorable comparison to the first quarter of 2007 CPGA of a $103.

Adjusted operating loss increase slightly to $30.7 million compared to $27 million in the first quarter of 2007. Our net loss increased slightly to a $129 million from a $122 million in the first quarter of 2007. The substantial increase in our copyright royalties rate which I have previously discussed as well as the subsidy cost associated with the rapid growth of our OEM installations were the primary issues that prevented us from narrowing our year-over-year adjusted operating loss and net loss.

Please take note that as of March 31, XM1 and XM2 have been fully depreciated. This should decrease our depreciation expense by approximately $12 million per quarter moving forward and therefore have a favorable impact on future net loss results. As you may recall from the fourth quarter call, we are now beginning discussions with our debt holders to facilitate the concerns waivers or refinancing necessary to complete the merger. Obviously we will need to get near to closure with the SEC before these will be finalized.

We ended the quarter with total available liquidity of $425 million comprised of approximately $212 million in cash and cash equivalent, $62.5 million remaining available on our $250 million revolver after drawing a $187.5 million on February 27, 2008 and a $150 million available under the GM credit facility.

Cash usage in the first quarter included $60 million payment for Major League Baseball for the full 2008 season, as well as the one time catch up payments to sound exchange of 37 million for music broadcast during 2007 under the terms of the December 2007 copyright royalty board decision. These two factors accounted for nearly a $100 million of the $133 million of negative cash in the first quarter.

Capital expenditures for the quarter were $17 million, while satellite related CapEx has been a burden on XM for the past two years, remember that we have successfully launched two new satellites and positioned our prior satellites as in-orbit spares, providing not only extraordinary signal coverage and service continuity protection, but also dramatically reducing future capital demand on the company.

We have only $57 million plus launch insurance remaining to spend to finish and launch XM-5, which will complete the refresh of our satellite constellation in 2009. Overall our financial performance met and even exceeded our expectations for the first quarter. Nate back to you

Nathaniel Davis

Thank you Joe, at this time Operator I believe we can take questions. Operator, are you there?

Question-and-Answer Session

Operator

If you would like to ask your question at this time please (Operator Instructions)

Your first question comes from the line of James Ratcliffe with Lehman Brothers.

James Ratcliffe - Lehman Brothers

Couple of questions, first of on SAC, could you talk about the OEM and retail fact trends individually? Was the increase entirely a mix-shift or were either of the two individual components up year-on-year? And second, I don’t know if this is covered on by the no-guidance caveat, but do you have a read about whether in the event of merger approves, you need to refinance the ’09 convert, thanks?

Nathaniel Davis

This is Nate speaking. I am going to handle the SAC question first and, so the OEM versus retail. First of all, we are not going into OEM versus retail SAC visually, but it suffices to say that the mix-shift is the biggest change and primarily because the OEM segment is growing so much and remember that with the OEM segment, you got a papers with radios are certainly going in the cars. You don’t really get the subscriber to pay revenue until three to six months out. So, you will see this ramp in expenses as OEM cars ramp before you see the revenue coming to door. So, the real the mix is really the biggest issue here on SAC expenses to mix, because OEM expense is coming to door first.

Gary Parsons

And the, this is Gary Parsons. On the second issue, I guess we are not really focusing on that so much at this point in time relative to the converts. Obviously we have hope to withdraw this whole FCC approval process to a closure far earlier than this and as it has extended on out, obviously we are trying to keep pace with the other elements that are necessary, which would be the necessary revise of the direct put arrangement that are in the change of control covenant. So it all has to be paralleled with what we are receiving on the SEC side of that house. So, those things will come in time but right now we are mostly focused on the SEC and on the direct fixed bond holders who have flip right.

James Ratcliffe - Lehman Brothers

And, just to clarify does that mean that you believe that the convert does in fact have a change of control provision that would be period or not?

Nathaniel Davis

What you mean this that we have discussion with all of our debt holders and we are not going to carry those in the public forum right now.

James Ratcliffe - Lehman Brothers

Alright, Thank You

Operator

Your next question comes in the line at David Bank with RBC Capital

David Bank - RBC Capital

Good morning, I was just hopping I can get a little bit more clarity in terms of the conversion ratio on your parking lot cars, where you are giving the service away 100% XM funded what kind of conversion rates are you seeing after the end of the promotional period? Does it differ from the Honda, GM experience thanks?

Nathaniel Davis

As you know, we are not disclose, we don’t yet disclose the conversation rate or trial retention rates for anything other than GM and Honda, but I can tell you that we are seeing rates that are comparable to what we're seeing in the others. So there is not a dramatic difference to them but it's very early in this stage though. Most of the car manufactures, Toyota just started with two cars that now have factory installed. Hyundai has been underway for while, Nissan has just started up as well. So it's really too early to start reporting on those numbers yet.

David Bank - RBC Capital

In terms of general trends I guess, are the higher end cars retaining any differently than the lower end cars?

Nathaniel Davis

Yes higher end cars do tend to retain as well as the high-end trucks, the big trucks and SUV's and the high-end cars all have higher conversion retention rate than do the lower price cars. Although, we are surprised because there is a few models of lower price cars that have a very good trends, but in general lower price cars then have a lower retention rate than our price.

Gary Parsons

And actually this is Gary. I’ll amplify after say. That’s one of the reasons why we're so particularly pleased to see this very solid conversion rate you know because we've known and understood that as we increase this penetration, we are going down into a lower and lower end-models or elsewhere expanding the penetration within lower end-models and yet we’ve been able to do that and continue to do that on a pretty rapid basis while seeing very stable overall trends that would some what indicate that we are doing better across the board even as we're bringing own lower end subscribers as well. But, we could not be more pleased with how not only the entire conversion rate trend is, but as Nate indicated even some of the newer manufactures are trending pretty much inline with where they are the earlier stages of Honda and GM did as well.

Nathaniel Davis

There is one other point I’d make. Remember that in the beginning when GM and Honda were first turning up you saw conversion rates increased as we got better at the process as the car manufactures got better. You can imagine that the same thing is happening with other manufactures, as they begin to learn more about the process and how to make the process work well and as we work better with them the rates are beginning to increase. So that’s why Gary is saying, we are pleased with the progress because while we have a matured process with GM and with Honda, we are seeing the process is beginning to mature with the other and is actually improving.

David Bank - RBC Capital

Okay thank you very much.

Nathaniel Davis

Thanks David.

Operator

Your next question comes from the line of April Horace with Janco Partners.

April Horace - Janco Partners

Hi thanks for taking the question. You mentioned that you were going from four out of ten to seven out of ten in the future of having XM enabled cars. Can you just give us, I don't know if you said it or not, but can you give us kind of timeframe as to when you will be seven out of ten and then have a follow up.

Gary Parsons

Yeah, hi April. The answer is it's by 2010. I said by 2010 model year. Which means, you will start to see those models come out in late 2009, fall of 2009, so sometime in August, September of 2009 you will start to see the rate gets up to that level and by the time in the mid model year 2010, which is mid year 2010 we will be certainly in that range.

Nathaniel Davis

April, one of the thing from a financial perspective because I know really that's what the modeling is all about, should note that since General Motor's in this current model year is already up around that level or approaching it. Most of the increase in penetration that you will be seeing will be coming from the newer manufacturers who are coming on board, those tend to be more favorable economically to us, but they are currently at a lower penetration rate for this model year they will be much stronger in the '09 model year and then far stronger during the '10 model year.

April Horace - Janco Partners

Okay, and then I know you have been focusing on direct sales and it proven to be very beneficial for Direct TV, could you give us what percentage of growth retails ads came to your direct sales channel.

Nathaniel Davis

That’s not a number we disclose, so I'm sorry to say no I can't give you that mix, but I can tell you that you've seen what happened through publicly available data, what’s been happening with a 30%, 35% of decline that are happening at the retail stores. We have been offsetting that. You get back into the math, we have been offsetting that by what’s happening in direct online, some key ops and particularly our own customer service sales. So we have seen significant, I will just use that word, increases in a percentage of sales that are coming from internal channel.

April Horace - Janco Partners

Great, that’s all I got, thank you.

Operator

Your next question comes from line of Glen Campbell with Merrill Lynch.

Glen Campbell - Merrill Lynch

Yes, thanks very much. I was wondering if you would elaborate a little bit more on some of the drivers of ARPU. You mentioned the impact from the way you are handling the commercial subs, but I wonder if you could talk through some of the sort of influences the extensive discounting, the proportion of sort of second subscribers and so, on that are reflecting that number, thanks?

Nathaniel Davis

Let me give you some color to it and Joe you might back me with any numbers that I don’t quote. But, first of all, our multi-year plans were about 44% of our base a year ago. They are now about 45%. Our family plans have gone from low 23% to mid 23% range and those are the two biggest factors that have had some impact on ARPU. Now that helps us well, because as the organization will tell you, I am pushing very hard for us to put, as many customers on multi-year and family plans, as we can because that actually drives down insurance. So, the way economics work, it's much better to have 8% to 10% dilution in ARPU, then to spin the lot of marking dollars, trying to replace every customer that’s turning out. So, our reduction in churn is partially associated with trying to go out and lock every customer we can into multi-year plans and discount plans that cost and stay on board with us.

Glen Campbell - Merrill Lynch

Just for my benefit, are those strictly done on a rate card basis or is there some what you call off rate card pricing done for retention and other purposes?

Nathaniel Davis

Most of it is done, you would call on record, but remember that there are situations where customers who are about to leave for some reason, we may end up trying to retain those customers, but for the most part it’s all done on rate card.

Gary Parsons

Yeah, that’s actually a pretty minimal piece of what the overall impact on ARPU is. It's mostly coming from the expansion of family plan and multi-year plans as Nate indicated.

Glen Campbell - Merrill Lynch

Okay, super enough. One follow up as well. Could you talk a little bit about the NavTraffic you have highlighted in the press release, but I want if you could just give us little bit of sense of how material that is now and could get to be?

Nathaniel Davis

All right well, we'll get the highlight with management team sometimes and Steve Cook is here, so I will have Steve talk about what we've done on NavTraffic.

Steve Cook

Yeah, I think this is big expansion year for NavTraffic. We are in model year ’08. We're in about 18 models. That increases to 40 models for ‘09. So we are seeing big push by our partner to highlight NavTraffic. And you got some other things coming downward as well.

Glen Campbell - Merrill Lynch

Can you talk at all about take rates there or revenue?

Steve Cook

It's too early. We really haven’t broken that out.

Glen Campbell - Merrill Lynch

Okay, Thanks very much

Nathaniel Davis

Thanks Glen.

Operator

Your next question comes from the line of Mark Wienkes with Goldman & Sachs

Mark Wienkes - Goldman & Sachs

Thank you, Good morning. Can you talk to the benefits you see with the tiered pricing plans that you've offered up and then is there any structured reasons why the benefits wouldn’t also accrue to not just a combined company but XM as a standalone, I guess given what you know about the listeners trends across your channels?

Nathaniel Davis

I think that the most important and most honest answer we can give you about these pricing plans is we really don't know. It's not as if we had some market analysis or market study that gave us all the answers to what was going to happen here. In reality we know there is risk and there is a reward. And the risk obviously is that some people take a lower price packages and dilute ARPU. The opportunity is that more people sign up for the service and we get more subscribers. And right now I don't know the balance between the two and so really, I really can't give you a projection on that. We just know that the synergies are large enough that we can take that risk in a merged company. It's probably not a risk we can take without being a merge company because we wouldn’t have the synergies to back ourselves. However, I think the synergies are large enough that we can take that risk and see if we can get more customers on this.

Mark Wienkes - Goldman & Sachs

Okay thank you. One quick follow up, I guess with, Honda is a the key partners of yours, is it safe to assume to that you are taking to them with respect to their new long-term agreement with Microsoft for the in car entrainment systems so that XM Radio functionality will be built in to that?

Nathaniel Davis

The conversations we are having with Honda number one are confidential but its safe to say that we are talking them and all the other cars manufactures about a number of things that gives us rare linkage in the car, linkage between what’s happening on the navigation system, what’s happening in the voice activation system because many of them putting voice activation in the car the XM system NavTraffic and Nav Weather and the audio entrainment system. So, I think you are going to see overtime greater integration between all of those and we are taking all the car manufactures including Honda about that.

Mark Wienkes - Goldman & Sachs

Great thank you very much.

Nathaniel Davis

Alright.

Operator

We now have time for two more questions. Your next question comes from the line of [Tony Vivo] with City.

Unidentified Analyst

I was hoping if you can talk about the linear progression in retail that you saw both during the quarter and after the quarter, if you saw any noticeable difference in retail churn and gross sub additions through out the last few months?

Nathaniel Davis

No there really has been no appreciable change in the trend either on gross ads or anything else and retail market is the trend that have been there for the last four, five quarters have continued. Now you do see seasonal change in retail because of what happens in the holiday period, what happens in spring time so you again expect to see more retail ads in the June timeframe for a Grads and Dads. You see more in the retail timeframe, you see little bit less in the summer time and in January but in overall no change in trends other than that seasonality I just mentioned.

Gary Parsons

Tony one piece of that you may be looking for and I just want to make sure, we are addressing your question directly. Nate indicated the gross ads piece of it and consistent with those trends historically 1st and 3rd quarter are our retail quarters and second, and fourth quarter are strongest. But, I think moreover you were going towards a churn off of that base. You know, are we seeing an acceleration of churn as this retail, as this recessionary concerns and consumer components elements, and as we indicated on our year end call as well too, we have frankly been very pleased.

Conversion rate is continuing solid and churn rate is just very solid right now. So, we are not completely certain, what to attribute that to, but apparently the people that have the service, it's a positive value proposition to them. And it's frankly inexpensive enough monthly service that we are not seeing. Thus far we all now convert its all consumer discussion people do, we are not seeing on impact on churn from the softness in the economy.

Nathaniel Davis

Let me link that however Tony to one of the comment that was asked earlier, it was asked about the ARPU impact and multi year plans of adding plans. Part of the reason of the phenomenon that churn is not changing is because we have that have encouraged more customers to be on multi year plan and particularly family plan. What happens in family plan, is those people who are buying cars, we sell them a family plan, and when they are on a family plan with a after market radio and they have got a OEM installation, we see less churn from that. In another words, if you got a car and you got a subscription with XM and you happened to buy second subscription for an after market radio, you tend to stay with that second subscription for a longer period of time. So, that also helps us with managed churn, which is why we try to put as many people as we can on family plan.

Unidentified Analyst

Great, well thanks. The last question is the chips that cost, what are your anticipation of those costs as the production rates increased, you anticipate the cost just trending down over time with numerous chipsets getting in or will there be any kind of one time cost for the higher production rate?

Nathaniel Davis

No, I think that we will continue to see a decreasing cost of both raw electronics components and most specifically the chipsets that we designed and have manufactured for us as well. Historically in the retail market place, we have tended to pass through those savings in an effort to continue to drive down the cost of that radio to the consumer and keep the retail growth up. We are tending to not necessarily pass through as much of that, because the radios are already fairly inexpensive. I think most of where you will see that improvement will be in the OEM channel as we improve the cost of the radios to our OEM car company partners. That tends to lag a little bit in time frame from each new chipset because it takes a while for those car companies to put it in place, but we do see that trend ongoing in the next couple of years.

Unidentified Analyst

Has that lag gotten any shorter?

Nathaniel Davis

It has for certain of the manufacturers. Some are little bit more aggressive on that front than others, but it still tends to be depending upon the model line at two to three year type of a process to get all of the new equipment validated and put in a factory, install type of a basis.

Unidentified Analyst

Great, thank you.

Operator

Your final question comes from the line of Kit Spring with Steifel Nicholas.

Kit Spring - Steifel Nicholas

Any change of control, provisions in either your content or OEM contracts that offer some potential opportunities or potential negatives?

Nathaniel Davis

In general, no. I mean, each contract is very specific and very unique but most nearly all contracts really don’t address change of control provisions, so and change of control in XM. So, no most of them are not impacted by change control and so that’s it.

Kit Spring - Steifel Nicholas

Okay thank you.

Gary Parsons

Thank you, operator. And, I guess kind of we’ll finish up if that’s the last call that we have is as Nate indicated we are very pleased with the operational performance that we have. I’ll particularly note that after five quarters of year-over-year declines in growth rates it's been great to see three quarters worth of increases in growth rates particularly with the weak economy out there. So, I think we’ve go some pretty decent trend lines going forward and we all crossed our fingers and hope this is our last standalone conference call. We appreciate the support of all of the investors and analyst that have participated on this over the years. Thanks a lot.

Operator

This concludes today’s conference you may now disconnect.

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Source: XM Satellite Radio Holdings Inc.Q1 2008 Earnings Call Transcript
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