Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Paul Blalock - SVP of IR

Mel Karmazin - CEO

Jim Meyer - President of Sales and Operations

Scott Greenstein - President of Entertainment and Sports

David Frear - EVP and CFO

Analysts

Benjamin Swinburne - Morgan Stanley

Tony Wible - Citi

James Radcliffe - Lehman Brothers

Glen Campbell - Merrill Lynch

Kit Spring - Stifel Nicolaus

April Horace - Janco Partners

SIRIUS Satellite Radio Inc. (SIRI) Q1 2008 Earnings Call May 12, 2008 4:30 PM ET

Operator

Good day, everyone, and welcome to the SIRIUS Satellite Radio first quarter 2008 earnings conference call. (Operator Instructions).

At this time, I would like to turn the conference over to Paul Blalock, Senior Vice President of Investor Relations. Please go ahead, sir.

Paul Blalock

Thank you. Good afternoon everyone, and thank you for your participation. This afternoon Mel Karmazin, our CEO, joined by Jim Meyer, President of Operations and Sales; and Scott Greenstein, President of Entertainment and Sports, will review our first quarter financial results and operational accomplishments. David Frear, our EVP and CFO, will then discuss our financial results as outlined in our press release this afternoon. At the conclusion of our prepared remarks, management will be glad to take your questions.

First, I would like to remind everyone that certain statements made during this call might be forward-looking 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 upon assumptions, data and methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For information about those risks and uncertainties, more information is 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 afternoon and thank you all for joining us today. Once again, SIRIUS had another quarter of very good subscriber growth, strong revenue growth and solid cost control. That is the good news, however, the bad news is we are still awaiting regulatory approval for our pending merger with XM. I will have more to say about the merger at the end of the call, but I would like to now focus on the first quarter results.

SIRIUS continues to execute very well on our operating plan. In the first quarter of 2008, SIRIUS achieved our financial goals and continued to grow revenue dramatically with only modest expense growth. Highlights of the first quarter results include a 33% increase in revenue to $270 million. Results were driven by record gross subscriber additions during the first quarter of over 1 million.

First quarter 2008 growth of 322,000 net new subscribers drove a 31% increase in our ending subscriber base to more than 8.6 million subscribers, up from 6.6 million a year ago. We believe this growth of over 2 million net subscribers is very strong in light of the prolonged merger approval and its impact on retail ales, lower production from automakers and a challenging economy. The ability to add over 2 million subs from Q1 '07 is a reflection of our strong content, consumer acceptance of our brand and exceptional execution by all of our partners.

First quarter 2008 results also demonstrated excellent cost control with cash operating expenses increasing only 8%. Again, 33% revenue growth with 8% growth in cost demonstrates the leverage in our business. Further, the adjusted loss from operations improved 55% as compared with first quarter of 2007.

Turning now to the auto sector, only three years ago, in 2005, SIRIUS production penetration rate was approximately 10% of our exclusive OEMs total production. That figure is expected to grow to over 50% this year and is poised to rise even higher over the next few years. In particular, we are excited about the upcoming increase in production penetration at Ford, going from 40% to approximately 70% starting with the 2009 model year. We expect to see the beginning of the impact of this very significant increase in penetration in the third quarter of this year. As you know, we have long-term agreements with our OEMs that will ensure substantial sub growth for many years to come.

In future years, just doing the simple math, SIRIUS' partners share of total US auto production, which we will assume after this year, is $16 million; this year we are expecting it to be below $16 million, We are assuming going forward a $16 million, times our blended forecasted penetration rate, you get over 4 million gross OEM adds per year. We believe this to be a very realistic number and one that demonstrates the strong future prospects for SIRIUS.

On the retail front, SIRIUS continues to outperform albeit in a softer than expected environment. Contributing to this softness is the merger-related confusion, which our aftermarket partners are telling us they are seeing. We also continue to invest in growth strategies in the aftermarket by working closely with the certified pre-owned programs of our automakers and with large used car dealers.

Beginning in Q4 2005 and continuing for 10 consecutive quarters, SIRIUS has attracted the majority of the growth in total satellite radio subscribers. According to NPD Group, SIRIUS achieved a 63% share of satellite radio after market sales during the fourth quarter of 2008, up from 62% one year ago. SIRIUS is continuing to increase market share.

We also have a strong marketing program currently underway to stimulate our aftermarket sales. The campaign is focused on TV and newspapers and a design to enhance consumer awareness of The Best Radio on Radio and drive traffic into retail as well as to our own DTC store. We believe the best way for consumers to spend our government stimulus package rebate check is to buy SIRIUS.

In summary, SIRIUS continues to execute extremely well. We are growing subs, growing revenue, controlling costs and continuing to pick up market share. We think that is a real good story.

I would like to turn it over to Jim now, and I would return to say a few additional words before we take your questions.

Jim Meyer

Thanks, Mel. We are pleased with SIRIUS first quarter results and we are well positioned for the remainder of the year. As Mel discussed, we reported 322,500 net additions in the first quarter, bringing our total subscribers to over 8.6 million, a 31% increase from the same point last year. Net additions were driven by OEM growth, and we are pleased with our gross addition performance, which saw an increase to just over 1 million in the quarter.

On the aftermarket side, we met share goals for the quarter, which according to the NPD Group was 63%. However, the overall satellite radio market continues to be soft. Overall, SIRIUS subscribers increased 10% in the aftermarket to 4.6 million as compared with last year's 4.2 million.

We see some evidence in the market place that the prolong merger approval is not feeding consumers purchase decisions. While we maintain realistic models for the aftermarket channel, we continue to believe a significant opportunity to innovate and growth in the long run exists in the aftermarket business.

We recently launched our second quarter 2008 retail promotion, which includes the Father Day's period. With the purchase of a $50 subscription card, consumers can obtain a discount on their radio purchase. They are also eligible for an additional discount on professional installation. This basic structure will serve as the model for our future promotions, requiring the purchase of a prepaid subscription to obtain the benefits of hardware and installation discount. We believe this strategy will enable a more profitable and stable subscriber.

In the OEM channel, SIRIUS performed well in a very difficult and challenging auto production environment, with ending OEM subscribers up 72% over the last year. As you know, we recently extended several of our OEM relationships and are excited by the production penetration targets of 70% above Chrysler and Ford.

Chrysler's actual 2008 model year production has been running above 70%, beginning with the 2008 model year, which began in the third quarter of 2007. Ford should reach a similar level with its model year 2009 vehicles in this year's third quarter.

While we are excited about these higher penetration rates and those of our partners such as Mercedes at 90% and Audi and VW at 80%, this is not to say the first quarter was without challenges. Chrysler in particular lost market share and significantly reduced its production to more efficient levels. Both of these factors negatively impacted us in the quarter. Ford and other automakers largely performed in line with our cautious expectations.

In addition to new car production, we are also excited about the opportunity that certified pre-owned or second owner vehicles will offer to our business.

Having just launched the Ford certified pre-owned program, we look forward to rolling out a CPO program with most of our key partners throughout the year. At this point, the number of gross ads that we generate through these programs is limited; however, the opportunity to capture at very attractive economic significant numbers of subscribers in this category will grow over the near term as many vehicles are now entering the second-owner population.

I believe there is also some good news in overall inventory positions, which are in good shape in both the aftermarket and OEM channels. The automakers are generally not carrying excessive inventories and we, along with our retail partners, are running very cleanly in the aftermarket channel. All else equal, I believe this is good for both net subscriber addition and SAC per gross add trends going forward.

Our churn performance in the first quarter was 2.7%. The increase in rate was largely attributable to a significant increase in renewal opportunities, driven by our rapid OEM growth over the last year. While overall OEM conversion rates were relatively unchanged, churn from conversion increased significantly due to volume.

Self-pay churn was also impacted by the high number of annual renewal opportunities in the first quarter, particularly in January. We are very focused on churn. Let me say that we are investing in several churn-reducing strategies and expect to continue to see improved self-pay churn benefiting from these programs later this year.

Another important metric in the business is overall SAC, which despite the significant mix shift towards OEM growth still improved 10% over the last year to $91. Both aftermarket and OEM SAC continue to improve due to lower costs and improved inventory management. Thus, we expect further improvement in SAC in the future.

With that, I would like to turn it over to Scott for additional remarks.

Scott Greenstein

Thanks, Jim. In the first quarter, SIRIUS enhanced its standing as the ultimate destination for the best music, talk and sports audio entertainment.

With new and returning artist brand to take over channel and unprecedented coverage of the biggest cultural and sporting events, SIRIUS is clearly the home to the most distinguished audio content, offering our growing subscriber base a programming lineup they simply cannot get anywhere else.

In the music area, we proudly welcome the return of Rolling Stone Radio in conjunction with the release of the Martin Scorsese film Shine a Light. Our music lineup was also deepened with the week-long radio, REM, and a limited engagement channel, Neil Diamond Radio, currently on the air now, hosted by Neil Diamond.

By working directly with the artists, these one-of-a-kind channels deepen our already powerful lineup and help to make SIRIUS the ultimate destination for music fans, providing a unique form for music lovers to connect as a community from anywhere in the country.

This was never more clearly evidenced than most recently on E Street Radio, SIRIUS' exclusive 24/7 Bruce Springsteen channel where after the tragic passing of long-time E Street Band member, Danny Federici, noted music critic and Springsteen biographer, Dave Marsh, hosted a live tribute special on the channel and featured stories on the call from callers all over the country on the impact of Danny's music and their lives. SIRIUS became their community for that moment.

SIRUS was also the ultimate destination for the most compressive coverage of the first visit by Pope to the U.S. since 1999, when Benedict arrived last month, we devoted three entire channels devoted to broadcast in all the major Papal events and key moments, including SIRIUS' owned flagship for that broadcast to Catholic Channel created exclusively for SIRIUS in partnership with the Archdiocese in New York.

We added for that two special occasion pop-up channels, the Papal Archives Channel and Papal Playback. The highlight of our programming came on Saturday, April 19th, when Pope Benedict delivered a special radio message exclusively on the Catholic Channel acknowledging SIRIUS and the channel.

Next month, SIRIUS will officially launch an important and groundbreaking new channel, Doctor Radio, powered by NYU Langone Medical Center. The first of its kind, Doctor Radio is a 24/7 health channel hosted by world-class doctors, a true breakthrough, not only in talk radio, but in All Media.

SIRIUS makes it possible for dozens of experts in their fields to be part of radio channel on which realized medical matters are explored candidly with experts and listeners can call in and ask the question that matters to them most. We will be launching a targeted marketing campaign around this exciting channel launch, utilizing national newspaper and major online health resources. In addition, we are planning a significant national publicity outrage.

In our coverage of the election, during one of the most publicized Presidential elections, SIRIUS created Indie Talk to complement our existing offering of news coverage and left and right talks. Indie talk features shows hosted by political mavericks like Ron Silver and innovative blog news updates. Indie talk is the first political talk radio channel for the independent voter.

On to sports; as the sports leader, SIRIUS continued to deliver every important game, race and event. SIRIUS NASCAR Radio kicked off its second year of unparalleled 24/7 coverage of everything NASCAR. For the Daytona 500, SIRIUS NASCAR Radio featured 15 hours of live broadcast from Daytona International Speedway, and we are thrilled to welcome Tony Stewart back for its second season as the host of the critically acclaimed Tony Stewart Live.

As always, there is no off season on SIRIUS NFL Radio, which offers the most in-depth coverage of events including the Pro Bowl, the Senior Bowl, the Combines and the 2008 NFL Draft. For 52 weeks a year, it is the definitive destination for NFL fan and will continue to be so.

SIRIUS has already been carrying every game at the NBA Playoffs, but now with the start of the conference semifinals, fans will be able to hear both the home and away broadcast for every game. During the heated time of the season, SIRIUS is also broadcasting live from the showcase window of the NBA Store on Fifth Avenue in the heart of Manhattan with special guests throughout the two weeks, including signage up for the entire month on the window in Fifth Avenue.

The key show will be the reunion of key members of the '72/'73 NBA Champions New York Knicks team, Willis Reed, Earl Monroe and Bill Bradley together at the store for one show. The strong press attention that that will gather among all the other things SIRIUS does will continue to have SIRIUS programming generate on a daily basis to serve as a substitute for marketing dollars. More than 3000 print stories appeared in the first quarter with audience impressions of more than 1.2 billion.

Our marketing efforts, as Mel mentioned, will continue. They will continue to serve as a significant public embodiment of the company and our latest targeted campaign will reinforce SIRIUS' superior programming line-up of exclusive artist-branded channel and celebrity hosted shows, an incredible listening experience we offer as a result.

We have already launched a TV campaign which started running May 5 putting SIRIUS out in the market earlier than a year had passed. Thousands of stocks are currently running on major cable network emphasizing several touches to our potential consumer. In addition, our new print campaign will begin in major markets at the end of this week and run through mid June.

Advertising, ad sales; in an environment where terrestrial radio is seeing dropping revenues from ad sales, ours have continued to grow. The first quarter of 2008 ended 25% ahead of the same quarter last year. Our roster of blue-chip advertisers has also grown with the additions of Anheuser-Busch, Toyota, Kraft, Wal-Mart, Unilever, Nationwide Insurance, BF Goodrich and Wachovia in the first quarter.

As we continue to attract the biggest names in entertainment and sports and cover the most significant social and sporting events like no other broadcaster, SIRIUS will maintain its position as the ultimate destination for the best audio entertainment available.

I would like to turn it over to David Frear.

David Frear

Thanks, Scott. SIRIUS first quarter continued the consistent trend of delivering a combination of solid expense management with strong revenue growth. Adjusted EBITDA in the quarter improved at a rate of $0.67 for each dollar of increase to revenue.

Of the back of record first quarter gross adds, SIRIUS added 2.1 million net new subscriptions in the last 12-month, driving a 31% increases in subscribers and driving total revenues in the first quarter to $270 million up 33% compared to last year's first quarter. Advertising revenue of $8.4 million was up 25% year-over-year.

Jim already hit the churn right, but let me do one more time. Our first quarter all-in churn rate of 2.7% reflects changes in mix as our OEM subscriber base grew nearly 72% in the last year as well as historic seasonality related to holiday season renewal.

Looking deeper into the underlying facts, OEM conversions have actually improved slightly and self-pay renewals remain consistent with past experience, or said differently the increase in the all-in churn rate is a function of math, not a change in underlying performance.

Total operating expense before non-cash, depreciations, stock comp were $310 million, up just 7.6% despite the absorption of higher music royalties and despite increased litigation cost. Cash OpEx exclusive revenue share of royalties was up just 2.5% in the quarter last year.

ARPU was $10.42, essentially unchanged year-over-year, and our SAC per gross add improved by 10% to $91 per gross add despite the mix shift away from retail. The improvement was driven primarily by lower product costs, higher average retail selling prices and better efficiency in our OEM channel. We also continued to see improvements in customer service and billing with a 9% decline to $1.5 per subscriber per month.

Total SAC was $90 million, now 9% year-over-year, despite achieving a record gross adds of over 1 new subscriptions on the first quarter, sales and marketing cost of $33 million, down 6% versus last year. The robust revenue picture combined with solid cost management drove an improvement in our adjusted operating loss of 53% to $39 million.

Our pre-SAC adjusted EBITDA climbed to 175% to $52 million and our pre-marketing adjusted EBITDA climbed 66% to $85 million. Contribution margin was about 72%, approximately in line with last year's figure and within our long-term guidance range, with a lower customer care and billing margin partially offsetting the higher OEM revenue share of music royalties.

Consolidated net loss improved 28% to $104 million or $0.07 per share compared to $145 million or $0.10 per share a year ago. First quarter 2008 free cash flow negative $187 million reflects only seasonal trend you have seen in prior years in the business, but also $34 million of increased CapEx for new satellite construction and merger cost, and the payment of the true-up for the music royalty decision, as well as increased payments to litigation cost. Excluding these latter two items, net cash used by operating activities improved by roughly $25 billion or $0.38 for each dollar of increased revenue in the quarter.

In previous years the first quarter has seen seasonally higher cash out flows in the other quarter reflecting the payment of subsidies and commissions associated with fourth quarter additions in the New Year. For all of 2007, free cash flow before satellite merger cost showed significant improvements over previous years and you should expect that 2008 will do the same. The company ended the quarter with $253 million in cash and equivalents and another $56 million of restricted cash.

With that, I will turn it back to Mel for his final remarks.

Mel Karmazin

Thanks, David. I think you all heard that the first quarter of 2008 was really a very strong quarter for SIRIUS. This is our fifth quarterly conference call since we announced the merger. I want to begin by saying that I share the sentiment I hear from many of you regarding the length of time it is taking to complete our transaction.

As I am sure you know, on March 24, the DOJ announced that they concluded their investigation of our merger, and, but for the FCC approval, we would be free to close. They concluded it we now have to wait for the FCC. The DOJ spent well over six months, had approximately 30 layers and economist reviewing the merger. They received from SIRIUS and XM over 12 million pages of documents. There were several dozen subpoenas issued and responded to by interested parties, major players like content partners, OEM and retail partners, competitors and even bloggers were interviewed.

The DOJ said in their final press release they interviewed scores of industry participants. There were also over a dozen depositions taken. They were viewers extensive and concluded the merger would not substantially reduce competition.

So, now we move to the FCC where we need to demonstrate that the merger is in the public interest. We believe there is nothing that is more in the public interest than committing to offer the American consumer more choices and lower prices, which is exactly what we have done.

Our merger has received widespread support from thousands of consumers, prominent individuals, members of Congress, former FCC Chairman, public interest groups, diversity organizations, retail and OEM partners, content providers, religious leaders and more.

We filed our application at the FCC over 400 days ago. It is almost 350 days on the FCC clock from when it was put on public notice. The FCC historically tries to review deals within 180 days. We share the reasonable frustration that many of our investors feel regarding the time it has taken. We also share the outrage that some have expressed to me regarding press reports of opportunistic parties trying to take advantage of the process and extract value for themselves that properly belongs to SIRIUS subscribers and shareholders.

I can assure you we will work with the regulators on any conditions they feel should be attached to an approval. I can also assure you that we will not do anything that is not in our subscribers', future subscribers' or shareholders' best interest. Our benefit of the merger to shareholders and consumers are extraordinary. The efficiencies created will be very substantial, and we will be able to capture a very material amount of them immediately.

As a large shareholder myself, I know how owning a stock that is in deal limbo is not very rewarding. However, I believe now more than ever that this merger is so beneficial that it is worth waiting for. We will constructively work with the FCC. I am optimistic that we are getting close to the finish line and will be able to close the deal.

As I have said before and I repeat today, SIRIUS is executing very well as we continue to scale our business. We are very well positioned whether we combine with XM or continue as a standalone company. We are a company uniquely positioned in the media space, very strong topline revenue growth, while managing our expenses very well and having a great deal of growth ahead for many, many years to come.

Thank you all for your support. We are now ready to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions)

Benjamin Swinburne with Morgan Stanley is on the line.

Benjamin Swinburne - Morgan Stanley

Thank you. Good afternoon. Now, you talked about confusion in the market in the retail channel over the merger. And I am wondering if you had any research that told you conversion ratios or self-pay churn after promotional periods on the OEM side have also been impacted by any confusion around the merger in the long-term upwards into radios or programming. Obviously, as the mix continues to skew more OEM conversion ratio, it becomes an even more critical piece of the economics going forward.

Along those lines, I would love to hear in your better dealers or better OEM partners, how does the conversion ratio is compared. In other words how wide is the range relative to the mean in terms of your better performing and your lower performing dealerships and in terms of converting promotional subs into long-term subscriber?

Mel Karmazin

Okay. So, then your question about are we seeing the merger changing anything in the OEM side of the house, and really the answer is no. So, we will give David and Jim an opportunity to chime in.

This seems to be clearly a retail issue. David said in his remarks that our conversion rates are about the same or slightly improved, and the only thing that we are really seeing on our self-pay churn is the seasonal difference from what we normally do because of the significant number of retail customers that we have that become due for renewal in January and at the beginning of the year, some of them from the original Howard Stern signing on.

So, on conversion, I do not think that we have historically given conversion by align a vehicle, something that we look at, certainly things that we monitor. You would not be surprised that the more expensive the car, the higher the conversion rate tends to be, but that does not mean that there is not good economics in our dealings with some of the less expensive cars and based on our prepay and subsidy that are going out to them.

So, all in all, we think that the OEM business will continue to be strong for us with or without the merger and that the retail market is where there is the uncertainty.

Benjamin Swinburne - Morgan Stanley

If I could ask one unrelated follow-up, David, you talked about the free cash flow from operations in the quarter. It looks like the biggest swing was in the accounts payable and accrued expense line. Is that where the one-timers you mentioned are booked?

David Frear

Yes, that is where they would be, Ben. Both the litigation cost would have been accrued up there as well as the accrual for the final CRB decision.

Benjamin Swinburne - Morgan Stanley

You said it was a $25 million positive year-on-year if you axed out that stuff?

David Frear

Yes, roughly. Right.

Benjamin Swinburne - Morgan Stanley

Okay. Thanks a lot.

Operator

We will move to Tony Wible with Citi.

Tony Wible - Citi

Good morning. I was hoping you can comment on just the linear progression that you have seen in the sub base post quarter-end. Have you seen the same metrics hold up with churn and gross?

Mel Karmazin

So, we have a normal seasonality to churn. As seen in years passed, you see it again this year that our churn rate tends to be higher in the first quarter, because you have all those renewals from Christmas after Christmas after Christmas, so piled up on one another. Most of those turn on in the last week of December into January, and so they tend to mathematically impact the first quarter, where you also tend to have less growth than you do coming out of the fourth quarter, right. So, and then that tails off as you work through the year. So, yes, we see the same seasonal pattern this year that we have seen in prior years.

Mel Karmazin

We obviously do not April number completed, but we sort that the numbers on churn were higher in January than they were in February than they were in March. So you are seeing it trending downward.

Tony Wible - Citi

With the ramp in OEM penetration rate, where do that leave you on retail as far as thoughts on marketing and SAC in that channel versus the OEM channel? Do you see a need to change?

Mel Karmazin

Yes. So, let me deal with part of it, and then Jim could pipe in. So, we think that the aftermarket will always be an important channel for us, not just in the form of a second sub, because obviously the more OEM customers we get, the more opportunity it is to convince them that they would be happier if they had a radio in their home or in their office or in their second car or any other place. So, we think that it is always going to be important. We also believe that if the merger happens, we think that there will be some really opportunities for us to spend in the retail market, as well we will wait till after the approval before we get into specifics in that regard when we talk with XM. However, we think that with the merger there is even more opportunities, but without the merger, we think that that is still going to always be an important channel for us.

Tony Wible - Citi

What was the percentage of subs on annual plus plans, the multi plans?

Jim Meyer

Both teams are around 15% and the annual plus plans continues to exceed 60%.

Mel Karmazin

We have some programs that we are currently working on particularly on the multi sub plant to get that number up beyond where it is today.

Tony Wible - Citi

Great. Thank you.

Operator

We will move on to James Radcliffe with Lehman Brothers.

James Radcliffe - Lehman Brothers

Thank you. Good afternoon. First-off, looks like G&A was up somewhat materially as a percentage of revenue. What was driving this? Was any merger cost in there?

David Frear

Litigation expenses.

James Radcliffe - Lehman Brothers

Litigation expenses entirely?

David Frear

Yes, that's all. Well, some compensation, but the primary driver of it is litigation cost.

James Radcliffe - Lehman Brothers

Okay. For aftermarket customers who are churning off, do you see any change in where they are going? Are they primarily people within satellite radio entirely or are you seeing an increasing portion switching from one provider to another?

Mel Karmazin

Yes, we do not see any, hardly any of what the latter. What we said to the Department of Justice when we were talking to them about our competition, we get our subscribers from people who never subscribe to satellite radio. If for any reason they decide to no longer keep satellite radio, it is because they are going back to old fashioned terrestrial radio.

James Radcliffe - Lehman Brothers

Got it. All right. Thank you.

Operator

Next we will next move on to Glen Campbell with Merrill Lynch.

Glen Campbell - Merrill Lynch

Yes, thanks very much. I was wondering if you would be willing to talk about what your expectations are for ARPU once you have introduced the tiered and à la carte programming?

Mel Karmazin

Our feeling after the merger, we will have hopefully on approval, as soon as we get approval we will sit down and talk to you all about what we see. However, we believe that there will be some people who might find our à la carte radio, à la carte attractive. We also think that there are some people who might find some of the packages that we might offer for $9.99 to be attractive. Those things might be particularly useful in areas of retention, but one of things that we think is a very exciting opportunity for us after the merger would be the package that would give an XM subscriber the best of SIRUS.

So hypothetically, XM has, and I think their last numbers were 9.3 million subscribers, so we think that they are an awful lot of their 9.3 million who would like to have some of the content that is on SIRUS, like how it is done ands some of our other stuff. So, there is a real opportunity for us based on the packages that we propose to the FCC where we would get and additional $4 or so in ARPU from some of those 9 million subscribers. So, we are not convinced that the ARPU will go down after the merger, just as a result of people wanting to get some more packages, but we will have to wait and see how that plays out.

Glen Campbell - Merrill Lynch

As we model the business, we think about there being discounts for term commitments and so on with the current packages. Should we think in terms of those discounts also being available on the lower end à la carte and $9.99 packages as well?

Mel Karmazin

We have not finalized our arrangement with the FCC on where they may want us to be on our card based on what we have submitted in our application. We assume that what we have put in our application at some point might be a condition as part of the merger, and we have not concluded what those conditions would be including any specifics on pricing.

Glen Campbell - Merrill Lynch

Okay, thanks. The used car program, can you give us any early indications as to how it is going?

Jim Meyer

Yes, we are quite excited in particular first with the certified pre-own programs. I think as all of you know, those are cars that are coming back to the auto companies and the auto companies are adding a lot of things to the package, including a warranty to sell them among our own dealers.

The great news there is it allows us to market those customers in the same way that we market to these new customers, and yet, of late, the SAC investment a second time or at least the subsidy investment a second time. So, I would say I am quite excited about the earlier results, albeit still small, but clearly the trend is it will grow significantly.

Glen Campbell - Merrill Lynch

Percentage take rates on those; we would assume it'd be lower, but are you saying they are not a lot lower?

Jim Meyer

I am saying that I think they are going to be lower, but I do not believe they are going to be a lot lower, no.

Glen Campbell - Merrill Lynch

Okay, super. Thanks.

Operator

Next we will move to Kit Spring with Stifel Nicolaus.

Kit Spring - Stifel Nicolaus

A question for David concerning the revenue shares and royalties; is the 16%-ish this quarter a good run rate for the rest of the year? Could you then tell us about your confidence in your ability to refinance XM's puttable bonds upon FCC approval? Thanks.

David Frear

On the rev share royalties, we now finally have the effect of the CRB decision fully baked into the rate. So, changes in that rate will have more to do with the mix between OEM and retail lending out. So, you should expect it to jump a little bit as the OEM base of subscribers and therefore revenue base continues to grow. The refinancing, it is a tough credit market out there. The XM is in discussions with its bondholders about what to do once the merger comes along. I think we are cautiously optimistic that the one-on-one offer that is recorded to be made on some of their debt is not going to be an impediment to the merger.

Mel Karmazin

I think you have to refer any call, any questions you have on XM, I think you have to refer to that company.

Kit Spring - Stifel Nicolaus

Thanks.

Operator

We will then take our final question from April Horace with Janco Partners.

April Horace - Janco Partners

Hi. Thanks for taking the question. You said you are going to be at 4 million car penetration rate assuming 16 million car production rates. If it goes to 15, can you give us any indication as to what kind of penetration rate that would be? Then with respect to the certified market, how many vehicles are out there that would be in that particular market opportunity?

Mel Karmazin

Okay. So, the description was trying to give you an estimate or a demonstration at shows that in model where there is about 16 million of production, we are going to wind up with over 4 million. If in fact, there is less production, you should assume we will have less. If in fact, there is more production, you should assume we will have more.

However, at this point, we were just trying to give you a sense. Long-term investors who are interested and seeing where the company would be adding subscribers over the years to come, demonstrates that each year, whether or not they manufacture 15 million cars for United States or 17 million, SIRIUS will be getting to grow subscribers in the millions every single year just based on the new car sales.

On the certified pre-owned --

Jim Meyer

On the certified pre-owned, we have actually put in place some pretty sophisticated metrics now that they tell us when these cars are going to come back that have factory radios in them. I will tell you the opportunity in 2008 is relatively small, but in 2009 is what we are talking about and to which we are looking ahead. As you can guess, it just gets bigger and bigger every year after that.

Mel Karmazin

Yes, I mean, if you start thinking about when SIRIUS started to wrap up on its OEM side in 2005, four years, five years after those cars have been in the hands of the consumer, they are going to find a way back into the market. We think that as you get further and further away from when we started ramping up, you are going to see a significant increase in the opportunities we will have in that marketplace.

April Horace - Janco Partners

Okay. Lastly on the merger, is there any point in time where you throw in the towel and just go on a standalone basis or are we just going to continue to wait for the FCC and is there any catalyst to move the FCC forward on the decision?

Mel Karmazin

I mean I think the sense is that what we have said is that the efficiencies that are created by this merger it certainly is difficult from the stock point of view, but the efficiencies created this merger are very substantial. We think that there are great benefits to the consumer about having content from both services and our ability to drive down costs based on those efficiencies.

We believe in the merger. SIRIUS believes in the merger more so than we did even when we were announcing it. In spite of the debt market going the other way, but we believe that the synergies are important. If in fact we can get the FCC to move sooner, for which we have been asking, that is better. If it turns out that the conditions are such that they are so egregious that they are not in the shareholders' or subscribers' best interest, then we will not do it.

However, we are doing everything we can to bring this to a successful conclusion, and we really are looking forward to working with the FCC to complete the last hurdle remaining on getting the deal done.

April Horace - Janco Partners

Great. Congratulations on a good solid quarter.

Paul Blalock

Thank you very much. That concludes our call for today.

Operator

Thank you. That concludes our question-and-answer session and our conference call. We do thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: SIRIUS Satellite Radio Inc. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts