Sirius Satellite Radio Q1 2006 Earnings Conference Call Transcript (SIRI)

May. 2.06 | About: Sirius XM (SIRI)

Sirius Satellite Radio (NASDAQ:SIRI)

Q1 2006 Earnings Conference Call

May 2, 2006, 8:00 a.m. EST

Executives

Michelle McKinnon - IR

Mel Karmazin - CEO

Jim Meyer - President, Sales & Operations

Scott Greenstein - President, Entertainment & Sports

David Frear - CFO, EVP

Analysts

Bob Peck - Bear Stearns

Craig Moffett - Sanford Bernstein

Jason Helfstein - CIBC World Markets

Benjamin Swinburne - Morgan Stanley

Kit Spring - Stifel Nicolaus

Eileen Furukawa - Citigroup

Barton Crockett - JP Morgan

Laraine Mancini - Merrill Lynch

Operator

Good day, everyone and welcome to the Sirius Satellite Radio first quarter 2006 earnings conference call. Today's conference is being recorded. At this time I'd like to turn the conference over to Michelle McKinnon, Senior Director of IR. Ms. McKinnon, please go ahead.

Michelle McKinnon

Good morning, everyone, and thank you for your participation. This morning Mel Karmazin, our CEO, joined by Jim Meyer, President of Operations and Sales; and Scott Greenstein, President of Entertainment and Sports; will review our achievements during the first quarter of 2006 and our current outlook for Sirius Satellite Radio. David Frear, our Chief Financial Officer, will discuss our Q1 financial results and update you on our full year 2006 guidance. At the conclusion of our prepared remarks Mel, David, Jim and Scott will 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 maybe incorrect or imprecise.

Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. More information about those risks and uncertainties 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 turn the call over to Mel Karmazin for his opening remarks.

Mel Karmazin

Thanks, Michelle. Good morning and thanks for joining us. Today I am pleased to report that Sirius has continued to live up to our commitments to investors and also delivered record first quarter results. Subscriber growth of 761,187 net additions was a 149% improvement over last year's first quarter and represent 57% of Satellite Radio's first quarter total net additions and a 64% retail market share for Sirius. This is the second consecutive quarter that Sirius added more net subscribers than our competitor. Sirius is the fastest-growing satellite radio company and I am proud to say that today we are raising our end of year subscriber guidance to over 6.2 million.

First-quarter revenue nearly tripled to $126.7 million, up from $43.2 million last year. Advertising revenue increased to $7.3 million; a dramatic improvement over just $0.5 million generated in last year's first quarter. Sirius generated more advertising revenue in the first quarter than we generated in all of 2005. We are already the advertising revenue leader in Satellite Radio.

On a per subscriber basis, advertising revenue contributed $0.65 to the average monthly revenue per subscriber. Advertisers buy the best content and that's why our advertising revenue per subscriber is almost double that of our competitor. We believe the combination of subscription price elasticity and advertising gives us great ARPU advantage for the future.

Subscriber monthly churn was just 1.8% and consistent with our guidance. Our all-in churn remains one of the lowest among subscription services and our customer satisfaction continues to be above 90% which is among the highest levels measured by subscription services. Most importantly, we remain laser-like focused on achieving positive free cash flow. SAC per gross add of $113 in the first quarter is a 41% improvement over last year's first quarter SAC per gross add of $190 and positions us to reach our goals of continued lower costs for the remainder of '06 and '07.

Our sales and marketing expense increased by only 12% year-over-year despite our triple-digit subscription growth, which once again demonstrates the promotional value of our programming and our focus on cost control.

During the quarter, Sirius reached financially favorable new exclusive agreements with Kia, Volkswagen, Audi and Rolls Royce. Sirius will be a standard feature in 2009 model year Kia vehicles. Volkswagen will target Sirius in 80% of its production in the 2007 model year. Sirius is now a standard feature in all Rolls Royce vehicles.

We expect to continue our considerable progress in the OEM channel and we are well on our way to fulfilling our commitment to more than double our OEM sub base in 2006. Jim will highlight more details for you in a few minutes.

In the first quarter, Sirius also added significant new content to our already strong programming line-up. Additions to Sirius' line-up included the two 24-hour a day seven-day a week Howard Stern channels, the increasingly popular Playboy Channel, Cosmo Radio, Blue Collar Comedy, FOX News and an exclusive new live morning show from Court TV. Scott will highlight in more detail the exciting things going on in programming .

Let me just reiterate another commitment; and that is, Sirius will not run commercials on our music stations. Subscribers and advertisers tell us that we have the best programming in radio and that is what will continue to drive subscribers and advertisers to Sirius. Just to reiterate, in the most recent quarter Sirius added more net subscribers and more advertising revenue than our competitors.

In the quarter we also reached agreements with the four major record labels regarding the industry's first wearable satellite radio MP3 player, the S-50, and we expect to introduce our first live wearable this summer. We also anticipate that we will be streaming the Howard Stern show via the Internet to Sirius subscribers before Father's Day. We believe this will be another catalyst for Sirius to get new subscribers who will find listening online in their office, home or dorm to be an additional incentive to subscribe.

Let me also mention that in Canada, where Sirius has a premium priced service, we are already the category leader in satellite radio and growing faster than anticipated.

In a few minutes David will take you through our financial highlights for the first quarter and our new guidance, but I'd like to make a few observations.

  1. First, Sirius has a very strong balance sheet and a strong cash position. Our business plan is fully funded. We have no need for additional financing.
  2. Our strong subscribers and revenue growth give us confidence in our ability to reach positive free cash flow as early as the fourth quarter of this year and for the full year of 2007.
  3. We continue to expect to generate approximately $1 billion of revenue in the 2007.
  4. Lastly, when we look out to 2010 we see revenues of approximately $3 billion and free cash flow of approximately $1 billion -- and that's after capital expenditures. Real free cash flow based on reasonable assumptions and our business model.

So as you can see, things are really going great at Sirius. Jim will now take you through his operation followed by Scott and then David and then we will open it up for questions.

Jim Meyer

Thank you, Mel. I'll first start with comments on our retail sector. Industry satellite radio sales in the first quarter were strong, running approximately 63% higher than the first quarter of 2005. Sirius added 534,958 net retail subscribers in the first quarter, which is 169% over net retail subscriber additions from the year ago quarter. Sirius Satellite Radio's actual retail first quarter market share was 64% making us the retail market leader for the second quarter in a row.

With the launch of Howard Stern's show in January, we continued to see strong hardware sales at retail during the first quarter, in addition to the activations that carried over from 2005. We believe that this positive momentum will continue throughout the year as the demand for our programming continues and as we introduce new products.

Our hardware models continue to be well-received and we will be introducing new versions of some of our popular plug and play products in time for Father's Day as well as later this summer. These new products will have added features and new sleek designs that we believe will be very popular with consumers.

The latest version of the industry's leading seller Sportster, our new Sportster 4, has started production and we will reach retail stores in late May. The new Sportster 4 design is ultra sleek and incorporates our Gen3 chipset which allows significant cost reduction. In addition, Sportster 4 will be our first product which incorporates our innovative Sirius universal connector which allows for expanded accessory options.

Later this summer we also plan to introduce our first live portable satellite radio that will have a number of exciting features and will complement the already successful S-50. In addition to life capability, this exciting new product will feature expanded memory, enhanced user interface, MP3 functionality, a buy button and a few others surprise features to improve the customer experience and expand access to our unique content.

I think it's important to note that almost every major retailer in 2006 is expanding both the advertising linage and in-store square footage dedicated to satellite radio. Over the next few months, we will be rolling out new displays and POS materials in these locations. I believe this commitment by major retailers is a very positive sign for the satellite radio category and is key to increased growth for the important fall selling season.

Now let's switch to OEM. The OEM sector where we continued to see strong progress during the first quarter as our factory programs gained momentum. In the first quarter we added 225,343 net subscribers from our automotive OEM channel, which is a 109% increase over the net OEM subscriber additions for the first quarter of last year.

Again, we expect significant growth to continue in this sector during the year. Plus as we have previously announced, all of our exclusive OEM agreements were renewed in 2005 with long-term deals which both improve our penetration rates at each of these car companies as well as consistently improve our economics.

Let me now comment on each of our partners beginning with DaimlerChrysler, where we extended exclusivity until September 2012. Factory installations continue in high volume across virtually all DCC vehicle lines. Now including availability on the newly introduced models such as the Dodge Caliber, Jeep Compass and Jeep Patriot. Sirius is now available on virtually every DCC model as a factory option and DCC is targeting 750,000 units for the 2006 model year, representing over 30% penetration in the '06 model year.

With Mercedes, we extended exclusivity until September 2012. Mercedes Benz is targeting approximately 50% of production with Sirius over the next two years. Sirius is currently available on virtually every Mercedes Benz vehicle. Sirius is currently standard on 2007 model year SL Class, CL Class, AMG and 600 model vehicles. Additionally, Mercedes-Benz is packaging Sirius on other model year 2007 vehicles as standard equipment in the premium PI package. The penetration rate on the all-new S Class with the P1 package is currently running approximately 90%.

Ford extended their exclusivity with Sirius through 2011 with an option to extend to 2013. This covers all Ford Motor Company brands. Beginning this month, Ford and Lincoln Mercury will be offering Sirius as a factory-installed option on at least eight vehicle lines: the Ford F-150, Ford Explorer, Ford Sport Trac, Mercury Mountaineer, Lincoln Mark LT, Ford 500, Freestyle and Mercury Montego; double the number of the models in the first quarter.

Order rates at Ford continue strong and continue to exceed our projections. By the end of the '06 calendar year we expect approximately 19 vehicle lines to be available from Ford with Sirius as a factory option; and up to 21 vehicle lines for the 2006/2007 model years, generating up to 1 million subscribers. We remain on track to reach our projected activations for Ford this year, and successful ramp up of the new factory program is key for significant growth in 2007.

We have renewed our exclusivity with BMW and are seeing increased penetration on the four model lines that are now available with Sirius as both a factory and dealer option, the 3, 5, 6 and 7 series. Sirius is also available as a dealer-installed option on the X3, X5, Z4 and selected Mini models.

As Mel referenced earlier, we also announced an exclusive agreement with Rolls Royce to offer Sirius as a standard feature with a lifetime subscription.

With Toyota Sirius is now available as a port or dealer option on the Camry, Solera, Avalon and Land Cruiser as well as on the Lexus LS430, ES330, GS, LX470 and three Scion models. Availability of Sirius will be expanding over the next several weeks to include the 4Runner, FJ Cruiser, Prius and the IS.

During the first quarter we were very pleased to announce that we also signed a new agreement with Volkswagen and Audi to exclusively offer Sirius in their vehicles beginning with the 2007 model year and running through 2012. Volkswagen targets to include Sirius in up to 80% of their vehicles beginning with the '07 model year.

We also signed an exclusive agreement with Kia that calls for Sirius to become a factory standard feature in 100% of their vehicles beginning with the 2009 model year that begins rolling out in the spring of '08. This agreement runs through 2014 with an option to extend to 2017. Naturally we're very pleased to welcome Volkswagen, Audi, Rolls-Royce and Kia to our list of exclusive partners.

Sirius will also be offered exclusively on the Subaru Forester beginning in June of this year and the Impreza in September. We anticipate that Subaru will be expanding their offering of Sirius in other models in the future. I'd now like to turn it over to Scott to talk about our programming, marketing and promotion.

Scott Greenstein

Thanks, Jim. In the first quarter, Sirius continued its practice of delivering the best programming in all of radio. We are selectively expanding and deepening the programming line-up at Sirius with content from mainstream as well as niche audiences. It is our goal to continue to carefully develop Sirius programming to satisfy the growing number of varying audiences considering satellite radio.

Sirius now sets the bar for programming in all of radio by pioneering and remaining committed to delivering music channels that are 100% commercial-free music and by offering meaningful, compelling and informative programming for multiple demographic groups across diverse channels. With each show we add and the talent we sign, we not only enrich our customers' listening experience, we generate positive awareness and, more importantly, build the Sirius brand. Such that it is rapidly becoming a brand that the mention of its name is becoming synonymous with the best programming in radio.

This quarter we significantly deepened our mainstream programming. First, with respect to the significant male mainstream audience we launched Howard 100 and 101. They are now fully advertiser supported channels with very high customer satisfaction. We launched Playboy Radio as a free opt-in; Howard Stern talked about Playboy Radio on his show and with a few brief mentions within a few weeks during the quarter opt-in soared to more than 400,000. This complements our already strong exclusive line-up for men which features extensive sports offerings including the NFL exclusively, the NBA and the premium college sports package in all of satellite radio and all of radio.

Just for example, we broadcast every 2006 NCAA Division I men's basketball tournament. The NCAA championship game featured Florida and UCLA, two Sirius exclusive schools. That comes on the heals of the NCAA BCS college football championship which also featured two Sirius exclusive schools, Texas and USC.

We continue to expand our sports programming by having reports from the 2000 Olympic winter games. We added programming on Maxim Radio and, most importantly, NASCAR arrives in January 2007. So in sum, with the NFL, the NBA and NASCAR combined Sirius will clearly have the most compelling, dominant and, most importantly, exclusive sports offering on radio.

With this build throughout the year continued growth with the NFL and NBA and the 2000 programming launch of NASCAR on Sirius, the fourth quarter is likely to be the strongest quarter for sports-related satellite radio subs yet.

In our mainstream general audience offerings this past quarter we had FOX News and its newly created talk channels return, Headline News. In the emerging area of trucking radio we launched Road Dog Trucking featuring Charlie Daniels and other personalities. In one of the few comedy brands to emerge in years, Blue Collar, we launched Blue Collar Radio, a 24-hour Blue Collar radio comedy channel. We have Court TV, as Mel mentioned, featuring the new exclusive Court TV morning show. This complements our already strong mainstream line-up of NPR and our growing Christian music and talk programming.

We again this past quarter strengthened our position as the programming leader with our core music audience. We extended our exclusive Rolling Stones Radio through the end of the year. We hosted a limited run Pink Floyd Radio. We continued our Springsteen relationship with an exclusive interview on his album release last week. Most recently we announced that we're going to broadcast every concert on Jimmy Buffett's upcoming tour through August on his own radio, Margaritaville.

Turning to women. This quarter I'm proud to announce that we have launched a true spectrum of content for a growing female audience with original content and channels that are able to be daily and react in the tradition of radio, not an assemblage of TV feeds that women might have missed on their TV during the day. We launched Cosmo Radio with a live daily morning show. We added compelling programming to Martha Stewart Living Radio, the first and only satellite radio channel providing women with new exclusive and original content every day.

We had a breakout success out of that channel called "Whatever" featuring Jennifer and Alexis which continues to generate a dynamic buzz and press at every show. We launched the Candace Bushnell show, we launched in Judith Regan show and we launched the new newly revamped Lime. This complements our already existing content, To Go with Richard Simmons and our commercial-free music channels which are already a favorite of our female audience.

So in the strong dominant male and female demographics we have already demonstrated our commitment and will continue to do so. We expanded our programming for the young male audience by coverage of the winter and summer X Games and the Faction Channel continues to dominate among young male awareness.

We continued to launch offerings for multicultural audiences. Again as we promised, we would continue to look into content for this. We launched the ESPN Deportes radio content which also reinforces our growing Latin content push and highlights our sports programming into the Latin community. We had broadcasts of the Super Bowl in seven languages. Our Korean Channel continues to perform strongly and a Chinese channel is in development. Our French Canadian channels, our talk and music channels in Canada are already getting the same critical acclaim they get here in the United States.

Our strong programming results in passionate audiences which results in stronger ad sales. Just this past quarter we have seen advertisers such as ABC, Goodyear, Toshiba, UPS, Universal, Bayer, NBC, Castro, Warner and Verizon, among others, jump on. The Blue Chip advertisers are flocking to satellite radio and flocking to Sirius due to its content.

So what does this all mean in terms of our brand? Let me explain now briefly what our programming and targeted planned approach to demographics has meant to our brand and our Company. In the first quarter, total Sirius brand awareness hit 70%, for the first time and unaided brand awareness reached over 50%.

In terms of everyday awareness, the Sirius brand is thriving. It is equally gaining additional momentum in press services and on the Web. In the first quarter alone our programming initiative generated more than 4,000 articles regarding Sirius, an audience impression of 2.1 billion. The outlets covering Sirius reflect and are a product of the diversity and quality of Sirius programming. We were featured in numerous publications from Forbes to Wall Street Journal and Time Magazine to Entertainment Weekly and Rolling Stone.

On TV, it's no different. Sirius was featured in programs from Extra, Today, Good Morning America, David Letterman and others. The press continues to lavish praise on Sirius hardware and content. Money Magazine said Sirius is the clear winner when it comes to top tier talent. Esquire called the S-50 and Sirius 'radio perfecto'.

Our website, Sirius.com, according to Nielsen net ratings has seen triple-digit over the year growth. We've outpaced our competitor since January and visitors to Sirius.com are loyal. Again, Nielsen net ratings also reported that visitors coming to Sirius.com for streaming and online content resulted in return visitation rates on par with Rhapsody and MSN Radio and other Internet companies who's sole businesses is providing online audio content, where it's secondary to Sirius.

Our publicity awareness and now Web traffic continue to support a goal many of you have heard me mention on numerous occasions; that our programming leads to awareness and news which leads to direct savings in the amount of marketing dollars we need to spend.

Finally on marketing, we will take all this massive amount of free publicity and consistent Web traffic and combine it with and reinforce it with our usual inventive and efficient Father's Day and fourth quarter campaigns to complement our programming such that our goal of having everyone be aware of Sirius and ultimately choose Sirius becomes a step closer each quarter. Thank you very much. I turn it over to David Frear.

David Frear

Thank you, Scott. Good morning, everyone. We were very pleased with our first quarter results. Sirius' better than expected subscriber growth and market share is great news for investors. Perhaps even more important is the efficiency with which we achieve that growth. The combination of higher ARPU, lower product costs, lower customer care cost per subscriber and continued spending efficiencies in sales and marketing, as Scott just discussed, is equally great news for investors.

Total revenue was up 193% as subscribers increased 181% year-over-year, while SAC per gross add was driven down by 41% and pre-SAC adjusted loss from operations improved by 54%.

As we highlighted during our last conference call, Sirius is realizing promotional benefits from our high-profile content, and for the first quarter our sales and marketing expense increased by only 12% yet fueled a 171% increase in gross adds. We ended the first quarter with almost 4.1 million subs, crossing the 4 million subscriber mark, well ahead of Street expectations. First quarter subscriber net additions grew 149% with both retail and OEM net additions more than doubling over last year's levels.

Our retail channel contributed 535,000 net adds or approximately 70% of our total first quarter net adds despite stock outs of certain products during the quarter due to stronger than expected demand. We also added approximately 225,000 net OEM subscribers in the quarter and continue to experience strong growth from this channel.

As Jim said, Chrysler is now offering Sirius factory installed in virtually all its models and is targeting over 30% penetration in the current '06 model year. Ford's order rates are ahead of expectations and beginning this month, Ford will be offering Sirius as a factory option in at least eight models up from our four models during the first quarter.

As Mel said, we are raising our 2006 year-end guidance to over 6.2 million subs, reflecting our expectations for continued strong demand for Sirius. We continue to expect parity at retail this year while our OEM subscriber base will more than double in 2006, in line with previous guidance.

Our first quarter churn was in line with guidance at 1.8% per month in the quarter. Churn for the quarter reflects a bump in churn which commonly follows big selling seasons as well as the seasonality of our business given the large number of annual planned subscriptions which expire in late December and January every year, as any not renewed are reported in first-quarter churn.

Our subscriber research continues to indicate extraordinary levels of customer satisfaction with Sirius and we maintain our churn guidance of approximately 1.8% per month for 2006.

Our SAC per gross add came in at $113, 41% lower than in the first quarter of 2005 reflecting a substantial year-over-year reduction in our product cost as well as greater inventory sell through than we had expected, as strong demand for Sirius continued in the first quarter. We are reiterating our previous guidance for SAC per gross add to approach $110 for the full year.

Customer service and billing expense per average subscriber per month is a key measure of efficiency in the business model. This metric improved significantly in the first quarter of this year declining 42% to $1.40 per sub per month from $2.40 in the year ago quarter. Total customer service expenses also declined sequentially as call center staffing levels normalized after the hot holiday selling season.

Our average months of prepaid revenue declined slightly in the first quarter given a higher mix of monthly subscription plans resulting from 2005 holiday gifting as well as the initial impact of six-month forward bundled subscriptions.

Cash employed per new subscriber, meaning our average prepaid revenue per new sub net of SAC, was negative by less than $10 per gross add in the first quarter. As we have highlighted before, positive cash employed per subscriber is a key milestone in our path to free cash flow and we are nearing that point very quickly.

Total revenue nearly tripled in the first quarter to over $126 million reflecting a 181% increase in our subscriber base year-over-year, with Sirius having 2.6 million more revenue-generating subs than we had 12 months ago. Reflecting our strong first quarter subscriber growth we now believe total revenue will exceed $600 million this year.

Total ARPU for the quarter was $10.80, up from $10.72 in the first quarter of '05 including a $0.58 offset from mail-in rebates and a positive $0.65 impact from advertising revenue in the first quarter. As Mel and Scott discussed, Sirius generated $7.3 million of advertising revenue in the first quarter, exceeding our total ad revenues for all of 2005. Finally, approximately 12% of our subscribers were paying $6.99 per month under a multi-unit subscriber plan at the end of the first quarter.

Our adjusted loss from operations widened by approximately $10 million to $137 million for the quarter driven by a $42 million increase in total SAC to support the 171% increase in gross ads. Excluding SAC, our adjusted loss from operations narrowed to $27.5 million for the quarter from $60 million in Q1 '05, reflecting improving operating leverage in our business model as we move towards generating positive free cash flow as early as this year's fourth quarter. Given the impact of our increased subscriber guidance on total SAC, we now expect our adjusted loss from operations for 2006 to be approximately $565 million.

Our net use of cash in the quarter was $165 million, including $159 million of cash used in operating activities which resulted in part from prepayments for programming, as well as pay downs of accruals built up in the fourth quarter of '05 offset by first-quarter subscriber prepayments. For 2006 we expect our net use of cash will remain unchanged from our previous expectations of approximately $480 million.

Our loss per share for the first quarter of $0.33 included a $0.20 per share impact from non-cash equity charges. Excluding these non-cash expenses, our adjusted loss per share would have been a penny more, at $0.13 from last year.

Sirius ended the quarter with approximately $715 million in cash, cash equivalents and marketable securities. That is all the money we need. We continue to expect to be free cash flow positive after CapEx as early as the fourth quarter of this year, and for the full year 2007. With that, operator, let's open it up for questions.

Question-and-Answer Period

Operator

(Operator Instructions) Your first question is from Bob Peck, Bear Stearns.

Bob Peck - Bear Stearns

I guess my first question is for Jim. Jim, could you comment a little bit about the roll out of the next models after this summer? How is Sirius looking at models that include cellular capability, maybe even video capability? Could you comment there? Mel, could you maybe comment on when we could possibly see a price increase across the platform? Thanks.

Jim Meyer

Right now we're pretty focused on the products we're going to roll out between now and the end of the year. I think it's fair to say that we clearly are developing chipsets that would give us many options as it relates to incorporation in cell phones. I think that we're still spending a lot of time understanding that business model and understanding exactly what those type of products might bring to us in terms of subscribers.

The real focus for us is that we are staying very focused first on introducing products that are significantly lower cost than the ones they replaced while being innovative and, we think, capture the consumer's attention. Obviously our wearable that will be introduced this summer and then quickly cost reducing that model as well.

Mel Karmazin

Bob, obviously our labs are working on a whole lot of products that can do really cool things. But we're also interested in business models and it's not just the idea of putting a chipset someplace, it's really making sure that the business model works for us. So you should just stay tuned, but assuming that we're looking across everything.

Regarding price increases, we have really nothing to say other than the fact that we have historically been the premium priced service. We are the premium priced service in Canada and in the future there will be price increases coming from Sirius.

Bob Peck - Bear Stearns

Thanks.

Operator

Our next question comes from Craig Moffett, Sanford Bernstein.

Craig Moffett - Sanford Bernstein

I understand churn rate reflects the increased mix of OEM subscribers. I'm wondering if you now have enough experience in the OEM channel to start to comment directly on the kind of conversion rates you're seeing. If you could talk about the methods and procedures you use to try to ensure that customers do convert at the end of their promotional window.

Mel Karmazin

Let me start and then David can jump in. We really don't have enough history. We have some obviously BMW information which is very encouraging for us on penetration early on. We really are starting to move up with Ford. We're having some greater history with DaimlerChrysler. So, the only thing that we can really tell you is that we think the most relevant number for investors is the overall all-in churn, and we certainly have given you that.

We have no information today that we can give you on conversion that would tell you why our conversion would be different than that of our competitor that has a longer history. So until the time comes that we can give you a number that is either higher or lower than theirs, our assumption is that you ought to look at their numbers and use that as some indication until we can give you something better.

One of the things that we really like about our business model is the fact that we have significant revenue sharing with our OEM partners. So it is obviously not only in our interest to have a high conversion rate, but it is also in their interest in increasing penetration because they're sharing in that revenue. We work very closely with our automobile partners to ensure that they're going to get the maximum revenue out of Satellite Radio from each vehicle.

Craig Moffett - Sanford Bernstein

Can you discuss just what are the methods and procedures you use when a customer is ending their window to how you get them to convert and how successfully each one of those has turned out to be?

Jim Meyer

Sure. We have multiple punches during the life cycle of the customer's initial bundled subscription that starts with what happens on the dealer floor and extends to welcome kits and other follow-up mailings. Then as they near the end of their bundled subscription period that we work with our automotive partners in a multi-touch strategy to remind people that they're coming up. In terms of talking about the effectiveness of those programs, that goes right back to conversion rates. I think Mel's already answered that question.

Craig Moffett - Sanford Bernstein

Thank you.

Operator

Our next question comes from Jason Helfstein, CIBC World Markets.

Jason Helfstein - CIBC World Markets

Two questions. One, sales and marketing was obviously much better than a lot of us expected in the quarter. I'm curious if it was better than your internal forecast? If so, did that have to do with your competitor spending less? To the extent that your competitor stays a bit more rational through the rest of the year as they did in fourth quarter, obviously opposite the fourth quarter, does that put less pressure on you to drive that sales and marketing?

Secondly, a question for Jim. You rattled off a number of Toyota models that would support a port or dealer option. How should we think about it if XM continues to keep a factory deal with Toyota, how should we think about perhaps a breakdown with how many installs you would get perhaps percentage-wise versus them based on the XM being included in models of Toyota versus Sirius being a stand-alone dealer option? Thanks.

Mel Karmazin

So on the sales and marketing side, I think what we told you is the fact that we're just not going to be doing anything stupid and that obviously we have said that we will be competitive in our pricing at retail and that we can't really let another company's actions dictate what our actions do. Our shareholders expect us to act the way we ought to act based on our judgment and not based on doing something because somebody else does it.

I'm going to turn it over to Jim on the other part of your question. But just remember, it's not like this is a commodity, it's really about the fact that there's a distinction between the content that Sirius has and the content of our competitor and the customer is really the one that the OEM partners are interested in pleasing. We believe that there is going to be a great deal of demand on the part of automobile customers to want to get Sirius Satellite Radio, not just satellite radio, but Sirius Satellite Radio. You can see it in the retail numbers.

So when somebody has a choice and they can go into a store where they can get both products in the first quarter, 64% of them said, you know what? I want Sirius. By the way, that was probably in spite of higher price points for the product. So I think there's not enough credit that's given to the content that exists in our Company.

Jim Meyer

As far as they Toyota question goes, we're also trying to understand that question well. I don't know that I can give you clear guidance beyond this year. This year, I fully expect that we should get a share of the Toyota business that more matches our retail share and the factory roll out has got a very small part to do. How fast that factory roll out goes over the next five years is unclear to me. We're trying to understand that better.

We also believe, to Mel's point, I had dinner with another car company last night who had been offering both brands and they told me very consistently in the last six months that Sirius' market share has been greater than 60% where the customer has a choice. So I think that's the mantra we're going to stay on and that's what we're going to continue to focus on over the next several years with Toyota, where we think there is opportunity for several months to come.

Jason Helfstein - CIBC World Markets

So just to clarify. Right now with Toyota, for the most part except in the Lexus or just the Toyota nameplates, both companies are basically being offered on the same models as a dealer install. There's basically no difference when you walk in.

Jim Meyer

That's correct. We don't know the actual share data. We only can interpolate what we believe it is. So I want to be careful there. We don't have actual market share data. On the one I quoted we do have market share data.

Jason Helfstein - CIBC World Markets

Mel, just back to your first response. Can you tell us, were your sales and marketing expenses lower than you guys had initially expected in the quarter?

Mel Karmazin

No, it was exactly where we budgeted and thought it would be.

Jason Helfstein - CIBC World Markets

Thank you very much.

Operator

Our next question comes from Benjamin Swinburne, Morgan Stanley.

Benjamin Swinburne - Morgan Stanley

Good morning, guys. I have two questions. First, on SAC, you came in with a very nice number in the first quarter and I'm wondering in the context of the modest shift towards OEM through '06 as well as bringing the some new products to market, new chipsets, should we expect a steady improvement in that number through the year or is there seasonality, marketing campaigns we should think about as we think about how that trends toward your guidance projection?

Second, maybe for Mel. There's been a lot of noise in Washington, this Performance Act which has been discussed recently. What are your thoughts on how realistic it is for some new legislation around your relationship with the record labels this year? What does that mean for your business if you think it is realistic? Thanks.

David Frear

So on the SAC question, Ben, I think as most people know by now, we've got two things that work to bias that up. One is a shift in mix towards OEM which is, I think everyone knows, is working off earlier generation products that have higher cost. So as we do a greater share of business in OEM that would tend to bias the SAC up a little bit.

Similarly, generally in the first nine months of the year we're busy trying to rebuild stocks from one holiday season and build retail stocks for the next holiday season. So there tends to be an inventory load factor in the first nine months of the year.

So I think we had less of both of those things in the first quarter than we would have originally expected as the retail demand was stronger than we thought so it pulled first quarter SAC down just on a mix basis. We got just less inventory build as we had stronger product sell through. So I don't think you should expect SAC to be declining sequentially quarter-to-quarter until you hit the fourth quarter.

Mel Karmazin

On the Performance Act, I thought that Gary Parsons did a very good job. We have provided testimony down there. We worked with XM on his comments. We believe that what they're talking about is not very consumer-friendly. We think that clearly we are providing a great service for the music industry. We are paying them a significant amount of money.

So I can't tell you where the government will ever come out, so it would be presumptuous for me to speculate on where it's going to wind up, but we would be very surprised if, in fact, there is any movement on that bill.

Our relationships with the music industry, in spite of them trying to get more money from us, remain to be very strong. We are paying them on devices that have recording capabilities. We're paying them a royalty fee on the music that we're using. We've negotiated what we thought was a very smart deal to work with our partners on the S-50 device.

They have a very difficult business model; they're looking to figure out any way they can to generate additional revenues and we are as aggressive in Washington as they are, but I really can't give you the outcome.

If you'd like to receive a copy of the testimony that we filed in the case, you can get a hold of Paul or Michelle and we'll be happy to provide it to you.

Benjamin Swinburne - Morgan Stanley

Thanks a lot.

Operator

Our next question comes from Kit Spring, Stifel Nicolaus.

Kit Spring - Stifel Nicolaus

My question is on getting the OEMs to ramp up in Ford and Chrysler. If Kia and Volkswagen are going standard and those are much smaller car companies, what's holding back Ford and Chrysler?

Mel Karmazin

Jim, you can add onto it. Look at our growth rate. Here we're telling you that in 2006 that we're going to double where we went into the year. There are increased discussions on what the right penetration is. There are discussions with Ford and Chrysler about increased penetration all the time.

We're at, fortunately for us, an early stage in our ability to be ramping up our performance with Ford and Chrysler. But the fact that Hyundai and Kia are offering it as standard and there are other competitors putting it in as greater penetration is certainly taking notice by the part of the people at Ford and Chrysler. We would fully expect that they would be ramping up as well.

Kit Spring - Stifel Nicolaus

As a follow-up, should we expect you to partner with a larger Internet company, particularly as you're going to introduce Howard Stern on the Internet?

Mel Karmazin

Only if by having a partner with a large Internet company it would make financial sense to us. I can't rule anything out to you. But our vision on streaming Howard Stern would be that you'd pay $12.95 -- so there's not going to be any certainly Sirius light subscription involving Howard Stern -- so you'd pay your subscription.

If you went out and bought a radio for Mother's Day or you buy a radio for Father's Day, that when we deliver Sirius online you'd go to Sirius.com and/or we're thinking of HowardStern.com, his site, and you'd be able to get his content.

We think that will be particularly attractive to people in their office and in their home and it will be a further catalyst for people to subscribe. Whether or not there is a reason for us to work with an Internet partner would just really be up to them and what kind of a deal they'd like to offer us.

Kit Spring - Stifel Nicolaus

Thanks.

Operator

Our next question comes from Eileen Furukawa, Citigroup.

Eileen Furukawa - Citigroup

I have a few questions. First, with advertising going so well are you tracking above your own internal goals in terms of ad demand? Do you feel that your goal for 10% of total revenue for advertising is too conservative now?

Also, can you tell us your reaction to the syndication of the Opie & Anthony onto terrestrial radio? Do you think that this is going to have any impact on the demand for your service from subscribers looking for racier talk show content? Do you see yourself as a syndicator of content in the future?

Lastly, as a follow-up to the last question, can you tell us your expectations in terms of number of new subs from making Stern available on the Internet? Thanks.

Mel Karmazin

Okay. So, on the subject of advertising we said that we would target to get to 10%. If you take a look at where we were in the first quarter, remember the first quarter is the lowest calendar quarter for advertising. It was about 6% is what I'm estimating it to be. We were pleased. What our concern on our internal projections are is how quickly we can find salespeople that are up to our standards to join the organization.

We have a bunch of openings and our salespeople are busy just in servicing a lot of the accounts we have. So I'm pleased. We certainly are still looking at that 10% as something we'd like to get to as a first step. Obviously I believe the long-term numbers could be significantly higher than that. But pleased.

A comment on Opie & Anthony; I think it was a great deal for Opie & Anthony. On whether or not -- what was your third question?

Eileen Furukawa - Citigroup

Well, also do you see yourself as a syndicator of content in the future?

Mel Karmazin

I think right now as far as our idea to syndicate content, we're in the business of getting subscribers to satellite radio. We have a long way to go. Obviously at the end of this year there will be somewhere between 15 million and 16 million people subscribing to satellite radio. That's really a very low number. I think that the more that we have exclusive content that will drive them to subscribe to Satellite Radio as compared to share content I think is better for the industry. I don't think that if in fact somebody could get content in terrestrial radio and having that on Satellite Radio justifies the $12.95 purchase price.

So we like exclusive content. We believe we have all of the exclusive content we need. We don't feel there is a missing piece in our puzzle. No, we have gotten requests obviously about a lot of our content and whether or not we'd be interested in licensing it back. We have no interest, it doesn't mean that we couldn't in the future, but it's not something that we're looking at.

On the question of how many more additional subscribers we will get as a result of Howard being streamed; we are not prepared to make any comment on that. We just believe that we're not planning to charge any additional price. Howard feels that it's something that he would like to do for his loyal audience and we think that it will definitely be an advantage, but we're really not prepared to give you any new number for it.

Eileen Furukawa - Citigroup

Okay, thank you very much.

Operator

Our next question comes from Barton Crockett, JP Morgan.

Barton Crockett - JP Morgan

Thank you very much for taking my question. Two points I wanted to get in a question on. First was looking ahead to the wearables with the remote reception capability coming out, could you comment on your expectations for the performance of that remote reception capability relative to your competitor and terrestrial radio? And the sufficiency of your terrestrial repeater network and your satellite configuration for that and the importance of that, in your opinion, for consumers?

And then secondly, in terms of your customer care and billing, that went down a lot sequentially. It was a much better number than what we were looking for. What do you see for the balance of the year in terms of the year-to-year trend in that and what's driving it? Thank you.

Jim Meyer

In terms of our wearable product, I assume you're referring to performance in the terrestrial network when the satellite signal is not available. I think number one, we go back and forth on this quite a bit. We believe that the way our satellite network is architected it gives us better coverage to start with versus our competitor.

Second, we've done quite a bit of testing on how the unit performs. Unfortunately it's not just tied to terrestrial repeaters, it's also tied to the quality of the antenna and the quality of the technology that goes around that antenna which we've invested money in and we'll continue to invest money in.

I feel pretty confident the product that we're going to have this summer is going to work very acceptable, certainly in the metro markets. We are looking at additional ways to enhance our repeater network, we're always looking at that. I believe we included in our last filing that we will be adding repeaters as we see appropriate and we're actually right in the middle now of deciding where those go and getting ready to file for how we might deploy those.

David Frear

On the customer care question, Barton, as you know we don't give guidance at that level of detail, but there are probably a couple of directional indicators I can help you with. One is that we would expect it to go down year on year.

The other thing is that I think if you look back at the history of our customer care costs and how they compare to our competitor's customer care cost per sub at similar points, at similar numbers of subscribers, that you'll find that they get into a similar range which would make a certain amount of sense. We aren't radically different in terms of what we do from a customer care perspective.

The one thing that you show bear in mind that is different between us is the distribution of additions across the year that we have traditionally had significantly more subs on a proportional basis than our competitor in the fourth quarter, so that spikiness around the Christmas season and you'll see this from our last couple years of customer care numbers. We put a pretty significant layer of new communications capacity as well as new call center agent capacity in place to handle the Christmas volume.

Barton Crockett - JP Morgan

Okay, great. Thank you very much.

Operator

Our final question comes from Laraine Mancini, Merrill Lynch.

Laraine Mancini - Merrill Lynch

A couple questions. In Congress there's a new telecom act being floated that it doesn't deal with this issue in audio rights, but it seems to suggest that in video that there should be no exclusive content on national platforms. Could you comment on if you think that that has any traction and could that potentially be an issue in the audio format?

Second, with Opie & Anthony on terrestrial radio -- obviously able to mention the word XM, do you see any impact to your sales and marketing budget? Are you going to have to put any dollars there to battle that?

Mel Karmazin

I really have been around this thing too long to ever predict what your country would ever do in Congress. So I just really don't feel comfortable. No, it's not something that we are concerned about at this point. But we monitor everything that's going on down there.

Regarding the marketing or promotion that XM would benefit from by having their name mentioned, it's not something that we give any thought to reacting to at all. You should, again, understand that we're going to do what we believe to be in our best interest. Hurray for XM as long as Sirius continues to hit the ball out of the park as we're doing, we wish them well as well.

Laraine Mancini - Merrill Lynch

One quick follow up. The S-50, you dealt with that with your music royalty agreements with the four labels, but the new product coming out this summer would need a new agreement, is that correct? The S-50, the royalty that you agreed to with the four record labels was just for the current S-50 and for the new one coming out, correct?

Mel Karmazin

Correct.

Laraine Mancini - Merrill Lynch

So will that be included in the big contract that's due at year end?

Jim Meyer

Number one, you're right. The agreement we do have with the music companies applies to the S-50. Number two, we are in discussions with the music companies about our new devices now and how that licensing agreement might be reached. I think we understand pretty well their position and I think they understand ours. We're trying to find a way and of course we're anxious to see how the products that just hit the market from XM are received by the music companies as well.

Mel Karmazin

There's nothing that necessarily means that we will come up with a license agreement. We may take the viewpoint that our product is consistent with the law and not have a deal with the industry beforehand. We have a number of ways that we could play it.

In the case of the S-50, because of its first to market uniqueness and our desire to focus and not be bogged down in arguments and litigation, we decided to do a deal. We may not necessarily choose to do these same thing on subsequent products.

Laraine Mancini - Merrill Lynch

Okay, thank you.

Michelle McKinnon

Thanks very much.

Operator

That concludes today's teleconference. Thank you all for your participation.

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