Sirius Satellite Radio (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

Presentation

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 &# ...