XM Radio 2006 Annual Report Download - page 2

Dear Shareholders,
2006 was a pivotal year for XM. Our financial metrics headed in the right direction as our revenues increased and marketing
costs declined, and we had positive cash flow from operations in the fourth quarter, although, as expected, we did have a
significant loss in 2006. The automobile segment emerged as a key catalyst for satellite radio’s future growth, validating XM’s
early automotive-centric distribution strategy. XM is in an ideal position to take advantage of this trend through its relationships
with the nation’s largest and fastest-growing automakers. And, of course, we announced the proposed merger with Sirius.
Merger Agreement with Sirius: The satellite radio industry took a major step forward on February 19, 2007 when we
announced that XM had signed an agreement to merge with Sirius in a $13 billion merger of equals.
The combined company will become the nation’s premier provider of audio entertainment. It will be able to offer more value to
consumers by creating an even greater portfolio of programming choices and technological innovation. The merger will also
create a combination with the long-term financial strength to compete more effectively against the many existing and emerging
competitors in the audio entertainment market.
The companies will be merged in a tax-free, all-stock merger. Under the terms of the agreement, XM shareholders will receive
a fixed exchange ratio of 4.6 shares of Sirius common stock for each share of XM they own. XM and Sirius shareholders will
each own approximately 50 percent of the combined company.
We are now working to secure the necessary regulatory approval to complete the process, but we cannot assure you that the
merger can be successfully completed. We currently expect to accomplish the merger by the end of this year.
We want to emphasize that XM and Sirius today continue to operate as separate businesses, and will continue to do so until the
merger is completed. XM customers will continue to receive our great programming after the merger. Indeed, after the merger,
existing XM radios will be able to receive a mix of programming from both services.
While we are excited about the merger and the synergies it will create, we still have a billion-dollar business to run and a
responsibility to deliver the strongest financial results we can. This report focuses on XM and the company’s financials for the
calendar year 2006.
Revenue and Subscriber Growth; Positive Cash Flow in Fourth Quarter: XM’s 2006 revenue increased year over year by 67
percent to $933 million. For the first time, XM exceeded the $1 billion revenue mark on an annualized basis. In the fourth quarter
of 2006, we generated $43 million of positive cash flow from operations, our largest positive cash flow in any quarter to date.
XM added over 3.8 million new gross subscribers in 2006 – the most gross subscriber additions in satellite radio. We added
approximately 1.7 million new net subscribers in 2006 and ended the year with over 7.6 million subscribers.
Successful Balance Sheet Restructuring: XM successfully restructured its balance sheet in 2006. By leveraging the company’s
improving credit profile, we transitioned to a largely unsecured capital structure, reduced interest expense by refinancing the
debt issued earlier in the company’s development, extended debt maturities and enhanced our liquidity position. The company
established a secured $250 million revolving credit facility maturing in 2009 with a syndicate of blue chip banks and increased
the size of the credit facility with GM to $150 million.
In February 2007, the company entered into a sale-leaseback of the transponders on the XM-4 satellite generating $288.5
million of net proceeds of which $44 million was used to retire outstanding mortgages.
Automotive Segment Posts Record Customer Gains: XM has established strategic partnerships with General Motors, Honda,
Toyota, Nissan, Hyundai and Porsche, which represent approximately 60 percent of the U.S. auto market. 2006 marked the first
year that XM added more net new customers through its automotive partners than at retail. XM had nearly 2.1 million OEM
gross additions and 884,000 net additions for the year. XM also expanded its penetration into a wider selection of more
moderately priced vehicles, a clear indication that XM has broad appeal across vehicle segments. GM, the world’s largest
automaker and the leading automotive provider of satellite radio, plans to build more than 1.8 million vehicles with factory-
installed XM in 2007. XM’s recent ten-year contract extensions with Toyota and Honda, among the fastest-growing car makers,
add to our momentum in the new car segment. Honda plans to equip more than 650,000 vehicles with factory XM radios for
2007. Toyota is expected to produce more than one million vehicles with factory-installed XM radios annually by 2010.