XM Radio 2005 Annual Report Download - page 2

Dear Shareholders,
2005 was another year of extraordinary growth for XM Satellite Radio. We
started 2005 with 3.2 million subscribers and added over 2.7 million net new
subscribers to pass the six million subscriber mark in the first few days of this
year. We achieved this 84 percent year-over-year increase in subscribers even
with the $3 rate increase we instituted in April. In 2005, we grew revenue to
$558 million compared to $244 million in 2004, a 128 percent increase. Solid
growth in both subscribers and revenue will continue in 2006 as we expect to
surpass the seven million, eight million and nine million subscriber milestones.
The rapid pace of our subscriber growth continues to illustrate the value and
popularity of the XM service; at the same time, XM management is
committed to achieving this growth in an economic manner. In 2005, we
made progress toward that goal. We again achieved solid growth, increased
our market leadership, and improved many financial metrics, including gross
margins, average revenue per subscriber (ARPU), annual/multi-year prepaid
subscribers, two quarters of positive cash flow from operations, and the launch of XM Canada with our partner Canadian Satellite Radio – all strategically
important areas of long-term value creation to our stockholders.
XM Radio’s progress in 2005 was reflected in increased subscribers and revenue, as well as in the programming, technology and distribution
accomplishments that are critical to balanced growth in the coming years.
• 2005 Smart Subscriber Growth: XM’s overall 2005 subscriber acquisition cost (SAC), the “direct cost”to gain a new subscriber was an industry low
$64 for the year, despite a spike in direct marketing costs during the fourth quarter holiday season. Low SAC is widely considered an indicator of
cost-effective growth.
• Advances in XM Technology: In 2005, we unveiled the first XM radios that combine live XM and MP3, the two most popular forms of audio
entertainment over the last 10 years. The sleek, portable Pioneer Inno and Samsung Helix are available this quarter and allow consumers to “Hear it,
Click it, Save it,”providing the same “time-shifting”capability that many enjoy at home with their TV viewing. These high-end devices join our large
and diversified portfolio of XM radios.
• Leadership in the New Car Market: We have secured our long-term leadership in the car market with the largest and fastest-growing automotive
partners, representing nearly 60 percent of the new car market. In 2005, we added over 963,000 net subscribers from the auto market, led by General
Motors and Honda, marking an increase of 20 percent compared to 2004. In 2006 these automakers will again increase the number of XM factory-installed
cars. Most importantly, 2006 is the staging year for more substantial auto growth in 2007, 2008 and beyond for our newer exclusive automotive partners
with factory installations. Toyota and Hyundai will launch their factory-installation programs toward the end of 2006 for their 2007 models. Nissan will
also begin contributing as well with more than 500,000 Nissan and Infinity 2008 model year vehicles. Taken together, we expect our automotive partners’
plans to result in annual production of nearly 5 million vehicles with factory-installed XM radios during calendar year 2008 and beyond.
• Added Unique Content to Attract New Consumers: Over the past year, we greatly expanded our channel lineup by adding 15 channels featuring
more music, more live sports play-by-play coverage and other exclusive, original programming. In May of 2006, we will increase our total number of
channels to more than 170 – the most choice and channels in satellite radio, including 69 commercial-free music channels. Also in May, we premiere
our exclusive, weekly show hosted by music legend Bob Dylan, and this June we launch our comprehensive coverage of FIFA World Cup Soccer. In
addition, XM returns with play-by-play coverage of Major League Baseball, NASCAR, the PGA TOUR and the National Hockey League.
• Oprah & Friends debuts in September: Finally, in early 2006, we announced the last major addition to our programming offering – the September
2006 launch of the “Oprah & Friends”channel (XM 156). This exclusive channel will feature a weekly, reality show co-hosted by Oprah Winfrey, as well
as daily shows with the well-known personalities who regularly appear on “The Oprah Winfrey Show.”Oprah and her friends join other top-branded
XM content, completing the most diverse, most compelling and highest-quality lineup in all of radio.
While 2005 marked a year of significant success for the XM Radio service, this fact was not reflected in our stock price. XM’s stock performance during the
last quarter of 2005 into 2006 has been disappointing, and we are committed to improving it. We believe the marketplace will respond favorably to our
breakthrough new products, compelling content and continued cost-efficient subscriber growth. Under this strategy, we expect to generate positive cash
flow from operations in the fourth quarter of 2006 and for full-year 2007. We deeply appreciate your support of XM Satellite Radio during the past year
and the opportunity to grow and develop this revolutionary new entertainment business.
This spring, XM will introduce the most innovative and highly-anticipated products
in its history. The Pioneer Inno™ and the Samsung Helix™ are the world’s first
portable, handheld radios designed to receive live satellite radio programming on
the go, plus play and store MP3s and other audio files in addition to XM content.
It’s the best of both worlds – live XM and MP3. Songs heard on XM through these
devices can even be bookmarked and purchased later online from the XM +
Napster online service. The Inno and Helix were top award winners at this year’s
Consumer Electronics Show, and early product reviews have been outstanding.
For more information on the new Inno and Helix, visit xmradio.com/inno.
The Most Advanced Satellite Radios
“Move over iPod…[It’s] a brave new world out there.”
The Biggest Names in News, Talk & Entertainment
“Together with my friends, we look forward to creating programming that will
entertain, inform and inspire our listening audience on XM.”
XM is proud to launch the Oprah & Friends channel this September, featuring programs hosted by Oprah’s friends, all experts who
appear regularly on “The Oprah Winfrey Show” and a weekly reality radio show with Oprah Winfrey and Gayle King, the
editor-at-large of O, The Oprah Magazine.
Last fall, XM launched Take 5, its exclusive talk and lifestyle channel programmed especially for women, featuring The Ellen
DeGeneres Show, The Tyra Banks Show and Good Morning America Radio.
The Most Sports Play-by-Play in Satellite Radio
“...all baseball all the time, and it is highly addictive.”
XM is the exclusive satellite radio home of Major League Baseball®, the PGA TOUR®, college sports from ACC, Pac-10, Big Ten and the Big
East, FIFA® World Cup™ Soccer (with play-by-play in English and Spanish), The U.S. Open® and the IndyCar® Series, featuring the Indy 500.™
Plus, XM offers over 1,000 NHL hockey games each season and will become the exclusive home for NHL games starting with the
2007/2008 season. In addition, XM features exclusive Sports shows hosted by NASCAR® superstars Dale Earnhardt, Jr. and Jimmie Johnson,
baseball legend Cal Ripken, Jr., Duke’s Coach K., and a new sports show cohosted by political guru James Carville and Luke Russert.
–CNN
–Sports Illustrated LIVE XM PLUS MP3
–Oprah Winfrey
NATE BERKUS DR. OZ OPRAH WINFREY
DR. ROBIN GAYLE KING MARIANNE WILLIAMSON BOB GREENE
Gary Parsons
Chairman
Hugh Panero
President and CEO
Coming September 2006
RoadyXT®
Award-Winning Plug-and-Play
and XM2go®Radios
XpressTM
neXusTM
Airware®
Gary Parsons
Chairman
Hugh Panero
President and CEO
XM Boombox
DAVID ORTIZ JIMMIE JOHNSON®DEREK JETER DALE EARNHARDT, JR®MARK MESSIER
Snoop Dogg
Snoop Dogg
Only on XM
Only on XM
Only on XM
CAL RIPKEN, JR.
SportscasterTM
™