XM Satellite Radio Upbeat

DENVER March 13, 2003; Dow Jones reports that XM Chairman Gary Parsons said XM Satellite Radio Inc. is a "hell of a product and people really like it".

Word-of-mouth, along with radio-installation commitments by automobile manufacturers such as General Motors Corp. , are driving subscriber growth, he said in a presentation at the Janco Partners 8th Annual Media & Telecommunications Conference in Denver.

Subscribers have grown from 28,000 at the end of the fourth quarter of 2001, to 201,500 by the end of the third quarter of last year and 347,000 by the end of the fourth quarter.

Mr. Parsons noted that he "feels comfortable" that XM subscribers will pass one million by the end of this year.

The $10 monthly fee for the 101-channel radio service has been well accepted, he said, and an important impetus to consumer satisfaction has been the advent of a second generation of radios that are higher quality and less expensive, at about $200.

The improvement in radio cost and quality is occurring faster than expected, and XM's subsidization of radios is now expected to end much sooner than the two-year period the company originally anticipated, Mr. Parsons said.

In addition, GM has provided a "tremendous amount of financial support," Mr. Parsons said. "They know it's a hell of a product" that helps GM differentiate its vehicles.

With a January $475 million financial package supported by GM, the number of XM shares has the potential to roughly double, from 132 million diluted shares prior to the financing to potentially as high as 272 million shares, said Mr. Parsons. The amount of dilution might be less if XM's stock price goes above a certain level, he noted.

GM has the XM-receiving radio factory-installed in 25 model lines this year, with penetration within those models at about 15%. The number is rising to 44 models of its 57 models for 2004, and higher penetration is expected within the 2004 models. So Mr. Parson expects the number of GM vehicles equipped with the radio to rise from 350,000 to 400,000 GM 2003-model vehicles to 700,000 2004- model vehicles. Of the buyers getting vehicles equipped with the radio, he expects 70% to activate the service. They are allowed to initially sample ten of the channels free to see if they like the service.

The satellite-radio market is "absolutely" large enough for both XM and its competitor, Sirius Satellite Radio Inc., according to Mr. Parsons. The two companies have incompatible technologies now, but they are working on an interoperable technology that's about two years away, Mr. Parsons said.

In a March 11 note, Janco Partners analyst April Horace said she expects XM to generate positive cash flow, under generally accepted accounting principles, by the beginning of 2005. If XM cuts back on subscriber acquisition costs and marketing and advertising expenses, then it could become free cash-flow positive by 2004, she said.

Ms. Horace has a buy rating on the stock and a $5.85 price target. She doesn't own shares of XM, and her firm makes a market in XM shares but it hasn't received investment banking compensation from XM in the last 12 months and doesn't anticipate receiving any in the next three months.