SIRIUS XM Radio's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 5.13 | About: Sirius XM (SIRI)


Q4 2012 Earnings Conference Call

February 5, 2013, 8:00 am ET


Hooper Stevens – VP of IR

Jim Meyer – CEO

David Frear – EVP, CFO


Barton Crockett – Lazard Capital Markets

Benjamin Swinburne – Morgan Stanley

Matthew Niknam – Goldman Sachs

Jessica Reif Cohen – Bank of America Merrill Lynch

Bryan Kraft – Evercore Partners

John Tinker – Maxim

David Joyce – ISI Group


Good morning and welcome to the SIRIUS XM Radio’s full-year and fourth quarter 2012 earnings conference call. Today’s conference is being recorded. A question-and-answer session will be conducted following the presentation. (Operator Instructions)

At this time, I would like to turn the call over to Hooper Stevens, Vice President Investor Relations Finance. Mr. Stevens, please go ahead.

Hooper Stevens

Thank you, (Shelly), and good morning, everyone. Welcome to SIRIUS XM Radio’s earnings conference call. Today Jim Meyer, our Chief Executive Officer, will be joined by David Frear, our Executive Vice President and Chief Financial Officer. At the conclusion of our prepared remarks, management will be glad to take your questions. Scott Greenstein, our President and Chief Content Officer, will also be available for the Q&A portion of the call.

First, I would like to remind everyone that certain statements made during the call might be forward-looking statements as the 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 upon assumptions, data or methods that may be incorrect or imprecise.

Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For more information about those risks and uncertainties, please view SIRIUS XM’s SEC filings.

We advise listeners not to rely unduly on forward-looking statements and disclaim any intent or obligation to update them.

As we begin, I would like to advise listeners that today’s results will include discussions about both actual results and adjusted results. All discussions of adjusted operating results exclude the effects of stock-based compensation and certain purchase price accounting adjustments.

With that, I will now hand the call over to Jim Meyer.

Jim Meyer

Thank you, Hooper. Good morning. 2012 was a great year for SIRIUS XM as we reached a number of records and milestones and earlier this year we issued guidance for meaningful growth in 2013 to our subscriber base and financial performance.

In 2012, we added more than 2 million net new subscribers, the largest number of new subscribers in a single year since 2007. At 1.7 million net additions, our 2012 self-pay subscriber growth was up 36% over 2011 and 69% over 2010’s self-pay net additions.

Self-pay churn and conversion rates were steady at 1.9% and 45% respectively despite and increase in our base price, notably, the first core price increase ever at SIRIUS and only the second one ever at the XM base.

We believe these statistics indicate strong demand for and satisfaction with our service and I believe this bodes very well for the future.

These 2 million net additions exceeded our original guidance on the strength of lower-than-expected churn, higher auto sales and improved used car additions. We exceeded all of our 2012 financial guidance as well.

Revenue was a record high, up 13% to just over $3.4 billion versus our guidance of approximately $3.4 billion. Adjusted EBITDA climbed 26% and reached a record $920 million compared to guidance of approximately $900 million. And free cash flow jumped a massive 71% to $709 million, beating guidance of approximately $700 million.

Auto sales certainly provided a tailwind to our growth in 2012 with SAR climbing 12% in the fourth quarter to around $15 million and growing about 13% to $14.4 million for the full year.

Consensus estimates call for auto sales to rise at a slower rate in 2013, just under 5% to $15.1 million.

Earlier this year, we announced that Toyota is increasing its penetration rate of satellite radio over the next two to three years. Every Toyota that features the In Tune Multimedia System will also feature satellite radio.

I think this is an important indication that auto makers see multiple technologies coexisting in the vehicle for a very long time. And rising penetration of the Japanese OEMs like Toyota will mean that we should see less variability in our penetration rate due to market share shifts among the OEMs.

Our overall penetration rate was 68% in the fourth quarter and 67% for the full year 2012. We expect to be in this range over the next few years as OEMs remain very committed to satellite radio, including the deployment of our new 2.0 radios in additional models as well as at additional OEMs.

SIRIUS XM ended 2012 with approximately 50 million satellite-equipped vehicles in operation in the United States, roughly a 20% penetration rate of all registered vehicles on the road and up from about 40 million vehicles at the end of 2011.

This trend just keeps going. Driven by rising auto sales and our strong new car penetration rate, we expect the number of enabled vehicles to approximately double in the next five years.

The rising number of pre-owned vehicles on the road combined with our marketing initiatives are certainly boosting our subscriber additions for previously-owned cars.

Our used car trial program has now been implemented at over 8000 dealer locations across the country, including all of those run by many large retailers such as CarMax, AutoNation and Penske.

As more and more of the satellite radio enabled vehicles turn over to the first or, yes, even second time, our opportunities in the used car market will continue to grow. As the average car on the road today is over 10 years old, our penetration rate in the pre-owned vehicle market will steadily increase over time.

It’s really just a numbers game and we want to be prepared to capitalize on these opportunities as they become more material to our business in each passing year.

As we mentioned last year, we expected to do approximately 1 million gross ads in the used car channel in 2012. We surpassed this number and in 2013 we are targeting used car gross additions in the range of 1.5 million.

We will continue to grow our pre-owned business by adding more dealers to our current programming, launching new initiatives with both franchises and independent dealers and by riding the meaningful increase in SIRIUS XM pre-owned vehicle sales.

At the end of the day, however, it’s our brand name talent, commercial free music and exclusive content that continue to attract and retain listeners. We continue to deliver unique subscriber experiences that make for the best in audio entertainment and we remain aggressive about making sure we provide the best available programming to our listeners.

We’ve expanded our online sports offerings in 2012 to make play by play available from the NFL, major league baseball, NASCAR, the NBA and the NHL and added a number of high profile sports personalities to our rosters of hosts.

Our town hall and artist confidential series are drawing some of the biggest names in pop culture and entertainment to deliver exclusive interviews and performances to our subscribers, including Quentin Tarantino, Jane Fonda, One Direction, KISS, Aerosmith, Taylor Swift, Alicia Keys and Willy Nelson, just to name a few.

We were also adding new programming in the important comedy area, such as Comedy Central Radio, launching this spring with the biggest brand name in comedy, and a new daily talk show with Martha Stewart.

We have the best audio entertainment content in the country and are constantly looking for unique, innovative programming to improve our offering even further.

We’ve also been expanding our streamed offering. In fact, we are in consumer data now on an exciting new feature called (My SXM). We are very excited about the upcoming launch of (My SXM), which empowers our subscribers to create their own versions of their favorite commercial-free SIRIUS XM music channels when listening online.

Whether it’s more rock on 70s on 7, more of tomorrow’s hits on Hits 1 or more dance pop on (8PM), (My SXM) users will now hear more of the music they love tailored to how they want to hear it. If they happen to hear a song they don’t like, (My SXM) will let them skip it.

Most important for us, we are not asking listeners to start from scratch, like other personalized services. One of (My SXM)’s core strengths is that it starts with channels our subscribers already know and love, channels that have been crafted and curated by our music experts.

Now, they can take those music channels and personalize them to their taste and moods. With (My SXM), listeners also don’t need to constantly lean forward to create a tailored listening experience. They can just tune to the music channels they already like and adjust the channel’s unique slider controls and set them once for good or change them any time they want.

And since our music libraries are hand curated by SIRIUS XM’s expert music programmers, (My SIRIUS XM) further enhances an already robust music discovery experience for our subscribers.

This new feature will further enhance our IP offering, which has been greatly improved over the past year and now includes the ability to time shift up to five hours on many stations, start songs at the beginning when tuning to a music channel and the ability to play thousands of hours of talk and entertainment from over 300 shows from our library of on-demand content.

All of these features, including (My SXM) and on-demand access, will be available across all of our internet platforms, including our Android and iOS apps for smartphones and tablets.

Last summer, we reorganized areas of our company with the purpose of improving our IP development, delivering better streaming offerings and apps and speeding up the process of innovation in this area.

In October, we added Enrique Rodriguez to our team, a former leader at Microsoft and a proven technology senior executive as our EVP Operations and Products to assume responsibility for our streaming, infotainment and telematics business as well as our product and technology operations.

We believe we are beginning to see the fruits of some of these efforts in IP. Ultimately, these enhanced online capabilities will make their way into automobile seamlessly as well.

Having both a satellite connection and an IP connection into vehicles will prove to be a durable advantage versus IP-only competitors in a connected car world. Stay tuned.

As you know, in addition to audio entertainment, we also offer a variety of infotainment services in the car. Real-time traffic, in particular is a valuable service that today many of our subscribers are using and paying for.

In September, SIRIUS XM announced our first entry into the telematics space with our Nissan agreement. We are developing a comprehensive suite of services for Nissan vehicles such as automatic crash notification, stolen vehicle tracking, roadside assistance and other safety and convenience features.

The deployment of telematics is the logical next step for broadening our in-vehicle technology and strengthening our relationships with auto makers. We intend to pursue more such agreements in the future.

As you know, we’ve had a lot of change in the last six weeks here at SIRIUS XM. Liberty Media has purchased additional shares in the open market and converted their remaining preferred shares, bringing their ownership of our common stock to more than 50%. And we recently welcomed three new directors to our board.

What is not changing is the consistent focus by everyone here at SIRIUS XM from on-air talent to senior management on delivering a great service that will help us grow our subscriber base and drive free cash flow growth to enhance value for all of our shareholders.

To remind everyone, we have a very unique and powerful business model that is unmatched by any of our competitors in the audio entertainment space. We have a reoccurring subscription revenue model with low marginal costs that enables us to keep the vast majority of our incremental revenue.

By monetizing our listeners better than any other audio service to generate lots of revenue, brining that revenue in at higher incremental margins and tightly controlling fixed costs, we were able to produce significant operating leverage as we grow.

This is the heart of our margin expansion story and our high monetization means we can continue offering our subscribers extensive and exclusive content that is simply unavailable to most of our competitors, particularly in the IP world who primarily tend to rely on music content that is available to everyone ubiquitously.

In December, the Copyright Royalty Board issued its decision setting our performance royalties for music over the next five years and nothing in the CRB decision change the way our model will work. This should be very comforting to our shareholders.

Our company has no significant debt maturities for nearly two years, an underleveraged balance sheet, no need to pay significant cash taxes for several years because of our NOLs, only small investments required for satellites over the next few years and our cash flow from operations is growing quickly.

This means that SIRIUS XM is in a very strong position to increase our investments in our business, particularly in areas such as telematics, IP technology and other long-term strategic investments.

We continue to actively evaluate M&A opportunities and will, as always, apply a very disciplined approach to ensure any future transactions meets a high threshold for value creation.

But even with all of this opportunity to invest, we expect to have plenty of capital to return to our shareholders over the coming years.

In December, we announced and paid a $327 million special dividend to our shareholders making the first time in the history of our company that we have returned capital to our shareholders.

We also announced in December a 2 billion share repurchase program. We expect the company to continue returning capital to our shareholders as our free cash flow grows and we maintain a prudent level of leverage in the 3.5 times range.

The first question I usually get from investors is what should we expect from you and what’s going to change at SIRIUS XM under your leadership?

Well, I can tell you that you will see a lot more of the same with a focus on self-pay subscriber growth and a very tight focus on costs. Internally, we are constantly asking ourselves how our decisions will improve the subscriber experience.

We will keep our subscribers front of mind when we make business decisions and we will keep our focuses tight as ever on operational excellence. If we do a good job satisfying our subscribers, I truly believe that the ultimate result should be very rewarding to our shareholders as well.

With that, I’ll turn it over to David for additional comments.

David Frear

Thanks, Jim. The fourth quarter was another extraordinary performance by SIRIUS XM turning in our best quarter for self-pay additions since the merger. We adding 529,000 self-pay subscribers in the quarter driving full-year total subscriber additions to 2,008,000 and bringing total subscribers to 23.9 million.

In the course of 2012, we raised subscriber guidance three times and ended up beating our original guidance by more than 50%. The beat was broadly based. Auto sales were better; second owner additions were stronger; and most importantly, self-pay churn was better than our original expectations.

Self-pay churn continues to show long-term consistency. The year rounded up to 1.9%, the third year in a row at that level.

The fourth quarter at 1.8% was our best quarterly performance since Q3 ’08. You can really see the strength of the business in our self-pay subscriber additions which, for 2012, were at 10 times their 2009 level.

In the depths of the 2009 financial crisis, our first full year of operations as emerged company, we added 154,000 self-pay net additions. That jumped to 983,000 as the recovery got underway in 2010 followed by 24% growth in 2011 to 1.2 million and 36% growth in 2012 to 1,662,000 self-pay net apps.

A slow but steady progressing economy seemed to shake off both the effects of Hurricane Sandy on the northeast and year-end concerns over the fiscal cliff as seasonally adjusted auto sales in the fourth quarter reached $15 million, the strongest quarter since Q1 ’08.

Asian automakers continued to gain share versus the prior year period and market share continued to shift towards small to mid-size cars, both of which tend to put downward pressure on conversion rates.

The new vehicle conversion rate was 44% for the quarter and remained at 45% for the year, both within our 44% to 46% expectations.

There are now more than 50 millions SIRIUS XM enabled vehicles on the road. Our penetration new vehicle production remained at about 67% in 2012 and for the first time, new vehicle installations eclipsed the 10 million mark for the year. That is nearly three times the level of installations we had in 2006.

As these new car installations move into the used car market over the next several years, SIRIUS XM will become an easily available entertainment options for millions of new potential customers, a great continuing growth opportunity for us.

Growth in new and used car sales has led to consistent growth in the inventory of trial subscriptions, which ended the year at 6.1 million. As of today, over 8000 franchise and independent auto dealers have signed on to our used car program.

RPU is up 4.4% over the prior year, helping to fuel our strongest quarter of the year for revenue growth, 13.8% in bringing quarterly revenues to nearly $900 million for the first time.

With more than $3.4 billion for the full year, revenues grew by 12.7% over 2011. Cash operating expenses increased by 7.3% for the quarter and 8.5% for the year. As has been true throughout the year, roughly 90% of the increase in cash operating expenses was related to increases in variable costs.

While contribution margin improved slightly over the prior year in Q4, for the full year it was down 0.6% to 70%, largely due to the statutory increase in music royalty rates.

Subscriber acquisition costs were up 7% for the quarter and 8.7% for the year on the strong growth of new car installations while fact per growth ad fell $1 to $54 for both the quarter and year.

Fixed costs grew just 2.2% for the quarter and 1.9% for the year as the company’s successful focus on cost efficient growth continues.

Adjusted EBITDA grew 37.8% in the quarter, our fastest pace of the year to $230.5 million. Full-year EBITDA of $920.3 million comfortably exceeded guidance, represented 25.9% growth over 2011 and represents a record full-year adjusted EBTIDA margin of 27%.

Free cash flow increased 40% in the quarter to $269.5 million and nearly 71% for the year to $709 million, exceeding guidance. We generated more free cash flow in the fourth quarter alone than in all of 2010 and we generated more in the second half of 2012 than in all of 2011.

SIRIUS XM’s growing free cash flow and improving credit quality has allowed us to dramatically improve leverage and reduce our borrowing costs. As a result, interest expense showed a 40% improvement over 2011’s fourth quarter, dropping to $45.5 million from $75.2 million.

We ended the quarter with $521 million in cash and $2.4 billion in debt. Gross debt to EBITDA is at a very conservative 2.6 times. During the quarter, we completed the company’s first bank financing, a $1.25 billion revolver that was undrawn at year-end, providing the company with ready access to a substantial amount of capital to support our stock buyback program and pursue strategic opportunities.

The Copyright Royalty Board, as Jim mentioned, rendered its decision on sound recording performance royalties for the 2013 to 2017 period for our satellite radio service in December.

While the decision resulted in an increase in our royalty rates, the increase is substantially less than what was thought by the music industry.

Effective January 1, 2013, the rate increased from 2012’s 8% rate to 9% and then it will grow by 0.5% each year, reaching 11% in 2017. As a result of the decision, we increased US music royalty fee from $1.42 to $1.81 on our basic $14.49 package as of February 1st.

In our 2010 earnings call two years ago, we spoke to investors about the company’s strong business model, growth prospects and the coming opportunity for substantial returns of capital to shareholders.

In the fourth quarter, we began delivering on that promise. SIRIUS XM paid a special dividend of $0.05 per share, totaling $327 million and announced a $2 billion stock buyback program or approximately 10% of our current equity capitalization and 20% of the public float.

In our earnings release this morning, we announced that Liberty Media is not required to participate in our stock buybacks.

SIRIUS XM is one of the best growth stories in media. In 2012, we grew revenues by 12.7%, adjusted EBITDA by 25.9% and free cash flow by 71%. Our 2013 guidance issued a few weeks ago continues our record of cost effective growth.

We expect to see another strong year with $1.6 million net self-pay subscriber additions as total subscribers will grow to 25.3 million. Revenue will exceed $3.7 billion, nearly 10% growth over 2012.

Adjusted EBITDA will grow more than 20%, exceeding $1.1 billion, and free cash flow will continue to grow faster than EBITDA as it approaches $900 million.

Free cash flow per share is also growing at a rapid rate and it will grow faster as we begin to buy back stock. Based on our reported fully diluted shares and free cash flow, free cash flow per share grew from roughly 6.4 cents in 2011 to 10.3 cents in 2012.

Now, just for the sake of argument, if you assumed retire about 600 million shares in our $2 billion buyback program and assume our guidance of approaching $900 million in pre-cash flow for 2013, free cash flow per share would trend towards $0.15 or roughly 40% growth over 2012’s level.

We have a great product that our customers love and we are constantly working to make it better. We also have a great business model with great long-term growth prospects and that should drive great results for investors.

Operator, let’s open it up for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Barton Crockett – Lazard Capital Markets.

Barton Crockett – Lazard Capital Markets

Two questions, if I could, first on one of the numbers in the financial statement was customer care and billing expenses went up a decent amount year-to-year per average subscriber and I was wondering if you could talk about what’s going on there and whether this is the new level that should persist going forward or whether this was an unusual investment.

David Frear

So we did a couple things. One is I think you’ve seen the numbers be up year-over-year for a few quarters now. We’ve made the decision – I think we’ve talked about this in prior calls – to invest a little more in customer care. We believe that it is showing up in our churn rate beating expectations.

That was certainly true in the fourth quarter that one of the things we did this year that was a little bit different than prior years is that we actually kept our staffing levels at higher levels rolling into Christmas, that instead of reducing staff in the fall – in the early part of fall – and then rehiring and retraining going into December to meet the Christmas bump, we just a kept a sustained higher level of staffing throughout the quarter.

We think it showed up in better customer service and then better churn rates with the churn being the best we’ve seen in four years for the quarter.

Barton Crockett – Lazard Capital Markets

So in the past you guys have had some scale there, some improvements in spend per average subscriber. Is that basically ending or should we see that resume for the next couple of quarters?

Jim MeyerIt’s a balance, and what Dave had said is absolutely what we’re trying to gauge right now. We invested more in the second half of last year and we believe it correlated to a better result for our subscribers. In 2013, at least in the first half of the year, we intend to continue that way. David FrearAnd Barton, as a percentage of revenues, it really hasn’t budged. Barton Crockett - Lazard Capital Markets Okay. And then if I could switch to the share repurchase, I just want to be clear about a couple of things related to this. First, did you guys not buy back any stock to date, in the fourth quarter, so far this year? And if not, was there some type of constraint that kept you from getting into the market?And then secondly, on the Liberty Media change, was there some type of contractual commitment that had to be changed? Or is this just a statement from Liberty that they’re no longer kind of necessarily participating in the share repurchase?David FrearTwo things. When we announced the program in December, we were pretty close to earnings. And so the advice we had was to stay out of the market until we had gotten kind of the material nonpublic information into the marketplace, which I think we effectively do with this call and getting the K filed. You know, with respect to Liberty, when we originally announced the program Liberty was under 50%. We announced that they would be participating pro ratas so as not to accrete their ownership. You know, given that they’ve gone into the marketplace and they have gone over 50%, that there doesn’t seem to be any structural reason why the board should, for instance, insist on their pro rata participation. So it’s left to their discretion to participate in a manner that they feel is best for their business.OperatorAnd our next question is from Ben Swinburne with Morgan Stanley.Benjamin Swinburne - Morgan StanleyI have two strategic questions. One I wanted to ask about how you’re thinking about telematics in particular, and any other sort of new business investments or opportunities ahead of the company you haven’t talked about before. Telematics is certainly getting a lot of buzz and focus coming out of CES, etc., and you guys are pretty uniquely positioned given your customer base and platform to look at that opportunity. And then also related to CES, you had the Toyota announcement. Can you talk about what that announcement and what maybe other announcements with other OEMs might mean to the business longer term? I know, David, you’ve always talked about a sweet spot in penetration rate, but maybe there’s more opportunity for upside than people realize. Your thoughts there? Jim MeyerI think, number one, I want to be clear. The word “telematics” is the buzzword, but the real buzzword for me is “connected car” and all of those things that connected car offers in the future, many of which haven’t been completely fleshed out yet. So, as you know, I think every auto maker now is either planning or is putting in place how they intend to deal with their architecture in 2017 and beyond vis-à-vis the connected car. We think it’s important that we participate in those discussions. I’m not sure exactly which businesses that ultimately we need to be in. Obviously, on the short term, the one that is important for auto makers and one that we think we can play in and provide value is in fact the telematics business. And so that’s why we launched our initiative with Nissan. That’s why we’re out working with other OEMs to try to pursue and deliver to them what they may want. What’s most important to me is that we ensure that in this next generation - and by that I mean in the ’17 and beyond timeframe, that when the car has two paths into it, both the IP path and the satellite path, that we’re able to figure out how to best monetize that, and, as importantly, use both of those capabilities to improve the experience for our customers. And I think it’s a very logical step for us, and it’s one where we intend to put a lot of focus.In terms of the Toyota announcement, number one we were quite excited about that announcement. And these things take time, as you all know, with OEMs. We’ve been working on it for a couple of years, and it takes a couple more years before it ramps up and rolls out to the numbers, but the great thing about this channel is when the OEM commits to it, it does happen, and we love the result.I personally believe, still, that high-60%, 70% is the right sweet spot for us for penetration, and I do believe that’s kind of where you’ll see our penetration stay over the next five years. Benjamin Swinburne - Morgan StanleyAnd you wouldn’t expect any change to conversion ratio as a result of that inching up over time as you get into maybe lower price point cars and stuff? Jim MeyerIt’s a challenge, I’ll be honest with you. I mean, we have issues of mix that we wrestle with every quarter. The primary reason is, obviously, the lower price models convert at a lower rate than the higher price models. And so we wrestle with that. I think we’re still comfortable with our range that we’ve given for conversion, and I think we’ll see how 2013 goes.OperatorAnd our next question comes from Matthew Niknam with Goldman Sachs.Matthew Niknam - Goldman Sachs Two if I could. One on used cars. If you can give us any more color on the churn profile and profitability of a used car customer and how that might compare to your traditional base? And then secondly, on self-pay churn, that continues to improve, even as the rate hike from earlier last year rolls through the base. Can you help us think through what’s driving the improvements in self-pay churn, and if there’s an opportunity for any additional improvement from these levels going forward? Jim MeyerLet me just start on self-pay for a moment, and then David will take it and then answer your specific question on used cars. So there’s a lot going on. It’s hard to necessarily say our improvement is due to one thing or the other. I mean, starting with the economy, we think, improved in 2012, and we think that was helpful. Obviously, we continue to try to correlate what drove what we thought was outstanding performance in the fourth quarter. I think there were a lot of little things, also, that we did, that helped improve that number, and we’re going to continue to do those things as we move forward. I don’t think there was one magical thing that drove the number where it went. David FrearAnd on the used cars, I’d say that it’s still sort of early days on individual metrics, and I know it sounds like we’ve got a lot of transactions, and we do. But we do like to see these things sort of trend over time. Overall profitability on used cards is going to be certainly as good as the new car profitability, the single biggest reason being that we don’t have to reinvest in the radio. So reacquiring revenue generating subscriptions on previously installed radios is an immensely profitable business for us. I think it will be a little while before we’re able to tease out sort of sustained differences in churn profile. So you just have to stay tuned for that. OperatorAnd our next question comes from Jessica Reif Cohen with Bank of America Merrill Lynch. Jessica Reif Cohen - Bank of America Merrill LynchFirst, on the buyback, are you willing to commit to a timeframe? You’re so far below your leverage target. I was just wondering, now that you’re going to start it, is there any timeframe that you can offer? Jim MeyerNo, I don’t think we’re going to come out with a timeframe. We don’t want to compete against ourselves in the market. We will fill the initial authorization. As you know, we’ve got to be mindful of our restricted payment covenants as well. Jessica Reif Cohen - Bank of America Merrill LynchAnd then the second question is, on some of the new initiatives that you outlined, Jim, should we think about this as a revenue opportunity? How will you charge for it? Or do you think of it as a churn reducer? Jim MeyerI think it’s a great question. In the IP area, as you know, we charge for our subscribers to be able to stream our content. And we certainly have no plans to change that. And I think as we’ve improved significantly our IP offering, we ought to be able to sell more of our subscribers a bundle that includes both our satellite-delivered content as well as our IP-delivered content. And we’re certainly working hard to do that.At the heart of it, though, is our basic belief, which is a more-engaged subscriber is more likely a subscriber that’s going to stay with us over the long term. And so we see IP, particularly as it’s easy path into the home, as another great way to keep our subscribers engaged. So I think in terms of IP it’s a double-edged sword.In terms of the stuff we talked about longer term, with the connected car, I see two things there. One, certainly it’s a defensive play to make sure that we are part of new technology that rolls out and helps us keep a hand in what may go out in many, many years to come. But also, I believe there will be other revenue opportunities there that will be good for us, and as those businesses evolve, I think we’re well-positioned to take advantage of those. And then finally, in a true, connected car, I can’t help but believe that’s a better experience for our subscribers, and should help our churn and conversion profiles as well. David FrearIt’s definitely both. We will get additional revenue from it. It may be a way, through bundling, to help with the RPU block as opposed to just price increases. And we definitely know from the last 10 years of selling bundles and upgrades to customers that the more engaged customer does in fact churn less. Jessica Reif Cohen - Bank of America Merrill LynchCan you give the difference in churn? David FrearI’d just say that the people that buy more for longer periods of time churn less than the average that we’ve got. Jessica Reif Cohen - Bank of America Merrill LynchRight. And then just switching gears, I have a question for Scott. You said that he’s on the call. You have differentiated content, and I think Jim was the one who kind of laid out a lot of the stuff that you have, the town halls and interviews, etc. As you look out to this kind of content, which is really unique, and exclusive, do you begin to see pressure on costs, or conversely are there ways for you decrease costs in other areas? Scott GreensteinThere’s always going to be pressure on cost, because people that have valuable content and copyrights want to maximize the amount they can get for them. On the other hand, they definitely see the benefits of their content being used and distributed on Sirius XM, whether it’s through awareness or the fact that often our listeners and therefore their content are being heard by credit card-bearing audience, and that provides a valuable filtering tool to get to people that can buy content, which is what their key offering would be, or to buy concert tickets or anything else, sports tickets and all that. So while the pressure is there, we’re trying to make sure that we offer the best we can in a two-way street to those copyright holders to do the best we can. So, so far that’s working and it’s clear our costs are being held under control.Jessica Reif Cohen - Bank of America Merrill LynchI have one last question. Again, it relates to churn, which everybody’s brought up. It’s so good. You’re passing through the music royalty fee. Given this low churn, can you give us your current view on price increase? Would you consider a price increase for this year? Jim MeyerWell, we don’t have any plans right now for a general price increase. I can tell you, and if you’re a subscriber whose account renewed in February, for instance, you have been notified of a change in the MRF, and a passing along of that. We need to see how that goes, and watch that profile over the next six months. And I think that’s going to be our focus for 2013.OperatorAnd our next question comes from Bryan Kraft with Evercore Partners.Bryan Kraft - Evercore PartnersQuestion on RPU. It was basically flat quarter-over-quarter, despite a lot of fourth quarter renewals at the new higher price point. Was there a step up in the level of discounting to drive more sub growth in the quarter, and if so, was that driven more toward retaining customers who were receiving the price increase for the first time? Or was it more to convert unpaid trial subs to paid? If you could just shed some light on that, it would be helpful. David FrearThere’s no change in the discounting practices. That wasn’t really a factor in the quarter on quarter change in RPU. I think you’ve seen other seasonality in the RPU in previous years, where any enhancement in is a little bit less fourth quarter from third quarter. Part of it is that it is an average, right? So the fourth quarter renewals at the higher price, remember, are coming at the end of the quarter, and there’s very little recognized revenue that comes from all those rollovers. So that’s certainly going to affect it. But there’s really no underlying change of business practice that you should be concerned about. Bryan Kraft - Evercore PartnersSo is it safe to say that you would expect the RPU to continue to increase in the first and second quarter as the price increase rolls through? David FrearYeah. The RPU will continue to pick up. Remember, it takes a long time for things to roll through, and so believe it or not, we’re only just shaking off, now, the effects of the reduction in the music royalty fee from $1.98 to $1.42 that went through in December of 2010. That negatively impacted our RPU numbers all year. In the first quarter, we’ll pick that up, and so RPU should grow. Jim MeyerAlso remember that the percent of subscribers who come in through paid trials also impacts that number, and as those grow, let’s say differently, and different rates quarter to quarter, that can also have a factor on suppressing RPU, obviously, as the money comes from the automaker instead of the end user. OperatorAnd our next question is from John Tinker with Maxim.John Tinker - MaximYou haven’t discussed your ratings for a while, in terms of how many people actually listen to your service who take the service versus, say, listening to an iPod or radio. And I wondered if you could give us some idea of how that’s going. Jim MeyerWell, we’ve been competing against iPod and terrestrial radio for 10 years now. I’ve been here for 10 years, I don’t ever remember having talked about ratings between satellite radio, terrestrial radio, internet radio, and iPod listening. But there’s a lot of competition in audio entertainment. There are complementary services. Many of our subscribers are internet radio listeners, and many of them have personal digital music collections, and so that’s just been part of the program for 10 years now. John Tinker - MaximI think actually you published a number about two or three years ago, I think in the K, and you suggested that people that had your service listened - you had said about 70% of the listening, which was obviously pretty high. Could you just touch on the $3 billion income tax benefit that went through the P&L, and where your NOL now stands? David FrearThe NOL will be in a footnote to the K. I think it’s around $7 billion. And it should shield taxes for the next several years. The $3 billion income item is the reversal of the deferred tax valuation allowance. It’s a sort of GAAP driven disclosure, but from an investor’s perspective, it’s the future shield of taxable income that will really matter in valuation.OperatorAnd our last question comes from Vijay Jayant with ISI Group.David Joyce - ISI GroupHi, this is David Joyce for Vijay. Just wanted to see if you could provide some color on the impact to your business model when a large OEM partner contract changes toward the end of this year. David FrearWell, it’s going to be accretive to EBITDA. The contract comes up in the fourth quarter and I think year on year comparisons in the quarter for EBITDA will be favorable. Obviously it’s only one quarter’s impact on the full year, so most of the benefit will actually be found in 2014. Many analysts, I think Vijay included, have written on the subscriber recognition affected. Effectively, in the contract that we have a paid trial moving to an unpaid trial, so the year on year comparisons and total subscriber additions fourth quarter to fourth quarter will be down. But it really doesn’t affect self-pay. The business is effectively how many self-paid subscribers do we have and how many conversion opportunities do we have in the trial funnel, and the change in geography for the OEM between paid and unpaid trial doesn’t change any of those dynamics.Okay, thanks everyone. Appreciate your time this morning.

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