SIRIUS XM Radio (NASDAQ:SIRI)
Q4 2009 Earnings Call
February 25, 2010 8:00 am ET
William Prip – Senior Vice President, Treasurer and Investor Relations
Mel Karmazin - Chief Executive Officer
David J. Frear - Executive Vice President, Chief Financial Officer
James E. Meyer - President, Operations and Sales
Scott A. Greenstein - President, Chief Content Officer
David Bank - RBC Capital Markets
Barton Crockett – Lazard Capital Markets
Mike Pace – JP Morgan
Jim Goss - Barrington Research
Welcome to SIRIUS XM Radio’s fourth quarter 2009 earnings conference. (Operator Instructions) At this time, I would like to turn the conference over to William Prip, Senior Vice President, Treasurer and Investor Relations.
Thank you. Good morning, everyone and welcome to SIRIUS XM Radio's earnings conference call. Today Mel Karmazin, our CEO, will be joined by David Frear, our EVP and CFO. The will discuss SIRIUS XM’s fourth quarter and full-year 2009 financial results. At the conclusion of the prepared remarks management will be glad to your questions. James Meyer, President of Operations and Sales and Scott Greenstein, 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 this call might be forward-looking 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 upon assumptions, data and 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 see SIRIUS XM’s SEC filings. We caution 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 caution our listeners today’s results may include discussions of both actual results and pro forma results. Listeners are cautioned to take special care to ensure accuracy in looking at today’s report.
I will now hand the call over to Mel Karmazin.
Thanks, Will. Welcome everyone to our earnings call. What a year 2009 was. We began the year with a tremendous sense of uncertainty. The economy appeared to be in shambles with the labor market experiencing severe contraction and the auto industry and financial markets faring even worse. But by the end of the year the economy was beginning to show signs of recovery.
At SIRIUS XM we too began the year with a great sense of uncertainty stemming from the fact we were facing near-term maturities with neither the cash on hand to satisfy those maturities nor a functioning capital market to provide us the opportunity to extend them. We also felt a sense of frustration because we knew the company would thrive and not just survive if given a liquidity lifeline. We were anxious to validate our superior business model as a result of the recently consummated merger.
Fortunately, Liberty Media saw our situation in the same way we did and provided us with the liquidity we needed to meet our financial obligations in February. This allowed management to focus on the company’s operations and the results were worthy of our hopes and expectations.
As we announced in our press release this morning we had a banner year. Operational and financial metrics have improved year-over-year or over the course of the year and collectively they demonstrate the strength of our differentiated business model; the paid subscriber business model works well in radio and SIRIUS XM’s business model in particular is strong and resilient.
David will provide more details and insights on our financial and operational metrics but I also want to address a few of them. First, the company’s revenue grew 4% in 2009 which was a year which many people might have expected our revenue to decline given the hostile macroeconomic environment we experienced overlaid with the unique challenge facing the auto industry. As a matter of fact, we had record revenue.
Second, we grew pro forma adjusted income from operations, adjusted EBITDA, by nearly $600 million in 2009 to $463 million from negative $136 million in 2008. This represents the first year that the company has generated positive pro forma adjusted income from operations. In March 2009 our original guidance for 2009 was just over $300 million in adjusted EBITDA. Producing $300 million in adjusted EBITDA in 2009 compared to a negative $136 million in 2008 would have been great performance. Delivering $463 million compared to the loss of $136 million was extraordinary performance.
One more time, negative $136 million to positive $460 million in adjusted EBITDA in just one year.
Third, we grew free cash flow by over $700 million in 2009 to $185 million from negative $550 million in 2008. This too represents a first for the company; the first full year of positive free cash flow and as we have previously stated free cash flow is a key metric for creating value for shareholders.
I also want to discuss a few operational metrics that highlight the strength of our business. We experienced better subscriber performance in the second half of the year clawing back 359,000 subscribers in Q3 and Q4 of the 590,000 subscribers we lost in the first half of the year. While this improvement in our overall subscriber base over the course of 2009 was obviously welcome I was extremely gratified that our self pay subscriber base turned around even more quickly and ultimately resulted in us ending the year with more self-pay subscribers than we had at the beginning; 154,000 more to be precise.
In fact, our overall subscriber decline last year was driven solely by the loss of 385,000 promotional subscribers which was clearly a consequence of the dramatic decline in auto sales in 2009. It is obviously reassuring to us that the self-pay subscriber base grew last year despite the recession and its impact on consumer spending. Now with auto sales showing signs of recovery we are well positioned to hopefully grow our promotional base in 2010 and beyond.
We also note that our unpaid trials which are not counted in our subscriber base have also begun to grow and represent a significant source of future self-pay subscribers. Finally, I just want to touch on churn. Churn ticked up a bit in 2009 versus 2008 and it is difficult to be certain as to the cause of that increase. Our subscribers like all consumers last year were pressured by a severe recession. At the same time, the company had taken pricing actions on certain of our services last year that likely caused some of our subscribers to cancel their subscriptions. But we have suspected throughout last year the economy more than our pricing actions increased our churn.
Now given the lack of discernible impact on churn of the company’s passing through the music royalty fee we are even more confident that the economy was the negative pressure on churn last year. AS such, we are hopeful that churn will improve as the economy returns to health. These results are outstanding when put in the context of the environment we operated in last year. The auto industry’s decline coupled with consumers curtailing many areas of discretionary spending could have been disastrous for SIRIUS XM but our business model allowed us to be successful.
Specifically, two aspects of our business model allowed us to thrive last year and will continue to fuel our future growth. First, we offer consumers a service that they appreciate and for which they are willing to pay despite the innumerable free entertainment we have always competed against. Simply put, we offer our subscribers a great product at a great price.
The second aspect of our business model that is allowing us to be successful and grow at the pace we demonstrated for the past two years is the operational leverage that is inherent in our business. As I have noted before, when businesses like ours reach sufficient scale to cover the fixed costs and subscriber acquisition costs which is a cost we are happy to pay because it represents future subscribers it becomes a powerful cash flow generator because of the high contribution margin we enjoy. Clearly the operational leverage of this business was enhanced by the merger in mid-year 2008. The merger provided significant cost synergies in our fixed cost base which consequently allowed us to reach scale more quickly than other companies.
Our fixed cost base dropped nearly $350 million since 2007. This fact has allowed the combined company to increase pro forma adjusted income from operations in 2009 by almost $600 million in over one year and by over $1 billion over two years.
So I mentioned earlier about our differentiated business model. As you know we principally generate our revenue from subscribers. Approximately 98% of our 2009 revenue of over $2.5 billion came from our subscribers. Having multiple revenue streams is superior to the model that principally relies on advertising. SIRIUS XM ended the year with over 18.7 million subscribers. That translated according to Arbitron to approximately 35 million listeners. We were able to generate over $70 in revenue annually from each listener in satellite radio.
If you consider the major terrestrial radio companies and compare their total revenue with their total weekly listeners they are only generating between $10 and $20 per listener per year. SIRIUS XM’s business model enables us to monetize our listeners over 3.5 times that of terrestrial radio. Also, if you look at the largest internet radio company that has over 40 million users and generates about $50 million of revenue which is about $1.20 per user per year, our superior model is even more dramatic. $70 for satellite radio. $10-20 per listener for terrestrial radio and $1.20 per year per listener for internet radio.
In addition, our unique contracts with OEMs also are a significant contributor to our business model and is a major driver of our future growth. So what does this mean for our future? With respect to 2010 we are anticipating a very strong year. We expect to generate over $2.7 billion in total revenue for 2010. We also expect our pro forma adjusted income from operations to reach approximately $550 million this year which is consistent with the 20% increase we guided to on our last call despite the fact we significantly over-achieved our 2009 guidance.
Finally, we expect to grow subscribers in 2010 and add over 500,000 net subscribers this year which will exceed the company’s previous high of 19 million at the end of 2008. Now with respect to our long-term performance SIRIUS XM will undoubtedly continue to be a strong cash flow generator over the coming years. We will continue to be installed in the majority of new cars sold in the United States, an important fact given that new cars have become the source of the vast majority of our new subscribers and we are also extremely excited about our potential to grow subscribers through the used car market.
Eventually there will be many more used cars with factor or dealer installed radios on the road than new cars so the universe of potential subscribers who can easily sample our service will continue to grow and we are devoting a great deal of energy to create and refine processes to take advantage of this future fact. We have recently announced the management team to focus on capitalizing from the very large, certified pre-owned and used car market. Importantly we also expect to grow ARPU over the coming years by offering additional services and pricing plans that make our services even more valuable to subscribers. As we make our service offering better we will not only increase ARPU but we will also enhance the stickiness of our service customers which would have the additional benefit of positive impact on churn.
We are very pleased that in a very short time since the merger we now have over one million subscribers buying our best known packages.
Now let me turn to our balance sheet. As we continue to focus on growing cash flow we will be more aggressive in attacking our balance sheet by repaying debt as it comes due and in some cases selectively refinancing an opportunistic transaction. Because we have no debt maturing this year and manageable amounts maturing in the following two years we will be building a strong cash balance that will allow us to address our debt that matures in 2013. By reducing indebtedness while accretive to equity it not only is adding to our strong cash flow generation but it will greatly increase shareholder value. Reducing overall leverage is as great a flexibility generally which consequently provides us with greater operational flexibility.
As the company improves its balance sheet we will more be able to invest in strategic and commercial initiatives as well as improve our internal business processes. Without financial flexibility it is often impossible for companies to seize opportunities as they come along. Bottom line, we are positioning SIRIUS XM to have the agility and flexibility we need to grow the top line.
So as I pass the call on to David I just want to address one final issue. Obviously with our stock price trading above the $1 mark for the past six days it is possible we will requalify under the NASDAQ continued listing criteria with ten consecutive days over $1. If that were to happen we would obviously not pursue a reverse stock split. Moreover, even if we were to slip below $1 again and we receive a delisting notice from the Exchange on March 15th we would appeal that notice and seek a six month extension as permitted under the NASDAQ rules. We are optimistic we will prevail.
We hope and expect we will meet the continued listing criteria either in the next few days or over the next several weeks to months. There is absolutely no concern about SIRIUS XM continuing to be listed and traded on NASDAQ. If successful in meeting NASDAQs $1 bid requirement we have no plan to execute a reverse split. We are very excited about our future. 2009 was a good year and we look forward to 2010 being great years.
Now I will turn the call over to David.
Thanks Mel. Our performance in the fourth quarter and full-year continued to demonstrate the strength of the satellite radio business model and the bright future for our company. Through the worst economic environment in a generation our results are phenomenal.
Subscription performance in the quarter was encouraging on virtually all fronts. Gross additions in the quarter were at their highest level since Q2 2008 as automotive sales continued their recovery and our penetration reached 55% for the full-year and 60% in the fourth quarter. Auto sales were 10.4 million for the year and SAR ran at a 10.8 million unit pace for the fourth quarter. Conversion rate was up two percentage points from Q4 2008 at 46.4%.
Self-pay churn was under 2% for the second consecutive quarter despite the introduction of the U.S. music recovery fee in August. Net additions of 257,000 represented our best quarter since Q3 2008 and virtually all of these net additions were self-pay subscribers. We are well positioned for a continuing recovery in the automotive sector with self-pay subs at 15.7 million and total trials, paid and unpaid, in the funnel of 3.6 million as of the end of the year.
January auto sales remained level with Q4’s 10.8 million seasonally adjusted rate and we are cautiously optimistic that pace can be maintained. We expect our subscribers and [and [pace] will grow by over 500,000 subscribers in 2010 with most of that increase occurring in our self-pay segment meaning that we expect to exceed our previous high of 19 million total subs by year-end.
Note that most of the financial results I will discuss today will be based on pro forma combined company figures without purchase price accounting adjustments which we believe represents the best way to observe the core trends underlying the business.
Revenues for the quarter were $684 million, up 6% as subscription and other revenues increased with higher ARPU and the implementation of the music recovery fee. ARPU improved $0.27 or 2.5% to $10.92 driven by higher sales of best sub packages and the rate increases on multi-radio subscriptions and internet streaming. Advertising revenues were flat with 2008 representing the strongest quarter of the year. As with auto sales, we are cautiously optimistic about the general advertising environment. Early bookings in 2010 are positive to year-ago levels.
Our track record of great cost control continued in the fourth quarter as virtually every element of our costs improved. Customer service and billing costs per sub improved 10% to $1.06 per month or on a margin basis from 10% of revenue to 9%. Revenue share and royalties improved slightly on a margin basis year-over-year to 18% of revenue with the music recovery fee revenue and improved OEM revenue share terms offsetting a higher performance royalty rate and a higher percentage of OEM customers versus retail compared to last year.
As a result, contribution margin improved 3.7 percentage points to 71.4%. SAC per gross add dropped 9% to $64 and SAC as a percentage of revenue also dropped to 19% from 21%. The increase in satellite transmission costs in the quarter is related to non-cash charges associated with lease accounting and launch insurance allocation. Sales and marketing costs were flat with last year as cost efficiencies were used to fund our Icons Media campaign in the fourth quarter.
Programming, customer service, G&A and engineering all experienced double digit percentage declines over the year-ago period. In total, our fixed operating expenses fell 6 percentage points to 36% of revenue. Add it all up and adjusted income from operations more than tripled to $115 million representing a 17% margin on sales compared to last year’s 5% margin.
We have now had five consecutive quarters of positive adjusted income from operations and in all four quarters of 2009 it exceeded $100 million. For 2009 SIRIUS XM earned over $463 million of adjusted income from operations, an improvement of just under $600 million over 2008 and an improvement of more than $1 billion since 2007 when the recession started.
One year ago we gave you guidance of adjusted income from operations would be more than $300 million. We have delivered 54% more than that guidance. Similarly, we saw dramatic gains in our free cash flow. Free cash flow in the fourth quarter was up nearly six times to $150 million. Full-year free cash flow improved to positive $185 million from negative $552 million in 2008, a swing of $737 million in a single year.
With $383 million in cash, continuing positive free cash flow and minimal debt maturities in 2010 we will opportunistically look to improve our balance sheet. We expect revenue to exceed $2.7 billion in 2010 which would represent at least 7% growth consistent with our prior guidance of mid to high single digit revenue growth with the continuing shift in our subscriber base towards factory installed radios and the increase in statutory royalty rates we expect revenue share and royalties to grow at a faster rate than revenue in 2010.
Similarly, with low auto inventories at year-end and a recovering automotive sector, subscriber acquisition costs will grow faster than revenues in 2010 as we invest in growth that will reap revenue and cash flow benefits in 2011. We will continue seeking efficiencies throughout the company. Many, though certainly not all of the merger cost synergies have been realized. Year-over-year cost comparisons in 2010 will now show the dramatic, across the board improvements you have consistently seen us demonstrate over the last 18 months. Our 2009 adjusted income from operations of $463 million was significantly higher than we had anticipated in our prior guidance but we are maintaining our guidance of a roughly 20% improvement in adjusted operating income effectively raising our 2010 adjusted EBITDA guidance to $550 million.
Despite an increase in satellite capital expenditures in 2010 we continue to expect positive free cash flow generation this year. With satellite CapEx declining by $100 million in each of the next two years, 2011 and 2012 that is, as we complete the replacement of the satellite fleet we expect increasing amounts of our cash flow from operations to be available to fund debt maturities or other strategic or financial priorities. While we continue to de-lever in the near-term our growing cash flow presents many interesting opportunities for the company.
With those comments, now I would like to open up the line for questions.
Question and Answer Session
(Operator Instructions) The first question comes from the line of David Bank - RBC Capital Markets.
David Bank - RBC Capital Markets
First off, can you talk a little bit about what drove the reduction in revenue share on the automotive side where the nature of some agreements changed or what happened there? Can you also tell us what percentage of your subscribers during the fourth quarter were paying the royalty pass through and should we assume it is fully baked into the subscriber base for the first quarter or will it continue to roll out? Third, tough for you to talk about I am sure but can you give us any color on where you are with Howard Stern and what scenarios you might be playing out. Is there a potential for you to re-sign Howard but for maybe fewer days on the air or something like that? Or is it all or nothing? Lastly, Mel highlighted the operating leverage inherent in the model in his comments but in some cases next year in 2010 we are going to see expenses ramp faster than revenue growth. David kind of hit on it briefly if the OEMs ramp faster than the retail base that is part of the driver. Why exactly are revenue sharing royalties growing faster than revenues and why exactly is SAC growing faster than revenues?
The reduction in revenue share, we did renegotiate one of our OEM agreements entering 2009 and we extended that agreement and were able to secure a reduction in revenue share as a result. We also have mix issues going on in the OEM side where we have an increasing mix of subscribers from OEMs with lower rates. So overall that is what brought that down.
In terms of the music recovery fee we estimate at this point about 2/3 of the self-pay base had the music recovery fee assessed. I think the way you should think about it is some of the remaining 1/3 will never get it. So we have subs that are on very long-term plans that may not roll up. The lifetime subscribers that pre-dated the imposition of the fee, of course they will never be assessed it. I think substantially all of the subs that are going to experience the fee will get it within the next couple of months.
In terms of the faster growth of some expenses, one of the things about the model is that when we have rapid growth we incur all of the SAC expense on the day we recognize the subscriber but the revenue follows over some period of time after the subscription is initiated. As the automotive industry recovers and if you look at most of the estimates for the automotive industry this year it is sort of even with the fourth quarter and then it seems to be rising as you go out through the year. If that forecast comes true you end up with a decent ramp in OEM additions in the second half of the year so you will be recognizing all of that [TAC] expense but the revenue associated with those won’t really come until 2011. So that sort of covers the SAC thing. If you look back at the company’s growth in the sort of 2004, 2005 and 2006 period you would see similar behavior on SAC.
With revenue share, again that is nothing more than math. There is nothing actually changing with respect to the underlying rates in the business. IN 2009 we got the one-time benefit of a reduction in rates from one of our automotive partners as well as the ramp up in mix of some of the lower rated partners. At 60% penetration and with a mix that isn’t changing all that much in the course of this year it is just the OEM subs become a larger proportion of total subs there is going to be a natural bias up in revenue share expense as a percentage of total revenues.
When you add it all up we are showing you what I think is very strong contribution margins. Very strong incremental margins in the business. You have $463 million of EBITDA going to $550 million so that is what a $87 million improvement. We have given you guidance of revenues going up by at least $150 million. So you are looking at incremental margins that we are providing guidance that will put you somewhere in the zip code of a 50% plus incremental EBITDA margin business. That is still a very, very strong economic model.
One of the other things along the lines of what David said is that you should assume our revenue is growing faster than our operating expenses are and we will have EBITDA margin improvement as a percentage as well. So I think that is a statement.
On the subject of Howard Stern, I wasn’t here at the time the decision was made to bring Howard to SIRIUS. Scott and the team made an absolutely great decision and something that has worked out terrifically well. So bringing Howard to SIRIUS was a great call. Along with everybody else I believe that in the last four years Howard has done his best work. His shows are better than they have ever been before. They are helped by the fact that he has a national platform and probably more importantly by the fact that for the first time Howard is operating in a very minimal commercial advertising mode. So in terrestrial radio listeners were hearing up to 22 minutes an hour of commercials where at SIRIUS XM the most we are running are six. So when you think about the fact Howard does about four hours a day and listeners are hearing 15 minutes an hour more of Howard, in essence an extra hour each show of Howard it has worked out terrifically well.
He has been a great partner. We would like to continue doing business together. There is nothing in his contract that deals with a timeframe as to when we need to negotiate and do a deal. Some contracts provide a period where that negotiation needs to take place. In Howard’s contract that is not the case. So we have nothing to announce today. My suggesting for those that are interested, and I am sure many of you are, is tune into Howard 100 because we will be providing you with regular updates. Howard talks about his life regularly and I am sure as he talks about it this morning he will continue to talk about and when we have something to announce we will announce it.
The next question comes from the line of Barton Crockett – Lazard Capital Markets.
Barton Crockett – Lazard Capital Markets
I wanted to ask a little bit about your outlook for subscriber growth in 2010, the 500,000 growth. Is it safe to assume that is all on the auto side and that retail subs are down again?
I think that is safe to assume.
I think one of the things you have to think about longer term and starting when I say longer term I am not talking a long term away, including 2010, the aftermarket as you knew it before OEMs ramped up is going to sort of migrate towards the used car market. Because that market is really the potential for us to add significant amounts of additional subscribers. So there will always be an aftermarket. Our DTC and retail stores will continue to sell it but as people are principally using their car as the opportunity to access radio, that is the main spot, our initiatives in new cars and used cars will be the predominate driver. That is a good business model for us.
Barton Crockett – Lazard Capital Markets
To that end, I was going to ask about used cars. Can you give us any sense of how much contribution used cars were to subscriber total in 2009 and any color on how that might change in 2010?
It is certainly going to be increasing in terms of number of adds we have each year. We haven’t broken out those figures for you yet. I don’t think we are going to do so today. It is one of these things as we look at the 25 million or so factory installed radios that are in the field and the roughly 100 million or so that are out there it is obviously a growing pool of those that are opportunities for us to get turned back on. Most of those are still in the hands of the original owner because the ramp up in OEM is fairly recent. But in the course of the next couple of years the second owner market is going to kick in and we are going to start seeing a really significant number of them begin to turn over. Of course at 60% penetration level the total is growing pretty rapidly.
I think as we see the volume growth and I think you will probably hear more details about it in the future.
I think you should expect in the future as our IT systems evolve to be able to get us the kind of precise information we want that will become a reporting item as well. So we will be reporting the aftermarket will be reporting at some point the used car/secondary market as well as the OEMs.
Barton Crockett – Lazard Capital Markets
On the topic of cars can you talk about the Toyota issue, what impact that has had on the quarter and what, if any, impact it is having on the first quarter and might have the balance of the year?
With Toyota, number one the Toyota program that we have is a non-pay trial. So the impact of the first quarter in terms of subscribers is zero. In terms of production, as you know they were down for a fair amount of days. They are now back up and running. They have made up a lot of their production. What we can’t predict is what is going to happen to their market share. So I really don’t think it is going to be terribly disruptive to our numbers in the first half of 2010.
We had a meeting yesterday of all of our senior executives and we talked about another advantage of the merger for the company was that the combined company has deals with every single OEM. So if in fact one of our OEMs is going to lose some market share then another of our OEMs is going to pick up that market share. We, for the most part, are not adversely affected at all.
Barton Crockett – Lazard Capital Markets
I wanted to switch gears and ask a bit about the relationship with Liberty and in particular in a little over a year they will have an opportunity to adjust their holding structure. One thing they have done in recent history with their holdings of DirecTV which they weren’t given full credit for that; they spun it off and merged it in with DirecTV which is a good thing for their shareholders. Is there any scenario in which it might make sense for SIRIUS to think about doing something like that with Liberty? Can you talk a little bit about that?
Obviously about a year ago when we first got together with Liberty it turned out to be a very good deal for SIRIUS. They stepped up and provided us with liquidity we needed. We paid them back. We refinanced it. It was an extraordinary investment for Liberty and at this point what hypotheticals and possibilities could exist in the future I really don’t want to comment on. I also think that any questions about what Liberty might do is best directed to Greg Maffei and John Malone. From our point of view there is a standstill. One of the reasons that we were attracted to the Liberty deal and not to other deals we have the opportunity to do was that we didn’t want to provide control of this company to somebody without a significant control premium. So the Liberty investment is at 40% and there is a period of time where they have to stay at that. So what Liberty does with its shares of SIRIUS is really something that should be directed to Liberty.
The next question comes from the line of Mike Pace – JP Morgan.
Mike Pace – JP Morgan
I would love to debate some of your guidance. First of all, what SAR rate are you assuming in your subscriber guidance for 2010?
We do a bottom’s up approach in arriving at our guidance on subscriber numbers. We talk to each of our teams that represents the various automotives. We look at each of the contracts. We have the range of SARs like everybody has given. We are not in the SAR predicting business. We tend to be more conservative than what is out there generally.
Mike Pace – JP Morgan
I acknowledge there is a greater than sign next to your revenue guidance but if I think about you are growing subs. You still have some more royalty rate pass throughs to hit the financials in 2010, I guess if I just look at annualizing fourth quarter revenue numbers then that would assume no more growth, we are already above the 2.7 number. I just wonder if we are missing anything. Do you expect the underlying ARPU to be more promotional or safe techniques as you are thinking about that?
No, I think you are reading the guidance correctly. I think that our guidance of greater than 2.7 covers it.
Mike Pace – JP Morgan
On cost savings, what are the key line items you still have some more to do? I am thinking particularly more customer service and billing and then programming of course. If you could be as specific as possible that would be great.
So we have said this many times, as each contract comes up regardless of whether it is programming, automotive, retail printing, legal services that we take the opportunity to negotiate hard with the bigger buying power that we now have. On the programming side there are a number of high profile contracts that come up year by year. I think everybody knows that Howard’s deal is up at the end of this year and that we are entering our last season under the current NFL agreement in the fall. So 2011 and as both of those are up in 2012. NASCAR is up and then there are others that follow year after year.
I think in terms of line items we will be integrating the subscriber management system platforms in the sort of third quarter of this year. That could give us opportunities on the IT side of things in 2011 and really not so much in 2010. IT expenditures get split between G&A and customer service billing so they will be in there. We still think there are opportunities for other improvements on the G&A side. Then generally part of the DNA of this company we go through and we beat the expenses up every month. So again, I think as we have said before you shouldn’t expect to see this dramatic improvement in every single line item we have shown in the last 18 months but you should expect to continue to see expanding EBITDA as a percentage of revenue.
The next question comes from the line of Jim Goss - Barrington Research.
Jim Goss - Barrington Research
I would be interested in your thoughts and some insight into your thought process with regard to your pricing philosophy. I realize we are still more than a year away before you can really adjust the basic prices but you do have these several significant contracts coming due and I would imagine as you look at those you think about the two systems you might spread certain of the programming over and there could be a development of a premium service tier versus just straight pricing. Could you provide any thoughts on that matter?
Obviously we have a lot of competition. We compete with free. We believe right now we are offering extraordinary value to our subscribers. We have talked about how we have seen the churn improvement in the fourth quarter from the point of view of even passing along the MRF and as the economy gets better we would like to be able to continue to offer subscriber’s value that we are sort of mandated under the SEC order until July or August of 2011 about making any current subscriber pay more for that they were currently getting before.
As we go through that process we will sort what the impact is that we can add more value for our subscribers and that might include subscribers paying a little bit more for some of the value we are going to add. We really have not announced anything and I really have no comment today on anything that we may be doing sometime in the future.
Jim Goss - Barrington Research
With regard to the 2013 maturities, despite the fact you have no maturities this year and manageable in 2011 and 2012, the looming 2013 still seems to pop up periodically wit investors. I am wondering if there is any though aside from building cash to try to or the things you can do to try and address that issue ahead of time?
You should expect us to be smart and opportunistic with respect to the 2013 maturities. They are obviously a long way out and the company’s credit profile is very clearly improving rapidly and dramatically. So we keep a pretty close eye on the market. If there is an opportunity to go into the markets and get attractively priced, long-term paper to trim out some of those maturities that is something you should expect us to do to the extent that the paper trades weekly from time to time. As we build the cash over the course of the next couple of years we could decide to buy paper in early.
It is obviously an important thing for the company to focus on. We have put a lot of effort into it. As the opportunities arise you can expect us to move quickly to take advantage of it.
Just to answer and agree with David said you should assume that extending that 2013 maturity is something we would like to do.
Jim Goss - Barrington Research
The share of autos with the built in radio at year-end, I think earlier in the year you thought your year-end target would be something like 58%. Is that about where you wound up?
60% in the fourth quarter.
Jim Goss - Barrington Research
The upside is not much more than that? 65% or so?
I think you should plan penetration in 2010 around 60-62%. One of the things we are going through now and I think it is a great sign of the maturity of the company there certain cars that are built that just don’t yield an acceptable subscriber profile for us. An example is one of our large OEMs there is a group of commercial trucks that we have learned don’t convert anywhere near to give us an acceptable financial equation. Despite the short-term impact on subscribers we are eliminating those from including satellite radio going forward.
Thank you for dialing in. That concludes our conference call.
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