Sirius XM Radio's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Sirius XM (SIRI)

Sirius XM Radio Inc. (NASDAQ:SIRI)

Q4 2013 Earnings Conference Call

February 4, 2014, 8:00 AM ET


Hooper Stevens - Vice President, Investor Relations and Finance

Jim Meyer - Chief Executive Officer, Director

David Frear - Chief Financial Officer, Executive Vice President

Scott Greenstein - President, Chief Content Officer


Jason Bazinet - Citi

Barton Crockett - FBR Capital Markets

Ben Swinburne - Morgan Stanley

Jessica Reif Cohen - Bank of America Merrill Lynch

David Joyce - ISI Group

Amy Yong - Macquarie

Matt Niknam - Goldman Sachs


Good morning and welcome to the Sirius XM full year and fourth quarter 2013 results earnings conference call. [Operator instructions.] At this time, I would like to turn the call over to Hooper Stevens, vice president, investor relations and finance. Mr. Stevens, please go ahead.

Hooper Stevens

Thank you, operator, and good morning, everyone. Welcome to Sirius XM's earnings conference call for the 2013 year and fourth quarter. 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 these risks and uncertainties, please view Sirius XM's SEC filings. We advise listeners not to rely unduly upon forward-looking statements and disclaim any intent or obligation to update them.

As we begin, I would like to advise our 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 hand the call over to Jim Meyer.

Jim Meyer

Thanks, Hooper, and good morning. Thank you for joining us today. 2013 was an exciting year for our company as we delivered on all our financial guidance for the year and positioned the business for continued growth in the vehicles and devices of tomorrow. We increased revenue by 12% to $3.8 billion, beating our guidance. We grew our subscriber base by 1.66 million to a level now over 25.5 million, one of the largest subscription media businesses in the world.

Self-pay churn and conversion rates were well manage throughout the year. We also improved our revenue per subscriber by just over 2%. We held our expense growth well below revenue growth, despite investments across our business, particularly in IP technologies and connected vehicle services.

This drove 27% growth in adjusted EBITDA to nearly $1.17 billion, also beating our guidance. For the year, this delivered a record margin of 30.6%, an increase from 27% in 2012 and 24% in 2011. Fourth quarter adjusted EBITDA grew an astounding 41%, boosted by lower subsidy rates on vehicles.

In short, our business is healthy and our model is working. We are running the business to focus on free cash flow while continuing to make investments in key growth initiatives. On that measure, we had a very good 2013. We improved free cash flow by 31% to a record $927 million, or nearly 80% of our adjusted EBITDA, and on a per-share basis, free cash flow rose at an even faster 41% in 2013 as we reduced our share count by 520 million shares via stock repurchase.

Let me reiterate, we believe growing our free cash flow and even more specifically, free cash flow pretty significant, is the most important we can do to enhance value for our shareholders over time. New car sales are back to about 16 million per year.

We continue to see enthusiasm and increased commitments to our audio service from OEMs. Our penetration rate in the fourth quarter was 71%, the highest in the history of the company. This year, it should be right around 70%.

More satellite radios than ever are being installed in new cars. Last year, we announced penetration increases at Toyota and Honda. We recently extended our agreement with Nissan through 2018 and Nissan will now be significantly expanding satellite radio penetration across its entire model line as well.

Sirius XM’s great content and easy to use service continues to be in high demand by OEMs and their customers. New cars sold with a satellite radio should top 11 million this year, up from 10.7 million last year and 9.6 million in 2012. There are now approximately 60 million vehicles on the road today with a factory installed satellite radio, and we expect that to nearly double the next five years, as satellite enabled vehicles exceed 110 million.

Our initiatives in the used car market are really starting to take hold. We now have more than 11,000 dealers reporting previously owned vehicle sales to us, and we expect the volume of those sales and the 90-day trials we offer to those buyers to more than double in the next five years. In fact, within the next several years, sales of previously owned vehicles with satellite radio will actually exceed sales of new cars with our radios.

Our Service Lane initiative has proved to be an early success. If there hasn’t been an active subscription in a vehicle for a while, when owners service their cars at participating dealers, we can now offer those customers an abbreviated trial, exposing them once again to our ever changing and improving programming lineup.

Currently, this dealer count is at 2,500 and climbing, yet another way we are creatively approaching both the first and second owner market. In 2013, new car buyers converted at about 44% and used car buyers converted at about 34%. We ran about 13 million total trials in 2013, and we expect this number to be over 15 million in 2014. Incremental penetration into more mid and lower end cars may cause a softening of conversion metrics, but with declining SAC per new vehicle, we are more than willing to take this tradeoff.

With the continued recovery of new car sales and growing availability of satellite radio in previously owned vehicles, Sirius XM’s unparalleled entertainment offering is becoming available to more households than ever. In both the new and used car markets, we are seeing increased numbers of sub-$75,000 households coming through our trial funnels.

We continue to be creative about improving, fine-tuning, and testing segmented marketing efforts in order to maximize yields from the growing base of installed vehicles. As we discussed on our last call, our new car subscribers are selling their cars more quickly than industry averages. Increasing vehicle turnover and income sensitivity in our subscriber base are contributing to churn.

The mix of our vehicle, owner, and subscription base will continue to move toward the demographics of the average driver in this country. I don’t think it will surprise any of you that over the years, we have seen higher income households convert at higher rates and churn at lower rates than lower income households, but lower income subscribers remain a very profitable segment for us, because of our high contribution margin and low variable cost per acquisition.

Today, our radios are only in about 25% of the active cars on the road, so as we grow, changing demographics will of course impact some of our metrics. But remember, 80% of car owning households in this country own two or more cars. 80%. Among all households that do subscribe, we have a great opportunity to expand our relationships by adding additional subscriptions within those households, as the vehicle fleet grows.

Now let me give you an update on our connected vehicles strategy. We know where the auto makers are going in this area, and we have a clearly defined strategy to execute and win in this business. In September 2012, we won a contract to provide connected vehicle services for Nissan, and this past November, we significantly expanded our commitment to lead this market by acquiring the connected vehicle unit of Agero, which will be a core part of our long term growth strategy in connected cars.

The expansion of our CV platform gives us immediate credibility with OEMs, enhances relationships with key Asian and European OEMs, and improves opportunities at several others. We’ve acquired a smart team of technology engineers who are accelerating development of our overall connected car architecture, including the combination of satellite receivers with LTE hardware, a strategy that should also yield benefits to our existing audio business.

The CV business also gives us entrée to create a worldwide connected car platform, something of particular interest to our OEMs. We now have live connected vehicle service with eight OEM brands, with several others in the pipeline, making us the leading provider of these services to OEMs today. Much of the market is still uncommitted, and we believe our acquisition improves the odds of expanding our relationship with existing OEMs and winning new business at several key other OEMs.

We expect connected vehicle services to deliver close to $100 million of revenue this year, and we expect to grow this at strong double digit rates over the next many years. We are in the process of fully integrating the CV business into Sirius XM, and its financial results are embedded in our guidance today.

As an early stage growth business, we expect the connected vehicle services product line to contribute at or near breakeven on an EBITDA basis in 2014, but with high variable margins, a relatively low capex profile, and substantial scaling in the business as penetration expands, we see many similarities in the financial profile of connected vehicle services and satellite radio.

Just keep in mind the connected vehicle business is still in its very early days. Building this business is a key step in realizing our vision of a merged satellite and IP connected environment that will truly deliver amazing features to our subscribers and benefits to our business. The race we are running is a marathon, not a sprint. It will take several years, just like satellite radio did, to fully deploy our connected vehicle services, but successful leadership now will create a significant source of growth in the years to come.

Sirius XM continues to deliver great programming across sports, talk, and our commercial free lineup that simply can’t be found elsewhere. Take our coverage of the Super Bowl, 11 feeds of the game, wall to wall coverage on NFL Radio, the halftime show with Bruno Mars’ on Sirius XM Hits One, and more.

We recently launched NBA Radio, and we relaunched our PGA Tour Radio channel, with top pros like Ben Crenshaw. We’ve strengthened our position as a leader in music discovery, and we’ve held private concerts for our subscribers by emerging artists including several new artists who got their first airplay on Sirius XM.

We continued our acclaimed Town Hall series with recent guests including Katie Perry, Eminem, Lady Gaga, Pearl Jam, Mike Tyson, and the cast of Downton Abbey. Most exciting of all, last Friday night we celebrated Howard Stern’s birthday with an amazing bash at the Hammerstein Ballroom in New York.

We love having Howard as part of the Sirius XM family, and we were thrilled to be able to celebrate with him with the late night trio of Letterman, Kimmel, and Fallon, plus other guests: Robert Downey Jr., Sarah Silverman, Bon Jovi, Steven Tyler, Adam Levine, John Mayer, and of course hundreds of our subscribers who joined us live to watch the show. It was an epic night, so if you missed it, make sure to check it out on the replay online or with your Sirius XM app.

Let me now give you a quick update on Liberty Media. In response to Liberty’s offer to swap its equity for the remaining public shares of Sirius XM, a special committee of our board of directors was established. This special committee has now hired its own advisors to evaluate Liberty’s proposal and negotiate on behalf of the non-Liberty shareholders. If the special committee can reach an agreement with Liberty on a favorable transaction, any deal would then have to be approved by the majority of the non-Liberty shareholders. That’s the process, and it’s well underway.

During this process, on the advice of legal counsel, capital returns are on hold. But from the perspective of our management team, it’s business as usual at Sirius XM. We will not let the Liberty transaction turn our head in any way away from the focus of running this business the best possible way to grow subscribers and free cash flow.

This year, we expect to show you another year of solid execution and growth. We expect to grow our base by approximately 1.25 million net new subscribers. We are very confident in our ability to grow our revenue to exceed 4 billion, grow adjusted EBITDA to approximately $1.38 billion, and grow free cash flow to approach $1.1 billion.

I’m very excited about our prospects this year. We have the best content, we have a leading position in the car, we have proven our ability to monetize better than the competition, and we will maintain the discipline to stay focused on rewarding our shareholders. With that, let me turn it over to David.

David Frear

Thanks, Jim. Sirius XM topped off an incredible year with the best fourth quarter in our history. Our quarterly revenues cracked the billion dollar mark for the first time in both quarterly adjusted EBITDA and free cash flow [unintelligible] $300 million also for the first time.

Q4 revenues were up 12% over the prior year as total subscribers grew to 25.6 million and self-pay subscribers grew to $21.1 million. A half a point increase in contribution margin to 69.8% set the stage for explosive growth in the EBITDA margin as SAC per gross add fell 19% to $44.

Adjusted EBITDA in Q4 grew 41% to a record $325.6 million and EBITDA margin expanded by almost 7 full percentage points as SAC fell by 4 points on a percentage of revenue basis and fixed cash operating expenses grew just 3.5% against the 12% revenue growth. Maybe even more impressively, we converted 93% of this adjusted EBITDA to free cash flow in the quarter, driving free cash flow to a record $303.2 million in the quarter.

Our full year results were just as impressive. Taking into consideration the change in a major OEM contract in Q4, 2013 was our best year for net additions since the merger of Sirius and XM. Revenues grew nearly 12% to more than $3.8 billion, contribution margin continued its strong and consistent history at 69.9%. Record new car installations were met with a record low for subscriber acquisition costs as a percent of revenues, just 14.7%, or less than half of its pre-merger level.

Adjusted EBITDA margins grew to a record 30.6% from 27% the prior year, driving 26.7% adjusted EBITDA growth and crushing the $1 billion mark as adjusted EBITDA finished at $1.166 billion.

We converted nearly 80% of adjusted EBITDA to free cash flow for the full year, finishing at $927.5 million, and returned a total of $1.8 billion to shareholders through stock buybacks in 2013. Free cash flow per share grew almost 41% over 2012 to $0.145 per share.

The company is very conservatively capitalized today. From August 2012 to the end of 2013, we refinanced $2.5 billion of debt, pushing the average maturities out from 4.7 years to 6.7 years, and reducing weighted average interest rates from 9.2% to 5.1%.

Our $3.6 billion of total debt includes $500 million of deep in the money converts that mature in December of this year. Our total forward leverage is just 2.6x based on our EBITDA guidance and just 2.25x if you exclude the converts. Interest coverage was 6x in the fourth quarter.

For years, we have told investors that we do not intend to be an investment grade rated company and that over time investors should expect to see us take our leverage target up. We did just that in early January, announcing an increase in our target leverage from 3.5x to 4.5x.

We now have over $2.4 billion of borrowing capacity under our target leverage ratio, and when combined with free cash flow, that will approach $1.1 billion in 2014. We have total liquidity of $3.5 billion to pursue acquisitions and return capital to shareholders. That’s roughly 16% of our current equity capitalization.

We have an excellent business model in satellite radio, and with our low cost of acquisition, we have tremendous opportunity for long term growth and free cash flow through continued growth in our subscriber base.

In the fourth quarter, we added an important new accelerator of future growth through the acquisition of the connected vehicle business from Agero, connecting cars at a very early stage of development. In the next five years, we expect connected vehicle production penetration rates to expand to more than 50% from less than 10% last year.

Today, we have relationships with more auto makers than any other connected vehicle service provider, and believe we are in an excellent position to add more OEMs to our roster of connected vehicle partners.

In 2014, we expect connected vehicle services, excluding our existing traffic business, to approach $100 million in revenue. In the course of the next three years, we expect connected vehicle service revenue will double, and will continue to grow at high rates for many years to come. For those of you who have been following satellite radio, you know that integration of a product into a car takes time, but once in, it has a visible, long term growth path.

As Jim noted earlier, in 2014 we expect revenues to exceed $4 billion, adjusted EBITDA to grow more than 18% to approximately $1.38 billion, and free cash flow will crack the billion dollar mark, approaching $1.1 billion.

And with that, operator, let’s open it up for questions.

Question-and-Answer Session


[Operator instructions.] We’ll take our first question from Jason Bazinet with Citi.

Jason Bazinet - Citi

Just had one question on your commentary regarding the worldwide connected car platform that you talked about on the call. If you go down that path, were you contemplating something that’s LTE based, that integrates Agero, or something that sort of mimics the architecture that you have in the U.S. with satellites?

Jim Meyer

I think a couple of comments on that, Jason. One, there’s virtually no auto company left today that’s not competing on a worldwide basis. And certainly all of the big ones are. And they are without question driving to global platforms that they then can localize to various geographies around the world.

Our vision and what we’ve demoed to them and shown working hardware of, is a platform that combines satellite and LTE in the North American markets and then it allows the satellite portion to be easily uncoupled everywhere else in the world, at virtually no cost premium to do that.

And so we’re providing them a very flexible platform that they could incorporate on a worldwide basis. What specific service strategies will evolve in those evolving regions is still work to be done.


Next we’ll hear from Barton Crockett with FBR Capital.

Barton Crockett - FBR Capital Markets

I wanted to ask a little bit more about the subscriber outlook for next year, 1.25 million subscribers. First, just kind of a factual point, does that include or exclude promotional subscribers? And then a little bit kind of bigger picture, why the slowdown? You guys were having 1.5 self-pay in 2013. Why would that slow down so much in 2014?

David Frear

For now, we don’t see much of a difference between the self-pay growth and the total, including the paid trials. We’ll see where auto inventories come out. Clearly, there isn’t as much new car volume growth that people are looking for in 2014 relative to past years. And then with the OEM contract change that we went through, we’ve got one less partner in the paid trial bucket.

So right now we don’t see a growth in the inventory of paid trial subscribers. We do expect the total funnel to grow a little bit, but we won’t see the same kind of growth that we’ve seen in past years.

In terms of the change from 1.5 million self-pay [inaudible] to 1.25, you know, honestly, we got surprised last year with the amount of vehicle migrations that went on. And so we’ve taken a pretty cautious view towards that this year.

As Jim mentioned, as we get to a more price sensitive subscriber, it makes sense to us that you might see conversion rates coming down a little bit. We are up at roughly 70% penetration now as opposed to being at 60% a couple of years ago. Throughout the history of satellite radio, you’ve seen as production penetration rises, conversion rates fall a little bit, but generally that’s been good news, right? You’d rather have 44% of 70% than have 46% of 60%.

So all in all, we’ve taken a cautious outlook towards next year, and that’s what we see.

Jim Meyer

Just one other comment. We also have a price increase. We have to wait and see how that works its way through. So I think David summed it up well.


Next we’ll hear from Ben Swinburne with Morgan Stanley.

Ben Swinburne - Morgan Stanley

Jim, can you just remind us the GM impact, at least what buckets that hit in the fourth quarter? I was a little surprised that the revenue share ratio didn’t move. I thought that was going to tick down. Maybe it was all in SAC. And then I have a follow up.

David Frear

It was a large OEM that I don’t think anybody’s ever said it was GM. You know, a change in the contract, which we negotiated several years ago, affects a lot of lines. It affects revenue, it affects revenue share, it affects marketing, a couple of different layers of marketing expenses. And it affects subscriber acquisition costs. So it is pretty widely spread through the P&L.

Ben Swinburne - Morgan Stanley

And then just going back to this push into the lower income, less premium part of the market, you have one of the best incremental return businesses out there. I think you’ve got like a six-month payback on the marginal sub or something. Do you think the returns of the business will go down as you penetrate deeper into the base? Still attractive, but go down? Or do you see cost levers as you add a more price sensitive customer base that you can pull to sort of maintain the kind of return profile and maybe margin outlook that you’ve always talked about in the past?

David Frear

You know, when you think about the subscriber acquisition cost at $44 for new car installations, and that the average customer pays us more than that when they convert from their trial, I think there isn’t anything I see that’s going to damage the return profile. And if anything, the overall return continues to improve as we penetrate used car sales.

Jim Meyer

I completely agree. But you know, I think there’s kind of three things to keep in mind that at least I’m thinking about, that are changing our business. I think all of us need to remember that when the SAAR has improved from call it 10 million to 16 million, so has the spread of income for buyers who can buy those cars.

So the returns even from 13 million to 16 million, I’m telling you, has been driven by more confidence of people who are sub-$75,000 having the confidence to buy a new car. It’s not being driven by households over $125,000. They came back quicker. So we are definitely seeing a mix in income there that we watch.

Second, because of our low SAC profile now, we are driving for penetration everywhere we can, because you’re right, that makes good economic sense for us. That penetration, as you can imagine, we got the higher trim levels in years past, is lower trim levels in lower priced vehicles. That puts a little bit of strain on our incoming subscriber base.

And then finally, in general, the used car buyer is less affluent than the new car buyer. And so when you combine all those, I think the real challenge is not on the cost side. I think David’s 100% right, what he said. Our real challenge is what is our proper marketing mix as those segments emerge and our proper segment strategy to maximize revenue/cash flow as opposed to subscriber growth. And I think it’s going to take us time just to work our way through it.


Next we’ll hear from Jessica Reif Cohen with Bank of America Merrill Lynch.

Jessica Reif Cohen - Bank of America Merrill Lynch

Jim, in your opening remarks, you talked about free cash flow per share being a big driver, but you’re obviously hindered by lack of buybacks in this interim period. Do you expect to catch up following some sort of a deal announcement? What is the timeframe once you announce, assuming you can agree, from the announcement to [close] [ph], to get through the shareholder vote, etc.?

David Frear

I think if in fact the special committee and Liberty come to an agreement on a transaction that then proceeds to a vote I think that puts the capital allocation decision sort of back in the hands of Liberty. I don’t know how they would respond to continuing to buy back while the deal is pending. We’ll have to see where the negotiations go.

In the event that there isn’t an agreement reached, I think you should expect us to resume normal buying back in the marketplace. We’ve obviously been out of the market for a little bit. I don’t know that the timing of it within a quarter or two makes a heck of a lot of difference to valuation, but certainly if there isn’t a deal that you can expect us to resume buying at a pretty healthy pace.

Jim Meyer

Just to reiterate, our Board has approved, as you know, $4 billion in buyback. We’ve used $1.8 billion, so we have - these are approximate - $2.2 billion still open. Obviously, we’re on hold right now, but you know, if the transaction that Liberty has proposed doesn’t go forward, then I would expect we would be back buying back stock, and certainly meeting or exceeding, or moving towards, what we’ve been authorized.

Jessica Reif Cohen - Bank of America Merrill Lynch

And the second question is on EBITDA margin expansion. Obviously you had a great quarter. Just wondering, you said 40% as a goal. Is this still a reasonable long term goal? Can you go higher?

And maybe you can hone a little bit in on things like content costs. Will they go lower? Maybe Scott can talk about what he’s doing here. And one of the offers you announced last year was this Spanish language offer. Maybe you can give us some color?

And on SAC, I know you touched on it, but how low can it go on a blended basis?

Jim Meyer

Let me take the first one, which is the 40%. And I can tell you, yes, we absolutely believe that we can get to a 40% EBITDA margin. What’s more important is, as you heard in my comments, we have made 1 to 2 basis points of an improvement each and every year, starting with 2011.

And when you look at our guidance, and you look at our revenue, you can do the math quickly and see that we expect to continue to improve our EBITDA margin, you know, you pick it, in the 34% to 35% range in 2014.

And you know, our model is all about, now, the scalability. We understand our cost very well. I’ll let Scott comment in a moment on content and then David on SAC. But you know we have a lot of initiatives that are underway. They’re going to take time as we look at how they grow.

The Hispanic segment is one that I personally have had a bugaboo about why we can’t do better. And over time, I think we can, and that opens up a different opportunity to us, that may be a lower ARPU, but certainly a profitable profile for us.

Scott, do you want to comment?

Scott Greenstein

Most of our, if not all, frankly, I think our agreements have now gone through a post-merger negotiation. So we’re past that round where I think the dramatic cost cutting exists. We only have a couple of major agreements up in the near future, and short of that, I think we’ve done a good job as a company looking at our programming and our bandwidth and deciding what should stay and what should go and redeploying that bandwidth and that capital into new programming.

So I’m certainly not concerned about anything going up on the line item. On the other hand, I think the very dramatic drops that have gone on over the last few years, I don’t think that should be expected either.

David Frear

From a margin perspective, I think two things. I fully agree with what Scott says about programming costs. And so what that suggests is that programming costs should be pretty stable going forward.

I think you can see the same thing in SAC. The auto recovery seems to be sort of complete. I don’t know how much higher new car sales can really go from here. We are not anticipating significant changes in our production penetration rate. So new car installations, which is what really drives SAC, should sort of stay around this low 11 million level.

We think there’s still a little bit of improvement that we can get out of SAC per gross add. So that would suggest that you’ve got two numbers, at least, in programming and subscriber acquisition costs that are going to look sort of flattish. Maybe they’ve got slightly rising numbers in them, but I think flattish is a good way to think about it. And revenues will continue to grow. So we still have the opportunity for margin expansion.


Next we’ll hear from Vijay Jayant from ISI Group.

David Joyce - ISI Group

This is David Joyce for Vijay. You had some impressive used car conversion rates. What can you talk about in terms of expectations of the growth of that market this year? And then I know you touched a bit on the lease swap trends. Are you getting any greater comfort about those trends and how those might look seasonally?

Jim Meyer

I think on the used cars, in January, at the Consumer Electronics Show, I made some public comments regarding that business. And there I said that we believe that additions from that business will approach 2 million in 2014, and I absolutely stick by that. It’s growing nicely. We’re off to a strong start, and I think it bodes very well for growth, particularly once the recovery then starts going through on kind of the future years, for really big growth. And then I do eventually believe that we will end up with more trials and more new subscribers from that segment than the new car business. David, can you take the second question?

David Frear

On the vehicle turnover, we continue to watch it. Certainly vehicle related churn is now the biggest component of our churn. And I’d say that we haven’t seen any change in those trends at this point. So we expect it to continue. It’s one of the reasons why we’re relatively conservative about the guidance for this year.

One more thing, on the used car side, remember that new car installations were sort of flat from 2007 to 2009, that we did about 5.5 to slightly more than that a year in each of those years. And then the last two years, we’re doing something that looks like 10.5 and 11 million.

So we think as we go into the next couple of years, that we’re walking into what should be a very significant upswing in used car volumes. We don’t necessarily think that that upswing is this year, because of how flat the installs were in 2007 through 2009, but you know, from 2009 to 2013, the installs basically doubled. And that volume has got to come through the used car market in the next couple of years.


At this time, we will hear Amy Yong with Macquarie.

Amy Yong - Macquarie

My question is on IP. You’ve helped us quantify some of the opportunities in telematics and the used car market. Can you do the same on the IP side? And on acquisitions, what other opportunities could you pursue?

Jim Meyer

I think first and foremost, today we view IP as a way to enhance our service, not necessarily as a big channel for acquiring new subscribers. And so where our focus has been over the last few years is trying to get more and more of our base to both have a satellite and IP account, so that they can enjoy our programming in the car and enjoy our programming at home, seamlessly and easily or on the go seamlessly and easily.

And I don’t see any change in that, certainly in the next couple of years. That said, once this stuff becomes connected and this experience becomes blended, we’ll see. But I have to tell you, in our thinking over the long term, we still expect - we are auto-centric and auto-focused, and that’s where we’re going to stay focused in both acquiring subscribers and keeping subscribers. But, we do believe that we have to make our service easy to use, robust, and available, frankly, over our terrestrial networks, over our satellite networks, and over our IP networks.

Amy Yong - Macquarie

And on acquisitions?

Jim Meyer

I’m sorry. I don’t understand the acquisition question.

Amy Yong - Macquarie

What other opportunities could you look at? Telematics…

Jim Meyer

I’m sorry, I thought you meant acquisition of the subscriber. Look, we’re always looking, and you know, I think you should assume that over the years, we will find some opportunities that match the strategy we’ve laid out for you pretty consistently I think over the last two or three years.

And again, we’ve got a lot we’ve looked at. We don’t have any we’re contemplating right now, I’ll be clear with you. But we are going to look hard, and if I had to guess, one is, and I think I hinted at it a little bit today, over time, we’d like to expand our footprint on an international basis. We want to do that slowly and carefully, and we want to do it along with the OEMs, not just charging out on our own, that scenario where, today, we don’t have what we need and we might look in that area.

And then I think we’re always looking in the connected world for a service opportunity or a partner that can accelerate our strategy in those areas. And I think that’s primarily where we’re looking at in the acquisition funnel today. We continue to look at others, but we just haven’t seen anything that either excites David and I in a way that gets us even to a second step.


Our next and final question today will come from Matt Niknam with Goldman Sachs.

Matt Niknam - Goldman Sachs

One, on the OEM reset in the fourth quarter, just wondering, were the full benefits from that reset reflected in Q4 results? Or should we expect any incremental improvements in Q1 going forward? And then secondly, on the Agero contribution, can you outline what the contribution was in the quarter and how the EBIT contribution from that ramps beyond 2014?

David Frear

On the Agero side, it didn’t have a meaningful impact on the EBITDA in 2013. And I think you should think of it as not having a meaningful impact in 2014 either. But it is a business that, like satellite radio, has high contribution margins. And so as you grow the revenues, you get a very meaningful contribution relative to the size of the revenues from the business.

And the OEM reset, the full effects weren’t felt in the fourth quarter, but an awful lot of it was. And so certainly quarter to quarter comparisons throughout the year are going to benefit. Year over year comparisons will obviously benefit from the overall improved economics. We’ve got a business with a bigger scale, costs are lower in many areas, and certainly lower as a percentage of revenue.

But along with the contract change, you’ll get nice year on year improvements for each of the quarters. And you know, the fourth quarter year on year will probably have a little bit of benefit from the change, but for the most part, be just related to scale.

Okay, thanks, everybody. Appreciate your time this morning.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!