Sirius XM Holdings Inc. (NASDAQ:SIRI)
Q1 2014 Earnings Conference Call
April 24, 2014 08:00 AM ET
Hooper Stevens - VP, IR
Jim Meyer - CEO
David Frear - EVP and CFO
Scott Greenstein - President and Chief Content Officer
Brian Kraft - Evercore
Barton Crockett - FBR Capital Markets
James Marsh - Piper Jaffray
Kannan Venkateshwar - Barclays
Mike Pace - JP Morgan
Jason Bazinet - Citi
Good morning. And welcome to Sirius XM’s First Quarter 2013 Results Earnings Conference Call. Today’s conference is been 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 and Finance. Mr. Stevens, please go ahead.
Thank you, Jennifer and good morning, everyone. Welcome to Sirius XM's first quarter 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. We will also be joined by Scott Greenstein, our President and Chief Content Officer 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 on 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 now hand the call over to Jim Meyer.
Thanks you Hooper. Good morning. And thank you for joining us today to discuss to what we think was a very strong first quarter and one that positions us to succeed and achieve record financial performance in 2014.
For the ninth consecutive quarter we’ve grown revenue at double digits to a number that was just shy of $1 billion, up 11% year-over-year. Driven by the strong revenue growth and tight management of cash operating expenses which were up just 4%, adjusted EBITDA climbed 28% to 335% million, the highest level the company has ever achieved in a single quarter.
An adjusted EBITDA margin of 33.5% was also a record, up over 400 basis points from 29.1% in last year’s first quarter. Free cash flow of $223 million was up 56% and represented a first quarter record and free cash flow per share was $0.036, up 64% from $0.022 in last year’s first quarter, as reduced our share count through buybacks over the past year.
Net subscribers grew by 267,000 in the first quarter to an all time high of 25.8 million. Self-pay subscribers grew by a 173,000 in the first quarter also to an all time high of $21.3 million up 7% year-over-year. This first quarter subscriber growth was actually a bit above our internal forecast for the quarter and is consistent with our full year guidance.
Let me iterate, we remain confident in achieving our full year subscriber growth target of approximately 1.25 million and furthermore, we see nothing in the next few years that should prevent us from continuing to grow our paid subscriber base toward 30 million.
Our solid subscriber growth, even faster revenue growth and high contribution margins had produced dramatic growth in adjusted EBTIDA and free cash flow, exactly what you would expect from SiriusXM’s highly scalable in this model. We are the world leader in monetizing audio entertainment, and the way this monetization translates in the cash flow is also unmatched. Our radios today are only in about 20%, 26% of the cars on the road today. So we believe the opportunity for long term growth remains significant.
We do not believe that any other company in audio entertainment in particular and in media in general can match our business model or the excellent cash flow growth that comes along with it. I’m pleased to say we have resumed our capital return program, which will enable us to drive this and faster growth in free cash flow per diluted share, as we reduce our outstanding share account.
Tomorrow we’ll complete the final tranche of our repurchase agreement with Liberty. With a $4 billion share authorization, a little over than half way complete, an under levered balance sheet and growing free cash flow, we have plenty of fire power to deploy our capital at what we believe are attractive prices.
OEMs continue to embrace SiriusXM. Our penetration rate in the first quarter was about 70% up from 67% in last year’s first quarter. Auto sales were sharply below our expectations in January and February, primarily due to bad weather, but rebounded nicely in March to the highest level since February 2007.
Based on our penetration work forecast and this year’s expected auto sales of around $16.2 million, we project around 11 million trials in the new car market this year. Total enabled vehicles on the road with a factory installed satellite radio were approximately $62 million at the end of the first quarter and we expect this to double in the next five years to approximately $120 million, giving us an opportunity to both grow our new car base and drive our second owner business as well.
The second owner market continues to yield significant and growing results for us. We have over 12,000 dealers who report to us sales information. Over 3000 of these dealers are also enrolled in our service line initiative, which gives us the opportunity to offer trials to dealers’ customers who are getting their vehicle serviced at participating locations. From this growing dealer account and larger turnover of our enabled vehicles we expect to run more than 4 million trials in the second owner car market this year.
In addition to the formal trials we are running, a couple of million vehicles will also transact in channels where we are unable to offer a trial, but we will still see significant direct to self-pay additions here as well. Where are we are able to offer trial in the used car segment, we continue to see buyers converting in the low 30% range. Over time, and really over the next few years more precisely, turnover of enabled vehicles in the secondary market will actually come to exceed the new vehicle universe.
We are very excited about this opportunity and well-positioned to capitalize on it. We are on track to grow self-pay additions in this segment from approximately 1.5 million last year to close to 2 million this year. But this is just the beginning. Based on the coming growth and turnover of vehicles with radios, we expect substantial increase in used car additions in the coming years. Honestly, we’ve really just barely began to scratch the surface here.
We continue to deploy our next generation technology 2.0 satellite radios in more new vehicles which adds functionality and also allows our OEMs to cost down their cost to implement our radios and reduced or subsidies. We continue to create more ways to super serve our OEM customers, such as the deployment of our connected vehicle business. The integration of Sirius XM of the connected vehicle business we purchased Agero from East Europe is in full swing and we now have fully aligned management structure.
Our OEM sales team is completely integrated and talking with one voice now to the OEMs that a full range of services offered by Sirius XM, including both audio entertainment and connected vehicle services. We have also made significant progress on executing on our Nissan connected vehicle agreement. And the integration of the Agero resources and technology certainly helps that effort. We remain on track to do approximately $ 100 million of revenue in our connected vehicle business this year and we expect this to double over a three-year timeframe with strong double-digit annual growth in revenue.
The newly enlarged connected vehicle business at Sirius XM also have strengthen our push to win more business as several large OEMs remain uncommitted to a connected vehicle provider. The connected car is coming, and that’s a fact. We are moving our entire organization to capitalize on this opportunity from our investments in the CV business to the improvements we are planning in our core audio service. We see tremendous value in delivering a service that combines the best features of satellite broadcast and IP connectivity.
Our connected vehicle business is still in very early stages, but our development work here is a critical part of building our both offensive and defensive capabilities, all with the goal of improving what we offer to our OEM customers and ultimately to our self-pay customers. You know, what really sets us apart from all of our competitors is our great content. In programming, I’ve never been more excited about what we are doing here at Sirius XM across sports, talk and music. Creating and broadcasting unrivalled content is the core of our business and vital to attracting new subscribers and keeping existing ones.
Over the past year we have secured long-term renewals of many of our key assets, such as Fox News, Major League Baseball, and the NBA, which will ensure their place in our lineup for many years to come. We continue to look at many additional long-term renewals and ways to make sure our content assets remain exclusive in vehicle and bolster our position as the leader in audio entertainment in the car. In studios across the country, our programming team continues to create new channels, new shows, new formats, and new ideas for expanding our roster of posts and content.
Earlier this week we announced with NBC news the launch of Our Today Show, radio channel, delivering the iconic and respected daily programming from today, with feeds from both coasts and hit summer concert series.
We’ve also added business radio, powered by the Wharton School, a new full time channel dedicated to giving business owners, executives or anyone with an interest in starting a business insight and advice from the stars of the business and finance world.
Our exclusive Town Hall series continues to draw the biggest names for in depth sit downs with our listeners including George Clooney, George Lopez, Seth MacFarlane, 50 Cent and Pele and our music channels are drawing critical acclaim as places that listeners and the industry go to discover trend setting new music and artists, such as in country music with highway channel and electric music -- electronic music with our format leading dance station BPM. Artist and industry insiders now know airplay by SiriusXM leads to selling more music and concert tickets as well as establishing new careers.
Later this year, we look forward to introducing a number of new commercial free music channels that we think will be perfect for our increasingly diverse audience. Then there’s Howard Stern. I think he’s having one of the best years of his career. And he will host his first town hall series event on Monday with music legend Billy Joel, who will also performed along with a host of top performers. Stay tuned, this one should be fun.
We continue to make strives to provide the best content for target segments including Hispanic and women’s content. Last year we increased the number of channels in our Latino category offered to every radio led by the addition of Piolin radio. We have also added significant Spanish language sports playback collection.
We continue to challenge our programming team to find new opportunities in big niche areas as we have done in the business and rural segments. Our new moves we are now considering will congest some truly iconic cultural figures, stay tuned. We expect 2014 to be another great year for our Company. We’ve reiterated our guidance for approximately 1.25 million new subscribers this year and revenue of over $4 billion.
We’re targeting double digit growth in adjusted EBITDA to about $1.38 billion and free cash flow approaching $1.1 billion. And now that capital returns have resumed, we expect an even sharper growth in free cash flow per share.
We are constantly investing to evolve and improve our leading content position, working diligently on tomorrows connected car and striving most importantly to continue our excellent track record of execution. We are pleased to be in a position to once again reward our shareholders with significant capital returns.
Now let me turn it over to David.
Thanks, Jim. Despite an unrelenting winter that restrained auto sales, SiriusXM turned in its best operating quarter ever and has restructured its balance sheet to continue delivering strong growth and free cash flow per share.
Net additions of 267,000 were stronger than our expectations and we remain confident of achieving approximately quarter million net additions for 2014. Car sales through February were flat year-over-year but with better weather in March sales were up 7% over 2013, to bring the quarter SAR in at 15.66 million, up 3% over 2013 and the better quarter since the merger nearly six year ago.
Vehicle penetration was up 3% to 70% car sales in the first quarter. We had our strongest first quarter ever for new car trail starts at more than $2.4 million and used car trail starts at an all-time quarterly record exceeding $1 million for the first time. Total conversions increased year-over-year, our best first quarter ever for conversion volume, very strong growth in the subsequent owner conversions and stable new car conversions offset a slight decline in the aftermarket business.
Churn improved to 1.9% from 2% in the first quarter. Improvements in non-pay and other voluntary churn more than offset continuing growth in vehicle turnover among our subscribers. We finished with the record self-pay subscriber base of $21.3 million and total subscribers of more than 25.8 million.
Revenue increased 11%, the quarter, driven by subscriber growth, ARPU growth and revenue from connected vehicles. Adjusted EBTIDA grew nearly 28% to a record $335 million and adjusted EBITDA margin jumped from 29.1% to 33.5%. The biggest single factor was the 11% drop in subscriber acquisition costs, as the growth in the OEM installations was than offset by a drop in unit cost.
We picked up 3.1 points of margin on the improvement in SAAC. Contribution margin improved slightly to 70.6% and all other line items improved as a percentage of revenue over the prior year except for G&A, which reflects the cost associated with connected vehicle services, increased legal fees and the cost of the Liberty proposal.
Free cash flow grew 56% over the prior year to $223 million, the first time we have exceeded $200 million of free cash flow in our first quarter. Historically the first quarter has been lowest cash flow quarter of the year. In fact just three years ago free cash flow was negative in the first quarter. As I said at the opening, we are focused on driving free cash flow per share. In the last 12 months we have completely overhauled the Company’s capital structure, reducing borrowing cost, pushing out maturities and increasing our flexibility to return capital to shareholders. All of our bonds now have investment grade style covenant packages.
Two weeks ago our 5.25% bonds were granted security and received investment-grade ratings from both S&P and Moody’s. With these investment-grade ratings, the bond covenants fall away essentially freeing the company from the restricted payment limitations in the 5.25%. This week, consistent with our recently raised target leverage of four times, we also raised the restricted payment limitation in our revolving credit facility to allow unlimited restricted payments as long as leverage is under 4.5 times.
These changes allow us to continue cost effectively funding stock buybacks out of the operating company while we retaining the flexibility of hold-co [ph] financing for strategic expansion. Our stock buyback program will reach 2.3 billion tomorrow with the closing of the final tranche of the Liberty purchase. High yield market conditions remain very favorable. Our leverage at the end of quarter stands at $2.8 times including nearly half a turn related to our deep in the money 7% exchangeable notes. We are likely to tap periods of opportunity in the bond market to issue new debt and to replace the 7% notes that will convert into equity in December of this year. As Jim mentioned we are confident of achieving our guidance for the year.
And with that operator, let’s open it up for questions.
(Operator Instructions). And your first question comes from Brian Kraft from Evercore.
Brian Kraft - Evercore
Hey good morning guys, a couple of questions. One on self-pay and net adds, I think early in the year, you had said that self-pay and total net adds would be relatively similar this year. I just want to see if you could update that, and now with the quarter behind us, if you still saw the year playing out that way. One last question on cost, with the OEMs shifting to 2.0 chipsets; will the SAC declines continue or are close chipsets more expensive -- so do we go through a period at some point in the next couple of years where SAC maybe flattens or goes back up before coming down again. And then also on programming, Jimmy talked a lot about the incremental programming enhancements that you’re making, which I think is great for the product, but can you continue to do that and also maintain that flattish programming cost outlook. Those were my two questions? Thank you.
I’ll take the first one in the third one and David will take the middle one on SAC. First of all, I thought we were clear, I just want to be clearer. Our guidance for self-pay net additions this year is 1.25 million. Our first quarter performance quite candidly was a little better than we had expected when we drew that plan. But I want to continue to see how the months unfold, but I’m confident in the 1.25 million.
We don’t see a difference between the two self-pay and the total nets. It’s just in inventory difference. We still think they both look like one and a quarter.
And then on the last point, there is no question that, through the merger and through the rationalization of our agreements in programming, we have been able to take a significant chunk out of our programming cost. I think, programming for us is -- it’s hard to say which one of your children do you love more, but it’s a very key asset. And so as we go forward, if we see opportunities where we can get a meaningful program that we believe gives us a competitive advantage we will take it. Okay, I think it’s the only thing I can comment. Scott, do you want to add.
Yes. One thing, Brian. The other thing that as the company has grown, the advantages that we offer our content partners in all walks of life from -- as you mentioned, music sales, ticket sales, everything else just becomes exponential as the company continues to grow. So while costs are always going to be an issue, alike in earlier years our benefits are very clear right now to a lot of our partners. So it’s helping obviously with the cost maintenance.
And on the chipset question there isn't anything about the rollout of the 2.0 chipsets going to drive the unit costs up?
Brian Kraft - Evercore
Does it cause the declines or maybe flat line for a while at some point? Is that the right way to think about it?
I don’t -- there are so many different generations of radios that go into cars. We have some OEMs that are still selling radios from seven years ago. So I think you should think about unit cost as slowly declining over time.
And now, we’ll hear from Barton Crockett out of FBR Capital Markets.
Barton Crockett - FBR Capital Markets
I wanted to drill down a little bit more on the self-pay number. The net additions there were down 43%, I think year-over-year. They’d be about 14% of your full-year guidance, which is not a 42% decline. So I was wondering if you could explain why they were down so much this quarter, and why you see the trend looking so much different over the next few quarters?
So I think there is heavy seasonality to the flow of our business that our first quarter self-pay churn has always been a high point. We still have a lot of that Christmas effect from the early days and it’s migrated from people who had aftermarket radios, who went into OEM vehicles. Remember Howard started in January of ’06; a lot of people came on then and so the cycle dates are -- haven’t changed much over the years. So our first quarter has always been a high churn quarter as Jim said that it was ahead of our expectation. So we’re off to a faster start for the year. We probably, despite the fact it was above our expectations, it probably took a little bit of a hit from the slowing auto sales in the quarter, turnover of all kinds of vehicles slowed down, not just new vehicles but used vehicle sales were slower. So just a whole bunch of things, but as we look at it, we think it’s a great start to the year and we remain very confident on the guidance.
Barton Crockett - FBR Capital Markets
Okay great. And then If I could ask another question here. We’ve done some survey work that would say that a lot of Sirius subscribers, on our survey, 64% are using Pandora. Pandora is reporting that they’re seeing a big increase in people using their service in the car, as you know the integration with the car improves. What do you see about the Sirius subscribers using Pandora now? Are they more likely to cancel or is there any churn impact or not?
I have to tell you, I look at this one, this is maybe a question I only worry about every week or every day, right. And so, we go through a pretty thorough analysis, at least twice a month on reason codes for churn and exactly what’s going on there. And Barton I have to tell you, by and large for us, it hasn’t changed. The majority of the churn we see, and I said it publicly, and I’m going to see it again, are going back to FM radio, or going back to terrestrial radio. Obviously when you look at the Pandora listening numbers, they are currently increasing and that listenership has to be coming from somewhere. I think it’s coming from terrestrial radio. We’re not seeing a meaningful impact that I can see on our business today from streaming. That doesn’t mean we won’t in the future, but today we just don’t see it.
The other thing, Barton is that there’s a plenty of information out there from sort of music industry, from the radio industry, that would suggest that the pie of listening is actually expanding, all right, and so, there was a day when people used to walk around with transistor radios and they went away for a long time, and they’re effectively back with smart phones. And so you got more listening to the aggregate of satellite radio, AM/FM radio, Pandora-like services, Spotify-like services than you’ve seen before and we can’t at this point in time find the effect in our results.
Barton Crockett - FBR Capital Markets
Okay. And then if I could just squeeze in one other question; on the share repurchase potential and your leverage, if you guys were to move to your leverage target of 4x by the end of this year, you could free up between free cash flow and borrowing capacity over $3 billion to do share repurchase or other capital returns to shareholders. Could you talk about your appetite to do something at that level of magnitude, which could require looking at your repurchase authorization and adjusting that?
We have the program that we have. I don’t disagree with your math, that if we chose to use all of the leverage and all of the cash flow in that way, then it is certainly mathematically possible that we would do 3 billion. We have 1.7 billion remaining on our existing authorization. We care about how we use the shareholders’ money. We think we’ll be smart with how we do that once we get through that authorization, we’ll have a discussion with the board and consider what we might want to do in the future.
And now we’ll hear from James Marsh from Piper Jaffray.
James Marsh - Piper Jaffray.
Just a quick question on Agero here. I was hoping you could give us a little bit more granularity here. Obviously the rate of growth looks pretty impressive here but I was hoping you can talk a little bit about how you guys see the ultimate market size getting here and just who do you expect to pay for the services, is it OEM or is it consumers, you expect that to shift over time? Do you think this a business that can approach the size of your satellite business over time? Just trying to get kind of a big picture views on the market?
This is Jim. First of all I think we’ve given all the guidance that we’re going to give right now for what we see in the next three years, which I think is pretty far outlook. How do I see it? It’s a combination of both, James. I mean number one -- and it’s brand new and so we’re still following what each and every OEM wants to do. I think it will be a combination of what I call wholesale and retail, meaning that there will be certain features that some automakers builds into their cars and want in their cars for as long as that car is on the road and will pay for it upfront but there will be other automakers who want to offer certain services, but want them provided on a retail basis, as we do today with our audio service.
So it’s going to be a mix and a blend. And frankly most of the players are still figuring out what they want to do and how they want to do it. I have been very careful in my comments and I will again. This is a march, not a sprint, okay. There is no -- I’ll be clear again there is absolutely no doubt in my mind where the automakers are going. Every one of them is evolving to a connected car and every one of them will offer connected vehicle services of some type.
And frankly they all will have to remain competitive, okay. But the speed is unpredictable and for those of you that followed our Company for a long time, you know how long it takes to get technology seated in a new car and then how long it takes to run through the several evolutions as they move to a model year. So I’m really confident we’re well positioned. I’m confident in the guidance we’ve given you for the connected vehicle business this year and as growth potential over the next couple of years and we’re just going to keep our head down and keep working and we’ll give you an update when appropriate.
And now we’ll take a question from James Radcliffe out of Buckingham Research.
James Radcliffe - Buckingham Research
Two if I could. First of all, I know it’s a long term sort of question but how do you think about making the service available in vehicles that might be connected cars in terms of having a terrestrial wireless connection, but might actually not have satellite radio installed. So effectively moving toward being an app without the associated SAC cost of the satellite hardware. And secondly can you give a granularity on how self-pay beat your expectations? Was it the churn turned out to be lower or you had better conversion rates or better install mix? Thanks.
Jim will take the second one first.
Yeah. So self-pay, definitely better with a surprise on churn, I mean we expected more non-pay and other voluntary churn then we’ve saw in the quarter. And it was - we’re really excited about the improvements of those, especially given the higher car turnover we saw. So actually the, but for the improvements in non-paying voluntary churn, that car turnover might have pushed churn up and so really it was a very strong performance for churn and then it was nice to see the strong performance coming out of the conversion opportunities as well. So both new car conversions and subsequent owner conversions were at very strong levels in the quarter. So it’s sort of multiple front beat on our internal expectations.
And on your first question, I mean first, I think we get a little hung up on the transport from the delivery of service and I think what’s really important is the service. Okay? And so first and foremost, I think its content that’s going to matter more than anything else, as it has been for the last at least 10 years I’ve been here. That said, that said, number one, I personally -- we’re committed that customers can have our content any way they want it and if they want to just get it through an app, that’s fine with us. The vast majority of our customers prefer to get it today through built in satellite in a vehicle and I can tell you it’s, one of the reasons it’s because it’s really easy to use and very convenient for them. As time rules out, we’ll see which way they get it which way it goes. I do think James, you raise an important point that I think some of your colleagues don’t see as clearly and that is, I don’t really expect a major shift. I believe automakers will be deploying built in satellite broadcast technology for many, many, many, many years to come. But those that choose not to, if they ever did or vehicles in certain categories that choose not to, absolutely, we will offer our product to those customers through streaming. And by the way in those cases there will be no SAC or no revenue shares associated with that.
And now we’ll take a question from Ben Swinburne of Morgan Stanley.
This is Brian [indiscernible] for Ben. I have a couple of questions, if I may. Just a follow-up on the churn question earlier. You mentioned normally it’s a seasonally high quarter and you put in the price increase, but churn was down year-over-year. So it sounds like that beat your expectation. So is there any change to your retention practices or how you went about retaining subs to generate that result?
No there wasn’t. We did -- continue to do the same things we’ve been doing a long time.
Okay, and then it seems that self-pay growth adds, which is in a metric you report, but it seems to imply that they would have been down year-over-year, and I know in the fourth-quarter you mentioned there was a trend of customers trading in their cars earlier than you expected, which drove some reclassification. Was that a factor in the quarter and could you help us at all quantify that trend?
When we look at this we -- the vehicle migrations, sort of out of self-pay and into back-ended trials, whether they are paid or unpaid, was at a pretty high level. And so we were very pleased with the kind of net result for the quarter. And honestly it’s not a bad thing. I think about it relative to -- like the wireless industry, right, where people go in and swap out their phones. And for the most point part of the wireless, right that’s a same day or same hour transaction, where they swaps one for another. And in our distribution it’s over an extended period of time because they swap into something with a three month to 12 month trial depending on what brand they’re in before they are back into that self-pay universe. And so for the ones that are swapping into unpaid trials, which is most of the car manufacturers at this point, we count that as churn in the reported churn rate. But I think if you were to look at the effective rate through the migrations, we’re actually running solidly beneath the reported churn.
Okay, and next we’ll hear from Kannan Venkateshwar out of Barclays.
Kannan Venkateshwar - Barclays
One question I had is from the used car side. You guys have been guiding us with the numbers for the last two or three years, but it looks like that number is growing at about 0.5 million a year, even though the base is growing. So from your perspective what gets that rate to accelerate from where it is, given the kind of opportunity that it has?
We’ve talked about this a good bit in various conferences over the last couple of years. When you look at car turnover profiles, and then you look at the new car installations, you certainly have to look at the average ownership and what the history of new cars has been. And we actually are in a little bit of a lull, if you roll back to what were the new car installations five and six years ago. They were sort of flattish going through the recession, even though our penetration rate was growing dramatically. So when they entered the recession, and there were 16 million cars being sold in the country, and then we sort of exited it and started to recover 10 million cars; our new car installations were about the same through that slide in auto sale, and then really began to ramp up with the recovery. And that same number of installations from sort of the 2008, 2009, 2010 period is what’s rolling over now, in the fact that we’re able to manifest the sharp increases that we are is really testimony to the great job that our team has done in building out the distribution infrastructure in the used car business. And as the volume start to ramp up, which we expect in the next couple of years, that will stand to benefit from that in much the same way that the business benefited from the recovery in new car sales after 2010.
Kannan Venkateshwar - Barclays
Overall, I mean is there a possibility that over the next couple of years, because of this particular trend, the overall net add trend actually starts to accelerate again?
We will see.
And now we will move to a question from Mike Pace with JPMorgan
Mike Pace - JPMorgan
Just a couple of questions on capital structure. You recently provide security to the 5.25% note. Is that security in collateral generally the same as your revolver, and can you remind us what that collateral includes or does it exclude anything? And then is the rating initiatives were to lower those ratings back down to BB for whatever reason, do those covenants to come back or are they gone forever. And then I have one follow up.
Okay. So no, the covenants are gone forever. And the collateral package is the same between the two, the general assets of the company and it doesn’t exclude anything in particular.
Mike Pace - JPMorgan
Okay and then, David, you mentioned you still have four times total leverage target. You also mentioned considering the high yield market at some point in the future. When you think about those funding needs, would you consider issuing new secured bonds parallel with the 5.25%; and if so, how should we think about where you want secured leverage within that four times total leverage target?
No, tapping secured debt capacity isn’t high on our list of the things to do. It’s kind of like a rainy day fund. Things are good in the market like they are now that our interest in tapping the capacity is not all that great. Obviously we tapped for the sake of getting rid of the restricted payment limitations in the 5.25% and so that was in our mind a good trade for equity holders. Right now we always consider the cost of different types of debt when we go to issue, but I wouldn’t play additional secure debt high on my list of things to do this year.
And our next and final question will come from Jason Bazinet with Citi.
Jason Bazinet - Citi
As you guys know there’s a lot of concern about what the connected or what sort of the Pandora threat means and players like it. I was just wondering have you guys ever done any work on your existing customer base to segment whey they subscribe to SIRI. In other words was it for the proprietary content? Is easier to use? Is it because there’s fewer ads? It is because there are on a limited -- wireless data plan, any sort of segmentation or maybe give us some color on what -- why people subscribe?
So, Jason this is Jim. I think number one, obviously we do that quite a bit, okay. And by the way the answer to your question from the point you listed is yes. I’m not inclined to share that data, because I don’t know what -- why that would be advantageous. What I will tell you is that breadth of content matters a lot. And that’s why we spend what we spend, okay. And that’s why we put the focus on it that we do. To answer the very first question; do we look at it? Yes, we survey it a lot. David you want to add anything or?
You know for -- we have the same product for a long time. And I think that over the history that -- the themes have been the same. People -- when people are going to pay to listen to the radio, they want something different and better than what they get in a free versions. And so one of those things is commercial free music. It’s been a core tenant of the company since the date of -- since before Scott, Jim and I got here and the diversity of the content we always thought was important. We felt it was important to be more than just music out there. And then to have specialized content that connects with people. We made investments in major brands -- the awareness and to track subscribers in the satellite radio. It’s clear that the investment in those - in that branded content has paid off over the years and has left us with a really unique product offering that a lot of people are willing to pay for. And yes, we continue to watch how tastes change and I think we’ve done a great job of keeping the content fresh and interesting to listening public.
And just one another to add to that. If you look at, well, not apples to oranges, we complement in the video area. When you look at lots of free video content all over the internet and everywhere, it doesn’t mean HBO or NetFlix or anything else, it doesn’t have premium content that people are paying for. So people can try lots of things for free as long as our content remains premium at the level it is. Lots of things are going on, but our model is solid.
Okay. Thank you.
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