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Executives

William Prip - SVP of IR

Mel Karmazin - CEO

David Frear - EVP and CFO

Jim Meyer - President, Operations and Sales

Scott Greenstein - President and Chief Content Officer

Analysts

David Gober - Morgan Stanley

Lev Polinsky - JPMorgan

Barton Crockett - Lazard Capital Markets

John Tinker - Maxim

Matthew Harrigan - Wunderlich Securities

Leah Pilla - Knight Capital

Sirius XM Radio Inc. (SIRI) Q3 2010 Earnings Call November 4, 2010 8:00 AM ET

Operator

Good morning and welcome to the SIRIUS XM Radio's third quarter 2010 earnings conference call. (Operator Instructions) At this time, I'd like to turn the call over to William Prip, Senior Vice President, Treasurer and Investor Relations.

William Prip

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. They will review SIRIUS XM's third quarter 2010 financial results. At the conclusion of our prepared remarks, management will be glad to take your questions. Jim Meyer, President, 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 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 views 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 and could cause actual results to differ materially.

For more information about those risks and uncertainties, please see 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 advise our listeners that today's results will include discussions of 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'll hand the call over to Mel Karmazin.

Mel Karmazin

Thanks, Will. Good morning, everyone. Our earnings release this morning continues to demonstrate the strengths of SIRIUS XMs business model. In fact, today we are stronger than ever. We have more subscribers, more revenue and more adjusted EBITDA than ever in the history of satellite radio.

Previously, we told you that 2010 would be the first year since the merger that investors could get a real indication of how good our business can be, and our third quarter clearly demonstrates this proposition. The company added 335,000 net subscribers this quarter or more than three times the 102,000 subscribers we added during the same quarter last year.

Perhaps a more important subscriber metric is the increase in our self-pay subscriber base. We added 258,000 self-pay subscribers this third quarter versus 35,000 a year ago, which represents a sevenfold increase. At the end of 2010, our self-pay base and our total sub count are at record levels.

The phenomenal performance of our self-paid base was driven by an increase in conversion rate from 46.2 to 48.1, the highest level since the merger over two years ago, and a decrease in churn from 2.0% to 1.9%. Importantly, our subscriber metrics improved, with higher ARPU which was up over 6% from 1109 to 1181, the highest level the company has ever delivered.

These subscriber metrics continue to prove that our service is one that consumers want and for which they are willing to pay. This strong subscriber performance has generated some impressive year-over-year financial metrics. Our adjusted revenue increased 15% to $722.5 million for the quarter, also representing a record quarter for SIRIUS XM.

Total cash operating expenses increased by 6% this quarter versus the same quarter last year. But if you exclude the increases in revenue share expense and SAC increases, which generally indicate healthy business performance for the period, we actually delivered lower cash operating expenses for the quarter compared to last year.

The combination of strong revenue performance and prudent cost management drove a 60% increase in adjusted EBITDA year-over-year, reaching $170 and representing a record quarter. Our adjusted EBITDA margin increased to 23% from 17% in the same period last year.

Free cash flow grew at an even more impressive 132% during the same period. The free cash flow metric in particular has experienced tremendous improvement over the years. In the third quarter of 2008, 2009 and 2010 our free cash flow went from negative 98 million to positive 26.7 million and now to 62 million, significant progress that is representative of the overall trajectory of our business.

Our incredible operational financial performance over the past several quarters is clearly a reflection of our competitive advantages, which include nearly complete coverage of the Continental United States. Not many companies can deliver content as ubiquitously as we can, and certainly no audio content provider out there today or any time in the near future will be able to match that.

A vast array of curated content delivered through 130 plus channels, we offer some programming that's of interest to every single consumer in America. Our long term OEM relationships ensure that we will continue to occupy prime real estate on the dashboard and a strong and stable subscription model as demonstrated by our very strong performance during extremely difficult macroeconomic environments over the past several quarters. Not only do these competitive advantages help explain our recent performance, but I also want to point out that these factors are not going away as we look forward. In fact, some of these competitive advantages will continue to improve and further differentiate our business from existing competitors and any potential competitors on the horizon.

I'd like to discuss our near term future in general strategic terms. As previously announced, we expect to bring to market the next generation of satellite radio or what we are calling Sirius XM 2.0. We expect to have aftermarket products available in the fourth quarter of 2011. So what is Sirius XM 2.0? As I mentioned earlier you should think of this evolution as more content and more functionality.

Through the use of advanced technology we anticipate that we will be able to increase our effective bandwidth by 25%. This advanced technology will only apply to new radios, but will not create any obsolescence with our existing radios. Hence, you can expect us to offer even more content in the future, including more music and other audio content, as well as more data services. For example, we could be introducing a suite of Spanish language channels to address the large and growing segment of the population.

With respect to functionality, we expect to offer our subscribers new, easy-to-use features centered around convenience and personalization. I think these improvements to our service will be highly appreciated by our subscribers and I am eagerly awaiting the introduction of Sirius XM 2.0 into the marketplace. But we're not standing still in the meantime. We continue to improve our programming by adding new and interesting content like our Fantasy Sports channel and Pearl Jam Radio.

In addition, we're making our service even easy to get by offering a product that we named Snap! which is an easy to install satellite radio for the car. In fact we've just begun offering it through a two-minute direct response TV commercial that offers the radio and a one-month free trial at a very attractive price point of $50.

The most important thing to appreciate about our philosophy around content is that our objective is to accumulate the best audio content for our subscribers. And with nearly $3 billion in projected revenue, we can buy whatever content we believe will drive listener satisfaction and thereby subscriber additions and revenue growth.

We had hoped that prior to this call we would have an update on the status of how it's done with Sirius XM. We do not have any update today, other than to say, discussions continue. The contract expires at the end of the year.

Another characteristic of our business going forward is the quality of our adjusted EBITDA. By quality, I'm referring to how well our adjusted EBITDA converts into free cash flow. As you know, various cash items make claims against the company's EBITDA, generally including interest, taxes and capital expenditure. The interest and CapEx requirements have traditionally been quite heavy for Sirius XM, but we expect that to change in the coming years.

With respect to interest expense, our strong performance over the past several quarters has allowed us to refinance our expensive debt with lower cost debt each time we have gone to market. Our most recent yield, priced just a few days ago, was an eight-year unsecured note with seven and five-eighths percent coupon. This is a huge improvement in our borrowing cost since the time of the merger, and given the trajectory of our business and improving credit metrics, we should enjoy lower costs of borrowing in the future. Moreover, we also expect to reduce leverage over time. Together, this should reduce our cash interest expense requirement and improve our free cash flow.

The story around taxes and CapEx is more obvious and is delivering better free cash flow today. With respect to taxes, our $8 billion of NOLs should shield our income from federal taxes for several years. Similarly, with our satellite replacement cycle coming to an end next year, David will speak about our recent launch of XM-5 in a few minutes. We expect to incur no material satellite-related CapEx for several years as well. Our free cash flow conversion is going to look much better than that of many other companies in the media sector.

In addition to these, one characteristic that is somewhat unique to Sirius XM within the media sector is our ability to generate free cash flow from our working capital. Most subscribers pay for our service in advance; quarterly, yearly and sometimes even longer. Thus, we typically generate cash from our working capital and we expect to continue doing so in the future. However, we also need to grow the top-line and our adjusted EBITDA in order to take advantage of the free cash flow characteristics that I just described.

Q2, I am happy about where we are in the lifecycle of our business. As you can appreciate, any business that involves launching multiple satellites requires scale to be successful. As our recent results have shown, we've reached sufficient scale to generate very strong economic results from each incremental customer that we add to our subscriber base.

As we've mentioned often in the past, we enjoy roughly a 70% contribution margin. Thus, each incremental subscriber is incredibly valuable to us. So how do we get additional subscribers? Well, the way we add and keep future subscribers is by capitalizing on our competitive advantage mentioned earlier. And given our 61% penetration rate of all new cars sold in the U.S., there will be a growing number of used cars that have our radios preinstalled.

That used car base for us will expand tremendously over the coming years. We've already paid for the installation of these radios at the factory, when the cars were manufactured. So we will not have to incur any subsidy associated with adding these unactivated radios to our subscriber count.

Subscribers, through such reactivations are immediately profitable, hence very attractive for us to acquire. We've devoted significant management time and talent to develop marketing methodologies to acquire new customers in the used car market. We expect that these efforts will contribute significantly through our future results, nicely complementing our OEM and aftermarket business.

There is also a significant upside potential in the new car business as well. As you know, overall sales in the past two, three years have been severely depressed and well below the recent historical average of 15 million to 16 million units per year. We all hope and expect that the auto sector will continue to recover in the future. Although we certainly cannot predict the pace of that recovery, we do expect that the recovery will have a significant positive impact on our business in the years ahead.

So the upside potential of our business is extremely strong, but one of the risks we proactively address is our balance sheet. With current leverage at 4.2 times as of September 30, 2010, our overall leverage is the best the company has witnessed. But more importantly, our decision over the past several quarters to refinance near-term maturities with longer-dated maturities has eliminated any potential liquidity issues for the company.

Another risk involves competition, particularly internet radio competition brought wirelessly into the car through Smartphones. Make no mistake, this does represent competition, but we've lived with and grown tremendously despite intense competition since our inception. After all, how can we ignore the free competition of terrestrial radio, which represented 100% of the radio market when we launched service back in 2001.

But over the years, we've provided a superior product that consumers were willing to pay for, and I don't see wireless internet radio having more impact on us than terrestrial radio has had. In fact, if you think about it how will internet radio generate revenue in the car? Presumably it's through subscription fees or through advertising.

I challenge anyone to show me an internet company or a collection of companies that provide the depth and breadth of content than we do at the same or price point. I don't think a subscription-based competitor is a viable concept in the near future, particularly with the advent of consumption-based wireless data plans.

Alternatively, if they need to generate revenues through audio advertising, because we all hope people aren't going to be reading banner ads on their iPhones while they are driving, then I have a hard time understanding why that's any more potent a competitor than the ad laden terrestrial radio that we've always competed against.

Today, satellite radio has gained share against terrestrial radio to constitute roughly 15% of the total radio revenue market. Internet radio today represents another 5% or so. So therefore, terrestrial radio is still the behemoth in the marketplace with 80% market share, and the most endangered by our future growth as well as that of internet radio.

We believe in the years ahead, satellite radio will grow and IP-delivered radio will grow. This growth will take share from terrestrial radio. And don't forget, Sirius XM is not standing still. We are continuing to innovate and expect to improve the value proposition to our subscribers over the years.

Given all of this, I am confident that we have significant potential to continue delivering strong operational and financial performance in the years ahead just in spite of some of the risks I mentioned. I also am very pleased to announce that we are increasing our guidance for full year 2010 adjusted EBITDA from approximately $600 million. That would represent nearly a 30% increase in adjusted EBITDA versus 2009.

In addition, we are increasing our other important financial guidance for full year 2010. At this time, we expect adjusted revenues to exceed $2.8 billion and free cash flow to exceed $150 million. We believe we are stronger than ever and getting stronger, and are very excited to be in a position to soon pass 20 million subscribers.

Now I'll turn the call over to David.

David Frear

Thanks Mel. The improving conditions of U.S. consumers helped us turn in a much better than expected quarter with 335,000 net adds, by across the board improvements in gross adds, churn and conversions. Gross adds were up a surprising 21.5% versus the prior year's Cash For Clunkers quarter. We finished Q3 with over 16.3 million self-paying subscribers, up 6% over 2009 and over 4.4 million paid and unpaid trials in the conversion (silo).

Although sales have continued to have modest recovery, retail sales are up 4% year-to-date through October. October total auto sales were up 12%; retail was up 16%, and SAR cracked the 12 million mark for the first time since August 2009.

For the third quarter, consumer sales were actually down 5% relative to 2009's Cash For Clunkers boosted quarter, really underscoring the strength of our 21.5% improvement in gross adds. U.S. total sales appear to be on pace to hit the roughly $11.5 million that many industry analysts have put out there for 2010. The consistency you have seen us deliver in our operating results continued in this most recent quarter. Many of our key operating metrics are at record levels; subscribers, self-pay subscribers, ARPU, revenue, SAC per gross add, contribution margin and adjusted EBITDA margin are all at record levels, showing strength in the breadth of our operating performance.

Total ARPU improved $0.72 to 1181 as a result of improving ad sales and the now essentially complete rollout of the U.S. music recovery fee. The 6.5% improvement in ARPU and the 7.3% increase in subscribers combined to drive adjusted revenues up 15% and $93 million to $723 million. This was a record for us and we now expect our revenue to exceed $2.8 billion for 2010 versus our previous expectation that it would approach $2.8 billion.

The strong revenue growth also produced a pickup of 1.5 points in contribution margin bringing it to 71.2% for the quarter, the fourth consecutive quarter above 70%, and keeping us on pace to deliver record performance for this metric.

SAC per gross add improved by 14.5%, declining $10 from 2009 to $59 per gross add. This improved efficiency fully offset the 21.5% increasing in gross adds and left SAC as a percentage of revenue virtually unchanged at 17.6% of revenues.

In 2009, fixed cost came in at 35.4% of revenue. The company's consistent performance of delivering cost-efficient growth continued as fixed cost declined from the prior year coming in at 30.1% of revenue.

Compared to the nine months ended September 30, 2008, when we closed the merger, we have reduced current year-to-date fixed cost spending by $275 million, and obviously the annualized number would be greater. The merger occurred in the third quarter of 2008. Since then every operating expense line item has declined as a percentage of revenue. Most notably, programming and content was 21.5% two years ago and now stands at 12.3%. Sales and marketing was 12.8% and is now 7.2%. G&A was 12.4% and is now 6.3%.

As a result, adjusted EBITDA has improved from a negative 6% of revenues two years ago to 23.5% positive in the current quarter.

As Mel mentioned, adjusted EBITDA was up 60% over 2009 in the quarter to $170 million, also a record level for the company. That's a $64 million increase in EBITDA and $93 million of increased revenues.

Although the fourth quarter typically sees some seasonality and lower EBITDA, with $482 million of adjusted EBITDA for the nine months we are clearly on pace to exceed our previous guidance of $575 million. As Mel mentioned earlier, we have raised EBITDA guidance for the third time this year, and now expect adjusted EBITDA to be approximately $600 billion.

On October 14, we successfully launched the XM-5 satellite. XM-5 is capable of broadcasting in both the Sirius and XM spectrum, allowing it to act as an in-orbit spare for both broadcast platforms. The satellite is undergoing in-orbit performance tests. Its solar arrays were successfully deployed as were its two nine-meter glass reflectors. Everything looks fine so far.

XM-5's launch (inaudible) also contained one year of in-orbit insurance protection with its successful launch, and considering that XM-1 and XM-2 also provide in-orbit sparing, we have elected to drop in-orbit coverage on XM-3 and XM-4 going forward.

We are in the final year of construction of the Sirius-6 satellite. With the launch of that satellite in the fourth quarter of 2011 we do not expect another satellite launch until we approach 2020. As we've said before, satellite expenditures are expected to decline by about $200 million from 2010 to 2012.

We also continue to reshape our balance sheet following the end of the quarter. Favorable U.S. debt markets and upgrades from Moody's and S&P allowed us to opportunistically raise $700 million of the eight-year unsecured note at the company's lowest cost of capital in it's history, seven and five-eights percent.

We used most of the proceeds to call XM's 11.25% notes; 93% were tendered. About $37 million of principal remains outstanding which we intend to either acquire in the open market or call next summer.

Free cash flow was $62 million for the quarter, up from $27 million in the prior year. Year-to-date free cash flow is at $43 million and based on the typical seasonality of renewals, we are now projecting full year of free cash flow to exceed $150 million compared to our prior expectation that it would approach $150 million.

This free cash flow combined with the excess proceeds from XM's October bond offer should put our year-end cash balance above $500million. We believe this positions us extremely well given the only notable debt maturity before August 2013 is the $230 million 3.25% convert that is due next October.

With that, Operator, let's open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question from David Gober with Morgan Stanley.

David Gober - Morgan Stanley

You mentioned that the impressive improvement in SAC per gross add, and I was just wondering if you could dig a little bit into the drivers there, and also expectations around SAC per gross add as you start to think about Sirius XM 2.0? And then also, I thought the commentary on potential Spanish and international tiers is very interesting, could you give us any color around what percentage of your gross adds are in Spanish speaking households, and potentially what the conversion rates have been in bilingual households versus non-bilingual households?

David Frear

Starting with the SAC per gross add, in 2.0 we don't expect to have much of an impact on SAC per gross add. Nothing to change the general downward trend that you've seen for years and that we expect to continue. With respect to the quarter, there always are inventory movements, but I think generally what you see coming through year-on-year is just continuing efficiencies in the underlying manufacturing cost, continued efficiencies in contractual subsidy rates.

And a growing effect of this mix of gross adds that come form reactivate radios, that we do expect more and more of gross adds to come from reactivated radios as we go forward. And as Mel mentioned, we've already made the investment in the subsidy there. So that's effectively a gross add with SAC. And when you add them all up, you get this consistent downward trend.

Mel Karmazin

On your second question, because of limited bandwidth, we have the 130 plus channels, we have not done a good job at all in reaching out to the Hispanic speaking market if you take a look at what dish network and direct TV has now in them offering a good number of channels available as a special package.

So now with 2.0, if you think about it, we have this additional bandwidth and it would not be difficult for us to create a whole group of channels, 10 channels, 12 channels, having decided exactly what we're going to do. That would be programmed and devoted to the Hispanic market.

Today, Sirius XM has a total of three Latin channels; One is ESPN Deportes, one is CNN Espanol and we have a single channel Caliente, which is a music channel catering to the Spanish market. With the population growing rapidly, when we see the new census, it will be even more impressive. We think that this market is a huge upside opportunity for us, and 2.0 gives us the opportunity to do it.

David Gober - Morgan Stanley

David, you talked a little bit about de-leveraging and the improvement in borrowing costs. But as the company starts to generate more and more significant free cash flow, could you talk about where you think the optimal leverage is for the company? And how do you think about uses of free cash flow, buybacks etcetera are, going forward?

Mel Karmazin

Well, obviously with the way the company is expecting to generate cash flow and the way the capital structure looks, certainly you look at most models and helps a lot of people think we're going to have a lot of excess cash. From a leverage perspective, I frequently turn that question back around on investors and analysts who ask it. And the answer I get back is, the people generally think for our company and the media business that two to four times EBITDA broadly speaking is a good range of leverage to be in. So I think you can expect us long term to be somewhere in that range.

What can we do with the excess cash? We certainly can return cash to shareholders; we can use that cash to invest in new businesses; we can use that cash to acquire things that we think strategically add value to the company. It certainly gives you a lot of flexibility.

Operator

We'll take our next question from Lev Polinsky with JPMorgan.

Lev Polinsky - JPMorgan

Thank you very much for taking my question. One thing that I wanted to ask about is, it seems like sales and marketing, you've been seeing some nice leverage. And what I am curious about is, is that a result of being more efficient in marketing? Is there room for that to increase? Do you expect that to increase in the fourth quarter? And how should we think about that going forward?

David Frear

We've always said that sales and marketing is a fixed cost. It's something that you decide how much you're going to budget; you decide what you're going to spend. And so each year, we look at what we believe we can productively spend and what's going to generate a good return for the business.

Now I know we get questions from time to time from people who think that it should behave more like a variable cost. But it is a choice for how we deploy our cash. So we think that the efficiencies that we've seen in marketing costs are in fact sustainable, but we are seasonal in some of our media spend that as we come into the Christmas holiday season that the service and the products have always been great gifts for the holidays. And so we tend to pick up media spending during the holiday periods.

Lev Polinsky - JPMorgan

And then, are you able to put any numbers at this point around the reactivations? I know you've spoken generally of how big the opportunity is in terms of the number of inactive radios that are out there, but any sort of sense on how that's doing on a quarter-by-quarter basis?

David Frear

So we are tracking the numbers internally. And I think in terms of external disclosures on the absolute numbers that I think we'd like to spend a little more time with them internally before beginning to speak specifically about them.

Operator

We will take our next question from Barton Crockett with Lazard Capital Markets.

Barton Crockett - Lazard Capital Markets

The first thing, I was just wondering about your guidance. At a possibly $600 million of EBITDA, if I have my maths right, that would imply approximately $118 million in the fourth quarter, which would be a big step down from the third quarter and not much growth year-over-year despite fair revenues. So I'm wondering, should I regard that as really a measure of conservatives? And you guys have had a good track record of doing better than you have guided.

Or there is something going on in expenses, SAC plus ad or our marketing expenses that's really going to be a big factor for the fourth quarter?

Mel Karmazin

You got a couple of things. So it's pretty common for us to show lower EBITDA levels seasonally in the fourth quarter than what you see in other parts of the year. And so there's nothing different about this year from that perspective then. We also have an automotive recovery underway. We are still very cautious about the shape of that recovery.

But if you look at what the published estimates are for automotive sales next year, that you've got guys out there with 12.3 numbers, 12.5 numbers, 12.9 numbers; there are still some guys over 13. And there's definitely a wide range to it, and if they are going to build to that kind of a sales ramp that the auto companies will be driving things through production in the fourth quarter which would be increasing our SAC.

Barton Crockett - Lazard Capital Markets

And then just drilling down on the expense question a bit here; last year over the second quarter, there was a big jump in SAC per gross add of $12. We didn't see that this year; I thought we might, but we didn't. What was different about this year's sequential trend versus last year on that line? What drove that? Why was it so much higher than last year?

Mel Karmazin

You mean the big jump last year?

Barton Crockett - Lazard Capital Markets.

Yes, why did we have it last year and not this year?

David Frear

Yes, largely inventory effects. And I think SAC per gross add, it's sometimes difficult to look at on a quarter-by-quarter basis. We tend to keep track of where it's headed year-to-year, which tends to smooth out the movements in manufacturing levels relative to auto sales and gross additions.

Barton Crockett - Lazard Capital Markets.

And then one final question here and then I'll step aside. Mel, I think you had suggested at one of the investor conferences that an NFL contract for renewal was near. And I was just wondering if you could update us. I'm not sure, maybe you have announced a renewal, but I'm just not sure where that stands right now.

Mel Karmazin

No we have not, and it's still very near. It's in the hands of lawyers. There are a couple of issues that we need to work on in language. Nothing that we believe is material, and hopefully will be able to officially announce one very soon.

Operator

We'll take our next question from John Tinker with Maxim.

John Tinker - Maxim

Could you just provide a quick update on where you are with the Toyota backlog? And also then just generally comment, given the car sales numbers were out yesterday, is there any shifts in that which particularly affect you or don't affect you?

Mel Karmazin

John, could you just clarify what you mean by Toyota backlog?

John Tinker - Maxim

I think you tend to report their numbers a little differently.

Mel Karmazin

Well, Toyota like other automakers has an unpaid trial. And so when I mentioned the funnel of $4.4 million paid and unpaid trials in the conversion funnel, that would incorporate not only the pay trails that are in our total subscriber numbers, but also any unpaid trials on the road that we're currently working on converting to. So it's all in that $ 4.4 million.

John Tinker - Maxim

Wondering if you could provide a little more specific guidance on it?

Mel Karmazin

I don't think we've ever provided reporting automaker-by-automaker. And what was your second question?

Jim Meyer

Let me also tell you, everything with Toyota is on schedule. There is no material change one way or the other.

Mel Karmazin

And in part, one of the ways I think that you get to look at our 21.5% increase in gross adds while consumer sales are down year-on-year, is the continuing launch and increasing penetration with Toyota.

John Tinker - Maxim

But more generally, is there any shift in terms of, as the car makers bounce around, does that impact you in any way?

Mel Karmazin

I think from an economic perspective, I don't think you should think of that as being material, but because we do have deals with every automaker, and while every deal has different economic terms, when you're all done with it the shift in share between automakers doesn't materially affect our operating results.

Operator

We'll take our next question from Matthew Harrigan with Wunderlich Securities.

Matthew Harrigan - Wunderlich Securities

Firstly, on the sports side, do you have any concerns about the labor dislocations next year? I mean, not just as far as structuring the contract with the NFL, but as far as disruption to activity. And then on Howard Stern, you may or may not comment on this, but what's your sense for how active he is as a generator of new customers. Is there just really a die hard basis in place that's kind of eroding or steady state over time, or do you actually see him as a driver for picking up a lot of new customers.

Mel Karmazin

So, on your first question, obviously when we're dealing with the contract, the subject that you're bringing up obviously would be something that would be addressed. And we're not in a position to discuss what our terms are regarding that. But you should be aware that it is an issue and it is a discussion point on the contract.

And on Howard, as I said, he's been a great partner. He's driven a significant number of subscribers, and I don't believe that all of Howard's subscribers came to us. I believe that we continue to get subscribers every day because of the content that we have on our 130 plus channels. And I think Howard is a big part of that as well.

Operator

And we'll take our next and final question from Leah Pilla with Knight Capital.

Leah Pilla - Knight Capital

Just a couple of questions. I was wondering if you could talk a little bit about churn and how you expect that to trend over the next couple of quarters, given the fact that you have an increase in the number of promotional subs out there. And then, number two, you talked a little bit about your retail strategy and the rollout of Sirius 2.0. Do you think that could cause retail net adds to be positive in 2011?

Jim Meyer

We certainly hope so. I mean, we're putting a fair amount of money into both the development of products for the aftermarket targeted for the fall of next year, as well as the services. And we expect all those products and services to be well received in the aftermarket. That said, the juggernaut of our automotive distribution is going to be very difficult to surpass.

And so I think we are going to end up with strong growth going forward. We're hoping to see some of this new stuff move the aftermarket number.

Mel Karmazin

Yes, and if you think a little bit longer term, I think that OEM is going to be the biggest driver of our subs. I believe that, take nothing away from the aftermarket because that will always be important and hopefully will be growing, more important. But we believe that the second-largest driver longer term will be the second owner and the third owner of some of the vehicles that are on the road. There are over 200 million vehicles on the road and an awful lot of nav radios and we think that will be a driver.

David Frear

On the churn side, you're right, as the automotive industry continues to recover, as paid trials continue to grow in volume that will inevitably drive up promotional deactivations in terms of total number. I would not that self-pay churn, we have driven below 2% and we'll work hard to ensure that it stays below 2%.

Mel Karmazin

That concludes our call for today. Thank you for joining.

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