Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Sirius XM Radio Inc. (NASDAQ:SIRI)

December 05, 2011 8:00 am ET

Executives

David J. Frear - Chief Financial Officer and Executive Vice President

Analysts

Unknown Analyst

Unknown Analyst

Good morning. Welcome to 39th Annual UBS Media and Telecommunications Conference, the longest-running conference in Wall Street. To kick us off, please welcome David Frear, Executive Vice President and Chief Financial Officer of SiriusXM. David?

David J. Frear

Good morning, everybody. Thanks for taking the time to come in. The -- I know many of you have seen the story before, but I'd like to do -- hopefully you won't find it as too much for a remedial exercise but I think it's important to put some perspective on where the company is and what we've come through. We see ourselves as being in an intensely competitive environment and it's been that way for a long period of time that as you can see from the slide, that Internet streaming is actually much older than satellite radio is. And as we -- have gone through sort of a real incredible 10 years, especially the last 10 years since satellite radio began, iPods were introduced, HD radio came out, that MP3 connectivity came to vehicles, smartphones nearly 100 million on the road in the United States today. The -- becomes an enabling technology for Internet radio and it's just an incredibly competitive environment. And this is -- the slide leaves off AM and FM radio. Right? AM and FM free service in 235 million cars on the road today. So really an incredibly competitive environment. But we seem to have thrived in that environment, that in the 10 years since launching service, we've managed to carve out about 15% of the radio revenue market for ourselves. And we think that's very, very good performance. As we sit here just as an individual company, this year, we're sort of neck-and-neck with Clear Channel for being the largest radio company by revenues in America. I'm optimistic that next year that we will in fact be the largest company -- radio company in terms of revenues in the country. Part of what gets us there is we think we have a better revenue model, that most of the radio business plans that you see are advertising-based. We have an advertising component to what we do, but we are really driven by a subscription-based service and we've done a fantastic job of monetizing the listening that we get. And as you'll see as I run through the presentation, that monetization just doesn't occur at the top line, it drops all the way down to free cash flow.

Just looking at subscription radio, we've found a way to attract subscribers in a scale that nobody else has matched. There's a lot of versions of subscription radio out in the -- among the Internet services in particular. None of them seem to have found broad-base customer acceptance. They're mostly music visiting services and generally, what's really working for the guys in Internet radio is a freemium model. The 21.3 million subscribers that we have amassed for radio listening provides us, we think, with an incredible competitive advantage going forward. The success we've had in amassing scale and in monetizing is driven 100% by the content. We've put up an incredible array of music, talk, news and sports. It's not a music listening service. It is radio as we've all known radio to be. And we've just done a better job by virtue of having these subscriptions, having our advertising that we've done a better job of putting up a compelling lineup that's available to everybody in the country who wants it. Now, we've had that program and it hasn't changed a lot over the course of the last several years. But what's gotten us to where we are isn't necessarily going to be enough to keep us going forward. So we continue to invest in what we bring the subscribers from a programming perspective as well as a technology perspective. So in the programming side of things that we've recently introduced a suite of Latin channels to better address the large and growing Hispanic marketplace in the country. We continue to improve our online offering, actually have been offering service online for about 7 years now. And at that previous slide where you saw the subscriptions compared to other offerings, if you were to look at just Internet radio subscriptions in the United States, I believe we're far and away the largest player in that market, although it's a fairly small market from a revenue perspective.

We've expanded the functionality that we provide to our subscribers through the smartphones as well the -- as well as tablets. That -- what we find overwhelmingly is that consumers don't necessarily want a separate online streaming service that they're going to pay a subscription for. They love the freemium versions, lots of listeners that generally very difficult to monetize. What smartphones represent for our subscribers: an extension of functionality. They come to us for the programming. They overwhelmingly come to us for satellite radio subscriptions and then we find that many of those subscribers are interested in extending their listening environment beyond the car or beyond a radio they might have at home and they use it on IT-based devices in the office, at home as well as when they're out in the street.

With the launch of 2.0, we'll continue to expand the programming, features and functionalities that we offer to subscribers. The new channels that I showed a few minutes ago are part of that, that expanding the online content is part of that. Offering additional functionality, including access to on-demand content will be part of the future for our subscribers as well.

Where we brought the company to over the course of the last 10 years is now one of the largest subscription media companies in the country. Only Comcast and Netflix are managing more subscription relationships everyday than SiriusXM is. The -- it's -- we've seen a lot of consistency in the behavior of our subscribers over time. They love the service. The churn is very low, that add 1.9% per month, it rivals the satellite TV guys and significantly better than other premium content services that the people are familiar with. All of this adds up to a really consistent record of demonstrating growth and through all sorts of economic environments that we've all lived through 2008 and '09, and yet through the extent of the recession that we continued to grow our base. The decline in subscribers from 2008 to '09 is solely related to the inventory of trials related to new car sales. If you were to look at the self-pay subscribers underpinning these numbers, you would see that we grew self-pay subscribers from 2007 to 2008 to 2009. They continue to grow today.

Driving subscription growth is something that drives revenue growth in the 6 years since 2006 and running through the guidance we've provided. Next year, we will more than double sales. As you can see from this chart that $1.7 billion added to our annual revenues from 2006 to 2012. And honestly, a great job running cost-effective growth has actually delivered nearly that much in terms of EBITDA improvement, that the $1.7 billion in revenue growth has turned into $1.5 billion of EBITDA growth. The merger of the 2 companies was certainly very helpful in terms of being able to squeeze out cost efficiencies. We continue to deliver on those efficiencies today. But we often get asked, "Where are you at synergies?" and while most of them are already in the numbers, there's still a few left to go, at the General Motors contract which was renegotiated shortly after the merger. The original GM contract ended in the fourth quarter of 2013 that we renegotiated that contract back at Christmas of '08. New terms go into effect in October of 2014. While it's confidential, I can't talk about the terms of any of the automotive agreements, you should think about the change in terms as being something that's material to the EBIT -- continued EBITDA growth of the company.

We still have additional programming synergies that we'll be able to explore with our programming partners over the course of the next few years. The -- this year, we had a new contract with Howard Stern that's in place for the full year. Howard will be here for another 4 years. He's been a fantastic component of our business. We have new agreements with the NFL, who's been another great partner. That -- the new NFL contract went into effect with the season in August. And most recently, we extended our agreement with NASCAR, which ended when the season ended just a couple of weeks ago and we're in a new multiyear agreement with NASCAR.

As you look to the future, we've got a couple of good contracts from the pre-merger days with Fox News. We'll have an opportunity to talk to Fox about those contracts in mid-2013. And then the baseball and hockey agreements which are the last of the premerger agreements, there's still a few years to go, but we'll have an opportunity to talk to both of the leagues in 2015 after their seasons are up about continuing the relationship with both of those and with programming that our subscribers love.

We've taken this EBITDA growth and we have dropped it down to the free cash flow line as well. Now here, you can see that with declining capital expenditures, that $1.7 million of revenue growth from 2006, 2012 has turned into $1.9 billion of free cash flow improvement. The free cash flow story is probably nearest and dearest to our hearts that we think that's what really drives shareholder value, that we've got a nice confluence of events going that we still have healthy growth in subscribers and revenue. We're doing a good job at cost control. And as I'll show you in a moment, that leverage is coming down, interest cost will be coming down. Capital expenditures are declining, that we're near the end of the satellite replacement cycle for the company, that in January, I believe, it is. We're still trying to work out the final launch date with International Launch Services. But we'll launch the Sirius 6 satellite. That is the last of the replacement constellation satellites. And we'll have a bit of a holiday on satellite capital expenditures until probably late 2016. The replacement cycle for the XM satellites will be roughly 2019, 2020. For the Sirius satellites, will be in sort of the 2023 to 2024 timeframe from a launch perspective.

So what it gives you is about 4 years of very little in the way of satellite capital expenditures. And with the growing EBITDA declining capital expenditures improving interest cost, it really foreshadows great growth in free cash flow. And additionally, no taxes. And so probably won't absorb all of our NOLs until the very late part of the decade. And so you can think of the next several years as having no taxes.

Now, as you think about future growth, we think it's important that you bear in mind what we've been able to do with the auto makers, that we're the only company that we know of that has been successful in going out and integrating a consumer electronics product in the dashboard of every vehicle manufacturer in the country, that 6 years ago, we were penetrated 20% into new car sales. That has grown to about 65% at this point. We don't anticipate significant increases in the penetration rate from here. We're happy with where it is. It may bounce around a little bit with the mix of sales among the automakers, but the U.S., European, Korean manufacturers tend to be higher-penetrated in production than the Japanese manufacturers. So as you watch market share move around a little bit, you may see this fluctuate slightly, but it should stay right about where it is. Now I think it's a pretty good thing being in nearly 2/3 of automobile production. I don't have any great insight into what car sales are going to be next year, okay? We follow 21 people who put out estimates of car sales. I can tell you then since June, that 12 of those 21 have updated their estimates. They have all updated their estimates and revised downward their outlook for 2012 sales. One initiated, the University of Michigan, I believe it was, at 13.5 for next year, One Wall Street firm has constantly reissued its 2012 forecast at a constant 13.9. And 7 people, but mostly auto makers, haven't updated since June. They're generally in the 14.3 range. My betting is, is that when they do update, they'll probably update downward from what their current estimates are. The overall average of everybody out there is right now around 13.6, 13.7. Where it's going to come out, I really don't know. We'll see in the next month. I thought November sales were great, that being up last year at -- or was it about 13.4, 13.6, I think, is great. But most notably, consumer sales were up 18% year-on-year, which is a number we tend to look at that spikes or fall off in fleet volume doesn't have much of an impact on satellite radio subscribers. But growing consumer sales is a very good sign for us. Depending on what you think the shape of the curve is for the automotive recovery, where you think U.S. auto sales will ultimately get to, you can run the math and get a pretty good sense as to where their -- our enabled universe is headed.

So one of the ways to think about us might be that we're still in a buildout phase. When we launched satellites, while we might've been able to cover all of the 48 states with 3, 9 service availability, that we really didn't cover inning cars, because none of the cars had radios in them. So we had a launch service through the aftermarket at Best Buy, RadioShack, Circuit City, get somebody to go out, buy a radio, install it. It sits on the dashboard, you've got wires and things like that. It was great. Great products, a lot of people really liked it, we did well on it. But it's not very easy. It's a lot easier when you buy that new car, you open the door, you turn on the radio, you turn on the car and you push a button and it's playing. And so where we are today, is there are about maybe just a little less than 40 million cars that have been manufactured with a factory-installed satellite radio. There's probably 3 million of those that are still sitting on lots, waiting to get sold, just normal inventory in automotives. So you've got 37 million on the road today. Well, If you take that 65% of automotive sales, and just kind the run the math for whatever you think automotive sales are going to settle out at. If you think they're going to 14 million a year, 15 million a year, we'll have our 65%. You're going to run through the next, within about 3 years or so, that the enabled universe of cars with a satellite radio in them will exceed 70 million. By the time you get to the end of the decade, there'll be 100 million cars on the road with a factory-installed satellite radio. To me, that reminds me a little bit of cable back in the mid-80's when they were still building out neighborhoods, they were still -- the analysts following were talking about homes past and what the penetration of homes past was. So as we head towards 100 million cars on the road, that we think there's a great opportunity for long-term subscriber growth here. As you think about the competitive environment, I want you to bear couple of things in mind, that there are already 235 million cars on the road with an AM and FM radio. It's going to continue to be an intensely competitive environment. There are 95 million smartphones on the road today and many of the cars on the road today, not all yet, but many of them have an aux-in jack in the car. It's pretty easy today to take your smartphone into the car, plug it in and use your Internet radio service if that's what you want to do. It turns out that we still seem to compete very well against both of those products, AM and FM radio as well as Internet radio-enabled smartphones, despite the fact that we only have 37 million cars on the road.

Now there is a firm IHSI supplier global that came out with an estimate of connected car. I can tell you connected car is coming, all right? So we know it. We think it's great. We think there are a lot of service opportunities for us in connected car. Connected car will, according to IHSI, and I think it's a pretty good estimate, that by 2018, somewhere around 28 million cars on the road will be connected. They'll have easy IP connectivity available on the built-in product. So when you're coming out towards the end of the decade, you'll have 235 million AM & FM satellite radios on the road, you'll have 100 million satellite radios on the road. And there will probably be solidly over 30 million cars on the road that are connected and are capable of receiving IP services.

I like our competitive positioning. I think we've done well competing against these technologies so far. I like the industrialization that's going on for us and the opportunity it gives us to continue to sell into the new vehicle market. And increasingly, we're going to find that used car sales are a great opportunity for growth for us. That the -- when you look at car transactions in the country, there are 50 million cars sold, roughly, in the United States every year. Only 13 million, 14 million of those are new cars. The rest is used. So as these 37 million cars that we have today move out of first car ownership and into the used car market, we're going to have an opportunity to acquire additional subscribers in the way that isn't reflected in our numbers today.

Alright. So along with all this growth comes improving leverage. Right? So as you can see from this and over the last few years, that we've gone from being something in excess of 7x levered, brought it down pretty quickly to less than half of that at the end of the third quarter. Based on the guidance that we've provided to the market, that we will be about 2x leverage in terms of net debt to adjusted EBITDA by the end of next year. And that opens up lots of opportunities for us. It would, tell you, that we have a lot of strategic flexibility that's generating a lot of cash flow. It's an opportunity to perhaps be more acquisitive if we can find something interesting out there. It looks like a good value, adds to our value proposition some way. It's an opportunity to return capital to shareholders and it certainly provides us with a great cushion for when things go wrong in the world. We all know that, that happens from time to time.

We've really driven down borrowing costs rapidly in the course of the last few years. That you can see from the slide that in the depths of the recession, February '09, 15% secured debt with a huge equity component that -- you're welcome, Mr. Malone [ph] and Mr. Mafey [ph] , the -- that we cut back in half the -- our long bonds are now trading below 7%, and I think that there is an opportunity for us to continue to narrow the credit spread implicit in those numbers as people see us realize the growth, realize the free cash flow and realize the reduced leverage.

When you kind of add all this up, right? And you have good, solid, consistent long-term subscriber growth, you have the same thing coming through to revenue, there's -- the management team has shown you an ability to manage cost well, so it comes down to EBITDA. Interest expense will be coming down, capital expenditures are dropping significantly, that we -- again, in the absence of the satellite spending for the next 4 years. You'll probably see them in the range of $70 million. No taxes to pay, one of the nice benefits of having NOLs. And what you get is a great free cash flow growth story for quite some time. We like the way we stack up from a competition perspective. We understand the world's a competitive market. We think it's a great thing, great for consumers. We think our satellite delivery system, despite connected car, despite 3G networks, is a great competitive advantage.

The -- listening to the radio, on your smart phone, is probably not one of the most innovative uses of your smartphone, right? there's a lot of things we can do with a smartphone beyond listen to radio. And while listening to radio is fun, that we think broadcast spectrum and broadcast technologies have a lot of meaning in a world where data plans are becoming the norm. And data plans by their nature, by the cost structure for the industry should be variable. The more you consume, the more you should pay. And from that perspective, broadcast becomes of incredibly efficient way to offload applications that are very heavy on network utilization.

Curated content is not going away. The idea that everybody wants to always find the one thing that they want to do with no help from anybody else doesn't make any sense, that none of us live our lives that way. Our newspaper is curated content. It doesn't matter whether you get it online or whether you get it in print. Yahoo!, MSN, the -- our AOL, are all homepages, that are curated content. The Huffington Post is curated content. The broadcast networks are curated content. Your cable system, your satellite television system, it's all curated content. So we believe that it is a consumer convenience, and consumers' value organizing content. Whether it's organizing music, organizing news, organizing talk, sports, whether you organize the programs during the day by what shows at what hour, or whether you simply tell them what channel it's on and what's on that channel at what time, it's all a way of adding value to subscribers and we just don't see that going away. Our agreements with the automotive companies are all long-term agreements that we have new chipset technologies that the auto companies will be adopting over the course of the next couple of years, that great relationships there and long-term OEM agreements are a very strong asset of the company's. The 8 billion of NOLs we have will clearly benefit shareholders. The subscription model, we think, is a great way of doing business. We saw how it protects the downside associated with revenue and operating performance in the midst of one of the worst recessions any of us has ever seen. And it will continue to pay benefits in the future. And at the end of the day, we're doing one thing. We're all about satellite radio, all about what you hear when you turn on that radio. There are additional features, functionalities, services that we add to enrich that subscription experience. But in fact, the team is focused on delivering the very best that we can out of the satellite radio, and that's what we think is going to drive returns for shareholders in the long-term. So with that, let me flip through the mouse print, the disclaimers and everything you could possibly want is on radio, so you should all run out and get one right now. Thank you. Questions?

Question-and-Answer Session

Unknown Analyst

As you think about questions, let me ask you -- is that a question? Okay. David, can you talk a little bit about your pricing strategy and implications on subscriber growth, churn, all the metrics?

David J. Frear

Sure. So, when you raise prices, you're going to suppress demand. So some people argue that that's not true. I'm happy to have the debate with them, but I actually really believe it's true, that if you raise prices, you suppress demand. That being said, that we are looking to do is maximize the revenues and free cash flow of the company. So we have a price increase going into effect on January 1 that if -- I often get asked what's the effect of that is going to be? Well, I would expect that we're going do with the price increase, have lower conversion then, of new car sales into subscriptions than we would have if we didn't increase the price. I would think that we're going to have higher self-paid churn with the price increase than we would if we didn't increase the price. But at the end of it, I think we're going to end up with more subscribers, more revenue and more free cash flow after doing the price increase than what we have today. So it's a good thing for the business. It's tough to gauge. I get asked, "Well, how much churn is it going to generate?" It's almost impossible to know the answer to that question. That we've got thoughts on what might it do, that one of the things that we know for sure is that it's much easier to keep a subscriber that you have already converted than it is to convert a subscriber. So we'll work hard to retain every subscriber that we have today, including through managing through reaction to increased prices. We've begun notifying our customers now of the price increase, that the notifications go out based on renewal dates, so the monthly subscribers have been notified, that the subscribers whose quarterly, semiannual, annual, 2-year, 3-year plans that rollover in January that they've been notified. We haven't seen so far a -- much of a response to the increase. We haven't seen a significant upswing in complaint calls or anything like that, but it hasn't hit the credit cards yet, alright? So it's -- some of the billing statements are out, but 80% of the self-pay subscriber base is on credit card or debit card, and we'll probably see the reaction come more after the -- it hits the cards than in advance. But so far, early returns are good. In terms of long-term pricing strategy, one of the things that we have to bear in mind is that because of most of our subscribers pay us in advance. And not just in monthly in advance, they're paying us a year or more in advance. Over half of the self-paid base is 1 year or longer in terms of advance payments. That when you change prices, it actually takes a while to work through the base. In fact, it takes about 18 months for price changes to work their way fully through the base of the company. And so while we haven't made any decisions on it, when every price increase takes 18 months to roll through, it's kind of hard. We've often been asked, "Would you do annual price increases?" Well, it's sort of hard to do annual price increases if it takes 18 months to roll through. And if you think about it, especially many for our subscribers, about 20% of them have a second, third, fourth radio. So -- and they don't necessarily renew at the same time. So if you have one radio that renews in December, you have another one that renews in June and then if we're increasing prices annually, we're constantly sending you letters, notifying you of price increases. So while we haven't invested in terms of any firm policy, that kind of cadence of communications with our subscribers will probably help inform our pricing decisions going forward. This is the first base price increase that goes across the board since we launched service 10 years ago. There's been a lot of programming that's been added. A lot of the features and functionality added to our subscribers. Generally, I think if you look across the media landscape, you'd find a significant level of price increases over the course of the last 10 years. So we do believe that this will go through, it'll do well with our subscribers and then we'll consider price increase strategies in the future.

Unknown Analyst

Thank you. Any questions from the audience?

Unknown Analyst

[indiscernible] when do you expect to have Lynx kind of -- excuse me, when you expect to have 2.0 fully rolled out and where -- what's the status of Lynx is at this point, I wasn't sure if Best Buy or it's actually at a retail at this --

David J. Frear

Sorry, the status of what?

Unknown Analyst

Of the Lynx, the new hardware product?

David J. Frear

Great. 2.0 is a sort of a serial rollout, right? There are multiple components to it. And it's in part programming, it's in part features and functionality from -- on the IP product set. It's in part changes in chipset technology features and functionality on the satellite radio part of the service. So I think as you look at the 2.0 chips, will go into their first car in the middle of next year with model year 2013 that'll bring it to the OEM market. We'll have a retail product out shortly that has the 2.0 functionality in it. The release of our -- release of it on the IP platform also should come shortly. But then, what you should expect is that there'll be sort of an initial launch of it and then we'll continue to roll out more and more features with it. So for instance, the availability of on-demand content, that the -- how much is available to bring down, will continue to expand over time. So some of the 2.0 is already out there, right? The Hispanic channels are out there. That -- the -- we have a product at retail now that picks that up as we -- it'll be a little while before that chipset gets rolled out into automotive production. But I -- you should think about it as an evolutionary introduction into the markets.

Unknown Analyst

As you go through contract negotiations with the content providers, what's the risk that you don't come to an agreement on a certain content package? And what's the possibility that the content providers, say the NFL, could decide just to offer their content directly to consumers through the smartphones and the Internet?

David J. Frear

Well, the content that -- the content arrangements we have now with the -- with all the what we call the third-party programming providers are not exclusive to wireless service today, so that they are free to go out and cut deals with the wireless carriers. They're free to go out and offer their programming online, that we're just in the satellite radio business. We understand that we compete against a lot of other stuff. And that's okay. The -- one of the things that's changed a little bit is that when we were negotiating a lot of these contracts, 6 and 7 years ago, and we were streaming our service online, that we said to a lot of these programming providers, "Hey, let us incorporate the audio feeds that we're providing across a satellite system into our online offering as well, so that our subscribers can enjoy the same SiriusXM-branded programming package online that they get in vehicle." Generally, several years ago, the reaction was, "No way. That's tremendous value to us. We have our own plan. We're going to make huge sums of money doing this." That what they learned over the course of the last several years, is that they can still pursue their own online initiatives which continue to change as everybody can turns to -- continues to learn more about consumer behavior on the internet. The -- but that incorporating it into the SiriusXM-branded programming lineup doesn't really compete with what they do at all. So in the new contract with the NFL, for instance, the play-by-play of all the games is available on our Internet service now. Now, not everybody has the same view, all right? So we go out, we ask for that, so most of the -- not sure if it's all, but certainly most of the news services realize that we don't really compete with what they're doing online. We're not showing video, all right? So the news services allowed us to incorporate it in a few years ago. The sports leagues are beginning to roll in. And I think it's one of those things that as each year goes by will be more and more successful at making it virtually indistinguishable to a consumer whether they're listening online or via satellite.

Unknown Analyst

Two related questions. Is it technologically possible for you guys to feed Internet-enabled radio services through the satellite infrastructure? And then the follow-up to that, if so, have you guys entertained or considered or at least evaluated what a commercial arrangement like -- might look like for these web radio services which are trying to get into cars. And as you said, if there are only going to be at 30 million cars at the end of the decade. There might some guys out there that want to accelerate that to the extent that Sirius can get some of those services onto their platform. That might be content that costs you nothing, because they're able to monetize through their ads or however else they do it?

David J. Frear

It's -- is it technologically possible? It is, though I don't know why you'd do it that way, alright? So you can use satellites as a way of getting 2 points of presence on the Internet. And although for the most part, while it's technically possible, it doesn't seem that there's any real reason to do it, that the Internet is basically a bunch of servers and communication lines that -- and the routes between them are largely logical routes as opposed to physical routes. They operate on something called open-shortest path first for the most part. And so -- and there's incredible redundancy, right? So as you send the packet, the -- if it runs into a busy router, it bounces, and goes on a different path. So the part of the beauty of the Internet is it resiliency, alright? It's kind of -- it's completely agnostic as to whether or not the best way to get from this room to the next -- the room next door is through a router that might be 2 blocks away from here or whether it bounces down to Miami back up to Washington and then ends up in the room next door. So I think that one of the things that we're doing is trying to make it largely transparent to our customers as to whether they're getting the signal across a satellite system, a terrestrial repeater or whether it's coming in across the Internet. For the most part, they don't really care, alright? They just want to listen to what they want to listen to, and we want to give it to them. So we've been streaming online for 7 years, precisely because we believe in an IP-connected world definitely coming. And so why not offer your subscribers the opportunity to listen to the same thing when they're online that they can hear when they're in the vehicle? They don't really need to know, in fact, in the vehicle, that does it really matter whether it's coming in across our satellite spectrum, our terrestrial radio spectrum or the spectrum that a 3G network is routing with an IP service? I mean, to the customer, they don't really care. So what we're looking to do is position ourselves from a rights perspective, as well as in terms of enabling technologies in the radios with the ability for the service to be received from any of the above. Sure.

Unknown Analyst

[indiscernible] could Pandora stream through SiriusXM satellites? And if that was even possible, is there any sort of web service arrangement that you might consider in the future? Do you know what I mean? Coming through Sirius? That's the question [indiscernible]

David J. Frear

It wouldn't make, in my mind, I can't speak for Pandora because I'm not them, right? If I were over there managing that company, I wouldn't spend any time figuring out how I could get off the Internet and get onto satellite. I just -- it would -- They at Pandora today, none of the Internet radio, doesn't matter whether it's Pandora, Spotify, MOG, RDO, pick any one. None of them make any investment in anything other than the servers that send the -- their service out to content or distribution networks. They don't make radios. They don't make smartphones. They don't make computers. So the listening devices that those services use are not made nor is their architecture influenced in any way by those service providers. They've got other challenges in their business, kind of just probably passively focus their efforts on those challenges and not on infrastructure that probably isn't really going to change demand for their service very much.

Unknown Analyst

David, 2 follow-up questions on that. Do you think there is any difference in competitive environment for streaming 4G versus 3G? First question. And the second related question, do you think it's important for you guys to own your own 4G pipe or let just somebody else, the connected car concept, let somebody else figure it out, and you'll figure out what services to provide around that?

David J. Frear

So, first of all, right? We all know that 4G versus 3G are marketing terms, right? They don't necessarily mean that any change has taken place in underlying network technology. But as the network technologies improve, which is really what the question's about, there's no doubt that data networks on -- in the wireless industry are going to get more and more capable, right? You're going to deliver faster speeds, but they're going to figure out things like streaming applications and what they do to network capacity. Streaming applications are a nightmare for wireless network operators. The -- but they're smart guys. Eventually, they'll figure out how they can manipulate a middle way and maybe its caching technologies or storage is cheap. And so maybe if you drip down a lot of content, leave it stored on a device that'll help offload the network. At the end of the day, you're still going to have usage driving cost. And it may be -- we'll get to a point where the pricing plans to consumers, that the amount they use is largely invisible to them and they'll be completely insensitive to the applications and how much data they're using. I suspect that many people in the country will continue to manage their wallets. And if they can offload services, that they will. All that being said, the -- our plan is to make our service available on all platforms. So to the extent that the IP platform improves the extent that streaming applications are engineered to work better across wireless networks, I think we'll benefit from that as well.

Unknown Analyst

I believe that Liberty has the opportunity to move to a greater than 50% stake in March. What's your expectation on what they would do that? And how much would they actually have to own in order to be able to take advantage of some of the NOLs that your company has?

David J. Frear

Okay, so in terms of the -- using the NOLs, that the tax code provides, they need to go to 80%, right, to -- in order to tax consolidate. So it -- that would be the answer to that. If Liberty wants to use the SiriusXM NOLs directly, they'd have to take their position up to about 80%. In terms of what are their intentions, with respect to going north of 50%, I really don't know yet. You'd have to ask Greg [ph].

Unknown Analyst

Just 2 follow-up questions, I'm just curious. As far as Sirius 6 goes, when that's in place, and I assume maybe operational in the second quarter or something like that. What will you use that additional capacity for? Is that going to be part of the Sirius constellation? I'm assuming so. And I was just trying to get a little idea of what you'll use the additional capacity for.

David J. Frear

Sorry. The question started with SMH [ph] or...

Unknown Analyst

No, no. I'm sorry. For Sirius 6, the newest satellite? Just trying to get an idea what you'll use the additional capacity for.

David J. Frear

Yes, Sirius 6, -- it's on expansion of capacity. It's effectively getting ahead of the end-of-life for the existing constellation, right? So the Sirius 5 was the first of the replacement satellites. We launched that I think about 2 years ago. And Sirius 6 will be the second of the replacement satellites for the Sirius constellation. The original 3 kiode [ph] satellites now have an end-of-service life that is in roughly 2015, that with the -- in the satellite business, you tend to want to get your replacements up a few years in advance of when your current generation's going to die. You never know, bad things happen sometimes with rockets. And so if you were to have a launch failure or if a satellite successfully launched, didn't function as intended when it got to its on-orbit position, you still need time in the schedule to be able to get a replacement up, so you to tend to go up a couple of years early.

Unknown Analyst

Could you talk a little bit about conversion, range of conversion rates between different automakers. What's the low, what's the high? And long-term, I mean you could -- I have a hypothesis, that it's going to decline over time. Do you agree with that? Do you think longer-term, you're going to see conversion falling? And where do you think it stabilizes, if you do?

David J. Frear

I don't necessarily see it falling. But it certainly fell as we increased the penetration, all right? And so when you went from being in 20% of the cars and you were maybe converting 50% or so of the opportunities. And now we're in 65% of the cars, you're converting 46%. So it comes down somewhat. But I don't see it coming down in the long-term. Now if you were to go to standard, then yes, I would think that it would probably come down. If we went into 100% of the cars, I think it'd be less than it would be today. The range really varies. And it tends to move consistent with the price of the car which is -- tends to be consistent with the incomes, all right? And so very high-end cars are going to convert at better rates than low-end cars. So for instance, if we have some models that convert north of 70%. We have other models that convert below 30%. It's -- I think that on the low end of the conversion, that it's not all explained by income differential. That we find that with some of the lower converting cars, that there are actually executional issues with those auto makers, all right? That -- or there's something about the car itself. So there was a time when one of the auto makers, who'll go unnamed, that put satellite radio into hearses. Okay, so the hearse system really convert at all well. The work trucks in West Texas, that -- they tended not to convert so well. They tend to be pretty stripped-down cabs, very few kind of features and niceties, and so we found that some of those didn't convert so well. Sometimes it has to do with cadences of customer communications. So one of the things that we've worked very hard on with automotive companies is getting the IT systems integrated. It's -- I can't tell you how important it is to get a welcome kit to a subscriber when the car still has that new car smell in it. You get a big difference in conversion rate if you get the customer name and address and you start marketing to them within a couple of weeks of purchasing the car as opposed to a month or so later. That the -- we just found in -- the great thing about having 21 million subscribers in all these transactions is that you get statistically significant samples of almost everything. And so from a numbers perspective, there's been a remarkable statistical consistency. I joined the company, there were 120,000 subscribers. It's 21 million now. And we've just seen remarkable statistical consistency across the years. And so for instance, in this area of conversion. If an OEM, I want to call it forgets, but if they forget to send us a sale record, it's going to convert lower when we finally get it. We just know it will. And so going through the protocols of establishing good supply chain handoff between the auto company and SiriusXM, it is -- it's been a big deal. We've seen major auto makers improve their conversion rates by 4 or 5 percentage points just by the virtue of getting files daily instead of weekly. Any other questions? We got a couple of minutes left. Sure.

Unknown Analyst

Just curious, do you break down at all on your subscriber numbers? How many are -- or do you have any way of knowing, how many are used car owners versus new car owners?

David J. Frear

Yes. We -- I have estimates that we use internally that we haven't gone public with them yet. In large part, because it's not as easy as you might think to figure out whether or not a car has changed hands, alright. So a good example, that if a radio goes from my name to my daughter's name that it may show up as a used car, alright? So it's -- we're still working through the matching protocols to make sure that we know what a second owner is. It's easy when it comes through a used car trial. And so when we get a sale reported to us from one of the dealers out there, that says, "Hey, I just sold a used car." That's great. But at this point in time, the majority of our reactivations, the overwhelming majority, just come back as opposed to being a -- associated with a used car trial program. They just come back. That's something, I think, is good news for long-term subscriber growth, that when you look at the awareness among -- unaided awareness among new car buyers, it's over 90%. Over 90% of the people buying a new car know there's a satellite radio in the car. The -- I was very surprised when we ran a survey 2 years ago to find that, and very pleased to find that unaided awareness among used car buyers was over 70%. And so we're in the early stages now of rolling out information exchange programs throughout the auto dealerships. We have them with the OEMs. So anything centrally coordinated, we get that information. New car sales, we get it. Certified preowned vehicles, we get that because those are centrally coordinated programs. But the vast majority, probably 95% of used car sales, either take place in privately negotiated transactions or they take place by franchise in independent dealers outside of an OEM-sponsored program. And then the dealers are on their own, they manage that information on their own. So we have a third-party provider that is working with us to sign these dealers up on information exchange programs. What does the dealer get for it? Well, dealer gets a 90-day subscription that's free for the consumer. You can market as part of the value associated with that car. What we get is the customer name and address information and that gives us the opportunity to market directly to those potential new subscribers. So thank you for your time today. We really appreciate it.

Unknown Analyst

Thank you, David.

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 www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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

Source: SIRIUS XM Radio Inc. Presents at The UBS 39th Annual Global Media and Communications Conference, Dec-05-2011 08:00 AM
This Transcript
All Transcripts