Sirius XM's (SIRI) Management Presents at Goldman Sachs Communacopia 2016 Conference (Transcript)

| About: Sirius XM (SIRI)

Sirius XM Holdings, Inc. (NASDAQ:SIRI)

Goldman Sachs Communacopia 2016 Conference

September 20, 2016 04:35 PM ET

Executives

David Frear - CFO

Analysts

Unidentified Company Representative

If everybody would take a seat, we're going to go ahead here with our next session. We're very happy to have at the conference David Frear, the CFO of Sirius XM. David, great to have you here.

David Frear

Thank you.

Question-and-Answer Session

Q - Unidentified Analyst

We'll start up sort of high level here. And just thinking about the business, you've had a pretty good start to the year. Your subscriber net additions are already over 1 million; your used car funnel is showing that it's continuing to have a lot of momentum; you’ve implemented some price increases that seem to be working. And so, I guess the real question is are you taking this momentum into the back half of the year as you expected and how do you generally feel about the positioning of the business as we look into next year?

David Frear

Okay. So, we feel good about the year. We’ve got off to a good start; raised guidance across the board. The auto markets, I wouldn't call it weak because the level of car sales is so strong by any historical standard that it’s -- if we could settle in on this for a long time, we'd be really happy. But it doesn't have the growth that it's had in the last couple of years. So, there a lot of people, I get a lot of questions about geez, auto sales are weakening. Well, okay, yes, on a relative basis [indiscernible] much of a push behind us but we still feel very confident that the guidance that we've given for the year, the year is off to a good start. And I'll tell you one thing that really surprised us is the margins. In the original guidance, we gave we had flat margins and so far first two quarters, margins have been up, and that was not something we anticipated.

Unidentified Analyst

You mentioned SAAR, what do you assume, what's kind of the run rate, how do you -- as you do your long term plan, what level of SAAR do you feel like you need to be comfortable with? Are you comfortable you can meet some of the long-term growth objectives the Company is targeting?

David Frear

We've never really taken a position on SAAR. It’s not like we get a team of people to go through and look at all the things that can drive auto sales and try and come up with their own forecast. There is an industry full of people that do that, we take -- we subscribe to all that stuff, we take it, we add it all up and average it and then pretty much go with what the third party average is. It's funny, when you talk about long-term, you don't see all that many long-term forecasts for auto sales. So, as we look at -- when you hear us talking about 185 million vehicles that the enabled vehicle fleet will grow to in the next 10 years, roughly double from where we are today, that's assuming that auto sales continue in sort of -- not at the 17 level but the high 16. We just take it in straight line and run it out. Auto sales out there for the next 10 years, 16.5 million, I think everybody would be thrilled, probably not going to happen that way but…

Unidentified Analyst

How much do you adjust the way you function day-to-day based on changes in new car market? Does it have to be a pretty dramatic shift in sales volumes for you to say hold on a second, we need to think about our costs or the way we're marketing ourselves to consumers?

David Frear

Honestly, it really does, right. The business is considerably less dependent; new car sales are important but it’s considerably less dependent than it was just a few years ago that I think gross additions from new car trial conversions will by the end of the year -- I think they’ll be less than half of what we are at. And so, it's just -- it's the growth in the used car market, the growth in the win back market. People used to subscribe that have churned, then they do come back, that as we look at those channels of distribution, they just keep edging up, and solely but truly new car sales edged down in terms of the level of importance.

Unidentified Analyst

Got it. Penetration, you target 75% penetration of cars over the long-term, I think you've been slightly below that the last few quarters. First, just help us understand why did that number move down a little bit and why is it not going to go higher than 75%? It seems the costs of installing these radios keep going down, isn't the hurdle lower-and-lower over time?

David Frear

It bounces around a little bit on sales mix. I'll tell you that in general, everybody's penetration rate is at or above what we thought it was going to be and then the mix would be auto partners moves around a little bit. The partners themselves do alter mix on the lot, right? And so, if they're driving for a lower income buyer, they might put a larger assortment of fairly stripped down vehicles out on lot. So, that could affect us a little bit. I guess it could go higher. It's not something that we feel like there's a reason for us to incentivize the automakers to take it higher, so paying another $5 a radio to see if we can get it from 75 daily which we don't think that's worth it, because it goes back and hits you from where you [indiscernible]. And so, we're happy with where it's at. It is one of these things that over time as we do knockdown -- continue to knockdown the cost of the radios, we can put more functionality in them; we also can reduce the price, maybe with that and just the economies of scale manufacturing automakers will take it up.

Unidentified Analyst

I want to go back, you were talking about used car and how that could potentially smooth out your sales over time. Used car is interesting; there are elements of that market that you've done a very good job establishing the distribution channel, some of it’s really hard. And so, I thought we could just kind of recap and say where do you feel best about your positioning to win activations as used cars turn over and where do you feel like you have the most opportunity to do better?

David Frear

So, hard question, it really is a hard question. I think we've done a great job in terms of getting transaction reporting out of the automakers in out of all the major dealers in the country that we -- we now have over 23,000 dealers that are reporting sales transactions to us every day. And just getting that done is a major accomplishment. We've got -- I think it's around 12,000 or 13,000 dealers now signed up for what we call our Service Lane program where any car that rolls to their service bay, they check to see whether or not that's got a satellite radio, does the person have an active subscription, would they like a free 60-day trial or if they don't. And that's the way of getting access to cars. We have deals we're doing with insurance companies with auto financing sources to try and get closer to the actual act of buying the cars for the ones that we -- that don't get reported to us. And it's one of the things -- social media is turning out to we think be a promising way of getting at it. Getting at what I call the unstructured part of the auto market, the private transactions and the independent dealers that -- who may not have all the transaction reporting systems that franchise dealers do, that's going to be a tough nut to crack. But we've been at it for few years now. And I am pretty optimistic as to how it's going to come out.

We sit there and we look at today, right, we put about 55%, 56% of the satellite radio enabled used cars that sell in the country this year, we'll put though an organized trial. And then, we'll get the names from derivative sources for maybe another 24%, so we’ll actually treat 80% of the turnover population which quite honestly I think is a great result for this which I didn't expect us to get that many sales transactions in the system. And we'll see what it is as years go on, but we'll continue knock away at it.

Unidentified Analyst

In your Service Lane program for example, you have a different type of person who's going to be noticing that this car is enabled but they’re not activated; so in another words, you’re still accustomed to working with car dealers and now you might be working with guys who [run a line] [ph]. You've gotten your concepts into the channel. Does it take longer to get those channels to be effective at doing this?

David Frear

Surprisingly, they come up to speed pretty fast. I mean it's not that complicated. It’s a car and a person, right? So, in a lot of ways, it's a pretty simple concept. The hard thing is making the initial sale, convincing somebody in organization, whether it's an auto dealer, insurance company or credit union that they should work with you that there is something in it for their customer, which is really what it's all about. It's about are they providing value added to their customer. And once they realize that they are, then, it goes pretty fast.

Unidentified Analyst

And insurance and auto financing, those are channels you're working with, how is your progress there?

David Frear

It's good. It's early days and we've got a few partners in each channel. And we hope to broaden that out considerably over the next few years.

Unidentified Analyst

This comes back to a point you were making before is that if all of this continues to click, then the portion of your activations, it's coming out of used cars, going to continue to expand. And so, presumably, your net additions would be less sensitive to SAAR over time anyhow. Is that how you think about it?

David Frear

Yes, in the very long-term, there is no reason why our market opportunity isn’t going to reflect the distribution of auto sales nationally. So, 50 million cars or so sell over a year, only 15 million, 16 million of them are new; 35 million, 36 million are used. That same kind of distribution is ultimately what we should be facing.

Unidentified Analyst

So, let’s talk about another way you’re thinking about growth and that’s your 360 L platform; so, this used to be SXM17…

David Frear

Yes. We wanted to come up with a more consumer friendly name.

Unidentified Analyst

Yes, more analyst friendly too, which stands for 360 degree listening. So, first of all, just for people who haven’t been following, just frame what this initiative is?

David Frear

It’s really taking and marrying in a seamless interface the satellite radio and IP connectivity, what you can essentially do on our app. And it’s putting them into one slick user interface that works on the dashboard in the car. I mean it’s simplest form that’s -- that's what it is to the consumers. So, what do they get out of that? Well, they get our linear channels. So, they get all the great content that’s built us upto 32 million subs in the U.S. and Canada. But then they get on top of it the Internet capabilities as well, so on-demand content; interactive services that obviously a more robust electronic programming guide; the ability to actually for the first time know what radio is doing; return [past] [ph] data; is the radio on, is it not on; is somebody listening more; they’re listening less; what are they listening to; and then the ability to transact with the customer, to interact with them in a variety of ways. And we think that those aspects, the customer relationship management aspects of the product are probably going to be the most exciting part of it.

Unidentified Analyst

And where are you in getting this new platform, ready to be put into market because it seems that there is a lot of new elements that you have to figure out. So, you have to figure out how do we engage in two-way connectivity; what do we do with all this information that we have; if some of the content is being streamed, you pay for it on your end differently? So, you think about these big building blocks, where are we in the process?

David Frear

So, let’s talk about technology and then we’ll talk about sort of [indiscernible] separately. From a technology perspective, it’s actually not doing anything different than what we already do today. It’s just that today we do it in all these different beakers so to speak that you’ve got the satellite radio beaker over here and you’ve get the app beaker over here and then you have the customer relationship management beaker over here, and everything is sort of separated today. And with 360 L, what we’ll get is sort of all be happening within the same technology platform. And so, we have the information usually exchangeable between the two. So, it’s not really different; it’s just a packaging of it.

From a cost perspective, it doesn’t really change the cost structure of the business either. It’s a lot more efficient to deliver the broadcasted linear channels across satellite spectrums and across one-to-one communications on the Internet. Nothing is going to change about that. So, when you’re in the car and want to listen to Howard, or you want to listen to the Highway or NFL radio or whatever it is, that’s still going to come across the satellite. It’s the interactive components or some of the expanded channels that will come across the Internet, which is exactly what we do on the app today. So, the question is will we have significantly more people utilizing the functionality of the app when we have this distributed in cars. My guess is the answer to that will be yes. But generally, I think it’s fair to assume that they will be paying a little bit more to get that functionality. And so, at the end of day, I don’t really think it's going to change the overall economic picture.

Unidentified Analyst

So, the idea…

David Frear

So, let me just say -- so on the webcast, a lot of people do say, well, geez, you take the biggest webcaster out there Pandora, right, so their content cost are 40%, 45% of their revenue, but they don't monetize the way we do. And so, even if you just look at the $4 a month that we charge for the all access product, that’s $48 a year. I think Pandora's monetizing more in the mid teens. And so, you can -- if that's just the differential that we have tripled the monetization, we'd have at the exact same listening level and assuming no talk listing or anything else, you'd have one third of the royalty load. It wouldn't be 40%, it would be 13%; we have top content. And so, by the time you're all done with it, it actually doesn't look a lot different than satellite radio economics.

Unidentified Analyst

It does seem that you would make this a premium service. In other words, if I get a car that's really enabled for all this, I could choose a basic Sirius package over the satellite like you have now and then you'd also be able to say if you’d like something more, we have this.

David Frear

Just like today, we sell our all access product, right; you get all of the satellite radio channels and your Internet access capability. It's same thing, packages, the all access products.

Unidentified Analyst

Okay. So, if we just -- one last question on this, because I am interested in it. Do you still view it as mostly a car based service or is it your vision that for 360 L to really take hold, [some will] [ph] think about it as more of a primary music service in [indiscernible]?

David Frear

So, it's definitely not a primary music service for some -- music's important, customers like music but we are not a music distribution service. We are radio. It's 150 channels of talk, news, music, weather and sports. And it's [indiscernible]. This doesn't really change that. That's the basic product proposition that we're taking to market, is 150 channels plus a diversified bunch of content. I mean, the number one reason why people subscribe to the service is diversity of content.

Unidentified Analyst

And how would you know that it was a successful product for you as a company? Where do your shareholders benefit? Are you going to get even higher conversions in cars, higher ARPUs, what makes it a success?

David Frear

So, we would expect it to pay off through higher ARPU by selling more premium services. We'd expect it to pay off with improved churn and improved conversion.

Unidentified Analyst

Streaming is something that comes up a lot because of the competitive elements as well. And I know that you’ve said for a long time you don't feel like streaming is a source of competition to you. So, then, the question is what was not competition is a cooperation? And you're doing something here with 360 L where you're leveraging some streaming capabilities you have; you're trying to create a new product. It comes up all the time, why not just combine or partner with an existing streamer like Pandora and maybe get to market with scale more quickly. How do you think about the tradeoffs of really creating something new in-house versus leveraging capabilities and scale that a streaming company might already have?

David Frear

So, you know a preference-based engine for delivering content is just -- it's work, it's coding work but it's not insurmountable task. And you've seen an awful lot of companies put together those kind of players for distribution on the internet and most of them have not been terribly successful. But it's not because the coding wasn't good; it's got more to do with branding and just trying to cut through all the clutter and get to customers. So, there isn't anything about the functionality that requires that we go buy somebody in order to get that functionality, we don't need to; it's something that not terribly difficult thing to build.

Now, not to get anything away from it, the music channel is great thing, the algorithm is great thing, they learn proprietary but basically build the consumer preferences, giving them choices and serving them content is not an insurmountable coding task. So, what it comes around to is when you're -- if you're looking at gee, should I buy somebody to complement, so, it really gets down to the business line. And at the end of the day, the one thing that's really sort of entwined in our DNA is that we have business plan people, it matters whether or not something makes money. So, we don't want to have the greatest number of listeners in the world unless it translates into something that really monetizes well and we money make on. The business plans in the sector have been challenging.

Now, all that being said, the consumers do value these personalized and interactive music products; it's just very difficult to make any money on it as a standalone operator. And so one of the things that we've been kicking around for years is should we have on our own? We had different passes added in the past; we still consider it, still debate it internally. And if it ever turns out that -- coming back to original point on competition, if it turns out that it's important to the competitive positioning a satellite radio to have that capability, it's not a terribly difficult thing to add in. And as you pointed out, there're multiple ways you can do it. You can buy the technology; you can build the technology internally and then offer it up. But for now, the way the market seems to be breaking down that when people are making a choice on what they're going to listen to in audio that there seems to be there's one sort of large pool of services, various levels of the interactive music listening, which largely displays everybody's digital files. So, the playlist that you used to have on iTunes who is now a play list or play list like product that you have on, Spotify or Pandora or Deezer or Slacker or one of the other competitors out there. And it doesn't seem to have eroded so much into listening on either terrestrial radio or satellite radio.

Unidentified Analyst

So, if we think about something that's always been a competitive advantage, it’s your programming content mix. This was a year where you noted you didn't think you were going to expand margins and you certainly have some content step up this year and I think in the back half you saw a little bit more to work through. Is this really the year, in another words, as we move pass this year, you're still confident that they way you thought about margins that the operating leverage would be greater in ‘17 and beyond?

David Frear

All else being equal, it should be a little greater in ‘17; we did have a pretty big hill to climb in ‘16 so far. And again, we were little surprised with how EBITDA margins were in the first half of the year. We still do see EBITDA margins going to 40% plus, although -- and we always put this caveat in there. We're not vetted to hitting 40% plus. What we're vetted to doing is driving the maximum amount of free cash flow out of the enabled vehicle fleet. And if we can do that at 39% margins or 38% margins that's what we'll do because that's what going to drive value. So, if it turns out for instance IP distribution had a lower margin, what was going to drive higher overall engagement from customers, and back to your question early about, is it really -- is 360 L a way to get into IP distribution? Not really because we think our core competitive advantage is actually in the vehicle, but we've been streaming since 2004 because we understand people want to use the product outside the car. It's just not a primary way to capture subscribers. That could change; as cars get connected, that could change. And so, if it -- to drive the max amount of free cash flow, if we need to sacrifice a little bit of margin, that's what we’ll do within the Company to work more because there is a lot more free cash flow.

Unidentified Analyst

A lot more connected cars having been sold in less than year and half because really when you start to see a lot of that happened. Has that -- can we see any change in behavior in a sense that you know that certain heads of vehicles, are you converting those the same way you historically would have converted cars at that price point?

David Frear

I mean, look, this is really interesting thing to watch to happen. I’m going to take it back just one step. We used to worry a lot about the streaming providers. And there were mostly desktops that you could see the smartphone coming, oh my god, what's going to happen, everybody has got that little jack in the car they can plug-in into. And BMW put it in the car I think in 2005 and everybody said we’re going to be dead in a couple of years. But what we've seen happened the last five years is we've seen smartphones in the U.S. go from zero to 200 million on the street in the U.S. and it is the primarily listening device for streaming services. And at over 200 million smartphones, we will never get as many satellite enabled vehicles on the road as there are already smartphones, and we can't find the effect of the streaming services on demand. So, okay, can’t see that.

So, then the next area is okay, cars are connecting up, so streaming which because smartphones aren't easy to use, we all know that, the streaming is going to get a lot more competitive when it gets better integrated with a car. So, now you're looking at -- you have connected cars on the road today that can't take entertainment services that are sort of at 70% type in corporation rate. We're still not seeing it. Okay, I would tell you that I don't think the execution of audio entertainment in the connected vehicles being sold today is all that great, it's going to be great better as Android Auto and CarPlay get distributed in cars. And it will come pretty fast. And so, remember there have been two bites at this apple now, there is smartphones and connected vehicles that can do audio entertainment. And now, it's going to be the effectively the middleware or the platform of Android Auto and CarPlay. And that's going to be the next big thing, we'll see. We're going to find out in next couple of years. I think it's different. I don't think it's about technology. I think it goes back to what’s the products that’s being offered because all of us, while we might be interested in the technology for what it might mean to in different investment ideas that we have, when we get behind the wheel and we're a consumer, we're not really thinking about the technology some much, we're thinking more about the product that we're going to get.

And so, the question is what the product do you want? Do you want to listen to your play list; do you want to listen to the radio; do you want to listen to a local host you like; do you want to listen to Howard Stern; do you want to listen to a football game that's out of market; what is it that you want to do? And I think at the end of the day that you're playing our content. We have a great slate of content. Ultimately, I think that’s what people are coming for. What we have to make sure we do along the way is that we take advantage of all the great technology that’s being distributed out there and use it to continue to improve the service for our customers.

Unidentified Analyst

So, in terms of content, you obviously have addressed most of the major content distribution agreements you have; you are always trying to make it better. Are there any key demographics when you feel you’re underpenetrated and maybe getting content -- better content or more content to help you get there? And really the point of question is do you think you have to spend a meaningful amount on content that’s incremental to where you are now or would it fall within kind of standard we’re always fine tuning the stuff?

David Frear

I think it’s more of the latter. It’s not to say there isn’t something new that’s going to come up, but I’m hard-pressed to think of a major piece of content that we’re missing today. And especially when you think of major piece of content that would appeal to a different demographic that I’m harder pressed to figure out what that is. But all that being said that your business is always going to reflect your distribution. And so for the last 15 years, distribution’s been centered on new cars. And so, our subscribers look like the average new car buyer and your content has to be interesting to the average new car buyer.

What’s different today than 15 years ago is that the average new car buyer was born 15 years later. So, they might be interested in something a little bit different than the 45-year old of 2005. So, the 45-year old of 2016, their content is different; the 45-year of 2025, their content is going to be a little different. So, we have to continue to evolve along with how the market is evolving.

Unidentified Analyst

I’m going to pause for one second because we are going to take some questions. So, if you have a question, please raise your hand and we’ll bring a microphone over. We have one. Could you just wait one second, so we get you a microphone?

Unidentified Analyst

Thanks. Why do you think Pandora and Spotify don’t combine and have their sort of Sirius and XM moment to create the killer app? And if so, would that change your view on the need to integrate them into your offering?

David Frear

It’s a great question. One of the challenges -- I don’t -- in the SiriusXM merger -- and I know those companies pretty well, but not well enough to give a great answer for that question. In the SiriusXM merger, we knew that we had two companies doing exactly the same thing. And so that when you went through the whole infrastructure of the business, you could say, I only need one of those, one of those, one of those, one and a half of those. By the way, I don’t have to bid up all the OEM contracts and I don’t have to bid up all the programming contracts. But, I think when you combine those two brands that one, you still have totally different technology platforms that have to be supported. You have one guy that’s really big in the ad based space and other guy that’s really big in the subscription based. Those are different business class, the different execution costs infrastructures. And then there is no advantage on the content side. Even though combined -- they each pay a huge amount of money to the music industry. The Pandora money for the most part is governed under the statutory license. And so, we all know how that works. And Spotify is subject to individual negotiations with music labels and the labels are holding all the cards in those negotiations.

And so, I think on the content side, you're not going to find the same kind of efficiencies that we have there. But all that being said, you would be taking one group of managers who have I think done a great job at driving the advertising model and another group of managers that are working hard and driving those subscription model and you're putting complementary workforce at scale. I don't know that I see the cost synergies to drive it and I'm not sure I necessarily see the revenue side synergies either.

Unidentified Analyst

Any more questions right now? We have in the back of the room.

Unidentified Analyst

So, just with regards to capital allocation, I think at some point you guys have considered or thought about boards, sorry thought about dividends at the board level. Just wondering where your thinking is on that and pros and cons and where you go from here?

David Frear

It's a great question. The Company's cash flow is obviously set up really well for dividend story, but we all know return on capital doesn’t matter to valuation. I mean it's like -- it doesn't make the firm worth more if you distribute it one way versus another. And so, you can look at anybody's model. And this Company with the growth that we anticipate can continue a $2 billion a year capital return program without moving leverage out of this 3.5 to 4 times range for the foreseeable future. And that's a pretty powerful model. On our equity capitalization, it's roughly a 10% yield. And while it shouldn’t make a difference to valuation, the fact is that salesman's always selling something. And you’ve got a whole bunch of money out there on the buy side that's organized around growth and income stories or income stories. And when the analyst is going to the PM or this five recommendations, he's got the one that has zero yield attached to it, and the guy says next and he wants to -- that's it. You're done with the pitch. And so, it is one of these things where the fact that everybody's doing it at 85% of the S&P 500 doesn't mean that it's the right thing to do from a financial theory perspective. But in terms of the money is organized in the market, it just seems like it would increase demand for the stock which should be good for price realization. All that being said, it is a board decision, it’s not a management decision and I'd tell the board the exact same thing I just told you.

Unidentified Analyst

Another one in the back row.

Unidentified Analyst

Just related to that talk about CapEx plans and what is discretionary and what is not in CapEx?

David Frear

So let's see, we're entering another satellite replacement cycle. And we have signed up -- geez, I hope we announced this. We did sign up with Loral to build two new satellites that are due for launch in ‘19 and ‘20. The programs I think are on a little bit more than a 12-month center that -- there'll be a little spending that goes out this year. It's already in our free cash flow and then it'll be strung out between now and 2020 and you can think of it as 300 million of satellite is a good way to think of it with satellite launch, insurance and launch vehicle. In terms of other spending, there's a lot of it that’s discretionary but I would tell you that I think it's all -- that it's a basic need to say that you have to be constantly updating the code, whether it's in products or whether it's in the administrative support. You’ve got to be refreshing the servers, you've got to redo studios, desktop technology gets old. And so that a $100 million a year in the non-satellite spend is probably a -- you could call it discretionary for a couple of years, you could cut it, defer it, but you're going to have to do it at some point.

Unidentified Analyst

Hi. Can you talk a little bit more about the Apple and Google products that will be in the dashboard and how you think that will impact you? And in particular my question is, if it becomes so easy for the consumer to have choice whereas they previously had AM, FM, or AM, FM and Sirius and now it’s AM, FM, Pandora, Spotify and three other apps, isn't it going to be easier for the consumer to choose some of the other options? Are you going to lose out in part just because previously the consumer had less choice and now they have more and it's become easier for the consumer to make that switch?

David Frear

So, for me, I just -- with over 200 million smartphones on the street that really easily connect up with cars and I mean even I’ve streamed in a car. And I've a country station on Pandora. And it's easy to do. So, I actually don't think in the initial -- and I don't know for sure, I'm wrong so often, I can't keep track, but I don't think the initial implementations of any of those products through CarPlay and the Android Auto are going to be as good as the apps that they completely control on the smartphone today that the -- it's going to -- they'll figure it out eventually. But it's not going to be the same thing as when any of us, whether it's us, whether it's Spotify, whether it's Pandora, the Wall Street Journal, the New York Times, doesn't matter who is this, that we manage these apps, we put them through the mill and they come out on Android phones and iPhones. And when they run through the car in Android Auto, on CarPlay, the automakers in the middle, the automaker is -- the way those Android Auto and CarPlay work, it's going to be a little more constraining on the app developed here, the user interface is going to be as rich, it's not going to be as visually sort of engaging. And so, that’s got to go through an evolution.

Ultimately I think it gets there; I don't think it gets there in generation one. What it does competitively, I think it's when I come around said earlier, I think we're already in full fledged competition with all those guys. There are just too many people using it. Pandora has over 80 million regular lose -- users that there're over a 100 billion people -- nobody heard that except for you. There're over a 100 million people that are listening to streaming services every week in the United States. That is so much bigger than satellite radio, it’s not even funny. I mean, we're really proud of our 32 million subscribers but we're the smallest player in the audio entertainment market. You've got 200 million people on AM and FM radio still, you've got over 100 million people streaming in United States every week. So, I think all the competition is already in the market. And our challenge as those technologies come in is to make sure that we leverage them to make our product better as well. And honestly at the end of the day, I think we end up with the most robust product in the car because we have the combination of the IP capability as well as 10 mega bits of download capability over the satellite.

Unidentified Analyst

So, think about connected car, you have a connected car business; it's off to becoming a more competitive space. Verizon’s done three meaningful connected car acquisitions over just the last couple of years. How do you think about the positioning of that business and do you need to make significant incremental investments in it in order to head-to-head with some of the other entrants in that sector?

David Frear

We don't have significant additional investments to make in it. I think we're actually the leading player in the connected vehicle field that I think we have more OEMs represent much larger market share than anybody else. All that being -- and it's a good solid long-term business. But the OEMs are still figuring out exactly how they're going to take that to market and what they're going to do with it. But some of them are putting it into long-term trials; some of them are putting in the short terms trials. Almost all of them want to mange it under their own brand and control the marketing and communications. And so, we're providing what is a high margin, high variable margin wholesale product to OEMs or taking on the retail responsibilities. And we’ll kind of -- I think we probably have a little more experience than most other people at providing trial services to consumers and cars and then convincing them to subscribe over the long-term. And then when they say they want to, trying to convince them they really do, winning them back when they turn. I think we have more experience than anybody else has had. But it's a going to be a great long-term market. But it won't be -- it's not a satellite radio sized market.

Unidentified Analyst

Sure. One of the things I am asking is you've mentioned that your leverage is in the 3.4 to 4 range. You're actually towards the low end of it. In theory, you could be more levered and not be violating your target if you wanted to and that may not seem like a deal. But if I were to run your model in perpetuity of 4 turns versus 3.5 turns, over time that quite a bit. So, I guess the question would be, why not just push your leverage all the way upto 4 turns and do all that -- the share purchases. You seem like you're holding some capacity and maybe we’re not entirely sure why.

David Frear

I guess the way that we’ve looked at it is asset dislocations happen all the time that happen at our stock, it happen in another stocks. And so, I guess going from 3.5 to 4 is like a one-year acceleration of the buyback. But then, when you hit it, if that asset dislocation occurs and when those things occur usually the cost of all funding goes up and the availability of the funding drives up a little bit. And that can happen to us too. So, in a way, we look at it as a bit of strategic flexibility to maybe take that extra half a turn of leverage, it's something that lets us maybe take advantage in usual opportunity in difficult times.

Unidentified Analyst

So, to be opportunistic, it's not so much that you have some large asset class that you have your eyes on and you're trying to accumulate this capacity?

David Frear

Let me give an example. Let’s assume that the markets crash because they -- let's say, well, what if the Fed takes the discount rate up a quarter point? I mean the market is going to be decimated. So, let's say that everybody’s stock drops 50% and we still can't find anything attractive to buy out there, maybe we’d like load up on our own stock too.

Unidentified Analyst

So, it’s about flexibility.

David Frear

Yes.

Unidentified Company Representative

Okay. We do have time for maybe one last question. So, if there is someone in the audience who didn’t get chance to ask, let me know. All right. David, with that, we’re out of time. Thanks so much.

David Frear

Thank you.

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