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SIRIUS XM Radio (NASDAQ:SIRI)

Q1 2012 Earnings Call

May 01, 2012 8:00 am ET

Executives

Hooper Stevens -

Mel Karmazin - Chief Executive Officer and Director

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

Analysts

John Tinker - Maxim Group LLC, Research Division

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

James M. Ratcliffe - Barclays Capital, Research Division

Jason B. Bazinet - Citigroup Inc, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

David Bank - RBC Capital Markets, LLC, Research Division

Operator

Good day, everyone, and welcome to SiriusXM Radio's First Quarter 2012 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Hooper Stevens, Senior Director, Investor Relations and Finance. Mr. Stevens, please go ahead.

Hooper Stevens

Thank you, April, and good morning, everyone. Welcome to SiriusXM Radio's earnings conference call. Today, Mel Karmazin, our Chief Executive Officer, will be joined by David Frear, our Executive Vice President and Chief Financial Officer. At the conclusion of our prepared remarks, management will be glad to take your questions. Scott Greenstein, President and Chief Content Officer, will also be available for the Q&A portion of the call. Jim Meyer, our President of Operations and Sales is dialed in and should be available for the Q&A as well.

First, I would like to remind everyone that certain statements made during the call might be forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based on management's current beliefs and expectations and necessarily depend upon assumptions, data or methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For more information about these risks and uncertainties, please view SiriusXM's SEC filings. We advise listeners not to rely unduly upon forward-looking statements and disclaim any intent or obligation to update them.

As we begin, I would like to advise our listeners that today's results will include discussions about both actual results and adjusted results. All discussions of adjusted operating results exclude the effects of stock-based compensation and certain purchase price accounting adjustments.

I will now hand the call over to Mel Karmazin.

Mel Karmazin

Thank you for joining us this morning on SiriusXM earnings call to discuss our first quarter results and updated outlook for the future. Our first quarter results show the power of our high-margin model that is producing exceptional subscriber and cash flow growth for our investors. SiriusXM's first quarter results demonstrate the best of both worlds, strong subscriber growth and reduced churn. We grew net subscribers by more than 400,000 in the first quarter, an 8% increase from last year's first quarter. Importantly, self-pay net additions of 299,000 grew dramatically by 148% compared to the same quarter last year. Both of these figures represent the strongest first quarter net ad performance we have achieved since the combination of Sirius and XM in 2008.

Rising U.S. auto sales contributed to our growth, and we are also pleased with our lower churn rate and our stable conversion rate. The first quarter annualized SAAR of $14.5 million was up from $13 million in the first quarter of 2011. Our churn rate improved in the first quarter year-over-year from 2.0 to 1.9, and our conversion rate held at 45%. Given the approximately 12%-based package price increase we implemented in January, this positive churn result and no dip in conversion certainly exceeded our expectations and is an excellent demonstration of the value consumers place on our service.

The price increase was the first change in the base price of the Sirius service and only the second change in the base price of the XM service. So it is prudent that we have conservative expectations around churn, and we will continue this practice. While it's early and we still have much work to do, we have now billed 35% of the self-pay subscriber base at the new higher rate, and the reaction to the price increase has clearly exceeded our expectations. No one likes to raise prices, especially when competing against free services like AM, FM and IP radio, but we could not have hoped for a better outcome at this stage than what we have seen so far. These initial results are a clear endorsement of SiriusXM's strong value proposition to our customers in spite of the increased competition in the audio entertainment space. And it certainly helps that the economic trends have begun to provide a bit of a tailwind.

On the financial side, we also performed very well in the first quarter. Revenue grew by 11% to $805 million, and adjusted EBITDA grew 15% to $208 million. Total cash operating expenses were up 9.6% with most of that attributed to expenses associated with higher revenue and higher SAC to support improved auto sales and future growth. Our revenue and adjusted EBITDA figures were both record highs for SiriusXM, the first time revenue passed $800 million in a single quarter and the first time adjusted EBITDA reached $200 million in a single quarter.

The first quarter adjusted EBITDA margin at just over 25.8% is at the highest level in the history of the company for a single quarter. Free cash flow improved by $32 million year-over-year to positive $15 million in the first quarter, the first time in the history of satellite radio that we delivered positive free cash flow in the first quarter of the year. Revenue, adjusted EBITDA and free cash flow are expected to accelerate throughout the year as the price increase rolls through the subscriber base and additional subscribers join the service. The consensus expectation for full year 2012 auto sales has climbed to about $14.3 million today from $13.7 million when we gave our initial guidance in February. This provides nice momentum for our growth this year, and we are also benefiting from our efforts in the used-car market. This year, we anticipate adding approximately $1 million self-pay additions to SiriusXM from our rapidly growing used-car market channel.

In February, we told investors that our subscriber guidance was conservative and -- but for the uncertainty around the price increase, the forecast would have been higher. While we still have a lot of work to do implementing this price increase and retaining subscribers as we compete against free terrestrial and free online competitors, this strong first quarter performance has made us comfortable in raising our full year net addition guidance from 1.3 million to 1.5 million. This increased guidance will put our paid subscriber base at 23.4 million by year end, an all-time record. And yes, we continue to be conservative, but are more optimistic than we were 3 months ago. We are also on track to meet our full year 2012 revenue guidance of $3.3 billion, adjusted EBITDA guidance of $875 million and free cash flow guidance of $700 million. The record free cash flow that we are anticipating this year is after substantial investments we are making in our company. For example, we are now programming 33 more channels today compared to last year. Many are part of our 2.0 rollout. And we are very excited about the new services we are launching later this year to broaden the distribution of our content online and offer more exclusive content. We are investing to make more content available online, particularly in sports program. SiriusXM now offers subscribers live play-by-play with no blackouts from the NHL, NFL, MLB, NBA, NASCAR, Formula 1, select college sports and English Premier League soccer. Much of this content is hard to find or unavailable elsewhere online. And certainly, no other audio company on the Internet has a sports lineup remotely approaching our offering, all under one app. For example, SiriusXM subscribers can receive every major league baseball game on their smartphone or computer. The only option, the only other option to get baseball games on the Internet is MLB.com, period. No other IP destination. Even terrestrial radio does not have the Internet rights for the games they broadcast locally. We think sports programming is a perfect example of content that subscribers find valuable and are willing to pay for, and the great thing about our business model is that we are able to add this great sports content at relatively low cost, especially compared to our peers in the video market.

Our on-demand service is anticipated to launch this summer across a variety of IP platforms such as the web, smartphones and other connected devices. And late this year, we plan to debut a SiriusXM version of personalized music online, allowing subscribers to tailor their favorite SiriusXM music channels to their tastes. The combination of exclusive online access to sports, proprietary on-demand SiriusXM branded content and personalized music should drive adoption of our Internet tier and All Access plans to make our overall service all that more desirable to consumers. Our on-demand and personalized radio programming will have no commercials on our music offerings and will be at no extra charge to those subscribers who have added Internet Listening to their plans. Free and freemium competitors online will have a tough time matching the commercial-free aspect of SiriusXM branded music combined with the unique sports and talk content we offer.

And let me remind you, the development of all of this plus the investment in 33 new channels are within the financial results you've seen in the first quarter and the guidance we've given you this year. We're also excited to see automakers embrace 2.0 technology, which gives us the ability to add additional channels, new features and software upgradability for future enhancements. Our additional 2.0 channels include the suite of Hispanic channels and are now available at no extra charge to subscribers who have a 2.0-capable satellite radio, and we've also added these channels to our online package. The 2.0 radios are available now at retail, and we just announced our first OEM deployment of 2.0 on select Chrysler vehicles available this summer. More models from Chrysler and additional OEMs will be rolling out 2.0 in the future.

As we've said many times, business models matter. We not only have a lot of users, but we have a fantastic model for monetizing this usage through subscription services. Our business model is superior to that of terrestrial radio and the Internet radio companies we compete with. The subscription business is a great one. SiriusXM has more paying subscribers than all the other companies in the world combined. Also, at a time when more and more content is available and consumers continue to be time-constrained, as there is still only 24 hours in a day, we believe curated content, especially SiriusXM-aggregated curated audio content, is more important than ever and will be even more important in the future as even more content becomes available especially on the Internet.

The first quarter of 2009 was just the second full quarter of combined Sirius and XM operations following our merger. In the 3 years since then, you can easily see the kind of progress we've made in our business. Subscribers are up 20% from 18.6 million 22.3 million. The operating metrics have likewise improved over that same period. Self-pay churn of 2.2% in the first quarter of 2009 has improved to the 1.9% we saw in this year's first quarter. Our conversion rate has been steady at 45% despite our penetration rate climbing from 52% to 65% over that time period.

On the financial side, revenue is up 37% from $587 million to $805 million. Adjusted EBITDA is up 91% from $109 million to $208 million, representing margin growth from 18% to 25.8% over that 3-year period. But for the growth in SAC associated with higher auto sales, margin growth would have been even much higher. We believe we have substantial room for additional long-term margin improvement and free cash flow growth by delivering our content to more subscribers while maintaining a tight discipline around costs. We've used this higher earnings power to reduce our leverage and pay down debt. SiriusXM was 72.5x levered debt to EBITDA in the first quarter of 2009. And that improved to 7.1x at the first quarter of 2010, 4.8x first quarter of 2011 and just 3.9x at the first quarter of 2012. And our cash position has doubled over that time period from $375 million to almost $750 million. The company is remarkably well-positioned to deliver great performance for our investors. We are very bullish on our results for the remainder of the year. While there are always bumps along the road, the economy, employment and consumer confidence seem to be heading in the right direction.

Car sales are up, with automakers appear to be effectively dealing with the resin issue that could threaten the supply chain. Increased competition is certainly out there, especially in the Internet universe. But today, we can't identify the effect of new competition on our business. SiriusXM has more paying subs today than ever before in our history, and we are going to keep growing this year to end at another record level. We are focused on accelerating our revenue and adjusted EBITDA growth, and we will attain new record levels in both of these measures. And our cash flow is now growing this year into a substantial asset for investors with tremendous potential for long-term growth. Our capital expenditures will be decreasing as a result of the significant reduction in satellite expenditures after FM-6 is successfully launched. With the benefit of our NOLs, we will not be paying any significant amount of income taxes for quite a few years. Combining all of this adds up to our ability to efficiently use the cash generated by our business for the benefit of our shareholders.

Our strategy is working, our execution is strong and we have a fantastic organization that is capable of meeting our goals. We have started this year with great results, and I believe it's an exciting time to be a shareholder of our company. Based on everything we know today, we are confident that 2012 will be a great year for us and 2013 will be even better.

With that, I'll turn it over to David for some additional remarks.

David J. Frear

Thanks, Mel. This was a great quarter for SiriusXM on all fronts. While the macroeconomic picture is a little mixed, auto sales and credit card defaults are improving, providing a good backdrop for SiriusXM. The first quarter was the best quarter for auto sales in 4 years. SAAR came in at 14.5 million vehicles, rising 14% over 2011's first quarter. And consumer purchases of SiriusXM-enabled vehicles were up an even more encouraging 16%. Auto analysts have been raising their outlooks toward 2012, now averaging about 14.3 million cars.

The production penetration rate remained at 65% for the quarter. As a result, the rise in auto sales produced record levels of sales and installations of satellite radio-enabled vehicles in the quarter. Installations were up 19% from the prior year. Record sales of SiriusXM-enabled vehicles has driven total trial inventory to record levels as well. We entered the second quarter with over 5.7 million vehicles in trial. Ending subscribers are up 8% from the year-ago level at 22.3 million subs. The 105,000 unit increase in paid trial inventory in the quarter was complemented by 148% increase in self-pay subscriber net additions to 299,000 from 121,000 in 2011. Self-pay subscribers now exceed 18.2 million.

The new car conversion rate was 45% in the quarter, matching 2011's first quarter performance. Strong growth in new car conversion volumes was met with strong growth in subsequent owner additions to drive total self-pay growth additions up nearly 20% over the comparable period last year. We now have more than 5,000 dealers signed up to report sales of previously owned vehicles with satellite radios.

We continue to work hard to retain every subscriber, and that work is clearly paying off. Self-pay churn declined to 1.9% from 2% in 2011 as the improving economy and reduced deactivations for non-payment clearly helped us overcome some of the early effects of the price increase. As Mel mentioned, with the good start for the year for self-pay additions and rising expectations for auto sales, we are increasing our guidance for net subscriber additions from 1.3 million to 1.5 million.

Revenue growth was also strong at 11%, bringing total revenue to $805 million for the quarter as our 8% subscriber growth was aided by 2% ARPU growth. The price increase has been rolled out to 35% of our self-pay subs. ARPU growth will improve throughout the year as we continue rolling out our new pricing as the effect of the Music Royalty fee rate reduction in December of 2010 subsides in the second half of the year.

Ad sales were also up a solid 12.8%, continuing our record of outperforming the radio industry. Other revenue was flat year-on-year as growth in Canadian royalties and U.S. subscribers subject to the Music Royalty fee was offset by the reduction of the MRF rate in December 2010. Revenue shared royalties picked up a little this quarter along with the increase in the statutory royalty rate and the increasing mix of automotive volume. Contribution margin for the quarter was 70.4%, consistent with the 70.6% recorded for the full year 2011. Subscriber acquisition costs were up 10.5% for the quarter with the 19% increase in installations. SAC for growth add increased $3 over the prior year as the increase in installations has not yet been fully reflected in increases in gross additions.

Total cash OpEx increased 9.6% over the prior year. However, nearly 82% of the increase was associated with costs reflecting our growth, revenue share, royalties and subscriber acquisition costs. On the other hand, fixed operating expenses increased just 4.4% over the prior year. Programming cost continued declining as did satellite and transmission costs, offsetting increases in engineering, design and development and general and administrative cost. Sales and marketing cost increased $10 million over the prior year due to increased conversion and retention cost associated with our increased subscriber base and the increased trial pipeline, as well as higher automotive, cooperative marketing spending.

Adjusted EBITDA crossed the $200 million mark for the first time this quarter, finishing up nearly 15% at $208 million. The 25.8% adjusted EBITDA margin for the quarter was the highest in our history. Interest expense declined slightly in the quarter and adjusted EBITDA to interest improved to 2.7x. Net income also increased 38% to $107.8 million in the quarter.

Free cash flow was $14.8 million, a nearly $32 million improvement over 2011's first quarter and marking the first time we have had positive free cash flow in the first quarter of the year. The first quarter is a seasonally slow quarter for free cash flow for us, a large annual payment to our programming partner, year-end bonus payments, fourth quarter marketing and subscriber acquisition costs historically have laid down first quarter free cash flow relative to other parts of the year.

We finished the quarter with $747 million in cash. Net debt to EBITDA improved to 2.9x from 3.1x at year-end. Through today, we have repurchased $130 million face amount of our 9.75% and 13% notes. The 9.75% notes are callable in September, and the 13% notes are due in the middle of next summer, that's 2013. We'll continue to look for opportunities to either repurchase or refinance debt unfavorable terms.

The launch of the Sirius 6 satellite was delayed from its early-March scheduled launch, as a result of the slow but ultimately successful deployment of the solar array on the satellite that launched immediately prior to Sirius 6's scheduled launch. The satellite manufacturer continues its review of the available data to determine if any modifications to our satellite are required. We have plenty of room for delay. Our existing in-orbit satellites can provide full service to all of our subscribers for several years. The Sirius 6 launch has been rescheduled for the second quarter of 2013 and may go earlier if a launch slot opens up.

Our revenue, EBITDA and free cash flow guidance remain unchanged to $3.3 billion, $875 million and $700 million, respectively. Higher subscribers also mean higher subscriber acquisition cost in the near term. The revenue and adjusted EBITDA benefits of our increased subscriber guidance will clearly benefit 2013 operating results.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll first hear from John Tinker of Maxim.

John Tinker - Maxim Group LLC, Research Division

Could you just elaborate a little more on the 1 million number you're using for the used-car estimate? How that ties into your 1.5 million guidance number for the full year for all net additions?

Mel Karmazin

John, the 1 million used-car additions, you should think of as a gross additions figure and not a net additions figure. So it would be a component of your growth additions forecast for the year.

John Tinker - Maxim Group LLC, Research Division

Right. But at this stage, I am assuming the gross is pretty close to the net. How is that actually working out at the moment?

Mel Karmazin

We've been adding sort of second-owner additions for a few years now. And while the volumes are clearly ramping up and will continue to ramp up that you do have your normal self-pay churn that goes along with them. So for the most part, we haven't found material long-term differences in churn rates on second owners. And so we've got the churn roll off from stuff added a year ago, 2 years ago, as well as in the first quarter of this year will affect the rest of the year.

Operator

Next, we hear from Barton Crockett of Lazard Capital Markets.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

I wanted to ask a little bit about the refinancing commentary. You projected to refinance over the next several months, and you talked about how there were reduced interest expense. What's your view though on potential uses of this capacity you're building up for share repurchase? How do you feel about that right now as a use cash if you were to do what would be kind of the timing that would it become a real plausible possibility?

Mel Karmazin

So as we've said before that our Board, certainly, should be in position as our business model continues to work and as these results that we generate continue to add more and more cash to our balance sheet. We believe that a good use of our cash, certainly, would be to return capital to our shareholders. We've said that before, nothing has changed. We have talked about the fact that acquisitions would be something that we would consider for our free cash flow. But I could tell you that there is just nothing that we're seeing out there that we feel anxious to want to acquire or consider acquiring. So we will continue to be opportunistic as debt is offered to us or us to reduce our more expensive debt. As we are sitting with the cash, we're not getting very much interest, obviously, on that cash. And by retiring some of the debt, as David talked, about makes really good sense for our investors to do while we continue to build up cash in a significant way to consider returning capital to shareholders when the Board makes that decision.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Okay. And then I wanted to switch a little bit to this on all of the attention to this FCC license tussle with Liberty. I was wondering if you could just comment on that. I mean is there anything more going on than just paperwork filings between 2 companies for FCC licenses? Does the Liberty motion cause any potential problems for Sirius if they're successful? Or could it help Liberty in any way that you can identify?

Mel Karmazin

Yes. I'm not sure how much noise there really is about it. But Liberty has filed a petition at the FCC that says that they're asking the FCC to declare de facto that they have de facto control. Our Board reviewed that petition. Our Board absolutely concluded that they do not have de facto control. The Board of Directors of our company has control of the company. There are 13 members of our Board, and Liberty has 5 participants of that 13. Liberty's 40% is significant influence but not control. As we said in our filings, 40 is not the new 50. So we think that Liberty's reasoning on it is what they disclosed. They said that they were filing it. They want to keep their options open, and we filed it not to be combative with Liberty because we're not, but we believe that they do not have de facto control. And we felt that we had a responsibility to file those comments with the FCC. So we believe that the FCC will conclude based on their precedent that a 40% shareholder, even one with influence, is not in de facto control, and that's how they will rule, but we're waiting to hear from them.

Operator

Next, we'll hear from James Ratcliffe from Barclays.

James M. Ratcliffe - Barclays Capital, Research Division

A couple, if I could. First of all, could you talk a little bit about what the programming cost structure of the customized channels that you're launching later this year is likely to look like? And how that would affect with the -- the incremental margin associated with the business? And secondly...

Mel Karmazin

Yes, I mean what we said about our programming expenses are is that we're going to continue to invest in our programming channels. Most of the 2.0 channels that we have invested in have been relatively low-cost channels. But obviously, there's an expense to them. You should assume that our programming cost will continue to decline. But for us making a decision, to do something "oh wow" in the programming area, and we don't see that on the horizon. So you should assume that our programming costs will continue to go down in absolute terms, as well as in as a percentage of our revenue. But again, we continue to not be only focused on our programming cost going down but in providing the best service in a competitive environment to our subscribers. So if, in fact, we thought that investing in more content is something that will get us more free cash flow and subscriber growth, we would do that. But as of right now, what we're guiding you to this year is that our programming costs for this year will continue to go down, including our expanding our programming lineup because we are making significant reductions in some of the other contracts that we had pre-merger as those contracts are rolled over.

James M. Ratcliffe - Barclays Capital, Research Division

And can you unpack a little bit the better churn number in the quarter? How much was that, the declining retail base and then the declining seasonality of that churn versus any boost from the price increase?

Mel Karmazin

I think that the biggest factor in the churn is, obviously, the stickiness of the service but improving economic conditions benefit us, right? So generally, the consumer has gotten healthier. We keep an eye on credit card default rates and delinquencies that while the sequential improvements in the fourth quarter and those are a little mixed, the year-over-year improvements are pretty significant. And that has a big impact on us. One of the things working against us is the continued rollover of cars, right, so that the fleet of enabled vehicles is aging. We have more vehicle-related churn now than we used to have. But that more -- that's been more than offset by reduced non-pay rates on credit cards, as well as just the general improvement in the economy.

Operator

We'll move next to Jason Bazinet with Citi.

Jason B. Bazinet - Citigroup Inc, Research Division

I think you gave the paid and unpaid trial inventory figure, 5.7 million. Do you mind just giving us the paid trial component of that? And then my second question is on the churn. Is there any reason to believe, is there any sort of, other than the car sales dynamic you mentioned, any reason to believe that the Q1 churn rate won't be sort of the seasonal-high for the year?

Mel Karmazin

Let me hit the churn question, and then David will handle the other one. We've given some metrics, and we basically believe that our churn rate will be somewhere between 1.8 and 2.0. We have thought that 2.1 might be the result of the price increase. Right now, that's looking less and less likely. So if you take a look at how we performed over a long period of time, the churn rate is somewhere in this 1.8 to 2.0 range, just like the conversion rate will move around a little bit. But for the most part, we think of that as being somewhere around 45%.

David J. Frear

And the promotional, paid promotional trials at the end of the quarter were just a little less than 12.1 million.

Operator

We'll move next to Ben Swinburne with Morgan Stanley

Benjamin Swinburne - Morgan Stanley, Research Division

A couple of questions, David. Could you just help us think through the move from SAAR as we see the numbers roll through to gross adds? You gave the -- the sort of build, I think, was 65%, the conversion rate. But there's other things going on in that number that we probably don't see, particularly channel mix within OEM that might lead to car sales with radios that don't show up in your gross adds number. So I wonder if you could add any color there to help us think about that math. And then related to that, which cost items are impacted by that? In other words, where are you going to book expense without gross adds in the current quarter? I think you mentioned SAC, but I think there are probably some others as well.

David J. Frear

Well, for the most part, it's in SAC, right, that on -- the install side of things that, generally, that's all subsidies, there are some partners who, when we convert, we have a bounty payment to do that shows up in sales and marketing cost. You also have some pick-up, I guess, in both customer service and billing and sales and marketing as it relates to the attempts to convert those unpaid trial subscriptions, right? For the most part, I think you should think of it as being in SAC. In terms of the translation from SAAR to gross adds, you're right, it gets a little fuzzy that there are a lot of moving parts to it that go to not only shifts in market share among OEMs and which ones are paid-trial partners versus unpaid-trial partners. But also, as you think about the full year that the guidance we provide for net additions is based upon an assumed mix in effective inventory of paid trial subscriptions as of December 31, so it's a particular point in time. And so depending on what you assume sort of that fourth quarter pattern of sales is and what the mix is between paid-trial partners and unpaid-trial partners, that you can end up with some variability in what you estimate for gross adds and therefore, net adds for the year.

Benjamin Swinburne - Morgan Stanley, Research Division

Is it safe to assume that there was a mix towards greater unpaid trial subs this quarter, like a Toyota or other channels, where you -- are there partners wouldn't show up in the subs?

David J. Frear

It's probably a little bit that you had generally Ford and GM shedding share in favor of Chrysler, which is sort of a push from a subscriber perspective. But the Japanese are picking up, and that's especially going to be true in year-on-year comparisons as you go through the rest of the year that we know that a year ago, there were -- there's terrible set of circumstances in Japan and then the flooding in Thailand later that both of those events impacting the -- our Asian partners more than the U.S. and European partners. And so generally, I think, as you look at the SAAR increase year-on-year, that all other things being equal, I don't know what's going to change in the automotive industry but just relative to last year, you would think that pick-up would be generally be in unpaid trial partners.

Mel Karmazin

It's interesting this morning, Hyundai announced that they were adding a third shift to their factories because demand was increasing so greatly. So we think that the mix of Asian partners impacted that in the first quarter.

Benjamin Swinburne - Morgan Stanley, Research Division

Okay, that's very helpful. And then lastly, just, Mel, if I could come back, and thanks for humoring us on the Liberty discussion, I get out the question from a lot of Sirius shareholders when they read the Liberty commentary and the petition that the company sort of argues that they've already got de facto control because of their position and sort of the way people vote their shares. It's a little bit of a circular sort of argument, but it seems to suggest they've already got control, so you might as well give it to them. And one question I get is what's the -- what are the sort of practical implications of that for Sirius shareholders? And I don't know if you've spent time on that, I'm sure everyone can sympathize as to why any company would not want the FCC to declare that they're now controlled by another company, but in terms of the practical applications for Sirius shareholders, any comment there as to what you guys think that might be if the FCC rules not in favor of your argument?

Mel Karmazin

So again, I need to direct you to Liberty because what Liberty has not in that FCC application indicated anything that they want to do. They just are asking for it. And when they get asked why are you doing it, they have only said, "We want to keep all of our options open." So I think it would be foolish to discuss what Liberty's decision would be and what the impact would be upon our company. Obviously, we're interested in doing what's right for all of our shareholders. When the time comes, if the time ever comes, that Liberty's interests are different than the 60% shareholders, then obviously, we will do whatever we can do to assure and protect the interest of our 60% shareholders. But we have no reason that our interests are not aligned. Liberty has the right to not tell us what their interest is, they have not told us exactly what they're interest is. And I can only urge you to ask them, and we'll listen in on those calls.

Operator

And our final question for today will come from David Bank of RBC Capital Markets.

David Bank - RBC Capital Markets, LLC, Research Division

Mel, thanks for the detail on the online product that's rolling out to All Access. It looks like both kind of a great offensive as well as defensive product. Can you talk a little bit about how you view the ad supported competition in that? Did your research tell -- did your research give you a sense of how many of your current subscriber base are listening to the premium or sort of they're for the premium product versus the jukebox in the sky? Is there -- like do you guys have research behind that or a sense of what that is?

Mel Karmazin

Yes, so let me give you some just overview. So yes, we have a great deal of research about our subscribers and what they like from us and what they may like from others as well. In general, we don't believe that the IP business for audio content, the radio content business, where the royalty fees are so extraordinarily high and you are at the mercy of advertising revenue, particularly as the advertising moves toward the smartphone and the limited opportunities that you have to monetize that through different types of advertising. So we're not big fans of it. On the other hand, we are very big fans of giving our subscribers what they want, not just in the car. So you should think of our 2.0 strategy as being to super-serve our subscribers. They get a great product when they're in the car. We want them to get that same great product and even expanded versions of it when they're in a mobile environment or in their home, and that device that they're using is principally a smartphone. So why wouldn't we, with there is no constraint on our bandwidth, be able to expand our offerings so that our existing subscribers got this great experience with the user interface in the car and total no dropouts and able to get the channels no matter you are in the continental United States. That experience is phenomenal, and we want to give them that same great experience on the Internet, where the technology has some vulnerability. But the one thing that is really an asset is the fact that we have more bandwidth and we could put more content out there. So yes, sometimes that content drops out on the Internet, but on the other hand, that's a problem more for our competitors than for us. So that's our strategy. It's not that we think it's such a great business to be in the Internet radio business, it's because we are doing it to supplement the experience that our subscribers get.

Hooper Stevens

Thank you very much, and that concludes our call.

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