Sirius XM Holdings Inc (SIRI) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to today's SIRIUS XM Radio's third quarter 2009 earnings conference. Just as a reminder, today's call is being recorded.

At this time, I would like to turn the call over to William Prip, Senior Vice President, Treasurer, and Investor Relations. Mr. Prip, please go ahead, sir.

Thank you. Good morning, everyone. Welcome to SIRIUS XM Radio's earnings conference call today. Today, Mel Karmazin our CEO will be joined by David Frear, our EVP and CFO. They will review SIRIUS XM's third quarter 2009 results. At the conclusion of our prepared remarks, management will be glad to take the questions. Jim Meyer, President of Operations and Sales and Scott Greenstein, President and Chief Content Officer will also be available for the Q&A portion of the call.

First, I would like to remind everyone that certain statements made during the call might be forward-looking statements as defined by 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 on assumptions, data and methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to defer materially. For more information about those risks and uncertainties please see SIRIUS XM SEC filings. We caution listeners to not rely unduly on forward-looking statements and disclaim any intent or obligation to update them. As we begin, I would like to caution our listeners that today's results may include discussions of both actual results and pro forma results. Listeners are cautioned to take special care to ensure accuracy in looking at today's reports. I will now hand the call over to Mel Karmazin.

Thanks, Will. Good morning, everyone. Thank you for joining our call today. The Company's quarterly results demonstrate the strength of our differentiated business model. The subscription audio entertainment model is very alive and doing very well. I'm happy to report that despite the various economic head winds that all companies are facing today, the financial and operational metrics we use to measure the health of our Company continues to show very positive momentum. Compared to last year, we grew revenue, grew ARPU, reduced operating costs, increased adjusted income from operations, which we refer to as adjusted EBITDA, and increased cash flow significantly, added to our great content, introduced new products, and refinanced expensive debt. We were also pleased this quarter that we grew subscribers and improved churn.

Our subscriber base is large, loyal, and satisfied and is expanding again with the net addition of over 100,000 subscribers in the third quarter. ARPU continues to grow because of the steps we've taken to improve the economics of this business. Consequently, our revenue grew this quarter to a record third quarter revenue, the best-ever in satellite radio history, of $630 million. At the same time, we continue to manage expenses aggressively by continuing to squeeze out merger-related synergies and also by simply making smart business decisions, which resulted in a 19% improvement in operating expenses versus the same period last year, combining revenue growth with expense reduction allowed us to generate $106 million of adjusted EBITDA in the third quarter this year versus negative $37 million for the same quarter last year, a swing of $143 million. Similarly, free cash flow for the quarter was $27 million versus negative $98 million, a substantial positive swing of approximately $125 million.

As I've said before, SIRIUS XM truly is a cash flow growth story. In fact, this quarter marks the fourth consecutive quarter of positive adjusted income from operations. You can expect us to continue reporting positive adjusted income from operations going forward. Today, we are confirming guidance for the year at over $400 million of adjusted EBITDA. The two satellite radios combined ended 2007 with an adjusted EBITDA loss of $565 million. Before the merger, the two companies lost $565 million. After the merger, the Company is going to report over $400 million, a $1 billion turnaround in two years. The scale of our business is now sufficient to more than cover our fixed costs and we're now at a point that will allow us to demonstrate the operational leverage inherent in our business model. Simply put, our fixed cost base would not materially change, whether we are serving 18.5 million, 20 million, or 25 million subscribers, or even 50 million subscribers, for that matter. Thus, as we grow our subscriber base in the coming years, these customers will be driving tremendous cash flow for the company, with almost $0.70 of each incremental subscriber revenue dollar hitting our cash covers. When we combine the basic economic model with the idea that we expect to finish our satellite replacement cycle over the next couple of years, it should be no surprise that we expect this company to drive tremendous free cash flow in the years ahead.

The quarter highlights also include an improvement in self-pay churn, which dropped below 2% for the first time this year, at 1.96% for the third quarter, it represents significant progress from the 2.2% reported for the first quarter this year. We expect to bring this figure down over time, as the economy recovers and consumers begin to feel less pressure on their discretionary spending. David will discuss some additional financial highlights and expand on some of the metrics I just discussed, so let me speak generally about the state of the business and the financial health of the Company.

First, we have taken steps to greatly enhance our liquidity and strengthen our balance sheet. We completed two financings during the summer months, which not only lowered our cash interest expense, but extended debt maturities. We ended the quarter with approximately $380 million in cash, with only $82 million of debt due by the end of this year and no maturities next year. As we noted on our last call, following the end of the second quarter, we repurchased $179 million of debt that would have matured this December. Similarly, last month we repurchased nearly $59 million of our next meaningful maturity, the 10% senior secured PIC notes due in 2011. We believe both repurchases were prudent steps to reduce our interest costs, while maintaining sufficient liquidity for the Company's operations.

Next, regarding our core operations, I'm extremely happy with the state of our business today and what's ahead for us. The financial performance we reported today speaks for itself. We are firing on all cylinders and we're not sitting idle just waiting and hoping for a full recovery in the auto sector. Regardless of how quickly that sector recovers, SIRIUS XM will continue to grow. We will add subscribers, introduce new products, improve ARPU, manage churn, and control costs.

The great thing about our relationship with the automakers is that they are very effective ways to market to potential customers. With penetration currently at 55% and conversion rates at 46.8%, we can be highly confident that new subscribers will be joining us as they are introduced to our service. In addition, we just recently have begun to aggressively pursue the used car market and believe that there is a tremendous opportunity to convert already installed, but dormant satellite radios into paying subscriptions. As you know, we have established relationships with the OEMs to market our service through their various certified preowned programs. We have also recently established a relationship with the nation's largest used car dealer as well. Between new and used car sales, plus the after markets, we believe the Company subscriber base will continue to grow.

On the new products front, we introduced the SIRIUS XM iPhone application to allow customers to stay connected to the best audio content available, whether they are in their cars, homes, and offices, or if they are on the move. Similarly, available now in retailers across the country, including Apple stores and Best Buy stores is the new XM Skydock, which allows iPhone and iPod touch users to use their handheld device to receive live satellite radio. It installs easily and allows subscribers to hear our differentiated content. It automatically charges your iPhone and is easily portable from car to car.

Similarly, we're taking advantage of the prevalence of home Wi-Fi networks by bringing to the retail market a wireless IP table-top radio that gives our subscribers access to the vast amount of content that they have come to expect from SIRIUS XM, but without the need for a computer.

So in addition to introducing innovative new products, we continue to provide innovative new content, sometimes in response to news events as they happen. For example, we introduced the Michael Jackson Channel immediately following his unexpected death, dedicated to the King of Pop's extensive music catalog. Similarly, we responded to senator Ted Kennedy's death with a tribute and discussions across numerous channels about the senator's life and times.

Our recent programming additions, whether it's comedies such as Monty Python radio, sports, which included Reggie Jackson hosting a 6-week post-season major league baseball talk program, frights and fun, our pop-up channel for Halloween, or politics, like our coverage of the National Equality March in Washington, DC, all continue to illustrate the vast and flexible scope of our business, allowing us to deliver timely and culturally relevant entertainment and information to our subscribers. We are particularly excited about Rosie O'Donnell joining SIRIUS XM for an exclusive daily radio show called Rosie Radio, which debuted earlier this week. There is no, there is no audio entertainment content that comes close to delivering what subscribers receive from SIRIUS XM every day.

Also significant, beginning in 10 days, we will be launching the most aggressive brand marketing advertising campaign in our history, with so much media coverage about our merger and past liquidity issues, it's now time for current and potential subscribers to hear about our great and differentiated content and they will hear about it with the most exciting campaign we've prepared.

With respect to ARPU, the increase we experienced in the third quarter is the consequence of deliberate steps we've taken to make our business model more profitable. Over the past year, we introduced the best of service to both SIRIUS and XM subscribers, increased pricing on our multiradio subscription plans, and began charging for streaming on the Internet, including on the iPhone. Obviously price increases can help profitability, but subscriber numbers can suffer as a consequence, too. Perhaps this year's increase in self-pay churn was partly driven by the various pricing actions we took earlier this year. I personally suspect, however, that the economy is the root cause of most of the increase in churn. As you know, we introduced our music royalty pass-through fee to our subscribers, starting August 1. At the end of the third quarter, approximately 40% of our subscribers have been charged for this incremental cost and we are very pleased with the results to date. We will keenly analyze churn over the coming quarters to better determine the impact of this pass-through cost.

Finally, in the area of controlling costs, certainly our record is very clear on this matter. Cash operating costs for the first nine months of 2009 were down almost $0.5 half billion or almost 25% from last year. We know how to squeeze costs out of the system and you should look forward to more of that in the quarters to come. Some of that will come from additional cost synergies, one might expect as a result of a merger, but we also expect to realize additional cost reductions in the area of content and in our contractual economics, including OEM agreements that will roll over. We have various contracts coming up for renewal over the next several quarters and we hope to see additional cost savings as we renegotiate and extend those contracts.

All in, I'm very happy with where we are today, but most importantly, the Company is strongly positioned to grow even more aggressively, as the economy and the auto sector rebound. I'm also very pleased with the guidance we provided you for 2010 earlier today in our press release. Obviously there's a great deal of uncertainty surrounding macroeconomic issues. With that in mind, we assumed a conservative estimate for 2010 SAR of 11 million cars and light trucks. In that scenario, we will finish 2010 with an increase in net adds, our revenue will grow mid to high single digits, we're forecasting growing adjusted EBITDA over 20%, and we will not only be free cash flow positive. We will increase SIRIUS XM free cash flow over the 2009 results.

Today, management focus is on subgrowth, retention, costs, EBITDA, and free cash flow growth. I'm looking forward to telling you about how we're doing in the quarters to come and remain very confident in our ability to execute on our plan. Now I will turn it over to David for some additional comments on our financial results.

Thanks, Mel. SIRIUS XM's third quarter shows phenomenal progress in improving our results and balance sheet. If you're looking for evidence of realizing synergies from the merger, you'll see it here. In the first nine months of this year, we have now generated $347 million of adjusted income from operations, a positive swing of $515 million from the first nine months of 2008. Cash operating expenses year to date were $465 million lower than 2008. Even if you isolate the impact of lower gross adds resulting from the automotive industry's slump, cash operating expenses were lower by $375 million in just nine months.

We continue to grow our revenue, with increased ARPU through the sale of our best subpackages and data services. We will continue to maintain the cost discipline we have consistently demonstrated and the Company is well positioned to capitalize on an economic rebound. October saw US auto sales return to double digits at 10.4 million, a very encouraging sign following the Cash for Clunkers program this summer. Many industry estimates for 2010 place US auto sales in the 11.5 million range, up significantly from the 9 million to 10 million pace we have seen in much of 2009.

Now, most of the results I will discuss today will be based on pro forma combined Company figures without price purchase adjustments, which we believe represents the best way to observe the core trends underlying the business. With the slight decline in churn from Q2 and an increase in auto sales, we were able to resume subscriber growth in the third quarter, adding approximately 102,000 net subscribers to finish the quarter with 18.5 million. Both are self-paid and promotional subscriber bases and have increased since the end of Q2, 35,000 and 67,000 respectively. Our self-pay base was 15.5 million at the end of the third quarter compared to 15.2 million a year prior. Our paid promotional base was about 3.1 million at the end of the third quarter compared to 3.7 million at the end of the third quarter of '08, lower by nearly 700,000 subs due to the dramatic fall-off in North American auto sales.

In addition to the paid promotional subscriptions we have historically reported, we want to highlight the growing number of unpaid promotional trials, resulting from the increasing volume of installation with Kia, Hyundai, Toyota, and Nissan, among others. Unpaid promotional trials which are not included in our subscriber count because there is no associated subscription payment from the automakers exceeded 600,000 at the end of the third quarter and represent a visible source of self-pay additions in coming quarters. Unpaid trials are generally 90 days long and have historically converted at rates a little below our reported conversion rates on paid promotional trials.

Our self-pay churn rate in the third quarter improved to slightly less than 2%, encouraging performance in light of the ongoing impact of steps we have taken to increase free cash flow growth, including the $2 per month price hike for multiradio subscriptions and the $2.99 per month charge for online streaming. As we discussed on the last call, we implemented the US music recovery fee on August 1. This fee, which is akin to a tax, is reflected in other revenue in our income statement over 40% of our self-pay subscriber base has been assessed this fee so far.

We are particularly pleased with the uptick in our conversion rate in the third quarter, moving up to approximately 47% from the 44 to 45% we have been seeing in the previous several months. This improvement was driven by implementing best practices across both platforms, and we are optimistic that this quarter's conversion results are sustainable, despite what is expected to be a negative influence as the Cash for Clunkers sales trials come up for conversion over the next several months. Total revenue grew approximately 3%, or $17 million versus the same period a year ago to $630 million, primarily driven by a 3% increase in ARPU, plus the collection of additional music recovery fee revenues, which are not included in our ARPU. We achieved this revenue growth despite 1.7% decline in average subscribers versus the same period last year. The increase in ARPU would have been higher on a subscription-only basis, which is a good news/bad news story.

The good news is that our core business is becoming more profitable, but the bad news is that our advertising business is suffering right now, as is the case across the media sector. Ad revenue fell 30% to $12 million, fairly consistent with declines observed in the sector. As the advertising market recovers, ad revenues will represent incremental high margin revenues in the coming quarters. As Mel noted earlier, SIRIUS XM continues to deliver positive adjusted EBITDA, reaching $106 million this quarter. The big driver here was 19% reduction in cash operating expenses, bringing them down to $126 million lower than Q3 last year. The decline would have been larger but for a sequential increase in SAC associated with new car builds, which of course is a good thing for us in the long run.

On a margin basis, adjusted EBITDA reached 17% of revenue compared to the negative 6% in the third quarter of 2008. While some of the cash expense reduction is from lower SAC associated with lower gross additions, we also improved SAC per gross add by 7%. SAC per gross add would have fallen further but we did begin expensing the build associated with increasing automotive production, including the ramp in unpaid trial production. Given these vehicles do not count as a gross addition until there is a self-pay conversion, this tends to have the effect of raising our SAC per gross add somewhat as the unpaid trials bill.

Nearly every single expense line item used in adjusted EBITDA declined from the prior year. Satellite and transmission declined 26%, programming 29%, sales and marketing 32%, G&A 36%, and engineering 8%. Revenue share and royalties up 2%, slightly less than our revenue growth rate, as we saw improvement from the renegotiated GM contract, which partially offset the effects of higher OEM mix and higher performance royalties versus year-ago.

Summing up our operations, revenue improved $17 million. Contribution margin improved by $21 million. Pre-SAC EBITDA improved by $118 million, as we reduced fixed costs and adjusted EBITDA improved by $143 million. Consolidated net loss improved to $182 million, excluding a one-time noncash loss on redemption of debt, our net loss would have improved to $44 million. The $143 million improvement in adjusted EBITDA drove a $218 million improvement in net cash used in operating activities compared to the combined figures from SIRIUS and XM in Q3 '08.

Free cash flow of $27 million in the quarter was improved from a negative $98 million in the third quarter of '08. EBITDA improvements driving cash flow improvements can be seen in our nine-month cash flows as well. The $515 million improvement in EBITDA year to date drove nine-month free cash flow to a positive $36 million compared to a negative $578 million in the first nine months of '08.

Many investors have been asking for guidance on satellite CapEx with the timing now set for the launch of the remaining satellites that will complete the refresh of our in-orbit fleet by 2011. We are now in a position to provide that guidance. This summer, we successfully launched SIRIUS 5, placing it into a geo stationery orbit. Mid next year we expect to launch XM 5 as an in-orbit spare with the technical capability to service either the XM or SIRIUS network, should the need ever arise. The build of XM 5 is largely complete and we expect to launch it on a Proton rocket next summer.

Completing the refresh of the SIRIUS Constellation will be the launch of SIRIUS 6 in late 2011, which will also go into a geo stationery orbit. Satellite CapEx excluding capitalized interest to support these programs is expected to be approximately $170 million in 2009, $220 million in 2010, and $125 million in 2011. As Mel mentioned, once these programs are complete, we do not expect to begin building a third generation satellite fleet before 2016.

With these satellites in place, we realize the first of the satellite synergies from the merger. The move from a HEO to GEO Constellation for the SIRIUS system and the ability of XM 5 to serve as a backup to both systems eliminates the need for the build of two additional SIRIUS satellites, a savings of more than $400 million. With growing EBITDA, declining interest costs with debt retirement, the completion of our satellite replacement cycle and our ability to use NOLs to shield earnings, we expect very strong long-term cash flow growth.

As Mel mentioned, we are pleased to maintain our guidance for full year adjusted EBITDA of greater than $400 million this year and to introduce new expanded guidance for 2010. Some of you may feel we are low balling our adjusted EBITDA guidance given the $347 million we have earned so far this year, but please bear in mind that our fourth quarter media campaign, as well as SAC from the continuing recovery in automotive is likely to result in somewhat lower EBITDA in Q4 than Q3.

In 2010, we are expecting revenue growth in the mid to high single digits, adjusted EBITDA growth of approximately 20%, and positive subscriber growth based upon projected auto sales of $11.3 million. Our performance this year and our guidance for adjusted EBITDA and cash flow growth clearly showed that we can deliver growth, despite a challenging economic environment, and with an improving outlook for auto sales, we are pleased with the opportunities in front of us. With that, let's turn it over to the operator to open up the line for questions.

(Operator Instructions) Lev Polinsky of JPMorgan has our first question.

Hi, thank you for taking my question. Couple of questions on the car market. So, one, I was wondering if you could give any sort of metrics on, on the kind of performance you're getting out of your programs with used car sales, and any sort of good ways to think about how big an opportunity that can be over time. And then you said there were about 600,000 unpaid trial subs at the end of this quarter. Can you give an indication of what that number looks like at the end of maybe second quarter and first quarter also? Thank you very much.

Jim, why don't you do it.

Sure. On the used cars, we're learning quite a bit and frankly the way we forecast the number is we've gone back and looked at how many cars have been built with satellite radio inception to date. We then use kind of a industry standard curve for when those cars transition. So for instance, after four years, we know almost close to 55% to 60% have moved to a second owner. We then overlay that on what's been built. We look forward to what we think's going to be built and we predict both a industry going-forward year by year. I can tell you the industry between now and 2014 grows extensively. Our challenge in 2010 is to get our arms around effectively predicting how big that market is and how to reach those subscribers, and I think you'll hear more from us in quarters to come on that particular one. Dave, do you want to comment on the pay trials?

Yes, so on the pay trials, the figures I have handy are a year ago as opposed to sequential quarter. So the way you should think of it is that a year ago, we had a little bit less than 400,000 unpaid trials, so the growth has been a little bit more than 200,000 since a year-ago. I think you can expect that most of that growth came as the automotive industry began rebounding from the lows that had hit at the end of last year, beginning of this year.

Thank you.

(Operator Instructions) From RBC Capital Markets, we'll go to David Bank.

Thank you, good morning. Question on the network architecture situation. How, how long do you think it will be before SIRIUS is using sort of one Constellation of satellites to service the entire customer base? And has that, has that time frame changed since you first kind of started contemplating the original merger?

So the answer to the second question is that it hasn't changed. When we contemplated the merger and then when we finally announced it and began explaining to people what was going to happen, one of the things that we told them is to not expect really any meaningful satellite efficiencies from getting from one satellite Constellation for a really long time. The way that we explained it is that it takes a long time to make changes in what the auto makers put in Cars and so, once you pick, let's say you were to decide to pick to go to one system, that it would -- once you made that choice, it would take a few years to roll it into production and then a few years for them to actually ramp it up and get it through all of the -- alter their plans. So what you end up with is several years before you begin really a meaningful transition of what's in the field. Then you've got all of those cars in the field.

So we've already got the spending out of the way for second generation satellite Constellations in basically the next 24 months and then those assets are good until beyond 2020, so we'll face the decision from a spend perspective really in sort of about seven, eight years time on what we want to do with respect to two versus one Constellation. So the timing is, is still what it was at the time of the merger and it's still pretty far out. But what it does allow us to do is that there were near-term savings, so that by making the decision for SIRIUS to operate with two GEO stationery satellites instead of three HEO satellites that we basically cut one satellite and save a spare because XM had already built a spare. Relative to the plans we had premerger, it takes about $400 million of CapEx out of the near term.

Thank you very much.

We'll move to Jim Goss of Barrington Research.

Okay. First, one follow-up on what was just being talked about. Do you use the same repeater system with the new SIRIUS GEO stationery satellites in addition to the XM GEO stationery satellites?

So that's a great question, and here also since the merger, our engineers have been hard at work and really done what I consider to be some very clever engineering. We have fully integrated now the repeater networks and in fact we expect going forward to actually be able to operate repeaters that allow us very efficiently to broadcast both streams. So we're still working on the numbers, but we're confident that our repeater expenses are under control and will not -- would not grow the way you would expect them to grow if you went to an all GEO versus HEO Constellation.

And so do the, do the elliptical ring satellites end up being the backup to the GEO stationery orbiting rather than the other way around?

I think what happens is the lives of these things are so difficult to predict, and we're actually in a very great situation where we have a lot of options as to how ultimately that works. But I'll go back to David's comments. We are going to end up with two GEO stationery SIRIUS satellites, two GEO stationery XM satellites and a spare that we will launch next summer in the middle which gives us a lot of flexibility.

Jim, I think the way that you should think about it is that right now, since we turned on SIRIUS 5 in September, we're operating that effectively in a 2 GEO -- 2 HEO 1 GEO operating configuration. We're likely to stay in that configuration at least until 2013 and then sometime between 2013 and 2015, which is roughly when the HEO -- the first generation HEO Constellation reaches its end of life, we'll flip over to the 2 GEO mode supplemented by the extended thrust of our peers.

Okay. Then another area, if I might, what is the timeframe you're envisioning for total penetration of all vehicles? You're up to 55% now. I think I understood 58% by year end. When do you -- how long before you get to 100% and what does that do to conversion rate? And then sort of in a related subscriber area, with the bump you got in the third quarter that I think was a little bit unexpected, do you think you'll still get the Q4 sub seasonality, or does that change because of the changing mix between OEM and retail and the bump you just had?

So on the question of penetration, I will again comment, as we did last quarter, that Toyota is in the middle of their ramp-up right now and you will continue to see Toyota rolling out overall our penetration to increase. The penetration numbers that you quoted are in fact the same numbers that we're using. I'll comment first on overall penetration and that is, the way we think of it, the luxury brands are going to settle in at close to standard and, on the leader cars, we like to have just a minimal amount of satellite radio because in fact several of them convert at low rates. It's difficult to balance that in total. I don't think you'll ever see 100% penetration, but certainly I think penetrations in the low to mid-60s over a long period are reasonable to expect.

Regarding our fourth quarter sub additions, we are -- we finished October. We are very guardedly optimistic, we're excited about this, new iPhone Skydock that will be hitting, that's currently actually in Apple stores, as well as the other retail stores. We have this huge advertising campaign that is starting, on November 15. There's not the noise surrounding any issues that satellite radio has this year versus last year. We are very optimistic about our ability to grow the Company in the fourth quarter and not just beyond that.

All right, thanks very much.

(Operator Instructions) From CRT Capital, we hear from Joe Stauff.

Hey, good morning. Two questions. One, what are you able to share with us regarding the sensitivity of churn of various pricing, sort of experiments? That is, as you referred to, you increased the pricing of your family plan earlier this year and also sort of the impact of the royalty pass-through and its effect, effectively on your view of churn, how you can control that or in particular, the sensitivity of those moves?

So this is Jim. I think there's a couple of points. First of all, I think it's too early to draw a final conclusion on the impact of churn related to the US royalty pass-through, and I think Mel was pretty clear on that in his comments. I do believe by the end of the first quarter of next year, we will much better understand that. As we by then, we'll have passed it along to the entirety of our subscriber base. With that in mind, I think I would speak for both Mel, David and I, we're pleasantly surprised so far to the elasticity that we've seen in the marketplace and our churn performance given that royalty pass-through and the other two price increases David mentioned as well. I'm pleased, but we've got a ways to go here.

In terms of overall pricing, we have gotten a lot more sophisticated since the merger. We've implemented best practices in both companies. And here, I'm really talking about churn and retention management as opposed to our overall basic $12.95, $14.95 price. And by that I mean we are constantly looking at and testing a variety of offers for retention and winback, and we're learning quite a bit. And obviously in the third quarter, honestly we made a lot of progress there and it was a part of why we were able to have positive growth.

Yes, we think that there's upside to where we are in churn, as we mentioned earlier. If you compare ourselves to cell phone companies and DIRECTV or EchoStar, I think that you can see that there's opportunities. Other well-regarded subscription services, pay television, HBO, is somewhere in the 4 to 5% per month. NetFlix, which is a Company that many people like the service and their churn is over 4% a month. So, us being around this 2% with upside, we think is a great opportunity for us, more so than the risk is.

Okay, fair enough. And just, just to reconfirm, and maybe you said this. I apologize if I didn't hear it. But the royalty pass-through, that is not part of your ARPU calculation, correct?

That's correct.

Thanks a lot.

We'll go to Murray Aronson of Janco Partners.

Thank you, good morning. Couple questions for you. One is, I wonder if you could talk a little bit more about SAC and some of the levers there and how to look at that over the coming quarters. I'm thinking about the work you're doing with Toyota and then I'm thinking about the impact of preowned vehicles going forward.

I think generally, we've had a long-term, track record of reducing SAC per gross add. And, I don't think there's anything that's going to change about that going forward. Our expectation is, one of our management's objectives is to continue to drive SAC per gross add down. There are lots of different ways to do that. Jim's guys just do a lot of great engineering work to drive costs out of radio modules and chipset advancements. We've talked before about the shift from Black Boxes in the trunk for an automotive companies to integrated head units, where there's just a module that plugs into the radio in the dash. And all of those things result in lower billable materials costs, which will translate ultimately into lower subsidies. Even with the kind of what I call the accounting effect of things like unpaid trials coming through where you have SAC expense, but no associated gross add I think even with that effect that generally you should find SAC per gross add coming down year to year to year.

And then SAC on used car sales helps that. Since we've already incurred the subsidy associated with that as we begin to get the second owners coming back, effectively a returning activation, it comes back into gross adds and there's very little in the way of associated subscriber acquisition costs with that. So it's another factor that should help bring the number down over the years.

Excellent, thank you. And I wanted to ask you a little bit more about the marketing and advertising plan you have. And ask you to maybe characterize that. Should we view that as a major holiday season ad spend? Is it a more extensive effort? Is it solely focused on the brand advertising you were talking about, or should we also be looking for promotions and retention tied into this? Just a little more detail, please.

Sure. It will be a national brand campaign geared to putting our brand out in the marketplace in context as the leader in audio entertainment. It will cover a wide variety of media, largely centered in network and cable TV, some Internet and some newspaper. And it's going to be a straight branding campaign as opposed to specifically with the TV spot tied to any promotional offers.

I think that you ought to think about it as being a special one-off. Though marketing obviously will continue to be a part of every Company's business model, this one was necessary because of -- we believe, all of the noise that was in the market earlier this year that is no longer relevant. So it's been a while since we have put the brand out there advertising. It's not something that you ought to model in 2010 as our costs going up next year because of marketing for a full year. We'll continue to market as we have.

The merger has absolutely presented a great savings for us because so much of the marketing between SIRIUS and XM was done against each other as compared to where our competitor today is terrestrial radio. So they are making it pretty easy for us. You think about where we get subscribers from. We get subscribers from terrestrial radio. Even though our business model is the exact opposite of theirs, we have 2% of our revenue coming from advertising and theirs is virtually 100%. So our business model is different, but we do get subscribers from them. They are helping us by pushing subscribers toward us, so we don't need the same kind of advertising that the companies did individually, but, bench fitting your feedback when you see the spots, we're very excited about it. They will be very noticed. You'll see it a lot and we think it will go a long way towards enhancing the long-term image of our Company and, get any of those past issues behind us.

Great. Thanks very much.

With that in mind, I don't want to miss. We are going to promote during the holiday period our products in the after market hand in glove, it's just the campaign that's got commented on is a brand-oriented campaign, but hand in the glove along with that, we will be promoting at our various retail outlets along very extensively on SIRIUSXM.com our products for the Christmas season.

And we have time for one further question and that comes from [Michael Shumbach] of JPMorgan.

I'm wondering if you can speak to the divide and the content availability between the iPhone ap and the Skydock. The advantage to the product launch over the holiday is that the subscribers are able to get in a lot of the contract, the contracted media, Howard Stern, NFL. Is that still the case versus the iPhone ap, where some of that stuff's not available because of contract rates?

Sure. Let me comment on that. First, the Skydock is a really clever product in that it's obviously one of the lowest cost radios we can build because there's no display. So your iPhone or iTouch, and remember, iTouch, with the exception of Wi-Fi, does not get our service delivered through streaming. So it provides a great, first of all, a great in-vehicle kit for your iPhone and your iTouch in that it -- it allows us it to be charged. Second, and I think when you see it at retail, it's our easiest radio to install yet. It's very, very simple and it goes in. Third, obviously it does allow you to get all of our content because it's a full -- you're a regular satellite radio subscriber. And finally, and again this, is no knock on the big technology of 3G networks, but there's a lot of places where 3G doesn't work. And in terms of streaming, where it reverts to a 2G service for voice. Obviously our network was built to work with over three 9s of accuracy and so all of those places you're assured of getting our full selection of satellite radio. So we're pretty excited about it as it complements those technologies not to compete with those technologies.

And we believe that if you take our content and you compare it to any alternative, whether it be Internet-driven content, whether or not the terrestrial-radio delivered content, whether or not it includes the NFL and includes Howard Stern or doesn't, our content is still the best content that exists anywhere. Certainly, Howard and some of our other premium content enhances it, but even those people that don't have the opportunity to get that specific content are still getting a great value and getting great content that they can't replicate anyplace else.

Thank you.

And that is all the time we have for questions. I would like to turn the conference back over to our speakers.

Thank you very much, everyone.