Sirius XM Holdings Inc (SIRI) 2011 Q4 法說會逐字稿

Good day, everyone. Welcome to the Sirius XM Radio's full-year and fourth-quarter 2011 earnings conference call. Today's conference is being recorded. A question and answer session will be conducted following the presentation. (Operator Instructions)

And now, your host for today's call, Mr. Hooper Stevens, Senior Director of Investor Relations and Finance. Mr. Stevens, please go ahead, sir.

Thank you, Rufus, and good morning everyone. Welcome to Sirius XM 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. Jim Meyer, President, Operations and Sales, and Scott Greenstein, President and Chief Content Officer will also be available for the Q&A portion of the call.

First, I would like to remind everyone that certain statements made during 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 Sirius XM's SEC filings. We advise listeners not to rely unduly on forward-looking statements and disclaim any intent or obligation to update them.

As we begin, I would like 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.

Thank you, all, once again for joining us on Sirius XM's earnings call to discuss our fourth-quarter and full-year 2011 results. And more importantly, our expectations for the future. We are very pleased to report our 2011 results met or exceeded the guidance we gave you at the beginning of the year. And I'm even more excited about our prospects for accelerating revenue and adjusted EBITDA growth in 2012. We expect to deliver a very good year across-the-board in 2012.

In 2011, we delivered the best year of subscriber growth since the merger of Sirius and XM by adding 1.7 million net new subscribers. Revenue reached a record of over $3 billion. Adjusted EBITDA climbed 17% to a record $731 million, beating our guidance of $715 million. Free cash flow essentially doubled to a record $416 million beating our forecast of $400 million. These statistics paint a picture of remarkable growth and record achievements in 2011. And had we not been constrained on the revenue side by our agreement with the FCC and other litigation, our numbers would have been even stronger. Those handcuffs are now off for 2012 and beyond.

For 2012, we are very optimistic about our ability to grow subscribers. And at this time, we expect 1.3 million net additions this year. Which should put our subscriber base at another all-time record high of 23.2 million by the end of the year. The consensus for auto sales in 2012 is approximately 13.7 million which represents the highest number since 2007 which was before the merger of Sirius and XM. The fact that US light vehicle sales should be up by 8% provides a solid foundation for subscriber growth this year. In addition to new car sales, we expect this year we will see a bigger contribution from the reactivation of radios in these cars.

Our net subscriber addition guidance is tempered by our sense of conservatism around the price increase we implemented January 1, 2012. Since the time of the Sirius and XM merger, we have been conservative in all of our subscriber growth forecasts. I believe this is the prudent cost and we will continue that practice. We will update our guidance, if appropriate, as the year progresses. On January 1, the price restrictions came off and we raised the base price of our service by just under 12% to $14.49 per month. This was the first increase in the core price in the history of Sirius service, and only the second time ever on the XM platform.

I'm pleased to report that initial indications about consumer reaction to the price increase are meeting our expectations. While no one likes to pay higher prices, and we certainly don't like to charge more as we're competing against free services like AM/FM radio and IP radio, we are not seeing any major problems yet from the increase. It is still early so we need to be conservative in our outlook.

We will also continue to provide the best customer service possible, so when there are complaints, we are able to minimize churn. Because of the price increase and our conservative outlook, we expect churn to be up modestly this year, probably in the 2.1% range. Without the price increase, we would be providing self-pay churn guidance consistent with past years of 1.9%. And we continue to expect a conversion rate in the 44% to 46% range depending upon mix. The price increase will benefit our revenue performance in 2012 and 2013 as it rolls out and flows through the subscriber base.

We are projecting that revenue will grow by almost 10% to a record $3.3 billion this year. And we expect further revenue growth in 2013 from more subscribers and a full year's effect on our price increase. In addition to our subscriber revenue focus, we expect advertising revenue will outperform the percentage increase in total revenue, as we attract more blue chip advertisers. Advertising represents a very small but profitable segment of our revenue.

Because our revenue growth will exceed expense growth, our adjusted EBITDA should grow by 20% this year to approximately $875 million, also a new record high. And the best operating margin in our history. We still believe that we have plenty of room for margin growth over the next several years. And that a 40% long-term adjusted EBITDA target is a reasonable goal. Keep in mind that we have a significant improvement in a material OEM contract in late 2013 that will benefit EBITDA and margins in 2013 and 2014. The last but not the least piece of our guidance is for free cash flow to grow by nearly 70% to a record $700 million this year. All of our 2012 financial metrics are anticipated to be very strong, even if we only deliver the net adds we are currently forecasting. Used car sales continue to gain momentum for us.

To augment our programs for buyers of certified pre-owned vehicles, we are also rolling out trials to all buyers of satellite radio equipped cars at increasing numbers of franchise dealerships. In 2011, we announced programs to enroll Chevy, Buick, GMC, Cadillac and Nissan dealers nationwide in a new program where we are providing all purchasers of used vehicles of any brand, not just certified pre-owned, with a complementary three-month trial of Sirius XM. This year, we announced we are expanding this program to Chrysler dealers, as well as launching a similar program at the country's largest independent auto retailer, AutoNation.

Currently, across the different brands, we have enrolled over 4,000 dealers nationwide in our non-certified pre-owned used car program. More OEM brands, franchise dealers will be announced later this year. It's a fantastic benefit to the used car sales process. And it's also a great way for consumers to trial satellite radio in newly-acquired used cars. We expect that the previously owned market will be a major growth opportunity in the coming years.

In 2012, we will introduce a variety of new services to broaden the availability of our suite of premium content. One major way we will do this is through an on-demand service across our IP platforms, such as the Web, smartphones, and other connected devices. This on-demand platform will enable subscribers to access a continuously updated library of some of our best content and listen on their own schedules, not just those of our programmers. We think this service will drive demand for our Internet add-on option, an all access tier, which will improve ARPU and only make our service more and have it be a must-have ownership for consumers.

None of our IT-based competitors will have anything remotely approaching the depth and breadth of our non-music online offerings. Later this year, we will also debut personalized radio on the same IP platforms. This will let people tailor music to their own preferences. We believe on-demand and personalization will add to increased customer satisfaction and improved churn and conversion. We look forward to offering this to subscribers this year.

Both of these new services, on-demand and personalization, will be available at no additional charge to subscribers who upgrade to our Internet add-on, making this option all the more desirable. Similarly, our additional 2.0 channels, including the suite of Hispanic channels, will be available at no extra charge to subscribers who have a 2.0-capable satellite radio. Adding this functionality on the Internet and increasing our content line up on the satellites are two very visible ways we are adding value to our service and keeping this service attractive to consumers in the face of more competition.

We are also investing in subscriber exclusive events such as our very special upcoming March 9 concert with Bruce Springsteen and the E Street Band at the Apollo Theatre here in New York. This concert celebrates satellite radio's tenth anniversary. The only way to see this concert will be via a lottery exclusively for our subscribers. And the only way to hear the concert will be on Sirius XM's exclusive Bruce Springsteen's E Street radio channel. This kind of event is not only a great source of exclusive content for us but it also helps us generate a tremendous amount of media attention and buzz about the consumer benefits of being a Sirius XM subscriber.

Remember, although we are the only satellite radio company, we do face numerous competitors. And this competition is increasing in the IP world as there is no real barrier to entry. In 2011, Sirius XM was factory installed in about two-thirds of all cars sold in America, while AM and FM radio was ubiquitous. Today, we are not seeing IP as a game changer. IP easy to use connectivity in cars is still very modest, but will become more commonplace over the coming years. Terrestrial radio is still our biggest competitor by far, and we know very well how to compete with it.

What also gives us comfort as we face these challenges is that we continue to have a prime place in the car's dashboard. And that we have the economic model to support this position and deliver valuable, often exclusive content, that consumers love. Unique proprietary distribution of our satellite service through OEMs remains important. And our relationships with all of our OEMs are very strong. They are embracing 2.0 technology and those rollouts will begin this year and rollout to more OEMs over the coming years. OEMs love the entertainment we offer their car buyers and our relationships are stronger than ever. Demonstrating this is the penetration into OEM models and trims continue in 2011. Sirius XM Satellite Radio are now factory installed in 67% of all new vehicles, up from 62% in 2010.

Our subscription-based business model is superior to that of terrestrial radio and IP radio, but this model clearly benefits our investors. For the full year of 2011, Sirius XM generated approximately $139 of revenue per year per subscriber. The largest terrestrial radio company received only approximately 10% of what we did, or about $13 of revenue for each of its listeners per year. The difference is even more extreme when you compare the largest IT competitor's revenue with the number of regular users that they have and you see that they will generate less than $6 of revenue per year for each active user. This demonstrates the difficulty of generating advertising revenue from mobile users on their smartphones.

Business models matter for investors and Sirius XM has a great one. Another interesting statistic to look at is revenue per employee. At Sirius XM, we generate approximately $2 million per employee per year, as compared to IP radio which is less than half that. Interestingly, terrestrial radio generates about $300,000 per employee compared to our $2 million. Our business model will be even more important to investors as revenue growth accelerates.

Because of our powerful scalable business model, we have the ability to offer premium content and also commercial-free music as an option that is simply not available to advertising-based companies that wish to make a profit. We have always said that great content is critical, and never is that more true than today. We are also notable for being the only company in the premium content business where programming costs are actually dropping. In 2008, we spent $447 million on programming costs or 18.3% of our adjusted revenue. In three years, we have reduced our programming costs by 27% to $324 million or just 10.7% of adjusted revenue. In 2012, we will spend less on programming than we did in 2011, both in absolute dollars and as a percentage of revenue. Compare that to other video premium content providers and you will find that their content costs are going up, often even faster than their revenues.

We are accomplishing this cost reduction while the quality and the quantity of our programming is increasing. While we are proud of our cost savings in this area, among others in our Company, you should know that we have the means and ability to increase investments in content should the right content become available. We will never stop evolving and enhancing the content we offer our subscribers.

In closing, I want to remind investors that the Company is laser-like focused on growing subscribers and growing free cash flow. Free cash flow is a financial metric that I believe can create value for shareholders. David will talk more about the financials and balance sheet, but let me just say that I am very pleased about our prospects for growing free cash flow rapidly over the next few years. Not only do we expect continued expansion in our revenue and adjusted EBITDA, but we also expect to deliver most of this adjusted EBITDA as free cash flow. Some companies generate lots of EBITDA but a much smaller amount of free cash flow.

But in our case, our EBITDA to free cash flow conversion will continue to benefit from four positive factors. First, subscribers prepay for our service which generates cash as new subscribers come onboard and current subscribers renew. Second, our interest expense should fall as we've refinanced and deleveraged. Already, our debt trades at levels that imply a far lower borrowing cost for future issuance than what we are currently paying. Next, capital expenditures will fall significantly as we finish the deployment of our second generation of satellites in the first half of this year. We don't expect to start spending significantly on new satellites for another five years. And finally, our net operating loss carryforwards total some $7.8 billion should allow us to pay minimal cash taxes for many years to come.

Our ending cash balance in 2012 should be about $1.5 billion, or about $1.2 billion if you assume we call the 9.75% notes this September. And our gross leverage will have fallen to under 3.2 times. There is an opportunity for the Board of Directors to consider a return of capital to shareholders beginning later this year. The Board has not taken up this topic so obviously no decision has been made as yet. Despite all the competition, our Company has more paying subs today than ever before in its history. We have plans to grow this record level of subscribers, accelerate our revenue growth, and dramatically grow our free cash flow in 2012 and beyond.

If we keep offering great content and making it easy for consumers to access, I have no doubt that Sirius and XM will continue to prosper in the coming years. We are starting this year very strong. New car sales in January were up 11%. We will end 2012 with a record number of subscribers, record revenue, record adjusted EBITDA, highest margin ever and record free cash flow. The Company is well-positioned to deliver subscriber growth and free cash flow for many years to come.

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

Thanks, Mel. Sirius XM delivered a spectacular year in 2011. We set all-time records for gross additions and auto penetration. And self-pay monthly churn remained at 1.9%, resulting in the best year for net additions since the merger. A strong finish to the year in auto sales also produced our best fourth quarter since the merger. More than 540,000 fourth quarter net additions drove the year to over 1.7 million net adds, solidly beating subscriber guidance and bringing total subscribers to 21.9 million.

Solid subscriber growth and focused efforts to deliver profitable growth also allowed us to outperform our financial guidance, beating revenue, adjusted EBITDA and free cash flow guidance. Over $3 billion in revenue, $731 million in adjusted EBITDA, and $416 million in free cash flow. The 8% growth in our subscribers was aided by a record-setting pace in gross additions. Our 8.7 million gross adds were the highest in the history of satellite radio. The auto market continued its steady recovery with SAR at 12.7 million, up 10% from 2010. Consumer purchases of cars were up an even more encouraging 12% from 2010. Sirius XM radios were incorporated into nearly 67% of cars sold in 2011, up from 62% in the prior year. The increase in penetration resulted from higher incorporation rates among some OEMs and a shift in sales mix to higher penetrated OEMs during the year.

While automotive industry volumes remain well below the 16 million-plus car pace of several years ago, improvements in the production penetration rate has resulted in steady growth for Sirius XM. And should insure continuing growth in the future as the auto industry and the economy continue to recover. Gross additions were also aided by continuing success in the previously-owned car channel. In addition to the certified pre-owned programs launch with nearly all OEMs, we have signed up more than 4,000 dealers who provide customer name and address in exchange for free 90-day trials to their pre-owned vehicle customers. Our experience in the new car channel has showed us that providing trials and obtaining timely and accurate customer data significantly improves subscriber additions.

Since the merger in mid 2008 the new car trial conversion rate has generally ranged between 44% and 46%. In 2011, we remained in this range but were down slightly from 2010 at 44.6%. Sales mix and delays in getting trial conversion communications to some new car buyers contributed to the decline.

During 2011, we made significant investments in our customer care operations, introducing and improving upon our self-care website, and investing in call center and subscriber management technologies to improve the quality of customer care and the level of customer satisfaction. We also continued to invest in our programming, renewing agreements with longstanding partners like the NFL, NASCAR, Martha Stewart and Oprah. Launching new programming to better serve our Hispanic audience. And bringing live events to our subscribers from Coldplay, Tim McGraw, and Paul McCartney, among others.

Continuing to focus on delivering great programming and service to our customers allowed us to continue to deliver self-pay churn of 1.9% per month. Sell-pay subscribers grew 7.3% to a record 17.9 million at year-end. Net self-pay additions of 1.2 million expanded 24% over 2010. Total paid and unpaid trials at year end expanded 26% from 4.3 million in 2010 to over 5.4 million at the end of December, a very solid new business pipeline as we enter 2012.

Total revenues exceeded $3 billion and grew 7% over 2010, including 8% growth in subscriber revenues and 14% growth in ad revenues. Other revenue increased 3% for the year and declined 10% for the quarter, reflecting the adjustment of the music royalty fee in December 2010. ARPU declined $0.15 from the prior year due to the reduction of the US music royalty fee in December 2010, the growth in paid automotive trials and the use of save offers as a subscriber retention tool. The total cash operating expenses grew only 3.7% in the year, resulting in an increase in adjusted EBITDA margin to 24.2% for 2011. Costs that vary with growth and subscribers or revenue accounted for all of the increase in cash operating expenses. Fixed costs actually fell in the year by $16.7 million. Over the last three years, our EBITDA margin has grown by nearly one-third from 18.3% to 24.2%.

Contribution margin is down slightly from the prior year from 71.2% to 70.6% as music royalty rates increase, and the automotive share of our business on which we pay revenue share continues to rise. Subscriber acquisition costs increased 6% in the year, only half of the 12% increase in gross additions, as SAC per growth add declined from $59 to $55. Led by reductions in spending in our programming, satellite and transmission and G&A areas, total fixed expenses declined by $16.7 million from 2010. Fixed operating costs are now $366 million or nearly 30% lower than their pre-merger levels.

Despite this, we continue to invest in our product platform, bringing Sirius XM 2.0 to market through the Lynx introduction just prior to the Consumer Electronics Show. The Lynx allow subscribers to access content through either the satellites or a Wi-Fi connection, store up to 200 hours of programming, simultaneously record content from multiple channels, through Tune Start, start every song from the beginning and see what's coming next on that first electronic programming guide. The Lynx will also be capable of accessing on-demand content when that service is launched. Lynx provides a window to the kind of services we expect to bring to factory-installed radios and new car production in coming years.

Adjusted EBITDA grew 17% in the year to $731 million from $626 million in 2010. The 24.2% EBITDA margin is on pace to achieve the 40% EBITDA margins we believe Sirius XM can achieve in the future. Great performance in the P&L helped deliver a near double and free cash flow to $416 million from $211 million in 2010. Over $100 million in EBITDA growth, combined with $174 million in reduced capital expenditures, fueled an expansion of free cash flow that will accelerate in 2012. Our cash balances grew to $774 million at year-end. Gross debt to EBITDA stands at 4.1 times, while net debt to EBITDA is at 3.1. Upgrades in the fourth quarter from both Moody's and S&P reflect our improving credit fundamentals. The debt market has also recognized our rapidly improving prospects. Sirius XM's benchmark unsecured debt is trading below 6%, a dramatic improvement from the cost of 15% secured debt with equity, we incurred just three years ago.

As Mel mentioned, our outlook for 2012 is for continued growth and rapidly improving profitability, liquidity and leverage. The consensus forecast for auto sales in 2012 is about 13.7 million cars and light trucks, up a little less than the 8% from 2011's 12.7 million vehicle pace. In January, we began implementing the first basic price increase for Sirius subscribers since the service was launched in 2001, and the first increase for XM subscribers in nearly seven years. Sirius XM programming is unparalleled value for consumers and audio entertainment. Our call center agents are equipped with a variety of tools to save every customer who is at risk of canceling. While we are encouraged by the early response to the price increase, we are anticipating a modest increase in self-pay churn in 2012 to approximately 2.1%.

We also expect the new car conversion rate to remain in the 44% to 46% range we have seen over the course of the last three years. Sirius XM expects to add 1.3 million net subscribers in 2012, or about 6% growth. Revenues will expand by nearly 10% to approximately $3.3 billion. Over half of our customers are on one-year or longer plans. The full effect of the price increase will take about 18 months to be reflected in our operating results. As a result of the effects of the price increase and continued reductions in programming cost, adjusted EBITDA will expand at nearly twice the rate of our revenue growth, growing to $875 million. This represents an increase to our previous adjusted EBITDA guidance for 2012.

Sirius 6, the last of our next generation satellites, should launch in the next several weeks. As adjusted EBITDA grows and working capital flows improve with the price increase, free cash flow will expand over 70% to $700 million for 2012. Based on this guidance, the Company's liquidity profile will improve dramatically. Cash will expand to nearly $1.5 billion and net debt to EBITDA will fall to about 1.8 times. During the course of the year, we will begin to evaluate returning capital to shareholders through dividends or stock buybacks. We expect to discuss our plans with you later in the year.

Sirius XM has shown a consistent ability to deliver solid operating performance under less than ideal conditions. The last three years has been tough on consumers and the worst stretch for the auto industry since 1981 to 1983. Despite that, we have significantly grown subscribers, revenue, EBITDA, and free cash flow, and significantly reduced our leverage. With continuing growth at auto sales, the growing opportunity to recapture subscriptions in the previously-owned car market, our strong operating leverage, the opportunity to renegotiate the remaining pre-merger contracts, lower interest expense, low capital expenditures and no taxes, Sirius XM is poised to show strong long-term growth and free cash flow.

Operator, let's open it up for questions.

(Operator Instructions) Benjamin Swinburne with Morgan Stanley.

One for David and one for Mel. David, can you go back and talk about how sales mix impacted '11 and how it might impact '12? I think you said that it was a negative around conversion rate, maybe a positive on the build, the two-thirds build rate. I want to clarify that I got that right. And then any insights into how you're thinking about how that might impact '12. And then Mel, your comments were really interesting about the IP competition. You talked about greater penetration in car from IP services. But you also talked about the difficulty for them to sell advertising spots to advertisers. And obviously, you've spent a lot of time selling advertising over your career, going all the way back to Infinity and CBS. Can you just spend a minute on why you think it's going to be difficult, particularly on the mobile front, which a lot of people seem to be excited about. It sounds like you're a little more cautious on the opportunity for them to generate meaningful revenue there.

Okay, on the mix issues, on penetration rate, the shift towards North American automotive manufactures, primarily the Japanese, but generally Asian manufactures, had lower sales mix this year overall in the industry. And so that tends to bias the penetration rates up a little bit. The North American manufacturers are overpenetrated relative to the Japanese in particular. On conversion rate, the mix moves around a little bit that. Without getting into too much of the details, that when you're all done sorting through the mix of the conversion opportunities that came up in the year, which is a little bit different than the sales mix, that it biased a little bit towards lower converting manufacturers. And there was also a bias within model mix towards lower converting models in the sales mix.

On the question about advertising, if you think about where the biggest piece of the pie goes in advertising, it's television, right? Television has the benefit of sight, the visual, the sound, high-definition, big screen. And now you take a look at what happens in the mobile environment. And in the mobile environment, you're not really able to do as robust video, particularly if you're thinking about it in the car. So you're limited in what type of advertising you're really going to be able to put on that mobile device. And if the mobile device is audio commercials, that sounds an awful lot like FM radio to me. And I also believe on the advertising side -- and I felt this way for a number of years -- and that is that there is just too much supply that's out there. There's no barrier to entry for people to be on the Internet. And there are more companies that are taking advertising dollars. So therefore, the idea of having so much supply puts the power in the hands of the buyer of the advertising. Other than when you get big events like the Super Bowl or big ticket items there's just a robust amount of advertising inventory available. So I think it's challenging. Obviously advertising's going to be around for a long time but there's going to be an awful lot of companies dividing up that advertising dollar.

So hard to drive CPM, it sounds like you're saying, over time?

Unless you're something other than a commodity. And if, in fact, you have music principally, and a lot of other people have music, and you're out there trying to sell your music is better. I think it's a challenging business.

Thank you.

Barton Crockett with Lazard Capital Markets.

I wanted to drill a little bit into the subscriber outlook, seeing 1.3 million net additions versus 1.7 million. I was wondering if it's possible for you to parse in a little bit more detail what drives the production in net additions. Is it purely just a higher churn assumption, churn rate assumption, or is there something else going in there? That's question number one. And then question number two related to the churn, I was just curious, when you say you expect 2.1% in 2012, is that based on seeing a 2.1% churn from people that have been hit with the price hike in January? Or is that just your best guess on what's really not fully data that can give you a churn rate yet?

This is Mel. Let me start and then Jim and David can add-on anything they want to comment about it. First of all, I am saying that we are being conservative. There is no information that we have about our business. Our most recent quarter, our fourth quarter, showed the best fourth quarter in our history since the merger as far as net adds are concerned. So there's nothing that we are seeing impacting us. We're not seeing any new competition that's impacting us. We're not seeing any dissatisfaction of our service. What we're doing is we are putting in a price increase. We made that decision to do. And we really don't know exactly what the impact is going to be on subscribers, mainly because we have very limited experience at the Company in putting in a price increase. We compete with free. So in an ideal world, we would have lower cost per service. But that doesn't generate us as much revenue and EBITDA and free cash flow as we're looking for. So we're starting out conservative. We're not seeing anything impacting our January churn that is alarming to us at all. I think it's prudent to be conservative and that's the basis of the 1.3 million.

Barton, we're just a month into it now. And when you think about the fact that 80% of our self-pay subscriber base is on credit card or debit card, you've got to wait for them, even though we notified everybody of the price increase, you've got to wait for them to see it come through on their bills, and then see how they react. So honestly, four weeks into the year, it's very early and this is our best estimate of what we think it will look like for the year.

In terms of drilling into the sub outlook a little bit, one of the things that you have to bear in mind on net additions is that the inventory of paid trial subscriptions at the end of the year, the change in that from year to year, affects what the total net additions are going to look like. So in 2011, we have supply disruptions in Asia. What we have is a shift in mix towards US and European manufacturers who tend to be paid trial partners. And I think the industry view is that there will be a shift in mix back towards Asian manufacturers in the course of 2012. Which will be a shift back towards unpaid trial partners. So part of what you're seeing in the sub outlook is just shifting mix in paid versus unpaid trial subscriptions. As well as the fact that we're instituting a price increase. Look, if you look at last year as being a year without a price increase, and this year being a year with a price increase, and you said do you think you'll have more or less overall demand for the service at the higher price or the lower price, you're probably going to say that the price increase ought to suppress demand a little bit. So we're reflecting that in our numbers.

Okay, great. I'll leave it there. Thank you very much.

Bryan Kraft with Evercore Partners.

I just had two questions. One, just wanted to see if you could talk about how you're handling the music growth you see this year from a pricing perspective to the consumer. And then, secondly, the conversion rate, I assume you're talking the official conversion rate which you would apply to the paid promotional subs. Can you talk about what you're seeing in terms of conversion on the free trial side, what the trend has been there and where you see that going this year, as well. Thank you.

Brian, the conversion rate we've been talking about applies to all of the new car trials. So paid and unpaid. The 44% to 46% range covers all new car trials and our results for last year again covers all of them. On the music recovery fee, there's a little bit of art in coming up with that every year because we, in essence, have to project different mixes of subscribers on different plans and all the rest. But I think that the way you should look at it is that we came out from under the restrictions of the FCC merger order in the late part of the summer of 2011. Through last year, that what we were charging for the music royalty fee was in compliance with the terms of the merger order. Which involved delaying the recovery of that stuff for a couple of years and then we had to catch up on it.

So coming into the gate this year with a price change, that we've rejiggered the rate, the effect is about the same. If you look at a primary subscription, that I think in December we were charging $1.40 on a $12.95 subscription. And in January we were charging $1.42 on a $14.49 subscription. And just like it will take 18 months for the price increase to work its way through, the reduction in the music recovery fee that we did in December 2010 also takes about 18 months to work its way through the numbers. If you look at that component of ARPU over the course of last year, you generally see negative quarter-on-quarter comparisons. And that would continue to be true in the first part of this year and then it should level out.

Okay, thank you very much. That's helpful.

James Ratcliffe with Barclays.

Two quick ones, if I could. Just generally, could you talk about the impact that Sirius 2.0 on-demand, personalized radio and the like has on the royalty payment stream? And if that's going to change in any way the structure of those payments. And, secondly, could you talk about the activity you saw toward the end of the year. Didn't see as much of a bump up in prepaid revenue as I expected. Do you see a lot of customers aware of the price increase and contracting before it? Or do you think it's most generally seeing it as it comes through in their bills? Thanks.

On the last question, I don't think there's really anything out of trend with prepaid revenue. I don't think we had a significant pull forward in the price increase. The ARPU is down a little bit, which is going to bring prepaid revenue down. The average month's prepaid remains fairly consistent. That hasn't changed a whole lot so it should move with ARPU. And on the 2.0 products are fully DMCA compliant and so we really don't anticipate any change in the royalty payment structure associated with the product.

Great. Thanks.

Amy Young with Macquarie.

Can you talk a little bit about your increased EBITDA guidance? Is this largely a result of cost or expectations for advertising growth?

I think the biggest impact on it is subscriber growth and the price increase. We've got $300 million worth of revenue growth and generally 70% contribution margins. So that, with some increase in SAC associated with the growing auto industry that you get to, they're still pretty healthy incremental EBITDA margins year to year.

Okay, thanks.

Okay, thanks, everybody.