Sirius XM Holdings Inc (SIRI) 2012 Q1 法說會逐字稿

Welcome to SIRIUS XM Radio's first-quarter 2012 earnings conference call. Today's conference is being recorded. A question-and-answer session will be conducted following the presentation.

(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.

Thank you April, 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. Scott Greenstein, President and Chief Content Officer, will also be available for the Q&A portion of the call. Jim Meyer, our President of Operation 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 might be forward-looking statements 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 those risks and uncertainties, please view SIRIUS XM'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.

Thank you for joining us on the SIRIUS XM 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 business model, that is producing exceptional subscriber and cash flow growth for our investors. SIRIUS XM'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 add performance we have achieved since the combination of SIRIUS and XM in 2008.

Rising US 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 [SAR] 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% base 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 is 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 SIRIUS XM'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 tail wind.

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 SIRIUS XM, 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 1 million self-pay additions to SIRIUS XM 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 three 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. 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 programming. SIRIUS XM now offers subscribers live play-by-play, with no blackouts, from the NHL, NFL, MLB, NBA, NASCAR, Formula 1, select college sports, and the 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 line-up remotely approaching our offering, all under one app. For example, SIRIUS XM subscribers can receive every Major League Baseball game on their smart phone or computer. 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 costs, especially compared to our peers in the video market.

Our on-demand service is anticipated to launch this summer across a vary of IP platforms, such as the web, smart phones, and other connected devices. Late this year, we plan to debut a SIRIUS XM version of personalized music online, allowing subscribers to tailor their favorite SIRIUS XM music channels to their taste. The combination of exclusive online access to sports, proprietary on-demand SIRIUS XM-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 premium competitors online will have a tough time matching the commercial-free aspect of SIRIUS XM-branded music combined with the unique sports and talk content we offer. Let me remind you, the development of all of this plus the investment in 33 new channels are within the financial result you've seen in the fist quarter and the guidance we've given you this year.

We are also excited to see auto makers embrace 2.0 technology, which gives us the ability to add additional channels, new features, and software upgradeability 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 have 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. SIRIUS XM 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 are still only 24 hours in a day, we believe curated content, SIRIUS XM 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 three years since then, you can easily see the kind of progress we have made in our business. Subscribers are up 20% from 18.6 million, to 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 three-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. SIRIUS XM was 72.5 times levered debt-to-EBITDA in the first quarter of 2009 and that improved to 7.1 times at the first quarter of 2010, 4.8 times, first quarter of 2011, and just 3.9 times at the first quarter of 2012. 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. Though 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 auto makers appearing 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. SIRIUS XM 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 obtain new record levels in both of these measures. And our cash flow is now growing this year in to a substantial asset for investors with tremendous potential for long-term growth.

Our capital expenditures will be decreasing as a result of this 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 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 will turn it over to David for some additional remarks.

Thanks, Mel. This was a great quarter for SIRIUS XM on all fronts. While the macroeconomic picture is a little mixed, auto sales and credit card defaults are improving providing a good backdrop for SIRIUS XM. The first quarter was the best quarter for auto sales in four years. SAR came in at 14.5 million vehicles, rising 12% over 2011's first quarter and consumer purchases of SIRIUS XM-enabled vehicles were up an even more encouraging 16%. Auto analysts have been raising their outlooks for 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 SIRIUS XM-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 were up 8% over the year-ago level at 22.3 million subs, the 105,000 unit increase in paid trial inventory in the quarter was complimented by a 148% increase in self-paid subscriber net additions to 299,000, from 121,000 in 2011. Self-pay subscribers 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 gross additions up nearly 20% over the comparable period last year.

We now have more than 5000 dealers 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 nonpayment clearly helped us overcome some of the early effects of the price increase. As Mel mentioned, with the good start to the year for self-pay additions and the 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% RPU growth. The price increase has been rolled out to 35% of our self-pay subs. RPU growth will improve throughout the year as we continue rolling out our new pricing, and 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 US subscribers subject to the music royalty fee was offset by the reduction of the MRF rate in December 2010. Revenue share and 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 a 19% increase in installations, SAC per gross add increased $3 over the prior year as the increase in installation 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 costs continued declining as did satellite and transmission costs, offsetting increases in engineering, design, and environment and general and administrative costs. Sales and marketing costs 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 2.7 times. 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 a programming partner, year-end bonus payments, fourth quarter marketing, and subscriber acquisition costs historically weighed 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 2.9 times from 3.1 times 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 will continue to look for opportunities to either repurchase or refinance debt on favorable terms. The launch of the SIRIUS 6 satellite was delayed from its early March scheduled launch as a result of a 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 at $3.3 billion, $875 million, and $700 million, respectively. Higher subscribers also means higher subscriber acquisition costs in the near term. The revenue and adjusted EBITDA benefits of our increased subscriber guidance will clearly benefit 2013 operating results. With that, operator, let's open it up for questions.

(Operator Instructions) John Tinker, Maxim.

Congratulations. Good quarter. Could you just elaborate a little more on the 1 million number you are using for the used car estimate and how that ties in to your 1.5 million guidance number for the full year for all net additions. Thanks.

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 gross additions forecast for the year.

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

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

Barton Crocket, Lazard Capital Markets.

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

As we have 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 can tell you that there is just nothing we are 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, for us to reduce our more expensive debt. As we are sitting with the cash, we are not getting very much interest, obviously, on the cash. By retiring some of the debt as David talked about, makes really good sense for our investors to do. While we continue to buildup cash in a significant way, to consider returning capital to shareholders when the Board makes that decision.

Okay. I wanted to switch a little bit to all of the attention to this SEC license tussle with Liberty. I was wondering if you could just comment on that. Is there anything more going on than just paperwork filings between two companies over FCC licenses? Does the Liberty motion cause any potential problems for SIRIUS if they are successful or could it help Liberty in any way that you can identify?

I'm not sure how much noise there really is about it. Liberty has filed a petition at the FCC that says that they are 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 controlled. As we said in our filings, 40% is not the new 50%.

We think that Liberty's reasoning on it is what they disclosed, they said they were filing it. They want to keep their options opened. We filed it not to be combative with Liberty, because we are 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. 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 are waiting to hear from them.

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

James Ratcliffe, Barclays.

Can 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 effectively the incremental margins associated with the business?

What we said about our programming expenses are, is that we are 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 is an expense to them. You should assume that our programming costs will continue to decline, but for us making a decision to do something, oh wow, in the programming area. 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 a percentage of our revenue.

Again, we continue to not be only focused on our programming costs going down, but in providing the best service in a competitive environment to our subscribers. 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. As of right now, what we are 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 have rolled over.

Can you unpack a little bit the better churn number in the quarter. How much was that declining retail base and the declining seasonality of that churn versus any boost from the price increase.

I think that the biggest factor in the churn is obviously the stickiness of the service. Improving economic conditions benefit us. Generally the consumer has gotten healthier. We keep an eye on credit card default rates and delinquencies, that while the sequential improvements from the fourth quarter and those are a little mixed, the year-over-year improvements are pretty significant. 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. That has been more than offset by reduced non-pay rates and credit cards as well as just the general improvement in the economy.

Jason Bazinet, Citi.

Thanks so much. I think you gave the paid and unpaid trial inventory figure of 5.7 million; do you mind giving us the paid trial component of that. 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 the seasonal high for the year? Thanks so much.

Let me hit the churn question and then David will handle the other one. We have given some metrics and we basically believe that our churn rate will be somewhere between 1.8 and 2.0. We had thought that the 2.1 might be the result of the price increase; right now that's looking less and less likely. 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. For the most part we think of that as being somewhere around 45%.

And the paid promotional trials at the end of the quarter were less than 4.1 million.

Thank you so much.

Ben Swinburne, Morgan Stanley

Couple of questions, David, could you help us think through the move from SAR as we see the numbers roll through to gross adds. You gave the build rate, I think was 65%, the conversion rate. But there is 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 you gross adds number. 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.

It's for the most part it's in SAC. 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 that's due that shows up in sales and marketing costs. 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. For the most part, I think you should think of it as being in SAC.

In terms of the translation from SAR to gross adds, you're right, it gets a little fuzzy. There are a lot of moving parts to it that go to not only shifts and 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 and effective inventory of paid trial subscriptions as of December 31. So it's a particular point in time. And, depending on what you assume that fourth quarter pattern of sales is and what the mix is between paid trial partners and unpaid trial partners, you can end up with some variability in what you estimate for gross adds and therefore, net adds for the year.

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

It's probably a little bit, but you had generally Ford and GM shedding share in favor of Chrysler, which is a push from a subscriber perspective. But the Japanese are picking up and that's especially going to be true in year-on-year comparison as you go through the rest of the year. We know that a year ago, there was a terrible set of circumstances in Japan and then the flooding in Thailand later, both of those events impacting our asian partners more than the US and European partners. Generally, I think as you look at the SAR 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 the pick up would generally be in unpaid trial partners.

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

That's very helpful. Lastly, Mel, if I could come back and thanks for humoring us on the Liberty discussion. I get the question from a lot of SIRIUS shareholders when they read the Liberty commentary and the petition that the company argues they have already got de facto control because of their position and the way people vote their shares. It's a little bit of a circular argument. It seems to suggest they have already got control, so you might as well give it to them. One of the questions I get is, what are the practical implications of that for SIRIUS shareholders. I don't know if you have spent time on that. I'm sure everyone can sympathize as to why any company would not want the FCC to declare that they are now controlled by another company. But, in terms of the practical implications 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?

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. When they get asked, why are you doing it? They have only said we want to keep all of our options open. 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 are interested in doing what is 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 their interest is. I can only urge you to ask them and we will listen in on those calls.

David Bank, RBC Capital Markets.

Thanks very much for squeezing me in. Mel, thanks for the detail on the online product that's rolling out to all access. It looks like both a great offensive as well as defensive product. Can you talk a little bit about how you view the ad-supported competition in that -- does your research give you a sense of how many of your current subscriber base are listening to the premium, are there for the premium product versus the jukebox in the sky? Do you guys have research behind that or a sense of what that is?

Let me give you some overview. 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 towards the smart phone, and the limited opportunities that you have to monetize that through different types of advertising. We are not big fans of it.

On the other hand we are very big fans of giving subscribers what they want, not just in the car. You should think of our 2.0 strategy as being to super serve our subscribers. They get a great product when they are in the car; we want them to get the same great product and even expanded versions of it when they are in a mobile environment or in their home, and that device that they are using is principally a smart phone. Why wouldn't we, where there is no constraint on our bandwidth, be able to expand our offering 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 where 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 an asset is the fact that we have more bandwidth and we can 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. 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.

Thank you, guys.

Thank you very much, and that concludes our call.