Sirius XM Holdings Inc (SIRI) 2012 Q2 法說會逐字稿

Good morning. Welcome to the Sirius XM Radio second-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 call over to Hooper Stevens, Vice President, Investor Relations and Finance. Mr. Stevens, please go ahead.

Thank you, Jeremy, 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 & Sales; and Scott Greenstein, President and Chief Content Officer will be also 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 those 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.

With that I will now hand the call over to Mel Karmazin.

Thanks for joining us this morning. Our second-quarter results were outstanding across the board and we are particularly pleased that we have increased our guidance for subscribers, revenue, and EBITDA, since the second quarter ended. The second quarter of 2012 was in some ways a microcosm of the Company we said we would create by merging Sirius and XM. Our strategy is working and we are consistently delivering on the execution of our business plan that we articulated to you. The audio entertainment business is more competitive than ever but we are delivering across all metrics. We have a unique and powerful business that we believe is very scalable, and very sustainable.

Our subscription revenue business model is unequaled. We derive almost 95% of our revenue from subscriptions, with consumers paying us in advance for our service. We know that historically subscription businesses outperform the more cyclical advertising business. We are also pleased that, although small, our advertising business is growing and outperforming most radio companies.

Uniquely, Sirius XM has long-term agreements with all of the OEMs that manufacture and sell vehicles in the United States. As a result, today, approximately two-thirds of all new vehicles sold come with a satellite radio, and a trial to our service. Which, by the way, consumers love. Since an estimated 145 million people spend over 50 minutes a day in the car, with almost 75% of these people being alone, our in integration into the car with an easy user interface also contributes significantly to our success. We're proud to say that since the merger, we have consistently delivered excellent operating results, quarter after quarter, as reflected in all of our important metrics.

Revenue is not only growing, it is actually accelerating. Operating expenses have been increasing less than revenue, and principally only related to our growth. This has resulted in accelerating adjusted EBITDA growth, along with margin expansion. Churn and conversion have been consistent for many quarters. And ARPU is also growing as our January price increase rolls out to more and more of our subscribers.

We grew net subscribers by 622,000 in the second quarter. The strongest quarterly subscriber growth since the merger of Sirius and XM. This was a 38% increase from the subscriber growth we saw in last year's second quarter. Self-pay net adds, arguably the most important component of our subscriber growth, were 463,000, up 28%, from the second quarter of 2011. Year to date, total net additions through the first half have exceeded 1 million, up 24%, from the first half of 2011.

This strong second-quarter performance was built around very solid execution across the board including stable conversion and stable churn. Despite more people paying higher prices from the January 1 price increase. And improving results from win-back and subsequent owner vehicle sales. We continue to benefit from increases in auto sales. And our churn and conversion performance is steady versus last year. We view both the churn and the conversion statistics as significant wins. Viewed in light of a difficult economy, and our January price increase. We have a conservative expectation around auto sales, and churn, for the second half of the year. Particularly as the economy continues to show signs of tepid growth.

While it is still early, after two strong quarters, we are positive that this year's price change was the right step for the Company. Consumers recognize our strong value proposition, despite the intense competition from existing terrestrial and IP radio. And the new audio services that are making their way into the market. Revenue of $838 million, the highest quarterly revenue figure in the history of the Company, was up 13% over the second quarter of 2011. This acceleration from the first quarter's 11% growth rate, as the price change affected a higher proportion of the base. Following our second-quarter subscriber pre-announcement in July, we increased our full-year revenue estimate to approaching $3.4 billion.

Total cash operating expenses were up just 7.1%. With all of this growth attributed to revenue-based and growth-related expenses. Fixed costs, excluding revenue share and royalties, customer care, and billing and SAP, were actually down year over year. We continue to find efficiencies in programming, and other areas within the organization. The combination of accelerating revenue growth, and strong expense management, drove an expansion in our adjusted EBITDA of 28%, to a record $237 million.

Never before has the Company produced so much EBITDA in one quarter and this figure clearly puts us on track to exceed the previous guidance we gave you. Incidentally, the adjusted EBITDA margin in the second quarter was also a record 28.2%, up significantly from 24.8% in the second quarter of last year. We are now confident in beating our previous adjusted EBITDA guidance, so we are raising our full-year guidance to approximately $900 million.

Free cash flow in the second quarter grew 39%, to a record $230 million. The result of higher cash flow from operations, combined with lower capital expenditures. This very strong cash flow performance beat all other quarters in the history of Sirius XM Radio, or its standalone predecessor companies. We even outperformed last year's fourth quarter, which is typically the strongest quarter seasonably for cash flows. Year to date free cash flow reached $245 million, up 65%. We are still very much on track to generate approximately $700 million of free cash flow this year.

As I mentioned, on the first-quarter call, revenue, adjusted EBITDA, and free cash flow, are expected to continue to increase throughout the year, as the price increase rolls out through the subscriber base and additional subscribers join the service. The consensus expectation for auto sales has flattened but remains up from last year's numbers. The current expectation for full-year 2012 is 14.3 million and this is in line with where auto sales were at the time we did our first-quarter earnings call in early May. Despite this flattening, in auto sales expectations, our strong execution has enabled us to raise our full-year guidance for the second time this year and we now believe our net subscriber additions will approach 1.6 million. This means our paid subscriber base should approach 23.5 million, by the end of this year, which would obviously be a record high level.

Challenges still abound in reaching our targets. but we're confident that our subscriber growth estimates are achievable. I'm particularly pleased with the growth we are seeing in the used car channel and we continue to target 1 million or more self-pay additions from our efforts with previously-owned cars. While we are coming up with programs to further improve our performance in used cars, we are benefiting from what is largely a numbers game. Cars turning over today, in the second owner market, are increasingly likely to have a satellite radio, as our new car penetration rate began to increase materially five to six years ago. These trends will continue accelerating over the years to come.

We continue to focus on the subscriber experience, this means we want to deliver the best content, the best customer service, and the best technology that we possibly can, to make sure our subscribers remain loyal members of the Sirius XM family. Our very strong lineup of non-music programming, including Howard Stern, best-in-class curation of comedy, the NFL, major league baseball, National Basketball Association, the NHL, NASCAR, all types of collegiate sport, news and business offering, position us very well against our terrestrial and IP competitors. Added to this advantage is that we provide our music to subscribers commercial-free. Which is how listeners would prefer to receive their music content. Though some investors may be disappointed that we have chosen to keep our subscription costs low, we believe that this, too, adds to our competitive advantage.

Today, we are announcing the launch of Sirius XM On Demand. Sirius XM subscribers listening by our online media player, on Apple iPhone, iPad, or iTouch, with Android soon to follow, will be able to choose their favorite episodes from a catalog of more than 200 shows and over 2,000 hours of content to listen to, whenever they want. This is a very cool feature that enables our Internet subscribers to listen to some of Sirius XM's best content, when and how they want it. Pulling up recent shows, searching for archived content, and navigating through that content, at will.

The Company's personalized radio project is also on track for rollout by the end of this year. This is a feature that will let our Internet subscribers tailor our expertly curated music channels to their tastes. We continue to be excited about the additional Sirius XM 2.0 channels in English and Spanish that we're offering in select radios and on the Internet. And we're getting good initial reaction from the expansion of our sports content online. Sirius XM is absolutely the best place to listen on line to all of the major sports out there. And no other competitor online comes close to matching the variety of non-music programming we offer. We continue to look for ways to efficiently invest in more content, including more exclusive content online. All of this new content and features online will help drive adoption of our premium all access and Internet add-on packages, which will benefit ARPU.

Once again, these investments in new content and new features are popular because of our strong business model. We collect revenue from our subscribers and on a variable basis, we keep the vast majority of our incremental revenue. By combining our great revenue model with tightly-controlled fixed expenses, and low variable costs, we are able to produce tremendous operating leverage as we grow. And we can offer consumers the kind of expensive, hard-to-build content offerings that can't be found elsewhere, content like Howard Stern, our great collection of sports and news, and even the simple yet powerful idea of commercial-free music. Free and premium competitors will always have a tough time replicating this winning lineup.

I do not believe that there is any question about how well we are performing today. But I also want to assure you that in addition to focusing on the current business, our newest initiatives will be significant drivers of our long-term growth, these include our focus and investments in the second owner of each vehicle, and our IP delivery platform. We also believe that, while our satellite architecture will remain a very powerful advantage, the ultimate combination of satellite and IP will give us even stronger, long-term competitive advantages. We are working with all of our automakers to roll out the next generation of radios and user interfaces, that combine the best aspects of satellite and IP, to enhance the driving experience.

Our business continues to be very scalable and we continue to invest in our back-end infrastructure, to handle a subscriber and enabled-vehicle base, that will serve 35 million paying subscribers, as well as 65 million inactive but potential subscribers. Our earnings results are not being adversely affected by the slowdown in China, the troubles in Europe, or currency fluctuations. As our results demonstrate, there is nothing wrong with operating a company that is currently exclusively focused on the US that still can deliver the growth that our shareholders expect.

In summary, we're very pleased with the Company's performance, particularly compared to other subscription media services and other radio companies. We see no reason today why Sirius XM will not have many years of continued growth. Our greatest concerns are not company-related but more macro issues, such as the economy, fiscal cliff, budget deficit and gridlock in Washington. We can't do much about those, but I can assure you, we will do everything possible to continue to grow our Company, no matter the environment.

The model and plan are quite simple; we grow subscribers, revenue and adjusted EBITDA grow, interest expense goes down, capital expenditures remain low as there is no need to invest significantly in satellites for many years. NOLs are used to keep cash taxes minimal for many years, free cash flow grows, and is substantial management will then use that free cash flow in the most advantageous way for (inaudible). Real simple., as long as we execute and I am confident that Sirius XM will continue to execute.

With that, I will turn the call over to David for some additional comments.

Thanks, Mel. The second quarter was another extraordinary performance by Sirius XM. In the face of weakening global growth, continuing serious concerns about the stability of the Euro and a weak US economy, Sirius XM chalked up its best quarter for subscriber growth in the four years since the merger, adding 622,000 subscribers, bringing total subs to over 22.9 million. We continue to be pleased by consumer response to the $1.50 basic price increase initiated on January 1 of this year. Self paid churn, at 1.9%, and new vehicle conversion rates at 45%, remain consistent with our historical experience. The 1 million net additions in the first half of the year, a 24% increase over 2011's first half, have prompted us to raise guidance for the second time this year, to approaching 1.6 million net additions, from 1.5 million last quarter, and 1.3 million when we started the year.

SAAR grew 16% over the prior year, in the second quarter, to 14.1 million, though SAAR actually declined modestly from 14.2 million in Q1. July SAAR came in at just above 14 million, up 14%, from July in 2011, however, keep in mind that last summer's numbers were adversely impacted by the tragedy in Japan. Analysts' SAAR outlooks for 2012 have been softening in the past couple of months, although the average remains at 14.3 million, for the year. We entered the year with nearly 5.5 million trials, in the conversion funnel.

Growth in new and used car sales has led to consistent growth in the inventory of trial subscriptions, which for the first time now tops 6 million. As of today, over 6,000 franchised and independent auto dealers have signed on to our used car program. We continue to convert new car trial opportunities at 45%, even though vehicle mix continues to shift to smaller, less expensive cars. With new vehicle conversion rates steady at 45%, the increasing volume from new and used car conversions, as well as reactivated radio increases, resulted in nearly 15% growth in our self-pay growth additions in the second quarter. With self-pay churn study at 1.9%, self-pay net additions grew by 58% over the first half of 2011, to 762,000, from 484,000 in the prior year.

The price increase has been rolled out to approximately 50% of the self-pay subscriber base. We continue to be pleased by subscriber reactions with the price increase and the success in selling our all-access plan, which offers subscribers our premiere channels and smart phone access for a 16% savings. ARPU was up 3.8% over the prior year to $11.97 for the quarter. Combined with the 9% growth in subscribers, subscriber revenue grew 14%, to $730 million. Advertising revenue increased 14% over the prior year, continuing to grow faster than the national radio advertising market. Equipment and other revenue were largely unchanged. Total revenues increased by 13% to a record $838 million for the quarter.

Cash operating expenses increased by only 7.1%, or $40 million, to $602 million, $29 million of the increases was related to increases in variable cost, $16 million of the increases was related to increased subscriber acquisition costs. and fixed costs actually declined by $5 million. Adjusted EBITDA was a record $237 million, up 28% over the prior year and at a record 28.2% margin, was up 2.4 points on revenue over the first quarter of the year. Adjusted EBITDA for the first half of 2012 increased 22% from a year ago to $445 million. We are increasing adjusted EBITDA guidance from $875 million, to $900 million, as a result of this strong performance.

Our long track record of cost-effective growth continued in the quarter. Contribution margin was down slightly at 70.6% from the prior year's 70.9%, reflecting the statutory increase in music royalty rates, and an increasing mix of OEM vehicles with revenue share. Subscriber acquisition costs increased 13%, as installs and growth additions increased by 22% and 14%, respectively, while SAC per growth add was flat at $54. Fixed costs declined in the quarter on continuing reductions in programming costs, lower satellite and transmission costs related to reductions in in-orbit insurance and lower engineering design and development costs resulting from the reversal of an accrual for nonrecurring engineering costs.

Sales and marketing costs increased 10% in the quarter, due to increased marketing efforts associated with increased trial conversion opportunities and increased marketing efforts to reactivate subscriptions. We also reversed our deferred tax allowance in the quarter, resulting in a tax benefit to earnings of approximately $3 billion. Another $112 million of tax benefit will be recognized in the second half of the year. The reversal of the deferred tax allowance was triggered by achieving three years of cumulative pretax income, and management's expectations of sufficient and sustainable future taxable income to utilize our NOLs.

Free cash flow increased 39% over the prior year, to $230 million in the quarter. We are on pace to meet our guidance of $700 million in free cash flow for the year and we currently expect to launch Sirius 6 as early as late December. We ended the quarter with $868 million in cash and $2.9 billion in debt. On July 25, we called the remaining $186 million of 9.75% as well [10.875%], we will redeem the notes on September 1. Following the repayment of those notes, our gross debt will stand at $2.7 billion and gross debt to 2012 EBITDA guidance will be at our 3 times target leverage, a significant improvement from 4.4 times one year ago. Our rapidly-growing EBITDA has also improved interest coverage, which increased to 3.3 times in the current quarter from 2.4 times in the prior year. The retirement of the 9.75% notes will be followed in the next several months with the refinancing or retirement of our 13% notes due August 1, 2013. These two debt issues have accounted for $125 million of annual interest payments, presenting a significant opportunity for continuing improvements of interest coverage, and free cash flow.

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

(Operator Instructions)

Jason Bazinet, Citi.

I just have a strategic question for Mr. Karmazin. The FTC is out there talking about spectrum shortages for the wireless players and there was a move by Verizon to acquire Hughes Telematics a few months ago. And I was just wondering if you could elaborate a bit on how the world might evolve in terms of telcos getting maybe more interested in services in the car and is that an opportunity for you to partner? Do you view it as a threat at all? Thank you.

Obviously, all of our competitors, and there are lots of competitors out there in a lot of different places, are interested in getting their content to consumers wherever the consumers want it and that includes the cars. So obviously, with Internet penetrating the home, with mobile phones, that the next logical place for people to start thinking about, is how do they get their content into the car and the people who are certainly positioned to be able to do that are the telcos. And you should assume that we have had a great deal, over a good period of time, comments and conversations with the various people who are potentially partners for us. We have also said to you that since we're delivering bits into the car, that we also have data that we deliver into the car and the idea of expanding into the telematics area is an efficient way for us to consider doing things as well.

Having said all of that, we really like our core business. I know you're talking strategy, so I want to make sure that it is clear, that we have no urgent need to acquire anything. We were obviously aware that Hughes Telematics was potentially available, and we did not express an interest in acquiring it. Normally we wouldn't talk about that before a transaction but since the transaction is already made, that is something that we did not feel that we needed to acquire. So we have an interest in particularly anything involving the vehicle and reaching consumers in the vehicle.

We know that it is going to take many years for these wired cars to roll out with any sort of mass amount. I've mentioned to you that we're in -- not going to be in, but we are in -- two-thirds of all of the vehicles manufactured today. There is a relatively small number of vehicles that are being manufactured today, that are enabling consumers to have a good user experience with IP. You can obviously bring your smartphone into the car, and make phone calls but the user experience for other content is not there. It will be a factor, a greater factor, in the years to come and we think we're really well-positioned to either provide that kind of content, or to be able to partner with others and do it together.

Thank you very much.

Ben Swinburne from Morgan Stanley.

Mel, one of the things that you did not list in your concerns -- you talked about fiscal cliff and our situation in Washington -- was just the somewhat Washington-related rights fee, the situation with SoundExchange. I was just wondering if you could update us there, at least on timing and maybe why you're not worried about it, I think it's something investors are focused on. And David, if you gave this in your prepared remarks, I apologize, but it sounds like you've got a good sense of how much the used car market is driving subscriber growth, either on the gross level or net level. And if that's true, I don't know if you would be willing to share some more statistics, either year to date or on the quarter, how much that's starting to factor in, I know it's been tougher in the past to isolate those subs but it sounds like you've got more visibility there.

Let me just give you an opening statement on the first part of your comment. I worry about everything, okay? So let's just make it clear about that. But what I was looking at is that there was really nothing out there that was going to dramatically change our business model based on anything we know, but those macro economic. Sure, every single contract that comes up, we are making sure that we are doing what is in our shareholders' best interests insofar as dealing with it. And on the Copyright Royalty Board, that, too, is a contract, or an agreement that we're concerned about. But let me let David update you on where we are.

The CRB process, it is effectively, just like a trial. We went through a direct phase in June, the rebuttal phase of the trial continues, actually next week and then in, I believe it is early October, counsel will provide what amounts to closing arguments to the panel of judges who will render a decision in December. We don't really have any great insight into what the outcome of that will be other than just what the timing is. So we like our case. We like our case better than their case. And so we will work through the litigation and see where it comes out.

On the used cars, nothing has really changed on it, than that we do track it but I still don't think that it really fits for separate reporting. A big part of what we have in terms of second owner volumes come from what we call hand-raisers, people who pick up the phone and call us. And it is not always clear when a hand-raiser is calling us, whether or not that is actually a new owner of the car, or whether or not the name is just configured differently on the account. So it is a robustly growing segment of the business.

As Mel said, the increases, the significant increases in new car incorporation, really got underway about five or six years ago. And since average first car ownership is about six years long, we're beginning to see those turn over now. So the best way to get a sense of what the used car opportunity is going forward is to look back at what we publicly reported as gross additions from the past, as we've talked about. New car penetration rates, and you know what the SAAR was and you get a pretty good estimate of what our installs were historically. And then you can use that as a guideline for what the turnover is going to look like in the next few years.

It is Mel. We're clearly expanding internally our resources in the second owner market. Obviously, the size of that market, we haven't tapped a way to get all of it, is larger than what the SAAR number is, as far as new cars are concerned. So this is something that is real. This is something that we are generating subscribers. Contributing toward our extraordinary growth in the second quarter was the second owner. And it is something that is going to continue for many years to come.

Thank you, Mel and Dave.

James Marsh, Piper Jaffray.

Just a quick question on On Demand here. I was hoping you could discuss some of the challenges and which ones seem to be most prominent. Obviously have you technological challenges in delivering it. You've got some licensing issues with the various rights holders. And then you've got the issue of simply promoting this service to your subscribers. Could you just talk through some of those challenges and which ones are the most important, or the biggest ones in your mind?

Let me touch the last one first and then I will let Jim come in, and then Scott can add anything else. Fortunately, it is real easy for us to promote it and not very costly to promote it. Because, as you mentioned, they are all our existing subscribers. So we know exactly who they are. We know that they're listening to our service. So the combination of having their e-mail and communicating with them, as well as our reaching them through our service, is the way that we will very efficiently promote it and (inaudible).

Sure, this is Jim. I just want to comment on the technology. And I want to go back to a comment Mel made in his remarks. Which is, this is an important step for us, as we continue to invest in, and build out our IP infrastructure, to provide an experience to our subscribers that, in our mind, combines the best of satellite, broadcast, and IP. The technical challenges for us were different. But I wouldn't say insurmountable and we're pretty pleased with where we are right now, getting it built out. It is important also to note, this is the second big step in the IP road map this year that we've delivered. The first one being about three months ago, when we delivered increased functionality to all of our subscribers, with new features, Start Now, and some other important things. And we then will deliver again by the end of the year a third step with personalized radio.

I just wanted to add, with 150 channels and different programming going on all the time, it is literally impossible for all of our subscribers to consume the content that we're so proud of. And with this, and the promotions obviously on air, on different channels, including the channels that some of the programs live on, it will be really easy for a lot of our subscribers now to hear content they may have missed, whether due to drive time, or schedules, or personal convenience. So we're pretty excited about making this an even stickier subscriber, based on the fact that they will get even more programming when they want.

Yes, we're not reinventing the whole world. Obviously, set top boxes and television enable people to get content on demand. We saw that the results in the television world was that it made subscribers stay longer and contributed toward their enjoying the experience, contributed toward higher prices. So we're doing something in radio that really hasn't been done much and we think our subscribers are really going to love it.

Excellent. Thanks very much.

Barton Crockett from Lazard Capital Markets.

I was wondering if you could update us a little bit on what may be an unanswerable question, but where discussions, some sense of where discussions are between Sirius and Liberty. You both had filings, that there is some level of interaction. I think we all assume that Liberty is potentially interested in a tax-free exit, maybe with a reverse Morris Trust structure. But if you could shed any light on what is happening there. And also on a related question, Mel, I know your contract comes up for renewal at the end of this year, you've suggested a degree of, I think, reluctance to work for Liberty. And I'm just wondering if that gets tied up into discussions with them about what they do with their stake. And if you have begun discussions with the board about potentially renewing after 2012.

On the first point, we really have nothing new to report. Obviously, we are engaged with Liberty, we speak to them from time to time on what their interest is. Clearly, Liberty has to decide what they want to do and maybe they've done that already, they have not exactly communicated that to us. And when we hear what Liberty wants to do, we will clearly respond.

On the second part of your question, I think that I'm the biggest believer in free speech. I don't question anyone's ability to write things. But the fact that I was asked the question two years ago about working for somebody, and I told them that my experience at Viacom was such that I didn't enjoy, and I liked working for a board as compared to working for a controlling shareholder, was something that I said. And then every time the discussion of Liberty comes up, somebody is coupling my name into that. I can assure you that our board and I am interested in trying to accomplish whatever Liberty wants to do. As long as it is in all of our shareholder's best interests. And that there is no issue involving Mel that has anything to do with the current conversations with Liberty at all. Regarding my contract, it doesn't expire until the end of the year. And prior to the third quarter earnings call, prior to our next call, I think the board and I will deal with it.

Okay. That's great to hear. Now, I also wanted to ask just a numbers question. Could you remind us, what percentage of subs were hit with the price hike in the quarter? And what more have to come?

I think, Barton, in the first quarter call, I think I said that we were at about 35%. And in this call, I said we were at about 50%. So it would be that incremental 15%.

Okay. Great. Thank you very much.

Vijay Jayant, ISI Group.

I actually have more housekeeping questions. First, David, just on the engineering design/development number that is down substantially, is that the new trend line? And second, the significance of the deferred tax valuation reversal, does that mean that going forward you're going to be fully taxing on your income statement, on your GAAP income statement? But obviously reversing that on your cash flow statement, on taxes?

On the engineering design/development, no, I wouldn't say that that is the new trend of where you should expect progressively declining engineering design/development. We did have a contract renegotiation that occurred in the second quarter that resulted in the release of some accruals. But overall, we will continue to take what are probably similar dollars in engineering design/development, and find and innovative ways to spend that money. It should remain consistent with our prior trend statement.

On deferred taxes, what we will be doing going forward is reflecting the tax expense offset by the utilization of the NOLs. I haven't looked at a forward P&L for exactly how that is going to play out on a GAAP basis, but you should expect us to be using our deferred fax assets that are now recognized on the balance sheet to shield income from taxes going forward.

Great, thank you.

Jim Goss from Barrington Research.

A couple of them. One, I think for David. I was wondering if you could target your desired debt level? You're getting to a level at about 3 to 1 and if you factor in cash, closer to 2 to 1. That you probably don't really need to go any lower in terms of leverage level. And it is mainly just repaying the higher cost to outstanding debt. And to the extent that once you got to that desired level, share repurchases might be, at least momentarily, less desirable until the Liberty issue is resolved. I'm wondering both the level of debt you would like to get to, and what would be the best options for cash at this moment.

We have a longstanding target of 3 times EBITDA in terms of leverage. We're at that level now. We have delevered a little bit. And as EBITDA continues to grow, certainly we can relever a little bit and maintain that 3 times level. In terms of what we do with cash, we do have near-term maturities that probably is going to make sense to take care of the $680 million or $690 million of remaining of 13% notes that are due next summer. That is a substantial near-term maturity. We certainly have the cash and liquidity to handle that quite easily. But it will probably make sense for us to take a good look at the opportunities available to us in the long-term debt market, as well as the bank market for reducing interest costs on the debt we do put on the Company.

Yes. And I think regarding what we do with our cash, it is something that the board will certainly address. And we think that management feels very comfortable when we get to the leverage ratios that David talked about getting to, that we would be in a position at that time to go to the board, and discuss what management's recommendation is, as to what we would do with the cash. Based on sitting here today, I can tell that you there really is no acquisition that the Company is interested in. I can also tell you today that we are planning to considerably, as we have been doing, investing in the growth of our existing Company. So if you think about the fact that we're currently investing in the growth of our Company, we don't have any acquisitions to make, I think really puts us in a good position to figure out the best and most efficient way to benefit shareholders by having all that cash and the additional leverage that we have available to us, as well.

Okay. And one other question, for Mel. In the past, historically, you've had a significant advertising focus, certainly coming into Sirius XM. It seems like your tone has softened because of the robust nature of the subscription model. Have you started to just change your attitude at all, or shift your attitude in recognition of the bullet-proof nature of the subscription model? Or do you think there is some opportunity on the advertising side, as relatively small as it is in context, going forward?

I don't think my tone has changed recently at all. Just for the record, I've been a seller of media. I sold infinity to CBS, and then I sold CBS to Viacom. And certainly the Internet has changed. When we sold CBS to Viacom, we sold our cash flow that we had in the radio group at 20 times cash flow. And that price, again, was warranted at that time based on growth rates. The Internet has created so much additional supply for advertising, that in general I believe that the advertising business is a much more difficult business today than it was in the past. There is still a lot of business being done in it. It is just less good. And the things that do really well are things like the highest rated TV shows and the Olympics, and the Super Bowl.

think that the advertising business is going to be even more challenged, as a whole lot of people are getting their content on mobile. And the ability for companies to monetize the mobile advertising experience is even more challenging. So I think that when I first came to Sirius eight years ago, I believed that we had an opportunity to take 10% of our revenue in the form of advertising. I don't believe that that is likely. I believe that our advertising will continue to grow, particularly as we do creative content deals. But I don't believe that you should think that advertising is going to be a significant driver of this Company.

Okay. Thank you.

I think that's it, operator. Thanks, everybody, for joining us.