Sirius XM Holdings Inc (SIRI) 2012 Q4 法說會逐字稿

Good morning, and welcome to the SIRIUS XM Radio's full-year and fourth-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, Finance. Mr. Stevens, please go ahead.

Thank you, Shelly, and good morning, everyone. Welcome to SIRIUS XM Radio's earnings conference call. Today, Jim Meyer, 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, our 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 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 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 Jim Meyer.

Thank you, Hooper. Good morning. 2012 was a great year for SIRIUS XM, as we reached a number of records and milestones. Earlier this year, we issued guidance for meaningful growth in 2013 in our subscriber base, and financial performance. In 2012, we added more than 2 million net new subscribers. The largest number of new subscribers in a single year since 2007. At 1.7 million net additions, our 2012 self-pay subscriber growth was up 36% over 2011, and 69% over 2010's self-pay net additions.

Self-pay churn and conversion rates were steady, at 1.9% and 45% respectively, despite an increase in our base price. Notably, the first core price increase ever at SIRIUS, and only the second one ever at the XM base. We believe these statistics indicate strong demand for and satisfaction with our service, and I believe this bodes very well for the future. These 2 million net additions exceeded our original guidance on the strength of lower-than-expected churn, higher auto sales, and improved used car additions.

We exceeded all of our 2012 financial guidance as well. Revenue was a record high, up 13% to just over $3.4 billion, versus our guidance of approximately $3.4 billion. Adjusted EBITDA climbed 26%, and reached a record $920 million, compared to guidance of approximately $900 million. And free cash flow jumped a massive 71%, to $709 million, beating guidance of approximately $700 million. Auto sales certainly provided a tail wind to our growth in 2012, with SAAR climbing 12% in the fourth quarter to around $15 million and growing about 13% to $14.4 million for the full year. Consensus estimates called for auto sales to rise at a slower rate in 2013, just under 5%, to 15.1 million.

Earlier this year, we announced that Toyota is increasing its penetration rate of satellite radio over the next two to three years. Every Toyota that features the Entune Multimedia System will also feature satellite radio. I think this is an important indication that automakers see multiple technologies coexisting in the vehicle for a very long time. And rising penetration at the Japanese OEMs, like Toyota, will mean that we should see less variability in our penetration rate due to market share shifts among the OEMs. Our overall penetration rate was 68% in the fourth quarter, and 67% for the full-year 2012. We expect to be in this range over the next few years, as OEMs remain very committed to satellite radio, including the deployment of our new 2.0 radios in additional models, as well as at additional OEMs.

SIRIUS XM ended 2012 with approximately 50 million satellite-equipped vehicles in operation in the United States, roughly a 20% penetration rate of all registered vehicles on the road. And up from about 40 million vehicles at the end of 2011. This trend just keeps going. Driven by rising auto sales and our strong new car penetration rate, we expect the number of enabled vehicles to approximately double in the next five years. The rising number of pre-owned vehicles on the road, combined with our marketing initiatives, are certainly boosting our subscriber additions, for previously-owned cars. Our used car trial program has now been implemented at over 8,000 dealer locations across the country, including all of those run by many large retailers, such as CarMax, AutoNation, and Penske. As more and more of the satellite radio-enabled vehicles turn over for the first or, yes, even second time, our opportunities in the used car market will continue to grow. As the average car on the road today is over 10 years old, our penetration rate in the pre-owned vehicle market will steadily increase over time. It is really just a numbers game, and we want to be prepared to capitalize on these opportunities as they become more material to our business in each passing year.

As we mentioned last year, we expected to do approximately 1 million gross adds in the used car channel in 2012. We surpassed this number, and in 2013, we are targeting used car gross additions in the range of 1.5 million. We will continue to grow our pre-owned business by adding more dealers to our current programming, launching new initiatives with both franchise and independent dealers, and by riding the meaningful increase, in SIRIUS XM pre-owned vehicle sales. At the end of the day, however, it is our brand-name talent, commercial-free music, and exclusive content that continue to attract and retain listeners.

We continue to deliver unique subscriber experiences that make for the best in audio entertainment. And we remain aggressive about making sure we provide the best available programming to our listeners. We have expanded our online sports offering in 2012, to make Play By Play available from the NFL, Major League Baseball, NASCAR, the NBA, and the NHL, and added a number of high-profile sports personalities to our rosters of hosts. Our town hall and artist confidential series are drawing some of the biggest names in pop culture and entertainment to deliver exclusive interviews and performances to our subscribers including Quentin Tarantino, Jane Fonda, One Direction, KISS, Aerosmith, Taylor Swift, Alicia Keys, and Willie Nelson, just to name a few. We are also adding new programming in the important comedy area, such as Comedy Central Radio, launching this spring with the biggest brand name in comedy. And a new daily talk show, with Martha Stewart.

We have the best audio entertainment content in the country, and are constantly looking for unique innovative programming to improve our offering even further. We have also been expanding our streamed offering. In fact, we are in consumer beta now on an exciting new feature called My SXM. We are very excited about the upcoming launch of My SXM, which empowers our subscribers to create their own versions of their favorite commercial-free SIRIUS XM music channels when listening online, whether it is more rock on '70s on 7, more of tomorrow's hits on Hits 1, or more dance pop on BPM, My SXM users with will hear more of the music they love, tailored to how they want to hear it. If they happen to hear a song they don't like, My SXM will let them skip it. Most important for us, we are not asking listeners to start from scratch, like other personalized services.

One of My SXM's core strengths is that it starts with channels our subscribers already know and love. Channels that have been crafted and curated by our music experts. Now, they can take those music channels, and personalize them to their taste and moods. With My SXM, listeners also don't need to constantly lean forward to create a tailored listening experience. They can just tune to the music channels they already like and adjust the channel's unique slider controls, and set them once for good, or change them any time they want. An since our music libraries are hand curated by SIRIUS XM's expert music programmers, My SIRIUS XM further enhances an already robust music discovery experience for our subscribers. This new feature will further enhance our IP offering, which has been greatly improved over the past year, and now includes the ability to time shift up to five hours on many stations, start songs at the beginning when tuning to a music channel, and the ability to play 1,000s of hours of talk and entertainment from over 300 shows, from our library of On Demand content. All of these features, including My SXM and on-demand access, will be available across all of our Internet platforms, including our android and iOS apps for smartphones and tablets.

Last summer, we reorganized areas of our Company with the purpose of improving our IP development, delivering better streaming offerings and apps, and speeding up the process of innovation in this area. In October, we added in Ricky Rodriguez to our team, a former leader at Microsoft, and a proven technology senior executive, as our EVP Operations and Products, to assume responsibility for our streaming, infotainment, and telematics business, as well as our product and technology operations. We believe we are beginning to see the fruits of some of these efforts in IP. Ultimately, these enhanced online capabilities will make their way into automobiles seamlessly as well. Having both a satellite connection and an IP connection in the vehicles will prove to be a durable advantage versus IP-only competitors in a connected car world. Stay tuned.

As you know, in addition to audio entertainment, we also offer a variety of infotainment services in the car, realtime traffic, in particular, is a valuable service that today many of our subscribers are using and paying for. In September, SIRIUS XM announced our first entry into the telematic space with our Nissan agreement. We are developing a comprehensive suite of services for Nissan vehicles, such as automatic crash notification, stolen vehicle tracking, roadside assistance, and other safety and convenience features. The deployment of telematics is the logical next step for broadening our in-vehicle technology, and strengthening our relationships with automakers. We intend to pursue more such agreements in the future.

As you know, we've have had a lot of change in the last six weeks here at SIRIUS XM. Liberty Media has purchased additional shares in the open market and converted their remaining preferred shares, bringing their ownership of our common stock to more than 50%. And we recently welcomed three new directors to our Board. What is not changing is the consistent focus by everyone here at SIRIUS XM, from on-air talent to senior management, on delivering a great service that will help us grow our subscriber base and drive free cash flow growth to enhance value for all of our shareholders.

To remind everyone, we have a very unique and powerful business model that is unmatched by any of our competitors in the audio entertainment space. We have a recurring subscription revenue model with low marginal costs that enables us to keep the vast majority of our incremental revenue. By monetizing our listeners better than any other audio service, to generate lots of revenue, bringing that revenue in at higher incremental margins and tightly controlling fixed costs, we are able to produce significant operating leverage as we grow. This is the heart of our margin expansion story, and our high monetization means that we can continue offering our subscribers expensive and exclusive content that is simply unavailable to most of our competitors, particularly in the IP world, who primarily tend to rely on music content that is available to everyone ubiquitously.

In December, the Copyright Royalty Board issued its decision, setting our performance royalties for music over the next five years, and nothing in the CRB decision changes the way our model will work. This should be very comforting to our shareholders. Our Company has no significant debt maturities for nearly 2 years, an underleveraged balance sheet, no need to pay significant cash taxes for several years because of our NOLs, only small investments required for satellites over the next few years, and our cash flow from operations is growing quickly. This means that SIRIUS XM is in a very strong position to increase our investments in our business, particularly in areas such as telematics, IP technology, and other long-term strategic investments.

We continue to actively evaluate M&A opportunities, and will, as always, apply a very disciplined approach to ensure any future transactions meets the high threshold for value creation. But even with all of this opportunity to invest, we expect to have plenty of capital to return to our shareholders over the coming years. In December, we announced and paid a $327 million special dividend to our shareholders, marking the first time in the history of our Company that we have returned capital to our shareholders. We also announced in December a $2 billion share repurchase program. We expect the Company to continue returning capital to our shareholders as our free cash flow grows, and we maintain a prudent level of leverage in the 3.5 times range.

The first question I usually get from investors is what should we expect from you and what's going to change at SIRIUS XM under your leadership? Well, I can tell you that you will see a lot more of the same, with a focus on self-pay subscriber growth, and a very tight focus on costs. Internally, we are constantly asking ourselves how our decisions will improve the subscriber experience. We will keep our subscribers front of mind when we make business decisions. And we will keep our focus as tight as ever on operational excellence. If we do a good job satisfying our subscribers, I truly believe that the ultimate result should be very rewarding to our shareholders as well.

With that, I will turn it over to David for additional comments.

Thanks, Jim. The fourth quarter was another extraordinary performance by SIRIUS XM, turning in our best quarter for self-pay additions since the merger. We added 529,000 self-pay subscribers in the quarter, driving full-year total subscriber addition to 2.008 million, and bringing total subscribers to 23.9 million. In the course of 2012, we raised subscriber guidance three times, and ended up beating our original guidance by more than 50%. The beat was broadly-based. Auto sales were better. Second-owner additions were stronger, and most importantly, self-pay churn was better than our original expectations. Self-pay churn continues to show long-term consistency. The year rounded up to 1.9%, the third year in a row at that level. The fourth quarter, at 1.8%, was our best quarterly performance since Q3 '08. You can really see the strength of the business in our self-pay subscriber additions, which for 2012 were at 10 times their 2009 level. In the depths of the 2009 financial crisis, our first full-year of operations as a merged company, we added 154,000 self pay net additions. That jumped to 983,000 as the recovery got under way in 2010, followed by 24% growth in 2011 to 1.2 million and 36% growth in 2012, to 1.662 million self-pay net adds.

A slow but steadily progressing economy seemed to shake off both the effects of Hurricane Sandy on the northeast and year-end concerns over the fiscal cliff, as seasonally adjusted auto sales in the fourth quarter reached 15 million, the strongest quarter since Q1 2008. Asian automakers continued to gain share versus the prior-year period and market share continued to shift toward small to mid-sized cars, both of which tend to put downward pressure on conversion rates. The new vehicle conversion rate was 44% for the quarter and remained at 45% for the year, both within our 44% to 46% expectations.

There are now more than 50 million SIRIUS XM-enabled vehicles on the road. Our penetration of new vehicle production remained at about 67% in 2012, and for the first time, new vehicle installations eclipsed the 10 million mark for the year. That is nearly three times the level of installations we had in 2006. As these new car installations move into the used car market over the next several years, SIRIUS XM will become an easily-available entertainment option for millions of new potential customers, a great continuing growth opportunity for us. Growth in new and used car sales has led to consistent growth in the inventory of trial subscriptions, which ended the year at 6.1 million. As of today, over 8,000 franchise and independent auto dealers have signed on to our used car program.

ARPU is up 4.4% over the prior year, helping to fuel our strongest quarter of the year for revenue growth, 13.8% in bringing quarterly revenues to nearly $900 million for the first time. With more than $3.4 billion for the full year, revenues grew by 12.7% over 2011. Cash operating expenses increased by 7.3% for the quarter, and 8.5% for the year. As has been true throughout the year, roughly 90% of the increase in cash operating expenses was related to increases in variable costs. While contribution margin improved slightly over the prior year in Q4, for the full year, it was down 0.6% to 70%, largely due to the statutory increase in music royalty rates. Subscriber acquisition costs were up 7% for the quarter and 8.7% for the year, on the strong growth of new car installations, while FAC per gross ad fell $1 to $54 for both the quarter and the year. Fixed costs grew 2.2% in the quarter and 1.9% for the year as the Company's successful focus on cost efficient growth continues.

Adjusted EBITDA grew 37.8% in the quarter, our fastest pace of the year, to $230.5 million. Full-year EBITDA of $920.3 million comfortably exceeded guidance, represented 25.9% growth over 2011, and represents a record full-year adjusted EBITDA margin of 27%. Free cash flow increased 40% in the quarter, to $269.5 million, and nearly 71% for the year, to $709 million, exceeding guidance. We generated more free cash flow in the fourth quarter alone than in all of 2010, and we generated more in the second half of 2012 than in all of 2011. SIRIUS XM's growing free cash flow and improving credit quality has allowed us to dramatically improve leverage, and reduce our borrowing costs. As a result, interest expense showed a 40% improvement over 2011's fourth quarter, dropping to $45.5 million from $75.2 million.

We ended the quarter with $521 million in cash and $2.4 billion in debt. Gross debt to EBITDA is at a very conservative 2.6 times. During the quarter, we completed the Company's first bank financing, a $1.25 billion revolver that was undrawn at year-end, providing the Company with ready access to a substantial amount of capital to support our stock buyback program, and pursue strategic opportunities.

The Copyright Royalty Board, as Jim mentioned, rendered its decisions on sound recording performance royalties for the 2013 to 2017 period for our satellite radio service in December. While the decision resulted in an increase in our royalty rates, the increase is substantially less than what was sought by the music industry. Effective January 1, 2013, the rate increased from 2012's 8% rate to 9%. And then it will grow by 0.5% each year, reaching 11% in 2017. As a result of the decision, we increased the US music royalty fee from $1.42 to $1.81 on our basic $14.49 package as of February 1.

In our 2010 earnings call two years ago, we spoke to investors about the Company's strong business model, growth prospects, and the coming opportunity for substantial returns of capital to shareholders. In the fourth quarter, we began delivering on that promise. SIRIUS XM paid a special dividend of $0.05 per share, totaling $327 million, and announced a $2 billion stock buyback program, or approximately 10% of our current equity capitalization, and 20% of the public float. In our earnings release this morning, we announced that Liberty Media is not required to participate in our stock buybacks.

SIRIUS XM is one of the best growth stories in media. In 2012, we grew revenues by 12.7%, adjusted EBITDA by 25.9%, and free cash flow by 71%. Our 2013 guidance issued a few weeks ago continues our record of cost-effective growth. We expect to see another strong year with 1.6 million net self-pay subscriber additions, as total subscribers will grow to 25.3 million. Revenue will exceed $3.7 billion, nearly 10% growth over 2012. Adjusted EBITDA will grow more than 20%, exceeding $1.1 billion, and free cash flow will continue to grow faster than EBITDA as it approaches $900 million.

Free cash flow per share is also growing at a rapid rate, and it will grow faster as we begin to buy back stock. Based on our reported fully-diluted shares and free cash flow, free cash flow per share grew from roughly $0.064 in 2011 to $0.103 cents in 2012. Now, just for the sake of argument, if you assumed we retire about 600 million shares in our $2 billion buyback program and/or assume our guidance of approaching $900 million in free cash flow for 2013, free cash flow per share would trend towards $0.15, or roughly 40% growth over 2012 levels. We have a great product that our customers love, and we are constantly working to make it better. We also have a great business model with great long-term growth prospects, and that should drive great results for investors.

Operator, let's open it up for questions.

(Operator Instructions)

And your first question comes from Barton Crockett with Lazard.

Two questions, if I could. First, on one of the numbers in the financial statement, was customer care and billing expenses went up a decent amount year-to-year per average subscriber. And I was wondering if you could talk about what is going on there and whether this is the new level that should persist going forward, or whether this was kind of an unusual investment? That is my first question.

Okay. So we did a couple of things. One is I think you've seen the numbers be up year-over-year for a few quarters now. We've made the decision, I think we've talked about this in prior calls, to invest a little more in customer care. We believe that it is showing up in our churn rate, beating expectations. That was certainly true in the fourth quarter, that one of the things we did this year that was a little bit different than prior years, is that we actually kept our staffing levels at higher levels. So, rolling into Christmas. That, instead of reducing staff in the fall -- in the early part of fall and then rehiring and retraining going into December to meet the Christmas bump. We just kept a sustained higher level of staffing throughout the quarter. And we think it showed up in better customer service, and then in better churn rates with the churn being the best we've seen in four years for the quarter.

Okay. So in the past, you have had some scale there, some improvements in spend per average subscriber. Is that basically ending or should we see that resume for the next couple of quarters?

This is Jim. It is a balance. And what David said is absolutely what we're trying to gauge right now. We invested more in the second half of last year, and we believe it correlated to a better result for our subscribers. In 2013, at least in the first half of the year, we intend to continue that way.

Okay.

And Barton, as a percentage of revenues, it really hasn't budged.

Okay. And then if I could switch to the share repurchase, I just want to be clear about a couple of things related to it. First, did you not buy back any stock to date in the fourth quarter or so far this year? If not, was there some type of risk constraint that kept you from getting into the market? And then secondly, on the Liberty Media change, was there some type of contractual commitment that had to be changed, or is this just a statement from Liberty that they're no longer kind of necessarily participating in the share repurchase?

Two things, when we announced the program in December, we are pretty close to earnings, right? So, the advice we had was to stay out of the market until we had gotten the material non-public information into the marketplace, which I think we effectively do with this call and getting the K filed. With respect to Liberty, when we originally announced the program, Liberty was under 50%. We announced that they would be participating pro rata so not as to accrete their ownership. Given that they've gone into the marketplace and they have gone over 50%, that there doesn't seem to be any structural reason why the Board should for instance, insist on their pro rata participation. So, it is left to their discretion to participate in a manner that they feel is best for their business.

Okay, great. Thank you.

And our next question is from Ben Swinburne with Morgan Stanley.

I have two questions, strategic questions. One, I wanted to ask, Jim, about how you're thinking about telematics in particular, and other sort of new business investments or opportunities ahead of the Company. You haven't talked about before. Telematics is certainly getting a lot of buzz and focus coming out of CES, et cetera, and you are pretty uniquely-positioned given your customer base and platform to look at that community.

Also related to CES, you had the Toyota announcement. Can you talk about what that announcement and maybe what other announcements with other OEMs might mean to the business longer term? I know, David, you always talked about sort of a sweet spot in penetration rate, but maybe there is more opportunity for upside than people realize. I would love to hear your thoughts there.

So I think number one, I want to be clear, the word telematics is the buzzword, but the real buzzword for me is connected car. And all of those things that connected car offers in the future, many of which have not been completely fleshed out yet. So Ben, as you know, I think every automaker now is either planning or is putting in place how they intend to deal with their architecture in 2017 and beyond, vis-a-vis the connected car. We think it is important that we participate in those discussions.

I'm not sure exactly which businesses that ultimately we need to be in. Obviously, on the short term, the one that is important for automakers, and one that we think we can play in and provide value is in fact the telematics business, and that's why we launched our initiative with Nissan. That's why we are out working with other OEMs to try to pursue and deliver to them what they may want. What is most important to me is that we ensure that in this next generation -- and by that, I mean in the 2017 and beyond time frame -- that when the car has two paths into it, both the IP path and the satellite path, that we're able to figure out how to best monetize that. And, as importantly, use both of those capabilities to improve the experience for our customers. I think it is a very logical step for us and it is one where we intend to put a lot of focus.

In terms of the Toyota announcement, number one, we were quite excited about that announcement. These things take time, as you all know with OEMs. We've been working on it for a couple of years, but it takes a couple more years before it ramps up and rolls out to the numbers. But the great thing about this channel is when the OEM commits to it, it does happen and we love the results. I personally believe still that high 60%, 70% is the right sweet spot for us for penetration, and I do believe that is where you will see our penetration stay over the next five years.

And you wouldn't expect any change to the conversion ratio as a result of that inching up over time, as you get into the lower price point cars and stuff?

It is a challenge. I will be honest with you. I mean, we have issues of mix that we wrestle with every quarter. Those mixes are -- the primary reason is obviously the lower-priced models convert at a lower rate than the higher-priced models, and so we wrestle with that. I think we're still comfortable with our range that we've given for conversion. I think we will see how 2013 goes.

Thank you.

And our next question comes from Matthew Niknam with Goldman Sachs.

Two if I could. One on used cars. If you can give us any more color on the churn profile and profitability of a used car customer, and how that might compare to your traditional base? And then secondly, on self-pay churn, that continues to improve, even as the rate hike from earlier last year rolls through the base. Can you help us think through what is driving the improvements in self-pay churn and there is an opportunity for any addtional improvements from these levels going forward? Thanks.

Let me just start on self pay for a minute and then David will take it and answer your specific question on used cars. There is a lot going on. And so it is hard to just necessarily say our improvement is due to one thing or the other. I mean starting with the economy, we think improved in 2012, and we think that was helpful. Obviously, we continue to try to correlate what drove what we thought was outstanding performance in the fourth quarter. I think there are a lot of little things also that we did that helped improve that number, and we are going to continue to do those things, as we move forward. I don't think there was one magical thing that drove the number where it went.

On the used cars, I would say that it is still early days on individual metrics. I know it sounds like we've got a lot of transactions, and we do, but we do like to see these things trend over time. Overall profitability on used cars is going to be certainly as good as the new car profitability and if the single biggest reason being we don't have to reinvest in the radio. So, reacquiring revenue-generating subscriptions on previously-installed radios is an immensely profitable business for us. I think it will be a little while before we're able to tease out the sustained differences in churn profile. So you will just have to stay tuned for that.

Thanks.

And our next question comes from Jessica Reif Cohen with Bank of America Merrill Lynch.

Thank you, I have several. First on the buybacks, can you -- are you willing to commit to a time frame? You're so far below your leverage target, I was just wondering now that you're going to start that, is there any time frame that you can offer?

No, we're not -- I don't think we're going to come out with a time frame. We don't want to compete against ourselves in the market. We will fill the initial authorization, as you know, we have got to be mindful of our restricted payment covenants as well.

Okay. And then second question is on some of the new initiatives that you outlined, Jim, can you just -- is this -- should we think about this as a revenue opportunity? How will you charge for it? Or do you think of it as a churn reducer?

Well, I think it is a great question. I think in the IP area, as you know, we charge for our subscribers to be able to stream our content and we certainly have no plans to change that. I think we can, as we've improved significantly our IP offering, we ought to be able to sell more of our subscribers a bundle that includes both our satellite-delivered content as well as our IP-delivered content, and we're certainly working hard to do that. At the heart of it, though, is our basic belief, which is that a more engaged subscriber is more likely a subscriber that is going to stay with us over the long term. So, we see IP, particularly as its easy path into the home, as another great way to keep our subscribers engaged. So I think in terms of IP, it is a double-edged sword.

In terms of this stuff we talked about longer term, with the connected car, I see two things there. One, certainly it is a defensive play, to make sure that we are part of new technology that rolls out, and helps us keep a hand in what may go out in many, many years to come. But also, I believe there will be other revenue opportunities there that will be good for us. As those businesses evolve, I think we're well positioned to take advantage of those, and then finally in a true connected car, I can't help but believe that is a better experience for our subscribers, and should help our churn and conversion profiles as well.

But it is definitely both, right? So Jessica, that we will get additional revenue from it, is may be a way, as Jim mentioned, through bundling, to help with the ARPU block, as opposed to just straight price increases. And we definitely know from the last 10 years, selling bundles and upgrades to customers, that the more engaged customers Jim described does in fact churn less.

Can you give the difference in churn?

No, I mean I would just say that the people that buy more, for longer periods of time, churn less than the average that we've got.

Right. And then just switching gears, I have a question for Scott. You said he is on the call. You have differentiated content, and I think Jim was the one who laid out a lot of the stuff that you have. The town halls, and the interviews, et cetera. Is this -- as you look out to this kind of content, which is really unique and exclusive, do you begin to see pressure on costs or conversely, are there ways for you to decrease costs in other areas?

Sure. So there is always going to be pressure on costs, because people that have valuable content and copyrights want to maximize the amount they can get for them. On the other hand, they definitely see the benefits of their content being used and distributed on SIRIUS XM, whether it is through awareness or the fact that often our listeners and therefore this content is being heard by a credit card-bearing audience, and that provides a valuable filtering tool to get to people that can buy content, which is what their key offering would be, or to buy concert tickets or anything else, sports tickets, and all that. So while the pressure is there, we're trying to make sure that we offer the best we can in a two-way street to those copyright holders, to do the best we can. So far, that is working and it is clear our costs are being held under control.

I have one last question. Again, it is related to churn, which everybody has brought up. It is so good. You are passing through the music royalty fee. Given this low churn, can you give us your current view on price increase? Would you be considering a price increase for this year?

We don't have any plans right now for a price increase, a general price increase. I can tell you, and if you're a subscriber whose account renewed in February, for instance, you have been notified of a change in the MRF, and a passing along of that. We need to see how that goes, and watch that profile over the next six months. And I think that is going to be our focus for 2013.

Thank you.

And our next question comes from Bryan Kraft with Evercore Partners.

A question on ARPU, it was basically flat quarter over quarter, despite a lot of fourth-quarter renewals at the new higher price point. Was there a step-up in the level of discounting to drive more sub-growth in the quarter? And if so, was that driven more towards retaining customers that were receiving the price increase for the first time? Or was it more to convert on the trial sub to pay, if you could just shed some light on that, it would be helpful.

There is no change in the discounting practices. It wasn't really a factor on the quote, unquote quarter change in ARPU. Now, I think you've seen other seasonality in the ARPU in previous years where the main enhancement is a little bit less fourth quarter to third quarter. Part of it is, it is an average, so that the fourth-quarter renewals at the higher price, remember, are coming at the end of the quarter, and there is very little recognized revenue that comes from all of those rollovers. So that is certainly going to effect it. But there is really no underlying change of business practice that you should be concerned about.

So is it safe to say that you would expect the ARPU to continue to increase in the first and second quarter, as the price increase rolls through?

Yes, the ARPU will continue to pick up. Remember, it takes a long time for things to roll through. So believe it or not, we're only just shaking off now the effects of the reduction in the music royalty fee from $1.98 to $1.42 that went through in December of 2010. That negatively impacted ARPU numbers all year. In the first quarter, we will pick that up, and so ARPU should grow.

Also remember that the percent of subscribers who come in through paid trials also impacts that number. And as those grow, let's say differently, and different rates quarter-to-quarter. That can also have a factor on suppressing ARPU, obviously, as the money comes from the automaker instead of the end user.

Okay. Thank you.

And our next question is from John Tinker with Maxim.

You haven't discussed your ratings for a while, in terms of how many people actually listen to your service, who take the service versus say listening to an iPod or radio, and I wonder if you could give us some idea of how that is going.

We've been competing against iPod and terrestrial radio for 10 years now. I don't -- I've been here for 10 years, I don't ever remember having talked about ratings between satellite radio, terrestrial radio, Internet radio and iPod listening. We see -- there is a lot of competition in audio entertainment. There are complementary services, many of our subscribers are Internet radio listeners, and many of them have personal digital music collections. And so you know, that is just part of the firmament for 10 years now.

I think actually, you published a number about two or three years ago in the K, and you suggested that people that had your service listened to it -- you said about 70% of the listening, which is obviously pretty high. Could you just touch on the $3 billion income tax benefit that went through the P&L then, and where your NOL now stands? Thanks.

The NOL will be in a footnote to the K. I think it is around $7 billion. And it should shield taxes for the next several years. The $3 billion income item is the reversal of the deferred tax valuation allowance. It is a GAAP-driven disclosure, but from an investment perspective, it is the future shield of taxable income that will really matter in the valuation.

Thanks.

And our last question comes from Vijay Jayant with ISI Group.

This is David Joyce for Vijay. Just wanted to see if you could provide some color or the impact to your business model and the large OEM partner contract changes toward the end of this year.

Well, it is going to be accretive to EBITDA. The contract comes up in the fourth quarter and I think year-on-year comparisons in the quarter for EBITDA will be favorable. Obviously, it is only one quarter's impact on the full year, so most of the benefit will actually be found in 2014. Many analysts, I think Vijay included, have written on the subscriber recognition effectively in the contract that we have a paid trial moving to an unpaid trial. So the year-on-year comparisons and total subscriber additions in the fourth quarter to fourth quarter will be down. But it really doesn't effect self-pay. So that we will -- the business is effectively how many self-pay subscribers do we have, and how many conversion opportunities do we have in the trial funnel, and the change in geography for the OEM between paid and unpaid trials. It doesn't change any of those dynamics.

Thank you very much.

Okay. Thanks, everyone. Appreciate your time this morning.