Sirius XM Holdings Inc (SIRI) 2016 Q1 法說會逐字稿

Good morning and welcome to Sirius XM's first-quarter 2016 results conference call. Today's conference is being recorded.

(Operator Instructions)

At this time, I would like to turn the call over to Hooper Stevens, Vice President Investor Relations and Finance. Mr. Stephens, please go ahead.

Thank you, Taylor. Good morning everyone. Welcome to SiriusXM's first-quarter 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 the prepared remarks, management will be glad to take your questions.

First, I would like to remind everyone that certain statements made during the call may be forward-looking statements as the term is defined by the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based on management's current beliefs and expectations and necessarily depend upon assumptions data or methods that may be incorrect or imprecise.

Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For more information about these risks and uncertainties please view SiriusXM's FCC 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 decisions of adjusted operating results exclude the effects of stock base compensation.

I will now turn the over to Jim Meyer.

Thanks, Hooper. And good morning. We had a fantastic first quarter. With solid execution and progress in advancing all of our long-term strategic goals. During the first quarter we grew revenue and EBITDA by double digits while still making major investments in content and technology.

We added 465,000 net new subscribers and crossed the 30 million subscriber mark. A number that few media companies in the United States or anywhere can match. All in all, a quarter to be proud of.

Now we're increasing our full year guidance for net subscriber additions by 200,000 to 1.6 million. The first quarter proves yet again how important it is to have unique, high value content in a way that is extremely easy for consumers to access and use. The quarter also proves, as I have told you many times, that business models really do matter and our business is thriving.

We continue to add new on-point content, renew key content assets and strengthen our excellent relationships with OEMs. For the quarter, the audiosaur was about 17 million, up 2% from last year. You know times are pretty good when the March autosaur of $16.5 million was considered modestly disappointing.

OEMs that I speak to expect a rebound through the summer and general economic conditions remain strong. We continue to be optimistic.

During the first quarter we were incorporated in 75% of all new cars that were sold in the United States, up about 3 percentage points from the first quarter of last year. I think 75% is a good estimate for you to use going forward. To put it simply, our relationships with our OEMs has never been stronger.

This relationship is also helped by our push into the connected vehicle services business. We are quickly becoming the leader here in this business which provides safety, security, and advanced convenience features to OEMs and car buyers.

Here, we continue to gain traction with OEMs and we are working with them to deliver new platforms, some of which will not be deployed for many years. It's a long haul to build this business. But we are convinced as ever, that it is the right course.

Our high new car penetration combined with strong auto sales will continue to increase the number of cars on the road with our equipment factory installed. We ended the quarter with approximately 85 million satellite radio enabled cars in operation, up from 73 million, this time a year ago. As our embedded fleet grows from 85 million today, towards 185 million over the next decade, we are very confident we will continue growing our trial thuddles and our ability to add paying subscribers across a diverse and evolving spectrum of car owners for a long, long time to come.

As the fleet of enabled vehicles grows and cars find their way into the used cars sales channel, our used business in particular will continue to trend favorably. The vast majority of dealers, more than 16,000, now offer trials on all used cars sold with satellite radio.

We are increasing our focus on independent dealers, where we now have more than 4,000 reporting relationships. Beyond the straightforward deal or trial programs, we are experimenting in many other channels and learning about what works best. The goal is to understand in a timely manner who owns cars with satellite radios, to figure out how we can offer them a trial and to show car owners how a subscription to SiriusXM can make any and every car ride more enjoyable and of course to do all of this with our partners that protects the privacy of customers.

In this process, we have learned that our service laying program works and we are now busy expanding it. Service lane now has over 10,000 locations participating. These locations help us capture owner information and offer trials when vehicles are being serviced at participating dealerships.

We have also begun offering second owner trials with Liberty Mutual insurance, one of the nation's insurers who will soon be adding -- I'm sorry, one of the nation's biggest insurers and we will soon be adding another significant insurance company. We also now have an association of credit unions on board to explore how we draw from both of our strengths, and this is just the beginning. We had many similar initiatives on the drawing board to help us capture the large, long-term growth potential in used car subscriptions and we will continue investing and testing to optimize this channel.

I'm particularly pleased that churn has remained in the 1.8 to 1.9 range as our business has grown and as we have worked our way through changes and telemarketing rules, dictated by the US government last summer. This consistently low churn rate highlights the strong consumer demand for our service and the steady predictable nature at which most of our subscribers renew their plans. Our deep relationship with car makers and our focus on next generation technology are vital to our future, but, so too, is the constant refreshing and rethinking of our content lineup across channels, shows and hosts.

We recently expanded our unmatched offering of country music as we welcome Kenny Chesney's, no shoes radio a full-time radio created by Kenny himself. This new channel, now our seventh country music channel is only available on SiriusXM.

Last week, we launched a limited run channel to celebrate the music of Prince, one of the biggest artists of his generation. We brought back our critically claimed Billy Joel channel, and this time it included Garth Brooks, Don Henley and other special guest D.J.'s playing their favorite top ten Billy Joel songs. We celebrated our 10th year broadcasting performances from the Ultra music festival and we launched our exclusive Coachella music channel earlier this month, examples of our broad coverage of major music festivals around the country.

SiriusXM subscribers also have access to the most extensive schedule of live sporting events, all in one place. In the first quarter alone, there was great content on Sirius from the NFL, major league baseball, NBA, NHL, and NASCAR, plus, many major college football bowl games, every game of the NCAA basketball tournament and the most comprehensive golf programming on radio. We now have more than a dozen channels doing daily sports talk.

Some of our original programming includes a series of documentary-style shows on some of college football's biggest rivalries, a two-hour retrospective show on Kobe Bryant's career, daily fantasy sports advice and a reality style series on Texas rangers. Our coverage of the presidential primaries takes listeners directly to the battle ground states. So far we have aired over 125 exclusive interviews with the presidential candidates. We will be following the action all the way to Cleveland and Philadelphia.

We know our subscribers value variety, they want a bundle of content and not just one part of it and we are extremely committed to maintaining and strengthening our content bundle. When it comes to the future of our service, we are fully embracing the connectivity that is coming to vehicles. In future connected cars with the SiriusXM 17 platform, we will be offer even more new services to consumers from non-linear content, like on demand shows and personalized music, to interactive program guides with personalized recommendations.

Simplified in-car, on-screen account management will lower friction associated with subscribing to our service. No matter what we do to innovate with SiriusXM, we will always remember that ease of use is paramount. My goal for our team is a simple one, you're never going to need an instruction manual to operate your SiriusXM radio that I promise you.

In short, moving from a one-way world to a two-way world, will help us better understand and serve our customers. We couldn't be more thrilled with the progress we're making on our SXM 17 platform and the reception we're getting from the focus groups who have tried this new platforms, and the OEMs that are eager to deploy it. We are very confident that these investments in our long-term platform are the right course and we are also encouraged by early research highlighting our performance in connected vehicles.

In its 12th annual tech survey, which I think was published about three weeks ago, Jacobs media found that consumers continue to spend a majority of their time in the car listening to terrestrial radio, whether they are in connected cars or non-connected cars. This shouldn't be news that surprised anyone. What is surprising, is that in connected cars, the Jacobs Media research showed that time listening to SiriusXM actually climbed significantly. The demand for our differentiated bundle in cars remained strong, even as technology platforms evolve.

This survey data reminds us that once again terrestrial radio is the 800 pound gorilla in the room and by far our largest competition. Most people who don't subscribe at the end of the trial, do so for the simple reason that they don't want to pay for radio. When travelers don't convert to self pay or subscribers churn, research shows that they are overwhelming turning to free ad supported terrestrial radio.

So I would like to remind investors that we are not locked in a zero some battle with streaming players. Like a proverbial ice cube melting in Alaska, terrestrial radio is not going anywhere quickly, it will remain a massive, slow moving, yet still widely used incumbent, that we at SiriusXM and streaming can continue growing against for years and years to come. We have a huge opportunity here to tap this potential and provide a better bundle of radio to those who are willing to pay.

In sum, our track record of operational excellence continued in the first quarter and we expect to have another year of record operating and financial performance. We are doing what we said we would do; we are investing in the content and technology to maintain our competitive advantages in the radio and in the car; we are generating tons of cash and always looking for the smartest way to deploy this cash. So far we have returned to our shareholders nearly $7 billion with our share repurchase program and with tremendous cash flows and liquidity, we remain flexible to continue these capital returns while also looking at other internal and external investments.

I am thrilled with the performance of our team in driving this business to more than 30 million subscribers and now on ward and upwards towards 40 million. David.

Thanks, Jim. Good morning, everyone. Thanks for taking the time today as we celebrate reaching 30 million subscribers and a very strong start to 2016.

New car sales are up 3% in the quarter, with our penetration rising to 75% from under 72% in the prior year, sales of SiriusXM enabled vehicles rose 8% to more than 3 million vehicles. Total trial starts in the quarter rose 17%, while used car trials starts, grew 24%. People often write of our sensitivity to new car sales, while conversions of new car buyers remains our largest acquisition channel, it represented just slightly more than half of all self-pay additions this quarter.

Conversion of used car buyers has been growing rapidly and is expected to grow many years to come it accounted for 23% of self pay additions in the quarter. In the first quarter of the year, we added 465,000 total net new subscribers, an 8% increase from the first quarter of 2015,which pushed us over 30 million total subscribers, this was our strongest first quarter for total net add since the mergers.

Self paid net additions totaled 348,000 compared to 394,000 in the prior year bringing us to a total of 24.6 million self paid subs. Our self paid churn rate in the quarter was 1.9%, up from 1.8%, in the first quarter of 2015 on increased vehicle related churn and to a lesser extent increased voluntary churn, but it still came in right at the mid point of the 1.8% to 2% range, that we view as our long-term range. Based on these strengths and trends in the first quarter we are increasing our total subscriber guidance to 1.6 million net adds to the full year and maintaining our guidance of 1.4 million expected self paid net subscriber additions.

Revenue in the quarter was up 11% to just over $1.2 billion on the strength of our subscribers additions, as well as, growth in ARPU. ARPU in the quarter was $12.66, growing more than 3% from $12.26 in the prior year. Subscriber revenue overall increased 11% while advertising turned in yet another great quarter with 17% growth. We feel extremely good about our revenue guidance of approximately $4.9 billion in 2016.

Contribution margin in the quarter was 70.3%, down 80 basis points versus the first quarter of last year due to higher music royalty rates and costs related to pre-1972 music but still right in that 70% long-term range that I told you to expect. While fixed costs increased $23 million or 9% in the quarter, close to half of this increase was due to higher programming costs associated with some big contract renewals. We also absorbed another $10 million of higher SAC associated with stronger auto sales and higher penetration rates, a good investment in growing our new and used car trial funnels long-term.

Together all of this produced adjusted EBITDA of $441 million, up 11% over the prior year period, resulting in an adjusted EBITDA margin of 36.7% in the first quarter, very close to last year's first quarter margin, despite the higher SAC, music royalties and a step up in programming costs. All major programming assets are now under multi- year agreements lasting at least to the end of the decade.

In the first quarter we converted 74% of our adjusted EBITDA into free cash flow totaling $328 million, up 19% year- over -year. We remain on course to meet our guidance for our full year 2016 adjusted EBITDA of approximately $1.78 billion and free cash flow of approximately $1.4 billion. Year- over- year our free cash flow per share was up 31% to $0.064 as our cash flow growth was applied across a lower overall share count.

In the first quarter we spent $588 million to repurchase 159 million shares and over the past 12 months, we have purchased 539 million shares for just under $2.1 billion. Total debt now stands at $5.7 billion with no maturities in the next four years, leverage of 3.4 times trailing adjusted EBITDA. We ended the first quarter with $102 million in cash and $1.15 billion available under our revolver, this is plenty of liquidity to invest in the business, pursue strategic investments and return capital to shareholders.

We're also pleased who we recently previously discussed TCPA related litigation removing potential risks associated with the suits. The vast majority of the expense of this settlement was accounted for by the charge we took in the fourth quarter and expected insurance recoveries, subject to court approval of the settlement we expect to pay out the $35 million later this year.

Additionally in the last month, we fully completed the transition of our Sirius network from the original three highly inclined orbiting satellites to two geo stationary satellites, the transition went off without a hitch. This transition clears the way for us to begin deorbiting our fully depreciated Sirius 1, 2 and 3 satellites in the coming months, all of which have served us faithfully, since their launch in 2000.

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

(Operator Instructions)

And your first question comes from Vijay Jayant with Evercore ISI.

Hi -- if I can, two questions. Just the secondary market -- can you give us any sense on what percentage of gross adds are coming from that funnel? How is that trending? And is conversion still holding at about 30%?

And second, as you think about your XM17 product, is there any strategic interest in owning TV -- I'm sorry, radio station assets across the country, given some of those assets may be available? Thank you.

I'll just take the early part of it, and then David will answer the front part of your question. I don't see any reason for us to want to own those stations. We don't rule anything out.

I can tell you we look at everything. As you know, there's a lot for sale right now. But I just don't see any obvious strategic rationale for doing that right now.

David, do you want to go back to the question on used cars?

Yes. Sure. The conversion rates continue to hold in that 30% range.

And in terms of the contribution of what you called a secondary market, again, the new car business was just slightly more than half of our distribution in the first quarter. And the rest of it is honestly coming from the aftermarket and used cars.

We effectively operate four channels of distribution that -- the new car conversion funnel, the used car conversion funnel. What distinguishes those two is that they're trials that are very closely tied to the sale of a vehicle.

Then we have two other significant channels of acquisition. One is the old aftermarket businesses, as we used to note, that launched satellite radio a long time ago. It's still pretty healthy.

But there are an awful lot of inactive satellite radio-enabled vehicles out there. And we have a group that we call our gross add win-back team who continuously markets to owners of those vehicles, whether they're original owners or subsequent owners. And they honestly do a great job of bringing them through.

Great. Thanks so much.

And we will take our next question from Jason Bazinet with Citi.

I appreciate the color you gave on the progress you're making signing up dealers, both independent dealers and franchise dealers. I just had a question on the comments you made around insurance companies. Is that really designed to go after the cars that are sold privately? Is that what your objective there is, or is it --?

So, Jason, the way we look at it is, as you know, the used car business is gigantic. And it fundamentally goes through three channels -- the franchise dealers, let's call it, the same guys that sell new cars; independent dealers, which are the little mom-and-pops that are in every little town around the country; and a whole bunch of those sales are also one to one -- me to David, David to me.

So what we're after is as many sources as we can find that give us accurate owner data on a very timely basis. And I can emphasize timely, because our research says we do a lot better on conversion if we get to you very early on in that purchase decision than down the road.

So we are trying to get accurate, good data from as many places as we can. I look at the data from the insurance companies. I don't really actually care where those cars were being sold. I just want to make sure that this master VIN database we keep, of the 85 million cars I talked about, we have as good a record as possible who owns them.

Okay. Thank you.

And because every vehicle needs to be insured, we think it's a natural path to try to find that stuff.

I agree. Thank you very much.

And we will take our next question from Amy Yong with Macquarie.

Thanks. I wanted to focus a little bit on just the ARPU increase that we saw this quarter. It seems like the 3% was one of the biggest we have seen in a while. What drove the beat this quarter, and can you talk about trends going forward? Thank you.

I was a little surprised at the growth in the ARPU, too. It was more than I expected. Some of it is just favorable mix that we -- we have a very complicated price grid.

And so we took -- we have said it a number of times over the years that we're constantly tinkering with the grid, tinkering with what we emphasize in our marketing efforts. And we had a great combination of things here.

We did change some rates last year. So we have the effect of that still rolling through. Every time we change rates, it takes about 1.5 years for things to roll through.

I think it was just a confluence of factors that -- generally we try to encourage you to think of us as having gently rising ARPU over time. And that's what -- that's still what we expect.

Great. Thank you.

We will take our next question from Jessica Reif Cohen with Bank of America Merrill Lynch.

Thanks. I have a couple of questions. Can we start on XM17? Have you started any trials? And if you have, can you discuss what you've found so far?

I just wanted to clarify the rollout. Will the rollout be across the board in all 75% penetrated -- the OEMs? And can you be more specific on the actual rollout, and what you expect the benefits to be, whether decreased churn or further opportunity in increased ARPU?

Jessica, let me take those a little apiece. I will start with the easiest part, which is, our goal clearly is -- and it's a long march -- is to have SiriusXM17 in every car eventually that has satellite radio in it. So our goal would be to have -- to match right up against the 75%. That's going to take quite a long time to accomplish.

Where are we today with the SXM17 platform is, as I have said a couple times, we are doing extensive user testing here. And the size of our focus groups has expanded; the number of vehicles that we now have equipped with this product out there that we can do real-time testing with has expanded. And we are right where we want to be.

We're not ready yet to give you rollouts with the OEMs specifically because, A, they are very guarded of their own product plans, and we will have more to say about that later on this year. But what I will guarantee you is that the trajectory of where we're going with SXM17 is moving along, frankly, right at the pace that I want to see it.

One of the benefits of it are, I think, three kinds of things to think about. One, it eliminates all of, let's call it, the technical hurdles of our technology -- of our satellite technology platform, in that it changes our relationship from one-way to two-way. And with that two-way, it allows us to do all of those things that you can think about, from interactive music and on demand, and much more customized things to you as an individual owner.

Where I think it's going to have one of its biggest impacts, is it's simply going to be much easier to deal with us. And we're not that far from one button to renew. And so the team is all excited.

One half of the team is all excited about what we can do with all of the cool technology. But where I've been driving this platform, and David is driving this platform, is -- what can it do to really take away any of those hassles or barriers to subscribe to our service or to make dealing with us a lot easier? And I think what you're going to find when we're done with this -- it's going to satisfy both of those very well.

Let me just add a couple of things to that, Jessica. So we do expect benefits in churn and conversion. If you asked us to quantify it, we couldn't do it at this time. We will have to wait and see as the product gets in the marketplace.

But we also expect to be able to lower costs through it. What Jim described as one-button push to effectively convert from your trial into a subscription means that we're deflecting calls away from the call center. I think there are benefits in churn and conversion, and more efficient operations in terms of onboarding customers.

Every major OEM is very engaged with us. And I would say almost every OEM is engaged on this product. They are excited about it and want to see us get it into their vehicles as quickly as possible.

All that being said, then you get right back into the OEM roll-out mode where they love an idea and they want to go right now, and then they go back and they coordinate with the engineering team. And they say -- well, when is the next change in this head unit or when is the next change in this part of the infotainment system, and then you end up with multi-year rollouts. I think you can think about the rollout of SiriusXM17 trailing slightly the rollout of connected vehicles.

Okay. Great. And then the second question, you -- in your press release, you specifically called out acquisitions, which is a slight nuance to historical language. As you look around, what areas are most interesting to you? Is it the streaming businesses related to connected cars, or is there anything else that we should be focused on?

I would say the answer to that is, no. We took a very hard look over a couple of years at the interactive streaming marketplace, and we do not think it has attractive economics, and that the participants in it, almost every one of them have been out raising money over the years or have been for sale. And we just don't see the value proposition there.

Look, we try and stay open-minded. One of the things that we have to be cautious about with things going as well as they are in satellite radio, we don't want to become complacent. I don't think the language is really anything more than the team here pushing itself to make sure that we're open minded -- we're looking at ways to diversify the Business.

Jessica, I look -- and I probably look at it differently than most people. By my own calculation, radio in the United States is actually a $25 billion business. And it's going -- it surprises you how big it is.

We're getting about 20% share of that revenue, or roughly $5 billion and $25 billion.

Obviously, our hard look is -- well, where is the other $20 billion going, and should we play there or not? We have not found any obvious answer to that, I can tell you.

In the connected vehicle space, we look at everything. And as I said, I'm really happy with the vector that business is on. If we could find a really killer application that could sit on top of our platform or something that could sit on top of our platform that we could figure out how to either make it really valuable to our customers or how to get more revenue from it, we would certainly acquire something in that area if we found it.

Again, it's frustrating. We have lots of money. We can do whatever we want. But we remain very disciplined at what we look at.

Great. One last small -- can you give us an update on a video offer? You talked about that when you resigned Howard.

Yes, I don't have anything to say today. I will soon. I'm not playing a game with you.

We're working with Howard's team. And I think what we're going to have is going to be pretty interesting. And then, obviously we will talk about what else we might do. But right now, I've got the team concentrating on Howard, and there's really nothing more to say at this moment.

Thank you.

We will take our next question from Ben Swinburne with Morgan Stanley.

Thanks. Good morning. I just want to come back to a couple things.

David, first for you -- can you give us a little more color on the ARPU? Was the extra day in the quarter material, and were there any price adjustments that might explain the increase in voluntary churn that you called out? Any color around those two counter-balancing forces?

And then, Jim, I would love to hear -- we hear a lot about your fantastic relationship with the OEMs. What about with the labels? If you guys were to look at getting into new kinds of businesses on the music front that required direct deals, is that even a possibility, or do you look at the industry landscape and say -- that's just a bridge too far, given the tension in the space? I would love your thoughts on that.

David will take the first one. I'll take the second. Go ahead, David.

On the ARPU?

Yes.

Yes. I mean, the math is the math, Ben. So you've got x number of days in the quarter, and there's one extra day. And so the -- it's going to be a little more than 1% -- increase is going to be associated with the extra day.

Last summer, we moved up prices for what we call our deeply discounted plans. And we changed the kind of plans that we feature and offer in a number of our acquisition channels, trying to get people to go a little longer to a little higher price point. And I think there was an adjustment of the music royalty fee that is still working its way through. So all of those things were at play in the first quarter.

I don't really think there was anything about the increased ARPU that had a meaningful impact on voluntary churn. I think there's probably a little bit of it associated with the -- what I'd call a price walk in the deeply discounted plans. But I think you would be hard pressed to get too precise about the attribution there.

So generally, look, Jim said it, that the biggest reason why people leave us is they don't want to pay, and then they go back to listening to free radio alternatives. So our voluntary churn bumps around a little bit. But it's within a few basis points.

Thank you.

Ben, I'll address our relationship with -- so of course, we report on our relationship with the labels. Why wouldn't we? And I don't think any of us believe it needs to have any kind of contentious nature to it.

For me, it's actually -- it's funny you asked. It's a goal I kind of set for myself about 12 months ago. And as an example, I speak quite often with Lucian Grainge at Universal.

The fact of the matter is though, at the end of the day, Lucian's question for me is really simple, which is -- well, what do you want? What do you want from us? And my answer back to him today is I haven't given it to him yet.

So we continue to look at all of the possibilities there. We value our relationship with the labels. We obviously very much value our relationship with our artists. And it's a dance that we continue to do every day.

But I will tell you, my goal is not for this to be a contentious relationship. And we will just keep at it.

Thank you, both.

And we will take our next question from Stan Meyers with Piper Jaffray.

Thanks, guys. I still wanted to discuss a little bit your subscriber acquisition costs. We have seen a meaningful step down in 2014. Since then, those costs have been fairly flattish.

I just wanted to see if you have any color there? Is there room for another step down in the future? Any trends there would be helpful. Thanks.

I think that SAC should come down a little bit over time. It's got a lot to do with mix and timing that, as newer generation radios go into vehicles, that SAC tends to come down.

There is a pretty long lag from the time that we develop these newer generation radios that have lower costs, and then when they get actually incorporated into automotive production. So I think you can expect to see SAC come down a little bit as we go forward.

But the other thing about SAC is that we're pretty happy with the level it's at. One of the things that we look at in those vehicles or in those -- in the product, is ways to improve the capabilities of the product within the money that we currently spend. All that being said, I do expect it to drift down a bit over time.

All right. Thank you.

And we will take our next question from Brett Feldman with Goldman Sachs.

Thanks for taking the question. Your programming costs are up considerably year over year, which is not surprising based on some of the new programming agreements you renewed.

I was just hoping we could get a little help in terms of thinking about how to model that line item for the rest of the year, particularly in light of some of the seasonality. Are we going to see the same year-over-year step-up as we saw in 1Q, or is that going to start flatling a bit as we move into the second half?

You should see the same seasonality. The contracts aren't different in structure. So you should see the same kind of seasonality you have seen in prior years.

I just want to comment on top of what David said. We had been very clear about the renewals we had. And as you said, there's no surprise.

I think what you should focus on though is, in a lot of other media business, programming costs move directly with subscribers. In our Business, programming moves much more like a stair step. And obviously that got convoluted when we merged, and we were able to take out a significant chunk of costs from the content line item.

I want to go back to one item David had in his comments because I think it's really, really important. The vast majority -- and I think it's actually fair to say all of the major content that we need to have under license is now under license at a fee that will not grow for many, many years to come. And so I think as you're modeling our Business longer term, that's a better way to think about it.

So just as a follow-up to that then, as we think about into next year, does that effectively mean that programming costs would be fairly flat as we exit 2016?

There's always going to be an inflationary component to it. But all of the major contracts, as I have said and as Jim has said, are set through the end of the decade and beyond.

That said, if I find something -- my team, rather, finds something -- that we think either can help us keep subscribers or generate more subscribers, boom -- this is not a matter of we're not willing to spend the money. This is a matter of keeping our discipline of the way we do it.

Great, thank you so much for that color.

We will take our next question from Jim Goss with Barrington Research.

Thanks. Back to SXM17 a bit, I was wondering if the Internet version of your service may be redesigned to be consistent with SXM17, just to feed the habit of using the service home and away? And could there be any logical streamed version of SXM17?

So, Jim, I'm not going to comment except to say that's a really good question. And we will have more to say about it later in the year.

Okay. And maybe just one last thing -- your subs are up -- your guidance is up 200,000, but your revenue guidance is flat. I wonder what the assumption going into that is, given that you were just talking about ARPU increases.

I think that we feel, first of all, confident in all of our guidance. It's tough to move a $5 billion number in the subscription business.

While we're certainly thrilled with the increased subscriber growth, we did increase the trials. There's a little bit of a delay in revenue recognition associated with some of those trials, because they get sold for -- they get shipped first and then sold through to customers. And it's after the sell-through that the revenue recognition starts. So it's tough to move a $5 billion number, Jim.

Okay. Thanks very much.

And we will take our next question from Eric Pan with JPMorgan.

Good morning, guys. Thanks for taking the question. So your new subscriber guidance implies a rather conservative pay promo adds compared to last year. Are you anticipating a slowdown in new car sales?

No, we're not anticipating a slowdown in new car sales. The way it works is that, for the paid promo adds to grow year over year, or even remain the same, actually kind of requires a similar increase in auto sales year over year for our paid trial partners.

So if auto sales were flat one year to the next, among our paid trial partners -- they sold exactly the same number of cars -- that paid promotional additions would probably be zero for those guys in the year, because it's based on the change, not based on the absolute volume of sales.

I just want to comment on your question on SAAR. I think we probably have -- we pay for probably at least 15 or 20 different sources. We don't predict SAAR ourselves, obviously. We get a lot of input from our OEM partners, but we also get an extensive amount of research from various outside firms.

And I just have to tell you, right now we haven't seen any change in any of that thinking for the year. And so that's what we're betting on. We don't have -- we just don't gamble here.

Got it. And then, back to the used car topic, you guys had over 6 million used car trials last year. How many trials can we expect from that funnel this year and going forward? And what kind of commission, if any, do you pay to used car deals or the affinity partners for reaching those used car market?

We found that paying the dealers doesn't really work. (Inaudible) at the dealer level don't really work.

The payments we have are about access to the data with the information system providers who sell systems to the dealer world. So there aren't really any commissions there.

We did say that trials for the used car guys grew 24% in the quarter. That kind of strong double-digit trial start growth is what our expectations are for used cars.

Got it. Thank you very much.

And we will take our next and final question from Barton Crockett with FBR Capital Markets.

Okay. Great. Thanks for taking the question. Switching gears a little bit, your controlling shareholder, Liberty Media, has just gone through this very interesting split into three different tracking stocks, including one that tracks their holdings of your equity. They have been pretty vocal about saying that they think, over time, it would make sense potentially for Liberty and Sirius to be one company. Presumably by splitting all of this stuff up, it's easier to value what the pieces are there at Liberty, and maybe it would make it easier to come to terms on some type of agreement.

I wonder if you can update us on your thoughts about that? Does the tracker split make it in any way easier to think about a combination of these two ways of holding your equity over time? Do you think that's at all important or interesting in any way for your base of equity holders?

Barton, let me start, and then I want David to weigh in, because this is a topic David and I probably only talk about once every two or three days. Number one, there is zero, and I mean zero, drama with Liberty -- none.

So, some compelling reason for us to say -- gee, having them in the position they're in, let's take it out and get rid of it or something, just simply is not an issue. They have been active in our Board now for more than seven years. They're great Board members. And for me and for my team, we couldn't have a better working relationship with Liberty.

By the way, you don't know how hard I practiced this morning, Barton. I was dead afraid I was going to say Liberty Media instead of Liberty Mutual when I was reading my insurance company comments.

That said, we've obviously looked at both sides of the equation. Certainly, Liberty believed that setting up the trackers was a better way for them. We will see. The trackers have been trading for, what, a week, 1.5 weeks or something. And so we're still waiting to see where everything settles out.

I want to be clear, we fully understand they're accreting every quarter as we buy back shares. And we fully understand at some point that has to be dealt with. More importantly, our Board fully understands that, and we have strong independent Directors who fully understand that. And they will deal with it.

I have said many times, I don't know what the difference is to us whether they own 51% or 71%. Clearly, as you get up approaching 80%, it becomes a lot more important issue. So we're acute -- we're very -- we understand this very, very well. Liberty certainly hasn't indicated anything to us in terms of what they want or where they might go.

And our Board is well aware of it. We discuss it at every Board meeting. And we will keep you posted.

So, look, just logically, one equity makes sense. And the -- at the moment, there doesn't appear to be any compelling reason for the public shareholders of Sirius to try and rationalize the equity structure.

And knowing the way that Liberty is owned, it really comes down to what would they like to accomplish? The trackers certainly look like they were good for their shareholders. It looks like kind of the aggregate discount has narrowed a bit. The discount on the Sirius tracker still seems to be around 10% or so, which seems big.

But really I think the rationalization of the ownership structure is clearly going to be a Liberty decision -- do they see something in it for them to squeeze out the remaining discount of the Sirius stock? Look, we're open-minded about it. But I think it really is their decision.

Okay. And then if I could ask one other question here on another relationship with SiriusXM Canada. Could you just update us on what is going on there in terms of their disclosure of a demand I guess from you of some fees that they object to? And if this is having any impact on your P&L now, and what your current thinking is about the impact going forward?

There's no impact on our P&L now. We have been talking to them for about a year about an interpretation they have under the XM license agreement that we think defies any rational reading of the agreement.

And we just haven't been able to make progress with them. We sort of reached a final impasse. I couldn't take it anymore.

So we sent them a demand letter. We actually never heard back from them about our demand letter, until we read it in the press that they are seeking arbitration, which I thought was sort of a bizarre response.

Look, we believe they are underpaying us for fees due us under the agreements. As I can tell from my discussions with them previously, as well as from their press release, they disagree with us. And apparently we will go to arbitration over it, which I am thrilled about because I think we will end up with a satisfactory resolution.

All that being said, they have a great business up in Canada. They are happily serving 2 million subscribers up there. And it's been a good investment for us.

Barton, I want to be clear. I characterize this as a squabble between two partners. We obviously feel strongly in our position or we wouldn't be going down the path we are. But there's nothing wrong with our relationship with Sirius Canada, nothing at all.

And as David pointed out, it's a good business. It's a business we're happy to have a significant shareholder and financial relationship with. But these things happen sometimes. I wouldn't make more out of this than that.

Thank you, everybody, for participating this quarter, and we will look forward to speaking next quarter. Take care.