Sirius XM Holdings Inc (SIRI) 2016 Q3 法說會逐字稿

Good morning, and welcome to SiriusXM's third-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 of Investor Relations and Finance. Mr. Stevens, please go ahead.

Thank you, Kyla, and good morning everyone. Welcome, to SiriusXM earnings conference call for the third quarter. Today, Jim Meyer, our Chief Executive Officer, will be joined by David Frear, our Senior Executive Vice President and Chief Financial Officer. At the conclusion of our prepared remarks, Management will be glad to take your questions. Scott Greenstein, President and Chief Content Officer, is also available for the Q&A portion of the call.

First, I'd like to remind everyone that certain statements made during the call might be forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based on Management's current beliefs and expectations and necessarily depend upon assumptions, data or methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For more information about these risks and uncertainties, please view SiriusXM'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 a remind 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. With that, I'll hand the call over to Jim Meyer.

Thanks, Hooper, and good morning.

What an exciting quarter here at SiriusXM. We turned in strong third-quarter results including record revenue and adjusted EBITDA and we are increasing our full-year guidance for both of these two metrics. We are on track to achieve the rest of our guidance, which we increased across the board this summer, and for the first time ever we are adding a regular quarterly dividend to enhance our best-in-class capital return program. We also added another $2 billion to our share buyback authorization.

Once again, SiriusXM is executing on our short term goals even while making substantial progress on long-term objectives. We are doing a great job of avoiding distractions and following through on our commitments. We delivered an all-time high adjusted EBITDA margin of 38.4% during the quarter, continuing our march north in margins. During the quarter we added 385,000 self-pay net additions, were 345,000 total net adds after accounting for changes in paid trials. I'm thrilled to announce that as of today we have now exceeded 31 million total subscribers. Quite frankly, the auto industry is right where we anticipated and we remain pleased as new auto sales bounce around in the high 16 millions to low 17 million range. We are confident in our full-year estimate for approximately 1.6 million self-pay net additions and 1.7 million total net additions.

Those of you who have been following me at this Company know how much I value our OEM distribution partners and how hard we work to keep that auto distribution channel strong. In the third quarter we achieved several key accomplishments here and our OEM relationships have never been in better shape. Our penetration rate of 76% in the third quarter was up a point year over year and it has never been higher; and our enabled fleet has grown to 91 million cars on the road. We've also recently extended our satellite radio contracts with Fiat Chrysler until 2022, Toyota until 2022, and Ford until 2024. All told, we now have well over 70% of the OEM market by volume covered with long-term contracts that run through until 2020 or beyond. This is a tremendous vote of confidence by OEMs, that our service and our technology is a must-have for consumers and will remain a central part of infotainment in the car for years to come.

Our relationships with the OEMs has yielded benefits on both sides. Not only do we generate a ton of cash flow, but the strength of our model also rewards the OEMs with aggregate payments of approximately $1 billion per year. No other service in the car provide such a financial benefit to the OEMs. Our used car efforts are yielding meaningful results with strong double-digit growth and self-pay gross additions. We believe our radios were penetrated in approximately 30% of all used cars sold in the third quarter, an increase of about three points year over year. We still expect to add just under 3 million self-pay gross additions from this channel in 2016.

Our team continues to focus on offering trials at more dealerships. We are now at over 17,000 franchise dealers and over 70,00 independent dealers, where we've seen the largest amount of growth this year. We have 11,000 dealer locations participating in our Service Lane initiative, now touching 65 million service transactions per year, which lets us offer trials to car owners who might have missed getting one at the point of sale. In the third quarter we expanded Service Lane by joining with Sears Auto to make SiriusXM trials available to qualifying owners who have their SiriusXM-equipped vehicles serviced at Sears 600-plus auto centers. Sears is the first aftermarket maintenance and repair center to fully participate in our Service Lane program, and we are both excited to begin this exciting marketing relationship. Our efforts also continue with both insurance and auto finance companies.

Our success in signing up used car buyers for SiriusXM gives us confidence in our ability to continue growing for many years to come, as the fleet of enabled vehicles expands. And as I've said before, the SiriusXM-enabled fleet is set to double over a long period to about 185 million cars as used car penetration catches up to where we are in new cars. Many households own a mix of new and used cars and increasingly the Company structure is oriented to focus on doing business across all auto sales and channels.

It is clear from our data that a huge amount of people value SiriusXM across multiple demographic factors. From new car buyers to used car buyers, from young to old, and from low- to high-income households. This year approximately 55 million total vehicles will be sold in the United States, and our technology will be in approximately 43% of those vehicles. This is up from approximately 34% in 2013. Our long-term agreements with the OEMs, our outstanding new car penetration rate, and big investments and extending our marketing reach in used cars means our growth will benefit from this dual acquisition funnel of new and used cars for many years to come. It also gives us a natural hedge for volatility in the new car market.

We are investing in the future of our business in two other key and intersecting areas with 360 L and our connected vehicle service business. Our strong relationships with OEMs, have resulted in numerous programs to deploy our 360 platform, which completely embraces connectivity in all forms. 360L maintains a satellite link to vehicles while also taking advantage of embedded or tethered connectivity via wireless networks to improve the customer experience and provide valuable user data. This means consumers can access nonlinear content, such as personalized music or our archive on-demand shows. It also gives us unlimited capacity for new channels, more control over the user experience, lets us update our platform even after the car ships and helps us understand our subscribers and even transact with them directly in the car.

Let me be crystal clear: the long-term future of our business simply gets better with two-way connectivity. But the car market doesn't simply change overnight. Our service in cars will continue to benefit from our private satellite networks, which gives us significant advantages, but we will also have the technical capability to offer a vast array of new services in car as 360 rolls out. This revolution in our platform frees us to innovate and power the best, most content-rich and easy-to-use service, whether you are in the car or on the smartphone on the go. While the rollout of 360L will take quite some time, due to the extended OEM product cycles, success here will future-proof our service from a technology standpoint.

We also continued to focus on improving our iOS and Android apps, to make the service more accessible in-home and outside of the car. To this end we will deploy our service on several major new platforms in the next few months. Including Amazon's Echo and Fire TV, Apple TV, Chromecast, Sony's PlayStation 3 and 4 consoles. We are also implementing significant feature upgrades on Sonos, Roku, and smart TVs from Samsung and Sony. Quite simply, we want our subscribers to get SiriusXM's fantastic content wherever they want it and in whatever way works best for them. Increasingly, this will be over IP services outside the car and over mixed satellite and IP services in the car.

In addition to all the exciting features planned for 360L and the valuable usage data it will generate, we are also deploying connected vehicle services across a range of OEMs. Every week, I read analyst and consultant reports on the profound long-term impact of the connected vehicle and the immense market opportunities it will create. We have only begun to scratch the surface here. And running and developing our connected vehicle business puts us in a great position to evaluate these opportunities. We have recently secured substantial arrangements in this space with OEMs such as FCA, Toyota, Lexus, Honda, and Acura. These join Nissan and Infiniti among others. We are racing to build platforms that are secure, resilient, and exciting for OEMs and their car buyers, but we can only go as fast as the OEM product development cycle allows.

And we remain focused on business models. As the example, last year we actually dropped one of our OEM deals in the CV space, where we did not see a path to profitability. The CV business is small relative to scale of our audio business. But this business carries with it numerous strategic benefits to our relationships with the OEMs, and as I mentioned, greater visibility into other areas of potential future growth and investment. Make no mistake, we are keenly focused on building a successful and very profitable franchise here. We have accomplished much of the hard work, but we will remain diligent in growing our core CV business, and actively pursuing additional opportunities in the mass of greenfield opportunities surrounding the connected car. Put simply, it is likely we will make further investments here in the coming years.

Speaking of future-proofing our business, I've been very clear about our commitment to protecting, nurturing, and growing our unmatched and easy-to-use content bundle. We have many exciting things planned, and as I like to remind our content creators and curators, our checkbooks should not be the limitation. In recent months, we've strengthened our offering in country music and comedy. We've added new talent and channels and talk programming, held special live music events for subscribers nationwide. After launching an exclusive channel with Kenny Chesney earlier this year, we doubled down on country music this summer to add a new channel from Garth Brooks. It is the first time his music is available in one place via satellite and online. To market the launch, Garth performed live for our subscribers at the Ryman Theater in Nashville.

We also launched our secret location concert series during the third quarter with Coldplay, which took a break from its stadium tour to play exclusively for us in a small intimate venue. Many of you have even told me you wish you could have joined. We also put on private concerts recently with Korn, Kings of Leon, and Metallica, performed live on the Howard Stern show. We know, our listeners love to talk about music, so we created Volume, the first full-time talk channel in radio devoted to music. I'm really excited so far about this channel and so far, for participation from subscribers and artists like Lady Gaga has been very high. We've begun acquiring exclusive archivable and recent special performance of top comedians to broadcast across our eight popular comedy channels. We aired a new George Carlin album weeks in advance of when the album went on sale.

Our sports lineup is also an MVP. We now have a weekly show with Hall of Famer Brett Favre, whose analysis and comments are generating constant headlines. We re-signed our high-profile sports post-radio icon, Chris Mad Dog Russo, to a new mult-year deal. And we enhanced our college sports play-by-play offering, with a new agreement with Learfield and IMG that greatly expands the number of college games that are available to our subscribers online.

As you can see from our third-quarter results, we are executing on our plans to grow. We are investing to ensure that we have the best content and future-proof technology, in and of the cars, to deliver content to our subscribers in an easy-to-use fashion wherever they happen to be. We will protect our OEM relationships and offer an evolving set of content and features to ensure our subscribers will continue to find value in a SiriusXM subscription. And because of our strong, scalable business model, we are throwing [off] substantial and growing free cash flow. We will continue to look at ways to invest more in our business and to look at acquisitions, but as always, we are taking a disciplined approach to both of these areas.

I'm extremely pleased to continue and expand our capital return program. Our Board of Directors has authorized another $2 billion of share repurchases, bringing our total authorization up to a massive $10 billion. We see our stock as an attractive value, and we intend to move on this share buyback plan efficiently and effectively. Our Board also decided to enhance our capital return program with a recurring dividend, which we will start paying this quarter with a $0.01 per share payment to our stockholders. We added the dividend to broaden the potential base of investors in our stock and we hope that investors will appreciate the unique combination of income, substantial share buybacks, and strong long-term growth in our underlying cash flows. It is clear that our payout ratio with leaves us plenty of flexibility to grow the dividend, should our Board decide, while also maintaining capacity for strategic investments and continuing our substantial share buyback program.

With that, I'll turn it over to David.

Thanks, Jim. Good morning, everyone. Thanks for joining us today.

Our third-quarter results continue to build on the strong performance we turned in, in the first half of the year. New car sales may have been down 1% in the quarter year over year, but SAR remains at a very healthy 17.4 million vehicle level and we will take that as long as it comes. Sales of SiriusXM-enabled vehicles actually grew 1% as our penetration rate rose to an all-time high of 76%. Used vehicle trial starts grew 21% over the prior-year, bringing the total trial funnel at the end of the quarter to just under 9 million cars, the highest ever, up from 8.4 million at this time last year.

While conversion of new car buyers remains our largest acquisition channel, it accounted for only 48% of all self-pay gross additions this quarter. Conversions of used car buyers continues to grow rapidly, accounting for 25% of self-pay additions in the quarter, and we expect this figure to grow for many years to come.

Including our win-back and direct-to-self-pay marketing efforts, total used car additions were 34% of our self-pay adds in the quarter. We added 345,000 total net new subscribers in the quarter to bring our total subscriber count to just under 31 million. On a self-pay basis we added 385,000 net new subs to bring our self-pay count to just over 25.5 million. Our self-pay churn rate in the quarter was 1.9%, which is flat from the third quarter of 2015 and in line with what we view as our long-term range. Based on these solid results, we feel good about achieving our total subscriber guidance of approximately 1.7 million net adds for the full year and self-pay net subscriber additions of approximately 1.6 million.

Revenue in the quarter was a record high of 9% to $1.28 billion on the strength of our growing subscriber base as well as the rise in ARPU. ARPU in the quarter was its highest ever at $13.04, growing 3% from $12.67 in the third quarter of 2015. Based off this performance, we now expect our full-year revenue to be approximately $5 billion. Contribution margin in the quarter, was 70.6%, down by 20 basis points versus the third quarter of last year. We made up for the rising music royalty rates with excellent execution in pursuing efficiency in our customer service and billing operations. As a result, contribution margin remains in that 70% range we have told you to expect for many years.

Adjusted EBITDA in the quarter reached a record $492 million, up 10% over the prior year, and for those of you keeping track, we have now grown adjusted EBITDA by double digits or higher for 31 of the last 32 quarters since we first became EBITDA-positive in the fourth quarter of 2008. Our adjusted EBITDA margin also reached a record high of 38.4% in the third quarter as we continued to grow revenue faster than expenses. This is the 27 basis-point expansion over the third quarter of 2015. As subscriber acquisition cost dropped 200 basis points on declining unit cost, offsetting higher music royalties, a step up in programming cost, and a tough prior-year comp where G&A in 2015 benefited from $11 million of insurance recoveries. Based on the strong performance we are raising our full year adjusted EBITDA guidance to approximately $1.85 billion.

In the third quarter we converted 72% of our adjusted EBITDA into free cash flow, which totaled $357 million in the quarter, down 3% year over year, due primarily to a $22 million payment net of insurance recoveries made for our telephone consumer protection act settlement announced earlier this year, in addition to a $19 million down payment to Loral for new satellites that we are building over the course of the next three years. We continue to expect our full-year free cash flow to approach $1.5 billion.

Since the start of the third quarter, we spent roughly $300 million to repurchase 72 million shares. We have expected the Canadian recapitalization to close in the quarter. The recap involves the repurchase for cash of about CAD175 million of equity in the recent [and seeing] of CAD200 million of debt. The only remaining hurdle to closing the Canadian recap is CRTC approval, that's their equivalent of the FCC, which we are optimistic will be forthcoming shortly.

As Jim mentioned, we are also pleased to announce the Company will start paying a regular cash dividend of $0.01 per share this quarter, part of our substantial capital return program. The dividend marks a yield of about 1%, consistent with yield levels for dividend initiations as well as companies with similar growth characteristics. And we have the capacity to grow this dividend over time.

In addition, our Board has also approved an additional $2 billion of share repurchases to bring our total repurchase authorization to $10 billion. We continue to feel very good about the Company's ability to return $2 billion a year to our shareholders for many years to come, through the period when we begin to pay cash taxes in the satellite CapEx cycle, all while maintaining leverage in the 3.5 to 4 times adjusted EBITDA range.

Total debt at the end of the quarter stood at $6.1 billion with no maturities until May 2020. Leverage as of quarter end was 3.4 times trailing EBITDA. We ended the quarter with approximately $572 million in cash on hand, a higher than normal cash balance in anticipation of the October 1 redemption of $650 million of our 5.875% notes due 2020, and the CAD175 million roughly of cash in anticipation of the closing of recap. We have plenty of liquidity to continue returning capital to shareholders via buybacks and dividends while making strategic investments in technology, content, and new satellite infrastructure.

Operator, with that, let's open it up for questions.

(Operator Instructions).

Vijay Jayant, with Evercore ISI.

Question on the dividend. It is about $200 million a year and if you start to look at your buyback through 3Q and so far in 4Q, it started running below the $500 million level that you've done in the past so just want to understand how is this dividend adding on or part of a $2 billion your -- I think you mentioned that I want to confirm that. Then just on the business, can you talk about how you think you're going to price the 360L product? Will all the chip sets have both the IP and the satellite functions embedded in it and you only activate IP version if that person chooses the premium service and any talk on what that price in premium would be? Thank you.

I will take that question on 360L first. Let me be clear, at the heart of 360L is really software as opposed to a chip set, that drives it. Because, it is designed to take advantage both of and an embedded modems, should that exist in the car, or a tethered modem from someone's device that they carry into the car. We have not gotten anywhere near where we are ready yet to talk about how we might price or what options it might give us. It is a really interesting question. It is one that my staff and I, quite honestly, are going to discuss a couple weeks at an off-site. I would say we are fairly far away from getting any detail from that level in terms of what it might do to our tiering and our pricing structure. In terms of the dividend, number one, I want to be clear really excited to be able to offer -- that our Board obviously, felt strongly about offering this and clearly was managements recommendation to do this. I don't really see tying the two together that the capital return authorization we have been very clear on.

The boards increased it from $8 billion to $10 billion. I think David and I have both been clear that as you are thinking about our business, you ought to plan on that being about $2 billion a year. Some quarters will be a little less, some quarters will be a little more, but that's really clear where we are trying to go and what we are trying to do. The launch of the dividend you are exactly right, it is about $200 million and we want to get it out there and see how it does.

Great, thank you so much.

(Operator Instructions) Jason Bazinet from Citi.

I know historically you guys have always downplayed the International opportunity, but at least when I've done, the simple back of the envelope math, it suggests that your sub-base in North America, may run out of gas at around the 40 million customer mark. So, I just want to check-in and see is has anything changed in terms of your think regarding in International expansion or is it still the same,?

Well Jason, I for one, would be really happy with 40 million subscribers and I sure am working hard to get there. We are obviously, we are acquiring the Canadian entity because we see real value of -- we see real value in improving how we can run the Company together. From a variety of best practices. Frankly on both sides. Of what our Canadian Company is doing and what we're doing. We continue to look at Mexico. We have not come up with a viable plan there yet. David and I look at them all the time but they are a long way from a plan we are ready to endorse, or one that we think is a good path for us and with those exceptions I have to be quite honest with you, we are simply not focused on the other International expansion.

We look at it, people come to us all the time with various opportunities that are satellite-based. We've had some people talk to us about partnering with them on the Internet-based services. We have some visitors, for instance, coming in a couple weeks from a country that the leading provider in that country of radio services that wants to talk about doing something together, but I would tell you it is all really nothing more than talk right now.

Okay. Thank you very much.

We will take our next question from Jessica Reif Cohen, Bank of America.

Thank you. First of all, congratulations on the dividend. A couple of questions. Can you give us any update on when you will roll out the video product starting with Howard Sterne and anything to come after that?

Yes, I think David made some comments at a conference a couple weeks ago that I think is exactly where we are. Number one, we don't have that date lined up yet.

We are deep into it and I think, I mentioned, Jessica, at your conference that we have signed a strategic agreement with a company called, Whalerock, that's working with us to both architect, and help us plot out, not just what we want to launch short term, but where we might want to be mid-term and long-term, using video to enhance our service. We are also getting that in a position where we can begin to have more conversations with Howard, himself, and clearly we will launch our video service with Howard, there's no question there. I hope I have more to say about this in the next couple months, but you should assume it is sometime next year.

2017, okay. SAC was down a lot in the quarter, is this all do to (inaudible) car Channel or was there a change in your cost, underlying cost?

Sorry, I missed part of your -- .

The decline in SAC, is that due to the growth in the used car Channel or was there a change in the cost structure?

The used car Channel doesn't affect SAC because it is only a fraction of new car installations. So it is not a Channel mix thing. It is just improvement in contractual rates. We do hammer away at driving costs down and there are times when we get step function changes in what this looks at where we have a particular contract that rolls over and changes rates. But we are like any technologies company where, we know exactly what those costs are going to be, because we know the bill of materials for the product is. But then, it is implemented through a bunch of OEMs who are all operating on different time frames in terms of when they move from an older higher cost platform to a lower new cost platform. So every now and then we get a bump like this.

Than one last question. Jim mentioned, Jim you mentioned that you will invest more in [attracting] vehicles did you mean investments or acquisitions?

I mean both. I said that, more to kind of point you guys and point investors where I think there may be opportunities. I will tell you and I use the words carefully in my comments today, this is a Greenfield kind of thing.

I know your firms participate in writing them. I know investors that are on the phone participate in subscribing to them. The opportunities that you see, I cannot remember which big bank came out with the report in the last two weeks, a very credible report that sizes the opportunity in the connected vehicle at $5 billion to $800 billion globally. This is a gigantic thing. And I have been very clear with you guys that we know where North is. The connected vehicle is going to come. We know where we're going to play in that, in terms of safety and security and things like that in the near term, but bigger opportunities in that area. We are studying hard now to see, are there areas out there where not only can we play, but quite candidly, areas there that our strengths match very well with. I don't have any answers for you but what I want to assure you is we're putting a lot of effort there and my gut tells me this is an area in the future we will certainly invest more in.

Thank you.

We'll take our next question from Phil Cusick, JPMorgan.

Thanks. I wonder if you could talk about used. If the pace of new car sales come off, I wonder how you think about the correlation of the velocity of used car turnover and sales there as well. How correlated should we think of those two streams, or is there so much opportunity in use that you wouldn't expect any pullback? And also you pointed out that a lot of homes in the US of both new and used cars. Have you seen any difference in churn across similar cohorts of new and used? Thanks.

On the churn question we really don't see a difference, once somebody chooses to become a self-pay subscriber then they pretty much behave all the rest. In terms of your question on volatility, we think the growth that we have, just the organic growth, we have in used car Channel was likely to offset any impact from new cars is certainly mitigated.

In terms of a historical volatility in used cars, to be honest, I don't think there's a lots of really good long-term data on used cars the way it is on new cars. But with the data set that we have some of our guys think there's about -- the used car market has about half of the volatility of the new car market. I think for us if you are thinking about the next let's call it five years, I think overwhelmingly the organic growth in used car distribution for us is going to offset any cyclicality.

Understood. Thanks.

Ben Swinburne, Morgan Stanley.

Thank you. I want to stay the theme of used cars for a second because it is a big driver, no pun intended, of the success event the last couple of years. Jim, when you look at how many used cars sell a year in the US, how many of those sales are you communicating with the buyer around a trial today and what's a realistic goal for your organization? I would imagine, 100% of used car markets probably not realistic, but we do think you can get the Company through the various relationships you have with dealers, and insurance companies, and other things you've got planned over the next few years? Then a had a quick follow-up for David.

Ben, I will a David take your first question to. Go ahead, David.

Ben, think of the cars satellite enabled vehicles that are turning over in the used car market today, we think are directed dealer reporting system is getting us that timely customer name and address for the sale of the car for maybe just under a 60% of the vehicles being sold.

Then we get to another 25% or so from buying basically lists -- so we think we are getting to 80% with the 55%, 56% range being something that we get within a few days of the sale.

Got it. So then naturally, that number continues to -- the absolute grows as a number of vehicles and enabled grows over time?

Exactly.

I think the challenge Ben, and again, I don't have an answer for you here, is what David said is absolutely correct, is we are much more heavily penetrated today in the third of the used car business that are certified dealers which we're getting direct reports from. So to answer your question longer-term, it is harder because we don't know but more of those sales are going to start coming either from independent dealers or private transactions. Which is why we are working so hard to try to find better ways to get that data. So we don't really -- I've got to be honest with you, I don't really know where we are going to end up.

Right. Quickly David, can you help us think about CapEx next couple of years as we go through this build cycle -- rough bracketing of where we should expect total capital spending to be over the next two to three years?

I will do that, as part of guidance for a 2017, that we do have the capital spending program going on the satellites, obviously with launches in 2019 and 2020, but we come out with guidance for 2017 I will give you a little more detail on the spend.

Okay, thank you.

We'll take our next question from Barton Crockett, of FBR Capital Markets.

One kind of bigger picture and then another a little bit more detail on the numbers. You are getting this great penetration of some of the great new technology for the home, with Sonos and you talk about PlayStation. Huge improvement over the start of [Sirius] we had to stick these clunky satellite antennas out the window.

Which in personal experience didn't often work. Now it works beautifully through Sonos. Are you getting better engagement from your subscribers as you build into these new technologies and get into the home? Is that part of what's helping you put up these excellent self paid churn rates right now?

I think that's certainly our intention. There's no question why we are doing it. We are not driving hard today. I won't say in the future we may not experiment. We're not driving hard for, let's call it, a standalone in-home subscriber. Most -- our effort for doing all of these things is exactly as you said, to enhance the listening experience outside of the car and it is our theory, and I believe it is going to prove to be absolutely true that, that will have a good strong anchoring result in helping our churn performance stay steady. That's certainly our intention. It is a little early to say we can prove the thesis, but that's what we are trying to do.

Okay, great. Then on one of the numbers on your self-pay subscriber guidance that would imply only a couple hundred thousand net additions in the fourth quarter so a lot less than last year. I struggle to come up with the fourth quarter where you've added that few self- pay subs. Is there anything specific going on in the fourth quarter or is there just an element of conservatism in the guidance here?

I would say neither. We are -- we actually do tend to tell you exactly what we think things are going to be, and the fact is the subscriber base is a lot bigger. So the churn numbers are just bigger while the rate is flat, you know; that means we have a lot more people turning over, so there is a title effect from that, that you battle against.

We've challenged our team members to really drive the top end of the funnel this quarter, just like we do every quarter. We come out, we give you guys numbers and then we go back and we work our tails off to beat them. I think it is just a realistic outlook.

Okay, great. Thank you.

We'll take our next question from Amy Young, Macquarie.

Thanks, and good morning. David, I think last quarter you talked about how you are watching churn really carefully opposed to a price increase, but with churn steady at these levels I guess what gives you confidence that perhaps there is wiggle room for additional price increase. And is the video product with Howard Sterne and products like Telematics, does that boost ARPU over time? Thank you.

We always worry about the price adjustments that we make and we worry about all of them a lot. I think we've had enough time with the spring increase to be confident that we are not seeing a material amount of churn, all that being said, there was no doubt my mind or in Jim's mind that there is churn going on. Is just that it is not as apparent.

You are right, we do watch the churn very closely. We are looking for literally a few basis points of difference in trend rates. One of the things about this business we've talked about it over time, is this, laws of large numbers that you've got 25 million self paid subscribers and are running 20 million trials a year to get new people to join the service. Those are just enormous figures. It is a lot of individual consumers making individual decisions, so statistically if we see -- we don't expect to see much variability in at this point time which is why we watch it so closely. In terms of ARPU opportunities that -- Telematics doesn't figure into our ARPU calculations. So I would say, as it relates to [that] statistic, that we are not looking for connected vehicle services to drive ARPU, but we actually are very optimistic about this business as we talked many times before. It is a long cycle implementation because you get the contracts done, and the OEMs got to work it into production, that tends to take years, and you've got to begin to ramp up, but there's a very bright long-term future for connected vehicle.

Great, thank you.

We'll take our next question from Bryan Kraft, Deutsche Bank.

Hi, good morning. Two questions. First, want to ask you about royalties. Over the past several months, I think we've seen several online music industry players signing royalties directly with the labels. I was wondering with your proceeding underway, do you think this time there could be an opportunity for commercial deals instead of the statutory process? And then my other question is on Canada.

Can you talk about how integrated those operations will be given the ownership structure and also how the accounting is going to work. Will you consolidate it? That would be great, thank you.

Okay, so on the royalties. I think that a direct deal in place of a statutory license for us is -- I don't think that's a possibility. That even if you've got the three majors, which I think is highly unlikely, that you would still need the statutory license in order to cover all the people that you did not have deals with. Our business is not the interactive music business where you actually cannot play somebody's music out if you don't have a direct to deal with them. I don't really see that as something that's a likely possibility. On the Canadian integration, I think the most important thing to remember with Canada is that it is a different market. The consumers are different. The economy is different up there.

They own their cars much longer. It is an economy that's based more on extractive industries and it just has a fundamentally different cycle and in many respects it is culturally different in some of the content that they enjoy is different than the US. One of the things that we are not interested in doing is failing to continue to recognize that in fact, it is different it needs to have its own identity and needs to be managed as a separate business.

We do think that there are integration opportunities in an awful lot of functions, especially in the area of IT systems and how you procure IT technologies. There's probably some efficiencies from a G&A perspective that wouldn't be a public Company any longer. But this recapitalization, unlike the US merger, and unlike the Canadian merger, which were all about the synergies of taking two companies, doing the same thing in the same market putting them together. This is two companies offering the same product in totally different markets so it is just not really about synergies so much. From an accounting perspective we have worked through that now with KPMG and with their national office, that as you know we will own 70% of the equity in the Company but because Canada is a closed market from immediate ownership perspective, Canadians will own 2/3 of the voting equity and will have a majority of the Board of Directors. As result under the existing accounting rules we are not deemed to control Canada and so we will not be consolidating it.

When we've got a better view on timing of closing, which I hope to have certainly before we issued 2017 guidance, we will help you get an understanding of how it is going to affect the various line items in the financial statements. For now, what you know is that we use equity accounting for Canada in today and will be continuing to use equity accounting for Canada in the future. We'll just have a bigger share.

Great, thanks very much, David.

Hey Brian, one of the other comment I want to make. You should assume it is a different model, but what David says -- absolutely driving us on Canada. Anything that's customer facing we want to remain the way it should be. But you should also -- we learned a lot in the acquisition of the (inaudible) -- we learned a lot about what we can and cannot quickly combine and frankly, forget the cost aspects of it. We just learned it just helps those businesses run better when we can use the best tools across everything so I think you should have a lot of confidence we know what we're doing there.

Okay, great, thanks, Jim.

We'll now take our next and finale question from Matthew Harrigan, Wunderlich.

Thank you. In your (inaudible) 360L demo you highlighted you log in and the log out of your radio car to car which is (inaudible) applicability for Uber or Lift can you talk about that and specifically how you can see increasing prevalence of Uber and Lift affecting your business? Thank you.

I don't have a really good answer for you right now. We continue to try to work with Uber and Lift to figure out a way for our customers to be able to conveniently enjoy our service. As you can guess, as more and more of our customers use our service on the App it becomes much easier for them to do that. I just don't have a lot more that I can I can add there right now.

Thanks, Jim.

Thank you for participating in today's call and we look forward to speaking with you next quarter.