Sirius XM Holdings Inc (SIRI) 2017 Q4 法說會逐字稿

Good morning, and welcome to the SiriusXM's Fourth Quarter 2017 Earnings Results Conference Call. Today's conference is being recorded. (Operator Instructions) At this time, I'd like to turn the call over to Hooper Stevens, Head of Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to SiriusXM's Fourth Quarter and 2017 Earnings Conference Call. 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. And we'll also be joined by Scott Greenstein, our President and Chief Content Officer, 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 upon 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 SiriusXM's SEC filings. We advise listeners to not rely unduly upon forward-looking statements and disclaim any intent or obligation to update them.

As we begin, I would like to advise our listeners that today's results will include discussions about both actual results and adjusted results. Our adjusted operating results exclude the effects of stock-based compensation.

I'll now hand the call over to Jim Meyer.

Thank you, Hooper, and good morning. SiriusXM executed extremely well in 2017 and particularly in the fourth quarter to achieve and exceed all of our subscriber and financial guidance. We have once again set record high-water marks for subscribers, revenue, adjusted EBITDA and free cash flow. Our business model remains unmatched in its ability to maintain high EBITDA margins and to convert that EBITDA into free cash flow that we can invest to grow our business, make external investments or deploy for the benefit of our stockholders. And as David will talk about more, recent tax reform will make our long-term cash flows even sweeter.

We expect approximately 1 million self-pay net additions in 2018, approximately $5.7 billion of revenue, $2.15 billion of adjusted EBITDA and another $1.5 billion of free cash flow. In the fourth quarter, with nearly 570,000 net additions, 527,000 of which were self-pay, we had our best quarter of self-pay additions in 5 years. And our 2017 self-pay gain of 1.56 million subscribers was a full 20% above our original guidance.

The adjusted EBITDA margin reached 39% in 2017, up about 400 basis points in 3 short years. The CRB decision will postpone the 40% milestone but has changed nothing about the general characteristics of our unbeatable business model. The march to higher margins will resume after absorbing the royalty charge this year. And remember, our goal is not margin for margin's sake, but rather to maximize the amount of free cash flow available to our stockholders.

We did very well in the fourth quarter, both marketing to new subscribers with self-pay gross adds up almost 5%, and also in retaining existing subscribers with churn down more than 10 basis points. SiriusXM has produced churn results in the 1.8% to 1.9% range for 8 straight years, a remarkable result that highlights our strong value proposition and steady execution.

New car conversions in the fourth quarter were roughly flat, as you would expect. But we drove reactivations among original owners up 14% and we drove total used car additions up 12%. Also during the fourth quarter, we had a successful marketing campaign with TV and digital support around our Garth Brooks channel and around our free listening event. And we increased focus on older vehicles and subs that had previously churned due to vehicle turnover.

The industry sold 17.1 million new cars in '17, down about 2% from '16 but still a great number. At CES, as we typically do, we meet with most of the OEMs. Quite frankly, their outlook for 2018 is good. And we agree with that assessment. The consensus seems to be a little more conservative for '18 at about 16.7 million cars. We saw a gently rising new car penetration rate of nearly 77% in 2017. And the OEMs remain very committed to SiriusXM for the long term.

Our estimated penetration of used cars in '17 climbed to about 35% from about 31% in 2016. And we continue to expand our presence across a variety of used car distribution channels. We are now represented at over 30,000 auto dealers across the country, including more than 18,000 franchise dealers and 12,500 independent dealers. The total dealership count expanded by more than 5,000 over the course of 2017.

And we continue to work very hard to gain subscribers even when a car is sold privately with a variety of trial programmings -- programs covering the service industry, insurance and more. In particular, our Service Lane program, which lets us offer trials to car owners who bought privately or elsewhere, is now at nearly 16,000 dealers and is proving to be a rich source of subscriber information and additions.

Our next-generation interface, 360L, is here. And let me be clear, this is a big deal. We are extremely proud -- we were extremely proud to officially launch 360L with Fiat Chrysler in the all-new Ram 1500 at the Detroit Auto Show in January. We expect this truck will be released to consumers in the second quarter.

Housed within a beautiful and huge 12-inch display, this implementation of 360L marries our ubiquitous satellite network with the benefits of two-way wireless connectivity. The new interface is a game changer. It offers a more personalized experience with content recommendations based upon listening preferences and will make discovery within our vast lineup much easier.

And the 360-degree listening experience will sync across devices outside of the car, allowing a subscriber's mobile phone or Alexa device to access favorites and pick up listening where they left off in the car. Over the coming months, even more features will be enabled as we can now remotely update 360L's software. For instance, later this year, we plan to update -- plan an update to launch a concept called [Artist Radio], online and in 360L cars, to provide customized artist-specific channels designed to please our subscribers.

As with any in-new car feature, 360L has been a long-term project, but is now on the march. Later this year, you will hear more from us about OEM rollouts for delivery next year. The deployment of 360L over the next 5 years accelerates quickly and dovetails nicely with the growing presence of embedded modems in cars. The timing is really perfect. While 360L will take time to roll out new vehicles, our completely redesigned app will be available in the second quarter, providing our customers with an entirely new and personalized user experience.

We are continuing our push in the connected vehicle services business and expect that business to grow this year as it scales with more OEMs. While the numbers are small compared to our core audio business, revenue should grow by double digits in '18. And EBITDA, which was positive in 2017, will expand by even more. In short, this business is gaining momentum, and we are confident we are on the right track.

At Automatic, which we acquired in 2017, we are planning a push to scale its aftermarket connected vehicle business and tap new revenue opportunities from a growing base of users by leveraging our relationships with hardware manufacturers, auto dealers and our existing billing and marketing infrastructure. This remains an exciting startup business operating within SiriusXM that could lend some interesting applications and benefits to our broader strategy in connected vehicles.

Outside of the car, it has never been easier to enjoy SiriusXM on the go or at home, be it on your phone, with your smart speaker or your smart TV. Our completely redesigned SiriusXM app for iOS and Android is now in beta testing. And we plan to launch it next quarter, providing the springboard to launch video as well as aligning nicely with deployment of the first 360L cars. This app provides a faster, cleaner interface with a high degree of personalized suggestions.

And by the way, now that we've invested more in streaming products, there's no reason we can't begin to acquire larger numbers of streaming-only subscribers. This is going to be a growing priority of the company over the next few years. With a new app in the marketplace, our plan is to launch video, first, with Howard Stern in the second quarter, and then follow up later in '18 with additional short-form content from around the SiriusXM bundle.

Let me be clear, we are wading into the video pool, not diving headfirst. Our approach to video is just one part of our nonstop effort to add value to the SiriusXM experience. And that always starts with our content. SiriusXM didn't let up this quarter in finding and delivering outstanding new programming. It's our lifeblood and it is a truly competitive advantage, a piece of our DNA from the start and something we love to do.

Sports programming has been vital to SiriusXM since the beginning. But we are now going even deeper. We announced the launch of new full-time channels for key athletic conferences, including the SEC, Pac-12 and ACC. Each channel will deliver game broadcasts as well as daily talk programming about the schools that matter most to fans. We also launched Barstool Sports' own 24/7 channel, a radio home to one of today's leading brands that is hugely popular, especially among younger listeners.

In comedy, we believe we have the best offering in all of radio. But we are finding ways to make it even stronger. Next month, we will launch a full-time comedy channel, Kevin Hart's Laugh Out Loud radio. One of the biggest comedic names in the world, Kevin Hart will host a regular show exclusively for SiriusXM as well as curate the channel with a selection of his favorite artists, including those from his Laugh Out Loud brand. And because it's not enough just to have one of the biggest stars in comedy, I also want to mention our ongoing Ricky Gervais Show, another program from a comic who, like Hart, sells out arenas everywhere. He does an exclusive show for us with an eclectic array of guests that shows off the more serious side of Ricky's personality as well as his love of music and science.

On the music front, we continued our successful series of one-of-a-kind music events exclusively for our subscribers and our national broadcast audience, including Duran Duran in Miami Beach and the Eagles at the Grand Ole Opry in Nashville. We also broadcast special performances just for SiriusXM from music superstars such as Taylor Swift, Kelly Clarkson, Blake Shelton and more. And those stars know the power of our platform. Eminem took over his SiriusXM channel and did a live press conference around the launch of his new album. Our content lineup has never been more exciting for SiriusXM subscribers. And we are constantly investing to make that lineup even better.

In 2018, our management will once again be extremely focused on delivering excellent results for our stockholders, including achieving the subscriber and financial growth targets I outlined earlier. Going a bit deeper, we have prioritized deepening household penetration and increasing engagement outside of the car. We also want to improve customer satisfaction and remove friction in our relationships with how we deal with our subscribers.

Achieving a greater household penetration naturally comes from more radios per household as the enabled fleet expands. But it also comes from a focus on new packaging and an expanded streaming offering, which dovetails nicely with increasing our goal of out-of-car engagement. We want to leverage the growing base of cars, growing streaming infrastructure and vastly growing usage data to drive more engagement, a better value proposition and ultimately, more revenue and more cash flow.

There is clearly tremendous potential to continue growing our existing business for many years to come. And our unique position with automakers, rich content, valuable spectrum and significant cash flows should represent additional long-term branches of opportunity to grow even further down the road. Not only did we reward our shareholders with $1.6 billion of capital returns via stock repurchases and increased dividend, 2017 also saw us make several strategic moves, such as our investment in Pandora, our move to recapitalize SiriusXM Canada and our opportunistic acquisition of Automatic.

As always, we will continue to be smart in how we use our cash flow to benefit our shareholders. The additional $2 billion of share repurchase authorization earlier this month is a strong endorsement from our board of our long-term prospects and cash generation ability. And we continue to see our stock as a good value. Thus, we expect further capital returns. And as always, we will continue our sharp focus on execution, while also looking for other smart and creative investment opportunities.

With that, let me turn it over to David.

Thanks, Jim. Good morning, everyone, and thanks for joining today. SiriusXM finished a strong 2017 with an exceptional fourth quarter. For the third straight year, SAAR exceeded 17 million cars and SiriusXM's new car penetration rate increased to 76.6% from 2016's 75% on the strength of penetration growth at Honda, Nissan and Ford.

2017 saw the total number of SiriusXM-enabled vehicles on the road increase 14% to nearly 108 million as we continue along the natural arc of our installed base toward 185 million vehicles. Trial starts rose more than 7% for the year to an all-time high of approximately 21.4 million, another record new car trial starts as paired with 16% growth in used car trial starts totaling 8.5 million for the year. At the end of the year, the new and used car total trial funnel stood at approximately 8.85 million vehicles.

New car conversion rates for the year of 40% and used car rates in the high 20s helped produce record new and used car conversion volumes, bringing self-pay gross adds above 9 million for the first time. Used car gross additions in '17 represented approximately 35% of the total, a 230 basis point increase versus 2016. We expect this share to climb higher in the future as our 35% used car penetration rate more than doubles to eventually match the 75%-plus penetration rate in the new car market. With over 18,000 franchise dealers, 12,000 independent dealers and 16,000 Service Lane dealers participating in our trial programs, we are getting direct access to 60% of used car transactions.

Churn for the full year was 1.8%, down 6 basis points from 2016, as reductions in voluntary and nonpaid churn rates continued to more than offset pressure from an increasing rate of vehicle-related churn. Our fourth quarter self-pay net adds with more than 527,000, as Jim said, was our strongest quarterly performance in 5 years. This brought total self-pay net adds in the year to over 1.56 million and our self-pay sub base to more than 27.5 million. Fourth quarter total net additions of more than 569,000 brought our annual total net adds to 1.39 million and our total sub base to over 32.7 million.

The sub base produced record total revenue for the year of more than $5.4 billion and $1.4 billion in the quarter, (inaudible) 8% on the strength of our sub adds as well as growth in ARPU. ARPU for the year totaled $13.25, a 2.6% increase over 2016, with ARPU in the fourth quarter also increasing 2% to a record $13.43.

Contribution margin for the year was 70.9%, up 50 basis points versus last year, with lower customer service and billing expenses and cost of equipment as a percentage of revenue more than offsetting slightly higher revenue share and royalty expenses. For the fourth quarter and the year, customer service and billing, satellite and transmission, subscriber acquisition costs, equipment costs and G&A were all down from prior year levels.

Collectively, these savings were reinvested in engineering design and development, fueling our investments in 360L, video capabilities, app improvements and new products from CV and Automatic. Subscriber acquisition costs were down 2.6% for the year, helping to bring SAC per install down to $30 from $31. Overall cash operating expenses grew just 5.3% for the year, well below the growth in revenue.

Together, all of this produced record adjusted EBITDA of nearly $2.12 billion in 2017, up 13% over '16, with a fourth quarter record of 542 million, up 14%. This translated to an annual adjusted EBITDA margin of 38.9%, 160 basis point increase over the prior year. Last year, we converted 74% of our adjusted EBITDA into free cash flow, which reached a record $1.56 billion, up 3% year-on-year. Capital expenditures in the period totaled $288 million compared to $206 million in '16 with all of the increase driven by satellite CapEx.

In the fourth quarter, we booked $185 million or $0.04 per diluted share noncash charge for the revaluation of deferred tax assets related to the recent tax reform legislation. Tax reform will have a material positive impact on future free cash flow over the next 4 years. We expect to save over $900 million in taxes. And we expect the ongoing tax savings will exceed $200 million per year.

Also in the quarter, in accordance with the fair value accounting method for our Pandora investment, we recognized a decrease in the investment of approximately $72 million or approximately $0.02 per diluted share, reversing prior quarter unrealized gains. As the market value of Pandora's stock fluctuates, we may continue to book unrealized gains and losses. However, we do not currently expect the value of our preferred stock investment in Pandora will fall below the accreted value of that investment.

For 2018, we've issued guidance for continued growth in subs' revenue and adjusted EBITDA. We are projecting self-pay net sub adds of approximately 1 million, revenue of approximately $5.7 billion, adjusted EBITDA of approximately $2.15 billion and free cash flow of approximately $1.5 billion. Revenue growth would be 1.6 percentage points higher but for the adoption of the new revenue recognition standard that was effective beginning of this year. This will lead us to reclassify approximately $90 million of revenue to offset expenses related to automaker agreements.

We are pleased to guide the continued growth in adjusted EBITDA following the large increase in our performance royalties resulting from the CRB's decision in December. This decision hands us a $200 million headwind on costs this year. And as you may have already noted, we have announced plans to adjust our MRF to recoup most of this increase. The new royalty rate applies to our cost structure as of January 1. But the MRF change will be phased in as subscriber plans renew, and as with other pricing actions in the past, will take about 18 months to work its way through.

As I mentioned earlier, the impact of the Tax Cuts and Jobs Act of 2017 will be a big boost to our long-run free cash flow. The new law slashes our expected tax rate. It enables us to pull forward deductions for capital expenses, such as building new satellites. You should expect a long-term tax rate of approximately 24.5%, inclusive of state taxes. In sum, our net cash generation should improve by some $900 million through 2021 and some $200 million per year and growing thereafter, truly a home run for our shareholders, customers and employees.

Total debt now stands at approximately $6.7 billion with no bond maturities until August 2022 and an average coupon of 5.1%. Our debt-to-adjusted EBITDA was just 3.2x at year-end. And with cash on hand of $69 million and undrawn revolver capacity of nearly $1.5 billion, we entered 2018 with plenty of liquidity to continue investing in the business, returning capital to shareholders and with ample room for strategic investments.

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

(Operator Instructions) And we'll take a question from Vijay Jayant with Evercore ISI.

James Ratcliffe for Vijay. Two if I could. Any further comment on the timing of the flow-through of the MRF increase? (inaudible) how much you'd like to see that. And secondly, for the ARPU growth we've been seeing, how much of that is driven by the price increases versus change in mix of customer subscriptions they're taking?

On the timing of the MRF change, it will start going into customer bills in the month of February. And it will take 18 months to work its way through. As it relates to your ARPU question, to be honest, I actually don't ever break it down that way, so I don't think I can really answer the question. We do have an improving mix of business. We continue to sell higher-priced products. But then we're always tinkering with the price grid. There's always something that's going on in the price grid. And so what we've seen over the last 8.5 years or so is we've seen the self-pay ARPU, including the MRF, increasing about 2.5% per year.

We'll take our next question from Ben Swinburne, Morgan Stanley.

Jim, you've talked a lot about the streaming opportunity in the industry or in the market as well as for Sirius. You've often said business models matter, something I think your shareholders certainly appreciate. But you sound very excited about attacking the streaming-only sub opportunity for Sirius and talked about out-of-home listening, et cetera. And you talked about wading, not diving in. But just to maybe play devil's advocate, you guys have a content portfolio you've built over almost 20 years that's quite differentiated. You have a significant level of scale, a brand people know. Obviously, the tax benefits are a nice boost to your margin. So what's the argument against actually diving in, into video more aggressively and sort of attacking that business opportunity with a little more urgency and maybe a little more resources behind it quickly since it seems like there is a big TAM out there for the business beyond just the car? I'd love to just hear your thoughts. And whether your philosophy has changed because the enthusiasm we heard in your prepared remarks seems higher than maybe I've heard in the past.

Listen, Ben, I'd kind of -- I'll answer it maybe 3 ways. One is we'll do 21 million to 22 million trials between new car and used cars in 2018. So that's a tremendous funnel, okay? There is no reason why now -- and if you look at our R&D expense, you'll see that it's checked up quite a bit from where it was 3 years ago. That's a very conscious decision. We've been investing heavily in both 360L and significantly improving our investment in our streaming product from a technical standpoint. I'm now confident that we're kind of there to where -- and by the way, what's changed my mind a little bit also, Ben, I just -- you only see a few things every once in a while that you think are truly changing. These in-home speakers are truly changing when you look at the way people use them. And so when I watch my wife or my own kids in their kitchens with the Echo Dot or Sonos speaker and our service, they love the way it works there. And so we want -- I think the time is right for us to start driving, listening across multiple platforms. I don't know how successful we'll be in the streaming-only business. We're going to try. We're going to put focus on it and we'll see. And like many things we do, we're going to have to learn about it and see what the churn profiles are with it and see how it works. But I don't see why we wouldn't try to drive that channel as another way to acquire subscribers to essentially the same content, okay? Lastly, on video, I actually don't disagree with what you said. I mean, but we've got a lot -- it turns out, doing video is more complicated than it looks on the surface. Some of my people in the room are looking at me because we've been talking quite a bit about it in the last couple of days. I think getting the content and getting the offer actually won't be the hard part for us once we get and are sure that we have the app, the customer experience working the way we want and in fact, our customers like it. Look, I know our Howard customers absolutely are going to want Howard video. I don't even need to do the research. Howard customers want one thing, more Howard, okay? And we're going to give them more Howard. And when you see in the second quarter, I think you're going to be quite impressed. But I think our approach to video right now is around how do we improve our value proposition and as importantly, more importantly, how do we improve the customer experience to their attachment to our content.

That's helpful. I just wanted to...

By the way, I can assure you, Ben, we're not going into the Netflix business. They can rest easy, we're not coming after them.

Right, okay. Well, I'll tell them to calm down. David, just quickly, are you willing to give us a CapEx rough estimate for '18? If you said that in your prepared remarks, I missed it.

Let's see. Ben, let me come back to you, I haven't got it handy.

And we'll move next to Jessica Reif with Bank of America.

Just to follow up on the video product, you finally announced the timing, which is great. I just wanted to see, is there anything you can say about the economics of the video product? Is there any potential revenue uplift over time? And you alluded to -- Jim, you alluded to having more content. Can you just give us some color on that? And then separate question, programming cost growth was just 2%, well below recent growth. What was the driver of that and kind of your outlook as we go forward on programming costs? And then finally, last thing, advertising was still strong relative to everything else we expect and media did slow. So is there anything going on there that you can discuss?

So Jessica, I mean, our advertising growth was spectacular last year, especially against the backdrop of -- maybe the rate of growth slowed from (inaudible), but the base continues to get bigger. And so we had a great year in advertising. We're expecting another great year this year. The programming costs up 2%, and we do expect programming to -- the big contracts are all out of the way for a few years. We've got nothing big coming up. And so we do have inflationary pressures just for -- we've got a lot of employees in there and hosts and things like that. And Scott's team is continuously looking for ways to expand the content offering and bring new things in. So we do expect gently rising programming costs in the near future. And I'll turn it over to Jim for your other...

Yes. So Jessica, one of the things I really like about what we've done over the last 3 years is we've really put a focus on trying to sell our subscribers a premium experience, that experience called All Access. And we're starting to really get it. We're really getting at it. We really are making good strides there. You can see partly in our ARPU. That's something Dave and I watch closely. With that in mind, I can tell you our video offering in 2018 will be included as part of the All Access package. And I'm hoping it helps us sell more All Access programming.

And just to add on the video thing, there's no audio company that I can think of that can start wading into video with the amount of potential video content we have already under the roof in our audio programming group. So we feel good about that. As David mentioned, the programming costs are what they are. We feel our lineup is complete right now. We're always looking and opportunistic. And there's certainly not a problem with the war chest to look at other items to go after. But right now, we feel pretty good where we are.

And Scott, could you just give us color? I mean -- or Jim. There was an allusion to rolling out more video, like how much content and over what period of time. What do you think about...

Well, Jessica, I will tell you. In the first half of '18, it's going to be Howard.

Exactly.

Okay. And we're going to focus on getting it promoted right, getting it out there right. And we won't have to do too much because he's a pretty effective promoter, okay? In the second half, I think in our next call, we'll be ready to say a little more. But we're going to wade into it. Now look, Scott and I always debate this. And if we see a really good opportunity, we'll take it. But for me, the good thing is the technology part of it will be done. It will be out of the way. It will -- our channels will be the creative part of it and what can we monetize either through better retention of our customers or ARPU opportunity.

And last thing is anyone who's been up to our studio on any given day, there's a lot of free great video content happening all the time on a daily basis plus there are major, major pieces of recorded concerts and other things and interviews in our archives. So before we ever get to even a cost issue, we have to -- as Jim said, we'll get it right and then we have our own internal stuff that, I think, is going to be pretty exciting plus, as Jim said, we'll be opportunistic if something in our wheelhouse comes up.

Can I just ask one last question, Scott? Do you record every -- all of the special programs that you -- when you have people come in, is all of that video recorded?

Some are, some aren't. But we have a pretty extensive library over the last 12 years.

We'll go next to Bryan Kraft with Deutsche Bank.

Jim, I wanted to ask you about the recent CRB decision. That decision seems to have raised some concerns that we're starting to see more significant shifts in the economics of the business toward the music industry. Do you share that concern? And can you talk about why you think the CRB came to a different decision than in past proceedings and what you think the decision means as it relates to the future decisions in the economic -- the CRB decision in the economics of your business? And then also I just wanted to ask, David, on the free cash flow guidance for '18, it implies a modest decline despite some EBITDA growth for this year. I just wanted to understand what's going the other way that's offsetting that EBITDA growth. Is it CapEx or working capital interest or something else?

So I'll start on the CRB, and then turn it over to David. I hate the decision. I'll be clear with you. I think it's just wrong, okay? And quite candidly, I think the basis for how it was reached is just wrong. And we'll follow our paths to try to rectify that. That said, I mean, there's not a big thick book of success in appealing these things. The logic for -- David, why don't you take what your interpretation of the logic for it?

It was sort of a surprising result as I think they did it. To us, as you read the decision, it sort of defies any logic or understanding of our industry that in order to get to the rate that the judges got to. First, they made some mathematical errors that, for instance, not dividing by the right ARPU to get the percentage, which inflated the rate by a couple of percentage points. So we'll go back and ask them to reconsider that because it does look to be simply a mathematical error. But we'll see how they do it. The second thing that's even more surprising is that, as many of you remember, we went through a pretty extensive review by the Justice Department when we merged Sirius and XM. And the Justice Department came to the conclusion that satellite radio participated in a broader audio entertainment marketplace that included terrestrial radio and all the streaming services that existed at that time, which was 10 years ago. And certainly, for sure, the streaming services are way more robust today than they were back then. So the market has only become more competitive. Now miraculously, a completely different arm of the U.S. government that has, to my knowledge, no background in competitive market analysis has come to the conclusion that satellite radio is a separate marketplace and distinct from terrestrial radio. And that's just sort of staggering. And then as part of their -- the fundamental underpinnings for the decision, they ran along this theory of an opportunity costs for the music industry and said, "What would happen if satellite radio didn't exist, where would that listening go?" And they made the assumption that 0, none of it, absolutely none of satellite radio listening would go to AM and FM radio. I mean, the basis for it is preposterous. But we said this before that there was an unexpected result in the Brexit vote, there was an unexpected result in the U.S. presidential election, there's an unexpected result from the CRB judges. And it just goes to show you that you can have as many expert opinions as you want, but at the end of the day, the only opinions that matter are the people who are voting.

So Bryan, I'll just make one more comment. For me, personally, I certainly was surprised by the ruling. Okay, we get paid to deal with stuff like that. And as I said in my comments, it creates a little bit of a speed bump for us in '18. But I think what's important here and important for investors, when you look at our 5-year valuation and when me, David's team went back and looked at where we are, we think we're exactly in the same place. And so this is a company that is going to continue to generate strong, strong EBITDA and strong, strong cash flow.

We created the music recovery fee several years ago to provide transparency for our subscribers in what we view as an uncontrollable cost in our structure. And so we're passing this through. We're hopeful, as we go through review and appeals on this, that we'll get a revised ruling. But -- and if it does, we'll change the MRF again to pass that through to consumers. To the question on free cash flow, we do have an increase in CapEx coming in the year. We expect it to move up to the $330 million to $350 million range (inaudible) and the increase is all associated with satellite CapEx spending.

We'll move next to Sebastiano Petti with JPMorgan.

Just 2 quickly on 360L, (inaudible) announced the Dodge Ram 1500 at the auto show. But how should we think about the ramp of 360L availability over the next 3 to 5 years? Will it ultimately reach that 75%, 77% penetration of new auto sales that SIRI is currently hitting? Or do you expect the OEMs to have a good, better, best type of strategy similar to how they currently offer the SIRI product?

No, I think -- let me just take that one first, okay? So on this one, I've been absolutely clear. I told you guys from day 1, we would introduce it early in 2018. We've done that. By the way, if you haven't seen the Dodge Ram, you should go see it. It's an impressive vehicle, okay? And by that, I mean our experience within that vehicle, I just -- I can only say it's really cool, okay, and I really like it. The answer to your question is this is a march. It will ramp up, as I said in my comments. Inevitably, it should reach the same as our penetration, okay? But it will take many, many years to get there. So no, I don't see the automakers leading this part as a good, better, best. Unfortunately, I don't control that 100%, the automakers do. But I can tell you our bigger challenge is not a segmentation of good, better, best. It's just simply where can it fit in their development cycles and how do we match it so that they do the least amount of work and take the least amount of risk to bring this exciting new stuff in their cars. A real window for that, and I've gone on record with this, is I believe that certainly at least 80% of the new cars made in 2020 will have embedded modems in them. And we're certainly trying to grow 360L as fast as we can to match that.

Okay, great. And then just a quick follow-up related to the 360L and just the delivery of the SIRI product long term. I mean, if you look out over the next 5 years, both terrestrial and satellite capacity in the U.S. is probably expected to ramp, whether it's the wireless providers densifying and moving to 5G or existing satellite operators like EchoStar and ViaSat launching additional capacity. So over that time, I mean, how do you think about the ultimate delivery of your offering? Obviously, a great product, but does it have to be delivered via satellite? Obviously, 360L is one step towards moving away from that. And then do you envision a world where...

I want to correct you. There's no step of moving away. Let's be clear here, okay? I mean, we've invested billions of dollars on our own private network. And that private network, we've been able to do really, really well with and provide a really, really good experience. That said, we can't ignore the rollout of the huge wireless broadband networks. And the thinking for me is never one replaces the other. The thinking for me is we dovetail them together, and it gives us a competitive advantage. I've been saying this for 3 years. And I can't seem to get anybody to understand me. And that is we won't be an only-streaming company. We'll always use the private network that we have to our own advantage. But why wouldn't we combine it with these great, big wireless networks as they build out to have the best of both worlds? So I think you should think about us that way. We're going to roll these things out to where we could take advantage of both.

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

Maybe a question for Mr. Frear. Going back to the CRB decision, I think you guys did a good job explaining sort of the quantum of the step-up. But there's one other facet I wanted to just touch on. In the past, the CRB has sort of gradually stepped you up 50 or 100 basis points per year for the applicable revenue. And this one is a bit different in that it's a bigger step-up, but it's also flat over a 5-year period. Is there -- is it reading too much into it to sort of say we're hitting some sort of asymptote, where the increases are coming to an end? Or is every one of the CRB decision sort of independent from whatever happened historically and we could see it rise after 2022?

To be honest, Jason, I can't read the minds of who the future judges will be. It might be the same guys, it might be different people. We have our rates for the next 5 years. And when we get to 5 years from now, we'll see what case gets put up.

And our final question will come from Barton Crockett with B. Riley FBR.

I guess a couple of things I was interested in. One, just a little bit of a follow-up on the CRB MRF pass-through. I mean, it's going to be about an effective 4% or so increment to what the consumer pays for your service over the next 18 months, so a little bit of an acceleration in the effective pricing to the consumer. What's your sense right now of the sensitivity of your subscriber to pricing? I mean, are they relatively inelastic? What type of impact do you think that might have on subscriber growth?

We don't believe they're inelastic. And we do think that as you raise prices that you suppress demand. And as you decrease prices, you stimulate demand. But that being said, we've had mechanisms that we've used to increase prices and save customers with lower-priced offers. And that's why I keep coming back to the long-term compound average growth rate of our self-pay ARPU, including the MRF. That in the sort of 8 to 9 years that we've been raising, tinkering with the price grid, that we've ended up at an effective increase of about 2.5% per year, and which sounds a lot like a normal inflationary increase. And it's produced the subscriber results it's produced. And so I can tell you that as we put the MRF change through, we expect that it's going to stimulate some churn. We expect it will stimulate increased use of discount plans through our (inaudible). But all of that is incorporated into the guidance that we've given you.

Okay. And then if I could switch gears on one other question. This gets to the employment contracts, I guess, with Jim and I think also with you, Dave. As I understand it this year, at the end of the year or May, both might be coming up. And I was just wondering if you guys can express what you expect the transition to be? I mean, do you -- are you interested in continuing? And if not, is there -- can you tell us about the transition planning procedures there?

So look. I'll start with me, and that is -- and I'll start with a simple statement. There's no other CEO job I'd rather do. I love working at SiriusXM. I could tell you, I'm extremely proud to be able to come to work every day with the wonderful men and women that make up this organization, and I'm committed to it. That said, for me, I'm going to be 64 years old this fall. And the conversations I have with Greg and with our board is we should just shorten the window a little bit and have more conversations about what I might want to do and frankly what they might want to do with me. But where investor should not be the least bit concerned about this is whatever happens, I guarantee you, our board will do it in an orderly and efficient, well-done manner. And I'm committed to whenever that day comes to be in a key part of how that transition would work. And so I just don't think there's really any story here.

Thanks very much, Martin. And anybody we didn't get to, let's catch up with offline today. Thanks, guys.