Good morning, and welcome to SiriusXM Radio's Third Quarter 2013 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I'd like to turn the call over to Hooper Stevens, Vice President, Investor Relations and Finance. Mr. Stevens, please go ahead.

Thank you, Janine, and good morning, everyone. Welcome to SiriusXM's third 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 our prepared remarks, management will be glad to take your questions. Scott Greenstein, our President and Chief Content Officer, will also be available for the Q&A portion of the call. First, I would like to remind everyone that certain statements made during the call might be forward-looking statements as determined, defined in the Private Securities and 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 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. All discussions of adjusted operating results exclude the effects of stock-based compensation and certain purchase price accounting adjustments. I will now hand the call over to Jim Meyer.

Thank you for joining us today to discuss what we think was a very important quarter for our company, particularly around moves we had made in telematics and programming that will position SiriusXM very well for long-term growth. Total third quarter revenue of $962 million climbed 11% from $867 million in the third quarter of 2012, once again setting a new record high. Driven by revenue growth of 11% and modest cash operating expense growth, adjusted EBITDA climbed by 21%, also to a new record high, of 260 -- $296 million in the third quarter, up from $245 million last year. This represented an adjusted EBITDA margin of 30.7%, also a new record, and up just over 250 basis points from the prior year quarter. Free cash flow of $245 million climbed by 26% from last year's third quarter to set a new third quarter record. Based on our strong growth year-to-date in revenue and our outlook for the fourth quarter, we have raised our 2013 revenue guidance to approximately $3.77 billion. We also just issued our initial outlook for 2014, showing continued revenue growth and sharp growth in adjusted EBITDA and margins. In 2014, we anticipate total revenue of over $4 billion and adjusted EBITDA of approximately $1.38 billion, which works out to a 21% growth in adjusted EBITDA versus this year's guidance, and an expansion in our adjusted EBITDA margin to 34.5%. We have also decided to increase the monthly price of our core service offering by $0.50 beginning January 1 to $14.99 per month. As always, you should note that many of our plans, such as our pay auto trials, our All Access plan, multi-radio subs and others, will not see any change in pricing. While changing prices is a difficult decision, particularly the competitive audio entertainment…

Thanks, Jim. I'll be brief, and we'll open it up for questions. SiriusXM had its best quarter ever for the revenue, adjusted EBITDA and adjusted EBITDA margin. And with the help of an 83% free cash flow to adjusted EBITDA conversion ratio, we had our second best quarter ever for free cash flow. Our results were are driven by the best third quarter for both total net additions and self-pay net additions since the merger of the 2 companies 5 years ago. Revenue in the quarter rose nearly 11% over the prior year to $962 million on 9.5% subscriber growth and 1.2% growth in ARPU. We continue to see stable trends in new car conversion and self-pay churn. We have been pleasantly surprised by used car conversion rates this year, used car trials from dealer reports, and self-identified used-car buyers have seen conversion rates in the low 30% and gross additions from subsequent owners are on track to exceed 1.5 million for the year. As Jim mentioned, with the strength of new car sales, we are raising guidance for total net subscriber addition, for the second time this year, from 1.5 million to 1.6 million while, at the same time, trimming self-pay net additions from 1.6 million to 1.5 million. With the continuing improvements in the economy and robust auto sales, we are seeing a larger number of subscribers selling their car and rotating back into the trial funnel. We are also increasing revenue guidance for 2013 to approximately $3.77 billion. Contribution margin rose 70.4 -- arose to 70.4% in the quarter, up 3 basis points sequentially and 6 basis points over the prior year. Fixed costs increased by 3.7%, but declined as a percentage of revenue from 26.2% to 24.5%. The increase in fixed cost was driven entirely by…

[Operator Instructions] And your first question will come from Kannan Venkateshwar from Barclays.

So just a couple of questions. The first was on the self-pay sub, could you help us understand the numbers a little bit in terms of the penetration rates and so on, and what drove the slight decline in terms of the guidance numbers there? And also, in terms of the numbers going forward, how much of the guidance next year is driven by self-pay versus used -- versus OEM?

Okay. So on penetration rate, we're just a wee bit below 70% in terms of the incorporation rate, new car production. I think as we mentioned a couple of times on the call, the change in self-pay subs is the result of migrations of existing subscribers as they turn over their cars, probably not a big surprise that since our subscribers over-index higher income that they turn their cars over faster than general industry trends. And so as it's turning out, it looks like they're moving them. We anticipated that, but it looks like they're turning over cars at least, at this point in time, a little faster than what our expectations were. So effectively, it's like somebody upgrading to a new phone, right? They're moving from 1 car to another, but remaining as subscribers. So we just have the sort of migration effect out of self-pay and into trials. So that was the driver of the decline. Most of our self-pay subscribers come from auto sales, right? So really, to your final question, I don't think there's much distinction there. In terms of our guidance, the guidance we, for 2014, were providing this time is the over $4 billion in revenue and the $1.38 billion in adjusted EBITDA. Subscriber guidance will probably follow at the close of the year, as we traditionally tune up for the finish of the year, we look at the most recent forecast for auto sales and then finalize our marketing and retention plans for the year.

Yes, I just want to add one thing on top of that, I think David used the right word in his comments. Yes, we have tweaked basically our subscriber guidance for the year. And we have tweaked it for 1 phenomena, which is it appears our subscribers are transitioning faster to newer cars, either because the economy's improving or because they're more affluent. I don't know which one. And so we're really just seeing a shift in those subscribers when they go from their first relationship with us to their next new car, they're now moving from self-pay into our trial funnels, and you'll see our trial funnels look very strong.

Okay. And just one question on -- the comment on embedded cars in the IP platform, I mean is that, at some point in the future, the core part of your business model and the way your content gets delivered? And what kind of economics does that represent?

Well, I think I was pretty clear on what I said which is, number one, there's no question in my mind the architecture of the future, long term, the vehicle will incorporate an embedded transporter, or call it, embedded modem. Which way, ultimately, customers get which part of their services, way too early to define. But what I will clearly tell you is, again, I was strong in my comments there and I'll be strong again, the value of having our own private, ubiquitous, one-way, nationwide network and being able to combine it with a public 2-way LTE network, we think, gives us a very strong option or strong position going forward to optimize the entertainment experience.

For a long time, data traffic has shown severely asymmetric patterns, and we don't think that's going to change going forward. So having an interactive -- effectively, an interactive request channel through embedded modems combined with an ample downlink channel is, we think, a very valuable asset to have in the automotive fleet.

And we'll take our next question from Matthew Niknam with Goldman Sachs.

Two for me, if I could. One, on ARPU, can you talk about some of the factors giving you increased confidence in the ability to raise prices next year and whether the greater investments and a differentiated content provide greater ability for increases beyond '14? And then secondly, on margins, so there's a good deal of margin expansion we've seen in recent years, the reset with your large OEM partner in 4Q gives additional tailwind. Given that and the announced rate hike, can you talk about where you might see opportunity to maybe reinvest some of the margin tailwinds into '14?

So I'll deal with the price increase and then David will take the rest. But I mean, price increases are never a happy thing or never easy to decide. We have kind of gauged where we are. We've looked with our churn profile, where we are. We look at the great value story that we believe we're bringing our customers. And we wouldn't have announced a price increase if we weren't confident that we could achieve that without turning over the applecart per se. And then I remain confident in that. As far as where our price goes in the future, we will cross those bridges as we get there and we'll continue to make the same kind of assessment to try to judge the elasticity of our subscribers, clearly, what's going on in the economy at that time and what our value proposition is and optimize all 3. But I feel comfortable with the price increase. By the way, our subscribers will be hearing about it in the next week. And I think that's all I can say on that. David, can you take the rest?

Yes, sure. On the content differentiation, and as Jim has said, that we think long and hard about this, the content differentiation is pretty much the only reason why people are paying us at all because, as you know, all of the competitive services are free to the consumer. So the content differentiation is important, and Scott's team continues to do an unbelievable job creating a unique and compelling experience for our subscribers. In terms of what are we going to do with the expanding margin, well, I think you should expect us to continue to invest the way that we have been all the way along that in our results so far, you've seen us make major investments in the development and deployment of IP services, of telematics, sort of continuous generational change in the SDARS technology and in sort of better intelligence to help us manage what is outside of the cellular carriers, one of the largest paid subscriber bases in the world, so -- and we'll continue to do that, and we believe we can continue to make those important investments in the future within the margin expansion and are very confident that we're investing at a strong level to drive future services and still be able to hit the 40% EBITDA margins that we've given you for long-term guidance.

And we'll take our next question from Jessica Reif Cohen from Bank of America Merrill Lynch.

I have a couple of questions. On capital returns, the $2.4 billion remaining, I was wondering if you could talk about the time frame and why wouldn't you accelerate next year, particularly now that you've announced a HoldCo structure?

Well, HoldCo is not quite there yet. But -- and as you know, we haven't had a history of talking specifically to time frame. Although we have said many times that we have a 3.5x leverage target that if we look to that target, and look at everybody's model out there, so it gets you to the conclusion that we'll probably raise an additional $1 billion a year in net debt. But our free cash flow is clearly headed to $1 billion a year. And so when you look at what amounts to $2 billion of potential funding, where is the company -- what's the company going to do with it? If we don't have something to buy well, from time to time, we could, I guess, let cash levels build. I think it's likely that we'll choose to return that money to shareholders.

Great. And then just a couple more. Just on the guidance, for the initial guidance of $1.3 billion for EBITDA for next year, I mean, initially, it just seems low given all of the trends that are in place and then combine that with the price increase. So I was just wondering if you could give us some color on just kind of the -- your thoughts on that.

Well, let's really talk about the price increase. You got to remember that if the price increase on the basic package and the -- and there are a lot of packages that aren't affected by the increase, so it's -- I think that what we've said is that, over time, you should expect to see gently rising sort of ARPU as we maybe tinker with price here and there and continue our efforts to upsell. But at the same time, we continue to look at the introduction of lower-priced packages that may appeal to a more price-sensitive consumer. And at the end of the day, what we're really driving towards is optimizing the free cash flow of the business, so we're looking to drive the subscriber growth and -- which we believe will drive margins.

Which leads to my last question, perfect segue. On the Hispanic market, which is lower-priced, I was just wondering could you give us a sense of what you think that market opportunity is? I mean, it just seems like a really interesting add-on. And I guess, part B to that question is, on some of the content renewals, you mentioned Fox and Major League Baseball. Can you give a sense of what happens to those costs, the underlying costs?

David, do you want to do the content renewals first?

Yes. We've had a long-term trend statement where, on programming costs, we said that we expect the trend to be down, right, and reducing the programming costs. And that, in fact, is exactly what Scott has delivered. He's taken a whole bunch of channels and content arrangements that were driving the $400 million a year in spending when we put the 2 companies together, and his team has driven that to now under $300 million. We only have 1 premerger contract left, which is the NHL agreement, still isn't up until after the Stanley Cup in 2015. So I think that the process of continuously declining the programming cost is certainly going to abate in the next couple of years. And then, like every other business that we're subject to inflationary increases from time to time, I don't think you will see us have the kind of pressure in content costs that you've seen on the video side.

Yes. I think I'll add 1 point to that. We consciously, and I repeat, consciously, work with our programming partners for a longer-term agreement that, I think, is great for our company which gives us certainty on what our programming costs are going to be for these 2 major pieces of content over the next 6 and 7 years. I can tell you, I'm very happy with where we came out. In terms of the Hispanic, Jessica, I only know a couple of things. Number one, it's a rising and growing percent of the population. Number two, our data clearly shows us we're under-indexed. When we look at our conversion data, we look at our self-pay data, we're clearly under-indexed. And that can only be from, first, from one conclusion, which is we don't have -- we didn't have the content necessary to successfully compete in this important segment. And so we very carefully -- and someone asked the question earlier about it, are you going to invest? We're investing pretty heavily in the Hispanic community and the Hispanic tier in content. Piolin being a great example. This a major morning star on -- that was on Hispanic terrestrial radio that's now exclusively on SiriusXM. And then, as you've seen in baseball, for instance, we now have -- we have the Spanish rights to the games. And more and more and more, we continue to take an expansion of our content, call it, Hispanitizing it, meaning making it available in the Spanish-language as well as combining with unique and exclusive content to build, what I think, is a strong package. I want to caution you -- and I made my comment very deliberately so you can hold me accountable to it, this is a march, not a sprint, okay? We are going to -- we haven't even gotten our marketing rolled out yet to know what we're even going to get through this in the next 6 months, so -- but what I can tell you is, we're going to stay at it and we're going to continue to learn and figure out, just like we've done in other important segments, and I'm not going to rest until we get our fair share of that business. That's what we deserve. And I'm really excited about it because I think it's totally added to our business and not in any way predatory to our existing subscriber base. I also want to point out that I don't think Hispanic is the only place that this concept can work. And so I think you're going to see us look at other niche, none -- that are single-digit, low double-digit parts of kind of the demographics out there where we can offer unique programming and mass market to that unique segment. And I'm pretty excited about that. Scott, do you want to add anything?

Yes. One other thing, Jessica, I wanted to add, when David accurately mentioned about our programming costs and all that, I want to be really clear because sometimes there's questions about that. It isn't either a charitable situation or anything else why our cost structure is what it is. The partners do exhaustive research, and they get great, great feedback for a variety of different reasons and often -- overlapping reasons from brand extensions in the car for a TV network to national calls, on what was a local show and other things. And we actually have a couple of situations now where there are partners paying us, in some cases, significant money for content we want and they want the bandwidth to be on our platform. So we are in a unique position in the assets we offer versus a lot of other media companies to partners that come on our platform.

All right. Can I just follow up on what you just said? So you -- can you just give us a sense of the magnitude of how much partners pay you in total?

No, I don't think we want to give any of that detail. I think that's just one way we're balancing our programming costs, though, just to Scott's point.

And we'll take our next question from Bryan Kraft with Evercore.

A couple of questions. One, I was wondering if you could provide any kind of rough quantification of the percentage of units that are entering trials that are existing subscribers, sort of quantifying these trial subs that are existing subs and are buying new cars? And also, can you talk about what percentage of the trial base at this point represents used cars? And finally, can you just talk about how you're tracking according to your initial plan this year for used car unit growth?

So I'll take the easiest one first and that is, I'm real confident in our used car guidance for this year. We're moving on quite nicely. David, I think you can comment on the other 2.

Yes. In terms of the proportion of our trials -- trial volume that represents sort of existing subscribers migrating through, I don't think that's a delineation we're going to provide at the time, and same thing with the trial inventory on used cars that -- probably best to just stay focused on the fact that we're seeing roughly 50% growth year-over-year in additions from the used car volumes.

David, maybe in that vein, on the first question, can you talk about maybe year-over-year, what kind of increase you've seen in the existing subs turning over as a percentage?

I don't have that number, honestly, off the top of my head. As we mentioned in the call, it's a little -- this is all sort of new, developing information, right? We don't have any real history on it. And so, we're going through the learning curve for the first time. My guess is, is that the behavior of this is going to change with economic cycles, right, and it's going to change as the complexion of the subscriber base changes. So what we're seeing now in our activity is most likely the behavior of people who were buying cars as we were moving into the recession and out of the early recovery of the recession now, presumably, those are higher-income people. So this is just one of these things we're going to have to watch over time like a lot of the numbers you've seen from us over the years that we end up showing great statistical stability at the end of the day. And my guess is, just like the first couple of years when we weren't talking about used car conversion rates because we're seeing a lot of volatility month-to-month in what those rates were, and for the first time today, hear us coming out in saying, "Hey, we see those rates in the low 30%," and that's because we -- the numbers have sort of stabilized. So we'll keep an eye on some of these other things. And as we feel that we have a better grip on the numbers, we see the statistical behavior stabilize a little bit, maybe we'll open the cupboard a little bit.

Yes, I think David is absolutely right. The key word he used there was this is a new phenomena for us that we've seen some acceleration on. And I think the used car conversion rate compares [ph] is exactly right. I don't think we want to comment until we can -- until we're sure we know that what we're going to tell you is what we believe is right. And I don't think we know. I agree with David, I don't know what that number is today.

Could I just ask one other, just a clarification to -- when someone is an existing subscriber, and they get a new car and that's a free-trial car, not a paid trial, are they counted as self-pay churn?

Yes. So I think the way -- look, I think the 1.8% continues to be a pretty good number because your next logical question would tend -- I know what you're going to ask is that, "Well, do you keep 100% of those guys when they migrate back to the trial?" And of course, the answer is no. But when you're all done tracking it through, whether it rotates through as a paid trial or an unpaid trial and you look at the net retention, we think 1.8% is a fair representation of the -- of what happens after the migration effect of people moving from 1 car to another. And so it continues to be, I think, a good, long-term planning number for you to use.

And we'll take our next question from Mike Pace with JPMorgan.

Just a couple of structural questions. You mentioned a few items that are still pending to complete the HoldCo structure. I guess, is there anything else that has to get done? And if so, what? And then as far as the Agero acquisition goes, can you just talk about how you'll fund that, where that would sit in the capital structure if HoldCo has put in place prior to that? And then just a follow-up or 2.

So with HoldCo, it is just paperwork at this point, paperwork and time. We have to provide notices to people and we have to wait for periods of time. So I think you should see HoldCo in place in the next few weeks. We obviously don't have a clearance yet from the government to close if we close the HoldCo or close Agero prior to HoldCo's formation. Obviously, we'd be funding it out of the operating company. If we closed it after HoldCo is formed, it's possible that we could acquire it or finance it up there. But if I had to pick the odds today, the odds today is that we'll draw down on our $1.25 billion bank facility in order to initially fund the acquisition. And we'll look opportunistically at the markets and maybe turn that money out.

And then I think you said pro forma for Agero -- and I thought you said -- and stock buybacks in the fourth quarter, your leverage ratio will be around 3.5x. How does that work? And when you first close Agero, will you be under the 3.5x? And obviously, this is just in the context of 3.5x covenant in one of your bonds.

So I think that we have a couple of things, right? So in the 5 inter quarters, right, that have the 3.5x research and they also had a builder, and then we also have HoldCo. So between the builder and HoldCo, we have plenty of flexibility that, if we choose to continue buying back at $5.5 million a quarter, that I don't see any particular problem with doing that.

Great. And then just one more. As far as the stock buybacks that you've agreed to do with Liberty, I think the timing and the amounts are pretty clear. But can you remind us who has what options to accelerate that? And how should we think about that from your end?

I'm going to reference you back to kind of the 8-K on the description of the options. But I think, for the most part, you should think of it as we'll do purchases. And this point, you should anticipate purchases in November, January and April. And Mike, just to finish on the 3.5x, I think the way everybody ought to be looking at our leverage at this point is not as a convert. And certainly it would be my intention to manage to a net of the convert leverage that with it so deep in the money, the odds are overwhelmingly likely that it turns into equity in December of '14. And like everybody talks about, we're seeing historically low rates in the high-yield market. And knowing that we're going to maintain a 3.5x ratio for the long term, we -- over the next couple of quarters, we may very well look to effectively prefund the replenishment of the deleveraging that's going to occur. So if you see us bump above -- up above 3.5x, assuming nothing more than just sort of managing the fact that we know we have a big slug that we're going to be raising -- need to replace next December.

And gentlemen, your next and final question will come from Jim Goss with Barrington Research.

To the questions. First, is there more upside in terms of penetration similar to the Honda revised agreement you described earlier? And to the extent that you have had the wind at your back with auto sales reaching a cyclical peak or at least a more normalized peak, are there other opportunities that are sufficient to sustain this area of growth? Is it the used car market, the Spanish language, IP or what are the strategic priorities you feel are most important in that regard?

Well, I think -- this is Jim. I think, a couple of things, Jim. Thanks for answering the question on Honda because I do think the Honda announcement was a pretty important announcement that we made yesterday in terms of penetration, more towards the confidence in automakers with Satellite Radio. Is there some more? There's some tweaking, okay, around the penetration rate. But I think 70% continues to be a very strong and good benchmark. In terms of growth, I think we've been very clear, we continue to put major emphasis on the second owner business and drive that hard. Obviously then, we are looking at other initiatives like Hispanic to supplement around that with additional growth. And I think you got it. I think those are the 2 big ones that we're concentrating on right now for 2014. Thank you.

Thank you, everybody.