Sirius XM Holdings Inc. (SIRI) Q4 2012 Earnings Report, Transcript and Summary

Good morning and welcome to the SIRIUS XM Radio’s full-year and fourth quarter 2012 earnings conference call. Today’s conference is being recorded. A question-and-answer session will be conducted following the presentation. (Operator Instructions) At this time, I would like to turn the call over to Hooper Stevens, Vice President Investor Relations Finance. Mr. Stevens, please go ahead.

Thank you, (Shelly), and good morning, everyone. Welcome to SIRIUS XM Radio’s earnings conference call. Today Jim Meyer, our Chief Executive Officer, will be joined by David Frear, our Executive Vice President and Chief Financial Officer. At the conclusion of our prepared remarks, management will be glad to take your questions. Scott Greenstein, our President and Chief Content Officer, will also be available for the Q&A portion of the call. First, I would like to remind everyone that certain statements made during the call might be forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based on management’s current beliefs and expectations and necessarily depend upon assumptions, data or methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For more information about those risks and uncertainties, please view SIRIUS XM’s SEC filings. We advise listeners not to rely unduly on forward-looking statements and disclaim any intent or obligation to update them. As we begin, I would like to advise listeners that today’s results will include discussions about both actual results and adjusted results. All discussions of adjusted operating results exclude the effects of stock-based compensation and certain purchase price accounting adjustments. With that, I will now hand the call over to Jim Meyer.

Thank you, Hooper. Good morning. 2012 was a great year for SIRIUS XM as we reached a number of records and milestones and earlier this year we issued guidance for meaningful growth in 2013 to our subscriber base and financial performance. In 2012, we added more than 2 million net new subscribers, the largest number of new subscribers in a single year since 2007. At 1.7 million net additions, our 2012 self-pay subscriber growth was up 36% over 2011 and 69% over 2010’s self-pay net additions. Self-pay churn and conversion rates were steady at 1.9% and 45% respectively despite and increase in our base price, notably, the first core price increase ever at SIRIUS and only the second one ever at the XM base. We believe these statistics indicate strong demand for and satisfaction with our service and I believe this bodes very well for the future. These 2 million net additions exceeded our original guidance on the strength of lower-than-expected churn, higher auto sales and improved used car additions. We exceeded all of our 2012 financial guidance as well. Revenue was a record high, up 13% to just over $3.4 billion versus our guidance of approximately $3.4 billion. Adjusted EBITDA climbed 26% and reached a record $920 million compared to guidance of approximately $900 million. And free cash flow jumped a massive 71% to $709 million, beating guidance of approximately $700 million. Auto sales certainly provided a tailwind to our growth in 2012 with SAR climbing 12% in the fourth quarter to around $15 million and growing about 13% to $14.4 million for the full year. Consensus estimates call for auto sales to rise at a slower rate in 2013, just under 5% to $15.1 million. Earlier this year, we announced that Toyota is increasing its penetration rate of…

Thanks, Jim. The fourth quarter was another extraordinary performance by SIRIUS XM turning in our best quarter for self-pay additions since the merger. We adding 529,000 self-pay subscribers in the quarter driving full-year total subscriber additions to 2,008,000 and bringing total subscribers to 23.9 million. In the course of 2012, we raised subscriber guidance three times and ended up beating our original guidance by more than 50%. The beat was broadly based. Auto sales were better; second owner additions were stronger; and most importantly, self-pay churn was better than our original expectations. Self-pay churn continues to show long-term consistency. The year rounded up to 1.9%, the third year in a row at that level. The fourth quarter at 1.8% was our best quarterly performance since Q3 ’08. You can really see the strength of the business in our self-pay subscriber additions which, for 2012, were at 10 times their 2009 level. In the depths of the 2009 financial crisis, our first full year of operations as emerged company, we added 154,000 self-pay net additions. That jumped to 983,000 as the recovery got underway in 2010 followed by 24% growth in 2011 to 1.2 million and 36% growth in 2012 to 1,662,000 self-pay net apps. A slow but steady progressing economy seemed to shake off both the effects of Hurricane Sandy on the northeast and year-end concerns over the fiscal cliff as seasonally adjusted auto sales in the fourth quarter reached $15 million, the strongest quarter since Q1 ’08. Asian automakers continued to gain share versus the prior year period and market share continued to shift towards small to mid-size cars, both of which tend to put downward pressure on conversion rates. The new vehicle conversion rate was 44% for the quarter and remained at 45% for the year, both within…

(Operator Instructions) Your first question comes from the line of Barton Crockett – Lazard Capital Markets. Barton Crockett – Lazard Capital Markets: Two questions, if I could, first on one of the numbers in the financial statement was customer care and billing expenses went up a decent amount year-to-year per average subscriber and I was wondering if you could talk about what’s going on there and whether this is the new level that should persist going forward or whether this was an unusual investment.

So we did a couple things. One is I think you’ve seen the numbers be up year-over-year for a few quarters now. We’ve made the decision – I think we’ve talked about this in prior calls – to invest a little more in customer care. We believe that it is showing up in our churn rate beating expectations. That was certainly true in the fourth quarter that one of the things we did this year that was a little bit different than prior years is that we actually kept our staffing levels at higher levels rolling into Christmas, that instead of reducing staff in the fall – in the early part of fall – and then rehiring and retraining going into December to meet the Christmas bump, we just a kept a sustained higher level of staffing throughout the quarter. We think it showed up in better customer service and then better churn rates with the churn being the best we’ve seen in four years for the quarter. Barton Crockett – Lazard Capital Markets: So in the past you guys have had some scale there, some improvements in spend per average subscriber. Is that basically ending or should we see that resume for the next couple of quarters?