Sirius XM Holdings Inc

NASDAQ:SIRI

Earnings Call Transcript 2018-Q1

[Operator]

Good morning and welcome to the SiriusXM's First Quarter 2018 Results Conference Call. Today's conference is being recorded. A question-and-answer session will be conducted following the presentation.

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.

[Hooper Stevens, Sirius XM Holdings, Inc.]

Thank you, and good morning, everyone. Welcome to SiriusXM's earnings conference call for the first quarter. 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'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 those 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'd like to 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.

[James E. Meyer, Sirius XM Holdings, Inc.]

Thanks, Hooper, and good morning. Thank you for joining us. The entire team at SiriusXM, once again, delivered excellent results during the first quarter. We grew subscribers by more than 300,000 to a record 33 million, and we continue to grow revenue in line with EBITDA, despite a very significant increase in our music royalty costs. We're on track to achieve all of our full-year guidance for subscriber growth and financial performance. First quarter self-pay net subscriber additions of 206,000 were very solid, and conversion and churn performance was right on target. Although, of course, it's still early, I'm particularly pleased with our churn performance in light of the increased MRF we began to pass through in February. This is a strong testament to our excellent value proposition.

With new car sales actually growing 2% in the first quarter and our used car penetration continuing to climb, trials in progress at the end of the first quarter increased nearly 300,000 from the end of 2017, which positions us well as we move through 2018. Incidentally, after good first quarter auto sales numbers, the consensus sales number for 2018 moved up slightly to $16.8 million from the $16.7 million we spoke about in late January.

We continue to renew multi-year OEM deals on favorable terms and with growing support for 360L as they come up for expiration. So far this year, we've extended our relationships with Hyundai Genesis and Nissan Infiniti, and OEMs remain committed to SiriusXM as part of their long-term platform decisions. Our new car penetration rate remained at 76%, in line with the first quarter of 2017. Estimated used car penetration in the first quarter is in the neighborhood of 37%, continuing its steady march towards our new car penetration as the fleet cycles.

Our used car manufacturing efforts are operational at 32,000 franchise and independent dealers, up almost 5,000 from this time a year ago. We will continue to work this year to build out our presence in independent dealers, our service initiatives and other ways to drive results from the private sale market.

I'm very satisfied with our track record of signing up dealerships, but I'm convinced there is much more we can do to garner more subs from this vastly growing opportunity. Just like in the new car world, we are working to ensure used car buyers receive a high-quality timely trial from every pre-owned sales channel, and we're investing heavily to obtain more timely and accurate data on private transactions as well. As I stated before, we're also investing across our digital footprint. It's rewarding to see two of these major initiatives come into the marketplace in the first half of this year. 360L-enabled Ram 1500s are now on the road and in the hands of consumers as we speak.

The marriage of our ubiquitous satellite broadcast network with two-way wireless connectivity is a game changer for our business, not only our 360L trialers and subscribers getting a vastly improved user interface, they also have a personalized experience that learns and grows the more they use our service. And there will be growing commonality between what's offered in the car and what's offered out of the car. Return path data will also enable us to more efficiently market to trial customers and to serve our subscribers better. We couldn't be more pleased to have 360L in market and later this year I will provide additional updates about further OEM rollouts of this exciting technology.

During the second quarter, we will also launch our new streaming experience with new iOS and Android apps, plus a new web player, each delivering a better experience outside the car with an improved interface, more channels, content on demand, and personalized recommendations. And we will also debut SiriusXM video with the new app focused at first on Howard Stern's rich library with more great content to follow. In conjunction with this launch, we are planning a well-publicized free listening event from May 14 to May 29 across our entire platform of apps, web player and, of course, in millions of inactive vehicles to let people sample SiriusXM's great content and new features.

Our tremendous subscriber base clearly shows that consumers love our content in car and our new app gives them better access to the same content and more, while they're at the home, in the office or on the go. With improved apps and even more access via smart speakers, smart TVs and a variety of other connected devices, it's never been easier to enjoy SiriusXM outside the car. And for that reason, as I told you in January, we are building the resources to focus on acquiring streaming-only subscribers as well. Streaming-only ads will invariably be small compared to subs generated from our 20 million-plus annual vehicle trial funnel. But if we are successful, they could still meaningfully bend our long-term subscriber growth arc. Given our unbeatable content, strong sales infrastructure and improving streaming distribution, I am optimistic that we will make progress here.

What you are seeing with both of these deployments, this enhanced cross-platform digital footprint is exactly what we have been telling you expect for some time now. 360L will now march into more cars, while a better app experience will give us an expanded opportunity outside of the car. Building that great, easy-to-use digital experience of the future is key. But our content will always be the true beating heart of SiriusXM.

We have long been the home of compelling, diverse voices; voices of people who have either played the game or made an indelible mark in their field; people who are insiders who can tell a story as no one else can. And once again, we've made great new additions to our talent roster and talk sports, comedy and music. We launched an entirely new comedy channel with comic superstar Kevin Hart. Kevin Hart's Laugh Out Loud Radio is a regular show now on SiriusXM, highlighting new comedic talent who aren't getting played on regular radio.

Trisha Yearwood now hosts her own exclusive show on The Garth Channel. Irving Azoff, the music industry power player launched a special talk show on SiriusXM's Volume channel. The first installment had Jon Bon Jovi, Judd Apatow, and Irving on his couch riffing about MTV, careers and life on tour.

NASCAR champion, Kevin Harvick premiered season 2 of his show in February and has already won a Cynopsis Sports Media Award. Champion golfer Fred Couples returned to the SiriusXM PGA TOUR Radio with his exclusive show. And Jeffrey Seller, the producer of Broadway's Hamilton continued his conversation series with theater legends Hal Prince and Andrew Lloyd Webber.

We enhanced an already stellar and expertly curated music programming lineup with a new classic hip-hop channel with music and TV star LL Cool J. Rock the Bells Radio launched with a star-packed special event in Los Angeles. We also launched a new EDM channel with international DJ Diplo, called Diplo's Revolution, which plays global rhythmic music.

Our Southern Rock channel, Free Bird, launched with a special concert in Atlanta by Lynyrd Skynyrd. It was a hit with fans and has been extended through May 1. And we added to our already potent country music lineup with a new full-time channel from Dwight Yoakam, called Dwight Yoakam and The Bakersfield Beat, Where Country Went Mod, featuring the enduring genre of country music made famous by Buck Owens and other artists.

We expanded our sports offerings significantly with dedicated 24/7 conference channels for the ACC, Pac-12 and SEC. We are broadcasting all of the games of the Major League Baseball season, and carried the Masters, the Daytona 500 and every game of March Madness, while also agreeing to a four-year extension of the SiriusXM PGA TOUR Radio channel. We also debuted the full-time CBS Sports Radio channel and launched our already popular Barstool Radio channel.

I'd be remiss if I didn't mention that, once again, we provided special moments that only our subscribers can experience live. We did it in March with a special performance of Springsteen on Broadway presented by our E Street Radio channel. Our unique programming bundle is a significant element of our value proposition and why so many millions of Americans pay us every month. It is also one element of an overall business model that scales beautifully and generates tremendous cash flows. Even with higher music royalties, we continue to run a business that generates incredibly high variable margins, a 70% contribution margin in the first quarter. So, with each new subscriber comes a rise in revenue, but an even bigger rise in our EBITDA.

It's surprising to me that so many highly valued businesses out there today do not have this inherent scalability. In a sense, we're able to serve more subscribers with existing resources. From 2009 to 2017, we have grown our revenue annually by an average of 10% and grown adjusted EBITDA by an astounding 21% per year. Comparing us to other companies provides some illuminating statistics. SiriusXM generates more revenue per employee than 90% of the companies in the S&P 500. More importantly, SiriusXM generates more cash flow per employee than 95% of the companies in the S&P 500. Wow, I know I sound like a broken record, but business models do matter, and SiriusXM's is hard to beat.

During the first quarter, we continued our practice of buying our stock methodically and opportunistically, and we also returned capital with our dividend which we hiked by 10% late last year. To date, we have now paid our shareholders over $10 billion from our first special dividend in December 2012 to share repurchases beginning in 2013 at an average price that year of $3.39 to our first regular dividend in November 2016. I'm extremely proud of this multi-year record of driving value by applying our excellent business model to deliver consistent, growing operating and financial results, and using those results, that immense cash flow to return capital to our owners in a smart, sustainable way.

We also continued to use our growing resources to make important internal investments in new technology and content, which positions us for long-term success. We've deployed capital externally to make strategic acquisitions and investments, such as our investment in SiriusXM Canada, Automatic Labs and Pandora. And clearly, we continue to express further interest in the ad-supported radio market.

Although the year is still early, I'm very pleased with our progress so far toward achieving our full-year strategic and operating objectives. 360L is now in the market, our new app rollout is on track for this quarter, the content we are producing and delivering to our subscribers has never been better, and our business model continues to scale and produce tremendous cash flow for our shareholders.

Let me turn it over to you, David.

[David J. Frear, Sirius XM Holdings, Inc.]

Thanks, Jim. Good morning, everyone, and thanks for joining the call. Our outstanding results in the first quarter show the strength and resiliency of our business model and the 330,000 total net adds was enough to drive our total subscriber base to over 33 million for the first time ever, a tremendous milestone.

New car sales growth of 2% in the quarter with a production penetration rate of 76% pushed our installed base of vehicles up 11% year-over-year to 109 million, or approximately 42% of the total cars on the road in the U.S. This number while significant is poised to grow another 70%, eventually reaching approximately 185 million vehicles by the middle of the next decade.

New vehicle trial starts increased 3% to 3.2 million, while used car trial starts grew over 10% to a record 2.3 million, resulting in total trial start growth of 6% to over 5.4 million. At the end of the quarter, the total trial funnel stood at over 9.1 million with paid trials expanding by 124,000 in the quarter.

Self-pay net adds in the quarter were 206,000 for a total self-pay subscriber base of 27.7 million, benefiting from continued churn performance at just 1.8% per month. From a rate perspective, rising vehicle churn was more than offset by improving non-pay and voluntary churn. Solid new car conversion rates of 39% and used car rates in the high-20s also contributed to self-pay subscriber growth. Based on this performance, we feel confident about meeting our full-year guidance of approximately 1 million self-pay net sub additions.

Effective January 1, the new revenue recognition standard create a $0.25 headwind to ARPU, resulting in a flat number year-over-year in otherwise masking the 2% growth in ARPU. The strength of our subscriber growth combined with an outstanding 17% growth in advertising and continued growth in other ancillary revenue was enough to lift revenue 6% in the quarter to $1.38 billion. ARPU will resume growth as we move through the year and receive more flow-through of the new MRF rates. We continue to expect full-year revenue of approximately $5.7 billion, very solid growth especially considering the accounting reclass of $90 million that we will see during the course of the year.

Contribution margin in the quarter was 70.2%, down 50 basis points versus first quarter of last year, with lower customer service and billing expenses and the accounting change partially offsetting higher revenue share and royalty expenses. SAC declined marginally from Q1 2017 due to reductions in OEM hardware subsidy rates, lower chipset costs and the decrease in the volume of installations, resulting in SAC per install of $28.

As you're all aware, the CRB increased our royalty load by approximately 40% beginning January 1. In response, we raised our music royalty fee, but this was a minimal benefit to the quarter as these new MRF rates only slowly started to phase in halfway through the period, while the higher costs applied immediately. In spite of this, we still grew adjusted EBITDA 6% to $532 million, a Q1 record. This produced a margin of 38.6% in the quarter, only a 10-basis point decline from the first quarter of 2017, despite the significant royalty hike.

We feel very comfortable reaching our full-year adjusted EBITDA guidance of approximately $2.15 billion. We converted 61% of our adjusted EBITDA into free cash flow in the quarter totaling $326 million, up 31% year-over-year despite capital expenditures stepping up to $81 million in the period, approximately $36 million of that was for satellites versus $53 million from the prior year, approximately $12 million of which was for satellites. We remain confident in achieving our full-year cash flow guidance of approximately $1.5 billion.

In the first quarter, we spent approximately $295 million to repurchase more than 52 million shares in an average price of $564, and paid nearly $50 million in dividends to our stockholders. Total debt now stands at approximately $6.8 billion with no bond maturities until August 2022. Leverage is 3.2 times trailing adjusted EBITDA. With $79 million in cash and nearly $1.4 billion available under our revolver at quarter-end, we entered the second quarter with ample liquidity to continue investing in the business, pursuing strategic investments and returning capital to shareholders.

And, operator, let's open it up for questions.

[Operator]

At this time, we'd like to open up the call for questions. We'll pause for just a moment to compile the Q&A roster. And your first question comes from Barton Crockett from B. Riley FBR.

[James E. Meyer, Sirius XM Holdings, Inc.]

Hey, Barton, you must be on mute.

[Hooper Stevens, Sirius XM Holdings, Inc.]

Operator, let's come back to him and...

[Barton Crockett, B. Riley FBR, Inc.]

Can you hear me? I'm not on mute. Can you hear me?

[James E. Meyer, Sirius XM Holdings, Inc.]

Yeah.

[Barton Crockett, B. Riley FBR, Inc.]

Okay. Great. Great. Sorry about that. Hi there. So, yeah, thanks for taking the question, and I was really curious about the commentary and the interest around ad-supported radio. And really my question is this, across the Liberty and Sirius complex, you have a whole bunch of kind of minority/majority stakes in Sirius, Pandora, Live Nation with standstills and reporting out there and talk about maybe getting a minority stake in iHeart.

How would you get any synergies out of a collection of kind of minority stakes or non-controlling or non-100% stakes? How does that stuff work together? And how does getting a minority stake potentially in iHeart in any way really meaningfully further your interest in ad-supported radio beyond just creating a debate upon what the valuation should be? How does that strategically and synergistically help you?

[James E. Meyer, Sirius XM Holdings, Inc.]

So, Barton, first of all, I'm not going to comment for what Liberty's strategy with other assets is. I'm more going to concentrate on what I believe our strategy, which I think I've been very consistent on which is – I think what we do really, really well is several things, but in particular, we really understand how to program radio.

And obviously, we've gained a tremendous amount of strength in how to work with automakers to distribute services and we've gained a tremendous amount of subscription skills. As we look across the whole radio listening in the United States, again, I see just radio as a $25 billion business in the U.S. that today we're roughly getting a low-20% share of. And I see no reason why we shouldn't opportunistically look for good paths to strengthen that position.

Your question is a relevant one. We continue to evaluate what we would do and I think as we pick a direction, we would purely want to pick a direction that would enable us to take advantage, obviously, of synergies. David, do you want to...?

[David J. Frear, Sirius XM Holdings, Inc.]

Yeah. I mean, so affiliation can lead to cooperation, which can lead to some level of synergies, right? And then obviously, if you rationalize equity ownership structures, you can get to larger synergies, but the question of whether or not you want to rationalize equity is – it involves other things that, are the synergies big enough to drive a deal, for instance, in the merger of Sirius and XM, both in the U.S. and Canada, that was clearly the case where the synergies were so large between the two parties, it justified sort of driving the deal. In other circumstances, that may not be true. So, there is some level of synergies that you get in through affiliation and then if it makes sense to rationalize equity structures, you tend to get a little more. I think that's about all we have to say about it.

[Barton Crockett, B. Riley FBR, Inc.]

Okay. Thank you for that. If I could just ask one other question, really kind of bigger picture, I mean the big news story around your sector, I think, has been the Spotify IPO, with that they've given us tons of disclosure. Are there any learnings from what they've said about their business and their trajectory and how they're approaching the market that could be helpful for Sirius or for Pandora do you think?

[James E. Meyer, Sirius XM Holdings, Inc.]

So, I mean, number one, obviously their growth is extremely impressive. And we take great interest in the additional data that we've been able to garner. To be honest, I don't think we've seen anything there that's actually really surprised us in any way. And I think that's probably all I can say right there. Look, their growth has been impressive. Nothing about their financial model is different than what we thought it was. I'm not going to worry about their financials. I'm going to stick to ours.

[Barton Crockett, B. Riley FBR, Inc.]

Okay. Great. Thank you.

[Operator]

And we'll take our next question from Kannan Venkateshwar from Barclays.

[Kannan Venkateshwar, Barclays Capital, Inc.]

Thank you. Morning everybody. Just one question, there appears to be some move in Congress to try and modify the Copyright Act more with a view on royalty rates which might impact Sirius longer term. So, I just wanted to get your take on what's going on in Congress right now. And based on our understanding right now, it's not an immediate impact, but it would be good to get your take on what's going on.

[James E. Meyer, Sirius XM Holdings, Inc.]

I'll let David address the question specifically, but if you want to get our take what's going on in Congress, you ought to listen to one of our six or seven news talk channels. We can give you a perspective on either side.

[David J. Frear, Sirius XM Holdings, Inc.]

So, look, we'll see what turns out. Obviously, House, I guess was judiciary passed the Music Modernization Act. They're attaching the CLASSICS Act sort of to it that the – we'll see what happens as it moves on to the Senate. I presume that it will. And we watch with interest. We are talking to people in Washington about some of the imperfections associated with the legislation they're considering and then we'll just see where it comes out.

[Kannan Venkateshwar, Barclays Capital, Inc.]

Okay. And if this was to pass, is it fair to say that this has no impact on you right now? The CRB process that you've just concluded, that's what will be your royalty rates for now?

[David J. Frear, Sirius XM Holdings, Inc.]

Yeah. I think until they pass something, we know the final shape of exactly what that is. I mean, we just don't have a point of view about how it would impact us.

[Kannan Venkateshwar, Barclays Capital, Inc.]

If they pass something?

[David J. Frear, Sirius XM Holdings, Inc.]

Yeah, if they pass something.

[Kannan Venkateshwar, Barclays Capital, Inc.]

Okay. All right. Thank you.

[Operator]

And we'll take our next question from Vijay Jayant from Evercore.

[James Ratcliffe, Evercore Group LLC]

Hi. This is James Ratcliffe for Vijay. Two, if I could. First of all, can you give some color on the MRF increased pacing, what share of customers already have it in their bills at the end of the quarter and how long you expect it to flow through the base? And secondly, international outside – because outside of Canada hasn't historically made much sense given the fixed satellite costs growth scape (28:30) encountered, for example. Does that market become more viable to look outside of North America with a streaming-only product?

[Scott Andrew Greenstein, Sirius XM Holdings, Inc.]

So, let me do international first. In order to go outside the U.S. with a streaming product that there are many important jurisdictions in the world that don't have a compulsory license in our requirement and so you end up having to negotiate direct licenses with the labels. The profits associated with sort of music distribution around the world are pretty scant. And so, look, if you can add that product on top of some other business that you have a chance of earning some incremental margin, but you wouldn't launch it on your own, it's just not a profitable business. Jim, if you want to comment on that?

[James E. Meyer, Sirius XM Holdings, Inc.]

Yeah. James, before David answers your question on MRF, I'll be even more specific. We're very focused on North America. We think there is still a lot of opportunity for us to grow in North America. I couldn't agree more with how David has summarized international, and so I think it's fair to say we're just not focused there right now.

[David J. Frear, Sirius XM Holdings, Inc.]

And the MRF pacing, it will take about 18 months for it to roll through. I think that right now we're somewhere in the range of 20% to 25%.

[James Ratcliffe, Evercore Group LLC]

Got it. Thank you.

[Operator]

And we'll take our next question from Jessica Reif from Merrill Lynch.

[Jessica Jean Reif Cohen, Bank of America Merrill Lynch]

I have a couple of questions. The first one, your guidance was maintained for the year, which is essentially flattish kind of EBITDA. First quarter was up 6% and the royalty, as David said, was in effect for the full quarter and the revenue is just starting to come through. What is it about the second half that will lead to slower growth? Is there something that you expect that's not clear?

[David J. Frear, Sirius XM Holdings, Inc.]

You mean slower growth in the EBITDA?

[Jessica Jean Reif Cohen, Bank of America Merrill Lynch]

Right.

[David J. Frear, Sirius XM Holdings, Inc.]

I mean...

[Jessica Jean Reif Cohen, Bank of America Merrill Lynch]

Because you guys are (30:45) flattish.

[David J. Frear, Sirius XM Holdings, Inc.]

Yeah, I mean, we have plans for a fairly aggressive investment in the business going forward. We have a lot of going on in streaming. We still have a lot going on in 360L. We have a lot going on with video launch. And so, we do expect heavy investment in the course of the balance of the year. We had some surprises in the first quarter. We don't know how sustainable they are, so contract rates from customers were significantly below what we would have expected and that led to some savings. We wonder how sustainable that is. So, I mean, look, we remain confident in our guidance for the year.

[Jessica Jean Reif Cohen, Bank of America Merrill Lynch]

Right. And then just on the last point that you made on the costs, I mean your margins were actually amazing considering the royalty roll-through. Is there anything else? Is there any more to cut? Did you say it's – the margins were great.

[James E. Meyer, Sirius XM Holdings, Inc.]

Well, Jessica, this is Jim. The only thing I would say is, again I completely agree with what David said. Obviously, we're very pleased with where the first quarter came out. We're watching closely to see if some of those trends are sustainable for the year. But our marketing spend will be higher as we go forward than it was in the first quarter for exactly the things that David mentioned. And so, I just think it's too early to kind of draw a conclusion yet of – ask us the same question after the next earnings call and let's see where we are.

[David J. Frear, Sirius XM Holdings, Inc.]

There are nine months to go, Jessica...

[James E. Meyer, Sirius XM Holdings, Inc.]

Yeah.

[David J. Frear, Sirius XM Holdings, Inc.]

...not six.

[James E. Meyer, Sirius XM Holdings, Inc.]

Maybe, maybe.

[Jessica Jean Reif Cohen, Bank of America Merrill Lynch]

All right. Right. And then I guess just the last thing, on video which you're finally launching after all this time is great. Can you just talk about – just what color in terms of expectations, it's great that you're doing the free promotion. And what are the plans post Howard Stern's launch?

[Scott Andrew Greenstein, Sirius XM Holdings, Inc.]

Okay. So, it's Scott. On the video front, we're going to launch with a sampling of Howard's diversity, whether it's music performance, interview, skits, whatever, just to have a tease out there. And then as we roll it out over the summer, there'll be more and more from the library and classic Howard and everything else with that.

As far as beyond Howard, there's lots of opportunities and surprisingly a number of people, some of our partners and some outside our partners pitching on ideas to do it. We still see video as complementary to our audio and it will stay that way, but there are obviously assets that come to mind that would be valuable in short form video with very little expense to put them out in the same fashion as Howard. So, we're going to just get Howard right and then look at what's next.

[James E. Meyer, Sirius XM Holdings, Inc.]

Hey, Jessica, what I'm most excited is we now have the technical capability to do what we want in video. We can now turn our really creative of which we've just added a couple of new people, one in particular that we think is going to really add to our team that's working on video. But we're not going to be doing television shows and those kind of things. Scott said it very, very succinctly and clearly. Our video strategy needs to dovetail very nicely with our audio offering and it's meant to make our customer experience in that area much better.

[Jessica Jean Reif Cohen, Bank of America Merrill Lynch]

Great. Thank you.

[Operator]

And we'll take our next question from Jim Goss from Barrington Research.

[James Charles Goss, Barrington Research Associates, Inc.]

Hi. Couple of questions about the 360L product, I wonder if you can elaborate on how you will promote the value of the 360L product and the means of accessing those benefits. And could you also talk about the expected pace of uptake in the economic value and how that might pace in?

[James E. Meyer, Sirius XM Holdings, Inc.]

Well, Jim, this is Jim.

[James Charles Goss, Barrington Research Associates, Inc.]

Yes.

[James E. Meyer, Sirius XM Holdings, Inc.]

I can't tell you how excited I am to finally have it in the marketplace. For those of you that haven't seen it in the Dodge Ram 1500, you really should. I'm really proud of what we've been able to do with the Fiat Chrysler team and how it enhances our entire listening experience as well as all the things it does to make life a lot easier for the customer and how they interface and deal with it. It's just way – these are the kind of things, I just know they're the right thing to do. It's way too early to quantify what all those benefits will be.

I'll bet you some of the ones that we thought would really be big, may not be as big as we thought and there'll be one or two we didn't anticipate that will end up being much bigger than we thought. So, I don't really have any way to quantify and answer your question yet. I think honestly, it's going to be many, many – it's going to be several quarters before we're going to be able to know on a meaningful number what that does to our business. What I can tell you is I've been here since 2004, I know this will make a big change to our business. And so, our heads are down and we're going to keep marching towards delivering this over the next several years.

[James Charles Goss, Barrington Research Associates, Inc.]

All right, that's great. And just one small follow-up. The video delivery, I'm wondering what platforms you're using. Will it just be through the Internet site or are there other means you expect to access it?

[James E. Meyer, Sirius XM Holdings, Inc.]

I mean, it'll only be available through our app...

[James Charles Goss, Barrington Research Associates, Inc.]

Okay.

[James E. Meyer, Sirius XM Holdings, Inc.]

...and our web player.

[James Charles Goss, Barrington Research Associates, Inc.]

All right. Okay. Thanks very much.

[Operator]

And we'll take our next question from Amy Yong from Macquarie.

[Amy Yong, Macquarie Capital (NYSE:USA), Inc.]

Good morning. I was wondering if you could elaborate on your streaming only (37:23) sub initiatives. How do you plan on attacking that market? It's obviously very competitive. Maybe if you could talk through your go-to-market strategy and maybe some of the economics and margins around that particular service. Thanks.

[James E. Meyer, Sirius XM Holdings, Inc.]

So, Amy, this is Jim. I think obviously when we started our business, we were solely focused on new car distribution. Obviously, it became very apparent to us, the opportunity and really changing that focus to – instead of new cars to really look at the 240 million-plus vehicles in this country and really focus on how do we play in the turnover of all of those vehicles eventually and we're a long way along. Then we've done a really strong, great job of having a very robust program to go back to trialers or subscribers who have rejected our service and trying to win them back in our business and I'm really pleased with those.

Obviously, other competitors out there have had a lot of success in growing both listeners and subscribers to their product with a streaming-only offering. We haven't really been able to do exactly what I wanted to do technically until recently. And as I've said in several earnings calls, we've been on – we've really invested a lot of money and time here to put ourselves in this position.

I believe that with this app we're going to launch in the next several weeks, we're now there in a meaningful way. Both David and I have committed to additional resources now in this area on both the distribution and marketing side of looking at this. It's an area quite candidly that we haven't really spent a lot of time on and one of the reasons we just – we didn't really have the right product and by that I mean the right technical solution to it.

Those things are now behind us and we're going to focus here. We're going to be able to add more subscribers here first and foremost by just focusing and putting our marketing muscle behind it. Midterm, I think what you're really asking is which distribution partners might we align to, to try to drive this in a more meaningful way. We're not ready to answer that question yet. You should assume we're working on that question. It takes obviously two to tango in that area, but I'm optimistic we're going to find a path here that allows us to establish what you might call a fourth channel for subscriber growth.

I will tell you, in my comments I meant exactly what I said, this will never be for us anywhere near as big or approaching the 20-plus million funnel we're getting through the car business today. But, success here can have a meaningful impact on our five-year subscriber outlook.

[Scott Andrew Greenstein, Sirius XM Holdings, Inc.]

Also on the programming side, the digital capacity allows us other programming, particularly niche programming, expanding our conference channel initiative with colleges and other things. So, it will have some programming components to it that the satellite capacity doesn't allow. So, we're hopeful some of that will lead to some growth.

[Hooper Stevens, Sirius XM Holdings, Inc.]

Operator, next question, please. Next and final question.

[Operator]

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

[Bryan Kraft, Deutsche Bank Securities, Inc.]

Hi. Good morning. I had two questions. First, David, the revenue share on royalties expense didn't increase sequentially the way at least we had modeled it based on the royalty increase. Putting aside the fact that this expense will obviously increase with revenue, was the first quarter a good run rate or was there something that was one-time in nature that pulled it down in the quarter? Or was there something maybe that where the impact was delayed on the new royalty or something?

[David J. Frear, Sirius XM Holdings, Inc.]

We have that accounting...

[Bryan Kraft, Deutsche Bank Securities, Inc.]

Yeah. Go ahead.

[David J. Frear, Sirius XM Holdings, Inc.]

Let me just do that one first. We have that accounting change that's affecting it as well, right? We got to reclass out of revenue against revenue share and so you pull that out, the contribution margin declined a little further.

[Bryan Kraft, Deutsche Bank Securities, Inc.]

Yeah. I guess and we tried to factor that in as well, not to get too into modeling, but I guess it sounds like it was a clean number though. So, if we were trending off for the first quarter, it's a reasonable basis, is that fair?

[David J. Frear, Sirius XM Holdings, Inc.]

I think that's right. We'll be happy to follow up with you afterwards.

[Bryan Kraft, Deutsche Bank Securities, Inc.]

Okay. And then, my other question is, on a higher level, wondering if you or Jim could comment on the interest level you're seeing in the aftermarket connected vehicle product that you announced about a month ago utilizing Automatic Labs, and also maybe talk about how big of an opportunity you think that could be.

[James E. Meyer, Sirius XM Holdings, Inc.]

So, I mean, I'm thrilled that we finally – that we're getting a product to market. Bryan, I think it's way too early to say, we just don't have a lot to say there. I will tell you, I remain intrigued by the opportunity of this product and I'm hoping certainly by the fall, we have more to say there to give you more specifics around what I believe we can do here.

[Bryan Kraft, Deutsche Bank Securities, Inc.]

Okay. All right. Thank you.

[James E. Meyer, Sirius XM Holdings, Inc.]

Thank you.

[Operator]

That concludes today's call. Thank you for your participation. You may now disconnect.