Good day and welcome to the SiriusXM’s First Quarter 2022 Financial and Operating 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, Senior Vice President, Investor Relations and Finance. Mr. Stevens, please go ahead.

Thank you and good morning, everyone. Welcome to SiriusXM’s first quarter 2022 earnings conference call. Today, we will have prepared remarks from Jennifer Witz, our Chief Executive Officer and Sean Sullivan, our Chief Financial Officer. Scott Greenstein, our President and Chief Content Officer, will join Jennifer and Sean to take your questions. 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 maybe 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 and today’s earnings release. We advise listeners to not rely unduly on forward-looking statements and disclaim any intent or obligation to update them. As we begin, I would like to remind our listeners that today’s call 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 will hand the call over to Jennifer.

Thank you for joining us today. SiriusXM reported solid first quarter growth in both subscription and advertising revenue and healthy cash generation even after substantial investments in our business. We are reaffirming all of our subscriber and financial guidance for the year. Each day, we make progress in shaping the future of audio entertainment in North America with curated, distinct and original content, exclusive live events and a growing podcast business. Audio in America is thriving and so is SiriusXM. According to recent Edison Research, monthly online audio listeners in the U.S. grew to 73% of the 12 and up U.S. population, up from 68% a year prior. Daily audio time is also increasing, with Americans on average spending 17 more minutes per day with audio compared to the same time in 2020. At SiriusXM, consumption of our unique content via streaming is contributing to this growth as we are seeing time spent listening to SiriusXM growing meaningfully faster than our subscriber base. These industry trends are also driving enhanced monetization as is evident in the IAB’s new Internet advertising revenue report, which found that digital audio was the fastest growing advertising segment last year, climbing to almost $5 billion. This underscores the continued opportunity for scale within this segment of our business. SXM Media has established itself as a leader as the number one ranked podcasting ad network, powering significant growth in our advertising revenue. Across all of our platforms, we reach approximately 150 million monthly listeners and we are extremely well-positioned for future growth. As you saw in the release, SiriusXM self-pay net additions were slightly negative in the first quarter, with growth in digital subscriptions, partially offsetting a decline in our traditional in-car subscription. First quarter net additions, much as in the fourth quarter, were impacted by…

Thank you, Jennifer. To highlight Q1 results, revenue increased by 6% in the first quarter, with advertising revenue up 8% to $383 million. Adjusted EBITDA grew 1% to $690 million, a new first quarter record, even as we continue to make meaningful investments in sales and marketing plus revenue share associated with our podcasting ad rep deals. Diluted earnings per share were $0.08 versus $0.05 in last year’s first quarter when we had the impact of $245 million in non-cash impairment charges. We generated $258 million of free cash flow during the first quarter, up 22% from the prior year, primarily on higher receipts from customers, partially offset by higher satellite capital expenditures. Turning to our operating segments. For SiriusXM, total revenue in the first quarter increased 6.4% to $1.7 billion, driven by the 9% growth in ARPU, offset by lower paid trial subscribers. Gross profit in the SiriusXM segment climbed 8% to $1.07 billion, representing a margin of 62%. In the Pandora and off-platform segment, advertising revenue of $336 million increased 8% in the first quarter with Pandora’s ad revenue per 1,000 hours reaching a first quarter record of $90. In the first quarter, our podcasting and off-platform businesses generated $95 million in revenue, an increase of 42% year-over-year. We expect these businesses will represent a growing portion of this segment’s revenue over time. Gross profit in the Pandora and off-platform segment was flat at $137 million, in what is typically a seasonally light ad revenue quarter, with a 29% gross margin, slightly lower than last year, given meaningful investments in new podcast content that are still early in monetization. Today, we reiterate our existing guidance for 2022. Revenue of approximately $9 billion, adjusted EBITDA of approximately $2.8 billion, and free cash flow of approximately $1.55 billion. And as…

Thank you. [Operator Instructions] Your first question comes from Jessica Reif Ehrlich of Bank of America Securities. Please go ahead.

Thank you. Two questions. Impressively, you did not reduce your self-pay net add guidance. I’m wondering if you could talk a little bit or give some more color on what you’re seeing in the digital-only channel? And do you think it will – sorry, I’m freezing. Will it represent a meaningful portion of net adds this year given what’s going on in the auto sector? And when would you expect it to be an overall – a meaningful part of your overall sub base? That’s the first question. And then I have a follow-up.

Hi, Jessica, so look, I think we talked a little bit about this on the last call. And as we expected going into this year, there are going to be quarters where we see low or negative satellite net adds. And as I mentioned in the comments, we did have positive digital net adds that way, negative satellite net adds in part. And I expect as the trial funnel continues to build over the course of the year, we could see more of that. I still don’t – it’s not going to be a significant proportion of our overall self-pay base in the near-term, right? This is a long-term build for us. We’re definitely seeing some success and an uptick in the digital trial starts on our efforts, not only on the marketing side with Performance Media, but also through in-app purchase in the app stores, and our partnerships, and we will have more to launch there. So again, it’s a steady uptick in trials leading to more growth in the digital trial funnel and more digital net adds, but I still expect satellite net adds to ultimately be the majority of our net adds going forward as the trial funnel starts to come back.

Right. I remember it’s such an impressive performance. And then just like switching gears to maybe Scott. Just talk about a little bit about the investment focus. There is so much going on in the content side from podcasting to artist channels to live. It just feels pretty diverse. Can you talk about the kind of build versus buy? It seems like most of it build, but you did allude to or as Sean alluded to possible M&A.

I’ll – Jessica, I’ll speak to the content. Sean can touch on any M&A. We’re, as you know, always opportunistic in what we look at in content. The goal is, ultimately, as we laid out in earlier calls, that they feed as many of our platforms, and in a synergistic and organic way sort of grow. When you look at – whether it’s King, who has a podcast has a play on TikTok radio and music, we will do playlists on Pandora or any of the other things that we look at, it’s where do they feed and best fit. As you know, content is a creative thing. And when opportunities pop up, we look at them, see where they fit in our plans and some things, obviously, we don’t do. But the goal really is to look at blend of things that will make an impact immediately and others that we can grow and figure out where they go. If you look at early days of satellite radio, it was much more focused on a very established demo. As time has gone on, we’ve created pop-ups and a regular rhythm in routine of having artists of all types from young, old and diverse and every genre. And that’s really going to be the model going forward, where there is something that’s really big and matters, we will look at it and in some cases, do it. And in others, we’re looking to sort of broaden and widen the portfolio of content to serve as many new audiences as much as holding the old audiences.

I think – I’m not sure we had any reference to M&A, Jessica. Obviously, we did a 99 PI deal last year, and we will continue to look at opportunities there. But a lot of the deals we’ve been doing have been focused on wrapping the ad sales with some pretty significant additions over the last few months. And that shows up in the Edison report, which is a nice win for us. We’re number one in listener reach. And since then, we signed Crooked Media. So, yes. I think what Sean mentioned on the margin side is as we ramp up sales for these new arrangements, we would expect that the margins will get better over time in podcasting, but like we see a lot of great tailwinds in podcasting in general. The listening growth is coming from, I think, our Core Demo, the 3554. We’re seeing also, I think, growth coming in the car generally, which is obviously a strength for us. So we feel really good about our position here.

And last thing we expect to see more of the big podcasting turning into SiriusXM channels like Freakonomics. I think there is a plan there to really grow that area, and that will also obviously expand the growth in the revenue.

Thank you.

Thank you. We will take our next question from Steven Cahall with Wells Fargo.

Thanks. Jennifer, I was wondering if you could just talk a little more about how the trial funnel is shaping up now that we’re almost 4 full months into the year. You talked about the deceleration in SAAR that you saw in the first quarter. I know there is a churn benefit in these environments on vehicle churn, but obviously, the ad side of things is probably running a little tough. So maybe just give us a little more color on how you think about the reaffirm net add guidance as we move a little closer to the back half of the year. And then, Sean, you talked about the positive reaction to the special dividend. Just wondering how the company thinks about those and what conditions are right for the potential for future special dividends? Is it the stock price? Is it something in regards to the balance sheet? And would you ever consider inching up your leverage for even more cash deployment? Thanks.

Sure. So I’ll talk a little bit about the net add guidance, Steven. Look, we going into the year in the fourth quarter of last year, which set up our trials for the first quarter of this year. Last year in the fourth quarter, we saw significant downtick in trials, as we addressed on the last call. They were down about 20% from the peak in the second quarter of last year and nearly as low as we saw really at the lows of the pandemic in the Q2 of ‘20. So that was real downtick and then we’ve seen a little bit of an uptick in the first quarter, which will help in the second quarter. And then I would expect that, that will just continue to uptick during the course of the year. Look, there is a lot of dynamics here. You are all seeing this. It’s very public. There is new challenges in the auto supply chain due to the war in Ukraine and shutdowns in China, because of COVID cases, which we obviously hadn’t expected at the beginning of the year. But I think we’re very keyed into the third-party estimates for SAAR. And that suggests that the auto sales will continue to come up over the course of the year. I feel good about some of the comments from the automakers and their earnings calls over the last couple of days. It sounds like they continue to see strong demand as evidenced by the higher prices and are looking for production to increase throughout the year. The used car dynamics are shifting around a bit. I mean we definitely have seen some pressure on used car sales generally in the industry, because of the high prices. Now they have come down a little bit. But we have this organic increase in our pen rates and are continuing to grow our distribution channels. So we feel good about the trial funnel, starting to come back over the course of this year. And on the churn side, you mentioned vehicle-related, we did have a tick down in the first quarter to 1.6%, slightly lower than the one I think we had last year in the first quarter. really strong results. We continue to see, I think, really strong performance on the voluntary side. Vehicle-related was actually up a little bit. And non-pay continues to hold at relatively low levels. So I think 1.6% is not where I would expect the rest of the year to be, but it’s a bit strong to start to the year and really encouraged by the retention among our self-pay base, which clearly shows up on the voluntary side.

And Steve, just on capital allocation, again, we are continuing on focused on the organic investments. We talked about content. We talked about sales and marketing. We really want to build the funnel around digital. So obviously, that’s our highest and best use. We will look at M&A. I think we’re very comfortable in the low to mid-3s. To the extent we would take that higher would be something opportunistic, but probably temporary and short-term at the moment. So we will be guided by EBITDA growth. We will be guided by free cash flow. We will be guided by the stock price in terms of our grid and the activity and the pace of our share repurchase. So I think what we did in the first quarter is not dissimilar to what you would expect in terms of pacing. But again, we’re going to be opportunistic. And the beauty is it’s a flexible allocation policy that we have, and we can pull the levers as the situations and facts and circumstances change. So that’s how we look at it. No real change from what we said historically.

Great. Thanks for all the color.

Thank you.

Thank you. We will take our next question from Barton Crockett with Rosenblatt Securities.

Great. Thank you for taking the question. I wanted to ask about the inflationary environment, which really hasn’t come up on your call, which is curious because it’s coming up everywhere else that people are talking about business right now. So I’m wondering, from your perspective, in this environment, do you have greater ability to drive our pricing? Do you feel that with an inflationary backdrop like this? Does that matter? And on the cost side, does it impact you? I suspect there might be a situation where you can raise prices more than you see costs grow, so it might be margin positive, but I was wondering if you could address that.

Yes. I think – thanks for the question, Barton. On the inflation side, from a pricing standpoint, we took some rate actions, which we’ve talked about in the fourth quarter, both on our full price side and our promotional plans. And we’ve benefited. I think we saw some initial subscriber reaction, but we’re through that. And I think the timing was actually pretty good. In the past, we’ve had a large amount of success in terms of raising prices, but we’re always mindful that our primary competition, certainly in the vehicle is free. And we need to be very careful about how we look at rate increases going forward. And we – again, we’re not just focused on the rate increase. We look at revenue overall. So there is some balance clearly on demand. I suspect there is more demand at the lower end. And so we will continue to look at opportunities there. But I think the inflationary trends have only helped on the pricing side. And on the cost structure, I mean, Sean, you can chime in, but I think a large part of our cost structure is not tied to rises or increases in commodity prices or things like that. I mean we have a lot of our economics tied into relationships with third parties that are a percentage of revenue, and so that’s affected by where revenue is going in general. Is there anything else on that?

Yes, nothing more material. Again, some of the module cost, obviously, wages and labor, really, at the end of the day I think Scott talked about the content marketplace. So, all in all, I think we feel good about the resiliency of the business in the context of an inflationary environment.

Okay, that’s great. Thanks a lot for the color.

Thank you. Our next question comes from Kutgun Maral with RBC Capital Markets.

Good morning. Thanks for taking the question. I just wanted to dig into advertising. You continue to see strength there with strong monetization on Pandora and off platform as well as continued growth with podcasting. That said, a number of other companies have called out some recent pressures or at a minimum, some limited visibility heading into Q2 given the broader macro issues. So I was hoping for some more color on the trends that you’re seeing and expectations throughout the year. Thanks.

Sure. So from an advertising, I certainly have heard the comments from some of the other conference calls this week. I guess from our perspective, top line feel great about digital audio advertising over the long-term. As you know and we talked about, we are making meaningful investments in our podcast business and some of those big deals that we’ve done are just onboarding and really need to be fully absorbed to ramp monetization. So from a supply side, we feel very good about the available capacity to monetize. The sales team has done a wonderful job in terms of – you see our RPM, you see the ability to monetize. Again, there is definitely some caution out there around certain advertisers, CPG specifically. So I think there may be some near-term, I guess, hesitancy, deferrals, etcetera, but over the ‘22 timeframe, we feel good about the supply. We feel good about where the demand is in our ability to monetize it. So, I don’t know if Jennifer, there is anything you want to add to that?

Yes. I would just add that I think what’s been great about adding podcasting to the mix is that we have a really strong brand presence on the Pandora side of the business, where we have really extensive relationships there. And we have really strong D2C representation on the SiriusXM broadcast side of the business. And so we can ultimately build the right mix in podcasting. Podcasting has largely been a DR advertising opportunity. And we are bringing more brands to the podcasting opportunity. And we also have the opportunity to build the relationships across SiriusXM podcasting on the DR side. So, the cross-selling opportunity is something I think is really strong for us and unique to us. And again, any kind of headwinds that are coming, given sort of hesitancy that Sean mentioned, I think we can offset in some part, based on what we have in terms of opportunities in that area in cross-selling.

That’s great. Thank you both.

Thank you. Our next question comes from Stephen Laszczyk with Goldman Sachs.

Great. Thank you. Maybe a follow-up for Jennifer on broadcasting. You mentioned the sales and distribution deals you added the buybacks here in the quarter. Could you maybe talk about how much opportunity, how much more opportunity do you think is out there to sign more of these representation deals going forward? And then maybe for Sean, can you talk a little bit about maybe what the economics these representation deals look like for you? Help us think through the revenue and EBITDA contribution and so more of these deals come on.

I would say – and Scott, you can jump in. But on the ad rep deals, a lot of the big podcast, the top 10, top 15 have really traded. So, I am not sure there is a lot of opportunity to add large amounts of inventory there. I mean of course, there will be up and comers and other podcasters emerging. But we have a lot of strong names. And as we talked about, we have three, soon to be four in the top 15. The inventory we have is largely said, I would say, probably for this year. Of course, we will be opportunistic in looking at other deals as they might come available. But that’s, I think largely set for the year. Scott, did you think…

Yes. Jennifer’s statement is obviously correct as to where it stands today. What I do think is going to emerge is you are going to see genres become very strong. So, true crime, comedy, and I think politics, as we get into election season, will continue to grow. So, having anchors like Crime Junkie, Crooked and Coco and things like that, allow us to be in a position where we will be able to grow brands underneath that. That hopefully will be the next group that hits the top 10 or 20 on that and get it – and will be in early on those. So, I think those will have a different economic portfolio. And a lot of those won’t be just ad rep deals. There will be deals that we have broader rights on a broader creative involvement with. So, I am optimistic that while the top 15 is – and we love our position in that, is somewhat static right now, it’s clearly going to evolve and is evolving where things will come out of those genres. And like normal succession in music or film or others, there will be others coming in there, and we think we are positioned pretty well in the big genres.

Yes. And then Steve, just to follow-up on your last point on the economics. They are generally revenue share deals with minimum guarantees Obviously, they do need to ramp as onboard. You saw some of that pressure in the margin in the first quarter. And our hope and expectation is that these deals have a margin – gross margin profile that’s not dissimilar to where the segment is today.

Okay. Thanks for the color.

Operator, next question please.

We will take our next question from Grant Jason with Credit Suisse.

Hey, good morning. Could you help us take apart the really strong SIRI ARPU growth in the quarter and understand how much of 1Q strength was flow-through of the fall price increase versus subscribers using the tier up to the premium plans or other factors? Thanks so much.

Yes. I mean, certainly a big part of it is the roll-through of the rate increase in the fourth quarter and also some of the actions we took on promotional pricing at the lower end. But we are seeing strong demand for our Platinum VIP plan. And I do believe there is opportunity, probably even above that. I mean we have such loyalty among our subscriber base that there are, I think other creative ways that we can add value and create packaging above that. But – and some of that’s just become clear, because of the demand for PVIP. And PVIP, it’s a $35 price point. We haven’t seen any decrease in kind of the take rate on our platinum plan, which is right below that from a pricing standpoint. But the other factors in ARPU are clearly that the ad revenue continues to recover and perform nicely on the SiriusXM side. So, that’s helped as well. Is there anything Sean, I missed on?

No, I think that covers it.

Thank you. We will take our next question from Jim Goss with Barrington Research.

Thanks. A couple of questions. One, I would like a little more discussion about the ad sales process. You have a great breadth of the audience and better variety of demos and geographic focuses. And between Pandora, Sirius and podcasting, there are a lot of opportunities with lot of complications. And I am just wondering if you can discuss the process you go through and the sales group you try to assign and the incentivizations you might provide in order to advance the whole ad sales category.

So, look, I can give you some more color. There is – we are, as I mentioned, I think being effective in cross-selling with broadcast on the SiriusXM side, with podcasting and with of course, the significant contributor we have with Pandora. And the teams that we are continuing to find ways to sell more effectively across the teams. It was just last year that we really brought everything together under SXM Media, in that banner. And so bringing kind of the best practices we have had in these individual areas, all together collectively, I do believe, is going to continue to help us more effectively and take advantage of opportunities. I mean we have not exhausted every opportunity here, right. There is more opportunity in programmatic. There are probably more opportunities on our self-serve platform through ads with. There is definitely some opportunity for us to continue to roll out our AudioID product in terms of better targeting for advertisers. And as I talked about earlier, we have these great relationships with brands. We also have these great relationships with kind of the direct response advertisers and making sure that we are bringing them effective products across our inventory. There is just – there is more room there. And we have, as we have talked about, I think a lot on the call, we have great representation deals on the podcasting side, with Conan and Megan Kelly and IPI and NBC and Last Podcast on the Left and Crooked and Crime Junkie. So, we are well represented across the inventory with different demos and younger around podcasting, all the way up to probably slightly older demo on SiriusXM. So, I believe we are really well positioned here.

Okay. Thank you. And one other area, I thought it was a good point that your improved usage is offsetting the softness in auto sales. And there is somewhat of a capacity utilization aspect of this, if you will, because you are hitting an inflection point where the relative importance of the other listing have are creating a benefit that might provide an upward bias in the revenue opportunities. And I am wondering if there are metrics you use or we should embrace to evaluate the growth progress in the absence of some traditional drivers, especially SAAR, for example.

Look, the usage, of course, we are hampered in some ways on the satellite side. We don’t have a lot of usage statistics. But with 360L rolling out, we are getting more and more data. And our – as we have talked about, our satellite subscribers are using our digital products more and more, and we get usage information there. And I referenced a stat in my comments about on-demand listening increasing 50% year-over-year, the listeners of on-demand content. And we have also had a nice uptick on extra channels listening as well. And I believe that’s just a sign of our customers wanting to be able to customize their listening more and more, right. It’s happening all over media. And in some ways, we have achieved this tremendous success over all of these years without that capability. And there is just more and more for us to do in the car and on the apps, which will help with satellite subscriber acquisition and retention, and digital acquisition and retention, in terms of providing more personalized recommendations. We have, I believe improvements coming in the next few months here that will roll out to 360L vehicles on the road and all of the apps, of course. And it’s just – I really am confident there is an untapped opportunity here, because we know it works with other companies, whether it’s video or otherwise. And if we can provide that, those personalized recommendations to our customers, they will listen to more content, buy more great content that they love. And we just haven’t been able to do that in the car, and we will.

Thanks. I mean I agree. I think there is an upward growth bias that tends to get lost in the shuffle of focusing on auto sales alone with the various things we have been doing and trying to measure that is a good thing too.

Thanks.

Okay. Anyway, thank you very much.

Thank you. We will take our next and final question from Sebastiano Petti with JPMorgan.

Hi guys. Thanks for the question. I just wanted to see if you could help us think about the off-platform growth in the quarter. Obviously, you talked about it here during the call, and we are pretty positive on it coming out of the fourth quarter call as well. Can you help us think about what the revenue growth there? What is owned and operated, for lack of a better term, stuff that you guys are now just kind of integrating, I think as Scott mentioned or just bringing online versus new partnerships and just new perhaps inventory that you are getting from some of these deals outside of the SiriusXM family or ecosystem? Just some color around that would be great.

Yes. I will start and Sean, you can pick up if you have something to add. But look, our platform is by its nature, not owned and operated. And that’s why we have provided some clarity on kind of the segment name. And the growth there covers everything from podcasting to tech fees from AdsWizz as well as some of the marketplaces we have where we are selling third-party inventory. And we are seeing nice growth across all of those pieces. Of course, podcasting is growing and in particular, because of the new ad rep deals we have been adding. And so we have more inventory there. But we have a lot of other relationships out there, whether it’s SoundCloud and we are ramping up in Europe or Adobe. And we have set up these various marketplaces for both general advertising on the music streaming side, but also in podcasting. So, there has been growth across all three of those areas, I would say in podcasting the tech fees and the other off-platform audio sales that we do in music and otherwise.

Yes. So, we will continue prospectively, to provide some color in terms of what’s O&O, what’s on Pandora. Obviously, you see the dynamic around MAUs and ad hours. And we have added a bunch of ad sales representation deals. So, we will try to continue to provide an update in terms of what those podcasts off platform are driving in terms of growth on a quarter-to-quarter basis.

Thank you. And Sean, one quick follow-up on, I think in your prepared remarks, the substantial majority of growth coming in the back half of the year. I mean does that imply some growth for the first half of the year in terms of self-pay ads?

Yes, I don’t think we are providing a second quarter. Again, I am going to leave it there, Sebastiano. We talked about where SAAR is, where the trial funnel and trial starts are, certainly coming into the year was probably a little more optimism than where we sit today in terms of the marketplace. But again, we feel confident for the full year number and the majority of it coming in the back half.

Great. Thanks again.

Thank you, Sebastiano. Thank you, everyone, for joining today. We will speak to you soon.