Greetings, and welcome to the Sirius XM's Second Quarter 2023 Operating and Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Hooper Stevens, Senior Vice President, Investor Relations and Finance. Thank you, Hooper. You may begin.

Thank you, and good morning, everyone. Welcome to Sirius XM's second quarter 2023 earnings conference call. Today, we'll have prepared remarks from Jennifer Witz, our Chief Executive Officer; and Tom Barry, our Chief Financial Officer. Scott Greenstein, our President and Chief Content Officer, will join Jennifer and Tom to take your questions during the Q&A portion of this call. I would like to remind everyone that certain statements made during the call might be forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based upon management's current beliefs and expectations and necessarily depend upon assumptions, data or methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For more information about those risks and uncertainties, please view Sirius XM'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'd 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'll hand the call over to Jennifer.

Thanks, Hooper, and good morning, everyone. Thank you for joining us. We are pleased with our accomplishments this quarter and remain on track to meet the guidance we set forward for the 2023 fiscal year, including our newly increased free cash flow guidance. Our strong second quarter performance reflected most prominently in our EBITDA growth, significant cash generation and sustained low churn at 1.5%, reaffirms our consumer value proposition and the enduring appeal of our differentiated business model in audio entertainment. We closed the quarter with over 34 million total subscribers to our flagship Sirius XM service and as we expected, we saw a meaningful sequential improvement in self-pay net subscriber additions compared to the first quarter. The improvement in auto trial starts that began in the first quarter continued into the second quarter and while producing an increase in vehicle related churn still sets us up for continued improvement in subscriber performance and a positive back half of the year. I'm also pleased to report our ad revenue was in line with our expectations, which in today's choppy market is a testament to the strength of our sales offering, including our robust podcast content network and in demand suite of programmatic solutions. And while we are cautiously optimistic the second half we'll see year-over-year improvement in ad revenue, there are still many variabilities in the marketplace we will be watching closely. It appears at this time that more substantial gains in the ad market will not come before 2024. The quarter saw a strong momentum behind our strategic investments as well with work accelerating behind the scenes in support of our next-generation Sirius XM product experience plan to rollout later this year. We are bullish on our business transformation to meet the consumer demands of tomorrow particularly those of…

Thank you, Jennifer, and good morning, everyone. As Jennifer noted, we had a very solid second quarter and we are in good shape as we head into the second half of the year. We are reiterating our revenue and adjusted EBITDA guidance and increasing our free-cash flow guidance to $1.15 billion based on lower expected cash taxes and improved working capital resulting in higher free-cash flow conversion. In the quarter, we recorded $2.25 billion of revenue relatively flat across the lines of business compared to the prior year. Subscriber revenue was slightly higher, driven by increased self-pay revenue, while advertising revenue decreased as a result of lower Pandora ad hours in sell-through. In the quarter, we are pleased with the $445 million of advertising revenue delivered considering the ongoing headwinds, we continue to expect sequential improvements in ad revenue, with continued growth anticipated in podcasting and programmatic. Adjusted EBITDA of $702 million increased by 3% year-over-year and 12% sequentially consistent with our expectations. The year-over-year increase was driven by reduced sales and marketing expenses, partially offset by higher revenue share and royalties in G&A. Total cash operating expenses in the second quarter were down 2% year-over-year. The company's focus on improving efficiency and cost structure, contributed to these benefits. And we are continuing to pursue areas that will enhance productivity and reduce expenses. Turning to the segments, the SiriusXM segment delivered $1.7 billion in revenue, which was relatively flat year-over-year, subscriber in equipment revenue during the quarter saw a slight increase of 1% and 4% respectively year-over-year, and as expected given broader market conditions advertising revenue in the SiriusXM segment was down approximately 8% year-over-year is broadcast ad revenue lagged digital. The total ARPU for the quarter was $15.66, up modestly year-over-year and up 2.4% from the first quarter of…

Thank you. [Operator Instructions] Thank you. Our first question is from Steven Cahall with Wells Fargo. Please proceed with your question.

Thanks, good morning. Jennifer as you look to relaunch the app experience, I think the hope is that you'll get more engagement and discovery both in and out of the car and I think the app already has a lot of incremental stations, music stations that are non-satellite and if engagement is going to benefit from that, I think there's also some skippability with songs on those. So I'm just wondering how we should think about as you look to relaunch the app in the back half of the year. What the gross margin start to look like as that streaming business builds? Are the royalty structures materially different than what you have in-car on the satellite side? I mean, you talked a little bit about lower customer acquisition costs. Maybe you can just help us think about streaming margins overall versus satellite margins. And then secondly, churn was excellent 1.5% as the trial funnel improves. What kind of upward pressure do you expect from vehicle churn maybe in the back half of the year of net adds start to go positive. And relatedly, any comments you could make on how conversion is trending, because I think it's been a bit choppier between model mix and demo mix in the post-COVID period. Thank you.

Sure. Thanks, Steven. So taking a margin question first, we are investing in this platform to support both the streaming business, which will enable us we believe to improve our streaming subscribers, who listen in and outside of the car. But also to improve retention and conversion among our in-car subscribers, because when they stream, we see higher conversion and retention rates. So what we're building that will come out as we discussed later this year and roll through with future releases into next year is going to support both sides of the business. But to your point on streaming margins, really there is a couple dynamics on average our streaming licensing, our music licensing and our customer service and billing costs, which include sort of the app store fees we have to the extent that customers are coming through the app stores directly are in general lower than what we see on the satellite side for our music licensing, our OEM revenue share and our customer service and billing. So margins are a bit stronger from a percentage standpoint, pricing is lower, right, our streaming only subscriptions are today about $10.99 and our core package on the in-car side, which also include streaming access is $18.99. So overall, we feel really good about the business model both on the streaming side and on the in-car side, and expect to probably have add more subscribers on the streaming side as we move forward as we see more growth there. And to your question on churn, yes, another great quarter, we're really pleased with our performance there. We have very solid voluntary, involuntary churn, no signs of really any consumer weakness. We are continuing to roll-through the rate increase on full-price packages and we have not seen any disruptions in terms of the voluntary churn. You noted vehicle related so we did see an uptick in-vehicle related in the last quarter. Auto sales have been getting stronger. The estimates for the rest of the year are typically they lag and they would suggest you have the full year 14 million or 15 million that auto sales would actually decline on the new car side in the next few quarters. So we're cautious about how that will evolve, we believe that there are definite signs with higher inventory levels and otherwise that auto sales will perform well in the second half. But to your point, to the extent there is a very strong fourth quarter with the unique dynamics of our funnel, we would likely see more vehicle related churn there. But see the conversions rolling through into next year, but our guidance reflects those trends and we are very focused on doing exactly what we said we would do with improving quarters of net-adds throughout the year and the back-half being positive. And was there one other part to your question?

No. I think you touched on it all. Yes, conversion rate.

If we touch on conversion rates, we can see a fair amount of stability. Right now, we are very eager for what's to come with the new platform. But just ahead of that, we have a number of pilots and tests in-market leveraging data from 360L to improve personalized marketing, we're leveraging new channels that are really only possible through 360L. We have an in-vehicle messaging capability with one of our OEMs and we're providing easier access to streaming. So we can again get our in-car trial to stream earlier in trial outside of the car to help with discovery navigation, so conversion rates have been pretty stable right now.

Thank you.

Thank you. Our next question is from Jessica Reif Ehrlich with Bank of America. Please proceed with your question.

Thanks. A couple of different things. So Jennifer, if you can give us some more color on what you're thinking about pricing changes, but these different packages that you'll introduced with the new streaming offer and how does listening differ inside and outside the car in terms of like music, talk, news, sports. That's the first thing. And then the second, I just wondering if you talk a lot about advertising, it sounds like you guys are confident that it will improve. Are you seeing signs of that and what will be the biggest drivers of podcasting or the non-music platform. And then the last thing, sorry for so much but podcasting the content that seems like there's a lot going on in the industry, what are you seeing in terms of cost and competition for content, when it seems like others are may be pulling back a bit. Thank you.

Okay. Thanks, Jessica. I'll start with pricing. As you know, we use free trials when we bring people into the car funnel and also increasingly on the streaming side as well. And in the car funnel, we typically use introductory promotional prices to bring people into the self-pay subscription base. And I think where we've seen some pressure is where the identified growth segments and their interest at paying those full price rates that customers role to after the introductory pricing period end. And we believe that there is demand among those growth segments if we repackage and perhaps create packages with less content and then we've done a fair amount of research on this. But now we're going to go through some testing in the next few months to actually prove this out. I mean, the dynamic, obviously that we need to make sure we solve for is that we don't see any of our current customers trading down to those packages. And we believe we have a path here, but we do want to test some in market packages to make sure that when we roll this out there is that opportunity to maximize growth in both areas. But as I referenced earlier, we do have a lower-priced package in market and streaming. And that has given us an opportunity to test with these growth lower potentially more diverse, younger and some lower-income segments with that package and continue to do that. I think the question on listening differences. So one thing we do see is that, when - not surprisingly, when our customers listened to a broader set of content across genres music and non-music, their retention is higher and of course, that has a lot to do with the breadth of the content that we have. We've talked a lot about how sports plays into that and a lot of our other news, politics, comedy, entertainment, content is really critical in terms of driving retention. And we see similar dynamics, both in the car and out of the car in terms of the level of music and non-music listening with perhaps a bit more non-music listening-in our streaming service. With advertising. I'll turn it over to Tom to make some comments there.

Yes, just Jessica, on the advertising side, our dynamic ad sales team has continued to face resiliently against the headwinds that are in the industry. So if you look at our individual businesses, Sirius XM side is down slightly at 1.5%, but it's lower spots and softness in the news and media space. Pandora is lower on streaming sell-through and demand, which is hampered a little bit, but the reality is the growth the podcasting is making a significant contribution to the overall ad revenue. We continue to see strength in travel and tourism and telecom in the Pandora side. Just skipping back to the strength on the podcast side, we continue to see growth with podcast RPMs up double-digits this quarter and the build out of the podcast revenue channel significantly helped our sales organization. We currently have three channels - three revenue channels to sell across on the ad sales side, the satellite, the podcast and the streaming and our top 20 advertisers advertised on two of the three channels, 17 of the 20 of them advertised on two of the three channels. So the breadth of our product is strong. And we consider that the rest of the year will continue to fight the headwinds in the marketplace and we look for '24 to be more robust in the industry, especially on the digital side.

Yes. And Scott, you want to pick up podcasting?

Yes, sure. So Jessica, a couple of things. The overall view is podcasting has remained relatively stable in terms of what's working. So for instance, the top 10 in podcasting and top 20 largely has the same podcast it had at least a year ago. And we have two of the top 10, five of the top 20 and 14 of the top 50. And when you look at some of the bigger ones, Audiochuck, NBC, Crooked, Coco, Freakonomics and all of those. We feel really good on our ability to market and get those out there, but more importantly, to monetize those. As Tom mentioned, I think our monetization is getting better all the time. And while content will never be science, this is the closest it's come as compared to the satellite. Also the multiple distribution platforms. So when you look at the Tom Brady podcast, which started out that way, is now exclusive on SiriusXM. So, our ability to look at distribution channels as well as advertising channels and find the optimum point to use on any of these gives us, I think, the flexibility we need. Obviously, if anything frees up, that matters or is emerging, we can be a player in that market, given our financial position. So, we feel pretty good where we are in podcasting right now.

Thank you. Operator, next question.

Thank you. Our next question is from Jason Bazinet with Citi. Please proceed with your question.

I know you guys have always been focused on the U.S. and Canada. But as the app becomes a bigger part of the narrative. Has there been any change in your thinking about sort of your geographic aspirations?

I think Jason, we certainly are building a set of capabilities, and underlying platform that could be used in other territories. So, there is an opportunity there - we did probably more so in English-speaking areas. We have not pursued the licensing that would be required there. But also, we're just very, focused at this stage in maximizing our opportunity in North America, because we really believe that we have super -- we've been successful at super serving our core audience within those segments, largely with our in-car offering. And going forward, we have a lot more opportunity to tap into these growth segments that really represent another, like I said earlier, 50 million to 55 million adults in the U.S. And of course, there's incremental opportunity in Canada as well. And there are ways for us to serve them both in the car and through our streaming experience streaming on - the phone or other streaming devices. In a much more effective way, as we tap into addressing the pain points with better discovery, and control in our product experience. So, we're excited about the growth that we have in North America ahead of us.

That's great. Thank you.

Thank you. Our next question is from Sebastiano Petti with JPMorgan. Please proceed with your question.

Hi. Thanks for taking the question. Just wanted to clarify on the advertising front. Has your expectation for the second half changed relative to maybe what you had been messaging on the first quarter in terms of just the second half recovery, obviously, things are choppy, but just wasn't sure if we now expect more of the year-on-year improvement, or just benefits from some broader markets, and being more weighted into '24? And then I have a quick follow-up as well?

I mean the second half of the year, Sebastiano will obviously have comparables to the prior year, they're a little bit better, but we don't see a lot of changes. We think it's still going to be choppy. But obviously, we're focused on podcasting - and the ad sales team will continue to focus on the ad front.

Yes. I would just add that the marketers out there, the brands have budgets to deploy. And I think we are really well positioned with the capabilities that Tom discussed in terms of being able to take advantage of close-in bookings to the extent that those open up with programmatic or audience buys across our network or to do more custom-oriented programs with advertisers in podcasting or with live events. So, I think we - as Tom said, I don't think we've changed our expectations that much. There's probably a little less upside in Q3 than in Q4. The comps get a bit easier as we go through the year. But the dynamics we've set at the offset - at the outset of the year have probably changed a bit in terms of the strength of the recovery not really coming until 2024.

Thank you. That's helpful. And just zooming out real quick, if I could. I think, Jennifer, you described it as a strategic transition with the business. And so, there are some one-time costs that Sirius wearing this year. You have the reduction in force. It sounds like, there's an eye towards additional efficiencies in the business here. But yes how should we think about - I guess, if you can provide some high-level thoughts on where - yes the growth algorithm for the business on a go-forward basis? If we think out 12, 24 months from here, Sirius has a high-growth capital return story, free cash flow machine. I mean has the growth algorithm changed? How are you thinking about, I guess, the Ps and Q of the business and the free cash flow profile on the other side of this transition, as you kind of attack these new cohorts, and podcasting and advertising scale as a percentage of the business? Thank you.

Sure. I'll start with the top line, and Tom can talk a bit about the free cash flow dynamic. So again, as we look to build out this new platform, and address margins a bit earlier, in the call. But our margins - our variable margins across in-car and streaming are very strong. So we have - we're sort of indifferent as to where we add subscribers. And I would expect that and I've certainly been saying that this new platform will better position us all other things being equal, of course, on auto sales and things like that, but better position us to add subscribers going forward. So, we are looking to return to subscriber growth and the pricing side of it we are still researching and testing. So, there will be opportunities. I'm sure, to capture more demand among those subscribers with our lower-priced packages, but we also believe that, because we have a very affluent and satisfied customer base that there are more opportunities at the higher end as well. So, I think that there are dynamics on both the sort of P and Q side that will work in our favor going forward. And advertising is a great business for us. We love the position we have in terms of the three channels that Tom talked about and our Pandora business is profitable, and that has a lot to do with some of the cost efficiencies we've put in place. And but, we like the dynamics of that business going forward as well. So Tom, do you want to talk about free cash flow?

Yes, sure. Sebastiano. So just covering free cash flow. I mean, we had a good quarter at $323 million. It was down obviously from prior year, as you're aware, from the - as it relates to the higher satellite payments and tax payments. So, we raised our guidance for the year based upon our review of the - as a review of our cost and basically, our working capital and principal and in taxes. And so, we raised our guidance based upon that to $1.15 billion. I think we'll continue to generate significant cash. We're always looking at our free cash flow conversion and our free cash flow per share. But I think as you look at the year, we continue to generate - a very significant positive cash. We said it will be back-end loaded to the fourth quarter. Just talking about the cost savings, you hit it right. We have optimized our floor space. We're down about 38% from pre-COVID pandemic era and we did have a downsizing earlier this year. We are being very detailed and very - focused on our cost structure as we're building out the revenue and the strength of the top line. We need to and the - Jennifer and the team here has been very focused on taking costs out of the business then moving us towards more efficiency and innovation and putting the cost and the dollars where the future next-generation SiriusXM is. And so, although we've done some early cost reductions, we are continuing and we'll be an ongoing program, and we've seen early benefits in call centers and then - and just optimization across the business. But we will continue to focus on that and obviously reinvest in areas that will thrive whether it's content or whether it's technology that will drive our future. So that's...

I would just add, Sebastiano, on free cash flow that we have a unique set of dynamics that we've talked about this year and particularly with satellite CapEx rolling through it, levels of about $300 million this year and next year. And I think as we've talked about over time, that goes to zero, probably for several years. And so we have the tailwind of working our way through that build cycle. But we also believe there's potential upside on both working capital and taxes as we move forward. So we will continue to be a strong and growing cash flow generator for years to come.

Thank you, both.

Thank you. Our next question is from Cameron Mansson-Perrone with Morgan Stanley. Please proceed with your question.

Hi. Thanks for taking the question. It's interesting to see the sequential improvement in MAUs at Pandora. Can you talk about what you're seeing in terms of the trends there? And then on the off-net growth at Pandora pretty healthy in the second quarter, you talked about remaining focused on the long tail programmatic part of the podcast business. What do you do to pull forward that opportunity there? Any color there would be helpful. Thanks guys.

Sure. On Pandora MAUs, we have - we continue to find ways to improve on platform listening with both investments in our algorithmic programming and also more branded channels such as [indiscernible], The 615. So that supported the loyal cohort behavior that we've continued to see on the platform. We've also been testing new onboarding features in Pandora to help new customers that are coming in, build personalized stations. One of the things that we're doing is taking those learnings and using them as we build out the SiriusXM experience as well. And we continue to make headway on our CRM and marketing efforts to reduce churn there. So it's been a number of initiatives. And yes, trends have been slightly more positive, with MAUs down just 6% and hours down 4% in the last quarter. And I think the - we continue to take actions there to improve the profitability of the business. But we have a lot of optionality going forward with our Pandora segment. And on the programmatic side, I mean, Tom touched on this. We have - we've just started, I think, tapping the opportunity on programmatic for podcasts. We've had it in place on the music streaming side for a number of years. And it's - by the way, still nowhere near what I think you see on video platforms, but there is opportunity to continue to build out the tools there on both streaming and on podcasting. And we're really just, again, getting started on the podcasting side. So I think there's growth going forward for programmatic there.

Got it. Helpful. Thanks.

Thank you. Our next question is from [indiscernible] with Evercore ISI. Please proceed with your question.

Hi. Good morning. Thanks for taking the question. One on self-pay net adds and one on costs. So first, I don't think there were too many surprises with self-pay net adds this quarter, and it's certainly encouraging to track towards a positive back half. Sorry to get a bit specific, but is it too premature to suggest that you'll get to positive next quarter? Or is it more likely that Q3 will be - maybe closer to flattish before you see a bigger ramp in the fourth quarter? And I know we're not talking too specifically on the contribution of streaming versus satellite. But is your expectation that satellite also begins to trend positive as well? Or is the overall outlook more driven by upside from streaming? And on the expense side, can you help us better understand some of the cost trends in the back half as you look to relaunch SiriusXM's Next Gen? I think sales and marketing in the first half continued to be down ahead of the relaunch presumably this continues in Q3 and then reverses in Q4, where I assume you'll see some EBITDA pressure, but any added color would be helpful. Thank you.

Okay. I'll let Tom address the cost in a minute. But on the net adds, quickly I mean - I'm not going to provide any more specific guidance on Q3 and Q4. We have said that we expect the back half to be slightly positive. I mean there's too much variability around Q3 really to provide a more specific number. But my expectation is that it will be better than Q2, right? So the trends will continue to improve over the course of the year. And on the streaming versus satellite - not really - I don't plan to give more insight into that right now. Going forward, I would expect we'll share some more metrics around those two pieces of our business. But I will say that our streaming net adds will also improve over the course of the year. And we highlighted some of the trends that we're seeing, which are really encouraging in terms of early in trial engagement, which obviously plays into better retention and ultimately, higher LTVs for our streaming subscribers. And coupled with that, lower cost to acquire. So that helps give us confidence that when we launch this new platform, which will give us even more capabilities to improve both of those pieces of the equation, that we'll continue to see upside in our streaming net adds.

On the cost side, you're correct. We're obviously back loading sales and marketing. We had planned that all year. As you saw in the quarter, we were down year-over-year by 23% in sales and marketing. As you look at the fourth quarter, including our press event we will have for the app, we have backloaded a lot of the costs, but I believe we also will have heavy cash flow in the fourth quarter. So the realignment of the cost and everything is planned. And obviously, we're driving towards our 2.75 adjusted EBITDA target for the full year. So I don't see a lot changing other than as you're right, the sales and marketing will obviously be back loaded into the fourth quarter.

That's great. Thank you, both.

All right. Thanks, everyone, for participating in our call this morning, and we look forward to continuing the conversation with many of you in the coming days. Take care.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.