Good morning, and welcome to SiriusXM's First Quarter 2019 Results Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Hooper Stevens, Senior Vice President, Investor Relations. Mr. Stevens, please go ahead.

Thank you, Matt, and good morning, everyone. Welcome to SiriusXM's first quarter 2019 earnings conference call. Today, Jim Meyer, our CEO, will be joined by David Frear, our CFO. And 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 terms 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 dependent 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 to not rely unduly on forward-looking statements and disclaim any intent or obligation to update them. As we begin today, I'd like to remind our listeners that today's results will include discussions about both actual results and pro forma adjusted results. All discussions of pro forma adjusted operating results within the Pandora transaction closed January 1, 2018, and exclude the effects of stock-based compensation and certain purchase price accounting adjustments. With that, I'll hand the call over to Jim Meyer.

Thanks, Hooper. Good morning, I can't think of a more exciting time to be at SiriusXM newly joined with Pandora and forging our own unique path in audio entertainment. I would like to thank the entire team at SiriusXM and Pandora for working so hard and so effectively to make our combination a success. We're right where we want to be and moving very fast. We have a new organization and reporting structure to emphasize speed and to bring people together. It's still the first inning, but I'm pleased with the enormous progress we've made so far in streamlining our business, developing new strategies, and working so well together. We are pleased to initiate new pro forma revenue guidance for 2019 of approximately $7.7 billion; reiterate adjusted EBITDA guidance, now pro forma of approximately $2.3 billion; and reiterate free cash flow guidance of approximately $1.6 billion. And we are reiterating our existing SiriusXM subscriber guidance. The hunt for Pandora cost synergies is going better than expected. Obviously, it’s rolled into the guidance, but at this point, we expect to exit 2019 at an annual run rate of $75 million or more, up 50% from our call in February. I want to emphasize the enormity of our new platform. We are now bar none, the leader in audio entertainment in North America, with over 100 million monthly listeners. That's roughly 35 million self-pay subscribers on the two services, and 70 million ad-based listeners and trailers. The SiriusXM and Pandora suite of services, both paid and free, is really unmatched by any of our competitors. It’s designed to appeal to listeners and subscribers, fans of music, talk and everything in between as they move throughout the day from home to vehicle and beyond. Now you can accuse me of hyperbole, but with…

Thanks, Jim. Good morning, everyone, and thanks for joining the call. As you heard from Jim, SiriusXM had a fantastic quarter. The auto market continues to be healthy, churn performance continues to improve, ad monetization is strong, pro forma adjusted EBITDA grew 27% year-on-year, and we've already repurchased 63% of the shares issued in the acquisition of Pandora. We said this acquisition is not about cost synergies, yet we expect the cost synergies to exceed $75 million per year. The integration of the two companies is moving quickly. We have created Pandora's first content team and they have moved quickly to bring Pandora now to SiriusXM and SiriusXM talk content to Pandora. As I discussed the results for the quarter, I'll focus on the pro forma results, which combined the two companies for the full quarter in both years. To help put this in the -- in a historical context, we will make available nine quarters of pro forma trends and financials for the combined company on our IR website. As you consider our new guidance for the combined company, please note that we are maintaining our original free cash flow and adjusted EBITDA guidance. We feel confident that SiriusXM can absorb the Pandora operations and need or beat the guidance we gave you in January. So let's dive in. Robust March SAAR brought the first quarter end at $16.9 million cars, just 1% off Q1 2018 strong pace. Increased fleet next in an unexpected head unit change and an Asian OEM pushed pen rate down to a little over 73% in the quarter. Nevertheless, we remain confident that our pen rate will exceed 80% as we move into 2020. The installed base of vehicles grew 11% year-over-year to 119 million, or approximately 45% of the total cars on the…

Thank you. [Operator Instructions] And your first question will come from Ben Swinburne with Morgan Stanley.

Jim, just sort of two, maybe bigger picture questions. The first one is, you guys have been generally delivering kind of better-than-expected churn and conversion rates, when you look across all the channels at the satellite business over the past few years. And I'm wondering, as you bring Pandora in, how do you manage the company so that people remain focused and not distracted by all the new opportunities and challenges ahead? And if we externally should be expecting more volatility, I'm guessing based on the prepared remarks, you guys remain quite confident in your ability to walk and chew gum, but I wanted to hear your thoughts on that since it's a new challenge for you. And then second, a little bit related, we've been spoiled by kind of consistent margin progression at this business for years. And as you think about pivoting or migrating to more and more streaming, does that change? Is there a period of time where you're either reinvesting back in the business more or changing the unit economics or do you think you can harvest the sort of streaming opportunity at the combined company while continuing to deliver kind of steady margin expansion over time? Thank you for your thoughts.

Let me take the first one, and then on the second one, David and I'll kind of both contribute. On the first one, I almost feel like you've attended the over, I think, I don't know how many town halls and employee meetings I've had over the last eight weeks as we've rolled out our new organization and talked about what our priorities are. Rest assured, I understand very well, what we've delivered at least under my tenure over the last, almost seven years of CEO, as being the CEO and what our team has done. More importantly, our team understands it very well. We're organized for success there, and quite candidly, Ben, I don't expect any kind of a blip in that performance based on having anything to do with Pandora, okay? And frankly, I still see a very strong performance this year in terms of our subscriber metrics. So we're very focused and we won't lose that focus. Again, I love the acquisition of Pandora. I love having it in our portfolio. I particularly love all of the options it gives us starting with, I think, just this month alone we've shown the power of being able to create -- to be able to show what combining human creation along with a very strongly performing set of automation called the Pandora Genome together, what the vast variety of content opportunities we have, and I couldn't be more excited. That said, we fully understand the SiriusXM model, and we fully understand where we need to keep our attention, rest assured. I give you my commitment, we have that. On the second point, I don't expect there to be a big change in the way our margins perform. We obviously don't know what will happen to Web Casting V [ph] down the road and where those costs might go. But what we do, I think, fully grasp, and what is a way that is sweeping across this company. And I think, frankly, it's been good, it's been accelerated by bringing the Pandora team under the same umbrella is that we shouldn't care where people listen. Our job is to get people to listen. And when they listen, I'm confident, particularly, on the SiriusXM platform, no matter which platform they listen on, we’re going to monetize that better than anyone else, and consistent with where we've gone. I can't help but crow a little bit, and it will be the last time I crow on this. But, in the first quarter on the SiriusXM side, we delivered EBITDA margin of more than 40%. That's been a goal of mine for -- since I've been in-charge of the company, and it's something I'm very pleased with. Obviously, we will be much more focused on the total EBITDA margin of the company going forward. David you want to add anything on that question?

Yes, Ben, I think in a lot of ways -- on the old SiriusXM side, it really is no change, all right? We've told you that we thought that EBITDA margins could exceed 40%, they have. And -- but we've also said that what we -- what our real objective is to drive the maximum amount of free cash flow out of the enabled vehicle fleet, and that continues to be the way we think about it with just a little bit of a twist now that we've got Pandora's 66 million listeners on board to drive the maximum amount of free cash flow out of that listener base, whether they're in vehicle or whether they're out of vehicle. And we've long been willing to invest in initiatives that we think will drive more free cash flow out of the business even if it comes at the expense of margin expansion. And so, look, in the short-term, obviously, driving after cost synergies is going to improve the -- let's call it margin efficiency of the combined organization. There is solid growth in Pandora coming, and we think we can get that in a very cost-effective manner.

And next, we will go to Sebastiano Petti with JP Morgan.

Just wanted to see if you could unpack the 1Q self-pay subscriber results in the quarter. I think you called out the OEM that drove the pen rate lower, but it implies, I guess, results imply that conversion rates were a little bit lower in the quarter. Any color you could potentially give us on that?

I think that -- the quarter came in above our expectations, and so we're on track for guidance. With the automotive business, it's funny. It's hard for me to say the words the automotive business is slowing. I know it's factually correct, but selling at the 16.9 million pace is incredibly strong, but it is less than the prior year. And with the pen rate down a little bit, there's a little bit less coming into the top of the funnel.

David, I just want to emphasize the blip in pen rate this quarter is not a mid- or a long-term phenomenon, okay. We understand exactly what occurred there. Quite candidly, it is a short-term issue that many – we’re underway to improve that. It's not a big deal, I assure you that. Stay focused on what I've said, which is my -- our commitment to you is that you should plan our business going forward from the beginning to the end of this year at an 80% or greater penetration rate. And I'm really confident of that number. So, I’ll reiterate what David said, there really wasn't anything in the first quarter, certainly, compared to the plan that David and I laid out for our team that we drew up honestly back in the fourth quarter for what we expected in the first quarter that gives us any concern.

And then just thinking about -- you mentioned that bringing Pandora into the fold give you kind of a good, better, best, you have the ad supported, you had these $5 and $10 tiers at Pandora and then the higher monetization at the legacy series satellite platform. Can you just think about how does that product suite evolve overtime? Obviously, you just recently launched the new $8 streaming service at legacy series, well so. Just kind of thinking about how your thoughts evolve there. And potentially any color on revenue synergies that could -- new product suite that could evolve over time? Thank you.

So the honest answer is I don't know. I do know I love the different combinations. As Scott's team brings us more and more opportunities and our marketing teams figure out how to package those, I think we’re going to see a try of whole variety of stuff and test into things that give us quite candlelit answer to the point that David made earlier that end up resulting in the most free cash flow down the road. I do want to make a couple of comments. I -- and I don't want to sound too much hyperbole. But I really like our position. I mean, over 100 million monthly listeners, over 80% penetration long-term and new vehicles for a long, long time to come with the tail of the used car business behind that. We now have the ability to take the best of human curation and machine generated, artificially intelligent generated music genome and combining those into a variety of unique products. And now two very powerful revenue streams in advertising and subscription, I just think gives us a tremendous ability to go after the radio platform in the United States, like no other. I don't know specifically what combinations will evolve. I can tell you, obvious, candidly tell you I've been really surprised how much positive feedback we've gotten just on the Pandora NOW channel from the SiriusXM subscribers. So I think the answer to your question is we're just going to keep trying it based on our insight, our experience and our consumer knowledge and adjusting it quickly to what our customers love.

And our next question will come from Vijay Jayant with Evercore.

This quarter you guys have bought a pretty good monetization on Pandora even though your ad supported listening hours was declining. So there seems to be some inefficiencies you've gotten even though you haven't really turned around the listening hours which is really your key focus. Can you just talk about how much more there is obviously be waiting for listening hours to improve? But this efficiency of improving on the current level of listenership, what's the opportunity there? And second, I think this is the first time you didn't report subscriber acquisition costs on the satellite side. I know the mix of shifting with the Toyota standardization. Can you just talk about how should we expect that trend? Thank you.

I'm pretty sure subscriber acquisition costs, in fact, for install is in the material. I guess, we didn't comment on it. SAC per install came down, let's say, it was something like $4 year-on-year. And it's really strong performance. The pen rate shortfall is a little disappointing for us, but it is a short-term thing. And so, but the good side about having lower installs is that you end up with lower SAC. But the unit costs continue to be done, my guess, is not in press release, you'll see in the queue. The -- on the monetization side, at Pandora what we're -- we actually were finding is we get to learn that this is -- we're pleasantly surprised to meet the -- they have a really talented scaled digital ad sales team. And they -- aggressively manage the inventory and the ad capacity, they are very aggressive in new product development from an ad format perspective. And the team has done a fantastic job of increasing yield on what they do sell. And as you move into points of the year like -- the first quarter is a soft time of year for the ad business. And so it's especially gratifying to see them get this kind of monetization improvement in the soft period in the year. It's like a lot of other things. These guys just do in and they slug it out in the field every month and they go out to hunt, they’re top on pricing and top on sell-through. So quite honestly, Vijay, it's -- it is just good nuts and bolts execution by the ad sales team.

And next question will come from Brandon Ross with BTIG.

Thanks for taking the questions, a couple. You mentioned you had restructured some of the bad Pandora label deals with minimum guarantee. Where do you stand in reworking those deals overall? And maybe if you could tell us how big you think the margin benefit could be there? And then I have another one.

So David, I'll handle that. I just want to clarify. I don't think we ever called them bad deals, okay? I mean, and those conversations have been ongoing for months, just to be clear.

And the results we spoke about today was actually -- those deals were recut by the prior management team. I think the Pandora Executive Team and the music industry have had a pretty good healthy relationship in the last few years. It was little rocky a few years back, but they're through that period. And they don't -- and so really it was something that Roger and Naveen [ph] delivered.

And then maybe a follow-up on the revenue synergies question. Could to speak more specifically, how big you think the opportunity is for Pandora to drive Sirius subscribers? And what you could do in addition to adding Pandora now to Sirius to sort of upsell subscribers from Pandora to Sirius?

So, I mean, I think, I was quite explicit on cost synergies. And the reason is, because I feel like David and I are pretty confident we understand where those numbers are going. And I don't like to say anything on these calls unless I'm quite confident that we know where we're going. So I'm not going to give you an answer today on revenue because I'm not confident enough to give you that answer. What I am confident in is I see endless possibilities, and they just keep continuing to develop. And so we're going to test a whole bunch of things, my guess is for a long, long time, and evolve into those revenue synergies that we can get. I will tell you, I think it makes infinite sense that inevitably we ought to be able to go fish in a pool of 100 million active free listeners and be able to pull out of that people who are willing to pay and put them into pay products that yield the best margin for our shareholders. Second, on the flip side, we're going to run, I don't know, God willing, a great auto company, I mean a great auto economy. We're going to run 24 million trials or whatever the number might be, in 2019. We're going to be thrilled if we monetize to a third of that are slightly higher than that between used and new. That other two thirds, we ought to be figuring out how to get those people to go into a funnel that we still benefit from, particularly, are free funnels. And so I really like the fact that we have the ability now to go between both which are gigantic -- both are a gigantic funnels, okay, if you think about it in the United States. How we're going to optimize that is going to be developed over time, and frankly, I think is one of the finest puzzles we worked on.

One other thing just on the Pandora, the Sirius path, just one example, but you can multiply this into the thousands or 10,000. Someone listening or see a Garth Brooks channel for instance on Pandora, is that clearly someone who has an affinity to Garth. Right now, there's [indiscernible] and other things playing on Pandora that are whether they're 30 seconds or a minute before different songs that highlight that there's a Garth Brooks channel on SiriusXM. So you can see where some maybe perfectly happy and we're okay with that at Pandora, and others that are wanting a deeper fan experience will be able to go and subscribe to Sirius. And you can multiply that in any area then you have accommodate that will ultimately be all forms of talk and sports clip. And I think there will be a path back and forth fluidity going back on the content as sort of the hinge between the two. So as Jim said, it's an exciting app to look down. We're definitely down.

Now, we will hear from Jessica Reif Elrick with Bank of America Merrill Lynch.

Actually, my first question Scott sort of just addressed, but I'll ask it anyway. You're turning around the decline in Pandora MAU seems to be a key focus, rightly a key focus, and you're increasing content. I was just wondering about marketing. Scott just mentioned that the internal channels of the cross promotion. What else you're doing to drive listeners in new listeners or listeners back to Pandora? And I have couple of others.

So, look, I think, Jessica, we're going to do what we've always done in that particular area, which is use the appeal of our content and promote around that to both the audiences that we've captured as well as audiences that haven't come into one of our funnels. Quite candidly, when you look at the size now of the Pandora funnels meaning users that are in it or users that have tried it, and you look at the size of the SiriusXM funnel, and then you look at where that's going renewing used cars. The opportunity just within those two is so big. I don't know that we have to worry that much about going outside of those two, but we will and we'll do it in association with our content, launches, promoting alongside our artists and promoting alongside our content as it's introduced. I will also tell you though the most effective marketing between those two platforms is on air and in app and within our communications to our trailers and our customers in general. And there, you will see an acute marketing focus as we move forward.

And then two more there. On the podcast side, the market seems to be getting crowded, everybody's announcing podcasts like almost every day. Can you talk about monetization and what are you doing to stand out? What you're doing differently or what you think you're doing to be different? And where do you see the long-term growth of the podcast market?

So I I'll take this, and then Scott, you can jump in, if you want a minute. But number one, Jessica, I don't think anybody's figured out the monetization question yet in podcast. And so I'm not going to be so brazen to tell you we know the answer either. What I will tell you the heart of the answer is going to live and what are people listened to it and how long do they listen? And once you solve that, I think the monetization will follow. We certainly have always believed in spoken word. It's funny in my mind. I'll give an example of one particular talent we spend a lot of time with. We asked that individual a big time talent if they were interested in doing a radio show. They kind of hymn hard about the time commit. We asked that individual would you like to do a podcast. They jumped all over and want to do it. And so I believe in my mind, podcasting isn't a revolution. It's just an evolution in my mind of how spoken word is being delivered to customers in ways that they -- in another way that they may want to enjoy that content. Scott, do you want to add anything here?

Jessica, for me, the most exciting part and where I think the podcasting thing hasn't been started even though you're seeing a lot of announcements. When you look back in the early days of satellite radio, you had FM, largely on music, AM on talk. We looked at that landscape as a company and said wait a second, there's no real comedy in here, there's not 24X7 league channels, big brands, like the TV channels, like the Fox, CNN, MSNBC, brands you could create out of whole cloth from magazines and other brands. And that sort of was the evolution. When you look at the digital landscape, Pandora included, they've been, it's not exclusively, virtually all music. So podcasting comes along, and yes, people are jumping on it. But the big brands line the hole and many, many big personalities that are perfect for podcasting due to their time schedule or there are other activities in the media business, we're not in there. Those brands and the bigger names are going to look for quality production, experience, real depth in audio production. That's where you can erase our 10, 12 years as a company of doing this and being at the forefront of this. So while there's a lot of announcements, what we're most excited about is what can come in going forward that sitting on the sidelines waiting for this to evolve both creatively and monetarily.

Yes. And I think -- thanks Scott. And just one other plan, I think we're just experimenting with it now. But I've seen some stuff, and my gut tells me taking the creativity of what Scott just talked about and combining it with using some part of the Genome to make search and recommendation within that Pandora world much more, a much better experience. I think it's going to yield a very strong product. So I like what we're doing here.

For David, sorry, but just on the buyback, first quarter was seems like well ahead of your $2 billion pace. Can you talk to me is there any comment you can give on full year outlook?

Jessica the only I can tell you is we think the stocks have value at this level. And so we bought it and bought it aggressively.

Operator, next question?

Certainly. Our next and final question will come from Zach Silver with B. Riley FBR.

I wanted to just touch on the Amazon announcement around free ad base service on the Echo. Just curious, if this affects what you would characterize in the past as an expanding relationship with Amazon? And it doesn't then what maybe next in store with that relationship?

So this is Jim. I'll comment on a couple of things. Number one, the space is always been jammed with competition. This is just one another step of competition. And so it doesn't surprise me at all that it's occurred. I also tell you I spend a lot of time personally with Amazon. It's a complex company. And so I don't fully understand their different motivations. What I do know is that we want customers to experience our products in an easy to use environment in the car, but now just as importantly in the home. And we'll continue to make that service available as much as we can, as easy as we can on various home devices over the next several months.

Got it. And then just one more if I could. Yes, just one more on the essentials plan. I know its early days, but how big of a market do you think that this represents? And then do you think that the unit economics of the essential SUVs are significantly different than your legacy SUVs?

Well, number one, I think, we wouldn't introduce the product. We didn't think it was a profitable, good profitable product for us. I don't know. I'm excited about getting out there and getting this price point going. It's -- this does still newer to us in the standalone streaming areas. So I'm not going to hazard a prediction yet. I've been pretty clear though that this is an area of focus where we want to drive subscriber growth.

Zach, I tell you that from a profitably perspective, I mean, we don't know how big it's going to be, but certainly, from a profitability perspective, if the people who come in on that plan, listen in ways consistent with other people that we have listening online that it's without a doubt margin-accretive to our business.

Thanks, Zach. Thanks everybody for participating in today's call. We'll talk to you next quarter.