Good morning, everyone, and welcome to SiriusXM's Second Quarter 2019 Results Conference Call. Today's conference is being recorded. A question-and-answer session will be conducted following the presentation. [Operator Instructions] At this time, I would like to turn the call to Hooper Stevens, Senior Vice President, Investor Relations and Finance. Mr. Stevens, please go ahead, sir.

Thank you, and good morning, everyone. Welcome to SiriusXM's second quarter 2019 earnings conference call. Today Jim Meyer, our Chief Executive Officer, will be joined by David Frear, our Senior Executive Vice President and CFO. At the conclusion of our prepared remarks, management will be glad to take your questions. Scott Greenstein, our President and Chief Content Officer; and Jennifer Witz, our President of Sales Marketing and Operations, 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 use 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, 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 assume that Pandora transaction closed on January 1, 2018 and exclude the effects of stock-based compensation and certain purchase price accounting adjustments. I will hand the call over to Jim Meyer now.

Thanks, Hooper. Good morning. Thank you for joining today's call. We continued our track record of strong execution in the second quarter and I'd like to, once again, thank, our combined team at SiriusXM and Pandora for working so well together towards our goals. In the second quarter, pro forma revenue grew at 9% to a record $1.98 billion and adjusted EBITDA grew by 22% to a record $618 million. We are increasing our full year guidance for both metrics and we now expect to approach $7.8 billion of pro forma revenue and $2.35 billion of adjusted EBITDA. We added nearly 300,000 self-pay subscribers at SiriusXM, which keeps us on track to meet our full year guidance of self-pay net additions approaching one million. I remain very confident in achieving all of our public guidance. The SiriusXM business is really performing well. Churn remains near record low levels. ARPU at $13.83 has never been higher and gross profit at SiriusXM also set a record in the second quarter. At Pandora, we are well under way with a much needed restructuring efforts. But the real work on changing usage trends is just beginning. This will come from adding more content to the platform, improving the app and user experience and better deploying Pandora in car. We continue to find incremental cost savings and I'm happy to note that in our first full quarter of operating Pandora, the business delivered positive adjusted EBITDA in the second quarter from a $35 million adjusted EBITDA loss in last year's second quarter. This is a huge swing to the positive and will drive more than a $100 million EBITDA improvement in 2019 over 2018. Let me re-emphasize, by combining SiriusXM and Pandora, we have a business with world-class expertise in both subscriptions and advertising. Business…

Thanks, Jim. Good morning, everyone, and thanks for joining the call. The first half of 2019 has seen a higher monetization profitability of the newly combined SiriusXM and Pandora, coupled with a record pace of capital returns. Pro forma revenue grew 9%, pro forma gross profit grew 11% and adjusted EBITDA grew 22% year-on-year to an all-time record of $618 million, demonstrating the strong leverageable business model the combined company brings. As Jim mentioned, Pandora was accretive to adjusted EBITDA in the second quarter, a remarkable turnaround from a reported negative $36 million of adjusted EBITDA just one year ago. As we approach the one-year anniversary of the announcement of the Pandora acquisition later this quarter, we bring you a company with significantly more adjusted EBITDA and fewer outstanding shares than we had one year ago. As I've discuss the results for the quarter, I'll focus on the pro forma results which combine the two companies for the full quarter in both years. Auto sales were down slightly in the second quarter at 1% with SAAR still coming in strong at $17 million. Penetration rate exceeded 72% in the quarter and remain confident that our pen rate will reach 80% next year. The installed base of vehicles grew 11% year-on-year to 121 million or approximately 46% of the total cars on the road. The used car penetration rate was approximately 44% in the quarter, jumping 500 basis points year-over-year and helped lift self-pay gross additions from the used car channel to a record 39% of the total, up from 35% in the prior year period. Used car penetration rate will increase steadily over the next several years as it inevitably climbs to match the new car pen rate. Used car trial starts grew 11% in the quarter and at the…

Thank you. At this time, we’d like to open the call up for questions. [Operator Instructions] And the first question will come from Brian Russo with Credit Suisse. Please go ahead.

Hi. Thanks. I wanted to ask about your outlook for Sirius self-pay net adds. I think your guidance implies net adds will sort of be back half weighted. And so I wanted to help understand what the main drivers are behind that. And relatedly that lower penetration rate that you saw in the first quarter, to what extent was that a drag on the 2Q net add results that you reported or maybe even full year results? Any color there would be appreciated. Thanks.

So the lower pen rate the same thing we talked about in the first quarter, right, that it's in part fleet mix and it's in part related to head unit change in the manufacture that will swing back around. We're definitely expecting pen rate to pick up as we go through the rollouts at both Toyota and GM that are increasing penetration or on track for hitting 80% next year. With respect to self-pay nets the year for -- from a management perspective is unfolding exactly as we had expected it to. And we are just slightly above what our internal plan was at this point in the year and it really is just playing out exactly as we had seen it.

Got you. And then just again the back half-weighted piece, does that have to do with your outlook for SAAR? Or does it have to do with the increasing pen rate of Toyota? Or is there anything else there that's sort of driving a big picture?

Well, yeah, I mean the increasing pen rate in the second half of the year from the rollouts is really going to benefit self-pay subscribers next year, right? It won't have so much of an impact this year. So it's really just nothing more than the way the calendar plays out.

Yeah. I'll just -- and to follow what David said we track this extremely closely as you can imagine. I want to reiterate what David said. Number one, penetrate -- auto penetration is simply not a worry for me. We're on a gray trajectory there and we're very confident in the second half.

Terrific. Thanks.

Our next question will come from Sebastiano Petti with JPMorgan. Please go ahead.

Hi. Thanks for taking the question. I guess my first real quick for David. Performance year-to-date at Pandora has been quite strong. Legacy Siri also performing well, increased EBITDA guide for the full year. Is there any sense on, I guess, run rate synergies by year-end for Pandora? And then I guess as a part of that question, you talked a little bit additional content on the platform whether it be legacy Siri as well as Pandora, the Drake announcement this week as an example. Is that offsetting some of the EBITDA benefits you might be hitting? Or should we expect that to mitigate some of the costs that come through or mitigate some of the outperformance so far this year? Just any thoughts on that.

Sure. So look we've been involved with the Pandora business for a long time either from sitting on the Board or just from looking at it and having had continuous discussions. And part of our plan always was to invest in additional content that would benefit both platforms. And so as we look at things like the groundbreaking deal that we've struck with Drake that investing in content is in fact part of the plan. So, yes, that will offset, I guess, synergies. But it's all been part of the guidance we've already given. And as we start working on where we're headed for 2020, it's incorporated in that thinking as well. With respect to the synergies, we're right on track. We gave you an update in guidance in the first quarter call. And in the synergies, we're coming in stronger than we had originally guided to. We are on pace for that. And, again, I said it in my comments, business models matter. And you saw us drive monetization at the top line and drop it through to EBITDA and we continue to -- we expect to continue to do things like that.

Great. I had one quick follow-up, just a question for Jennifer. You have several different announcements this quarter whether it be the implementation of streaming to Select hubs; additional channels as well, and obviously 360L, I guess, in Cadillac, an additional OEM with Cadillac launching. Just as you kind of think about broadly the levers across the different ops that you're implementing, how do you see that rolling impacting the bottom line potentially through engagement leading to lower churn and higher EBITDA? So, I guess, some of the thresholds or key KPIs that you're kind of looking at going forward as a part of your role. Thank you.

So you really touched on it. I mean it's really delivering more value to our customers and in two ways, right. Additional content because until 360L is more broadly rolled out, as you know, we're pretty limited in what we can deliver into the car. So it's more content in more ways, on more platforms and increasing that engagement outside of the car. And then eventually we'll be able to roll out this content and these features through our 360L implementation.

Great. Thank you.

Moving next to Jessica Reif Ehrlich with Bank of America Merrill Lynch. Please go ahead.

Thanks. I have two different questions. First, on content. Maybe, this is Scott, but or Jim. It seems like everyone in the audio industry is focused on podcasts. Can you talk a little bit about your podcast strategy and how that's going to help you differentiate you from competition? And continuing on the content you guys mentioned Drake a few times. How different will that collaboration be with some of the other artist channels like Pitbull? And on the SoulCycle recent announcement, it seems like you're going in a completely different direction, maybe more lifestyle. So can you talk about what's going on with that? And then I have a related question later on.

So let me just jump in and Scott will take the majority of it. So I agree with you, there is a podcast announcement, seems like every day. I think, look, we're very committed to the podcast space. We feel like we built talk premium radio. And so I think -- we think we have a really good understanding of what listeners want in terms of spoken word. There's a long way to go in my opinion in two areas. The first one is exactly what content do people really want in podcasting. Right now it seems to be a race as you can just put the most stuff up, which personally I don't believe is what's going to win. I believe and I think Scott will reiterate with me we believe that probably more branded content is probably more important in the space, but we'll continue to work there. As important, Jessica, as you well know, there's content everywhere but it's almost like a flea market, in that it's up there everywhere and no one can find it and no one can find it easily. And so we're busily working on those two things that we think are kind of gatekeeper kinds of things that need to be done for this stuff to finally catch fire. That doesn't mean we won't keep introducing it. We've been really happy with, for instance, with what we've seen with Kevin Hart and what we've seen listeners respond to that. But there are a few big things that need to happen I think before this becomes a mega audience. Scott, why don't you take that and Drake?

Sure and I'll touch on SoulCycle for me. On podcasts, yes, as Jim said, and our strategy has always been -- it's sort of a twofold strategy. Pandora will acquire a lot of podcasts that are out there. So it's a convenience factor for a lot of the listeners that they don't have to go elsewhere to find it. So to-date Pandora has already picked up about 3,000 podcasts, and well on their way towards their goal of between 5,000 and 10,000 by the end of the year. So we do -- we have a lot of convenience of having most of the major if not all the top podcasts available on Pandora. Sirius, which will continue – SiriusXM, which will continue to be very active in audio content as always will feed those podcasts with a whole another layer and that's what Jim mentioned with Kevin Hart, Andy Cohen and a number of other ones we have are going to be repurposed in some cases original podcasts created with those artists that will be completely unique. And this will separate us at one level from everyone else. That is going to be unique to the SiriusXM and Pandora platform. And so those will be another layer of that. And then the last piece which more to come at a later call are going to be the big names and big brands that actually are not in podcasting yet that will likely make one-off big podcasting deals to be part of the platform. Those will look more reminiscent of the SiriusXM early talk deals, but will be triggered by both a component potentially for talk radio, but mostly for podcasting. So there are layers to go on that. On Drake it is unequivocally the deepest we've ever gone on any artist deal. All our other artist deals are largely content deals with a little bit of marketing. This is a very deep two-platform SiriusXM and Pandora deal. It has multiple content components. It does have marketing components that will roll-out later and other things with it that will show how deep and unique this deal is. More to come on that. SoulCycle is really consistent actually with what we've always done is look for interesting brands that haven't gone into the audio space and figure out are they suited for our audience. And we consistently get requests or even our generic workout channels as part of a new 100 channels we added with Polaris. The demand for this is constant. So anyone jogging, working out at home, walking to work in whatever version you want is looking for some, sort of, music or backdrop to this. And SoulCycle is a natural extension to that. All the major instructors have already reported they're interstitial. This channel will be launched and it will feel like a virtual SoulCycle. And there's other brands like this out there that we'll be touching on.

I thought you're amazing. It so creative. And then for David. As you said capital returns this year are so far already $1.9 billion. Historically, you've been around $2 billion. Can you -- how should we think about capital returns for the rest of 2019 and beyond?

Well, I think, about all I can say is -- is that when the stock runs we tend to lighten up on buyback. And -- but when it falls if we think there's value there we're not shy about going heavy. You know the stock, I mean, look I'm not thrilled with the idea that we issued shares at an effective price of $6.98 and we're then were to buy it back at $5.90. I guess that's the silver lining in the cloud. I'd rather have the problem of deciding how much to buy back at $7. But the fact is that the market pushed the stock to a place where we thought it was a significant value. And so we bought a lot.

And Jessica, I'd -- this is Jim. I'd also point out we discuss this topic every single Board meeting and we enlighten our Board with every relevant fact that we think they need to be able to form an opinion on this. They are extremely engaged on this. And I think it is what you see it as.

Thank you.

We will take our next question from Tim Nollen with Macquarie. Please go ahead.

Hi. Thanks. Your monetization of Pandora as I thought was pretty impressive. You gave a few reasons for it. Wonder if you could elaborate a little bit on the programmatic ad side please? Maybe explain a bit more what you're doing there if you've got a figure in terms of percentage of revenues from programmatic to offer. And also if you could talk a little bit about what you might be doing on the SiriusXM side. I know it's a very small number for advertising but if there's anything you're doing with the data from Pandora to help the programmatic ad business on that side as well? Thanks.

Well, I'll start out and then David will jump in. I don't believe we're going to break out the revenue by all these different categories. But I can tell you the question on programmatic is quite simple. A year ago, we simply didn't really have the capability in any meaningful way with the acquisition of AdsWizz. And you bring up an important point. And that is we all want to talk about the investment in content. I think the other thing, I'm firmly committed to as we delve much deeper in the digital advertising business is obviously the value of technology is extremely important. And we're very pleased with what's happened with AdsWizz and we're very pleased also with what Pandora has developed in terms of programmatic capabilities. Clearly, now most of our major big advertisers demand that they can use some portion of their budget for programmatic. And so we're really pleased with how programmatic performed in the second quarter. I don't want to correct what you said. I just want to maybe take a slight exception. Our advertising business at SiriusXM has been growing quite nicely. And look it's growing faster or -- at certainly the same kind of rate as the Pandora performance in the second quarter. So we're really pleased also with that business. It's a different business, because it is not "digital oriented" but it's great to have both. David you want to add anything on it?

Yes. I think the monetization really is driven by sell-through and programmatic is part of what's helping to drive the sell-through. It gives the team another tool to pull out of the box and it just is -- it's helpful in driving a greater share of ad budgets from advertisers and agencies. The -- on the SiriusXM side, the -- look the team in ad sales at SiriusXM continues to knock the cover off the ball. They -- we like to beat up everybody over hitting their numbers. So I don't want to say too many nice things about them. But they do -- they still maintain double-digit growth rates in advertising. And so just overall both the Pandora side and the SiriusXM side the ad teams are really, really killing it.

Got it. Thank you.

Our next question will come from Vijay Jayant with Evercore ISI. Please go ahead.

Thanks. For Jim, obviously, you just mention on the call that 360L is the long-term future of the company. Can you just broadly talk about the cadence of how that's going to get rolled out over multiple years? When is it going to be sort of the DNA of the company given sort of the long lead times? And again, obviously you haven't had a lot of units on it so far given it still is pretty early. If there is any experience engagement that you can sort of talk about and what consumers that have it are experiencing. And then very...

Yes. So Vijay...

For David, go ahead.

Sorry. Go ahead, Vijay.

So just for David, I just wanted to clarify that headunit comment that you made in 1Q sort of played out through these healthy numbers in 2Q. So that's sort of behind us?

Yes. So let's do last one first. The cycle times are a little longer, right? So when things show up in pen rate, it's at the install level. And then they've got to work their way through the dealership chain into consumers and then get through the trial period before they hit self-pay. So I would say that the headunit change had virtually no impact on second quarter subscriber additions, self-pay additions. And so the effect of that will really come through in sort of the second half and late part of the year. Which again if you come back to the comments about how we feel about hitting the year in the guidance, it sort of accentuates, how strongly Jim and I think -- how confident we are that despite what will be a headwind in the second half from the headunit change that we remain confident of hitting the full year guidance. And I'll turn it back to Jim.

Yes, Vijay, I think we try to get a little too surgical sometimes on this -- on the penetration number. I think David said two things and I want to emphasize that. There is a mix issue going on between cars sold at retail and cars sold to fleets. And when they shift to fleets, which historically happens in this industry, either when inventories get a little high or when the economy gets a little unsteady that shift occurred. That certainly occurred in both the first and second quarter. We're assuming it continues to occur in our guidance for the rest of the year. Also, one other phenomena going on that we have no control over, is as you know we're heavily, heavily penetrated in every single automaker. But with the vast majority of the automakers, we're not 100% penetrated, meaning all of them have very low entry-level cars that they continue to offer that have the lowest kind of features across everything, including -- not including satellite radio. Clearly, in the second quarter, the retail pressure on automobiles forced the mix also to go a little way that way. We're assuming that also continues in our guidance in the second half. And your comment regarding SAAR, we're kind of assuming things stay kind of the way we are. And so, I think, we got it lined up. We think we have a good perspective on it. There are -- I want to reemphasize, we are right where we think, we are right -- David said it, we are right where we thought we would be and we're pleased with where we are and we feel really good about the second half and being well positioned. Back to your comment on 360, Vijay. Your comment -- your frustration is my…

Great. Thanks so much.

We will take our next and final question from Ben Swinburne at Morgan Stanley. Please go ahead.

Thanks. Good morning. David, if you look at the first half EBITDA numbers you guys put up and then your comment, or Jim's comment, on Pandora making money for the year. The second half -- the full year guidance looks quite conservative, at least to me. I'm just curious, if there's anything on the cost side you would call out at the Sirius business in the second half, whether it's marketing around the streaming product launches you guys have, or content costs that we should be keeping in mind. And then for Jim and Scott, when you think about this partnership with Drake, he could probably go -- I'm sure he could go anywhere, not probably, he could go anywhere. I'm sure there's lots of bidders for his content and his brand. I think he has done deals with Apple in the past. Why does he go to Sirius? And do we need to be thinking sort of an arms race here for top talent that's going to cost a lot of money, like, we saw pre-SiriusXM merger back in the day? Or do you think that this is beyond just the highest bidder, but actually the platform is differentiated and that's helping you secure this kind of IP? I'd love your thoughts on that topic.

Let's go to the second question.

Okay. So let me start first, Ben, and I'll give you my assurance that, I do not believe this is the start of a bidding war. I do not believe that's why Drake made the decision he made. I do believe quite candidly that if both companies weren't together and had the strength of this massive audience that we now have that we probably would not have been able to do the deal that we structured with Drake. Scott, you want to take it?

Yeah. And also look they are as smart and – Drake himself and his organization as you can guess they did their homework and I think the creative freedom and the history of dealing with iconic artists how we do and our support in a lot of ways of that where there's no doubt that their creative vision can be executed and put on our platform was a factor. As to economics, there are many examples of what we've done, and we have consistently said as David said is business models matter. This is not an example of that.

So Ben I think it also plays into your question on EBITDA and it – people asked us when we announced that Pandora acquisition if we were sort of attitudinally prepared to invest in growth. And when you kind of look at the team you have sitting around the table that – Jennifer joined in I think 2002, I joined in 2003, Scott and Jim joined in 2004, and Pat Donnelly sitting here I think he's from like the 1990s. He's like the carpet that came with the office. And the – this is a team of people, who collectively invested $12 billion building the satellite radio business first. Then, we turned and we've acquired a huge audience and scaled digital ad technology with the Pandora base. And we really believe that we can drive this business and we're not afraid to invest. And we've been saying it repeatedly we have lots of investments under way like in Drake and in content, in ad technology, in product enhancements, and in distribution. And the – one of the challenges for us as we have all these investment initiatives that go – that we have under way sometimes you can't do them as fast as you'd like to. And so if there is upside in EBITDA it will in part be due to the fact that we probably can't move as fast as – it's kind of going to the buffet line when you're hungry and you just can't load that plate fast enough. There's – this is an incredibly strong business model gives us a lot of discretion over how we invest money.

Ben, I'd also like to point out we traditionally spend more of our brand-focused money in the fourth quarter because we think it gets a lot more bang around the holiday periods as well. So I don't actually know the exact timing. David and Hooper can take you through that. But I can tell you we're – we've got pretty solid plans for what we want to – how we want to promote our brands as well in the fall.

Got it. Thank you everybody.

Thanks Ben, and thanks to everybody for participating today. We'll speak to you soon.