Good morning and welcome to SiriusXM's Second Quarter 2022 Financial and Operating Results Conference Call. This conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference 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 second 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 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 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 those 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 today. We are pleased with our results in the second quarter of 2022. While we continue to navigate variability in customer and market demand, we delivered strong financial performance with record low churn. By leveraging our balance sheet and scaling key growth initiatives to deliver best-in-class content to our customers, we are setting SiriusXM up for future expansion and solid financial performance. Into the second half, we remain committed to building on that momentum by making the strategic investments necessary for our long-term success while continuing to exercise financial discipline. SiriusXM added 23,000 net new self-pay subscribers and 54,000 paid promotional subscribers in the second quarter. Despite a slight sequential uptick in April, SAAR saw further weakness in May and June and ended the quarter down 4% from Q1 and 20% year-over-year. While we are confident we can deliver positive self-pay subscriber growth, we no longer expect to attain our prior subscriber guidance due to challenges and uncertainty in new and used auto sales. However, with strong predictable subscriber-driven revenue, we are able to reiterate all of our financial guidance. There is growing uncertainty in the advertising market, where we generate significant revenue with high variable margins. So we are prudently implementing a variety of cost-saving measures such as limiting our head count growth to priority roles and taking a more measured approach on discretionary spending. While we manage through prolonged supply-related challenges in the auto industry, the strength of SiriusXM's brand and uniqueness of our product which is evidenced by our large subscriber base and outstanding churn rate of 1.5% remains extremely attractive to automakers which continue to see us as the premium audio entertainment provider of choice in North America. Our new and used car penetration rates…

Thank you, Jennifer. A few quick highlights on the quarter. Revenue increased by 4% in the second quarter with advertising revenue up 5% to $452 million and subscription revenue also growing by 5% to $1.7 billion. Adjusted EBITDA was 3% lower at $679 million as we made substantial investments in sales, marketing, content and product development. Diluted earnings per share were $0.07 versus $0.10 in last year's second quarter where we booked approximately $140 million of satellite insurance recoveries. We generated $435 million of free cash flow during the second quarter, down 21% from the prior year as cash taxes rose by $97 million year-over-year and last year's second quarter benefited from $17 million of satellite insurance receipts. Turning to our operating segments. For SiriusXM, total revenue in the second quarter increased 5% to $1.7 billion driven by the larger self-pay subscriber base and 7% growth in ARPU, offset by a lower base of paid trial subscribers. Jennifer highlighted SiriusXM's subscriber growth but to give us some more clarity into the back half, looking at trial starts can be useful. During the second quarter, SiriusXM new and used car trial starts were down 20% and 8%, respectively. Total trial starts were down 15% year-over-year in the second quarter somewhat worse than the first quarter figure of down 10%. Gross profit in the SiriusXM segment climbed 6% to $1.05 billion, representing a margin of 61%. In the Pandora and off-platform segment, advertising revenue of $403 million increased 5% in the second quarter with Pandora's ad revenue per 1,000 hours, stable at approximately $100. In the second quarter, our podcasting and off-platform business generated $119 million in revenue, an increase of 50% year-over-year. We expect these businesses to represent a growing portion of this segment's advertising revenue over time. Travel, restaurants, gambling…

[Operator Instructions] We will take the first question from Jessica Reif Ehrlich from BofA Securities.

Hi, Jessica. Can you go ahead?

Hi, operator, why don't we go to the next one and come back to Jessica?

We will now take the next question from James Ratcliffe from Evercore ISI.

I have two questions, if I could. On the SiriusXM side, SAC was up per installation, about 7% or so year-on-year. Can you just talk about the trends at that level, quite apart from the issue of actual volumes of SAAR? And secondly, at Pandora, you mentioned investment in new content pressure in gross margins there. Can you help us size that sort of investment and get a sense of what the run rate gross margin profile of the business is and how that evolves as presumably off-platform revenue becomes a larger share of the ad revenue there?

Sure, James. I'll take the first one on SAC and SAAR and then I'll let Sean talk a little bit about the margins on the ad side. So look, our SAC for install has come down significantly, as you've seen over the years. And it's going to fluctuate. I would expect by a couple of dollars here and there by quarter, just depending upon the mix of our automakers, installing modules into the vehicles and then the ramp of different technologies within our modules. So we have different economic structures with the producers of the module. So overall SAC per install, obviously, is a reflection of the equipment margin, the revenue that's coming through on the top line, the cost and then the subsidies. So there will just be some variability around there but I don't think it's necessarily indicative of a higher trend. And Sean, do you want to start on the second one?

Yes, sure, James. So as it relates to Pandora and the ramp, obviously, we have announced a number of new deals. We have an incredible amount of inventory coming online. I think as I said in my comments who are still in the early stages of monetization of some of these podcast ramps. So in the early days, you're seeing the pressure on the gross margin on the Pandora and off platform margin for the segment. But overall, long term, we think it's a great place to be. I think it's early to really articulate what our margin goals are. Every deal that we do, obviously. Builds a great audience scale allows us to maintain our position in the podcast audience space. And -- but all in all, we're pleased with the deals we're doing. We're all -- and hopeful that we can continue to improve the margin profile but I think it's still premature to talk about it, given that the market is still growing, it's still early days and we want to make sure we capture share but certainly do it in a financially disciplined way so that we can really have an additive halo effect to the overall FX and media and advertising REIT. So, I don't know if Jennifer or Scott, you want to add anything to that?

I'd just build on that a little bit, Sean, that I think exactly what you said. We're in the early days. I would expect monetization in podcasting to grow faster than the audience listening is growing just because we're still working with largely manual process, right? There's a lot of host-read ads. There's a lot of working closely with the talent. Programmatic is in its early stages. So there's a lot of technology and capabilities that is going to come to the space just generally and certainly with our solutions that I believe is going to continue to enable us to grow going forward. I mean you saw the -- we did stipulate that our growth in the off-platform side of our ad business was up 50% in the second quarter and it was up 43% in the first quarter. So we're seeing nice growth trends in this part of our business.

The next question comes from Jessica Reif Ehrlich from Bank of America.

Hopefully, you can hear me this time. Can you?

Yes, yes.

Okay. Good. So your content costs were up double digits but there's, obviously, a ton of new content both in the car and in-app. And I was just wondering if you could talk about the outlook for both cost and content across music, sports and podcasting for the foreseeable future. And then on advertising, I mean, you're, I guess, appropriately cautious but how does that -- how do you factor in political? And then as kind of we get through supply chain issues, do you expect to pick up in like auto or other areas?

Yes. Just on content costs in general, I'll let Sean or Scott jump in, too. But we will continue to make selective investments to support the service both in the car and in streaming. You saw our announcement about the NFL. Scott can talk more about that. We are big believers in sports and certainly, the live aspects of sports and play by play and really excited about what we're doing with the NFL there. And I don't think -- I'll talk specifically about the different categories but in terms of cost but you heard me earlier highlight some of the areas where we believe we're definitely making strides. And of course, there's going to be investments alongside that in music and in sports and in comedy. So Scott, do you want to talk a little bit more about NFL and maybe to cover...

Yes, exactly. So Jessica, on sports, the one thing we've seen which is interesting and I think the TV networks have seen it as well. It cuts across all demos, number one; and number two, live still matters. So we've always been a big believer in live sports and in all live sports and having one-stop shopping. If you look how video sports rights are now, they are fragmented in many places. You just can't say, I want all the basketball, football, baseball, hockey, car racing or anything else in one spot, the way we have that. So I feel really good about that and it will translate more into digital as we do micro channels based on teams and other things down the road on that. Just quickly on podcasting. Early stages, one of the first goals with Stitcher was to figure out which podcasts would really matter and make it number one and according to Triton, Stitcher is number one by a large margin. So that's now leading to a lot of other talent and opportunities coming through here as well as some of that talent working its way like Coco and Crooked and others on to SiriusXM. So I feel pretty good about that. The digital area is interesting because that's where the younger demo growth will come. We know our core demo on Sirius is solid. And right now, you're seeing with the extra channels. But over time, you'll start to see branded channels and others some of which are there to grow in that space as well. So we feel pretty good where we are right now.

Just on advertising then, Sean addressed some of this earlier in his comments but we are facing some of the same challenges you see in the industry, more generally, we're watching cancellations closely. We, obviously, feel very comfortable with our full year revenue guidance. But yes, there are some categories where there's softness. I think as automotive starts to rebound, we would expect to benefit from that. There have been other areas of opportunity with travel and restaurants, et cetera. D2C tends to be more vulnerable than brand. And we do have both sides of advertisers represented across our platforms. But again, we saw some nice growth in our off-platform business in the second quarter. We continue to cross-sell across our platforms and make strides there. And we have a lot of other unique solutions such as just what we're doing with AmEx on small stages and branding that around their Shop Small initiative that we're continuing to see opportunities around those.

Can I just ask one follow-up for Scott? Scott, look, you've earned a lot in podcasting. Are there any specific genres that you think that you need to kind of focus on or beef up? And then in content on the music side which you didn't really talk about, are you going -- is it important to have specific artist relationships? I mean you've just introduced so many different kinds of content over the last, I'd say, two or three years, it's credible in app and in the car.

Okay. So the one category we wanted just to set the ability to answer the second part was True Crime because that seems to be the first unique audio category that's come along in years and it's the biggest thing in podcasting. So with Crime Junkie and a few of the others, we have that locked up. So I'd like to see empowerment and self-help and a lot of other things like in that area grow. Doctor Radio and some of the things we did on Sirius are a little more narrow, podcasting and podcasting networks and some brands and others in that area, I'd like to see grow. On the music side, it's always a balance. We feel we have a good balance between the categories that matter in rock, pop and hip-hop in both our curated channels and our artist channels on it. It's just a question of will it move the needle to have an artist or a brand over a channel in music similar to the way you could have a hip-hop channel, or you could have Drake do a hip-hop channel. That one is pretty obvious. So we just need to look what makes sense both economically and culturally and see where that goes.

The next question comes from Ben Swinburne from Morgan Stanley.

This is Cameron [ph] on for Ben. Just a follow-up on content. On the NFL deal, did the expanded rights allow you to stream games or any other affiliated content on Pandora? And then second, how is the bidding environment for your sports deals these days? Have those become more competitive at all? Or do you get a first-look window when going up for sports renewals? Just any color there? And then second, on the satellite business, self-pay churn has continued to come in persistently low. Is the path to that normalizing kind of wholly connected to vehicle-related churn coming back? Or are you seeing other benefits helping there as well?

Scott, why don't you start on the content side?

Right. So on the sports rights, yes, there's always, as I said, I think, they'll always be bidding on live sports. We saw it on the NFL and all our sports rights. There aren't that many out there between pro and even the major colleges that matter. So that's always going to be true. And there's just no burn in sight on live sports. So I like our position and I particularly like our one-stop shopping position on all the sports under one roof which I don't think anyone can come close to saying that. So I feel pretty good on that. No, the NFL rights don't extend to Pandora but Pandora is largely going to be looked at in terms of music and podcasting, not live sports. We want to direct people to Sirius. It's a premium service to have all that live sports under one roof.

Yes. And on the churn side, we're really pleased with our second quarter performance. The second quarter is typically strong for us from a seasonal standpoint but we are actually down a few basis points year-over-year. Obviously, vehicle-related has played a role in that. Sean highlighted the lower trial starts year-over-year on both the new and used car side. Non-pay, I'd say, has been pretty steady. We do see some seasonal uptick in credit card entry rates in the spring. That happens every year and we're seeing some of that now. We don't really see any concern from an economic standpoint in the entry rates, so we're really pleased with that. Similarly, we're focused on the voluntary side and watching carefully just any impact to cancel demand, just in terms of the strength of the customer, the consumer, in general. And we've been very -- performing very solidly there as well. So we'll continue to watch those trends but I would expect we'll see some uptick in the second half just from a natural seasonal standpoint. And then hopefully, as we continue to see improvements in trial starts and auto sales overall.

The next question comes from Kutgun Maral from RBC Capital Markets.

Maybe just a follow-up on the advertising discussion, it seems like there continues to be a solid opportunity there with off-platform and podcasting. Though as you called out, there's clearly a lot of uncertainty in the market. I appreciate that you may not want to comment too much on Q3 at this point. But is there any more color you could provide on maybe RPMs at Pandora or just the sustainability of the robust off-platform trends? And then just on guidance, you reiterated the $9 billion in revenue for the year which is great. Is it right to assume that your expectations for advertising may have come down compared to the initial budget? And if so, I'd be very curious to see where you're seeing positive offsets?

Sean, do you want to start?

Yes, sure. Kutgun, thanks for the question. I guess on the advertising discussions, we continue to see a very positive demand. As you said, we're in this early stage of monetization. So we have the benefit of really having increased supply. So we have the expectation that we'll continue to ramp. We'll continue to improve monetization which will hopefully continue to deliver growth on the off platform. As it relates to Pandora on platform, you saw the stats, you saw RPM is holding pretty steady despite the decline in hours. So we're seeing the active listeners continue to increase their usage. So again, there is some caution in the marketplace. I think we do have the benefit of increasing supply, just to reiterate it. So we're comfortable and confident we'll continue to drive growth over the remainder of the year. In terms of the guidance, again, we reiterated it. Certainly, the marketplace given the macroeconomic environment, we keep a cautious outlook but we're comfortable with where we're at. So I don't know, Jennifer or Scott or anybody wants to add anything on the advertising market or as it relates to the full year guide and offsets, that's how I see it.

Yes. I believe we've provided a fair amount of color on this. I wouldn't comment specifically on Q3, obviously but our guidance is reflective of kind of what we're seeing in the markets today. And as we've discussed, there have been some cancellations and deferrals. And so we expect some continuation of that and we've incorporated all that in the numbers.

The next question comes from Barton Crockett from Rosenblatt Securities.

And I was just interested in just drilling down a little bit more into the commentary about EBITDA outlook for the year. If you guys pacing down a little bit year-over-year here in the quarter. But speaking to a number for the full year that would be flat to maybe slightly up year-over-year, suggest that there's some change in the trend in the back half of the year on revenues and expenses versus what we just went through. And I just want to make sure I understand what is it that changes to kind of give you that comfort to reiterate the EBITDA guidance?

Sean, I'll let you start and then I'll jump in.

Yes. I mean we have an outlook for the year. Again, $2.8 billion is the guide. We feel confident with where we are from a -- having positive subscribers for the year and the impact that has on subscriber revenue. We've talked a lot this morning about the advertising outlook. I think we have a good handle on what our investments are from a content and programming and podcasting perspective. We have spent a fair amount, as you saw in our results year-to-date on sales and marketing and bulk performance media and brands. So as we look out at the back half of the year, we have confidence in our ability to meet the guide. We did comment a couple of times about -- Jennifer and I about tightening some control. So it's certainly -- we're looking at headcount. We're looking at our real estate footprint. We're looking at all discretionary spending. So we're trying to manage both the short term and the long term. Of course, we want to make sure we're investing for long-term growth. At the same time, we want to meet our guide and what we have set -- the expectation we set for our investors for the year. So I don't know, Jennifer, you want to take it there.

I agree, Sean, with obviously everything you've said. I guess I would just add to acknowledge Barton, yes, it's going to be back-half weighted. And there is some variability to our sales and marketing expenditures based on how we're handling and looking at the digital part of our business and we'll expect to see some fluctuations there. We've done a lot of great experimentation and there is more to come by using different marketing channels, the app stores, different distribution partners and I think we're still learning and optimizing where we're spending and the types of subs we're -- we are able to acquire through those different channels. And we're going to be opportunistic in our investments and continuing to drive what's been encouraging trends in that part of our business.

Yes. And lastly, just to punctuate -- sorry, Barton, just to punctuate. The big uptick -- no, the big uptick that you've seen in sales and marketing in the first half will likely not continue for the second half. It's probably an important point.

Okay. That's helpful. Just one other quick thing. You mentioned you're expecting to make some announcements with EV companies. As we're all aware, I mean, there's one EV company that really matters, Tesla which seems to have a founder that has very particular opinions about what goes into the cabin there of the cars. Well, how would you describe kind of your relationship with Tesla and how we should be thinking about opportunities there over some period of time?

Look, I -- we are in some of the Tesla models and we clearly would like to be in more of the Tesla models and we're working very closely with them to be able to execute on that. But I would speak more broadly just for a minute on EVs. What we certainly know to be true is that consumers want SiriusXM when they buy a new car. And especially the affluent buyers of many of these EV companies, including the start-ups that are just starting to produce vehicles this year. So we hear it all the time from the EV makers as well as our long-standing auto partners and we are going to be flexible on distribution but what we are absolutely focused on is ensuring the ease of use in the customer experience, particularly with the onboarding. It's been a huge advantage in our business that new car buyers and, to a large extent, now used car buyers can get into their car and have our service working and in a very frictionless environment. So we're very focused on how we're developing those solutions for the EV partners as well.

We will take our next question from David Joyce from Barclays.

Just a further question on the expense side of the equation. You called out the extra spending on sales and marketing and product development. Content spending was also up this quarter. But how should we think about seasonality? I know you just said that sales and marketing will probably be lighter in the second half. But on the content side, since you're spending more on both the satellite platform and the streaming and podcasting platforms. Was there some seasonal strength? Was it sports-related maybe in the second quarter? Or is this just overall a more elevated level of content spending we're flowing through the income statement that we should be thinking about through the rest of the year?

Yes, David. Yes, I think that you should think about it as just a slight elevation over the course of the year. Again, it's in percentage terms, at least on the SiriusXM segment, you saw and elevated in the second quarter. We've announced a number of deals as those things ramp over the course of the year, that's kind of a new normalized level. And I think that's what you should expect over the course of the year. As Scott and I will tell you, we are a content company. We got to provide, obviously, the best mix of news talk, sports and music. So we think this is a prudent investment even, again, it's not a large amount of money. I think it was $25 million year-to-date on the programming and content side and 11%. So I think it's just an increased level of investment.

And if I could, just a second one on capital returns. I was just wondering how you're thinking about the timing of your stock buybacks. Are you kind of matching that with the working capital flows or the cash flow from operations as opposed to more like straight lining buybacks through the year? How should we be thinking about your strategy there?

Sure. Just to reiterate what we've said, I think, consistently over the last couple of quarters, we're guided by, obviously, free cash flow generation. We're guided by what our leverage is in the mid to 3x, 3.5x; we exited the quarter at 3.6x. You saw the aggressive return of capital in the first half of the year that we've done inclusive of the special dividend. So I think we're going to be guided by the free cash flow. We're going to be guided by our leverage. And I think, hopefully, what we've articulated is fairly predictable. So it's not necessarily a straight line. It's more how we see the outlook of the business, how we view what the grid is, what we view valuation to be and we'll execute it accordingly.

We will take our next and final question from Steven Cahall from Wells Fargo.

So Jennifer, you talked a lot about expanding the streaming business, I guess, how do you think about SiriusXM streaming as a kind of stand-alone product? Would you consider on-demand or a playlist functionality to make it more like the peers? I know that really changes the business model of the streaming business. So just curious how you kind of think about drafting off of the satellite product versus something more independent and also tying that into things like Pandora and podcasting. And then secondly, on SiriusXM ARPU, I mean, it grew at like an inflationary rate forever. And I know now you've looked at increasing ARPU, it was up nicely in the quarter. It's been up for, I think, a few quarters now. Maybe you could unpack that ARPU growth a little bit. Is it price? Is it more multicar tiers? And should we think about ARPU as just being a stronger component going forward than it has been historically?

Yes. Thanks, Steven. I'll let Sean address ARPU in a minute. On the digital side, we are constantly looking at new product features and talked a little bit about the growth in on-demand listening and listening to our extra channels earlier in the call. Outside of live which is still the predominant amount of our listening in our apps, we do see strong listening to both of those areas which is not surprising, right? I mean it's very similar to what's happened in the video business where customers expect to be able to time shift their listening, where they're watching and that's a function of what we're seeing in on-demand. The personalized stations, the extra channels, in particular, are just giving our users more control over their listening experience. In many cases, they leverage the brands we've already established with our listeners. So those are some examples of where we're providing more control. We haven't, obviously, gone down the path of full interactive on-demand capabilities but we'll look at that. We have a great product team in place under Joe Inzerillo, He's continuing to build out that team. And so we'll look at that. Obviously, we've been very disciplined in how we've approached our licenses on the music side. And we would -- if we were to entertain something like that, there would, obviously, have to be a step function, assumption about how we're attracting and retaining subscribers. But just on the digital side, in general, we're pleased with where we are. It will represent a large portion of our adds this year. Of course, that's because of the trajectory in the auto funnel. There's still generally a smaller proportion of our trial starts overall in our gross adds. But obviously, given the dynamics, it will be a bigger part of our net adds this year. So we're really pleased with what we're seeing so far. Sean, do you want to tackle the ARPU?

Yes. Sorry about that. Yes. So Steven, on the ARPU side, the biggest driver here is, obviously, the rate increase that we put in, in November. I think we see continued sequential increase probably in the third quarter. Obviously, the comps probably get more challenging as we roll over that price action that we took last year. So there's some benefiting from the higher ad revenue and some other minor picks and takes -- puts and takes, excuse me, from some of our OEM relationships. But overall, the majority is rate.

Yes. I mean the one thing I would just add to that is that -- sorry, Steven, just that as you've heard us say in the past, we are trying to be very opportunistic in capturing demand across the pricing curve. So some of our digital plans are $8 a month. We have a PV IP plan at $35 a month. And there is likely demand below $8 and above $35. So just the dynamics on ARPU alone, while I know we want to -- we want to make sure that we're watching the metric. It's not the only metric like we're really just driving overall revenue and maximizing customer demand.

Yes. And should we think about that price increase last November is kind of onetime in nature? Or is that something we could see a little more consistently in the future?

We had a history of executing rate increases certainly on the full price side. And we're very sensitive to the fact that, again, our largest competition in the car continues to be free. So we are very disciplined in how we look at these rate increases. But I would expect us to continue to consider them going forward.

Thanks, Steven. Thanks, everybody, for joining today. We'll speak to you soon.