Q2 2019 Earnings Call

July 30, 2019

Please standby.

Good morning, everyone and welcome to Sirius XM <unk> second quarter 2019 results conference call.

Operator: Good morning, everyone, and welcome to SiriusXM's Q2 2019 results conference call. Today's conference is being recorded. A question-and-answer session will be conducted following the presentation. If you have a question at that time, please press star one on your telephone keypad. If at any time you'd like to be removed from the queue, please press star two. At this time, I would like to turn the call over to Hooper Stevens, Senior Vice President, Investor Relations and Finance. Mr. Stevens, please go ahead, sir.

Today's conference is being recorded.

A question and answer session will be conducted following the presentation. If you have a question at that time. Please press star one on your telephone keypad.

If at any time you'd like to be removed from the queue. Please press star two.

At this time I would like to turn the call over to for Stevens Senior Vice President Investor Relations and Finance Mr. Stevens. Please go ahead Sir.

Thank you and good morning, everyone welcome to Sirius XM second quarter 2019 earnings Conference call today, Jim Meyer, Our Chief Executive Officer will be joined by David for your our senior Executive Vice President and CFO .

Hooper Stevens: Thank you. Good morning, everyone. Welcome to SiriusXM's Q2 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.

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 What's our president of sales marketing and operations will also be available for the Q and a portion of the call first I'd like to remind everyone that certain statements made during the call may be forward looking statements as the term is defined in the private Securities Litigation Reform Act of 1995.

These and all forward looking statements.

They 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 view Sirius XM SEC filings, we advise listeners to not rely unduly on forward looking statements and disclaim any intent or obligation to update them.

Hooper Stevens: 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, 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 the Pandora transaction closed on 1 January 2018, and they exclude the effects of stock-based compensation and certain purchase price accounting adjustments. I'll hand the call over to Jim Meyer now.

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 assumed this indoor transaction closed on January Onest, 2018, and exclude the effects of stock based compensation and certain purchase price accounting adjustments I'll hand, the call over to Jim Arnaud.

Thanks, So for good morning. Thank you for joining todays 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 Sirius XM 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, a pro forma revenue and $2.35 billion of adjusted EBITDA.

Jim Meyer: Thanks, Hooper. Good morning. Thank you for joining today's call. We continued our track record of strong execution in Q2, and I'd like to once again thank our combined team at SiriusXM and Pandora for working so well together towards our goals. In Q2, 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 1 million. I remain very confident in achieving all of our public guidance.

We added nearly 300000 self pay subscribers at Sirius XM, which keeps us on track to meet our full year guidance of self pay net additions approaching 1 million I remain very confident in achieving all of our public guidance. The Sirius XM business is really performing well.

Jim Meyer: 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 Q2. At Pandora, we are well underway with the much-needed restructuring efforts, 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 Q2 from a $35 million adjusted EBITDA loss in last year's Q2.

Churn remains near record low levels ARPU at $13.83 has never been higher and gross profit at Sirius XM also set a record in the second quarter at Pandora, we are well underway 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 and 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 dollar adjusted EBITDA loss in last years second quarter.

Jim Meyer: This is a huge swing to the positive and will drive more than a $100 million dollar EBITDA improvement in 2019 over 2018. Let me reemphasize, by combining SiriusXM and Pandora, we have a business with world-class expertise in both subscriptions and advertising. Business models evolve over time, and by having both revenue streams and both skill sets, we have tremendous financial and operating flexibility in how we go to market. We have scaled platforms on both sides of the coin, reaching a combined 100 million listeners, and have a full product offering that ranges from super premium, high-value subscriptions with unique, exclusive content to advertising-supported free services. We're working hard to build a platform with differentiated offerings that fit every American consumer, and we expect our audience reach will be extremely beneficial to both artists and advertisers.

This is a huge swing to the positive and will drive more than a 100 million dollar EBITDA improvement in 2019 over 2018.

Let me reemphasize by combining Sirius XM and Pandora, we have a business we're world class expertise in both subscriptions and advertising.

Business models evolve over time and by having both revenue streams and both skill sets, we have tremendous financial and operating flexibility and how we go to market.

We have scaled platforms on both sides of the coin.

Reaching a combined 100 million listeners and have a full product offering that ranges from super premium high value subscriptions with unique exclusive content to advertising supported free services, we're working hard to build a platform with differentiated offerings that fit every American consumer and we expect our audience reach will be extremely beneficial to both artists and advertisers our long term growth strategy has a strong foundation.

Jim Meyer: Our long-term growth strategy has a strong foundation. Starting at SiriusXM, the strength of our OEM relationships mean we continue to build out the car fleet for many years to come, powering growth from new and used car buyers. The fleet should grow from about 121 million today to about 220 million over time. Our new car penetration rate, now in the low 70%, will climb to about 80% next year. The appetite for SiriusXM by the auto companies is the highest it's ever been. The addition of 360L, which marries satellite broadcast with streaming, vastly enhances our in-car offering and ability to give consumers more content and personalization. I'm pleased to report that GM has rolled out 360L to eight new vehicle models in production right now, and we expect more models to roll out by year-end.

Starting at Sirius XM, the strength of our OEM relationships mean, we continue to build out the car fleet for many years to come powering growth from new and used car buyers. The fleet should grow from about 121 million today to about $220 million over time.

Our new car penetration rate now in the low seventys percent will climb to about 80% next year.

The appetite for Sirius XM by the auto companies is the highest it's ever bad.

The addition of 360 ml, which marries satellite broadcast with streaming vastly enhances our in car offering and ability to give consumers more content and personalization.

I'm pleased to report that GM has rolled out three six deal to eight new vehicle models in production right now and we expect more models to rollout by year end as I've said before three six deal is our platform for the future and we expect all automakers will deploy it in the years to come.

Jim Meyer: As I have said before, 360L is our platform for the future, and we expect all automakers will deploy it in the years to come. We are also working hard to improve out-of-car engagement for existing subscribers. As part of this effort, earlier this month, we began to include streaming at no extra charge for our select subscribers, meaning that more than 30 million SiriusXM subscribers are now eligible to stream as part of their package. When streaming, our select offering now includes our satellite radio channels, 100 extra music channels, and SiriusXM Video. Subscribers can now see hundreds of videos, including in-studio performances, behind-the-scene moments, and more.

We're also working hard to improve at a car engagement for existing subscribers.

As part of this effort earlier this month.

We began to include streaming at no extra charge for our select for our select subscribers, meaning that more than 30 million Sirius XM subscribers are now eligible to stream as part of their package.

When streaming.

Our select customers.

Winslet when streaming our select offering now includes our satellite radio channels 100 extra music channels and Sirius XM video subscribers can now see hundreds of videos, including in studio performances behind the scene moments and more.

Jim Meyer: SiriusXM All Access, our premium tier, subscribers continue to receive exclusive content like Howard Stern and the NFL, and now get commercial-free, personalized stations powered by Pandora, all conveniently within the same SiriusXM app. All of this additional content, access, and features are designed to enhance our value proposition and strengthen our consumer franchise. We are also using streaming-only plans, like our SiriusXM Essential plan, to appeal to consumers who don't have a car or need in-car satellite subscriptions. Beginning soon, SiriusXM will offer a $4 per month student-only online plan. We think it's smart to make our content available to younger listeners as easily as possible. With these additional plans, our upgraded app, and wider distribution across smart speakers, I'm optimistic we can grow this business.

Sirius XM all access our premium tier.

Subscribers continue to receive exclusive content like Howard Stern, and the NFL and now get commercial free personalized stations powered by Pandora all conveniently within the same Sirius XM App all all of this additional content access and features are designed to enhance our value proposition and strengthen our consumer franchise.

We are also using streaming only plans like our Sirius XM essential plan to appeal to consumers, who don't have a car or need in car satellite subscriptions and beginning soon Sirius XM will offer a $4 per month student only online plan.

We think it's smart to make our content available to younger listeners as easily as possible.

With these additional plants are upgraded app and wider distribution across smart speakers I'm optimistic we can grow this business.

Jim Meyer: At Pandora, we are not only focused on near-term and sustained profitability, but we are also rolling out product enhancements and moving toward a strategy of increasingly differentiated content with more curation. Features like Voice Mode and Pandora within Waze are just two examples of how we're making it easier to use and interact with the service. We also recently launched student and military plans for Pandora Premium, priced at $4.99 and $7.99 per month, respectively. We are continuing to experiment with offering content in front of the paywall. For example, many SiriusXM talk shows are now available in podcast form on the Pandora platform, and these have risen to become some of the most popular podcast content on Pandora.

At Pandora, we're not only focused on near term and sustained profitability, but we're also rolling out product enhancements and moving toward a strategy of increasingly differentiated content with more curations.

Features like voice mode, and Pandora within ways are just two examples of how we're making it easier to use and interact with the service. We also recently launched student and military plans for Pandora premium priced at 499 and 799 per month, respectively.

We are continuing to experiment to experiment with offering content in front of the payroll for example.

Many Sirius XM talk shows are now available and podcast form on the Pandora platform.

And these have risen to become some of the most popular podcast content on Pandora.

Stabilizing the user base and the AD supported listening hours will not be done quickly or easily but we expect that with these investments in content and product compiling combined with better OEM support we can alter this trajectory over time.

Jim Meyer: Stabilizing the user base and the ad-supported listening hours will not be done quickly or easily, but we expect that with these investments in content and product, combined with better OEM support, we can alter this trajectory over time. We are committed to driving the Pandora business with sustained profitability. Monetization trends are very strong on the ad-supported business, with RPM of $80 setting a Q2 record and climbing 17% year-over-year on the back of strong sell-through, solid performance from our agreement with SoundCloud, continued growth of our AdsWizz platform, and improvements from our investment in programmatic technology. This and improved efficiencies in our music costs on the subscription side drove Pandora's gross margin up 650 basis points year-over-year. As I said, combined with six cost reductions, we expect the business to contribute EBITDA going forward.

We are committed to driving the Pandora business with sustained profitability.

Monetization trends are very strong on the AD supported business with RPM of $80 setting a second quarter record and climbing 17% year over year on the back of strong sell through solid performance from our agreement with sound cloud.

Continued growth of our ads was platform and improvements from our investment and programmatic technology.

This and improved efficiencies in our music costs on the subscription side drove Pandora's gross margin up 650 basis points year over year and as I said combined with fixed cost reductions, we expect the business to contribute EBITDA going forward.

With both brands content is our lifeblood and as time goes on that takes on even greater meaning for Sirius XM as we executed in the competitive in the competitive space of audio entertainment.

Jim Meyer: With both brands, content is our lifeblood, and as time goes on, that takes on even greater meaning for SiriusXM as we execute in the competitive space of audio entertainment. We seek the most compelling, relevant, and frankly, fun and exciting brands and hosts to work with. Our creative collaboration with Drake across Pandora and SiriusXM is an example of what is possible with our combined scale. This guy is just so talented, and he's now the most streamed artist in history. We couldn't be more excited to be working with Drake and his team, and we'll have much more to say when we announce our fall launch as we get in fall, as we get closer to our launch.

We seek the most compelling relevant and frankly fun and exciting brands and hosts to work with.

Our creative collaboration with Drake across Pandora and Sirius XM is an example of what is possible with our combined scale.

This guy is just so talented and he is now the most streamed artist in history, we couldn't be more excited to be working with Drake and his team and we will have much more to say when we announce our fall launch as we get and fall as we get closer to our launch.

We have expanded our relationship with comic superstar, Kevin Hart doubling the time and number of shows he is doing for US honestly exclusive laugh out loud channel. We've launched our first daily live programming for our Netflix channel net flex is Netflix is a joke radio. The show is recorded from our new state of the art broadcast studio in Hollywood, where we are now broadcasting a growing number of shows across our top music sports and entertainment channels.

Jim Meyer: We have expanded our relationship with comic superstar Kevin Hart, doubling the time and number of shows he's doing for us on his exclusive Laugh Out Loud channel. We've launched our first daily live programming for our Netflix channel, Netflix Is A Joke Radio. The show is recorded from our new state-of-the-art broadcast studio in Hollywood, where we are now broadcasting a growing number of shows across our talk, music, sports, and entertainment channels. We also believe that subscribers should get more than just a great audio service for their car or home subscription, and so we continue to create great live events they can be part of. Lady Gaga played a once-in-a-lifetime show for SiriusXM subscribers and Pandora listeners in late June at Harlem's Apollo Theater, marking the first major joint event of the two brands.

We also believe that subscriber should get more than just a great audio service for their car or home subscription and so we continue to create great live events that can be part of.

Lady Gaga played at once in a lifetime show for Sirius XM subscribers and Pandora listeners in late June at Harlem's, Apollo theater, marking the first major joint event of the two brands.

Jim Meyer: We are finding that Pandora's live events are also of good value to the national audience of SiriusXM. Pandora's live show with rising country music star, Maren Morris, in Nashville, was also broadcast nationally on SiriusXM. Country superstars, Florida Georgia Line, performed in Nashville for SiriusXM subscribers at the famed Ryman Auditorium. We continue to strike important deals with leading content brands, with faithful and large communities of followers. We've announced plans to launch a new music channel with SoulCycle that brings the sound and vibe of SoulCycle wherever you are, with music curated by influential instructors. We continue to super serve in music with a string of limited time channels, we call them pop-ups, from an array of artists such as Madonna, Cher, Dave Matthews Band, and the music of Pavarotti.

And we are finding that Pandora's live events are also have good value to the national audience of Sirius XM.

Pandora's live show with rising country Music Star Marin Morris and Nashville was also broadcast nationally on Sirius XM and country Superstars, Florida, Georgia line performed in Nashville for Sirius XM subscribers at the famed Ryman auditorium.

We continue to strike important deals with leading context content brands with faithful and large communities of followers Weve announced plans to launch a new music channel with soul cycle that brings the sound and Vivus soul cycle wherever you are with music curated by influential instructors.

And we continue to super serve in music with a strong with a string of limited time channels, we call them pop ups from a ray of artists such as Madonna share, Dave that Dave Matthews band and the music Pavarotti, We've launched a new jam band channel with fish and Hallmark Channel Radio returned with music for the important wedding season.

Jim Meyer: We've launched a new jam band channel with Phish, and Hallmark Channel Radio returned with music for the important wedding season. The idea of music at SiriusXM is exactly the opposite of just listening to generic playlists. We believe branded channels and collaboration with top artists really provide differentiation and a unique entertainment experience that our subscribers have proved are willing to pay for. Drake is just our next example, but look at what we've done with the Beatles, Bruce Springsteen, and countless other mega talents. The process will be a bit fluid, but we'll certainly be experimenting with some of this on the Pandora platform as well. As you can see, we are driving both brands forward with exciting new content, features, and even more distribution.

The idea of music at Sirius XM is exactly the opposite of just listening to generic play lists we believe branded channels and collaboration with our top artists really provide differentiation and a unique entertainment experience that our subscribers have proved are willing to pay for.

Drake is just our next example, but look at what we've done with the Beatles, Bruce Springsteen and countless other mega talents the process will be a bit fluid, but we'll certainly be experimenting with some of this on the Pandora platform as well.

So as you can see we are driving both brands forward with exciting new content features and even more distribution, we're driving cost efficiencies throughout the combined business using our scale to strike new deals that would not have been possible without our massive reach and doing all of this with a focus on growing the cash flow our strong business model can deliver to our stockholders.

Jim Meyer: We're driving cost efficiencies throughout the combined business, using our scale to strike new deals that would not have been possible without our massive reach, and doing all of this with a focus on growing the cash flow our strong business model can deliver to our stockholders. I'm pleased to report that so far this year, we've repurchased $1.8 billion of our shares and paid about $110 million of dividends. The Q2 repurchase of approximately 158 million shares for nearly $900 million represents the biggest quarterly total of open market repurchases in shares and dollars since the program commenced in early 2013. It's also important to note that from the time we announced the Pandora transaction, we have now bought back all of the shares we issued in the acquisition.

I'm pleased to report that so far this year, we've repurchased $1.8 billion of our shares and paid about $110 million of dividends. The second quarter repurchases of approximately 158 million shares for nearly $900 million represents the biggest quarterly total open market repurchases in shares and dollars since the program commenced in early 2013.

It's also important to note that from the time, we announced the Pandora attractive transaction. We have now bought back all of the shares we issued in the acquisition.

Meanwhile, David and his team continue to optimize and refinance our balance sheet by raising debt capital at extremely attractive rates and terms.

Jim Meyer: Meanwhile, David and his team have continued to optimize and refinance our balance sheet by raising debt capital at extremely attractive rates and terms. I remain very confident in our public guidance for subscriber growth and free cash flow, and I'm pleased to increase our guidance for pro forma revenue and adjusted EBITDA. This is an extremely exciting time for everyone at SiriusXM. I'd also like to welcome Jennifer Witz for the Q&A portion of this call. Jennifer has been helping us grow SiriusXM since I joined in 2004, and she recently assumed the position of President of Sales, Marketing, and Operations. I know you will come to appreciate her outstanding contributions to and knowledge of our business. With that, let me turn it over to David.

I remain very confident in our public guidance for subscriber growth and free cash flow.

And I am pleased to increase our guidance for pro forma revenue and adjusted EBITDA. This is an extremely exciting time for everyone at Sirius XM.

I'd also like to welcome Jennifer Wits for the Q and a portion of this call.

Jennifer has been helping us grow Sirius XM since I joined in 2004, and she recently assumed the position of president of sales marketing and operations. I know you will come to appreciate her outstanding contributions do and knowledge of our business with that let me turn it over to David.

Thanks, Jim Good morning, everyone and thanks for joining the call that the first half of 2019 is seeing the higher monetization profitability.

David Frear: 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-over-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 Q2, 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.

Of the newly combined Sirius XM 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, but combined company bricks.

As Jim mentioned Pandora was accretive to adjusted EBITDA in the second quarter, our 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 was significantly more adjusted EBITDA in fewer outstanding shares than we had one year ago.

As I discuss the results for the quarter I'll focus on the pro forma results, which combine the two companies for the full quarter of both years.

David Frear: As I've discussed 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 Q2 at 1%, with SAR 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-over-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.

Auto sales were down slightly in the second quarter of 1% was Sars still coming in strong at $17 million penetration rate exceeded 72% in the quarter and we 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 jump in 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% from the prior year period.

David Frear: 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 end of the quarter, the total trial funnel stood at over $9.4 million. Self-pay net additions at SiriusXM in the quarter were approximately $290,000, bringing the self-pay base to more than $29.3 million subscribers. Conversion rates in our new and used car business remain strong at just below 40% and in the upper 20% range respectively. Our streaming-only plans also continue to gain traction.

Used car penetration rate will increase steadily over the next several years as it inevitably climbs to match the new car penetrate.

Used car trial starts grew 11% in the quarter and at the end of the quarter. The total trial funnel stood at over $9.4 million.

Self pay net additions at Sirius XM in the quarter were approximately 290000, bringing the self pay base to more than 29.3 million subscribers conversion rates in our new and used car business remained strong at just below 40% and then the upper 20% range respectively.

Our streaming only plans also continue to gain traction.

David Frear: Churn in the quarter was just 1.7% per month, 6 basis points higher than Q2 2018's all-time low of 1.6%, but still well below the low end of our expected range, as rising vehicle churn continues to be offset by improving voluntary and non-pay churn. Total net additions in Q2 were 174,000, resulting in a total subscriber base of over 34.3 million. This represents a decline of 116,000 in the paid promotional bucket, driven by slightly lower auto sales, higher fleet mix, and lower shipments from OEMs with paid trials. SiriusXM ARPU in the quarter was a record $13.83, growing approximately 4% year-on-year.

Churn in the quarter was just 1.7% per month six basis points higher than the second quarter eighteens all time low of 1.6%, but still well below the low end of our expected range as rising vehicle churn continues to be offset by improving voluntary and non pay churn.

Total net additions in the second quarter were 174000, resulting in a total subscriber base of over $34.3 million. This represents a decline of 116000 in the paid promotional bucket driven by slightly lower auto sales higher fleet mix and lower shipments from Oems with paid trials.

Sirius XM ARPU in the quarter was a record $13.83 growing approximately 4% year on year together with 3% growth in our sub base Sears.

David Frear: Together with 3% growth in our sub-base, SiriusXM segment revenue for Q2 grew 7% to more than $1.5 billion. Total cost of services at SiriusXM increased 7% to $594 million in the quarter, driven by higher revenue share and royalties and programming and content costs, although they remained flat as a percentage of revenue. Gross profit totaled $944 million, increasing 7% over the prior year, producing a very healthy gross margin of 61%. At Pandora, advertising revenues grew 13% to $306 million, a Q2 record. Higher in-quarter bookings, strong sell-through, growth from the AdsWizz platform, and contributions from the SoundCloud partnership drove this strong performance.

Segment revenue for the second quarter grew 7% to more than $1.5 billion.

Total cost of services at Sirius XM increased 7% to $594 million in the quarter, driven by higher revenue share and royalties in programming and content costs, although they remain flat as a percentage of revenue.

Gross profit totaled $944 million, increasing 7% over the prior year, producing a very healthy gross margin was 61%.

At Pandora advertising revenues grew 13% to $306 million, a second quarter record higher in quarter bookings strong sell through growth from the ads was platform and contributions from the sound cloud partnership drove this strong performance.

Growth in AD RPM continues to accelerate reaching $80.14 in the quarter, approximately 17% higher than the second quarter of 18.

David Frear: Growth in ad RPMs continues to accelerate, reaching $80.14 in the quarter, approximately 17% higher than the Q2 2018. MAU and ad hours trends continued, with MAUs down 9% to 64.9 million and ad hours down 10% to 3.49 billion. Pandora's audience trends have been years in the making. As Jim discussed, we are committed to investments in content, distribution, product, and technology to ultimately improve audience performance at Pandora. Pandora self-pay subscribers grew by 64,000 net additions in the Q2 to a total of 6.22 million. Paid promotional subs were down by 3,000 year-over-year, bringing total net additions in the quarter to 61,000. The growing subscriber base produced subscription revenue of $135 million, up 18% over the Q2 2018.

EMEA you an AD hours trends continued with M&A used down 9% to $64.9 million in the AD hours down 10% to $3.49 billion.

Pandoras audience trends have been years in the making as Jim discussed we are committed to investments in content distribution product and technology to ultimately improve audience performance at Pandora.

Pandora self pay subscribers grew by 64000 net additions in the second quarter to a total of 6.22 million paid promotional subs were down by 3000 year on year, bringing total net additions in the quarter to 61000, the growing subscriber base produce subscription revenue of $135 million up 18% over the second quarter of 18 total Pandora revenue in the quarter grew 15% to $441 million.

David Frear: Total Pandora revenue in the quarter grew 15% to $441 million. With total cost of services increasing only 4% over the prior year to $284 million, Pandora's gross profit jumped 40% to $157 million in Q2. This represented a margin of approximately 36%, 700 basis points higher than Q2 2018, with the expansion driven primarily by lower revenue share and royalties in customer service and billing expenses as a percentage of revenue. We've always said that business models matter. Our full stack of audio entertainment products, from ad-based, persistently free music to premium subscription products, appeals to a broad cross-section of over 100 million North American listeners and delivers one of the most attractive business models in media.

With total cost of services, increasing only 4% over the prior year to $284 million Pandora is gross profit jumped 40% to $157 million in the second quarter. This represented a margin of approximately 36% 700 basis points higher than the second quarter of 18 with the expansion driven primarily by lower revenue share in royalties and customer service and billing expenses as a percentage of revenue.

We've always said the business models matter.

Our full stack of audio entertainment products from AD based persistently free music to premium subscription products Appeals to a broad cross section of over $100 million North American listeners and delivers one of the most attractive business models and media.

For the combined company pro forma revenue grew 9% or 160 million over the second quarter last year $111 million of this increase or about 69% fell through to pro forma gross profit driving it up 11% and all of the increase in pro forma gross profit fell through to adjusted EBITDA driving it up 22% to $618 million.

David Frear: For the combined company, pro forma revenue grew 9% or $160 million over Q2 last year. $111 million of this increase, or about 69%, fell through to pro forma gross profit, driving it up 11%. All of the increase in pro forma gross profit fell through to Adjusted EBITDA, driving it up 22% to $618 million. Adjusted EBITDA margin was 31.2% in Q2, growing approximately 330 basis points from 27.9% a year ago. We converted about 77% of this Adjusted EBITDA into free cash flow, totaling $474 million in Q2 2019. Q2 net income of $263 million declined 10% over the prior year.

Adjusted EBITDA margin was 31.2% in the second quarter growing approximately 330 basis points from 27.9% a year ago.

We converted about 77% this adjusted EBITDA into free cash flow totaling $474 million in the second quarter of 19.

Second quarter net income of 263 million declined 10% over the prior year, primarily due to a onetime $86 million benefit to other income last year, driven by unrealized gains from our investment in Pandora.

David Frear: primarily due to a one-time $86 million benefit to other income last year, driven by unrealized gains from our investment in Pandora. Our effective tax rate for the second quarter was, 2019 was 22.4% compared to 19.4% in the prior year, with the change driven primarily by lower recognition of excess tax benefits related to share-based comp. We expect our full effective year tax rate to be approximately 23%. Earnings per diluted share for Q2 2019 on a GAAP basis was $0.06, with a fully diluted average share count of 4.68 billion shares.

David Frear: Our effective tax rate for the second quarter was, 2019 was 22.4% compared to 19.4% in the prior year, with the change driven primarily by lower recognition of excess tax benefits related to share-based comp. We expect our full effective year tax rate to be approximately 23%. Earnings per diluted share for Q2 2019 on a GAAP basis was $0.06, with a fully diluted average share count of 4.68 billion shares.

Our effective tax rate for the second quarter was.

2019 was 22.4% compared to 19.4% in the prior year with the change driven primarily by lower recognition of excess tax benefits related to share based comp.

We expect our full effective year tax rate to be approximately 23%.

Earnings per diluted share for the second COVID-19 on a GAAP basis was six cents with a fully diluted average share count of 4.68 billion shares.

David Frear: Based on our strong performance in the first half of the year, our new pro forma guidance for 2019 calls for revenue approaching $7.8 billion, adjusted EBITDA approaching $2.35 billion, and we are reiterating our guidance for self-pay net subscriber additions at SiriusXM, approaching 1 million, and free cash flow guidance of approximately $1.6 billion. In Q2, we spent approximately $898 million to repurchase nearly 158 million shares at an average price of $5.70, and paid $56 million in dividends to our stockholders. Year-to-date, capital returns through Friday are close to $1.9 billion.

Based on our strong performance in the first half of the year, our new pro forma guidance for 19 calls for revenue approaching $7.8 billion adjusted EBITDA approaching $2.35 billion. We are reiterating our guidance for self pay net subscriber additions at Sirius XM approaching $1 million and free cash flow guidance of approximately $1.6 billion.

In the second quarter, we spent approximately 898 million to repurchase nearly a 158 million shares at an average price of $5.70 and paid $56 million in dividends to our stockholders.

Year to date capital turns through Friday, or close to $1.9 billion as mentioned all of the shares we agreed to issue at a price of $6 to 98 cents to acquire Pandora have now been repurchased and retired at an average price of $5.90.

David Frear: As mentioned, all of the shares we agreed to issue at a price of $6.98 to acquire Pandora, have now been repurchased and retired at an average price of $5.90. During the quarter, we issued one and a quarter billion dollars in 10-year, 5.5% bonds to pay down our revolver. Toward the end of the quarter, we announced the issuance of a billion and a half dollars of 5-year, 4 and five-eighths percent notes for redemption of our outstanding 6% July 2024 notes, both issuance and redemption of these instruments occurred in early July. Total debt now stands at approximately $7.8 billion, with no material bond maturities until August 2022.

During the quarter, we issued about one in a quarter billion, the 10 year, 5.5% bonds to pay down our revolver toward the end of the quarter, we announced the issuance of <unk> billion and a half dollars of five year, four and 5% notes.

For redemption of our outstanding 6% July 2024 notes.

But both issuance and redemption of these intrude instruments occurred in early July total debt now stands at approximately 7.8 billion with no material bond maturities until August 2022.

Leverage net of cash is 3.2 times trailing pro forma adjusted EBITDA with $215 million in cash in our entire $1.75 billion revolver available we're firmly.

David Frear: Leverage net of cash is 3.2x trailing pro forma adjusted EBITDA, with $215 million in cash in our entire $1.75 billion revolver available. We're firmly positioned to continue investing in the business, pursuing strategic investments, and returning capital to shareholders. Operator, with that, let's open it up for questions.

Positioned to continue investing in the business pursuing strategic investments and returning capital to shareholders.

And operator with that let's open it up for questions.

Thank you.

Operator: Thank you. At this time, we'd like to open the call up for questions. I would like to remind everyone, in order to ask a question, press star one on your telephone keypad. If at any time you'd like to be removed from the queue, please press star two. We will pause for just a moment to compile the Q&A roster. The first question will come from Brian Russo with Credit Suisse. Please go ahead.

At this time, we'd like to open the call up for questions I would like to remind everyone in order to ask a question press star one on your telephone keypad.

If at any time you'd like to be removed from the queue. Please press star two.

We will pause for just a moment to compile the culinary roster.

And the first question will come from Brian Russo with Credit Suisse. Please go ahead.

Hi, Thanks.

Brian Russo: Hi, thanks. I wanted to ask about your outlook for Sirius self-pay net ads. I think your guidance implies net ads will sort of be back half weighted, and so, wanted to help understand, you know, what the main drivers are behind that. Relatedly, that lower penetration rate that you saw in Q1, to what extent was that, you know, a drag on the two net ad results that you reported, or maybe even full year results? Any color there would be appreciated. Thanks.

I wanted to ask about.

Outlook for serious self pay net.

I think your guidance implies then that will sort of be back half weighted.

Wanted to help understand what the main drivers are behind that.

And Relatedly.

Lower penetration rate that you saw in the first quarter.

To what extent was that.

To your net add results that you reported.

Or maybe even full year results any color there would be appreciated. Thanks.

So.

David Frear: You know, the lower penetration rate, it's, you know, the same thing we talked about in Q1, right? That it's in part fleet mix, and it's in part related to head unit change in the manufacturer that, you know, will swing back around. We're definitely expecting penetration rate to pick up as we go through the rollouts at both Toyota and GM that are increasing penetration. We're, you know, on track for hitting 80% next year. With respect to self-pay nets, the year for, you know, from a management perspective, is unfolding exactly as we had expected it to.

The lower pen rate.

The same same thing we talked about in the first quarter.

Right that it's in part fleet mix since impart related to.

Head unit change in the manufacture that.

It will swing back around we're definitely expecting pen rate to pick up as we go through the Rollouts at both Toyota GM that are increasing penetration in order.

On track for hitting 80%.

Next next year.

With respect to self pay net the year floor from a management perspective is unfolding exactly as we had expected it to and.

David Frear: You know, 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'd seen it.

We are just slightly above what our internal plan was at this point in the year and it. So it really is just playing out exactly as as Weve seen it.

Got you and then.

Brian Russo: Got you. Just again, you know, the back half-weighted piece, does that have to do with your outlook for SAR, or does it have to do with the increasing penetration rate of Toyota, or is there, you know, anything else there that's sort of driving a big picture?

Just again.

The back half weighted pieces that.

We have to do with your outlook for SAR.

Does it have to do with the increasing pen rate of Toyota.

Is there anything else there that's sort of driving a big picture.

Well, yes, 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 or did it won't have so much of an impact this year. So it's.

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

It's really just nothing more than the way the calendar plays out.

Yes, I would just amplify what David said, we track this extremely closely as you can imagine.

Jim Meyer: Yeah, I'd just amplify what David said. We track this extremely closely, as you can imagine. I wanna reiterate what David said, number one, auto penetration is simply not a worry for me. We're on a great trajectory there. We're very confident in the second half.

I want to reiterate what David said number one.

Penetrate auto penetration is simply not a worry for me we're on a great trajectory there.

And.

We're very confident in the second half.

Terrific. Thanks.

Brian Russo: Terrific. Thanks.

Our next question will come from Sebastiano Petty with JP Morgan. Please go ahead.

Operator: Our next question will come from Sebastiano Petti with J.P. Morgan. Please go ahead.

Hi, Thanks for taking the question I guess my first.

[Analyst] (Aiera): Hi, thanks for taking the question. I guess my first, real quick for David. Performance year to date, Pandora has been quite strong. Legacy Sirius also performing well, increased the EBITDA guide for the full year. Is there any sense on, I guess, run rate synergies by year end for Pandora? I guess, as a part of that question, you talked a little bit about additional content on the platform, whether it be legacy Sirius, as well as Pandora, you know, the Drake announcement this week, as an example. Is that offsetting some of the EBITDA benefits you might be hitting? Should we expect that to, I guess, mitigate some of the costs that come through, to mitigate some of the outperformance so far this year? Just any thoughts on that.

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

Real quick for David.

Performance year to date Pandora has been quite strong legacy cereals, performing well increase the 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 about additional content on the platform whether it be legacy Siri.

As well as Pandora.

The drink 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.

The cost to come through to mitigate some of the outperformance. So far this year just any thoughts on that.

Sure so.

David Frear: Sure. You know, look, we've been involved with the Pandora business for a long time, either, you know, from sitting on the board or just from looking at it and having had continuous discussions. You know, part of our plan always was to invest in additional content that would benefit both platforms. You know, so as we look at things like, you know, the groundbreaking deal that we've struck with Drake, you know, investing in content is, in fact, part of the plan. Yeah, that will offset, you know, I guess, synergies. It's, it's all been part of the guidance we've already given, and as we start, you know, working on, you know, where we're headed for 2020, it's incorporated in that thinking as well.

What we have been involved with the.

Tender business for a long time, either from seat on the board or or just from looking at having had continuous discussions and.

Part of our plan always was to invest in.

Additional content that would benefit both platforms and so as as we look at things like the groundbreaking deal that we 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 it's all been part of the guidance, we've already given and as we start working on where we're headed for 2020 its incorporated in that thinking as well.

With respect to the synergies we are we're right on track. We we gave you an update and guidance and.

David Frear: With respect to the synergies, we're right on track. We, you know, we gave you an update and guidance. You know, in the Q1 call, and the synergies were coming in stronger than we had originally guided to. You know, we are on pace for that. You know, again, you know, I said it in my comments, business models matter. You know, 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.

In the first quarter call and in the synergies were coming in stronger than we had originally guided to.

We are on pace for that and.

No again.

I said in my comments business models matter and you saw us drive monetization at the topline and dropping through to to EBITDA and we continue to.

We expect to continue to do things like that.

Great.

[Analyst] (Aiera): Great. I have one quick follow-up, just a question for Jennifer. You know, several different announcements this quarter, whether it be the implementation of streaming to select subs, 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, you know, different ops that you're implementing, how do you see that rolling, you know, impacting the bottom line, potentially through engagement, leading to lower churn and higher EBITDA? 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.

Sebastiano Petti: Great. I have one quick follow-up, just a question for Jennifer. You know, several different announcements this quarter, whether it be the implementation of streaming to select subs, 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, you know, different ops that you're implementing, how do you see that rolling, you know, impacting the bottom line, potentially through engagement, leading to lower churn and higher EBITDA? 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.

Quick follow up just a question for Jennifer.

Several different announcements this quarter, whether it be the implementation of streaming to select subs.

Additional channels as well and obviously threesixty al.

I guess and Cadillac.

In addition.

OEM with Cadillac launching just.

You kind of think about broadly the levers across the.

Different.

Apps 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 those thresholds are key KPI that youre kind of looking at going forward.

A part of your overall thank you.

You really touched on it I mean, it's really delivering more value to our customer event in two ways right.

Jennifer Witz: 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. It's more content in more ways, on more platforms, and increasing that engagement outside of the car. Then eventually, we'll be able to roll all this content and new features through, you know, our 360L implementation.

Additional content, because Intel Threesixty Alice more broadly rolled out as you know are pretty limited in what we can deliver into the car. So it's more content and more ways on more platforms and increasing that engagement outside of the car and then eventually will be on a roll. All this content any features through Threesixty al implementation.

Great. Thank you.

[Analyst] (Aiera): Great. Thank you.

Sebastiano Petti: Great. Thank you.

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

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

Thanks.

Jessica Reif Ehrlich: Oh, thanks. I have two different questions. First, on content, maybe this is for Scott, 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 gonna help you differentiate you from competition? Continuing on content, you guys mentioned Drake a few times. How different will that collaboration be with some of the other artist channels like Pitbull? On the SoulCycle recent announcement, it seems like you're going in a completely different direction, maybe more lifestyle. Can you talk about, you know, what's going on with that? I have a David question later.

Two different questions first on content, maybe this is for Scott but.

What Jim.

It seems like everyone in the audio industries.

Just on podcast can you talk a little bit about your strategy and how that's going to help you differentiate you from.

The question and continuing a contact you you guys mentioned Drake a few times how different will that.

Collaboration be with some of the other artist channels like pit Bull.

And on the soul cycle within announcement, it seems like you're going in a completely different direction, maybe more lifestyle. So can you talk about.

You know, what's going on with that and then I have a Dave question later.

So let me just jump and then Scott will take the majority of it. So I agree with you there is a bought gas announcement.

Jim Meyer: Let me just jump in. Scott will take the majority of it. 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, you know, talk premium radio, and 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 who can just put the most stuff up, which personally, I don't believe is what's gonna win.

Seems like every day.

I think look we're we're very committed to the cup podcast space.

We feel like we we build.

You know talk premium radio and.

And so I think we are we think we have a really good understanding of what listeners want in terms of spoken word I. There's a long way to go in my opinion in two areas. The first one is exactly what content.

The people really want and podcasting right now it seems to be a racist who can put just put the most stuff up which personally I don't believe is whats going to win I I believe and I think Scott will reiterate with an a., we believe that probably more branded content is probably more important than the space but.

Jim Meyer: 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. 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.

We will 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 on those two things that we think are kind of gatekeeper kinds of things that need to be done.

For the for for this stuff to finally catch fire that doesn't mean, we won't keep introducing it we we've been really happy with for instance, and what we've seen with Kevin art and what Weve seen listeners respond to that so.

Jim Meyer: 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?

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.

Jim Meyer: 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?

[Analyst] (Aiera): Sure.

Scott Greenstein: Sure. Touch on SoulCycle for a minute. On podcasts, yeah, as Jim said, 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. To date, Pandora has already picked up about 3,000 podcasts and well on their way towards a goal of between 5,000 and 10,000 by the end of the year. It'll have a lot of convenience of having most of the major, if not all of the top podcasts available on Pandora.

David Frear: Touch on SoulCycle for a minute. On podcasts, yeah, as Jim said, 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. To date, Pandora has already picked up about 3,000 podcasts and well on their way towards a goal of between 5,000 and 10,000 by the end of the year. It'll have a lot of convenience of having most of the major, if not all of the top podcasts available on Pandora.

Touching so cycle permanent on podcast, yeah, as Jim said and our strategy has always been it's sort of a twofold strategy Pandora.

We will acquire a lot of podcast that are out there. So its a convenience factor for a lot of the listeners that they don't have to go elsewhere to find so to date to endure it's already.

Picked up about 3000, podcasts and well on their way.

Towards the goal of between five and 10000 by the end of the year. So it will have a lot of convenience of having most of the major if not all of the top podcasts available on on the indoor serious which will continue series XM, which we will continue to be very active in audio content as always we'll feed those podcast 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.

Scott Greenstein: Sirius, which will continue, SiriusXM, which will continue to be very active in audio content, as always, will feed those podcasts with a whole other layer. 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. This will separate us at one level from everyone else, that are gonna be unique to the SiriusXM and Pandora platform. So those will be another layer of that. Then the last piece, which more to come at a later call, are gonna be the big names and big brands that actually are not in podcasting yet, that will likely make, you know, one-off big podcasting deals, to be part of the platform.

Re purpose in some cases original podcast created with those orders that will be completely unique and this will separate us.

At one level from everyone else that are going to be unique to the Sirius XM and Pandora platform and so those will be another layer 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 Sirius XM early talk deals, but will be triggered by both.

Scott Greenstein: 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. There are layers to go on that. Andre, 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 we'll roll out later and other things with it, you know, 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?

A component potentially for talk radio, but mostly for podcasting. So there are layers to go on that Andre.

It is unequivocally the deepest we've ever gone on any artist deal.

Or other artist deals are largely content deals.

With a little bit of marketing. This is a very deep two platform Sirius XM and Pandora deal. It has multiple content components. It does have marketing components that will roll out later and other things with it.

You know that we will show how the and unique this deal is more to come on that so cycle.

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 the new hundred channels, we added.

Scott Greenstein: We consistently get requests or even our generic workout channels, as part of the new 100 channels we added with Polaris. The demand for this is constant. Anyone, you know, jogging, working out at home, walking to work, 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 recorded their interstitials. This channel will be launched. It will feel like a virtual SoulCycle. There's other brands like this out there that we'll be touching on.

With Polaris.

The demand for this is constant so anyone.

Jogging working out at home walking toward whatever version you want is looking for some sort of music or backdrop to this and soul cycle is a natural extension to that all the major instructors have already reported their interstitial. This channel will be launched and it will feel like a virtual cycle and there's other brands like this out there that.

We'll be touching on.

And Nathan So creative and then for sure.

Jessica Reif Ehrlich: Amazing. It's so creative. For David, as you said, capital returns this year so far already $1.9 billion. Historically, you've been around, too. You know, how should we think about capital returns for the rest of 2019 and beyond?

David.

As you said capital returns this year, so far already 1.9 billion historically, you've been around too.

Can you.

How should we think about capital returns for the rest of 2019 and beyond.

Well I think.

David Frear: Well, you know, I think about all I can say is that, you know, when the stock runs, we tend to lighten up on, you know, on buyback. But, you know, when it falls, you know, if we think there's value there, we're not shy about going heavy. The stock, I mean, look, you know, 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 all I can say is that wind.

When the stock runs we tend to lighten up on you know on buyback and when it falls.

If we if we think theres value there were were not not shy about going going heavy and.

The the stock.

I mean look you know it.

Im not thrilled with the idea that we issued shares at an effective price of 698 and were then were to buy it back at 590, I guess, that's the silver lining in the cloud and the cloud I'd, rather have the problem of deciding how much to buy back and $7.

David Frear: You know, the fact is that the market pushed the, you know, stock to a place where we thought it was a significant value, we bought a lot.

But the fact is is that the mark and push the.

Stock to a place where we thought it was a significant value and so we bought along.

Scott Greenstein: Jessica, This is Jim. I'd also point out, we discuss this topic every single board meeting, 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, I think it is what you see it as.

Jim Meyer: Jessica, This is Jim. I'd also point out, we discuss this topic every single board meeting, 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, I think it is what you see it as.

And Jeff Scott I'll, just as John also pointed out we discuss this topic every single board meeting and we enlighten our with every relevant fact that we think they need to be able to form an opinion on this day are extremely engaged on this.

And I think it is what you see it as.

Thank you.

Jessica Reif Ehrlich: Thank you.

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

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

Hi, Thanks.

Tim Nollen: Hi, thanks. Your monetization of Pandora ads, I thought was pretty impressive. You gave a few reasons for it. I 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. 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.

Youre a monetization of Pandora ads I thought was pretty impressive you gave a few reasons, but 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 he's got to 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 Sirius XM 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 also I'll start out and then Dave will jump in I don't believe we're going to break out.

Scott Greenstein: 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. You know, a year ago, we simply didn't really have the capability in any meaningful way with the acquisition of AdsWizz. 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. You know, 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.

Jim Meyer: 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. You know, a year ago, we simply didn't really have the capability in any meaningful way with the acquisition of AdsWizz. 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. You know, 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.

The revenue by all these different categories, but.

I can tell you. The question on programmatic is quite simple you know a year ago, we simply didn't really have the capability in any meaningful way with the acquisition of ads was 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 am 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 well.

We're very pleased with what's happened with ads was and were very pleased also with what Pandora has developed in terms of programmatic capabilities clearly now.

Scott Greenstein: Clearly now, you know, most of our major big advertisers demand that they can use some portion of their budget for programmatic. You know, so we're really pleased with how programmatic performed in Q2. I don't want to correct what you said. I just want to maybe take slight exception. Our advertising business at SiriusXM has been growing quite nicely. You know, look, I've--

Jim Meyer: Clearly now, you know, most of our major big advertisers demand that they can use some portion of their budget for programmatic. You know, so we're really pleased with how programmatic performed in Q2. I don't want to correct what you said. I just want to maybe take slight exception. Our advertising business at SiriusXM has been growing quite nicely. You know, look, I've--... you know, it's growing faster, or at certainly the same kind of rate as the Pandora performance in Q2. We're really pleased also with that business. It's a different business because it is not, quote, unquote, "digital-oriented," but it's great to have both. David, you want to add anything on?

Most of our major big advertisers.

Demand that they can use.

Some portion of their budget for programmatic and.

And 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 slight exception.

Our advertising business at Sirius XM has been growing quite nicely and.

So.

Look I.

You know it's growing faster.

Jim Meyer: ... you know, it's growing faster, or at certainly the same kind of rate as the Pandora performance in Q2. We're really pleased also with that business. It's a different business because it is not, quote, unquote, "digital-oriented," but it's great to have both. David, you want to add anything on?

Or add certainly the same kind of rate as the Pandora performance in the second quarter. So we're really pleased also with with that business. It's a different business because it is not quote unquote digital oriented.

But it's great to have both David you want to add anything on that.

David Frear: Yeah, you know, I think, you know, the monetization really is driven by sell-through, and programmatic is part of what's helping to drive the sell-through. It, you know, it gives the team another, you know, tool to pull out of the box, and it just is, you know, it's helpful in driving, you know, a greater share of ad budgets from, you know, from advertisers and agencies. You know, on the SiriusXM side, look, you know, the team in ad sales at SiriusXM continues to knock the cover off the ball. They, you know, you know, we like to beat up everybody over hitting their numbers, so I don't want to say too many nice things about them.

I think.

The the monetization really is driven by sell through and programmatic twos 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 helpful in driving greater share of AD budgets from from advertisers and agencies.

On the Sirius XM side the.

Look.

The team and AD sales and servicing some continues to knock the cover off the ball they.

We like to beat up everybody over him hitting their numbers. So I don't want to say too many nice things about them, but the.

David Frear: They, you know, they still maintain double-digit growth rates in advertising. You know, just overall, both the Pandora side and the SiriusXM side, you know, the ad teams are really killing it.

They do they still maintain double digit growth rates in.

In advertising and so just overall bulk of Pandora side, and the Sirius XM side.

The teams are really really killing it.

Got it thank you.

Jessica Reif Ehrlich: Got it. Thank you.

Tim Nollen: Got it. Thank you.

Our next question will come from BJ giant with Evercore ISI. Please go ahead.

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

Thanks.

Vijay Jayant: Thanks. For Jim, obviously, you just mentioned on the call that, you know, 360L is the long-term future of the company. Can you just broadly talk about, you know, 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? 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 about and what consumers that have it, are experiencing. Then very...

Jim Obviously you.

All that you know see 60 idle as a long term future of the company can you just broadly talk about you know the cadence of how that's gonna get rolled.

And again, obviously you haven't had a lot of units on it so far given its still pretty early if there is any experience engagement that you can sort of talk about and what consumers.

Okay, and then yeah, so VJ David.

Jim Meyer: Yeah.

Vijay Jayant: David, go ahead.

Sorry go ahead VJ.

Jim Meyer: Sorry, go ahead, Vijay.

Vijay Jayant: Just for David, I just wanted to clarify that the head unit, comment that you'd made in Q1 sort of played out through the self-pay numbers in Q2, so that's sort of behind us.

Well just for David I, just wanted to clarify that had units a comment that you made Q1 sort of played out through the self pay numbers into Q. So that's all behind us.

Vijay Jayant: Just for David, I just wanted to clarify that the head unit, comment that you'd made in Q1 sort of played out through the self-pay numbers in Q2, so that's sort of behind us.

Yeah, So let's do the last one first the [noise].

David Frear: Yeah, let's do the last one first. The, you know, the cycle times are a little longer, right? You know, when, you know, when things show up in penetration rate, it's at the install level, and then they've got to work their way through the dealership chain and to consumers, and then get through the trial period before they hit self-pay. I would say that the head unit change had virtually no impact on Q2 subscriber additions, self-pay additions. The effect of that, you know, will really come through in sort of the second half and late, you know, late part of the year.

You know the cycle times are are little longer right. So.

You know when you know when.

Thing Sheldon penetrate et cetera installed level and then they've got to work their way through the dealership chain and to consumers and then get through the trial period before they hit.

Self pay so I would say that the head unit change had virtually no impact on that.

On second quarter.

Subscriber addition, self pay additions and and so the the effect of that you know will will really come through and sort of the second half and late late part of the the year, which again, if you come back to the comments about.

David Frear: Which again, if you come back to the comments about, you know, about how we feel about hitting the year and the guidance, you know, it sort of accentuates, you know, how strongly Jim and I think, how confident we are that despite what will be a headwind in the second half from, you know, the head unit change, we remain confident of hitting the full year guidance. I'll turn it back to Jim.

You know about how we feel about the about hitting the year in the guidance.

It's sort of accentuates.

How's strongly Jim and I think.

I'm confident we are that despite what will be a headwind in the second half from.

Had you in a change that we remain confident of hitting the full full year guidance and I'll turn it back to Jim Yes, Yes, I think we do we try to get a little to surgical sometimes on this on that on the penetration number I think David said, two things that I want to emphasize that.

Jim Meyer: Yeah, Vijay, I think we try to get a little too surgical sometimes 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. 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 Q2. We're assuming it continues to occur in our guidance for the rest of the year. Also, one other phenomenon going on, that we have no control over is, as you know, we're heavily penetrated in every single automaker, but with the vast majority of the automakers, we're not 100% penetrated.

There is a mix issue going on.

Between car sold at retail and car sold the fleets and when they shift to fleets, which historically happens in this industry, either when inventories get a little high or or when the economy gets a little on study.

That shift occurred that certainly occurred in both the first and second quarter. We're assuming it continues to occur and our guidance for the rest of the year also one other phenomenon going on those we have no control over is as you know we're heavily heavily penetrated and every single automaker, but was 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 has the lowest kind of features across.

Jim Meyer: 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 Q2, 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. Your comment regarding SAR, we're kind of assuming things stay kind of the way they are. You know, I think we got it lined up. We think we have a good perspective on it. I want to reemphasize, we are right where we think we are right. David said it proof.

Everything, including not including satellite radio clearly in the second quarter. The retail pressure on automobiles force. The mix also to go a little a that way. We're assuming that also continues and our guidance in the second half and.

Your cart comment regarding SAR, we're kind of assuming things stay kind of the way they are and so.

I think we got it lined up we think we have a good perspective on there I want to reemphasize, we are right, where we think we we're right. David said, if we're 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 well position that your comment on 360 VJ.

Jim Meyer: 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. You know, your comment, your frustration is my frustration, which is, it takes a long time to roll things out in the automotive industry. The flip side of that is, once you roll it out, it stays for a long, long time. You know, these aren't things that come and go, both our kind of challenge is also our strength. 360L is now on a steady march, having the largest automaker in the country rolling out across their entire line at the pace they are with GM, correct me, it's not Cadillac, it's going across multiple GM brands now....

Your comment.

Your frustration is my frustration budget. It takes a long time to roll things out in the automotive industry and the flip side of that is once you roll it out it stays for a long long time.

These aren't things that come and go and so both are kind of challenge is also our strength Threesixty al is now on a steady March and having the largest automaker in the country rolling out across their entire line at the pace. They are with GM on it correctly, it's not Cadillac, it's going across multiple GM brands now Okay is a big step for us in 2019 that will accelerate and 20 and I think you see a real stepping stone.

Jim Meyer: Okay, is a big step for us in 2019. That will accelerate in 2020, I think you see a real stepping stone in 2021. I can't give you any hard data about, you know, what is 360L doing for our KPIs? I can tell you, common sense will tell you, it has got to improve listener engagement and listener satisfaction. It is just so fundamentally easier and such an improved customer experience. I remain extremely bullish on this. I can tell you, I've been here now 15 years. I can't tell you how many times I've tried to make the auto industry go faster than they're gonna go. They're gonna go at the pace they're on.

And 21.

I can't give you any hard data about what is 360 l. doing for our KP eyes I can tell you common sense will tell you. It is got to improve listener engagement and listen our satisfaction. It is just so fundamentally.

Easier and such an improved customer experience. So I remain extremely bullish on this I can tell you.

Then here now 15 years I can't tell you how many trials I've tried to make the auto industry go faster than they're going to go they are going to go at the pace. They are on the great News is we're on a really strong trajectory here and I feel really good about what this is going to bring our shareholders going forward and our listeners.

Jim Meyer: The great news is we're on a really strong trajectory here, and I feel really good about what this is gonna bring our shareholders going forward, and our listeners.

Great. Thanks, so much.

David Frear: Great. Thanks so much.

Vijay Jayant: Great. Thanks so much.

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

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

Thanks, Good morning.

Ben Swinburne: Thanks. Morning. David, if we look at the first half EBITDA numbers you guys put up, your comment or Jim's comment on Pandora making money for the year, 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, well, you know, product launches you guys have or content costs that we should be keeping in mind. You know, for Jim and Scott, you know, when you think about this partnership with Drake, you know, he could probably go. I'm sure he could go anywhere, not probably. He could go anywhere.

David If you look at the 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 is the full year guidance looks quite conservative at least to me I'm. Just curious if there's any thing on the cost side, you would call out at the serious business in the second half whether it's marketing around the streaming well you know product launches you guys have or.

Content costs at that we should be keeping in mind.

And then you know for for Jim and Scott You know when you think about this partnership with Drake.

He is he could probably go I'm sure. He could go anywhere not probably can go anywhere I'm sure there's lots of bidders for his.

Ben Swinburne: He could go anywhere. I'm sure there's lots of bidders for his content and his brand. I think he's done deals with Apple in the past. Why does he go to Sirius, and do we need to be thinking about sort of, you know, an arms race here for top talent that's gonna cost a lot of money, like we saw, you know, pre SiriusXM merger back in the day? 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.

Ben Swinburne: I'm sure there's lots of bidders for his content and his brand. I think he's done deals with Apple in the past. Why does he go to Sirius, and do we need to be thinking about sort of, you know, an arms race here for top talent that's gonna cost a lot of money, like we saw, you know, pre SiriusXM merger back in the day? 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.

His content in his brand I think he's done deals with Apple in the past why why does he go to serious.

And do we need to be thinking about sort of you know an arms race here for top talent, that's going to cost a lot of money.

Like we saw pretty serious ex XM 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 secured this kind of IP I love your thoughts on that topic.

Let's go to the second question is okay. So let me start first batter and I'll give you my bias assurance that I do not believe this is the start of a bidding war I do not believe that why that's why Greg made the decision he made.

David Frear: Let's go to the second question.

Jim Meyer: Okay. 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 wanna take it?

I do believe quite candidly that of both companies work 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 structure with Rick Scott you want to take it yes, and also you know look they are smart and or you know Drake himself and his organization as you can get they do 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 is no doubt that they are creative vision can be executed input on our platform was a factor.

Scott Greenstein: Yeah, also, you know, look, they are as smart, you know, Drake himself and his organization, as you can get. They did their homework, 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, we have consistently said, as David said, business models matter. This is not an example of that.

As to economics.

There are.

Many examples of what we've done and we've consistently stayed as David said business models matter. This is not an example of that.

David Frear: You know, Ben, I think it also plays into your question on, you know, EBITDA. People asked us when we announced the Pandora acquisition, if we were, you know, sort of attitudinally prepared to invest in growth. You know, when you kind of look at the team you have sitting around the table that, you know, Jennifer joined in, I think, 2002. I joined in 2003. Scott and Jim joined in 2004. Pat Donnelly, sitting here, I think, you know, he's from, like, the 90s. He, you know, he came, you know, he looks like the carpet, you know, that came with the office.

So you know, but I think it also plays into your question on.

EBITDA and you know.

People ask this one when we announced the Pandora acquisition, if we were.

So sort of avid today only prepared to invest in growth and you know when you kind of look at the team you have sitting around the table that Jennifer joined and I think 2002 I joined in 2003, Scott and Jim joined in 2004 and color and Pat Donnelly sitting here like you. He is from like the nineties.

I'd like to follow.

They're the same or the office and.

David Frear: You know, this is a team of people who collectively invested $12 billion building the satellite radio business first. That we've turned and we've acquired a huge audience and, you know, scaled digital ad technology with the Pandora base. You know, we really believe that we can drive this business, and we're not afraid to invest. We, you know, we've been saying it repeatedly, we have lots of investments underway, like in Drake and, you know, in content, in ad technology, in product enhancements, and in distribution. You know, one of the challenges for us is we, you know, have all these investment initiatives that go, you know, that we have underway. Sometimes you can't do them as fast as you'd like to.

Hey, this is a team of people, who collectively invested $12 billion building. The satellite radio business first that we've turned and we required a huge audience and.

And you know scale digital AD technology with the Pandora base, and we really believe that.

That we can drive this business and we're not afraid to invest and we you know we've been saying it repeatedly we have.

Lots of investments underway like in Drake, and you know and content and AD technology and product enhancements and in distribution and you know the.

One of the challenges for us as we have all these investment initiatives that goes.

The that we have under way, sometimes you can't do them as fast as you'd like to and so you know if there is upside in EBITDA it will.

David Frear: you know, if there is upside in EBITDA, it will, you know, in part, be due to the fact that we probably can't move as fast as it's kind of like going to the buffet line when you're hungry and, you know, you just can't load that plate fast enough. This is an incredibly strong business model, gives us a lot of discretion over how we invest money.

In part be due to the fact that we probably can't move as fast as it is kinda like going to the buffet line when you're hungry and you know you just can't load that played fast enough. There's this is an incredibly strong business model gives us a lot of the discretion over how we invest money and I'd also like to point out. We you know we we traditionally spend more of our brand focus money and 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, Dave Hoover can take you through that but but I can tell you where we're.

Jim Meyer: I'd also like to point out, we, you know, we traditionally spend more of our brand-focused money in Q4 because we think it gets a lot more bang around the holiday periods as well. I don't actually know the exact timing. David Frear can take you through that, but I can tell you, we're, you know, we've got pretty solid plans for what we wanna, how we wanna promote our brands as well in the fall.

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.

Ben Swinburne: Got it. Thank you, everybody.

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

David Frear: Thanks, Ben. Thanks for everybody for participating today. We'll speak to you soon.

Hooper Stevens: Thanks, Ben. Thanks for everybody for participating today. We'll speak to you soon.

Q2 2019 Earnings Call

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Sirius XM Holdings

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