Greetings. Welcome to SiriusXM’s first quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation.

[Operator instructions] Please note that this conference is being recorded. I will now turn the conference over to Hooper Stevens, senior vice president of investor relations and finance. Mr. Stevens, you may now begin your presentation.

Hooper Stevens — Senior Vice President, Investor Relations and Finance

Thank you, and good morning, everyone. Welcome to SiriusXM’s first quarter 2024 earnings conference call. Today, we will have prepared remarks from Jennifer Witz, our chief executive officer, and Tom Barry, our chief financial officer. Scott Greenstein, our president and chief content officer, will join Jennifer and Tom to take questions during the Q&A portion of this call.

I would like to remind everyone that certain statements made during this call might be forward-looking statements as the term is defined in Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based upon management’s current beliefs and expectations and necessarily depend upon assumptions, data or methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For more information about these risks and uncertainties, please view SiriusXM’s SEC filings and today’s earnings release.

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We advise listeners to not rely unduly on forward-looking statements and disclaim any intent or obligation to update them. As we begin, I’d like to remind our listeners that today’s call will include discussions about both actual results and adjusted results. All discussions of adjusted operating results exclude the effects of stock-based compensation. With that, I’ll hand the call over to Jennifer.

Jennifer Witz — Chief Executive Officer

Thanks, Hooper, and good morning, everyone. Thank you for joining us today. We are encouraged by our first quarter financial performance and we are on course to meet all of our full year guidance. Our growing addressable advertising audience and a strengthening ad market powered a 7% increase in our ad revenue year over year to a record level of over $400 million, offsetting a 1% drop in subscription revenue.

SiriusXM is an extremely profitable business with adjusted EBITDA up 4% year over year and running at a margin of 30%, up 1 percentage point from last year. And we continue to forecast that 2024 will represent our peak year for capital expenditures. As these capital investments trend down over the next few years, we expect to convert even more of our EBITDA into free cash flow. We are continuing to evolve our strong business model and investing in future growth areas by striving to enhance our listening experience and consumer value proposition.

At the end of last year, we launched the first step in a longer multi-phase journey deploying our new SiriusXM streaming app supported by a new digital infrastructure. We are confident this platform will enable us to innovate and deliver the best audio experiences, whether in car or on the go. And we are focused on growing our audience base with a new brand campaign in market now, along with investments in recent tentpole channels and shows such as Life with John Mayer, This Life of Mine with James Corden, and our limited engagement exclusive channel with Taylor Swift. While it’s extremely early given our three-month trial structures, there are some promising engagement indicators among new users.

Our SiriusXM app improves recommendations and search, broadens content discovery, and includes a modernized user interface. It was built from the ground up to enable instrumentation and experimentation, and with advanced capabilities in mind, such as Martech. And in MarTech, we’ve only touched the surface of what is possible, such as customized multi-channel marketing journeys. As we continue to iterate this year, we plan to enable sharing and content sampling to broaden access to our content, as well as enhance the in-app podcast listening experience.

This will become more important as we begin to offer podcast windowing and exclusive library access for SiriusXM subscribers that podcast listeners won’t find on other platforms. For some of our longtime users, the change that came with the completely revamped SiriusXM app was disruptive. Fortunately, the all new platform enables us to iterate and innovate at a much more rapid pace, one that would have been unimaginable under the constraints of our prior platform. We’ve diligently addressed user feedback and biweekly updates, and we’ve driven significant positive change already this year.

Our early engagement metrics and other consumer signals we are following from the new SiriusXM app are improving. We are confident that our app platform relaunch and the product improvements coming in the car are putting us on the right path. Yesterday, we announced an expanded agreement with Hyundai and Genesis to integrate 360L and we recently initiated the launch of our next-gen in-car platform with Mercedes-Benz and Subaru. The Subaru rollout is especially exciting as they also enabled a broader set of SiriusXM features in nearly 0.5 million vehicles already on the road via an over-the-air update.

Additionally, our SiriusXM 360L platform for the Android Automotive Operating System began rolling out in the popular Nissan Rogue and on the new Ford and Lincoln Digital experience, which debuted in the Lincoln Nautilus. AAOS allows us to more quickly deliver new features to vehicles and we are working with several automakers to implement SiriusXM on AAOS as adoption of the platform continues to grow. As our product and engineering team replatforms our automotive tech stack, 360L adoption will be key to unlocking the benefits of the platform for consumers across a variety of vehicles. Another key tenet in our overall transformation beginning to bear fruit is the use of AI technologies to improve not only automation but also the customer experience and business outcomes.

Last quarter, we introduced a cutting-edge platform, Sierra, founded by former Salesforce co-CEO and OpenAI board chairman, Bret Taylor, and former Google Labs vice president, Clay Bavor. Sierra is a machine learning and generative AI platform that has been integrated into our customer service chat function. Sierra currently handles a portion of our chat-based support cases, and we plan to pilot the platform with voice later this year. With its highly developed conversational capabilities, we expect to see cost efficiencies and an improved customer experience.

But a revamped tech stack is just one piece of a broader long-term transformation. To further our objective of reaching new audiences, we premiered our latest national brand campaign late in the first quarter, including a brand film which ran during the Oscars and Taylor Swift’s Eras concert on Disney+. Early indicators suggest our campaign, including its focused out-of-home advertising, is effectively enhancing our connection with potential listeners and subscribers, and even contributing to improved time spent listening in car for trialers. The foundation of that connection, however, will always be our content.

And this is where we are beginning to see our improved data-driven tech platform driving greater discovery and engagement. The strong initial reach of our guest DJ campaign in January is one such example. We launched exclusive sets from more than 175 of the world’s top artists, including Dua Lipa, Cardi B, and Ed Sheeran, and drove strong reach among our in-app listener base. Utilizing our app’s new layout, we can now feature timely sports collections, like one for March Madness, and our personalization engine further tailors content offering leagues, games, and expert analysis based on each user’s behavior.

We found that trial subscribers who engage with sports content are more likely to convert at higher rates and existing subscribers who do so tend to stay longer. But our content decisions will always involve an element of human connection, brought to our listeners by our deep entertainment industry relationships and supported by now two decades of experience in audio entertainment. In January, we launched our new exclusive series, This Life of Mine with James Corden, which has quickly become one of our top three on-demand talk shows. James’ interviews with A-list celebrities, such as Kim Kardashian, Dr.

Dre, and David Beckham, has kept the show at the forefront of cultural relevance, generating substantial media attention and underscoring the significance of our exclusive content as a distinguishing factor where we can excel. To this end, just last Friday, Howard Stern demonstrated how he earned his reputation as an unparalleled interviewer at the center of culture when President Biden joined him live from our New York studios for an extensive interview as the election season heats up. Moments like this really drive home the unique value SiriusXM brings to our listeners. Our biggest incremental content investments are now in podcasting and in service of both growing our advertising-based audience reach and in delivering more value to SiriusXM subscribers.

We now sell advertising that reaches about half the American population every month and this audience is growing. The SiriusXM Media portfolio highlights our broad network approach to advertising, and it’s anchored by Pandora, SoundCloud, growing SiriusXM digital reach, and as I began to mention, the growth in our podcasting business. We believe we can effectively monetize and deliver broad reach to benefit podcast creators, while also carving out unique content experiences to drive interest and engagement to SiriusXM’s subscriptions in a true win-win. For example, just last week we launched Crime Junkie Radio, a true crime-focused channel led by Ashley Flowers, founder of audiochuck and host of one of America’s most popular podcasts, Crime Junkie.

With this new channel, we are leveraging top-ranked podcasts, including Crime Junkie, The Deck and CounterClock, to bring their audiences to SiriusXM by offering subscribers early access to an exclusive show from Ashley airing on the channel. Combined with our recent deal with another chart-topping podcast, SmartLess, we are well-positioned to bring that engaged fan base and growing podcast listenership into our ecosystem. Throughout the year, we expect to continue to innovate on our podcast product features, including content preview functionality coming later this year, rolling out first with podcasts. Moving on to advertising, we are seeing increasing success by taking a network-first approach, allowing for greater flexibility and audience targeting for our advertisers.

Overall, our podcast revenue is up 16% year over year. Buying across the SiriusXM Podcast Network allows marketers to target their audiences at scale and to reach dedicated fandom, and we’re working to make this even easier. This quarter, for example, we entered a new agreement with Locked On, a leading sports podcast publisher, and in the coming months, we will officially launch sports-curated collections. This offering enabled by our ad tech position, combines sports inventory from across our podcast portfolio and empowers advertisers to tap into audiences with similar interests and engagement through programmatic advice.

This approach is anticipated to continue to bolster our programmatic podcast offering, which is up 90% versus the same quarter last year. Additionally, we continue to invest in ad tech solutions that open up new opportunities for us. This quarter, we launched Synthetic Voices, the first tool in AdsWizz AI Ad Tools, a set of ad tech solutions powered by artificial intelligence. Synthetic Voices give small and midsize business owners an opportunity to continuously evolve their messaging and quickly record new content with a variety of different artificial voices categorized by tone.

This industry-leading innovative suite of offerings is designed to deliver cost effective and efficient solutions to advertisers with an initial focus on lowering the barrier for entry into audio advertising for small businesses. In short, I remain very optimistic that we will see benefits in the business and in the consumer experience from our long-term investments. We are eager to be further along in this journey and to deliver improved subscriber results for our stockholders, and I believe we are on the right path to do so. I’m proud of the financial results we achieved this quarter and grateful to the incredible team we have here at SiriusXM as we continue to progress in our transformation.

Before I pass the call over to Tom, I did want to share that yesterday we announced that Joe Verbrugge will be stepping down from his position as chief commercial officer this summer, retiring after 20 years at SiriusXM. We are in active conversations to fill this role and have a deep bench of talent internally across the commercial organization. We’d like to thank Joe for his long and impactful service to the company. And now to walk you through more detailed financials, I’ll turn the call over to Tom.

Tom Barry — Chief Financial Officer

Thank you, Jennifer, and good morning, everyone, and thanks for joining us for our first quarter 2024 earnings call. Following Jennifer’s lead, I want to acknowledge our steady start to what is a transformational year for the company. We are pleased to reiterate our full year financial guidance despite headwinds we see from the challenging subscriber environment. We are committed to and are executing on our strategic plan to transform and modernize the SiriusXM experience in the car and on the go.

We remain focused on investing in our customer experience, enhancing our value proposition, expanding our ad business and seeking greater efficiencies across the organization. With that, let’s dive into the quarter. We recorded total revenue of $2.16 billion in Q1, up 1% year over year. The growth was driven by 7% increase in advertising revenue to $402 million, with an improving ad sales, particularly in podcast and via programmatic sales.

In fact, podcasting revenue grew 16% compared to last year’s first quarter. Subscription revenue dipped slightly with a modestly lower average subscriber base offsetting slightly higher ARPU. Delving a little deeper into the subscriber dynamics, an increase in vehicle sales this quarter contributed to slightly higher churn, as a greater number of new and used vehicle purchasers with existing subscriptions moved out of the self-pay base and into unpaid trials. We expect this to help grow trial conversions in the future quarters.

We continue to expect our subscriber results to improve from 2023 and we should see similar seasonality in 2024 with better year over year subscriber performance beginning in the back half of the year. Adjusted EBITDA was $650 million, a 4% year-over-year increase. The increase was boosted by a greater advertising revenue and resulting gross profit, as well as our cost optimization initiatives across the business, which also benefited from lower legal expenses. In the first quarter of 2024, the company saved approximately $45 million through our cost optimization efforts and consolidations across its business.

These gains were slightly tempered by the strategic investments in design and development, which support enhancements to our products and platforms Our total cash operating expenses saw a very slight decrease year over year, reflecting our focus on enhancing efficiency even as we increase important investments in the business. Turning to the segments, the SiriusXM segment delivered approximately $1.7 billion in revenue, down 1% year over year. SiriusXM’s ARPU for the quarter was $15.36, up from $15.29 in last year’s first quarter. The increase was driven by price increases in early 2023 to full price plans, partially offset by an increase in subscribers on our streaming-only and self-pay promotional plans.

ARPU was also impacted by reduced rates associated with paid trials from select automakers. SiriusXM reported $993 million in gross profit during the quarter, representing gross margin of about 60%. Turning to the Pandora and Off-Platform segment, reported total revenue of $495 million, an increase of 7%. Advertising revenue in the segment of $362 million increased 8% year over year, driven by a 5% growth in our streaming revenue and 16% growth in our podcasting revenue.

As Jennifer mentioned, programmatic sales have continued to thrive, up 29% across streaming and podcasting combined, as advertisers gravitate to this efficient way of buying. Segment gross profit reached $143 million for the first quarter, representing a margin of 29%, up from 24% in the prior year’s first quarter. Pandora ad hours were 2.49 billion, declining 4% year over year and average hours per ad active user increased slightly and was about 21 hours per month. Advertising RPM saw a nice 7% lift to $91.

During the quarter, our free cash flow was 132 million, an 8% decrease from the $144 million realized in Q1 of 2023. The decrease can be attributed to new content spend and a timing of higher vendor payments during the quarter, partially offset by $31 million of lower capital expenditures for the quarter. In addition, during the quarter, we invested $187 million in our previous disclosed clean energy technology investments. We plan to fund approximately $50 million more in 2024.

As with any equity investments, these investments are outside of free cash flow. We have modeled that these investments will reduce our cash taxes by roughly $130 million this year. As we mentioned previously, the bulk of our roughly $250 million in net after tax cash benefits will come in the later years of the investment cycle. And lastly, a short update on our balance sheet and capital returns.

During the first quarter, SiriusXM paid $102 million to stockholders through our dividend and ended the quarter with net debt to adjusted EBITDA of 3.3 times. As we approach the closure of the Liberty Media transaction next couple of months, we remain committed to maintain a strong and flexible balance sheet with the leverage target in the low- to mid-3 times range. We will prioritize our substantial ongoing investments in the business and continuing our dividend with excess discretionary cash flow primarily used to reduce our leverage to the targeted range by the back half of 2025. Additionally, we will look at share repurchases in an opportunistic manner following the close of the transaction.

Thank you. We’ll now be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of Sebastiano Petti with J.P. Morgan.

Hi. Thanks for taking the question. Just first quickly for Tom, just regards to self-pay guidance or commentary, you said that you expect similar seasonality with improvements in the back half of the year on a year-over-year basis. Does that imply anything? Are you trying to say anything specific regarding the second quarter expectations? And then, also on the vehicles-related churn side, obviously, this is favorable on a longer-term basis as you increase gross adds there.

But any updates on what you’re seeing now currently in voluntary and non-pay churn perhaps just as we’re thinking about the balance of the year on the churn line? Thank you so much.

Jennifer Witz — Chief Executive Officer

Yeah, Sebastian, I’ll take that. So, as we mentioned earlier in the earlier comments, we do believe we will see improvements year over year in the second half. I do think that we will have similar seasonality to last year in terms of the quarters. Obviously, we don’t provide specific quarterly guidance, but that should give you some sense as to the movement over the course of the year.

And as it relates to vehicle-related churn, so in this first quarter, it was a single biggest driver of performance versus last year. We had 70,000 higher vehicle-related DX in Q1, mostly obviously on higher trial starts. And yes, to your point that helps us grow the funnel and improve gross adds going forward. We did have higher conversions in the first quarter as well based on higher prior quarter trial starts and that was slightly offset by performance on the conversion side, which is still not where we want it to be.

But churn overall, so outside of vehicle related, has still continued to be strong. So, right about the 1% rate for non-pay and voluntary, which we’ve trended out for quite some time now. No indications of softness on the non-pay side, as a result of any change in sort of consumer behavior. So, we feel really good about where we are on voluntary and non-pay.

And yeah, for the rest of the year, it’s really going to be about, as always, the trend line on vehicle related as it relates to the strength in new and used car auto sales. Right now, we’re certainly expecting that where the third-party analysts are to be at new car SAAR somewhere in the high 15. And then, one other factor that of course plays into sort of the sequential improvements this year and year-over-year improvements in the back half, it’s really the timing of what we’re rolling out with the new app and marketing associated with that. We should see greater improvements in streaming as we move through the course of the year with improvements in conversion really starting to come late in the year.

Thank you. Our next question is from the line of Jason Bazinet with Citi. Please proceed with your questions.

Jason Bazinet — Citi — Analyst

I just have one big picture question for you all. I think everyone on this call knows you have a great business, a lot of cash flow, great margins, predictable, but the multiple seems to reflect a belief that there isn’t sort of another leg of growth, another sort of initiative that could reaccelerate your top-line. And so, my question is, do you guys feel like you’ve explored a lot of other potential things and come up sort of empty and the best sort of course of action is to launch the app, deepen engagement and just sort of keep generating significant free cash? Or is there the potential for something that might be a bit different that could really sort of get the market animated about top-line acceleration? Thanks.

Jennifer Witz — Chief Executive Officer

So, Jason, appreciate the question. So, two things, I guess. We’re still clearly working through the Liberty transaction, have no change in terms of the assumed timing, but are really looking forward to a simplified equity structure that gives us the opportunity to approach a broader investor base and tell our story. But on the business side, it’s really about reinvigorating demand and we have a number of reasons to believe that we can successfully execute on this.

I would say, it’s probably taking longer than we’d hoped in terms of the rollout of the new platform and our ability to capitalize on improvements in marketing, especially as we’re just starting to get real end-to-end personalization into our streaming marketing flows. But as we’ve been talking about the key opportunities to build demand with growth audiences are clear across price, discovery and control. And we do have this multi-pronged effort underway to address these across our products, content marketing and pricing and packaging. On the product side, we’re going to have really fast improvements in the app now that we have a new platform in place.

And also in car, but it’s going to take longer obviously with the rollout of 360L and driving feature parity and awareness there. But we’re also as you’ve seen continue to bolster our content offering, which helps clearly with retention and also with acquisition as we have more and more exclusive content and a lot of that ties to having real exclusivity in terms of content with key podcast talent. And then, we just launched a recent brand campaign. We’re seeing some positive indicators there.

That’s really early. And then, on pricing and packaging, we’ve talked about the need to create a broader set of packages and capture demand potentially at lower price points with less content. But our early testing there and it is early is showing some lift with younger cohorts. So, we do have other future areas of exploration.

It’s still early, but there are opportunities I think to drive even more demand potentially with adding interactive capabilities maybe to certain packages. And that of course could come with, our Pandora product or otherwise. And then, looking at low cost or even free offerings potentially on the SiriusXM side, which would obviously be ad supported. So, I think those are things to look out for in the future as we get through the major pieces of this transformation this year.

Jason Bazinet — Citi — Analyst

Can I just ask one follow-up? In that proxy that you filed with Liberty that sort of laid out your financial forecast, just qualitatively, would you say a lot of the initiatives you just talked about are embedded in those numbers or not much?

Jennifer Witz — Chief Executive Officer

Yeah, as we put together the forecast, we really anticipated the things that we’ve been talking about. Obviously, we haven’t provided specific guidance for ’25 yet, but they’re certainly baked into our guidance for this year.

Yeah. I would just say, Jason, when you look at it, I think when you look at the numbers for 2025, we did it as a model at that point, we had a lot of these initiatives in there and we’re obviously building and changing as we transform this year. So, they’re directionally the right way, but we’re obviously got a lot of moving parts this year.

Jason, one other thing to add, what I’m excited about, when you look at just five of the podcasts we have, it’s an audience of over 70 million U.S. monthly downloads. So, business models matter, as you’ve heard Jennifer and others always say. We continue to look at where that fulcrum balancing point is between taking content behind the paywall and we saw years ago what meant taking a large audience from Howard and then making behind the paywall.

So we’re consistently analyzing where that balance is. But there is a large audience, a large younger audience out there in podcasting, and we have a leading position in that. And at any point, some of those large audiences could be behind the paywall. So, it’s just something we’re monitoring and looking at down the road, but it is something to consider.

Our next question is from the line of Bryan Kraft with Deutsche Bank. Please proceed with your question.

Bryan Kraft — Deutsche Bank — Analyst

Hi. Good morning. I have two, if I could. I guess, first, you’ve obviously seen a nice rebound in advertising in Pandora and Off-Platform.

Can you talk a bit about more what you’re seeing there in terms of industry category strength? And also in the press release, you mentioned Synthetic Voices and the value it brings to SMBs. Can you talk a bit more about your exposure to SMBs versus enterprise today in the business? And whether you see this and other potential AI tools as a way to expand in SMB in the future and whether that could be a meaningful opportunity for growth? And then, my second question is for Tom. Tom, if investors wanted to look at your free cash flow, assuming a normalized capex level pulling out satellite capex and temporarily high non-satellite capex, what would that normalized capex level be as you see it today? And how much are we pulling out of the capex guidance for the year to get to that number? Thank you.

Tom Barry — Chief Financial Officer

OK. So, I’ll start on the first one and just start touching on the advertising. So, as we’ve said, the advertising for the quarter, we’ve always said over time that advertising is choppy. And first quarter, everything hit — the cylinders hit properly.

We ended up, up 7% overall. When you look at it, a couple of things contributed to us, obviously, the investment and strategy on the podcast side. We had higher network demand on the podcast side by about 16%. And the streaming demand is up 5%, but a lot of it is because of our ability to leverage programmatic, which increased the demand across streaming and podcasting by about 29%.

This has been a great advantage to us for the quarter, and it’s also drove up our RPMs for the quarter. So, when you look at overall advertising, a lot of factors contributed positively. No new industries, I would say, that changed significantly as far as who’s advertising, but we continue to see positive signals out of the first quarter heading into the early part of the second quarter. So, that’s the advertising.

No, I think the really interesting thing we’ve seen, Bryan, is just — there’s just been a fundamental shift in advertising, I think, over the last few years, just with more and more supply coming on with SVODs introducing ad- supported tiers and more and more targeting available. And where we have played really well, as Tom mentioned, is in programmatic. And we’re still at the earlier stages on the podcast side for programmatic, but we’ve had it in place on the music streaming side for quite some time. And these capabilities extend across the platform, and it really plays to what advertisers are looking to do in terms of buying later, later in the process, right? There’s fewer sort of upfront commitments and more buying based on last minute sort of consumer expectations.

And we really fulfill that need incredibly well, especially relative to our other competitors in audio. And so, I think you’ll see a lot of those trends continuing. And then, as it relates to sort of SMB versus enterprise, we’ve always had sort of strong business on the SMB side. And I think now it’s really about unlocking more solutions and again it kind of plays to what we’ve been able to do on programmatic, but offering more and more self-serve solutions that allow smaller advertisers to come into audio and scale and experiment and integrate on their campaigns without a lot of direct sales assistance.

And so, I think we do see opportunities to continue to grow in this area. And you want to touch on capex?

Tom Barry — Chief Financial Officer

Yeah. So, Bryan, on capex, as you look at first quarter, capex was lower principally because of timing of payments, lower on principally on the satellite capex side. So, we were slightly lower on capex in Q1. We still expect to have our highest level of capex for 2024, and to look at the more broadly at the outer years of 2026, 2027, we believe that capex will be somewhere around $300 million.

Jennifer Witz — Chief Executive Officer

Probably more. Yeah, it could be as high. I think — look, the thing that we want to make sure that we do is maximize our opportunity to invest in the business on the non-satellite capex side. Obviously, we’ve got the cycle of satellite capex rolling through in the next few years as we get through those launches.

But we do have other, I guess, for lack of a better phrase, end-of-life replacements we need to make on the terrestrial and broadcast side that will roll through in the non-satellite capex. And then, we are continuing to transform the business and making sure that we’re migrating legacy systems, and that’s going to roll into next year. And so, while we do expect, as Tom said, this to be kind of a high in terms of overall capex, we’ll continue to see some higher levels in non-sat capex as we go into next year.

Our next question is from the line of Jessica Reif Ehrlich with Bank of America. Please proceed with your questions.

Jessica Reif Ehrlich — Bank of America Merrill Lynch — Analyst

Hi. Thank you. I guess, can we go back to advertising? I have two questions. One on advertising and one on programming.

Obviously, your programmatic efforts have really kicked in. Just wondering how you compare to other audio marketers in terms of share — in terms of podcasting and also maybe digital more broadly? And how different is your set of tools? And then, on programming, it’s a — we haven’t asked this question in a long time, but how you — have you had initial conversations with Howard Stern returning at the end of his contract, which I think is next year? And if he doesn’t come back, how are you thinking about replacement programming? And how would it impact your programming budget and plans? Thanks.

Jennifer Witz — Chief Executive Officer

Hey, Jessica, I’m going to let Scott cover your second question first.

Scott Greenstein — President and Chief Content Officer

Hi. OK. So, on Howard, first of all, Howard, as you know, is synonymous with the brand and as relevant as he’s ever been as witnessed by not only the President Biden interview, but recently, whether it’s Kelly Musgrave or Emily Blunt, actually his audience is getting younger and he’s getting more younger talent to want to do it. So, you never want to be a company without Howard.

And if he decides to retire or do whatever he does, that’s his choice. We would like him to be here. But as far as replacing, we’ve seen that there’s certain singular talent that whether it’s Johnny Carson retiring and somebody else comes in and all that, you don’t replace someone. You come up with a strategy of what is your current demo and your target audience and you look at what would be best suited for that at any given time.

And we love our bench. I mean, whether it’s James Corden, Conan, Andy Cohen and many others, they’re not Howard replacements. They have their own distinct audience, style and demo that they go after. And so, we feel pretty good where we stand on that front as we continue to evolve our content and go forward.

Jennifer Witz — Chief Executive Officer

Yeah. And just back on advertising, we do have an industry-leading set of solutions in programmatic. And I believe, certainly from our perspective, others have not emphasized these solutions quite as much as we have. Our AdsWizz platform has continued to release new technology and solutions to serve this.

We remain pretty open in terms of the partnerships that we’ll work with, whether it’s measurement or targeting on the vendor side, and you really want to make sure that we continue to take that approach going forward as others look at maybe capitalizing on their walled garden. So, I think we continue to push for improvements to standards and industry certifications and that provides, I think, the industry overall with better measurement and targeting and certainly what advertisers are looking for. You’ve heard us talk about clearly Synthetic Voices, we’ll have more AI tools there coming this year. We’ve brought more brand suitability and safety solutions as well.

And so, I just — I think we are really well positioned here, Jessica. And it certainly contributed to podcast being up in the first quarter, as Tom mentioned. We also have a lot of other sales solutions in place, like we just launched a relationship with Locked On, and we’re building out a sports network offering. Because of the great sports content, we not only have on the podcasting side but on SiriusXM as well in terms of all the play-by-play and commentary we have across the leagues, because we’re really the only audio service to bring all those leagues together in one place.

Our next question is from the line of David Joyce with Seaport Research Partners. Please proceed with your questions.

David Joyce — Seaport Research Partners — Analyst

Thank you. And thinking about 360L and the advertising opportunity there, what would you say that inning are you in, in terms of monetizing via advertisements there? Is this a year where you’re more focused in driving up engagement because you’ve been rolling out the new functionality and then you would seek to monetize it later? Or do you have a view of like what the right ad load is there? Just if you could provide any color on what your marketing strategy there is in terms of pricing versus competitors that sort of thing? Thanks.

Jennifer Witz — Chief Executive Officer

Sure. It’s really — David, it’s really early for targeted advertising in 360L. It’s really still in its infancy. Of course, we have about little over 3 million self-pay customers on 360L and somewhere around 12 million vehicles on the road so far.

And we haven’t opened up anything in terms of a free offering or a true ad-supported offering in 360L to a broader audience. But it’s certainly something we’re looking at. We would want to build ideally more volume, but we are doing some testing this year on a reduced content offering, very limited in terms of the volumes. But that could give us some insights in terms of having fewer channels, but more ad-supported across music and talk.

But right now, it’s just — it’s really early stages. I mean, I think we do have an opportunity here as the volumes grow to develop and implement more targeted advertising in the 360L platform. But today, it’s mostly just broadcast ad. So, the real opportunity with 360L continues to be improving the customer experience in the car, providing more personalization opportunities, more control and discovery, just like we’re doing in the app.

And I’d say the 360L strategy overall is really three prongs, right? It’s rolling out in more OEMs, and we continue to have more announcements there. Hopefully, as you’ve seen with Mercedes, Subaru, we have AAOS in market, which helps with the second piece, which is building feature parity, so that the implementations in market have a full set of features, including in-vehicle messaging, ignition on recommendations, which are really just starting to get in market in low volumes. So, we’re really encouraged about what we can deliver there. And we’ve launched with AAOS in Ford, Volvo and Nissan and more to come.

And then, the third part is really about expanding awareness, right? And because we know that the 360L conversion rates are higher than non-360L, but where people actually really understand what the features are and start to use them, they’re significantly higher. And of course, the awareness is still pretty low. And that’s why building out better personalized marketing capabilities in car, which will start to come really in the second half of this year, is going to be key to improving that awareness on a personalized basis and then more generally across our marketing campaigns to our in-car customers.

Our next question is from the line of Steven Cahall with Wells Fargo. Please proceed with your questions.

Steven Cahall — Wells Fargo Securities — Analyst

Thanks. Jennifer, I’d love to dig into conversion a little bit. So, there’s a lot going on, the trial funnel is picking up, vehicle churn is picking up a little bit, and then it sounds like you maybe have some early improving signs of conversion. I guess, my big question is, I think conversion is what you’ve been trying to solve for with the digital relaunch.

What kind of conversion levels do you need on new car and used car to get back to self-pay net add growth over time? And can you give us an update on kind of where you’re starting to track toward those target conversion levels? And within that, maybe what you’re starting to see with younger first-time car buying cohorts? And then, just secondly on ARPU, are you comfortable raising price at this point for SiriusXM? And is there a meaningful headwind to ARPU from streaming-only subs? Or is that not something we need to take too much into consideration for a bit? Thank you.

Jennifer Witz — Chief Executive Officer

Thanks, Steven. So, on the first, there are really two pieces. There’s conversion rates for our in-car trialers and then there’s what I call conversion or post-trial retention for our streaming trialers. And so far, this year, we’ve prioritized the launch of the new platform, which came obviously in December.

And since then, we have made significant improvements to the experience, both on the side of current in-car subscribers who are streaming, which is, again, the largest part of our streaming MAUs. And we have had to make some adjustments there to solve for some gaps we had when we first launched, and we’ve done a series of releases over the last few months to solve many of those concerns on the part of customers and we’re back to where we were before generally in terms of listening rates. But the second cohort there obviously is new streaming trialers. And it’s a little too early to look at post-trial retention for those early streaming trialers that started in December and January.

It’s very similar to what we look for on the in-car side of the business where there’s a three-month trial and then there’s kind of a maturing phase of a couple of months after to get to a more stable level of retention. And on the streaming side, I’d say we’re a couple of months behind. We’re probably two to three months behind in terms of rolling out our fully personalized marketing efforts there. It’s taken longer than we expected to sort of build out the full data flows.

And in that, we have a lot of great leading indicators where we’ve been able to move engagement for low listening cohorts to higher listening levels. We’ve been able to work within the “For You” tab in the app to improve content engagement. And we’re just starting to roll out real full personalization in the marketing flows, the journeys, based on content listening and feature usage. And this is the real unlock.

And look, it’s going to take time, as you get these journeys rolled out even in the next couple of weeks, we need time to test and iterate and scale those solutions. But again, there’s a lot of leading indicators that give us real strong belief that we’re on the right path. And now when we start building out these personalized marketing flows, we would expect to see improvements in early in-trial engagement, which is a great leading indicator for post-trial retention. And over the last few months, even without these full capabilities, we’ve seen sort of continued slow but steady improvement in these early engagement indicators, and we are above — just starting to be above where we were late last year.

So, lots more to come on that. That is really key to growing clearly, our streaming-only — I’ll let Tom talk about ARPU in a minute in terms of how we think about that impacting pricing and packaging and ARPU overall. But on the in-car side, so conversion rates are, like I mentioned earlier, not really where we want them to be. We’ve seen some pressure there, certainly from younger generations.

We may end up with trialers — younger trialers have an in-car trial taking a streaming product instead. But in that case, I would not have expected them to necessarily have signed up for the $19 a month in-car product. But today, we don’t really see any of that cannibalization. In fact, in more cases, we actually see customers coming into our streaming flows, being confused as to why it doesn’t include the car.

So, I think there’s a lot of opportunity to optimize those. And I would expect that we ultimately probably have two strong segments. One is looking for a premium experience and integrated into the car, which includes streaming as well. And another, it’s probably a lot of our growing audiences and tend to be younger may be more interested in the streaming-only product.

So, just back to the in-car conversion rate, so both used and new car conversion rates are core to future growth. And all the things I talked about in terms of personalized marketing will not be in place for the in-car side of the business until the latter part of the year. And that’s because we still need to build out those flows, and it takes — it’s going to just take longer to build them in the in-car side. We are learning a lot in streaming.

So, I think we can get off the ground running once they’re there. But we’re definitely prioritizing marketing over some of the other parts of the migration of the in-car proprietary systems, because we believe that gives us the most opportunity to impact business metrics. And so, I wouldn’t expect to see those kinds of improvements rolling through conversion rates until much later in the year. And then, Tom, on ARPU?

Tom Barry — Chief Financial Officer

So, on ARPU, so basically in Q1, we had $15.36. We had year-over-year increase, which is principally driven by last year. We’re lapping a period where there was a price increase on the full price plans last March. So, we’re up a little bit year over year.

But looking at the full year, we’ll continue, obviously, through our pricing and packaging, as well as a lot of the other initiatives we have going on. But we overall see ARPU to be slightly down for the year, but it will obviously depend on the streaming mix, the promotional mix and other factors contributing to the calculation.

Jennifer Witz — Chief Executive Officer

Yeah, that was all incorporated into our guidance, and we talked about that earlier this year. And we’ve also talked about the fact that this isn’t a year where we’re raising price on in-car pricing and packages, sorry, and would expect to look at that as we go into next year as an opportunity. But we continue to do a lot of testing on the pricing and packaging front for our in-car packages and believe — continue to believe that there’s opportunity to open up more demand at a broader set of prices in our packaging structure.

Thank you. The next question is from Stephen Laszczyk with Goldman Sachs. Please proceed with your questions.

You executed against $45 million in cost efficiencies in the quarter. Could you perhaps just update us on where you’ve been able to make the most progress so far? And then, as you think about pacing the remaining cost savings coming into the next few quarters, how should we think about that? And then, secondly, just a housekeeping one. Is there anything more you can say about the progress or timing of the Liberty transaction closing? Any detail would be great. Thank you.

Tom Barry — Chief Financial Officer

Yeah. So, Stephen, a couple of things. So on the — yeah, Q1, we had about $45 million of savings that we outlined in the script. It’s principally been across a variety of areas.

Really, what we’ve been focused on is trying to maintain our EBITDA margin. So, we are investing some of the savings back in the business. But in Q1, we did have some optimization around headcount and around some of our programming and podcast margins. So, the initiatives are continuing on our trend, as we said, we have $200 million worth of savings this year.

We are continuing to reinvest. But net-net, we were happy with our margin being the 30% for Q1, and we’re going to continue to look at the cost saving initiatives throughout the year. And as we’ve said, there’s a lot of things going on between the optimization and the transformation we’re going through. So, that’s broadly the $200 million.

And then, I would just say on the Liberty transaction, the Liberty transaction, I think, is still currently planned for early Q3. We have no update from Denver as far as any change in that. Obviously, there’s a lot of moving pieces, but we are trying to get to close as soon as we can.

Jennifer Witz — Chief Executive Officer

Yeah, I’d just say we’re going to update for first quarter financials. So that’s part of the process, obviously and factors into the timing. But as Tom said, still expect early Q3.

Thank you. Our next and final question is from the line of Cameron Mansson-Perrone with Morgan Stanley.

Cameron Mansson-Perrone — Morgan Stanley — Analyst

Thank you. Good morning. Yeah, I wanted to ask on the margin trends at Pandora. Obviously, the strong ad growth helps there.

But really, positive gross margin improvement year over year. Could you just touch on what’s driving those trends, if anything beyond that performance, and whether we should expect kind of that magnitude of year-over-year improvement to continue? And then, maybe more broadly, just how should we think about the unit economics between the music and off-net businesses today and what the opportunity for each of those is over time? Thanks.

Tom Barry — Chief Financial Officer

So, Cameron, from the margin, not a lot has changed. The improvement is us monetizing and leveraging different products out there and putting the ad demand against the corresponding products that would create the best benefit to SiriusXM. But overall, the optimization out there and the cost side is really what’s providing the higher margin right now.

Jennifer Witz — Chief Executive Officer

Yeah. And I don’t know that I’m prepared to really talk about margins for — necessarily in terms of unit economics for on and off platform, but overall, in terms of how we monetize on the ad side of the business, we have very strong RPM on Pandora, which we reported at $91, Tom mentioned earlier, and continue to see really healthy rates there. And I’d say even stronger on the podcasting side of the business as there’s a lot of great growth dynamics there, and we continue to look for opportunities to improve sell-through, obviously, and programmatic solutions.

Thanks, everyone, for participating today. We’ll speak to you in the coming weeks, of course. Thank you.

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Sirius XM (SIRI) Q1 2024 Earnings Call Transcript was originally published by The Motley Fool

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