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Edited Transcript of SIRI earnings conference call or presentation 24-Apr-19 12:00pm GMT

Q1 2019 Sirius XM Holdings Inc Earnings Call

New York Apr 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Sirius XM Holdings Inc earnings conference call or presentation Wednesday, April 24, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David J. Frear

Sirius XM Holdings Inc. - Senior EVP & CFO

* Hooper Stevens

Sirius XM Holdings Inc. - VP of IR & Finance

* James E. Meyer

Sirius XM Holdings Inc. - CEO & Director

* Scott A. Greenstein

Sirius XM Radio Inc. - President and Chief Content Officer

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Conference Call Participants

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* Benjamin Daniel Swinburne

Morgan Stanley, Research Division - MD

* Brandon A Ross

BTIG, LLC, Research Division - Associate Analyst

* Jessica Jean Reif Ehrlich

BofA Merrill Lynch, Research Division - MD in Equity Research

* Sebastiano Carmine Petti

JP Morgan Chase & Co, Research Division - Analyst

* Vijay A. Jayant

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Media, Entertainment, Cable, Satellite & Telecommunication

* Zachary Alan Silver

B. Riley FBR, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good morning and welcome to SiriusXM's First Quarter 2019 Results Conference Call. Today's conference is being recorded. (Operator Instructions)

At this time, I'd like to turn the call over to Hooper Stevens, Senior Vice President, Investor Relations. Mr. Stevens, please go ahead.

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Hooper Stevens, Sirius XM Holdings Inc. - VP of IR & Finance [2]

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Thank you, Matt. And good morning, everyone. Welcome to SiriusXM's First Quarter 2019 Earnings Conference Call.

Today, Jim Meyer, our CEO, will be joined by David Frear, our CFO. And at the conclusion of our prepared remarks, management will be glad to take your questions. Scott Greenstein, our President and Chief Content Officer, will also be available for the Q&A portion of the call.

First, I'd like to remind everyone that certain statements made during the call might be forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based on management's current beliefs and expectations, and necessarily depend upon assumptions, data or methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For more information about those risks and uncertainties, please view SiriusXM's SEC filings. We advise listeners to not rely unduly on forward-looking statements and disclaim any intent or obligation to update them.

As we begin today, I'd like to remind our listeners that today's results will include discussions about both actual results and pro forma adjusted results. All discussions of pro forma adjusted operating results assume the Pandora transaction closed January 1, 2018, and exclude the effects of stock-based compensation and certain purchase price accounting adjustments.

With that, I will hand the call over to Jim Meyer.

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James E. Meyer, Sirius XM Holdings Inc. - CEO & Director [3]

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Thanks, Hooper. Good morning.

I can't think of a more exciting time to be at SiriusXM, newly joined with Pandora and forging our own unique path in audio entertainment. I'd like to thank the entire team at SiriusXM and Pandora for working so hard and so effectively to make our combination a success. We are right where we want to be and moving very fast. We have a new organization and reporting structure to emphasize speed and to bring people together. It's still the first inning, but I'm pleased with the enormous progress we've made so far in streamlining our business, developing new strategies and working so well together.

We are pleased to initiate new pro forma revenue guidance for 2019 of approximately $7.7 billion; reiterate adjusted EBITDA guidance, now pro forma, of approximately $2.3 billion; and reiterate free cash flow guidance of approximately $1.6 billion. And we are reiterating our existing SiriusXM subscriber guidance. The hunt for Pandora cost synergies is going better than expected. Obviously, it's rolled into the guidance, but at this point we expected to -- we expect to exit 2019 at an annual run rate of $75 million or more, up 50% from our call in February.

I want to emphasize the enormity of our new platform. We are now, bar none, the leader in audio entertainment in North America with over 100 million monthly listeners. That's roughly 35 million pay -- self-pay subscribers on the 2 services and 70 million ad-based listeners and trialers. The SiriusXM and Pandora suite of services, both paid and free, is really unmatched by any of our competitors. It's designed to appeal to listeners and subscribers, fans of music, talk and everything in between, as they move throughout the day from home to vehicle and beyond. Now you can accuse me of hyperbole, but with all the tools and offerings we now have, I've challenged our team that our goal should be to never lose a listener. And by the way, we intend to use this platform to be a strong ally to artists as they grow their fan base and to labels as they break new artists.

Stepping back, the core business model and strengths of the SiriusXM service are unchanged: unmatched content, a powerful high-margin subscription business, long-term commitments from OEMs, and growing distribution out of car. We are extremely focused on delivering the excellent financial and operating performance that you've come to expect. Our subscriber growth in the first quarter puts us solidly on track to achieve our full year guidance of SiriusXM self-pay net add additions approaching 1 million. Churn was stable. And ARPU in the first quarter grew at its fastest rate in nearly 9 years at 4.4%.

We're pleased that auto sales remained robust in the quarter. We continue to see strong new car penetration and a buildout of our domestic fleet. With our gold standard deal at Toyota phasing in later this year, our penetration rate will exceed 80% next year, and the enabled fleet size should grow to over 200 million vehicles over time. Growing new car penetration also extends the tail of our used car business, where we continue to make investments in technology and field teams. Our used trial distribution has now grown to 37,500 dealerships.

We are more focused than ever on accelerating the rollout of our 360L platform across our new vehicle penetration. You may have seen the press release from General Motors in January announcing the all-new model year '20 Cadillac XT6, which will debut with 360L. We're excited for further announcements from GM later this summer showing an expansion of 360L across a wide range of 2020 model year vehicles. 360L is the future platform for SiriusXM in the car, and all of our OEMs are at some stage in moving to full adoption. Over time, we also expect that the 360L rollout will significantly benefit the Pandora platform by introducing a better native environment within the vehicle.

The first quarter also saw the largest expansion in content lineup in SiriusXM's history with the addition of 100 Xtra music channels. This will be joined over the summer by a variety of initiatives designed to increase the rich value of SiriusXM to our subscribers and potential subscribers. This summer, all Sirius Select subscribers will gain access to streaming at no extra charge, allowing them to take SiriusXM content out of the vehicle. With this step, we hope streaming becomes a part of the SiriusXM experience for a much greater number of our subscribers. Our expanded video offering will also roll out this summer and, with more content continuously added, should reach a couple thousand video clips by the end of the year. And we will launch a personalized streaming music feature within SiriusXM powered by the Pandora genome. Think about that. Just a few months after the merger, the heart of Pandora's personalized service will become a part of the SiriusXM experience. These long-term investments in SiriusXM product and brand are a big, big deal.

We also recently launched an $8 per month streaming-only package called Essential, which includes a music and talk package built especially for people who want to listen on mobile, tablet, desktop and home devices. With new plans like this, streaming at no charge for most SiriusXM subscribers and the deployment of 360L, more of our content delivery than ever will be across IP. And that's before we talk about Pandora. As I've said before, Pandora's assets, great talent, technology, products, data and brand, properly managed, will deliver value to our shareholders and position SiriusXM for meaningful long-term growth. And there are a tremendous number of product initiatives underway at Pandora to improve both the user experience and the business. I like to joke that I spent 10 years telling people that the music genome was no good. Well, guess what? It's very good. And I also used to joke that I used to stay up at night worrying about Pandora's position in the car. Well on that front, maybe I should have slept better because in the car the Pandora position isn't so strong, and that's an area we are going to improve dramatically.

When it comes to the merger, I can tell you we're very far along and moving very fast on cost reduction. We see where we need to go here. Revenue synergies will be our next focus and will take a bit longer. There's still a lot of work to do at Pandora, but the financial results in the first quarter highlight improving sales execution. First quarter revenue grew 14%, and RPM hit an all-time first quarter high of nearly $63. And gross margins significantly expanded, but we still need to make much more progress against 2 key goals: stabilizing ad-based listening and strengthening our position as the largest digital audio advertising player in the U.S. These will require a long-term focus on expanding content, vastly improving auto integration, continuing improvements in ad technology and solid execution.

A couple of updates on our consumer features and ad products on the Pandora side. Premium access, which was launched in early 2018, lets ad-supported users unlock interactive features by watching short video advertisements. This will allow us to continue to grow our share of digital video ad budgets and economically give our free listeners more interactivity. We will continue to expand podcasting initiatives, which I'll talk more about in a moment. Dovetailing with podcasts, we also launched Pandora Stories earlier this year, which allow artists and creatives -- and creators of all kinds to blend spoken word with music. And about a month ago, we launched Pandora Modes, giving listeners more control over what kind of songs are played on their stations. For instance, they can opt for deeper discovery, more crowd favorites or new-release content.

The past year has also been a time of innovation and improvement in Pandora's ad technology. Earlier this year, we began selling commercial time and streams targeting smart speakers like Amazon Echo and Google Home, opening a path for advertisers to reach people as they use voice-activated assistants in their home. Our programmatic platform, launched in 2018, is now delivering close to 10% of our audio revenue on Pandora and sold to over 170 different advertisers in the first quarter. The acquisition last year of AdsWizz has enabled us to create a large-scale platform to serve the needs of leading audio publishers such as SoundCloud. This extends Pandora's ad reach to over 100 million listeners, and we have a real opportunity to further grow this off-platform business over time for -- with other audio publishers.

Let me really emphasize this point. We are now actively in the market with the ability to deliver impressions across a base of more than 100 million listeners in the United States.

Stabilizing and growing listener hours on the platform is priority #1 at Pandora. It's going to take time and hard work, but we pride ourselves in doing what we commit to do, and I'm confident we will get this right. Over the medium and long term, we expect Pandora will benefit from a more differentiated content offering, more efficient data-driven performance marketing, cross-promotion from the SiriusXM active and inactive user base and a vastly enhanced in-vehicle experience. And of course, we will continue to focus on building stronger relationships with leading advertising brands.

Speaking of brands. I've talked about maintaining and growing our 2 great brands: SiriusXM and Pandora. The foundation of each is vibrant programming beyond what regular radio can deliver, and with great curation and depth that goes beyond just a playlist. Using our content on both platforms is going to improve listener engagement and help us get more value out of our spending. Scott Greenstein is leading Pandora's first-ever content team, which is looking at music, talk, podcasting, enhanced playlists and interactive channels to deliver the best content to listeners. Earlier this month, we debuted Pandora NOW, a full-time SiriusXM channel curated with the help of Pandora data. It's also available on Pandora as an interactive channel. It's very exciting to create this new listening experience for all 100 million-plus combined listeners. Further, we recently made available a suite of SiriusXM stellar talk, sports and comedy shows as podcasts exclusive to Pandora. Our Podcast Genome Project helps overcome the discovery challenge by evaluating content and leading you to the best stuff.

As I mentioned earlier, we added more than 100 new SiriusXM streaming music channels, the largest addition ever, all of them based on our existing popular channels but more finely tuned to fit any mood, occasion or activities. These have been a hit and have driven an increase in streaming activity on the SiriusXM platform. Quite frankly, I've never seen so much creation and energy pouring into our content offering as I'm seeing today.

Just to conclude. Following the close of Pandora, we have resumed our stock purchase program. David will expand on that in a moment. The SiriusXM business continues to scale in both terms of subscribers and profitability, and we are positioning the brands and service for long-term success. We are in the early stages but moving very quickly on the necessary steps with Pandora. We feel confident about our newly issued guidance, and we are excited to be creating the best audio entertainment company in the world.

With that, I'll turn it over to David.

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David J. Frear, Sirius XM Holdings Inc. - Senior EVP & CFO [4]

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Thanks, Jim. Good morning, everyone, and thanks for joining the call.

As you heard from Jim, SiriusXM had a fantastic quarter. The auto market continues to be healthy. Churn performance continues to improve. Ad monetization is strong. Pro forma adjusted EBITDA grew 27% year-on-year. And we've already repurchased 63% of the shares issued in the acquisition of Pandora. We've said this acquisition is not about cost synergies, yet we expect the cost synergies to exceed $75 million per year. The integration of the 2 companies is moving quickly. We have created Pandora's first content team, and they have moved quickly to bring Pandora NOW to SiriusXM and SiriusXM talk content to Pandora.

As I discuss the results for the quarter, I'll focus on the pro forma results, which combine the 2 companies for the full quarter of both years. To help put this in a historical context, we'll make available 9 quarters of pro forma trended financials for the combined company on our IR website. As you consider our new guidance for the combined company, please note that we are maintaining our original free cash flow and adjusted EBITDA guidance. We feel confident that SiriusXM can absorb the Pandora operations and meet or beat the guidance we gave you in January. So let's dive in.

Robust March SAAR brought the first quarter in at 16.9 million cars, just 1% off Q1 2018's strong pace. Increased fleet mix and an unexpected head unit change at an Asian OEM pushed pen rate down to a little over 73% in the quarter. Nevertheless, we remain confident that our pen rate will exceed 80% as we move into 2020. The installed base of vehicles grew 11% year-over-year to 119 million or approximately 45% of the total cars on the road in the U.S. The used car penetration rate was approximately 44% in the quarter, taking up about 400 basis points year-over-year and helped lift self-pay gross additions from the used channel to 38% of the total, up from 33% the prior year period. Used car trial starts grew 18% at the end of the quarter. The total trial funnel stood at over 9.3 million.

Self-pay net additions in the quarter were 131,000, ahead of our expectations, bringing the self-pay base above 29 million for the first time ever. With a flat paid trial funnel, the total subscriber base reached a record 34.2 million subs. Net adds benefited from continued strong churn performance at just 1.8% per month, identical to the strong churn performance from last year's first quarter, with rising vehicle churn being offset by improving voluntary churn.

SiriusXM ARPU in the quarter was $13.52, growing as Jim said by 4.4%, which was the fastest rate in 9 years. Together with the more than 3% growth in our subscriber base, SiriusXM's segment revenue for the first quarter grew 8.5% to nearly $1.5 billion. Contribution margin in SiriusXM remained robust at approximately 70%, flat year-over-year. Total cost of services grew in line with revenue to $569 million compared to $524 million in the prior year period. Together, this produced a gross profit of $926 million, up 8% over the first quarter of 2018, and resulted in a gross margin of 62%, approximately flat. This is the last quarter we'll have a clean look at the separate economics of the 2 businesses, and I'm thrilled to report that adjusted EBITDA at SiriusXM clocked in at 40.6%.

At Pandora, advertising revenues had their best first quarter ever, posting 7% growth to approximately $231 million. Higher in-quarter bookings, strong sell-through and pricing, growth from the AdsWizz platform and the first contributions from the SoundCloud relationship drove the strong performance. Ad RPMs for the quarter totaled a first quarter record of $62.60, approximately 13% higher than the first quarter of '18. MAU and ad hour trends continued downward, with MAUs down 9% to 66 million and ad hours down 11% to 3.42 billion. Through investments in content, distribution, vehicle integration and ad technology, product and cross-promoting the brands, we believe the combination of Pandora and SiriusXM gives us an unbeatable product lineup.

Pandora's self-pay subscribers grew by 246,000 net additions in the first quarter and by 9% or 534,000 net adds versus a year ago, to a total of 6.16 million. Paid promotional subscribers were up by 736,000 year-over-year following a successful third quarter partner promotion. This growing subscriber base produced subscription revenue of $134 million, up 29% over the first quarter of 2018.

Total Pandora revenue in the quarter grew 14% to $365 million.

Total cost of services held flat over the prior year at $254 million, with lower revenue share and royalties as a result of the restructuring of the minimum guarantees to the music label which had burdened the prior year by about $15 million. As a result, Pandora's gross profit jumped 73% to $111 million in the first quarter. This represented a margin of approximately 30%, 1,000 basis points higher than the first quarter of '18.

For the combined company, revenue grew 10% to approximately $1.86 billion, with adjusted EBITDA growing 27% to $567 million. This resulted in an adjusted EBITDA margin of 30.5% in the quarter, growing over 400 basis points on the prior year, driven primarily by revenue growth and cost efficiencies. As you look at the combined P&L, nearly every cost deducted in arriving at adjusted EBITDA declined as a percentage of revenue. Of the 4 percentage point improvement in adjusted EBITDA margin, SAC contributed 1.4%, revenue share and royalties contributed 1.2%, and G&A and sales and marketing combined to contribute 0.9%. And the contribution from the cost synergies is still to come. We converted approximately 53% of this adjusted EBITDA into free cash flow totaling $300 million in the first quarter of '19, not including the month of preacquisition results at Pandora.

Our effective tax rate for the quarter totaled 33.3% compared to 21.7% in the prior year period, with the change driven primarily by an increase to the valuation allowance related to federal research and development credits as a result of our expected use of Pandora NOLs. We continue to expect our full year effective tax rate to be approximately 24%.

Earnings per diluted share for the first quarter of '19 on a GAAP basis were $0.03, with [a fully diluted] average share count of 4.68 billion shares, which included the issuance of 392 million shares related to the Pandora acquisition.

Based on our strong performance so far this year, our new pro forma guidance for 2019 calls for revenue of approximately $7.7 billion. We are maintaining guidance for self-pay net subscriber additions at SiriusXM of approaching 1 million. And even layering in Pandora, we are maintaining adjusted EBITDA guidance of approximately $2.3 billion and free cash flow guidance of approximately $1.6 billion.

In the first quarter, we spent approximately $604 million to repurchase 101 million shares at an average price of $5.96 and paid approximately $57 million in dividends. Year-to-date, capital returns total approximately $900 million. From the date of the announcement of the Pandora transaction through Monday, we have repurchased over 63% of the 392 million shares issued in the transaction.

Total debt now stands at approximately $7.2 billion, with no bond maturities until August 2022. Leverage is 3.2x trailing pro forma adjusted EBITDA. With $62 million in cash and nearly $1.2 billion available under our revolver at quarter end, we entered the second quarter with ample liquidity 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question will come from Ben Swinburne with Morgan Stanley.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [2]

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Jim, just sort of 2 maybe bigger-picture questions. And the first one is you guys have been generally delivering kind of better-than-expected churn and conversion rates, when you look across all the channels at the satellite business over the past few years. And I'm wondering, as you bring Pandora in, how do you manage the company so that people remain focused and not distracted by all the new opportunities and challenges ahead? And if we externally should be expecting more volatility? Or I'm guessing, based on the prepared remarks, you guys remain quite confident in your ability to walk and chew gum, but I wanted to hear your thoughts on that since it's a new challenge for you. And then second, and a little bit related. We've been spoiled by kind of consistent margin progression at this business for years. And as you think about pivoting or migrating to more and more streaming, does that change? Is there a period of time where you're either reinvesting back in the business more or changing the unit economics? Or do you think you can harvest the sort of streaming opportunity at the combined company while continuing to deliver kind of steady margin expansion over time?

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James E. Meyer, Sirius XM Holdings Inc. - CEO & Director [3]

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So Ben -- thanks, Ben. Let me take them -- let me take the first one. And then on the second one, David and I will kind of both contribute. On the first one, I almost feel like you've attended the over, I think -- I don't know how many town halls and employee meetings I've had over the last 8 weeks as we've rolled out our new organization and talked about what our priorities are. Rest assured, I understand very well what we've delivered, at least under my tenure over the last almost 7 years of CEO, as being the CEO, what our team has done. More importantly, our team understands it very well. We're organized for success there. And quite candidly, Ben, I don't expect any kind of a blip in that performance based on having anything to do with Pandora, okay? And frankly, I still see a very strong performance this year in terms of our subscriber metrics. So we're very focused and we won't lose that focus. And I also -- I love the acquisition of Pandora. I love having it in our portfolio. I particularly love all the options it gives us, starting with, I think, just this month alone, we've shown the power of being able to create -- to be able to show what combining human creation along with a very strongly performing set of automation called the Pandora genome together, what the vast variety of content opportunities we have. And I couldn't be more excited. That said, we fully understand the SiriusXM model and we fully understand where we need to keep our attention. Rest assured, I give you my commitment, we have that.

On the second point. I don't expect there to be a big change in the way our margins perform. We obviously don't know what'll happen to [webcasting 5] down the road and where those [costs] might go, but what we do, I think, fully grasp and what is a wave that is sweeping across this company -- and I think, frankly, it's been good, it's been accelerated by bringing the Pandora team under the same umbrella -- is that we shouldn't care where people listen. Our job is to get people to listen. And when they listen, I'm confident, particularly on the SiriusXM platform, no matter which platform they listen on, we're going to monetize that better than anyone else and consistent with where are we going. I can't help but crow a little bit, and it'll be the last time I crow on this, but in the first quarter, on the SiriusXM side, we delivered EBITDA margin of more than 40%. That's been a goal of mine for -- since I've been in charge of the company, and it's something I'm very pleased with. Obviously, we will be much more focused on the total EBITDA margin of the company going forward. David, do you want to add anything on that question?

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David J. Frear, Sirius XM Holdings Inc. - Senior EVP & CFO [4]

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

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Operator [5]

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And next we will go to Sebastiano Petti with JPMorgan.

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Sebastiano Carmine Petti, JP Morgan Chase & Co, Research Division - Analyst [6]

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

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David J. Frear, Sirius XM Holdings Inc. - Senior EVP & CFO [7]

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

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James E. Meyer, Sirius XM Holdings Inc. - CEO & Director [8]

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And David, I just want to emphasize the blip in pen rate this quarter is not a mid- or a long-term phenomenon, okay? We understand exactly what occurred there. And quite candidly, it is a short-term issue that many -- no. We're underway to improve that. It's not a big deal. I assure you that. Stay focused on what I said, which is my -- our commitment to you is that you should plan our business going forward from the beginning -- the end of this year at an 80% or greater penetration rate. And I'm really confident of that number. So I'll reiterate what David said. There really wasn't anything in the first quarter, certainly compared to the plan that David and I let out for our team that we drew up, honestly, back in the fourth quarter for what we expected in the first quarter, that gives us any concern.

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Sebastiano Carmine Petti, JP Morgan Chase & Co, Research Division - Analyst [9]

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

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James E. Meyer, Sirius XM Holdings Inc. - CEO & Director [10]

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Yes. So the honest answer is I don't know. I do know I love the different combinations. As Scott's team brings us more and more opportunities and our marketing teams figure out how to package those, I think you're going to see us try a whole variety of stuff and test into things that give us -- quite candidly, in an answer to the point that David made earlier, that end up resulting in the most free cash flow down the road. I do want to make a couple of comments. I -- and I don't want to sound too much hyperbole, but I really like our position. I mean over 100 million monthly listeners; over 80% penetration long term in new vehicles for a long, long time to come, with the tail of the used car business behind that.

We now have the ability to take the best of human curation and machine-generated, artificially intelligence generated music genome, and combining those into a variety of unique products, and now 2 very powerful revenue streams in advertising and subscription, I just think gives us a tremendous ability to go after the radio platform in the United States like no other. I don't know specifically what combinations will evolve. I can tell you -- I'll just candidly tell you, I've been really surprised how much positive feedback we've gotten just on the Pandora NOW channel from the SiriusXM subscribers. So I think the answer to your question is we're just going to keep trying it based on our insight, our experience and our consumer knowledge, and adjusting it quickly to what our customers love.

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Operator [11]

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

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Vijay A. Jayant, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Media, Entertainment, Cable, Satellite & Telecommunication [12]

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

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David J. Frear, Sirius XM Holdings Inc. - Senior EVP & CFO [13]

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

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Operator [14]

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Our next question will come from Brandon Ross with BTIG.

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Brandon A Ross, BTIG, LLC, Research Division - Associate Analyst [15]

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

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James E. Meyer, Sirius XM Holdings Inc. - CEO & Director [16]

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

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David J. Frear, Sirius XM Holdings Inc. - Senior EVP & CFO [17]

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And in the results we spoke about today was actually -- those deals were recut by the prior management team. I think the Pandora executive team and the music industry has had a pretty good, healthy relationship in the last few years. It was a little rocky a few years back, but they're through that period. And so really it was something that Roger and Naveen delivered.

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Brandon A Ross, BTIG, LLC, Research Division - Associate Analyst [18]

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

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James E. Meyer, Sirius XM Holdings Inc. - CEO & Director [19]

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So I mean I think I was quite explicit on costs synergies, and the reason is because I feel like David and I are pretty confident we understand where those numbers are going. And I don't like to say anything on these calls unless I'm quite confident that we know where we're going. So I'm not going to give you an answer today on revenue because I'm not confident enough to give you that answer. What I am confident in is I see endless possibilities, and they just keep continuing to develop. And so we're going to test a whole bunch of things, my guess is for a long, long time, and evolve into those revenue synergies that we can get. I will tell you I think it makes infinite sense that inevitably we ought to be able to go fish in a pool of 100 million active free listeners and be able to pull out of that people who are willing to pay and put them into paid products that yield the best margin for our shareholders.

Second, on the flip side, we're going to run, I don't know -- god willing, a great auto company -- I mean, a great auto economy. We're going to run 24 million trials, or whatever the number might be, in 2019. We're going to be thrilled if we monetize 1/3 of that or slightly higher than that between used and new. That other 2/3, we ought to be figuring out how to get those people to go into a funnel that we still benefit from, particularly our free funnels. And so I really like the fact that we have the ability now to go between both, which are gigantic. Both are gigantic funnels, okay, if you think about it, in the United States. How we're going to optimize that is going to be developed over time. And frankly, I think it's one of the funnest puzzles we've worked on.

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Scott A. Greenstein, Sirius XM Radio Inc. - President and Chief Content Officer [20]

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

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James E. Meyer, Sirius XM Holdings Inc. - CEO & Director [21]

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Thanks, Scott.

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Operator [22]

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

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Jessica Jean Reif Ehrlich, BofA Merrill Lynch, Research Division - MD in Equity Research [23]

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

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James E. Meyer, Sirius XM Holdings Inc. - CEO & Director [24]

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So look, I think, Jessica, we're going to do what we've always done in that particular area, which is use the appeal of our content and promote around that to both the audiences that we've captured as well as audiences that haven't come into one of our funnels. Quite candidly, when you look at the size now of the Pandora funnel, meaning users that are in it or users that have tried it, and you look at the size of the SiriusXM funnel and then you look at where that's going with new and used cars, the opportunity just within those two is so big. I don't know that we have to worry that much about going outside of those two, but we will. And we'll do it in association with our content launches, promoting alongside our artists and promoting alongside our content as it's introduced. I will also tell you, though, the most effective marketing between those 2 platforms is on air and in-app and within our communications to our trialers and our customers in general. And there you will see an acute marketing focus as we move forward.

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Jessica Jean Reif Ehrlich, BofA Merrill Lynch, Research Division - MD in Equity Research [25]

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Great. And then just two more. The -- on the podcast side, the market seems to be getting crowded. Everybody is announcing podcasts like almost every day. Can you talk about monetization and what you're doing to stand out, what you're doing differently or what you think you're doing to be different and where you see the long-term growth of the podcast market?

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James E. Meyer, Sirius XM Holdings Inc. - CEO & Director [26]

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

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Scott A. Greenstein, Sirius XM Radio Inc. - President and Chief Content Officer [27]

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Jessica, for me, the most exciting part and where I think the podcasting thing hasn't even been started, even though you're seeing a lot of announcements, is -- when you look back at the early days of satellite radio, you had FM largely on music, AM on talk. We've looked at that landscape as a company and said, "Wait a second. There's no real comedy in here. There's not 24/7 league channels; big brands like the TV channels like the Fox, CNN, MSNBC; brands you could create out of whole cloth from magazines and other brands." And that sort of was the evolution. When you look at the digital landscape, Pandora included, they've been, if not exclusively, virtually all music. So podcasting comes along, and yes, people are jumping on it, but the big brands (inaudible) and many, many big personalities that are perfect for podcasting due to their time schedule or their other activities in the media business are not in that. Those brands and the bigger names are going to look for quality production, experience, real depth in audio production. That's where you can't erase our 10, 12 years as a company of doing this and being at the forefront of this. So while there's a lot of announcements, what we're most excited about is what can come in going forward that's sitting on the sidelines, waiting for this to evolve both creatively and monetarily. So we think [we're well positioned].

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James E. Meyer, Sirius XM Holdings Inc. - CEO & Director [28]

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

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Hooper Stevens, Sirius XM Holdings Inc. - VP of IR & Finance [29]

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Operator, can we -- please go ahead, Jessica.

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Jessica Jean Reif Ehrlich, BofA Merrill Lynch, Research Division - MD in Equity Research [30]

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Okay. And then -- (inaudible) one for David. Sorry, Hooper, but just on the buybacks. First quarter was -- seems well ahead of your $2 billion pace. Can you talk to me, is there any comment you can give on full year outlook?

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David J. Frear, Sirius XM Holdings Inc. - Senior EVP & CFO [31]

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Jessica, the only thing I can tell you is we think the stock is a value at this level and so we bought it and bought it aggressively.

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Operator [32]

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

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [33]

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Okay. Great. I wanted to just touch on the Amazon announcement around a free ad-based service on the Echo. Just curious if this affects what you have characterized in the past as an expanding relationship with Amazon. And if it doesn't, then what maybe is next in store with that relationship?

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James E. Meyer, Sirius XM Holdings Inc. - CEO & Director [34]

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

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [35]

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Got it. And then one more, if I -- yes, just one more, if I could, just on the Essential plan. I know it's early days, but how big of a market do you think that this represents? And then do you think that the unit economics of the Essential subs are significantly different than your legacy subs?

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James E. Meyer, Sirius XM Holdings Inc. - CEO & Director [36]

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

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David J. Frear, Sirius XM Holdings Inc. - Senior EVP & CFO [37]

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

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Hooper Stevens, Sirius XM Holdings Inc. - VP of IR & Finance [38]

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Great. Thank you very -- thanks, everybody, for participating in today's call. We'll talk to you next quarter.