SiriusXM Holdings Inc.

Thank you and good morning, everyone. Welcome to SiriusXM's third quarter 2022 earnings conference call. Today, we will have prepared remarks from Jennifer Witts, our chief executive officer, and Sean Sullivan, our chief financial officer. Scott Greenstein, our president and chief content officer, will join Jennifer and Sean to take your questions. I would like to remind everyone that certain statements made during the call might be forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based upon management's current beliefs and expectations and necessarily depend upon assumptions, data, or methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For more information about those risks and uncertainties, please view SiriusXM's SEC filings and today's earnings release. We advise listeners to not rely unduly on forward-looking statements and disclaim any intent or obligation to update them. As we begin, I would like to remind our listeners that today's call will include discussions about 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.

Thanks, Hooper, and good morning, everyone. Thank you for joining us today. In the third quarter, we delivered solid results as we continued to drive growth and focus on a disciplined approach to cost management across our organization. While near-term objectives remain top of mind, we are focused on the strategy and investments that will drive long-term value for our stockholders, including continuous improvements in the differentiated listening experiences that our customers love. Self-pay net ads were 187,000 in the third quarter as we sustained a record low churn of 1.5%, and total revenue grew 4% versus the prior year period, while advertising revenue remained relatively flat as macroeconomic factors resulted in a deceleration in ad spending late in the quarter. Our subscriber growth, despite continued automotive supply chain constraints, is a testament to the loyalty of our listeners, the value of our content, and our highly resilient subscription business model. As such, we are pleased to reaffirm our full-year financial guidance, although headwinds in the advertising environment will continue to add some degree of uncertainty in achieving 2022 guidance. As we move into the fourth quarter, we remain focused on maintaining our momentum with steady work to expand relationships with OEMs and deliver an incredible content slate, new listener experiences, and exciting product and technology enhancements. Our products and content remain extremely attractive to vehicle buyers and automakers. Our new and used vehicle penetration rates continue to remain strong at 83% and 53%, respectively. and our enabled fleet reached 150 million vehicles in September. We completed several extensions of our agreements with automakers in the third quarter, including Subaru and Stellantis. In addition, our 360L platform launched in the popular 2023 Nissan Altima, and we should exit this year with 360L installations up approximately 500 basis points as a percentage of new SiriusXM-enabled vehicles compared to the end of 2021. We are also pleased with the progress we have seen with EV startups. In the coming months, Series XM will be available for the first time in Lucid's full lineup of electric vehicles. Announced yesterday, all Lucid customers will receive an over-the-air update in the coming months launching a free beta version of Series XM. When the full Series XM experience debuts later in 2023, customers will move into our standard trial subscription funnel. While initial volumes will be relatively small, the Lucid Beta provides an exciting opportunity to test enhanced capabilities and new solutions to drive forward the in-vehicle audio entertainment experience. This past year, our focus on opening new distribution channels has led to continuous broadening of our acquisition funnel, particularly on the streaming side of our business, which continues to see strong performance and is expected to be the majority of our subscriber growth this year. While our streaming business is still at an early stage, we are investing in building out the experience and our capabilities in anticipation that it will become a much more significant part of our subscriber mix in the near future, even as auto sales rebound over time. Streaming also remains an important part of our value proposition for our in-car subscribers. We are also expanding beyond our historical demographics, identifying growth segments that comprise an additional quarter of the U.S. population. These growth segments are younger, more diverse, and willing to pay for multiple streams of audio entertainment. We have found that many additional consumers find the premium music and non-music content that only SiriusXM offers attractive, and we are working to scale in these segments. To help showcase our offering, this past quarter we launched the second installment of our national ad campaign, The Home of SiriusXM, highlighting several content categories such as comedy, sports, lifestyle podcasts, and multiple music genres. The new spots feature talent including Conan O'Brien, 2 Chainz, and Alanis Morissette, showcasing the diversity of content on SiriusXM that appeals to a multi-generational audience. The national ad campaign, coupled with the return of the NFL this fall, contributed to one of our biggest acquisition months to date on the streaming side. We are working hard to improve the consumer experience in and out of the vehicle. This past quarter, our product and technology team drove several vital improvements to our core consumer listening experiences. most notably with advancements in our content personalization technology leveraged across both Pandora and SiriusXM. Pandora's personalized music experience has long been driven by our proprietary algorithms that continually learn from past user behavior, enabling Pandora to deliver music catered to each user's tastes and preferences. Recently, we've made algorithm improvements that include scaling up our model and adding more signals derived from listener interactions with songs and artists. On the SiriusXM side, we made several in-vehicle personalization improvements to our 360L products, including the introduction of data-driven music and talk recommendations on four U-tabs, which has helped drive double-digit increases in listener click-through rates. We also made enhancements to the 360L user interface that have significantly increased engagement and discovery of new content, including one-touch access to Pandora Artist stations from SiriusXM's now playing screen. The update is live in select 2023 GM vehicles and will launch with more OEMs next year. Last week, we rolled out an updated version of SiriusXM on Apple's CarPlay with redesigned navigation, new recommendation carousels, and several new design enhancements. An upgraded SiriusXM experience on Android Auto should ship in the coming months. Later this year, we also plan to update our core SXM mobile app for iOS and Android with a design refresh that will enhance navigation and streamline content discovery. The updated personalized carousels will ease listeners' quick access to a wide range of personalized recommendations, and the update will include visual enhancements like the new dark mode theme. These are just the start of a series of improvements in the Series XM products that we will be making in the coming months. In addition to the product enhancements, we continue to broaden our content in music, comedy, and sports to draw in streaming subscribers that are younger and more diverse. This audience segment tends to over-index on fandom for music artists and other celebrity talents. We see a real opportunity to highlight the intimate connections and unique artist experiences that we have built our brand on over the past two decades. This past quarter saw launches of new artist shows, channels, and special events. For example, six-time Grammy Award-winning singer-songwriter Brandi Carlile launched her new show, Somewhere Over the Radio, on the Spectrum, where Brandi engages in candid conversations with guests from the LGBTQ community and their allies. The launch of the Chicks Channel, a limited-run channel celebrating the music of the 13-time Grammy winners, was another great example of our curated artist experiences. and the channel provided a great promotional vehicle for the artists to connect with fans across the country while they were on tour this summer. Turning to our small stage series, we hosted two iconic bands at the Apollo Theater in New York City this quarter, Pearl Jam and the Red Hot Chili Peppers. Halsey performed for us in Philadelphia, John Legend in Los Angeles, and earlier this month, we hosted Lizzo in her hometown of Detroit. These incredible experiences continue to prove a valuable and unique subscriber benefit. with our enter-to-win campaigns reaching record highs, while promotions through dedicated pop-up channels, rebroadcasts across our most popular stations, and other on-demand content in the SXM app contributed to a 22% year-over-year lift in on-demand listening. The third quarter also saw strong performance in our sports category. SiriusXM remains an essential unmatched subscription for sports fans. offering more live games and events to listeners in North America on one platform with one subscription than anyone else in audio. We recently extended our NFL agreement as the exclusive third-party audio broadcaster of every NFL game, and we continue to cover sports underserved by other outlets. Sports have a proven appeal to new subscribers, with trialers who listen to sports channels converting to paid subscribers at a higher rate and once subscribed, sticking around with higher retention rates. We know there is more opportunity to capture audio share on this front, and we recently launched our first-ever fully dedicated sports campaign to increase awareness. Lastly, we remain incredibly bullish on the broader entertainment, political, and news talk audio ecosystem that we are continually cultivating. As part of our election coverage, Crooked Media's top-ranked podcasts have taken over the SiriusXM Progress Channel's weekend lineup leading up to this month's midterm elections. This special programming includes recordings of Pod Save America, taped in front of live audiences at SiriusXM's LA Garage Studios. SiriusXM's subscribers also had exclusive early access to a Pod Save America interview with former President Barack Obama. And we will soon be launching a full-time original Team Coco comedy channel available only to SiriusXM subscribers, tapping into the large-scale fandom behind his popular podcast, Conan O'Brien Needs a Friend. Our unique podcast strategy sets us apart in the marketplace, as we can monetize efficiently through off-platform distribution and give advertisers and creators the thing they want most, tremendous audience reach across all platforms, while also offering creators unique access to the exclusive and live audience of SiriusXM. Today, we touch over 150 million listeners, including SiriusXM, Pandora, SoundCloud, and our broader podcast and off-platform ad network. Having the best content and talent in podcasting makes us the leader in digital audio advertising. We have more shows in Edison's top 25 podcast rankings than any other network, with Crime Junkie, Office Ladies, Dateline NBC, Pod Save America, and Conan O'Brien Needs a Friend continually making the charts. In the third quarter, we added ad representation and distribution agreements with the School of Greatness and the Mel Robbins podcast. Capitalizing on the growth we are seeing in podcasting, SXM Media recently deployed new ad products to give brands more automated and efficient ways to buy advertising at scale. Our new Podcast Everywhere solution allows brands to reach their audience wherever they're listening, and our Podcast Select product gives advertisers better control over audience targeting. Revenue from these two solutions, plus podcast programmatic, meaningfully increased compared to a year ago. and we saw more than 250 additional advertisers leveraging network solutions such as these versus Q3 last year. We expect continued uncertainty around macro factors and recessionary trends impacting the broader economy in the coming months to dampen the digital audio ad market, but we are encouraged by the early response to these foundational drivers of our SXM media business. We are closing the year with momentum in our vehicle distribution, new product and technology enhancements, and an exciting pipeline of fresh content, including the launch of Team Coco's channel and next week's special event with Grammy Award-winning hip-hop artist Drake live at the Apollo. The announcement of Drake's exclusive show for SiriusXM led to record-breaking downloads of the SXM app in the days that followed, and we are incredibly excited to share Drake's performance next week with listeners. To wrap up, despite some uncertainty in the macro environment, we continue to pursue all avenues of opportunity to build long-term and sustainable value for our business and remain equally committed to delivering consumers the best and most comprehensive choice in premium audio content. I am confident we have taken appropriate actions to finish the year strong. I'm excited and energized by the momentum of our business and organization and the culture of progress at SiriusXM. And with that, I'll turn it over to Sean.

Thank you, Jennifer, and good morning, everyone. Starting with a recap of the third quarter financials, revenue was up 4% in the quarter to 2.28 billion. Within that, advertising revenue was up 1% to 457 million, while subscription revenue climbed 4% to 1.7 billion. Adjusted EBITDA was flat at 720 million as we continue to make material investments in sales, marketing, content, and product development. During the quarter, we booked 69 million of one-time charges reflecting cost to exit real estate leases, personnel severance, and a write-off of select software development initiatives that we no longer intend to pursue as we speed ahead on other enhancements to the listener experience. Net income for the quarter was $247 million, representing diluted earnings per common share of $0.06 or $0.07, excluding the one-time restructuring costs. We generated $329 million of free cash flow during the third quarter, down year-over-year as the third quarter of 2021 benefited from $208 million of satellite insurance recoveries. In addition, free cash flow felt the material impact of a $56 million year-over-year increase in cash taxes as most of our federal net operating loss carry forwards became fully utilized last year. We expect cash taxes, which were $82 million in 2021, to grow to approximately $270 million this year. This year's increase was partially mitigated by the use of R&D and other tax credits. These tax credits are likely to be available on a much smaller scale in 2023, including the adverse timing of certain R&D expenses that are now required to be capitalized under Section 174. Therefore, we expect our cash taxes to continue growing meaningfully next year. Also looking ahead, we expect capital expenditures to increase next year as production for the SXM 11 and 12 satellites currently being procured begins to ramp. As we discussed at investor conferences in September, a combination of years of improving churn and successful used car and win-back programs means that we have more subscribers on our low-band spectrum today than we might have thought a few years ago. So this Constellation refresh signals our commitment to maintaining premium services on our low-band spectrum, and it will also give us options to create new revenue streams on this portion of our spectrum over the long term. Turning to our operating segments, at SiriusXM, total revenue in the third quarter increased 5% to $1.7 billion, driven by a 6% increase in ARPU to a record $15.72, which includes a 6% advertising growth rate on the SiriusXM platform, combined with a larger self-pay subscriber base compared to the prior year period, partially offset by lower paid trial subscribers. As Jennifer mentioned, SiriusXM's net self-pay subscriber growth in the quarter was an outstanding 187,000, boosted by trial funnel growth in the second quarter, leading to increased conversion opportunities combined with growth in our streaming-only subscriber base. During the third quarter, SiriusXM's new and used car trial starts with both down 4% sequentially as auto industry sales continue to remain soft and vehicle prices remain near record highs. And analysts largely expect this to continue. Since May, the consensus 2023 SAR estimate has fallen from 16.6 million to 14.8 million. We anticipate that continued softness will continue to impact the trial funnel and self-pay net adds into Q4 and into next year. Gross profit in the SiriusXM segment climbed 6% to 1.08 billion, representing a gross margin of 62%, a point higher than last year's third quarter. In our Pandora and off-platform segment, third quarter advertising revenue of $407 million was a slight increase versus last year, and Pandora's ad revenue per 1,000 hours of $103 declined slightly from $109 in the third quarter of 2021. During the quarter, our podcasting and off-platform businesses generated $123 million in total revenue, an increase of 37% year over year. Non-Pandora ad revenue was about 38% of the company's total ad revenue during the quarter, and we expect this to continue growing over time. This past quarter, we saw growth in political advertising and restaurants. Travel and tech have all been strong categories for us. Pharma, entertainment, telecoms, and financial services have shown more weakness in recent months. Gross profit in the Pandora and off-platform segment declined 12% to $173 million, representing a 32% gross margin. The margin decrease in the third quarter of 2021 is mostly due to investments we are making in new podcasting content, and we expect the margin profile of these new advertising representation deals to improve over time. Today, we reiterate our existing financial guidance for 2022, revenue of approximately $9 billion, adjusted EBITDA of roughly $2.8 billion, and free cash flow of about $1.55 billion. Given the macro outlook and headwinds in the advertising market, we remain focused on cost discipline across the organization, and we expect that to continue in 2023. That discipline will be important given the CPI adjustments to some of our streaming royalties and the expiration of our discounted 2015 rates for pre-1972 content will produce an increase in music royalty costs next year. On the capital allocation front, We returned $262 million to stockholders in the third quarter with $176 million of share repurchases and $86 million in dividends, bringing year-to-date capital returns to roughly $1.84 billion. We are very pleased to announce a further 10% increase in our recurring dividend on top of last year's 50% increase. This marks the sixth year in a row of double-digit increases to our dividend. We ended the third quarter at 3.5 times net debt to EBITDA within the low to mid threes range we previously articulated. Our balance sheet remains exceptionally well positioned with limited near-term maturities and roughly $1.4 billion of liquidity available at the end of September via cash and undrawn revolver capacity. We have significant capacity to continue investing in the business, evaluating strategic opportunities, and to continue returning capital to our stockholders.