Sirius XM - Earnings Call - Q1 2020

Transcript

Speaker 0

Ladies and gentlemen, good morning and welcome to the SiriusXM First Quarter twenty twenty Results Conference Call. Today's conference is being recorded. A question and answer session will be conducted following the presentation. At this time, I'd like to turn the conference over to Cooper Stevens, Senior Vice President, Investor Relations and Finance. Mr.

Stevens, please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to SiriusXM's first quarter twenty twenty conference call. Today, Jim Meyer, our Chief Executive Officer, will be joined by David Frear, our Senior Executive Vice President and Chief Financial Officer. At the conclusion of our prepared remarks, management will be glad to take your questions. Scott Greenstein, our President and Chief Content Officer, will be available as well as Jennifer Witz, our President of Sales, Marketing and Operations.

Those two will also be available for the Q and A portion of the call. First, I'd like to remind everybody 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.

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 advise our listeners that today's results will include discussions about both actual results and pro form a adjusted results. All discussion of pro form a adjusted operating results assume the Pandora transaction closed on 01/01/2018, and exclude the effects of stock based compensation and certain purchase price accounting adjustments. With that, I'll hand the call to Jim Meyer.

Speaker 2

Thanks, Hilfer, and good morning. We're going to keep it brief, give you a further look at trends in recent weeks, and reserve plenty of time for your questions. The world has changed very dramatically and very rapidly since the onset of COVID-nineteen health and economic crisis. Yet our first quarter was exactly the kind of strong performance you'd expect from us. We grew subscribers, had solid revenue growth, and grew adjusted EBITDA by 13% to a record first quarter level.

We are fortunate to benefit from a powerful subscription business model. And while we are not providing guidance at this time, we expect to generate substantial positive cash flows this year and in years to come. Our biggest priorities in the crisis will always be to ensure the well-being of our employees and to manage business continuity. Global stay at home orders swiftly and materially altered the way we work. All of our teams have responded with speed and creativity.

We migrated 5,500 employees and contractors contractors to work from home in mere days. This required a tremendous effort from our IT and HR teams. We experienced a substantial disruption of our call center staffing. Staffing levels fell 50 to 60%, lengthening hold times, increasing abandon rates, and reducing our ability to handle customer needs and support our sales campaigns. In response, our IT, marketing, and call center operations teams took a variety of actions, including enabling more than 2,500 of our call center agents to work at home, significantly increasing online chat capability and enhancing self care tools online and through our IVR systems.

We have made significant improvement here, but I don't expect us to get back to our normal levels until stay at home orders are lifted, perhaps in June or July. But we are playing offense as well as defense To drive awareness of our streaming offering and make it very easy for Americans to access vital news and information, we launched a free online listening period. With most of us staying home, we see an opportunity to get more Americans to stream SiriusXM as well as unique occasion to get our existing subscribers to stream more. Our programming group has been in overdrive. Our content right now not only sounds great, but it's super relevant, and the response has been remarkable.

In times like these, more than ever, our service brings people together, gives people company, and helps us share our changing national experience. We were one of the first media companies to create virtual events to replace canceled ones as we did for the Ultra Music Festival and more recently with Stage Couch. Bruce Springsteen, Taylor Smith, Taylor Swift, Garth Brooks, and many more have participated in special DJ sets and home performances for our listeners. And Howard Stern has conducted phenomenal interviews from his home with Tom Brady, governor Andrew Cuomo, and Paul McCartney. I'm happy to report that Andy Cohen made a healthy return to his exclusive talk show.

Kevin Hart is back doing new shows, and Greg and Greg Norman and Coach Kaye did special shows for us. We all could use a laugh, and we created She's So Funny, a full time comedy channel based on the works of female comics. Last week, we announced and launched an exclusive weekly show by Gayle King, where she hears from and talks to Americans during this crisis. Very early in March, even before the gravity of the crisis was fully understood, we enlisted NYU Langone Health, which has powered our doctor radio channel for more than a decade, to create a new full time channel about the coronavirus. We made this channel available free on both active and inactive satellite radios.

Doctor Radio and our special coronavirus channel are providing daily reports from experts, astonishing stories for medical personnel on the front lines, and fielding calls from listeners to answer questions on everyone's minds. This programming, along with the daily podcast we've created and are making available widely, has become an essential source of the kind of fact based medical information that is both in demand and so vital to our country's future. In short, we quickly took steps to ensure that our audio entertainment service would be uninterrupted. We provided the best possible customer service, and we continue to operate the business with the level of excellence you have come to expect from SiriusXM. I could not be more proud of the efforts and the performance of our teams during this difficult period.

But make no mistake. SiriusXM is also still focused on building strong long term foundations for growth. Our new car penetration rate rose to 76% in the first quarter, on its way to the 80% that I've talked about a few later this year. We continue to extend OEM contracts, further three sixty l rollouts, and increase the quality of our streaming offer. Our investment in SoundCloud in February deepens our relationship with the company and builds upon our successful ad sales agreement.

SoundCloud is one of the largest open audio platforms in the world and plays a critical role in the music ecosystem. It helps rising artists get discovered and gives them the tools to understand how their content is being consumed. When combined with the reach of SiriusXM and Pandora, we can now offer advertisers the opportunity to reach 140,000,000 listeners in North America. This enormous reach and our growing innovative capabilities in digital advertising technology are a tremendous strategic asset that will benefit our shareholders over the long term. Excuse me.

It's difficult to predict what the next three to six months will bring. Our ad revenue our ad revenues will take a hit just like everyone else. But with a eighty twenty subscription advertising mix, SiriusXM is better positioned than most companies to weather this storm with our talented employees, a unique, powerful business model, and extremely strong financial position. And I can assure you we will also be well positioned to capture upside when this crisis finally ends. Of course, we are taking a fresh look at everything in the business.

Like many other companies, we have paused nearly all hiring, and we are putting a tight squeeze on spending where possible while still investing where we see opportunity. Our response to all of our stakeholders will be guided by both empathy and smart economics. Our primary brands at SiriusXM and Pandora remain very attractive to consumers because we have fantastic content. And we keep the service easy to use, and we continue to present a good value proposition. I remain as optimistic about our company's future as ever before.

Once we have a better view of the slope of the restart and recovery, we plan to resume providing guidance. Now let me hand it off to David for more details on the quarter.

Speaker 3

Thanks, Jim. SiriusXM's first quarter was solid across the board, as you have come to expect from us. We added 69,000 self pay net adds and grew pro form a revenue 5% to $2,000,000,000 Adjusted EBITDA climbed 13% to a new first quarter record of $639,000,000 ARPU was $13.95 in the first quarter, up 3.2% year on year. Our churn rate was flat year over year at a very good 1.8% per month, and new car conversion rates improved one point versus last year's first quarter to 39%. Used car conversion rates were similarly solid.

Our installed base of enabled vehicles grew 10% year over year to 128,000,000 or approximately 46% of the cars on the road in The U. S. The used car penetration rate climbed about 400 basis points year on year to about 48%. At the end of the quarter, the total trial funnel stood at $9,100,000 down from $9,300,000 at the 2019. All of that contraction in the trial funnel came in the March as stay at home orders reduced auto sales.

From a healthy new car SAAR of $16,800,000 in February, SAAR came in at $11,400,000 in March with all of the declines seen after March 9. So far in April, new and used car trial starts, a close proxy for sales, are down roughly 55% to 60%, not quite as bad as we thought, and many states are now reevaluating whether auto dealer showrooms should remain closed. However, lower sales auto sales today flows through to fewer conversion opportunities three months from now. We will see the biggest effect of this lower top of the funnel activity in the third quarter. Lower auto sales does provide a benefit of reduced vehicle related churn, which will partially offset an expected rise in nonpay and voluntary churn.

In March, we saw a 15 basis point increase in nonpay and other voluntary churn, which was completely offset by a reduction in vehicle related churn. Conversion rates fall in late March but have already partially recovered. We did see a small number of advertising buys get canceled in late March and a much bigger impact starting this March. We have not yet seen much of a slowdown in payments related to ad sales. Bad debts associated with this or consumers should increase in a recessionary environment, but once again, have not seen much of this impact so far.

Given how much has changed in the economy, when Jim and I put all of this together, we can't help but see these recent trends as confirmation of the high quality of the business model. We currently expect no more than £340,000,000 of CapEx in 2020. The launch of SiriusXM seven is currently expected to occur later this year, but we expect the launch of SiriusXM eight to be pushed into early twenty twenty one. The health of the satellite fleet is good, and there is no customer impact to this push. We still expect to pay no federal cash taxes in 2020 and a very small amount in late 'twenty one.

As we mentioned in the press release, in late March, we temporarily suspended our stock buybacks. Even with that, we put $377,000,000 to work in the first quarter through returns of capital to shareholders and the investment in SoundCloud. Following the buyback suspension, we used cash flow to quickly pay down a small balance in our revolver, which is now completely undrawn and available at $1,750,000,000 and we are building cash. Our capital allocation strategy and leverage targets have not changed. However, global assets have clearly been repriced, and the stock repurchase grid we set at the February had simply become out of date by the time we hit the March.

We expect to take a look at this in light of the outlook for The U. S. Economy and resume the buyback accordingly. We will update you further on capital returns on our next call. And with that, operator, let's open it up for Q and A.

Speaker 0

We will now take our first question from Jayant from Evercore. Please go ahead. Your line is open.

Speaker 4

Good morning. It's James Rackle for Vijay. Two if I could. First of all, on the advertising front, you mentioned seeing significant impact. How do you adapt to that in terms of putting down price versus putting down quantity and balancing those two, particularly on the Pandora side?

And secondly, on the particularly on the satellite radio side, what are your expectations if there is a sustained change in the with the amount of time spent in cars increasing work from home? How that translates through into subscriber impact and your ability to offset that with, you

Speaker 2

know, in home, private solutions?

Speaker 4

Thanks. So

Speaker 2

I'll take the first half of your question, and David will take I'll take the second half of your question, and David will take the first. So let let me comment. I I don't see, like, at this time, why there'll be any material change in the demand for our product going forward. Obviously, the amount of listening in the car is significantly down over the last six to eight eight weeks. Once the country is open again, I see a big chunk, if not all, of that listening, returning.

I, you know, I I think Americans have had a love story for their car for a long, long time, and and I and I don't see why that's gonna change. With that said, I'm really glad that we have significantly strengthened our streaming offering on on the SiriusXM side the way we have over the last three years. I'm also glad now that virtually all of our subscribers, receive that, receive streaming with no for no extra cost. So I think we're well positioned either way. And so I'm not worried at all about the demand for or the listening hours for our product going forward.

David, can you take the question on advertising, please?

Speaker 3

Yeah. And James, if I heard it right, I think you were talking about what can you do to bring down price to stimulate the demand side. And for what we see generally in the advertising markets right now, you can drop your prices, but you're not really going to bring a lot of dollars out. Advertisers are cutting back for a whole whole host of reasons. You know, one of the you know, have a little bit hesitant to say this, but, you know, we see some encouraging signs.

If we if we were literally to take the order book, you know, for what it for what it says or what it is, that, you know, you'd have the point of view that advertisers think we're gonna be back to normal in the third quarter. Now Jim and I look at that and recognizing that, people can pull their ads at any time. For the most part, we think that's probably hopeful work and people have time to make decisions about how quickly they restore advertising because you can turn it up pretty fast. And so we'll just have to wait and see. But for the situation as we walk into this early part of the second quarter, I mean, you can drop your prices.

But the fact is that you got a you're you're in a demand side problem here, and you're not really gonna stimulate it with by dropping prices.

Speaker 0

Great. Thank you. Next question comes from Ben Swinburne from Morgan Stanley. Please go ahead. Your line is open.

Speaker 5

Thanks. I wanted to ask about your programming during this, you know, pandemic and stay at home situation in a couple of ways. You guys typically don't share engagement statistics, and I know it's tricky with the satellite business. But I was just curious if you had a sense for how the programming was resonating with listeners who are, as you just were talking about, not driving, not commuting, but in the home. And also, you expect the programming moves you've made to impact your programming cost structure one way or the other.

I think you even mentioned in the release that you're continuing to pay for sports, even though there are no sports. So it's really a question around the moves you've made in content, which seem to be really resonating, at least anecdotally.

Speaker 3

I mean, thinking about some of

Speaker 5

the stuff that Howard's been doing has been pretty incredible, and how that is impacting or not engagement on the platform broadly. And then also how how much it may be impacting the cost structure, you know, one way or the other. It's kind of a bigger question,

Speaker 3

but wanted to get your thoughts.

Speaker 2

So Ben, it's Jim, and I'll start. I'll ask Scott to say a couple of quick words and then David to wrap up on cost. So first and foremost, and I don't want this to sound like a paid political ad, but I couldn't be more proud of the content we have on the air right now. Our team has transitioned so quickly to be able to provide the content that our listeners expect from us, from an environment where we worked at a virtually, probably, I think, eight or nine national studios around the country to where all of our content today is being produced outside of our outside of our studios without losing a beat. Furthermore, we just had tremendous support from the talent that, that, you know, is a big part of the SiriusXM story.

I can tell you that on the SiriusXM side, we do have our own barometers to understand what the response is is to our programming and how it's being received. Examples being, for instance, on the talk side, how many calls we'll receive from listeners on on various subjects. I'll just give you a small one. The Craig Couples did a show on the ball channel a couple weeks ago. The the call in queue was longer, I think, than we've ever seen for for any content we've had on that channel.

And so there there's a good Greg Norman. Norman. I'm sorry. People listening. And so, you you know, we know it's resonating, and and we couldn't be more pleased with that.

On the Pandora side, we have definitely seen a downturn in our listening. It has come back recently, but still not quite where we would have expected it to be. And so we're spending, you know, a lot of time on understanding that. Most of that, we're sure is related to, the impact of the virus right now and and and, obviously, the flip between stay at home and commuting slash working out slash in the car. I also expect that will change and return normal once Americans begin to get back to what we all know we're gonna do every day, which is get back to going going back to work.

So, Scott, anything quickly you wanna add?

Speaker 6

Yeah. Just quick. So, just a couple of things then. One, I think you actually kicked off with how and people took note, both in the audience community and then just the community of the amount of social media and everything which generated, you know, far more than even any of his normal shows, and it continues that way, you know, the day. That led to people at least realizing we could go live.

We could take calls, which I don't wanna downplay that compared to anybody else out there. Just the fact that we have live radio shows taking calls multiple billions every day, you know, around the clock. And then that led to, obviously, a lot of stars and others that work with us really digging in and using their channels from Bruce and his, you know, guest DJ sessions then, and then he'd have to do stuff, the DC boys town hall with all the cool j. And then that led to people like Jimmy Fallon saying, I'll host this one. Taylor Swift, this one.

And it just continues each day and will be more coming shortly of talent that really wants to get engaged because the service is functioning in a unique way during a unique time. So as Jim said, I couldn't be more proud, but we're just getting started, and we learned a lot from this. And some of this will continue as as we come back to them.

Speaker 2

Dave, do you wanna comment on on go ahead. Sorry, Dan. Yeah. Yeah.

Speaker 3

Yeah. I got it. Yeah. One one more thing on the, Jim mentioned the Pandora listening done, and we we can, you know, track the listening changes directly to commute times. And, you know, we Right.

Look at the markets with stronger stay at home orders, and, you know, we've looked at the markets that don't have them. You know, there's a lot of data at Pandora. And you can track the change in listening trend directly to commute. We have picked up quite a bit on CE devices with the whole growth in smart speakers. So we did actually see people you know, sort of, effectively transitioning to a different location.

But the pickup in CE doesn't make up for, you know, the the loss of commute. On on the cost side, we have some there are a few contracts where we have lower expenses given what's happened. And some of them are related to the reduced demand on the advertising side. But for the most part, our programming costs remain the same. Got it.

Thank you all.

Speaker 0

Thank you. We will now take our next question from Steven Cahall from Wells Fargo. Please go ahead. Your line is open.

Speaker 2

Thanks. You talked a little bit about the churn dynamics and lower vehicle churn versus the involuntary churn. Could you maybe talk a little bit about how churn trended in 2008 to 02/09? And do you think that you can have it sort of be net neutral in terms of the way those two forces are acting in this cycle? And then you said the trial starts were down about 55% to 60%.

That was a little better than thought. Do you think that's the peak of the decline? Or is it too soon to tell? And as the funnel shrinks, should we start to expect I assume there's a pretty big offset to the SAC expense. Maybe you can just help us think about how much SAC comes down when the funnel starts to make that sort of shift.

So so David will David will respond to some of those in a bit. Just one point I wanna make just before remember in 2008 and 02/2009, we did not have a used car funnel that was near as powerful as we do today, and we weren't penetrated in the fleet anywhere near where we are today. So I believe we can we can take a lot of lessons from how nonpay and voluntary behave during that time frame, but I don't really believe there's anything from that period that's going to help us predict whether one's going to offset. With that said, David, let me turn it over to you.

Speaker 3

Sure. Yes, in February, we were sort of late into the recession and early out of the recession because our the demographic and the customer base is above their average income. We're kind of more representative of the general driving population now with what Jim said about the growth of the second owner business. And so we would expect to be we don't know. We're going to find out.

So I'm going to tell you right now, I don't know what the answer is. But I would expect that we won't be quite as late in and quite as early out as last time. But we still have a customer base on average where the demographics say that we have better than average income. So they should be the customer base should be more recession resistant. I do expect because of the vehicle related churn that being a much bigger component to have less of a spike in churn than we had the last time around.

How much less of a spike? Sort of anybody's guess. But we're hard pressed to believe that churn wouldn't rise a little from this 1.8% level that we've been at for quite a while, but we don't expect the same kind of a spike. On the SAC, trial starts in SAC, the combination between those, it is sort of a one for one. As you take new car sales down, that you're going to end up ultimately with less production unless you expect on the other end the spike to recover.

That in other words, that if you go from 16,000,000 car sales down to $11,000,000 you think you're going to make all those up on the back end, your SAC would just come a little bit later. So a lot of what you have to forecast out of SAC is what your expectations for recovery is. In the meantime, we know that automakers have shut the plants down. So they're not making the cars now. That's absolutely going to result in a volume reduction in SAC.

Speaker 4

Great. Thank you.

Speaker 0

Thank you. We'll take our next question from Jessica Riefenge from Bank of America. Please go ahead. Your line is open.

Speaker 7

Hi. Thank you. My first is for Scott or Jim and then for David. So the first side or just to go back to the content, the release says, and as you said, you're you're still paying the sports leagues. And I'm just wondering what flexibility or what you get in return.

Do you send contracts? Do you like, what what happens with these contracts? And then I guess there was an announcement. Howard Stern must have said something on the show this morning that he's open to ideas on his contract. Can you give us any color on what what's going on there?

And then for David, I just you know, it seems like an opportunity possibly to maybe change the long term business operations if there's something that you feel could be more efficient. Are there any longer term impact from what's going on now? And then finally, could you talk about the confidence in resuming the buyback? That's it just seems amazingly confident when you it it sounds like you're leaning towards that. Maybe you can give us color, but it does sound like a big vote of confidence from from the company.

Thank you.

Speaker 2

Okay. So so so, Jessica, your I think it was a five four or five part question, so I'll try to keep I'll try to be an effective win leader. I'll take the question on Howard. I'll I'll comment quickly on the sports league. Scott can add him if he wants to, and David

Speaker 6

Yeah.

Speaker 2

Will take the rest. The so number one, you know, I've been really clear. I want Howard Stern to be on SiriusXM for as long as Howard wants to work. And I, you know, I don't I think Howard I know Howard and I have a tremendous relationship, and it's never been better. And as importantly, maybe most importantly rather, the quality of the show that he's bringing to our listeners every day couldn't be better, and I couldn't be more proud of it.

You know, I've I've put in place a cadence to begin discussions. I've had you you know, Howard and I chat quite often, but we put in place dates to begin more formalization of those discussions as as Howard's contract does expire at the end of the year. I'd actually, you know, set some time aside to begin taking you know, to begin working this through with Don Buchwald, who's Howard's agent. Obviously, with the coronavirus, we haven't been able to have those discussions. I actually spoke with Don even, you know, a couple days ago.

And, you know, I I think those discussions are better held in person. I'm not concerned that we won't find a way together to to to to, you know, try to to to find a path forward. And I'll have I I hope to have more to say when we do our third quarter call. But but, you know, again, think I I said enough there. On the on the sports programming side, I can tell you, know, there's gonna be a gigantic argument or no argument, you know, down the road.

First and foremost, you know, our number one concern is for the leads to get started and get the content back on the air that we know our subscribers love. There'll be, you know, all kinds of discussions here, but I think David summed it up pretty pretty well a couple minutes ago, which is certainly in 02/2020, we don't expect any change in the cost of our of our sports contents. David, you wanna take it from here? Jim, can I add just two things?

Speaker 6

Go ahead. Sure. So so just the one thing on Howard. You know, obviously, this whole situation unexpected has given Howard an entire another level of enthusiasm and appreciation for the company and all that. Even this morning on that stuff, he was talking about how proud of it he is and more importantly, how many of his former fans who didn't even know how the show really had evolved have now found the show through the free listening period.

In addition, this gives Howard an additional tool besides the studio. This this Zoom thing when talent doesn't have to be in New York or LA to promote a movie or a record or or whatever, that they he can get major guests from their home is an entirely new tool and is awesome, and then I expect things to continue. So we feel really good about that. And then just on the on the sports league, you know, Jim said it well, but you also have to remember, at this time when there's nothing else on, we have the largest library of classic sports being broadcast. I mean, there's many, games going over time.

So we're filling that gap as best we can, and and the leagues value us as partner, and we do them. But, you know, David will will deal with the financials as we go forward on that.

Speaker 3

Jessica, your your question on how this might change longer term business operations, it's it's a really good one. We've been talking a lot about this over the course of the last, you know, six weeks. So when you you know, as you you know, we've been a high touch customer service organization. We have, I think, between inbound and outbound call center staffing. Have, like, 10 to 12,000 agents, you know, around the world.

And, you know, with half of them, you know, not coming to work as of about, you know, five, six weeks ago, that, it really drove us into figuring out, well, how do we change do things? And now that we're five, six weeks into it, you know, one of the questions we're asking ourselves is, well, as we optimize in this new configuration, what is it what does it mean to long term performance? And is there an opportunity in here? So we you know, you see us, you know, moving into, you know, improved efficiency and and digital experience for for customers that we're, you know, figuring out how to turn up and make more effective chat agents as opposed to, you know, the the live agents. And, you know, as and we can work our way through an awful lot of the business and wonder about that.

Do we need as much office space? Do we actually need to put people in the air as as often as we do? We're I don't know what all of you are finding, but we're finding that this world of working across Zoom to be highly effective. And and so there there is a a real consideration of do we need the same kind of G and A infrastructure that we used to have. Even though we have incredibly strong liquidity and a lot of cash flow, and we can clearly afford to pursue new initiatives in the same way that we had in the past.

We've asked all of our guys to look hard at the initiatives that they had on the calendar for this year and start prioritizing between them. And part of that gets forced by the hiring pause that Jim mentioned. But we're going to you know what they say, never let a good recession go to waste. And, you know, we're working hard at this. Out of car engagement is going to be a, is turning out to be a really interesting thing for us that with you know, it was hard to get people's attention for Sirius when they were busy driving in their car.

And we're finding the free streaming alternatives as well as just our organic efforts to get people streaming more have really picked up steam since the commencement of the crisis. Stay tuned for how these changes play out. With on the buyback, well, we are confident. Clearly, we don't have a liquidity or a leverage problem to deal with. And what we are looking at is a price dislocation.

That's not just a dislocation for our asset, the Series stock. It's a dislocation for other people that were in the market. So there's for a company with an awful lot of financial resources, that we're in a good position as it relates to opportunities external acquisition. And with respect to the buyback itself, we'll take a hard look at what we think the shape of the recovery could look like, what we think that means for the value of our stock. And just like we have in the past, when we believe it's on sale, we won't hesitate to step on the gas.

Speaker 2

One point I'd like to add, David, is Jessica, we've been in as you would expect, we've been we've had multiple conversations with our board on this subject and including, obviously, just a few days ago. And I think David summed it up well as to both where the Board is and the direction the Board has given David and I, which obviously lines up exactly with where, with what our recommendation was. Next question please.

Speaker 0

Thank you. Our next question comes from Zack Silver from B. Riley FBR. Please go ahead. Your line is open.

Speaker 4

Okay, great. Thanks for taking the question. But first, just can you talk about what sort of levers you're contemplating using to win back any customers that may decide to pause or cancel to to a subscription in light of the economic downturn? And maybe if there's any kind of puts and takes on how that should impact the ARPU trajectory this year, whether it's material or not. And then the second one is just on some of the voluntary churn, you know, expedite on pay that you've experienced.

Do you have any sense of whether so far, that's been subscribers who are canceling because they're spending less time on the road and seeing less value of the service right now, or are those cancellations more from households just tightening up their discretionary expenses? Thanks.

Speaker 2

David, why don't you take that one?

Speaker 3

Yeah. So, you know, our nothing's really changed with our offer strategy. Right? The you know, we've we've done some things to streamline the offers in some respects that, you know, we when you used to get an agent on the phone, they'd take you through a more complicated offer cadence than now you can do it in the IVR, you can do it online, you can do it through a chat agent. And in those less interactive channels, we've tried to streamline, simplify the way that pitch is made.

Will it have a big effect on ARPU? No. Although you have to feel like in a recession environment that whatever increase in ARPU you thought might be coming in the business, it's got to be less, right? You're in a more recession sensitive environment. On the non pay side of things, you know, I don't I don't have any more data on that than than what I gave you in the prepared comments, you know.

So we tried to give you the data point of, okay, in March, we saw a 15 basis point increase in the total of non pay and other voluntary churn. It's you know, we've always felt that at, you know, you know, under $14 on average per subscriber that our our service has never really been about, you can't afford it. It's more that you choose not to pay for it. And so we do look at the two together. You've heard us talking about those two together in sort of the 120 basis point range over the last couple of years.

And so we saw a 15 basis point increase in that in March, but fully offset by the vehicle related churn. How sustained will that be going forward? It's sort of anybody's guess. We'll keep you posted.

Speaker 2

Got it. Thank you.

Speaker 0

Thank you. We'll now take our next question from Jason Bazinet from Citi. Please go ahead.

Speaker 4

I just had a very simple two part question. On gross additions, as we wait for sort of the auto plants to come back online, do you

Speaker 2

mind just giving us an update on the share of

Speaker 4

gross adds on the new car side versus used? And then on churn, you mentioned you don't expect churn to be as bad as the financial crisis of o nine. I assume that was a comment on sort of full year churn numbers, not the sort of trough to peak that we saw quarterly ten years ago or so?

Speaker 3

I think it's on the second question, Jason, I think it's both, right? And again, I don't know what we're going to see. I hope I'm right. But I don't think we'll see the kind of full year spike. I don't think we'll see the quarter spike quite as big.

I'm trying to remember now, but I think we might have seen like a 2.2% peak you know, in, yeah, in 02/2008, 02/2009. And, you know, could it go there? Sure. You know, I have to admit with the dampening effect of vehicle related churn, I'd be a little surprised, but we're all going to see. Yes, on gross adds, with new car sales dropping, right, so if you come through the first quarter of the year, the share of gross adds for new car versus and Jason, I'm talking about new car conversion, conversion from trials as opposed to winning back an original owner two years after they bought a new car, right?

And that's consistent with what you've heard in the past. It probably because of the way that sales fell off in at the end of the first quarter, maybe it dropped down a couple of ticks. But it's largely consistent with what you've been seeing. Certainly going forward, that as we go through the second and third quarter, new cars is probably going to drop a little faster than the subsequent owner plus the original owners who were winning back. Right?

So but, you know, again, we'll we'll have to see. But I I don't I don't really see anything in that materially changing from the trends you've been seeing.

Speaker 4

Okay. Thank you.

Speaker 1

Operator, can we take our next and last question, please?

Speaker 0

We'll take our next and final question from Brian Kraft from Deutsche Bank. Please go ahead. Your line is open.

Speaker 8

Hi, good morning. I wanted to ask about a little bit more on the Pandora ad revenue. Can you give us any sense for the actual pace of the advertising revenue declines that you're seeing at Pandora, quarter to date, just to help us frame sort of the worst case scenario? And also, how should we think about the margins on the ad revenue that is declining at Pandora?

Speaker 3

Do want me to take it, Jim?

Speaker 2

Yes, please, Ben. Go ahead.

Speaker 3

You know, so we're we're hesitant to provide, you know, information about what what's really happening with the book on on the advertising side. You know, it's it's still it's still a new business to us, and it is only 20% of the revenue. And, you know, so in the the part of the hesitation is is that it's the velocity of the change in orders. Right? But don't think Jim and I have a feel yet for how fast the people can change their minds on the advertising side.

So that's really where the reluctance comes in. I'm reading a lot of things from published statistics from various sources on what's happening with advertising sales out there broadly. It seems that digital properties are doing a little bit better than broadcast properties. Digital audio is a much smaller market than search and display. And you know, it's it's a scarcer commodity for people who who wanna reach that way.

So that you know, on the advertising side, that's about as as much as I can say. What was the other question? Oh, the margin on it. Yeah. So on the you know, so the on the Pandora side, you you don't have a completely variable cost associated with that, right?

The The formulations of these licenses are greater of, you know, sort of listening time or percent of monetization. And so, if your listening doesn't decline proportionately with the demand, you can flip, right, into the unit cost instead of the share of revenue. And generally, we expect that to be occurring. There's going to be fewer royalties than there otherwise were, certainly for the fact that listening is down a little bit through the crisis, and there'll be fewer royalties because of the drop on the demand side. But I do think the drop on demand from advertisers is going to be in excess of the drop in listening, and so we're not going to get a one to one benefit there.

Speaker 2

And maybe just

Speaker 8

one follow-up on the usage side too then. The advertising listening hours were down, I think, a little bit less than we expected. So it seemed like the underlying trend there was a little bit better, but there was probably also a pretty big falloff in the March. I was wondering if how much better that number might have looked, if not for the COVID nineteen crisis stepping in late in the quarter.

Speaker 3

Well, you know, hard to know, right? But, you know, we were we're feeling pretty good about, you know, the plan that we had until we got to March 9 on all aspects of the business. The satellite radio additions, listening time, ad orders were all very strong. And then when you hit the March 10, it was like business activity around the world fell off a cliff. So we are in a new normal.

We do feel. We had a call yesterday, Jim and I did, with you know, Scott was on, Jennifer was on, a lot of other people, and, you know, talking about listening trends at, you know, at Pandora. And and they are, you know, confident that, you know, they can track the change in listening to the reduction in commute time.

Speaker 2

Yeah, Brian, just one comment from Jim is your observation is exactly right. We were David's exactly We were sitting on March 10 and, you know, first of all, I wanna I wanna reiterate what I said in my comments. I I think we had an outstanding first quarter. It would have been even better without COVID nineteen. There's just no question.

And the only reason I say that is not to say, oh, gee. You know, let's let's cry over spilled, you know, over over lost, over spilled milk. That's that's not the point. The point is the strength of our business model was was never better evidence than than in the first quarter. That demand when it fell hit us both in revenue and ad revenue and in subscriptions.

There's no question about it, and I believe both of those metrics will come roaring back, once we get back to normal. Thank you for

Speaker 5

the Thanks, Brian.

Speaker 1

Thanks, everyone, for participating in today's call. Stay healthy, and we will speak to you soon. Goodbye.

Speaker 2

Thank you. Bye bye.