Good morning, everyone. I'm Sebastiano Petti, and I cover the cable telecom and satellite space at JP Morgan. I want to introduce Zac Coughlin, CFO of Sirius XM. Zac joined Sirius XM as CFO just in January of this year. This is your first conference. Thanks for joining us today.
Of course. Thank you for having me.
Great. Just to start off, since laying out your three strategic priorities before your time, in December 2024, you delivered a strong 1Q with record low churn, positive ARPU inflection, and 6% EBITDA growth. Where do you feel you are in the early innings of this transformation, and what does the next phase of execution look like from here?
Great. Thank you again for having me here at the conference. I've been on the stage before, but never by myself. Sebastiano, you promised to take it easy on me. We'll go from there. I think, thanks for starting with asking about December 2024. I would say that it's important to go back to that point in time, because at that point, we really focused in on three main pillars of the strategy, and I think those really are what's driving the financial performance that we're seeing here in the first quarter.
The first of those was strengthening the subscription business, through exceptional in-car listening. Secondly, accelerating growth across advertising with a big focus on off-platform monetization. Thirdly, leveraging the scale of the Sirius XM portfolio to drive efficiency and long-term shareholder value. Those are the three main pillars.
The results we're seeing in the first quarter are really coming off of improvements over that 18-month period in each of those. Starting on the subscription business, we've really worked hard at strengthening the core in-car experience. We've improved packaging and pricing. We've driven initiatives like continuous service, companion subscriptions, and all of that is driving deeper engagement with the customers by really leveraging the data and information that we're getting through 360L. That's showing up, and we could see that in the subscription metrics.
We see it in ARPU being up. We see it in churn being record lows, as a culmination of all those pieces. On the advertising side, we've continued to focus on the growth engine of podcasting, up 37%, year-over-year in that off-platform piece. Programmatic continues to be a growth engine for us.
The most recent announcement around YouTube, which I would guess will be things we'll get into here as well, and I think is a really important statement on how scaled and sophisticated our advertising platform has become, and we saw that with growth in the first quarter, following growth in the fourth quarter also. Lastly, on the piece of operational discipline and efficiency, obviously important to me as well, specifically. We came off of 2025, where we drove a couple hundred million dollars in gross savings.
Another $45 million in the first quarter towards our $100 million objective for 2026. As we continue to work on streamlining the organization, working on modernizing the infrastructure, and driving strong free cash flow out. That was the big metric we wanted to drive growth for us this year towards the $1.5 billion target we've stated for next year.
Specifically beginning to also be able to return more of that to shareholders. By the time we get into the second half of this year, we'll be inside of our target leverage range of low to mid 3s, which will allow us the freedom to be able to turn that free cash flow towards increasingly shareholder accretive opportunities. Those plans are now well underway, and we feel great that we're going to land for the end of the year.
I think it's really been a culmination of the work and the focus of those three pillars that's led to this first quarter. I think it also gives us the belief that the strength of delivery will continue to carry forward as well for the rest of this year.
Great. Definitely going to come back and touch on a bunch of those topics. First starting around spectrum, right? Big topic for Sirius XM of late. As you think about the spectrum opportunity and the monetization, I think you've talked about partnership driven path as the path forward. Can you help us unpack what that means in practice, including whether leasing, perhaps a joint venture, maybe other similar structures are on the table, and what a realistic timeline looks like around that?
Yeah. Yes, I think that really the three core pillars we talked about in December 2024, spectrum has now continued to emerge as almost a fourth pillar. I think first and foremost today, spectrum is a core piece of the underlying operating business as we have that. I think as we look forward from here, though, it's really about building optionality and choices.
Just to sort of ground everybody, for those of you who are not as familiar, we have 35 contiguous megahertz of spectrum, right in the middle of the mid-band segment. That's really broken up into three key distinct elements. You have CD blocks on each side of that, so five on each side, that have been focused predominantly on satisfying elements of safety and security delivery.
For the main core legacy 25 MHz, you've got that split between 12.5 MHz and 12.5 MHz tied to the prior legacy of Sirius and XM being separate companies. That low band 12.5 MHz is where some of our longer-term legacy subscribers have been landing or have landed over time. That still satisfies today in the millions of customers and subscribers. The more heavily utilized upper 12.5 MHz, which is where we've been focusing transition from a technology perspective over the last handful of years.
It's really those three distinct pieces. I think for us, what first and foremost is important is that we continue to deliver on the stated licensed objective of what each of those three bands are, and we continue to do so across all three, while at the same time building the optionality for what is emerging as a valuable resource and asset. I think that will come through. We don't see this as one single monetizing event.
I think each of those three come with its own specific moments of timing. I think what our focus for right now is really on building the optionality to make sure that as this space and sector evolves, that we have built the sorts of relationships required to make sure that we are active.
If we take a look at the ecosystem of partners that are interested in this area, the one core element across all of them is the core central element of spectrum in their business models, and I think we sit square in that space, and it gives us a good position to be able to work with all of them.
I think what's important for us is while the monetization of some of those elements of the spectrum may come in over a phase period of time, the work on building those partnerships and understanding what ultimately what is the right business model, to optimize for that value over time begins now. I think the work on doing that begins working with that ecosystem of partners.
Just to really just follow up quickly there. Not a single monetizable event. Should we think about that related to the different bands and the different, the WCS, the C and D relative to the TerreStar spectrum? Do those have different timelines? Is that kind of what you mean in terms of a single monetizing event?
Yeah. I think the timelines are gated to a certain extent based on the development of the technology and the partnerships that are available today. I think as we take a look at each of those three pieces we talked about, the ability for partners and the technology to take advantage of utilizing each of those pieces will develop in different phases and times from there.
Also, our underlying utilization today for our core, highly profitable business model looks slightly different in timing across each of those. I think that's why we say that it doesn't have to be a single monetizable event. We expect that to be a, for lack of a bad pun, spectrum of utilization over a period of time.
Okay. Our D2D, is that the use case that kind of probably percolates or the maybe topic of conversation most often cited?
Well, it seems to be the most popularly talked about, and I think that in some ways, the development and interest in that by some of the largest players in the telecom and connectivity space only helps to bring forward the value of Spectrum overall, which we're sort of quite happy about. I think at the end of the day, we're not a single technology. We're technology agnostic, I suppose, and partner agnostic.
I think for us, we're really making sure that we build that level of optionality to be able to deliver for our shareholders what is the best outcome from that space. direct-to-device is obviously an area of growing interest, and we think likely to be one of the most scaled and sizable monetizable opportunities.
That makes a lot of sense. Yeah, definitely a big focus the last couple of weeks and particularly here this week at the conference.
Yeah.
Definitely something to watch. As we think about shifting to the core business and expectations around self-pay net adds, starting with the near-term outlook, I think management has reiterated expectations for, quote, "modestly lower" self-pay net adds in 2026, which seems somewhat conservative despite limited visibility around OEMs, and expectations for lower SAR this year or lower SAR year-on-year. I guess, what, if anything, has changed in your view since the last update?
I think if we take a look at the first quarter performance, we're really happy with how self-pay net adds came out. I think strength of self-pay net adds as a metric paired with growing ARPU, which third straight quarter of that, and churn at the lowest levels, for the first quarter that the company's ever seen. I think that those are a function of going back to a little bit we talked about, sort of the work done over the last 18 months, to make sure that we're putting the customer at the center of the activities we're doing.
If you think about the initiatives we put into place, we've had continuous service, which is really a core piece of cutting or making a seamless experience for the customer as they transition through elements of the vehicle life cycle.
I think at the core of that is the idea that our relationship has evolved from being with the car to being with the end customer, and the ability to make increasing decisions looking at the end customer and what is good for them. Continuous service has been a big piece as we take a look and drive those metrics in the right direction.
Then the significant work around pricing and packaging that we've done over the last couple of years as well to really sharpen that idea of having sort of a good, better, best and making sure that pricing and content and value are matched at each of those points in time. I think all of those initiatives are what's leading to the performance we've seen in the first quarter.
All of those are the sorts of things that we also believe will continue to add value going forward. I think as we take a look at the outlook for the year, the one piece that is still somewhat uncertain, and as the year progresses, gets more and more certain, is the backdrop of the OEM environment.
Driven by the broader macro environment, whether it be gas prices, inflation, things of that nature that historically have impacted OEM sales and then has a knock-on effect to us. I think what we're just watching to see is how do those evolve over these next few months, and we'll be able to give a better update as the year progresses.
Just sticking with Companion Plan, I think Jennifer described it as maturing. How are you thinking about the durability of that program? I think 124,000 net adds here in the first quarter, or reported in the first quarter, 80,000 in 4Q. I think you've talked about using it as an acquisition, as more of a "family plan." Could we begin to see that latter initiative picking up and maybe supplementing some of the maturity this year?
Yeah. I think that we're really happy with the results of the Companion Plan. The idea obviously of creating a family plan, not new and it's obvious in that regard, and I think we're seeing the results that we would hope from that, which is lower churn, better value proposition. I think what's important on the Companion Plan is really to pull back and look at it in the context of what it's been a key part of supporting.
I'm going to go back to the point on this idea of getting sharper and sharper on packaging and pricing. The team has set out over the last couple of years to make sure that it's increasingly clear that the value you're getting for the price you're paying is more and more t ransparent.
That as we move forward, that we're going through a cycle of we add value, distinct and segmented value, then we build pricing power. Then we wait to see if the market is amenable to taking pricing. We've seen that in 2025. The value add for that was expanding access and for content. Then we got to the end of 2025, we had a Companion Plan which was really a function of expanding access to larger numbers of people inside of there. That creates value. We took pricing in February; first time we've taken pricing in back-to-back years.
As that's matured the cycle of time, we've seen the churn remain low, record low in that regard. I think that strategy is working. Companion Plan was a key piece inside of this ecosystem that's allowed the sub-base self-pay net adds to be stable.
That's allowed ARPU to go up and churn to come down. I would look at the Companion program as less a distinct single subscriber self-pay net add help, and really more of a value-add element of ecosystem that's allowing us to broaden pricing power and ultimately capture that value over time through taking more frequent pricing actions.
Just relatedly, and I guess for those that have been following SIRI for, I guess for myself, over a decade here. Thinking about the, as I think Jennifer has described it, as the benefits of 360L or the promise of 360L.
Yep.
Is now beginning to pay off. I do think there is, and we've talked about data analytics from 360L, I think have enabled better customer satisfaction, churn engagement. How much of the, I guess, recent operating improvement is being driven by some of these data capabilities which SIRI didn't necessarily have because there was no return path on the legacy satellite system. 360L, the app have helped enable.
I guess how much of that is shaping your product and packaging decisions? I guess what does that mean for conversion rates as 360L, I think ramping to 70% of auto sales by the year end and mix shift improving there?
Yeah. I think first and foremost, it's worth recognizing, as you'd said, that the prior communication signal was one way. The talent individuals we have in the company and that insight to the customer to build the company and the successful bases we have with only a one-way signal, I think is worth noting from there.
I think as we at the company look like, what data then does is we're able to take that strong base of inherent understanding of what the customer wants and complementing it. We're really just at the beginning of that journey because 360L has been rolling out and to work its way through car parc of any sort of technology is its own cycle from there.
We now have enough of an installed base to be able to look at that data and make assumptions that we believe confidently actually extend across the non-360L base as well. That data and insight is increasingly growing and becoming embedded in the decision making. That starts with programming. There's not a single programming decision we make anymore without understanding true listening behaviors at an incredibly granular level.
I think consumers can feel that benefit in terms of how programming getting sharper and sharper from there. I think for pricing and packaging, our ability to really understand what it is of our service that customers value and how do we give them more of that to drive pricing power. That's embedded inside of there.
I think lastly, in terms of the marketing communication, the ability to increasingly do personalized engagement with customers, and making sure that they're aware of the unique value add that we have. In many cases, they don't even realize that we're able to get to that point. Data's driving across all of those pieces. It's impossible to put a single metric tied exactly to that, but I do not think it's accidental that we're seeing that.
At the same time, I haven't mentioned, we just recorded our highest internally recorded customer satisfaction in the company's history. I think all of that is helping us give consumers more of what they want from us and expose them to more things that we know by customer cohorts that they're likely to be responsive to. I think that's increasing, improving some of the stickiness leading some of the metrics we're seeing.
Yeah, I think first quarter churn, if I'm not mistaken, was a record low of 1.5%.
Yep.
Even through a February price increase. It seems like you're obviously not guiding, but maybe some of this churn reduction, maybe there could be some additional opportunities or there's tailwinds there.
Yeah. I'm glad you mentioned the pricing. We took pricing for the first time ever in back-to-back years. I think there's always a certain amount of uncertainty. We built confidence in the strategy of adding value, building that sensation of pricing power, and then taking it. I think that's happened quite successfully. Right? We're now through enough of this pricing cycle to really monitor and watch the churn that comes after there.
We see the performance around churn at the 1.5% level for the first quarter and the strength of that and not being impacted by the other actions were taken negatively, the strong performance of that continuing as we move through into the second quarter as well.
Got it. With continued churn improvement, three quarters of consecutive ARPU growth, I think it reached $14.99 in the first quarter, but it appears your base is absorbing this back-to-back yearly rate increase that we talked about. As we layer in module tiers and the ad-supported opportunity, what are some of the puts and takes that we should be thinking about on ARPU, particularly at the lower price points?
Yeah.
More contribution there from a mix perspective.
I think that first and foremost, we are a premium service. As such, the premium pricing that we're taking in, that good, better, and best, we want to make sure we're continually driving increasing values for our highest paying, in many cases, most loyal customers.
I think we focus there first and foremost. Below that, the focus is really making sure as we get sharper and sharper on what is the specific value add to make sure that we're delivering delineated, differentiated positioning between what customers are paying and what service they're getting and making sure that stays value. I would say I would look at a la carte as sort of the lower paying customers. I think our goal for them is very much the same.
We want to make sure that we are understanding them better through utilization of data and listening patterns about what they're interested in. Then making sure that we continue to, as much as we can, target to make sure they also are seeing increasing value. In some ways, I would say it's a combination of giving them increasing value or actually for us, understanding what value they already create, and making sure that as well over time, that we are able to improve ARPU against that set of customers as well.
Okay.
Right. It's not a matter of capturing ARPU at the top and then trying to manage growth at the bottom. I think what we want to see is all tides rise, and many of the initiatives we're putting in place around increasingly sophisticated levels of one-to-one consumer engagement, understanding what they want, is enabling everybody to feel value. Continuous Service is a perfect example. Regardless of where you are in the ARPU tiering, Continuous Service is an absolutely customer-friendly experience where we've cut seamlessness out of there.
The integration between the digital app and the vehicle, all customers benefit from those things. I think that's why what we're seeing in the ARPU improvement is the opportunity to be able to improve across all tiers of that. That's giving the confidence that this should remain an improving factor. While we've said for the rest of the year, we would expect ARPU to be up each of the quarters this year.
Okay. All right. Shifting gears, obviously, a really big focus for the investment community has been your recently announced deal with YouTube. You announced the deal to become the exclusive U.S. advertising representation for YouTube's audio inventory, which expands your reach to 255 million monthly listeners, if I'm not mistaken. Roughly 90% of the U.S. population, over 13 years aged. With the deal launching in the fall and financials expected to be more meaningful next year, can you help us frame the profile of revenue relative to your existing ad business, maybe margins?
I think that one of the most exciting parts of the YouTube partnership is actually it gives us a platform to talk more expansively about what already is a scaled and important advertising business. Today, around $1.8 billion. That represents already about 10% of the total audio market segment from there. We are already a scaled player, and I think this gets the importance of why we ended up with a partnership with Google for the YouTube audio advertising. That scaled business is made up of three major elements.
One, we have the sales force to build the scaled relationships with the largest national advertisers and the big holdcos. Scale on that side of things. We have scale on the inventory, as we have both our fleet of our content with, we think is some of the best-in-class podcasts as well as other content.
You put in the middle, we have the scaled ad tech to be able to pair those two efficiently. I think for all advertisers, what you're looking for is targeting and measurement. That is something that on audio has been maybe behind the curve versus where video's been. We have been able to develop the ability to be able to give scaled measurement and targeting increasingly so for the advertisers. I think that that structure, as we look at it, has allowed us to engage with YouTube to be able to become their partner.
Obviously, we're talking now about a scaled material size of inventory. As you look at looking forward from there, we've not sized yet quantified the size of what that is, because we're still in the early stages of understanding the substance and quality of that inventory.
I think we'll be in a better position over the next few months to be able to talk more about what that looks like. What we do know now, without giving specific numbers, is that will be material. That means material growth, not just for our advertising segment, but this will be material growth with regards to total Sirius XM company revenue from there. From a profitability perspective, I think, again, we're not giving specifics there yet, but we would not have pursued the opportunity if we didn't believe that it would also be material from a profitability perspective.
We'll work on communicating what that looks like. I think there'll be a ramp-up period. My guess is that materiality will be unlikely to manifest itself in the financial statements probably for over the next few quarters where we get that ramped up.
I think by the middle of next year, we'll begin to see that ramp up and we'll be able to talk about the size that we're talking about, and with that'll come more insight around profitability as well. We expect this to move the needle for the total company on both revenue and on profitability.
As we think to January of 2027 and you're offering guidance, I would assume at that point in time, guidance should reflect your best judgment at that point in time of what the YouTube.
Are you trying to get me into giving 2027 guidance already?
I don't want [crosstalk]
I see Jen look in the audience now.
Don't want to get in trouble.
We will absolutely be quantifying for everybody the YouTube impact. I think it is going to be big enough that we won't be able to talk about the business without actually making sure that it's understandable from there. I think it'll be important to be able to make sure that we see how much of the growth is that versus the other pieces. Yes, we will be able to talk increasingly specific as we come to more deeply understand that body of work over the next few months.
Should be exciting.
Yeah.
Sticking with the theme of scale, in terms of strategic opportunities, I guess it seems like the $255 million give you a lot of scale already.
Yeah.
In audio. How are you thinking about scale as it pertains perhaps to ad-supported versus subscription? I guess, given where you are today, given some of the opportunities on the come, would you be willing to move above historical leverage ranges for the right opportunity should they avail themselves?
Yeah. I think first and foremost for us today, we're lucky that in both the subscription business and on the advertising business, we are already scaled. There's nothing that we would see that we would need to pursue to take a further step up driven just by scale. In fact, we believe our scale today is already an advantage that would let us take advantage of, again, I would say things like the YouTube opportunity is definitely available because we're already at scale from there.
I think speaking more broadly around leverage targets overall, I think we feel great about our opportunity to get inside of our target leverage range by the back end of this year. We've said low to mid threes. We've worked hard on that over the last couple of years.
Again, I guess at the same time, stepping up the free cash flow to the $1.5 billion target we have set out for next year. What that does is it increases a significant amount of optionality for us to continue to, of course, invest in our business and drive growth. I think we saw that in the first quarter growth across both the subscription business and the advertising business. Really important to us, that idea of getting to growth. Also importantly, increasingly be able to return value to shareholders. Right?
I think we'll have more to talk about that over the next couple of quarters. That gives us the optionality and the choices to work our way down the capital allocation strategy to make sure that we're increasingly putting that value back in the hands of shareholders, which is something they're obviously very interested with us. I think that being inside of that low to mid threes allows us the choicefulness to be able to do that, and especially be able to continue to take advantage of things like share buybacks or otherwise that we think will be a core piece of that strategy.
Yeah. I think based on our conversations, lots of investors that have hung in there with you, and I think now that you're light at the end of the tunnel in terms of the leverage target, I think pretty excited about that opportunity as well. Just sticking with that theme for a moment, how do you think about, obviously, not to put the cart before the horse here, but how should we think about the split between dividends and buybacks as we move.
Yep.
Towards that, this more meaningful step up or flexibility in capital returns as satellite CapEx starts to come down next year?
For sure. I think as we think about the capital allocation strategy, that goal of getting low to mid threes sort of sits at the top. I think we're well on our way to that. I think below that, we want to make sure we're continually to invest in opportunities in the business. The $1.5 billion target we've set out for next year contemplates already having the cash in there to be able to invest in whatever we need to continue to grow.
What that then leaves is, stepping down below there, you've got dividends, which we feel good about the dividend level as we have it now. Healthy amounts. I don't think that we'd be looking with regards to increases there as a significant priority. You come down below that, and there's really the two pillars of share buybacks and M&A.
I'll put M&A to the side. I think we'll have to sort of see what would come up around things of that nature. Recognize that anything we would do in that regard would be with a clear sort of value thesis, investor value-driven thesis inside of there. You're really looking at share buybacks. I would expect that that will be a significant piece.
Really, in spite of improvements in the share price over the last few months, which we're really proud of the work that we've done to earn that, we think there's still opportunity still ahead of us there, both the underlying business and the value proposition for the financial impact. Then you bring to bear some of the emerging, either business models like YouTube, which is still ahead of us, as well as opportunities around monetizing Spectrum. I think all of those leave a really compelling equity case that would say that share buybacks remain a good investment at this point in time.
Great. Now thinking about the 2026 EBITDA guide, so delivered 6% growth in the first quarter, very strong margin expansion of 140 basis points. Yet you reaffirmed the stable guidance for the year. What potential headwinds do you anticipate or we should be thinking about for the balance of the year, whether it be macro uncertainty, some of these other factors that could maybe offset some of this early year outperformance?
Yeah. I think that we set the goal for this year out to make sure we're stabilizing revenue trajectory, stabilizing EBITDA trajectory, and taking a significant step forward towards our $1.5 billion cash goal. I think that if we take a look at the first quarter, accomplished all three of those pieces. I would say to a certain extent, it's probably also important to look, fourth quarter was the beginning of that stabilization process. We're probably a couple quarters into there. We feel great about where the start of the year is.
As we finish up three months, there's still nine months ahead of us. We just want to make sure that that process of moving from stabilization maybe towards something a little bit better than that remains sticky in there.
The fundamentals of the first quarter would seem to point to that being the case, but still nine more months. I think the biggest overhang that we're looking at is the macroeconomic backdrop. Keeping in mind as we gave guidance, there was a lot going on more broadly and the sort of things that could impact both inflation and gas prices. Two things that being a customer-oriented business, sort of embedded inside of the OEM cycle, are sometimes exposed to from there.
I think, the goal would be just to then take a look at another quarter, understand that underlying progression from stabilization to the beginnings of strength, along with those external factors. We'll be in a better position at the end of the second quarter to give updated outlook on both of those two competing factors.
Just sticking with that macro theme for a moment. I think you or management has excited expectations for modest growth in advertising for the full year. Any updates on ad trends since the call? What are you seeing? Is there any pressure points given what's going on?
Advertising market remains quite constructive. I think that the overall advertising market does, and then I think especially underneath of there inside of the audio space, sort of the capabilities and scale that we talked about earlier continue to build and the recognition by, on one side of that, the content producers, the podcast leaders there, continue to be interested in how we can help them monetize and the big advertisers. I think that continues to go well.
Last year was sort of an interesting year with regards to a softer first half and a stronger second half. We are, to a certain extent, comping an easier base last year. That gets a little bit tougher in the second half as things got more constructive in the second half from there. We see continued good demand from across the advertising ecosystem as we work our way through here the second quarter as well.
Awesome. Well, Zac, thank you so much for joining us, and thanks everybody.
Yeah. Thank you, everybody. Thank you for having me, and thanks for everybody joining here today.