Sirius Xm Holdings Inc. Q2 FY2022 Earnings Call

Good morning and welcome to SiriusXM's Second Quarter 2022 Financial and Operating Results Conference Call. This conference is being recorded. At this time, I would like to turn the conference over to Hooper Stevens, Senior Vice President, Investor Relations and Finance. Mr. Stevens, please go ahead.

Thank you and good morning, everyone. Welcome to SiriusXM's second quarter 2022 earnings conference call. Today, we will have prepared remarks from Jennifer Witz, 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 those 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. We are pleased with our results in the second quarter of 2022. While we continue to navigate variability in customer and market demand, we delivered strong financial performance with record low churn. By leveraging our balance sheet and scaling key growth initiatives to deliver best-in-class content to our customers, we are setting SiriusXM up for future expansion and solid financial performance. Into the second half, we remain committed to building on that momentum by making the strategic investments necessary for our long-term success while continuing to exercise financial discipline. SiriusXM added 23,000 net new self-pay subscribers and 54,000 paid promotional subscribers in the second quarter. Despite a slight sequential uptick in April, SAAR saw further weakness in May and June and ended the quarter down 4% from Q1 and 20% year-over-year. While we are confident we can deliver positive self-pay subscriber growth, we no longer expect to attain our prior subscriber guidance due to challenges and uncertainty in new and used auto sales. However, with strong predictable subscriber-driven revenue, we are able to reiterate all of our financial guidance. There is growing uncertainty in the advertising market, where we generate significant revenue with high variable margins. So we are prudently implementing a variety of cost-saving measures such as limiting our headcount growth to priority roles and taking a more measured approach on discretionary spending. While we manage through prolonged supply-related challenges in the auto industry, the strength of SiriusXM's brand and the uniqueness of our product, which is evidenced by our large subscriber base and outstanding churn rate of 1.5%, remains extremely attractive to automakers who continue to see us as the premium audio entertainment provider of choice in North America. Our new and used car penetration rates grew to 84% and 51%, respectively and our enabled fleet is now approximately 145 million cars. In the second quarter and looking ahead, we continue to build on these long-term relationships. We completed several extensions with automakers this quarter, including Mazda and Mitsubishi. We continue to make progress in deploying our 360L platform and saw an uptick of two points in our mix from Q1. While we aren't announcing anything specific today, we are also making progress with several EV start-ups and look forward to sharing more with you in the coming months. While our in-car subscription growth continues to see the impact of the macro auto environment, we are seeing solid uptake of our streaming-only subscriptions and these offerings are a meaningful driver of subscriber growth this year. Recognizing this growing opportunity, we are evolving our business to focus on listening both in and outside of the vehicle. SiriusXM holds a differentiated content position and we are building on the strength of our in-car business, brand awareness, and robust business model to expand our streaming business and our total addressable market in an exciting and meaningful way. The initial consumer response to our streaming efforts has been encouraging and we expect this to be a much more significant part of our business in the future. In the second quarter, we also continued enhancements to our commerce experience to enable and ease sign-ups on key connected TV platforms, including Amazon Fire, Android TV, LG, and Roku. We also closed on a new agreement with Comcast, our first broadband TV provider, which includes launching a fully integrated SiriusXM audio experience to millions of Comcast customers on the Xfinity platform which will also support video later this year. All of these initiatives create new ways to reach and engage consumers, both those who already have a satellite subscription in their cars and those who may be new to the service, enhancing the SiriusXM brand and its relevance as we work to build the future of curated audio entertainment. Consumers have multiple options to stream their favorite music and playlists. However, SiriusXM remains the premier provider of live, human-curated music and audio entertainment. And combined with interactive and on-demand capabilities, we create unparalleled listening experiences to meet the needs of our audience. Fans can interact live with their favorite host like Sway, Megyn Kelly, or Howard or enjoy curated content experiences with major artists, including our exclusive special invitation-only events. In addition, this quarter, we created top-up channels for Black music appreciation month to celebrate the music of black artists such as Whitney Houston, Tupac, Biggie, and Prince. We also hosted a diverse roster of events including a concert cruise in New York City with Yacht rock stars, Kenny Loggins and Christopher Cross and small stage series concerts with the Grammy award-winning rapper, Two Chainz in Atlanta and Def Leppard in Los Angeles. While traditional content still drives the majority of in-app listening, unique content like this contributed to a 41% year-over-year increase in on-demand music listening in the SXM app. Tonight's Moneskin small-stage series event and Pearl Jam with the Apollo this fall in New York are just two examples of the exclusive experiences we continue to deliver to our subscribers this year. In addition to our exclusive and on-demand content, the SXM app is home to over 200 extra channels. These have the DNA of SiriusXM channels but are more finely curated for mood and activity-based listening. These extra channels continue to drive the largest share of listening outside of live programming in our app. Looking holistically across both in-car and streaming listening, this quarter, we saw strong performance in music, sports, and comedy. In music, Drake's SiriusXM channel Sound 42 which launched last year showcases boundary-pushing hip-hop in R&B and continues to bring in new audiences. Last month, he surprised fans with the premier of his new SiriusXM radio show Table For One. The first episode dropped in tandem with his surprise album which broke multiple industry charts. Looking at our streaming metrics, total daily listeners and time spent listening to Sound 42 were up 50% on average following Drake's June 16 album drop. In sports, SiriusXM offers a differentiated value proposition in an increasingly complex and fragmented media space; with video, sports fans are required to have multiple subscriptions to watch it all. Whereas SiriusXM offers one-stop shopping for all of the sports fans' audio needs. This quarter, we saw one of the strongest sports calendars post-pandemic and SiriusXM subscribers had a front-row seat to all the action. We delivered coverage of the biggest events, including the Masters, the PGA Championship in the U.S. Open, the men's and women's NCAA Final 4 and National Championship games, every MLB game starting with opening day and the Indianapolis 500. As a result, overall sports listening in the SXM app continues to increase and we are investing in exclusive content rights to expand our offering. Most recently, our NFL renewal and expansion agreement makes SiriusXM the exclusive third-party home to all NFL games and gives us additional rights and opportunities to expand our coverage plus original content produced by the team that will be available only on the SXM app. Also in May, we announced a multiyear extension with Formula 1, ensuring our listeners continued access to every F1 race, a fan favorite. Lastly, comedy continues to be a key content vertical for SiriusXM and our recent acquisition of Team Coco marks the latest addition to our ever-growing portfolio. The deal provides significant value on the podcast ad network side and opportunities for us to grow paid subscribers with exclusive content. Team Coco staff, now part of the SiriusXM team, will continue to produce the network slate of popular podcasts while collaborating on content exclusive to SiriusXM. Today, I'm excited to announce that we will be launching the inaugural Team Coco channel this fall, a full-time original Team Coco comedy channel available only to SiriusXM subscribers. Conan and the team are hard at work creating a unique experience for the channel and we'll have more to share on this in the coming months. But you can expect to hear all new original and exclusive content, along with his most popular podcast, stand-up clips, and interviews from his long-running TBS show. Before I turn it over to Sean to review the financials, I also want to spend a few minutes on SXM Media, our combined advertising sales group. We continue to be a leader in digital audio advertising and in podcasting specifically; per Edison Research, we are the number one podcast advertising network in weekly U.S. listeners and represent 4 of the Top 15 podcasts in the country, including Crime Junkie, Office Ladies, Dateline NBC and Pod Save America. People are listening to more audio on more platforms than ever before. According to the Edison Research Share of Ear Report for the second quarter, Americans are spending 20 more minutes per day listening to audio, a 9% increase compared to Q2 2021. We are well positioned to benefit from these trends, both in our listening platforms and in our ability to bring broad solutions to advertisers. While our advertising business is not immune to the macro trends felt industry-wide, we are seeing growth in our ad business, particularly on the podcast side as we continue to build our off-platform relationships and capabilities. Our total audience reaches 150 million listeners including SiriusXM, Pandora, SoundCloud and our broader podcast and off-platform network. Additionally, we continue to deliver best-in-class technology solutions, advancing the podcast ecosystem. Earlier this month, we released new AI-powered podcast audience targeting capabilities as part of an expanded agreement with Comscore to help accelerate our opportunity to monetize impressions and transform the market as we did in music with Pandora. SiriusXM remains an industry leader in podcasting, producing continuous positive gross margins thanks to our disciplined approach, rich content, and constant efforts to bring value and entertainment to listeners, content creators, and advertisers. Looking ahead, we remain focused on increasing the underlying resiliency of our business to continue delivering one-of-a-kind content and value for our customers and strong and sustainable financial results for our shareholders. We remain committed to our long-term focus of shaping the future of audio and broadening our revenue base into non-automotive markets and we are excited by the early strides our new team is making on the technology and product side. Later this year, we will deliver improved in-app personalization to drive content discovery and enhance CarPlay and Android Auto integration and we will continue to expand and innovate our product offering. Ultimately, this translates into solid revenue growth, margin expansion, and strong cash flow generation which can be reinvested in the business to create better products for our customers and more robust capital returns for our stockholders. With that, I'll turn the call over to Sean to go through the financial highlights in more detail.

Thank you, Jennifer. A few quick highlights on the quarter. Revenue increased by 4% in the second quarter with advertising revenue up 5% to $452 million and subscription revenue also growing by 5% to $1.7 billion. Adjusted EBITDA was 3% lower at $679 million as we made substantial investments in sales, marketing, content, and product development. Diluted earnings per share were $0.07 versus $0.10 in last year's second quarter where we booked approximately $140 million of satellite insurance recoveries. We generated $435 million of free cash flow during the second quarter, down 21% from the prior year as cash taxes rose by $97 million year-over-year and last year's second quarter benefited from $17 million of satellite insurance receipts. Turning to our operating segments. For SiriusXM, total revenue in the second quarter increased 5% to $1.7 billion driven by the larger self-pay subscriber base and 7% growth in ARPU, offset by a lower base of paid trial subscribers. Jennifer highlighted SiriusXM's subscriber growth but to give us some more clarity into the back half, looking at trial starts can be useful. During the second quarter, SiriusXM new and used car trial starts were down 20% and 8%, respectively. Total trial starts were down 15% year-over-year in the second quarter somewhat worse than the first quarter figure of down 10%. Gross profit in the SiriusXM segment climbed 6% to $1.05 billion, representing a margin of 61%. In the Pandora and off-platform segment, advertising revenue of $403 million increased 5% in the second quarter with Pandora's ad revenue per 1,000 hours stable at approximately $100. In the second quarter, our podcasting and off-platform business generated $119 million in revenue, an increase of 50% year-over-year. We expect these businesses to represent a growing portion of this segment's advertising revenue over time. Travel, restaurants, gambling, and retail have all been strong ad categories for us. But in health care, automotive, telecoms, and beverages, we are seeing weakness. Gross profit in the Pandora and off-platform segment declined 13% to $167 million, representing a 31% gross margin lower than last year, given meaningful investments in new podcast content that are still in the early stages of monetization. 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 approximately $1.55 billion. As we scale in podcasting, advertising revenue will continue to contribute to growth in 2022 and subscription revenue will increase with the benefit of prior rate actions. Our adjusted EBITDA guidance this year continues to reflect investments in product, content, and marketing to drive growth in streaming. But with modestly lower subscriber revenue than we originally forecast and a more cautious advertising outlook for the back half, we are tightening expense management across the organization. On the capital allocation front, we started the year by returning nearly $1.3 billion to our stockholders in the first quarter via dividends and share repurchases. We added another $303 million to this total in the second quarter, bringing year-to-date capital returns to roughly $1.58 billion. We ended the second quarter at 3.6x net debt to EBITDA within the range we previously articulated. Our balance sheet remains exceptionally well positioned with $1.24 billion available under our revolver and limited near-term maturities. We have significant capacity to continue investing in the business, pursue acquisition opportunities, and continue returning capital to our stockholders via dividends and share repurchases. With that, operator, let's open it up to Q&A.

We will take the first question from Jessica Reif Ehrlich at BofA Securities.

Hi, Jessica. Can you go ahead?

Hi, operator, why don't we go to the next one and come back to Jessica?

We will now take the next question from James Ratcliffe from Evercore ISI.

I have two questions, if I could. On the SiriusXM side, SAC was up per installation, about 7% or so year-on-year. Can you just talk about the trends at that level, quite apart from the issue of actual volumes of SAAR? And secondly, at Pandora, you mentioned investment in new content pressure in gross margins there. Can you help us size that sort of investment and get a sense of what the run rate gross margin profile of the business is and how that evolves as presumably off-platform revenue becomes a larger share of the ad revenue there?

Sure, James. I'll take the first one on SAC and SAAR and then I'll let Sean talk a little bit about the margins on the ad side. So look, our SAC for install has come down significantly, as you've seen over the years. And it's going to fluctuate. I would expect by a couple of dollars here and there by quarter, just depending upon the mix of our automakers installing modules into the vehicles and then the ramp of different technologies within our modules. So we have different economic structures with the producers of the module. So overall SAC per install, obviously, is a reflection of the equipment margin, the revenue that's coming through on the top line, the cost and then the subsidies. So there will just be some variability around there but I don't think it's necessarily indicative of a higher trend. And Sean, do you want to start on the second one?

Yes, of course, James. Regarding Pandora and its growth, we've announced several new deals and have a significant amount of inventory becoming available. As I mentioned earlier, we are still in the initial phases of monetizing some of these podcast ramps, which is causing some pressure on the gross margin for both Pandora and the off-platform margin in this segment. However, in the long run, we believe it's a promising area. It's still too early to define our margin objectives precisely. Each deal we make contributes to building a strong audience scale, helping us maintain our position in the podcast audience market. Overall, we are satisfied with the deals we are making and are optimistic about improving the margin profile, but it’s premature to discuss it further since the market is still expanding. We aim to capture market share in a financially responsible manner to create a positive impact on the overall FX and media advertising REIT. Jennifer or Scott, would you like to add anything?

I want to expand on that point, Sean. I completely agree with what you mentioned. We are still early in this process. I anticipate that monetization in podcasting will accelerate beyond the growth of the listening audience because we are mainly utilizing manual processes at this stage. There are numerous host-read ads and a lot of collaboration with talent. Programmatic advertising is just beginning to develop. Thus, there is significant technology and capabilities set to enter the market in general, and especially with our solutions, which I believe will support our continued growth. As you can see, we reported that our growth in the off-platform segment of our advertising business increased by 50% in the second quarter and rose by 43% in the first quarter. We are witnessing positive growth trends in this area of our business.

The next question comes from Jessica Reif Ehrlich from Bank of America.

Hopefully, you can hear me this time. Can you?

Yes, yes.

Your content costs have increased significantly, but there is a lot of new content available in both the car and in-app. Can you provide insights on the future expectations for costs and content in music, sports, and podcasting? Additionally, while you appear to be cautiously optimistic about advertising, how do you incorporate political factors into your outlook? As we move past supply chain challenges, do you anticipate growth in sectors like automotive or others?

Yes. Regarding content costs in general, I'll let Sean or Scott elaborate as well. We will continue to make selective investments to support our service both in cars and through streaming. You saw our announcement about the NFL, and Scott can provide more detail on that. We strongly believe in sports, especially the live aspects and play-by-play, and we are really excited about our developments with the NFL. While I won't delve into specific categories or costs, you heard me earlier emphasize areas where we believe we are definitely making progress. Naturally, there will be investments in music, sports, and comedy alongside that. So Scott, would you like to discuss the NFL a bit more?

Yes, exactly. So Jessica, on sports, the one thing we've seen, which is interesting, and I think the TV networks have seen it as well. It cuts across all demos, number one; and number two, live still matters. So we've always been a big believer in live sports and in all live sports and having one-stop shopping. If you look how video sports rights are now, they are fragmented in many places. You just can't say, I want all the basketball, football, baseball, hockey, car racing, or anything else in one spot, the way we have that. So I feel really good about that and it will translate more into digital as we do micro channels based on teams and other things down the road on that. Just quickly on podcasting. Early stages, one of the first goals with Stitcher was to figure out which podcasts would really matter and make it number one and according to Triton, Stitcher is number one by a large margin. So that's now leading to a lot of other talent and opportunities coming through here as well as some of that talent working its way like Coco and Crooked and others onto SiriusXM. So I feel pretty good about that. The digital area is interesting because that's where the younger demo growth will come. We know our core demo on Sirius is solid. And right now, you're seeing with the extra channels. But over time, you'll start to see branded channels and others, some of which are there to grow in that space as well. So we feel pretty good where we are right now.

Just on advertising then, Sean addressed some of this earlier in his comments but we are facing some of the same challenges you see in the industry, more generally; we're watching cancellations closely. We, obviously, feel very comfortable with our full year revenue guidance. But yes, there are some categories where there's softness. I think as automotive starts to rebound, we would expect to benefit from that. There have been other areas of opportunity with travel and restaurants, etc. D2C tends to be more vulnerable than brand. And we do have both sides of advertisers represented across our platforms. But again, we saw some nice growth in our off-platform business in the second quarter. We continue to cross-sell across our platforms and make strides there. And we have a lot of other unique solutions such as just what we're doing with AmEx on small stages and branding that around their Shop Small initiative that we're continuing to see opportunities around those.

Can I ask a follow-up question for Scott? Scott, you've seen significant success in podcasting. Are there any particular genres you think need more attention or enhancement? Also, regarding content on the music side, which you didn't really address, is it crucial to have specific relationships with artists? You've introduced so many different types of content over the past couple of years, both in the app and in cars.

Okay. So the one category we wanted just to set the ability to answer the second part was True Crime because that seems to be the first unique audio category that's come along in years and it's the biggest thing in podcasting. So with Crime Junkie and a few of the others, we have that locked up. So I'd like to see empowerment and self-help and a lot of other things like in that area grow. Doctor Radio and some of the things we did on Sirius are a little more narrow, podcasting and podcasting networks and some brands and others in that area, I'd like to see grow. On the music side, it's always a balance. We feel we have a good balance between the categories that matter in rock, pop, and hip-hop in both our curated channels and our artist channels on it. It's just a question of will it move the needle to have an artist or a brand over a channel in music similar to the way you could have a hip-hop channel, or you could have Drake do a hip-hop channel. That one is pretty obvious. So we just need to look at what makes sense both economically and culturally and see where that goes.

The next question comes from Ben Swinburne from Morgan Stanley.

This is Cameron on for Ben. Just a follow-up on content. On the NFL deal, did the expanded rights allow you to stream games or any other affiliated content on Pandora? And then second, how is the bidding environment for your sports deals these days? Have those become more competitive at all? Or do you get a first-look window when going up for sports renewals? Just any color there? And then second, on the satellite business, self-pay churn has continued to come in persistently low. Is the path to that normalizing kind of wholly connected to vehicle-related churn coming back? Or are you seeing other benefits helping there as well?

Scott, why don't you start on the content side?

Right. So on the sports rights, yes, there's always, as I said, I think, they'll always be bidding on live sports. We saw it on the NFL and all our sports rights. There aren't that many out there between pro and even the major colleges that matter. So that's always going to be true. And there's just no burnout in sight on live sports. So I like our position and I particularly like our one-stop shopping position on all the sports under one roof, which I don't think anyone can come close to saying that. So I feel pretty good on that. No, the NFL rights don't extend to Pandora but Pandora is largely going to be looked at in terms of music and podcasting, not live sports. We want to direct people to Sirius. It's a premium service to have all that live sports under one roof.

Yes. And on the churn side, we're really pleased with our second quarter performance. The second quarter is typically strong for us from a seasonal standpoint, but we are actually down a few basis points year-over-year. Obviously, vehicle-related has played a role in that. Sean highlighted the lower trial starts year-over-year on both the new and used car side. Non-pay, I'd say, has been pretty steady. We do see some seasonal uptick in credit card entry rates in the spring. That happens every year and we're seeing some of that now. We don't really see any concern from an economic standpoint in the entry rates, so we're really pleased with that. Similarly, we're focused on the voluntary side and watching carefully just any impact on cancel demand, just in terms of the strength of the customer, the consumer, in general. And we've been performing very solidly there as well. So we'll continue to watch those trends, but I would expect we'll see some uptick in the second half just from a natural seasonal standpoint. And then hopefully, as we continue to see improvements in trial starts and auto sales overall.

The next question comes from Kutgun Maral from RBC Capital Markets.

Maybe just a follow-up on the advertising discussion. It seems like there continues to be a solid opportunity there with off-platform and podcasting. Though as you called out, there's clearly a lot of uncertainty in the market. I appreciate that you may not want to comment too much on Q3 at this point. But is there any more color you could provide on maybe RPMs at Pandora or just the sustainability of the robust off-platform trends? And then just on guidance, you reiterated the $9 billion in revenue for the year which is great. Is it right to assume that your expectations for advertising may have come down compared to the initial budget? And if so, I'd be very curious to see where you're seeing positive offsets?

Sean, do you want to start?

Yes, sure. Kutgun, thanks for the question. I guess on the advertising discussions, we continue to see a very positive demand. As you said, we're in this early stage of monetization. So we have the benefit of really having increased supply. So we have the expectation that we'll continue to ramp. We'll continue to improve monetization which will hopefully continue to deliver growth on the off-platform. As it relates to Pandora on platform, you saw the stats; you saw RPM is holding pretty steady despite the decline in hours. So we're seeing the active listeners continue to increase their usage. So again, there is some caution in the marketplace. I think we do have the benefit of increasing supply, just to reiterate it. So we're comfortable and confident we'll continue to drive growth over the remainder of the year. In terms of the guidance, again, we reiterated it. Certainly, the marketplace given the macroeconomic environment, we keep a cautious outlook but we're comfortable with where we're at. So I don't know, Jennifer or Scott or anybody wants to add anything on the advertising market or as it relates to the full-year guide and offsets, that's how I see it.

Yes. I believe we've provided a fair amount of color on this. I wouldn't comment specifically on Q3, obviously, but our guidance is reflective of kind of what we're seeing in the markets today. And as we've discussed, there have been some cancellations and deferrals. And so we expect some continuation of that and we've incorporated all that in the numbers.

The next question comes from Barton Crockett from Rosenblatt Securities.

And I was just interested in just drilling down a little bit more into the commentary about EBITDA outlook for the year. If you guys pace down a little bit year-over-year here in the quarter. But speaking to a number for the full year that would be flat to maybe slightly up year-over-year suggests that there's some change in the trend in the back half of the year on revenues and expenses versus what we just went through. And I just want to make sure I understand what is it that changes to kind of give you that comfort to reiterate the EBITDA guidance?

Sean, I'll let you start and then I'll jump in.

Yes, we have our outlook for the year set at $2.8 billion, and we feel confident about our positive subscriber growth and its effects on subscriber revenue. We've discussed the advertising outlook this morning, and we understand our investments in content, programming, and podcasting. We have invested significantly, as reflected in our year-to-date results, particularly in sales, marketing, and performance media. As we plan for the second half of the year, we are confident in our ability to meet our guidance. We have mentioned several times about tightening controls; we are reviewing headcount, our real estate footprint, and all discretionary spending. Our goal is to manage both short-term and long-term effectively. While we aim to invest for long-term growth, we also want to fulfill the expectations we set for our investors for the year. Jennifer, would you like to add anything?

I agree, Sean, with everything you've said. I would just add to acknowledge Barton that we will see a heavier focus in the second half of the year. There is some variability to our sales and marketing expenditures depending on how we manage the digital aspects of our business, and we anticipate some fluctuations there. We have conducted a lot of successful experimentation and there is more to come by exploring different marketing channels, app stores, and distribution partners. We are still learning and optimizing our spending and the types of subscribers we can acquire through these various channels. We plan to be strategic with our investments and continue fostering the positive trends we have seen in that segment of our business.

Yes. And lastly, just to highlight, the significant increase in sales and marketing in the first half will likely not persist in the second half. This is probably an important point.

Okay. That's helpful. Just one other quick thing. You mentioned you're expecting to make some announcements with EV companies. As we're all aware, I mean, there's one EV company that really matters, Tesla, which seems to have a founder that has very particular opinions about what goes into the cabin there of the cars. Well, how would you describe kind of your relationship with Tesla and how we should be thinking about opportunities there over some period of time?

We are involved with some Tesla models and would like to expand our presence in more of them. We are collaborating closely with Tesla to make that happen. On a broader note regarding electric vehicles, it's evident that consumers want SiriusXM in their new cars, particularly among affluent buyers from various EV companies, including new startups that are beginning to produce vehicles this year. We frequently hear this from EV manufacturers as well as our longstanding automotive partners. We will remain flexible with distribution, but our primary focus is on ensuring a seamless customer experience, especially during onboarding. It has been a significant advantage for us that new car buyers, and increasingly used car buyers, can easily access our service in a smooth, hassle-free way. We are dedicated to developing solutions for our EV partners as well.

We will take our next question from David Joyce from Barclays.

Just a further question on the expense side of the equation. You called out the extra spending on sales and marketing and product development. Content spending was also up this quarter. But how should we think about seasonality? I know you just said that sales and marketing will probably be lighter in the second half. But on the content side, since you're spending more on both the satellite platform and the streaming and podcasting platforms. Was there some seasonal strength? Was it sports-related, maybe in the second quarter? Or is this just overall a more elevated level of content spending we're flowing through the income statement that we should be thinking about through the rest of the year?

Yes, David. Yes, I think that you should think about it as just a slight elevation over the course of the year. Again, in percentage terms, at least on the SiriusXM segment, you saw an elevated second quarter. We've announced a number of deals as those things ramp over the course of the year, that's kind of a new normalized level. And I think that's what you should expect over the course of the year. As Scott and I will tell you, we are a content company. We got to provide, obviously, the best mix of news talk, sports, and music. So we think this is a prudent investment even, again, it's not a large amount of money. I think it was $25 million year-to-date on the programming and content side and 11%. So I think it's just an increased level of investment.

And if I could, just a second one on capital returns. I was just wondering how you're thinking about the timing of your stock buybacks. Are you kind of matching that with the working capital flows or the cash flow from operations as opposed to more like straight-lining buybacks through the year? How should we be thinking about your strategy there?

Sure. Just to reiterate what we've said, I think, consistently over the last couple of quarters, we're guided by, obviously, free cash flow generation. We're guided by what our leverage is in the mid to 3x, 3.5x; we exited the quarter at 3.6x. You saw the aggressive return of capital in the first half of the year that we've done inclusive of the special dividend. So I think we're going to be guided by the free cash flow. We're going to be guided by our leverage. And I think, hopefully, what we've articulated is fairly predictable. So it's not necessarily a straight line. It's more how we see the outlook of the business, how we view what the grid is, and what we view valuation to be and we'll execute it accordingly.

We will take our next and final question from Steven Cahall from Wells Fargo.

So Jennifer, you talked a lot about expanding the streaming business, I guess, how do you think about SiriusXM streaming as a kind of stand-alone product? Would you consider on-demand or a playlist functionality to make it more like the peers? I know that really changes the business model of the streaming business. So just curious how you kind of think about drafting off of the satellite product versus something more independent and also tying that into things like Pandora and podcasting. And then secondly, on SiriusXM ARPU, I mean, it grew at like an inflationary rate forever. And I know now you've looked at increasing ARPU, it was up nicely in the quarter. It's been up for, I think, a few quarters now. Maybe you could unpack that ARPU growth a little bit. Is it price? Is it more multicar tiers? And should we think about ARPU as just being a stronger component going forward than it has been historically?

Yes, thank you, Steven. I'll have Sean discuss ARPU shortly. On the digital front, we are continually exploring new product features and earlier mentioned the growth in on-demand listening and engagement with our extra channels. While live listening remains the majority of our app usage, we're seeing robust interest in both areas, which aligns with trends observed in the video industry where customers prefer to control their viewing and listening times. The personalized stations and extra channels, in particular, enhance user control over their listening experiences, often leveraging the established brands we have. These are just a few examples of how we're giving users more autonomy. We have not yet fully developed interactive on-demand capabilities, but we're considering it. Our product team, led by Joe Inzerillo, is expanding, and we're excited about the possibilities. We've been methodical in managing our music licenses, and if we were to explore this further, we would need to consider how it impacts subscriber attraction and retention. Overall, on the digital side, we're happy with our current position, which is expected to contribute significantly to our net additions this year, particularly given the trends in the auto funnel. Although trial starts will remain a smaller portion of our gross additions, the dynamics suggest a larger impact on our net additions this year. So far, we're very pleased with our progress. Sean, would you like to address the ARPU?

Yes, regarding ARPU, the main factor driving it is the rate increase we implemented in November. We expect to see continued sequential growth, likely in the third quarter. However, the comparisons may become more difficult as we move past last year’s price changes. We are also benefiting from higher ad revenue and some small variations from our OEM relationships, but overall, the primary driver is the rate increase.

Yes, I would just add that we are being very opportunistic in capturing demand across the pricing curve. Some of our digital plans are $8 a month, and we have a PV IP plan at $35 a month. There is likely demand both below $8 and above $35. While we want to monitor ARPU closely, it is not the only metric we are focused on; our main goal is to drive overall revenue and maximize customer demand.

Thanks, Steven. Thanks, everybody, for joining today. We'll speak to you soon.