Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript

Good morning.

Good morning. Thank you, Jason.

Yes. Thank you for coming back. So as usual, you guys put out some numbers this morning. So maybe before we get started, you might want to just provide a little bit of context about what you said and what you think it means.

Sure. So with -- we're -- we finished with just about 30 million self-pay subscribers a year. So $1,063,000. That's our -- I think our 10th year of net adds above $1 million. It's a strong year. The auto sales came in pretty good. I know that when you look at the article this morning, they talk about forward sales being a little soft, but they're still at extraordinarily high levels. So clocking in right about $17 million. And a very healthy environment that -- you'll read in some of the press about incentives being up, but there was -- I don't know if you guys all saw it, but if you looked in the journal a few days ago. They had a chart of the average selling prices for new cars. And it's up to something like $34,500 or so, up from a number that looks like $24,000, $25,000 in 2010.

But there's no inflation.

Pardon?

But there's no inflation.

Well, I got to tell you, it's just -- it's sort of testimony to an incredibly healthy market, a strong consumer, the incentives are up, but those average prices in the journal are net of the incentives. And so all in all, it looks pretty good. The auto industry forecast that we've seen so far look for a little more softening again in '20, but still at levels around $16.5 million. That's pretty good. We're looking for, as you know, from previous calls, 80% penetration, which is a nice increase in pen rates. So that as you look at next year, one of the things you have to keep in mind is that in '19 installs actually declined from '18. And in '20, they're going to rise pretty significantly. So there'll be more SAC expense. You've got quite a swing in SAC in the year. But everything else looks pretty solid, right? And when we look at new car conversion rates, used car conversion rates, churn, they continue to cruise along the one spot where we obviously have a lot of work to do, and we're focused on it is the Pandora audience.

Sure. So can I ask you a question about that, the hardware going into 80% of cars over time. It just doesn't seem -- I mean maybe I'm getting old, but it doesn't seem that many years ago when it was sort of in that low-60s number. And then it went up to sort of mid-60s. It just keeps rising. Is that driven by you? Is that driven by the OEM? Like is it just a mutual agreement that it makes sense? What's driving that?

Yes. I think it's reflective of one consumer interest in the product. And I think it's also reflective of -- when you get to a certain penetration level in OEM production. It really is sort of a tipping point for them of why not just standardize, right? And so they -- there is a tendency to continue to drive it. As we go back for contract extensions and renegotiations, we frequently talk about better terms for the OEM to the extent that there's higher penetration, right? So it's really -- it's a combination of things, but it's really rooted in the fact that the customers are interested in the product.

Okay. Is there something going on with your SAC expense that sort of makes those economics work where you can get a -- you can put that hardware in some of those lower end cars, but as the SAC gets lower, it just sort of makes economic sense to go deeper?

Well, yes. Okay. And so I'm not going to be able to quote them off the top of my head, but SAC per install is now down to -- in like the $21, $23 area, right? And you've been covering this long ago -- you remember -- long enough, you remember the days when it was more than double that, right? So at the heart of it all, just like the conference going on nearby, it is a consumer electronics product. And we're able to cost down that product and expand the functionality of it over time. And so that makes it easier to incorporate.

So one of the things that I love about your business model and your company is it's easy as an analyst to sort of forecast, right, because it's a subscription-based business.

We're worried about that. We didn't want you guys to work too hard.

But the flip side of that is when I sort of think back to our old cable coverage. There was always a way where the cable companies could take that sort of substrate of coaxial cable and just reinvent themselves and do something new. And when I sort of look at my model going out 3 or 4 years, it's like, okay, I sort of expect the net adds to modestly -- smaller net adds each year just because you have a bigger installed base and churn has been good, but it's going to be in that 1.6, 1.7 range. And you guys have been pretty consistent about there's not a ton of pricing power in this business. And so it begins to look like a stock that either or a company that's either going to do something pretty different or is going to begin to become more of a return of capital story. And buy -- I know you guys have bought back a lot of stock, but I tend to think about more of a big robust dividend payer, right, as the business model sort of asymptotes. What are the debates you guys have internally about what Sirius is going to look like 5 years from now or 7 years from now? Is it just going to asymptote down and just become a slow co?

Well, if we don't do anything else, that's what happens in every subscription business in a given market, right? You get fully penetrated in the market then you become -- you start trading sideways. And as you know, with the cycle of car ownership, we -- we've got a pretty long turnover cycle, right? So you look at the used car business. And we're representing about 45% of used car sales. Now we'll -- in the course of the next 7 to 8 to 10 years, the -- that's going to sort of grow progressively until we're in about 75% of used car. So there's a nice long tail to expanded distribution there. But what we're -- one of the things we're also focused on, we have been for a long time, is well what do you do with the inactive vehicles, right? So we've been reasonably successful so far. And if you look at the 120 million vehicles we have on the road, about 40 million of them are active in the business, either in a trial or as a self-pay subscriber. And if we're phenomenally successful over the next several years as our enabled fleet on the road grows from 120 million to 220 million, maybe the self-pay subscribers will grow to, let's call it, 40 million, and we'll have 10 million trials. You'll have 50 million active in the business. Great. Super. It'd generate a huge amount of money. But the inactive vehicles are going to grow from 80 million to 170 million. And so -- and that's the heart of why we acquired Pandora. It has a scaled audience, a scaled digital ad technology, a scaled native digital ad sales force. And the cars themselves are all getting connected. And so there's an opportunity to, over time, as technology changes in the car, move Pandora from being something that's just listened to on mobile phones and consumer electronics devices and laptops and able to get a bigger share of listening in vehicle. And at the end of the day, we always thought our job at Sirius XM was to maximize the amount of free cash flow we can drive off of the enabled vehicle fleet. If the subscription audio business is going to get, let's say, in -- I don't know, make it up 40 million vehicles. You'll want to monetize the other 80 million. And it's very clear that North American audience has a very strong interest in free audio where they listen to some ads. And with the growth of digital audio advertising, I think you see it in Pandora's results in 2019, they've done -- even though the audience is declining. They've done a bang-up job monetizing it. It's because advertisers find it to be an effective media. So I think there's a lot of runway for growth here.

So we're -- if we decompose sort of the Pandora listenership today. I would imagine in-car must be sub-1% or something, right? It's got to be very, very small.

It's a really difficult number to get a hold of because of how mobile phones are used and what information you get back as to how they're being used. So you get -- for instance, there's data that gets blocked when they run through CarPlay or Android Auto. So the -- but it's small. It's small.

And so what are the gating factors as you sort of think about getting Pandora in-car listenership up, what are the gating factors? Is this a OEM issue? Is it a...

Well, certainly, there's the car itself being connected, right. And then it's the presence in the HMI, right? And it being simple and intuitive for the consumer to reach out and press that touch screen to get what they're looking for.

Yes. And so how far -- I mean connected cars and the HMI, how far would you say we are today?

We're in the top half of the first, and I'm not sure batters at the plate yet.

Okay. All right. So many years of potential growth. What about -- there's been a lot in the press around iHeart. And it's a little bit unclear in the press reporting whether it's Liberty Sirius or Sirius. But I think in the past, you've always sort of said you don't really have a Sirius-level interest in radio stations or iHeart. Is that an accurate characterization of what you see out there?

Well, the filings are Liberty filings. And so -- and remember that Liberty is a very adept media portfolio manager. And so spreading bets and having optionality around the media industry is really their stock and trade. For SiriusXM, Jim and I and the rest of the team are heads down focused on Pandora. And that's got us -- that's got our plate full right now.

Okay. All right. So I've got this crazy notion about the terminal year for you guys. Do you know what my terminal year vision is?

No. Please tell me.

So the idea is that it would be super interesting if you had a company that had all of the assets in the music stack from Artist Nation to Live Nation to Ticketmaster, to Sirius to Pandora to iHeart, which would then put you in the pole position to begin to go after artists and say we can give you a larger slice of the economics than the traditional record label, and we can make the pie bigger for you as an artist because we can put you on an emerging artist channel on SIRI. We can put you on a Pandora playlist. We can promote you as -- on your song on iHeart radio stations. At Live Nation, we could put you in a festival, maybe sooner than otherwise would be. That's my sort of terminal year answer that there's this vertically integrated music entity that could very quickly become a very credible label as weird as that sounds. Does that seem just nonsense to you?

Well, there -- I wouldn't call it nonsense. The -- each of the components that you've described are major businesses with major infrastructure in their own -- each in their own right. And as you begin to put that stack together, the -- certainly, there's not much in the way of cost side synergies beyond just G&A-type expenses, right? And there's a reason why they have, sort of -- I'm going to call it infrastructure. But it's basically people and intellectual property and all the rest. That these are, in fact, wildly different businesses. And so managing an artist is a wildly different business than distributing the artist production, right? And then the form of distribution can be pretty varied. And so while there -- you may get synergies in terms of being able to bring, let's say, more product into your funnel that I don't know if that's worth the complexity of trying to manage those radically different things. So if you think about the Live Nation business where Mike sits on our Board, and he's run -- he has a phenomenal company. But you're talking about like giving the artist a bigger share. And then you hear Mike talk about his business and how big a share the artist's taken, the bet that he's making, each time he goes out on a tour. That is a risk management business that while there is some sort of symbiosis at the margins. With a music label or with a distributor like us. The fact is, is that Mike's risks are totally unique to the major concert business. And I'm not sure you gain a lot by taking all that and putting it together.

Okay. All right.

So on the other hand, there's a media portfolio strategy, right? If you really believe that there's a lot of good inherent growth in different components of the music industry. Sprinkling bets across those assets is -- may make a lot of sense.

I see. That's helpful. What -- maybe we can go to the poll question. I think we have a poll question. If you can pull that out. Wow, that's good.

It's a well-designed chart.

Yes. I thought about it carefully. So let's go back while they queue up the right question. Listening mix, I think it was maybe -- was it a year ago you've signed the agreement with Amazon? Is that right?

Yes. A little bit over a year.

Okay.

Yes.

So everyone sort of, I think, gets the idea that SIRI is dominant in the car and Pandora's dominant in mobile, and you guys have talked about sort of expanding the opportunity of SIRI listenership outside of the car. Where would you say you are in broad terms today versus what you think the opportunity is?

So we've been doing it for a long time, right? We've been streaming since -- I think it's the fall of 2004. We've gone through multiple generations of our app. We've gone through multiple generations of getting ourselves on like 10-foot devices and other CE devices. And so the Amazon partnership, which has been fantastic. The recent launch with Google, which has also been great. Our continuations and evolutions of that strategy, engaging people beyond the car is an important thing for us. We clearly have a great position to win people's hearts and minds in the vehicle. And then it's getting them to use it outside the vehicle is a way of just deepening that engagement and making them stickier. And so we keep hammering away at it. It's turned into a nice, healthy distribution channel. So for instance, the retail channel, which we rarely talk about anymore, is still a healthy distribution channel for us. And the stand-alone streaming business is coming up to begin to rival it as a nice, healthy contributor.