Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript

Okay. Good morning, everyone. My name is Bryan Kraft. I'm the media, telecom, cable analyst at Deutsche Bank. And I'm here with Jim Meyer, CEO of SiriusXM; and Hooper Stevens, Head of Investor Relations at SiriusXM. Thanks for joining us this morning. Jim, maybe just to start off, how are you feeling about the business now that 2020 is well underway? What are some of the more important areas that you're focused on as a management team this year?

So Bryan, I know you missed me down in Florida. I missed being down there for our annual conference as well. I love that location. But let's jump right into it. I think, first and foremost, we're still very -- feel very good about the year. Things have started -- obviously, with the backdrop of the coronavirus, which is uncharted waters for everyone but things have started out well for us. We continue to be confident in the kind of -- in the direction we've given. And I'll point out right off the bat, at this point, a couple of things worth noting is the supply chain is holding together remarkably well as we speak. It's difficult for us to be able to predict the entire auto supply chain, but the pieces of it that that we manage are holding together well. And we continue to see vehicles shipping at a normal rate. And so I think all those things are good. We -- I'll get another update actually late this week. It'll be interesting to see kind of what sales were over the past weekend given obviously the tumultuous nature of the financial markets, which kind of gives me pause. On the flip side, we're likely to see the lowest gas prices perhaps we've seen in years. And obviously, interest rates are as close to 0 as you can get. And so I remain kind of, I think, just right at this point, no change.

Okay. And I guess you kind of got a couple of cyclical issues there, gas prices, interest rates, which could be pluses. Obviously, there is some recession risk here, but your client base, I mean, tends to skew toward the high end. Is that fair, a little more [ inflated ]?

I would say our -- I would say on the SiriusXM side, our client base is clearly more affluent.

Okay. All right. Maybe just to start at the top of the marketing and trial funnel. Expanding that funnel has been a constant focus of yours for many years. What are the opportunities that you see to continue expanding that top of the funnel across new cars, used cars as well as outside the car, which has been a more recent focus?

So first and foremost is kind of the strength of the company over the last -- shoot, I've been here almost 17 years and could -- been focused on, I think, from the day I walked in, but our relationships with the OEMs couldn't be stronger and couldn't be better. That certainly is one of the biggest drivers of our top-of-the-funnel growth and that we've seen, obviously, pretty robust auto market for many, many years now but also a pretty steady increase in our penetration rate over that time, and I certainly see our pen rate, as I've said on our last earning call, continuing to rise and kind of top -- we're now saying that if you're modeling our business, longer term, 80% is the number, I think, you should use to model what our penetration rate's going to look like. That's the beauty of our model, is that as the new car model feeds it, it just feeds then the second, third and fourth owner business, right behind it, and we're really -- Bryan, you and I have talked about this business for many, many times that you've either come to see me or interviewed me that -- and I've used this crude expression, "If you live long enough, you're going to see that second owner business eventually get bigger than the first owner business." Those days are coming pretty quickly. And by the way, at least through the first 8 weeks of the year, the second owner business has been really robust. And I mean in general, and then obviously we've benefited from a rising penetration, which naturally just comes from the catch-up of the rising penetration in new cars. So number one, I'm really pleased with our position in the car and how that bodes very, very well for investors going forward. I have been -- I come from the consumer electronics business. It's where I had spent almost 30 years before coming to -- 25 years before coming to SiriusXM. And there is no doubt in my mind that the amount of devices that are now in the home that are fully connected, that allow a very robust and easy-to-use audio experience is creating another great opportunity for us to be able to drive both more listening in the home, whether that's as a complement to listening in the car or as a stand-alone experience. I don't really care. And so we're very focused on that. And then finally, as you know, we've spent a great deal of money, a great deal of time to vastly, I'll emphasize the word vastly, improve our apps that are available for our service, particularly SiriusXM, in the home to where today our performance level on, whether it's either the Android or Apple Stores, is consistently 4 stars or better and ease of use vastly improved and the offering that we now have through our apps also vastly improved. I just see that as another key opportunity at the top of the funnel to drive subscriber growth going forward.

Okay. And on the churn side, self-pay churn has been lower for the past 2 years than they had been in each of the previous 7 years, which is a bit surprising given the aging of the installed vehicle base and also the increased availability of entertainment alternatives in the car. How are you able to achieve that success? And how should we be thinking about the factors underlying churn going forward?

So I'm going to tell you, there's a whole lot of smart, tactical things we've done to manage churn, but I'm going to start with what I think is the obvious statement on churn. And our churn rate is a great testament by customers as to how much they enjoy our service. And I think that the robustness of our churn rate is a direct reflection on our customer satisfaction with the service. And I point out, not only we accomplished those self-pay rates in the last 2 years, but we've been able to do it in an environment where our pricing has gone up. And so it is a real testament to the strength of our service offering to our customers and how much they value it. With that said, and your point is exactly right, we do have the pressure of the turnover of vehicles as well as the aging car base that both create headwind to that churn rate. I've been really, really impressed, frankly, how the improvements in non-pay churn and voluntary churn at the rate level have been able to mitigate a fair amount of that natural churn that comes with the turnover of vehicles. An area where we've really, really gotten much better, and my hats off to our group, is in the last, gee, 2 or 3 years, we've really gotten focused on making the renewal process really, really easy, making how to deal with us far more easier, particularly online, and taking the stress out of, by the way, moving as you move from 1 vehicle to another. I can tell you today, we do a significantly better job of making that transaction either nontransparent and simple -- nontransparent, sorry, very simple to the customer and clearly way better than we were at it 3 or 4 years ago. That's definitely helping. We've really worked hard on moving and best in practice in terms of what I would call blocking and tackling, which is credit card renewal rates, credit card -- I mean credit card refresh rates, making sure our credit card database is as accurate as it can be so that when renewals come up, they go through seamlessly. And then I think we're beginning to understand better how our customers behave. And we're able to use that information, I think, to help us create a better customer experience, a better listening experience, which ultimately should result in an improved churn environment. So I would agree with you. Of all the things that we've done in, the many years I've been here but particularly the last 2 or 3 years, I'm most impressed with how our churn's performed. And I don't see any reason why that won't continue.

Okay. And your relationships with the OEMs, those, as you mentioned, have been a key part of the company's success over the past 15-plus years. How are these relations evolving, particularly with 360L and Connected Vehicle Services?

I'd start out, when you take what arguably is, if not, the largest auto company in the world, certainly would argue the largest retail brand in the U.S. and Toyota. And as you know, several -- a few months ago, we were able to implement both Toyota going standard with satellite radio in all of their vehicles in the U.S. as well as a 10-year extension of our agreement. Those are really strong endorsements of the relationships between the OEMs and SiriusXM. And for years, I've been coming to these conferences and answering questions about, "Gee, there's so much more stuff coming in the car, won't that inevitably put you in a position where the carmakers might not value SiriusXM as much? I think the exact opposites occurred, and that is that, today, without question, we're stronger with every OEM. And I think as you stay tuned, you're going to see some more announcements along that way here in the next 3 to 6 months that make me confident when I say to you that I think our penetration rate will settle out around 80% once those announcements are out. So couldn't be more pleased with where we are in terms of overall penetration. Second, and as important to me, is the upgrade of the experience in the vehicle as it relates to SiriusXM is really changing quite remarkably. And we talked about 360L, the first time it was available in a Ram Truck about 18 months ago, I think it's been -- what a great experience that was. It was the first one. You're now seeing General Motors in the middle of a significant rollout across multiple of their vehicle lines. And when you get in a General Motors car, and you look at that user experience with 360L today and compare it to what that user experience is without 360L, I think it's really obvious how much improved it is and how much better customers like it. I think as you're planning our business, every major -- every -- not every major, every OEM has committed to us on 360L, some faster than others, but none are wavering on their commitment. And you're just going to see a very direct and kind of stair-step approach to 360L across multiple vehicle lines, across multiple OEMs over the next 2, 3 and 4 years, which I think bodes very well for our business.

Okay. And you mentioned some of -- a little bit of what you're seeing with 360L. I know it's early days, but what have you learned from that active 360L customer base in terms of engagement levels, churn rates, the way they use the service? Anything even qualitative that you could share with us?

I think the vast majority of customers still listen to our service. Our customers have always listened in a very lean back mode, and they continue to do that. But as they find ways to expand that entertainment experience through 360L, well, the greatest example being, I'm listening to The Howard Stern Show in the car, I can pick it up immediately on my app and take it with me without losing any of it as I walk or commute from wherever I've left my car into the office and then pick it up immediately on my desktop, is a pretty cool thing, right, without losing a step. I think we're seeing more and more of our customers stream, and we're seeing more and more of our customers begin to understand how much of our product, particularly in spoken word, is available on an on-demand basis at their convenience and that, that content is searchable. I wouldn't say today the search -- put it this way. I will tell you the searchability of it will get a lot better over time, but I think the biggest thing we're seeing is convenience is a big thing for our customers. And that means being able to listen to content whenever I want as opposed to when it's scheduled, I would say is one thing that we're certainly seeing a pickup in. Number two, breadth of content. Of all the things that we've made available in 360L and we're making available in our new app, one of the things that has surprised me but shouldn't have is probably our most popular thing is our 100 extra channels that are now available that take mostly our basic themes of our current channels and either cut those in a more precise way or do really clever things like top 100 hits of the decade or top 100 hits of 1994, whatever it might be, and we're seeing good demand for that. And then we've seen, in terms of our extra channel, pretty good take-up on our workout channels as well.

Okay, interesting. And how are you handling the mobile data aspect of the service? Do customers need to have a data plan in their vehicle in order to utilize 360L? Or is SiriusXM paying the carrier directly for that data traffic? How does that work?

So the answer to all your questions is yes. Bryan, I would say the area that's in the most flux right now as to how it's going to work is where will the data charges settle out and who will pay them. And as you know, today, in the vast majority of the case, their -- the customer is paying them as part of their bundled experience, particularly when they engage in those services through some type of wireless connectivity. So -- and I mean it's funny. I was in a store 2 weekends ago helping my daughter look for a new refrigerator, freezer, and I was shocked at the amount of them that are actually connected to the Internet and wondering exactly how they were going to work in terms of who is going to pay the plan, and had the same conversation a couple of weeks ago at a high-level meeting in Dallas with a bunch of AT&T executives. And I think all of us are still figuring that out. And I think the biggest thing for me right now is taking any impediment out of the way to make sure that the 360L experience is very, very easy to use for the customer so that if the customer will engage in it and it is, in my opinion, a much better user experience, that should result in a more valuable customer. How those data charges are going to work down the road is -- I'm still not -- I'll be clear with you. I'm still not entirely sure who's going to shoulder what. I think, though, that from everything I see from the big carriers, there's 2 things kind of going in the favor of this becoming what I call a non-issue. And that is, number one, unlimited data plans seem to be coming everywhere, and seems to me they're going to increase in what are -- what customers ultimately take and other things are going to maybe define what creates the tiering in mobile pricing; and number two, 5G is certainly going to increase both the capacity and the speed of those things. And so I just -- at this point, I'm not particularly worried about where the cost is going to ultimately land. I am more concerned in the near term that we make these things available to customers so they're easy to use, and we'll see where they'll settle out. If you think about it, the same question applied to your iPad 5 years ago, right, when you bought it and now look how easy it is to add the iPad to your unlimited plan for another, I don't know what it is, $6 or $8 or $10 a month and how many people are doing that. So I think we're going to watch this, but it's going to evolve over the next 3 to 5 years in the vehicle.

Okay. And as you've entered this new phase of the company's life cycle with a greater emphasis on streaming, the ability to leverage more content and different types of content has expanded, as you alluded to. How is the content strategy evolving to take advantage of these opportunities?

So great question. And we've -- as we sat here and I think we're #1. We're already where we want to be. And by that, I mean I love the power of our private satellite network. But as you have pointed out to me a few times in our conversations and interviews, it does have some limitations. It is terrific for, what I would call, limited offering to many, and it's terrific for the breadth and how great its coverage is from coast-to-coast across the country irrespective of what the population might be in certain areas. You now take that and combine that with the redundancy of these really, really powerful 2-way broadband mobile networks that have been built, and you create a really cool user opportunity, which is exactly what 360L does. Within that, what it does for us is it really takes all of the handcuffs off us in terms of what we can do with content. And by that, I mean it takes away all of our capacity limitations to start with. So as I said to you earlier, adding 100 extra channels, in terms of the technical aspect of doing that, it was really very, very easy. And it put the focus back where it needs to be, which is, is it entertaining or not. And clearly, our customers are telling us it is. It obviously allows more interactivity. It obviously allows more convenience. By that, I mean time shift in terms of being able to take content on demand. And it clearly allows the content to be sorted in a variety of ways however the customer might want it. So I'm thrilled right now with what this new capability has given us. I can tell you that both our creative people, our programming staff is rapidly now accelerating in this world of creating creative -- of bringing creative ideas forward that use this new capability. That's only going to accelerate going forward, which to me bodes very, very well for our products. But as importantly, our talent that we bring you every day, whether that's Jenny McCarthy, Howard Stern, whoever it might be, they're now becoming extremely comfortable with this world, and that's really creating, in their mind, new creative opportunities as well. So I just think it's going to be -- you should just expect our product to get better and better and more and more entertaining going forward. And I'm really excited about that.

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