Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript

Good afternoon. My name is Sebastiano Petti. I work on the cable, satellite and telecommunications services team here at JPMorgan equity research. I want to introduce David Frear, CFO of SiriusXM. David, thanks for joining us today.

My pleasure. Thank you for having me, Sebastiano.

Great. And so I have a couple of questions prepared for David. But if the audience, attendees, if you have any questions, please submit them to the Q&A, and we'll take them live and towards the end as well. So thank you.

David, just given these unprecedented times, can you talk about what SiriusXM is doing to address this for customers and employees, and perhaps some of the longer-term structural changes you expect to happen across the business? And how does this change how you invest in the business and priorities from here?

Well, I can tell you that at this point, we [ are ] contemplating any changes in how we invest in the business. You still have to put compelling content out in the air for people that -- and to do that, you have to invest in the content, you have to invest in talent, you have to invest in the tools to make that available. So for right now, as we kind of work our way through this changed environment, we are making sure that we're providing good, solid, continuing service, good entertainment value. I think you've seen a lot of that with some of the specials we've come up, a lot of special artist channels. We are getting a tremendous sort of [ upswell in notes of ] interest from people in the creative community to reach their fan bases. And as you look across the Pandora and SiriusXM platforms, we're reaching more than 100 million people. Our Stream Free initiative, that's getting a lot of those people out in front of the paywall and -- which is what many of them are interested in doing as they look to connect with their fan base.

Great. On the 1Q call 2 weeks ago, you gave a lot of great color on some of the trends that you were seeing in the business through April. I want to see if you can maybe touch on a few of those topics, and let us know perhaps what you're seeing thus far through May -- through mid-May?

Sure. So we're definitely seeing economic activity pick up. And I'm sure everybody listening in has their own metrics that they look for. I know that -- I took note of the fact that retail gas station sales over the weekend were picking up in a way that shows that people are beginning to move around. And we're seeing [ in addition on ] that, so in our business. So auto showrooms are now open in over 30 states. And depending on where you are, there are different levels of what constitutes open, but we're seeing that get reflected back in our sales data. U.S. auto plants are also reopening that I think -- I'm not sure if they got good recovery the way that they had intended. But Toyota, Honda and Subaru in the U.S. were supposed to get going this week. I think Ford, GM and Chrysler, they have reached a consensus with the UAW to open next week. They could change their minds. But as far as I know as of this moment, the planned -- auto sales in April came in at 8.6 million. And while that's 48% off last year, it's a heck of a lot better than people were thinking April's going to look. And May is similarly improving from that level. To be honest, I'm a little surprised at the level that we're seeing come through. But it looks like new cars may be down at this point maybe 35% or something relative to last year, so continuing improvement over May. Used cars look like they're maybe off 20% from the year-ago period. But again these numbers are, I think, much better than we had expected. We are seeing consumer response rates to marketing campaigns pick up. So it's almost like -- and you saw this in a lot of statistics, right, coming out in early April looking back at the March period, where on the initial shutdown, it's like the whole country went into a pause. People didn't do things. So they, for instance, didn't call our call centers or something like that. But that's picked up. The responses to marketing campaigns, they have picked up. Conversion rates for new cars are -- they are most likely going to be in Q2 below what they were in Q1. But watching that pick back up sort of week by week, we've seen sequential improvements in what the outlook for that is. Used car rates are similar. They have [indiscernible]. I'll tell you, they're actually -- they seem to be holding up a little bit better than the new cars. Churn continues to improve from the initial response. We continued to see vehicle-related churn largely offsetting the nonpay and other voluntary increases. We're doing better with the call centers' staff. And also our strategy is to deflect calls because we're still short-staffed, but to deflect those calls into chat, into IVR responses, into fulfilling online. Those continue to be successful. And the litmus test for us there is that average speed to answer and abandon rates continue to improve. On the listening side, we've got a meaningful sample from the 360L vehicles that are in the field of what in-vehicle listening looks like. Now it doesn't apply to all the products, right, because of the very small number of 360L, but it's a meaningful sample. And listening is picking up in-vehicle. Both unique listeners as well as duration of listening is improving, which again is suggesting that people are beginning to move about their vehicles more. We have seen a sustained increase in people streaming on the SiriusXM side, people streaming on that platform and -- from subscribers and from trialers, and then also from the Stream Free initiative that we launched a few weeks back. Overall weekly active users on the SiriusXM product streaming platform are up 30% from January, right? And this is for -- and that's a pretty good indication of what's happened as people have sort of -- they're not commuting as much. But as they come into the home environment, they are in fact carrying over a lot of those habits into the home. Pandora listening continues to recover from the initial COVID response. So it took a swoon like almost every other activity did. And as we've been talking about long-term declines in listenership at Pandora, actually as we've watched it over the last 4 weeks, those declines continue to narrow the gap from last year, which is sort of good news. We'll see what that -- how that turns out to be longer term. But certainly at a minimum, it is good news for consumer engagement on the Pandora side. And we've [ put a bit of a bottom ] there. The demand side is still getting hammered, right, on the advertising side, right? I think everybody is seeing that in the results out there. And with listening staying where it is, that means the cost base isn't coming down with the demand. So margins at Pandora are going to be smaller. But all in all, what we see is a better consumer response throughout the business than we had anticipated that -- so we think that is good news. While the demand side in advertising is taking a bit of a hit, we've seen that bottom out, too. And as opposed to seeing Q2 bookings declining in successive weeks, we finally feel like we've seen a bottom there, and we're beginning to get a little bit of a recovery in terms of in-quarter dollars. We'll see how sustainable that is. I think as we mentioned during the call that -- the ad sales environment is still kind of new for me and for Jim, right, that the size of Pandora's ads and how quickly those orders can change. So -- but we feel like we're seeing a little bit of a bottoming and that things are beginning to pick up on the bookings side.

That's great. And I just wanted to follow up quickly on a couple of those. I think on the call you talked about, through April I think, trial starts were down about 55% to 60%. As sales have kind of come back a little bit, has the trial starts improved commensurately with auto sales as you kind of talked about?

Yes, they have. And so for instance, that down 35% new car sales, that it would be -- is similar for the trial starts. They'd be mimicking that behavior. The used car trial starts, with the increase in penetration rate, are actually not so far off last year. But -- so it's a promising -- it's more economic activity than we were expecting to see at this point in time.

And you talked about, yes, auto sales at 8.6 million in April. To your point, not as bad as some had feared. But just maybe perhaps in your conversations with either OEMs, maybe J.D. Powers, maybe what are they saying perhaps about the shape of the recovery in auto sales? Any additional kind of color you can provide?

Yes, I don't feel like -- I don't think anybody is getting a good view of that right now. I think they really don't. It really is one of these things that every couple of weeks, the changes out in the world are pretty big. And so trying to project out through all the eventualities that are going to come that so okay, auto showrooms are opening up and how many people are actually going to go back, right? You got a lot of -- unemployment is stratospheric, and that's got to have a knock-on effect for people spending money. And I think there's another wave of this that we haven't seen yet. But I guess, we're encouraged with the fact that the downstroke, so far, hasn't been as bad as we feared it might be in the beginning. But I don't -- I haven't talked to anybody who's got a good picture as to what the recovery is going to look like.

And similarly, while -- so conversion in the first quarter of 39% was pretty strong. And then you kind of talked about, okay, maybe -- I think you mentioned the second quarter may come in below that. Is it similarly too kind of too early to tell in terms of the trend of the conversion rate through the remainder of the year? Because to your point, there's still a lot of unknowns kind of out there and too early to call.

Yes. I think it is. And we're -- with the drop-off in auto sales, a lot of conversions that we have going on right now are from sales that occurred 3 months, 4 months, 5 months, 6 months ago, right? And so as we -- we're going to see a hit to top of the funnel activity in the third quarter, right, because auto sales started falling out of bed in sort of around the middle of March. And they're -- while they're beginning to pick back up, we felt that's a pretty big fall, down 48% in April. And those April trials are, for the most part, going to be coming due in July, August, September, October. And then May sales, again they might be up from April, but they're going to be down a long way from the historic levels. So the top of the funnel opportunities as we move into the third quarter are going to be less. And we're going to see more of the hit from a subscriber perspective as you move deeper into the year, and then that absence of new car sales and absence of some of the used car volume is going to be felt in lower conversion opportunities. Sebastiano, you're frozen. I don't know if I'm frozen. So we've lost Sebastiano here for a minute. When he comes back on, we'll get going. The -- there are a couple of other things I know that people are interested in that -- one of the things is CapEx. We haven't taken a point of view on where CapEx is going to go. Are you back, Sebastiano? Maybe you're on mute.

Yes, I'm sorry.

Okay. Go ahead.

So I'm not sure -- if I did ask about the advertising and if you had been seeing any payments -- late payments related to ad sales. Did you hear the question?

I did not hear the question. We've seen a little bit of it. We're getting some requests that come in. We're working through those with the customers. I wouldn't say it's a big level. We have -- I'm not going to say who it is, but we got alerted to one advertising client that filed for bankruptcy. And so there'll be an issue there. We expect more of that. I think everybody does. We have been building reserves for increased bad debts. We -- you do expect that in this kind of environment. But it's not something that's terribly worrisome to us. We don't think we have any big rock exposures in that.

Okay. That's good. So in the first quarter, you did pause the share repurchase program. Have you resumed share repurchases thus far in the second quarter?

Yes, we've reset the grid, right, just like we said that the way the global assets are being priced is different now than it was a few months ago. So we reset the grid, and nothing's changed about our capital return policy.

So yes. Just on that, in the past, you had talked about 2 billion of excess capital generated through the business between free cash flow and then EBITDA growth and putting some leverage on the EBITDA growth on a per annum basis. And how are you thinking about balancing capital returns with also maintaining flexibility in this environment?

Well, as you know, we have a lot of flexibility, right? We're well under our leverage target. We're almost a full turn of EBITDA below the leverage target. And we are undrawn on our revolving credit. And we're still generating a substantial amount of free cash flow. So we do have tremendous flexibility. We're very fortunate in that way. And then we'll continue to look for opportunities to deploy that capital productively for shareholders. And as global assets gets -- get repriced, there are companies out there raising money. There are companies out there that are looking to sell off assets. And we certainly will be taking a hard look. And with the liquidity we have, I think, we -- there may be some opportunities that we can take along the way.

So you did the SoundCloud deal in the first quarter. Not specifically touching on that yet, but what other types of maybe assets out there would be appealing? Is it more on the audio and streaming side? Obviously, connected vehicle and telematics has been an area of investment through the years as well. Just anything that kind of strikes you as most interesting?

Well, I think it's just opportunities across those sectors, and that's probably as much as I want to say.

Okay. That's helpful. And then in terms of finishing up on the updates from the first quarter call, so in terms of CapEx, $340 million kind of like a ceiling, I think, is kind of maybe how to think about it to an extent. Are you still comfortable with that level for the year? And maybe what are some of the key investments projects for 2020 that perhaps you could defer if need be? I mean you did mention SiriusXM 8 was probably one of those.

Well, I think that we're going to work through that in the course of the next several weeks. Obviously, the business needs to be replanned, right, with what's happened on the demand side. And so we'll go through that in the next several weeks. We'll take a hard look at the projects' state. 8 is definitely going to be a 2021 launch. And so that'll -- it doesn't really reduce CapEx. It just shifts it to the right. And we'll be looking at other projects, too. We talked about doing a hiring pause. And so we had a bunch of groups. Between our various engineering teams and the IT teams, there was a lot of internally developed software efforts that go on. And with the hiring pause as you pull resources that they had planned to expand in those group, you pull that expansion back a little bit, you're still going to do the projects. You're just going to do them later, right? And so we'll get a better read on what that quantifies out to be in time for the next call.

Great. So back to the business for a minute, in terms of just churn, there's a discretionary product there's been a lot of focus on, perhaps a potential increase through the rest of the year given the economic slowdown. I think you saw churn increase by about maybe 30 bps in the '08, '09 recession, I think to about 2 2. I mean do you think we could see that? Or could vehicle churn continue to do what it's doing and offset some of that nonpay and voluntary increase?

So obviously I don't know, right, until we get into it. But right now, I wouldn't expect to see 2, 2 2 again, right? I don't say -- now we're obviously -- I don't know if we're starting from a lower base or not. I think we are at the 1 7 level. And so do I see it going up 50 basis points? I don't. The size and the weight of the vehicle-related churn and the reduction in that is pretty material. And it continues to -- it all depends on the period either fully offset or nearly fully offset what we're seeing going on in nonpay and other voluntary side. Nonpay is still not seeing that much of a pickup. I mean it's up a little bit, but not a lot. It's more up from -- we have this process we go through where somebody enters the nonpay queue and then we churn them over time. And we're finding that the -- it's the churn period that -- the entry rates in the nonpay have not risen, at least not meaningfully. And so the little bit of increase in nonpay comes from the fact that we're churning fewer of them. Is that going to be a sustained trend? We don't really know. But so far, what we said in the first quarter call continues to be the case, that vehicle-related churn reductions and the reduced auto sales activity is nearly -- is offsetting nearly all of what we're seeing in increases in the other churn.