Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript
September 9, 2020
Earnings Call Speaker Segments
Good morning. So I could not be happier to welcome Jim Meyer, CEO of Sirius XM on a good news day. You really have great news this morning. So let's start with that.
By the way, it's great to be here, Jessica. Thank you.
I can't say how we truly appreciate having you.
But you increased guidance for self-pay net adds from approximately $500,000 to approximately $700,000. Could you jump to the main drivers for the better subscriber forecast? Is churn trending better than expected? Conversion rates better? Where is it coming from?
This is one of those, I think, across the board, good news stories, which is almost everything is stronger than we had expected even a couple of months ago when we gave our guidance. Clearly, our churn and our conversion is behaving better than we had expected, and I'm really pleased with that. But our trial funnel is now beginning to rebuild itself pretty well. And frankly, we've done a really good job of also, not only retaining customers, but winning back customers who had left us. And so all of that, coupled with, also, our penetration rate has been rising pretty steadily over the last several months. When you put it all together, we just see a stronger outlook for subscribers than even we saw 2 months ago.
But what gives you the confidence that the business will provide enough stability for the rest of the year to achieve your new guidance given this crazy environment we're in?
It's a crazy environment. I agree with you. And I always think twice, 3, 4 times before we increase guidance because one of the things that is core in our culture at SiriusXM is, "Do what you say you're going to do." And so when we raised guidance, we wouldn't do it unless we were very confident in being able to achieve. And what gives us that confidence is, I think, we've seen now several weeks, in particular, of strong performance in churn and in conversion that lets us have more visibility into how we think it's going to behave over the next 12 weeks. When you couple that with the recovery in auto sales has been pretty strong. It's not back to where it was a year ago, but it's recovered stronger. And we're doing that still with a very low level of inventory at retail. And so we think as that inventory levels begin to fill at retail, that's even going to help more give customers what they want. And so -- and then finally, my conversations with a couple of the biggest new car retailers and used car retailers in the country, they're pretty optimistic about what they see, and that's what -- that's why we're confident to increase our guidance.
Amazing. And in your view, how much runway remains for Sirius' subscriber growth? Where do you think it's about?
Great, great question, and I'm really bullish. It really bothered me. As you know, we've added plus self-pay ads now for 10 years in a row. This year, we're not quite there, but we're moving towards it. And I'm really happy that we're back so much more in the plus than when this thing has all in the chin and the stomach in March. But the fundamentals of our business haven't changed. And by that, I mean, we've got, number one, a rising penetration rate in new cars that is going to be with us for a long, long time. We've meticulously and methodically, both, worked through getting those increases in penetration rate, and they're going to be with us for many, many years to come. That increase in penetration rate will, in itself, begin to yield more and more products going forward, regardless of what SAAR is. Number two, if you look back at -- and this is another reason I'm really bullish, is if you look back at what our penetration was in the used car business and you look at the size of your used car business, which is 3x bigger, 2.5x, 2.0 to 2.5x better than the new car business, and you look at, over the last 5 or 6 years, how much our penetration rate has risen and how much the SAAR rose during that time, that bodes very well to what the used car outlook and our penetration of it should be for the next 5 years. And I think it's really important that investors look at that. Furthermore, I think we've learned a couple of really key things and managing our churn. We know, for instance, that customers that also stream our service, in addition to listen to our service in the car, churn less than customers who only listen in the car. And so if you're a customer of ours, and I know you are, Jessica, you've seen a repeated push from us to drive in-home listening, and it's working, and drive on-the-go listening outside the car through our app, which we spent a lot of time on. So when you couple all those things together, I see many years of continued subscriber growth, and we're only beginning to scratch the surface right now on what I call stand-alone streaming customers, meaning someone that has a relationship with it that's only through their connected device, whether it be their phone or their tablet, and we're pretty focused there. And I think certainly, in the first half of '21, I think you'll see some things we're working on come to fruition that should help that channel grow as well.
Can we just exploit that a little more? I mean it feels like in addition to its very stable, as you said, growing subscriber base business model, and you still have multiple areas of growth ahead, you touched on streaming. Is that the greatest opportunity? What do you see as the greatest opportunity for growth over the next 3 to 5 years?
Well, I think despite what some may think, just running our core business, continuing to run our core business better offers good growth opportunities. I think that we can even improve from where we are today and what our yield is from all of the -- all of the trial funnels that we have before you talk about the streaming opportunity, which I think is pretty big, okay? And I just -- I don't know yet. I don't have enough experience. We don't have enough experience in how those customers behave when we get them and how long do they stay and those kind of things. We're learning, we're learning quickly. I also think, and it's one of the reasons why I really wanted to buy Pandora, is that I think that we're in the audio entertainment business. And frankly, there's 2 ways to monetize that business: subscription or advertising and promotion. And before the Pandora acquisition, advertising was a very small part of our business. Now it's like 15% -- 12% to 15% of our business. I think we have the potential to grow that to 20% of our business going forward. And so I think the free business, whether it's through Pandora or some other ideas we have, still has good runway for us. And I think there's room to grow our advertising revenue as well. Besides that, one of the things I think we've learned is that as we have taken the core strength that Pandora had in the ad business and built around it, and you've asked me 2 or 3 times about what acquisitions we've made to strengthen our, what I would call the infrastructure of technology and the sales force, we've been very diligent and very deliberate about investing in those. One of the things we've learned is there are others out there that maybe can't afford those investments, that offer what we call an off-platform opportunity to be able to provide those services for them and monetize those, not at the same margin level as our core business, but at a pretty attractive margin level. Our SoundCloud relationship is a really good example of that.
And then on the other side of that, I mean, what do you see as the greatest risk to Sirius' sustained growth? Is it car sales? The economy? Not fixing Pandora? Not renewing Howard Stern? Like, what scares you?
Well, I'm not -- I can tell you right now, I'm not afraid of not renewing Howard Stern and I know you're going to ask me about that in a moment. But for me, right now, I kind of -- and I'm always someone that looks at, "Hey, this is great." And then, well, "What could go the other way?" The economy still worries. I -- We have a very, very, very difficult political environment right now. I think we're unsure exactly where that's going to lead over the next several months and what that might mean from the government. Obviously, the pandemic has hit us, everybody, really, really hard. And I still worry a little bit about how sustained the recovery will be and what its velocity would be. Those things clearly then may have an impact on auto sales, but we're not seeing that right now. We're actually seeing all of our businesses recover, both our advertising and our subscription business recover pretty nicely. And I just hope the economy can continue to mend itself and strengthen.
Right. So COVID's led to like a number of changes in, just, our general society. And for investors who are focusing on the potential changes to commuter travel, vacation travel, I mean, it does feel like people will take less public transportation for the foreseeable future. It all feels like car trips will substitute for air travel for a while. How do these factors affect your subscriber growth? I mean are they all seemingly positive.
Well, we're learning every day on that, right? But -- and I'll be candid with you, we're in better shape today than I would have thought 4 or 5 months ago. And I think I underestimated the resiliency of the customer's demand for our product and their satisfaction with it. But if you go back, I think that it cuts both ways. You know what I mean? I mean number one, I'm really pleased that everywhere we can directly measure in-home listening or on-the-go listening, in particular, in-home listening, it's increasing on both of our main platforms. The trick here is we're hoping that in home listening, that's increased, stays at that increased level, once people start returning back to a more normal commute pattern and spend more time in their automobiles. You're absolutely right, though, on the flip side and another good side for us. Not a good thing necessarily for a lot of other industries of the country, but for us, has been -- people are driving a lot more for -- to get those vacation satisfactions or whatever rather than flying. And as a result, we're benefiting from them enjoying our product more while we're doing that. I'm one of the few that thinks that COVID will have some fundamental long-term changes in our business, in particular. I wouldn't have -- if you'd asked me 10 months ago, did I believe that we could work as easily as and as well as we're working remotely right now? I would have said, no. I will also tell you, and I saw Reed Hastings had a few comments on remote work, I really miss the interface of having people together and the live part of what we do every day when we're back in the office. So I think that inevitably, when we get this pandemic issue resolved or solved, at least, or palatable, as -- let me put it that way, I think you're going to see more and more people revert back to those patterns we saw before it occurred.
And how else do you think this COVID impacting your businesses? Is it affecting any of your strategic plans, cost structure? Just anything -- is there any other impact? Before we move on to other subjects.
Well, it hasn't affected our strategy at all. None. And -- but I can tell you, it will be a long time before I lease any more office space, that's for sure. And I think that we're already beginning to really try to understand when it becomes safe for everybody to go back to work and when we believe that, that's the right time for -- at least for us, for our facilities to reopen. How much of it do we really reopen? I mean by that, I mean, there is a chunk of work that will get done remotely. And I think you'll see us probably take advantage of that and end up, I think, with a lower G&A structure, but not material. I mean is it a good thing? Yes, but I don't think -- if investors are looking at the strategic path for our business, I don't really see -- I see, certainly, a short-term impact to our business, which we've already felt and we're now recovering from. But I think if you're looking at our business for the midterm and the long-term trends, I don't see much change.
Okay. And then as evidenced by your increased guidance this morning, auto sales have been much stronger than most people expected, particularly in August. What are your expectations for new car sales throughout the remainder of this year and as you look out to 2021?
Well, we ask a lot of people what they think. And we subscribe to a lot of services. And then I do a lot of what I would call, informal surveys of people in the business to tell me what they think. I think we generally believe that the SAAR is going to finish in the mid- to high 13s, may get to $14 million for this year. I think that's probably a little bit of a stretch, but I will also tell you, it's -- [ it gets me ] every month so far and -- since the pandemic, after we got through March and April, recovery has been stronger. I think what's almost as important for us, Jessica, is it's not just the recovery of the SAAR, but for us, the tricky -- the part of auto sales that we've never been able to monetize as efficiently, or that portion of auto sales that go to fleets, rental car companies, those kind of things, right? Those sales are way, way down. So not only is the SAAR recovering, but the retail portion of the SAAR is much stronger, which is really good for our business. So we see the -- probably the fourth quarter being in the mid-14s. We could see that. And we think that rate's kind of the rate that goes into 2021.
That's great. So prior to buying Pandora, you stated over and over, so many times, the business models matter in relation to the various streaming music offerings that exist in the market, how are you changing the business model of Pandora to ensure that it succeeds? And how have the various investments you've made since acquiring Pandora, things like AdsWizz, supported your efforts to capture increasing digital dollars?
So I'll be the first one to admit to you, it's a work in progress, and we're -- I think we're making progress, and we're moving forward. So I think early on, we thought the cost structure for the business was too high, and we've corrected that, okay? And we've taken those steps, which gets us to a position where prior to the pandemic, the business was positive from an EBITDA standpoint and provided us room, which we're still continuing to do -- to invest more heavily in acquisition marketing. I think also, we've come to become much more focused on the free business and less focused on the subscription business there. Now I want to be clear here. The -- and when I say less focused, we have not done -- Pandora had not done very well before we bought it. And frankly, it was never my ambition to drive the $10 music business to any high rates. There's plenty of competition out there. In my opinion, a lot of people have already selected who they want for that. By the way, I think those businesses and ours co-exist really, really nicely, and I don't see one as substitutive for the other. The $5 business at Pandora, which is just a little more functionality, but a commercial-free experience, we've actually found that high single digits, low double digits of people are rolling of our base or willing to pay $5 a month for that, and that's a good business. I think that's probably -- I think we could do a little better, but not a lot better. Where I think we can do better in Pandora is getting -- creating the listening environment out there. And there are still -- we all talk about Apple and Spotify and Amazon, but the facts of the matter are more people listen to terrestrial radio for audio than anything else. And so in my opinion, there is still a huge opportunity in free radio. And our challenge is to get people who are listening to free radio on terrestrial to understand how good the content is on Pandora and how good the experience is and get them to try it and then get that experience tailored enough to them to keep them satisfied so we can keep them. So I still see continued opportunity in shifting listeners from terrestrial radio into free stream rate.
How important is SoundCloud to your overall strategy?
Well, SoundCloud is a big part of our off-platform strategy in terms of -- that I described earlier in terms of our ad business. In terms of where does SoundCloud fit into our overall strategy, I don't really have anything to add there right now. We took a minority investment in it. We have 2 key -- we have 2 people on the Board. I will tell you, I'm impressed with the SoundCloud management. And it gives us kind of a way to watch those things that others ask me about. For instance, SoundCloud is a global business. It's a tough business, okay? And we get to watch that from the inside out. SoundCloud obviously participates and a lot of different other businesses that feed off of streaming. Some of those look kind of interesting to us. So I think right now, our investment in SoundCloud, we think, has proven to be a smart idea. It certainly anchors our off-platform opportunity. And we'll see where we are in a year or 2 as to what's going on with the bigger picture.
And do you believe Pandora, the ad-based businesses is strategically complete? Or do you need to do you need further investments or acquisitions to -- in that area. I think you just alluded to something. I'm not sure if I heard that right, but that you might need more acquisitions to drive that?
No. I think that -- no, I don't think that we need an acquisition to fill out our repertoire, okay? I think the challenge for us in Pandora is to hammer home the marketing message of how good the content is and what's available on Pandora and it's free and how easy it is to get it. And we just need to do -- we need to see to continually keep working on that. And so the only area where I would say we need to fill out our dance card in Pandora is there's still other pieces of content, both -- more along the lines of what we've already announced. And for instance, what we're doing with LeBron James now, and then what we plan to do with Drake in the not-too-distant future as well as bringing more spoken word content to Pandora as well. Another point I want to make, Jessica, I think that an area that gets underestimated a little bit is we happen to believe that live is also important. And so we think if you want to be successful in the free business, you need to not only offer the streaming opportunities that are offered today, but that it's stronger when it's supplemented with some live capability. And I think you'll be seeing us drive that as well in the not-too-distant future.
Interesting. Moving on to podcasting. That's emerged as a new area of high-growth within the audio entertainment universe. And you've acquired a couple...
Truly is getting a lot of noise for not -- what's not that big a business yet.
It's a very small -- it is a relatively small business, but you've acquired a number of different podcasting assets in recent months, Simplecast, Stitcher. Can you just talk about your overall strategy there as it relates to podcasting? And will you be more focused on Pandora or Sirius side of the company? Like, where is the positioning within the company?
So let me take your latter question first, which is podcasting will be a part of both what SiriusXM offers in the future and Pandora offers in the future. It may be very different. Some behind the paywall, some in front of the paywall. You may even see us take content that is traditionally behind the paywall and put a little bit in front of the paywall to drive interest for it both ways, right? And I think -- one of the things I'm learning is that with some of it, the best way to find out is to experiment was a little bit of it and then be prepared to adjust those experiments if the results don't yield the direction you expected. I actually love the opportunity in podcasting. I think there is -- and what I love about it is I think it has an opportunity to expand the whole audio pie, okay? I don't see it as substitutive. And oh, by the way, I -- everybody wants to kind of talk about it, while it's one off. Well, if one company has this, then another company won't have it. I don't think that's the way it's going to work. I think there is going to be enough content out there for everybody to figure out a way to make podcasting very, very interesting. The part of podcasting that appeals to me today is a lot of the podcasts that you're seeing that is a form of entertainment that we really haven't seen a lot. And Serial was perhaps the beginning of that. Of course, taking existing spoken word content and making it available in a variety of podcasting content is a great idea. And there is a ton of podcasts out there, like the Jim Meyer podcast, which doesn't exist, but if it did, I'm not sure anybody would really be interested in, that I don't think you're ever going to see a very big market for. But I think what we've learned in entertainment, whether it's in video or an audio, frankly, is if you can bring a new, compelling form of content to listeners in a way that's easy for them to get and easy for them to use, they will like it. And I think some of the stuff you're seeing, some of the stuff, the original content you're seeing Stitcher do, some of the other original content, some of the stuff we heard from some of our big media partners that they plan to do, some of the stuff we plan to do with Marvel, these are new -- in my opinion, these are new entertainment experiences. And I think that's where the podcast market has the greatest room to grow. By the way, Jessica, I sort of -- I want to clear it up. We don't need anything else in terms of filling out the infrastructure here as well. We have everything we need. Now that's given that the Stitcher acquisition closes, which we're waiting for the final government approval, which we hope to get here in the next 2 to 4 weeks, right, which I'm confident we're going to get. But it's not up to me, it's up to the government. Once we get that, we're really pleased about getting, for instance, the Midroll sales force and combining that to give us a much -- a bigger basket of products to sell across our advertising sales force. We're really excited about the content that Stitcher has and how we can use that across both of our -- the Sirius and the Pandora platform as well. And so I think the one area in podcasting, again, that we're going to be focused on over the next several months is what do we really think are the content opportunities that are going to ring the subscribers' bell and how do we get them to it?
So on other types of content, we touched on, for a second, Howard Stern. You said you're not worried about him renewing. But can you tell us how many subscribers listen to Howard on a daily basis? And what kind of term you would expect if you don't renew him?
Well, I'll answer the question the other way, which is we've had Howard for 15 years, and I am sure that every penny we paid Howard, we -- our shareholders have economically benefited. So -- and I've been really clear. I want Howard Stern to work as long as Howard Stern wants to work. Howard, I can't speak for him, but I can speak for me, which is Howard has -- loves working at SiriusXM. We love having Howard at SiriusXM. I think the quality of his show is the best it's ever been. I think the level of guests that is getting is the best as it's ever been. And I don't see any reason, quite candidly, why that would slow down. I mean he amazes me. Frankly, the harshest critic of Howard Stern is Howard Stern, and that's great. We are in -- I'm personally, deeply engaged in conversations with Howard's team. I'm very optimistic about those conversations. We continue to make progress so stay tuned.
Can you discuss some of the creative deals you signed in the last year or 2? You mentioned Drake, who we're a huge fan of, U2. What are your plans for these super stars? And how do you measure -- how will you measure success?
Well, in how do you measure success is always -- there's always a direct measurement in terms of what listening can we actually measure and see, or how do subscribers interact to certain pieces of content. But I can also tell you, the part that's hard to measure is the positive rub off on our brands of having megastars like those associated on our platform, and frankly, helping us promote our platform. So I think you're going to see, probably, some more from us in terms of what we call the megastar opportunity. We're really excited about what we could do and what we're planning with Drake. Frankly, he is -- there is no doubt about what his star power. And if not for the pandemic, we certainly would have been a lot further along on that now, but we just didn't feel, and he didn't feel that launching this initiative in the middle of the pandemic was the right thing to do. And so we're working with his team now. But I could tell you, they are -- really impressed by both their commitment and their degree of -- their creativity is simply amazing. But I think, just for a little sample of what we're going to -- just look at what we're doing right now, for instance, on the Pandora platform and on the Sirius platform with LeBron James and his brand, UNINTERRUPTED. And I'm really pleased -- and we're really pleased with what we've seen from our listeners there. And as you know, we've launched the YouTube channel. That's really, really done well. We've got you to now in a variety of different ways to experience YouTube through a feature we call modes on Pandora. And I think you're going to see more and more from us on that.
Right. So in recent years, Sirius has done more than satellite distribution, including the 360 offering for the car. Can you give us an update on how that's progressing? And in your view, what's the biggest opportunity with this platform? Is it integrating linear with the 2-way capability connectivity? Is it improving customer relationship management? Tighter integration in the car, out of the car? How do you think about that?
But like -- Jessica, one thing I want to just -- I forgot to answer, and then I'll answer that question is -- one other thing I want to make clear is we are in the audio entertainment business, and we believe a fundamental part of being in the audio entertainment business is not just music and not just spoken word. We believe news, live news, and we believe sports and live sports are also very, very important. We are the leader in North America in those areas. We are the unquestioned leader in those areas. And I don't think you'll see us being shy about keeping that leadership position going forward. Now to your question on 360L, I'm really, really pleased. 360L goes like -- everything -- I would tell you, I've been a Sirius 17 years, and the one lesson I've learned is the automotive channel goes at the speed the automotive channel wants to go. And by that, I mean they implement technology at the rate they want to, not the rate you want to. I can remember talking to them about the -- I can remember showing you 360L early, early on when it was still just drawings on a piece of paper. And I'm finally so happy to see it now. It is in full momentum, okay? And that is -- on our last earnings call, I told you we expect to triple the amount of new cars with 360L from, call it, $1.3 million to $1.5 million to whatever triple is $4 million to $5 million next year. And that math will just keep increasing. And as time goes by, it will approach our 80% or a slightly older 80% penetration rate. 360L helps with all of those things you asked about. And that's why I'm so excited about it. Number one, it clearly gives us the power of being able to take all of the shortcomings of satellite, meaning that satellite is fundamentally one way in nature and marry that with all the 2-way capabilities of the connected vehicle. Number two, it will greatly help us with managing the customer relationship and everything from making it easier to re-subscribe or renew all the way through to being able to better understand what content you really want and how do we customize and provide that to you through your on demand experience. So I think 360L is not something really well understood or as well understood as it should be by people who follow our company and that it is -- the only thing I can tell you, it is now the plan to record with -- with every major automotive company we do business with. They are all now in the process of rolling it out, and you just got to wait for them to work through their cycles. But it's finally starting to boom. And over the next 3 years, it's really going to go. And when it really goes, we're going to get all those good things that go with it.
And I apologize for skipping so many topics like sports and news because we're like running out of time and I've still so many things to ask. I'm just going to skip ahead and talk about capital allocation. You've returned like $10 billion of capital over the past 5 years through both share repurchase and dividends. We just reauthorized another $2 billion in repurchase authorization. Can you talk about just the overall strategy and how you think about capital returns from here?
Sure. And I think we're very disciplined here, and our Chairman and our Board is also very disciplined here, again. It starts with, number one, we have a great problem, which is we're generating a lot of cash. And so we have a wonderful, I won't call it luxury, but a wonderful thing that we can figure out what to do with that cash. Our first and foremost use of that cash is how do we invest internally in those things that we think provide the greatest opportunity to drive our profitability and the size of our business. We're doing that, at least in my opinion, very, very well. And one of the exercise I love going through at the end of the year, but it's just so hard to believe we'll be out here another 3.5 months is, well, what didn't we do the previous year that we should have invested in? And I can tell you, in the last several years, at least as long as I've been CEO, that list is tiny, okay, and not -- frankly, not worth knowing. So that's our first use. Our second use of our capital is to take a hard look at are there things that we can own that we think help accelerate our strategy or strengthen our strategy? And while we returned $10 billion of capital at the same time, we bought a company called Agero several years ago to give us a really strong position in the connected vehicle business. And then we've acquired Pandora, which I really like. I mean as I've said going forward, I think the audio entertainment business is going to be a big business. But I don't think it's a given how that business will be monetized, certainly, with our children, okay, and their children. And -- but it's going to be monetized through subscription or advertising. And my guess is both of those markets are going to be around for a long, long time. We're now really good at both, and we're going to be in both of them for a long, long time. And then finally, we look at return of capital through dividends and share buyback. Our Board asked us this question constantly. We review with them constantly where we think we're at. And what I can say, I'm really, really pleased with is our Board, prior to our -- at our last board meeting, increased our authorization to buy back shares by another $2 billion. So I don't think you're going to see a lot different from us in terms of how we behave going forward from how we behaved the last 3, 4, 5 years in terms of capital allocation.
So even though we're out of time, I'm going to ask you one last -- I have to attempt to ask one last question, I have to. Liberty Media owns roughly 73% of Sirius at this point. Can you talk about the impact of Liberty's ownership level accreting over time? For instance, there -- are there any ownership levels like the 80% threshold that would impact your business, how you run the business or your capital allocation strategy?
Yes. So we clearly understand and have been advised very, very well on, what, 80% and 90% ownership levels entitle Liberty Media to do. And our Board is well aware of what those 2 threshold points mean. And I think I'll say, we have a very savvy board. We have a very strong, independent Board members as well. And -- by the way, things are going great with Liberty. And I -- what Liberty's long-term intent is, I actually don't know. You have to ask Liberty.
Okay. I mean I have 15 more questions, but thank you so much. We're out of time. Thank you so much for joining us today.
Thank you, Jessica. Sorry -- I'm sorry, we're not doing this in LA. I would have enjoyed seeing you in person.
Me too. Thank you.
Bye-bye.
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