Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript

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I have thought about retirement. I'll be 66 years old in a couple of weeks, and don't believe in mandatory retirement. But I do believe when the day comes, you're not ready to give 250%, you really should let somebody else move forward. I love this company. I love the people at this company. But I just want to slow down a little bit. And I've been talking with Greg, our Chairman, Greg Maffei, our Chairman about that for a while. Obviously, when the pandemic hit and then also, of course, the issues we've dealt with culturally with social injustice are front and center for us. Stability was most important. I think we've done, as a company, a really good job maneuvering through that. I think we've never been in a stronger position. And so I've gone to the Board and to Greg and said, "I think this is a good time for me to step down." The Board ran a rigorous process because I gave them plenty of notice of what my intentions were. And they examined both internal and external candidates. We have a really strong management team at Sirius XM. I'm thrilled that Jennifer came to the forefront and that the Board has selected Jennifer to be the next CEO of the company. I've worked with Jennifer for the entire time I've been at Sirius XM. I've promoted Jennifer numerous times, and every position I've ever given her, she's just done terrific at. She's ready, and she'll do a great job.

Thanks about that. you also announced that David Frear would be leaving as well and that Sean Sullivan would be joining as CFO. What qualities were you looking for in the search for a CFO? And why is Sean the right pricing for that position?

Sure. Before I comment, I just want to be clear. There's nothing wrong with the company's books and records. David is an individual of the highest integrity. And this isn't about a disagreement of any of those kind of things in the company. But with Jennifer's promotion, I felt it was a natural time for David to pursue other opportunities that he's talked about. I want to be clear. David and I have worked together for 17 years. I have the highest regard for David. I want to thank David for what he's done for me, and more importantly, what he's done for Sirius XM. I wish him nothing but the best, and I know he'll do very, very well going forward. With Sean, what -- and we also ran a pretty extensive process there. With Sean, we got -- we're really excited to have him join us, but we thought it was important first of all, to get someone of very high integrity. And Sean checks that box everywhere you go. Number two, he's a seasoned CFO, which was also very important. And then finally, he comes from the media business, which we think is great. And so he comes to us with the highest of integrity, highly recommended and a great experience base. And I think he'll bring a little fresh air into the building, not a hurricane, but a little bit of fresh air. And I always think fresh air is good.

So you mentioned the fresh air and I think naturally with management changes at companies such as this one, investors will typically ask, what's the strategic direction of the company going forward? How is that changing at all? So my question for you is what do you expect the main priorities for the management team to be over the next few years? And sort of what are the biggest opportunities for them to drive growth? And how do you expect them to execute on that plan?

Well I think that it's a great question. And I think you have to think of it kind of in a couple of different pieces. If you look at our business on the -- so number one, let's be clear. We are in the audio entertainment business in North America. That's what we define as our boundary. Now we wonder out of that occasionally for what I would call smaller initiatives like our position in the connected vehicle space. But one of the reasons we're in that business is because the OEMs ask us to be in that business, and it complements our OEM relationship that's so valuable us in our core audio business, okay? But our core business is audio entertainment, our core market is North America, and we are the leader in North America. As I look at the business, I see 2 main drivers to it. I see one, that we've just done a terrific job in, and that's our subscription business. When I joined Sirius, we literally had 40,000 subscribers. And I'm proud to say we now have over 34 million subscribers, right? And we also have a very robust subscriber business that is primarily driven by acquisition engines through car sales. As you look at that, there is lots of opportunity for that business to continue to grow. And we've owned self-pay subscribers by almost -- by 1 million a year, I think, for 10 years in a row. We'll -- we're not there this year, and our most recent guidance is 700,000. But I got to tell you, in a year like this, 700,000 feels a lot tougher than 1 million. And I'm really proud of how our team is performing and how we're doing there. I think, though, within that, we've learned that we can also both improve our churn and drive more growth through our streaming initiatives of Sirius XM. And we're only just getting started there. And I think there's a lot more opportunity for us to continue to improve there. The second leg of our stool, which is we're in, in my opinion, in the first or second innings still, is if you look at the North American audio entertainment business, the vast majority of it is driven by free. With terrestar radio, by far, being the biggest. I think there's still big opportunity for share shift between terrestrial radio and free streaming opportunities. That is at its core is why we bought Pandora, but most importantly, the reason I wanted to buy Pandora was also to build -- prior to our acquisition of Pandora, we had a very small advertising business. And now we are, I think, the leader -- I know we are the leader in digital audio advertising in North America. And we're building around that business with new tools and investing in it to drive it forward. I think this business has a lot of room for growth and opportunity, both in our traditional and by that, I mean a shift of listening over to something that we can monetize and by being able to take that same ecosystem and provide those services in an off-platform way like we're doing with SoundCloud right now. So I'm pretty excited about our growth opportunities.

Let's expand on that advertising point a little bit more. You mentioned you've been pretty acquisitive, both within the adtech space and then also on the ad-supported content side of things as well. Pandora 1.5 years ago, AdsWizz, Stitcher, Simplecast, the investment in SoundCloud, how do all these pieces fit together? And what's the opportunity you're going after, both on the on-platform side, and you mentioned on the off-platform piece as well?

And again, I stay focused on what's our core objective? And our core objective is to be the leader in audio entertainment in North America. And to do that, it's really clear to me, you have to participate both in the subscription business and the free business. And oh, by the way, I think the free business also is -- can be a pretty robust funnel for the subscription business, right? So when you get into that and as we continue to develop it, one of the things that we knew when we did our diligence on Pandora and has panned out to be really, really true is that Pandora had a very strong add -- digital add selling capability. And that's proven to be absolutely true. But it's one that hadn't been invested in enough for a lot of good reasons in terms of priority. And we've moved it way up the list in terms of priority. And so we're investing in that business to strengthen it and give it all it needs, and we're pretty close. We -- and one of the reasons why I'm really excited about when the Stitcher acquisition closes is, Stitcher has a very dedicated through Midroll, very dedicated ad sales force to podcast, that's just a natural fit into -- it's just another tool in the bag, for our digital audio sales force and a natural synergy that will make our ad-selling capability even more powerful. So this is clearly an area we want to invest in. Obviously, size of audience matters, but there is a big off-platform opportunity that we -- I won't say recently, but I will say in the last 9 to 12 months that we've become pretty excited about and we're a company that sets its sights on something, plans its strategy and then very methodically goes at it and executes, I think, extremely well. And so I think you're going to see us continue to drive in the ad business. Stephen, one other point I want to make is we do have these generational questions, right? About well, I have 3 kids and 2 grand kids. Well I'm positive, they'll enjoy audio entertainment. But it's really difficult to say 10 years from now, 20 years from now, how will that be monetized, okay? And it's got to be monetized or it can't survive. I'm reasonably sure that the 2 primary ways is going to be monetized or either subscription or advertising. We're a much different company today and that we're the leader in North America in both of those. And I'm really, really proud of that.

Got it. And I think you generate $1.3 billion in advertising revenue or you did in 2019 was around 16% or 17% of total revenues. How big of an opportunity do you see as being for Sirius XM over the next 5 or even 10 years? Is it something that could double, triple, grow to sizable partnering revenue?

Yes. I've kind of talked to our team about a goal over the next 5 years, certainly, to get it to $2 billion, okay? And as we understand the off-platform opportunity, I think we'll be able to better answer that number. We're just really beginning to understand all the pieces to it. And what are some of our best -- some of our good opportunities to drive it. But I can tell you not everybody can afford the investment to build the ecosystem. It takes to be a leader in digital audio advertising, and we recognize that. And we intend to not only nurture our own position, but make that position available to others where -- including competitors, okay, where -- but where we can also monetize that skill that we put in place.

Got it. You mentioned podcasting as a component of the ad strategy with the Stitcher acquisition. I'm curious, 2 questions here. What is like your most developed the podcasting opportunity going forward? And how does your strategy maybe defer from what we're seeing from some of your competitors in the audio space?

So I'm really excited about podcasting going forward, but I just -- I want to, first, I think, deal with what I think is a misnomer. And that is, there are some people who follow the audio entertainment space, who think this is a zero-sum game. Meaning, if one piece of content goes here, then it's not going to go here, and that's going to be the end and all that. That's not the way it's going to work. I mean, frankly, podcasting is in the first or second inning right now, again. And oh, by the way, there's way more content out there now than anybody can ever listen to. And so the content is a really important part of the story, but also effectively marketing it and making it easy to use for the end user is going to be critical here. And most of the big brands are just beginning to play. Most of the big media brands are just beginning to play and get interested in the media space. Our relationship with Marvel is a great example. That's a company that's made a fabulously successful path on video, who is now saying, "Hey, wait a minute, I see an emerging form of entertainment in audio, and we want our brand to play in it, and we want you to help us evangelize that and drive that across multiple platforms." And I think you're going to see a lot of that. I think what's most exciting about podcasting for me is, of course, taking existing spoken word shows and breaking them up and making them easier to search and to listen to it, make them more convenient is really, really important. But what I'm really excited about is the amount of effort that's going in to develop new content. Content that we've not seen. And I think we all were enticed by what happened with Serial. And I think now, when you look at a lot of the big-named titles that are out there and podcasting today, I think there's a real opportunity for content to come to the forefront. And believe me, Stephen, I'll put our content team up against anybody. We've proven over the last 17 years that we are as good, in fact, we are better, I believe, than anybody else in the audio entertainment business that building content and developing content. And so I think the opportunity for new exciting content that the consumers never really touched on before is going to come through podcasting. And I think it's got a real opportunity to expand the whole audio entertainment pie, not just some kind of a share shift.

Got it. And you mentioned putting your content team up against most others. One area of content that you've been very successful in over the last decade is in sports and news, and it's been a pretty big differentiator for your platform. Two questions here. Maybe looking forward, you've given all the focus on podcasting, how important is sports and news and live content to your audio bundle? And is exclusivity necessary in order for this type of content to be [indiscernible] and marketed to subscribers?

Well exclusivity is always nice, okay? But exclusivity also comes with a set of economics that have to be proven. And I can tell you that we understand the economics very, very well. For instance, of content like Howard Stern. And I can look every investor in the eye and tell them that is a good investment for Sirius XM. That's not true with -- there's just not that many pieces of content out there like that, okay? That it's that apparent to. And so you have to be really careful with that. And then there are many, many content holders who want to be available on multiple platforms. And I don't blame them, okay? And for instance, if you look at the music industry, there really is nothing. There is nothing that in itself is exclusive. We've been able to build brands within the music business that are exclusive, like The Highway, like Sirius Hits 1 and then supplement that also with what we think is really unique on our talent to make that a truly compelling opportunity. I think live is really important, Steve. And I think it's being overlooked because I think we are the leader in it, although terrestrial radio is pretty damn good at it too, right? And I think to be a leader in the audio entertainment business, obviously, you need music, and you need to do that very, very well. But I think you need live news and live sports. And then you need what comes from live news and live sports in whatever format that may be, whether it's linear shows or whether it's on-demand/podcasting. And then you need to participate as well in entertainment and all the other things that are really finding -- coming to the forefront, spoke about true prime, for instance, right now. If you look at podcast, we have one of the most popular versions out there. And so I think live is really, really critical. We understand it. We understand the sports rights business very well. But to be honest with you, if you look at the sports leagues, they've done a really, really -- I admire them because they've done a really effective job of dividing up what I call beachfront property in that the NFL is available many, many places. The NBA is available in many, many places. MLB and NHL are available in many, many places. And by that, I mean they're available on a given Sunday on your mobile devices, they're available on Sirius, and they're available on terrestrial radio. I just don't see that changing over the next several years. So I want to emphasize again, I think our position in live is a really core asset for us, and it's one we intend to build on. One of the places we're investing is we're completely rebuilding the Pandora app. And we'll have -- Jennifer will have more to say about that early next year, as we go into 2022. But I can tell you, we will bring live capability to the Pandora product offering.

Got it. So it sounds like you have a lot of ambitions on the programming front, maybe bringing some streaming capabilities in Pandora, doubling down on live sports and news, expanding in podcasting. Let me just ask this, you spent $460 million in programming and content cost last year, it was about 6% of revenue. How much money does Sirius need to spend to execute on its content strategy going forward? And can investors expect the programming and content cost line item to be as much of a source of operating leverage in the future as it has in the past?

So just for a point of clarity, and then I'm going to answer your question because it's a good one is, don't forget, we also spend $1.7 billion or something on music royalties. So we spend a lot more than $460 million on content. We just keep it in 2 different line items, right? We pay content holders up in the -- in music up in the royalty line and then spoken where we pay it mostly down in programming. And then that also includes the money for all our on-air talent across our various channels. I think our programming costs have risen kind of as a percent of revenue flat to a tiny bit up. That's been very deliberate. And I think it's reasonable to say that's what I continue seeing. That said I will tell you, if we see compelling content, and by that, I mean, Scott Greenstein and his team, and they bring me, I can tell you, Scott's team brings me opportunities daily and weekly. And as Scott and now, Jennifer, but -- become convinced that there is a piece of content that can significantly drive either our retention or our acquisition, we will go get it. And we will wait for that content then to pay off down the road because our content as a percent of revenue, obviously, hasn't always been the number you just quoted, it's quite a bit higher if you go back 10 years ago, and so I really think we're very disciplined here. But we are going to be, at least, we believe we are the leader in content in North America in audio entertainment. And I don't see any reason why that philosophy change, but responsibly, okay?

Got it. I wanted to switch gears for a moment and talk about your satellite business. Last week, you increased your guidance for 2020 self-pay net ads from approximately 500,000 to approximately 700,000. What trends are you seeing in the business? And what gave you confidence to increase the outlook when you did it?

So I'll be -- honestly, I'm really surprised with where we are when COVID hit and we were through our guidance, it was really -- and frankly, we didn't know what to expect. And I think what it shows is, frankly, how strong the demand for our product is and most importantly, how loyal our customers are to what we provide them. And so what gives us the confidence, I think, is 3 things: one, we've just seen really strong performance from our subscribers in churn to where our churn is just really, really behaved well, particularly our non-pay churn is -- has -- I'm really, really proud of how it's behaved and what our team has been able to do in that area. I'll also tell you that we've seen a resurgence in our winback business, meaning our marketing efforts out there to the more than 100 million dormant radios that are factory installed that aren't active out there now or whatever the -- I got the math a little confused, but it's a big number, okay? 80 million, 90 million. And we've seen good success also in the last 3 or 4 months and an uptick there. And then finally, it just seems like every week, the automotive business is getting better. We are very close to the automotive OEMs, and I'm also -- we are very close to the biggest automotive retailers. And so we get very clear feedback from them on what's happening with automotive sales, and it's a good story. It's not back to where it was, but it's steadily improving. Frankly, the near-term, right now, the biggest issue is there's just not enough inventory in the system, and particularly, in certain cases, like German brand luxury cars are very low in terms of inventory right now. That will fix itself. It always does, and it will fix itself over the next several weeks. But I'm pretty bullish on what we see in automotive sales. And so when you combine all of those together, it gives us the confidence to raise our guidance, and I'm highly confident that we'll achieve that 700,000.

You mentioned the pause, I think, to production and the low inventories. Is there a specific quarter that investors should expect that to particularly hit yourself being net adds? Is it a 3Q story or 4Q story? And sort of based on what you're seeing today, when would you expect maybe some of the trial funnel trends to normalize?

It's primarily for us a 3Q story. And I think the fact that we increased our guidance halfway through in the third quarter should give you a little indication of how we see things right now.