Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript

All right. Well, good afternoon, everyone. Welcome to Citi's Global TMT West Conference. I'm Jason Bazinet, I cover the Internet and media sectors here at Citi. We have disclosures available on the conference registration site. And so if you need those, you go there, and it is our real pleasure to welcome Jennifer Witz, CEO of Sirius XM.

Thank you, Jason.

Absolutely, absolutely. So I think you guys just put out some sort of release. I haven't had a chance to read it or see it, but maybe you could spend a few seconds and tell us the key elements in that.

That would be great. Thanks. Yes. So we just put out the release after the close, and I thought it would be good to start off by addressing a few topics from the release. And first, as we've done in years past, we confirmed our subscriber numbers for last year. So we delivered 909,000 self-pay net additions in 2020. That not only exceeds our last public guidance of 800,000, but it also exceeds our original guidance for 2020 that we issued last January of approximately 900,000. So really strong performance, especially in light of the lower auto sales we saw last year. We also said, and I'm pleased to report, that we expect to meet or exceed the rest of our 2020 financial guidance for revenue, EBITDA and free cash flow. And we'll have more to say on our earnings call on February 2, but the bottom line is, for 2020, our business model proved to be incredibly resilient. We grew subscribers. We're producing strong cash flow, returning capital to shareholders and our employees adapted really quickly to such a challenging environment. So I really -- I couldn't be more pleased with where we are in terms of our 2020 results. The second point from the press release that I want to address is we announced that we expect to report an impairment to intangibles in the fourth quarter associated with Pandora, and this is expected to be approximately $1 billion. So what I want to make clear first is that the strategic rationale for this acquisition still holds. Pandora has given us a leadership position in free digital audio in the U.S. supported by advertising. It's broadened our revenue base, given us expertise in digital, product and marketing and enhanced our distribution outside of car. So the impairment, which is noncash, of course, is driven by the anticipated operating performance of Pandora, primarily related to the royalty cost structure. So the uncertainty that we have this year and potential for higher royalty costs coming will likely drive lower margins and have a meaningful impact on Pandora's profitability over the coming years. So this drives the bulk of the expected impairment. However, the intensity of the competitive environment has grown in recent years among streaming music providers, especially, as you know, with the integrated tech companies, and that has cut into the engagement of our ad-supported base. And the decline in the Pandora MAUs that we've seen has been a bigger challenge than we expected, and it's one of my primary areas of focus. Despite the decline in the audience, however, we continue to see excellent monetization. You've seen it in our growing RPM metric, and we still have the largest free digital music service in the U.S. And along with Sirius XM and Stitcher, Pandora gives us broad reach to this massive audience. And we have our content creators, talent and artists, just a phenomenal platform across all formats, whether that's live, broadcast, through to on-demand and podcasts. And Pandora has enhanced our digital product and marketing capabilities, and it's enabled our off platform, adtech and sales growth. The combination of the AdsWizz, Tech platform and the ad-sales team that came from Pandora, along with our recent simple cast and Stitcher acquisitions, gives us the best platform, technology, the sales, capabilities across North America, and we're going to continue to leverage this to drive growth. So the -- and we can come back to any questions there, but the third thing that we announced in the press release is our 2021 guidance. And we expect for 2021 to deliver approximately 800,000 self-pay net additions, about $8.35 billion of revenue, $2.575 billion of adjusted EBITDA and $1.6 billion in free cash flow. I think even as we were talking for the call, Jason, we're being a bit cautious as I think most companies are, and I remain hopeful that things will slowly get back to normal in the second half, but I expect the first half is still going to be pretty challenging. COVID cases continue to rise. And clearly, the country is racing to distribute the vaccine. And the advertising business is continuing to build. For us, Q1 is always a seasonally light quarter, but we expect solid growth across the year with the addition of Stitcher. Our subscriber business should grow nicely in 2021. We've got a few tailwinds. Auto sales are expected to be strong and better than next -- than last year. We have growing pen rates on both the new and used car side and have more digital-only Sirius XM subscribers. So a bunch of tailwinds. We're being cautious on churn. 2020 was one of the best years we've had, and I think nonpay and vehicle-related, we could see some of -- some reversion back to normal levels this year. And then with conversion rates, with higher penetration, we're going to see a movement into lower trim levels and new cars. And then, of course, we'll see a growing percentage of older used cars in our trial funnel as well. So on the cost side, we're going to build SAC, right, with the increased installs this year. Marketing expense will rise driven by higher new and used car trials. And of course, we have the uncertainty around the Web 5 decision coming sometime in the next few months. So those are the 3 pieces of what we announced and happy to take it in any direction you want from there.

That's super helpful. Can I just -- so a lot of info, so I may have missed some of it. But going back to Pandora, everything you said sort of made sense, and the one thing that surprised me was the royalties. Was the -- is royalties being a higher percentage of revenue as a function of the ad monetization sort of coming in, so the royalties represent a larger percentage of the revenue? Or is it more a function of the negotiation with the labels? Or is it more a regulatory thing that changed the cause of royalties to be higher?

It's a combination, frankly. I mean our -- we have direct deals, as you know, but Web 5 will play a role in that. There's a relationship between the statutory rates and the direct deals. And as you think you saw in the second quarter when ad revenue went down but consumption was still pretty consistent with our prior expectations that the margin decreased because the royalty rates aren't necessarily tied directly to revenue. So the uncertainty around Web 5, that tied into the nature of our direct deals creates kind of a higher overall cost structure for Pandora going forward.

And then on the churn going back to sort of more normal levels, if I remember correctly, here, you've been putting up some quarters with 1.7s if I remember correctly. 1.8%...

1.6%.

1.6%? Okay. Even better.

Oh, 1.6%, yes.

So back to normal. That's still sub 2% or around 2%?

Oh, yes. We -- I mean I don't think there's anything that we should expect outside the normal range that we've been talking about, the 1.8% to 2%. And frankly, we've been under that for a while, so I think at the low end or even slightly below that is certainly where we're hoping to be. That -- it could come into the range of 1.8% to 2% a little bit more next year, but I don't expect it to be at the top end, definitely not.

And can you remind us -- because I'll just share with you sort of the broader buy-side perspective for a number of years on your firm has always been, gee, with all of these new streaming services that are out there, charge just has to go up for Sirius. And in fact, what we saw was exactly the opposite, right? We transferred and drifted lower. What is it if you -- I mean is that retention? Is it just be judicious on price increases? Is it the content investments you're making that are resonating, keeping the churn lower? What is it that caused that to happen? Because...

I think you hit on some key points. I mean we have to deliver the best content bundle because we're a premium product, and so we are very focused on ensuring that we have the best music, top news, sports bundle, we have the best combination of live and more personalized features and content. And you'll see us keep adding to that. And I think we have largely the big pieces of content that we need, but we're always opportunistic to the extent things open up, and we think they'll add value to our subscription packages. So content is incredibly important. The feature set is incredibly important. You've seen us push streaming access to our base. It's available with most of our subscription packages today, and we continue to see improvement in engagement with the streaming products outside of the car among our satellite subscribers. So that's certainly helping with voluntary churn and -- because it continues to reinforce the value of the subscription. I'm not just listening in the car, I'm listening in many other places as well. And by the way, engaging with the apps and on Alexa and other devices helps you find more content, right, because it's always challenging. And the car is one of the things, when we talk about 360L, we can talk more about. But challenging in the car to find new content, discover things, and so the streaming products definitely help us with that. But so we're -- we've always been really operationally focused on retention, and the team does just a phenomenal job there. And so we've had really strong results on the voluntary side. In nonpay, I think we were all a little surprised, and I think other subscription businesses have seen this, this year. Nonpay has just been really strong, really strong. I mean the entry rates on credit cards and debit cards have been low. We think that's because spending is generally lower and savings levels are a bit higher, and that's where I think we could see some reverting back to normal levels as we go through this year. Hopefully, people are getting out and spending more money. And vehicle, right, is just a function of our -- of the new auto sales, right, as people are trading their cars. And so we saw improvements in that last year, which as the trial starts starting to come back up on both new and used, we'll start to see a rise in vehicle-related churn.

Makes perfect sense. So stepping away from the release and my sort of tactical questions around it. What is -- if we think about your tenure as CEO and at someday, like Mr. Meyer, you'll retire, what do you want everyone to remember you for during your sort of tenure as CEO of Sirius? What are the main priorities that you have in the firm?

We'll continue to focus on this great content bundle we have, and what I want to make sure we do is protect our position in the car. So we'll continue to drive our in-car penetration for Sirius XM, the rollout of 360L to really fuel that long tail growth in both new and used cars over time. 360L enables us to improve the customer experience materially in the car with the addition of the use of IP delivery. But I think one of the areas that we're sort of at the early stages on is our digital products on the Sirius XM side, and there is just a lot of opportunity. The numbers are still small in our digital-only subscriptions. We're looking for different ways to continue to grow that. Improving the engagement, as we just talked about, among satellite subscribers is a corollary to that because the products are the same. And that's an area that I'm just really focused on driving at the company because I think it's key to our future growth. We're going to protect our position in the car and continue to grow with the tailwinds of pen rates supporting that. But I also just feel like we need to make sure that our presence is solid outside of the car and people are engaging with our great content in every place. So those are key areas. And then the last piece of the puzzle is what's really been coming together over the last year or so is the combination of all of our digital audio assets and how we're driving our off-platform business. So with the AdsWizz tech that we bought with Pandora, combined with Simplecast, which adds much needed capabilities on the podcast side and now Stitcher, we really just have an end-to-end platform to be able to deliver for whether it's podcast creators or publishers or advertisers to enable them to deliver content much more broadly. So that's an area where we will, I expect, continue to see growth in ad sales and enhance our leading position in digital audio advertising in North America.

So when you say protect the position in the car, I totally get that, right? Most of the cash flow from the firm comes from that core business. But if you unpack that and sort of say, "Okay, what are the tactics to make sure that we protect our position in the car," part of it's going to be maintaining the relationships with the OEMs, part of it is going to be content-based. But are there -- those -- are there any other things that you think you need to do to protect the position in the car? Or do you think as long as you got price point right, good content, solid OEM relationships, it sort of takes care of itself?

I think -- well, we never want to assume it's going to take care of itself, right? So -- but you hit on. I mean the OEM relationships are really key. And you've seen us extend the number of agreements, including with GM and Kia and BMW over the last several months. And the OEMs are still incredibly supportive of the product and when we work with them to determine what new features we can launch and when. And that's the beauty of 360L, is that we can -- we have the opportunity to upgrade it in certain instances and add new features even when cars are out there on the road. But just going forward, the ability to deliver content over IP just gives us a massive breadth of opportunities to improve the experience. And so when people talk about, oh, well, all these other streaming services are going to be available, they've been available, right, through the vehicle, whether it's bluetooth or auxiliary inputs. And yes, it'll get easier but with connectivity in the car, but it also get better and easier for us, too. I mean it just brings us a lot of different opportunities to provide, like I said earlier, content discovery, on-demand content, more podcast. We can better understand what the consumer is listening to, so we can deliver better recommendations, we can improve our marketing capabilities. So it's really the future, and I think that's key to protecting and growing our position in the car.

That's helpful. So one of the things that, that is a blessing, at least in my seat for your company, is that your firm has not particularly complicated the model, right? It's -- relative to a lot of other companies, it has a high degree of determinism, right? It's -- you have a big installed base of customers. Whether the net additions are $800,000 or $1 million in a year, it's not that dispositive in terms of radically moving your financials around. But the flip side of that is that it also means that the envelope of opportunity for what the firm could become is also tighter, right? And so one of the things that you alluded to at the Liberty Investor Day was this idea of a free ad-supported Sirius service, and that really caught my attention because then if you can sort of crack the code to not cannibalize, it sort of opens up a whole new avenue potentially. So can you talk a little bit about what was it that caused you to think about that as an opportunity? How dangerous is it to go down this path? How real could it be in 1 year, 2 years, 3 years down the road?

Sure. So we we've added this around for many years because we can do it today in broadcast, right? We could take down current channels that aren't ad-supported and make them ad-supported. But the -- what really changed just 360L because it enables us to send targeted advertising to consumers in the vehicle, and we could combine it with unique content over IP, but we also -- we have the ability to combine it with the broadcast content and just serve the ad through IP. So that's what really enhances the opportunity because 360L is here, the number of vehicles on the road are now going to start growing much more quickly. So we have the opportunity to offer an ad-supported service to those people that weren't going to pay. I mean while our conversion rates are very strong, we still have more than 60% of trialers that choose not to pay for satellite radio. For those nonconverters or for those who -- the self-pay subscribers who have churned and are unlikely to ever pay for radio, we see this as an opportunity to drive incremental revenue through advertising. And we can also use that inventory to continue to upsell into paid subscriptions as well. All right. So it's really just -- it's a matter of capturing greater share of year in the car, and it's an opportunity for us to monetize this massive inactive vehicle assets that we have.

So that's interesting. So when you think about an ad-supported Sirius service, you're really focused in the car, and then there's a separate sort of initiative about going after the paid Sirius subscriber outside the car in the digital-only platform. Is that the right way to think about it? It's not so much free ad-supported SIRI outside the car.

Yes. I think we will look to -- so our apps today are everything is behind the pay wall. I think there's probably an opportunity to pull some things forward so that we have certainly at least a platform to let consumers experience our content and then upsell them into paid. I don't know that, that'll be a big opportunity for ad sales, but you might have some version of a free preview or something in our app. But I think the key is what you said, leveraging that in vehicle asset and how do we monetize those inactive vehicles. And outside the car, absolutely, I think we need to be driving our paid Sirius XM subscriptions. And just one other point in the car. We can, of course, use Pandora, the brand, the features. I think we will have opportunities to test different ways of implementing free in the car, whether it be Sirius XM branded and more broadcast-like content or perhaps Pandora stations. We have a lot of flexibility in 360L. We'll be able to test different implementations, different content packages and the like.

When you sort of think about your relationship with the OEMs and sort of how prominent SIRI is in a lot of cars today, how would you characterize the prominence of the other brands that you have today in the car? Is that sort of a long journey where car models need to go through and negotiations need to happen with OEMs to get all of your sort of icons more prominently displaced? Or is that something that you just sort of hit the button on the keyboard in New York and everything sort of refreshes and it's easy?

I would like to take [indiscernible]. Well, it has -- there's a couple of pieces to that. There's what is integrated into the vehicle and what comes in through, say, CarPlay or Android auto or something like that. I mean all our apps are available through the distribution mechanism. But what's really been a competitive advantage for us is the integration, right? The combination of this great content bundle and the ease of use in the car. And that's where we're working closely with the OEMs to find ways to make sure or at least protect that position, but also because we're both equally focused on providing the best customer experience for Sirius XM subscribers. But also with 360L, again, to introduce other features, one of the features that we were able to introduce much more quickly because of the Pandora acquisition was Pandora stations. So in some implementations and then in many more going forward, you'll see Pandora stations in 360L. So we can use the IP and we use the brand of Pandora because people understand kind of what that product set is to deliver those more customized stations around an artist in the car. So -- and I think you'll see us doing that going forward. We'll certainly bring podcasts in. We're doing that through Sirius XM in the apps today, and that'll come in the future through the 360L implementation as well.

That's fantastic. So I should mention -- I feel to mention this. If anyone does have a question for Jennifer, you can just e-mail me at Jason.bazinet@Citi.com adjacent up as an@citi.com, and I'll get it and will be sure to read the question to Jennifer. I'm sure she would be happy to answer it. You -- I can't remember if it was November or December when you finally put the Howard Stern sort of contract behind you when you renew that. And so I think that's great news, that that's sort of behind you. You mentioned in your prepared remarks that there -- it didn't sound like there are a lot of other pieces of content that you wanted to go after from the year, that there were sort of tactical opportunities, maybe some fill-ins, but nothing that's going to be sort of dramatically new moving in terms of anyone's sort of financial forecast. Is that the right way to interpret your comments?

Yes. I mean we've invested a lot in content, and I think we have an extremely robust funnel. But I don't want to say we're not going to pursue other opportunities because we do have this incredible platform now, where we can offer talent, content creators, artists the opportunity to be on Sirius XM and have a radio channel or perhaps have playlists and stations on Pandora. Maybe we have a podcast that's going to be windowed on Sirius XM and then Pandora so some exclusivity, but then we push out more broadly, and that's clearly a way to monetize it more with ad revenue. So I think with that kind of platform, it just opens up a lot more opportunities for us to work with talent and brands and content creators in different ways. So I'm definitely open to that, and we have a lot of interested parties. So I think there will be more to come there. But from the content that we have today, first of all, we're thrilled to have the Howard deal signed. It was in December that we announced. And yes, I mean it's just -- he's an incredible talent, and he's done amazing work even while working from home and so excited to see what his interview slate is for 2021, and I think our subscribers and his fans are just thrilled to have his content continue for the live broadcast for as much as another 5 years and then the archives after that. So that's obviously such a key part of our content bundle and really pleased that Howard is staying with us. But if we use an example like UNINTERRUPTED, which is an incredible brand with LeBron James. And we've done some really unique work with UNINTERRUPTED where we have exclusive stations and modes and playlists on Pandora, and we'll be launching a channel on Sirius XM. And it's a great way to kind of pull together the intersection of sports and music, and we couldn't do something like that without the set of assets we have. So recently, we also announced that, speaking of sports, that we secured additional digital rights from the NFL. We're also adding rights from the NBA. And this -- it gives us, of course, more content with the digital rights for our streaming subscription packages. And we wanted -- we believe live sports is key to the content bundle, and so you'll see us adding there. We announced also that we've become the exclusive audio broadcaster for the Masters, and we'll have Play-by-Play from Augusta. And we've got a lot of passionate golf channel listeners, so that's great content for us to have as well. But so I think it is about the bundle, making sure that we have unique content across music, news, talks, sports, politics. And so well, I don't think there's any one piece we're missing. We'll be opportunistic if things come up that makes sense financially for us.

Okay. So I'm going to give a little bit of background, but you correct me if I get this wrong, all right? So when XM and SIRI came together back in, I think it was, 2009, you had Spectrum and satellites that each pointed towards cars on the ground. You merged the firms and then you needed to get a chipset into all cars that were coming off the production line that can point to both pieces of Spectrum. And now you need to wait for the last car to come off the road that points to one of those pieces of Spectrum. And when that happens, you have this extra swap, I think it's 20 megahertz, is that right, of Spectrum?

12.5.

Okay. 12.5 of extra Spectrum, and I think we're still 5 or 6 years away from sort of having the ability to sort of use it. Is that roughly right?

Yes. The merger happened in 2008, and we decided to shift most of the future production to the high band while we were developing the broadband chipset, and we're now just starting to put that gen 8 wide band chipset into vehicles. And so there's kind of 2 pieces of it. There is the legacy low band, which is declining over time in terms of the self-pay subscribers on the low band, which is from Sirius, legacy Sirius. And there's growth in the high band. And then there'll be growth in gen 8, which covers both. So yes, we have the low band. Self-pay subscribers will continue to decline. It's probably, like you said, about the middle of the decade where we could decide if we're going to shift that to another use. And then, of course, the gen 8 Spectrum provides for both, and so whatever we determine to use for low band would be available in the new cars going forward as well.

And so what are some of the things that are sort of up on the whiteboard that you're thinking about where there could be new monetization opportunities for that Spectrum once it is...