Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript
March 1, 2021
Earnings Call Speaker Segments
I'm Ben Swinburne, Morgan Stanley's media analyst. Welcome back to our next session here at the 2021 TMT conference. Just a quick administrative item. Please note that important disclosures, including my personal holdings, disclosures and Morgan Stanley disclosures all appear as a handout available in the registration area and on the Morgan Stanley public website. And we'd like to welcome, for the first time to our conference, Jennifer Witz. Jennifer is the newly appointed Chief Executive Officer of SiriusXM, where she has been for over 18 years working there. Prior to being named CEO, Jennifer was most recently President of Sales, Marketing and Operations at the company. Jennifer, it's great to see you. Thanks for being with us.
Thank you, Ben. It's great to be here. Nice to see you again.
Why don't we start -- we've had sort of the same management team at SiriusXM for quite a long time. Jim obviously did a fantastic job, very well-known on The Street. Could you talk a little bit now that you're in the CEO role, sort of where we should be focused in terms of your strategic priorities, both in 2021 but also as we move out of the pandemic and longer term?
Sure. Well, I want to start, first of all, by saying we're in an incredibly strong position overall. We have the largest paid subscriber base in audio in the U.S. with over 40 million subscribers across SiriusXM, Pandora. We have a reach of over 150 million listeners, and we're the leader in digital audio advertising in North America. So Jim left us in very strong hands, and I'm pleased to have worked with him for so many years. We have many of the same philosophies. And we continue to be focused on creating, first and foremost, fantastic audio experiences for our listeners and our subscribers across our platforms. And increasingly now, even beyond our platforms, with original podcasts, and I think we'll talk more about that. With our combination of assets, we're providing the best monetization opportunities for content creators. And we can do that because of our leading position in digital audio advertising, with our really expert sales force and the supporting ad tech we have behind that. And we're continuing to strengthen our position in the car with our higher penetration rates, our deeper rollout of 360L, which drives an even better customer experience there. And we're growing our engagement outside of the car, which is a big focus for us as we drive retention of our SiriusXM subscriber base, and we're increasing our digital-only SiriusXM subscribers. And I would say I just want to reinforce the fact that we are maintaining our cultural -- our culture of executing well and delivering on our commitments and our results, especially in generating strong EBITDA and free cash flow. So I think you'll see a lot of continuity in terms of our focus and our culture and expansion of our initiatives to continue to drive our strengths overall.
That's a great intro, Jennifer. And I know that you've spent a lot of your career there working with the OEMs and focused on sort of where that technology is going. And I think investors often debate the impact of connectivity, particularly in car connectivity on SiriusXM because you're OEM relationships are such a powerful competitive moat that you have. But obviously, it creates the opportunities for others to be in the dash over time. Maybe you could talk a little bit about your product position and how connectivity sort of drives the product pipeline and how you think about competitive dynamics as cars become more connected.
Sure. Well, as you know, we've been in the business of providing a premium in-car audio entertainment experience to our customers for really close to 20 years now. And over this time, we've seen a lot of changes in the competition we've faced in the car. Back in the day, we used to really be worried about the aux-in for the iPod, right? And so yet throughout all of this, including just the evolution of car play in Android Auto over the last several years, we've consistently grown. We've maintained our strong conversion rates, and we've added subscribers despite all of this change because we provide great content that is easy to use. So since we launched in 2001, we've continued to advance our content offering. We're adding an even broader set of exclusive artist channels, more news talk, comedy and sports. And we uniquely offer this unmatched set of content in a bundle. And we've brought great talent and brands to our services. Some of them have never been in audio before. But at its core, our service is linear, right? It's 150-channel, one-to-many broadcast service with no return path of data. So with 360L, in a connected car, we can access the modem. And obviously, the satellite path, and we will get user-level data to help drive personalized experiences; marketing, outside of the product and inside of the product; recommendations and discovery, which really helps us provide a more personalized experience. And we also have, obviously, a much broader set or expansive bandwidth to be able to just provide more channels. So we really have, I think, a unique position because we can still take advantage of the great economics of broadcast delivery. But in combination with that interactive path, we can offer an even more robust product in the car. And we'll continue to do this with a real focus on ease of use, which is what customers want and leveraging our experience in minimizing driver distraction. So these are all real game changers for us, and I think we're really well positioned still in the car.
Yes. And I know 360L is still ramping, but it's ramping pretty quickly. Are you starting to get some of these benefits already? Or is that more on to come? How would you talk about what's happening at this point?
Yes. I mean, it's still early. We ramped a lot in the second half of last year. We have a lot of customers in trial still. And the early feedback is matching kind of our testing before we even launched this platform, which is now several years in the making. Customers love the features, the personalized content, Pandora stations, which we have in FCA, Stellantis now, and just a lot more robust content overall. So it's still early to comment on specific data points, but we still believe fundamentally that it will lead to better conversion rates, better churn, and I think pricing opportunities in the future as well.
So great. Okay. You talked in your intro about some of the other areas of audio that you're investing in. I wanted to talk and ask you about podcasts. You guys made a number of acquisitions in the space. You sound very excited about the portfolio you put together. This is obviously an area that investors are hugely focused on. Maybe you could talk a little bit about your portfolio of capabilities that you offer to the market and why you think it could be a real growth driver for SiriusXM.
Yes. I think I think it's best to really address podcasting in terms of the 3 groups of constituents. So they're the listeners, the content creators and publishers and the advertisers. And so our strategy for listeners is, as always, to offer access to more great content, whether it's from us or from third-party podcast creators. We added a curated set of podcasts to SiriusXM in our apps, in certain 360L implementations, too, late last year. We have a broad set of podcasts in Pandora and, of course, in the Stitcher app. And we continue to drive engagement with podcasts. It will only enhance the value of the customer experience by including podcast. I mean listening is still generally relatively small, the time spent listening. But it's growing fast. And customers want that type of content. So we'll continue to provide that to make our services more robust. But on the content creator and publisher side, in addition to offering talent the opportunity for a live SiriusXM radio show or channel, we can provide broader exposure on Pandora. And now with our recent Stitcher and Simplecast acquisitions, we have this full suite of leading, distribution, ad tech and sales solutions. So it allows us to help creators produce, host and monetize their podcast content, both on our platforms and other platforms as well like Apple and Spotify. And having this breadth of format and distribution is really appealing to our content partners. I mean, it is a great example of what we've done with Kevin Hart. We have a really awesome channel on SiriusXM, Laugh Out Loud Radio, which leverages his huge standup comedy library, multiple shows, including his own, Straight From The Hart, which is also a popular podcast on Pandora. And then recently, we worked together to launch his Comedy Gold Minds podcast, where he's interviewing a lot of great comedic talent, and that's available everywhere. So our ad rep deal with NBC is another great example of how we can provide even broader audio services to great media brands. And that's what leads us into kind of the third constituent, which is advertisers. So SiriusXM, Pandora and Stitcher together provide major advertisers with everything they need to provide -- to build this connection with listeners across all these digital formats. And that's increasingly what advertisers want. They want to be able to leverage the great platform we have on the music side in combination with access to talk and podcast content as well. And this -- it's a crowded space, like you alluded to. And I think we really offer differentiated solution to advertisers because we provide access to both the scale and efficiency alongside the exclusive content and quality ad experiences, better measurement and effectiveness. And we have also really great custom creative as well. So I think for us, it's really about providing unique solutions across all 3 of those constituents. And I'm really pleased, given the Stitcher acquisition and Simplecast, of where we now are in being able to do that effectively.
Got it. That makes sense. So if we think about the podcasting sort of bull case at SiriusXM over a multiyear period, do you think we should be focused on advertising? Should we be focused on satellite churn? Should we be focus on Pandora users or all of the above? What would you suggest we'd be looking at?
Yes, I think it has a lot to do with advertising, both from the standpoint of we believe we have strong growth in the advertising segment of our revenue. But also because we can provide these monetization opportunities for content creators. So it's a dual purpose. But again, podcasting, even the advertising revenue is still relatively small, certainly as you compare it to something like terrestrial radio. But listening, it has been a driver for a decrease in music share over time. And it's -- the trend is towards more non-music content and audio. And so we absolutely believe that we can be successful there. We've always been a leader in talk audio content at SiriusXM. So I think we have a really exclusive and powerful experience to bring to this podcast.
Got it. Great. Why don't we shift gears a little bit back to sort of the here and now, 2020, 2021, the pandemic. You guys -- your year last year was certainly quite a bit stronger than we thought it would have been if you had gone back, I guess, sometime around this time last year, certainly, March or April, in a lot of ways. But maybe you could talk about how the pandemic impacted 2020's performance in ways that maybe were not obvious or things that we can take into the future?
Sure. I mean I think we were certainly surprised at how resilient our business was. And I think many companies probably felt that way back. This time last year, we had really no idea what to expect. The 2 obvious impacts were clearly depressed auto sales and advertising revenue. And that we had a difficult second quarter in both those areas, but both of them really started to pick up again in Q3. Auto sales were $16 million in Q4, which is really incredible. And our advertising revenue bounced back pretty quickly and so in Q4, we were up 17% year-over-year. So we had really strong revenue in total of over $8 billion. It's actually up slightly year-over-year. And I think in EBITDA too, up 6%, which is a combination of that strong revenue but also cost management and things shifting on the programming front and obviously, lower SAC and marketing costs because of the lower trial funnel. But I'd say the things we learned, we learned that we could produce pretty amazing content despite being remote, and content that was really fresh and relevant to what was going on and live. And we could do this all while being remote and not necessarily having access to studios in person. And I think this all comes back to churn and what we were able to deliver to our subscribers, both from a content standpoint and in terms of servicing our customers. Like one of the biggest shocks from the beginning was just not having call center agent availability. And I think the teams just did a tremendous job on the call center management side and the retention side. They're continuing to service our customers and doing that, building new tools to be able to do that given the constraints we had in many geographies and getting agents into the centers. And so it really -- I mean, I think the biggest surprise for me was being able to deliver on our self-pay net adds. We actually came out slightly above our original guidance at 909,000. And I think, again, that's a testament to their strong churn overall, which has a lot to do with content and our ability to continue to service our customers as well.
Yes; I think a lot of people think of your business as a bit of a reopening -- having reopening tailwinds because of the auto and advertising exposure. But your guidance, I think, was a little bit of a surprise to people, particularly around EBITDA. Maybe you could just talk a little bit about what reopening looks like and manifests itself in ad SiriusXM in 2021 because maybe it's not as obvious as you would think.
Yes. I think we always provide guidance early in the year. And I think I'm certainly being cautious in our outlook for 2021. There's still a lot of uncertainty as to when things really start to get back to normal. I'm really pleased to see, even as of today, faster rollout of vaccines, more reopenings across the company and maybe even a stimulus package coming through. So I remain optimistic about our position as things start to normalize, that I think as it relates to the big areas of impact on auto sales and ad revenue, we came into the year in a pretty strong position. Auto sales in January were $16.6 million on an annualized basis. There is some concern about silicon availability in the supply chain. But in general, I feel pretty good about where we are. There's certainly demand -- customer demand for -- on both the new car and used car side. And I think we're hopeful that as we see further rebounds in mobility, I mean, we still see kind of in our numbers, about a 5% to 10% usage rate decline in car just because customers, obviously, aren't in their cars as much as they were pre-COVID. But in the U.S., we never really had a full lockdown, right? So if mobility was down, but certainly not as much as you might have expected. And I think the nature of driving has changed. And in general, I think people want to own their own cars. Maybe there's a little more concern around ride sharing, and that's all really beneficial to us. And the other thing I would just highlight is that we had the opportunity to really promote our out-of-car streaming services at SiriusXM. We did a free stream promotion and opening of our streaming service for free last spring for a couple of months. We brought a lot of great new content to the streaming platform from a number of artists. And I think as the world normalizes, certainly in this country, that we hope to sustain these benefits of increased engagement outside of the car now that some of those behaviors and habits are reinforced.
Yes. I know I tried and failed on your earnings call to get you to disclose your streaming-only subscribers. I won't try here. But I was just wondering, as you think about your sub growth in '21, I think the guidance is quite strong on the subscriber side. Would you call out any particular new or used streaming in car? Anything that you would highlight as being a particular tailwind in your mind or that might be different than in prior years in terms of subscriber mix?
I think there's definitely a robust auto sales market like we talked about, right? I think the third parties are somewhere around $15.8 million for auto sales. And that would be up about 10% year-over-year. We certainly have the tailwind of increasing penetration rates. We ended last year at 80%. The full year number was about 78%. So I think on a full-year basis, we'll be up a bit this year. We have the same trends kind of happening on the used car side where our penetration rate sort of organically will increase a few hundred basis points again this year. And I think the biggest variables are what we could see in churn. So last year, lower auto sales means lower vehicle-related churn. Those obviously has picked up. We should see that revert back to normal a bit in non-pay. I think a lot of subscription services saw this last year, and we continue to see lower-than-typical entry rates on credit cards and debit cards as consumers just have more spending. And perhaps, the stimulus bill has something to do with that. So we're watching those carefully, but I am excited. While I haven't given any numbers, I am excited about growth in SiriusXM digital subscriptions. And while it is still pretty small portion of our overall sale fee base, it is important to our net adds and I do see lots of potential here.
So that's helpful. I wanted to just -- maybe just to wrap up on the guidance. On EBITDA, I think you guys are expecting less than we usually see in terms of operating leverage from the business. Maybe you can just talk about a little bit what's driving that and why that's kind of transitory for '21?
Yes, some of it is just a reversal of what happened last year where we had installations in the SAC and marketing kind of associated with trials, kind of fall more than auto sales because of various production shutdowns and things. And this should just naturally switch this year to a rebuild in inventories, again, depending what happens with Silicon, but and -- sales go up. And so I think I would expect to continue to see investment in SAC and marketing on that side. And we've seen -- we saw a number of savings last year on the content side because certain launches were postponed to this year. We had sports that didn't happen this year, will happen this year. The Major League Baseball, the NCAA tournament, for instance. And we are investing. So we do have new content initiatives. We are investing in our digital product development across our apps. And I think the last thing I would highlight is that -- and you've heard us say this before, but we are taking a pragmatic approach to what could happen with Web V, which sets the streaming royalty rates. And that could be a headwind on our 2021 royalty cost unit. The good thing is that once it's set, it's the rate for the next 5 years, so we wouldn't expect that kind of change going into next year.
Got it. That all makes sense. You touched on content in that last answer, so I want to shift to programming spend. And I can remember probably a couple of Liberty investor days ago, Jim and I were talking about your scale being maybe the biggest differentiator long-term for the company or something to that effect. So you guys have the ability to invest substantially in content, and you've really highlighted that as a differentiator. But we're seeing a lot of money thrown around the audio space. And I can remember because I'm old, back in the premerger days of SiriusXM, that was what it felt like a lot of battles over some very expensive, at the time, IP, Headlined probably by the first Howard Stern contract. How do you look at the world today? And what do you tell shareholders that are worried about sort of a spending war among some of the bigger scaled audio players, whether it's in podcasting or just exclusives or anything else?
Yes. I don't see a real competitive war on content. I mean, I think we have a really strong set of programming. And our focus will continue to be on providing this variety of exclusive and non-exclusive music, news talk, sports, comedy, entertainment for SiriusXM subscribers. We are absolutely focused on reinforcing the value of our subscription packages. And I guess, as -- I would just point out that also with the shift in video, there has been a shift to nonlive or nonlinear consumption in audio, but we clearly see the value in live news and sports. And we provide a really unique offering there. And we've added the play-by-play to our digital subscriptions as well. So I think during COVID, I think this was really important to be able to have this kind of platform with live access. So that artists, for instance, could jump on their channels and have access to their fans. But I think where this is all coming from, obviously, is the growth in podcasting, raising the profile of audio in general. Certainly, talk more specifically. And I think in the early days, for us, we looked at, well, what kind of talent would make sense for radio. But there's so much talent out there coming from every different corner, whether it's entertainment or sports, media brands that would work well in audio. And I think that's really where we've built our expertise. And the rising profile of podcasting just opens up more interesting opportunities. We've talked a bit about how I think we are uniquely positioned to monetize. So I think our great relationships with our core content partners that we've had for many years are just enabling us now to work with them to build their audio presence and other platforms now that we have all these assets. Uninterrupted is a great example. What we can do with this -- with new content across SiriusXM, Pandora and then off-platform as well. So I think we just -- we're really uniquely positioned. And I think given our acquisition of Stitcher, we have a lot more visibility into how these deals are done. But we are always disciplined. We always have been. And so while I'm not going to say we're not going to add more content, I think you should expect us to do it in a really disciplined way where we can monetize either through, again, kind of supporting the overall value proposition of our subscription, our premium audio subscription or monetizing off-platform in broader ways, primarily through advertising. So I'm -- I think, again, we should feel that we're going to continue to be disciplined, and we're really lucky to have all these different ways to be able to monetize the content.
Sure. And you guys also have, I think, one of the highest gross margins in the audio space. Are you -- do you think the landscape allows you to maintain or maybe even expand the kind of gross margins that you report, at least for the SiriusXM business?
I think margins are more of an output really than a driver of our business decisions. And many of the changes we're making here are pretty modest. We have really an unmatched programming lineup today. And I don't think that our margin profile changes dramatically. Look, there will be some shift between subscription and advertising revenue as we continue to build advertising, and the margins will be slightly different there. But overall, I don't see a major change, and I'm excited about the opportunities that we have as a result.
Okay. Great. Let me ask you about the used car channel because that's an area that has been actually probably an underappreciated source of subscriber growth and one that you guys are very focused on. Can you tell us a little bit about how big that funnel gets over time and sort of where we are today? And what you're doing to sort of maximize the conversion to pay in an area that I think a lot of people would assume would be harder for you, just given it tends to be maybe a more price-sensitive buyer?
Yes. I mean, we certainly have the tailwind of the trial funnel growing. And our increasing new car penetration rates will continue to roll through used cars for many years to come. But as used cars get older, the owners of those vehicles are probably a little less likely to pay for premium audio. I do expect our overall used car additions to continue growing but not necessarily our conversion rates, specifically, just as the vehicles get older. But we obviously work hard to improve on conversion, and we're looking to test some different kinds of packages. I think we have room both at the low end and the high end to drive more demand. And I think you'll see us doing more of that this year. But one of the biggest opportunities we have here is to continue to grow programs to get more used car sales on trials. As you know, on the new car side, it's really seamless. Virtually every car that's enabled, that's sold comes with a trial. It's much more fragmented on the used car side. And we are continuing to grow these platforms to capture the point-of-sale transaction to be able to provide the trial. We have programs in place where it might sound obvious, but not every trial is actually activated and working when the customer gets in the car. And so we have programs with auction houses and dealers and others to make sure that the radio is on. And conversion rate -- the conversion rate impact of that is actually pretty significant. So there is still a lot of opportunities to make sure that we're addressing, kind of, I would say, the points of leakage in the used trial funnel to continue to grow these additions over the next several years.
Got it. We've only got a few minutes left, Jennifer. I wanted to make sure we hit on Pandora, which is obviously an acquisition from a few years ago, impacted by the pandemic for reasons that are fairly obvious. But what's your outlook for that business as you look out over the next several years, particularly as hopefully, we come out of the pandemic and behaviors normalize and the ad market recovers?
Yes. So the pandemic certainly hit advertising revenue on Pandora very hard, but that came back pretty quickly. As we discussed in the fourth quarter, advertising revenues were up nicely year-over-year. But the reality is that from a pure user standpoint, the business hasn't performed where we had expected. And we have had some wins like our new Modes feature, which customers really like; the ability to customize their stations and new exclusive content like from UNINTERRUPTED; and increased listening on connected devices. We've benefited from that at Pandora as well. But there's no question the music streaming space is really competitive, especially with the integrated tech companies, using music to drive other parts of their business. And so while I think the free business is very different and really superior to the interactive music streaming business, it's still challenged from a margin standpoint. And I mentioned we'll have more information on streaming rates in the next couple of months. But I think the real benefit and one of the bright spots at Pandora is our monetization and including kind of the RPM metric where we just have been able to continue to drive innovative new ad units, higher sell-through and increasing CPMs. And this combined, again, with our ability to offer advertisers this great platform for targeting and measurement at Pandora but then use that sales force and the ad tech there to give advertisers the opportunity to reach a much broader set of audio properties, whether it's music or podcasting or otherwise, I think, is really the opportunity for us to leverage the Pandora asset going forward.
Got it. Okay. Maybe to wrap up on some of the financials. You guys bought back a lot of stock in the fourth quarter, at least relative to expectations. Leverage is in the low 3s. How should we think about capital allocation in '21 kind of relative to what you guys did last year? I think it was a little under $2 billion.
I think, generally speaking, it's going to be pretty similar this year. We increased our dividend by 10% per share in November, which was the fourth consecutive year we did that. But we continue to, as you know, devote the bulk of our capital returns to share repurchases. So we'll work with the Board really closely over the course of this year just to discuss how we're going to allocate capital going forward. But I think, in general, kind of the level of the capital returns and leverage should be generally similar as last year.
Okay. Well, I think we're out of time, Jennifer. It was great to see you. Thank you for being with us this morning virtually. And thanks, everybody, for joining us. Jennifer, it was great to see you.
Thanks, Ben. Great to see you, too.
Okay. Thanks, everybody.
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