Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript

Good morning, everyone. My name is Sebastiano Petti. I cover the communications services space here at JPMorgan. I want to introduce Jennifer Witz, CEO of SiriusXM. As many of you know, Jennifer became CEO of SiriusXM in January 2021. Jennifer joined SiriusXM in 2002 and has held a variety of leadership positions with the company. Jennifer, thanks for joining us today.

Thank you, Sebastiano. I'm happy to be here.

Great. The U.S. seems to be more open every week. Can you maybe start with an update on what you're seeing recently from customers?

Sure. I'll start first with the SiriusXM subscriber base. Over the past year, we've just seen record low churn, as I'm sure you've seen in our earnings reports. And it's just a testament to the incredible loyalty and satisfaction that our self-pay subscribers have with our service. And we've also seen really strong increases in listening outside of the car, which has been an important initiative for us. Great reactions to a lot of our new content. We had a number of artists top-up channels on our streaming service last year. And we've also launched new content, as you know, with Kevin Hart and podcast from Marvel. And I think it's just all great evidence that we have this terrific premium content bundle and our subscribers are very loyal. I think the reopening trends are encouraging. Commuting is definitely not back to normal as, I think, many of us are experiencing. And listening in trial is rising. We are seeing a pretty material improvement even over the last few months here. And now we're at about 90% of where we were pre-COVID in terms of listening in trial. We're seeing these same kinds of increases on the Pandora side as well in listening in car. So turning to the trial starts. April was another really strong month and SAAR, 18.5 million. And that strength in auto sales, obviously helps roll through the SiriusXM trial starts in Q1. We had a record quarter for trial starts, which bodes well for the rest of the year. The OEMs are definitely struggling with the inventory levels, and I think that is impacting sales to some extent. But I'm encouraged by the recent commentary from Ford and other OEMs, even as recent as last week that this could change and turn around really in the second half of the year. And then just on more on the business side, advertising has been very strong for us, and the market remains robust. Obviously, with the reopening, there are a lot of brands coming back into the market, and they want to participate. And we're definitely seeing the benefit of this and really pleased that we announced the formation of SXM Media. I think we'll have a chance to talk more about that later, but really helps us capitalize on the strength in advertising sales coming into this year as well.

Yes, a lot of great points I want to come back to as well. But I think starting with the trial funnel and auto sales. So SIRI reported what I thought was pretty strong 1Q results late last month. And since that time, you mentioned April SAAR came in at 18.5 million, which was the highest in any month over the last 16 years. So you mentioned before, but what are you hearing from OEMs and your dealership partners, perhaps? And just given the lower level of inventories, mathematically it's just difficult to think that SAAR remains at these levels through the rest of the year.

Yes, I agree. The third-party estimates on SAAR are still probably in the high 15s for this year, which obviously would suggest a decline from where we've been recently, and perhaps, adjust a bit for inventory levels. The levels of inventory based sales are in the mid-30s, which is something we haven't seen really since 2009, and so we would expect inventory levels to have an impact on sales. I think we are seeing that and hearing that from both the dealers and OEMs. But demand is certainly there, right, on both the new car side and the used car side. You see that on the used car side and pricing as well. But again, I think the commentary we're hearing from the OEMs is that now hopefully that some of the supply chain issues will -- the impact will lessen in the second half of the year.

So hopefully, the effects will probably dissipate as we move into 2022. Is that kind of their expectation?

That's our hope, but it really is a function of demand across a number of industries. It's just this unbelievable confluence of events that we've had over the past year with demand for consumer products that use these chips, and the auto manufacturers are just feeling that impact, obviously. But I think there is strong effort to continue to increase supply among the silicon producers, and I'm hopeful that going into next year, things will be back on track.

And then on the call, you noted that if not for this uncertainty and historically low inventories, you would have most likely increased your subscriber guidance for the year. So when you -- even when considering the silicon shortage, 2021 net add guidance still seems pretty conservative as you think about the tailwinds of rising penetration, higher auto sales and increasing digital-only subscriptions. And also payment trends, as you touched on early, churn is quite low and subscription businesses are seeing the benefit from lower churn rates. So I mean, what are we perhaps and the street missing as you add it all up?

Well, we are off to a really strong start. And I think our first quarter results demonstrated that it is actually, typically -- the first quarter is typically our lightest quarter of the year, but we delivered really strong self-pay net adds just despite that. And I would point out that we don't really have much of a history in adjusting our guidance on our first earnings call of the year. And we are -- we're going to watch what happens over the next few months. I think it's still early in the year. I'm eager to see how this quarter settles out on vehicle production. If it really is the trough, then we'll start seeing that over the next couple of months. And I want to see what that does in July as well, but our guidance probably does look a little conservative at this point. I am very focused on churn, and we've had these incredibly low quarters. I would expect some of the trends, particularly on non-Pay. As you said, the spending levels have been really low. Consumer savings levels are really high. I would expect that to change. People are eager to get out, start traveling more, going to restaurants and as it starts to pick up, it should -- we should see some reversion back to a normal trend on non-Pay. And then, of course, vehicle-related should tick up as well with the continued strong demand on auto sales and trial starts for us. But the year looks really good, given that we started off the first quarter really strong with trial funnel strength and also our pen rate, which is -- continues to be just over 80%.

Yes. I think -- that makes sense. And so as shifting to some of the new offerings that you talked about in the most recent earnings call, included a new top-tier, high-end offering and then perhaps, an upcoming family plan offer. As you look across SIRI's product suite, do you see these as holes in your offering? Or is -- and how are you thinking about how meaningful these could be longer term?

Well, I think it's an opportunity, not necessarily a hole. We've really just had long-term demand for our highest package. Our highest year is our all access package, and we've had strong take rates on that package all along. I think we have a segment of our subscriber base that just uses that price sensitive. And the research we've done over the last year or so indicates that there is more interest from our subscriber base in something bigger. So it's something that has additional content, VIP customer benefits and multiple access points. A lot of our customers do have multiple vehicle subscriptions, and they're also able to stream with those subscriptions. So we're pulling all these things together. We're expecting to have something to test among our customer segments in market in the next few months. And I think there is -- we're fulfilling really a customer need here. And this just continues to let us differentiate and add value across our packages at different price points to really capture that consumer demand along the pricing curve, and we'll continue to find ways to differentiate these packages with content and features. We've added a lot of content. Over -- even the past few months with Drakes, New SOUND 42, a channel on SiriusXM, and we have great new content coming with TikTok Radio and our new podcast with Seth Rogen.

Right. And I think at the Liberty Analyst Day, you talked about potentially exploring ad-supported SiriusXM satellite Tier. Is this more of a long-term opportunity as 360L penetration grows and that platform reaches critical mass? How should we be thinking about that?

There is really 2 pieces to that. We were in market now testing a limited channel free package. It's about 10 channels, and it's ad-supported. It's targeted towards those who never subscribed, maybe never converted and didn't subscribe or did subscribe and then have since canceled. And it can be done in these legacy vehicles with broadcast like ads. Clearly, the opportunity is in 360L because we can offer much more targeted advertising, which has the potential for higher CPMs. But this opportunity with 360L is just starting to grow, right? We have about 2 million vehicles in market and that will expand significantly over the next few years. But in the meantime, we'll test in these 2 sets of vehicles to see what is the take rate? What is the cannibalization? Right now, the response rates have been pretty good. It's early days, and we see very little canalization of either our current self-pay base or our ability to continue to win back customers. That's -- in addition to this being kind of an opportunity to monetize through advertising, it's a way to really keep these radios on and active and people engaging with our content and using that platform to upsell. And we do this free-to-air effort a couple of times a year. We have that launching tomorrow. So we'll light up all our inactive radios. We'll also have our streaming platforms available for free over the next 10 days or so. That is also a great way for us to get engagement with our service, bring people back to our service who maybe never subscribed or had canceled. And this, I feel like, is an even bigger way to do that more broadly.

Then increasing engagement outside of the car is obviously very important for SiriusXM. And then on the call, you noted again that -- and you touched on earlier that commuting rebound to about 80% of pre-COVID levels in 1Q as high as 90%, I think, in the last couple of weeks. Including in-app listening as well as other consumer electronics, I mean do you have a good sample set of what engagement has done over the last year? And what out-of-car engagement has done as well? Has it remained elevated?

Yes. It definitely remained elevated, and we continue to work to push this even higher with existing subscribers, new subscribers and our trialers. And as we've said many times, this is a great way for us to drive improved retention. We know that if consumers engage with us across multiple platforms, multiple devices in and out of the car that they're more likely to stay with us. And there is still more room for growth. We need to continue to drive the awareness outside of the car. And right now, since improved COVID, we've seen the increase coming a lot from our younger generation subscribers. That's maybe not surprising, but we also saw a pretty material increase in the percentage of our subscribers overall who site listening to SiriusXM as their primary audio source outside of the car. And this obviously ties into retention benefits, ties into revenue benefits. I think that it also really helps with content discovery. We're still limited in many of our vehicles to -- I turn the dial to find new channels, but if you use the app, there is a lot more opportunity for us to serve up more personalized recommendations on channels and other content that customers can also get when they're in their cars.

Yes. I think just going back quickly to 360L, as penetration grows and mirrors your new car penetration over time, hitting about 80%, I think, in 2025 is that you've mentioned.

That's right.

And how meaningful could the marketing stack and churn and topline benefits be over time?

Yes. It's still early with 2 million vehicles in market and through -- they're all at different stages in trial and self-pay and inactive. But we know that customers love the feature set through the research and surveys that we've done. They love the ease of use, which we've always brought in our products and the great interface. So a lot of the early rollouts have also come with these great new larger screens. So we're digging into the data. We continue to find really encouraging results on listening and conversion rates, especially as we really try to differentiate between those that are 360L capable and those that aren't and isolate for other variables. But I'm really encouraged with what we're seeing so far on the conversion rate side. Also, especially for customers that are using the features, right? So our focus right now is to continue to drive awareness of the features because when we see the usage of those features, whether it's on-demand content or a Pandora artist stations or the broad set of other channels we can deliver, more personalized music channels because of the IP delivery, we see stronger conversion rates if customers are using those features. So our objective is, now we have so much more data given that we have this return path of data on what customers are using and what they're listening to or not listening to, we can target our marketing to encourage that awareness and usage of those features. And that would expect us to have a lot more personalized marketing in market as we continue to grow this population. And it's going to help us with efficiency in the marketing as well, right? We may not need to market in the same way to every customer. Pretty much before this, without a lot of information, it was much more of a one-size-fits-all marketing effort.

Right. Right. And a key focus for investors is the growing ubiquity of connectivity in the car. While at the same time, Android Auto and Apple Play continue to make inroads. So in the past, SIRI has talked about connectivity being more friend than foe. But what do you tell investors who are concerned about these 2 converging trends and its impact on SIRI longer term?

Yes. We faced a lot of competition over the years of different forms, right? CDs, iPods, we've had, obviously, the growth in streaming music services, taking advantage of CarPlay and Android Auto, as you pointed out. Yet we've consistently grown through this environment. And so I'd say that CarPlay Android Auto in and of themselves, obviously, our competitors. We're more focused on what is the next generation and where the OEMs are going with the operating systems in the car. And we're working really closely with our OEM partners on maintaining that premium experience for our SiriusXM customers in the car by leveraging the operating system and the capabilities that, for instance, Google is bringing to many of the auto manufacturers. And we'll continue to benefit from this connectivity just like everyone else, but then we can do it in the way that we've always done it, which is a highly easy to use and accessible interface in the car. And now, again, this connectivity through the modem in the car allows us to provide a lot more personalized content to provide real on platform marketing recommendations. And obviously, we don't have the constraint of the satellite bandwidth. So we have the opportunity to deliver a lot more content as well on the platform.