Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript

Good morning. I'm Vijay Jayant, the media communications analyst at Evercore ISI. Thanks for joining us for a session with Sean Sullivan, the Chief Financial Officer of SiriusXM Radio. I have my colleague, James, who will tag team with me on some questions. With that, Sean, welcome. Thanks for doing it with us, which is really our inaugural TMT conference, hopefully, live one day and in person. So I thought I would start out with a broader question. You've been the CFO for a little over 6 months, which makes you a grizzled veteran, I guess. What's been your biggest surprise, both positive and negative? What's your expectation going in?

Yes. No, first of all, thanks for having me. Good morning, everybody. I appreciate it. So grizzled veteran, 6 months, 7 months into the job. So I guess, onboarding to a company of 5,000 employees during a global pandemic has certainly been a bit of a surprise for me. I certainly was excited about the challenge. I was excited about the opportunity at SiriusXM and probably onboarding virtually has been probably more difficult than anticipated. The good news is, life is returning to normal. I have met some of my colleagues in person. I have been to the office a few times. So it's all good. But in all seriousness, it's -- I've been a long-time consumer of the product and the company's products. It's been very positive. I think the brands, the collection of assets, the free cash flow generation, it's really a fabulous company. It's a fabulous team. I inherited a great finance organization. So I'm pleased with the team and where we're at. So I think on the positive side, it's been everything I expected it to be other than what -- the aforementioned challenges in terms of onboarding and transition integration. Again, through the pandemic, I think we've all been surprised by how resilient the business model and the business has been. So that's been incredibly positive for the company. This company has had a long track record of great financial results, great free cash flow generation, and I certainly have no intention of altering that trajectory. But when I think about surprises, and I don't want to say negative, but really opportunities. I think the real opportunities are a few. Like I said, we've got a great collection of assets. I think that a recent example where we've rebranded SiriusXM Media on the ad sales side, I think that has been a great way to bring together and really accelerate the integration and the monetization of this platform. I think the things that we need to do outside of the vehicle for digital, I think those are all opportunities that I think require a more accelerated approach to execution. We've looked at adjacent spaces. I'm sure we'll talk about M&A and things like that. But nothing negative. I think that the Pandora trajectory of MAUs is something we continue to work hard at. That's a bit of a surprise. And we need to sort through, and I think we have a plan to do that. But all in all, it's been what I expected it to be. Supporting Jennifer in this transition to CEO has been great, great partnership. So all in all, certainly more positives than negatives at this stage.

Got it. So let's start on some of the role of SiriusXM in the car and some of the auto market play. One of the key advantages that Sirius has is, in the audio marketplace, the company's integration into the dashboard and sort of the infotainment system. With the increasing use of CarPlay and Android Auto, does that advantage erode?

Yes. I don't know if it erodes. And again, I don't know that CarPlay and Android Auto in and of themselves are competitors, right? And you've heard Jennifer and others talk about this. We've been, I guess, competing for premium in-car entertainment for 20 years. As that system has evolved, we've done that with various forms of competition, formats, et cetera. But again, we're very -- obviously very focused on maintaining our leadership position in the vehicle. The 360L is obviously the next generation of both satellite and IP connectivity that really can allow us to really improve the interface and really deliver to the consumers a great value proposition. We've got long-standing relationships with the OEMs. We've worked with partners like Google. So all in all, I think with 130 million enabled vehicles on the road, with the deals we have with our OEM partners, I don't know that the advantage erode. I think we feel very good about our position in the vehicle. And I think we're making the appropriate content, product and consumer, user interface investments that are necessary to maintain that position.

So talking about the OEM partners, you've done a bunch of deals of late. And that sort of shifted some of your mix of subs from trial from [indiscernible], from paid to unpaid. But that's just sort of accounting. Fundamentally, can you just talk about the economics of these deals in terms of the upfront subsidy, OEM contribution to paid trials, revenue share? So how the economics of the business on the OEM side sort of shifted over the years?

I think each OEM takes their own unique approach. We look at each of the deals with the OEMs holistically. There are certainly several levers in that conversation and whether that's paid or unpaid trials, what the trial lengths are, the SAC, what the rev share subsidies are, et cetera. So I think we take a holistic approach to find what obviously is a mutually beneficial relationship for the OEMs, for SiriusXM and ultimately our consumers. So you see the effects of that, right? The pen rates in the first quarter, I think we're up 500 basis points from the prior year. A pen rate over 80%, I think, speaks volumes to the commitments that the OEMs have made to the SiriusXM product in the vehicle. I think -- and we talked about it on the Q1 call, we'll see some headwinds on paid trials as we alter some of the landscape. And as you say, it's just accounting. At the end of the day, we think we've come up with OEM deals holistically that makes sense for our economic requirements and what's good for the OEM. So all in all, I don't know, Vijay, that a lot has changed really over time. Certainly, changes have been made to trial lengths and what's paid, what's unpaid and the like. But all in all, I think we -- again, the financial results and the relationships with the OEMs, I think, speak for themselves.

So talking about penetration levels, over 80%. Can -- should that go higher? If there's an OEM set we'll put in every car, is that a good economic prospect for SiriusXM?

I think, again, we're above 80%, right? Thrilled to achieve that milestone and that threshold. The expectation is we'll continue to go higher. I don't know that we've guided or will guide to how high that can go. There's clearly certain trim levels and certain packages within a fleet or an offering that it's going to be probably uneconomical to offer a premium product like SiriusXM. But we've considered going 100%. I think standardization for some OEMs makes sense. For example, Toyota, I think we have 100% deal with Toyota. So there are instances where it can make sense for the OEM, for SiriusXM, but as you know, in some levels and some trim packages, it probably doesn't. So I think all in all, all the positives, I think we'll continue to accrete higher on the penetration rate. There'll be exceptions where we would do 100% deal. But I'm not sure that's the norm.

Got it. So the 360L platform clearly has an advantage over the current sort of satellite one-way product. But the fact that the auto product cycle is a lot slower than the consumer electronics product cycle, how much flexibility do you have to upgrade 360L over time? I know you've talked about some penetration targets through '24, '25. Just sort of given those 2 very different cycles, is that a hard thing to do?

I don't know if it's a hard thing. I mean, certainly, the beauty of the IP connectivity has the ability to do over-the-air updates, right? So the -- again, we have a small number of cars that are currently enabled. It's growing, as you said. We're excited about the deployment and what it will become. Consumers and customers that are using it on these large screens and these large interfaces have been very pleased with the features and the offerings that 360L brings. I have no doubt that it's going to improve retention. Hopefully, there's upsell opportunities in terms of packages, hopefully gives us a tremendous amount of flexibility over time that we wouldn't have on the satellite service. But all in all, I think that was the strategic initiative, that is 360L and the ability to iterate. Certainly, we won't be able to do it as quickly as you would do a mobile app or a SiriusXM digital app, but no question about it. It does provide enhanced flexibility relative to the non-360L offering.

Got it. So as penetration of the used car base increases, so does the average age of satellite radio equipped used cars. What trends are you seeing in used car trial conversion rates as cars age and go from, say, the second or third or even fourth owner of that car?

Yes. I mean, I think, Vijay, no surprise that conversion rates, I guess, the more subsequent owners there are, probably the conversion rates certainly do decline. I guess that's the bad news. The good news is that the SAC is already spent. We have very good conversion programs and win backs to the extent we recapture those subsequent owners. It comes at obviously at a low cost, and it's a great subscriber pickup. I think our conversion marketing team is aggressive and does a great job reclaiming that. I don't know that we've historically broken out conversion rates on used cars by subsequent owner. I don't know that we will. I guess the good news is there is, what, over 130 million enabled vehicles, probably 100 of them -- 100 million of them roughly are inactive enabled vehicles. So -- and you've heard us talk about other product offerings, maybe there's a free SiriusXM offering that we can have. So I guess, to your point about where conversion rates may decline on a subsequent owner basis, we certainly are looking at delivering offerings that can recapture them at what is an economical opportunity for SiriusXM.

I'd like to talk about content for a bit, if we could. I think your predecessor at one point said that music is a commodity product. Do you agree with that assessment? And how do you differentiate the SiriusXM product in what's a pretty crowded audio entertainment marketplace?

Yes. No, having come from the video space, in the content world from AMC Networks, I certainly think and talk a lot about it. Clearly, everyone has the same music on their platform for the most part. So if that's the definition of a commodity, then I guess I agree with my predecessor. I guess my real -- James, my real focus in energy is around how do we curate the content, how do we create discovery, how do we -- engagement, right? How do we create engagement? Engagement can come in many different forms. There's radio personalities that accompany a lot of the music offerings and think about your own personal audio listening experiences and whether that's a lean back or a lean in. I think that's how we do it. Certainly, with the marketplace and the competitive landscape, it becomes harder and harder to differentiate. But I think it's hard to argue with the breadth and depth of the offering that we have, not just in music, but obviously in news and sports and talk and other entertainment offerings. So again, I think differentiation does require some level of exclusive content. I do think that curation matters a whole lot. And the ability to make sure that your listeners have the ability to discover, recommend, I think that's important. So I think we do certainly a very good job of that on the SiriusXM platform. I think Pandora with Modes and some of the other features that we've been introducing to our listener base allows us to differentiate as well.

There's been a lot of discussion in the industry about podcast as a source of audio entertainment and the relevance of that content. How important is it to have podcasts that are effectively exclusive to SiriusXM? And then on the flip side, how important is it to have a few podcasts as possible to not be available via the SiriusXM platform?

Yes. Great question. There's obviously a lot of conversation in the marketplace. There's a feverish appetite, it would appear, for podcast at the moment. I guess as I look at it, it's a $1 billion market in terms of the advertising marketplace. There's a lot of, obviously, positive views of what the growth can be. So I think you got to -- it's primarily an ad-based business, right, for most of us in the podcast and for many of the creators and publishers. So I think we offer an incredible platform for creators and publishers to monetize. So -- and we want to maximize that for them. So I think that requires wide distribution. I do think there are exclusives that are required. I think exclusive podcasts -- I think most of the top podcasts are available pretty widely. I think there's only a handful that probably are exclusive to specific platforms. So I think that we have exclusive personalities, exclusive content that I think we'll look at windowing. And whether that's on the SiriusXM app, whether it's within Pandora or whether that's wide distribution, I think we have the ability to window across multiple platforms. Again, Stitcher has a subscription model today. So we're in the subscription business in terms of podcast. So I don't think it's a binary answer. I think you obviously have the content, some of which is exclusive. Otherwise, in order to work well with these creators and publishers, I think you -- we have an obligation to help them maximize the monetization and distribution of their offering.

And for satellite radio streaming and for 360L, you're kind of paying for music content twice, both through the -- for the -- as a percentage of revenue from the satellite radio side and then through Web V and the like. How do you think about the impact as in-home use and streaming grows on incremental margins for the business, which have traditionally been extremely high?

Yes. I mean as I think about your question, if we just think about in the vehicle, James, I don't know if you're thinking more in-home or more in the vehicle, at least in the vehicle, I think the majority of listening for music will probably be delivered through the satellite. Certainly a lot of nonmusic content that people will consume probably on an on-demand basis through the 360L IP interface. So we're not necessarily double paying there on the music side of the thing. Again, it's a consideration. But at the end of the day, we start with the consumer. We start with the offering. There will be revenue royalty impacts to a certain degree. But I think the good news is that the people that are using 360L, the consumers that are subscribing to these packages are mostly in All Access. We've got strong ARPU there. And there'll probably be some incremental cost, but I don't believe material to the overall financial portrait of the company. Again, we got to start with the consumer. We've got to start with delivering a great audio entertainment experience, both in and out of the car. And those are considerations, but certainly, something that we thought a lot about and continue to think about a lot when we think about the digital in-home and in-car as it relates to our forward outlook.

Sort of moving to Pandora, obviously, you guys have done a very good job in improving Pandora's monetization in terms of boosting RPM. What's sort of driven that increase? How does this sort of breakdown between pricing and ad loads? Any color on that monetization that's been so fantastic?

Yes. Again, a real credit to the Pandora team, SXM Media. The demand has been strong. It really -- as you see in our financial results, the RPMs have been very, very strong and accelerating. I don't believe we've affected ad loads at all, right? Again, we've got to think about the consumer experience. So really, ad loads haven't really changed. We're managing the consumer experience where the ability to monetize with the content we have and the demand has been great, just really great execution. So it's -- we're clearly trying to increase ad hours through more just the number of hours that are active listeners. So even with MAUs moderating, declining, if we can get our users to listen to more without an increased ad load, it really has been able to deliver. And again, that's just on platform. So we're not even talking about the off-platform opportunity. But again, I'm very pleased. And as I said, I think, in the first quarter call, we feel good about where the market is in April and May. So really pleased with the monetization. But really, at the end of the day, it's all -- it's been great, not ad load.