Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript

Good morning. Welcome to the next section of the 23rd Annual Credit Suisse Communications Conference. I'm Doug Mitchelson, the media and cable satellite and telecom analyst here at Credit Suisse. Very pleased to have with us this morning, Sean Sullivan, Executive Vice President and Chief Financial Officer of SiriusXM. Sean, thanks so much for joining us today.

Thanks, Doug. Good to see you. Thanks for having me.

Yes, of course. I mean, look, you've been at SiriusXM for about 8 months now. What surprised you as you've gotten to know the company that wasn't obvious to you from the outside or on day 1?

Yes. It's hard to believe it's been 8 months and onboarding during a global pandemic virtually to this company is certainly probably more challenging than I anticipated, but it's a great challenge. It's a great company, great people. I guess to your specific question, what surprised me, I've always been a huge fan of the brand, the content, the offering. I guess what I've been surprised and don't take this the wrong way, I really probably underappreciated the sophistication at which we manage our subscription business and our customer churn. You see it in the financial results. So certainly been pleasantly surprised by the team, certainly the finance organization, specifically under my watch, has been great. Otherwise, all the things you know. It's a great cash generation. There's a great portfolio of assets here. I think the strategic opportunities that are in front of the company are great. And the real question is, how do we capitalize on them. I've been surprised again, and I'm sure we'll talk about it, the resiliency of this business. Certainly, during the last 15 to 18 months has been incredible. So all in all, it's been pleasantly surprised. I look forward to getting back to work back in the office here in New York and meeting more of my colleagues in person. As I said, that's probably been the most surprising thing but probably not the intent of your question.

We are going to talk about that resiliency in a bit, but I did want to start with what your priorities are for the rest of the year.

Yes. I mean 2021, we had a great first quarter. I think it just typically -- like for us, we are focused on delivering. I mean, as you know, from Jim and now with Jennifer, this company has a long track record of delivering or exceeding on their goals and the operational excellence that they pride themselves on. So I have no intention of veering off from that. So really, for 2021, let's continue to deliver and meet and exceed the targets we've stated. Beyond that, for me and Jennifer, it's really about what the strategic planning looks like, right? And what does the next 3 to 5 years look like? And how do we set and accelerate and continue the investments that have been made and whether that's enhancing the content offering, whether that's what role does podcasting play in overall content offering. And we got 2 strategic pillars, right? We've got in the car, we've got out of a car, we've got digital. And I'm sure we'll talk about it, the ad platform and all the tools that we offer. So I really think that we're using the middle of this year as we continue to focus on delivering '21 is how do we really set this up and accelerate growth for the next 3 to 5 years.

Well, it's interesting. So let's dig into some of the fundamentals first before touching on some of those. SiriusXM is less and less leveraged to the new car market. I know with each passing year, penetration with vehicles on the road is increasing. I think I saw a Wall Street Journal article last night, 12 years now on sort of average car. Auto inventories are at all-time low with high demand, constrained supply. How's your new car business been disrupted by these conditions? And how is the used sale funnel?

Yes. I don't know that they've been disrupted, Doug. I think as you saw and I mentioned it briefly, the first quarter, typically a light quarter, was strong. The strength of the consumer continues to really be strong despite low inventories. You've seen the SAAR, you saw it for April, which I think was north of 18 million. You saw it for May in 17 million inventories are at record lows. That being said, we've really seen not a disruption but just a continued chugging along. A lot of the OEMs were staying very close to what they're saying and doing. And many have said that the second quarter hopefully will be a bit of a trough for them in terms of some of the supply chain disruptions they see. But all in all, things have been very positive. And frankly, we haven't been disrupted. I know we probably came into the year feeling conservative about the consumer, conservative about the marketplace and conservative on some of the chip shortages and how that may impact our ability to deliver. But to date, we've seen continued momentum.

So even though I think you just applied it 3 different ways, I'm still sort of going to ask specifically because I know investors really care about this. It sounds like you're tracking towards your guidance just fine, including how you did in 2Q, how you're doing in 2Q.

Yes. I mean if you're asking me specifically about our self-pay net adds, we are tracking well. I think that there were some contingencies in the market that certainly cautioned us to be conservative coming out of the first quarter. I think Jennifer last month was very direct about, if not for, we probably would have raised our self-pay net guide. So I guess what I would tell you is, again, the consumer landscape is incredibly strong right now. And as we've announced, we'll be on July 27, I think, and probably have more to say at the -- for the second quarter, Doug.

So back to resiliency, I think last March, most of the Street would have said SiriusXM would have been highly disrupted by remote work and social distancing. Your results last year were remarkably steady. And so as we sort of think about that and look forward, first, how is the business permanently different, if at all, than it would have been had the pandemic not happened?

Yes. So I guess, only having been here 8 months and joining during the pandemic, I'll give you the anecdotes or the virtual experiences. No. But in all seriousness, I think many of us have been surprised that if we think about the consumer-facing part of it, how resilient the business model has been and how we've been able to continue to deliver results even in the face of this. I guess the learnings are that is there an accelerated digital transformation in terms of how we engage with customers? Again, whether that's call center, whether that's online, whether that's messaging, I think that the pandemic in this time has given us an ability to really accelerate some of our learnings there. As you know, we've diversified our product offering, right? So we acquired Stitcher. We've got the AdsWizz business. We have Simplecast. We acquired 99% Invisible. Roman Mars is a podcasting company. And I think we've learned a lot about the power of the assets, the content centricity of the business and how we can leverage those things. I mean again, that's not even to say what have we learned in terms of a workforce, return to work, what is an office footprint and all those things that I think will hopefully accrue some operating leverage benefits to the company. But certainly, all in all, the other thing is we really focused on engagement, right? You think about people being at home as opposed to in their cars and what did mobility really mean. But I think we certainly try to enhance our out-of-car engagement through connected devices, et cetera. So a lot of learnings. I don't really think there were step function changes, Doug. I mean certainly, we're trying to capitalize on the cost base aspect of what we've learned through it and certainly enhance our engagement with consumers. And again, we weren't -- we stayed disciplined but focused on how do we enhance the content offering and make this business better for the consumer. So those are probably the high points.

So now as we emerge from the pandemic and we sort of head into a reopening backdrop, how is that going to influence SiriusXM? Should we think about a path where the level of gross additions and churn normalizes?

Yes. It's an interesting question. I think we have nonpaid churn. Nonpay has been incredibly resilient. Presumably, when we return to normal, we would expect that to tick up just like vehicle-related churn would. But I guess the real question for us is what is the nature of driving in the future? How does that impact our consumer base? For those of us that live in the Northeast corridor, there's nobody on the trains. There's a lot of people on the road. So I think what does reopening look like? What does mobility look like in drive? I think those feel more positive than negative for us. And certainly, we'd expect what has been historically low churn rates, in some cases, to tick up and normalize as we've indicated in the past. But so far, as you saw in the Q1 results, we continue to be very strong on the churn for sure.

You talked about some of the changes sort of the ecosystem and product set. How does marketing develop for SiriusXM, whether it's due to learnings or changes due to the pandemic, whether it's just overall ecosystem shifts? And as part of that, would you walk through the shift in OEM promotions that you started to talk about on the last quarterly conference call?

Yes. I mean I don't know that there's a ton of changes. I think the marketing during the pandemic for sure was probably more focused on the out-of-car engagement with the consumer. We have, which I think is a great opportunity and a great unlock here is the digital side of this, in terms of digital streaming and SiriusXM subscribers. So I think that we'll continue our focus of out of the car, how do we drive digital adoption, engagement and usage and really just a digital transformation for the company overall. In terms of the OEMs, again, those are -- I think we've talked about it at length in the past, those are 2 agreements. As you know, we holistically look at the levers. And at the end of the day, what are we doing? We're trading some prepaid promo for some benefits to SAC and rev share. But all in all, I think the trials in the most part are to 3 months. So I don't know that the OEM shift is that material. Hopefully, we've given enough clarity to people in terms of how it impacts the financials.

So we strategically scheduled our conference in this presentation right after the Copyright Royalty Board's Web V decision. I know you had a release on it last night. Any substantial true-up back to the start of the year? How does the rate compare to the conservative assumptions or what we thought might be conservative assumptions embedded in your guidance?

Yes. So yes, we're pleased to have the uncertainty removed, for sure, right? So now we've got some predictability and visibility for the next 5 years, which is great. Certainly, the increases are meaningful, but certainly less than what had been asked for. As you know, we put out an 8-K about it yesterday. I think the best way, as I've articulated, I think, in the first quarter, we took a pragmatic approach. So I guess the question is, what does pragmatic mean? I think for the most part, we turned out to be largely right given the past history of the CRB and what they did. So what does that mean? I think our assumption was probably slightly conservative So I think you said conservative. I think it was slightly better than we anticipated. But again, it removes an overhang. It gives us clarity for 5 years. In and of itself, it's not a material deviation from what we had anticipated and embedded in our overall guidance. So again, pleased to have that certainly announced. I know there's more to come in terms of actually publishing and finalizing over the coming months. But -- and again, well, I'm sure we'll have more to say late July, Doug, but that's overall, our point of view.

So let's talk about the 360L for a few minutes. I mean how much focus has management team placed on driving penetration in new cars? What's the end state for 360L? Should every SiriusXM car someday be that 360L radio car? Do you -- or do you only see it ever getting into sort of a fraction of the satellite user base?

No. It's a big focus for the management team. I think it's a significant move in investments for the company as we deliver both satellite and IP delivered content to the vehicle. I think we've said that we expect that 80% of the new cars in 2025 will have 360L in them. So to your point about what will it be and what will the interfaces be, we believe it to be -- it will be the predominant new car installation in 2025. So there's a lot of focus on it. There's incredible features. I think that it's a great mix. It -- some of the new vehicles that I've seen, it's larger screens. The interface is great and gives us really an opportunity to use the assets we have and whether that's Pandora, Stitcher or just our traditional SiriusXM satellite. We think it's great. And presumably, it will help with retention. It will help with upselling in terms of packages. So we really think -- again, just to reiterate, it's a huge focus for the company and the management team and as evidenced by our OEM relationships.

Yes. It'll be interesting to see as it sort of develops how sort of churn, ARPU, margins around that progress. Why don't we turn to Pandora? Certainly, one of the things that came out of last quarter was a little bit of MAU pressure. Do investors expect that to continue?

Hard to say. I think they certainly have seen the trends, and we're investing a meaningful amount in terms of product development, content, feature sets. We're really trying to leverage the content spend of the overall company to better enhance the product. So again, it's a -- I think it is the biggest free digital audio service in the United States. We're using our content to really drive it. You can see in the results. The monetization has been great from the ad sales team. So I think there is some sentiment that the trends are declining. We're doing everything we can in terms of content, features, curation, discovery, to really mitigate and reverse the trend of MAUs. But at the end of the day, the monetization, ad hours, RPM have been really positive. So we continue to be pleased with it. I think it brings a lot of digital learnings to the company that the SiriusXM side of the business can benefit from. So -- but again, still more work to go.

Yes. We're trying to figure out whether it was sort of SiriusXM crossovers or more distribution partnerships like T-Mobile's ad free weekends, something else entirely, maybe room to expand your initiatives with Live Nation, what else that you might do with Pandora. Anything sort of -- where should investors focus on that front?

Yes. I think they should focus on the reach and the scale of the Pandora audience, number one. Number two, I think, like I said, we -- the content investment we're making, I think we're now leveraging -- take Kevin Hart as an example. We're starting to leverage the relationships we have with creators and talent to be able to bring exclusive experiences to the Pandora platform, right? We're trying to identify and enhance content, getting younger audiences. The TikTok partnership is a great example of that on Pandora. So again, there's both the on-platform opportunity at Pandora, there's the off-platform opportunity. Again, we have a tremendous reach and scale. We now have a unified sales force that can go to the market to advertisers and agency and really bring to bear. So I think the scale brings a lot to us. In terms of Live Nation, I think somebody -- obviously, Michael is on our board, and I think proximity matters. There's always opportunities to collaborate. I think live is important. I know I'm certainly excited for live events to return. So there's always opportunity. There's always opportunities to collaborate. But to your point, we did the ad-free weekend with T-Mobile. I think we're always looking for opportunities to -- for better distribution with Pandora and other partnerships that can really enhance the product offering and either retain or attract new users. So all in all, a lot going on at Pandora.

Anything in the SoundCloud sort of ownership and partnership that investors should be paying attention to? Is that really a bit more behind the scenes?

No, I think -- as you know, we had an ad sales representation arrangement. So I think that, again, as part of the SXM Media, we continue to enjoy a good partnership on the ad sales front and monetization. SoundCloud investment, I think it is an important one, but they have a different approach, right? They're an open music platform. They're more -- very focused on creators and discovery, and we're certainly happy with the investment. On the Pandora side, we're more focused obviously on the ad side of it and monetization and come at it slightly differently. So -- but again, a good relationship, but again, an investment with an ad sales rep at the moment.