Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript
September 13, 2021
Earnings Call Speaker Segments
Hi, I'm Jessica Reif Ehrlich, and welcome to the video portion of our conference. I'm thrilled to start the day with Jennifer Witz, CEO of SiriusXM. Jennifer, welcome to the conference. So it's your first appearance.
Thank you, Jessica. I'm happy to be here.
Thrilled to have you. Just in almost 1 year to the day since it was announced you had become Sirius' CEO, and you've been in the position for a little over 9 months. Since that time, you focused on 3 pillars of growth: first, continuing Sirius' strong in-vehicle presence; second, increasing usage and subscriptions outside of the vehicle; and finally, driving growth through your extensive advertising platform.
In your view, which of these pillars represent the greatest opportunity for growth over, let's say, the next 3 to 5 years?
Well, first, I'm pleased that we've made great progress across all 3 of these areas this year. And as you would expect, the car will remain the foundation of our business, and we're working hard to maintain our dominant position there. But increasingly, our growth going forward will come outside of the car with both digital subscriptions and from our ad platform, which has tremendous long-term potential. Underpinning all 3 of these pillars, of course, is our outstanding content, whether it's the highly curated content we have on Sirius XM, which crosses all genres, including our live, top news and sports content or the more algorithmic music on Pandora or our growing portfolio of podcasts.
Okay. And what do you see as the greatest risk to Sirius generating sustained growth?
Well, certainly, I worry about a recession or a pullback in the economy that would pressure our growth. Because we do offer a premium subscription service, there's always a risk that customers don't want to pay for what we're offering. But we have such tremendous advantages and resources and flexibility. Our teams are consistently looking at ways to innovate and to think creatively, leveraging our strengths to continue to reinvent radio and to shape the future of audio. We have a legacy of disruption across our services and innovating, and my goal is to continue fostering the spirit, the next phase of Sirius XM's journey.
For years, there's been concern about Apple Music and Spotify entering the car through whether it's Apple CarPlay or Android Auto. And this would really erode Sirius' position. But it just doesn't happen. You've had such a low churn and healthy additions. So what's changed from your vantage point as a result of Apple CarPlay and Android Auto? For example, have the OEMs viewed your agreements differently or look to work with your competitors more closely? Do you think the opportunity for a service like Pandora to regain traction has been reduced in any way?
At Sirius, we've been in this business for a long time of providing premium in-car entertainment to customers. It's been 20 years. And over all these years, we've seen a lot of different types of competition. The in-car environment has changed significantly, and yet we have continued to grow despite these changes by consistently focusing on providing great content that's easy to access. And we have had long-standing relationships with the OEMs. We have a very good view as to the upcoming changes, including those impacting the underlying operating system in the car. And so we work closely with automakers and their technology partners, of course, to make sure that Sirius XM maintains this leading position in the car in the display and otherwise as these cars become more software focused. And we and the OEMs, our interests are pretty aligned in that we want to continue to provide this premium and easy-to-use audio experience for our customers, especially as Sirius XM has the largest share of ear in the car of any audio service. And this is true despite the fact that we're not in every car, as you know, and we're a premium-priced service. So we are very aligned with the OEMs in trying to ensure that, that customer experience in the car is maintained. And remember, we drive, all these years utilizing a one-way broadcast network into the vehicle. And now IP connectivity, whether that comes through the modem in the car or tethered through broad end devices, it gives us the ability to deliver more features and content to consumers than ever we've been able to do before with our 360L platform, and that really enabled us to speed the pace of our innovation in the car.
Right. we'll get to 360 in a few minutes. But can you talk a little bit about that -- what you're seeing in terms of new car conversion statistics? And specifically, how does that compare in cars with Apple AutoPlay (sic) [ CarPlay ] or Android Auto and the vehicles that don't have that? Is there a difference?
Yes. Our new car conversion rates still remain in the upper -- the mid to upper 30s, in that range. And that's a really strong result given our record new car penetration rate, which this year have been in the 80% to 82% range. And that means we're delivering these results while expanding into lower-priced vehicles across various OEMs. And we haven't seen overall erosion in performance tied to Apple CarPlay or Android Auto specifically. And those have been standard features really for a few years now in the vast majority of new cars. And of course, prior to Apple CarPlay, Android Auto, there were Bluetooth and auxiliary inputs that have been around even longer. So the impacts are really already in the numbers.
Right. And then you're targeting 80% of new cars by 2025 to have 360L and 25% of the installs, I think this year will be 360L. How far along are you in your agreements with the OEMs to ensure that you do get to that -- those -- 80%? And have basically all of your OEM deals -- have all your deals with OEMs agree to replace current equipment with 360L by that time frame, like the...
Well, it's typically a progressive change over, of course. The OEMs update their models and their radio platforms over time rather than a specific crossover point. So it'll be different for every automaker, but we do expect 360L to be the default Sirius XM platform at all of the OEMs over time. Nine of our OEM partners are already rolling out 360L in significant volumes, and this includes Audi, BMW, Ford, GM, Stellantis and Volkswagen. And there are more on the way. So it'll be, really though, a multiyear build to get to those levels.
And at what point do you consider critical mass where it actually impacts, like, going through your decisions about content, marketing, et cetera?
We make content decisions today, of course, based on a number of inputs, including the listening data we do receive that could be streaming or some limited in-car data absent 360L as well as customer research. But 360L will definitely improve the discovery of our content for individual consumers because it drives much more personalized in-vehicle listening experience. And one of our biggest challenges in the car historically has been discovery because it really was limited to turning the dial on the car or the up/down button. And now we have the ability to serve recommended content to individual listeners through the display in the head unit. And while our performance and our direct marketing off platform, if you will, is already very effective, it will get even better as our user-level data informs our marketing treatment. And we're using the 360L listening data today to drive more customized marketing communications to trialers, and we're recommending specific content and features outside of the car as well.
And then last question on this topic. But can you provide or share any statistics on 360L conversion rates relative to your traditional equipment? Is there a difference?
So we are seeing -- yes, I mean we are seeing positive listening and conversion trends when we -- we have to isolate for all the other variables, and sometimes that is challenging with the changing size of the screens in the car and other capabilities. But if we isolate to those that are 360L capable versus not 360L capable, we do see positive trends. And the numbers are still relatively small, but we really do see strong conversion rates among trialers who are using the features, and that includes on-demand or the Pandora stations or even the broader set of extra music channels that we're delivering through the IP delivery mechanism. And awareness of these features is key. So in order to build this, we are working really hard to continuously improve our targeted and personalized marketing. And as I said earlier to, really, both in the car and outside of the car, in our marketing communications that we can now do this. We've just really never had this level of usage information from the car. And it's clear to me that it could be very helpful in improving the efficiency, the relevance of our current marketing efforts across, really, multiple channels that we use today. And I'm confident that over the long term, the 360L content and features will drive improved retention and upsell opportunities also.
As Delta variant unfortunately is growing in the U.S., it's been a big surprise for a lot of us. Now pandemic era, government relief is starting to wind down. What gives you the confidence in the business that you'll maintain the stability for the rest of the year to achieve your revised upward guidance?
Well, certainly, the August star of just $13.1 million will pressure our conversion opportunities in the fourth quarter. And to the extent that these new car sales levels persist, these numbers, it could also lead to softer results into 2022. As everyone knows, the auto industry continues to experience significant chipset-driven supply constraints, and inventory levels are down significantly from where they are typically. And based on just public commentary from the OEMs, it looks like the situation is not really going to change that much in the next few months. And I think buyers are probably rethinking some of their purchase decisions given that dealers are consistently selling new cars above MSRP. So buyers may really want to wait it out for a bit and wait to see if better pricing develops and they can get the cars they want. But all of this is also flowing into the used car market. We see some of the same dynamics, and the average transaction price is up 30% year-over-year, which is really never seen an environment like this. But despite all of this, we're growing visibility into the final part of the year. We're in December already. Hence, we maintain full confidence in our subscriber and financial guidance.
Is there anything that -- any update that you can provide us in terms of whether it's just subscribers, churn trends, trial starts for the third quarter?
We don't typically provide intra-quarter results. So we'll have to wait for the third quarter call to go through some of that. But I can tell you the performance in the back half of the year should be very strong. With most new and used car purchasers receiving 90-day trials of Sirius XM, much like last year, we'll see the impact of softer auto sales and net adds come through in the following quarter. And that means more of our second half subscriber growth will come in the third quarter than usual. But again, we feel very good about our guidance and our second half performance.
And just on churn, it's -- the state of this historically low level of 1.5%, just incredible, really in how low your churn has been. What do you think is the biggest driver of this low churn?
Yes. It is really unprecedented, and I'm really proud of the low churn we've been able to achieve, especially over the last 18 months. And we've seen strong performance across the board on the different components of churn. Voluntary cancel demand is lower, which is a great sign that our listeners' perception of value is very high for our service. This is especially impressive, I think, given that Americans are still not back to their pre-COVID driving levels. And we've been working hard to improve our value proposition, whether it's more content, getting more of our subscribers to listen outside of the car and stream and of course, including that streaming access in virtually all of our subscription packages. So that's on the voluntary side. Nonpay -- I think we're benefiting from what a lot of subscription businesses are continuing to see that the nonpay entry rates in terms of credit card default rates are really low. But our curates, in terms of getting people ultimately pay are better than expected as well. And on the vehicle-related side, it ties very much to auto sales, both new and used. And so in months or quarters where we see lower auto sales and lower trial starts, of course, we'll see lower vehicle related. And we expect that to bump up over time as auto sales recover from the recent low levels. But given this great subscriber growth we've seen this year, we are looking at this as an opportunity to optimize other areas of the business, including promotional rates and making sure people are presented with the best subscription plan option.
To consolidate the Sirius and XM platforms, and if just -- can you talk about timing? And what they'll do with the extra spectrum?
Well, we're still marching towards a point in time, which I think we've said is sort of the middle of this decade. But sometime in the coming years, where we'll really only need 1 of our 2 broadcast systems to deliver the current business. Now that could get pushed out another year or 2 just because of the lower churn that we've been seeing and also our success in reactivating used cars. So we're going to have to watch that closely and see what makes most sense to the business.
How many digital-only subscribers does Sirius currently have? And how much of an opportunity do you believe that out-of-vehicle market could be the incumbent?
On the Sirius XM stand-alone streaming subscribers, the numbers are still relatively small. But they are a growing component of our overall 31 million self-pay subscriber base. This is a big focus for us in terms of growth in the coming years. And we do believe there's opportunities to drive more listening outside of the car where people subscribe just for that purpose. And we have a major media campaign in market today that speaks to all the phenomenal talent we have in the Sirius XM house and it is focused on no-car-required subscribing through or for the Sirius XM app. We've made investments to improve the quality and the capabilities of the app experience and alongside that, we've added additional content. And we've recently added capabilities to bill through third-party platforms, which reduces some of the friction associated with transacting in the app. And I will note that our marginal economics on the digital side are fantastic. And they're really on par with our satellite subscriber economics, which is very different than what you see kind of in the interactive music space. And for us, the other big priority is getting our existing in-car subscribers to stream and engage more outside of the car, and we continue to see steady increases here and usage by our satellite subs. And the research we've done shows that the share of subscribers who say Sirius XM is their #1 source for audio outside of the car has doubled in the last 3 years. Those who do stream tend to stream twice as much or listen twice as much in total versus what they would be listening to just in the car. And so it's clear that a couple of years ago, when we provided streaming access as part of our subscription plan that, that has benefited both satisfaction and retention.
We know that engagement helps churn, so it's a great flywheel.
Absolutely.
And what color can you provide on actual digital subscription purchases made through the app? Are people doing that?
Yes, but it is still pretty early. We are -- we just launched an app purchase last month. And so we have some interesting and encouraging trends. But again, it's too early to provide any numbers. We have the ability now to allow consumers to sample our service in the app just for a few hours without committing to any subscription plan. And we are seeing a number of users going down that path. We also have higher and more immediate engagement, because again, there's less friction in terms of you can sign up and get immediately into the app and start listening.
Right. Switching gears to Pandora. Is there any plan to grow or at least to stabilize Pandora's active users and listening hours? Do you think there's...
Yes. It has been tough. And I continue to emphasize that we have the largest free digital audio platform in the U.S., not just in terms of MAUs and listeners, but also in terms of our share of ear among ad-supported listeners. And for that reason, it's monetizing really well. We had record high RPMs on the ad side. We also have a nice subscription business of about 6 million and/or plus some premium subscribers as well. And we're working to improve the business with more and better content, more relevant recommendations, new features, enhancing the ease of use, both in vehicle and on connected devices. We did launch a content and marketing partnership with TikTok recently and a distribution partnership with T-Mobile, and we're continuing to look for new opportunities like these. There is this very core loyal listener base of more frequent listeners that's becoming a bigger portion of the MAUs. Our overall listening engagement is very strong with about 20 hours a month. So yes, there's no doubt that the trends here are long term, and they will be tough to change. But we are cautiously optimistic by focusing on the user experience, content and distribution that we can at least slow the declines in listeners at Pandora.
Right. Earlier this year, you created SXM Media to better leverage the scale of your audio advertising platform. Can you talk about some of the benefits from SXM Media? And how it affects the overall -- what the overall advertiser response has been to this new sales organization?
We have had success for closing some big multiyear deals with major advertisers who love this opportunity we bring for them with our scale, the 150 million listeners across our O&O and off platform listener bases. And we also just offer so many different audio format. So in addition to the great sales team we have and the strong ad tech, we also offer a lot of other services like our creative services to actually help with campaign development. We have research and live event integration. So I think there's a lot of opportunity here. SXM Media's a great way to be able to bring some of the consolidated opportunity to advertisers. And the advertisers, there's been a significant growth in digital audio advertising, and the advertisers are looking for more opportunities to bring their campaigns across formats and across platforms, and that's something I think we can uniquely provide.
Audio seems to be like very hot at the moment. So there seems to be ton of advertising interest. Can you talk about trends both at Pandora as well as Sirius, what you're seeing in the third quarter and maybe it's later into the fourth quarter?
Yes. Again, I don't want to be too specific about intra-quarterly results, but we do see strong growth year-over-year, especially last year, still depressed back out of COVID in some ways. The digital audio advertising market in the U.S. is today expected to be around $5.6 million -- I'm sorry, $5.6 billion this year. And it is going to grow 10% to 11% over the next several years. And in the past 12 months, we've done about $1.6 billion in advertising revenue. And we're clearly seeing the demand across our platforms, and we're very focused on taking advantage of this and expanding our share of the market over time. Because the demand is there, it's a real opportunity for us to continue to deliver the supply, whether that's listening hours on Pandora or bringing more our platform supply to our advertiser base. And that can be through deals like we did with SoundCloud or the NBC, MSNBC and CNBC Podcast, and we continue to look for more opportunities like these. But podcasting, too, is one of the biggest areas of growth, as you know, and digital auto advertising. It will be roughly $1.3 billion this year, and it's expected to grow by double digits as well. So it's under monetized today. And given our history of really kind of being able to drive monetization in many ways with innovative ad products, increasing sell-through, developing kind of targeted audience, selling programs and other things, we expect to play a big part in the podcast advertising growth as well. And this podcasting focus really complements the other assets we have in audio advertising. So we're just -- we're able to bring these full service solutions to advertisers.
Right. I mean could you talk a little bit more about your overall strategy as it relates to podcasting? Do you think it aligns better with Pandora or Sirius XM part of the business setting? And just, by the way, on that number, the $1.3 billion, podcasting has exceeded everybody's estimates for the last, like, 3 years. It's really -- it's amazing how quickly it's grown. So again, like in your strategy, when is it, like, better? And where do you see it going over the next like 3 to 5 years?
Yes. Look, we are always looking to provide the best content for our Sirius XM and Pandora listeners, and that will, of course, include podcast. And these could be owned and operated podcast or third-party podcasts. Our focus at SiriusXM has always been to bring this great curated audio experience to our listeners. And we'll have a broader set of podcasts available to our Pandora listeners as well. But as we look at how to build the best content experiences for our listeners, we're leveraging our strength, which is working with content creators to find the formats that work best for them. And at SiriusXM, that's traditionally been radio formats with live interactions where hosts can kind of directly connect with their audiences. And we've made that content available on demand or through podcast or even in video, both in our apps or in many cases, off platform as well. And these multi-format, multi-platform creator relationships are where we really excel and where I think we can provide, really, unique opportunities for talent, including like Tom Brady and Megyn Kelly and Kevin Hart and so many others. So that's kind of a unique focus, I think, for us that others really aren't looking to do. And for podcast publishers, specifically, we are offering them this broad reach and full suite of industry-leading tools in a way that really sets us apart. So we're distributing the content across our O&O platforms, but not just on our platform, on third-party platforms as well. And this enables us to cross-promote across a major listener base, a massive audience. And we have a leading set of the acquisitions we did, Stitcher and Simplecast and the ads business that we had already owned with Pandora. We just have a full set of hosting, ad tech and ad sales solutions to be able to provide podcast publishers and, of course, healthy advertisers as well.
And on that point, I mean you have a number of advertising pieces, whether it's Pandora, podcasting, et cetera. Do you feel at this point that you're strategically complete? Do you need to buy anything else? Do you need to invest further in that side of the business?
So we are investing definitely. I mean there's always ways to continue. A lot of competition in the business. And there's always ways to continue to offer more technical capabilities and sales solutions to advertisers and to the creators. And so we are investing in the business. I don't see anything in particular that we need to buy, but we will continue to look for investments or acquisitions that might make sense to further our lead in the space. But we have been able to achieve efficient scale with what we have today, and we'll continue to focus on capitalizing on our current investments. And we will look at investing, I think, in more content opportunities where it makes sense to support future development, such as our acquisition of 99% of visible and bringing on Roman Mars and his team. But as you know, the space is really competitive, and we want to make sure we do -- that we're focused on the right types of investments for us in a disciplined way.
Which brings us to the overall point of content. Has exclusive content become more important to the company given the focus by competitors on areas outside of music?
I think exclusivity it is just 1 piece, but what's most important is curation. And we've always focused on providing a robust and diverse curated offering of content to our subscribers. And it's not necessarily about having the most content, but having the best mix of exclusive and nonexclusive content in audio. And look, clearly, a lot of competition has emerged over the past several years, both from other audio-only providers, but also the tech companies, and we've maintained a really differentiated service despite all this competition. And we're creating artists and brand collaborations as we've done with, Drake, U2, TikTok and many others. And we just offer this really unique mix of live and on-demand news, sports, comedy and other entertainment programming and we'll continue to work with the best talent and audio to add to our premium bundle.
But do you think the competitors, as they expand their appetite beyond just music and podcasting and into life categories, are you expecting to go more into things like sports? You can be in that area as well?
Well, certainly with live, we've seen a lot of companies extend into live audio in different ways, whether it's a clubhouse-type follow-up or live event extensions and other things. And I do believe this is a growing area. But we've always believed strongly in live, in music and sports events. We have news and political commentary, audience interactions, a lot more. And the artists and talent that we work with have enjoyed the opportunity, really, to use their exclusive Sirius XM channels to connect with their fans on a real-time basis by hosting their own curated radio shows. So just last week, Drake curated and presented a mix of songs from his latest album, Sound 42, which is exclusive to Sirius XM. And since the start of the pandemic, another example is Bruce Springsteen hosting a series of specials on his E Street Radio channel that have been timed to just various cultural moments. And we've continued to deliver through the live experiences through our Sirius XM subscriber events. We just kicked off, again, this summer, a series of in-person events through our small stage series. We've had, for a long time, a Pandora live series. We've been running that mostly virtually over the last 18 months with a number of different artists. And we'll continue to extend our live offerings, but in a way that makes the most sense for our subscribers and listeners.
One more question on this topic. But are you concerned that Spotify scale, which is different than your other competitors, because they have a global presence, does that concern you that they can outbid you for exclusive content, particularly in podcasting?
Well, Spotify has certainly been aggressive in bidding for some key podcast assets that they are exclusively distributing on their platform. However, we believe there are opportunities to work with talent and publishers to provide, perhaps, exclusive content on the Sirius XM platform, but also distribute their content much more broadly on a time-delayed or edited basis across third-party platforms as well. And this fully supports what we believe talent wants and also supports our business models across subscription and advertising as well. And certainly, as you know, our business model provides robust opportunities to secure the content we believe we need to maintain our premium positioning, and we'll always look for opportunities to do that.
So moving along to the topic that we sort of have to cover which is Liberty. They're now approaching, I guess, 80% plus and they signed a tax sharing agreement. There's been a lot of speculation that you'll shift capital away from a buyback towards dividend or potentially even offer a onetime dividend. Can you talk about your capital allocation strategy? And how you're thinking about capital returns specifically, what you're thinking about share buybacks versus increased dividends in the future?
So as you know, capital returns and the allocation, the mix and the amount is a Board-level decision. And we do generate significant excess cash. We have a long track record of returning capital to shareholders in a really productive way through a combination of buybacks and dividends, of course. And I see no reason that won't continue over the long term. Obviously, when Liberty goes above 80%, they could choose to participate in our buyback. I know they've talked about that. We can certainly afford a higher dividend payout or special dividends. So these are all options and they are evaluated alongside, obviously, our options to look at -- to continue to look at investment opportunities, whether that's internally or externally through investments or acquisitions. But I'm confident that our Board will make the best decisions for all shareholders. We have a very strong business model. I feel very good about our long-term prospects and our strategic and financial flexibility and all the opportunities in front of us.
Can you talk about or say anything about how you'd like to see the structure between Liberty Sirius and Sirius handles?
Management and I really are focused on running the business, right, in the most efficient way possible to maximize value for all of our shareholders. And we could have a view on ownership structure, but ultimately, Liberty will decide what to do with their ownership stake. And we have a strong set of independent records who can be called upon to work with Liberty on the options or issues that may arise as we consider where to go moving forward.
And at the end of the second quarter, you booked $140 million of insurance proceeds related to SXM7. Do you expect to book additional insurance proceeds?
Well, the great news is yes, we expect to book and receive all of the $225 million in insurance proceeds in this year.
And the insurance proceeds will be utilized for SXM9. Could you talk about an update on when you expect to launch that?
Yes. We did announce we have contracts in place, both for Sirius XM9 and 10, and we expect to launch Sirius XM9 probably about 3 years from now, as the usual build term.
And then last question. Are there any significant CapEx projects on the horizon? And after this peak, when do you think the next major ramp in CapEx will be?
Well, once we complete 9 and 10, we're really covered from the standpoint of the existing subscription business and supporting our growth there, really, for the next 12 to 15 years. But we're still working through the process to decide what satellite coverage to have on the low band. We'll need to support the subscribers on a low band as we've discussed a little bit earlier for a number of years. But over time, we can look at a number of options to utilize that spectrum to enhance our audio offering, paid or free. At ancillary data, our video services is to order work with other companies on other options. But that decision around satellite -- the CapEx associated with those satellites to support the low band is something we're still working through.
Right. And then we have another. Is there anything that we didn't cover that we probably should have? I mean it feels like you've done an amazing job with amazing content, advertisings ramping, podcastings ramping. I mean it sounds -- I don't want to put words in your mouth, but the only kind of -- it's not a company negative, but your SAR, which is completely out of your control, and it's due to, like, parts coming through the only kind of -- I don't want to say a risk, but kind of the weak link at the moment. Is there -- are there any other areas that we should cover or that you -- anything else that you want to add to this conversation?
I think we're really well positioned. I mean even if there's sort of a short-term downturn or continued downturn in auto sales, we saw it came -- come back pretty quickly after last spring. And we're certainly hopeful that, that demand still exists, and that will support the growth of the business going forward. And in the meantime, we're focused on working with the OEMs to continue to drive penetration and to support our 360L rollout. And I think we addressed a lot of other points on our growth initiatives, including driving our digital subscriptions and continue to capitalize on our ad platform. So I continue to believe we're really well positioned this year and for many years to come to grow.
Great. Jennifer, Thank you so much for joining this conference. And with that, we will reconvene at 11:15 with Charter Communications. Thank you.
Great. Thank you, Jessica.
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