Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript
May 23, 2022
Earnings Call Speaker Segments
Good morning, everyone. I'm Sebastiano Petti. I cover the Media and Communication Services space at JPMorgan. I want to introduce Sean Sullivan, CFO of Sirius XM. As many of you know, Sean became CFO of Sirius XM in October 2020. Sean, thanks for joining us today.
Good morning. Thanks for having me.
So the new management team at Sirius has been in place since January 21, when Jennifer took over as CEO following your appointment in late 2020. What have been the team's priority since that time? And as you look out over the next 12 to 24 months, what are you most excited about?
Yes. So it's hard to believe it's been 20 months or so. But I guess what I'm excited about today is the same thing that really attracted me to the opportunity when Jennifer took over in 2021, just reset the vision for the company, obviously, to continue to own the car to really accelerate our digital streaming and experience for consumers and a growing and scaling advertising business. So those priorities, I think, have been fairly consistent. I think we're still on that path. I think what's great about the leadership team under Jennifer's new role is we brought in some really new people to enhance and complement some of the long-tenured experienced people at SiriusXM. So Joe Inzerillo joined us from Disney. So I think as we think about a more consumer-focused digital subscription experience, I think what Joe did and his capabilities from Disney+ and Hulu and other things, I think, will be invaluable. We have a new Head of Human Resources that we brought on. As you think about the labor market and the changing aspects of that and the capabilities that I think we need to complement a great existing team. Obviously, the history of SiriusXM speaks for itself in terms of its resiliency and ability to deliver strong financial results as well as shape the future of audio, being an innovator, et cetera. So I think what's been great under Jennifer's leadership is to really, again, enhance the management team, really refine a vision as we shape the future of audio and really focus on those 3 key pillars. And whether that's through organic investment, whether that's through M&A, or otherwise, I think we're on that path. So again, I remain as excited today as I was when I joined back in October of 2020.
Great. So why don't we start off with auto sales in the trial funnel. April saw $14.3 million, improved modestly versus March. However, inventories are still very lean just 23 days supply, given ongoing production and supply chain challenges. But on the call, you noted expectations for the substantial majority of self-pay subscriber growth to occur in the second half of the year. What have you been hearing from OEMs and your dealership partners? And what are the team's expectations for new auto sales?
Yes. We stay close to the OEMs, obviously, in the backdrop of the current macro economy, I think that most continue to see supply chain issues and obviously, inventory supply challenges. That being said, I think we all believe that at least prior to the last few weeks, there is a meaningful pent-up demand for autos. We continue to believe that the majority of our ads will occur in the back half of the year. We do think there is strong demand. We do think it will inch up over the course of the year. I think that's consistent with at least the comments that I've read from a lot of the automakers. So I guess I was encouraged to hear that their thoughts on what 2022 into '23 look like are not dissimilar to our expectations. we can only control -- we can control. So that's effectively where we're at. We continue to monitor all third-party sources on what the full year is. So we'll see, but where we sit today is consistent with what we talked about in the first quarter call.
And IHS is, I think, looking for $15.2 million in terms of SAR for the year. What is the team looking for in terms of the guide?
We look at IHS. We -- I don't think we publicly state what the underlying SAR is in our guidance. But as I look across all third-party estimates, I guess I don't -- I don't have anything to say differently relative to how our models have been built.
Okay. Any color on how things are progressing perhaps this far in 2Q?
I don't believe -- so I think we talked about -- it's a back half year. You'll see some, hopefully, some growth in the second quarter. But I don't believe we said much more than that at this stage.
Awesome. So a lot of concern about the macro environment that you touched on the health of the consumer due to inflation, among other things, but churn has remained quite low at SIRI over the last few years, even before the pandemic. But SIRI is a premium product. What's contributed to those strong churn trends over the last several years and maybe into the pandemic?
Yes. We have a premium product. We have a large user base that's incredibly loyal. Obviously, we have to continue to enhance the value proposition for our consumers with enhanced features and content, and I think we've done that. And churn has been historically low. And we -- some of that's certainly a function of the reduced auto sales. But all in all, we've been pleased by the strength of consumers, pleased by the engagement in the product and non-pay entry rates continue to be low. But I guess that's a testament to the strength of our consumers and the strength hopefully of the perceived value in the product that we're offering.
And Jennifer indicated that you would expect trying to pick up at some point through the course of the year. Are you beginning to see any signs of that, consumers tightening their belt or is that just more predicated on some normalization we would perhaps call it?
Yes. I think Jennifer's comments were that there were such historic levels in terms of where churn is, where the funnel is, that I think there's just a natural expectation that things will revert back to historical trends. We have not really seen that as of yet. And given the nature of our customers, given the nature of the health of the consumer despite the macro environment that we're operating in, we have not seen that. But again, we're not immune to these factors. We'll continue to closely monitor them. But as we sit here today, again, churn continues to be really, really low and strong.
So digital net adds partially offset the self-pay net losses on the satellite side in the first quarter. So while digital starts will pick up from here, likely leading to improved subscriber growth, satellite net adds, I think the team talked about on the call are expected to constitute the majority of growth going forward, as the new auto sales and used auto sales trial funnel rebounds, can you help us think about the strategic focus to grow the digital-only subscriber base? And you touched on the addition of Joe joining, but as he helped accelerate efforts there? Or is it still kind of ramping up?
Yes. I think it's still ramping up. It's early days. So we see a great opportunity. We see a lot of folks, I think, see the SiriusXM digital app as a companion to the satellite service. I think that given the nature of our content, we think there's an incredible opportunity. I mean, just think about the pandemic and how people's driving habits have changed, how connected devices, so we really think there is a strong digital-only opportunity outside of the vehicle. And we think it not only complements for existing satellite subscribers, but it's a true stand-alone streaming opportunity for people. As it relates to Joe, absolutely. I touched on it, I think, at the beginning about his experiences, enhanced capability. I think that there's no question that a big attractiveness in recruiting Joe to SiriusXM is his ability to accelerate and move in a more agile fashion and enhance all of our digital experiences and touch points with consumers. So we continue to think it's a big unlock for us and a real strategic focus for the company.
Okay. And then as we're thinking about the digital subscriber base versus the satellite sub, how should we think about the economics? What are the different kind of puts and takes of those different sub code?
Yes. From a SiriusXM digital streaming, we obviously have a licensing regime that's very attractive. Frankly, the contribution margin of a digital sub is very attractive, especially given that we're not paying a rev share or SAC related to those subscribers. So again, a digital sub is a very attractive one from a margin profile. That being said, it's a funnel that obviously, you've got to balance the LTVs of these subs. You got to balance how much consumer acquisition cost you spend and really find the right channels to make sure that you're doing it on an economic basis and a very disciplined basis. So I think there's still room, certainly to optimize what channels and where we find the digital subs. But from a margin and financial attribute perspective, very positive, certainly in comparison to our satellite subs.
Can you give us any color perhaps on the consumption engagement trends across that digital-only subs?
I guess the one thing I would say, it's again, it's early days. It's a small portion of our overall subscriber base. But I think when you look at, for example, timeshare listening, I think for those consumers that do stream using our product on a stand-alone basis, their consumption habits are not dissimilar to our satellite business. So the real challenge for us will be finding them, getting them engaged and getting them to stream. So I think from a consumption perspective, we're very pleased once we get them streaming. It's really probably at the front end of that requires probably some product enhancements, technology enhancements, and I think we're doing a lot on the content side in terms of adding extra channels and on-demand and other features. But -- so I guess we're pleased with the share of listening for those that do stream on a stand-alone basis. That's correct.
And how should we -- how should investors measure success in the digital-only initiative? How big could the base be over time?
I think my hope is over the long term, it's a more and more substantial portion of our net adds. As I said, it's early days. It's a small portion of our subscriber base today. I think as you measure the success of SiriusXM subscriptions today, I would look at our digital business similarly. How are we doing with sub growth and how are we doing in terms of driving EBITDA and free cash flow, right? So we're trying to do this in a disciplined fashion and balancing those factors, I think that I would look at our digital business and evaluate success not to similarly what we've done on the satellite side. So hopefully, at least in the near-term growth but long-term profitability.
Okay. Great. So legacy SIRI ARPU grew 8.6% in the first quarter, nice acceleration. How should we think about the level of growth from here? Should we expect it to moderate somewhat through the rest of the year? Is there any obviously, outside of the late 2021 increase? Are there other underlying factors or trends within the ARPU that we should be thinking about?
So I think the comps, as you know, especially on later in the year will get more difficult, right? We put through some rate actions back in November. I think the company has had a fairly disciplined and regular, if I can say it that way, approach to pricing. As I think about it prospectively, our job is to continue to enhance the value to the consumer. I think we have done good work on the content side doing that, but we're not immune, like I said before, to the factors. So as we look out over the course of the next 12 to 18 months, I think ARPU comps will become less favorable in light of what we did in the fall, as I said, and we've got to keep an eye on the consumer, right, and enhance that -- and ensure any incremental pricing is justified given the value proposition. We haven't talked much about the SiriusXM broadcast. But on the advertising side, that certainly returned to a more robust level after the early days of the pandemic. So that focus on advertising and monetization of the non-music side of the SiriusXM has certainly helped as well.
That's a good segue to the advertising business at SIRI. A lot of questions on the visibility of advertising in the market due to the macro uncertainty. What is the tone of conversations with national advertisers? What are you seeing at a category level and obviously, retail sales data and the data out from last week with the major retailers suggest some softening of consumer spending and demand? What are you seeing?
Yes. What am I seeing -- I'm continuing to see strong growth. And again, that's as much as a supply -- a function of increasing supply as anything, we continue to see strong demand. There's no question. There's been some caution in the CPG retail automotive space in light of the macro factors. I don't know, consumer spending seemingly hasn't abated despite the backdrop of the economic environment we're in. So I think that there's some caution upon some of our advertising clients. I think there's probably -- that may result in some deferrals in terms of spend, maybe at this point, not outright cancellations, but I think that there is a cautious approach. That being said, we continue to see strong demand for at least our audio products. We've added a lot of inventory over in terms of some of our ad rep deals, et cetera. So we still feel good about where we've guided for the year. But we're going to monitor the marketplace because clearly, there is some incremental caution from advertisers.
And so on the Pandora side, obviously, continue to have some -- face some headwinds of declining MAUs, but RPM growth remains strong, probably touching upon a lot of the stuff you just hit on, but -- so what is -- can you break down some of the drivers of the strong RPM growth? I mean, obviously, strong demand that you just touched on, but how long can perhaps the lower volumes offset the higher -- how long can the rates offset the lower volume as you think about the on-platform business at Pandora? And I mean, how can you perhaps enhance that value prop?
Yes. No, it's a great question. Certainly, we've been on a moderating declining trend in terms of MAUs. It's certainly on platform. The team has done a wonderful job of monetizing what appears to be a very loyal active user base. So we're -- and that's part -- again, it's early days with Joe and figuring out the product and the feature set that can hopefully reverse the trajectory of the MAUs. I guess in the near term, I'd probably bring back the aperture a bit to talk more about SXM media, right? So we really think advertising is a great opportunity, probably saw some of the maturation of the Pandora platform and realize that there's a real opportunity from an off-platform perspective, podcasts, obviously, the Sirius XM broadcast. So I think what's -- even in the context of the Pandora KPIs, we've got an audio offering that is multi-platform that I think is very attractive to advertisers whether you want to be on the broadcast platform, whether you want to be in a podcast or you want to advertise in Pandora. So I am hopeful not only with Joe and the product and tech team, enhancing the SiriusXM digital app, as we talked about, but we think that there's certainly enhancements and improvements that over the term will hopefully moderate or change the trajectory of the Pandora O&O platform.
So you touched on podcasting and some stuff we had some news out this morning and I want to come back to it a bit. But off-platform at Pandora grew 43%. I mean can you unpack some of the strength there? I mean just from the podcasting, the rep deals, ad tech, you're winning some share. I mean, maybe take us through some of the levers there. What does the podcasting strategy now with Stitcher unfolds? Like how is it, and maybe with Conan in the fold now?
Sure. Yes, I don't know that -- hopefully, people understand the podcast strategy. To be a leader in audio seemingly, you should be offering your consumers podcast, right? The market size, I guess, from an advertising perspective is anywhere from, what, $1.7 billion to $2 billion. I think people are predicting it to grow significantly over the next year or 2, but it's hard to believe that, again, it's not a hugely material part of the audio advertising marketplace. But our strategy is, number one, our consumers and customers want to consume podcasts. I think the purchase of Stitcher was our entree into that. At the same time, we're serving content creators who are very much focused on monetization. So we've done a number of deals like audiochuck with Crime Junkie, recent one, Crooked Media that has Pod Save America, for example, so we are not doing necessarily these things exclusive to our platform. We're doing wide distribution and giving content creators the opportunity to monetize that. So that is -- the advertising growth is certainly a big part of it. At the same time, when you talk about Team Coco, the acquisition we announced this morning we -- where we think we differentiate ourselves in the podcast strategy is the opportunity to make it multi-platform. So if you take Conan, for example, not only are we going to widely distribute his podcast, you can envision -- I know he's a big music consumer, you can envision there's something he could do with us on Pandora. I think we announced in the press release today that there'll be a Team Coco SiriusXM channel on the satellite and digital side of the business. So I think our differentiation and hopefully, over the long-term competitive advantages, we provide multi-platform opportunities. We did the same thing with Megan Kelly and others. So my hope is that in success, we're not only serving content creators and consumers, but we're doing it in a financially disciplined and fruitful way for the company. So that's the podcast strategy. Certainly, we want the scale and reach for advertising growth and monetization but at the same time, we wanted to enhance the overall value of our subscription and our business.
Yes. So touching on that last point, I think it came up on the call. Is the expectations from a profitability or gross margin perspective? Is that the off-platform business will approximate or look something like what Pandora at a segment level looks like over time? Is that the...
Yes, that's certainly the hope. I mean, I think we're in this for a financial return and reward over the long term. I don't think we're just -- we're not just chasing ad growth for the sake of ad growth. But it is early days. The market and podcast is still developing. It's still a fairly manual DR intensive environment. But over the long term, my hope, as I said, with what we do in terms of how we differentiate ourselves, the expectation is that we're running this to get to something that isn't dissimilar to that.
Can you touch on perhaps what you're seeing in terms of CPMs in podcasting? How have they perhaps trended this -- the age of podcasting or the allure of podcasting? It's been pretty robust or invoked for, call it, the last 12, 24 months. I mean, so obviously, penetration among the U.S. population still going higher, engaging likely still going higher. CPMs held firm or...
Yes. CPMs have been strong. There's usually -- as those who consume now, there's a pre-roll, there's a mid-roll, there's some post-rolls, obviously, depending on the placement will impact what the pricing is people will pay. Host-read ads are certainly at a premium and command the highest CPM. So -- but all in all, it's been positive.
Awesome. So the first quarter revenue growth was solid, as we touched on, but EBITDA reflected higher investments in digital growth and content and product as the team had identified coming out for some time -- coming out of the fourth quarter as well when you gave the guidance. But does the '22 EBITDA guide also reflect a step-up in technology platform investments particularly following the appointment of a new Head of Product and Technology?
Talking a lot about him today, aren't we? No. No, it's -- again, I think especially on the early days, I would expect there'll be incremental investments. At the same time, what we've been able to do under this new organization structure is to really centralize all product, tech, IT engineering. So you won't be surprised to hear as a CFO, my expectation is that some of these investments will be self-funded through efficiencies and other opportunities to really leverage -- get some early operating leverage out of the cost base.
So following the special dividend in January, share repurchases have slowed and as the company prioritizes delevering to your target of low to mid 3s and why did the special dividend makes sense for SIRI and its shareholders?
Yes. I guess just to clarify your comments. I think we've -- at least under my tenure, we've talked about the low to mid 3s. I think pro forma for the special dividend, we were at the 3.5x leverage at the end of 2021. So when you say prioritizing deleveraging, I guess what is so wonderful about our business, our business model, our free cash flow characteristics is we have a very flexible capital allocation policy. So we have the ability to do significant organic investments, which we're doing. We announced a Team Coco deal today. So we'll do disciplined M&A where we think it makes sense. And then I have the benefit of either using share repurchase or a onetime special dividend to really reward and return capital to shareholders. So I think as you look back over the last few months or so, I think the equity market seemingly have come back to businesses that I think have some resiliency and some strong profit and free cash flow profiles. We'll continue to be a share repurchaser in the context of our view of valuation and hopefully, I believe, at least my articulated comments are fairly prescriptive about in terms of what people should anticipate and expect our capital allocation policy to be going forward such that there's really, hopefully, no surprises.
And should we expect special dividends to remain the predominant form of capital returns going forward? Is there any reason why that might make sense versus...
Again, I think they're special for a reason, right? So I don't know that we're getting into the recurring special dividend business. I think at the point in time, given the strength of the business. I would just have you go back and look at the comments I made back when we announced it, right? It was really a onetime levering situation, rewarding all shareholders given the significant positive performance of the business over the course of the pandemic. So I guess many of our future actions are predicated on our past behaviors but I'll let my capital allocation comments stand on their own.
And so just thinking about that balance and your capital allocation priorities, if EBITDA free cash flow trends better, is the preference to lean into perhaps some of the more organic investments? Just how should we think about the levers that the team is thinking about within capital allocation if growth comes in better? If EBITDA comes in better, does that mean more investments? Or does that mean more delevering?
Well, we don't think we're under-investing in the business, right? We think at the center of what we do is content, right? So I think the -- again, Conan O'Brien is a good example. We thought we had an opportunity to get one of the preeminent people in comedy to be on our platform. So I don't -- we're investing significantly in content. We're investing significantly in product and technology to obviously underpin and develop the digital opportunity that we see as well as build out the ad tech stack and really unify it to deliver on the advertising growth. So by no means do we view us underinvesting. I'm not -- maybe I'm inferring things from your comments or questions. So I think that the organic investment today seems like the highest and best use but certainly, we're not going to do special dividends or share repurchases at the extent of the long-term growth and profit generation of this business. So number one. Number two, I think we're going to try to be disciplined. I think that during my time here, we've done fairly small M&A that really enhances the strategic road map, accelerates the road map, 99pi, we did the Conan O'Brien deal, Stitcher closed just as I was arriving I think and back in October of 2020 because we wanted to be in the podcast business. So I think we'll do things that we think enhance our strategic road map, but I think they're smaller things like the Conan situation as opposed to large scale. And then again, share repurchase, special dividend is always a tool in the toolkit. Again, we're at whatever, 80-some-odd percent ownership today. You know what the special committee is announced as it relates to if and when we were to go to 90%. So I think that's where our priorities are.
So yes, so just kind of following up on that, but I think you've been pretty clear. And just audio advertising is just increasingly larger portion of the base. You've done some additional -- you've done some tuck-in acquisitions. Is that how we should think about it? I mean, is there other assets beyond what the team has been doing that maybe makes sense for SIRI? What else looks interesting?
No, I think from audio advertising, whether it's Simplecast AdsWizz, I think we feel very good about the offering and the portfolio that we have. I think there's certainly more work to be done to unify that and enhance how we bring it to market and how we leverage the scale opportunity in that. But I think we feel good about the opportunity. I think, again, content is at the core of what we do. I think you probably would see us do more small things around content that are multi-platform opportunities. But I think we feel very good about the asset base as we have today.
Got it. And I guess thinking about -- just maybe perhaps remind us about -- just the satellite CapEx build out -- just over the next couple of years launch timing, what should we be thinking about from an investment?
Yes. From an investment, I think we've announced the 9 and 10 I believe those are 2024, 2025 events. So there'll be some elevated CapEx that we've talked about that hopefully will abate over time once we're through those build cycles, but that's the current satellite contemplation.
Great. And last question in a year from now and we'll be returning Sean, what we'll be thinking about? What will we be talking about that at that time?
A year from now, I hope we're talking more about the enhancements to the product, the enhancements to the consumer experience, some of the digital transformation that I hope will be happening to the business. Hopefully, we're talking about return to normalcy. And whether that's supply chain, whether that's health, it seems like every pundit thinks a year from now we're going to be sitting here in a recession, but I don't want to end on that note. I think that in many respects, my hope is that with the enhanced team at SiriusXM, we've enhanced the product. We've enhanced digital and consumer experience. And we just continue to deliver, hopefully, very strong financial results for our shareholders.
Great. Thanks, everybody. I think we'll leave it there. Sean, thanks for coming.
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