Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript

We have Sean Sullivan, Chief Financial Officer of Sirius XM. Sean, thanks for being with us today.

Thanks, Stephen. Good to be in person.

Great. So I want to start off high level, Sirius XM has been a leader in streaming audio, [indiscernible] [ digital ] radio and podcasting. With that said, the audio market has become very competitive over the last number of years, in fact on the [ car ] side. Maybe against that backdrop, what are Sirius XM's top priorities for maintaining that competitive edge, continuing to grow the business long term?

Sure. So the key pillars that we've had, I guess, are pretty well articulated in the backdrop of the competitive marketplace. So we obviously have a very dominant position in the vehicle. We continue to look to drive streaming outside of the car. It obviously has both the benefit of augmenting the listenership of our satellite subscribers, but also opening up the addressable market to non-satellite subscribers. And then advertising continues to be a bigger component, with Pandora, with some of the off-platform and podcast investments, acquisitions we made, that's really where we believe we're best positioned. So from a competitive standpoint, others are doing many things, but I think that a focused product, a focused content and marketing and acquisition strategy has served us well. We're certainly -- I'm sure we'll get into it. We're certainly watching the auto market very closely, as it relates to our subscription business in car, and what's the sign of the recovery, the advertising market, the streaming landscape, all of those things underpin the investments we're making and where we're going. But generally speaking, I think we've been fairly well narrated, where our focus points are. That has not changed. We brought on people. We're making investments. I know we'll probably talk about some of these things today. So that's really where we think we're best positioned against the competitive landscape.

[indiscernible] But first, I want to touch on the macros, just off the top of mind. The operating environment has changed a fair bit from this point last year. The macro backdrop is often a little bit -- margin issue I think you've probably expected [indiscernible] market. Just talk a little bit about how it has impacted Sirius XM the last number of months and what [indiscernible]?

Yes. Certainly, a lot of things going on. When we entered 2022, we had certain expectations over the course of the last 8 months. It's been more challenging than many had anticipated. Much of that outside of our control. I don't think the market or macro environment has changed our strategic approach, whether that's to investment, whether that's to product enhancement, whether that's how we engage with our customers. So I think, again, as we talked about the strategy, I think, it is solid. Again, it has been a more challenging environment. We -- sorry, having technical difficulties. So we look at the order recovery. We look at SAAR. That certainly has impacted our ability to deliver what we had originally articulated, in terms of self-pay net adds. At the same time, we remain committed to our financial guidance for 2022. So again, subscription business, very strong, very good visibility, good predictability. The advertising marketplace that, again, we'll talk about, certainly has less predictability than the subscription side of our business. But at the same time, the good -- and the good part is, there's a great growth opportunity in the advertising today, it certainly represents only 20% of our total revenue. So all in all, I think the strategy remains the same. The macro condition is certainly more challenging. I think we're being more measured in terms of our cost control, in light of the economic environment, not unlike many other companies today, in terms of prioritizing where the critical hires are, and when we think about headcount, given the state of hybrid remote in-office, return to office, what does that mean for your real estate footprint? There's certainly actions we've taken and can take on the real estate side. So I think as we commit ourselves to the financial guidance for '22, we're just being very cost conscious. We certainly want to deliver in the near term, but make sure we're making the investments to continue to deliver long-term growth.

You mentioned the impact of the auto market. I think trial starts were down 15% year-over-year in the second quarter, given some of the supply chain issues. You maybe talk about the pacing of trial starts through the third quarter, what you've seen so far, and maybe any expectations you have for that trial funnel growing? Again, either in the later part of this year or into 2023?

Yes. I mean it's certainly true that year-over-year, we're down. I think we saw sequential improvement in trial starts from Q1 to Q2 in 2022. As we get into the back half of 2022, we have a more favorable, I guess, year-over-year comparison, in terms of where things were last year. When we get on -- when we talk probably late October, early November, we can talk more about where Q3 and where things are pacing, because that will certainly be determine of the positive self-pay net adds that we've talked about for 2022. So all in all, as we talked about SAAR is, what, in the [ $13 some-odd million ], many of the third-party analysts, which we track very closely, still have a very large fourth quarter out there. I don't know if that's a lagging or leading indicator. It seems like a lot of the estimates continue to get pulled in. So we'll certainly watch that closely over the course of the year. But that's kind of where things are out on trial starts and what the impacts are to our business.

Great. The Sirius XM in the second quarter reported record low churn of 1.5%, helped by improvements in vehicle-related churn, which is a product of the lower gross add environment we just talked about. But maybe setting that aside for a moment, how has underlying voluntary and nonpaid churn trended over the last several quarters? And are you seeing any signs of the macro environment impacting the subscriber base?

Yes, we haven't. It has not. And I think much to our surprise, I think much to many people's surprise, the strength of the consumer has been strong. The non-pay, we continue to run at historically low rates. I think we continue to all believe, that it will revert and regress to something more normalized, but we are in unusual times. So we've been very pleased. And that's just not a function of the consumer, that's a function of pricing and packaging, monthly versus annual, how people are invoiced. So I think that credit to the team in terms of managing non-pay and some of the things we've done, to make it more consumer-friendly and really mitigate some of the factors that may contribute to non-pay. But I think we've all been pleased and frankly surprised by the strength of the consumer. We are a premium-priced product. Maybe it's a function of the customer base that we serve, but very pleased there. On the voluntary side, again, it's -- cancel demand has been low. I credit that to a number of things about the content investment. I think adding streaming to most of our packages a couple of years has certainly enhanced the value retention engagement of our consumers in the product. So again, 1.5% is record low. I think we've been trending that way for the last 18 months, certainly as long as I've been here. I think there's an expectation that, it's possible certainly in the non-pay to regress a bit, but we're pleased with where we're at.

Is there any reason, churn could in structurally go lower below 1.5% over the long term, given the investments you're making?

Yes, yes, I think it's hard to think that non-pay could go lower. I think what, non-paying voluntary is roughly 1 point of it, excluding the vehicle-related churn. So we're working on the product and trying to improve the cancel demand, for sure. Of course, we've set a goal to go lower. But I think we're at such historically low rates relative to where we've been historically. It's hard to imagine it getting materially better.

Okay. Headline SXM ARPU grew 7.2% year-over-year in the second quarter, which is well above Sirius' long-term average of 2% to 3%. Could you impact some of the key factors that are driving higher than usual ARPU growth this year and discuss your expectations for pricing growth heading into the back half and into 2023?

Yes. We -- I think the company has been fairly -- I don't want to say predictable, but fairly consistent, in terms of the pricing actions it has taken with its consumer base across the packages. So as you know, we put through some pricing increases back in November of '21. I think part of the ARPU benefit you're seeing in 2022, is a function of those rate actions. Initially, you see some pushback, but generally, given the record low churn, we've got what we think is a premium product with a great value proposition. So I don't know that -- I'm not going to sit here and predict or foreshadow what our future pricing actions are, but we do believe that to the extent we continue to improve the product, to the extent we continue to invest in content, and whether that's music royalties or news talk, sports, you name it, we'll continue to look at it and I imagine in the similar cadence to what we've done as a company, historically. But we need to be mindful of the consumer. We got to be mindful of the price point of the product. We got to be mindful of churn. But certainly, I think there is an opportunity in the future, in terms of pricing.

How much of the mix shift with paid promo versus self-pay impacted that ARPU number this year? And if you wanted to look at core underlying ARPU growth?

I think a lot of that shift has occurred. I don't know that's material. I mean, I think the one thing, Stephen, I didn't really talk about is advertising, right? And there's another one Platinum VIP. So we continue to grow and do better and recover from pre-COVID level advertising on the satellite service, from an advertising perspective. So certainly, advertising has contributed to that growth. And we've introduced some premium plans. So Platinum VIP is at $35, I believe, for 2 and 2 stream log-ins. So that's contributed to it as well. But probably, to a lesser extent, the shift on the promo side.

Got it. All right. Let's shift a little bit and talk about your streaming-only service, SiriusXM [ VN ], expanding the target market for the streaming only service a little over a year ago now. How has uptake of the service been to date, and what are some of the key learnings you've had over the last year, after ramping the target market?

Yes. It's -- again, it's still early days. The market on the streaming side is competitive. There's a lot of consumer research out there about how many services people subscribe to, how many of them are paid. So we do think that there is a large addressable market for the standalone streaming product. It's early days, and we've just hired -- we keep talking about our new Chief Product and Technology Officer, but he has been on board from the beginning of 2022. He's very focused on some certain foundational aspects of our business, from a technology and product, but also very focused on the content side. So I think we're doing a better job getting people into the app. I think that for those that have used it, there's certainly a lot more to do. I think we've got rich content that needs to be unlocked and on demand, and certainly, some of those things will need probably more rights to do. But yes, we've been pleased. I mean those -- the people that have a satellite subscription, seem to double their usage, and we've said this before, the large streamers. Standalone streamer again, it's a different product. It's a different market where it's younger, it's more diverse. I think we need to really continue to invest and refine our content strategy to serve a different market of consumers. But we're pleased. Again, it's early days. It's a small percentage of our self-pay subscriber base, certainly hope in the future, will be a larger contributor. But so we're there, we've got a lot of work to do, but I think we've got the people and the product road map in place to accomplish it.

So you mentioned that the market and the target market that the self-paid service or the streaming only services is going after. SiriusXM on the satellite side has built an incredible business model around the new and used car market, and using that as the target addressable market to go after subscribers. I was curious, at this point, do you have an idea of what that equivalent market could be on the streaming only side of the business to the market, and give trials into and ultimately convert trials in the paid streaming only subs?

Yes. I mean, again, it's -- in the United States, there's obviously a large addressable market. We've done customer segmentation analysis in terms of the satellite. I think there are younger and diverse audiences that are probably equal to the size of the addressable market of our satellite business. I think Jennifer talked a little bit about this in the last couple of weeks. So we think there's a great opportunity. But again, the long road churn profile is probably very different. The price point is very different from the traditional satellite. So -- but we do think, it's certainly a worthy investment to continue to grow, drive growth in the business. And also, we've got what we think is a unique content offering that is differentiated. And therefore, we think there is a market on a standalone basis for people, to subscribe to it, relative to what else is in the marketplace.

In the past, I think you mentioned that the margin profile of streaming only is similar to the satellite service. I was curious, as you think about your business plan over the long term for streaming only, is the business plan designed around that margin profile remaining similar to what it is today? Or are you willing perhaps maybe to sacrifice margin to expand the TAM, that the streaming-only service can sell into? And then you have marketing -- addressable marketing is a big component of the cost structure?

Yes. We've talked a lot about the margin profile. We've talked about the fact that on the streaming side, we don't have to pay SAC. We don't have the rev share with the OEM partners. We're dealing with, obviously, the traditional distribution platforms, where you would distribute a streaming product. So I think we're looking at the LTVs, how we spend against those, in terms of making sure they're economically viable. But we want to grow the subscription revenue. We think that the margin profile is not dissimilar to the satellite side, and we think we can do that. Again, there are investments that are required to get there. So possibly in the near term, you'll see some investment in margin pressure. But over the long term, I think our objective is to have a -- not a materially dissimilar margin profile on the digital side.

Understood. I want to switch and talk about Pandora for a few minutes. On your second quarter call, I think Jennifer mentioned that the advertising business, your advertising business, [ wasn't ] immune to the macro trends that are being felt industry-wide? Could you update us on some of the trends that you're seeing in the advertising market through the third quarter?

Yes. We've seen growth rates from third-party estimates have certainly been pulled back. I think everybody still continues to feel that there is growth in '22, maybe less so than where we started the year. We have been pleased with how SXM Media has performed. There's certainly certain categories that are under pressure, not surprisingly, in terms of auto, in terms of some consumer packaged goods companies, et cetera. But all in all, we're confident of where it's at. We've got a great sales team. We've got, I think, a unique platform opportunity to sell. I think we're taking share. There's a lot of demand. So overall, I think we're pleased. I mean, we're certainly watching the market, third quarter and fourth quarter is traditionally obviously a big advertising quarter. Hopeful that we'll have some tailwind with political. But all in all, I think that's -- as I said earlier, subscription is certainly more predictable than the advertising, as we think about Q3 and into the back half of the year -- etching out the year.

And then maybe just to drill down on this a little bit more. Where do you think we are in the process of seeing perhaps more of the cyclical end markets, in terms of them pulling back on advertising spend? Are we through sort of the later innings of that, or is there still spend to come, to be caught in this present market?

It's hard to say. I think there's just so many factors around the environment in terms of recession? Are we in a recession? Are we entering a recession, what have you. I think most of the pullback has probably occurred. Certainly, people are more cautious and probably making decisions closer to the end, in terms of either cancellations or pushing things or deferring things. At the same time, I think SiriusXM sits in a unique position, right, because we have added a fair amount of inventory in terms of our podcast and platform investments, the team has done a very astute job in terms of managing the on-platform monetization in terms of RPM. So I don't know that I would define ourselves as the market. I think the podcast -- and we can talk about it more, is still in kind of the infancy stage. So I think there's still a lot of opportunity to transition spend from other avenues, and whether that's video or other -- or terrestrial radio, I think there's still opportunities to grab share, as people get more educated, as technology ad tech improved. So in terms of the market comment, we feel okay where we're at, and I think the market -- I don't want to say it's stabilized, but certainly, there is some uncertainty going into the fourth quarter. But we reiterate where we're at for the year in terms of financial guidance.

Got it. And you mentioned some of the off-platform and podcasting opportunities ahead of you -- first through the lens of SXM Media, but SXM Media has emerged as a leader in digital audio advertising. I think your network has 150 million listeners across SiriusXM, Pandora, SoundCloud, your podcasting business, off platform, all of which you host on the advertising side. What's the overarching strategy for growing your third-party sales rep business, both from the supply side and the demand side?

Yes. I think simply put, it's scale and its diversification. So the beauty of pulling together a combined ad sales force and having a portfolio to sell on platform Pandora, to sell podcast, to sell a satellite service, I think, gives us an opportunity to sell, I think, what is a differentiated platform to advertisers, to agencies, et cetera. So that's the strategy. I think there's a tremendous amount of growth in the podcast. I think it's still kind of in its infancy, nascent stage. I think there's more to do on the ad tech side, in terms of programmatic advertising and automation. I think there are a lot of brand advertisers that still haven't necessarily dove into the podcast side. So I think the strategy to put the team together to bring a unified product with a scale of 150 million listeners, has been a very positive market approach, and even with some of the listener trends on Pandora, I think we've been able to continue to grow advertising, and we do that, because I think we offer a differentiated product to an advertiser and to the agencies.

What do you think it will take to bring in some of these other ad verticals into segments like podcast? Do you think it's just time and recognition or building scale or them getting comfortable with the ad medium?

Yes, I think it's all of the above. I think they got to get comfortable with the targeting capabilities. They got to get comfortable with the brand safety and ensuring brand safety within certain podcasts. I think we're getting there. I think there's third-party research and validation of impressions and downloads and listenership. But I think we're getting there. I think it's just time, but it is all of the above.

What about on the third-party ad rep side of the business and growing the supply and then the number of partners you have in that business? What verticals are still out there to capture and go after and bring on supply onto the platform?

Good question. I think we -- historically, on the podcast side, we had the relationship with SoundCloud, we had a relationship with NBC. On the podcast side, we went down a path of really being deep in the True Crime area. We've gone deep into comedy with Team Coco and some of the other comedy brands we represent. So I think that from a genre perspective, from a vertical perspective, I think we feel pleased with where we're at. I don't know that there are any obvious verticals that we want to add. We've done some things in sports. I think it's all just supplement, it augments what we've already done. Maybe there are verticals that we could tuck in within it. But I don't know that there are unmet verticals that we aren't addressing currently, but we certainly are trying to be focused and bring substance and substantial inventory to those target verticals that we've been talking about.

Who are you competing with on the third-party ad rep side of the business?