Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript
March 7, 2023
Earnings Call Speaker Segments
Okay. Great. I'm Ben Swinburne, Morgan Stanley's media analyst. Quick disclosure. Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures all appear as a handout available in the registration area and on the Morgan Stanley public website. Really happy to welcome to the Morgan Stanley TMT Conference. Jennifer Witz, the CEO of Sirius XM. Jennifer?
Thank you, Ben. Good to be here.
Thank you for coming. Maybe to start out, you recently reported your fourth quarter results, you provided guidance for 2023. Maybe before we sort of dial into 2023, what do you see as the long-term growth prospects for the company? Where are you and the team focused in terms of investment priorities?
Sure. Our single biggest opportunity I continue to believe is growing our Sirius XM subscribers. And we have -- you've known us, you followed us all these years, we have an incredible business in the car that we've built over the last 20 years. And we have 32 million self-pay subscribers, all of that is really generated off the automotive funnel, right? And we are the predominant player in the car. We have the largest share of year in the car outside of all of AM/FM combined, which is larger than any other service. And that's despite the fact that all these other services, obviously, have made inroads in the car through CarPlay or Android Auto or otherwise, but we're still the dominant player there, and we are premium priced, and we're not even in every car. So we still have lots of growth in the car. And I'd say the way we started looking at our business over the last year is that we really have 2 sets of segments. We have our core audience segments, which -- where we've built our presence so far, largely off of our presence in the car, it's about 1/4 of the overall market. And with 32 million subscribers, that's probably of the adult population in the quarter, it's probably 50 million to 55 million. So we're already very penetrated there. And we still have opportunity for growth as we continue to improve our in-car products. But we're also looking at another quarter of the market, which represents, again, about 50 million to 55 million adults in the U.S. that are highly engaged in audio. And they tend to be younger, more diverse audiences. They certainly have the wealth to be able to pay for audio services. Many of them are paying for one or more audio services, and they love the content, the breadth of the content that we offer. But we do have gaps in what we provide in terms of what they're looking for. And most of those gaps revolve around providing a service that is fundamentally more personalized and more customized for their listening needs. And -- so I think we have lots of opportunity in addressing that market. I'm sure we'll talk more about the platform that we're building. But that is going to set us up for growth going forward. So really, there are 3 areas. There's -- for longer-term growth, there's recovery of the auto funnel, both on the new and used car side that sets us up for in-car growth. There are the investments that we're making across our product and tech infrastructure that will support demand and retention improvements, both in and out of the car. And then maybe to a lesser extent, but still important to our business, is podcasting. And I think we have a lot of opportunity there as we improve monetization over time.
Great. That's a great intro. And we'll talk about all 3 of those buckets as we go through this conversation. So let's talk about the near term though in 2023. I think you're guiding to relatively flattish revenues year-on-year, there are some headwinds, I think, as you are aware of. But just talk a little bit about the sort of headwinds the business is facing today and kind of the time line you see for revenue to reaccelerate.
Yes. There's certainly some unique headwinds we're facing this year, it start with ad sales. Going into the fourth quarter, fourth quarter ad sales were down year-over-year about 3%. And that decline accelerated into December. I think this is pretty consistent with what you're hearing from other audio and video services that are in advertising. So that decline continued into the early part of this year. And I expect -- we don't really obviously provide quarterly guidance, but I expect ad sales definitely to be back half weighted. We've talked a lot about that. And the early part of the year is going to be tough in terms of the year-over-year comp. I'd say the advertisers are booking later, which doesn't give us a lot of great visibility into how the second quarter is materializing, for instance. But we do see a bright spot in podcasting. We talked a little bit about that in the last call about how last year -- there was certainly progress we've made across our audience products and podcasting, and we can talk more about that today, but advertising is definitely a headwind. So that's a big piece of our 20% of our revenue. It's something we're very focused on. The other 2 pieces I'll just address are ARPU and then subscriber volume. And on the ARPU side, we're rolling through a rate increase basically this month, and that will...
I got my letter.
You got your letter. Okay. Thank you. Thank you for being a subscriber. And that will -- that pretty much covers all of our full-price subscribers, and we'll start to see that roll through the numbers in the first quarter, but not -- it won't be material, obviously, until we work our way through the year. And the comps on ARPU -- again, last year was pretty strong. We had a rate increase that we did late in '21 rolling through. So the comps on ARPU will be tough in the early part of the year, but then we should start to show some progress. And then on subs, as you know, we haven't provided specific subscriber guidance. We would expect subs to be modestly negative. And the first quarter is going to be tough. We'll definitely be negative in the first quarter. The dynamics and what our expectation is that each quarter thereafter will improve, and we'll be making progress over the course of the year. But the auto sales just -- we haven't seen the recovery materialize. The expectation is that it's coming maybe in the fourth quarter, which really doesn't help us in terms of in your subs. So all those dynamics come together and that gets us to where we are in terms of our revenue guide, which is relatively flat to last year.
Okay. And so that price increase, the letter I received is in the guidance.
Yes, it is.
Okay. Got it. You guys talked on the call a lot about your streaming product offering and making some I guess it was described as a bit of a foundational rebuild. I don't know, I don't want to put words in your mouth, but tell us what you were working on specifically? And what are the goals that you're hoping to achieve over time from the investments you're making?
Yes. So there's -- substantially, there's really 2 parts to this. One is just the foundational -- I use the word, foundational improvements we're making across the platform. And our product can design for in-car consumption. And we've used -- all of these years, it's primarily been broadcast. We could talk more about 360L. But we've used a lot of off-platform marketing, for instance that we haven't really had the full D2C set of capabilities that other companies have had on the streaming side. So we brought Joe Inzerillo, who came from BAMTech and then Disney, and he and his team have built D2C streaming services from the ground up. And we are working together on building out a set of foundational capabilities that are going to give us a lot more, not only in the streaming service, but also to help the in-car service as well because clearly with 360L is delivered through satellite and IP. And these foundational capabilities include things like commerce, identity, Martech and better data. So on commerce alone, we'll be much more flexible in our ability to implement pricing and packaging changes. I think there's a lot of opportunity for us to be more flexible in how we're designing packages to capture more demand. We'll have less friction in our purchase flows. There'll be more payment mechanisms, all those things. On the identity side, our systems are really designed to recognize individuals as radio IDs, and we need to fundamentally change that so that we recognize listeners for who they are and where they're listening and be able to use that data across all the devices on which they're listening. In Martech -- and we've used a lot of off-line channels in the past, e-mail, direct mail, even calling, and we need much more targeted marketing capabilities to support what we're doing in car and out of car. And so those capabilities will get built out this year. And then all of the data pipeline because really with 360L and all the streaming consumption we have, we have real data for the first time, and we need to have better capabilities to use that to personalize not only the product, but also the marketing that we're doing. So all of those things, I would say, fall into this foundational bucket of improvements we're making this year. And then on the other side, we'll relaunch our consumer app. So that is a much more consumer-facing aspect of what we're building this year. We'll have more share on what exactly that looks like as we go throughout the year. But fundamentally, we need -- the apps were designed as a companion to what we have in car, and we really just provide a more enhanced experience for linear listening. And what we want to do is provide much more customization, much more personalization, better discovery so that when we bring in these younger growth audiences that we've talked about, they'll have something where they can find the content they love in a much more easy way.
And how long will this all -- you just described a lot, both in terms of how you run the company and operate, but also the consumer-facing product. What's the time line of getting all this done. Is it something we probably should look to next year for sort of the benefits?
So the launch is coming in the fourth quarter and...
The consumer launch.
Yes. But also a lot of these foundational capabilities, which will help us both in the streaming products and outside of that. But really, what I think is important that you're highlighting is that, that just sets us up to iterate much more quickly going forward. And we did some improvements to the app late last year, and that was really the first time we've launched something new in several years. So the idea is to build something that can then be improved on a regular cadence going forward. So yes, I would expect that in terms of how we're watching and what improvements we're going to see in the business that those will start to materialize in next year.
Okay. I was going to ask this question around the importance strategically for this -- for you to grow a streaming-only customer base. It sounds like a lot of these investments really are broader than that, though. Is that the right way to think about it?
Yes. So we absolutely believe that there's opportunity in streaming only. Still a relatively small percentage of our overall subscriber base, but really, we just want to be agnostic as to how consumers actually listen to our service, whether it's the embedded radio and car, they want to listen on a mobile device or a connected device or use their mobile device in the car. So we just want to be much more agnostic across the board. But anything we design on the streaming platform is going to support not only streaming subscribers -- stand-alone streaming subscribers, that are in-car business in 2 ways. Because through 360L, which is both satellite and IP delivered, all of those capabilities will help customize the experience in the car for those listeners in car. And then also our in-car subscribers are increasingly listening to us outside of the car, so it will improve that experience as well.
Yes. Is there a scenario where you sort of focus on your in-car plus streaming customer base where you have so many advantages structurally rather than go after the streaming-only customer base? Or do you view that as a strategic imperative long term?
It's both. It's absolutely both. And that's because we want to be flexible. We launched an implementation with Lucid, which is streaming only in the car. So again, all of this platform is going to support any delivery mechanism, whether it's in or outside of the car. And there's clear benefits to getting our in-car subscribers to listen to us outside of the car. We've talked about that a lot in terms of retention, discovery of new content that they then bring the behaviors back into the car. But I do believe there's opportunity to grow on streaming only as well.
Okay. Great. The other big focus on the earnings call, and I think, obviously, since then has been around cost. And your Sirius XM filed an 8-K that was yesterday, announcing some news around headcount reduction. I want to give you an opportunity to talk about that and how you thought about the cost opportunity at the company, and also what this sort of means for the business going forward?
Yes, it was a hard day, yesterday. There's no hiding that. It's the first time in my career that I've been through something like this. We reduced our workforce by about 8%. Lots of other companies are going through this. We started the effort of looking at the cost structure in a more disciplined way through the middle of last year as the headwinds really picked up on advertising and the recovery in auto sales is continuing to get delayed. And it started with looking at new hiring, and we pulled back on how fast we were hiring and made sure that we were concentrating in the areas that made most sense for our future investments, including products and tech. But we really looked at everything. We pulled back on discretionary marketing. We have made fewer new content investments, and we're relying on building around the ones that we have. We've also relooked at T&E. We've reduced our real estate footprint. So really look at every aspect of the cost structure with the intent of minimizing the impact on our employee base. But we also started a couple of months ago, the effort to just look at the organization overall with the intent to improve efficiency, and how we're working. And we have bought a number of companies, mostly smaller companies since the Pandora acquisition in 2019. But there were still opportunities to bring some of those teams together in a more efficient way and just make the organization more agile. And so those are the efforts we focused on. Pretty much every team was affected in some way. And of course, it's really tough to see the number of talented employees leaving the company, but it was the right thing to do for the business. We absolutely want to make sure that we're being disciplined. We've always been relatively disciplined. We aren't one of those companies that doubled headcount during the pandemic or anything like that. But there were opportunities, and I think we will operate much more efficiently going forward, and that's going to give us even more flexibility to invest where we need to build out this platform and generate future growth.
And just on the marketing front, is that some place you guys are also looking, I think you and Sean talked a bit about maybe dialing back marketing a bit this year as you navigate some of these headwinds we talked about.
Yes. Well, we want to build out some of these capabilities that are going to make the marketing much more efficient. So that's where Martech comes into play. We've also -- we've had a pretty successful run on our Sirius XM house campaign. We've done 2 seasons of that. It's really helped broaden the awareness and consideration for the product in terms of generating more awareness around the breadth of the content we have, especially outside of music and also in all the great talent we have and everything else, but also just making sure people understand that we're not just about the car and that there are a lot of other listening occasions. So that's something we could dial back up when we get through the launch, and we have -- we want to get the out more about the opportunity.
Okay. So maybe we'll go back and you laid out sort of those 2 big buckets of opportunity around driving the in-car business faster or building that starter base more and then going after sort of a newer TAM. You guys have ramped up your in-vehicle radio penetration up into the '80s over the last few years. And I know you've worked with the OEMs for a long time at Sirius XM. Can you just talk about where that goes from here? Do you see opportunities to drive that higher? And sort of what are your relationships with the OEMs today relative to what we've seen in the past?
Yes. I think we're really well positioned where we are at 82%, 83% on the new car side, there will always be opportunities, and we continue to have conversations with the OEMs on a regular basis as to where we might want to increase the breadth of the presentation of Sirius XM in their cars across their vehicle lines and models. So we'll continue to look at those, especially where it makes sense economically to be more standard with certain OEMs. But I like where we are today. It certainly helped as auto sales have been constrained to have higher penetration rates overall. And our cost to install the product in the car has gone down materially over the years. So the economics definitely support the penetration rates. It obviously helps as we roll through to used cars because we're still at about at low 50s on the used car side. And organically, that will continue to grow over time, that's becoming an increasingly important funnel to our business as well.
I was going to ask you about that next. Are there operational opportunities with the used car channels to do a better job of driving trial starts and conversion?
Definitely. I mean the have been quarters over the last few years where used car trial starts are actually in excess of our new car trial starts, that's just a function of dynamics between the relative levels of auto sales. But on the used car side, it's just more difficult to capture the consumer at the point of sale because it's much more fragmented. And we have done a considerable amount of work over the years to build out these programs with dealerships so that consumers when they come in, they recognize that there'll be a trial. But there's at least 1/3 of used car sales that are done through private channels, and it's much more difficult to capture those transactions at point of sale. We know that when consumers know that they have a free trial and the radio is actually on in the car when they get in, that conversion rates are much higher. So it's not surprising, right? It's very easy to come in and explore the product and experience it, and that increases conversion over time. So there are more opportunities. I think to get consumers on trial at point of sale. There are more opportunities to make sure the radio is on when they actually get into the car, and that will help us with the volume of trial starts as well as the conversion...
Yes. So what is happening with conversion? I mean it sounds like there's been maybe some downward pressure on conversion rates, both in new and used. Can you talk a little bit out what's happening there and what you -- is in your control to try to improve those trends?
Yes. That's been -- in some ways that we've talked about this over the years, it's been a natural occurrence just because of the higher pen rate. So as we've increased penetration rates across new cars, we end up in lower trim models and the purchasers of those vehicles tend to be more price sensitive and may or may not convert at the same levels as our core audiences, but as we evaluate these deals, we're always looking at yields. So our pen rate relative to our conversion rate and how much we yield out of that funnel. And that's all in context of the economics, the arrangements that we have with the OEM. And so over time, it's made sense to push penetration where it is, even though we're seeing conversion rates come down. I would also say on both the new and used car side that our pricing, we've been really effective on pricing. I'm sure we'll talk a little bit more about that in driving up ARPU. And that's -- we've been very effective in managing retention of our customer base despite those rate increases, but I do think it's hampered demand to some extent because our headline package is now, after the rate increase, 1899, and a new consumer, especially the more price-sensitive consumers coming into a new car, especially a lower trim car, where they're price-sensitive. They're not going to be as interested at that price point, which is why we're designing -- some of the commerce systems were designed to be much more flexible in our pricing and packaging going forward because they do believe there's ways to us for us to capture that demand in lower segments of the population, maybe with some of our growth segments. But 360L will also fundamentally help with conversion rates. Certainly, rolling out on the new car side and eventually coming through on the used car side as well. We just -- we have the capability to just simply use the data to better customize the product and the marketing to provide more personalized recommendations as to content and features. And we've just started trying things there, but we know when consumers use the function, the features and the capabilities of 360L, they convert at higher levels.
I want to get to 360L but before, I want to make sure I hit churn because that's been something that has just been a success story now for a number of years. I think Jim used to say 2% is normal. Then you admitted 1.8...
I wonder if you remember that, yes.
Business models matter. If he's listening, which I'm sure he's not.
1.8% to 2% was our guide for a long time, and we haven't been in that range for several years. So it's really -- it's been impressive. And clearly, some of the variability there is associated with vehicle auto sales and vehicle-related churn. And clearly, when auto sales go up, our vehicle-related churn will go up. But on the voluntary and non-pay side, we've been very consistent over the last several quarters and surprising to even me that we've been able to maintain it at the 1.5%, 1.6% level. And there's just a lot of dynamics that have gone into supporting it at that level particularly on the voluntary side and to some extent, the non-pay side, just with better credit card processing, and we put a lot of things in place in 2019 that have continued to help mitigate that. And on the voluntary side, it has a lot to do with -- we're starting to see better retention on 360L. It certainly helps that we have more of our in-car subscribers listening to us outside of the car, more points of engagement, there's more value out of the service and that helps with retention. And then just the content bundle. And just to give one example, our sports package, especially with the splintering of rights across video, we have the single best sports package out there. We offer pretty much everything on a play-by-play basis, plus all the talk around it. And we've seen listening, for instance, to our sports content, increased pretty dramatically over the past few years and hit an all-time high last year. So those kinds of things are incredibly important in terms of retention, and if -- we know if consumers listen to our nonmusic content in cars that they convert at higher rates and then they ultimately retain at higher rates, too.
Got it. You've got, I think, 7 million 360L cars on the road now, that's a real number and obviously growing. You've mentioned it a few times, but can you talk a little bit, give us some sense of some of the learnings that you've gotten out of that customer base that is informing your strategy going forward?
Yes. We have 7 million enabled vehicles. About 2 million of those are actually self-pay now. Some are in trials, some are inactive. So we have a lot of learnings. It's not quite critical math in terms of our ability to understand what impact it will have ultimately on the business, but there's lots of great insights into where it will go. And one of those is just -- we did some AB testing late last year in vehicles that have 360L with trailers and the incidence -- we put better recommendations, more personalized recommendations into the For You screens in those vehicles that had 360L, and there were much higher click-through rates when consumers saw those recommendations. So we know there is something there, not only from something like that with AB testing, but also just general surveys that we do with our consumers that -- recommendations is possibly the single most important thing that we can better execute on. But it's everything. It's just having a more customized experience in the car, being able to listen to all of our extra channels. So if you like the highway, you may want to listen to the highway without the host on it. So we have a lot of our extra channels, which are our big brands on the music side, but without the host, for instance. And there's lots of other features as well, including the Pandora artist station. So be able to control more of that experience in the car ultimately will provide better metrics around conversion and retention, and we're seeing that today.
And then coming back to ARPU, which you mentioned earlier, you've just implemented another price increase. ARPU has been on a CAGR basis, incredibly steady over a long period of time. Do you think that -- should we be thinking about ARPU growth differently over the next 5 years because of the strategy, and the way it's evolving towards more segmentation?
Well -- in some ways, we're trying to disrupt ourselves on pricing with streaming-only subscriptions because we're undercutting our in-car subscriptions pretty materially, our lowest price package is $5 a month on the streaming site. And that presents, again, a different opportunity for us to open up to some of these other younger and growth audiences, where we may be more of a complementary product to another streaming service. So I get a little nervous about focusing on ARPU on its own because we really want to balance, and I think we've got a really long history of this. We want to balance rate and volume to maximize revenue overall. So like I referenced earlier, I think there's more opportunity for us to capture demand in our automotive funnel with lower-priced packages. We have to figure out exactly how to do that, so we don't cannibalize people paying at the higher end. I also think there's a lot of opportunity at the higher end pricing. So we have a platinum VIP package, it's $35 a month, and that continues to grow because we have a lot of very affluent consumers just want more. They want our service in more cars, but they want a really easy way to subscribe across multiple vehicles, multiple log-ins, they want VIP experiences. So I think there are opportunities at the higher end as well.
You get Sirius XM on your yacht for $35.
We have that.
I'm sure you do. One more on Sirius XM segment before I want to make sure we save time for the Pandora segment. You guys called out some increase in royalty costs this year. But gross margins at the Sirius XM segment have been really consistent for a long time. Do you think this is enough to sort of put real pressure on that line? Or what's the outlook for margins at Sirius XM...
We've been pretty consistently in the low 60s, and I would expect it to stay relatively at that level.
Okay. So on the Pandora segment, obviously, most people are familiar with Pandora, the product, but you've bolted on a lot of assets in and around that business. Maybe just spend a minute talking about the portfolio of Pandora and the off-platform business and sort of what the long-term strategy is to try to grow that business?
Yes. And the segment, so at least on the advertising side, Pandora represents about at least -- our owned and operated Pandora business represents about 62% of our advertising based on last year's results. So the other 38% is Sirius XM advertising, and then we have a fairly sizable off-platform business as well. And that includes representation deals like SoundCloud, where we're managing their ad sales as well as our podcast business. And I referenced this a little bit earlier, but we've seen some really strong growth in some of our podcast products where we're selling audience-based products as opposed to -- podcasting has traditionally been sold by show. And it's just bringing the dynamics that we brought. And historically, we built the digital audio advertising business at Pandora and bringing some of these dynamics to our off-platform business opens up a lot of opportunities. So we're able to cross-sell across all these platforms. We have great brand relationships at Pandora. We have great D2C DR relationships in podcasting and in Sirius XM, and we can cross-sell across all of these platforms, offer a lot of different types of advertising experiences, whether it's live events or custom integrations on the podcasting side. So I would expect our off-platform business to continue to grow at healthy rates on the Pandora side. We've certainly been constrained in terms of the user declines, but we've had very healthy monetization there, and I think there's still opportunities there as well.
Great. We're almost out of time. I want to make sure we at least ask one question around capital returns, which has been a big part of the Sirius XM story for a very long time. Sean Sullivan talked about a more conservative stance this year on the earnings call. Can you just talk a little bit about the cadence for buybacks to come back and the time line that you see ahead for getting back to a more normalized approach?
I think just given the macro environment, it makes sense to be a little cautious here. Also, our free cash flow profile will be pretty back half weighted. So that affects our decisions as well. I mean we're always opportunistic. I mean, given where the stock might be at any particular point in time, we might be more active in the market or not. We've certainly shown a long history of increasing our recurring dividend. Last year, we were very opportunistic in issuing the special dividend in February. So we have a lot of tools. We have a really healthy balance sheet. We don't have any real maturities until 2026. So we have a lot of flexibility to relook at this, and I'm sure we'll talk more about it in our future calls.
Any last comments before we wrap up?
No. It's great to be here. I thank you for the time.
Absolutely. Okay. Thanks, everybody. Thank you, Jennifer.
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