Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript

Great. I think we're going to get started now. Thanks, everyone, for joining us. I'm Batya Levi with the communications and media team at UBS, and our next speaker is Jennifer Witz, CEO of Sirius XM Holdings. Thank you so much for joining us today.

Thank you for having me, Batya. Nice to be here.

Thank you. With every session when we're starting and it's that time of the year, it's kind of like looking out to '24 and if you could talk about what your main priorities would be?

Sure. Our primary objective for '24 is setting ourselves up for future growth. We will continue to innovate and enhance the user experience on the platform that we're launching in just a couple of weeks now. Our SiriusXM next-generation platform, it launches first on streaming. We'll have new streaming products in market at that time, and then we'll roll through really the rest of our products after that as we move through next year. So we'll move over our in-car business to the new tech stack in the middle of next year. And then we're looking or at least targeting to move Pandora over to the new platform as well at the end of next year. So really, it provides us the opportunity to grow both subscribers, subscription revenue and advertising over time with this new platform in place, and I'm sure we'll talk more about that. But in addition -- so it's our primary objective. But in addition, we'll continue to focus on strategic cost management. And we've talked a little bit about in the last call our focus on continued cost reductions. We've been on this effort for about the last 12 months or so. And we identified in the last call that we saved about $40 million net in the quarter, which you could think of as kind of a run rate level of cost savings. And then finally, one of our main objectives is to continue to have a strong balance sheet and growing free cash flow. And that is -- I'm sure we'll talk a little bit about the proposal from Liberty, but that is to position us really well in case we do take on additional leverage to get down to our target leverage rate of the low to mid-3x EBITDA range.

Great. And I would like to dig in on all of them. And maybe starting with the recent one, the announcement for your next-gen platform. Can you talk a little bit about what does it mean? How does that transform the new products and services that we should expect from the company?

Yes. So we had a media event a few weeks ago. And if you didn't get to see it, you can check out some of the videos online. But it really is very comprehensive, but it does start with -- we're basically building an entirely new tech stack, and we'll start with these new streaming products in terms of new apps and a web player for SiriusXM launching on December 14. We also announced that we'll have a new streaming-only lower price point of $9.99 a month. That's all of our content for streaming. And we believe that positions us really well as complementary to other music streaming services that are in the market. Everyone wants the music collection and oftentimes now they're getting it through music streaming subscription. But we have a very differentiated value proposition at SiriusXM with very unique content, a breadth of content, very human curated and hosted by artists as well as other talent. And then things like a unique sports proposition -- value proposition, right, where we have virtually every major league live play-by-play on SiriusXM, very hard to replicate that in video, for instance. So it's about enhancing the ability for consumers to find this content because right now, it's really about getting into the car and turning the dial, and we need a better way to approach consumers going forward. So we will enhance search and recommendations in the streaming platform and also in 360L, which is our new in-car platform and provide a much better and enhanced user experience. So consumers who are frustrated by the lack of discovery capabilities or control, will have much more of that going forward. And again, it then positions us much better as a complement to a music streaming service because we have enhanced discovery. There are a lot of opportunities for our subscribers to better find content and discover new artists on our platform than many others.

What should be the next steps as you implement that strategy? And can you touch on a little bit more on that discovery mode in terms of -- from a customer perspective, how easy is it going to be? And looking at your scale, do you have enough scale to be able to provide that discovery and engagement to the customer base?

So we have -- we certainly have a lot of scale and data points built up from Pandora. So we've owned Pandora now for a little over 4 years, and there are billions and billions of data points on the music side at least, that we'll leverage for the machine learning we're using for recommendations in SiriusXM as well in terms of some of the back-end recommendation capabilities. But we also have millions of customers streaming on SiriusXM today. So our in-car subscribers tend to listen outside of the car to our streaming devices, and we'll be bringing that data over. So that will power a lot of the search and recommendation capabilities that we're using, and we'll continue to improve that over time. So it's not going to be perfect on day 1, but as more and more usage occurs, we'll collect that data and provide better recommendations and search to listeners. But this is -- again, it's just the first step we'll launch on a few platforms in the middle of December. And then going into next year, you should expect us to iterate monthly releases, improvements to the experience but also new features. And of course, it's all to highlight our content. And we also launched in -- we also announced a number of launches of new content when we had our media event. Kelly Clarkson channel, John Mayer channel, which are live today. And we have more coming in the first quarter with James Corden, The Life of Mine -- This Life of Mine. And we'll have a new true-crime channel with Ashley Flowers, who we have a broader relationship with our partner as well.

I see a lot of --- advertising around that.

Yes. So it's about new content -- surfacing that new content because, again, for us to grow, we have to tap into some of these growth segments that tend to be younger and more diverse and are looking for something differentiated in audio. And in order to do that, the biggest pain point has been able to -- is being able to get them into the content they love.

Right. Okay. Let's talk a little bit about subscriber growth. I think you have a guidance point out there for positive subscribers for the next quarter -- for second half...

And the fourth quarter, yes.

Right. And maybe if you could talk about how we're trending towards that? And can we expect sort of subscriber growth to continue into next year?

So we're certainly expecting meaningful improvement in our subscriber net adds next year versus this year. We haven't provided any guidance yet. But right now, we're focused on delivering on this year's number. December is a really big month for us. And I would say that the biggest uncertainty is vehicle-related churn, which is very much tied to auto sales, both new and used car auto sales. I just saw the SAAR actually for November come out on the new car side. And it was pretty strong. The best indicator, I think, I think it was $15.3 million, was a higher percentage of consumer sales, which is very important as we build our funnel. So we have -- what we've said publicly is that the fourth quarter will be positive in terms of subscriber net adds. In that, the second half should be slightly positive. We had negative adds in the third quarter, so positive adds we expect to slightly outweigh that in the fourth quarter. And again, vehicle-related churn is a factor. And also, we just have typically a very strong month in December in terms of adding new subscribers to the service. We have a free listening event that occurs over Thanksgiving for about 2 weeks, and we turn the radios off and we tend to see a lot of customers come on at that time. So a lot to come in December, but we're pretty confident in our guidance.

Right. I think you have a pretty good line of sight in terms of the new car sales. But in terms of the used car, that has been more of a challenge point. What are some strategies that you're implementing to overcome that?

Yes. Our new car funnel is very strong. We have great relationships with the OEMs. We have a strong pen rate of just over 80%. And those cars when they come off the line are active and on, so when a new car buyer comes into their vehicle, the trial is just on, they don't have to do anything to experience the service for 3 months or more. On the used car side, the funnel is a little different. We have about 55% of used car sales have SiriusXM enabled. Of course, those cars, because of their maturity, tend to be a bit older, and the buyers tend to be a little less affluent and younger and our conversion rates have been lower on the used car side. But of course, we have no investment in those vehicles because we made it upfront when we built -- when the cars were built originally. Our biggest challenge on the used car side finding the transactions because so many of them on -- so many used cars are sold through private channels, right? So just one-to-one. And our best opportunity to convert somebody through to self-pay is if -- we know that they've bought the car and the trial is on and they can experience the service. So the opportunity for us is to continue to find those transactions with different partnerships. And then, of course, to make sure that the radio is on, and we have a number of programs focused on that, and that helps us drive overall conversion.

That is -- conversion to paid subscribers. I think it used to be 40% -- around 40% a few years ago. And...

Several years ago, we were, yes, at about the low 40s. And on the new car side, we're in the low 30s now.

Okay. And look, like what drove that down? And what are -- you mentioned some opportunities on the used car side, but what could you implement to improve that conversion rate?

Yes. So the new car pen rate has gone up over many years, and that's us working in conjunction with the automakers to make sure that it's available in as many vehicles as possible, of course, at the right economic terms. And so over the last several years, as conversion rate has declined, it's in part because penetration has increased. And penetration has increased because we are present in more and more vehicles with -- that are sort of lower end models and lower trims of models. And that, again, reaches a consumer that tends to be younger and less affluent. But we -- and we've talked a little bit about the challenges that consumers have in finding content on our service, and there's also a challenge on price. So as we roll out 360L, we'll be able to do a couple of things. We can better serve recommendations in 360L, which is our in vehicle platform that combines satellite and IP delivery. So there is the benefit of broad-based delivery through satellite, where it's always on, and you have to worry about dropouts because of the wireless network, but also coupled with IP connection that gives us a back channel of data and more personalized because it's 2 way. So building out this platform, we're in about 35% of new cars sold today with 360L. That will continue to grow over time.

Where do you think, it can get to?

So likely over the next couple of years to 80% of our trial starts, I think, at this stage, and it's just a function of the automakers rolling out new infotainment systems. And there were some challenges with that during COVID and supply chain issues. But every major automaker has a plan of record. So it will come. And increasingly, we're going to be launching in AAOS, which allows for much more frequent updates. And for us, enhanced presence on the screen because it will be in the app store, but we'll also have an ongoing presence on the screen and radio. And again, better opportunity for us than other services because you don't have to set up your data plan. We're providing the delivery and there's better presence and the trial is just on when you get into the car. So we know today that 360L, consumers that have 360L convert at higher rates to sell side. And that includes the younger consumers that we're targeting because we're better able to provide them a more customized listening experience.

Is there a big difference in terms of churn from 360L users versus...

We don't have as many data points yet on churn, but churn appears to be better for 360L, so overall retention is better. And we see that generally because the breadth of content, consumers are experiencing is bigger and also because the personalized -- any of the personalized features that we offer, whether they're Pandora artist stations or what we call our extra channels, all those things that allow more customization, enhance the underlying value and therefore, improve overall conversion and retention. And I'm also -- over time with 360L and we showed some of this at the media day, we'll be able to make the transition between the in-car experience to streaming devices much more seamless, carry forward your listening preferences, actually let you listen to where you might have ended from the car, and that's also going to enhance engagement as people listen to more places.

Got it. In terms of general reasons for churn, what would you kind of site as the main ones? And how are you tackling them? It has been pretty...

Very strong. We've been at 1.5%, 1.6%, which is very low from a historic standpoint. And part of that is because of vehicle related. Vehicle related, it's the single biggest component of churn, and that's just I sold my car. Usually, I'm getting a new car and eventually, we'll convert you through. And it's also tied to higher trial starts in general. And so those other trial starts where it's not just trading in a car, also convert through. So in general, it's positive for us. It's just timing. But as new car sales continue to increase, we're constantly kind of chasing that a little bit. So that's the biggest factor today. The other parts of churn are about 1%. So voluntary and involuntary so were non-pay, total about 1%, which again is very low from a historical standpoint. And we're focused on those because we can control them more. On the non-pay side, that it tends to be a leading indicator for -- at least from a credit card entry point and non-pay as to what we think of the health of the consumer. Right now, we're not seeing any challenges there yet. So non-pay has been pretty strong. And on the voluntary side, we believe, over time, we've enhanced the value of our product because we provide streaming for free, and we continue to add content. So we have a very strong history of providing more and more value over time, even as we've raised prices.

Got it. In terms of your -- maybe paid base, do you have a sense of what percent of the subscribers also subscribe to another streaming service? And is there an effort to bring them onto your network just exclusively? Or can they coexist?

So complementary versus substitution. We think a lot about this. Most of our subscribers today use another music streaming service. And because most people have a music collection that they access in some way. And some people are still probably using CDs and others using downloads. But, obviously, with the rise of music streaming services, many of our subscribers also have those services. So the challenge for us today is to prove to a younger audience that they need both because -- again, many of our subscribers today already have them, but attracting new growth segment is going to require us to make sure that they understand the unique value proposition we have, which is we're not just music, right? We have a tremendously valuable music component to our product, which is hosted and allows you to discover new music you might not be able to find on a streaming service. But it's also, again, live play-by-play sport, it's comedy. We have a fantastic set of comedy channels. And it's just persistent and live content, whether it be news, politics, entertainment and a lot of very human-curated content across the spectrum of genres that we have.

Got it. And maybe if we could talk a little bit about your overall pricing strategy. You have a streaming service that will come out, which is a little bit cheaper than the market. What was the thought behind that? And also, how do we think about just general pricing and ARPU trends going forward?

Yes. We thought the $9.99 price point was very important in positioning as a complementary product to streaming service. And we believe it's going to be very competitive and in a position that's really strong. ARPU in the third quarter, and we're trending about $15.70, and there's a lot of factors in that. So we tend not to manage the ARPU specifically. We're trying to drive overall revenue growth, obviously. And we did a rate increase earlier this year that's rolling through. And we typically don't do them every year. So you would expect next year to be perhaps a year without a rate increase, and that may put some downward pressure on ARPU specifically. But our real opportunity is finding the balance between making sure that we have this very loyal core subscriber base, where we've been able to sustain price increases over time. And we need to make sure that we continue to deliver value to that subscriber base, whether it's new content or enhancing their ability to access and find that content or listening in multiple places and encouraging that, encouraging the breadth of the content use or experiences. We have a lot of live performance and others that things that customers can come to. So enhancing the value is going to be really critical to sustaining that high price point in our core subscribers and price increases over time. We need to balance that with what we believe is an opportunity to capture new demand at lower price points. So there obviously has to be differentiation between those packages, whether it's access or content or otherwise. So with streaming, for instance, $9.99 gets to the streaming product, but not from this embedded enhanced integrated experience in the car, which many people value and are willing to pay more for because that also includes streaming. So again, balancing kind of the core subscriber base and ensuring that we can continue to drive price increases there with more value combined with driving new demand among younger audiences at lower prices.

Approaching a wider TAM.