Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript

I'm Cameron Mansson-Perrone, Morgan Stanley music, live events analysts. Before we get started, 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. With that, please welcome Jennifer Witz, Chief Executive Officer of SiriusXM. Jennifer, welcome.

Thank you Cameron. Happy to be here.

I want to start -- I guess, I want to get into the '24 outlook, but maybe we start, you outlined 3 goals on the call, which I thought would be a good place to kick things off. The first one, enhancing subscription value. Is that a reference to what you've done in terms of refreshing and improving the streaming app and what we'll see and be the improvements to the in-dash experience? Or is there an added content or packaging element to that as well.

Yes. So key to enhancing subscription value really is ensuring that our trialers and our customers have broader exposure to the great content we have. So it really touches on every aspect, product, marketing and content. You've heard us talk a lot about what we're doing on the product side. In December, we launched our new apps off the new platform. And what we're really focused on is making sure that we have enhanced recommendations, better discovery and control features in our products, both outside the car and in the car to enable customers to better find the content that they love. And in streaming, we started that in December, and it's continuing to roll through as consumers adopt the new app. In the car, that will take place over time. We have 360L in market, obviously, but everything we're doing to rebuild the platform for streaming will help in 360L as well. And that allows us to improve search and recommendations in the car. So on the product side, it's all about enhancing discovery and control. On marketing, we're also leveraging improved MarTech in streaming and then to come later this year in the call as well to provide more personalized recommendations through things like Salesforce Einstein, using the AI features to really scale personalized marketing across all the life cycles -- all the life cycle moments and the journeys for trialers and subscribers. And so we have some interesting things we're seeing already as we start to roll that out. I mean just one small example is we took a segment of low listening trialers and sent a series of messages with content-related recommendations, and we're able to move up the listening levels as a result. So this kind of full life cycle, true personalization, end-to-end responsive marketing is all really new to us. And if you could just give us a sense as to how we're going to be able to scale it over time as we continue roll this out. So -- and you mentioned content, we've added some new content over the last few months with John Mayer channel, which has been a big success. He has a really interesting way of programming his playlist, whether it's the time of day or the day of week. We also recently launched James Corden, and he's quickly risen to the top of our sort of talk hosts on SiriusXM with his or celebrity interviews and things. So we'll continue to add content to the service. And it really is about how do we use all of these tools to make sure that consumers can find that more easily. And that's all about adding value from the product side and what's in the service. But of course, the value equation includes price as well. And I'm sure we'll talk more about that. But price and the things that we want to do on packaging, I believe, will allow us to reach broader set of audiences. And then on top of all that, we're working through a brand refresh, which really is about this concept of bringing customers closer to the content that they love. That will launch next week. If you turn into the Oscars, you might see one of our spots. And I think it's going to really help with resetting impression of who we are, really emotional campaign and really plays to our strength and differentiation. And so that's about kind of the top of the funnel and shifting perceptions about who we are. And we've got the new brand campaign out. We are hoping to launch some content sampling later this year, which will allow us to leverage that brand marketing, content marketing to bring consumers into our products to sample some of the content that we have in front of the paywall. So it will be great to be able to do that on platform. But again, all of these components, across product, marketing and content play to our ability to enhance the overall subscription value, which ultimately drives improvement in subscriber metrics and revenue it's just going to take time. So really encouraged about what we're seeing right now, but there are a lot of steps along the way, and we all want to see it roll through our results subscriber metrics and financials, but it's going to take time as we rebuild this tech platform and build out all the capabilities that come with it.

Great. Watching the Oscars is kind of a requirement of being part of the media and entertainment team. So I'll keep an eye on.

It will be fun.

The second goal that you outlined was getting as much growth out of the ad business as you can, recognizing that the ad market is something that's out of your control, what operationally can you do to try to execute, deliver on that?

Yes. I mean just a minute on the ad market, I think we're all hoping for a broader recovery this year across multiple categories. But what we're seeing so far seems relatively positive. And it has a lot to do with the extent of the portfolio that we have. So just starting with streaming -- music streaming, we've seen a lot of positive indicators on the Pandora side. Even though the user base has been declining, then last year, we spend declines a bit, both MAUs and ad hours were down less than 4%. And we've really been able to -- the science team has done tremendous work and try using ML to really improve not only ad capacity but also the user retention. So it sometimes hard, those are often competing goals, but they've found ways to really personalize ad loads like that to be able to enhance flows. And that really plays to our ability to continue to improve monetization on Pandora, which, of course, is the core asset in our ad portfolio. We also have a great portfolio in podcasting. And I'm really pleased where we are. We -- hopefully, we'll talk more about SmartLess, and it's going to be a great addition to the set of podcasts that we have. And there's a lot of tailwinds in the podcast business. Programmatic is a place where we really do have an industry-leading set of tools and particularly this time in the quarter, there's a lot of demand for Programmatic. It's very self-serve and a lot of advertisers come into the space. So we've got great tools there. And then we do have lots of new solutions for brands and in particular, we launched recently synthetic voices, which is an AI-based tool that will allow small businesses to come in and really use artificial voices to create campaigns, iterate, edit and scale them much more easily in self-serve mode. So we'll have more to talk about on the AI front as it relates to advertiser tools over the course of the year. But I just -- I like the portfolio we have across streaming, broadcast and podcasting and other off-platform. So I think we're really positioned well here as hopefully, the market recovers.

Yes, definitely. The last goal you outlined was, I think, optimizing the organization's focus and cost structure. You obviously spoke on the earnings call about the $200 million kind of optimization opportunity. And I want to focus on the focus element of that. Where is the organization focused right now? And what do you mean when you say that part of the priority is kind of focused?

Yes. It's $200 million is an ambitious number, and we have a path to get there, but especially on top of everything we put into place last year and it's going to touch every line item of the cost structure clearly. But the -- look, you end up when you do these programs, you focus on the easy stuff first. But now it's about leveraging technology and building improved workflows and organizational structures to not only improve efficiency and drive cost savings, but really benefit from opportunities to increase organizational effectiveness and the customer experience. So just a couple of examples. I mean, on the marketing side, we've brought the marketing teams together so that we can really have an agnostic approach as to how we're approaching the consumer no matter where they listen to our product. So that result ultimately in efficiencies in how we spend marketing. And then on the customer service side, we are using some more automation and tools, and we'll talk hopefully more about that, to drive improved customer service experiences, but also at a lower cost to serve. So I think those are interesting areas where we can actually drive goals in multiple places. And all of this is in order for us to continue to reinvest to support the first 2 priorities we talked about, enhancing subscription value and building our ad business and still maintain our industry-leading margins.

Great. Let's move on to the outlook for the year. Your guidance called for some revenue pressure this year. Maybe could you talk a bit about those near-term headwinds? And what the time line might be to see kind of growth reaccelerate from there?

Yes. So our revenue outlook is really impacted by 2 main factors, a, relatively level subscriber numbers going into the year, of course, and throughout this year and then also the modestly lower ARPU. And there are a number of things impacting ARPU and the outlook there. We aren't doing a rate increase this year. We've talked about that. I really think it's important to lean in enhancing subscription value first before we position ourselves for another rate increase. And also, we've traditionally used and continue to use self-pay promotional plans to retain and attract new customers. That's a factor. We also have a growing, albeit still relatively small streaming subscriber base at a lower price point. And then there's the impact just of our OEM paid trial deal. So we continue to work closely with the OEMs and modify the structure of our deals. Those over the course of the last few years have tended to reflect a different trial structure. Some are unpaid, some are shorter. And so we've seen that decline in OEM promotional revenue. But typically, that comes alongside improved penetration rates or also lower subsidies, which you would see, obviously, in another part of the P&L. So those are some of the factors in the outlook for this year. And look, our subscriber results for the year, I think, will represents largely what we saw last year in terms of the seasonality. So I would expect to see some losses to the first part of the year and then growth in the second half of the year. And of course, we're really focused on improving our net adds year-over-year in terms of how we end the year. But overall, from a revenue trajectory standpoint, it's all about setting ourselves up for future subscriber and revenue growth. And that comes back to everything we're doing on enhancing subscription value. Because more content consumers engage with in our service, the more likely they are to pay higher rates, take higher packages and to stick with us. So that drives subscriber volumes, obviously, and ARPU over time. And then, of course, we're hoping for the tailwind of advertising, but that's a little less certain, but that certainly will help with the revenue outlook as well.

Yes. The product road map, I feel like also has an opportunity to help there. You have your new in-dash experience coming. You have a new commerce platform launch. Maybe what's your latest thinking on the timing of each of those opportunities? And then anything else on the product pipeline front that you'd highlight?

Yes. It's really more than a new commerce platform. So it's commerce -- billing commerce, subscription management, identity data platform, MarTech is all tied together in a really significant replatform of the business. And most of it launched in December to support the new app, but that's going to continue to roll through. Existing subscribers will migrate over starting probably with streaming and then the in-car base over the course of this year. And then alongside that, improvements in MarTech will launch. And that's right now, we're seeing that we should have improved personalized marketing journeys on the streaming side, in market even later this month, and that will continue to get better. And what we learned there, I think, will help reinforce what we roll out in the in-car side of the business over the course of the year. In terms of in-dash, I mean, it really has to do with 360L. Hopefully, we'll talk a little bit more about that and how we continue to roll out that platform in general and how we can support that in the car with improved discovery in the product, but also outside of the car with the data we're getting to inform the marketing alongside that.

You also have a partnership with Audible coming. Any more detail you can provide in terms of what that partnership is going to look like?

Is just the first phase, they will be launching in the next couple of months. And I'm excited about it because I think there's a lot of commonality across the user bases. We tend to have a very affluent and highly educated listener base. So do those that listen to audio books, I mean Audible has been a leader in the space. So it's great to be working with them. And it really involves 2 components. It's some content sharing across platforms, so SiriusXM on Audible, Audible content on SiriusXM. And that provides because it will be integrated in that way, it provides an opportunity for enhanced subscription value for both services, but also exposure to the content and hopefully generation. So on Audible trials for SiriusXM and on SiriusXM trials for Audible. And so we have a lot of common goals, and I think we'll see increased ways to work together in the future once we get through the first phase.

Great. Maybe let's move and focus in on the in-car business a little bit. Growth in self-pay net adds is obviously very linked similar to advertising. But the other cyclical part of your business, which is auto sales and also outside of your control. What can you do when we talk about kind of reaccelerating the net add picture from an operational perspective within whatever is auto sales backdrop is?

Yes. I mean it starts with not in our control, but it certainly starts with the strength of the auto industry in general. And we saw new car SAAR in February 15.8 million, which is pretty strong, February is seasonally soft month. But year-to-date in January and February were up or the industry is up on the new car side, about 4%. A little hard to get a read on the used car market. There's a lag in kind of the industry data reporting. But it seems like there's some recovery there. Of course, in both. There's more new car inventory. So there's some pricing pressure, which should, I think, provide some pressure on prices and used as well. So hopefully, that actually opens up the market, and we see more consumer demand. And a healthy, robust auto market is great for the business. So we're eager for that to happen and play out. But in the meantime, we focus on the things we can control, which has a lot to do with what we've been talking about in terms of enhancing subscription value working on continuing the broad rollout of 360L, making sure that there's more consistency in the feature set for 360L and then taking advantage of all that data we're getting back to ultimately improve the conversion through to self-pay.

Yes. Important in that 360L rollout is the penetration during car penetration. That's kind of bounced around been pretty stable in the low 80s. It's come in a little bit from a few points from I think it was 83 in '22 and came down a couple of points, at least. Can you talk about what's going on there? Is -- do you think it returns to 83? Do you think it moves beyond that? Like what's the outlook for it?

It's always going to move around a bit depending upon model launches and changes in what the OEMs are doing or producing. But, in general, I feel really good about the low 80s and 2 key factors last year, at least, there were more fleet sales, and I think we expected we tend to be penetrated at lower rates in fleet vehicles can't drive through to self-pay the levels we can in consumer. And then Tesla, right? Tesla's continued growth and market share has been a challenge for us because we're not there yet, but I'm hopeful have some progress there. But yes, I feel good about the low 80s. It's -- there's always economic opportunities to look to improve penetration, but we seem to be in a comfortable level there with the OEMs.

Staying on EV topic, you announced new deals with Rivian and Polestar. Do those deals get standard over time? And how should we think about is there any structural reason why penetration within EVs shouldn't look the same as kind of the...

In fact our penetration rates among EV vehicles manufactured by, say, the more traditional OEMs are very strong. They probably trend higher than 80%. And we're in something like 80% or 85% of all EV models. Of course, Tesla is the big gap there. And can we get a lot of requests from our customers, other subscribers or prospects to have broader representation across the Tesla lineup. And so I'm hopeful that we'll have more to talk about with them in the next couple of months. But we're in the FNX today. It really has to do with launching more broadly across the 3 and why. We did announce -- we launched in Lucid, we'll be launching with Rivian in middle of this year, hopefully, and Polestar and the great thing about these software forward programs is that when we launch, of course, is a huge development effort upfront. But when we launch in new vehicles, we also typically can do an over their update, which updates all the vehicles out on the road, which that means a lot for those that are broadly distributed. And we can also customize in different ways. And so I'm really encouraged, I think we'll hopefully have more to say on that coming months.

Okay. I think you said one of your biggest priority with OEMs in '24 to focus on 360L and leaning into that product, really scaling that product. Most of us, I feel like view the growth of 360L to be kind of a gradual one because you're tied to turning over the vehicle installed base. What can you do in terms of -- what's in your control in terms of really focusing on 360L growing it?

Yes. our biggest opportunity with 360L is a trial start, right, because that's our opportunity really to expose people to more content and convert them self-pay. And so yes, the base, it's going to take a long time to roll through, especially with cars staying on the road for many, many years, upwards of 20 years in many cases. But we should be at -- on the new car side, about 40% of trial starts with 360L this year. And we're really focused on continuing to drive the rollout more broadly across the OEM models and showing them what's happening in terms of consumer response is really important on that front. And because it's been great for conversion, retention and ultimately, ARPU as well. And the OEMs are sharing in the revenue so that certainly helps them. But we're also focused on future parity. And we just have launched our really most advanced 360L platform on Android Automotive operating system. And that's with the Lincoln Nautilus, the 24 model year. That will be rolling out on more Ford and Lincoln vehicles that have their digital experience platform, also in Volvo and Nissan. And AAOS for 360L provides not only that same sort of opportunity as EVs where we can push an over-the-air update to those that have AAOS in those models on the road. But also has the most enhanced feature set that we have. So we can do things like broader in-vehicle messaging. We have 100 music channels and really enhance recommendation. So one of the things we're excited about is ignition on recommendations because somebody gets in the car at different times of the day, we'll be able to serve up recommendations. It really is so critical to finding content that we can improve that user interface. And unfortunately, it's going to take a while to work through, but I'm encouraged about what we're seeing on the new car side and really excited for this to roll out. One of the key features that we're going to see this year, hopefully, is what we call seamless app login. So if you come into the car with your phone and you're listening to SiriusXM in the car, we'll be able to have a button where you can just automatically download the app. And that kind of seamless movement between the in-car experience and your streaming device is ultimately going to result in a lot more engagement discovery of our content and improved retention rates over time. So it's about broadening the availability of 360L, improving feature parity through things like AAOS and enhancing awareness in general through marketing, using the data we're getting back from 360L platform to drive more personalized recommendations and marketing, and using it to create awareness around the features as well as consumers.