Sirius XM Holdings Inc. (NASDAQ:SIRI) Bank of America Media, Communications & Entertainment Conference 2022 September 7, 2022 4:10 PM ET
Company Participants
Jennifer Witz – Chief Executive Officer,
Conference Call Participants
Jessica Reif Ehrlich – BofA Securities
Jessica Reif Ehrlich
[Call Starts Abruptly] have Jennifer Witz, CEO of Sirius XM with us for the first time.
Jennifer Witz
Thank you so much.
So, very excited to have you.
Jennifer Witz
Thank you.
So, Jennifer, you remain focused on driving three pillars of growth to Sirius, continuing Sirius’ strong enviable presence, increasing usage and subscriptions outside of the vehicle and driving growth to your extensive advertising platform. What do you consider the biggest driver of growth over the next, say, three to five years?
Jennifer Witz
I have been to really happen, first let’s talk about the drivers. I – the subscription growth for our business has, in the past, really been driven by auto sales force on a new cost side and the eco side and clearly we have seen a significant impact from supply chain challenges and on the used car side this was really and a significantly high pricing.
And so, part of the growth going forward is going to depend upon the pace of recovery there and which is why we just are focused on building out the digital side of our business. So, from a subscriber standpoint, for this year, I expect it will represent a larger proportion of our net ads and I do think that’s probably going to continue in the years to come as auto sales continue to recover.
But on the revenue side, since satellite subscribers are the largest majority of our subscriber base and I do think we have room to continue to focus on pricing and packaging and continue to take rate reactions there. So I would expect revenue growth to be driven by rates on the satellite side of the business but more by volume on the digital side of the business.
And then of course, there is some room on the growth on the advertising side, I think that’s largely going to come in our platform and the podcasting investments we’ve made, but the advertising business for us still represents just 20% of our revenue.
Jessica Reif Ehrlich
But you’ve done an amazing job with that. Switching gears completely, how would you like to see the structure of – between Liberty Sirius and Sirius Sandals and any sense of timing when we could expect Liberty actually deal with this?
Jennifer Witz
Let me save your question.
Jessica Reif Ehrlich
Oh, we got.
Jennifer Witz
I guess, I would answer you as I had in the past, which is we remain focused as a management team on operating the business and driving our growth initiatives and continuing to execute on our plan and Liberty has been fantastic partner over all these years. And I’ve know Greg and the team since their early days and they are very supportive of our plans, whether they’d be operational or strategic.
And I would say, the corporate structure really doesn’t impact and the decisions we are making on a day-to-day basis. We have the flexibility to do the things that we need to do and the investments that we need to make.
That said, certainly Greg spoke a bit on the last earnings call about what they might look to do to simplify the capital out of the corporate structure and plus we are supportive of that, but ultimately the timing and the choice he makes depend upon what he is looking to do in terms of classing the discount and driving value for our shareholders.
Jessica Reif Ehrlich
Okay. So, going back to what we start on beverages what a sales, there has been a lot to navigate over these last few years and obviously in 2020 you had to deal with the chip shortage on testing, manufacturing. As a result, I mean, you need to – it like continuing shortages, but because of that, you adjusted your self pay – by this positive versus approximately 500,000 prior to that. What gives you the confidence you – self pay actually attain positive self pay net ads in 2022 and is there any update that you can give us on third quarter self pay and trial start turns?
Jennifer Witz
I mean, we do have a history of delivering against our guidance and I have every effort in some way to continue to do that going forward and I have confidence in the guidance that we updated on the last call. We have more confidence in the trials obviously as we get through this quarter, because the trial starts this quarter will materialize and to conversion opportunities in the fourth quarter. So, as we get through September, we’ll certainly have more confidence in terms of the auto funnel.
On the turn side, with lot of other subscription businesses we remain focused on looking for and any if there is weakness in the consumer whether it be in cancel demand on the voluntary side or entry rates for credit card or invoice on the non-pay side, but we really aren’t seeing anything material there. So, we get more confidence obviously as the year progresses on the churn side as well.
But that could change clearly in the fourth quarter and the last piece is digital and there is more variability I would say, month-to-month and quarter-to-quarter in digital just as we test different trial lengths. We launched different partners and we tried different marketing channels and – but I feel really good about the progress we are making there.
So I have every confidence we are going to deliver against, my subscriber guidance and deliver positive net assets here.
Jessica Reif Ehrlich
Right. What are you hearing from the OEM partners when to expect auto production and car sales turn to more normal levels?
Jennifer Witz
I, look, we pay very close attention to the public statements and we are talking to them every day. We are managing our own supply chain much more closely than we ever had in the past and that’s been very successful. And we haven’t had any issues there. The last three months has been all in the low 13s for SAR and we are hearing – whatever everyone else is hearing is that there is probably going to be a slow recovery and it’s going to last into next year. But the third party estimates for this year are still in the low 14s and just mathematically that gets challenging to get to. We would have a pretty big fourth quarter. So we are not relying on that. Clearly a healthy auto industry is great for our business, but that’s why we are building out the digital side. So, I’d say, we are continuing to hope and plan for recovery, but it’s sending into next year.
Jessica Reif Ehrlich
Right. Any initial thoughts on 2023 subscriber growth?
Jennifer Witz
I am not going to comment specifically on 2023. We’ll plan to give guidance as early to early in the year. I am obviously really focused on what happens over the next few months in terms of auto sales on the new and used car side because that will set us up for next year and having that additional knowledge is going obviously give us a lot more confidence as we look to give guidance for next year.
Jessica Reif Ehrlich
And how much runway remains for Sirius subscriber growth? How much of that runway do you think will come from digital, which obviously is long runway versus in vehicle?
Jennifer Witz
It comes back to the pace of the recovery for sure on the new car side and the used car side, we don’t often talk about that there honestly, I guess public statistics around the used car side. The used car sales this year are down 10% versus last year. And we’re close to probably just under 50% of our trial starts that are from used cars. So that we are very focused on progression of new and used car sales. But the runway we have, say, the audience as we’ve been focused on today have largely been in a couple of different segments, right. They tend to be older consumers. They tend to be more rural. They tend to be more affluent college educated. They obviously have cars, sometimes more than one car and we are very highly penetrated with those audience segments today. And as we look forward we’ve identified couple of additional audience segments that would get us another, say quarter of the total market. And these audience segments tend to be younger, more diverse not surprisingly. They may or may not have a car, but they are still very focused on audio solutions and I don’t believe that their needs are being met by a lot of the other providers out there. So our focus there in terms of driving future growth is with digital and it could be in the car or out of the car listening. But we do believe there is an opportunity to capture more of those audience segments which is the breadth of the content that we have to offer.
Jessica Reif Ehrlich
But that’s the last thing. Could you walk us through the difference in economics between the digital stuff and vehicle stuff?
Jennifer Witz
So, as it is on the satellite side we have upfront cost and performance SAC which – our SAC and SAAR has come down pretty significantly over the years. But we still have that investment upfront which isn’t necessarily tied to driving a subscriber. On the digital side, the margins are pretty consistent. I mean, our prices on the digital side are a little lower, because we are looking to go after a slightly more price-sensitive market. And the margins are going to pretty consistent, the licensing costs are relatively consistent. We don’t have the OEM revenue share on the digital subscribers, because we are generating them typically outside of the car to the app stores and otherwise. And, but the economics overall, we focus a lot on LTVs and what the digital sub will look like, because the cost to acquire is really just based on marketing, right. So, performance media and otherwise and so, we are constantly looking to measure the effectiveness of different marketing channels and the cost to get those trials relative to the LTVs of those subscribers. And again, it’s really early days still, for us here and we are still learning a lot and there is lot more we need to invest in the product otherwise, but – but we have the ability to adjust the marketing spend based on what the retention and ultimate LTV looks like for that stuff.
Jessica Reif Ehrlich
And where are these subs coming from? Are they coming from, like, radio? Are they coming from just, are they new to the audio ecosystem? Are they – or Apple subscribers?
Jennifer Witz
Of course, it’s really hard to tell where they are coming from and I actually think most of their digital subscribers are just heavy consumers of audio in general. So they are using five services or more. They are generally paying for two services of which we are one. I believe that most of them are using another on-demand music streaming service, alongside SiriusXM, but they are really looking for, again a broader set of content exclusive and non-exclusive and across multiple genres, which is something that we offer that really no one else can deliver them.
Jessica Reif Ehrlich
Which is naturally explains the content for the younger or digital focus audience, how different is their other listening campus, like what content?
Jennifer Witz
It’s content and then it’s the features that surface the content which is actually where I think we probably need to spend more of our time. We actually, we have a tremendous amount of content that appeals to younger listeners and just because they are lot younger doesn’t necessarily mean that they are all listening to hip hop or Indian pop. I mean, there are lot of younger customers listening to the Beetles. And so there is plenty of content, but it’s making sure that the younger listeners understand and can discover that content on our service. And so, it’s discovery, recommendations being able to surface the content that is most likely to resonate with the younger consumers. But we’ll also invest in additional content that might more specifically appeal to younger generations as well.
Jessica Reif Ehrlich
And you’ve done a nice job just growing that content over time. What do you see as the greatest risk for you, for Sirius to generate sustained subscriber growth?
Jennifer Witz
We are still tied to the automotive market. So, if auto sales do not recover as quickly as we might hope, that is going to be – get the time to growth going forward. But, overall, it’s demand for our product, right, demand and retention of our subscribers and going back to the content it’s the unique value proposition that we offer. We need to continue, we have a premium price product. Our core headline package is $18 a month and we look more like a video service and a lot of audio services. And that we had really strong performance on the churn side, because of the unique value proposition we have. But we are not naïve. We need to continue to add to that. We are doing all kinds of things like, as you know we have different pop up channels with different artists. We have great relationships with artists. They want to come to the platform whether it’s Wendy Carlos doing a show or the chicks doing a pop up channel, I mean, what wanting is, so – to support the launch of a tour or a new album and we are consistently launching new experiences that audience we have and a channel coming with Conan O’Brien later this year, we have a fantastic comedy offering and we just did an exclusive event with the – of the only third party audio provider of all of the games and we get a lot more content, shoulder content that were on the games as well. And so, it’s continuing to bolster the value propositions across content, features. We just gave our platinum subscribers platinum and package access to super premium brands. And so, we will continue to look for ways to continue to enhance the value of the subscriptions that we are offering.
Jessica Reif Ehrlich
So, the spike which is in your self-pay net add buys, you didn’t adjust any of your financial guidance. What gives you that confidence that you will attain that that financial guidance particularly when there is so much concern as we hurdle – about the advertising market?
Jennifer Witz
Advertising is probably the biggest area of uncertainty. I mean, the vast majority of revenue is clearly on the subscription side with a really stable subscriber base. And we have the impact of the rate increases we did last fall while we include the base this year. So it’s a high level confidence in the subscription revenue side of our business. On the advertising revenue, we’ve seen some more stability there just recently and but we continue to grow in podcasting and our platform and there is still significant demand from brands on the Pandora side of the business. So, obviously, as every month goes slightly a better visibility into the advertising side of the business. And then just on overall EBITDA and cash flow we’ve always managed the business in a really disciplined way, but we will continue to look for opportunities obviously in situations like this where there is more economic uncertainty and uncertainty on the top-line. We’ll be focused on finding opportunities on the cost structure and eliminating more marginal costs or discretionary spend where it makes sense.
Jessica Reif Ehrlich
So, before we get to cost, let me just stay with advertising for a second. Do you said something real surprising which is that you seem – it’s becoming more stable, what actually are you seeing right now? Can you give us any color on the overall market where is the strength and where is the softness for your business?
Jennifer Witz
There is different – I think consistently, because of the pressure on the auto manufacturers and in terms of having enough supply, there has been some pull back in auto. There has been some pull back in retail and CPG. We have seen strength on the tech side, also in travel and tourism, but we are watching cancellations really carefully. That’s, to me, cancels and push backs are good indication as to what’s happening. Some of that has slowed down, which I’d be real positive. I don’t – I can’t – September is a big month. The fourth quarter is a huge quarter for us obviously and many of the companies, so I can’t say that obviously we have full certainty into the rest of the year, but yeah, I mean, I rather than seeing sort of a consistent downward trend, I think we are seeing some of that start to level out.
Jessica Reif Ehrlich
Right. And then going back to cost, what are some of the cost saving measures that you are starting to use?
Jennifer Witz
I think we hired a lot of people in the first half. So we’ve been slowing hiring in the second half of the year. And just focusing on the high priority positions right now, and then other employee-related costs, other BT&A facilities in real estate which is looking to rationalize where we can and pull back in certain areas. And then on the more marginal discretionary marketing costs, we are looking to improve efficiencies there. Really as always, but what I really want to do is free up spending to be able to invest in the business and particularly on the product and technology side.
Jessica Reif Ehrlich
Right. And then churn, for you has been like remarkably low, – just 1.5% which I think is a great – A series of quarters over the last, I’d say 18 months with record low turns. And with the economy, like everybody nervous about the inflation on the economy it’s just incredible. So, what do you think is the biggest driver of your churn being that low?
Jennifer Witz
It was just the head or tailwind of lower vehicle related turns, just because it’s very much tied to auto sales and new and used car auto sales because as customers buy new cars and then they trade in their older vehicles in many cases, but really beyond that, we use to look at voluntary and non-pay as making up about 1.1% to 1.2% of our churn pretty consistently. And it’s been more in a range of just one point and. And so, that I attribute a lot of that to certainly there has been operational improvements on the non-pay side and using credit card updaters and things like that. But also on the voluntary side, we’ve seen lower cancel demand in general and I attribute that to just again continued investment in both trying the value of the subscriptions. And so, three years ago, we added streaming to the base which we’ve probably done it sooner, but that really has enabled customers to engage with our service in many more places besides the car. So and that affected not only listening more the locations, but they are exploring and finding new content that then they bring those back into the car and that just enhances the value of their inception.
Jessica Reif Ehrlich
Right. So have you seen engagement change? Like how was it – how much has it gone up? I don’t even ask the question but is it obviously improved as you just said, but with the in vehicle and outside just…
Jennifer Witz
We really haven’t had that much data in the past as you know, in the satellite side, but we have a lot more data on the digital side now and the vast majority of digital engagement is happening with our satellite subscribers who are listening and on the digital platforms. But we just have a lot more data to be able to better customize the experience. We know that our satellite subscribers who do stream are listening twice as much. So, they double their listening when they stream and that – again that engagement ties directly back to improve churn. We also know that because of that most of those satellite subscribers that take those habits outside of the car listening to the live channels. And whatever channels that they are listening and they love in the car, those may drop outside the car and other environments as well, but we are increasingly seeing improvements in listening among the other content that we’ve added over the last few years. So, more extra channels, more Pandora stations and just on-demand content which I view as when we speak about younger generations, it’s really just like video and many other services to want to customize their experience with satellite only delivery we really never had that capability. But now we can give our subscribers and digital subscribers as well the opportunity to really customize what their listening to that’s going to play into 360L, so we’ll just be able to deliver more and more personalized experience, more time shifting and really more control.
Jessica Reif Ehrlich
And how do you rate the offset between higher churn and price increases?
Jennifer Witz
We have long history of balancing that and it will really focus even in the fourth quarter of last year we raised rates on some of our promotional packages and we did see an impact on churn, but overall it was better for revenues. So, we are constantly looking to adjust so that we can build overall revenue growth, and but I am obviously concerned because many of our subscribers who do cancel say that they are going back to AM FM which is free and as we talked about before, many of the audio services are priced lower than we are. So we have to be very conscious of how we roll rate increases through the base and I don’t want to be overly aggressive there. So we do alongside improving the value, right whether we’re being more content or more features and with 360L we are just going to have such significantly more capacity to be able to provide more content and features to customers which is just going to continue enhance the value. So I think it gives us more opportunities to perhaps raise rates going forward.
Jessica Reif Ehrlich
Right. Before we get to 360 hours I have more question about kind of macro, which is, but supply chain is just, but obviously there is concern about recession – regarding for one inflation, any signs of – it doesn’t sound like it but just I am wondering like, where is inflation hitting your business and as you see your subscribers reacting in a new ways to inflation?
Jennifer Witz
Just really, I mean if we are going into recession, it’s just complicated by so many other factors, obviously inflation is high. The job market that’s still really strong. We have lingering effects of the pandemic. We have supply chain issues and there is a geopolitical uncertainty. So, it’s hard to see how all those factors are going to play out. For us, in terms of the cost structure, lot of our costs are tied to revenue and of course as we roll through the rate increases, we’ll see increases in the costs that are associated with revenue. We think probably about 40%, 45% of our cost structure is tied in some way to CPI or inflation. A lot of that has to do with certain licensing agreements that has CPI adjustments and a big portion of it is wages where we are seeing the same competitive environment that many other companies are seeing. But the single biggest factor impacting our business again, not to keep coming back to Sirius are the sales and just the impact of that the supply chain issues that we are having. I mean, there is more shut downs in China now. So how does that all roll through the supply chain and that’s been kind of the biggest impact on our business overall.
Jessica Reif Ehrlich
Right. So, turning to 360L, can you talk a little bit about like the specific product and – plans you want to do and how these initiatives and features will drive growth?
Jennifer Witz
A couple of with digital in general and we brought Joe Inzerillo on board earlier this year and to run all of the product and technology and he has been building out his team and we are really focused on improving some of the foundational aspects that will support for 360L and digital and even in the satellite side of our subscriptions, that includes identity and billing capabilities that is just going to give us a lot more flexibility as we move forward. And then, on top of that, we’ve got a clear product roadmap opening in place with many more consumer-facing features and that goes back to some of the things we are talking about in terms of enhanced recommendations, improving the for you page and the app and increasingly in car, as well. We are testing personalized recommendations in vehicle with 360L implementations today and we’ll start to get more information back on that as we go through this year and so, it’s really about investing in our digital products, because that helps both digital subscriptions, standalone digital subscriptions, it also helps our satellite subscribers who are streaming, but also the investments we make in digital on those platforms will translate through the 360L over time. Whether we are updating the current vehicles in market, which we can do in certain cases or we are launching new versions of 360L over time. We can use it or learning any apps to inform that decision. So, this is a series of investments we are making and we are really excited about the prospects of 360L going forward and all the capabilities it’s going to bring to our customer.
Jessica Reif Ehrlich
Have you – just have any additional subscribers you have now inside the channel?
Jennifer Witz
Still – it’s still relatively small. I think the bulk of our subscribers are satellite, but we are continuing to invest and I continue to think it’s going to be a bigger portion of our subscriptions going forward. It makes us less reliant on the auto market overall.
Jessica Reif Ehrlich
Right. And then, on the app, like is there anything just seeing in terms of usage that’s beneficial to the rest of your business like, or it kind of enhances what you can do?
Jennifer Witz
Difference in decision making, yeah, I mean, we – look, we’ve been using the – first of all, we haven’t had data on what consumers are doing in the car all these years. So, now we are starting to get about 6 million 360L vehicles less on the road today. Many of them are still in trial. But that’s giving us more and more insights but we have millions of customers on the satellite side who are streaming and we use that as a testing ground for new channels. So, we have limited capacity, when we have satellite only in the car and so we test various new channels like we did with the Ten Spot for instance which of course is on Channel 11 for some reason. But we moved to tenth slot from streaming into the car satellite because we are performing so well in streaming. So we will continue to do that with other content using that data to inform the decisions. What to bring satellite. We are also using the data to better understand with 360L, who you could market to and how. So whether that’s what we are doing in car in terms of recommendations or outside of the car with our marketing communications, say if somebody hasn’t listened in the first part of their trial we know that’s a key indicator of whether they are going to convert or not. So we can market more specifically to them. We’ve developed models what features they might like, we’ve developed different models to tell us what content to put in front of them in the marketing communications that are off platform. So whether they’d be email or direct mail I can inform what we are doing there on the marketing side to improve conversion over time.
Jessica Reif Ehrlich
Great. It is targeted 80% of new cars by both – 360L by 2025, is that still on track too?
Jennifer Witz
We are going to be a couple of years delayed. It’s been challenging with the OEMs who are obviously trying to produce as many vehicles as they can and so the product plans have changed to some extent. 360L is still plan of record with every major OEM. We still have great relationship with the OEMs. We and the OEMs continue to believe that it’s the future for choices and we are probably in about at the end of last year, we had about 25% of installs on 360L. Exiting this year it will be closer to 30%. So it’s going to continue to increase over time. It’s probably still little bit of slower roll out than we originally thought, But as I said earlier, we have about 6 million vehicles in market today that are at 360L capability and I think it’s a lot of them are still in a test phase trial. Lot of customers are in trial as we build the volumes of course more customers will be – eventually convert this to subscribers that will have more data on what they are using.
The advertisers are looking for different things. They may want, they are looking for brand safety or they are looking for more measurements or they want custom ad unit. So, it’s really just getting started, which I think there is a lot of opportunity going forward. So we may need more ad test that we are doing things for investing internally and developing things we have great ads rich team in Romania that continues to deliver new solutions. We are partnering like, with ComScore on predictive audiences that brings more privacy friendly targeting opportunities. So we will continue developing internally but I would absolutely look at opportunistic M&A there.
Jessica Reif Ehrlich
And then on the content side, you are competing against some companies that have global scale, which is not huge, it’s what something that I heard. But companies like Spotify like, does that – how does – does that enable them out bid you o…
Jennifer Witz
And it’s like not just Spotify, maybe look at resources obviously, Amazon, Apple, Google, but I – we offer something really special for content creators in terms of the breadth of content we have and I think our scale relative to Spotify is actually bigger in the U.S. in terms of ad and subscription revenue and that just affords us a lot more opportunity. We definitely have a financial wherewithal to be able to invest in the content we need going back to enhancing the value of our subscriptions. We want to make sure that we are providing the best content to our subscribers and I am fully confident we will be able to do that.
Jessica Reif Ehrlich
You have some fierce competition for sure. How to put your audio book strategy?
Jennifer Witz
We have looked at audio books, but I don’t think it’s necessarily important for our content portfolio today. I think the more obvious thing for us is to continue to invest in live where we really and attend on the space or in sports where with this broad set of sports properties and talk and things like that as opposed to entering into audio books.
Jessica Reif Ehrlich
And then finally, because the temple has two minutes, can you just talk about the capital allocation strategy? And how you think about capital returns? I mean, you’ve kind of loosed a little bit from share buybacks to dividends, any thoughts you can give us?
Jennifer Witz
We are going to continue to focus on how we can invest organically first and foremost and we do need to make more investments in product and technology. And we’ll look for strategic M&A opportunities. I don’t see anything significant on the horizon there. But yeah, expect us to continue to have excess free cash flow and as in the past, we are going to balance how we return that based on a number of factors, but I think there is still be a mix going forward of dividends and share repurchases.
Jessica Reif Ehrlich
And any change in your leverage targets, any?
Jennifer Witz
No, no, I think we are comfortable with where we are and I am pleased with where we are given sort of the economic uncertainty and we have a really clean balance sheet with maturities pushed out and I think that gives us a lot of flexibility.
Jessica Reif Ehrlich
Great. With that, thank you so much.
Jennifer Witz
Thank you, Jessica.
Question-And-Answer Session
End of Q&A
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