Sirius XM Holdings Inc. (SIRI) 30th Annual Deutsche Bank Media, Internet & Telecom Conference (Transcript)

Sirius XM Holdings Inc. (NASDAQ:SIRI) 30th Annual Deutsche Bank Media, Internet & Telecom Conference March 15, 2022 1:20 PM ET

Company Participants

Sean Sullivan – EVP and CFO

Conference Call Participants

Bryan Kraft – Deutsche Bank

Bryan Kraft

Thanks, everyone, for joining us this afternoon. Pleased to introduce Sean Sullivan, who is the Chief Financial Officer of SiriusXM. Sean, welcome.

Sean Sullivan

Thank you, Bryan. Good to be here.

Question-and-Answer Session

Q – Bryan Kraft

Why don’t we start off maybe at a high level. SiriusXM had really strong performance in 2021. That was despite the ongoing pandemic’s impact on auto sales and daily commutes, what are the key lessons from the past two years? And what do they tell you about the durability of your core SiriusXM service?

Sean Sullivan

Yes. I think we’ve all been pleased with not only 2020 and ’21, I’ve only been with the company, what, 6 months or so. And obviously, one of the big attractions is the resiliency of the business model. And obviously, in light of the, the world’s disruptions in our daily lives, we’ve got a discretionary premium product that our customer base stayed with us and it was very resilient.

So in many respects, reinforced what we already knew. I think people’s driving habits certainly changed during the pandemic. I don’t know what percentage of pre-pandemic driving at, but certainly, people’s lives have changed the driving times have changed. So I think that the resiliency and engagement and the value proposition we offer has been great.

I think it’s also been good. The pandemic was good for our ability to enhance and expand out of the car engagement, right, on connected devices on the app, et cetera. So all in all, very pleased with the financial results, very pleased with the customer engagement, retention and resiliency of the business. So I think those are really the key takeaways.

Bryan Kraft

Okay. And maybe looking more to the present and looking ahead, what are you and the rest of the management team focused on in 2022? What are the key priorities?

Sean Sullivan

Sure. I think the key priorities are, hopefully, fairly well articulated. I think there are really three core strategic pillars if I can call them that, where we want to continue to win in the car, right? Our penetration rates our 360L. I’m sure we’ll talk about some of the stuff. But I think winning in the car, in light of the competition in light of the consumer, it continues to be obviously a core tenet of the business. As I mentioned, driving engagement outside the vehicle is probably the second one that we’re really focused on, and that’s not only people who are using the service as part of their satellite subscription, but people that are engaging on a streaming-only basis. Obviously, pandora is outside the vehicle in many respects, too. So I really think that you’ll see a real focus on driving out-of-car engagement in ’22 and beyond.

And then I guess last is really the advertising business that we have. It’s our really third focus area. You saw really strong growth in ’21. I think we expect to see strong growth in ’22. That’s not only the ad tech platform that we have built or acquired in terms of the tools we had. But obviously, the formulation of SXM and Media are really national sales force that’s selling a multi-profit product opportunity. We really continue to think there is an advertising core strategy and growth pillar for the company.

So those are really the three core things. At the same time, content continues to be at the core of everything we do. We’ve hired a new Chief Product and Technology Officer. And I really think that we’ll continue to enhance and improve just the consumer experiences, hopefully reduce friction in the stream, so to speak. So as I think about the three pillars, I think about the functional expertise that we’ve hired and really where our investments are in ’22, I think that’s kind of how we lay it out for the year.

Bryan Kraft

Okay. Maybe to start at the top of the funnel here with vehicle sales. The impact of chip and part supply shortages has obviously hit production pretty hard for the OEMs. That started to show up really meaningfully in industry auto sales in the third quarter of last year, and we started to see it in your trial funnel as well. Can you talk about your expectations for the pace of production recovery the corresponding recovery and the trial funnel and when you think that funnel could be back to a “normal level?”

Sean Sullivan

Yes. I mean, I guess, as we think back to when we did the year-end call, the expectation was from most industry analysts or otherwise, the expectation was it was going to be a back half loaded year. Obviously, with the world events that are occurring with the way SAAR is jumping around as we exited ’21 and into ’22. I think the first quarter is performing as we expected it would. But again, we think the back half, it’s hard to know in terms of supply constraints, whether that be from world events or otherwise.

The good news is there’s incredible pent-up demand for any of those in the market that are looking for a car to talk to somebody today, who’s been waiting two years for his Ford Bronco. So the good news is there’s a lot of pent-up demand at the same time. There are supply. And certainly, as we sit here today, there are probably events that have occurred that are more headwind and tailwind relative to where we were maybe a month or so ago.

Bryan Kraft

Yes. Okay. And the installed base of SiriusXM equipped vehicles, I think, is now about $145 million, where does that go over time? And does that sort of lock in a minimum level of net adds for you in the hundreds of thousands for the next over many years?

Sean Sullivan

Yes. I don’t think the latter. I think the guide that we did on self-pay net adds in ’22 is probably more a function of vehicle sales than anything. It’s obviously a significant headwind for us. But I think the company and I think it’s 220 to 240, north of 220, I think, is where it can go. So I think there’s still a lot of growth and opportunity. Again, that’s in the car. That’s not talking about what the digital opportunity is, et cetera. But I don’t think that sizing of the market opportunity has changed a whole lot, but that’s how we see it.

Bryan Kraft

Okay. For several years now, there’s been this constant debate in the market over when your net adds would decelerate to a sub, call it, 500,000 level. Yet net adds stayed at about 1 million per year for the past two years despite the challenging auto sales environment. And I know the guidance this year is for 0.5 million net adds, but that’s due to an extreme auto sales headwind. But does the past two years’ performance seemed to push that debate out several more years where not maybe 1 million is more kind of the norm for a while still and not to get into specific numbers, but just curious how you think about that.

Sean Sullivan

Yes. I think there’s plenty of runway. There’s plenty of headroom in terms of the addressable market. So yes, I don’t know that it pushes the debate out. I think that there still continues to be great demand. I think once the supply catches up, I think it will be a nice tailwind for us. So again, we’re not only focused on the car out of the car. I think over time, our expectation is that streaming only subs will be a meaningful contributor to self-pay net adds. So I think there’s plenty of plenty of runway.

Bryan Kraft

Okay. All right. And throughout 2020, maybe we’ll get to streaming, but just to maybe hit on churn first throughout 2020 and 2021 or most of 2021 during the pandemic, self-pay churn declined. Can you just unpack that a bit, talk about the different drivers that led to that favorable trend and how you’re thinking about the direction of churn going forward as more normal trends return to the business.

Sean Sullivan

Yes. It’s — as we’ve said, the churn has probably exceeded our expectations. I think we have delivered, what, 5 years in a row of historically low churn. If we unpack it, as you say, on the vehicle-related side, it’s mostly a function of auto sales. So at some point, it’s a positive metric. At the same time, it’s a oddly is a tough one because of the nature of auto sales and the size of the auto sales market. So vehicle-related churn, I expect at some point when vehicle sales, whether it’s this year ’23, I think will probably return to a more normal place.

On the non-pay side I think we’ve been very pleased with the entry rates. I think there is a few factors. Obviously the consumer is incredibly strong, credibly resilient, whether that’s stimulus money or otherwise. We’ve just seen curates to be very low. So at some point one would presume that non-pay will revert to historical norms but we haven’t seen it. At the same time I will say that we are — as the business has evolved and matured we have moved from more of an annual plan to a monthly plan and I don’t think with credit card versus invoicing and monthly versus annual, I do think that has been a contributor to our ability to keep non-pay churn low and entry rates low.

And then lastly cancel demand, I think that we continue to focus on content, we continue to focus on the value proposition that we offer to our consumers. You know we’ve been pleased again I think — as I said the discretionary products it’s premium with great curated live, exclusive non-exclusive content. So overall we’ve been pleased with the cancel demand but obviously that’s on us to continue deliver a strong value proposition, so.

Bryan Kraft

On your fourth quarter earnings call, Jennifer mentioned that there was an increase, excuse me internally in the fourth quarter, around the pricing action that you took, was that short lived? Or is that something that you’re continuing to see, as we get into the score?

Sean Sullivan

It was fairly short lead. I’m sure we saw, I think we saw a little bit of it coming into the first quarter. But, you know, again, we’ve got, you know, multiple pricing methodologies, I think our cadence is pretty regular in terms of when we implement price increases. You know, there’s clearly a, you know, affluent, affluent segment of our customer base on the full pay. And I think we’ve done that historically, every couple of years in terms of price increases. And then, you know, on the discounting side, you know, there’s always going to be people looking for deals.

So I think we’re trying to find the right package and the right price for people.

Bryan Kraft

Okay. And I think that also on the earnings call, Jennifer had mentioned that new car conversion rate has been in the mid-30% range and use in the low to mid-20s. It’s a bit lower than I think we were one to two years ago. And, you know, just curious is that decline, or reflection in more consumers choosing substitute services? And OEMs, making it easier to stream in the car? Or are there other reasons such as ageing or the install base on the use side or, you know, lower end models and trim packages being added as you’ve increased your installation rates? Or even anything? Maybe on the trial? On the trial side? Because some of the changes there?

Sean Sullivan

Yes, I think some of the lower paid trials will have an impact. But you know, overall, you know, I think we’re pleased with where we’re at and conversion rates, I think that as we continue to push our penetration rates on the new cars, you know, north of 80%, and 50, on the used, I think you’re inevitably getting to a place where you’re at lower trim lower price point models, where you probably have more price sensitive consumers. So I think in many respects, the main aspect is just — it’s an output of that, right? You know, we’re continuing to push pen rates, and feel good about where those are at. But as a, you know, I think a byproduct of that is really going to potentially impact the conversions.

Bryan Kraft

Okay. Used car trials have obviously been a great source of sub growth for you guys in recent years. What kinds of opportunities do you see to continue to grow the used car trial pull over the medium to long term beyond just this short-term cyclical recovery in auto sales.

Sean Sullivan

Yes. I think the biggest opportunity in used car is the natural progression of our penetration rates. So when new cars become used cars, at some point, you would expect our used car penetration rate to get to the 80% level similar to where the new cars are. So I think as we think about the used car pool and opportunity, I think that’s probably the biggest tailwind we have. As you know, the used car market is highly fragmented. I think we have done a very good job in terms of capturing consumers where they’re transacting in terms of whether they’re franchise dealers, used cars, independents or what have you.

So, you know, we’ll continue to refine and capture new emerging entrants in terms of use car and where we can, you know, focus on retention and win back. But today, I think the — as the pen rate in overtime, I think that’s probably the biggest driver of the pool and the opportunity.

Bryan Kraft

Okay. Can you talk about the, the opportunities, you see, to increasingly grow subscribers through direct to self-pay channels, including streaming first, which you mentioned? Excuse me, and just talk about how much of an opportunity you see there?

Sean Sullivan

Yes, you know, I think we see standalone streaming as a big opportunity. Again, I mentioned at the top as it’s a real core tenet of ours, but I think we’re, we have a refined approach. And I think it’s what we’re good at is in terms of, you know, getting people direct to self-pay, but at the end of the day, it’s a installed car, it’s a trial to a conversion to a self-pay subscription opportunity.

So, you know, we are with Google, we are with Apple, you know, hopefully there are, you know, meaningful self-pay direct to self-pay channels that are out there on the streaming side. And I think we do a very good job with the vehicle and the satellite subscriptions today.

Bryan Kraft

Okay. All right. The business has had strong subscription, ARPU growth over the past two years, but particularly 2020-2021. Now looks poised to accelerate and ’22 given some of the pricing stuff that you’ve been doing recently. Can you talk about the pricing changes, you’ve made the philosophy behind them, and just how you think about ARPU growth going forward beyond this year?

Sean Sullivan

Yes, I you know, we saw very, very nice ARPU growth in 2021. I think we’ll continue to see growth in ’22. I don’t know that it will be at the same rate per se, but we see the real strong benefit in terms of advertising. We see the benefit of the rates we put through back in the fall. In many respects, I guess we were at the front end of these inflationary impressions that were occurring. As I said earlier, we’re fairly — I think we have a pattern over the last 10 years of an every other year price increase. So I think those are the things that will drive ARPU prospectively. And to the extent we continue to mine the advertising opportunity that can help enhance the growth as well.

Bryan Kraft

Okay. Obviously, inflation is a big topic these days. Are you seeing any incremental hesitation or belt tightening this year on the part of the consumer, given some of these inflationary pressures?

Sean Sullivan

We haven’t. Again, as it relates to churn as it relates to non-pay, is it like — again, I think the auto sales is the biggest inhibitor to our ability to grow beyond the 500,000 self-pay net adds. But from an inflationary perspective, as I said, we put our price increase through, we saw some very slight impacts, but we’re balancing always, obviously, rate and volume.

But no, I haven’t, and again, I don’t know if I should be surprised by it, but I think the consumer is strong. I think our value proposition is strong. And we have yet to see the impacts. I mean, there’s certainly inflationary pressures in everybody’s actual business and go to market. But from a consumer perspective, we have not seen to date the impact.

Bryan Kraft

Okay. A couple of questions on 360L. I know it’s still early days for 360L, but would you talk about what you’re seeing in terms of any measurable impact on the business from 360L? For example, any differences in conversion rates or churn ARPU, engagement or propensity even to use SiriusXM outside the car? Just any color there would be awesome.

Sean Sullivan

Sure. Yes. So again, 360L is for those less familiar, is our both satellite and IP delivery system in the vehicle. We exited, I think, 2021 with roughly 25% of new cars had the 360L-enabled module in the car. There’s — it’s still small. I mean there’s roughly, what, 4 million cars on the road, I believe, that are 360L-enabled.

That being said, I think it’s — for those who have experienced this an incredibly feature-rich opportunity. It allows personalization. It allows recommendation. It allows, obviously, us the ability to recommend even when you turn the car on in terms of what content you may like that is live, what you may like that is on demand and what you may like that could be a Pandora station, for example, to really enhance and bring forward all the assets that SiriusXM brings to bear.

So I think the other incredible thing that hopefully will really be the value proposition is the data that we will get, right? And think about how that will inform the content investments and decisions we make what features, what channels, et cetera. So that’s, I guess, the backtrack of the opportunity. At some point, we should be able to do addressable advertising through 360L. So that is an untapped opportunity at some point in the future.

But to your question, I think we have seen and I don’t have the specific stats to give you, but we have seen improved conversion. We’ve seen improved retention in the vehicle. And to your comment about outside the vehicle, I don’t know that there’s a direct correlation between in the car out of the car, we just know that people that have the SiriusXM and use the app are increasing their listening 2x.

So whether it’s 360 or non-360L, most of our packages come with the streaming app and the capability. So it only advances in a non-360L or 360L environment. So again, still I think, an incredible product. I still think a lot of work to do yet in terms of really mining the data, mining the future rich opportunity for the consumer, but it’s still an impressive installation for those that have experienced it.

Bryan Kraft

Are you able to tell how much users are taking advantage of the advanced features with 360L? I’m just curious how much awareness there is when someone has it and whether they actually know much is there and they’re using.

Sean Sullivan

A lot of that is education. I think we had — through the IP delivery system, we have the data. The real question is how do we educate and create awareness of what’s there. Because if not done well, it can be complicated and overwhelming. But think about the prospect of having a family car where you can have four separate profiles in the vehicle and you can actually personalize your stations and your experience depending on who’s driving the car.

Bryan Kraft

Yes. Okay. And just maybe can you talk about the — what the trajectory looks like for the ramp-up in 360L equipped vehicles?

Sean Sullivan

Yes. As I said, today, it’s roughly 25% of new vehicle sales. It is — the conversations we’re having with our OEM partners is to make 360L the plan of record. So presumably, at some point, I don’t know that we’ve said publicly what year we expect. But presumably, our 80% pen rates will get 360L to a point where we’re penetrating at 80%, similar to where we are today holistically.

Bryan Kraft

Okay. All right. Maybe shifting to just streaming and podcasting, the whole digital side of the business. On the Pandora front, I know that stabilizing MAUs and total listening hours continues to be a challenge. Can you tell us more about the company’s plans to make progress there? Are you making any changes to the apps or anything you’re doing to advance the content strategy to try to turn that or stabilize it?

Sean Sullivan

Yes. No, we’re looking at all of that. So yes, the stats have been a bit challenged in terms of MAUs. I think what we have done a wonderful job of is servicing our core loyal listeners. So when you think about hours per active user, et cetera, I think that those that use it, use it a lot, and we see that increasing slightly, not material, but I think a good stat nonetheless.

So yes, we are looking at the content strategy in terms of, I guess, good examples of this is artist channels, so YouTube and others. So trying to use our talent relationships and enhance the value. So a, how do we fix the content; b, we did a big awareness campaign because I don’t know that Pandora and awareness, it’s been historically a very performance media-driven investment. We did a big thing with DJ Khalid, so to try to increase awareness and maybe recapture former users or new users to Pandora.

And then yes, the product and the technology we’re going to evaluate. I think that’s the exciting thing with our new CPTO is how do we enhance the user experience so that it’s a destination that people want to be and what are the right level of interactive — with the right level of interactivity on Pandora. So we’re looking at all facets of it, I don’t think it’s an easy answer.

That being said, again, Pandora is a very large digital audience. It really does create positive effects across the advertising organization. So I think the on-platform Pandora opportunity continues to be an important part of our strategy when properly combined with what we’re doing off platform, what we’re doing on SiriusXM broadcast, et cetera. So a lot of work to do there. We’ve got to figure out how to moderate some of the trends that we’ve seen at Pandora. But I think it’s a multiple lever. I don’t think there’s any silver bullet.

Bryan Kraft

All right. You mentioned off platform. Can you talk about the off-platform digital advertising strategy, some of the building blocks that you’ve put in place with the ad tech stack, the ad tech force and other capabilities and how all of that positions SiriusXM to continue to grow that business?

Sean Sullivan

Yes. I think it’s not only, Bryan, for the benefit of advertisers for the benefit of creators. So with the acquisition of picture. It brought us into the podcast marketplace. The AdsWizz tech product that we had as part of the Pandora acquisition, Simplecast. So I think we feel that we built an ad tech stack that delivers for both creators and advertisers. I think is right up there with the rest of the marketplace.

So I think the off-platform opportunity from an advertiser perspective is we have SXM Media, we have a consolidated sales force, and we can bring just real audience scale and reach core agencies and advertisers that want to reach across audio.

So as you think about 2022 advertising growth, I think the off-platform opportunity will probably drive more of our growth than the on-platform opportunity at Pandora. We want to be — and I’m sure we’ll talk about podcast. I think we want to be the number 1 destination, so to speak, for creators in the podcast space. And I think we occupy that today and expect to maintain that position. So I think that what the off-platform opportunity does is it gives our advertisers and our ad sales force the opportunity to monetize.

And clearly, from a creative perspective in order to make some of these podcast arrangements work, we need to broadly monetize those. So we even — frankly, we probably have biased more towards the advertising opportunity that we have for subscriptions on podcast. But that’s not to say that we’re not enhancing the value of the SiriusXM subscription by giving our consumers the opportunity to consume podcasts in the digital app in a 360L environment, et cetera.

Bryan Kraft

And podcasting has been a big focus for you guys for the past few years. Maybe just an update on the strategy. How Stitcher, maybe more specifically is moving the business forward for those that may be a little bit new to it? And what are some of the other ways you’re leveraging it across your own platforms?

Sean Sullivan

Yes. I mean the marketplace for all of us that are paying attention for podcast is very competitive, right? It’s certainly frothy. And certainly, it is for the premier names and the premier podcasts that have an established growing audience. So I think what we’re focused on are deals that we can do with talent that really provide a multi-platform opportunity for them and for us.

So a good example of that, I guess, is Megyn Kelly, where she can do a daily radio show live that can then be distributed as a podcast on demand, et cetera. So there are going to be deals where we’re going to really have the talent do a multi-platform opportunity or there may be deals where we’re just doing a representation where we’re helping the creator monetize the downloads, not only in impressions, not only on our own platform, but on all platforms because that’s what they want.

So I do. Again, I think it enhances the value of the SiriusXM subscription. I think it allows creators the opportunity to monetize their great work. And I think we’re going to have to find the right financial discipline and balance such that it’s accretive to the enterprise because I think some of these — some of the prices in some of the market competitors operate in a different economic model. So I think we just have to be clear about what we’re doing and why we’re doing it. And I think to date, we’re pleased with it. I think it showed good growth in ’21, and I expect good growth in ’22 with the inventory that we’ll have.

Bryan Kraft

Okay. And at the risk of being a little bit redundant, I mean, maybe you could just talk about anything else on the results of your initiatives to drive higher out-of-vehicle usage through the app on smartphones and smart speakers and how that’s impacting the business?

Sean Sullivan

Yes. It’s a big focus. I think you’ll see significantly. You saw some of this in ’21. You see more in ’22 in terms of sales and marketing that we will be investing in to really drive both awareness and acquisition. So we did a very large SiriusXM house campaign to really drive for those of you who saw Kevin Hart day grow all these people.

So I think awareness is an important thing that just doing your own anecdotal focus group, how many people actually realize they have an app that they’ve — it’s included in their satellite subscription. So first and foremost, I think we’re doing awareness is important. Number two, we’re making additional content available. So there are extra channels available. There’s content there that is on demand that isn’t really available in a satellite only subscription or something that — if you don’t use the digital app.

So I think the enhanced content opportunity, I think, creates not only acquisition but retention. I said earlier, hear that the listening doubles when somebody uses the app from when they’re using the car. I think that’s a really, really encouraging stat. And I do think though that we’ve got and this is part of what our CPTO will do is we’ve got to make this a really consumer-first experience one that reduces friction, one that’s almost — it would be great if we knew Bryan was going from his car to his connected device to his 10-foot device, et cetera, all your favorites, all your channels, everything carries. I think we’re getting there and we’ll get there. But I think some of the product enhancements you’ll see coming will improve that, too. So again, I think the streaming and outside the car is a real big opportunity for us and a real focus, and you’ll see the investment.

Bryan Kraft

Okay. Maybe to talk about content costs. How should we think about programming cost growth over the next several years as you expand the content offering and continue to secure more digital rights for sports rights and podcasts?

Sean Sullivan

I think you’ll continue — we have to continue to enhance the value of the subscription. So I think there will be growth in content investment, non-music related investment. I think we have to find the right balance in terms of what’s exclusive, what’s nonexclusive, what’s digital or digital only or ubiquitous with satellites. So I think you’ll continue to see us make the appropriate investments. I think we have to do it to continue to maintain our position in sports and talk and news and other areas.

I think there are consumer and generational thoughts, and that’s — they take TikTok, for example. I do think that we skew older. So I think some of the investments you’ll start to see us do we’ll try to address and really focus on the younger generation of consumers. So yes, the — I think every business certainly in video every business is going to incrementally invest in content. I think we just got to find the right balance of what’s exclusive, what’s nonexclusive. And are we being responsive to what the customer appetite is.

Bryan Kraft

Okay. Free cash flow and capital allocation. So you’re guiding to a modest decline in free cash flow this year, all guiding to EBITDA growth. Can you just talk us through the factors that are reducing free cash flow conversion this year? And maybe just comment broadly on how we should think about free cash flow conversion beyond 2022?

Sean Sullivan

Yes. SiriusXM has always been a strong convert free cash flow from EBITDA. I don’t expect that to change. Just for everybody’s benefit, you probably know this already, but the decline this year is really a function of the satellite recovery that we got from SXM 7, $225 million last year. So that is certainly one lever that is depressing it in 2022. We’re not going to obviously see that again.

We’re a taxpayer now. So we’re going to start to see incremental income taxes, and we continue to have, I guess, elevated CapEx levels, not only to support product and technology, but the pending launches of Sirius X9 and 10, which will be, I guess, in ’24 and ’25 or thereabouts.

So I think all in all, those puts and takes put us at — where we guided the 155 number. But again, I think that over time, as we think through, I expect as people transition from annual to monthly, we won’t have that continued drag on working capital. The taxes will be a function, obviously, of pretax income. And at some point, I do expect that the product technology and the satellite spending to moderate. So I think that those things will moderate in the near term.

Bryan Kraft

Yes, you certainly have the step down and satellite CapEx after ’25. Okay. All right. Well, great. I think that about wraps it up. So thanks, Sean. I appreciate you.

Sean Sullivan

Thank you.

Bryan Kraft

Thanks, everyone.

================

Source link

Leave a Reply