Sirius XM Holdings Inc. (NASDAQ:SIRI) Morgan Stanley Technology, Media and Telecom March 1, 2021 10:15 AM ET
Company Participants
Jennifer Witz – Chief Executive Officer
Conference Call Participants
Ben Swinburne – Morgan Stanley
Ben Swinburne
Good morning, everybody welcome back. I’m Ben Swinburne Morgan Stanley's media analyst. Welcome back to our next session here at the 2021 TMT Conference. Just a quick administrative item. Please note that important disclosures including my personal holdings disclosures, and Morgan Stanley disclosures all appear as a handout available in the registration area and on the Morgan Stanley public website.
And we'd like to welcome for the first time to our conference, Jennifer Witz. Jennifer is the newly appointed Chief Executive Officer of Sirius XM, where she has been for over 18 years working there. Prior to be being named CEO, Jennifer was most recently President of Sales, Marketing and Operations at the company.
Jennifer, it's great to see you. Thanks for being with us.
Jennifer Witz
Thank you, Ben. It's great to be here. Nice to see you again.
Ben Swinburne
Why don't we start – we've had sort of the same management team at Sirius XM for quite a long time. Jim, obviously did a fantastic job very well known on the Street. Could you talk a little bit now that you are in the CEO role, sort of where we should be focused in terms of your strategic priorities, both in 2021, but also as we move out of the pandemic and longer term?
Jennifer Witz
Sure. Well, I want to start first of all by saying, we're in an incredibly strong position overall. We have the largest paid subscriber base in audio in the U.S. with over 40 million subscribers across Sirius XM, Pandora, it'll reach over 150 million listeners, and we're the leader in digital audio advertising in North America. So, Jim left us in very strong hands. And I am pleased to have worked with him for so many years, we have many of the same philosophies. And we continue to be focused on creating first and foremost, fantastic audio experiences for our listeners, and our subscribers across our platforms, and increasingly now, even beyond our platforms, with the original podcast, I think, we'll talk more about that.
With our combination of assets, we're providing the best monetization opportunities for content creators. And we can do that because of our leading position in digital audio advertising, with our really expert sales force and the supporting ad tech we have behind that. And we're continuing to strengthen our position in the car, whether higher penetration rates, or deeper rollouts of 360L, which drives an even better customer experience there. And we're growing our engagement outside of the car, which is a big focus for us as we drive retention of our Sirius XM subscriber base. And we're increasing our digital only Sirius XM subscribers.
And I would say, I just want to reinforce the fact that we are maintaining our culture, our culture of executing well, and delivering on our commitments and our results, especially in generating strong EBITDA and free cash flow. So, I think you'll see a lot of continuity in terms of our focus, and our culture, and expansion of our initiatives to continue to drive our strengths overall.
Ben Swinburne
That's a great intro, Jennifer. And I know that you've spent a lot of your career there working with the OEMs, and focused on sort of where that technology is going. And I think investors often debate the impact of connectivity, particularly in car connectivity on Sirius XM, because your OEM relationships are such a powerful, competitive moat that you have. But obviously, it creates the opportunities for others to be in the dash over time.
Maybe you could talk a little bit about your product position, and how connectivity sort of drives the product pipeline, and how you think about competitive dynamics as cars become more connected.
Sure, well, as you know, we've been in the business of providing a premium in-car audio entertainment experience to our customers for really close to 20 years now. And, over this time, we have seen, a lot of changes in the competition we've faced in the car. Back in the day, we used to really be worried about, the AUX in for the iPod, right. And so, yet, throughout all of this, including just the evolution of CarPlay/Android Auto over the last several years, we've consistently grown. We've maintained our strong conversion rates, and we've added subscribers, despite all of this change, because we provide great content that is easy to use.
So, since we launched in 2001, we've continued to advance our content offering, we're adding an even broader set of exclusive artist channels, more news, talk, comedy, and sports. And, we uniquely offer this unmatched set of content in a bundle. And we brought great talent and brands to our services, some of whom have never been in audio before. But at its core service is linear, right. It's 150 channels, one-to-many broadcast service, with no return path of data. So, with 360L, in a connected car, we can access the modem, and obviously, the satellite path, and we will get user level data to help drive personalized experiences, marketing, outside of the product, and inside of the product recommendations and discovery, which really helps us provide a more personalized experience.
And we also have obviously a much broader set or expansive bandwidth to be able to just provide more channels. And so, we really have, I think, a unique position because we can still take advantage of the great economics of broadcast delivery. But in combination with that interactive path, we can offer an even more robust product in the car. And we'll continue to do this with a real focus on ease of use, which is what customers want, and leveraging our experience in minimizing driver distraction. So, these are all real game changers for us and I think we're really well positioned still in the car.
Yes, and I know 360L is still ramping, but it's ramping pretty quickly. Are you starting to get some of these benefits already, or is there more on to come? How would you talk about what's happening at this point?
Jennifer Witz
Yes, I mean, it's still early, we ramped a lot in the second half of last year, we have a lot of customers and trial still. And the early feedback is matching kind of our testing before we even launched the platform, which is now several years into making. Customers love the features, the personalized content, Pandora stations, which we have, an XDA [indiscernible] now, and just a lot more robust content overall.
So, it's still early to comment on, you know, specific data points, but we still believe fundamentally that it will lead to better conversion rates and better churn, and I think pricing opportunities in the future as well.
Ben Swinburne
Great. Okay. You talked in your intro about some of the other areas of audio that you are investing in, I wanted to talk and ask you about podcast. You guys made a number of acquisitions. In the space, you sound very excited about the portfolio you've put together. This is obviously an area that investors are hugely focused on. Maybe you could talk a little bit about your portfolio capabilities that you offer to the market and why you think it could be a real growth driver for Sirius XM?
Jennifer Witz
Yes, I think, it's best to really address podcasting, in terms of the three groups of constituents. So, they're the listeners, the content creators, and publishers and the advertisers. And so, our strategy for listeners is, as always to offer access to more great content, whether it's from us or from third party podcast creators. And we added a curated set of podcasts to Sirius XM in our apps, and certain 360L implementations too late last year. We have a broad set of podcasts in Pandora and of course, in the Stitcher app. And we continue to drive engagement, with podcasts, it will only enhance the value of the customer experience by including podcasts. Maybe the listening is still generally, relatively small, the time spent listening, but it's growing fast. Customers want that type of content, so we'll continue to provide that, to make our services more robust.
On the content creator and publisher side, in addition to offering talent, the opportunity for a live Sirius XM Radio show channel, we can provide broader exposure on Pandora. And now with our recent Stitcher and Simplecast acquisitions, we have this full suite of leading distribution, ad tech, and sales solutions. So, it allows us to help creators produce host and monetize their podcast content both on our platforms, and other platforms as well, like Apple and Spotify.
And having this breadth of formats and distribution is really appealing to our content partners. I mean, it is a great example of what we've done with Kevin Hart. We have a really awesome channel on Sirius XM, Laugh Out Loud Radio, which leverages this huge stand-up comedy library, multiple shows, including his own Straight From The Heart, which is also a popular podcast on Pandora. And then recently, we work together to launch his Comedy Gold Minds podcast, where he's interviewing a lot of great comedic talent and that's available everywhere.
So, our Ad Rep deal with NBC is another great example of how we can provide even broader audio services to great media brands. And that's what leads us into kind of the third constituent which is advertisers. So, Sirius XM, Pandora and Stitcher together, provide major advertisers with everything they need to provide – to build this connection with listeners across all these digital formats. And that's increasingly what advertisers want. They want to be able to leverage the great platform we have on the music side, in combination with access to talk and podcast content as well.
And it’s a crowded space, like you alluded to. And I think we really offer a differentiated solution to advertisers because we provide access to both the scale and efficiency, alongside exclusive content, and quality add experiences, better measurement, and effectiveness. And we have also really great custom creative as well. So, I think for us, it's really about, providing unique solutions across all three of those constituents. And I'm really pleased given the Stitcher acquisition and Simplecast, where we now are in being able to do that effectively.
Ben Swinburne
Got it. That makes sense. So, if we think about the podcast in sort of both cases, Sirius XM over a multi-year period, do you think we should be focused on advertising? Should we be focused on satellite church, should we be focused on Pandora users, or all the above, but what would you suggest we will be looking at?
Jennifer Witz
Yes, I think, it has a lot to do with advertising, both from the standpoint of we believe we have strong growth in the advertising segment of our revenue, but also because we can provide these monetization opportunities for content creators. So, it's a dual purpose. But again, podcasting, even the advertising revenue is still relatively small, certainly, as you compare it to something like terrestrial radio, but listening, it has been a driver for a decrease in music, share over time. And the trend is towards more non-music content and audio. And so, we absolutely believe that we can be successful there. We've always been a leader in talk audio content at Sirius XM. So, I think we have really exclusive and powerful experience to bring to this.
Ben Swinburne
Got it. Great. Why don't we shift gears a little bit back to sort of the here now 2020, 2021 the pandemic? Your last year was certainly a quite a bit stronger than we thought it would have been if you'd gone back, I guess, sometime around this time last year, certainly, March or April, in a lot of ways. But maybe you could talk about how the pandemic impacted 2020’s performance and in ways that maybe that were not obvious for things that we can take into the future?
Jennifer Witz
Sure. I mean, I think, we were certainly surprised at how resilient our business was, I think many companies probably felt that way back this time. Last year, we had really no idea what to expect. And, the two obvious impacts were clearly depressed auto sales and advertising revenue. And we had difficult second quarter in both those areas. But both of them really started to pick up again, in Q3. Auto sales were $16 million in Q4, which is really incredible. And our advertising revenue bounced back pretty quickly. And so, in Q4 we were up 17%, year-over-year.
So, we had a really strong revenue in total of over $8 billion, it’s actually up slightly year-over-year. And I think EBITDA has geared up 6%, which is a combination of that strong revenue, but also, cost management and things shifting on the programming front, and obviously, lower stack and marketing costs because of the lower trial funnel. But I say this, the things we learned, we learned that we could produce pretty amazing content, despite being remote. And content that was really fresh and relevant to what was going on and live.
And we could do this all while being remote and not necessarily having access to studios in person. And this all comes back to churn. And what we were able to deliver to our subscribers, both from a content standpoint, and in terms of servicing our customers, like one of the biggest shocks from the beginning was just not having call center agent availability. And, I think, the teams just did a tremendous job on the call center management side and the retention side, continuing to service our customers and doing that, building new tools to be able to do that, given the constraints we had in many geographies and getting agents into the centers.
And so, it really – I think the biggest surprise for me was being able to deliver on our self-pay net add, we actually came out slightly above our original guidance at 909,000. And I think again, that's a testament to their strong churn overall, which has a lot to do with content and our ability to continue to service our customers well,
Ben Swinburne
Yes. I think a lot of people think of your business as a bit of a having reopening tailwinds because of the auto and advertising exposure. But your guidance, I think, was a little bit of a surprise to people, particularly around EBTIDA. Maybe you can just talk a little bit about what reopening looks like and manifests itself at Sirius XM in 2021, because maybe it's not as obvious as you would think?
Jennifer Witz
Yes, I think, we always provide guidance early in the year. And I think – I'm certainly being cautious on our outlook for 2021. There's still a lot of uncertainty as to when things really start to get back to normal. I'm really pleased to see even as of today, faster rollout of vaccines, more re-openings across the company, maybe even a stimulus package coming through. So, I remain optimistic about our position as things start to normalize.
I think as it relates to the big areas of impact on auto sales and ad revenue, we came into the year in a pretty strong position. Auto sales in January were 16.6 million on an annualized basis. There is some concern about silicon availability in the supply chain, but in general, I feel pretty good about where we are. There's certainly demand, customer demand for on both the new car and used car side.
And I think we're hopeful that as we see further rebounds in mobility, I mean, we still see kind of in our numbers about a 5% to 10% usage rate decline in car just because customers obviously aren't in their cars as much as they were pre-COVID. But in the U.S., we never really had a full lockdown, right. So, if mobility was down, but certainly not as much as you might have expected. And I think the nature of driving has changed. And in general, I think people want to own their own cars. Maybe there's a little more concern around ride sharing, and that's all really beneficial to us.
And the other thing I would just highlight is that we have the opportunity to really promote our out of car streaming services at Sirius XM. We did a free stream promotion and opening of our streaming service for free last spring for a couple of months, we brought a lot of great new content to the streaming platform from a number of artists. And I think as the world normalizes, certainly in this country that we hope to sustain these benefits of increased engagement outside of the car. Now that some of those behaviors and habits are reinforced.
Ben Swinburne
Yes. I know I tried and failed on your earnings call to get you to disclose your streaming-only subscribers. I won't try here, but I was just wondering as you think about your sub growth in 2021, I think the guidance is quite strong on the subscriber side. Would you call out any particular new or used streaming in car, anything you would highlight as being a particular tailwind in your mind, or it might be different than in prior years in terms of subscriber mix?
Jennifer Witz
I think, there's definitely a robust auto sales market like we talked about, right? I think the third parties are somewhere around 15.8 million for auto sales, and that would be up about 10% year-over-year. We certainly have the tailwind of increasing penetration rates. We ended last year at 80%. The full year number was about 78. So, I think on a full year basis, we'll be up a bit this year. We have those same trends kind of happening on the used car side where our penetration rate, sort of organically will increase a few 100 basis points again this year. And I think the biggest variables are what we could see in churn. So, last year lower auto sales means lower vehicle related churn is auto sales pickup. We should see that revert back to normal a bit.
And non-pay, I think a lot of subscription services saw this last year and we continue to see lower than typical entry rates on credit cards or debit cards, as consumers just have more spending. And perhaps the stimulus bill has something to do with that. So, we're watching those carefully. But I am excited while I haven't given any numbers. I am excited about growth in Sirius XM, digital subscriptions. And while it is still a pretty small portion of our overall self-pay base, it is important to our net ads. And I do see lots of potential here.
Ben Swinburne
So that's helpful. I wanted to just maybe just to wrap up on the guidance on EBITDA, I think you guys are expecting less than we usually see in terms of operating leverage from the business. Maybe you just talk about a little bit what's driving that and why that's kind of transitory for 2021?
Jennifer Witz
Yes. It's – some of it is just the reversal of what happened last year, where we had installations and the SAC and marketing kind of associated with trials kind of fall more than auto sales because of various production shutdowns and things. And this should just naturally switch this year to rebuild and inventories again, depending what happens with silicon, but – and sales go up. And so, I think I would expect to continue to see investment in SAC and marketing on that side. And we've seen – we saw a number of savings last year on the content side because certain launches were postponed to this year. We had sports that didn't happen this year, what will happen this year, the Major League Baseball in the NCAA tournament for instance, and we are investing.
So, we do have new content initiatives. We are investing in our digital product development across our apps. And I think the last thing I would highlight is that, and you've heard us say this before, but we are taking a pragmatic approach to what could happen with Web V, which sets the streaming royalty rates. And that could be a headwind on our 2021 royalty costs. The good thing is that once it's set, it's the rate for the next five years. So, we wouldn't expect that kind of change going into next year.
Ben Swinburne
Got it. That all makes sense. You touched on content in that last answer. So, I wanted to shift the programming spend. And I can remember probably a couple of liberty investor days ago, Jim Meyer talking about your scale being maybe the biggest differentiator long-term for the company or something to that effect. So, you guys have the ability to invest substantially in content, and you've really highlighted that as a differentiator, but we're seeing a lot of money thrown around the audio space. And I can remember, because I'm old back in the pre-merger days of Sirius XM, that was what it felt like a lot of battles over some very expensive at the time IP, headline probably like the first Howard Stern contract. How do you look at the world today? And what do you tell shareholders that – into that are worried about sort of a spending war among some of the bigger scaled audio players, whether it's in podcasting or just exclusives or anything else?
Jennifer Witz
Yes. I don't see a real competitive war on content. I mean, I think we have a really strong set of programming. In our focus we’ll continue to be on providing this variety of exclusive and non-exclusive in music, news talks, sports, comedy, entertainment for Sirius XM subscribers. We are absolutely focused on reinforcing the value of our subscription packages. And I guess as you know, I would just point out that also with the shift in video, there has been a shift to non-life or non-linear consumption in audio, but we clearly see the value in live news and sports. And we provide a really unique offering there. And we've added the play-by-play to our digital subscriptions as well.
So I think, during COVID, I think this was really important to be able to have this kind of platform with live access so that artists for instance, could jump on their channels and have access to their fans. But I think, where this is all coming from, obviously is the growth in podcasting, raising the profile of audio in general, certainly talk more specifically. And I think in the early days for us, we looked at well, what kind of talent would make sense for radio, but there's so much talent out there coming from every different corner, whether it's entertainment or sports, media brands that would work well in audio. And I think that's really where we've built our expertise and the rising profile podcasting just opens up more interesting opportunities. We've talked a bit about how I think we are uniquely positioned to monetize.
So I think our great relationships with our core content partners that we've had for many years are just enabling us now to work with them, to build their audio presence and other platforms now that we have all these assets uninterrupted as a great example, what we can do with this with new content across Sirius XM, Pandora, and then off platform as well.
So I think we just, we're really uniquely positioned and I think given our acquisition of Stitcher, we have a lot more visibility into how these deals are done, but we are always disciplined, we always have been. And so while I'm not going to say, we're not going to add more content, I think, you should expect us to do it in a really disciplined way where we can monetize either through, again, kind of supporting the overall value proposition of our subscription, our premium audio subscription, or monetizing off platform in broader ways, primarily through advertising. So I think, again, you should feel that we're going to continue to be disciplined and we're really lucky to have all these different ways to be able to monetize the content.
Ben Swinburne
Sure. And you guys also have, I think one of them, the highest gross margins in the audio space, are you – do you think that the landscape allows you to maintain, or maybe even expand the kind of gross margins that you report, at least for the Sirius XM business?
Jennifer Witz
I think margins are more of an output really then a driver of our business decisions. And many of the changes we're making here are pretty modest. We have really an unmatched programming lineup today and I don't think that our margin profile changes dramatically. And look, there'll be some shifts between subscription and advertising revenue as we continue to build advertising and the margins will be slightly different there, but overall, I don't see a major change and I'm excited about the opportunities that we have as a result.
Ben Swinburne
Okay, great. Let me ask you about the used car channel, because that's an area that has been actually probably an underappreciated source of subscriber growth and one that you guys are very focused on. Can you tell us a little bit about how big that funnel gets over time and sort of where we are today and what you're doing to sort of maximize the conversion to pay in an area that I think a lot of people would assume it would be harder for you just given it tends to be maybe a more price sensitive buyer?
Jennifer Witz
Yes, I mean, we certainly have the tailwind of the trial funnel growing and our increasing new car penetration rates will continue to roll through used cars for many years to come. But as used cars get older, the owners of those vehicles are probably a little less likely to pay for premium audio. And I do expect our overall used car additions to continue growing. But not necessarily our conversion rates specifically just as the vehicles get older, but we obviously work hard to improve on conversion and we're looking to test some different kinds of packages. I think we have room both at the low end and the high end to drive more demand. And I think you'll see us doing more of that this year, but one of the biggest opportunities we have here is to continue to grow programs to get more used car sales on trials. As you know, on a new car side, it's really seamless, virtually every car that's enabled, that's sold, comes with a trial, it's much more fragmented on the used car side.
And we are continuing to grow these platforms to capture, the point-of-sale transaction to be able to provide the trial. We have programs in place where it might sound obvious, but not every trial is actually activated and working when the customer gets in the car. And so, we have programs with auction houses and dealers and others to make sure that the radio is on and conversion rate – the conversion rate impact of that is actually pretty significant. So, there is still a lot of opportunities to make sure that we're addressing kind of, I would say the points of leakage in the use trial funnel to continue to grow these additions over the next several years.
Ben Swinburne
Got it. We've only got a few minutes left, Jennifer. I wanted to make sure we hit on Pandora, which is obviously an acquisition from a few years ago impacted by the pandemic for reasons that are fairly obvious, but what's your outlook for that business as you look out over the next several years, particularly as hopefully we come out of the pandemic and behaviors normalize and the ad market recovers.
Jennifer Witz
Yes. Simply the pandemic certainly hit advertising revenue on Pandora very hard. But that came back pretty quickly, as we discussed in the fourth quarter, advertising revenues were up nicely year-over-year. But the reality is that from a pure user standpoint, the business hasn't performed where we had expected. And we have had some wins like our new modes feature which customers really liked the ability to customize their stations and new exclusive content like from uninterrupted and increased listening on connected devices we've benefited from that at Pandora as well. But there's no question, the music streaming space is really competitive, especially with the integrated tech companies using music to drive other parts of their business.
And so, while I think the free business is very different and really superior to the interactive music streaming business and it's still challenged from a margin standpoint. I mentioned we'll have more information on streaming rates in the next couple of months. But I think the real benefit and one of the bright spots at Pandora is our monetization, including companies RPM metric where we just have been able to continue to drive innovative new ad units, higher sell through and increasing CPMs. And this combined again with our ability to offer advertisers into this great platform for targeting and measurement at Pandora, but then use that salesforce and the ad tech there to give advertisers the opportunity to reach a much broader set of audio properties, whether it's music or podcasting, or otherwise I think is really the opportunity for us to leverage the Pandora asset going forward.
Ben Swinburne
Got it. Okay. Maybe to wrap up on some of the financials you guys bought back a lot of stock in the fourth quarter at least relative to expectations, leverage is in the low threes. How should we think about capital allocation in 2021, kind of relative to what you guys did last year? I think was a little under $2 billion?
Jennifer Witz
I think generally speaking, it's going to be pretty similar this year. We've increased our dividend by 10% per share in November, which was the fourth consecutive year we did that. But we continue to – as you know, devote the bulk of our capital returns, share repurchases. So we'll work with the Board really closely over the course of this year, just to discuss, how we're going to allocate capital going forward. But I think, in general kind of the level of the capital returns and leverage should be generally similar as last year.
Ben Swinburne
Okay. Well, I think we're out of time, Jennifer. It was great to see you. Thank you for being with us this morning virtually and thanks everybody for joining us. Jennifer, it's great to see you.
Jennifer Witz
Thanks, Ben. Great to see you too.
Ben Swinburne
Okay. Thanks, everybody.
Question-and-Answer Session
Q -
- Read more current SIRI analysis and news
- View all earnings call transcripts
