Sirius XM Holdings' (SIRI) CEO Jennifer Witz Presents at J.P. Morgan Technology, Media & Communications Conference - Transcript

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Sirius XM Holdings, Inc. (NASDAQ:SIRI) J.P. Morgan Technology, Media & Communications Conference May 25, 2021 10:15 AM ET

Company Participants

Jennifer Witz – Chief Executive Officer

Conference Call Participants

Sebastiano Petti – JPMorgan

Sebastiano Petti

Good morning, everyone. My name is Sebastiano Petti, I cover the communication services space here at JPMorgan. I want to introduce Jennifer Witz, CEO of SiriusXM. As many of you know, Jennifer became CEO of SiriusXM in January, 2021. Jennifer joined SiriusXM in 2002 and has held a variety of leadership positions with the company. Jennifer, thanks for joining us today.

Jennifer Witz

Thank you, Sebastiano. I’m happy to be here.

Question-and-Answer Session

Q - Sebastiano Petti

Great. The U.S. seems to be more open every week. Can you maybe start with an update on what you’re seeing recently from customers?

Jennifer Witz

Sure. I’ll start first with the SiriusXM subscriber base. Over the past year we’ve just seen record low churn as I’m sure you’ve seen in our earnings reports and it’s just a testament to the incredible loyalty and satisfaction that our self-pay subscribers have with our service. We’ve also seen really strong increases in listening outside of the car, which has been an important initiative for us. Great reactions to a lot of our new content, we had a number of artist pop-up channels on our streaming service last year and we’ve also launched new content, as you know with Kevin Hart and podcasts from Marvel.

And I think it’s just all great evidence that we have this terrific premium content bundle and our subscribers are very loyal. I think the reopening trends are encouraging. Commuting is definitely not back to normal, I think many of us are experiencing. And listening and trial is rising. We are seeing pretty material improvement even over the last few months here. And now we’re at about 90% of where we were pre-COVID in terms of listening and trial. We’re seeing these same kinds of increases on the Pandora side as well in listening in car.

So turning to the trial starts, April was another really strong month in SAR 18.5 million and that strengthened auto sales obviously helpful through the SiriusXM trial starts in Q1. We had a record quarter for trial starts, which bodes well for the less – the rest of the year. Then the OEMs are definitely struggling with inventory levels. And I think that is impacting sales to some extent. But I’m encouraged by the recent commentary from Ford and other OEMs, even recent as last week that this could change and turn around really in the second half of the year.

And then just more of the business side, advertising has been very strong for us and the market remains robust. Obviously with the reopening, there are a lot of brands coming back into the market and they want to participate and we’re definitely seeing the benefit of this. And we’re really pleased that we announced the formation of SXM Media. I think we’ll have a chance to talk more about that later. But really helps us capitalize on the strength in advertising sales coming into this year as well.

Sebastiano Petti

Yes. A lot of great points want to come back to as well. But I think starting with the trial funnel and auto sales. So SIRI reported what I felt was pretty strong 1Q results late last month. And since that time you mentioned April SAR came in at 18.5 million, which was the highest than any month over the last 16 years. So you mentioned Ford, but what are you hearing from OEMs and your dealership partners perhaps, and just given the lower level of inventory, is it mathematically just difficult to think that SAR remains at these levels through the rest of the year?

Jennifer Witz

Yes. I agree. The third-party estimates on SAR are still probably in the high 15s for this year, which obviously would suggest a decline from where we’ve been recently and perhaps adjusts a bit for inventory levels. The levels of inventory day sales are in the mid-30s, which is something we haven’t seen really since 2009. And so we would expect inventory levels to have an impact on sales. I think we are seeing that and hearing that from both the dealers and OEMs. But the demand is certainly there, right, on both the new car side and the used car side. You see that on the used car side and pricing as well. But again, I think the commentary we’re hearing from the OEMs is that hopefully that some of the supply chain issues will be impactful lesson in the second half of the year.

Sebastiano Petti

And so hopefully the effects will probably dissipate as we move into 2022. Is that kind of their expectation?

Jennifer Witz

That’s our hope, but it really is a function of demand across a number of industries. It’s just this unbelievable confluence of events that we’ve had over the past year with demand for consumer products that use these chips and the automated manufacturers are just feeling that impact obviously. But I think there’s a strong effort to continue to increase supply among the silicon producers. And I’m hopeful that going into next year, things will be back on track.

Sebastiano Petti

And on the call, you noted that if not for this uncertainty and historically low inventory, you would have most likely increased your subscriber guidance for the year. So when you – even when considering the silicon shortage, 2021 guidance still seems pretty conservative as you think about the tailwinds of rising penetration, higher auto sales and the increasing digital-only subscriptions. And also payment trends as you touched on early, churn is quite low and subscription businesses are seeing the benefit from lower churn rates. I mean, what are we perhaps and Street missing as you add it all up?

Jennifer Witz

Well, we are off to a really strong start. And I think our first quarter results demonstrated that. It is actually typically – the first quarter is typically our lightest quarter of the year. But we delivered really strong self-pay net adds despite that. And I would point out that we don’t really have much of a history in adjusting our guidance on our first earnings call of the year. And we are – we’re going to watch what happens over the next few months. I think it’s still early in the year, I’m eager to see how this quarter settles out on vehicle production. If it really is the trough, then we’ll start seeing that over the next couple of months. And I want to see what that does in July as well.

But our guidance probably does look a little conservative at this point. I am very focused on churn and we’ve had these incredibly low quarters. I would expect some of the trends particularly on non-pay, as you said, spending levels have been really low, consumer savings levels are really high, I would expect that to change. People are eager to get out, start traveling more, going to restaurants and as that starts to pick up, it should – we should see some reversion back to a normal trend on non-pay. And then of course, vehicle related should tick-up as well with the continued strong demand on auto sales and trial starts for us. But the year looks really good given that we started off the first quarter really strong with trial funnel strength and also our PEN rate, which is continues to be just over 80%.

Sebastiano Petti

Yes. I think that makes sense. And as shifting to some of the new offerings that you talked about in the most recent earnings call, included a new top tier high-end offering, and then perhaps an upcoming family plan offer. As you look across SIRI’s product suite, do you see these as holes in your offering or is – and how are you thinking about how meaningful these could be longer-term?

Jennifer Witz

Well, I think it’s an opportunity and not necessarily a hole, we’ve really just had a long-term demand for our highest package or highest tier is our all access package. And we’ve had strong take rates on that package all along. I think we have a segment of our subscriber base that just isn’t that price sensitive. And the research we’ve done over the last year or so indicates that there’s more interest from our subscriber base in something bigger. So it’s something that has additional content, VIP customer benefits and multiple access points. A lot of our customers do have multiple vehicles subscriptions, and they’re also able to stream with those subscription.

So we’re pulling all these things together. We’re expecting to have something to test among our customer segments in market in the next few months. And I think there’s – we’re fulfilling really a customer need here. And this just continues to let us differentiate and add value across our packages at different price points to really capture that consumer demand along the pricing curve. And we’ll continue to find ways to differentiate these packages with content and features. We’ve added a lot of content over – even the past few months with Drake’s new SOUND 42, a channel on SiriusXM, and we have great new content coming with TikTok Radio and our new podcast with Seth Rogen.

Sebastiano Petti

And I think at the Liberty Analyst Day you talked about potentially exploring an ad supported SiriusXM satellite tier. Is this more of a long-term opportunity as 360L penetration grows, and that platform reaches critical mass. How should we be thinking about that?

Jennifer Witz

So there’s really two pieces to this. So we were in market now testing a limited channel, three package it’s about 10 channels and its ad supported. It’s targeted towards those who never subscribed, maybe never converted and didn’t subscribe or did subscribe and then have since canceled. And it can be done in these legacy vehicles with broadcast like ads. Clearly the opportunity is in 360L because we can offer much more targeted advertising, which has the potential for higher CPMs. But this opportunity with 360L is just starting to grow and we have about 2 million vehicles in market, and that will expand significantly over the next few years. But in the meantime, we’ll test in these two sets of vehicles to see what is the take rate, what is the cannibalization?

Right now the response rates have been pretty good, it’s early days and we see very little cannibalization of either our current self-pay base or ability to continue to win back customers. That’s – in addition to this being kind of an opportunity to monetize through advertising, it’s a way to really keep these radios on and active and people engaging with our content and using that platform to upsell. And we do this free-to-air effort a couple of times a year, we have that launching tomorrow. So we’ll light up all our inactive radios. We’ll also have our streaming platforms available for free over the next 10 days or so. That is also a great way for us to get engagement with our service, bring people back to our service who maybe never subscribed or had canceled. And this, I feel like is an even bigger way to do that more broadly.

Sebastiano Petti

The increasing engagement outside of the cars, obviously very important for SiriusXM and then on the call, you noted again that – and you touched on earlier that commuting rebounds are about 80% of pre-COVID levels in 1Q, as high as 90% I think in the last couple of weeks, including in-app listening as well as other consumer electronics. I mean, do you have a good sample set of what engagement has done over the last year and what out of cars – what out of car engagement has done as well as it remained elevated?

Jennifer Witz

Yes. So it’s definitely remained elevated and we continue to work to push this even higher with existing subscribers, new subscribers and/or trialers. And as we’ve said many times, this is a great way for us to drive improved retention. We know that if consumers engage with us across multiple platforms, multiple devices in and out of the car, that they’re more likely to stay with us. And there’s still more room for growth. We need to continue to drive the awareness outside of the car. And right now, since and through COVID we’ve seen this increase coming a lot from our younger generation subscribers.

That’s maybe not surprising, but we also saw pretty material increase in the percentage of our subscribers overall, who’s started listening to SiriusXM as their primary audio source outside of the car. And this obviously ties into retention benefits, ties into revenue benefits. I think that it also really helps with content discovery. We’re still limited in many of our vehicles to – I turned the dial to find new channels, but if you use the app, there’s a lot more opportunity for us to serve up more personalized recommendations on channels and other content that customer’s can also get when they’re in their cars.

Sebastiano Petti

Yes. I think just going back quickly to 360L. Penetration grows and mirrors your new car penetration over time and hitting about 80%, I think in 2025 is that you’ve mentioned?

Jennifer Witz

That’s right.

Sebastiano Petti

How meaningful could the marketing SAC and churn and top-line benefits be over time?

Jennifer Witz

Yes, it’s still early, right? We have 2 million vehicles in market and through they’re all at different stages in trial and self-pay and inactive. But we know that customers love the future set and through the research and surveys that we’ve done, they love the ease of use, which we’ve always brought in our products and the great interface. A lot of the early rollouts have also come with these great new larger screens. So we’re digging into the data. We continue to find really encouraging results on listening and conversion rates, especially as we really try to differentiate between those that are 360L capable and those that aren’t and isolate for other variables. But I’m really encouraged for – with what we’re seeing so far on the conversion rates side also, especially for customers that are using the features, right?

So our focus right now is continue to drive awareness of the features because when we see the usage of those features, whether it’s on-demand content or a Pandora artists stations or the broad set of other channels we can deliver, more personalized music channels because of the IP delivery. We see stronger conversion rates if customers are using those features. So our objective is, now we have so much more data given that we have this return path of data on what customers are using and what they’re listening to or not listening to, we can target our marketing to encourage that awareness and usage of those features.

And that would expect us to have a lot more personalized marketing in end market as we continue to grow this population. And it’s going to help us with efficiency in the marketing as well, right? We may not need to market in the same way to every customer. Pretty much, before this without a lot of information, it was much more of a one size fits all marketing effort.

Sebastiano Petti

Right. A key focus for investors is the growing ubiquity of connectivity in the car, while at the same time Android Auto and Apple Play continue to make inroads. So in the past theory has talked about connectivity being more friend and foe. But what do you tell investors who are concerned about these two converging trends and its impact on SIRI longer-term?

Jennifer Witz

Yes. We face a lot of competition over the years of different forms, right? CDs, iPod’s, we’ve had obviously the growth in streaming music services, taking advantage of CarPlay and Android Auto, as you pointed out. Yes, we’ve consistently grown through this environment. And I’d say that CarPlay and Android Auto in and of themselves, obviously our competitors. We’re more focused on what is the next-generation and where the OEMs are going with the operating systems in the car. And we’re working really closely with our OEM partners on maintaining that premium experience for our SiriusXM customers in the car by leveraging the operating system and the capabilities that, for instance, Google is bringing to many of the auto manufacturers.

We’ll continue to benefit from this connectivity, just like everyone else. But then we can do it in the way that we’ve always done it, which is a highly easy to use an accessible interface in the car. And now, again, this connectivity through the modem in the car allows us to provide a lot more personalized content to provide real on-platform marketing recommendations. And obviously we don’t have the constraint of the satellite bandwidth. So we have the opportunity to deliver a lot more content as well on the platform.

Sebastiano Petti

So advertising in 1Q is very strong and Sean highlighted the broad-based strength that had continued into April. So how have things trended since that time, and are you continuing to see strong digital audio advertising demand?

Jennifer Witz

Yes. We’re really thrilled with the 24% growth we saw in the first quarter in advertising revenue. And this was driven by both on-platform and off-platform modernization, including increased presence in the podcasting market. Pandora continues to drive improved monetization. Our RPM rose 27% in the first quarter to $86. And our off-platform revenue grew 48%. So we’re really seeing it across the board. And we’re encouraged by this strengthen – hopefully it’s going to continue as more and more categories continue to open up. And again, brands want to leverage the unique capabilities we bring to the table with SXM Media and on our tech stack side as well.

Sebastiano Petti

And SIRI is the leader in digital audio advertising in North America, which we believe is under appreciated by investors. How does the newly created XX – SXM Media group accelerate these efforts? And did the prior structure create any meaningful inefficiencies?

Jennifer Witz

Well, I also believe it’s under appreciated. So I appreciate you pointing that out. We have the largest addressable audience, 150 million listeners and the largest digital audio ad platform in North America. And I think investors and advertisers, and to a certain extent, content creators aren’t fully aware of all our capabilities. And last year we generated $1.3 billion in advertising revenue, arguably a very difficult year. And we’re really well positioned for a solid growth this year. SXM Media brings all of these ad sales capabilities together across SiriusXM, Pandora and Stitcher into one combined organization.

And we have a full suite to compliment that sales force of distribution and monetization solutions for content creators and publishers and marketers. From the advertisers side, our scaled ad network offers really the leading podcast advertising network and mid roll premium exclusive ad representation for other third-party platforms like SoundCloud and NBC News group as well. And then we have significant inventory also through our Pandora audio exchange packs or our ad wave marketplaces as well. So we really are the largest aggregator of bringing in audio content for advertisers. So this group, SXM Media brings together this phenomenal – this really talented sales force and access to all of these audio kind of inventory capabilities like music, spoken word and podcasts, we have, I think the most unique and best-in-class ad tech stack with the combination of AdsWizz and Simplecast that we bought last year.

We also have one of the best in-house creative agencies that serves advertisers called Studio Resonate. So all of these capabilities under the umbrella of SXM Media, I think really provides a unique opportunity for advertisers to reach premium content, right, and unrivaled listener base unique – using unique technology solutions, we have proprietary research, we have creative services, production services, and live and virtual events in addition to the millions of engaged listeners that we have across our platforms.

Sebastiano Petti

Just sticking with the off-platform business for a moment, it continued to grow very nicely as you pointed out, even on an organic basis, if you back out what it could be the Stitcher kind of contribution in the quarter. Can we spend a little time perhaps on the off-platform opportunity and your conversations with partners? You touched on a lot of the different pieces just now as well. But can you tell us a little bit more about the unique value proposition SIRI brings to the table and how big the segment could get long-term?

Jennifer Witz

Yes. I mean, it’s leveraging this great infrastructure that we have across sales and technology. And the scale and the track record we have for monetization, media properties, publishers, creators can focus on what they do best, right? Creating and making great content and we can help them monetize. So they don’t have to do that on their own. And we’re really pleased with how we brought all that together with SXM Media. We reached two-thirds of the total digital audio audience out there. And off-platform revenue grew 48%, not counting Stitcher in the first quarter. We continue to see strength there and we hope to bring other third-parties to our platform. But as I said, we’ve extended, we actually – exclusive ad representation in SoundCloud in the U.S., we’ve added Europe. And we’ve added the broad representation for the NBC News properties, MSNBC and many CNBC podcasts as well.

Sebastiano Petti

So sticking with podcasting, does SIRI need to move faster in podcasting, just given all the headlines you hear from the likes of Apple, Spotify, iHeart, and others?

Jennifer Witz

Look, we’ve done a lot in the last six to nine months, we acquired Stitcher and Simplecast and more recently, 99% Invisible, which is a great asset for us. And I think we’ll continue to look at opportunities there. Right now I’m really focused on continuing to absorb those assets and making sure that we’re presenting ourselves in a unified way. We’ve also added some really great brand and talent relationships in podcasting with Marvel and Kevin Hart, and now Seth Rogen. And that’s where – we just have these really unique relationships with talent and artists. And so I think we’re going to bring a lot to the table there as well. I do think we’ve always managed content investments in a disciplined way and you should continue to expect us to do that.

It’s a competitive space, for sure. I continue to be surprised at some of what I’m seeing out there. But there are a lot of big platforms, competing for this. And we have a really unique opportunity given the platforms we have to add content to our platforms to enhance the value of our services. But also again, help content creators really monetize off-platform and on any platform really. So we’re – we absolutely believe that content creators want wide distribution and we can offer that.

Sebastiano Petti

Yes. That did come up on the call as well. Just you’re focused on your strategy of just awareness for your content partners, I guess, versus some of the subscription-based services. So I guess, you have a long history in subscription-based services, but the broader distribution and awareness you and Scott touched on, on the call, why is that the right strategy for SIRI?

Jennifer Witz

Yes. Obviously SiriusXM has great capabilities on the subscription side, and we’ll continue to look for opportunities to bring content, including podcasts to the SiriusXM platform to enhance our subscription. We also have a premium podcast subscription through Stitcher that we’re continuing to work with and look at as well. I’ve said before, I’m not sure that content creators and consumers really want a number of micro subscriptions. And so aggregating into a premium subscription bundle is what I think makes most sense.

And then I think – again, what we’re hearing from content creators and publishers is they want broad distribution and they want ways to really grow their audiences. And that’s what Stitcher has always really done well. And that’s where I think we will continue to focus unless there’s a reason to pivot in the market, but that’s certainly what we’re seeing as all these new deals come forward.

Sebastiano Petti

Multiple third-party research firms have forecast greater than 30% growth in the podcast advertising market for this – for each of the next two years growing to over 2 billion, I think by 2023. Is there any reason SIRI’s podcast portfolio can follow a similar growth trajectory over that time?

Jennifer Witz

Well, I think again, as we brought together these great assets with Stitcher and we’ve integrated our ad sales efforts with SiriusXM Media, I think we bring a lot of value to content creators. And I believe that we will continue to participate in this growth. We’re very optimistic that we can see double digit revenue growth in podcasting for years to come. But it is still a relatively small piece of the audio advertising market. And it’s something like 115th, the size of terrestrial radio. And our platforms, our recent acquisitions, our expertise in SXM Media positions us really well to not only go after this audio advertising market in podcasting, but also meaningfully capture more share from terrestrial radio ad dollars as well.

Sebastiano Petti

Okay. You took the $1 billion write-off for Pandora acquisition at year end. MAUs continue to be pressured, but monetization has been very strong as we’ve discussed. What are some of the levers SIRI can pull to moderate the decline in MAUs and has the strategy at Pandora changed at all since you acquired the company?

Jennifer Witz

I continue to be really pleased with the Pandora asset. I obviously would prefer that we have a quicker change in the trajectory of listeners. But we are the largest free digital audio platform in the U.S. and that affords us a lot of opportunities. I mean, it’s monetizing extremely well. We’re working to improve the business with better content, more relevant recommendations and product enhancements for the user experience. You’ve also seen us done a number of really interesting partnerships. We’ve had a standing relationship with T-Mobile and we launched a really specialized, customized Pandora experience for the T-Mobile subscribers and it has ad free weekends, it has special access to SiriusXM content and music channels.

And we also just yesterday announced a relationship with TikTok, which is a phenomenal brand in the social space, as you know. And it’s going to allow us to – I think, really expand both of us, TikTok and Pandora and SiriusXM to expand our audiences. We have some really unique collaborations with TikTok. So across Pandora, many of the TikTok creators will be launching playlist. We’ll bring Pandora live experiences and events to the TikTok platform. And in the summer, we’re going to be launching a channel on SiriusXM as well.

So, yes, I think you’ll see us do more of those kinds of collaborations. We also – we have this great feature on Pandora called Modes which is, our service has always been traditionally more radio focus and Modes is a great way to customize your experience within your stations. And we’ve had really strong engagement from artists who want to come to the platform and take over Modes. And this is just a really unique feature for us to provide significant promotional value for artists and unique ways to connect with their fans because again, we have the largest free digital audio platform in the U.S.

Sebastiano Petti

Just a few minutes left here. So just want to pivot perhaps. Your largest shareholder has said that the year remains under monetized. So podcasting, as well as spoken word are becoming increasingly important to digital audio competitors. What’s the risk to SIRI’s long-term gross margins as renewals from premium content become more competitive, or as you try to scale up in podcasting?

Jennifer Witz

Well, we’re going to stay disciplined, right? And we have a long track record in doing so. And you’ll continue to see us do this. And that means sometimes we’re going to have to walk away and we are willing to do that. We will invest in the types of content we think are important for our platform, but we have all these new ways now to monetize, right? And that’s one of the things that we’ve built over the last couple of years, obviously after the Pandora acquisition and Stitcher is this really strong advertising component of our revenue.

And I’m confident that our strong business model, our great monetization will enable us to continue to maintain the best premium content bundle in the industry with all of this variety across formats and genres. And we’re going to continue to see players invest a lot of money. Some of those players have pretty low variable margins and those content investments, we’re going to see if they actually pay off.

Sebastiano Petti

That’s fair. Even 1Q was very strong and obviously included some benefit from the chip shortage while SIRI’s – while the CRB’s Web V decision is slated for June 14th, you did assume a higher royalty rate in 1Q. Even though the CRB lowered the ad supported royalty rates of 2015’s decision. Can you take us through some of the areas of investments in 2021 that will perhaps weigh on the EBITDA growth and what’s implied in your guidance?

Jennifer Witz

Sure. On Web V specifically, we don’t really have anything new to say here. We’ll find out in the next couple of weeks. As we’ve said before, we’re taking a pragmatic approach, which you can certainly take to mean we are not assuming the rate will go down at this stage. But maybe we’ll be surprised. We are investing more in programming. Of course, in this discipline way and we do have new ways to deploy and monetize that content. We do have some comparison issues, right, like with sports content, we did renew Howard. We launched Drake this year and we have expanded our digital rates – our digital rights with many of the leagues for play-by-play, which will, I think continue to help us grow our SiriusXM digital subscriptions.

And yes, we’re going to see some impact from fewer installations on the SAC expense. And I’m hopeful again, that we’ll continue to normalize as we go into the second half. And I think we are seeing on the marketing side though, with the strength in the trials, more marketing associated with our normal cadence to convert subscribers to self-pay. And we are ramping our marketing to support our digital SiriusXM subscriber acquisitions as well.

Sebastiano Petti

Leaving off last question here, SIRI remains a free cash flow machine and historically has returned 2 billion of excess capital annually. What are the capital allocation priorities from here? Do it additional investments in digital audio make sense? And how does Liberty’s ownership state factor into this perhaps?

Jennifer Witz

Well, we’re always looking for opportunities to grow, whether that be organic investments inside the company or select acquisitions where it makes sense. And so we’ll continue to be opportunistic there. Reality is we generate a lot of excess cash and we’ve had a long track record now of deploying this capital shareholders through a mix of buybacks and dividends. And I don’t see any reason this can’t continue in some form over the longer-term. We can afford a higher regular dividend payout, obviously we’re special dividends. We could also see Liberty perhaps participating in our buyback once they’re above the 80% level.

So we’ll continue to look at investment opportunities. Liberty is very supportive of that as, as our Board both internally and externally. And then of course, we will be working with the Board, it’s ultimately the Board’s decision about future capital return decisions. But I’m very confident in the long-term prospects of SiriusXM. We’ve got a fantastic business, a really strong business model, lots of strategic and financial flexibility and really tremendous opportunities in front of us.

Sebastiano Petti

Great. I think that’s a great place to leave it. Jennifer, thank you so much for joining us today. Thanks everybody.

Jennifer Witz

Thank you, Sebastiano.

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