Sirius XM Holdings Inc. (SIRI)
Deutsche Bank 31st Annual Media, Internet & Telecom Conference
February 28, 2023 02:40 PM ET
Company Participants
Sean Sullivan - CFO
Conference Call Participants
Bryan Kraft - Deutsche Bank
Presentation
Bryan Kraft
All right. Thanks, everyone, for coming. Really happy to introduce Sean Sullivan, who is the CFO of SiriusXM. Sean, thanks for joining us.
Sean Sullivan
Thanks, Bryan. Thanks for having me.
Question-and-Answer Session
Q - Bryan Kraft
Why don't we just maybe start off with just talking about your 2023 guidance, it Is obviously heavily impacted by the combination of macroeconomic pressures, including weak ad market, weak auto sales as well as some company-specific factors, including higher satellite CapEx and music royalties.
Do you want to maybe just start off by walking us through some of the moving pieces that are affecting the guidance for this year?
Sean Sullivan
Sure. No, happy to. So maybe we start with the macro factors in terms of advertising and auto sales. So on the advertising, I'm sure it's been a key topic of the conference that we exited Q4 of '22 at a bit of a depressed rate. You saw our minus 3%. We've certainly seen that persist here in the early part of the first quarter.
That being said, I think we're all anxious -- not anxious, anticipating -- probably a better way to say it, anticipating a bit of a recovery in the back half of the year. Certainly, if it improves sooner than that, that's hopefully some positive upside for us.
But as I think about whether it's major agencies, whether you think about [eMarketer], I think everybody has tempered their expectation, at least for the first half, 9 months of the year. I think a couple of bright spots, our podcasting seems to be fairly stable. And you know we've made a tremendous amount of investments in that area.
So I feel optimistic about what we'll see in the podcasting side. We are a big player in the programmatic space in audio. So I think as people put their money to work in a more flexible fashion, I think that will benefit us, too. But -- so overall, we're cautious here, a lot of uncertainty in the first half. So I guess that is what I would say about the advertising market.
In terms of auto sales, we look at all the third-party results or projections for the year in terms of SAAR. I think everybody is looking at it as a Q4 recovery. I know we had a bit of a nice pop here in January. I don't know that one month is a trend. So we'll see where that goes.
I mean it's -- we hope -- we obviously would benefit a lot from both the new and the used side. As you know, trial starts, I think we're down 9% and -- new and used trial starts were down 9% and 7%, respectively in '22.
So we're cautious as it relates to the first 9 months of the year, I think most of us believe that it's a fourth quarter recovery. As you know, with our trial start structures, et cetera, that's really a '24 conversation for us in terms of what it could mean.
So I think those two are the macro factors that influenced our guidance in terms of self-pay net ads and some of the revenue in the financial guidance.
And then there's certainly a couple of things on the cost side that we highlighted. I think we highlighted in the third quarter, we certainly reinforced them in the year-end call.
But on the one hand, we've got a cash tax profile that we're finally stepping up to being a full cash taxpayer in '23. So that's certainly unique to us and a onetime that will normalize as we think about '24 and beyond. We have the -- that's about $170 million. I think we've said for '23 incremental.
On the royalty side, it's kind of a two-parter. We had this pre-'72 settlement that happened in 2016 that rolled off in '22. So we're seeing a step-up in royalties in the SiriusXM side in '23, and then we've got the CRB with a 9% CPI inflator. So those two combined, it's about $100 million incremental cost to us.
So -- otherwise, you think about the investments we're making in both satellite and non-satellite CapEx. Satellite, I'm sure we'll talk about. It's -- we're in kind of in a high watermark year in '23. And as we make improvements to the product and some of the foundational things we're doing around, identity management and commerce, that's all embedded in the guidance, too, as you think about free cash flow for the year.
So it feels like a lot of headwinds. I think there are a number of things in our control. I think the good news is '23, I think, really does position us well for growth in '24 and beyond. It's a bit of an investment bubble that hopefully, our communication has gotten people to look through and see what '24, '25, '26 can be.
Bryan Kraft
Okay. And what needs to happen in order for the company to return to revenue, EBITDA and free cash flow growth in 2024 that's, say, more similar to the company's historical growth profile? I mean, is that even achievable?
Sean Sullivan
Yes. I think -- as I just said, I think the investments certainly in satellite and non-satellite, I think, are high watermarks in '23, based on the current roadmap. So what needs to happen? And certainly, the things in our control is we can continue to be more efficient on the cost side of the business.
I think that -- when I look at our competitor set, we haven't really grown headcount as dramatically or grown investment in the business as dramatically as some of our other market participants. There's always room to do that. I think I've been very direct about the fact that we'll keep looking at ways to be more efficient and take costs out of the business. So we'll do that.
But what needs to happen? Certainly, SAAR return to a 16 million level or thereabouts certainly would help us. On the used side, a fairly fragmented marketplace, but -- and less information on that, but I think we're expecting those to be down a bit this year, too, in terms of trial starts. So I think both new and used can help us.
So I think we're on a path. I think we've got to absorb some of these onetime normalizing events, and we're able to bring back to growth and having us back to where people have historically seen us generate.
Bryan Kraft
Great. And I know you just mentioned getting back to 16 would be part of getting back to that growth algorithm. What's the -- I don't know if you can answer this, but what's the sort of level, the threshold where auto sales would need to reach in order for you to just kind of have solidly positive self-pay net ads on the OEM side?
Sean Sullivan
Yes. I mean I think I addressed that a bit. There's two things going on, right? We -- our team has done a tremendous job with penetration rates in new cars, right, getting 83%. I think the streaming as a complement to the in-car subscription has certainly helped the value proposition for our customers. It certainly helped us keep our churn very low.
So I think we need to improve the in-car experience. I think we need to improve the streaming app. I'm sure we'll talk more about the app and some of the relaunch we're talking about later this year.
So certainly, those -- the SAAR would help, the in-car experience will help. I think all of that will hopefully feed into a better conversion rate with customers. So I think many of these things are in control. But clearly, if the ad market recovers and SAAR recovers, I think, that certainly will help.
Bryan Kraft
Yes. And on conversion, you just mentioned and Jennifer talked about new car conversion being in the low 30% range this year, which is longer than what it's been historically. Can you maybe talk about what's happening with trial conversion rates and why it seems to be moderating?
Sean Sullivan
Yes. I mean I don't think the moderation is necessarily unexpected, right? We really are starting and have historically, looking at yield. Really, it's the pen rate and the conversion rate. So we're really looking at the yields.
Because like I said, we've got 83% penetration in new cars. We have now -- we're getting to a point where we're at lower MSRPs, we're at lower trim levels. We're probably penetrating in vehicles that have a different consumer that's probably more sensitive to a premium priced product like SiriusXM. So we focus on yield.
As you know, the SAC cost has come down over the years. So we think it's a good balance. I think we're very good at managing that. So I don't think that necessarily the conversion rate pressure is a surprise. But I think that given the investment we made, given the low SAC, I think we really continue to focus on the yield in driving a better experience.
Bryan Kraft
Is the low 30% range for new cars, is that a conservative estimate? Or is that just based on what you're seeing now and more just a reflection of that?
Sean Sullivan
Yes. I think I don't know that I would characterize it conservative, not conservative. I think that in the last call, we talked about the low to mid-30s, I think that's where it's at. And I don't think there's anything more to say.
Bryan Kraft
Okay. Got it. Let's see. I guess one of the things that I think some clients have asked me post the quarter is, as you get the pickup in auto sales, is it enough to fix that self-pay net ad problem, given that lower conversion outlook, given that you will also likely see vehicle churn increase as auto sales pick up? So -- or do you really need success in streaming in order to drive the subscriber growth going forward?
Sean Sullivan
Yes. I mean, I guess, let's start with the streaming side of it. Again, streaming has two benefits to the company, right? So those that get streaming as part of their in-car subscription, obviously, it enhances the experience. I think we talked about in the past, where I think their listening for those subscribers effectively doubled.
So we think it's great in terms of engagement with the customer retention and has allowed us to keep our churn at historic lows and record lows. So I think that's number one.
Number two, we think that there is a big addressable market for streaming-only, given our product offering and price points. In 2022, certainly streaming was the majority of our self-pay net ads. We've tempered our, I guess, acquisition marketing in '23 as we wait for the relaunch of the app later this year.
So I do think that both the in-car opportunity in terms of SAAR returning, in terms of us improving yields and conversion rates, as well as stand-alone streaming with the right product in the marketplace, I think both contribute to a positive story.
Bryan Kraft
Okay. And maybe you could talk about the full scope of the streaming product redevelopment this year? What are the goals you hope to achieve, and any timing around the relaunch?
Sean Sullivan
Yes. It's probably a little premature to talk too much about it. It's certainly something that we will talk about as the months go by. So it's really a Q4 relaunch. For those that have used the product can appreciate my commentary, where I believe we need to improve the features, the functionalities, the recommendations and reducing the friction. So I'm excited about it.
We -- again, part of the investment we're making this year that's probably less consumer-facing but creates, I think, a lot of agility and flexibility for the company as some of the foundational work we're doing on the platform in terms of subscriber management system, in terms of identity, in terms of commerce and how you transact with us, how you put price increases through, et cetera.
So part of the work is not just a streaming relaunch later this year, but it's some foundational work that will support not only streaming, but in-car, make 360L better and probably accrue benefits to the Pandora business as well. So we're excited about it. Again, it's about recommendations, it's about features, functionality and really reducing the friction with the customer.
Bryan Kraft
And streaming subscribers have become a larger, albeit still, I think, a material portion of the overall base. Can you give us any sense as to how many streaming-first subscribers the company has? And if you could talk a bit about the relative customer lifetime value of a streaming versus a satellite radio subscriber?
Sean Sullivan
Yes. So as you know, we don't disclose our streaming-only subscriber. It continues to be a small portion of our 30-some-odd million subscriber base. As I said, it is a more important part of the self-pay net ads as it was in 2022. Again, I think we'll get to a maturity level where we'll be more comfortable probably saying more about the number of subscribers, what the churn rate is.
I think we're doing a very good job in terms of getting people into the funnel, whether those be on a direct basis, whether that be through the IAP or whether that be through partnerships that we do.
So very pleased about the addressable market, but -- and again, we've talked about the margin profile and the profitability of a streaming-only sub, right? You don't have necessarily -- you don't have rev share. You're paying a different royalty structure, et cetera.
So I think we're very comfortable with the unit economics of a streaming sub versus an in-car sub. And again, committed to it, but we're going to kind of take a more measured approach, I guess, until the relaunch later this year.
Bryan Kraft
Okay. Got it. I understand the company has some price increases taking effect in March. Can you talk about how you're managing the business to deliver positive ARPU growth every year through price increases as well as the other tools we have?
Sean Sullivan
Yes. And for those of you that are -- our customers are getting your notices, I think the customers have been contacted, I think, as plans start to renew in the middle of March, we're putting through $1 per month price increase on most full-priced plans.
So that's happening. I think that the company has certainly a long history of managing rate and price increases. We'll certainly have to keep an eye on the churn rate, but I think we do a good job there.
So we will see the benefit of that in 2023 in terms of those price increases. We'll certainly manage the promotional side or discount side as a normal customer will look to trade. So -- that -- I think those -- we have a history of doing that, what every couple of years.
I think our input costs, as we talked about at the beginning of this in terms of royalties, et cetera, I think it's warranted. I think we've got a great value proposition, both in and out of the car. So we'll manage that.
I think the ARPU growth, we have a long history of that, too. I don't know that we'll see the same level of growth that we have seen in ARPU. I think '22 was probably a fairly strong, maybe a high watermark in terms of growth in ARPU for the company. So I wouldn't expect that. Certainly, the ad market improving would help and be a positive lever there, too.
Bryan Kraft
Can you talk about or maybe give an update on where 360L is today in terms of the installed base and current installation rates? Any color around that?
Sean Sullivan
Yes. Those aren't familiar, 360L is our satellite and IP module in the car. I think we exited -- I think today, there are roughly 7 million 360L-enabled cars on the road. Again, a small number of the total enabled base. However, 23%, if I have my facts right, of the SiriusXM-enabled cars in '22 were 360L. As we look into 2023, my hope is that we're in the mid-30% range and exiting at something higher than that at the end of '23 in terms of every new SiriusXM-enabled car having 360L.
We've got, I think, 20 OEMs. We've announced new deals with Nissan, Land Rover, Jaguar, Lamborghini, et cetera. So we're getting there. And I think that it's starting to be the plan of record in many of these OEMs.
Bryan Kraft
And what kind of improvements are you seeing with 360L? I mean, do you see much of a difference between churn between 360L and non-360L as well as ARPU?
Sean Sullivan
Yes, we've seen -- I mean, again, we are seeing benefits. Again, given the propensity or the size of 360L versus non-360L, I think it's hard to see it coming through in the overall numbers. But I think that the 4U recommendations or people that use the features and functionality of 360L 4U, there are Pandora artist stations in the car.
I think we're seeing better engagement. We're seeing more usage of on-demand. We're seeing better conversion rates and better retention. So I think the promise of 360L is still valid and still a big initiative of ours. But -- and I think that as we continue down this path of a more distributed 360L and the -- in the enabled fleet and we'll have better data and better ability to really improve the in-car experience using that.
Bryan Kraft
I know you already talked a bit about the ad market, but I guess I wanted to ask something a little more specific around that. Just we've heard a couple of other companies talk about starting to see some green shoots, not all of them are saying that.
I was just curious if you were seeing any signs of improvement or if it's more or less a continuation of what you saw in December or just any sort of more granular color that would be relevant?
Sean Sullivan
Yes. I don't know that I have anything more granular. I think that -- and from my perspective, it's -- the market is in line with our expectations, for whatever that's worth. I don't think it's getting any worse than we anticipated.
I think, again, we've got a scaled ad platform across, obviously, Pandora, the podcasting satellite side of business. So certain categories that are up. There are certain categories that are down.
As I said earlier, I think podcasting continues to be at least a bright spot for us in terms of the -- not only the ad representation deals we've done and some of the inventory we've added. So I think with the right ad tech, I'm optimistic about the improved monetization on the podcast, and I think the demand is still there.
Again, people are waiting and placing their money closer to air, so to speak, right? So that hasn't changed. That was something that we saw at the end of 2022. But with our multi-platform solution, with our podcast, with programmatic, I think that we're in a good position, at least to take our share of the market.
Bryan Kraft
What's happening broadly with the SiriusXM content offering? Are there areas where you're leaning in and expanding? Any areas where you might be pulling back off?
Sean Sullivan
Yes. I don't think we're pulling back. As I think about the content offering, I think it feels almost unmatched. I mean, we've got an incredible library of live, curated, not only music, but news, talk, sports. Sports in particular, I think, that is a real strong niche for us.
So I don't think we're pulling back. I think it's really more about how do we get the customer to know what we have, to discover what we have. I mean, we've certainly got incredible live events, incredible tentpole events, whether through small stage series and some of the things we're doing to really drive usage in the streaming app as well as in the car.
So I think we've got -- again, I think we've got an unmatched content portfolio. I think it's how do we present it and how do we get the ability for consumers to discover it and make the recommendation. So no, I don't think we're pulling back. I think we feel great about what we have across the spectrum.
Bryan Kraft
Yes. And it's your renewing contracts with the sports leagues, what are the general trends you're seeing, rights, costs, step-ups, anything like they are on TV and streaming? I mean just any kind of color, broadly speaking.
Sean Sullivan
Yes. I don't -- I won't speak for the TV and streaming people, but we're certainly not seeing those type of increases. And maybe part of that is a function of the competitive marketplace we operate in versus what they're dealing with. But -- we certainly have seen increases in some cases. But I think in some of the sports leagues, I think at the end of the day, we've made good trades, where we've got either exclusivity or we've got the incremental content offering or something.
I think that, generally speaking, we've been able to moderate the increase, but at the same time, get incremental rights in content that we didn't have historically.
Bryan Kraft
Should we expect programming costs in the SiriusXM segment to continue to grow at this high single-digit rate in 2024 similar to the past couple of years? What have been the largest drivers maybe of that growth in recent years? And any color on whether that whether that continues?
Sean Sullivan
Yes. No. I mean I think it's helpful to break down the fact that if you exclude music royalties and you exclude the rev share that we have, we're not talking about a huge pot of money, right? We're a little north of $0.5 billion, I think.
So when you talk about the rate of increase, even though the percentage may be large, I don't -- again, I don't think, in absolute dollars, it's meaningful.
I do believe firmly that we are a content company that, I think, to enable us to continue to deliver a differentiated premium product, I do think we need to invest incrementally in these areas and non-music for sure. And I think we'll do that in a disciplined fashion. But I wouldn't get too hung up, frankly, on the percentage increase. I think the absolute dollars are probably a more relevant conversation.
Bryan Kraft
Yes. Okay. The satellite build cycle, as you mentioned, is the driver of the elevated CapEx in 2023, which goes through, I think, 2027. Once you complete it, how long will it be before you need to invest again in building satellites?
Sean Sullivan
I think a long time. Again, for everybody's benefit, we've got 4 satellites being built now. I think they will launch from '24 through '27 or thereabouts. So I guess when we're done with that cycle and launch, we're probably looking a decade out, probably before we're there. So when you get to '27 or thereabouts, I mean, we're effectively in a near-zero state in terms of satellite CapEx.
Bryan Kraft
Yes. Interesting. And then you could think about another 10 or 12 years later, I mean you'll have 360L fully penetrated. So...
Sean Sullivan
We'll have it penetrated. Who knows what the wireless cost will be at that point in time? I assume they'll continue to come down. So...
Bryan Kraft
Yes. Interesting. Over the past several years, you've repurchased a significant number of shares and paid dividends while keeping leverage in the low 3x range. Just given the more challenged outlook this year, how should we think about share repurchases and the outlook for the leverage ratio, going forward?
Sean Sullivan
I don't -- no new update on the leverage ratio. I think low to mid-3s is a prudent place for this company to be, given the market environment, given some of the uncertainty in ad sales in auto that we've talked at length about today. So very comfortable at the 3.5x, where we exited 2022. We've got the $400 million recurring dividend or thereabouts.
So -- and then the rest is, I guess, flexible, right? And we've done a special dividend in the past. We've got the capacity to do more. I think we're going to take a cautious approach to the market in the first half of the year, given the cadence and some of the impacts to our business.
So again, the -- I can't really say whether we're -- how active we are in the market in terms of share repurchases. I guess, wait until the Q1 call, and we can talk more about it. But I think the beauty is we've got a great balance sheet. We've got incredible capacity and flexibility to pull the levers, even with some of the muted guidance in terms of leverage capacity against the EBITDA guide. So I'm pleased with where we're at.
Bryan Kraft
Okay. Is there anything out there that might be of interest from an M&A perspective, not that you name a specific target, but I mean in terms of areas that could be of interest to you?
Sean Sullivan
I think the right thing to say is we look at everything or we're aware of everything that may advance our strategic roadmap and plan. I think it was what we outlined today between 360L, between the streaming app relaunch, some of the commerce and identity replatforming that we're doing this year.
We're in the podcasting space with, I guess, being the leader of audio. It's hard not to be there. I think -- and again, we've taken an ad sales monetization approach on podcasting rather than bringing it buying the paywall, so to speak. So I think there's a ton of organic opportunities for us to focus on, execute on, provide you the milestones in the roadmap to success that get us back to the growth path in '24 and beyond. So again, never say never, but I think we've got a lot to focus and execute on organically.
Bryan Kraft
I think the acquisitions that you've done over the past, call it, 5 years, have been mainly in the streaming space and podcasting. Do you think that the company is fairly complete in those areas? Not to say that you have to buy something, but are there capabilities that you still want to build organically?
Sean Sullivan
I think we've talked about it a few times. I think we've hired a new Head of Product in tech. We've added a tremendous number of resources to support that group. And a lot of that is bringing on new capabilities and prior experiences that we think will quickly advance our product. And again, I know it seems like the end of the year is a long time, but I think we'll be pleased with the success of that.
So I don't think we need to acquire something to onboard the capability, I think, from what we've acquired in Pandora, from what we've hired with the tremendous amount of resources within the product and tech group, I think we have the capability. I think the real focus now is on executing against the roadmap.
Bryan Kraft
Yes. Okay. All right. Great. We could go to audience Q&A, if anyone has any questions they'd like to ask. No? I guess we're -- I guess that -- all right. Thanks, John.
Sean Sullivan
Bryan, appreciate it. Thank you so much.
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Sirius XM Holdings Inc. (SIRI) Presents at Deutsche Bank 31st Annual Media, Internet & Telecom Conference (Transcript)