2023-11-28 13:36:05 ET
Start Time: 11:45
End Time: 12:50
Sirius XM Holdings Inc. (SIRI)
7th Annual Wells Fargo TMT Summit
November 28, 2023, 11:45 AM ET
Company Participants
Jennifer Witz - CEO
Conference Call Participants
Steven Cahall - Wells Fargo Securities
Presentation
Steven Cahall
Great. So for our next fireside, we're joined by Jennifer Witz, CEO of SiriusXM. Jennifer, thanks for joining us. I've had the joy of covering SiriusXM for a number of years and I think this, in my memory is probably the most change that you've gone through in that period, the transitions and technologies what you're doing on the app. So maybe we can start-off with your recent product launch announcement and how you anticipate the new SiriusXM streaming app starting to impact the business in the medium term?
Jennifer Witz
Well, thank you for having me and thank you for being a loyal subscriber. So yes, we had a big event a few weeks ago if any of you didn't have a chance to tune-in please visit our website to check it out. We have some great videos from that. But we announced two major things that we will be launching our new streaming experience on December 14, which will come with new set of apps and is this going in and out? Okay. New set of apps and a web player starting in December and then new platforms as we roll forward into next year.
We also announced a new streaming-only price point, lower price point of $9.99 a month, which is lower than where we're priced today and I think very effectively priced against other music streaming companies because we believe that we are a complementary service, that's certainly what our research says and what our experience has been to-date on our in-car business that many consumers are using both SiriusXM and another music streaming service to provide their needs on the music collection side.
And we have a much broader set of content overall, and we can talk more about that. But -- so new stream price point, new streaming platform that will power new apps, but also support the rest of the business as well. So we have a number of in-car subscribers who are streaming today as well as it will support our 360L platform going forward. We shared some highlights as to what will come in the car overtime throughout next year and beyond as we roll out 360L, including what will be better connectivity between the in-car experience and the streaming experience going forward.
We also launched a number of -- I talked about a number of new content launches that are coming, some of which have already been launched on the service, including the Kelly Clarkson channel and our John Mayer channel. We also have a new show with James Corden coming early next year and a new True Crime channel with Ashley Flowers from Crime Junkie.
We announced a number of partnerships, including one with Audible that will launch next year and our new brand positioning, which is a little bit of the old and the new. We're bringing back our old mascot, The Dog, which we're calling Stella. But really, I think, brings it all together because the brand positioning is about bringing consumers closer to the content they love. And that's what we're trying to solve for with this new experience. So we believe that there is demand that can capture among younger generations by solving for the pain points that we have with our service today, which has a lot to do with helping them find content they love.
So when we talk to users that either don't convert or don't come into our streaming experience, it's generally because they can't find the content they love, but when we explain what we do have, they see we do have the content they love. It's just helping them navigate the experience, providing them with better discovery optionality, better and easier discovery and more control.
Steven Cahall
So maybe we can go a bit deeper on that point. I think discovery and engagement or terms that you've used a lot in relation to the streaming app and then it seems like conversion is what you're trying to solve for. It seems like in the way we've looked at the business a couple of years ago, you may be started to notice some dilution in conversion. It was kind of a post-pandemic. The world is more being centric. You see some conversion rates softening, especially with some younger cohort car buyers. So how do you think now about discovering and engagement? And maybe you can give us some examples in the new streaming launches to how those can improve conversion?
Jennifer Witz
And you're right, Steve. I think that on the conversion side, what we saw is that we needed more personalized features inside our in-car experience. And we've been trying to solve for that with 360L, and we are seeing better conversion rates with our 360L platform, because you can provide -- we can provide the benefits of satellite delivery for very cost-effective, broad based and fewer interruptions across the country. But also complement that with IP delivery through the modem in the car, which provides much more enhanced recommendation and personalized content in the in the experience car.
And so we've been building out that platform to be able to solve for some of those gaps in our service. And what we're doing now is making sure that we have the right technology in place to support better search and recommendations, both in the car and out. So we do believe that it will continue to improve conversion overtime. And that's not only with improved product experience, but also better marketing. So we'll have enhanced Martec Commerce, a new identity and data platform to support all that.
Of course, it launches first with streaming and we'll see that rollout with the new products, but also in new Martec starting in the first quarter, which will allow us to have better personalization, again, in the product, but also in our marketing campaigns and that will support the in-car business towards the middle of the year when we move the in-car business over to the new platform, which will be a pretty big effort in the middle of next year.
So all is just to say that it's going to build and it's definitely a marathon and not sprint and we expect to show slow steady progress across our metrics. We're very focused as you highlighted, on engagement and retention, also conversion. But I think conversion in-car will come later. It's first about seeing engagement with the new streaming experience, both for in-car subscribers who are streaming and trailers, but also our streaming-only subscribers and trailers early on to -- because we know that clearly, if customers engage with our service early in trial, they're much more likely to stay as paying customers after the trial ends as well.
Steven Cahall
And it sounded like you do intend to put some marketing resources behind the product launch early next year, maybe you can expand on what that looks like? And I think this is a pretty big investment year for SiriusXM implied in the EBITDA guidance, you should be lapping a lot of that investment next year. It does sound like marketing is a bit higher. So maybe you can help us think about how those things come together a little bit?
Jennifer Witz
Well, we're not ready to give specific guidance, but I can talk generally about trends. And yes, this year was a big investment year in terms of product and tech. And we would expect next year to be as well, just as we continue support multiple platforms and market and that won't really resolve until we move the in-car business over to the new platform and we move Pandora over to the new platform, which we're targeting later next year for that. So I think the sort of improvement in our say, non-satellite CapEx expense and product and tech investments will really come as we move into 2025.
On the marketing side, we would expect to support and plan to support the launch early next year with brand campaign, but also really full-funnel marketing. So the brand positioning that we talked about in terms of bringing people closer to the content they love will help provide kind of the overarching promise and we'll hope to drive improved brand impression and perception metrics.
And then complementing that, we'll be spending on Performance Media, really much more targeted content marketing to bring people into the streaming funnel and to provide more awareness about the content we have, which will support the in-car business as well. But I would expect that marketing to start to ramp up in the early part of next year. We continue to drive efficiencies in the business to help offset some of these investments, both within marketing and within product to tech and also more broadly across the business and that helps, obviously, with the cost structure overall.
Steven Cahall
And I think you've guided to positive self-pay net adds for the second half of the year. I know this is always top of mind for investors. So maybe you can talk a little bit about just how the funnel has continued to trend? I think it was flat sequentially in the third quarter and what you're expecting for the trial funnel heading into next year?
Jennifer Witz
Yes. So starting with self-pay net adds, we would expect sequentially from Q3 to Q4 to see improvements in both our streaming net adds and in-car net adds as well. And we have guided to positive net adds in the fourth quarter, which I feel pretty confident about and then slightly positive net adds for the second half which obviously means that Q4 needs to be high enough to offset the slight losses we saw in Q3. And right now, the biggest near-term challenge in that, although we do still feel comfortable with positive second half net adds is vehicle-related churn, and that's a function of how strong the funnel is as we go into the last month of the year on auto sales.
And right now, auto sales have been pretty consistently in that sort of mid to low 15 million range or so on the new car side. And I'm not going to anything different at this stage, but we're watching obviously, the vehicle really to turn really carefully as we navigate rest of the year. I think the auto funnel is incredibly important to our business and strong auto funnel is good for us longer term. But it's also the streaming funnel that will continue to build and give us opportunities to bring streaming subscribers into the service.
Steven Cahall
I mean churn seems like it's been positively surprisingly low for, I'd say, the last two years or so. I know vehicle churn is part of that. So fewer gross adds, better churn and there's a natural relationship between those two. But underlying that, we've seen a lot of businesses that just have lower churn these days. I don't know if it's an establishment of habits or everybody kind of went through their exploration phase. Do you think there is underlying lower churn for SiriusXM than there was before, in addition to just the benefit of less car buying activity?
Jennifer Witz
Yes. I think the -- we used to guide to, I think, 1.8% to 2% on churn and I don't see us going back to that level, unless there's sort of a structural change in the business. But yes, at 1.5%, 1.6% last quarter. It's been phenomenally low, certainly with vehicle-related playing a part on kind of the -- part of those fluctuations. I think -- we have a really loyal subscriber base. There's no question. And for most people, we're a daily habit. And so that really reinforces the value proposition.
And overtime, we've continued to deliver more content. We're delivering more features and functionality through 360L and the streaming products that more and more of our in-car subscribers are using. And so developing those habits outside of the car have helped support the value proposition both in the car and overall because it just improves engagement across multiple devices.
Steven Cahall
Yes. And if new car is going through, especially this period where I think there were a lot of fleet sales this year and some pickup in consumer demand expected as supply chain improves. Can you contrast maybe that to what you're seeing on the used car side? And do you think you can improve conversion on used car, especially as pen rates go up?
Jennifer Witz
Yes. The used car market has always been more challenging because it's more fragmented for us, and it tends to be a slightly to consumer that's buying a used car versus a new car. But our used car funnel is very productive in the sense that we don't have any stack there, so it's really just marketing.
And we think that there are more opportunities really as opposed to necessarily improving the conversion rate, but helping to find more of the private sales that exist so that we can get more consumers who are buying a used car through one of those channels onto a trial because that's kind of the expectation when a consumer buys a new or used cars that you'll come in at least if you buy through a dealer or another sort of formalized channel that you'll get a trial and that it just works, right?
So we've done things like on the used car side, one of the best things that we've done to help improve conversion is making sure that the trial is active when you get into the car. And so we've developed programs with auction houses and other dealerships to make sure that, that's true. And there's more work we can do there as well. But yes, that's one of the biggest drivers of conversion is just is it easy, you get to the car and the service is working and I get to try it out.
Steven Cahall
Maybe switching gears to just technology in the industry. So there's been the industry move to the Android Automotive OS. And then I think what you commented on the last call was moving to a common 360L software integration platform. So maybe you -- because this is something that often confuses us, you can help us just understand how these fit together and then what the roadmap looks like to build that more common technology platform?
Jennifer Witz
Sure. So I think we're going to be supporting multiple implementations across the OEMs for many years as we have in the past. As there is -- seems to be a movement where the majority of OEMs will adopt AAOS or Android Automotive Operating System over the next few years. Now how fast that rolls out and across how many models for those OEMs is sort of an open question, but it does help us, and obviously, other services as well develop one app or one experience for AAOS and release it across those OEMs.
And so we get the benefits that other services have by being on AAOS, by being in the App Store, by having -- being able to update the service regularly, without having to do special over-the-air updates. But we also have preferential treatment like we have today in the sense that we'll exist separately on the screen in a separate sort of radio section. And still, like we have today, consumers will be able to come into the experience very easily click on SiriusXM, the trial just works. And you don't have to sign up for a WiFi plan or pay for some data plan, like you would have to if you were downloading an app from the Play Store in AAOS.
So we get many of the benefits that we have, just an enhanced experience overall. And it does allow us, again, to develop sort of one experience across the OEMs and update those regularly. But we expect to have multiple implementations across OEMs. What we're seeing today in 360L is very promising, in terms of our ability, again, to provide more personalized experiences in the product and also just connect listeners easier to streaming outside of the car, by allowing them to come in and click on a button that lets you just download the app onto your phone or provide in-vehicle messaging as well. So all those things will help improve our conversion rates over time.
Steven Cahall
And then on ARPU, so as I recall, I often thought of SiriusXM as kind of inflationary or inflationary plus ARPU algorithm. You talked about on-streaming only. You're going down $1 from, I think, $10.99 to $9.99. There's been less subscription ARPU growth in satellite-based as well over the last 12 months or so. So, can you talk about, what you're cycling through, how you're thinking about ARPU, how you're thinking about pricing power, etcetera?
Jennifer Witz
Yes. There's a lot of pieces to ARPU. So, we have -- we were at about $15.70 in ARPU in the third quarter. So, some of the highest levels we have seen on the self-pay side, subscription ARPU was higher than that and really supported by the rate increase that we launched in March of this year across many of our full price packages, but also on the self-pay side, offset in part by just general promotional plans we have in self-pay to support acquisition and retention.
And also, like you mentioned, the lower streaming price point we have, which is currently $10.99. So, at generally a lower price point than what we have on the in-car side, which tends to be at $18.99 for the full service, but then we have a price point slightly higher and lower than that as well. So, that's just on self-pay. And then outside of self-pay, there are other factors in ARPU, such as our OEM trial revenue, which has been declining in recent years as we just generally restructure the economics of our OEM agreements, which are positive overall, but we tend to have less paid trial OEM revenue, which impacts ARPU.
And then we've had softness on the SiriusXM broadcast advertising side, which is also a part of ARPU. So, that's all to say that ARPU in output really and not something we're managing at specifically, but there are a number of opportunities going forward as we said, we did a rate increase earlier this year. We've been on the cycle of rate increases kind every other year on the full price packages. There are also opportunities for us to increase rates on our promotional packages going forward.
We do believe that, that should come with enhanced value. And so whether it's bringing more content to our service or making it easier to find the content we have through improved features and functionality in the product, that's going to be key to setting us up for future rate increases.
But again, we talked a bit about the churn on our core segments in our subscriber base and we believe that we have room to continue to increase prices in the future on those core subscribers, but we also have room to open up new demand at lower price points, both in the car and with streaming at $9.99. We are testing lower price points for different types of packages in-car.
So really, the focus is on driving overall revenue growth, right? And that's going to be a balance always of rate and volume. We've had a very good history of managing this. And I think going forward, there is more demand at lower price points and we're going to look to make sure that we manage and how we generate that demand relative to where the current base is and our ability to drive and price expansion there overtime.
Steven Cahall
Okay. And could you maybe tie that lower price point opportunity into some of the cohorts that you see where you might be underpenetrated? Is that younger car buyers? Is that used car buyers on less expensive? I guess, people still think about the traditional SiriusXM subscriber is probably older and more affluent, I think, where you're trying to drive a lot of the growth or retention is ex-that? So -- yes…
Jennifer Witz
So yes, we have -- we've identified really two sets of segments. We've got -- and there's kind of two segments within them. But we have core segments that represent about quarter of the US adult population and then so something like $50 million to $55 million. And then we have growth segments that represent another quarter of the U.S. adult population. And we are highly penetrated in our core segments at about 60%, but we're much lower penetrated today in terms of our subscriber base, in the growth segments, which is about 10% today.
So we think there's a lot more room to grow in those segments, they tend to be younger. Then many of them do own cars and are looking for an experience that's very well integrated into the car. But it's not necessary. So we believe that there is growth opportunity with streaming only among some of those segments, and they tend to be younger, more diverse. They're interested in SiriusXM as a complementary audio service to the music streaming service that they have today, and they're willing to pay for more than one audio service, especially if it's differentiated enough and provides them with some unique experience outside of what they're getting with their music collection or their podcast service today. And that's really what we're all about, which is a truly differentiated audio service that offers a much more human curated approach to audio.
So whether it's our music channels that have hosts or artist as host that provide you with a very curated playlist of song or it's the breadth of content we have across sports and entertainment, comedy, politics. We really have a much broader set of content that really leans heavily on human curation and live, which really differentiates us from a lot of the other streaming services.
Steven Cahall
Maybe then changing a bit to Pandora. So RPM there has been very solid. I think you have a political headwind in 2024. But it doesn't seem like we've gotten yet to the complete dissolution of hours decline and user decline. So how do you think about managing that business for, I guess, gross profit growth for integrating it into some of the other digital properties that you have, whether it's SiriusXM or SoundCloud or Stitcher?
Jennifer Witz
Yes. So I'll speak first to the advertising business overall and that obviously comprises Pandora as one of our key assets, but also SiriusXM broadcast and digital and our off-platform advertising business, which is podcasting and a number of other third parties that we represent for ad sales, including SoundCloud.
Podcasting has been a real bright spot. We saw an increase in podcast revenue of 28% in the third quarter. That's also been bolstered by programmatic, both in podcasting and in music streaming, where we've seen growth of nearly 100%. And a lot of that, I think, is just how advertisers are trying to deploy their budgets because money sort of frees up at the last minute and they're looking for self-serve and programmatic solutions. So we really do -- we have a strong presence in podcast. We have a great set of assets there, great relationships with the creators.
And we have great representation among the bigger networks and with podcast among the top 50, which just positions us really well is that part of audio advertising continues to grow. And we can bring solutions with our ad tech offering through AdsWizz that really solve the pain points that advertisers have had in podcasting. So whether that's better targeting across all these third-party platforms where you don't necessarily have first-party data or brand safety and suitability solutions or even just better audience buying across our podcast inventory and the rest of inventory we have on streaming and otherwise and clearly, self-service solutions in programmatic.
So we believe that there's tailwinds, certainly in in podcasting and programmatic in our advertising business. We also believe that going forward. So we talked a little bit about Pandora. The user declines have stemmed a bit. We're down to -- I think we were down 5% in the third quarter and hours were down slightly less than that. And we're hopeful that we can stay kind of in that range while we continue to build out the SiriusXM platform.
And then later next year, and possibly in the fourth quarter, we'll look to port over Pandora to the new platform. And then just in terms of general cost efficiencies that will be an improvement, but also we believe we can launch a number of new features that that will help sustain audience and perhaps grow it in the future.
But then as you mentioned, that gives us some optionality about how we might think about the SiriusXM product and the Pandora product as working together more closely and perhaps create a more robust free tier. But we're really at the early stages of looking at that. And of course, sort of dependency is making sure they're on the same platform.
Steven Cahall
Yes. I remember when you bought Pandora, I guess it was six years or seven years ago now. And I think at that time...
Jennifer Witz
2019, early 2019, yes. Something like that.
Steven Cahall
I'm not good at math. No. At that time, I think a lot of the consumer expectation or the investor expectation was that it would probably, quickly dovetail and do an integrated consumer product. And that hasn't really been the approach. It sounds like much more of the integration is on back end where you can offer a more integrated suite to advertisers. And then I think what you're saying is it's going to be probably quite some time before we would see an integrated consumer product. You have a lot of other initiatives that may be take priority is that?
Jennifer Witz
Both brands have really strong brand equity and consumer affinity. And so we have to define what that new experience would look like. And there's a lot of great features and functionality in Pandora that could be value enhancing for SiriusXM subscribers. And I think there's a lot of value in SiriusXM content that could be value enhancing for the free tier of Pandora, if we were to bring them together. So that had always been kind of the strategy or ultimate goal. And I think we just need to make sure that fully built out the platform first before we contemplate how that might make sense.
Steven Cahall
On the cost side of things, I think you did $40 million in in EBITDA synergies the third quarter, which run rates to a pretty big number relative to the size of the company. So can you talk about the efficiency actions that you're taking?
Jennifer Witz
Yes. And I think that's the right way to look at it is that we talked about $40 million in the quarter as being net. There's gross savings that are clearly in excess of that. And we've been able to use the disciplined approach to spending to reinvest in other parts of the business, primarily in product and tech. And as we talked about some marketing next year. And I think it just gives us the flexibility to make sure that we're supporting strong EBITDA and margins going forward. I mean we would expect as some of the dynamics in advertising start to emerge. Hopefully, there's some tailwinds next year, but there's also kind of I think the question about when is there a broad-based recovery in advertising. And we are looking to build future subscriber growth, but that's going to take time to materialize.
So the key is really making sure that we're well positioned financially overall to continue to drive efficiencies across the cost structure. We've really worked to look at every part, every line item in the cost structure and -- we did a reorganization earlier this year. I think there's more opportunities.
But of course, the deeper you go, the harder it gets, and we're going to need more technology to support that. So like we talked about, if we move the in-car business and Pandora over to the new platform, there'll be legacy technology spending that goes down after that. We continue to look at marketing to deprioritize our less efficient channels. And as we step up our investments in the sales force tools and AI, I think we'll be able to make improvements on both the customer experience and on efficient marketing channels, and that applies in customer service as well. We've got some interesting work going on now.
And hopefully, we'll be in pilot soon on some improved customer service who still 2 million calls a month or so. And I think there's a better opportunity to provide a better customer experience, but also save money there as well. So there's more opportunities to continue to look at the cost structure going forward to support the business.
Steven Cahall
And then as we started this year, there was a number of headwinds that you came into this year, satellite CapEx, weaker net add environment, a lot of the investments that we talked about -- next year, it sounds at least like the net add story is a little bit improved. You're probably through the hardest part of investment period on the app. So I know, it's too early to get 2024 guidance of any sort. But as you just generally think about the picture for next year. Do you think it's a better year than some of the challenges you faced this year, but there are a lot of puts and takes that you've talked about? Or is it a little bit more...
Jennifer Witz
The challenges will continue. I mean we had a step up in royalty expense this year. That levels out. Obviously, we won't see the same step up. We have step up in satellite CapEx and non-satellite CapEx. Some of that will persist next year. As we said, satellite CapEx will start to decline in 2025 and as well non-satellite CapEx. But we still have investments to make in this platform, migrate over the in-car business next year. We're still supporting multiple platforms until we get through that.
And then Dynamics also, I think on other parts that you mentioned, net adds, I would expect to see improving net adds year-over-year, but it's really -- again, it's a marathon, not a sprint. We're looking for steady progress to set ourselves up for future subscriber growth. And hopefully, we start to see some of that emerge next year.
Advertising environment is a little uncertain right now, but I feel similar to how I did, I guess, this time last year was, hopefully, we're going to see a broader-based recovery as we go through next year, you mentioned political tailwinds. And then I just think, overall, we are going to have a very positive trend in free cash flow. As we look at improvements in CapEx, as we look at growing our subscribers and subscriber revenue to follow in future years and also just general tailwinds on better cash taxes and improved working capital, I think will result in meaningful improvements in free cash flow as we look out over the next 5 years or so.
Steven Cahall
And I know you can't say much about the proposal from Liberty maybe to come at that from another angle, how do you think about the leverage that you'd like to target for SiriusXM? And if there has been, obviously, a conclusion to that, which includes a little more debt, how are you prioritizing capital allocation?
Jennifer Witz
So nothing's changed about our target leverage ratio, and we're still in the low to mid-3x range. And we have a lot of liquidity right now. We're out of the market in terms of share repurchases for regulatory reasons. And so we're building some cash. Fourth quarter is going to be a large free cash flow generation quarter for us just for seasonality reasons. And so we'll have cash on hand. We'll have liquidity in our revolver, and we're really well positioned, fixed rate balance sheet, no near-term bond maturities until '26.
So to the extent something happens with Liberty and we take on additional debt, then our priority, at least from capital return process, we would expect to still keep the dividend in place. We've got a long history, at least over the last several years of continuing to increase the dividend by double digits.
And I think then we would relook at share repurchases as solely being sort of opportunistic, depending on market conditions, but really prioritize debt repayment back to our sort of low to mid three times. And the great news is I think we have a really strong free cash flow profile as we talked about and we have the capital we need to continue to invest in the business as we focus on repaying debt if that ends up being a necessary action.
Steven Cahall
And lastly, any significant content that you're excited about that we should be watching for?
Jennifer Witz
So, I'm really excited about the John Mayer channel, which just launched last week. And he is approaching this with an incredible amount of enthusiasm. He's been in our LA studio, and he's really just, it's like the life of John Mayer. So what kind of music he would want to listen to at different points in the day, at different times of the week, and he's been really creative. He's taken calls from callers and I think it's just evidence of what we do really well and how we're differentiated is that we give artists this incredible platform to speak to their audiences, right?
And as you see, fans are just really looking for opportunities to get closer to artists, and it's really hard. I mean, you see Taylor Swift out there trying to get in front of as many people as possible. Sirius is just another way for talent to be able to do that. I mean, Drake will go live on his channel, Bruce Springsteen will go live, Howard will go live. We launched a channel with Kelly Clarkson and she's taking an incredible approach too about the broad-based content and music that has always been inspiring to her.
And it's really cross-genre. Carrie Underwood did a special guest appearance on, of course she's a country artist, but she did a special guest appearance on our heavy metal channel, Octane, because she loves heavy metal. So, the -- in our service, obviously, is more than just music. We have the opportunity for many other, celebrities and talent to create something really special. So, James Corden is launching a show in early 2024. And Ashley Flowers is going to launch a True-Crime channel. There really hasn't been a True-Crime channel. So she's going to rethink how True-Crime might make sense in terms of storytelling opportunity in a more linear channel fashion beyond just putting podcasts on the radio.
So it really is, I think, a great time to be a subscriber and we have – we hope to have a lot more content coming in the future, but right now it's about making sure that this new audience and many younger generations, but just giving the new audience an easier way to access and experience the great content that we already have.
Question-and-Answer Session
Steven Cahall
Great, thank you for the time.
Jennifer Witz
Thank you, Steven. Good to be here.
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Sirius XM Holdings Inc. (SIRI) Presents at the 7th Annual Wells Fargo TMT Summit (Transcript)