Sirius XM Holdings Inc.
Q2 2021 Earnings Call Transcript

Published: 27 Jul 2021

[Operator:]

Good morning and welcome to SiriusXM’s Second Quarter 2021 Financial and Operating Results Conference Call. Today's conference is being recorded. A question-and-answer session will be conducted following the presentation. At this time, I'd like to turn the call over to Hooper Stevens, Senior Vice President, Investor Relations and Finance. Mr. Stevens, please go ahead.

[Hooper Stevens:]

Thank you, and good morning, everyone. Welcome to SiriusXM’s second quarter 2021 earnings conference call. Today, we will have prepared remarks from Jennifer Witz, our Chief Executive Officer and Sean Sullivan, our Chief Financial Officer; Scott Greenstein, our President and Chief Content Officer will join Jennifer and Sean to take your questions.

[Jennifer Witz:]

Thank you, and good morning, everyone. Our second quarter results demonstrate remarkable continued growth across our business, highlighted by 355,000 net new self-pay SiriusXM subscribers, record low churn of just 1.5% and outstanding advertising growth of 82%. Total revenue grew 15%, adjusted EBITDA climbed 14% to a new quarterly record and we generated $550 million of free cash flow. We now expect to add 1.1 million net new SiriusXM self-pay subscribers in 2021, marking our fastest annual growth since 2018. Given our strong operating and financial performance in the first half, we are raising all of our financial guidance across the board. In addition to highlighting a great quarter, today, I want to talk about our continued focus on three strategic areas

[Sean Sullivan:]

Thank you, Jennifer; and good morning, everyone. Our second quarter results highlight the impressive growth SiriusXM continues to deliver in subscribers, revenue, adjusted EBITDA and free cash flow. Total revenue increased 15% to $2.16 billion led by 82% growth in ad revenue, although the pandemic impacted of the advertising business in last year’s second quarter, as a point of comparison, our ad revenue grew 20% compared to the second quarter of 2019.

[Operator:]

Thank you. At this time, we'd like to open the call up for questions. All right, we'll go ahead and take our first question from Jessica Reif Ehrlich with Bank of America Securities. Please go ahead.

[Jessica Reif Ehrlich:]

Excuse me, thank you. Three separate questions. One on advertising, I mean, extraordinary growth. Can you parse through like the different areas podcasting versus the traditional platform versus digital, and maybe what the different demographics and growth rates are? And then second on churn, which was outstanding. Is – do you think it's sustainable to keep it at this level? And then finally on the premium service. It seems like I have the price, I'm just wondering if you can address what you think the TAM is? I mean, it's differentiated, but yes, if you could just address what you think that market size would be.

[Jennifer Witz:]

Sure. Hi, Jessica. So on the advertising front we saw growth across all categories and on the Pandora owned and operated, SiriusXM, Stitcher, and then our other off platforms. So it was really across the board and clearly last year second quarter was depressed, going into COVID, but overall advertising revenue, as I think Sean mentioned in his comment is up 20% versus the second quarter of 2019. So really strong growth across the board and I don't think we're going to share anything on demographics necessarily, but really just a lot of the categories, Sean, do you want to comment on some of the categories?

[Sean Sullivan:]

Yes. We saw a lot of – in travel, leisure, restaurants, we talked about it in the script. I guess what I would add Jessica is, obviously we've done very well both on and off platform. So whether it's SoundCloud, AdsWizz, some of the ad representation deals is really driven growth. And we continue to see strong demand across all of our platforms and products, we see great pricing. So we really think there is still meaningful amount of growth on the advertising line, depending on platform and an opportunity. So we're really pleased at where we're at. I think the SXM Media organization and bringing that together really positions us well for the back half of the year.

[Jennifer Witz:]

Great. So on churn and your question is whether it's sustainable. I think we are all a little surprised by 1.5%, we haven't seen that in really long time. But we've been at 1.6%, I think three of the four quarters prior to this last quarter, non-paid continues to run low, voluntary churn has been much lower than we even expected and vehicle re related is off year-over-year as we expect to going into this year with higher trial starts. So I think if you look at the rest of the year, as we said, kind of going into the year, we would expect it to tick up, I would expect non-pay to continue to revert to more normal levels of spending levels increase on the consumer side and vehicle related as well. Just as we think trial starts will continue to be strong going through this year. On the voluntary side, I would just point out that, we believe that there is a lot of momentum there with what we've done on streaming and providing access to our subscribers. Overall, we've seen really nice increases in satisfaction and value perception, which translates through to retention. So we're really pleased with that. And then your last question about the premium service. So assuming you’re referring to Platinum VIP, we just launched that this month and I think that’s the biggest opportunity there within our subscriber base is those households that have one active vehicle and another inactive vehicle and presenting this plan to them with the fact that it has two vehicle subscriptions, two streaming logins, a tremendous number of VIP benefits, including opportunities for access to our great live events and performances, access to nugs.net content through their app and then platinum level VIP care. So with these level of benefits, we do think that that's going to be the most attractive market within our subscriber base. But there is also opportunities to upsell those that have two vehicles subscribed, but on other plans and not the platinum level plans.

[Jessica Reif Ehrlich:]

Thank you.

[Operator:]

All right. We can go ahead and take our next question from Steven Cahall with Wells Fargo. Please go ahead.

[Steven Cahall:]

Thanks. Maybe first for me, I was just wondering if you could sort of break down your gross ad funnel in terms of what you've seen from new cars versus used cars. It seems like we'll probably get into a period here in the future where used cars are just going to be a bigger part of transactions on inventory shortages. So we'd just love to know how those trends track, especially as we're now getting into used cars that are a lot newer than they've historically been. And then Sean, I was wondering if you could give us a few housekeeping items like new car penetration, new and used car conversion rates and paid trial start. Thanks.

[Jennifer Witz:]

I'll start on kind of the contribution in the funnel. We've had really strong growth as you know record trial start in Q1 and Q2 of this year, the consumer demand for new and used vehicles has been really strong as you know. And so we've seen growth on the top line in terms of conversions and overall growth ads in addition to the lower churn rate, so that’s contributed through the better net ads overall. So I’d just say on a contribution or the relative contribution, so when rates are going up for both new cars and used cars for us, we said in the second quarter we had 82% on the new car side, which is up 4 points year-over-year. Used cars continues to tick up towards 50%, and it's up probably a couple of points year-over-year. So we did have one quarter last year, where used car trial starts where about the same, about 50-50 with new car trial starts. But otherwise our trial starts to tend to skew slightly towards new. And I would expect that to continue, given kind of the growth and the pen 10 rates we've seen there. And so on kind of the other metrics, I don't think we're going to get into some of the specifics on the splits of churn and otherwise. Was there another part to the question, Sean, that you want to cover?

[Sean Sullivan:]

I don't think so, I think you've covered it all, Jennifer. Thank you.

[Steven Cahall:]

Thanks.

[Operator:]

All right. We'll go ahead and take our next question from Jason Bazinet with Citi. Please go ahead.

[Jason Bazinet:]

Thanks so much. Thank you. Just one for Ms. Witz; and then one for Mr. Sullivan. You said one thing in the prepared remarks about variable margins in IP that were greater than the satellite service. Were you comparing variable margin to variable margin in that comment or variable margin to sort of average margin? And then for Mr. Sullivan, you mentioned the $2 billion capital raise that you did with the potential to use the proceeds to pay off the 2022 debt. I was just wondering, can you just sort of talk about what the extra $1 billion will be used for?

[Jennifer Witz:]

So first on your variable margin question. We were comparing variable margins for our digital standalone subscribers versus our satellite subscribers. And just looking at kind of the royalty rates, the data cost and customer care. And overall we look as good or better on the digital side and we don't have the same kind of facts, right, that we would have on the satellite side of the business. And in terms of digital subscriptions and the acquisition funnel, it's really about marketing and it's highly performance driven. So we have the ability to scale that up and down based on where we're trending in terms of the performance against kind of LTVs and other thresholds. So it's very trackable and something that you'll see us spending a lot more towards, as we launch through IAP. We've done a tremendous amount of work in building our products in the apps and our digital subscriptions on the SiriusXM side, vetted a lot of content over the last couple of years with 100s of extra channels with on-demand podcasts, video. So it's a really robust offering, as relatively low and competitive price point. And we've put the capabilities in place now for consumers to transact much more easily in app and we'll be putting marketing behind that to continue to drive awareness about the presence and availability and strength of our product outside of the car. And we hope to have more distribution partnerships to announce in the future as well to support that. Sean?

[Sean Sullivan:]

Yes. Jason, just on your other question. So we raised $2 million, we had a roughly $1 billion drawn on the revolver, so that was paid down and the $1 billion you see on the balance sheet at the end of the quarter will be used to call the August 22 notes that I mentioned.

[Jason Bazinet:]

Thank you.

[Operator:]

All right. We'll take our next question from Ben Swinburne with Morgan Stanley, Please go ahead.

[Ben Swinburne:]

Thanks. Good morning. Jennifer, just on the advertising business, obviously a lot of strengths there. Can you talk a little bit about sort of what the governors are on growth looking forward? I'm just wondering, if sort of third-party inventory is a key part of the longer-term growth story and kind of how you guys attract more third-party inventory into SiriusXM, sort of what's the pitch? And maybe you could talk a little bit about how advertisers are viewing digital audio as we have this really strong ad market we're seeing this year? And then Sean, is there anything in the quarter or in the guidance on the LPU front from the WEB5 decision that you want to call out? I don't know if there was any adjustments from first quarter or anything material you'd call out, just given that you now have line of sight on those costs versus sort of what you were accruing or what was in the guidance? Thank you.

[Sean Sullivan:]

Yes, Ben, maybe I'll take the second one first and I'll turn it over to Jennifer. So I think if you look at the LPM, you can see the effects through the first half of the year. As we said on the last call, or maybe I said at recent conference, we were narrowly better than what we had in – the ruling was narrowly better than what we've anticipated. So I think what you see in the first half and what you see embedded our guidance reflects the current rates and expectations. So it's all factored in.

[Ben Swinburne:]

Okay.

[Jennifer Witz:]

And on your advertising question, Ben; I think there is growth across all categories and clearly we’ve had declines in the listeners on the Pandora side, but despite that, we’ve continued to drive better monetization there and it's really a function of rates and sell-through. But yes, there is probably even more opportunity off platform, and we're using, as Sean mentioned with SXM Media, we’re using all of the strengths that we have with this combined sales force, this really strong ad tech platform, as well as really all the value-added services that we bring to the table, whether it's studio resonate, our creative consultancy or the ability to sell live events or proprietary research. So we just – we believe we have the most compelling set of assets on the advertising side, and it's reflected in our leadership position in digital audio in North America. So I do think there is opportunity for us to bring more publishers to our platform for them to participate in our marketplaces and for us to direct sell on their behalf. And we did that and we've continued to expand our relationship with SoundCloud, as you know, and with NBCUniversal, I believe there'll be more to come. And then of course, there has been dramatic growth in podcasting and we have all of the assets again that we need there to continue to support podcast creators and being able to monetize and distribute their content broadly, really across all platforms.

[Scott Greenstein:]

Jennifer, one other thing on that, I wanted to just add is with Pandora, the growth also will come through – we're not constrained on the music side, we're commercial-free on Sirius. And as Jennifer mentioned, the live events, they did one with Ed Sheeran at Pandora that was both great content, but also a great advertising revenue project. And the Modes launch has led to a number of major artists like Olivia Rodrigo and Justin Bieber and others. TikTok is now starting to be a presence on the platform. And other things will come as music and other content really starts to go into Pandora, it's going to lead to a lot of other opportunities. And other – and the second point was, there's a lot of content providers that look to us for ad sales. And as they get into that process, they determined there was audio assets we have that they want their content on whether it's NBC News and others, it can start with the content and end up at the ad sales or vice versa. So I like our position in growing in ad sales, due to the attractiveness on both sides.

[Ben Swinburne:]

Thanks Scott.

[Jennifer Witz:]

Yes. I think that's a great point, Scott. I mean, we just – we offer the broadest set of capabilities across multiple formats, whether it's live or podcasts or more interactive or on-demand. And we have all of these different formats, music, talk, news, sports. So we – and that's what advertisers want. They want – to be able to buy broadly across audio assets.

[Ben Swinburne:]

Thanks everybody.

[Operator:]

All right. We'll take our next question from Bryan Kraft with Deutsche Bank. Please go ahead.

[Bryan Kraft:]

Hi, thanks. Good morning. I had a couple of questions, if you don't mind. First, just wondering if you can give us a sense of whether you expect much acceleration in ARPU growth from the shift to the new plans. And can you clarify whether existing subscribers will be grandfathered into their old plans or if they will be forced to migrate as their subscriptions renew? And then secondly, how do you think the new vehicle inventory recovery is shaping up for the second half of the year? Do you think will be back to normal as far as dealer inventory is by the end of the year or at least close or do you think it actually takes into next year? Thanks.

[Jennifer Witz:]

So I guess, I’ll start with the first one on ARPU growth and Sean, if you want to add in, feel free. But the – we've had a sort of consistent growth of around, I think, 2% to 3% annually, an ARPU growth. And I do think we've had really strong take rates on our highest package prior to launch of Platinum VIP, which previously was called All Access and is now renamed Platinum. And so that was real evidence that there is demand above that, which played into our decision to launch Platinum VIP. No one's going to be forced to migrate. I mean, it's a voluntary package. The migration for the plans that are changing names obviously will be seamless. So I think there's upside in ARPU but we don't look at ARPU on its own, it it's really how do we drive overall revenue. And clearly, that's a function of volume and rate. And we believe that there's opportunity really across the pricing curve. And we have a number of packages at different price points that I think will continue to drive demand along a number of consumer segments, including our digital product, right, which is competitively priced against our other subscriptions as well. Is there anything else on ARPU, I mean, function this year, obviously of the increases in ARPU is also just the recovery in ad revenue, which has been really strong and roll through that as well. And then on your last point about new vehicle inventory, I mean, I'm sure you're following all the news, the day sales is, I think the mid-20s, which is just exceptionally low. But I'd say, the automakers have done a phenomenal job of determining which models to produce, putting vehicles on the lot until the parts come in. And making sure that they're making the best decisions, in vehicle – average vehicle sales prices were as high as they've ever been in the last quarter and the demand is still there. So I think there could be some softness in the third quarter still. But I'm hoping that it's turning around by the end of the year and going into next year.

[Bryan Kraft:]

Just one follow-up on the ARPU question. Did any of the price points on the other plans change or was it really just at the premium level?

[Jennifer Witz:]

No. No other price point change.

[Bryan Kraft:]

Okay. Thank you very much.

[Jennifer Witz:]

Thank you.

[Operator:]

All right, we'll take our next question from Doug Mitchelson with Credit Suisse. Please go ahead.

[Doug Mitchelson:]

Thanks so much. I was just curious, a lot of talk about advertising, obviously on this call and previous. For the Pandora specific inventory, like how much more upside to advertising ARPU do you see? And I can't tell if I just missed it in the answer to the last question, but you talk about ad loads on Pandora, have you considered changing those at all? Have they changed at all, given the good pricing that you're seeing on the advertising side? And then separately from that, anything on the M&A front that you were finding interesting, especially as you broaden out on the ad sales front. And obviously, you're a little bit further along on the podcast front. How should we think about potential for capital deployment, M&A and what are your thoughts on that right now? Thanks.

[Sean Sullivan:]

Sure, Doug. On the Pandora side, I think ad loads have been relatively consistent and I don't believe there's any intention to change that given the demand and the pricing environment, one. Two, I think we've seen increased sellout percentages across the board year-over-year. There is still room to increase sellout and given the strong demand and given the pricing. And I think the product that we offer we do think there's an incremental upside, so we'll leave it there. We've talked about the back half of the year in our expectation for advertising growth. So that's the advertising. Again, capital allocation remains consistent. As we talked about, we're really focused on 360L. We're really focused on the digital SXM App and investing there and enhancing our position outside of the vehicle. We've done as you know, disciplined M&A across the board, I think right now we really feel good about the portfolio of assets we have. We don't really think there's a real gap. There are things like Roman Mars and the 99% Invisible that I think are nice additions to the portfolio in the offering. So from an M&A perspective, we'll continue to observe what's in the marketplace and where there are gaps and things that can accelerate our offering our strategic roadmap, but we feel pretty good about where we're at right now.

[Doug Mitchelson:]

All right. Thank you.

[Operator:]

All right. We will take our last and final question from James Ratcliffe at Evercore ISI. Please go ahead.

[James Ratcliffe:]

Thank you. Two if I could. First of all, on 360L, I think you mentioned that you're working with customers who use the service are more likely to convert. As I recall back when the SiriusXM product was new and most people hadn't experienced it like a big driver of conversion was whether the salesperson actually demoed it on delivery. What are you doing with the dealerships to ensure that people actually understand what they're getting in the car and what the capabilities of 360L are? And secondly, on SiriusXM car radio ARPU, can you talk a little about what you're seeing in terms of ARPU for gross adds and how that's trending for new customers coming on board? Thanks.

[Jennifer Witz:]

Okay. So I'll start with 360L. Yes, you are right. That demos and dealerships definitely help drive conversion. And we do have a field team that helps train the employees at the dealerships to encourage them to provide trials. By the way, they're also making sure for used cars that the radios are on, which has done also a great job in terms of getting people to convert, because it's just another way to move – remove friction. But on the new car side with 360L, it's a competitive situation at the dealership. They're trying to provide a lot of information about the car to the buyer and we're not going to be always represented in a full demo mode. So the great thing about 360L is though, to the extent, we have good information over time, we can provide really strong recommendations. So, I mean, this is just a major fundamental change in our business. We have only been able to deliver as you know, through a broadcast network to the car in the past. And now leveraging the modem in the car and having access to all of that data. We can provide such a much more customized experience for the listener. And I absolutely believe that's going to drive performance. We see it as customers use all these new features, but we can provide information on what other features might be relevant or other content. I mean, it's just game changing. And of course, we can do that in the car and we can do it out of the car in our marketing materials. So even if we don't get the dealer demo, I think we have a lot of tools now to be able to improve the interaction from day one as consumers move into those cars that are 360L capable. And then we are really discussing ARPU for gross adds, I mean, we do use promotional offers and other types of plans to encourage conversion. And then roll people to higher price packages over time. So that's just a function of how the relative amount of new additions compared to the base and any given time period.

[James Ratcliffe:]

Thank you.

[Hooper Stevens:]

Thanks James. Thanks everybody for participating in today's call. If we didn't get to you, please give us a ring. We will talk offline and next quarter. Thanks everybody.