Sirius XM Holdings Inc.
Q1 2021 Earnings Call Transcript

Published: 28 Apr 2021

[Operator:]

Good morning, and welcome to SiriusXM's First Quarter 2021 Financial and Operating Results Conference Call. Today's conference is being recorded. . At this time, I'd like to turn the call over to Mr. 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 First 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:]

Good morning, and thank you for joining our first quarter call. SiriusXM turned in a great performance across the board. Like many companies, we are benefiting from Americans getting back on the road, growing auto sales and consumer incomes bolstered by significant federal stimulus. These impressive results are also a strong testament to demand for great content, our resilient business model and once again, our teams flawlessly executing the strategies we laid out. SiriusXM is the premier audio entertainment company in North America. Across our properties, approximately 150 million users regularly listen to our content, much of it is premium, unique and expertly curated, covering everything from music to talk, news, sports, comedy and podcast. I'd be remiss if I didn't mention upfront that Drake, a global superstar and one of the most streamed artists in the world, in March launched his highly anticipated exclusive SiriusXM channel, Sound 42, bringing his diverse musical taste to our millions of subscribers. For the first time ever, we have also enabled nonsubscribers to tune in by an open access option we set up for this channel. Our business model, the best in audio, powered by complementary subscription and advertising engines, has made us the most profitable audio company in the world. You are already familiar with our world-class capabilities on the subscription side. And on the advertising side, we now have the tools to serve as a one-stop shop for both advertisers looking to efficiently buy large audio audiences and for audio content creators looking to distribute and monetize their content. We are truly a unique company with a mix of assets and skills found nowhere else.

[Sean Sullivan:]

Thank you, Jennifer, and good morning, everyone. As Jennifer highlighted, our first quarter results were strong as we continue to rebound from a volatile year, investing in new content, while generating revenue and adjusted EBITDA growth from our business. Total revenue increased 5% to $2 billion, driven by sharp growth in advertising revenue of 24%. The addition of Stitcher, which we acquired in Q4 of 2020, coupled with growth in both our on and off-platform businesses, including AdsWizz, contributed to the advertising revenue growth year-over-year. Adjusted EBITDA increased 7% to $682 million. Diluted earnings per share were $0.05, or $0.07 excluding onetime items, including the satellite impairment and impairment related to office leases and a onetime tax settlement benefit. With respect to the onetime items, our results reflect a $220 million noncash impairment charge for the SXM-7 satellite failure, which was announced in January. We have issued a request for proposal to construct a new satellite to replace SXM-7, and we're currently working through the insurance process and will book the likely insurance recovery in a future period. We also incurred a $25 million noncash impairment charge related to office leases that we see occupying as we make more efficient use of our space going forward. These noncash impairment charges are excluded from adjusted EBITDA. And lastly, we also realized a $95 million benefit to income tax expense, resulting from a favorable state tax settlement. In terms of free cash flow, we generated $211 million for the quarter on lower contractual OEM receipts plus higher royalty and cash interest payments.

[Operator:]

. Your first question comes from Vijay Jayant of Evercore.

[James Ratcliffe:]

It's James Ratcliffe for Vijay. Two, if I could. First of all, on the Pandora side, very strong monetization in the quarter. You continue to see subscriber -- or listeners erode. Are there plans -- or can you talk about efforts to either start growing that listener base or at least to stabilize it? And secondly, on the satellite radio side, very low SAC in the quarter. Does that have to do with the new agreements that you mentioned? Or is there something else going on there?

[Jennifer Witz:]

Sure. Thanks, James. First, on the Pandora side, we're very pleased that we continue to have the largest free digital audio platform in the U.S. We recognize that the losses in the listeners are not where we want to be, and we're extremely focused on that. We have a number of initiatives in place to deliver more and better content, more relevant recommendations and improving the Pandora digital experience in the apps. But what you pointed out is key for us going forward that our monetization has been really strong at Pandora, and we continue to deliver strong RPM. The team has built strong innovative ad products there. And look, we've got -- we launched an interesting partnership with T-Mobile. We've had a really good relationship with them over the years. And we have a very unique Pandora offering in place with T-Mobile, and we look forward to doing more collaborations with T-Mobile hopefully in the future and other big brands that we should be able to talk about soon. And then I guess on the SAC, your question was about SAC right, James, your second question? Is that right? Yes. So I think overall, from a SAC -- go ahead.

[James Ratcliffe:]

Sorry, just why it stepped down so much and if that had anything to do with the new OEM agreements that were mentioned?

[Jennifer Witz:]

Yes. I think two things. We continue to work with our OEM partners to strengthen our relationships. You saw our announcement this month with Jaguar Land Rover, yet another example of an OEM partner increasing penetration. We're launching standard across their models on model year '21 vehicles, and we've extended that agreement through 2026. So we continue to work with the OEMs, and those agreements as we renegotiate them, the terms across our subsidies, our trial structures and our revenue share may change, but we're constantly optimizing them in favor of building penetration, which is what's going to drive longer-term growth for us in the future. So the SAC expense in the quarter is partially a function of those new agreements with various automakers, but it's also really driven by what supply constraints we've seen with silicon. And this is really across the board, it's an industry phenomenon that I know you've seen widely reported, where automakers are continuing to manage the supply of silicon across their vehicle lines. And so we did see lower installs than we would have expected in the quarter. But luckily, consumer demand on the automotive side is very strong. And we had the biggest quarter we've ever had on trial starts, which bodes well for conversions in the future.

[Operator:]

Our next question comes from Sebastiano Petti of JPMorgan.

[Sebastiano Petti:]

I was just wondering if you can give us an update on your podcast strategy. Obviously, a lot of headlines from Apple and Spotify recently about moving more towards subscription-based service. Just wanted to hear your views on if this is where the market is going and perhaps how SIRI is thinking about it longer term?

[Jennifer Witz:]

Sure. I'll start, and Scott, you can feel free to add on. Our focus is on delivering the best experiences for content creators, and we can help them monetize more broadly because we have the best solutions in terms of adtech and our ad sales teams. You saw with our acquisitions last year of Stitcher and Simplecast that we added to these capabilities, and we believe we are really well positioned to broadly distribute content from podcast creators and audio publishers across platforms, whether it's our own platforms or off platform. And we believe, and that's what we see content creators are really looking for. Of course, the announcement this week from Apple and Spotify, we are really well positioned to offer subscription products. We have subscription products across our brands today, including at Stitcher, where some time we've had -- for some time, we've had a premium podcast subscription end market, which does provide capabilities for listeners to listen to podcasts ad-free, to get early windows and to see -- have premium exclusive content. So we can be nimble. If that's really where the market heads and consumers want to go, we certainly have the opportunities to monetize and help content creators monetize through subscription. I'm not optimistic that consumers are going to want to have a lot of micro audio subscriptions. But again, if that's the path that we see evolving, we have the opportunity to pursue that as well. Scott, did you want to add on?

[Scott Greenstein:]

Sure. Just one thing on that. So the biggest thing right now for podcast, I think, is having high-quality production and enough A level content in the podcast -- sorry, marketplace. So we offer the production skills, the curation skills to get into a subscription model on a moment's notice. We're obviously living it every day. But if you look at a podcast in January, Crime Junkie was in the top 10 of Stitcher, Pandora and SiriusXM on people listening to podcasts. If you talk to any podcast creator, they want awareness and marketing. And we'd like to get into a position where we're comfortable marketing and promoting podcasts, so the awareness is there at a volume level. And at that point decisions on subscriptions, micro subscriptions, that will be easy. We're about trying to figure out where the best fighting point is that as this evolves.

[Sebastiano Petti:]

That's helpful. And then perhaps if I can follow-up on just your comments around the silicon shortage. If indeed, the supply chain is constrained and OEMs are unable to kind of refill that inventory, would that be a positive? Should we think about that as an upside benefit to EBITDA as -- for the full year as SAC build -- the inventory build will not necessarily come through in the numbers? Just any color there would be great.

[Jennifer Witz:]

Sure. Certainly, if installs are lighter going forward or continue to be lighter going forward, then we would have lower SAC expense. For the business, we clearly are hopeful that the OEMs will be able to meet consumer demand. There's just been an incredible amount of demand on the consumer side for both new and used cars. And you saw SAAR at 16.8 per -- 16.8 million in the first quarter. And as we said, March was at 17.7 million. If that strength continues, the inventory levels are historically low at 39 days, and there's only so much inventory out there to support the consumer demand. But strong auto sales is good for our business, and we're hopeful, again, that the OEMs will be able to deliver to support that demand and that there will be strong used car inventories as well to support the demand because that's the best thing for our business on the top line.

[Operator:]

. Our next question comes from Matthew Harrigan of Benchmark.

[Matthew Harrigan:]

You've got arguably certainly the best portfolio audio-wise on sports in North America. We've seen a lot of announcements on DraftKings. I know they probably distribute like the Dan Le Batard content through you. But can you talk about how online sports betting and the halo around that? I know sports viewing is down, but you still have a lot -- some benefits there. Is there any prospects for direct deals? I mean you have Action Network and some other assets that are super high profile.

[Jennifer Witz:]

Scott, do you want to take that?

[Scott Greenstein:]

Sure. So sports betting has always been a direct corollary to live sports. So when you look at where we'll go in audio, live sports, betting and other things, we've had a fantasy sports program for a long time. We have, as you saw recently with baseball, tied up digital rights. So the key to sports betting is, I believe, the affiliation and the relationship with the live sports events. And certain things, anyone can do and, others, you need the live and the authorized rights with the leagues digitally. And that's the position we're in right now. We're going to continue. We've tried things with this and other things. We're looking to create what will be the marquee in that area. The issue is it's easy when you see the NFL or baseball and all that, it's one of those. We're watching and analyzing all that's out there. And when 1 or 2 emerge, we'll be there in, and you'll hear more about that soon.

[Operator:]

Next question comes from David Joyce of Barclays Bank.

[David Joyce:]

I was wondering on the cadence of continued paid promotional subscriber losses. Granted you said that you'd be on the path to maybe losing 1.5 million this year. But is there a path to that going to 0 at some point? Or is that always going to be part of your range of the OEM relationships? And then secondly, related to the OEM payment impact that were lower in the first quarter, how much of that was timing and how much was related to the change in these contracts?

[Jennifer Witz:]

Sean, do you want to take those?

[Sean Sullivan:]

Yes. Maybe, Jennifer, I'll take the second one first. David, yes, the -- as you saw, we -- the cash flow in the first quarter, $211 million was in line with our expectations. We had some working capital timing movements, some incremental cash interest, as I talked about. So nothing really unusual there. On the paid promotional sub losses, I think they'll continue to be -- I think I tried to at least size that for you for 2021. And they'll continue to be, I think, part of our OEM deals, as Jennifer talked about. We've made some amendments. We look at these deals holistically. I think paid promotional is still an important part of our relationships with the OEMs and the consumers. So I don't expect it to go -- to be eliminated. I don't know if there's anything you want to add to that, Jennifer.

[Jennifer Witz:]

Yes, I think it's just one component, right? The trial structure. The overall deal economics. And again, we're focused on building penetration as are the OEMs. They've been very supportive of having the product in as many vehicles as possible. And every OEM is different in terms of what's important to them in terms of the economic structure. So the real key for us is driving self-pay subscribers as that's the biggest indicator of customer demand.

[David Joyce:]

Okay. And on the royalty decision that got delayed another couple of months, what is embedded in your expectations needed for this year? What should we be looking for?

[Jennifer Witz:]

Sean?

[Sean Sullivan:]

Yes, David, so I'll just -- I'll reiterate what I think we talked about at the year-end call. We've taken a pragmatic view. I think that what we pay, what we have lobbied for in the hearing and what they're asking for is all public information. I think we've taken a pragmatic view. It's embedded in our guidance. And frankly, it's embedded in our first quarter results. So as you know, we'll know June 15th, and we can certainly update everyone the next time we're together.

[Operator:]

Our next question comes from Robert Routh of FBN Securities.

[Robert Routh:]

First question -- or a couple, if you don't mind. First, could you -- there was a talk about you guys talking to AT&T about acquiring some of the spectrum that they have because it was complementary to some spectrum you have. And if that was true, I'm just curious as to whether or not that's something you're still interested in? And if so, what's the status of that process is or isn't, if you're comfortable talking about it?

[Jennifer Witz:]

Sure. So we've been working closely with AT&T and the FCC on the adjacent spectrum. And I think it's -- we're looking at various opportunities to use that in conjunction with government agencies. It's not for commercial purposes, but it's important to us to protect that guard band because it's next to our satellite spectrum. And we're making progress in terms of the steps we need to go through to put a test in market, and we feel confident that we'll be able to execute on that.

[Robert Routh:]

Okay. Great. And a related spectrum question. Given that you're migrating from the XM Sirius platform to one, and you're going to have a bunch of spectrum free under your control, what thoughts do you have as far as how you could possibly monetize that? Because I assume the SEC will let you keep the licenses. I don't know how they wouldn't. Have your autonomous car companies or anyone approached you all and inquired about somehow being able to use some of that spectrum when you free it up? Or are you planning to use at all for incremental products for one of your other platforms?

[Jennifer Witz:]

We're still looking at a number of options there. I mean the decision around low-band satellites will likely come in the next 18 months. But today, we still have a significant number of subscribers on the low band. And we want to continue to maintain and support that business. But over time, we have looked at, and we'll continue to look at opportunities to work with other companies on ideas, whether it's data services or video or other implementations. But of course, there's always the opportunity to use that very efficient broadcast spectrum to enhance our audio offering. And that could be more opportunities to build out different business models, including free.

[Robert Routh:]

Great. Okay. And one last one, if I may. I think you mentioned on a previous call about the omni platform deal that you had signed with Kevin Hart, where it's both on Sirius and Pandora and podcast and kind of doing that. And when it comes to major talent, I know that many of them are reluctant to be on anything other than the biggest platform you have. But I'm just curious as to how your success has been in attracting other major talents or even sort of A list, B or C list talent to some type of a SiriusXM omniplatform presence similar to what the model that you had highlighted that you had with Kevin.

[Jennifer Witz:]

Scott?

[Scott Greenstein:]

Yes. So thank you for that question. Not only Kevin was sort of the prototype for it, we have others that you'll be hearing about shortly that are multi-platform deals. I would go the other way. All our talent now is -- that we discussed within our current talent, Andy Cohen is launching a music channel, in addition to his channel, but it will have playlist on Pandora as podcasts. We're largely sort of only talking about what someone's audio content interests are? And then figuring out what they would like and what would work for us on all 3 platforms where relevant. This is almost now, I'd say, our standard procedure. We don't have too many people that are just coming in and saying, I'd like to be on one platform or the other. I think you'll see with U2 and Drake and others, you'll see some migration into platforms and things. This is what we like most about our three-pronged attack. It gives customization. We have people that due to schedules, like Kevin, may want a podcast for a while. Others want to do live radio due to topical events and current stories in the news. Others feel music is part of their life, but they don't have a way of expressing it and they'll do playlist. So this will be the standard operating procedure going forward, not the exception.

[Robert Routh:]

Another question, I guess, and it sounds -- I think it sounds like, yes, it's actually working, it's actually attracting a lot of talent too serious in your various platforms because you do have all of those where some of the other players only have one. Is that safe to say?

[Scott Greenstein:]

Exactly. More than safe to say. And the last point on that is awareness is the key point any content creator, no matter what you want, whether it's a live sporting event or anything, they want to know. And our 3 platforms allow what, I think, is the ultimate version of cross-promotion on any piece of content out there. So yes, they're all really excited when they come in to chat about it.

[Robert Routh:]

No, that's what I expected, and the flexibility that others can't offer. Great. Thank you very much. I really appreciate it.

[Scott Greenstein:]

Thanks so much.

[Operator:]

Your next and final question comes from Jim Goss of Barrington Research.

[James Goss:]

A couple of things. One, involving your ad sales process. I wonder if you could talk about the ad sales integration with through a variety of options, especially between Pandora and Sirius? And whether the app usage and availability has broadened ad avails significantly? And then separately, on the 360 rollout process, en route to 360L being your default version, as you mentioned, is there any targeted process to -- by price or demographics served or anything else that you're trying to do to get the 360L service rolled out to specific categories sooner than others?

[Jennifer Witz:]

Thanks for the question. So on the advertising side, we've been able to, I think, capitalize on our strengths on the sales team side under John Trimble. We've brought all the teams together. They'll still soon be launching under a new umbrella SiriusXM Media, which brings together all of the capabilities that we have on the sales side across the teams to offer advertisers really efficient opportunities to buy across scaled audiences. We reach 150 million listeners. And we just offer a great suite of opportunities across multiple formats and platforms on our owned and operating platform and off platforms. And we have all of the tech solutions to support that as well across AdsWizz and including Simplecast that we bought last year to provide enhanced podcast capabilities on the distribution and hosting analytics side as well. So we're really well positioned from an advertising side. As it relates to the inventory on our owned and operated platforms, clearly, Pandora is the largest, and we continue to monetize really strongly there. But we are growing our ad revenue on Stitcher and off-platform, and we have a nice business on the SiriusXM broadcast side as well. The SiriusXM digital side continues to build, and we hope that will contribute more in the future on the advertising side. For 360L, we are very focused on broadly distributing this right now. So we haven't focused on specific demographics or cohorts necessarily. The objective is to rapidly roll that out. And we expect to be in about 25% of our installs this year in terms of what's new and coming to the market. And we've talked about the fact that we have about 2 million vehicles in markets that are capable today. So we have great progress. It's moving very quickly. And the builds as most of our OEMs are now making it plan of record. And we'll -- moving forward because of all the data we're going to get from 360L in the vehicles, which is really new to us, we will be able to customize, I believe, our pricing and packaging even more to support demand for different segments. But today, we're just focused on getting the awareness up for the features that are there because when users take advantage of those features, there's a significant increase in value, in their attributed ease of use. And we're looking for improvements, obviously, related to that across conversion and retention as well.

[Hooper Stevens:]

Thanks, everybody, for participating in today's call. That concludes the call. We'll speak to you soon. Take care.