Great. I think we're gonna get started now. Thanks everyone for joining us. I'm Batya Levi with the communications and media team at UBS, and our next speaker is Jennifer Witz, CEO of SiriusXM Holdings. Thank you so much for joining us today.
Thank you for having me, Batya.
Thank you.
Nice to be here.
You know, with every session we've been starting, and it's that time of the year, kind of like looking out to 2024, and if you could talk about your, what your main priorities will be.
Sure. Our primary objective, for 2024 is setting ourselves up for future growth. We will continue to innovate and enhance the user experience on the platform that we're launching in just a couple of weeks now, our SiriusXM next generation platform. It launches first, on streaming, and we have new streaming products in market at that time, and then it'll roll through really the rest of our products after that as we move through next year. So we'll move over our in-car business, you know, to the new tech stack sort of the middle of next year. And then we're looking or at least targeting to move Pandora over to the new platform as well, at the end of next year. So really, it provides us the opportunity to grow both subscribers, subscription revenue, and advertising over time with this new platform in place.
And I'm sure we'll talk more about that. But in addition... So it's our primary objective, but in addition, we'll continue to focus on strategic cost management. And we've talked a little bit about in the, in the last call, our focus on continued cost reductions. We've been on this effort for about the last 12 months or so, and we identified in the last call that we'd saved about $40 million net in the quarter, which you could think of as kind of a run rate level of cost savings. And then finally, one of our main objective is continue to have a strong balance sheet and growing free cash flow.
That is, I'm sure we'll talk a little bit about the proposal from Liberty, but that is to position us really well in case we do take on additional leverage to get down to our target leverage rate of the low to mid three times EBITDA range.
Great. I would like to dig in on all of them, and maybe starting with the one, the recent one, the announcement for your next gen platform. Can you talk a little bit about what it means? How does that transform the new products and services that we should expect from the company?
Yeah. So we had a media event a few weeks ago, and if you didn't get to see it, you can check out some of the videos online. But it really is very comprehensive, but it does start with we're basically building an entirely new tech stack, and we'll start with these new streaming products in terms of new apps and a web player for SiriusXM, launching on December fourteenth. We also announced that we'll have a new streaming-only, lower price point of $9.99 a month. That's all of our content for streaming, and we believe that positions us really well as complementary to other music streaming services that are in the market. Everyone wants a music collection, and oftentimes now they're getting it through music streaming subscription.
But we have a very differentiated value proposition at SiriusXM with very unique content, a breadth of content, very human curated and hosted by artists as well as other talent. And then things like a unique sports proposition, value proposition, right, where we have virtually every major league live play-by-play on SiriusXM. It'd be very hard to replicate that in video, for instance. So it's about enhancing the ability for consumers to find this content, because right now it's really about getting into the car and turning the dial, and we need a better way to approach consumers going forward. So we will enhance search and recommendations in the streaming platform and also in 360L, which is our new in-car platform, and provide a much better and enhanced user experience.
Consumers who are frustrated by the lack of, you know, discovery capabilities or controls will have much more of that going forward. Again, it then positions us much better as a complement to a music streaming service because we have enhanced discovery. There are a lot of opportunities for our subscribers to better find content and discover new artists on our platform than many others.
What should be the next steps as you implement that strategy? And can you touch on a little bit more on that discovery mode, in terms of from a customer perspective, how easy is it gonna be? And looking at your scale, do you have enough scale to be able to provide that discovery and engagement to the customer base?
We certainly have a lot of scale and data points built up from Pandora. So we've owned Pandora now for a little over four years, and there are billions and billions of data points on the music side at least that we'll leverage for, you know, the machine learning we're using for recommendations in SiriusXM as well, in terms of, you know, some of the back-end recommendation capabilities. But we also have millions of customers streaming on SiriusXM today. So our in-car subscribers tend to listen outside of the car to our streaming devices, and we'll be bringing that data over. So that will power a lot of the search and recommendation capabilities that we're using, and we'll continue to improve that over time.
So it's not gonna be perfect on day one, but as more and more usage occurs, we'll collect that data and provide better recommendations and search to listeners. But this is, again, it's just the first step. We'll launch on a few platforms in the middle of December, and then going into next year, you should expect us to iterate monthly releases, improvements to the, to the experience, but also new features. And of course, it's all to highlight our content. And we also launched in... We also announced a number of launches of new content when we had our media event, Kelly Clarkson channel, John Mayer channel, which are live today, and we have more coming in the first quarter with James Corden, the life, life of mine, This Life of Mine.
And we'll have a new true crime channel with Ashley Flowers, who we have a broader relationship with her partner as well.
Yeah, a lot of it. Sorry, advertising around that.
Yeah. So it's about new content, surfacing that new content, because, again, for us to grow, we have to tap into some of these growth segments that tend to be younger and more diverse, and, you know, are looking for something differentiated in audio. And in order to do that, the biggest pain point is being able to get them into the content they love.
Right. Okay. Let's talk a little bit about subscriber growth. I think you have a guidance point out there for positive subscribers for the next quarter-
Second half.
For second half.
The fourth quarter, yeah.
Right. Maybe if you could talk about how we're trending towards that, and can we expect the subscriber growth to continue into next year?
So we're certainly expecting meaningful improvement in our subscriber net adds next year versus this year. We haven't provided any guidance yet. But right now, we're focused on delivering on this year's number. December is a really big month for us, and I would say the biggest uncertainty is vehicle-related churn, which is very much tied to auto sales, both new and used car auto sales.
Just saw the SAAR actually for November come out on the new car side, and it was pretty strong. The best indicator, I think it was $15.3 million, was a higher percentage of consumer sales, which is very important as we build our funnel.
So we have what we've said publicly is that the fourth quarter will be positive in terms of subscriber net adds, and that the second half should be slightly positive. We had negative adds in the third quarter, so positive adds, we expect to slightly outweigh that in the fourth quarter. And again, vehicle-related churn is a factor, and also we just have typically a very strong month in December in terms of adding new subscribers to the service. We have a free listening event that occurs over Thanksgiving for about two weeks, and we turn the radios off, and we tend to see a lot of customers come on at that time. So a lot to come in December, but we're pretty confident in our guidance today.
Great. I think you have a pretty good line of sight in terms of the new car sales, but in terms of the used car, that has been more of a challenge point. What are some strategies that you're implementing to overcome that?
Yeah, our new car funnel is very strong. We have great relationships with the OEMs. We have a strong pen rate of just over 80%, and those cars, when they come off the line, are active and on. So when a new car buyer comes into their vehicle, the trial is just on. They don't have to do anything to experience the service for three months or more. On the used car side, the funnel is a little different. We have about 55% of used car sales have SiriusXM enabled. Of course, those cars, because of, you know, their maturity, tend to be a bit older, and the buyers tend to be a little less affluent and younger, and our conversion rates have been lower on the used car side.
But of course, we have no investment in those vehicles because we made it upfront, when we built—when the cars were built originally. Our biggest challenge on the used car side is finding the transactions, because so many of them on, so many used cars are sold through private channels, right? So just one-to-one. And our best opportunity to convert somebody through to self-pay is if we know that they've bought the car, and they, the trial is on, and they can experience the service. So, the, the opportunity for us is to continue to find those transactions with different partnerships, and then, of course, to make sure that the radio is on, and we have a number of programs focused on that, and that helps us drive overall conversion.
That, conversion to paid subscribers, I think it used to be 40, around 40% a few years ago, and-
Several years ago, we were, yeah, at about the low 40s.
Okay.
The new car side, we're in the low 30s now.
Okay. And what is... Like, what drove that down? And what are—you mentioned some opportunities on the used car side, but what could you implement to improve that conversion rate?
Yeah. So the new car pen rate has gone up over many years, and that's us working in conjunction with the automakers to make sure that it's available in as many vehicles as possible, of course, at the right economic terms. And so over the last several years, as conversion rate has declined, it's in part because penetration has increased. And penetration has increased because we are present in more and more vehicles that are lower-end models and lower trims of models, and that again reaches a consumer that tends to be younger and less affluent. But we've talked a little bit about the challenges that consumers have in finding content in our service, and there's also a challenge around price. So as we roll out 360L, we'll be able to do a couple of things.
We can better serve recommendations in 360L, which is our in-vehicle platform that combines satellite and IP delivery. So there's the benefit of broad-based delivery through satellite, where it's always on and you don't have to worry about dropouts because of the wireless network, but also coupled with, you know, an IP connection that gives us a back channel of data and more personalized because it's two-way. So building out this platform, we're in about 35% of new cars sold today with 360L. That will continue to grow over time.
Where do you think you can get to?
So like, likely over the next several years, to 80% of our trial starts, I think, at this stage, and it's just a function of the automakers rolling out new infotainment systems. And there were some challenges with that during COVID and supply chain issues, but every major automaker, it's plan of record, so it will come. And increasingly, we're going to be launching in AAOS, which allows for much more frequent updates, and for us, enhanced presence on the screen because it'll be in the App Store, but we'll also have, you know, an ongoing presence on the screen under radio. And again, better opportunity for us than other services because you don't have to set up your data plan. We're providing the delivery, and you know, there's better presence, and the trial's just on when you get into the car.
We know today that 360L, consumers who have 360L convert at higher rates to self-pay. That includes the younger consumers that we're targeting because we're better able to provide them a more customized listening experience.
Is there a big difference in terms of churn from 360L users versus non?
We don't have as many data points yet on churn, but churn appears to be better for 360L, so overall retention is better. And we see that generally, because the breadth of content consumers are experiencing is bigger, and also because the personalized, any of the personalized features that we offer, whether they're Pandora artist stations or what we call our extra channels, all those things that allow more customization, enhance the underlying value and therefore improve overall, conversion and retention. And I'm also over time, with 360L, and we showed some of this at the media day, we'll be able to make the transition between the in-car experience to streaming devices much more seamless, carry forward your listening preferences, actually let you listen to where you might have ended from the car, and that's also gonna enhance engagement as people listen in more places.
Got it. In terms of general reasons for churn, what would you kind of cite as the main ones, and how are you tackling them?
Um-
Churn has been pretty flat.
Very strong.
Right.
We've been at 1.5%/ 1.6%, which is very low from a historic standpoint. Part of that is because of vehicle-related. Vehicle-related is the single biggest component of churn, and that's just, I sold my car.
Right.
Usually, I'm getting a new car, and eventually, we'll convert you through. And it's also tied to higher trial starts in general, and so those other trial starts, where it's not just trading in a car, also convert through. So in general, it's positive for us, it's just timing. But as new car sales continue to increase, we're constantly kind of, you know, chasing that a little bit. So that's our, our big, the biggest factor today. The other parts of churn are about 1%, so voluntary and involuntary, so or non-pay, total about 1%, which again, is very low from a historical standpoint. And we're focused on those because we can control them more.
On the non-pay side, that tends to be a leading indicator for, at least from a credit card entry point, non-pay, as to what we think of the health of the consumer. Right now, we're not seeing any challenges there yet. So non-pay has been pretty strong. And on the voluntary side, we believe over time, we've enhanced the value of our product because we provide streaming for free and we continue to add content. So we have a very strong history of providing more and more value over time, even as we've raised prices.
Got it. In terms of your maybe paid base, do you have a sense of what percent of the subscribers also subscribe to another streaming service? Is there an effort to bring them onto your network just exclusively, or can they coexist?
So complementary versus substitution?
Yes.
We think a lot about this. Most of our subscribers today use another music streaming service, and it's because most people have a music collection that they access in some way. And some people are still probably using CDs and others using downloads, but obviously, with the rise of music streaming services, many of our subscribers also have those services. So, you know, the challenge for us today is to prove to a younger audience that they need both. Because, again, many of our subscribers today already have them, but attracting new growth segments is going to require us to make sure that they understand the unique value proposition we have, which is we're not just music, right?
We have a tremendously valuable music component to our product, which is hosted and allows you to discover new music you might not be able to find on a streaming service. But it's also, again, live play-by-play sports, it's comedy. We have a fantastic set of comedy channels, and it, you know, just persistent and live content, whether it be news, politics, entertainment, and a lot of very human-curated content across the spectrum of genres that we have.
Got it. Maybe if we could talk a little bit about your overall pricing strategy. You have a streaming service that will come out, which is a little bit cheaper than the market.
Mm-hmm.
What was the thought behind that? And also, how do we think about just general pricing and ARPU trends going forward?
Yeah, we thought the $9.99 price point was very important in positioning as a complementary product to a streaming service, and we believe it's gonna be very competitive and position us really strong. ARPU in the third quarter, and we're trending about $15.70. And there's a lot of factors in that, so we tend not to manage to ARPU specifically. We're trying to drive overall revenue growth, obviously. And we did a rate increase earlier this year that's rolling through. And we typically don't do them every year, so you would expect next year to be, you know, perhaps a year without a rate increase, and that may put some downward pressure on ARPU specifically.
But our real opportunity is finding the balance between making sure that we have this very loyal core subscriber base, where we've been able to sustain price increases over time, and we need to make sure that we continue to deliver value to that subscriber base, whether it's new content or enhancing their ability to access and find that content or listening in multiple places and encouraging that, encouraging the breadth of the content use or experiences. We have a lot of live performances and others that customers can come to. So enhancing the value is gonna be really critical to sustaining that high price point in our core subscribers and price increases over time. We need to balance that with what we believe is an opportunity to capture new demand at lower price points.
So there obviously has to be differentiation between those packages, whether it's access or content or otherwise. So with streaming, for instance, $9.99 gets you the streaming product, but not sort of this embedded, enhanced, integrated experience in the car, which many people value and are willing to pay more for because that also includes streaming. So again, balancing kind of the core subscriber base and ensuring that we can continue to drive price increases there with more value, combined with driving new demand among younger audiences at much lower prices.
Right. Approaching a wider TAM.
Exactly. Exactly.
Maybe advertising. We had an advertising panel this morning, and frankly, the outlook for 2024 didn't seem as dire as we thought it is.
Yeah.
Maybe a little bit more on the media side.
We're gonna have political, obviously. That's gonna help.
That will help for sure. But in terms of what you're seeing out there, have there been some opportunity for improvement? And how would you characterize sort of like the way you're positioned versus the other music streaming platforms in order to tap that opportunity?
Yeah, we have a pretty unique set of assets in, in audio. So our first-party platforms, of course, are SiriusXM broadcast, where there's less advertising, broadcast and digital. Digital will be growing over time, we believe, as we roll out these new products. And then Pandora, which is the biggest piece of sort of the advertising platform for us. It represents about 60% of our overall advertising revenue. And then we have other off-platform advertising, where we either represent, have ad representation deals, or in some cases, we distribute some of our content more broadly across other listening platforms. And the biggest component of that is podcasting, of course. And we've seen great tailwinds in podcasting over time. Obviously, with the expansion of listening in podcasting, but also just monetization as we bring more solutions.
So we have an ad tech platform that powers most of our ad business, called AdsWizz, and we continue to bring and help solve advertiser... or help advertisers solve challenges they've had with either targeting or brand safety, particularly in podcasting, and we think that will continue to provide tailwinds in that business going forward.
Is there an ideal ad-supported mix versus subscription, or are you agnostic on how that shapes up?
Today, with the products on different platforms, it's more challenging maybe to assess that. But as we look to bring Pandora over to this new next generation platform we're developing, I think we'll have a lot more insights as to how to manage that, and we may or may not actually bring the products together, but at least the insights will be better to assess in terms of ad-supported versus paid. But clearly, I think as with video, there's proof in the market that solutions make sense sort of across the board. So free ad-supported, maybe ad-supported at a lower subscription fee, and then subscription generally without ads.
Right. What about on the podcast side? Maybe if you could talk a little bit about how the engagement has developed over time. And also, as you think about the content that you make available, does it matter if it's exclusive or not exclusive? And are there new monetization opportunities that you would want to invest in more exclusives to drive that?
Yeah. So we, we took an early approach where we bought Stitcher, and it was primarily a strategy around ad, ad representation, because we already had a very strong ad business, particularly with Pandora and music streaming, and we thought it was a nice complement to a lot of the skills that we already had. And then we added different ad representation deals and bought Conan's podcast business as well. So now we represent some of the biggest networks. So Audiochuck, Crime Junkie is consistently number one or number two, in, depending on which list you look at, in terms of podcasts. We also have Crooked Media in our networks, NBC, I mentioned Conan, and many others.
And so we have more podcasts that we represent in the top 50 than any other company, and I think that positions us really well in terms of the breadth of content we have. Most of those podcasts are distributed broadly, so across every other podcast listening platform. We haven't really taken an exclusive approach, where we've brought a lot of them behind the paywall at SiriusXM.
Instead, we've looked to take our relationships with many of these podcast creators and offer them an opportunity to reach a different audience on SiriusXM. So, for instance, Ashley Flowers, who has Crime Junkie, is gonna develop a true crime channel for SiriusXM that will have exclusive content for SiriusXM subscribers. Conan does some exclusive content for SiriusXM subscribers, and hopefully we'll have that perhaps with Crooked Media, you know, as we move forward through the political season.
And then we also do have some that are just exclusive because we look at podcasting really as an extension to the talk strategy that we've had in place for many years, say, with Howard Stern or otherwise. So we have podcasts with, for instance, Tom Brady. We're launching one with James Corden early next year that I mentioned. That will be exclusive to SiriusXM subscribers. And it's really just a balance of what content do we think makes most sense for the SiriusXM subscriber base? What does the talent want? Do they want broad distribution, or are they willing to maybe take a smaller audience, but have a more relevant base with a different, different approach, or other considerations about monetization.
But, we're really pretty agnostic, and we just wanna make sure that we're delivering the most value for our subscribers and something the talent is interested in, too.
As you think about the, maybe podcast versus ad-supported music, is the ad load or CPMs on both platforms different, quite different?
Yeah, they're pretty different, and it, it's gonna depend on a lot of different factors. But I think podcasting is generally pretty early in the stages of development. We have very strong monetization on Pandora, where, you know, we've been delivering ad-supported music for a long time. Our RPMs is the stat that we really look at on, on both, but for Pandora, it's, you know, revenue per thousand hours of listening, and on podcasting it would be revenue per thousand downloads, for instance. But, but Pandora's monetization's been about $100, and it continues to increase, despite sort of lower user levels there. On the podcasting side, where you see the highest sort of CPMs is obviously with host-read ads, which are harder to scale.
Perhaps with AI, that'll be easier, but right now, I mean, for instance, if Conan O'Brien reads an ad, you know, it's fantastic. He does such an incredible job speaking, from the advertiser's perspective, that it's a great way for brands to really connect-
Do they keep all of that, though?
... I'm not gonna disclose our terms. Just try.
Awesome. Maybe moving on to sort of like the cost side. You're implementing the new platforms. I guess there's gonna be more investment that we should think about that comes with it, and maybe content and marketing around that as well. How should we think about your general sort of cost buckets as we head into next year?
Yeah, so we're very focused on being disciplined about costs. I talked a little bit about sort of this $40 million in the quarter, which you could think of as a run rate on net savings. So kind of two dynamics that we're focused on. I talked a little bit about subscription revenue, maybe some pressure next year because we're not doing a rate increase. Also, I'm glad to hear that there's general positive feelings about the ad market next year, but you know, there's still a lot of uncertainty, I think, in terms of the health of the consumer and is there going to be a soft landing or not. So we want to remain disciplined on spending. We also want to continue to fund our investments.
And the investments are definitely across the board, but focused primarily on product and technology, where we're launching this new platform. And while we move over the automotive platform and eventually Pandora, we're really supporting two tech stacks, right? So it's going certainly in our best interest to move through that migration, as quickly as we can. But that's really an improvement I think you'll start to see as we exit next year. And then, of course, we'll be investing in marketing as we support the launch of the new streaming products and eventually having even better martech to support the in-car business as well. And so some of that is just a transition from more traditional avenues and channels of marketing to more modern, and I think we will get more and more efficient over time.
For instance, on the streaming side, a lot of that's supported by performance media, and it's very dynamic in terms of how we invest that. We watch very carefully our cost per trial or CPTs relative to our LTVs of the subscribers we're bringing in. So I think there may be some investment there next year, but otherwise, you know, I think most of our cost structure is fairly set. We have very strong gross margins at about 62%, and our EBITDA margin has been about 31% lately, and we're going to do everything we can to continue to maintain those.
As we sort of speed ahead to end of next year, most of the costs that we're talking about right now would be in the run rate. So beyond that, the operating leverage should be higher in the business. Is that-
Yes. Yes. I believe, especially on the product and tech side, right? As we start to deprecate some of those older systems. But also on the... We haven't talked yet about CapEx, that might be where you're going, but on, on capital expenditures, sort of two big groups, our satellite CapEx, you know, we are rebuilding the fleet. We have four satellites launching kind of over the next four years, starting with next year. And so we're at a peak level this year and next year, and then that will start to, to decline, and we've talked about some of those numbers publicly already in terms of what to expect. Should be near zero by 2028.
And then on the non-satellite CapEx side, of course, we have the product of tech in there as well, and that will start to mitigate as we exit next year, like we talked about. So I do think there's a lot of tailwinds on cash flow outside of, you know, the operating leverage in the business.
Mm-hmm. And what do you think the maintenance CapEx in this business is?
Yeah, that's kind of what I think of the non-satellite CapEx.
Mm-hmm.
Other than, you know, the satellite refresh, we do have other end-of-life cycles that we'll work through on our broadcast infrastructure, terrestrial. So not really prepared to provide a specific number, but you know, it has been increasing as we build out this new platform, and I would expect after that to start to get to more maintenance levels.
And as we think about sort of puts and takes for free cash flow, I think you talked about ending the year pretty strong. Part of it is due to seasonal trends. But looking out, we talked about CapEx levels. I think there are some tax credits that might go away. And what are some other?
This year was the first year I think we were a full cash taxpayer. As we look ahead, we certainly hope that there'll be some opportunities to reduce taxes. You know, we have some thoughts on that that we're not ready to share yet, but I do think there'll be some improvements in our tax profile going forward as well.
Looking out to next year, I mean, you'll give proper guidance later on, but political advertising is a tailwind, maybe some tax benefits with this we could get through. But is it, is it fair to assume that free cash flow could continue to grow?
I think as we look beyond next year, because we still have sort of satellite CapEx at-
Right
... at a high level and, and non-satellite maintenance levels for the new platform, at a pretty high level. I think as you look beyond to 2025 and forward, we would expect free cash flow to, to grow, and over the next five years, for sure.
Okay, great. And maybe the leverage question. You did mention that in the event that you need to reach your leverage target sooner than later, there are certain levers you could pull. Can you talk a little bit about that? And maybe just generally, how we should think about the Liberty proposal, the timeline of that, resolution, and how to think about the next step?
Yes, a lot of questions in there. So I guess let's start with the balance sheet. We have a really strong balance sheet today. We're in the sort of low- to mid-3s today, probably a little lower on that spectrum, 'cause we're building some cash, clearly, because we're out of the market in terms of share repurchase for regulatory reasons. We have, you know, about $2 billion of liquidity between cash on hand and the revolver that's available. So really strong balance sheet, no real bond maturities until 2026, you know, fixed rate. So we feel really good about the strength of our capital structure.
So to the extent that there's a Liberty proposal that comes to fruition and we take on additional leverage, our focus will be primarily on getting back to that long-term target of the low- to mid-3x EBITDA. You know, that would mean we're intent on, or we have every intention to keeping the dividend in place. It's something like 30% of our free cash flow in terms of the payout, so very manageable. We would expect to use the rest of the free cash flow generally to pay down debt and probably deprioritize share repurchases in the near term. But, you know, I think we have a very strong cash flow profile, and I don't see any challenges with us being able to get to that in the not-too-distant future.
You know, that's all alongside continuing to make investments in the business that we need to position ourselves for future growth.
Great. Is there any timeline on the resolution of the Liberty proposal?
You know, the two sides I know are actively in discussions, and, you know, I can't share anything specifically, but I feel confident, you know, we'll get somewhere and make a positive resolution. We all agree that something simpler makes sense, and I think it'll position us really well going forward to execute on the transformation that we're undertaking, and really look to have a much cleaner overall structure that's easier to understand, more liquidity. You know, I think we're all aligned on that. Liberty's been a great partner all along, all these years. I've been at the company a long time, and they've been a great source of, you know, support strategically and financially, and I expect us to continue to work together for a long time.
That's a great place to end it. Thank you so much. Thank you so much.