Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript & Summary

Okay. Thanks for joining us. I'm Bryan Kraft from Deutsche Bank and happy to introduce Tom Barry, the CFO of SiriusXM. Welcome, Tom.

Thanks, Bryan. Excited to be here. Thank you.

Maybe to start off with some high-level topics, so there are a number of changes happening simultaneously across the company. They started last year and really still being absorbed into the business now with the aim of better positioning the company for longer-term success. So maybe you could just start off by walking through these changes and your other priorities for 2025.

Great. Thanks, Bryan. So just to touch on, we came out with an announcement on December 10 that we are going to reprioritize the business. And so in the announcement that Jennifer made, we talked about we're going to focus on sustainable growth and that we are going to focus on a lot of the areas that we're in car and in vehicles. So when you look at it, we're looking at sustainable growth, we're looking at engagement across the business, and we're looking at cost optimization. So if I dig deeper into those, each one of them, we have more focused priorities. So for example, on the -- on sustainable growth, which -- and sustainable growth, which we were talking about, is not only the in-car, it's used cars, it's new cars, but also the growth on the ad sales side. So looking at the in-car and the subscriber growth, we have a few initiatives, which we'll talk about as we go along, but we have a few initiatives going on there, 360L, which is our Internet -- I'd say, streaming satellite platform, which is in the process and has been rolling out. We're also in the process on the in-car and the growth, looking at 3-year subscriptions which are dealer paid subscriptions over a 3-year period. And we're also looking -- as I'm sure you saw the announcements, we're also looking at the recent partnership with Tesla and with Rivian. And so when you look at all these initiatives, they're adding into the in-car and the sustainable growth. And it's really playing into the personalization. It's looking at the personalization, the value to the consumer, personalization, retention and strengthening the conversion, which we've seen better conversion rates on 360L. So that's the in-car. I think when you look at accessibility, we've had really good success on the accessibility side as it looks at the broader platforms, the Android Auto, the Apple CarPlay. And then, as I said, the EV IP vehicles that we've used our streaming side to pursue and expand into that area. So that's worked out very nicely. And then I would say also on the ad sales side, we are focused on our success on the podcasting side as well as programmatic. But we're also seeing, and we'll talk about a little later, is the ad-supported tier, which is something we're focused on down the road. And then last up is cost efficiency, which we'll talk about, Bryan, in a little bit more detail. But I think when you look at it, our cost efficiency over the last couple of years, we spent a lot of times on optimizing costs, and we will continue to focus on this. What we're going to -- what we've put out as far as guidance is for the end of 2025, we will end up -- leave with a run rate of $200 million worth of savings that we've targeted. And we feel really good and happy about where that's going right now. So when you add up all the priorities, really, it's focus, it's pulling back a little, and I think it's really looking at where is there the profitability where the high margins are in this business, which is in the vehicle. It's not discounting the companion nature of streaming, but it's literally focusing our money, our CapEx and making sure there's an ROI on our various investments.

That's a great overview. So we'll get into some of those in more detail. Maybe talk about streaming for a second, though. You pulled back on marketing to streaming for subscribers, but it's still a very important part of the business, streaming that is. What is the role of streaming in the customer experience and in the business more broadly as you go forward?

So streaming will always be an important part of our ecosystem at SiriusXM. And so when you look at where streaming plays in, for example, on the streaming side, 360L leverages streaming to be able to pivot between satellite and streaming. So there's a lot of benefit in the streaming and the satellite being together. And by using the 360L and by using the streaming side, it increases the amount of personalization, recommendations. It increases on-demand functionality, and it provides also an increased amount of content. So the streaming plays a factor in that. Streaming also plays a factor in as we look at accessibility, as I said earlier. The streaming module is what really supports the that really supports the Android Auto and the CarPlay as well as the electric vehicle IP. So it contributes to the success there. And also -- and as we'll talk later, also, it's going to be critical in the support as we go to an ad-supported tier and we start looking at different ways to monetize the ad-supported side of the business.

Okay. Management change that you recently announced -- or addition, so Wayne Thorsen was appointed COO in December. I think it's the first time you've had a COO since Jim Meyer held that position prior to becoming CEO. What led the decision to bring in a COO? And what will Wayne's primary focus be initially?

So Wayne was brought in, in December with a focus on -- he's overseeing product and tech and the commercial side of the business. And I think really, when you look at our overall where we've pivoted and focused on costs and really being really focused on the advancing of the streaming product, Wayne has a strong background in being able to manage those areas, and his contribution has already been felt as far as his look at product and tech and as we refocus our spending. But he does have a strong eye for the customer in our product. And I'd say in the 3 months, I think we've made a lot of progress. You'll hear from Wayne, I believe, in the first quarter earnings call, and you'll see a little bit more of him as we go forward.

So talk about the subscriber outlook a bit. So you've guided to better subscriber growth this year relative to 2024, excluding the negative impacts associated with some of the changes you're making in the business. Do you have any sense for how much these factors could weigh on self-pay net adds and over which quarters we'll see those impacts specifically?

Sure, Bryan. So Jennifer said at the December -- or the fourth quarter earnings call that the impact of these different initiatives, which is principally pulling back on streaming marketing, it's click to cancel that will have adversely impact on us as well as some level of tightening on the term of promotional plans post trial. And so when you add those 3 up, we said it would be about 200,000 -- or I'm sorry, we add those 2 up, and we said if you looked at the broader picture, it would end up being about 200,000, a couple of hundred thousand subscribers that would be adversely impacted during the -- 2025. In those numbers, you're going to see a heavy amount of it is focused on the marketing side and the marketing related to streaming. And so as you look at the streaming component in Q1, a lot of it will be tied into churn, and then there will be a lower net -- or gross adds coming into the quarter principally because of the cutback on marketing in the fourth quarter. So you'll see a contraction in the first quarter. And click to cancel and the trial period tightening of the terms will be more in the second half of the year in Q3 and Q4.

There've obviously been headwinds to self-pay net adds due to lower OEM trial conversion rates. However, you've got some mitigating factors that can help to stabilize that or potentially improve conversion rates, things like 360L and streaming app experience improving, et cetera. You've got 2 new OEM distribution agreements you mentioned with Tesla and Rivian, and there could be some churn benefit, I think, from the 3-year in-car subscription. So if you look beyond 2025, what do you think is achievable with respect to returning to positive self-pay net adds?

So I think if you look at self-pay net adds, and I think you hit on a lot of the initiatives appropriately, I think we're focused on boosting. We're really focused on boosting the engagement, and in some instances, expanding access and awareness of our product. And so I think those are critical as far as our focus on self-pay net adds. I think you'll also see a focus on conversion and longer-term retention. So overall, those are our overarching principles. I think when you look at 360L, I think we have higher conversion rates on 360L. Currently, 360L is rolling out, where about 50% of the vehicles going out by the end of this year will be 360L-compliant. So we're in a good shape from that standpoint. I think the subscribers and the listeners will see a great product. I think they'll see increased personalization, recommendations. And so I think the product will develop a stickier subscriber base. I think going further into the 3-year subscriber -- subscriptions, those are actually sold to the dealership. They're included as part of a package. And so I think that will help our self-pay net adds as we look forward. We currently have some of the OEMs. We don't have all the OEMs. So I look for us to continue to build that out as far as the OEMs. But it's really a great product. It's selling a 3-year subscription to a new vehicle sale. It's obviously lowering churn and it's increasing engagement in the short period. And so we see a lot of value there. We also see value as we roll out more of the OEMs and we get more of them involved. I think when you look at -- obviously, a lot of the cars that are coming off are Android Auto and CarPlay. We've spent a lot of money over the last 2 years focusing on the streaming side as we've talked about. I think what you're seeing now is our ability to have a very intuitive, very interactive app in that process, is creating benefit for us and will help us in self-pay net adds. I think it will also help as we get in broader into the $9.99 and the pricing and packaging as we start adding on incremental functionality. I think that will also help the self-pay net adds. And so I think that's really where we're going to see the self-pay net adds. I also think the ad tier in some of the pricing and packaging that we're going to do will actually help to self-pay net adds as we go out and get past this year and get through the transition that we're working on now.

Okay. Related to net adds, half of it is churn or more. So self-pay OEM churn has remained really low for the past 2 years. It's been in the 1.6% range. Where do you see that going from here?

You know what, I think with all the price increase and us working on optimizing the promotional plans, I think it's going to be -- it's going to slip -- slide up a little in the near term. But we're really working on focusing and leveraging our marketing plans to make sure that we keep that in a very tight window. We believe we've been really successful over the years of keeping the thing historically low in our marketing plans. A lot of the content that we put together, I think it allowed it to stay within a very narrow window. So we think it's going to slide up a little, but we don't see it moving up drastically.

Okay. What have you seen so far with Tesla and Rivian since that agreement was signed, both in terms of the new vehicle sales and those brands as well as the existing base? And can you talk about how you're marketing to the existing base and how the trials work in comparison to the traditional OEMs?

So -- that's a good question. So if you look at it and you step back, both of them are very similar from the standpoint of they're both IP-enabled in the vehicle. The Rivian actually has a button in there that allows you to push the button to get the 1-month trial on the -- and there's a similar process on the Tesla side. So when you look at it, the functionality is there. The button going on, on the Rivian side is very smooth. The over-the-air update that was provided to the Tesla, this is on the Y and the 3 vehicles that was provided in the December time frame over the -- most of the month of December, went out to approximately 2 million vehicles. And so all of those vehicles were provided with SiriusXM, which was great. We have a really good relationship with Tesla as far as getting that set up. But as you look at it broadly, in a Tesla, they have to initiate manually the engagement of the trial. And so as you look at it, there's a little extra effort in trying to put it together. But also in Tesla, when you send out over the air for 2 million vehicles, a lot of the people that are going to have a 3-year Y had already had their experience. So we're working heavily on marketing, which is what we're really good at. We're working on the marketing, we're looking at in-app messaging, and we've looked at some e-mails and other digital marketing. And we're continuing to focus on and use our leveraging -- or leveraging our marketing strength to be able to reach these new possible vehicles and subscribers.

How are you continuing to expand the used car trial funnel in order to try to capture a greater share of use of that used car sales pool? And what are the trends that you're seeing on the used car side in trials now?

So used car trials are becoming about 50% of our overall trialers. And so when you look at it, we've had really good success with the dealer framework to date. And the dealers are our best monetization because they actually turn the -- they turn the service on in the dealership, and they start the trial there. We've had less success on private third-party sales. In the last 3 or 4 months, we've actually expanded and got a new database that's allowed us to almost get pretty much almost all of the third-party sales in a database and allowing us better to market to them. So that database and that expansion is allowing us to reach a lot more possible subscribers. And so we've had really good success there. So now we feel like we have a good grasp of the overall population of used vehicles. I think the next phase is really going to be us continuing to work on our marketing side dealer. I think we're further along in order going to continue to work on the marketing side as it relates to third-party sales. But right now, we feel really good because we have a good grasp for the population.

So Jennifer mentioned on the 4Q call that used car ownership visibility has improved. I mean, is that what you're talking about? Or can you just clarify what she meant by that?

Yes, yes. So Bryan -- so really, what we're seeing is we used to have a reasonable amount of data. Now we have really end to end, and we have a really much broader database. And so as we've gotten more information, we started to move up -- moving up the trials and being able to manage the trial window. And so it's really actually been a great advantage. And even as we've seen this, we've started to see people that have subscriptions before, by having this broader database, we're ending up with much higher win-back rate. So there's a lot of things that are going into it that are working positively. We've got more work to do as far as from a marketing standpoint. But realistically, the database has really given us a much broader grasp of the market.

Okay. What are you seeing among younger car buyers, which in this context really means Gen Y since Gen Z is not really buying new cars yet? How are these consumers engaging with SiriusXM? Are you making any progress with this demographic?

So we're definitely making progress. And I would say, we have a multiple-pronged approach to this. I think in order to reach the Gen Ys, a lot of them are price-sensitive. So what we've done is we're going to work on our new modular pricing, which will allow to start with the $9.99 base and then add whether it's -- whether you want sports, you want more live sports or whether you want premium marketing or premium -- and premium listening or if you want talk. These categories are add-ons to the modular program. So that's great. So we have -- in order to reach them, we have better pricing, more flexibility in the pricing. And they can assess based upon the content what level of pricing they want. So we think that will help pricing wise. I also think when you look in the broader picture, some of the content that we've picked up on podcasting, the content is Alex Cooper and some of the rest of that is reaching -- it's content that's reaching more of the Gen Y. So as we build out the content and we end up with more favorable pricing, we think that overall product will be a better reach for the Gen Y. But we also obviously have the ad tier which is coming. But when you add all those up, we're trying to get the product to meet the need of the generation.

Okay. A few questions on ARPU. So you mentioned that Sirius is in the midst of refreshing pricing and packaging with the $9.99 base plan and then the add-ons. Can you talk a bit more about why you opted for the price structure, where you are in the process of rolling it out and what the reaction has been so far among consumers and whether they be new or existing?

Great. So when you look at the $9.99 program is really a reach that's really made it so we're trying to provide pricing and content. When you look at it, everyone has a different value point. And so with the modular pricing, it's allowing us to meet a broader audience. And I think in the broader audience, they'll get to see the quality of the product. And it also allows them to gain awareness of the product. It also allows them to -- allows us to upsell or allows them to upgrade their subscriptions. So we see a lot of benefit of the overall pricing and packaging structure, and I think that will help us broadly as we move forward.

Can you give us any color on take rates for the new plans or for the add-ons?

It's still -- what I would say at this point, it's still early. But I would say, when you look at it right now, I think it's being accepted favorably by the market. But just as importantly, a significant number of the subscribers have opted for those plans. A significant number have actually taken on add-on plans. So there is more upselling. As we fine-tune the mix of content that's matched up with the add-ons, I think we'll actually increase the level of people that are buying add-on plans.

Okay. That's encouraging. How do you expect ARPU to be impacted by the new price structure and over what period of time? And are there any offsetting impacts that could offset the ARPU headwind, for example, less need to use promotional discounting and, of course, the recent price increase?

Yes. So you hit it. And so -- I mean when we look at ARPU in the short term, we obviously have a price increase that's coming in a week ago or thereabout. And so we have a price increase that's coming into the overall relationship or overall pricing structure. We also have what's ticked up as the promotional subscriptions over the last year or so. And so when you look at the mixture of that, those are putting pressure on ARPU. I think we'll continue to have some pressure on ARPU. But I would also say, as you look at it with our new pricing plans, I think you'll see some pressure. But we also have a really well -- a well -- very embedded subscriber base that's at the higher end of the prices. We affectionately call it the barbell. They're very embedded in their pricing and their structure, and they want all of our content. And so when you look at it, the $15 or $15.21, when you look at the ARPU, it's really the middle of them. And I think what we're going to see as you work forward is we're going to see ARPU is going to have a little bit of a resetting. But I think as you look at it, you'll have the balance of the deeply discounted that are at the lower end, the $5. And some of those will be moving up to the new pricing of the new pricing plan and the new modular pricing. And so you'll see a mixture of it. So I think ARPU over time will be stressed in the near term, but I think it will stabilize as we get more streamlined pricing.

Okay. And then do you think you'd get back to growth at some point a couple of years out or...

And I think it will depend on the mix. But I think when you move and you get the ad tier in there and you add the ad component of the ARPU, I think you will see some level of stabilization, and it will be hopefully somewhere in the range where we're at.

Okay. How do you contain account sharing now that the app is well integrated into Apple CarPlay and Android Auto? Is this one of the sources of pressure on conversion rates and direct-to-self-pay gross adds?

So we've had a lot of internal discussions on that, on the impact of sharing. And I think we have not seen much impact on conversion or on the revenue side of the gross adds. And so what we really have seen is we've seen that the subscribers have -- in our testing, the subscriber has seen the value -- the incremental value of being able to share their access. It's also expanded the awareness of our product. So I think that's helped. So right now, we're seeing it as a positive, as marketing that's actually broadening the customer base and giving a little bit more awareness as well as access. And so -- and we also think it helps lower churn. So it's -- when you add all the factors up right now, the way we're looking at it is we see it as a positive. But obviously, that's always subject for review.

Okay. So maybe talk about advertising a little bit. So you mentioned the opportunity to launch an ad-supported SiriusXM tier. Can you talk maybe about what that product would look like?

So when we look at an ad-supported tier, we're trying to balance out the content people want and the price people want. And so as you look at the balance, we think -- as many of our competitors do, we think that it would be great to have an ad-supported tier. And in having an ad-supported tier, it gives us a place where we can market to these individuals. We can we can bring them up to a high price point as they appreciate and they increase their engagement in the product. I think as you look at the ad-supported tier, it also comes in at a lower price point that allows us to expand and broaden the number of subscribers we have. And so there's a lot of advantage to having that ad-supported tier to feed the bottom part of our overall price structure. And we're -- right now, we're spending a lot of time just trying to figure out the balance between the ad side, the demand on the ad side and then the engagement level on the subscribers. So we're doing a lot of work on this. We see it coming in the near term, but we have a little bit of work left to do on it.

Okay. Any sense for timing? Like when you said near term, it could come...

I would say, we're anticipating it will be by the end of the year, but it could slip. But that's -- we have pretty strong convictions. And right now, I think we're really happy with the results we're seeing.

How much of the vehicle park or of your installed base of vehicles is compatible with an ad-supported product through whether it's 360L or CarPlay or Android Auto?

So just broad numbers. As I said earlier, 360L is in about 50% of the vehicles rolling off the lot by the end of this year. There's currently 12 million vehicles on the road that have 360L. And obviously, as you said, when you look at CarPlay and Android Auto, that provides a much bigger distribution. When you look at them, I think there are 50 million or 60 million on each side of those vehicles on the road that have Android Auto and CarPlay. It's just a rough estimate. So there's a broad channel there. And I think as we get this up and running, I think it will actually propel itself. And I think as we end up with more cars, vehicles on the road with 360L, which will grow over the next couple of years, it will actually create a broader market.

So that's -- I mean that's like 120 million cars.

Yes.

Okay. So it's big?

Yes. It's a big opportunity.

Yes. Okay. How is the content strategy evolving? Where are you expanding or increasing investment? Any areas where you're pulling back?

Yes. So as we went through our discussion in December, looking at ROI, we are looking closely at content in a similar manner that we look at all of our other expenses. And we're obviously looking at ROI, we're looking at engagement, and we're looking at, in some instances, advertisers' demand and interest in it. So if you look at where we're looking, generally is we're looking at high-engagement areas, exclusive content. So we've been focused on there, sports we've been focused on and some of our partnerships. Where we've contracted a little bit is on areas that the engagement has not been as robust as we would like or the advertisers would like. And so we've done a good mix. I mean we've just re-upped Mel Robbins, we've re-upped Jeff Lewis, we -- John Mayer, we have up. So we've actually invested a fair amount. We've invested a fair amount in podcasting. And we will continue to invest as we see the content and the demand out there. But we are looking at it with critical eyes of looking at the return, and I think we're doing pretty good at that right now.

Okay. Advertising has been a headwind to growth for the last few quarters. What are you seeing currently in the advertising-driven parts of the business, Pandora, Off-Platform, SiriusXM? And how do you view the growth trajectory in advertising in 2025 and '26?

So Bryan, I would say 2 things on that. So when you look at the current environment, obviously, with the tariffs, inflation, just overall uncertainty in the market, I think it's adversely impacting the ad space. If you look at January and February of this quarter, we were stable. We were right in line where we thought we'd be. And in the last couple of weeks or 1.5 weeks, we're starting to see a drop-off. We had some softness on CPG and retail in the last couple of weeks, but we're also seeing more softness in other categories in the last couple of days. So we're -- I would say we're cautious about where the ad industry is going right now. But I think as we look forward, I think we'll see more as time rolls out. But right now, we're a little concerned and cautious about where ad sales are going.

Okay. Maybe we could move on to expenses and margin. As you operate in this more challenging revenue growth environment, how are you continuing to take costs out of the business in order to protect margin? And how much room is there to continue to cut cost given the amount of fixed costs you have in the business?

So -- that's a great question. That's 1 of our 3 or 4 priorities. When you look at it, we've been taking costs out over the last couple of years, and we continue to optimize and look more broadly in our cost structure. What you'll see in -- when we told the -- we published was -- our goal is to take another $200 million on a run rate basis out by the end of 2025. We believe we're well on our way there. What you're going to see is that's really optimizing our marketing and looking at marketing, becoming more efficient. So we're looking at the marketing side. We've cut out some of the high-cost, high-churn marketing that was related to streaming, which is part of our refocus back in December. And so we're optimizing marketing. You're going to see AI benefit as we look at the customer care side and our relationship there. We're starting to see advantages to CRAI, which we've put in place up in 2024. We were focused principally in CRAI of handling messaging. And by the middle of the end of this year, we'll be more in voice -- or the middle of this year, we'll be more on the voice side of being able to handle care calls in an AI manner. So we'll see benefit on the customer care. And then I think when you look more broadly, it's on the product and tech side, which will be a reduction in some level of focus on the CapEx as well as the OpEx. And then there's the normal course as you look at G&A and the other areas of fixed cost.

Okay. So maybe talking about free cash flow a little bit. So CapEx has been elevated for the past 2 years and will continue to be elevated this year due to both satellite and non-satellite CapEx as you've launched new satellites and invested in streaming and other projects. So what's the outlook beyond 2025? Will CapEx begin to step down?

So we're really upbeat on our free cash flow. We have a target of our free cash flow of having $1.5 billion of free cash flow generated by the end of 2027. And so we're upbeat on achieving that goal. When you look at CapEx, we have 2 components. We have a satellite portion that's somewhere around $220 million this year, and that will gradually go down to almost 0 by 2027. It will go down to somewhere around $90 million next year. When you look at non-sat CapEx, it's elevated, as you said, similar to 2024, somewhere in the $450 million to $500 million range for 2024 and 2025. A lot of what's driving 2025 is us building out the broadcasting infrastructure as well as some of the repeater networks being refreshed. So that's not something -- it's something that happens every 10 or 12 years. And so that's a lot of the cost this year. We'll see this go down. And as we've forecasted previously, we believe we'll be in the $375 million to $400 million range -- from the $450 million to $500 million this year, we'll be in $375 million to $400 million going forward. We're optimistic as we look and we refocus on all of our CapEx that we'll be able to achieve that. And as we're looking at innovation and further focus of our business, I think we'll continue to focus across the free cash flow areas.

Okay. Last question I have is just around guidance for this year. So you've given guidance for the full year. What are some of the risks to this year's financial guidance, for example, churn from the price increases, click-to-cancel impacts, the effects of tariffs, other macro uncertainties that could affect auto sales and advertising?

Yes. So I mean, we're excited. We're in a year of transformation. As I said, at the outstart, we're really excited on the repositioning of the business. I think as you look at the guidance for this year, we've spent a lot of time looking through a lot of scenarios, stress testing our guidance. I think we feel very comfortable with our guidance. As I said earlier, and you and I were talking earlier, the macroeconomic factors are a concern, but we feel like we've put different initiatives in place to balance that. But the truth of the matter is that's where -- if I was looking at the risk to my guidance, I think there's risk there. I think there's risk in -- as we change some of the pricing and some of the promotional plans, I think there's going to -- there's risk there. But we've mitigated a lot of the risk that we've known about. We feel fairly confident in our execution. So I think the factors, a lot of the bigger ones, are really outside factors that we're going to have to adjust to and we're going to -- obviously, I think we're prepared to meet, but those are the factors that I'm concerned about at this point.

Okay. All right. Great. Well, thanks, Tom. Thanks, everyone, for joining us.

Thank you. Thanks, everyone, for your time.