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

All right. Great. We can get started with our next session. Thank you, everyone, for taking the time to join us today. My name is Stephen Laszczyk, and I cover entertainment here for Goldman. We are excited to welcome back to the Communacopia and Technology Conference again this year, Jennifer Witz, the CEO of SiriusXM. Jennifer, thanks for being with us today.

Thanks, Stephen. Good to be here.

Great. Maybe you could start off high level. You talked a good bit over the last couple of quarters on a few different vectors. First, improving subscriber trends; second, executing against some cost savings, some growth opportunities in the advertising business of yours as well as some possible execution against spectrum value, which I know has been much discussed. And maybe just as you take a step back, I'd be curious from your perspective, what's changed in the story over the last year? And then as you look ahead over the next couple of years, what do you think the biggest drivers of value creation will be for the business?

Sure. So I guess it starts with the strategy reset we did in late 2024, where we outlined the 3 priorities you highlighted, strengthening our subscription business by enhancing our in-car listening experience, growing our ads business and really leveraging the scale of our portfolio to drive efficiencies and also unlock new monetization opportunities to enhance shareholder value. And the good news is these priorities haven't changed. They remain the same. And I think what's changed meaningfully over the past year is just that we now have tangible evidence that the strategy is working, right? And I think one of the best places to see that is in our Q2 results, right? So on the subscription side, really solid subscriber performance, growth in ARPU, strong customer satisfaction, very low churn. And then we've established a baseline, I think, where -- we will continue to improve the durability of that subscription business and a number of initiatives underway that will continue to play into that. On the ad side of the business, growth in the ad revenue in the second quarter of 5%. And as you know, we've launched additional partnerships. We're engaging with other platforms like Apple on the podcast side, Amazon for DSP and then, of course, YouTube, which we will be launching soon. So we continue to see a strong growth path on the advertising side of the business. We've unlocked efficiencies across the organization. We're on track this year to deliver another $100 million in gross savings. And that all plays into our strong cash flow generation. So -- last year, we delivered $1.25 billion in free cash flow. This year, we expect to deliver $1.375 billion and next year on target to deliver $1.5 billion. So it's all of the operating results that play into that, but also a decline in capital intensity as we lower our capital expenditures for our satellite fleet as we complete that next year. And that opens up significant opportunities for capital returns for shareholders, right? So we'll talk more about that, I'm sure, but we would expect share repurchases to be a bigger portion of use of capital going forward. And as you mentioned, on top of all of that, which is a pretty strong investment thesis, we have optionality in our spectrum assets. And so we'll talk more about that, I'm sure, as well. But that's something that we've always known was going to be an opportunity. But I think over the last year or 2, there's certainly been more attention on the space, and I think that's brought more attention to our assets as well.

Definitely. And I want to come back to a lot of those themes and topics. But maybe starting first with the core business, the in-car satellite radio business. Could you maybe talk a little bit more about some of the steps you're taking to improve SiriusXM's in-car position as well as improve the long-term growth profile of that subscription business that has been around for the long.

I mean we have a really unique business in car, right, that no one else has, and it's a massive competitive advantage for us. And I think maybe sort of the impression has been that this is going to decline really rapidly, maybe like pay TV. But the underlying metrics just don't show that, right, that our subscribers are incredibly loyal, that we have built in a number of new initiatives to expand access. And that's the usual. So we're going to increase penetration rates at the right economics, of course. We have organic increases in our penetration rates on the used car side of the business, and that's a meaningful contribution for us today. We've launched things like our extended duration plan, which brings new subscribers into the service who might not otherwise have experienced it through our normal conversion funnel. So all of those bring more customers into the service. And then beyond that, we're improving the customer experience. So everything from 360L, which provides a much more personalized experience in the car for better content, comedy launches, artist channels, like continue to increase the content in our unique bundle. And 360L helps us serve that to customers in a more personalized way, of course. And then better pricing and packaging to open up demand at lower price points and then also enhance value to be able to position ourselves for taking price probably annually going forward. And so all of that, I think, improves our economics for the subscription business in a way that gives us confidence in the durability of that business going forward. So we feel really good about the progress we've made and how it's setting us up for the future.

You mentioned 360L. I believe it's in about 20% of the self-pay base at the moment. I'm curious what you've learned in terms of maybe data and customer engagement with the product and with the channels and with the service itself that is maybe enhancing your understanding of subscriber behavior and maybe helping you better manage that.

I mean it's really a game changer that we now have access to all of this data on customer engagement. And it's in 20% of self-pay subscribers, and it's in just probably by the end of the year, just over about 60% of our new car sales as well. So it just continues to ramp. And the data we're getting back helps us make better decisions about the content portfolio, who was listening to what, should we take certain things down and put other things up. We made a decision recently to add local sports to the platform, for instance. And it's all about what are we learning about what our subscribers want, combining the data that we're getting back on listening with, obviously, the research that we might do as well, to make better decisions about what goes into the content portfolio, how we can better personalize the products. We saw a really strong increase and continue to really in our personalization features in car, like the personalized artist stations where you plug in an artist name and it creates a channel for you as well as our Xtra channels. So it's just a much more advanced personalized experience, and our subscribers are reacting really positively.

Do you see that show up in metrics like churn or ARPU on the...

It has better conversion, better -- yes, better retention overall and better ARPU. And it just gives us a lot more flexibility, right, in terms of different kinds of packages that we can create and different kinds of enhanced features that we can provide because of that interactivity in car.

That's helpful. Maybe turning to this year on the subscriber side. Your guidance for 2026 calls for modestly greater self-pay net add losses this year relative to last year. Could you maybe just touch a little bit on the puts and takes you're seeing in the self-pay metrics this year and what we should expect to see as we go into the back half of the year, maybe '27?

Yes. So first of all, we're really pleased with retention. We had churn in the second quarter of 1.4%. That's below where I certainly ever thought it would be. And I think we continue to see really strong retention going forward as well. And then on the sort of top line metrics in terms of demand, we've had this slow decline in conversion rates, but we've been able to offset that to a large extent with our companion subscriptions and our extended duration plans as well, which is, again, bringing new customers into the service. They might be part of the household, right, or they may not have chosen to subscribe, and we're getting them through EDP. So those have both helped bring in new demand. But I think the real opportunity in terms of how we look at subscribers this year, the 2 things that are maybe impacting our thoughts on slightly lower self-pay net adds this year versus last year are an opportunity to really stop using as many unpublished discounts. And so traditional subscription services tend to use a roll-to-pay trial where you roll to a full price package. And we're slowly moving our acquisition programs to that process. So that will result in some near-term net add degradation, but long-term, much better revenue profile. So it all speaks to strengthening the overall subscription base. And so we expect to see more of that in the coming months. And then in the fourth quarter, in particular, because we launched continuous service last year in the fourth quarter, so subscribers had stayed in a state of suspend until they resolve what they were going to do with a new car that they purchased, right? And so some subscribers will transfer the subscription and some might choose to cancel because they added a car to their household and they chose not to add it to that car. But at the beginning when we launched it, there were more customers in that state of suspend before they corrected that. And so while it continues to build, it starts to level out in the fourth quarter. So it's just going to contribute less in the fourth quarter than it did last year.

Understood. You mentioned the companion plan additions this year. Could you talk a little bit about the strategy of companion -- and then how you would encourage investors to think about the economic profile of these subscribers as well as the lifetime value perhaps of the account that they use companions of their...

Yes. We've been really pleased with the performance of companion. And while they are 0 ARPU, they do enhance the overall value of the household, right? So you have a current subscriber, paying subscriber who has access to a companion, whether it's a radio or a streaming subscription. And most customers who take advantage of it are giving it to another member of the household. So including sort of an adult child who's driving a new car. So it does, in that way, I think, open up some new demand and more sort of engagement with our service with a broader set of members of the household, but it's also supporting retention because you're less likely to cancel if more members of the household are using the service. And so we've been very pleased with what we've seen there and hoping that there's maybe more ways to broaden it going forward. There's been some very slight cannibalization. But overall, it supported the rate increase that we did earlier this year. And again, it could be, I think, very valuable to retention going forward, something like over 80% of customers who have taken advantage of it say that it's actually added value to their subscription and over 3 quarters, say that they're more likely to stay as a result.

Any way to size how large the companion add-on service could get across the base or maybe where we're at today or where you've gotten so far?

We've provided some estimates so far, so probably close to about 300,000. And I'm not sure how much more we will expand it. But so far, we continue to see progress in terms of customers adding these. And it, again, is net positive, I think, overall for revenue and for retention for it. So we'll continue to look at opportunities going forward.

That's great. You also mentioned continuous service. I was just curious if you could maybe expand on some of those comments around continuous service, the initiative is. And then as you anniversary the initiative, the extent to which it could perhaps continue to be a benefit to churn?

It's really about reducing friction in that process of moving from one car to another. And so we keep the subscription on until you decide when you add another car, you may not buy another car right away or maybe you bought a car and you're trying to decide which car you're going to keep the subscription on when it's during a trial. And so most customers have reacted incredibly positively to just having the capability to retain their profile, their preferences and their streaming credentials. And so it just makes things easier as they go through that process. And so when we launched it, of course, the incremental subscribers taking advantage of it at a gross level was higher than what we'll see because now it's on more of a run rate basis. But again, this is just the first step in moving to an identity structure that's based on a customer and not a car. And then also moving forward, we'll have things like auto transfer where we automatically -- if the matching is obviously appropriate, we'll automatically move the rest of that subscription to the new vehicle that somebody's purchased. So it just continues to, I think, remove some of that leakage, and it's a net positive overall for churn.

Yes. Maybe as you think of future initiatives that could potentially reduce leakage or reduce churn or add value to the lifetime customer. Any other initiatives that are on the horizon or thoughts or ideas in terms of what could add to the service?

Well, one in particular that -- so we'll talk a little bit about Sports Pass perhaps. But I think in general, in terms of acquisition and opening up new demand, there's an opportunity for us to create packages that are content focused. So we launched Play, of course, which was ad-supported music stations at a price point of $7. Sports Pass, which we're launching now is $5 for all of our sports content. And we have an incredible lineup of sports content that I think can be appealing to a broader set of subscribers. Maybe you already have a music service that you're satisfied with, but you can't possibly get the breadth of sports content anywhere else with SiriusXM. So for $5 a month, you could add that to one of your services. And so I think it's really compelling and could open up the addressable market for us. And sports is obviously incredibly powerful as an asset. And I think we have a really unique set of across all of play-by-play, the 4 major leagues. We have all kinds of other sports, golf, tennis, racing and soccer, and we have all the sports talk around that. And now we have local sports station through Audacy as well to add to that. So it's -- the content itself is enhancing the value of the subscription, and I think we'll work towards supporting retention. The package though, I think, could build new demand. It could also be used for retention if somebody comes through our sales process and we find that they most like sports, yes, you could offer them that as opposed to some other discount.

Maybe to extend the conversation on adding value, the next logical topic from there, ARPU and taking price after adding value to packages. I think this year marks the first year of consecutive annual price increases at SiriusXM. -- taken. Maybe just taking a step back, I'd be curious to get your updated thoughts on how you're thinking about balancing pricing versus retaining customer value, retention and then expanding the addressable market of the service.

I really think you know many of our package price points are $20, $25. And so we've been hesitant to maybe take price annually. But given the success we had earlier this year, it's probably a model that we'll use going forward. But always -- and we started this in late '24 as well, always adding value first. And so initially in '24, it was pushing more of our sports and our premium sports and top content down to more of our subscribers. And this past fall, we did companion, obviously. There are opportunities, I think, as we talked about, maybe to expand companion. And I also think lean more into super fan and fandom and what it means for us because that really is what's unique and differentiated for SiriusXM, right? So you can get music in a lot of other places, but how we deliver music is incredibly differentiated and very human curated. And so I think there's an opportunity to build that out so customers better understand all of the things they have access to, whether it's contest for special access to private events or it's call-ins or listening to special artist interviews or all of the exclusive content we have. There's just a breadth of things that I think we do very differently than any other service. And so that's going to enhance the value as well.

And maybe just a follow-up question on that because we've seen others in the music space be hesitant to take pricing over the last 2, 3, 4, 5 years. What are you seeing in the customer base on the back of some of the pricing that's maybe giving you the confidence to move to this annual model?

And you see it in the churn rate, right? And yes, we've had continuous service providing some support for that. But even with companion, those you take companion, the retention is 2 points higher. So I think despite the rate increase, we feel really good about where our churn rates are. And that's even before we've fully taken advantage of all the data we're getting back from 360L to better personalize all of the experiences, right? So we only have 20% of our subscribers, right, on 360L. And so we don't fully -- we don't have the full set of data available for us yet across the subscriber base to meaningfully enhance those personalized experiences through our marketing to make sure that customers are listening to a broader set of content, right, across more devices in more locations and across more members of the household because those are the things that drive engagement and value.

Let's pivot and I would love to talk a little bit more about the product offering and the content strategy moving forward. We touched on sports, but maybe even taking a step back, as you think about the home of fandom strategy that you've been talking about, where do you see the strategy going for Sirius XM? What opportunities do you see to deepen engagement? And what do you think that can mean for business longer term?

I think maybe an example would be best here. So if we take something like The Highway, we have an amazing set of country music content. And the highway is kind of at the core of it. It's our single biggest channel across every demographic from age 18 to 65. And 25% of our subscribers are tuning into the highway every single month. And it has so much to do with the content and the music that we play. But it's also about we have things like Highway Finds or On The Horizon or Future Five where we're actually bringing new artists to our listeners. And we've obviously built many careers across country, but Luke Combs and Lainey Wilson are 2 examples that have come up through those areas. And I think listeners really respond to being a part of that, and they feel a part of this highway community. And it's -- it's the -- being able to discover artists early on. It's having access to these special events like the Highway Happy Hour that Buzz Brainard does every Friday down in Nashville. It's the other on-air personalities like Ania Hammar or Cody Alan or Macie Banks, where they have such incredible passion just themselves. And I think customers and our listeners feel part of this community because they can call in and request songs or they can listen to artist interviews or they have the chance to attend some of these artist events. And there's just the breadth of our country music in general is massive. And so we have channels beyond the highway like Y2Kountry or Prime Country and all these artist channels as well, including Morgan Wallen that we just launched last quarter, who has been massive. I mean he's obviously a huge artist in his own right, but he's launched a channel with us, which is exclusive to SiriusXM. He did a small stage show for us down in Nashville as well. And -- it's been an incredibly powerful channel, growing rapidly. And I think the idea that we have access to all of this exclusive content, which is at the core of that fandom strategy, but then we build all of this community around. So it's like exclusive -- it's this flywheel, right, of exclusive access drives participation, which drives community, which drives loyalty, which drives growth and underlying strength in our business, which then gives us more opportunity to provide more exclusive access because more and more artists want to work with us. So that is the core of what fandom is for SiriusXM. And again, so unique to us. I don't think -- and I think the reason it matters now, even though we've been doing this for -- in some ways for 20 years, is that there's just so much content out there. AI generated, some of that very low quality. And customers are looking for platforms with trusted voices where there's real human curation and they feel part of something. And I think that's what we do incredibly uniquely, and we have the opportunity to do it in many other places. And Sports Pass is kind of like that, but I think there's like comedy and dance music and hard rock, where we have all these fantastic personalities that our listeners love, and we can build more and more events and call-in and participation around that to, I think, support retention and a better, stronger, durable subscription business going forward.

Highway is one of my favorite channels.

Thank you for being a listener.

You touched on Sports pass a bit earlier, but maybe to broaden that part of the conversation out a bit, thinking about the segmentation opportunity for SiriusXM moving forward, reaching different audiences, perhaps having some different price points and different use cases, whether that's in the car or on the app. How do you think about the segmentation strategy evolving from here? And sports is a great example. Are there other use cases or possibilities on that front?