Q3 2021 Sirius XM Holdings Inc Earnings Call
Again advertising deals with major brands crossing all of our platforms and AD formats underpinning our strength in car and out of car in both subscription and AD supported audio is of course, our content. It will always be the core of what we do and during the third quarter, we demonstrated our focus and execution with new.
Talent and distribution deals across the Sirius XM, Pandora and stitcher platforms on Sirius XM, we launched multiple new and limited time streaming channels based on iconic beloved artists established and emerging such as the ones for Bon Jovi, Grateful dead, Halsey, Metallica and Soundcloud radio.
We celebrated latinx and Hispanic heritage month recently across Sirius XM, and Pandora with new channels and initiatives highlighting artists like J Belden, Andreas Koller Morrow Becky G and many more were seeing success in multi platform deals where we have established podcast is beginning to do live shows on Sirius XM.
For instance, the host of the last podcast on the left will be doing a weekly call in show on Siriusxm faction talk channel starting early next year and also the other way where we bring live broadcast shows to broader podcast distribution. For example fans can hear directly from Tom Brady and Larry Fitzgerald.
Leon Sirius XM each week and then those individual conversations are later available as podcasts on multiple platforms expanding our audience even wider while we will remain financially disciplined we have been opportunistically, bringing major podcast and talent to Sirius XM platform and securing exclusive AD sales rates.
To name just a few crime junkie the top ranked podcast for colored Nerds story time with Seth Rogen last podcast on the left 99 per cent invisible, the Bellas and Rory and mall. We recently led the series B financing for audio App and innovative podcast in audio entertainment studio.
Under the agreement audio App will create new original unscripted podcasts for our platform and Sirius XM gets an exclusive first look option for new concepts as well as distribution and sales opportunities whether growing in existing but niche audience, expanding our powerhouse brand in audio or supporting audio superstars.
Out their careers siriusxm platforms give creators opportunities to flourish and unmatched ways and we continue to see duration, both human and AI augmented as the cornerstone of delivering unique experiences for our listeners be that on siriusxm or pandora or across our pod casting business.
A great example of this is our close collaboration with you too to build selectable modes on Pandora centered around Youtube first three albums.
<unk> members walk our listeners through a unique experience sharing stories behind the making of each album and guide our listeners to other classic songs from the artists who influenced each album. These modes were launched as a follow up to Youtube Fulltime Siriusxm channel and show, how we can leverage the strength of our multiple platforms to benefit artists and create great.
Content truly a competitive differentiator and I'm thrilled, we're producing live content and experiences again with our small stage series, which features music and comedy performances and iconic intimate venues. We've recently hosted Dave Matthews Brandi Carlile, Coldplay J coal comedian John Malini.
And we just announced upcoming shows at the Apollo with her and Alicia keys.
At Sirius XM now celebrates the 20th anniversary of our service launch we can rightfully say that we have transformed the way Americans consume entertainment inside the vehicle. We are now hard at work growing that reach outside of the vehicle expanding our advertising business and continuing to shape the future of audio with fur.
Further innovation and investments in new kinds of content and authentic audio experiences I'm incredibly proud that our listeners love Sirius XM offerings and of our company is very powerful and profitable business model I couldn't be more pleased with our position and the long term opportunities that sit in front of us with that.
I'll turn it over to Sean for additional remarks.
Thank you Jennifer and good morning, everyone to quickly hit some financial highlights total revenue increased 9% to $2 2 billion led by 31% growth in consolidated AD revenue adjusted EBITDA grew 9% to 719 million a new quarterly record diluted earnings per share were eight cents versus <unk>.
In Q3, 2020, we generated 588 million of free cash flow during the third quarter, which included 208 million of insurance proceeds related to FX and seven as of quarter end, we received all $225 million available under the policy. We have also entered into contracts for ethics, and nine and ethics something.
And have commenced early stage capex spend for these satellites turning to our segments and the Siriusxm segment revenue increased 5% to $1 six 6 billion with ARPA growth of 5% to $14.84 revenue grew in line with our pool, because the self pay subscriber base increase of $1 5 million.
Dollars year over year was offset by a decline in paid trials versus last year's third quarter, given new trials structures of two major OEM and a lower Saar gross profit in the Siriusxm segment grew 4% to $1 billion, resulting in a gross margin of 61% in the Pandora segment advertising revenue of 404.
Million increased 32% from last year and grew 28% compared to the same period in 2019 and doors and revenue per thousand hours was a stellar $109 up 29% from $84 in the third quarter of last year.
Revenue growth in the Pandora segment was aided by our off platform business centered around ads with an AD wave and by the addition of Stitcher together. These contributed $89 million of revenue in the third quarter and excluding stitcher grew 41% year over year. As a reminder, stitcher was acquired in October 2020.
And bookings were again impressive in Q3 with financial services and retail leading as the largest categories insurance companies are targeting major lifestyle changes as people continue to relocate and change jobs retail momentum is tied to the economic reopening as people head back to stores in shopping malls comes back to life Entertainment is also showing strong growth.
Given increased streaming competition and the expectation of a back to normal holiday season with big budget movie releases.
Monthly active users and total AD supported listening hours were 53 million and $2 9 billion, respectively and average monthly hours per AD supported user were $20. One in the third quarter up from 19.5, a year. Prior Pandora ended the third quarter was $6 5 million total self pay subscribers.
Gross profit in the Pandora segment grew 22% over the third quarter of 2020, while gross margin was flat at 37%.
Turning to capital allocation as announced earlier. This week, we are increasing our quarterly dividend by 50% to 50% increase is driven by our continued confidence in the company's strong operating results and cash generation and this increase will better align our dividend yield with the broader market.
The first three quarters of 2021, we returned approximately 1.35 billion of capital to stockholders comprised of 1.17 billion in stock repurchases and $180 million in dividends over the summer and we took advantage of very favorable credit markets to issue $4 5 billion of new senior unsecured notes across five.
Five seven and 10 year maturities at a weighted average interest rate of roughly $3 75 per cent proceeds were used to refinance existing notes, reducing future interest costs and extending maturities as well as eliminating the outstanding balance on our revolving credit facility, which we also extended until August 2026 at quarters end our one.
<unk> seven 5 billion dollar revolver was completely undrawn, and we had $164 million of cash and equivalents on hand.
In short we have a very strong balance sheet and one that provides significant flexibility to continue investing in the business, making opportunistic investments and acquisitions and delivering cash to our stockholders to recap our new higher full year guidance in this morning's release, we now expect self pay net additions to exceed $1 1 million revenue is expected to be <unk>.
865 billion and adjusted EBITDA is now expected to be approximately $2 75 billion. Our free cash flow guidance has increased to more than $1 $8 billion, which is driven by the higher adjusted EBITDA and satellite insurance recoveries, partially offset by spending on new satellites and programming investments with that we lit up.
And up to Q&A.
Okay.
At this time, we'd like to open the call up for questions I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad.
If at any time, you would like to be removed from the queue. Please press star two.
Polls for just a moment to compile the Q&A roster.
Your first question comes from Steven Cahall from Wells Fargo.
Jennifer maybe first I was wondering if you could elaborate on the comment you made about the promotional floor and the price increases it sounds like you know with a little bit less on the new car side next year, you're going to try to drive a revenue acceleration and I guess that costs should be down on that.
As well or is it logical for US to include that you might have kind of a one off year for EBITDA, our free cash flow growth next year based on that commentary.
And then Sean at the beginning of the year investors were a little bit concerned about the initial free cash flow guide and now you've raised a couple of times and it looks really strong. So maybe just a few comments on what's changed as you've moved through the year and it was related to you know the satellite recovery is it just good operating performance with love any any context on the free cash flow rabies. Thanks.
Very much.
Sure. Thanks, David I'll take your first question on promotional prices. So we're actually doing two things in the fourth quarter, we're doing a rate increase on some of our full priced packages and you know as you stated we've done this over time and I are base as you know has been very sticky and long.
Oil so we've been able to pass through these rate increases very effectively in the past so that'll be rolling through into next year and on the promotional side. We just see this as an opportunity given kind of the strong demand and retention of our base to focus on raising some of those rates as well we have a pretty robust packaging struck.
Sure from lower priced plans all the way up through our P. V. I P plan that we just launched a couple of months ago, and we are there's always been very effective at managing demand across the various price points, we have and we just view this as an opportunity I mean, it's somewhat of an inflationary environment. Other services are raising rates.
And we see it as a positive environment to do this and while it could have a small impact on subscribers. We don't think it's material and again, we tend to optimize this very effectively.
Yeah, and Steve on your free cash flow guide I guess as we step back to the beginning of the year a lot of uncertainty as we fast forward. Obviously, the first half of the year was incredibly strong in terms of our operating performance, especially on the Siriusxm side of the business operating performance.
On advertising as we talk today continues to be a.
Really positive and delivering strong operating performance. So we've been able to to raise our EBITDA guide by almost a couple of hundred million dollars from when we started the year. So really strong operating performance you look at our free cash flow conversion continues year to day basis to be a very strong as well no question.
Our insurance recovery is bolstering or assisting a bit in terms of the raise that we are as I said in the comments, we are making our investments against our Sirius XM nine and 10 and continue to to advance our content and programming initiatives. So all.
All in all I guess, it's a mix of everything it's some unexpected occurrences around the satellite it's incredible performance across both subscription and advertising them. So you know, we're really pleased with where we're at and where we expect to finish the year.
Thanks very much.
We will take the next question from Ben Swinburne from Morgan Stanley.
Hi, Cameron on for Ben.
Thanks for taking the question churn continues to trend really I think you guys talked a little more about what you're seeing there how much of the <unk> level was driven by vehicle related churn.
And then another one for Sean on capital return and a $2 billion of capital returns between buybacks and dividends on an annual basis still the right general ballpark to think about going forward. Thanks guys.
Okay. So Cameron first on churn, but third quarter was actually pretty close to the second quarter in terms of turnover all at one five it did round down to one five yeah. As we said in the past I don't believe this is sustainable in the long term, but we're really pleased about where we are are there isn't.
Flight movements and shifts between the categories in Q3 on a non pay side and the vehicle and the voluntary side. They picked up a little bit and vehicle related came down as you would expect considering Ah trial starts came down in the third quarter, but no material changes there, but you know again as we go.
Go into next year as spending levels, you know hopefully continue to increase you know for a healthy consumers that and there could be some reversion to a more normal level of non pay churn. I mean, we are we are significantly down from where we had been two years ago on non pay some of that I do think sustain.
And just based on the operating improvements we've made are but as again consumer spending levels go up I would expect to see non pay pick up a bit and then of course, we're hopeful that over the course of next year are the automotive sales continue to be a recovering and then we would see some impact on vehicle related churn there as well.
On the voluntary side can cancel demand has been really low there's been really strong satisfaction with the product and I believe that has a lot to do with us having added streaming to our packages a couple of years ago and how effective that's been in this environment, where consumers aren't in their car that.
As much as they had been before and they're listening much more than other locations.
Yeah, and then Cameron on the capital returns upfront as you know we put out a release on Monday. This week in connection with our announcement to increase the dividend by 50%. So again just to reiterate the capital allocation philosophy, we're still very focused on growth, we're focused on investing both organically and in.
Organically to drive the business long term, we will be guided by the historical leverage where we operate comfortably in the low to mid threes. So you should expect us to continue to operate on that basis.
What I provided was an expanded release and explanation on Monday that hopefully gives you some insights as we move.
Move forward prospectively in terms of what type of return to capital again continue and expect to be a very strong both in terms of the dividend and share repurchases, but again, you know we want to maintain as much financial and operational flexibility with the balance sheet, we have to take advantages.
All of the opportunities as we see them. So I don't know that I would ground you in the 2 billion per se, but I think I've given you enough information relative to our performance and our guidance are to manage the expectation going forward.
Yes, great. Thank you.
And we'll take the next question from Jessica Reif Ehrlich from Bank of America Securities.
Alright. Thank you I have a question for Scott Scott part casting later or if it just seems to be the hottest topic. These days.
As much as it focuses it is it still seems to be partly I think seems to be in the early stages.
What would you consider a full content slate how long do you think it takes to get there and what what do you think the ultimate margins are in this business.
Okay. Thanks, So a couple of things.
One is there's certainly plenty of podcasting out there to have a full slate. The question is is there enough out there to have a business and that's what we're trying to build so by doing something like crime Junkies, We're gonna look at being the leader in certain categories in podcasts much.
The way, we did with audio sports rights and news and some other things.
For audio that satellite radio.
Some of those will have.
Tougher economics, and others will cause young and emerging podcast as to when it come to that vertical and by doing that I think we'll be able to have.
Solid business model with good blended.
Margins on that because as you know right now the podcasting economics, it's heavily skewed to the creator based on the origin of how podcasting.
Hi, Paul.
But we feel pretty good about that what we feel great about is that podcasting is a great pool for us to find audio talent previously.
<unk> radio and you had some bloggers and some Youtube stuff now you have this rich pool of audio talent that we draw once they're in there.
As Jennifer mentioned, the podcast, which can go upstream and the radio host as way of podcasts on our west will happen, whether it's Megan Kelly or Kevin Hart and go into podcasting from the radio.
That way and all that so I view it as an emerging business model that we have to pay attention to the margins, but at the same time, our unique three pronged approach between Sirius Pandora and stitcher to both monetize market and create and figure out how that audio content works.
That business model I feel a lot more confident in that.
We'd be today, and just an isolated podcasts model.
Okay, I think I'd, just add two things to that Scott I mean, the the fact that you know we.
We are offering broad distribution of podcasts to talent, who want it like with crime Junkie I gives us an opportunity to perhaps more effectively monetize than we would have if we were trying to keep something exclusive and of course, we will consider those opportunities, but that certainly helps I in terms of the mall.
<unk> and then you know we look at the AD business internally increasingly together right. The Sirius XM broadcast addresses the Pandora you know traditionally music station focused advertising and then in podcast thing and you know the sales team has the capabilities to now Sam.
Across all of these formats and genres and advertisers not theres a lot of demand out there for audio advertising right now, which is a fantastic tailwind for all of us at our participating and I think we have the best set of capabilities to be able to bring advertisers. These solutions across so many different formats I and genres. So.
It really positions us well I think a better and more effectively monetize and the margins on each of those are a little different but overall, we feel really good about where that's heading.
Great. Thank you.
We will take our next question from Jason Bazinet from Citi.
So I just have a quick question you guys have put up a phenomenal numbers. This year. Your stock has not reacted to those and I guess my hypothesis, there's a lot of investors on the buy side or Plano affects a series spread by going long it looks like somebody in hedging are quite short in your stock.
And it would seem that if that were true.
The buyback you should be using every dollar you can't for buybacks and you chose right at that moment to increase your dividend by 50%.
So my question is do you disagree that if something is going on.
With your share price that has to do with the with Liberty is that the right interpretation.
I'll start and then John maybe you can tell that I I I believe that certainly where we'd like to see the stock react positively to the fantastic results that we've had this year and I'm sure. There's some truth in what you were saying we believe there is opportunity in the stock which is why we're maintaining a healthy buyback as part of our capital returns.
And I think the dividend was just an acknowledgment that we were generally are below median for S&P companies. So it kind of puts us in a you know right and with the mix with where other companies are but we still have a lot of flexibility to buy back our stock and you know I think there is opportunity to do so.
Yeah, Jason to it you know it's a fair question again, we're very confident in the long term opportunity here, we are deploying significant capital as Jennifer said, I think bringing the dividend more in line with sector comparable.
Think given the shareholder base of non Liberty shareholder base I think what we're doing in terms of capital allocation puts us more in line in terms of their expectation I think it opens us up to more assets under management that are investable against Sirius XM and the stock. So again, it's a you know positive results are we've got a long term.
Our focus of course, we're going to continue to buyback at these levels given our our point of view on what we think the long term intrinsic value is of the of the stock. So you know I'm not going to comment on the overhang or you know how investors are playing the a L. S X M versus serious serious but we're obviously focused on continuing.
To deliver just fabulous operating results deploying capital appropriately and we think will be rewarded long term.
Okay can I just ask one pedantic follow up when we're calculating the 80% threshold for the tax sharing agreement to kick in.
We used as the denominator.
Six years are dilutive.
I believe it's the diluted shares Jason.
Okay. Thank you.
We will take our next question from David Joyce from Barclays.
Thank you.
Sales and marketing expenses were elevated in the quarter I think you called out but it was more to drive.
Podcasting listenership, but what should we expect from that investment going forward.
At least through the next year, when you're going to be challenged on the gross adds from the new cars will you'll be focusing our marketing on.
If you can to the enormous installed base of cars in the secondary market as well as broadcast and I'm. Just wondering how we should think about that that cost down going forward. Thanks.
There's really a couple of big portions of thousand marketing there. There's all of the direct marketing associated with the trial starts that's really directly tied to new and used car trial starts and and you know to the extent that add new car trial starts are lower like we saw in the third quarter that will that expense comes down.
But we've actually taken the opportunity this year to invest and more media, whether it's performance based media I or like with the Sirius XM House campaign to drive awareness and drive through to trials on the digital side of the business. So so there is really kind of too.
<unk>.
Large components to sales and marketing that are you'll see fluctuate based on where we are with trial starts at any given time period and how we're investing on our overall media. We do a lot of performance media also on the Pandora side, and we've got pretty sophisticated modeling there that helps us decide when and how to invest up to.
The right threshold.
Bring listeners onto the platform and and that's pretty steady where you'll see fluctuations is more on the siriusxm digital side as we try to bring more trials onto the platform for that for those packages.
Great. Thanks, and could you please update us on the effectiveness of.
Bringing in the used car.
Gross ads.
Yeah.
And so the dynamic on the used car side have been impacted as I said in my comment in part by you know what's going on in the overall industry used car sale prices are at an all time high and so the trial starts were down slightly in Q3 versus Q2, but clearly they don't have the same issues.
From a supply standpoint as on the new car side in terms of you know chip that another other parts. So we think that they used car market will continue to be strong going into next year.
And our fundamentals are certainly help there in terms of just organically the pen rate continues to grow as more cars in our fleet turns over and we've got very robust programs on the trial start side to make sure that as those vehicles get sold and that we got consumers on trials we've got.
Our field teams ensuring that those radios are in fact on so when the consumer or the car buyer gets into the car. They can easily listen to Siriusxm and we have very robust marketing programs to convert them through so I you know look it depends on where we end up on.
On the new car side next year, but I think we could see a pretty strong year on the used car side.
Okay. Thank you.
We will take our next and final question from James Ratcliffe from Evercore ISI.
Good morning, Thanks for taking the question two if I could first of all.
Just conceptually how do consumers think about their subscription cost in context of their car payment and if you know with higher prices and the like if car payments are going up is that conceptually sort of one bucket of cost.
That could risk crowding out of the satellite radio subscription for one and just secondly, just on the auto production and chip shortage side.
Are there situations, where where the satellite radio or the person that you're contributing is the bottleneck or are you still are good on that front.
Just on the subscription price relative to the car payment I, we haven't really seen any tie between those two things if anything I think consumers are probably looking at their overall subscriptions and what they're paying for different types of services are but I don't believe it's tied to the car payment necessarily.
And of course again, we've had a really strong history of managing rate increases and I believe we will continue to see that given the robust nature of our of our subscription packages and the real loyalty of our subscriber base and that goes to you know clearly the.
Breadth of content that we have exclusive nonexclusive, it's really powerful and unmatched bundle that we've been able to offer subscribers and and then the second part of your question was.
Just in terms of production chip shortages are situations, where the celebrated the bottleneck.
Yeah, So we really Havent had.
Any material issues, we are working really closely as you might expect I across the supply chain with our chip manufacturers with a tier one and the OEM then the the teams internally on the engineering side and the OEM partnership side are doing an amazing job, making sure that we can fulfill that demand.
Through the supply chain and it just it takes a lot of coordination, but and but the team has done again, a terrific job managing that and I haven't seen any issues that are that concerned me kind of going into the rest of this year and going into next year at this point and and it's just I mean at the automakers, obviously managing a lot of differ.
<unk> parts supplies and we're just one piece of the puzzle, but we haven't created or had any challenges there that that would concern me.
I can't Thank you James Thank you James Thank you everyone for participating in today's call and we'll speak to you in the coming weeks take care.
Okay.
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