Q1 2023 Sirius XM Holdings Inc Earnings Call
Speaker 1: So really TRI.
Speaker 2: Greetings. Welcome to Series XM's first quarter 2023 Operating and Financial Results Conference call.
Speaker 2: At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation.
Speaker 2: If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad.
Speaker 2: Please note that this conference is being recorded.
Speaker 2: At this time I'll turn the conference over to Hooper Stevens, Senior Vice President of Investor Relations and Finance. Mr. Stevens, you may now begin.
Speaker 3: Thank you and good morning everyone. Welcome to Series 6M's first quarter, 2023 Earnings Conference call. Today we'll have prepared remarks from Jennifer Witts, our Chief Executive Officer, Sean Sullivan, our Chief Financial Officer, and Tom Berry, who will assume the position of CFO tomorrow. Scott Greenstein, our President and Chief Content Officer, will join Jennifer, Sean, and Tom to...
Speaker 3: depend upon assumptions, data, or methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For more information about those risks and uncertainties, please view SiriusXM's SEC filings and today's earnings release. We advise listeners to not rely unduly on forward-looking statements.
Speaker 3: and disclaim any intent or obligation to update them. As we begin, I'd like to remind our listeners that today's call will include discussions about both actual results and adjusted results. All discussions of adjusted operating results exclude the effects of stock-based compensation. With that, I'll hand the call over to Jennifer.
Speaker 4: Thanks Hooper and good morning everyone. Thank you for joining us. Before jumping into the quarter's results, I'd like to welcome Tom Berry as our incoming chief financial officer. With more than a decade's experience working closely together, I know that Tom's deep institutional knowledge and broad finance experience will be invaluable as we drive growth across the business and continue our commitments to customers.
Speaker 4: We also delivered better than expected ad revenue, partly due to our leading self-service and programmatic solutions that are allowing us to capture close invoicing, and I will address this more in a few minutes.
Speaker 4: in anticipation of product improvements we are launching later this year. This contributed to the expected negative subscriber growth in the quarter. On the positive side, however, our test and learn strategy will enable us to improve streaming subscriber results sequentially throughout the remainder of the year even with a lower baseline of spend.
Speaker 4: While we continue to see opportunities for a bigger streaming-only business, car sales will remain the dominant driver of our subscriber funnel. The fourth quarter's trial starts declined sequentially by 3% and 7% for new and used vehicles respectively, and this reduced conversion opportunities for us in the first quarter.
Speaker 4: And once again, we saw the seasonally higher turn we tend to see in Q1. We believe our overall subscriber performance should also trend better quarter over quarter as the year progresses. Supporting this, first quarter vehicle trial starts were up 7% overall compared to the fourth quarter.
Speaker 4: including a 3% rebound in new vehicle trials and an 11% rebound in used vehicle trials.
Speaker 4: enviable margins. We have a service with very high satisfaction, low churn, and one of the leading ARPUs across direct-to-consumer media, not just audio. It continues to be supported by the millions of trial starts we generate each quarter through our robust and long-term OEM partnerships. Our strong distribution, investment in new product offerings, and our un...
Speaker 4: launching later this year that allows for more control of the listener experience and improve discovery, fully utilizing our unmatched content lineup. And as we have always said, business models really do matter. We intend to make prudent decisions to remain a very profitable business that continues to serve as a primary audio subscription service for...
Speaker 4: marketing technology capabilities to better leverage our rich content to deliver more personalized messaging in our marketing efforts. Transitioning from a one-size-fits-all approach to a dynamic multi-channel individualized approach will promote only heard-here moments and exclusive talent to drive subscriber conversions among their fans.
Speaker 4: No matter how or where they want to listen.
Speaker 4: As we approach the launch of our next generation SiriusXM experience, we are confident that the upgrades will boost engagement and customer satisfaction for in-car and streaming only customers alike. This will have positive implications to ARPU, conversion, retention, and subscriber growth in 2024 and beyond.
Speaker 4: We'll share progress on future quarterly calls, but the first months of 2023 have already brought several exciting product iterations and consumer offers, providing valuable insights for the full platform relaunch later this year. For example, we introduced a new in-app onboarding experience for users to select genres and
Speaker 4: allowing faster, more efficient access to the most relevant content. This feature drives listener engagement that leads to higher retention. We're increasingly flexible and even agnostic in how we add subscribers and accommodate listening preferences. This past quarter, we introduced a first-of-its-kind, six-month trial offer for Walmart Plus members.
Speaker 4: easier for trailers to transition into paying subscribers. These collaborations demonstrate our strategy of inviting people to experience serious XM in the way that suits them best.
Speaker 4: We are making significant progress in rolling out our 360L platform and expect to exit 2023 with nearly 40% of new car trials including 360L. Over the next few years, 360L will continue to expand across OEMs, including on select Mercedes-Benz models as part of an agreement that will increase the installation of Sirius XM to make it a standard feature on all Mercedes-Benz models available in the United States.
Speaker 4: We will also begin to see 360L capable vehicles and are used car trial starts as well.
Speaker 4: We are very encouraged by the conversion lift we see in vehicles with 360L today and we are just getting started. We see significant in-car conversion improvements when trailers engage with features that enable more control and discovery, including our more targeted extra channels, Pandora artist stations, and enhanced recommendations.
Speaker 4: While this is a great indicator of what's to come, these features are currently only available in a limited number of 360L-enabled vehicles, and awareness of these features is still low. We expect to see more rapid feature adoption tied to Automakers and Corporation of the Android Automotive operating system with our 360L platform beginning later this year.
Speaker 4: AOS will roll out in small volumes initially, but should grow materially to become the dominant OEM operating system, improving 360L adoption and feature parity along the way. Turning to our content, given the strong engagement we continue to see with our extra channels in and out of the car, in the first quarter we expanded our focus here and launched several new hip hop and R&B channels.
Speaker 4: We have seen the percentage of listeners consuming these genres more than double versus a year ago, driven by younger audiences who value the more controlled listening experience. Against the splintering of sports rights in the video space, we offer incredible value as the one-stop audio home for all major sports, and it's powering record engagement of this content.
Speaker 4: We extended agreements with the NHL and NASCAR, ensuring continued access for our subscribers for years to come. TheresexM's Super Bowl broadcast this year was the most listened to in our history, and strong engagement continued during March madness, particularly with NCAA women's basketball. We increased the number of women's games we delivered to our subscribers to almost 800 minutes back.
Speaker 4: similarities between talk radio and podcasts, we can do more to seamlessly integrate them across our service and provide more control and discoverability for our subscribers. This past quarter, we combined Series XM's podcast group and Common Deion Entertainment group into one unit. Our extensive portfolio includes chart tapping podcasts by EarWolf and Team Cocoa.
Speaker 4: amplified by recent deals with Kevin Hart, Kelly Ripa and Tom Brady. Listeners can hear Kevin's show, Goldmines, on all major podcast platforms with extended episodes available early to subscribers on his laugh-out-loud radio channel only on Sirius XM. Kelly's new hit, Let's Talk Off-Camera...
Speaker 4: It's first released widely as a podcast, but also airs on Radio Andy. And returning this fall, let's go hosted by Tom Brady, Larry Fitzgerald, and Jim Gray will be available first to our subscribers, then on demand exclusively in our app.
Speaker 4: All of this is a testament to our leading position in talk audio and we will continue to leverage our world-class content to draw in new SiriusXM subscribers while also giving ad-supported listeners access to our high-quality programming. Our advertising business operated under the unified SXM Media banner.
Speaker 4: delivered solid first quarter results, bolstered by growth in podcasts and programmatic sales. At the intersection of the two, our programmatic podcast sales doubled year over year. I'll be at Office Mall Base and contribute to overall podcast ad revenue growth of 34%. And our ad technology business continues to be extremely profitable.
Speaker 4: growing about 20% year over year and partially offsetting broader headwinds during the first quarter. We help resolve pain points facing marketers by using greater automation and making buying more efficient. Alongside our ad tech success, this quarter we renewed US and international sales agreements with SoundCloud and our advertising.
Speaker 4: From Pandora to the Sirius XM Podcast Network, which also includes two of the largest Hispanic podcast networks with Pataya and Revolver, offers opportunities for advertisers to reach large and diverse audiences in audio.
Speaker 4: In short, I am pleased with our financial performance this quarter, and I'm confident in our opportunity to expand our subscriber base as auto sales recover and relaunch the next generation series exam experience later this year. This new experience will emphasize simplicity and elegance, provide more control and discoverability and drive greater consistency between
Speaker 2: of the serious XM and its finance organization since 2009. It has been a real pleasure to serve this company, its talented employees, and our shareholders at CFO these past two and a half years. In this past month, we have all worked together to ensure a smooth transition. I am confident that Tom's perspective, diligence, financial expertise, and history with serious XM will serve him well.
Speaker 5: controllers team to more broadly work with operations and the leadership team to shape the company's long-term direction.
Speaker 5: I think you'll see continuity as I lead our talented finance team and continue our disciplined approach to financial decision making.
Speaker 5: So with that, let's jump right into it. As Jennifer noted, the first quarter played out as we expected, albeit with a bit stronger finish to our advertising revenue performance and gradually improving trial starts. With these trends and more targeted cost control initiatives, we're now able to increase our full year guidance for adjusted EBITDA from 2.7 to 2.7.
year period.
The Sirius XM segment delivered $1.7 billion in revenue, which was down 2%, principally due to lower OEM-paid promotional trial revenue, reflected in our pool of $15.29, and declining subscriber revenue at connected vehicle, partially offset by a weighted average subscriber base that was up 1% year over year.
Self-pay net ads declined by 347,000 a quarter, consistent with our expectations given lower fourth quarter vehicle and streaming trial starts, combined with seasonally higher churn in the first quarter. I do expect to see future quarter over quarter progress in self-pay net ads.
but we still anticipate being modestly negative for the full year in aggregate.
Our total new and used car penetration rate was 80% and 55% respectively, and our enabled fleet standard about 154 million vehicles.
In the Pandora and off platform segment, total revenue is $462 million, nearly flat with prior year.
Advertising revenue of $334 million decreased slightly by 1% in the first quarter. Although we continue to be cautious about the overall ad sales market, we still see tailwinds in podcasting. Pandora's ad hours were 2.59 billion, climbing just 4% year over year as hours per active users climbed 4.5%. For more information, visit www.plastics-car.com
of the discounted rates on pre-1972 music as of the end of 2022, and a CRB announced 9% CPI implator on webcasting performance rights.
and programming and content expenses climbed 6% due to increased licensing fee and production costs.
Gross profit in the Pandora and off-platform segment was $111 million, down 19%, and representing a margin of 24%. Here you're seeing the normal effects of seasonally light ad revenue in the first quarter, combined with recent ad headwinds, plus the CPI inflator to web streaming royalties.
We expect this margin to trend favorably for the remainder of the year. At the corporate level, G&A was up 21% with the majority of the increase driven by litigation expenses and investment asset adjustments on our employee deferred comp plan. Sales and marketing expenses are lower by 17% as discussed, while engineering design and development expenses were up 15% on the back of new product investments.
Putting all this together, Justine Eberdas $625 million was down 9% over the prior year. We are already beginning to see benefits from cost reductions implemented in Q1 across every element of our business.
Seasonality in advertising revenue and strategic cost-saving measures should deliver ramping EBITDA in the second, third, and fourth quarter. During the first quarter, we generated $144 million of free cash flow, down from $258 million in the prior year. This decline of $114 million is principally the result of increased satellite capex of $103 million.
on top of ongoing preparation for FXM 9 and 10. This satellite capex spending will be in the 300 million dollar range per year in 2023 and 2024 before declining to approximately 175 million in 2025, approximately 80 million 2026, and approximately 20 million 2027.
While the exact timing of construction milestone payments can inevitably shift, this gives us a general idea of the trajectory and the scope of spending. The investments we are making now will support our remaining valuable low-band customers for several years to come, but will eventually provide new revenue opportunities.
Following this build cycle, we do not anticipate any spending on satellites for many years. Because of this typical seasonality of our business in terms of receipts versus expenditures, combined with the timing of our capital expenditures, we expect to produce a meaningful portion of 2023's free cash flow later in the year. Looking at the capital allocation for first quarter of 2023, we returned $160 million toL IRE, by? intervening costs in 2030 Plus prices and capital ReformsingObjures $2.4 billion in 2016. You may wish to create a final capsule to our industry wood finding, because thisikiVal???
a variety of future environments. And our goal, of course, is to continue a disciplined and thoughtful approach to capital return.
Despite market and business challenges, I'm proud of our good start to the year. Our team is working diligently to position us for success in the second half of 2023 and beyond, and I'm excited to see how this year shapes up.
In closing, I would also like to thank Sean for making this transition as seamless as possible. With that, I'll turn it over to the operator for Q&A.
I would also like to thank Sean for making this transition as seamless as possible. With that, I'll turn it over to the operator for Q&A. Thank you.
At this time we'll be conducting a question and answer session. If you'd like to ask a question today, please press star one from your telephone keypad and a confirmation tone indicate your line is in the question queue.
You may press star two if you like to move your question from the queue. For positions that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please will be pulled for questions. Thank you.
Thank you, and our first question is from the line of James Radcliffe with Evercore or ISI. Please receive your questions.
Hi, good morning. First of all, Sean, thanks very much. Pleasure working with you and good luck on the next gig. Keep them in the fairway. And on that note, Tom, if you could just give us an idea, you know, your key priorities coming into the role, sort of what's at the top of the bullet point list on the whiteboard in your office.
And secondly, regarding the satellite radio side, GM has announced that they are planning on dropping Apple CarPlay. What are you guys seeing among OEMs in terms of their positioning around third-party interfaces on the dash versus their own, and how does that affect the...
placement and role of the series XM product. Thanks. Okay, James, I'll go first. Good morning. Just to talk about my whiteboard, what we're focused on, you know, I'm focused on in the early days is, you know, a lot of what you'll see in raising our guidance and some of the other.
areas is we're investing a lot of time in our cost structure and Ensuring that our spending our cost optimization is headed the right direction with it in an effective manner. We're investing in our future We're investing in the new platforms or investing in satellites. So and obviously we'll continue to Carry forward with our capital return plan to shareholders But our my overall view is to is to work on obviously optimizing the
unique in that path. But we are well positioned to make sure that our incorporation sustains through whatever model the OEMs choose to pursue. And right now, we're certainly seeing significant take up in Android Automotive operating system, the integrated software from Google.
AOS. It allows us, like many other services, to update much more frequently our feature set, but we also have a unique setup because we will continue to maintain preferential treatment in terms of display and whereas other services you need to sign up for a data plan, we cover the data costs ourselves.
Welcome Tom. Jennifer, could you talk a little bit about the subscriber outlook for the rest of the year? In particular, what are the things that are going to allow for the streaming only subscriber losses to moderate? Could you give us a little bit of color on the puts and takes there and how the new next generation, Sirius XM experience will help improve that over the course of 2023?
Sure, thank you Ben. So the number in Q1 was anticipated, right? We expected Q1 to be a low point in terms of net ads. And as Tom referenced earlier, we also expect each quarter going forward to be better to the prior quarter. I'm going to did that slowly so that I have it configurations again.
The trends that we saw in Q1 in large part are reversing as we go through the year. So Q1 was impacted, as we said, by lower fourth quarter trials and then third quarter, but Q1 trials have been stronger, were stronger than Q4, so that sets us up well for the car funnel and we do expect auto sales to continue to grow.
I just saw a stat the other day that we watch quite frequently about intent to buy, and it's at one of the highest levels we've seen over the last couple of years. So I think there is a case to be made for demand to start coming back, maybe some of the pent-up demand to be released and auto sales to slowly, but...
incrementally improve over the course of the year. And of course, that helps with the funnel there. On the turn side, in-car Q1 is always seasonally soft for us. And we anticipate that to be true for this year as well. While we're still very strongly positioned with turn at just over 1.6%, and CSAT is at an all-time, our customer satisfaction is an all-time high since 2000.
buying and specific channels and we will continue to be active in generating trials but we are actually holding back largely until the launch of the new platform which is in the fourth quarter so I wouldn't expect to see major changes in our
streaming net ads until after that. They will improve over the course of the year as will overall total net ads, but we're still waiting to launch a lot of these underlying capabilities and functionality to be able to support the streaming business, not only for streaming only subscribers, but also as it continues to support our in-car business through no. try
customers listening outside of the car and 360L in the car. That's very helpful. Thank you and Sean, best of luck in your new opportunity.
outside of the car and 360 L in the car. That's very helpful thank you and Sean best of luck in your new opportunity. Thanks Ben.
Our next questions come in the line of Bart and Crockett with Rose & Blanche Securities. Please just see with your questions.
Thank you for taking the question. And I guess what I wanted to ask about is just to follow up on the subscriber.
progression here. So I think you were saying on the last quarter call that you weren't formally guiding for a number for subs for this year. Generally the expectation was modestly negative. You know, here you've come in and you've updated financial guidance. I was just wondering if you could give us an update on that subscriber kind of.
loose commentary that's still what you see or is there anything different that you can talk to at this point? Yes, Barton, we haven't changed the guidance on subscribers so still expecting modestly negative for the year. Clearly with negative 347, this quarter we are expecting as much as improvements quarter over quarter.
I would expect the second half to be positive and that nets us out to the modestly negative. And we're really focused again, heads down, on investing in this new platform and making sure that that positions us for growth going forward. But we are continuing to see progress in advance of that.
capable vehicles and that is because we're addressing these pain points and I I believe that is a very strong proof point for what we can continue to drive and see when we launch this new platform that is going to support 360 L but also drive cross-listening in and out of the car and provide much more personalized
course of this year in your view.
Yes, so what's key is the rollout and you know this has been a long time coming and the promise of 360 L is now delivering. We're in about, I think it's about a third of our new car trial starts have 360 L. Currently that'll increase to about 40% by the end of the year.
to roll out and we are very eager to see it continue to move through our OEM partners and you know it's key to not only lift in conversion but also improved retention and I think ultimately our poo as well because we can deliver even more content and features to
on that line of discussion. I was wondering if you talk a little bit to conversion rates. So your commentary on the intent to buy and the improving funnel sounds constructive. I know pen rates are higher now. Competitions may be a bit higher now. 360 L-Mix is also sounds like, you know, tracking up nicely. So how do you think about conversion rates on new car trials today versus where you were historically, I think in that sort of mid 30s range.
And then relatedly, I was just wondering if you could speak to what's going on in the used car market, any commentary on how those are contributing to either the modest decline or the growing funnel, and what we should expect for used car activity this year. Thank you. Sure. Thanks, Stephen. On the used car market...
to start with that. The used car sales were actually pretty strong in the first couple of months of the year, and in March, we started to see that tail off a little bit. As you know, it is a big part of our funnel, but we have seen used car trial starts did increase in Q1 versus Q4, which sets us up well. The dynamics are tough in the market because it's CNG put out by us.
add some more color. Conversion rates are continuing to trend in the low 30s and the for new car in the low 20s for used and is it really the downward pressure we've seen over the last few years had a lot to do with the dramatic increase we saw in pen rates
And then over the last few years, especially during COVID, there was a massive acceleration in the percentage of millennials buying cars. And while that growth will continue, it's actually come down to more normalized level at this point.
The competitive challenges we have are easily solved with 360L and the new platform that we're launching and we are starting to see that already in some of our numbers. So younger generations in particular are looking for more opportunities to control the listening experience. They're looking for more opportunities to more easily navigate the service and 360L becomes a lot of those.
features to life and we are seeing even better conversion rates among younger trialers who have 360 L relative to older generations and particularly our core audiences who know our service and are used to navigating it. Great, thank you.
Next questions from the line of David Joyce with Seaport. Please just hear us your questions.
Thank you. First, Sean, good luck. You'll be missed. I'm glad you extended your tenure in the media industry here. And to Tom, congratulations. Look forward to working with you.
Question on the new trends. Given the new Mercedes-Benz deal and some recent price increases, what are the impacts on ARPU in the near term? How should we think about the cadence of ARPU from here this year?
OEM paid promotional revenue has been trending down over the last few years. And it's really just one piece of the puzzle as we look at our economics with our OEM partners. So some OEMs will choose to pay for the trial and receive a higher subsidy. And obviously there's the impact of revenue share as well. And we're constantly navigating.
it's flowing through our pool over time. On the self-paced side, I would continue to expect improvements in your of your comps as we roll out the rate increase. It'll be less impactful than the last time we did the rate increase because we've focused primarily on full price plans. And that has a lot to do with maintaining our.
promotional plans in market are discounted plans to be able to better on board and retain our subscriber base where it makes sense. But I, positioning for the future, we have had a long history since we launched of annual average increases in our approved of about 3%. That may be at the top end of the range, but I still think there's opportunity.
Our next question is coming from the line of Steven with Goldman Sachs. Please proceed with your questions. Hey, great. Good morning. Maybe for Jennifer on distribution, you called out the partnership with Walmart Plus announced in the quarter. I was hoping you could maybe talk a little bit more about the third-party distribution strategy, how sizable of a trial acquisition funnel you think that could become over the next few years, and maybe how you see that fitting into the broader digital strategy later this year.
trial or in-car trial or a streaming trial and we're just in the phase of really testing and learning on these rollouts and we'll be much better positioned when we build out some of the capabilities in the new platform in terms of
easier sales flows, better onboarding, more personalized recommendations to take advantage of these partnerships going forward. The majority of our trial funnel as you would expect is represented by the millions of trial starts that we do every year through our automotive partners, but the streaming trial funnel our challenge
to better execute on that.
Great, thanks for that, Keller. And then maybe just one for Tom, just since it's your first call as CFO , follow up to James' question. It'd be great to maybe hear how you're thinking more broadly about leverage and capital allocation. What do you see as the right leverage profile, the right mix of capital returns, anything different here going forward that we should be mindful of relative to how we thought about it in the past? Great, thanks, Stephen. So, you know, we do have time for one more question here because we've got time, we're good. Okay, great, hey, you're very close. CF Emily Stauffer with CFO F
You know, we look at this probably more often than not, but we spend a lot of time looking at this. We'll continue our current process of being cautious and disciplined. Obviously, as we said to you at the year-end call, that a lot of our free cash flow and a lot of our numbers will be coming in the second half of the year. But we're going to continue with our disciplined approach as we've used over the last couple of years. We'll target leverage in the low to mid threes.
in light of the macroeconomic factors. And as we noted, Q1 was at 3.4 times, and we returned 161 million to shareholders in the first quarter. And we'll continue to be opportunistic for the remainder of the year. Great. Thank you.
Thank you. Thank you. Our final question is from the line of Matthew Harrigan with Benchmark Company. Please receive your questions.