Sirius XM Holdings Inc. (NASDAQ:SIRI)
Morgan Stanley Technology, Media & Telecom Conference Transcript
March 2, 2015 4:20 PM ET
Executives
Hooper Stevens - Vice President, Investor Relations and Finance
Analysts
Ben Steinberg - Morgan Stanley
Presentation
Q - Ben Steinberg
Thank you. Well, let me get started. Please note, that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures up here. There is a handout available in the registration area and on the Morgan Stanley public website.
So those of you who know Sirius XM. You may not recognize. You may understand this is not David Frear on my left. David if you are listening, I hope it stop snowing in New York. Unfortunately, David was snowed in yesterday and didn’t make it out to the West Coast.
But we are thrilled to have with us Hooper Stevens. Hooper is Vice President, Investor Relations and Finance. Use to be a sellsider before he got a real job working for real company. So congratulations and thanks for being here.
A - Hooper Stevens
Thank you for having me, Ben.
Q - Ben Steinberg
Hooper, why don’t we start at the high level on the opportunity you guys see in front of the company. When you think about the addressable market for satellite radio? What kind of numbers do you focus on and how should investors think about that attempt?
A - Hooper Stevens
Well, more broadly, we are driving the enabled fleet of vehicles in the United States from about 70 million vehicles today towards 140 million, 150 million over time. So with a lot more incremental vehicles on the road, we think we have an opportunity to drive more subscribers and more revenue.
Q - Ben Steinberg
How are you thinking about the used car so far though?
A - Hooper Stevens
Well, we -- I think used cars will continue to grow and become a more significant part of our total self-pay additions. But we see, for instance, significant participation in our business from kind of sub $75,000 household income and that -- those effects are already in our numbers.
So, the stats I have seen or that about 60% of new car buyers have household income under 75K and about 70% of used car buyers. So, I think that, while the business will continue to evolve. I think it’s going to be a lot more of the same in some respects.
Q - Ben Steinberg
How does the used car market behave relative to your experience than the new car market? I know you have shared some conversation ratio statistics with us? But how is the churn characteristic there, reaction to pricing changes?
A - Hooper Stevens
I think we have now got a couple years of experience looking at the used car market. I think a lot of it is very similar. So you see a lower initial conversation rate. It’s been in the low 30s about a third, 33% versus a new car penetration rate in the 40% range. But once you see that difference in initial conversation rates. I think a lot of the behavior following that conversation is very, very similar.
So we apply the same marketing treatments and retention treatments to those pools of subs both new and used. You don’t see a lot of differences between the two. Maybe that will change at some point. But I think that we have seen in our history at this point to say, the used car buyers might be a little bit lower end demographic, but this is a self-selecting group whose converted, they value our product and I think everybody is aspirational, he want great service -- a great service like ours in your car if he can.
Q - Ben Steinberg
We have, there, I think, you guys have highlighted this, there are more used car sales every year, the new car sales, so if you move that conversation ratio, it’s sub-add pretty meaningfully. What can you guys do operationally to impact and drive, obviously, higher that conversation ratio on new?
A - Hooper Stevens
Well, I think, there is a lot that we can do and continue to do. We have gotten a lot of experience running trial programs and conversation programs in the new car market and I think we are just continuing to apply those lessons in the used car market.
I think there are always things you can do better. But I think the performance in that area has been pretty strong. I mean, we are very pleased with the used car conversation rate. If you had asked us a few years ago what we thought it would be?
Q - Ben Steinberg
Yeah.
A - Hooper Stevens
I think it would have been materially lower than what we have actually seen in the results.
Q - Ben Steinberg
Can you talk a little bit about the distribution platform being used? How many dealers you guys have relationships with and how many more you need to build in order to actually fully capture that opportunity?
A - Hooper Stevens
We are in about 15,000 -- a little over 15,000 total dealerships. Most of those are in the sort of franchise dealer market. So there are about 18,000 franchise dealers, so we are nearly fully distributed within the franchise dealers in terms of who is reporting to us customer name and address information.
There are close to 30,000 independent dealers and I think, we will have a long rollout to get more of those, particularly the higher volume, more sophisticated independent dealers and there is a person to person market. So we are looking at innovative ways to go after all of those. But we are very pleased with the distribution we have particularly with the franchise dealers so far.
Q - Ben Steinberg
When you look at the used car sales per year, how many of total -- the total turnover you now address in your recent relationship standpoint?
A - Hooper Stevens
You will never know exactly but I think more broadly you can think about the kind of close to 12 million new car trials we’ll be doing. You can think of that as a number that will -- we will eventually exceed in the used car market. So we see eventually being able to drive more trials from the used car market than the new car market and that represents a very long-term sustainable source of growth to us.
Q - Ben Steinberg
One of the things that we’ve noticed in 2014, no one noticed is, your margins really were benefiting from lower subscriber acquisition costs. I think the used channels helping there but would you guys consider being more aggressive in terms of commissions or steps or anything to help drive to increase upon the conversion ratio higher?
A - Hooper Stevens
I think we’re a sort of a data-driven company. We look at everything we’ve done in the past. So we’ve tried years ago splitting the dealers. It frankly didn't work that well. The personnel at a car dealership, they turned over very frequently. I think general brand awareness, more trial programs to capture more of the customer name and address information and figure out who own these vehicles that’s going to be the most effective way we can market the service directly to the consumers who own the cars. I think paying the dealers or the dealer salespeople directly probably not going to work very well.
Q - Ben Steinberg
Yeah. Another opportunity in addition to used that at least we and I think you guys identify also is sort of that second and third car opportunity. We did a survey earlier this year. We were surprised from the systems that came back and through the people who would be interested in adding a subscription but don’t have availability that problem solved itself. But were you guys realistic about the opportunity there?
A - Hooper Stevens
Well, I think it's a huge opportunity and so the statistics I have seen show that about 80% of car running households own more than one car. And so right now, I know you these stats, a much smaller percentage of our households have a second subscription added. So more broadly, it’s a huge opportunity to grow second subscriptions and whether that’s done on an à la carte basis or eventually on some sort of householding plan to be determined right now, it's on an à la carte basis. So $15 for the first subscription and $10 for the incremental subscription within the same household.
Q - Ben Steinberg
Did you guys do anything from a marketing perspective to try to tap that in 2015?
A - Hooper Stevens
We’re trying those out. I don't know if we’ll get to a sort of mass-marketed household plan this year. But I think we’re thinking about the best way to structure that type of plan if were to go by launching it?
Q - Ben Steinberg
Okay. Let’s turn to pricing and ARPU this year to lever for the financial model of your business. You haven't announced any price increases with 2015 but how you’re thinking generally about ARPU growth over time? Certainly the observation from the market is at the last year price increases had essentially no impact or very low impact on churn which of course benefits pretty more often.
A - Hooper Stevens
Well, I think very broadly you have to kind of consider that we took a lot of pricing actions for a relatively shorter period of time. So we’re at 12.95 service that included free Internet streaming at one point. And then now we are essentially at $15 product that also includes music royalty fee and subsequent charge for streaming. So broadly speaking we’ve taken a lot of pricing actions.
I think that media prices tend to inflate over time. For subscription media, I think we would look to participate in that but there is no specific plans to raise the prices right now. We constantly also make adjustments to the offers we put out in the market place, how do we handle long-term discounts, the ideas of around household and second solid pricing will impact that.
So I think we’re focused on driving revenue growth. And I think that where we’re today, that’s going to include a lot of unit growth in addition to pricing growth over time.
Q - Ben Steinberg
Really started the conversation, Hooper, talking about how large the embedded space of cars is going to be over time. How do you guys go after the price sensitive customers? Jim has talked little bit about segmenting and tiering but I don’t know how successful that’s been in terms of what you try, what’s the latest on that?
A - Hooper Stevens
Well, it’s a good incremental little business for us to do those efforts. But what I’ll tell you, it’s hard to slice a $15 pie that many ways. So I’m not sure how much more you can sort of drive out of that. I think the big distinction is our people are going to pay for radio or they are not going to pay for radio. And so we’re trying to convince more people to pay. I think that discounted offers on conversion and retention are always going to be a part of any subscription business and certainly ours long-term. But I think at $15 and for a very-very broad based of diverse content that we offer in a great bundle, we think it’s a really great value.
Q - Ben Steinberg
I want to talk next about the connected car landscape, which is years away but sort of closing up the matter, I think the most investors. We got Pandora here, Google here later at this week, very focused on In-dash innovation. So how are you guys thinking about getting starting with the pace of the connected car rollout over time? What’s the latest from your perspective in relation with the OEMs, what you think?
A - Hooper Stevens
Yeah. We have great relationships with the wireless carriers, the OEMs who make the cars as well. Our look at this is that the vast majority of the cars are going to be connected by the end of the decades.
Q - Ben Steinberg
Are those that are sold?
A - Hooper Stevens
The new cars that are sold. We look to build really bringing on the best entertainment platform in the car. And with the benefits of kind of 25 megahertz of spectrum and all the benefits of two-way connectivity from those integrated modems, we think that we can have the best service out there. We are going to have the broadest variety of contents and we are looking to build an integrated satellite and IP platform that can really deliver a powerful end vehicle experience for us and travelers.
Q - Ben Steinberg
What does that look like from a consumer perspective? Does that mean more personalized or more video or…?
A - Hooper Stevens
I think one of the challenges for consumers using our service, particularly in the car is the discoverability of content. So you may be interested in a lot of things that we offer but you may not know how to get to it. So making all of that easier to get to is going to be important. On the mobile apps sand on the web, we do offer personalized music. We do offer on-demand content. So all of that kind of becomes something that we can do in the car and I think we are also excited about getting the data back for exactly how customers are using our service. And I think that has very potential, very strong potential benefits to our conversion, retention and how we manage the customer lifecycle.
Q - Ben Steinberg
Why do you think that streaming app product that you’ve had now for a number of years, has it become more popular with your customer base?
A - Hooper Stevens
Well, when we charge for it, so streaming selves really well when it’s free. I think there is a lot of evidence in the marketplace, so that’s true. We think that most consumers subscribe to Sirius XM because of the bundle we offer and because of the in-car satellite product. And I think the Internet is a way for those consumers to take that service outside of the car. So that’s been the primary way that we sort of address the Internet. But look, we are innovating on those apps. We are always looking to make them better. And I think letting people use the service easily anywhere is important to us.
Q - Ben Steinberg
How do you think about building versus buying in the Internet radio space or streaming space?
A - Hooper Stevens
Well, we just don't see a lot of good business models out there. If you are going to buy something, you would hopefully find a way to make money from it over time and that’s really difficult in the streaming Internet space.
Q - Ben Steinberg
Yeah. Connectivity also has implications for ancillary businesses like Telmatics, can you tell us all about the Agero business which you did acquire and how that’s tracking versus your expectation?
A - Hooper Stevens
Yeah. We are thrilled with that acquisition. It’s made us even closer to the automakers than we were before. We are doing most of them. There are -- I think it’s going to be a very solid organic growth opportunity over the next few years as penetration rises with an existing partners. And also we have the opportunity to win the OEM business. So we made an announcement in January with the Subaru, I believe and stay tune for more announcements to come. We always let the automakers announce their own product stuff.
Q - Ben Steinberg
Are these being branded as SiriusXM telematics services or they were white-label?
A - Hooper Stevens
We operate on a white-label business today. We continue to look at ways to optimize our business and how to best serve our OEM partners. So that could change someday but for now this is a white-label service.
Q - Ben Steinberg
You mentioned before as you were talking about where you won’t take the product you talked about content, best content, best entertainment experience. How does the content add in your product evolve over time? I know you did have contract renewal coming up but more broadly, particularly outside of the music, the way I’m thinking about to make this really better product?
A - Hooper Stevens
Well, I think the service is always evolving. We make a lot of content announcements every week. Typically, we are making content announcements. We are hiring new hosts. We are developing new channels. Over the past year or so, we’ve launched three new music channels. We are kind of constantly figuring out the best way to utilize our bandwidth to deliver the content that our subscriber base cares about.
That naturally changes over time, but we think we’ve got a great content today -- great content lineup today. I don’t think there is any sort of huge missing piece to that content lineup. So we are very pleased with where things are. We love having Howard Stern on the air. Still have to decide if he wants to keep doing radio, but we think he is going a fantastic job, and he’s really never been doing better show than today.
Q - Ben Steinberg
Great. I wanted to ask you about going back to the music piece of the content story. This is a big year for streaming costs with the Web 4 proceeding going on in Washington with the Copyright Board. There seems to be some, at least my read on recent report from the Copyright Office and typically to the argument that songwriters and publishers are being underpaid by these new digital services, including yours, but others, interactive or non-interactive. What is your expectation or maybe a better question is, what do you hope to see happen with the Web 4 process this year? What do you want depending…?
A - Hooper Stevens
Those are probably two different issues. One is kind of the potential rewrite of the entire copyrights landscape, and that’s an incredibly complicated issues. There are a lot of things that Congress will consider and we will weigh in there when appropriate.
But I think on the Web 4 proceeding, first of all, keep in mind streaming costs for us are not really material. They are very small part of our overall royalty picture. What we do think though is that we hope that that proceeding produces a level playing field, where everybody streaming on the Internet pays the same rate. Today, we pay a lot more than some of our Internet streaming competitors and we don’t think that’s really fair.
Q - Ben Steinberg
Would you like to see their rates go up or your rates go down?
A - Hooper Stevens
We filed on that proceeding and we are generally in favor of lower music royalty rate.
Q - Ben Steinberg
Okay. Even though that might didn’t really help your streaming competition. I know you don’t necessarily view them as your primary competitors.
A - Hooper Stevens
I think our service is very different from the other services out there. And our bundle of content and what we offer to subscribers is really unmatched. And I think we are fine with that decision.
Q - Ben Steinberg
Okay. Can you talk about and come back to your guidance for this year? Last year you guys beat expectations really in the fourth quarter, maybe you can talk about what listed results beyond your net adds expectations in the year. And then, what are you assuming that leading to the guidance for 2015 of 1.2 million adds?
A - Hooper Stevens
Well, I think we had a really strong beat across the board. We saw better absolute numbers of conversions. We saw a great retention performance. We saw strong used car additions. I think this year our model for self-pay additions looks a lot like last year. We would probably a little bit more conservative fourth quarter assumption where we just saw huge outperformance across the board.
We are assuming kind of like the market about 16.7 million new car sales, roughly 70% penetration rate. We are looking at robust growth in used car additions. So those are kind of the basic assumptions, I think this year probably pretty steady on the retention front. But we think our guidance is conservative and we expect to be it.
Q - Ben Steinberg
Great. Capital allocation is another big topic for investors, for you guys. I think David used the phrase dry powder on the last earnings call, which at least to me is a little bit of a shift in rhetoric a bit. How should we think about your leverage target and the sense of urgency or not of getting to that target over kind of reasonable period of time?
A - Hooper Stevens
Well, keep in mind last year was an extraordinary year in terms of EBITDA growth and also we had a $500 million convertible note that turned into equity in December. So it was pretty difficult, the challenge to raise your leverage ratio. We stated about 3.1 times, the publicly stated target is 4 times, and we will see -- I think we will move there over time.
But we also do value the flexibility and being able to make investments or acquisitions should the opportunities arise but kind of going back to what we were talking about earlier, I think those businesses are hard to find.
Q - Ben Steinberg
Yeah. Anything on the capital spending for which we keeping in mind if we think about allocating capital of your satellite build plans in particular?
A - Hooper Stevens
We require kind of five discrete satellite projects every 15 years. So two active satellites on the XM side, two active on the Sirius side and one spare, that can really go in between or kind of step in, in case of any issues with either or any of those four satellites. Those projects are really roughly speaking about $300 million a piece. So about $1.5 billion in total satellite CapEx spending over a cycle.
Q - Ben Steinberg
Yeah.
A - Hooper Stevens
And I think, we'll start that spending probably late ‘16. So it would be done approximately over a 12-year period.
Q - Ben Steinberg
Essentially replace the entire fleet?
A - Hooper Stevens
Essentially it’s replacement, yeah.
Q - Ben Steinberg
Okay.
A - Hooper Stevens
And as we better utilize some of the spectrum that is currently duplicative on the series side. In essence, some of that CapEx is really growth CapEx because we’ll be able to invest in delivering a better satellite radio service more functionality, more insularly services.
Q - Ben Steinberg
I’ll ask you one more and then open it up for the audience, if you have a question, please raise your hand and we’ll bring the mike over. I think you mentioned or Jim mentioned on the last call, you made an addition to free-up spectrum in less than 10 years but my understanding is that you’re still doing out radios that are not interoperable so ….
A - Hooper Stevens
I think it will be -- I think what we said is more than five years and less than 10. I think it’s going to be closer to 10 and five.
Q - Ben Steinberg
Right.
A - Hooper Stevens
But ultimately, it just represents a huge opportunity because clearly, our spectrum is very valuable. And I think we can do more of it than we do today and better serve our subscribers.
Q - Ben Steinberg
Okay. Let me see we have any questions. We’ll start with gentlemen right there. Yeah. Thanks.
Question-and-Answer Session
Q - Unidentified Analyst
Just a question on competition from the standpoint of the music, there is a lot of competition. You see a lot of activity with Apple and Google. But on the talk radio content side, you seem to be pretty standalone today. Is that changing? And as a result that there isn’t -- seems like there isn’t a tough competition. Is that keeping the cost of content at a reasonable level? Is it the different thing that we’re seeing in TV or it’s not where that’s gliding dramatically?
Hooper Stevens
Sure. I think we’ve done a really, really great job in reducing our content cost over the year. So, in 2008, we were spending over $400 million on content that was not music royalties. And I was on a revenue base of about $2.5 billion. So today, the run rate for that number is about $300 million. Our guidance for revenue this year is about $4.4 billion. So nobody in the premium content space has achieved that kind of record.
For whatever reason, I think most of the Internet streaming and the emerging competitors do focus on music. Music is a bit of a commoditized market. We run commercial free. We think that that’s an advantage. We also hire the best people in radio. And we try to do sort of live acoustic performances, other sort of one-off ways to get a degree of uniqueness for our music but it’s tough to do.
I think, keep in mind the biggest competitor that we have is terrestrial radio. And they do employ a lot of talk and news and sport content. But I think to your point, they are not really doing anything new. So, we have an opportunity as we become more distributed in cars to offer our bundled to more people and I think we are going to do just that.
Unidentified Analyst
Next question on a competition from connectivity in the car. I mean, there’s still a lot of friction if the end customer wants to listen to Internet radio in the car and we are probably a number of years away from when real full connectivity comes in. But I think there’s an interim step that Pandora is starting to rollout more, where we still have to use our smartphone for connectivity but the user interface is actually in-dash. So it’s a little bit easier I would say. I don’t know. Have you guys done any studies to see if that’s materially different and not for the consumer that it changes behavior?
Hooper Stevens
Well, there is studies out there that show a lot of people are streaming in cars. And I think that those interfaces have typically been around for long time. I mean, every car probably made since ‘04, ’05 has got either an auxiliary jack, a Bluetooth connector or some sort of iOS connection. And we haven't really seen a difference in conversion performance as people move into cars, where you can control some of that from the screen. I think some of those interfaces are still clunky. They have a long way to go. But we have not seen anything as a number that causes us to lose sleep. But we think that the world is never standing still and that's why we are investing so much time and effort to create, sort of a next-gen platform that combines the best benefits of satellite and IP.
Unidentified Analyst
Okay, if -- one more, if there is one after?
Hooper Stevens
Yeah. In the back.
Unidentified Analyst
I think a lot of people have been pleasantly surprised by the -- how high the used conversion rates have been in the past few years, but as you think about your evolving customer base to being maybe slightly lower income demographic. God forbid, we enter another recession pretty soon. How do you think about churn rate of new -- of your evolving customer base? And what your willingness to take retention driving concessions might be as your base customer changes demographic?
Hooper Stevens
Well, Ben asked a little bit about that earlier and I don't think that we see a substantial difference in churn between new and used car buyers today. So, again, we are starting to get a lot of history in this area and we’ll continue looking at it. But we employ a variety of retention in marketing treatments to both new and used car buyers and there is not a huge difference in what we do there. I think most subscription companies do offer concessions and discounts and keep in mind that these are pretty affective in that a lot of -- or most of these subscribers roll on to full price plans after that initial term is up.
Q - Ben Steinberg
Okay. I think we are out of time, Hopper. Thanks very much for filling in.
Hooper Stevens
Thanks, Ben. Thanks for having me. Thank you for attending.
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