For Sirius XM, Is There Life After Howard Stern?

The latest earnings report from satellite radio monopoly Sirius XM (SIRI -0.63%) had to please its shareholders, especially given that it delivered record revenue for the period. But as it continues its integration of Pandora, which it acquired last year, there remain some questions, particularly about what is in store for the company in the post-Howard Stern era. (The iconic shock jock's contract includes only a couple more years of him as a on-air personality.)

In this segment of the MarketFoolery podcast, host Mac Greer, Motley Fool Chief Investment Officer Andy Cross, and senior analyst Jason Moser drill into the business to consider the size of its audience, the levers it can pull with Pandora to increase its revenue, the commoditization of the music industry, and the breadth of Sirius' non-music offerings. They also discuss the value of its deep pool of data about its customers' preferences and the long-range brilliance of bringing the King of All Media on board, as reflected in its 10-year stock chart.

A full transcript follows the video.

Check out the latest Sirius earnings call transcript.

This video was recorded on Jan. 30, 2019.

Mac Greer: Let's talk some Sirius XM. Shares up on earnings. Jason, record revenues and the integration of Pandora, well, that seems to be going well. A lot of optimism. Sirius XM acquired Pandora last year.

Jason Moser: The conversation for us regarding Sirius XM for a long time has all revolved around Howard Stern, and would there actually be life beyond Howard. He obviously won't last forever. I think we're actually starting to see signs that there may indeed be life after Howard. I think the Pandora acquisition is going to play a pivotal role in that. Initially, when we saw they were doing that deal, there were some questions as to what they could get out of Pandora that they don't already have. What it boils down to is data. When you combine these two entities, they're essentially going to have an audience of over 100 million listeners. There's going to be about 40 million self-paying subscribers, about 75 million who are not paying for subscriptions, but either listening on the ad-based model or whatever. We talk a lot about how Starbucks has a lot of different levers they can pull when they want to try to generate more traffic in the store. Whether it's a treat receipt or a buy-one-get-one-free, whatever it may be. I think that Sirius is going to play that same card here with Pandora. They're going to get a lot of data here to be able to offer up some new products for listeners.

A couple of examples here. One thing they're going to do in early February, they're actually going to give select Pandora listeners an offer to buy a $5 a month mostly news and talk Sirius subscription. That matters because most all of the cars that are coming out now are all satellite-radio-enabled. They just struck a deal with Toyota where Sirius XM is going to be the provider for all Toyota cars going on the road here through 2028. They're projecting 200 million cars on the road over the next decade that will have that satellite radio hardware. Giving a product that scratches whatever itch the listener has is going to be critical. Having Pandora is going to give them the data to be able to do that.

Greer: It also seems like, going forward, the secret sauce for Sirius XM increasingly is going to be news, it's going to be talk, it's going to be live sports. Music feels like it's become so commoditized.

Moser: Yeah, I think you hit the nail on the head there. You can get whatever music you want anywhere. There are a million offerings out there. Spotify, Amazon, Apple, Google, you name it. Where Sirius has really differentiated themselves is the breadth of the content that they offer. Whether it's sports, news, talk, comedy -- look at the relationship with Netflix. They're leveraging some of that Netflix comedy to offer it in audio form on Sirius XM. More and more, it's becoming kind of like a Netflix in that regard. They have a little bit of something for everyone. If they can figure out ways to monetize that as optimally as possible, and whether that's just catered offerings to people who want a certain thing, or people who want the whole package -- remember, we're coming into a very polarizing election year here in 2020.

Greer:​ I've heard that!

Moser: I'm certain there are going to be a lot of people that would love to have access to a news-and-talk-style offering that's going to be reliable. That's the beauty of Sirius radio, the satellite is so reliable.

Andy Cross: Also, the defensive mechanism that this, against the likes of Spotify, the other competition that Jason mentioned. The top line growth rates for Sirius have slowed a little bit. Taking on something like Pandora to help bring some excitement back to both the product, as well as for shareholders -- the stock has reacted nicely on the news over the past couple of years. Thinking through how this changes the landscape of providers when it comes to music and talk radio is really interesting. If you were in the Sirius boardroom, you're saying, "Hey, we have to make some kind of move here, and here's a Pandora price that's pretty reasonable to get the assets that they own."

Moser: Yeah, they'll have a Pandora channel on Sirius XM here in the coming months. They're starting to place some big bets on podcasts. They felt like they missed that boat more or less. I think it's all based on growing out that offering, using the data to slice and dice different product offerings to give at least an option for everybody out there, considering how many people are going to actually have access to that satellite radio via the car.

Greer: It's really amazing, we were talking before the show, when you look at the 10-year stock chart of Sirius XM. It wasn't that long ago that this stock was trading for under $1. There was a very, very fair, reasonable question: are they going bankrupt? I didn't invest in them, and I love Sirius XM as a consumer. I think a lot of people probably underestimated the power of Howard Stern.

Moser: I think you're right. They obviously made a very smart bet in using him to really launch that offering. Such a loyal listener base on the Stern side of things, when he moved over to Sirius. That enabled him to do a lot more, as well. He didn't have to worry so much about the FCC anymore. I think it's made the show a lot funnier. Granted, it's probably not for everyone, but hey, I'm one of those loyal listeners. I think what Howard Stern ultimately bought them, other than really awesome content, he bought Sirius a lot of time to actually build up a subscriber base. And now that they have that base -- they also have some data on that user base, because they have a pretty slick app there -- they're more and more able to slice and dice and come up with product offerings that give you what you want to listen to when you want to listen to it. If you can offer it at multiple price points, or even possibly a free ad-supported model, which it sounds like they're coming out with, hey, they're making it available to the biggest space possible. That's important.

Cross: We talked about the advantage of subscription businesses, when you think about the Apples and the different profit margin between their Services business and Hardware business. Sirius actually has higher profit margins than Apple does as a subscription business. Just a little, 28% vs. 26%. But it's telling. This is why Tim Cook, looking at the Services business and reporting the gross margin that they reported this quarter, and saying, "Hey, this is the future of what Apple may look like," it's just a matter of getting the revenue growth high enough for that to make a meaningful difference for Apple's shareholders.

Greer: Any chance that Apple would buy Sirius XM? Doesn't make sense?

Cross: I don't think so!

Moser: Yeah, I don't think that's right up their alley. Content is such a tricky business. When you have a company like Sirius that's already bringing Pandora into the mix, I don't know that they would b e interested in an acquisition like that, anyway. I'm sticking with Square. Apple needs to buy Square.