SIRI - Sirius XM Radio

[Liberty]

Here's one I've been researching a bit lately. I don't own any, and don't know if I ever will, but it's just fun to broaden my circle of competence...

 

The basics:

 

-Found this one via Horizon Kinetics, they were discussion John Malone's Liberty Media and its huge stake in SIRI (they're about to take control, they had 49.5% last I checked). LMCA is spinning off the Starz tv channel and what remains will most likely take outright control of SIRI soon, possibly having SIRI merge with LMCA to use SIRI's NOLs (I hear Malone's nothing if not a tax-efficient guy).

 

-SIRI is now the merged Sirius and XM satellite radio corps and doesn't have a sat radio competitor in the US. They should have pretty great operating leverage because their costs are basically fixed whether they broadcast to 1 listener or 100 million, and those fixed costs for the tech and the content shouldn't grow too much from here.

 

-On the music side they have competition from terrestrial radio (though with ads) and internet radio (pandora, spotify, etc), but on the non-music side they have lots of exclusive stuff like tons of sports, talk-radio, etc. Seems like most of the "worth subscribing for" value is on the non-music side, which their free and freemium competitors probably can't afford. They also offer an internet radio option, so subscribers can listen while at work and then keep listening while they commute in their car. They're also coming out with an iOS and Android app, and by the end of this year they should have more 'on demand' features.

 

-They have deals with all carmakers operating in the US to put satellite radios in cars, they do a lot of free trials with new cars with apparently pretty high conversion rates (I've seen 45% in the financials), and since these sat radios because widespread about 5 years ago, they are now hitting the second-hand car market. Their deal with carmakers has the benefit of convenience; people get a free trial subscription, the radio's in the car when they buy it. They basically just have to start listening without having much to set up or figure out by themselves.

 

-If Malone takes control, I believe he's going to use the free cash flow for buybacks, debt repayment, some acquisitions, and other moves that should be shareholder-friendly if his track record is to be believed.

 

Here's some excerpts from Horizon Kinetics:

 

Liberty’s relationship with Sirius commenced on February 17, 2009—within  a few weeks of the stock market lows of the financial crisis of 2008/2009. At this tumultuous moment, Liberty extended a series of lifeline loans to Sirius, in aggregate equal to $530 million (includes $100 million in Sirius debt assumed by Liberty), which enabled the company to avoid a bankruptcy; in exchange, Liberty received a $30 million structuring fee and a 15% coupon payment on $400 million of the loans in addition to a preferred share class that is convertible into 40% of Sirius equity. At the time, the Sirius shares traded at about $0.15, having peaked at over $50 in the year 2000.  The Liberty Media loans were fully repaid with interest by May 2011, yet Liberty Media maintained its 40% stake. A liquid balance sheet, in the right hands, can be a beautiful thing. [...]

 

Sirius is a business that requires an enormous fixed cost before it can serve even one customer.  Before any customer is served, all of the radio spectrum must be acquired, all the satellites must be launched, and all of the radio broadcast infrastructure and on-air talent must be secured.  Once that happens, an innumerable number of customers may be served immediately, if they are even available in sufficient quantity. [...]

 

Sirius offers yet more value: the radio spectrum owned by Sirius  is a form of hidden/dormant asset. There is a finite amount of bandwidth available for those who wish to distribute content or data wirelessly, and the prices for such bandwidth have increased markedly of late with the widespread adoption of wireless devices. A legacy of the 2008 merger of Sirius Satellite Radio and XM Satellite Radio, the sole two such companies licensed in the U.S., is what appears to be excess spectrum that the company does not require for its operations. Although we cannot speculate as to the ability of Sirius to readily monetize the spectrum, it certainly is a form of added optionality.  Each company paid somewhat over $80 million for their FCC licenses in 1997.

 

-This is just an anecdote, but my father bought a Hyundai Santa Fe about a year ago. He got a Sirius XM 3-month trial subscription. My parents don't really speak English or listen to english-language music, so I figured that 99% of what Sirius XM offers wouldn't be for them, and that he probably had let the trial lapse and never really used it.. Well, tonight I asked, and he actually renewed for 3 months after the trial and then for 1 year for $125. He says that for $2 a week (for effect he takes out a handful of coins from his pocket as he says this) it's worth it to not have to deal with ads, and all he listens to is a couple of french-language music channels out of Sirius XM's hundreds of channels. If a couple of channels make it worth it for him, I'm guessing that English-speakers probably would see even more value for the money. I showed him the iPhone app, and he was pleased.

 

-I don't know if it would be better to approach this via Liberty Media or directly via the Sirius XM common. I've just started researching this and might never do anything about it, but I thought it was interesting enough to share and see what the smart investors here though.

 

I haven't yet dug into all the financials and everything - this is just a 'high level' look at this idea, so if it interests you, do your due diligence, I can't give you an IV estimate or anything precise like that - but the free cash flow seems to gear up nicely and so far the moat seems strong.

 

The barriers to entry are mostly in the cost of the satellites, the cost of getting the required radio spectrum (probably not possible anymore), and of getting the content. As long as the company keeps its costs under control, keeps its content producers happy and exclusive deals with high-profile talking heads and sports organizations, it'll probably have a pretty impregnable moat for direct competitors. Indirectly: Internet radios will keep getting more popular, but for people who want more than music, I kind of doubt that internet radio will be able to compete because its business model probably doesn't allow big investments into exclusive content deals and well-paid talking heads, though if there's a challenger it'll probably come from digital over 3G/LTE via a smartphone connected to a car radio.

 

A lot of this would be a bet on management keeping costs lower, keeping the subscriber growth healthy, and allocating capital well (including unlocking hidden assets in the form of radio spectrum at some point, maybe?). The value's not in the assets as there are lots of intangibles here; I'd mostly look at the moat and capital allocation qualitatively, and then try to value it based on free cash flow per share and how I see it gearing up if they can maintain some minimal subscriber growth rate. Even without huge growth in subscribers they could theoretically do well if they can use the cashflow to do huge buybacks under IV...

 

Anyway, anyone have any thoughts? As I said, I'm just looking at it for fun at this point, there's still a lot I don't know about the company and it's not my favorite idea right now, but it's an interesting business to learn about and seems like it could be a good investment.

 

 

---

And as a reference and for completeness's sake, here's an old thread about Sirius and XM:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/why-do-non-value-investors-(aka-traders)-love-siriusxm-stock-so-much/

[Packer16]

On the surface it appears expensive (12x EBITDA and 18x TTM FCF) for only 5% annualized sub growth.  Satellite TV sells at 6 - 7.3x EBITDA and terrestial radio is at 5.9 - 8.6x EBITDA and 5.4 to 7.1 x FCF.  The main question I would have is for the price where is the growth going to come from?  I think most folks who like sat radio already have it.  Although terrestial radio has lower growth it is reflected in the price and is where I think most of the bargains are.

 

Packer

[Guest rimm_never_sleeps]

I imagine that this is a business that will be able to raise prices without their costs going up. i.e. a pretty damn good business. so you get unit growth + price increases. that's the only way I can justify the valuation. malone will probably flip it to a big media company.

[Liberty]

On the surface it appears expensive (12x EBITDA and 18x TTM FCF) for only 5% annualized sub growth.  Satellite TV sells at 6 - 7.3x EBITDA and terrestial radio is at 5.9 - 8.6x EBITDA and 5.4 to 7.1 x FCF.  The main question I would have is for the price where is the growth going to come from?  I think most folks who like sat radio already have it.  Although terrestial radio has lower growth it is reflected in the price and is where I think most of the bargains are.

 

Packer

 

Their growth seems to be heavily influenced by car sales and by the used-car cycle. I think they still have lots of room to grow. Not forever, but the way they are gearing, adding a few million subscribers could make the free cash flow go up by hundreds of percents, I think.

 

"I think most folks who like sat radio already have it."

 

I don't feel it's quite how it works. People don't start out with 'hey, I think I'll get sat radio so I'll just go out and get it'. I think they buy a new car, get a trial, and then 45% of them stick with it (according to SIRI's conversion rate numbers). In recent years the replacement rate of the US passenger vehicle fleet has slowed down a lot..

[Liberty]

I imagine that this is a business that will be able to raise prices without their costs going up. i.e. a pretty damn good business. so you get unit growth + price increases. that's the only way I can justify the valuation. malone will probably flip it to a big media company.

 

They do seem to have good pricing power (everything changed when 2 competitors became the only player in that niche). They've recently done a price increase without any apparent negative impact (that I could see, anyway). But to me what makes it interesting is the operational leverage. Current multiples are pretty meaningless if adding 10% more subscribers makes FCF jump by 100% or whatever (made up numbers just to illustrate). The question is: How much certitude can we have that things will happen that way?

 

I doubt Malone would want to flip it quickly. He's been after it for years. I think he'll improve operations and capital allocation and use it as a cash cow to finance other investments. So a lot depends on whether you trust Malone to do a good job.

[woltac]

Interesting discussion.  I found a Bloomberg radio station on AM radio a while back and got spoiled listening to business radio on the way to and from work.  The radio station was recently sold and now broadcasts religious programming.  I seriously thought about subscribing to SIRI so I could listen to business radio again.  Frugality got the best of me and I passed.

 

Most of the rental car companies provide SIRI for free.  This is also a good way to hook new customers.

 

I could see their customer base expanding rapidly with the new car trial period, the rental car tease and the low subscription rate.

[woltac]

From the 10K:

 

In connection with the Merger, we had agreed with the FCC not to raise the retail price for, or reduce the number of channels in, our basic $12.95 per month subscription package, our a la carte programming packages or certain other programming packages until July 28, 2011. In July 2011, the FCC issued an order confirming that the price cap was no longer necessary. On January 1, 2012, we increased the base price of our basic subscription packages from $12.95 to $14.49 per month.

 

Revenue has been rising steadily even though subscription rates have remained the same since 2008.

[Packer16]

I would be surprised to see large growth going forward (higher than 5% current growth) as the most sticky and highest potential buyers of the service (those with the highest disposable income and are commuting) have purchased and tried out Sirius and XM.  I tried it out a few years ago and found just as much content on the web for free so I cancelled.  The customer service was also poor when I subscribed and the antenna and receiver actually broke so I had a bad experience.  I wonder if the 45% take up rate includes existing subscribers or only new subs.  I would suspect it includes existing subs so the real growth rate is smaller then the take up rate would imply.

 

This is a nice revenue model similar to the cable model of content distrbution.  However, the cable cos sell for 5.8 to 7.5x EBITDA and takeouts in the space have ranged from 5.3 to 7.5x (RCN, Mediacom, Sure West and Knology).  I would not pay above these mulitples unless I was confident in future growth over a number of years.  I would definately buy if the purchase price was closer to 5.0x EBITDA. 

 

Packer

[woltac]

Competition from smartphones synced to a car audio system would seem to be very effective competition to SIRI and could kill growth (or worse, Iridium?).  Is using a smartphone in this manner cost effective? 

[Liberty]

Competition from smartphones synced to a car audio system would seem to be very effective competition to SIRI and could kill growth (or worse, Iridium?).  Is using a smartphone in this manner cost effective?

 

As I mentioned in the writeup, that definitely seems to be the main competitor when it comes to the delivery technology, but it doesn't change anything on the content front. Ok, so you plug in your smartphone, but what content does that give you? Music -- sure. But who can afford to do the deals with well known talking heads and major sports organizations to have all that expensive content? That seems to be most of the moat, along with the fact that being built into cars removes a few steps for users, and making stuff simpler and more convenient always helps a lot with Joe Average (ie. original iPod vs mp3 players at the time).

 

If they grow for a few years, and Malone does big buybacks for a few years, all this while fixed costs stay mostly flat, the FCF/share could start looking much better. By how much? I don't really know yet...

[woltac]

Competition from smartphones synced to a car audio system would seem to be very effective competition to SIRI and could kill growth (or worse, Iridium?).  Is using a smartphone in this manner cost effective?

 

As I mentioned in the writeup, that definitely seems to be the main competitor when it comes to the delivery technology, but it doesn't change anything on the content front. Ok, so you plug in your smartphone, but what content does that give you? Music -- sure. But who can afford to do the deals with well known talking heads and major sports organizations to have all that expensive content? That seems to be most of the moat, along with the fact that being built into cars removes a few steps for users, and making stuff simpler and more convenient always helps a lot with Joe Average (ie. original iPod vs mp3 players at the time).

 

If they grow for a few years, and Malone does big buybacks for a few years, all this while fixed costs stay mostly flat, the FCF/share could start looking much better. By how much? I don't really know yet...

 

I don't have a smartphone, so I am curious if a person's cell phone bill goes up if they are streaming content while driving.  My question is, assuming I had a smartphone, would my phone bill increase if I streamed Bloomberg radio on it for three hours five days a week?  I am trying to compare the cost of SIRI to the most likely competitor.  I currently use a FM transmitter with a mp3 player to listen to various business related presentations at no cost, but finding content is not very convenient.  Before you bring it up, my family has already informed me that we are one of the last families on earth to get smartphones. 

 

 

[beerbaron]

I don't have a smartphone, so I am curious if a person's cell phone bill goes up if they are streaming content while driving.  My question is, assuming I had a smartphone, would my phone bill increase if I streamed Bloomberg radio on it for three hours five days a week?  I am trying to compare the cost of SIRI to the most likely competitor.  I currently use a FM transmitter with a mp3 player to listen to various business related presentations at no cost, but finding content is not very convenient.  Before you bring it up, my family has already informed me that we are one of the last families on earth to get smartphones.

 

Yes it will end up eating your bandwidth, a good quality MP3 is about 1MB per minute, a talk radio equivalent is probably 100 kB per minute.

 

BeerBaron

[Guest Dazel]

 

 

Malone will eat up the nol's in other businesses....after they are consolidated and then sell it... He will have made a killing. A very smart man....might be better off buying the parent.

 

Dazel.

[Guest Dazel]

 

 

Is there something we are missing here? Malone continues to buy it.

 

Can they use their asset base for another business? Tv ...iPads etc?

 

Dazel

[Liberty]

Since the day I created this thread on Sept 22, this stock is up 24.3%. Too bad I ended up not buying any  :P

[rogermunibond]

Interesting discussion.  I found a Bloomberg radio station on AM radio a while back and got spoiled listening to business radio on the way to and from work.  The radio station was recently sold and now broadcasts religious programming.  I seriously thought about subscribing to SIRI so I could listen to business radio again.  Frugality got the best of me and I passed.

 

Most of the rental car companies provide SIRI for free.  This is also a good way to hook new customers.

 

I could see their customer base expanding rapidly with the new car trial period, the rental car tease and the low subscription rate.

 

Bloomberg radio was my entre into SIRI too.  Bought a new car recently and during the free trial got hooked on Bloomberg radio and CNBC.  Malone in an interview pretty much said that once people get exposed to SIRI they tend to think it is pretty good.

 

I reupped to a 6 month special offer at about $25.  I'm afraid when that expires that I'm not going to find cellular streaming of Bloomber through my iphone to be as convenient (bandwidth shouldn't be a problem with 4GB of data).

 

Going to be tough not to keep the subscription.

[fareastwarriors]

Interesting discussion.  I found a Bloomberg radio station on AM radio a while back and got spoiled listening to business radio on the way to and from work.  The radio station was recently sold and now broadcasts religious programming.  I seriously thought about subscribing to SIRI so I could listen to business radio again.  Frugality got the best of me and I passed.

 

Most of the rental car companies provide SIRI for free.  This is also a good way to hook new customers.

 

I could see their customer base expanding rapidly with the new car trial period, the rental car tease and the low subscription rate.

 

Bloomberg radio was my entre into SIRI too.  Bought a new car recently and during the free trial got hooked on Bloomberg radio and CNBC.  Malone in an interview pretty much said that once people get exposed to SIRI they tend to think it is pretty good.

 

I reupped to a 6 month special offer at about $25.  I'm afraid when that expires that I'm not going to find cellular streaming of Bloomber through my iphone to be as convenient (bandwidth shouldn't be a problem with 4GB of data).

 

Going to be tough not to keep the subscription.

 

Luckily I have an unlimited data plan. I listened to Bloomberg Radio during my drive/train ride. nice to know  the big news of the day.

[Capitalist World]

I have been a buyer recently as I like their model and high margins.  Malone is a master and the upswing in the car buying cycle and an improving economy bodes well for Sirius.

[Liberty]

Sirius XM Canada Holdings (TSE:XSR) is up 100% in the past year. I wonder if Malone's been buying it too.

[Liberty]

Q2: http://investor.siriusxm.com/releasedetail.cfm?ReleaseID=780234

[jay21]

I have been a buyer recently as I like their model and high margins.  Malone is a master and the upswing in the car buying cycle and an improving economy bodes well for Sirius.

 

This seems to sum up the central tenets of the thesis.  I still can't tell if the price is too expensive assuming the high growth.

 

Has anyone seen reasonable projections of financials and subscribers? 

 

 

[moody202]

Does anyone know when Evercore will finish their evaluation of the Liberty proposal?

 

Upendra

[thefatbaboon]

Has anyone on here got any experience listening to the radio over 3G or 4G while in a moving vehicle?

[mankap]

I have listened to radio over 4G. I would say that it is not as good as Sirius or FM. The streaming will pause and buffer at times.

[thefatbaboon]

Where you driving or stationary?

 

If you don't mind me asking, in what geographic areas have you experimented? 

 

Also, do you know if you were in solid 4G coverage zones - or if the coverage was going between 4G and 3G?