LMCA - Liberty Media

[loganc]

SIRI Q2:

 

http://investor.siriusxm.com/releasedetail.cfm?ReleaseID=924102

 

Wow, 1.6% churn, that's impressive.

 

FCF/share up 25%.

 

Good to see great progress! :)

 

Liberty, do you feel you can predict SIRI’s future comfortably enough, or is it more a bet on Malone’s business acumen?

Thank you,

 

Gio

 

I think there is plenty of skepticism baked into the SIRI valuation at this point and clearly Malone/Maffei do not agree with that view as they continue to spend money hand over fist on the equity shrink.

 

A few comments that I have about the predictability of the business and LMCA/SIRI as an investment:

 

(1) Go back and look at the performance of the business during the crisis in terms of subscribers and ARPU.  Despite the financial problems at that point, the subscriber base was very stable and ARPU actually grew during that period, as I recall.

 

(2) SIRI has a tangible competitive advantage against Pandora/Spotify simply because SIRI actually generates free cash flow. 

 

(3) In terms of the increased competition from AAPL/GOOG in the dashboard, how long will it take them to actually get a significant number of cars on the road equipped with their product?  I think some simple math where one considers new car sales and penetration rate will indicate that it will take a number of years.  Meanwhile, there are going to be something like 120MM SIRI equipped vehicles within a few years.  I don't see how anything has really changed for SIRI at this point since the iPod/iPhone have existed for over ten years and SIRI has still been able to build the business that exists presently.  Finally, I am not even really convinced that the AAPL/GOOG dashboard will even be a per se competitor with SIRI.  Why couldn't the SIRI offering be integrated into the AAPL/GOOG dashboard? 

 

I think SIRI is in a very strong position, despite some of the negative sentiments that can be read about the business.  It is really hard for me to see that something like Pandora is going to kill SIRI when it is a dumpster fire of a business.  Finally, LMCA is going to own the entire company in a few years from the equity shrink and Malone/Maffei can use the SIRI FCF/balance sheet to make whatever  investments are attractive to them at that point.  The amount of optionality around LMCA/SIRI is pretty mindblowing.

[giofranchi]

I think SIRI is in a very strong position, despite some of the negative sentiments that can be read about the business.  It is really hard for me to see that something like Pandora is going to kill SIRI when it is a dumpster fire of a business.  Finally, LMCA is going to own the entire company in a few years from the equity shrink and Malone/Maffei can use the SIRI FCF/balance sheet to make whatever  investments are attractive to them at that point.  The amount of optionality around LMCA/SIRI is pretty mindblowing.

 

Thank you! I think your analysis makes great sense.

Though right now I still am more comfortable with Charter:

1) It is a special investment situation imo, and basically depends on how the TWC and the Bright House mergers will proceed;

2) Cable is Malone's historic business: if he says the industry is still very well positioned, I absolutely do not doubt his judgement.

I know he is also very upbeat about SIRI, and I’ll watch closely what happens here. As new cash comes in, I might gradually build a position in LMCA too.

 

Cheers,

 

Gio

 

[tombgrt]

SIRI Q2:

 

http://investor.siriusxm.com/releasedetail.cfm?ReleaseID=924102

 

Wow, 1.6% churn, that's impressive.

 

FCF/share up 25%.

 

Good to see great progress! :)

 

Liberty, do you feel you can predict SIRI’s future comfortably enough, or is it more a bet on Malone’s business acumen?

Thank you,

 

Gio

 

I think there is plenty of skepticism baked into the SIRI valuation at this point and clearly Malone/Maffei do not agree with that view as they continue to spend money hand over fist on the equity shrink.

 

A few comments that I have about the predictability of the business and LMCA/SIRI as an investment:

 

(1) Go back and look at the performance of the business during the crisis in terms of subscribers and ARPU.  Despite the financial problems at that point, the subscriber base was very stable and ARPU actually grew during that period, as I recall.

 

(2) SIRI has a tangible competitive advantage against Pandora/Spotify simply because SIRI actually generates free cash flow. 

 

(3) In terms of the increased competition from AAPL/GOOG in the dashboard, how long will it take them to actually get a significant number of cars on the road equipped with their product?  I think some simple math where one considers new car sales and penetration rate will indicate that it will take a number of years.  Meanwhile, there are going to be something like 120MM SIRI equipped vehicles within a few years.  I don't see how anything has really changed for SIRI at this point since the iPod/iPhone have existed for over ten years and SIRI has still been able to build the business that exists presently.  Finally, I am not even really convinced that the AAPL/GOOG dashboard will even be a per se competitor with SIRI.  Why couldn't the SIRI offering be integrated into the AAPL/GOOG dashboard? 

 

I think SIRI is in a very strong position, despite some of the negative sentiments that can be read about the business.  It is really hard for me to see that something like Pandora is going to kill SIRI when it is a dumpster fire of a business.  Finally, LMCA is going to own the entire company in a few years from the equity shrink and Malone/Maffei can use the SIRI FCF/balance sheet to make whatever  investments are attractive to them at that point.  The amount of optionality around LMCA/SIRI is pretty mindblowing.

 

Good points. This was my brief conclusion after a quick glance this weekend and bought a starter position.

 

On top of (2), SIRI actually offers something better than what spotify and the like offer. Spotify just offers generic music you can find everywhere else. They don't have much (if any) added value for the customer. It's very hard to replicate SIRI and even for guys with deep pockets it would take many years to build it out. Likely easier to just buy it from Liberty Media in a couple of years!

 

Spread between LMCK and SIRI just got a bit wider - again.

[Liberty]

SIRI: "Our performance has been so strong that we have already done 94% of original full year net subscriber ad projection in only 6 months"

 

(via Bluegrass Capital)

[giofranchi]

I have started a 9% position il $LMCK: I have come to realize you must be quite dogged to keep arguing with $SIRI’s results... FCF is growing incredibly fast, and that cash flow in the hands of Malone must be very valuable indeed! ;)

 

Cheers,

 

Gio

[Liberty]

I have started a 9% position il $LMCK: I have come to realize you must be quite dogged to keep arguing with $SIRI’s results... FCF is growing incredibly fast, and that cash flow in the hands of Malone must be very valuable indeed! ;)

 

Cheers,

 

Gio

 

I sure hope you're not a contrary indicator, because you keep buying things I own ;)

[Ross812]

Siri is a play on new car sales. If/when something better (apple/google will probably be next in the car) comes along, the pivot away from siri by the automakers is going to be pretty swift. That said, I don't think we are there yet in terms of wireless connectivity to make a 'smart dash' available to the masses. How long could this take? 5-10-15 years? Siri can throw off a lot of cash in that amount of time and you have Malone reinvesting it for you. It is an obsolete technology though, and there is not nearly the optionality you get with a cable network with satellite radio. 

[frommi]

Siri is a play on new car sales. If/when something better (apple/google will probably be next in the car) comes along, the pivot away from siri by the automakers is going to be pretty swift. That said, I don't think we are there yet in terms of wireless connectivity to make a 'smart dash' available to the masses. How long could this take? 5-10-15 years? Siri can throw off a lot of cash in that amount of time and you have Malone reinvesting it for you. It is an obsolete technology though, and there is not nearly the optionality you get with a cable network with satellite radio.

 

I still can`t believe that you can stream music without breaks over 4G, especially when your cell is crowded. Is someone doing this already?

[Picasso]

Slacker radio in my Tesla is pretty reliable over 3G.  No commercials and it's pretty good.  I didn't even bother getting Sirius for it.

 

But not a lot of cars have 3/4G yet.  I changed by mind and agree with some of the posters here that SIRI can produce a lot of growing cash flows for a long time.  There are definitely some headwinds but Liberty has correctly pointed out all the things that should have killed Sirius radio before. 

 

Personally I'd like to see a larger discount on LMCA before buying.

[Arden]

According to consumer affairs' website, SIRI has an average user satisfaction score of 1/5 based on almost 2000 reviews

http://www.consumeraffairs.com/home_electronics/sirius.html

 

Similar scores on Yelp, based on only 67 votes though

http://www.yelp.com/biz/sirius-xm-radio-washington-2

 

Any thoughts on why that is? Do you think  it matters at all for SIRI? Time warner is probably one of the most hated companies ever and they've done pretty well.

 

[Jurgis]

According to consumer affairs' website, SIRI has an average user satisfaction score of 1/5 based on almost 2000 reviews

http://www.consumeraffairs.com/home_electronics/sirius.html

 

Similar scores on Yelp, based on only 67 votes though

http://www.yelp.com/biz/sirius-xm-radio-washington-2

 

Any thoughts on why that is? Do you think  it matters at all for SIRI? Time warner is probably one of the most hated companies ever and they've done pretty well.

 

I think Sirius is pretty aggressive if you try to discontinue the service. Might not be a big deal for the company.

 

(We got Sirius in wife's car that we bought used. We activated for trial free period. There were some funkiness with activation, but it worked. We did not transfer to paid service. They badgered us with junk mail a bit and then gave up.)

[frommi]

Slacker radio in my Tesla is pretty reliable over 3G.  No commercials and it's pretty good.  I didn't even bother getting Sirius for it.

 

But not a lot of cars have 3/4G yet.  I changed by mind and agree with some of the posters here that SIRI can produce a lot of growing cash flows for a long time.  There are definitely some headwinds but Liberty has correctly pointed out all the things that should have killed Sirius radio before. 

 

Personally I'd like to see a larger discount on LMCA before buying.

 

Do you live in a bigger city and drive only there or is the US fully covered with 3G/4G already?

[Liberty]

SIRI's customers skew older and more rural. People who love the ease of paying less than 50 cents a day to have the ability to just push a button on their dash and have hundreds of channels of ad-free content of all kinds. As Maffei said, it's a "lean back" type of product rather than lean forward (so as simple as possible, as few choices to make as possible, everything in one bundle).

 

Is it the best content? Is it the best technology? Maybe not. That doesn't mean it can't be a very profitable product that attracts tens of millions of people. The main competitor is terrestrial radio still, because that's even easier and free.

 

Auto OEMs are getting a cut of these revenues, so they have a big incentive to keep it in their cars. Who else in the audio content business is even making enough money to share with autos?

 

CarPlay and Android Auto (or whatever it's called now) will make it easier to listen to other things, but they'll also be a really nice interface for SIRI. Lots of cars already have bluetooth and so you don't even have to connect your phone to listen to things, yet that doesn't seem to be slowing down SIRI subs too much (and they're barely starting to tap the used car market)...

 

Young urban engineers or whatever might never subscribe to SIRI, but I'm not sure if they would even without Carplay or whatever.

[jay21]

Even if SIRI stops working as a radio station you will have 100m cars with a lost cost satellite connection that might be able to be monetized in a different way.

[Picasso]

 

Do you live in a bigger city and drive only there or is the US fully covered with 3G/4G already?

 

 

I've driven from San Diego up to San Francisco and I've maybe had a few times where it cuts out for five minutes.  Not sure who Tesla uses but it's very reliable.

[giofranchi]

Liberty Media: Get $3 Billion Or More For Free

 

http://seekingalpha.com/article/3371365-liberty-media-get-3-billion-or-more-for-free?app=1&auth_param=7i5hb:1aridj0:482f62648e24817b140c25d82818db44&uprof=25

 

 

Gio

[giofranchi]

It is an obsolete technology though, and there is not nearly the optionality you get with a cable network with satellite radio.

 

That’s exactly what I thought… But recently I have changed my mind.

1) imo technology doesn’t matter all that much at this point: even if a new technology were to start replacing SIRI right now, it would take some years for old cars to be retired and for new cars to hit the road. First bet: Malone will enjoy lots of fcf from SIRI for the next 5 years.

2) The optionality lies in whatever the use for all that fcf Malone might find. Second bet: Malone is going to invest SIRI’s fcf intelligently.

If bet n.1 and bet n.2 come true, this investment will turn out to be a winner. I attach a high probability of success to both bets.

 

Cheers,

 

Gio

 

[tombgrt]

It's not just technology, it's mainly content. This isn't simply radio (almost) without ads.

 

Does anyone know of a strongly growing business with old technology that was generally known to be doomed soon and subsequently did go down the gutter? Strongly growing and being destined to fail soon seem contradictory to me. Correct me if I'm wrong.

 

Good to see how SIRI stock stays low. The remaining shareholders are probably mainly indexers. No use in buying SIRI directly for others and buying LMCA is viewed as equally unattractive because SOTP doesn't seem that great. In an investing world where looking beyond the next two quarters is uncommon, I guess it's hard to see how much Liberty is profiting from this odd dynamic over the longer term. That's how I read it at least...

[tombgrt]

Case in point, great tweets by jay21:

 

 

 

No need to make investments overly complex.

[giofranchi]

Liberty Media Corporation Reports Second Quarter 2015 Financial Results

 

http://ir.libertymedia.com/releasedetail.cfm?ReleaseID=925877

 

From May 1, 2015 through July 31, 2015, repurchased 2.5 million LMCA shares at an average price per share of $38.55 and a total cost of $97 million as well as 2.9 million LMCK shares at an average price per share of $38.03 and a total cost of $111 million.

 

Gio

[folivera13]

Does anyone remember Liberty Media's purchase cost for the Braves?

[merkhet]

http://www.denverpost.com/business/ci_5214612

[folivera13]

Thanks!!

[Guest Schwab711]

It's not just technology, it's mainly content. This isn't simply radio (almost) without ads.

 

Does anyone know of a strongly growing business with old technology that was generally known to be doomed soon and subsequently did go down the gutter? Strongly growing and being destined to fail soon seem contradictory to me. Correct me if I'm wrong.

 

Good to see how SIRI stock stays low. The remaining shareholders are probably mainly indexers. No use in buying SIRI directly for others and buying LMCA is viewed as equally unattractive because SOTP doesn't seem that great. In an investing world where looking beyond the next two quarters is uncommon, I guess it's hard to see how much Liberty is profiting from this odd dynamic over the longer term. That's how I read it at least...

 

I think Scantron (Hallwood Group) might make a good example. Up until 2007/08 it was steadily growing and then it dropped like a rock in water. I'm not sure what schools use now, but they never recovered.

[thefatbaboon]

Broadband has been getting a lot of love and attention recently....but I think Media is looking great.  It is an example of a stock that hasn't moved over the last year while the intrinsic value has steadily marched upwards.  The transparent mechanics of what is going on at Sirius/Media makes this stock, to me at least, appear like a fairly certain 50% return over two years, and possibly significantly higher.

 

There are some decent sell side SOTP, and a couple on SA, so i won't bother here.  But I will lay out the following:

 

Assume equity value of Sirius does not increase.  FCF and incremental debt to reach target leverage used by Sirius to repurchase own shares over the next 2 years will raise Media's ownership from 60% to 80%.  If one assumes Sirius is NOT worth more in 2017, i.e. Sirius equity worth $20bn like today, 80% of $20bn is $16bn.  Assume also that Media's other stakes, LYV, cash net of debt, discounted estimate of Vivendi suit etc remains at total of $3.5bn (where it is today). Thats total of $19.5bn in 2 years from $12.5bn today (current market value of Media).  i.e. a 56% two year return where one assumes that the underlying value of media's properties don't increase at all. 

 

There are some additional, and far from unlikely eventualities that improve this:  Sirius grows, Live grows, and Media repurchases its own shares (3% of float YTD).  Without any outlandish assumptions I can see Media's per share value being 100% higher in two years.