Chit Chat Stocks - Sirius XM (SIRI) | Not So Deep Dive

Episode Date: August 23, 2022

Sirius XM provides satellite radio across the United States. The company operates on a subscription model. Sirius XM was founded on July 29, 2008, in Washington DC. Listen closely as Brett and Ryan go through the history, financials, and future prospects of Sirius XM. Enjoy the show! Access our “Not So Deep Dive” episodes by signing up for CCM+. Sign-up directly through Spotify or Apple Podcasts. If you listen on another podcast player, use this link and create a private RSS feed: https://anchor.fm/chitchatmoney/subscribe Need more information? Check-out our launch newsletter: https://chitchatmoney.substack.com/p/welcome-to-chit-chat-money-plus  Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Timestamps Company Background | (2:02) Industry | (11:47) Management & Ownership | (16:11) Earnings | (20:10) Balance Sheet | (24:09) Valuation | (25:47) Our Analysis | (27:51) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not-So-Deep-Dive episode on Chitchat Money. This is the weekly episode only for CCM Plus subscribers. So if you are listening to this, thank you for signing up.

I know we're still early days with the subscription. One note that we'll be sending on every show um at least for the foreseeable future if you are not getting your email uh of what we call the show notes the research the charts the link to the google drive all that good stuff if that's not showing up in your inbox the day the show releases so tuesday morning email us at chitchat money podcast at gmail.com the spelling is in the show notes we'll get you signed up on that if you're an apple podcast it's harder for us to get your email so if you want all that research to go along with the ccm plus subscription which is a nice addition to um the audio version which we're listening you know what you're listening to now it has all the charts

and maybe some more of the numbers easy more easily digestible that's how we're trying to do it email us but without further ado i'm talking at serious xm today and i'll just mention this first if if you've listened to a lot of these now you're going to hear that every episode so feel free i mean it's we need it for new subscribers and i'm sure most of our listeners understand that so feel free to skip the first 30 seconds 45 seconds exactly skip 30 seconds in right when we introduce the company and it is serious xm a company i think a lot of people are aware of but is a bit of a mystery it's had its ups and downs ryan's going to go through the history but Ryan, what is SiriusXM? What do they own and how does that business work?

They are a leading audio entertainment company in North America. And so they actually kind of have the two, I think it used to be referred to, the newspaper business used to refer to them as the, I think it was the two golden rivers of you could run a subscription business, but also sell ads. And so SiriusXM is able to generate revenue through both subscriptions and ads. And so, So they have their core satellite radio business, which I'll talk about here in a second. But they've also added other audio offerings in recent years, including Pandora and Stitcher. And then there's some other ones that I'll touch on in a sec as well. But Sirius breaks its business into two parts.

So Sirius XM, the core business, is the only remaining satellite radio provider in the United States. Once you're subscribed to SiriusXM, you get a collection of channels covering music, sports, entertainment, comedy, news, traffic, weather, a bunch of different stuff. And there are exclusive personalities that are, as I mentioned, exclusive to SiriusXM channels and subscribers. And the music, I guess this is one of the benefits over terrestrial radio, is that the music is ad-free. The music ad channels or the music channels. and it's available anywhere you know how the the broadcast radio just has terrible reception all the time at least well maybe it's worse in the pacific northwest but it's really awful a lot of spots and sirius xm is lights out better right and they since they don't really have to bog the

platform down with a bunch of ads because they are a subscription business largely and you have to subscribe to get the channels so that kind of enhances the value compared to a traditional radio along with better coverage, as Brett mentioned. And then although subscribers can access now, they can pretty much see SiriusXM wherever now on most internet connected devices. They still, the company still relies heavily on automotive partnerships to drive new customer growth.

And so today SiriusXM is enabled in approximately 145 million cars that are on the road and 84% of all new cars produced. So all the big automakers have existing relationships with SiriusXM where they include the infotainment system and they're SiriusXM enabled so that when you sign up or when you buy a new car, they'll probably ask, do you want SiriusXM included? You sign up, you get the subscription, and then you get all those channels unlocked. And so the average price for subscriptions is just under $16 a month. And then Sirius currently touts about 34 million total subscribers. That has gone up over the last decade.

The second part of their business, they call Pandora an off-platform. So on the Pandora side of things, people are probably familiar with the Pandora platform. Pandora is a freemium audio streaming platform that allows listeners to create personalized stations and playlists. It's honestly fairly similar to Spotify, just worse, I would say. And I think that's reflected in the subscriber numbers. Don't let your bias come into it. but yes, probably given that less people use it and their subscribers are going down, but yeah.

Right, and the navigation on the mobile app isn't great compared to Spotify. And it's more, I guess, desktop oriented. And most of its revenue compared to SiriusXM is driven by ads, which is like the inverse for Spotify. So Pandora really, even though they have a Pandora Plus and I think a few different tiers where you can get it ad-free,

It's still primarily an ad-driven business. And then the other part, I guess, that's important is they have an exclusive deal with SoundCloud, Pandora does, where they are the exclusive ad sales representative for SoundCloud. So basically, they connect advertisers with any ad inventory that's on SoundCloud. um for anyone that doesn't know what soundcloud is another music listening platform where it's a lot of upload your own right yeah it's a lot of artists that it's a strange or smaller yeah it's it's uh there are some songs on there that you probably don't hear elsewhere that's fair that's good yes it's a i don't know i feel like they we don't want to talk about them forever but They've had trouble finding their target audience outside of the music diehards, if you know what I mean.

Yeah, a lot of remixes on there and stuff like that. And Pandora also owns a stake in SoundCloud as well, alongside being the exclusive ad sales representative. But then there's three other products I think are worth noting on the off-platform part. So there's AdsWiz, which is a programmatic audio advertising platform. this is exactly what it sounds like it helps advertisers connect with ad inventory and the ad inventory is basically collected through either Sirius XM's own content podcast stuff like that or there's some third parties that sign up as well so other other podcasts and then the second one is Simplecast this is a podcast management and analytics platform basically we let's say

we were to use it we would sign up pay whatever the monthly subscription is and they'd probably give us better analytics on who our listeners are how long they listen for all that good stuff and then the third one is stitcher you might be listening to this on stitcher right now i think a very few two percent or three percent of our audience i have no idea if any not so deep dive ccm plus listeners are on this but yeah like a single digit percentage yeah stitcher on a good that stitcher is it's it's actually more of a holistic podcast business so they they actually have their own production studios as well as the app where people can listen and then they have a mid-roll advertising network trying to become sort of like uh the spotify audience network

except it lacks i guess i i keep referencing it to spotify it doesn't have some of the benefits of spotify but it's basically just a typical ad network that's focused on podcasts yeah and I don't even know how to think of Stitcher because they used to be more popular on the listener side, but now it seems like they're focusing more on producing shows. And that's their bread and butter, but it's tough. All right. What's the history of the business? Because this is a tough one. Dotcom Bubble, although I don't think you went that far back, but it was a dotcom bubble company.

Yeah. The internet shut out Silicon Valley show. It was actually started. So XM and Sirius were two separate companies. Sirius was started in 1992, I believe, and they were basically effectively created the industry. They were the ones that got the regulatory approval to launch the satellites and distribute radio that way. XM basically tailed off that and built a satellite radio business. And then the two of them were the only two surviving in the industry or in the United States, the only two

satellite radio stations or satellite radio businesses that existed. And so they merged because neither one of them are profitable. And basically, they thought, if we can merge, we're going to be able to cut out some of the costs associated with duplicate stations, marketing costs, competing for the same customers. They were able to cut that out. And that was in 2007. They got regulatory approval in 2008. And then once the agreement finally passed, they were still basically on the brink of bankruptcy. And at that time, Liberty Media stepped in and gave them basically a $530 million. They said $530 million loan, but they acquired a 40% equity stake in the company with that $530 million purchase.

I think it was some complicated thing where they had converted into equity and they did over time. So essentially they got the equity stake and that's what they have today. That's probably what investors need to know. Yeah. With that cash infusion, they were able to make it out of that period. They started to turn a profit. And I think around 2012, they were at roughly 20 million subscribers. And a lot of the growth came from those automaker partnerships. And then in 2012, Liberty Media gained a 49.5% stake in the company. They replaced the CEO and effectively took over uh the business today i think it's at 81 equity stake you're going to touch on that so it's increasing ever higher uh because of ibex we'll get to that later uh and then since then

the company has also added the several businesses that i mentioned um so they added stitcher for 325 million in 2020 pandora was a 2018 acquisition for three and a half billion fair to say that was a that was a poor choice yeah well you'll see and this is why you know we want you to look at the sub stack and look at the Google Drive as well if you look at the charts

any of the Pandora stuff not looking too hot yeah and then they've also added as as with many John Malone companies they've added a lot of debt to the balance sheet over the years and they have actually in total mostly all on the SiriusXM side

grown subscribers um they're at about 34 million total subs now as i said i think in 2012 they're around 20 million so they have uh they have grown that business despite the shift towards streaming yep and yeah like we said yeah sirius xm look at the charts steady growth over the last five years let's take a look at the industry and the competition um the audio average industry in north america which is where sirius xm is mainly competing is it's tough to find a number on i don't think anyone's doing from what i could find numbers on the total audio industry in the united states however they do all the different niches so just for reference the recorded music industry is estimated to be around 9.8 billion dollars in north america in 2021 and growing quite quickly

a lot of that growth is streaming so maybe that's not benefiting sirius xm but if we want to look at podcasts, something that they're going to invest in heavily, that industry is expected to hit about $4 billion by 2024 and is closer to a billion to 2 billion right now. So a lot of growth there, a lot of potential dollars to go after. And then if we look at the radio broadcasting industry, it is estimated to still be $22.9 billion in 2022. So it's- Is that in advertising dollars? Yeah, I think it's got to be advertising dollars because radio is free. And- I guess that's still a market opportunity for SiriusXM to go after, although the industry is quite mature.

So there's a lot of there's a lot of different variables. You know, could they still take share from traditional broadcasting radio? Are they going to go, you know, be these competitors from streaming? Is there going to be other someone like iHeartRadio coming in? That's kind of a unique asset. But from a SiriusXM perspective, if we're looking at, say, the industry and the total market opportunity for audio in the United States, you don't you think maybe a 30 to 40 billion dollar range is is good that's kind of a good estimate for the total market opportunity although that would include radio podcasting and then

their streaming audio ambitions which we'll talk about later how they're trying to move out from beyond the car it really depends how i think podcasting develops because they are investing heavily towards that i think that's one of the larger that's one of the market opportunities i think it's probably the only market opportunity that's actually growing yeah i think another big question is is traditional radio ever gonna die because that's a lot of ad dollars there as well and just money spent in general for and the thing is they aren't necessarily maybe on the pandora side but they aren't competing for ad dollars they're trying to get people away essentially from advertisements in general but it's a mix it's

It's a very small percentage of their revenue on SiriusXM comes from ads. Right, right. Exactly. All right. If we look at competitors, one, I think the biggest competitor would, well, maybe it's a little different now, but a big competitor is traditional broadcast radio, all the different stations that people might tune into. There is iHeartRadio, and then there's a popular app now called TuneIn, which allows people to stream traditional radio stations. That's some competition maybe people for Sirius should take seriously. Then there's also Spotify, Apple Music, and the other streamers. And then I also take a look at Apple Podcasts, Spotify, and the other podcast platforms. They compete with Stitcher and really time spent. So essentially, the way I look at it is any service that is competing for audio listening time in the United States, which is where SiriusXM is competing, especially in the car, is going to be a competitor to SiriusXM. I don't like to make it more complicated than that.

They're competing for time spent, and that's how they'll drive either subscriber and ARPU growth, average revenue per user growth, or advertising growth on the Pandora and off-platform stuff. Yeah, I didn't find a number, but I'm going to go out on a limb here and say that more than 90% of the time spent on SiriusXM is spent in the car. So that's really, and that's kind of, they've kind of carved out that niche where it's a little more difficult to disrupt, potentially. And that's kind of foreshadowing. That's one of my highlights. But yeah, they're really competing for time spent in the car from listeners. I'll give a note there. If anyone, I think maybe younger user or younger listeners, which I know we skew towards,

might not think SiriusXM is popular because a lot of younger users, which we'll discuss as maybe a low light later, don't have the popularity of SiriusXM. But according to their proxy statement this year, they maintained a 20% share of in-car listening, which is still double that of streaming audio services. So they have had a strong, good stranglehold on in-car listening. All right. Management and ownership. Interesting one, because this is a Liberty Media controlled entity.

So the CEO is Jennifer Witz, W-I-T-Z. She became the CEO in January 2021 and has been a lifer at the company. He's been there for 18 years. And the other important person I think to note is Scott Greenstein. He is the chief content officer. According to the executive bio, it wasn't written that well, but it looks like he's been in a similar role since about 2004 he's had a very long tenure at SiriusXM through all the different ups and downs and I think spearheaded that content strategy you

know getting Howard Stern getting all that good stuff um that's made SiriusXM or attracted subscribers to SiriusXM and lowered that churn now one note I'd make here that we usually don't talk about is the board of directors has 15 members which I think is a lot especially for company of this size for example um i found the warder discovery ceo david zaslav is on the board um i wonder how much time he has to give any insights into serious xm strategy seems like he has a lot on his plate to deal with besides that i'm more of a small board guy maybe you know five to seven is kind of a good target there but and people people who have the time to care Exactly. Ex-CEOs, ex-whatever. Now, you might be concerned about board compensation. However,

actually, it wasn't that bad. About $6.8 million in total board compensation in 2021 were only about 0.15% of trailing gross profits, so not a huge concern about the board of directors stealing all the profits available for shareholders. Total executive compensation was about $53.5 million in 2021 are about approximately 1.2% of trailing gross profit. That one was fine. Not a huge concern, but they do pay people well. Total compensation has fluctuated when different executives get large bonuses. So it was a little higher this year because Wits, the new CEO, got a bonus because she just started out. But generally though, pay is strong. It's high. You might look at it on an absolute basis and say, wow, these people are paid well. But first

the size of their gross profit generation, and generally free cash flow as well, it's not too bad. Now, lastly, on executive compensation, they have a typical three-tier structure of salary, annual bonus, and long-term equity awards. Annual bonuses have no formulaic approach, so it's kind of up to, well, really, it's up to Liberty Media because they're a controlling state, but it's up to the board of directors and the CEO to determine the executive awards. But if we look at the long-term equity awards, which are just the RSUs or the options they're going to get. These are both based on free cash flow targets and total shareholder return. I like that. That's pretty good. You know, no, no big concerns there. However,

there are a ton of, there was a few paragraphs outlining all this stuff. So going into the nitty gritty of like, okay, what is the free cash flow target got to be over this multi-year period? Is it actually good? Like that, you know, is it just the same as it was? Are they incentivized based on total shareholder return that's not really that good of a hurdle rate it's hard uh it's a little beyond the scope of this basic show then the last thing i would note is they own 70 of serious xm canada which has approximately 2.6 million total subscribers that have been fairly stable the last few years so hasn't grown like the north america or excuse me the united states version but that's still a decent chunk of maybe um shareholder value there probably not

too high, but not low enough to be discluded. And then if we look at the ownership table, again, don't need to read all these off here because it'll be in the sub stack, but Liberty Media owns, as the proxy statement, 81.37% of the stock. Total executives, officers, and directors own 0.63%. So really think of this as a controlled company, as a subsidiary of Liberty Media. All right, Ryan, do you want to hit the rates? yeah over the last 12 months they've done about nine billion dollars in revenue just a little bit below that and that's up six percent roughly from the 12 months prior they have 50.5 percent gross margins the bulk of their costs come from royalty payouts similar if you've ever looked at

spotify very similar they have um a lot of artists that you know they're streaming music or maybe not streaming they're playing music yeah it goes to the labels and stuff like that yeah no you know positive or serious is uh the percentage payouts are a lot lower than the stream yeah definitely you can see that purely in the gross margin number versus uh spotify and then they have about a billion and a half in free cash flow over the last 12 months they're guiding for 1.55 billion this year. So that's going to be basically flat. And part of that, they're going through a bit of a tough period in terms of new customers because auto production has been down. And so they've got all these relationships, but with the chip shortages, automakers aren't able to build

as many cars. They're not getting their product in front of a bunch of new customers. So it's kind of hurting growth. As for the most recent quarter, 2.25 billion in total revenue, that's up 4% year-over-year. Most of that is coming from price increases at SiriusXM. So in terms of the revenue breakdown, 1.7 billion is SiriusXM, 403 million is Pandora and off-platform. So still the bulk coming from that core satellite radio business. And then SiriusXM total subscribers declined 1.3% while ARPU or the average revenue per user increased 7%. So they have increased over time so i don't know if this was the peak i will if we look at uh yeah we'll have some good charts for everyone that they're promotional subs because of i think it's because of the

automotive dynamics right now are down and sound which is kind of their funnel but their self-paced subs have steadily grown um if i have a chart basically from 2017 to 2022 it grew every year from that until now so i don't know if this is a huge concern but still something to track And then Pandora total subscribers decreased 4% as well as the engagement, essentially. So ad-supported listening hours were down, and then revenue per ad-supported listening hour were also down. All negatives. All pretty bad at Pandora. I have to imagine or hope they are just juicing that for whatever cash it's going to spit off between now and Judgment Day.

I don't know if Judgment Day will ever actually exist, but I hope they're not plowing resources back into that business. Yeah, if we look at Q1 2019, Pandora and other, which is basically Pandora, had 66 million monthly active users. And if we look at Q2 2022, it only had 50.5 million monthly active users, and that has steadily declined. So clearly they're seeing a decrease in usage, which is going to either Spotify, Apple, YouTube, wherever. Yeah. Free cashflow for the quarter was 435 million. It's about 19% free cashflow margins. They've generally had around 20%, a little under. So not too bad there. And then as I mentioned, just that over the short term, they seem to be pretty impacted by the automotive slowdown. So kind of it could be lumpy until the chip shortage gets figured out or now they're somewhat tied, at least on the promoted subs. They're kind of tied to the automotive cycle. So you can get some indicators by looking at car production generally as to what the quarter is probably going to look like for Sirius XM.

Yeah, for sure. All right. You want to hit balance sheet? Yeah, not. Well, I shouldn't say not a whole lot. they run the balance sheet quite lean. So they have $120 million in pure cash and equivalents and $10 billion in total debt. So lots of debt. Most of that is, it's almost entirely comprised of senior notes. There's some convertible debt that they ended up acquiring when they picked

up Pandora, but it's really a negligible amount. And then they have a credit facility that's open as well. But small, I think it's 500 million compared to their $10 billion outstanding. And then 90% of the debt is due after 2025. The average interest rate on that is 4.3%. Not bad. In terms of cashflow, they generate or they expect to generate 1.55 billion in free cashflow, and they generate just under $2 billion in operating cashflow. And there's a covenant in their credit facility agreement that they have to stay below a operating cash flow or a total debt to operating cash flow ratio of five times.

And based on their trailing numbers, they're at like 4.95 times. So they're running it quite close. I think they could probably live without their credit facility, but I imagine they try to stay around that target to kind of just keep their creditors happy. And the debt, or sorry, the cash on the balance sheet

It's not a big deal either because Liberty Media, if need be, controls this company so they can give them cash, scoot stuff around from other places. Yeah. And I mean, the cash flow is, I would say, fairly predictable in this business. Yeah. Yeah. All right. I'll hit valuation.

This is based on a stock price of $6.41 and we'll have the dynamic valuation listed that you can go and check just because stuff can change, especially right now. We're in a bit of volatility again, at least today. Market cap is actually pretty high. At least I was surprised at how high large this business was. Market cap is $24.9 billion, but enterprise value because of that debt load is closer to $35 billion. So it's about $34.7 billion.

The two numbers I'm looking at, the two metrics here are enterprise value to operating income and enterprise value to free cash flow, which is just taking enterprise value, dividing by both of those. on a trailing basis, our EV to operating income is 17.1 and EV to free cash flow is 22.5. No big surprises there, fairly standard, but I do like to check out both to see how much they're converting in their income to free cash flow. Last note, they have employed a huge buyback strategy that I think we mentioned. And stock options and RSUs as percentage of shares outstanding, they've hovered around six to 7% the last five years. And what this means is that there's

going to be dilution coming in down the line that is going to offset this heavy buyback strategy. So this is why share count has only gone down by 3.3% a year. Let me get that number correct here from our notes. Yeah, 3.3% a year since Q2 2017, even though they've spent over $15 billion buying back stock. So while share count has gone down and while they're going to employ the strategy, the absolute dollars there's just a lot of offsets because of their heavy RSUs compared to how many shares of Stanix they have

and they also have if I read it right they have an open repurchase program for up to $18 billion which is almost their entire market cap it's indefinite though so they can buy back as much as they want

or as much as they feel compelled to liberty owns everything here I guess but we'll talk about maybe that strange dynamic later all right anecdotal evidence yeah what do you got for me um all right two things i looked up serious xm reviews on youtube just to see what people thought and everyone called it a scam and that's weird well not a scam they said it was kind of like um kind of like the wall street journal how it's like really difficult to cancel you have a call and they'll put you on hold and then they'll say well you know we'll give you a reduced price and then they're like no we really want to cancel and then the phone will randomly disconnect

and so it's just like they make it a total pain um so people were upset about that but tie into the car too right so something might get sold additionally as like you buy the car at the lot and then you have to cancel later when you don't actually want it right and then um more positive anecdotal evidence i still think this is one of the best options for audio in the car most people i imagine prefer serious over terrestrial radio just thanks to the coverage and then the ad-free music channels but also there's content you can't get on streaming platforms it sounds like tune in might be interesting but like well tune in is just broadcast so as the if i wasn't clear about tune in tune in so that you still don't get the

exclusives okay i mean there's i think they have exclusive sports rights on on certain games so if you're whatever a fan of a certain sporting event that is exclusive on sirius or you're huge fan of howard stern um there's there's content you can't get anywhere else and then they also have been buying some other content um or production studios that i think are interesting and belong to them although they're starting to move off platform i'm kind of getting into my future growth opportunity so i'll leave it at that but i do think it's a valuable service that sits in a kind of unique spot yeah and you have you used it i've never used it so i don't really have any true anecdotal evidence but yeah i used it i had like friends parents that used it

as uh when i was a kid but they uh they're a lot of people have both streaming like a streaming subscription service and then serious so it's not like these people are just choosing to not have streaming services it's usually both yeah and then the downside of that is that might limit your addressable market to wealthy people only in the united states however you know there's a lot of wealthy people in the united states all right i mean my anecdotal evidence i mean the exclusive content strategy seems to have worked pretty darn well even though it's expensive to retain howard stern and all that good stuff um and kind of this 30 to 60 year old cohort in the united states consistently subscribes it may be 30 to 60 year old cohort that has large disposable

income um this with the nice thing about sirius xm is it doesn't seem like too expensive of an add-on when buying a new car especially again like i said before if you're on the wealthier side however anecdotally i worry about usage among people under 30 it is pretty non-existent um without any data i'm going to trust my gut on this one it's non-existent yeah i think it's fair to say that the trend despite growth of the last decade the trend is against anything radio related the growth is pretty meager too if we look at 2017 they had self-pay subs of 26.7 million and now they have 32 million so you know it's growth but yeah pretty small i mean the trend is shifting away yeah there's a headwind i should say there is definitely a headwind um i think the

headwind is people discovering auxiliary cords but no that's just a joke uh they explicitly call this out on the proxy statement though, right in the front. So they're focused on this and they know it's a risk. All right. Future growth opportunity, Brian, what do you got for us? Yeah, I'm going to go with acquiring production teams. I think as I mentioned at this point, the tide's pretty much against them on their core offering. And by acquiring content, you get the most flexibility as a business. So they just acquired Conan's podcast studio, uh conan o'brien's which is team coco for 150 million i think those are the right kind of moves because i think they have megan kelly as well which is like the political yeah they

yeah cool for that but economics because bringing on this was a part of stitcher it's pretty obviously big too and so though those are no matter where the how the landscape changes having the content allows them to adapt so if there's this big push away from satellite radio but you have the content and it works well on streaming also like people probably listen

to Megyn Kelly on Spotify as well as on probably not as much as on satellite radio but it gives them flexibility whereas kind of hitching your wagon solely to satellite radio seems like a big risk and that's obviously why they're making

they're pouring money into stuff like this It seems like a bit of a hedge. However, I do worry about it. Maybe we'll talk about this highlights and lowlights. The unit economics, as someone who doesn't own the consumer side of streaming very well, it's just tougher. With two poor, I'd say, sub-scale assets in Pandora and Stitcher. Yeah, yeah. And Pandora's kind of run off at this point. yeah it's just not it's just not working whatever they're doing it's not working all right i'll hit mine and this might seem strange but it's it's trying to succeed by getting the service available everywhere because the the advent of the streaming services which again spotify apple music youtube music amazon music all those uh even pandora i guess which are they on the the benefit of that is streaming everywhere streaming from any internet connected device and sirius xm

they're gonna need to make their service available outside of the car which they discussed and invested in um because you know the benefit again like the streaming service is you can go in the car but you can also go anywhere and as long as um not as long as as the internet what am i trying to say like the 5g coverage or however i'm saying this poorly but as that gets better and better that moat of the you know satellite radio of being in the car super strong connection kind of goes away now they've talked about this it seems like they're working well they're getting better growth across usage of um outside of the car streaming on the phone streaming on a connected tv you know watching howard stern on your connected tv app it's the ubiquity strategy

Yeah, exactly. But looking at their subscriber count, they're clearly still losing to Spotify, Apple, Google, and YouTube. Yeah. So while they can say they're making progress, I get concerned about their positioning here. Do you need to spend, if you had to pick between using your current money that you're reinvesting back into the business, would you choose to build out a mobile app and try to compete with Spotify or would you rather just- They have a mobile app. Oh, you mean directly compete, not like- Yeah, I mean, like, if you're trying to be everywhere and you're trying to, basically, that's probably all going into R&D. Would you rather spend all of that trying to compete essentially with, I think, companies that are probably better than you at that?

I mean, that's a bit of butter. And the difference of being not a satellite radio service, but a streaming service. Yeah. Or would you rather buy content and just ultimately probably live on the other platforms? I think they're going to be forced for that second one. But maybe we'll discuss that later as well. Because I don't... I don't think they can win that streaming fight.

Exactly. The streaming fight would be very hard from a user acquisition perspective. And that just puts them in between a rock and a hard place. And we're saying this while SiriusXM subscribers are going up. So it's not like this has materialized. But it's something just... And I read a good short report. actually well not a good short report in hindsight because the stock is up and they were kind of

wrong but an interesting short report in 2017 which basically outlined the same thing that streaming is going to disrupt this and basically it was 4g at the time but think of the same thing internet connectivity everywhere is going to disrupt sirius xm's moat and it hasn't materialized yet so maybe it doesn't but it's i don't know i mean eventually you're eventually i think Eventually, if no one under 30 right now is getting a Sirius XM, then in 20 years, their core audience will be in senior homes. Highlights and lowlights, what do you have? Yeah, I mean, I think the first one for me is the Moat and Monopoly for satellite radio.

It's pretty impenetrable. No one's really willing or even thinking of competing or disrupting their exact business model. Although, like we discussed, there's tons of people competing with other types of services. Also, I really like the royalty payments. As a percentage of revenue, it's a lot more favorable than the streaming services, which is just great. Now, will that change? Maybe.

It's always a risk with this type of industry. Second one on the highlight front is low churn. It's gone down. It's at about 1.5% right now on a monthly basis with rising average revenue per user. I think that's a great combination. I was pretty pleasantly surprised to see that when you have lowering churn and growing ARPU. I mean, I don't think you need to see much else.

People are loving the service and the core audience is sticking around. Now, the big question here is if streaming hasn't killed their core audience, not literally killed them, but, you know, killed their user base. Stolen the market. Yeah.

What, you know... Age. Age? Is it just going to be slow? I mean... okay this is kind of my highlight they aren't being so focused in the car is actually sort of hard makes it tougher for them to be disrupted but or else i think they'd be more like pandora how they're just getting destroyed by the other streaming platforms

but it still feels like well it's just a worse customer value proposition outside of the uvic outside of the exclusive content and being able to be available everywhere it feels like the connected tv universe where traditional cable is going to slowly lose and you're not going to see that in the numbers until you know but eventually you will and that's what happened with video video yeah there's actually a lot of parallels between those two but at the same time i would have said that five years ago yeah well here's the thing look at spotify apple and uh i guess some of the other players don't routinely release their numbers look at their subscriber counts and look at serious xms clearly the incremental users are going to the streaming

services yeah um and then last one here i think this kind of gonna be a highlight and a low like the growth of the podcast and advertising business it has been from a position of weakness but has been quite impressive because you know the huge players spotify and apple really have the bulk of user base and it's just a disadvantage there but you know series xm through their off-platform stitcher whatever strategy is really executed well now i i love to see what the kind of margins they're either coming out there um but yeah it was great to see i mean compared to say we're talking about execution wise from your competitive positioning i'd maybe argue that they've executed better than spotify now spotify might win because they have all the users in the long run but

it's been quite impressive now low lights i have four uh we already talked about being in the weaker position so i don't think we need to add that or talk about that again second one i do not like liberty media's debt strategy i know some people like it some people don't i don't like it and then using their stock kind of as a toy for buybacks is just a negative for me if i'm thinking of investing in serious xm stock um the debt load is steadily growing while free cash flow is not grown very much and the debt ratios are not like hugely concerning churn remains low but it just adds risk to me and there's like you're adding on all this debt to juice buybacks ever so slightly i think it makes it more fragile of a company if things kind of go south subscribers go down this

can get ugly fast um second low light or third low light is pandora and other pretty clearly in a bad spot we already talked about pandora so don't need to go any more details there but obviously a negative and then here's the low light on the advertising side i don't really know how to square the circle with um you know you have pandora losing customers so they don't they're losing their user side of things from listening to audio streaming yeah and it's hard to see where the end game is for the podcast content strategy because if all the listeners are on spotify and apple and then youtube maybe you could add them in it seems like they're going to be a tough series xm is going to be a tough spot even if they've had this early success and

they have the cash to acquire some of these top studios slash shows because you know maybe like 10 years ago you could have had a lot of success buying up some strong youtube channels but in the long run where's all the value going to accrue most likely to youtube i think it just makes it way more difficult for SiriusXM to succeed. Yeah. What do you think about this as a low light? And I could be wrong, but whenever I read through any Liberty Media owned company,

it always feels like John Malone makes out better than common stockholders. Or, well, yeah, because the reason they're buying back so much here, I could be reading this wrong, is that they want to get the, I was reading this in a value investor book write-up, So that's really where I caught it. It wasn't my own catch here, but they're buying back all the stock because they want to get themselves above the 80% threshold of ownership, which they did. And that makes all the gains on their investment that have been fantastic. I mean, when they bought shares at whatever, less than a dollar, huge gains. Now those gains will be tax-free for whatever reason. We don't need to go into the details why. but they're buying back stock not reducing share count by that much and adding this huge debt load which they don't really care about future gains for serious xm they're just trying to monetize

their serious xm investment tax free which is just different incentives um that you and i you might not be aligned with the incentives with uh if you're buying serious xm so i mean that's kind of what i guess i mean that was a better way of putting it but it kind of worries me that it feels like he always ends up maybe the common stockholders get short end of the stick. They don't get quite the benefits that John Malone

gets. Liberty Media. Yeah, it's not just him. It's the team. Alright. Lowlights. I guess I mentioned most of my highlights. I think the car is sort of a unique spot. I still think content's king. So even if the industry evolves away

from what would be the most favorable for them, they can survive if they have really good content here's a good question what's a bigger loss i think it's a pretty easy answer sirius xm loses howard stern or spotify loses joe rogan i don't know enough about howard stern to say they're both the same i guess i don't really know much about him either but i don't because he's exclusive on something they're both very highly controversial highly controversial figures they say a lot of uh crazy stuff yeah i think that's why people listen i think it's probably serious because just you've never the like they

haven't succeeded without him but spotify has without their exclusive strategy do you know what i mean yeah i mean they've been renewing that howard stern contract since that's been what since 2004 yeah a long time yeah so uh obviously he's pretty valuable to them um my only low light would be that the one the only one that you haven't mentioned um i guess you mentioned them all but there is sort of just this overall headwind and i think a big chunk of their cash flow over the next decade is going to go to debt holders so yeah or well they're going to refinance because that's really their strategy is to always have the liberty strategy but still i mean interest payments have got a they're low now but we'll see they're adding on more debt and

interest rates are rising the the interest expense interest expense is just going to rise and that could hurt free cash flow growth even if their top line is growing at single digits um that could really impact free cash flow all right last part bull case yeah what do you think you go right here all right here's my bull case over the next five years serious gets to around 40 million subscribers that's a three that's a three percent annual growth on the subs um so it i would say it's fairly aggressive but i think three percent for a bull case is potentially realistic i mean they've been able to go at about that rate haven't they let me let me calculate while you're talking about because i haven't yet the cagger on self-paced subs okay so 40 40 million

subscribers, $19 to $20 a month in average revenue per user. That's about a 4% to 5% CAGR or growth rate annually. That would be $9.6, a little under $10 billion in revenue for the core satellite radio business. Assuming cashflow margins can stay steady at about 20%, which I think is a realistic bet to make, especially if they grow. And they redeploy that cash into a mix of buybacks debt payments new audio content and they run pandora for cash basically they they don't try to reinvest back there i think there's a good chance you can get 10 returns but i don't see it going a whole lot higher yeah yeah unless they make a really good acquisition or something like that there have to be a trust in the capital allocation here

The thing is, they have been pretty methodical about their alternative audio investments, which I like. They haven't just been basically balls to the wall like Spotify has been, where they just throw cash at it. It's been a little steadier, a little more consistent. Yeah. All right. My bull case, yeah, I think with low churn and strong ARPU flowing through, which again is average revenue per user. Oh, actually, I should note, their self-pay subs have compounded at 3.7% from 2017 to 2022. too so not far off in the bold case there um although self-pay and total subs are a little different uh yeah i think you know if they continue with low churn and strong arpu you get single digit top line growth from serious xm then you add on the fast growing advertising

segment overall revenue could grow at 10 a year um with stable margins and still utilizing the buyback program although the liberty stick adds some complications because if they already own over 80 percent how much can we buy back without liberty having to sell some don't know if they're going to do that don't know if they're just going to take it in-house when they buy back everything um so we'll see all right let me let me paint this question 20 years from now does sirius xm still exist oh in its current form yeah sirius xm like the satellite radio people turn it on turn on the stations in their cars doubtful i think it's doubtful but 20 years is a long time yeah so

you would no one have even thought that the streaming would exist 15 years ago so we'll see but again i still think there's a lot of disruption risk here but either way if they can grow the top line at 10 they can probably grow free cash flow per share about 12 plus annually if you're at the current enterprise value to free cash flow this would likely equate to solid returns, and that current enterprise value of free cash flow is 22.5%. But let's move to Bearcase. Ryan, what do you think?

The shift to streaming slowly eats away at the SiriusXM subscriber base. Pandora continues hemorrhaging subs, and then the recent content investments just aren't enough to either replace the revenue from

a declining sub base, or they just don't find an ROI on those investments. and then on top of that you're pretty levered so um yeah momentum could really kind of go the opposite way here if streaming really did start to work against them but i feel like that would have happened already and so i don't know i the bear case could be quite bad but i have no idea what it feels more just like a matter of time like yeah i just don't see i don't know a single person below the age of 30 that has serious xm

no and maybe that's just our part of the country but i doubt it like no one you not no one like no eventually that's going to take effect we don't you know we're not recluses here no one is i asked my friends if they would ever subscribe to serious xm and they all said what's serious xm so exactly so that that's got i swear that's got to catch up to them but it hasn't yet so i don't really i honestly have no idea what their subscriber count is going to be uh but my case same thing streaming finally catches up um and pandora is a bad asset that basically goes to zero and i guess advertising never really it's not going to be big enough yeah their current equity or enterprise side all right more or less interesting i'm less uh i wouldn't i mean i'm not

like thrilled about the business overall but then on top of that i don't think it's a very compelling evaluation so it makes it pretty easy for me to say less interested yeah same boat i'm less interested just because i think there's key risks here that you'd rather be with at you know valuation agnostic and there's not that i don't think the valuation across you know the streaming competitors spotify is that different you'd rather be someone that's put up strong execution on user growth and subscriber growth yeah if we're trading like half the valuation i'd consider it yeah because of the churn because they are food growth you know you have that consistent core base but at an earnings ratio above 20 i mean i just don't get it um so yeah less interested

all right stop for next week teaser here we're going to be changing up the schedule a bit uh doing something more fun and more uh proactive with how we're going to do it so people that our listeners and potential subscribers and current subscribers understand what they're going to get, but we're going to continue with the audio theme until we do that new strategy or new format in September. And the format of the show will be the same. Just the format of the scheduling will be different,

but we're going to do it by themes. Yeah. We're going to do it by themes. Little teaser there, but the stock for next week is going to be a Warner music group. So we're going to have the other side of the industry, the company that the cartel, yeah,

the company that Sirius XM, spotify apple is all are all paying all right that's going to do it for this episode thank you all for listening remember we are not financial advisors and can we say on the show is not formal advice or recommendation we are general partners at arch capital and clients may hold securities discussed in this podcast thank you all for listening we'll see you next time