Wednesday, January 20, 2016

Conference Call & Earnings Notes: SiriusXM (SIRI) -- (2014 to Citi Conf. 01-06-2016)

15 conference calls & earnings call notes:

My notes on SiriusXM (SIRI):
·        Historically, SIRI built up subscribers through new car channel (~75% penetration, >40% conversion) at 15-17.5m SAAR in U.S.
·         SIRI just getting tapped into used car market (used car sales in US ~2.5x new car sales) (>30% conversion)
·         Used car segment is highly profitable; very little SAC as no install costs, revenue share
·         Used car prices increasing, representing >standard models (where SiriusXM is enabled)
·         Enabled vehicles for SiriusXM technology is ~79m (versus total ~245m total registered vehicles in U.S.), will increase by 11m + per year (new car SAAR + 75% penetration)
·         70% contribution margin on new subscriber revenue
·         Margin improvement inevitable (EBITDA at ~38%, should get to at least 40%+)
·         NOLs – no taxes through at least 2018 (per management estimates)
·         Capital light, even in satellite building stages ($1.5b for 5 satellites over 12 years)
·         Scale on programming costs (programming is down 1/3 over last 8-9 years, essentially flat since)
·         Huge opportunity for multiple subscriptions in households; ~80% of households have >1 car, yet only ~20% have more than one subscription to SiriusXM
·         SiriusXM partnering w/ non-traditional funnels to get access to non-subscribing/enabled vehicles (Jiffy Lube initiative, insurance company partnership, finance company partnership)
·         SiriusXM competitive advantage = content; less threat from Pandora, Spotify, Apple as they focus on music (commodity)
·         SXM17 project = will bring enhanced user experience to connected car (>90% cars will have built-in wireless modems by ~2020)
·         About 3.3x leveraged, target of 4.0x (capacity of about $1.2 billion) but won’t lever up anytime soon
·         Agero connected car “white label” with auto OEM, gives SIRI front row seat for auto technology development

Citi Conference
January 6, 2016
Speaker: David Frear

·         Posted high-single, low double digit revenue every year since 2009, mostly from subscriber growth
·         Tailwind = increasing penetration in new cars to 75% from 70%, conversion is low 40%
·         Toyota and Honda increasing penetration
·         As penetration increases, conversion should decline
·         We will probably run 18m trials in 2016
·         When gross adds = churn then subscribers have plateaued, think it will be more than 10 years from now
·         Ability to stream for about $4 extra
·         When we raise prices, we don’t do it all at once, it drives additional call volume
·         Since we are not cross-border, less room for us to optimize on taxes once we become a taxpayer
·         Best guess is penetration in used cars is mid-50%

Merrill Lynch 2015 Leveraged Finance Brokers Conference
Speaker: David Frear
December 2, 2015

·         Working through NOLs, have ~ couple years left
·         Have 80m cars - > will move to 180m
·         We don’t spend a lot of money on advertising, TV commercials, use content as advertising
·         Spent money on SIRI streaming app, has improved
·         Hard to believe we are at >30% conversion on used car sales
·         Average first car ownership is 6 years
·         Will be about 10-12 years before the used car trail business actually matures
·         With used cars, using the franchise dealers, they are sophisticated and give us name and address within 48 hours of sale
·         The non-franchise dealers (62-64% of used car sales) in used car sales is through independent dealers and private parties, not structured sales reporting systems. Service Line Program helpful.
·         The growth in cars on the road that are SIRI enabled over next 10 years is like winning the lotto – what could change is down economy and down car SAAR
·         We will become better at marketing to people as we can more involved in connected car
·         We have opportunity to double the content in the next decade with new chips and the spectrum we have
·         We have been buying back about $2b a year in stock without increasing leverage ratio
·         Don’t see the time value of money difference in valuation if we do an accelerated buyback in the $3’s stock range
·         EBITDA margin growth due to fixed cost leverage in programming, satellite and transmission, SG&A
·         FCF over last few years above norm as no satellite newbuilds – in initial stages of RFP on satellite procurement for two XM satellites, due to launch 2019 and 2020, takes about 3 years to build. Makes sense to launch that close together, with about 6-9 months offsets. Between those two, about $600m. After we will have launches in 2023, 2025, and 2028. It’s about $300m per each, we will do 5 satellites.
·         About 10% of subscribers use the streaming app, has been that way for long time
·         We have deals with all the auto OEMs, including Tesla
·         AM/FM radios – not great equity stories, a lot of listeners but too much debt, still have high 30% EBITDA margins
·         We own 38% of the equity in Canada; Canada is a commodity-based economy, been tough up there lately

Q3 2015: Earnings Call

·         Penetration rate was 75% for the quarter, up from 71% in Q3/2014
·         New car conversion was 41%; maintaining low 40% is strong because of increased penetration
·         Enabled vehicle penetration is at 79 million vehicles, or about 33% of total vehicles in the US – see this growing by 2% per year for the next decade (~52% of vehicles on the road by 2025?)
·         SXM fleet should be about 180m eventually
·         18,000 dealers now offer 3 month trials of SiriusXM to all used car buyers who acquire an enabled vehicle
·         Over 8,000 of these run Service Lane Program
·         During the quarter signed an agreement with a major insurer to pursue co-marketing of SiriusXM subscriptions to previously owned cars
·         Cash operating expenses up just 3%, fixed expenses up 1% despite subscribers up 8%
·         Renewed contracts with NHL and NFL
·         Since 2008, programming costs have fallen by a third, even as revenue has nearly doubled – shows synergies of merger between Sirius and XM on programming costs, expect programming costs to rise in 2016
·         SXM17 – will marry two way mobile connectivity with our satellite broadcast platform
·         Migrating OEMs to new chip, this technology could allow us to add up to 400 new audio channels
·         Feel that AM and FM radio is still top competitor; streaming and internet radio grows but the growth is slowing and profitability is a distant dream
·         New car trials up 15% on higher sales volume + higher penetration
·         Higher install volumes  = higher SAC
·         We tinker with price increases from time to time, we have about 22,000 price combinations in our rating engine
·         It doesn’t make me (Jim Meyer) happy NFL, MLB, Barclays Soccer licensed to TuneIn
·         SIRI different than TuneIn because depth of content (news, traffic, talk) and ease of use
·         FCC changes on cell phone marketing = now, instead of auto dial the number, have to manually dial the cell phone number
·         SAC driven by new car installations
·         When trying to value company, look at growth from 79m vehicles with SIRI enabled to >180m
·         Streaming is a technology, not a competitor
·         Auto OEMs decide the penetration level, not SIRI. But to get to 100% penetration, SIRI wouldn’t pay for all subsidies or boost the revenue share

Goldman Sachs Communacopia Conference
September 17, 2015
Speaker: Jim Meyer (CEO)

·         Trials at record level
·         Size of used car opportunity: there are about 240 million cars on the road, some pent up demand right now. If new car sales around 17m, used car sales around 40m. Think we will drive more used car trials than new car business in next 5-7 years. Used car buyer gets us different demographic. Also, we don’t have any subsidy attached to it. Only pay subsidy first time we put technology into the vehicle. Used car sales are 1/3 in each: franchise, independent, and private.
·         Average American keeps new car about 70 months
·         We run the business different than what the analysts write about; they talk about conversion rates of new and used cars. Almost any level of conversion in the used car business is going to be immediately profitable. That’s what investors need to focus on, a long runways for used cars. At end of Q2/2015, had about 75m cars in the field with our technology, so 75m of the 240m. Safely within 10 years that number will be 180m.
·         We are winning the used car in the franchise funnel
·         SIRI mostly in higher end models, that often get put back in the franchise used dealership, where SIRI has strong relationships.
·         Challenge is how are we going to go after the other 2/3 of used car sales. Not worried about conversion rates, the economics are great.
·         We are working with insurance companies, finance companies on the turnover of those vehicles
·         Trying other methods; for example, worked with Jiffy Lube (80 of them) and every vehicle brought in, if had satellite installed but not a subscriber, offered them a free trial. We are comfortable we will solve this.
·         Penetration of new cars  = 75% over next 5-10 years, because Honda and Toyota increasing penetration. We have 100% of luxury cars.
·         People don’t have SIRI because they don’t want to pay, that’s the top 5 reasons. Mid-90% are giving up SIRI and going back to terrestrial.
·         Streaming is not competition, FM and AM Radio is with over 230m people who listen to every day
·         Confident in SXM17
·         This morning announced 5 year extension on connected vehicle arrangement with Toyota; this gets us close to what Toyota is doing over the next 5 years
·         At the end of the decade high-80% to mid-90% of cars will have an embedded LTE route or whatever the next LTE is, in the cars – SXM17 will benefit tremendously
·         Spotify and Apple Music – its music, it takes the place of the CD or music streaming, but not content.
·         Churn should be 1.8% - 2.0% over time
·         Aside from conversion rates between new and used cars, once they become a subscriber, they seem to behave just like a new car customers…we will have to work on tiered pricing because the demographic gets wider (lower income, more elastic)
·         Average vehicle in US is owned 3.1 times
·         Economics on used cars are compelling, don’t pay a subsidy on second or third owner, only new car
·         There’s not any technology that will go on the vehicle that SIRI wont also be able to use
·         We won’t have commercials on our music channels, never will
·         Future of SIRI is based on subscriptions, not advertisement
·         We don’t want to get into video delivery, or compete with Netflix (NFLX), we want an acquisition that will make subscriber base stronger, lower the churn, grow ARPU, etc. We don’t see the streaming business models right now as good businesses, not good economics

Merrill Lynch TMT Conference
June 2, 2015

·         Greatest opportunity for growth in next 5 years = used car market
·         There will be 11.5m – 12m new car trials every year
·         Next 5 years – we will build out distribution there
·         40% EBITDA margins is long-term goal, don’t think we can get above that, we will find ways to spend the money
·         There is opportunity to optimize conversion rates and churn by knowing whether or not people are listening
·         SXM17 rollout will take 4-5 years, will have the on-demand content through the app
·         Telematics business – very high incremental margin, one of the largest providers of traffic and data services in North America
·         3-5 years ago was worried about streaming, but not anymore, they are all focused on music
·         Thus, terrestrial radio is biggest competitor – focuses on music, news, weather, talk, traffic
·         Buybacks in the $2 - $2.5b range is pretty sustainable
·         Doing more live events – the perception of live content by subscribers is important
·         Pandora monetizing at about $11 a user, Clear Channel at about $13, Spotify at about $30 and pays 2/3 of economics in royalties, and we monetize at $150 per subscriber.

Q2 2015: Earnings Call

·         Fewer people called us to cancel
·         When you have subscriber base as big as SIRI, a 0.10% change in monthly self-pay churn  = difference between 70,000 subs in a quarter or 280,000 net subs in a year
·         We don’t see 1.6% churn as the new normal
·         New vehicle penetration was 72%, up from 69%, now see long term penetration near 75%, up from previous expectations of 70%
·         More auto OEM like Toyota and Honda are increasing penetration rates
·         Now 17,000 dealerships, and the Service Lane Program has over 7,000 dealers
·         80% FCF conversion of EBITDA
·         The $210m settlement we reached with major record labels regarding pre-1972 recordings ensures we can keep playing approximately 80% of the pre-1972 recordings we used through the end of 2022. Remaining $102.3m will be amortized from now until end 2017.
·         NissanConnect – Agero connected car by SIRI
·         Looking to enhance audio service and provide new non-audio services
·         People who aren’t subscribers simply don’t want to pay
·         SIRI installed on 32% of cars on the road, or 76 million
·         Maintain long-term contribution margin of 70%
·         Churn – you have non-pay, vehicle turnover and voluntary churn. Seeing fewer people choose the free option than expected. We expect churn long-term to be 1.8%-2.2%.
·         Higher installation rate due to higher penetration by auto OEMs
·         Auto OEMs scared of the connected car getting vulnerable to hacking

Morgan Stanley TMT Conference
March 2, 2015
Speaker: Hooper Stevens

·         Driving the enabled fleet in U.S. from about 70m vehicles today to 140m, 150m over time. With more incremental cars on the road, SIRI has more opportunity
·         We see significant participation in our business from the sub-$75k income level- about 60% of new car buyers have HH income under $75,000 and about 70% of used car buyers.
·         Sued car – about 30-33% conversion rate versus in the 40% rate for new car
·         Have about 15,000 dealerships – most are franchise dealer, total there are 18,000 franchise dealerships, so nearly fully distributed. Total about 30,000 independent dealerships.
·         We tried splitting the commission with the dealers a few years ago, didn’t work out well, too much turnover at the personnel level at dealerships
·         Opportunity – households with multiple cars, 80% of HH have more than one vehicle, yet only about 20% have multiple subscriptions.
·         Should have a lot of unit growth in addition to pricing growth over time
·         With 25 MHz spectrum, two-way connectivity from integrated modems, our content, looking to build integrated satellite and IP platform
·         One challenge for our customers is – discoverability of content
·         Other business models – Pandora, Spotify – tough to make money
·         Agero, the telematics business, is offered on a “white-label basis” currently
·         We require 5 satellite projects every 15 years – 2 active on the XM side, two on Sirius side and one spare, they are about $300m a piece, so about $1.5b in total capex spend over a cycle. We will start spending in late 2016, so that would be done over a 12 year period. It’s replacement for the entire fleet. Some of the capex is growth capex because the satellites provide higher quality service than prior models.
·         Competition doesn’t focus on content, instead they focus on music, which is commoditized
·         We don’t see a big difference in churn between new and used cars

Q1 2015: Earnings Call

·         Seeing increased penetration in new vehicles – like Toyota, Nissan, Honda
·         Confident in maintaining 70% penetration rate in new cars for many years
·         Continued strength in used car market – 16,000+ dealers, more than 7,000 in Service Lane program
·         Offered 35% more trials in used car market than we did a year ago
·         Announced Nissan Connect Services powered by SiriusXM will be launching imminently on 2016 vehicles, starting with Maximum
·         Also announced new agreements with Jaguar Land Rover and Subaru
·         Have new project – SXM17 – multi-year project
·         Rolled out new apps for iOS and Android – improves reliability and speeds in low bandwidth situations
·         SiriusXM installed base in 73 million, only about 30% of vehicles on the road, new car penetration above 70%
·         Used car conversion remains in the low-30%
·         40% EBITDA margins Is still our goal
·         Don’t anticipate any SAC impact associated with SXM17
·         As the subscriber base grows, getting net addition relative growth is tougher
·         We try not to get too deep in the music business, don’t have any intention on competing with Apple in the download business or the physical distribution business
·         40% of the vehicles that rolled off the new car lines in 2014 were connected vehicles, not finding it adversely impacting our business in any way
·         Think most vehicles by end of the decade will have LTE built in modems, expect higher usage of Android Auto and CarPlay by Apple – SXM17 should enhance that experience
·         The new chipsets will give us more capacity, but that doesn’t help older SiriusXM radios
·         We offer the most channels we cat the best bit rate, but not all channels are the same bit rate
·         Eventually mix of subscribers will be lower end (used cars), might seem some change in conversion rates

Q4 2014: Earnings Call
Sirius XM

·         While we don’t know what new car sales will be, confident in new car penetration rate
·         New car penetration + natural turnover of vehicles  = enabled fleet will grow rapidly
·         Expect to go from shade over 70m at end of 2014 to over 100m, near 50% increase in 3 years
·         15,000 independent dealers, total cars on the road in US is about 230m
·         We are trying out household pricing plans as an alternative to per radio pricing
·         Contribution margins of ~70%, objective is to increase revenue and FCF from growing base on enabled cars
·         Intend to be well-positioned to succeed in a world of fully-connected cars
·         Think nearly end of decade all cars basically have some form of connectivity
·         Main competition is free ad-supported entertainment, which doesn’t change the connected vehicle
·         Believe subscription driven satellite radio is the brightest spot in the media landscape – have recurring revenue, strong monetization per user, high margins, rapidly growing fleet of enabled vehicles, rapidly expanding subsequent own opportunity as satellite-enabled vehicles begin to turn over in the previously-owned car market
·         Think chance to monetize 25 megahertz spectrum not within next 5 years but is within 10 years
·         Think it is becoming clear that satellite broadcast and streaming will co-exist for a long time
·         Streaming is an up-sell to current broadcast, and we are not disappointed with the amount of people that use it
·         About 80% of households in US have more than one vehicle, but low-20% have a matching subscription count = large opportunity, would benefit revenue and subscriber count
·         Not eager to get to 4.0x leverage, want to keep some dry powder
·         Think lower oil is great for the SIRI business because it boosts auto sales
·         Don’t think a music label would be a great bolt-on acquisition for us
·         Think we have long-term sustainable growth in used car business
·         Net Operating Losses = think we will become a tax payer in 2019, and full benefit through 2018 on taxes
·         We don’t have ARPU targets, not how we manage the business

Merrill Lynch 2014 Media Conference
September 17, 2014

·         Have over 60 million cars with our enabled technology in it, should see 100-110m in next 4-5 years, then 150m in 5-10 years
·         Installed base is the average car in this country is owned 2.3 times, so the cars change hands, create new opportunities, and the economics on the 2nd and 3rd owner very attractive versus the first
·         We pay a subsidy to the automakers for the first time SIRI technology gets installed in the cars, take that off from subscriber acquisition costs (SAC). By 2nd and 3rd time we reacquire a new car owner, there is no subsidy. That means we also get embedded deeper and deeper to demographics and incomes of less than $75,000 so we need to offer packages and pricing to keep the growth.
·         Every new subscriber is very, very profitable
·         Charge customers on XM side a premium is they want Howard Stern or NFL, and premium on Sirius side for MLB
·         People ask if I’m afraid of connected car, and absolutely not/ It will take a long time to roll out, and think it will offer revenue opps for Sirius.
·         Us versus competition = music isn’t the only thing we offer. Most content programming contracts are 4-5 years, some are longer at about 7 years.
·         Nothing blocks us from doing more streaming
·         Think we are under-leveraged compared to the 4.0x target, think our stock is very attractive today and represents a great return on investment
·         Agero – revenue about $100m in 2014 with breakeven margin
·         We are predominantly a North America company, don’t have a lot of expertise internationally
·         Two auto OEMs have asked us to partner with them outside of North America with connected car
·         Sirius and self-driving cars: SiriusXM network gives the auto OEM 99.98% reliability everywhere in the country. But we think driverless will take a very long time. Auto OEM will like that our network is US-wide.
·         Video – had aa kid’s television package for several years in minivans – Dodge and Chrysler. We didn’t have the scale to acquire the content at a margin that was acceptable.
·         Begin to look at new satellites in 2016/2017/2018 timeframe. It’s not like it used to be where one was $300m. Absorption cost much easier today than back then.
·         Our chip technology focuses on the upper band – XM Constellation, will take them years to transition off of that.
·         While I see maybe a way to rationalize spectrum, don’t see it in next 5-8 years
·         Margins: cost of electronics coming down, curve starting to flatten out, and then as we add more subscribers, the funnel requires no additional subsidy.

Q3 2014: Earnings Call

·         New car penetration 71.4%
·         Approx. 68 million factory-enabled vehicles in operation, about 28% of total cars on the road
·         As fleet continues to run over, vehicles in operation will eventually match new car penetration rate of 70%
·         Every major auto offers SIRI with certified pre-owned vehicles sales at every franchise dealer location
·         Have more than 14,000 auto dealers, up from 11,000 last year
·         Pay about 30% of incremental revenue to variable expenses, meaning each new subscriber contributes revenue at roughly 70% margin
·         Convert about 80% of EBITDA to FCF because of low taxes and capex
·         Contribution margin of 70% long-term is good
·         Churn elevated because many new car buyers in the funnel are lower demographic and income level; as SAAR grows, more will be subprime and lower income new buyers
·         Biggest driver of self-pay churn in terms of overall numbers is turnover of vehicles as buyers from first or second car that had SiriusXm to a new purchase – satisfied with churn levels today
·         Revenue share and royalties – declining as % of subscriber revenue
·         Q1 is highest churn quarter of the year
·         Seeing GM roll out LTE in their vehicles at an aggressive rate, think it’s an opportunity for SiriusXM. It is a benefit because helps with new 2-way connectivity
·         Would like to see more synergies with Live Nation (LYV), whom Liberty has a stake in
·         Sirius has 25 megahertz of spectrum – Siri uses all of it today, expect to use it all for foreseeable future. Maybe long term we could expand channel count, but not today as use it all up.

Q2 2014: Earnings Call

·         Scalable business model with high variable margins is unmatched in media
·         SAAR is strong + auto OEM relationships are good (penetration at 70%)
·         Over 13,000 used car dealers, about 4,000 have service lane initiative to give us another distribution channel
·         Cumulative installs passed 70m in June 2014; after eliminating unsold vehicles and scrappage, enabled vehicle population about 65m on the road right now, leaving SiriusXM with about 27% on the total amount of cars on the road…over time this will climb towards our new car penetration rate of 70%
·         Contribution margin was 70.9% on improved OEM revenue share
·         All bonds have investment grade style covenant packages
·         The last pre-merger agreement that hasn’t come up for renewal yet is NHL hockey, comes up at end of next season. Combined was about $400m in 2007 in programming costs to now about $300m level is amazing. We are growing revenues while holding programming pretty firm.
·         40% margin too conservative? We are still 3-4% away from this, still have room to improve to get to 40%.
·         We work hard on retention strategies
·         About 2.8m new car trials in the quarter + 1.2m used car trials  = ~4m car trials in the quarter. Looking to get about 30% or so of the 1.2m use car trials to subscribers. Eventually used car starts will exceed new car starts as penetration of total cars on road increases with ~70% penetration of new car market right now.
·         Advertising is about 2-2.5% of revenue
·         Think churn is overstated because shift to new cars by existing subs and getting free trials again, but not more than ~10 bps
·         Most of the trials in the new car funnel are non-subscribers pre-existing versus subscribers buying new cars
·         Average fleet is 3.8 years old
·         Have over 100 engineers working on connected car, Agero

Q1 2014: Earnings Call

·         Our radios in about 26% of cars, strong LT opportunity
·         Underleveraged balance sheet, growing FCF
·         OEMs embracing SIRI, penetration was 70%, up from 67% in Q1/2013
·         At 16.2m 2014 expected SAAR, would be around 11m trials in 2014
·         Total enabled vehicles on the road with factory installed satellite radio is 62 million at end of Q1/2014, should double in next 5 years to about 120m
·         Expect to run 4m used car trials in 2014 – see low 30% conversion in used cars; look to grow from about 1.5m to close to 2m this year in used car self-pay subscribers
·         Cost to install by OEM coming down
·         Connected car is coming, and that’s a fact, see our content as opportunity
·         11% drop in SAC, as growth in OEM installations was offset by drop in unit cost
·         Programming costs were rationalized with the merger
·         Still have some auto OEMs selling radios from 7 years ago, so should think about unit costs slowly declining over time
·         Howard Stern came over in January 2006, a lot of people came on because of him, thus first quarter churn # always highest quarter/month
·         Of the people using SiriusXM, 64% say they also use Pandora (from SiriusXM survey)
·         Majority of churn is people going back to terrestrial radio
·         Believe auto OEMS will be deploying satellite radio for many, many years; or people could use the streaming product (has no SAC costs) and no revenue sharing
·         Count churn as people swapping from paid to unpaid trials by selling and buying a car, think we are running solidly below the reported churn
·         Used car # growing about 0.5m per year with growing base
·         People subscribe because of the content, commercial free music, breadth and depth

Morgan Stanley Leveraged Financed Conference
SiriusXM (SIRI)
June 12, 2014
CFO David Frear

·         What are we: subscription radio satellite business, subscription provides strong and predictable free cash flow
·         We can deliver 10 mb of data to cars, can be used for video, radio, anything we choose
·         Content = differentiator between us versus radio and everyone else
·         We have deep relationships with Auto OEM, built penetration to 70%
·         Have invested $11-$12 billion in building the business, had ~ $6 billion in NOLs which provides a nice shelter for FCF over next several years
·         Subscriber growth about 40% since the depths of the 2009 recession = translated that to about 10% revenue growth last 5 years, have been expanding EBITDA at 25% as improvements in margins, and FCF even faster at about 43% rate over last 5 years
·         Churn coming down was beneficial
·         Subscriber growth + pricing + higher package take rate = higher revenue %....add cost improvements to expand margins.
·         First phase of distribution was retail – sold at Best Buy, RadioShack, Silicon City, Wal-Mart, sold an after-market product that was self-installed. Then began getting the OEMs ramped up in 2007, where SIRI was in a 1/3 of new cars. Increased penetration through financial crisis. Installed about same in 2007 as 2009 – 5.5m, despite auto sales declining 40%.
·         60m satellite enabled vehicles on the road today, at 11 million pace, will double it in next 5 years, will continue to build out the fleet, from 60m to 120m in 5 years, to 120m in another five years, to about 150m.
·         We will migrate to the previously owned vehicle sales; past 5 years most part was new car sales
·         2003 to 2005: retail stores
·         2006 to 2014: predominantly new vehicle sales
·         60m cars sell each year – about 15-17m in new cars, remainder in Used Cars
·         3:1 ratio of used cars to new cars, used car trial opportunities should be triple what new cars (but used cars sell for less than new cars)
·         Average first car ownership is about 6 years, average second car ownership is about 4 years, third car about another 4 years
·         New car conversion rate = 40%+, used car = low 30%
·         The 12,000 used car dealers will probably sell about 1/3 of the used car sales each year (~ 15m)
·         They send us customer file with customer name, address, vehicle number, etc.
·         Another third of the used car market is private transactions, the last third that is through independent dealers
·         If originally low 40% want the product, high 50% don’t the first time around; we try to circle back around and market to these; once they sell the car, it goes back into the funnel and gives SiriusXM a new chance at a new customer
·         The differentiator between us and someone else is content; music – nothing really unique about it, but the content – sports, news, Stern, Oprah, Martha, CNBC, etc. – with 140 channels there’s a lot of content.
·         Agero connected car – helps us integrate the app for satellite broadcast product.
·         Streaming – not as concerned about it now, its so competitive. Clear Channel’s iHeart radio with 40m subscribers, iTunes radio with over 20m users. Pandora with 77m users. The only different between us and everyone else is content, the depth and breadth of content.
·         Terrestrial radio monetizes about $12 a listener per year, Pandora about $8 a listener, SiriusXM about $149 a subscriber.
·         We won’t pay taxes for another 5 years or so, could knock down our FCF conversion to 58% of current levels, still among the highest in the industry/media space.
·         People could argue we aren’t building satellites right now so FCF is inflated – so take another 3% off that, which to build might add $150m a year, thus still around 55% FCF conversion rate.
·         Why 4x leverage? It is how Moody’s rates us, expect to be a strong BB rating. Both S&P and Moody’s rates us.
·         Over the long-term, what will drive the business? Enabled fleet. Once the radio is in the car, the car is on the road for generally 12 years.
·         SIRI has a very high variable margin business, so as long as management shows good discipline around costs, we should have nice steady growth in margins and FCF.
·         Question: Operating leverage capabilities?
·                     Answer: we talk about contribution margins, which is about 70% contribution margins. This number is revenue less the revenue share/royalties minus customer service and billing costs, minus cost of equipment. So if revenue growth is 10%, incremental costs on this growth is about 30%, remaining margin about 70%. We believe we will stay at about 70% contribution margin. Subscriber acquisition costs = related to new car installations. So, it auto sales have recovered and there are 15.5m new cars sold, we will stay close to 70% penetration which equals about 11m new installations in a year. The unit costs of those installations is generally coming down each year, so the SAC in the P&L, which is mid-to-high $400m should stay around that level even as revenue grows.
·                     70% contribution margin
·                     Sales and marketing costs sensitive to: (1) size of subscriber base. So if self-pay subscriber base is 20m versus 15m, that is 33% more people to communicate with. If have 11m new car installations, add welcome kit, outbound telemarketing calls, campaign costs to convert those people.
·                     Expect about 4m used car trials in 2014, which will grow over time, will have same growth in sales and marketing costs. Should keep pace generally with subscriber and revenue growth.
·                     Rest of costs = administrative, and we aren’t planning any big expansions or anything. Have about 2,000 employees, not planning to ramp to 3,000 or something. It’s not an employee-heavy business.
·                     Fixed costs should grow at inflationary-type rates.
·         Question: trucks, boats, airplanes?
·                     Answer: Aviation and marine is about 75,000 – 80,000 subscribers right now. Small number overall. Trucks distribution model similar to cars – started with after-market, then had OEM relationships. Used company called Pana-Pacific for trucks.

Bank of America Merrill Lynch Telecom and Media Conference
SiriusXM (SIRI)
June 3, 2014
CFO David Frear

·         Paid versus self-pay subscribers: a bet on the way paid trial inventories are going at the end of  the year. Auto sales grow then paid trial inventories grow. If flat paid trial then inventories shouldn’t change much.
·         Hard to estimate the used car funnel
·         Fastest growing business is subsequent owner business
·         Used car business growing from about 2.0 million gross additions from a little over 1.5 million in 2013, which is 30%-ish type of growth. Expect this to grow for years.
·         SAAR in U.S. expected to be 16 million – at 70% penetration rate for satellite radio = about 11 million new car trials in 2014.
·         The subsequent market – not sure how fast it’ll grow, aren’t many good resources for forecasting used car sales of satellite enabled vehicles.
·         Currently -  60 million cars on the road today with satellite enabled, will be 150 million in 10 years, and 120 million in 5 years.
·         Total sales in U.S. = 16 million SAAR + 44-45m used cars = 60 million
·         Used car market turnover is roughly triple the new car market (45m / 16 million SAAR)
·         Don’t expect SAAR above 16m or much better than that
·         Used car opportunity should grow to be at least twice the size of new car opportunity in next 10 years
·         Used car market = no SAC. SAC is a function of new car sales SAAR. If SAAR not growing much more then SAC should come down, as long as SAAR doesn’t grow a lot more which means new car installations don’t grow much.
·         SIRI has very high contribution margins
·         Conversion rates – new car market in 42% - 44%, used car market is low-30%
·         EBITDA margins shouldn’t get much higher than 40% if they do get to 40%, currently at about 34%
·         If low 30% conversion used cars, 2/3 used car buyers don’t take SIRI service
·         Competition for SIRI = largest is terrestrial radio, then Pandora, Spotify
·         There is going to be growing competition, also 150 million smartphones in U.S. syncing phone to car
·         Competition: Pandora has 70 million users in a month, 150m smartphones, Spotify has 10 million paid users (global) and 3 million in U.S. Spotify got to 3m users in less than 3 years. When satellite radio launched in 2002, 3m users in less than 3 years as well. Streaming tends to have high churn rates. AM and FM radio have over 200 million users a week, I-heart-Radio has 40 million regular users. Already a lot of people listening to radio in the U.S.
·         Internationally – won’t see us launch a satellite radio business, turned down multiple opportunities, such as Europe. In Europe, would take 7 years before we would be cash flow positive and go upside down about $4 billion to launch.
·         Still have about $1b in additional borrowing capacity to get to 4x leverage
·         Think the stock is cheap today (at $3.30 as of June 6, 2014) – if stock is cheap we buy it, if not then we don’t buy it.
·         Don’t see any advantage to consolidating with Liberty, no reason for SIRI to pursue it.
·         SIRI is not missing some big piece in programming; many of the streamers have challenging economics because the thing that sells to them is “free” and streaming players offering service at very low margins. SIRI monetizes better than them, have higher margins, powerful business model.
·         Agero – the $530m telematics acquisition – being marketed to auto OEM, they rebrand it to consumers; maybe eventually auto OEM let SIRI take brand, do customer service instead of them
·         Low-30% on used car conversion much higher than I thought it would be. Originally thought about 20%. Now have 12,000 dealers of used cars to help SIRI sell satellite radio. Total there are about 36,000 auto dealers in U.S., SIRI has 12,000 of the 16-18,000 franchise dealers, and then there are another 20,000 or so independent dealers.
·         We have 30% - 35% conversion on used cars; we are working on ways to improve this. 90 day trail period, for example.
·         Once a car gets sold, the dealer shares the information to SIRI, who then markets to them for 3 months. Also, when a car comes into the dealership to get serviced, the service department can check to see if the car is satellite enabled and whether there is an active subscription or not. If not, try to get them a free trial.
·         80% or more households have 2+ cars
·         Over 20% of subscribers are multi-radio HH despite 80% of HH have 2+ cars; but 20% have new cars, 80% have used cars
·         We think about ARPU a lot; if got more penetration, ARPU would drop because would offer multi-radio discount, which would be below current ARPU levels…would love to end up with more subscriptions long-term, and lower ARPU
·         NHL is only contract from pre-merger times; could add value/scale when it renews
·         Hard to imagine video in the car; in due time if/when self-driving cars come, then mobile video makes sense, and SiriusXM platform could be used for mobile video.
·         SIRI is designed to deliver 5-10 mb of data to a movie vehicle – can be video, audio, whatever
·         US Music Royalty: music royalties set up for another few years, got three years left on sound recording side and 2 years left on publishing side. They dominate the royalty payments, over 90%
·         Connected car business – currently have relationships with 40% of North American auto manufacturers
·         Question is: will competitors currently operating the cellular networks, are they going to modify their products to make it more competitive. If one would listen to a streaming service across 3G in the same way you listen to radio or satellite radio today, would consume at least $30 of data based on the best plans and prices you can get in the market.
·         Satellite radio would work outside the U.S., but it takes time, and costs about $4b to launch. Currently SIRI has 150 channels competing against 3 channels, 12 channels, 30 channels. But in Europe there are a lot of different cultures and we would need more spectrum bandwidth, more channels, or do you just limit it to less channels in each market? (making it less competitive). It is less compelling in Europe because of this. Add the negative FCF of $4-$5 billion for about 7 years.
·         There is no clear way of knowing we aren’t “over-earnings” or that the product is adequately priced. Believe we offer it at a fair price right now. Most people spend more on Starbucks each month than on SIRI. Higher income earners convert more, churn less, see a drop in points every $25,000 in income. $0 - $50,000 in income comprise a significant portion of new car sales in US and very significant used car sales. But, SIRI is sensitive to them. Want to make sure SIRI is priced okay with average HH income of about $51,000.

Disclosure: I own LMCA, which has a position in SIRI


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