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

SiriusXM

·         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

·         TuneIn = http://tunein.com/premium/?source=footer.upsell

·         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

SiriusXM

·         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

SiriusXM

·         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

SiriusXM

·         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 2^nd and 3^rd 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 2^nd and 3^rd 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

SiriusXM

·         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

SiriusXM

·         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

SiriusXM

·         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

Notes:

·         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

Notes:

·         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

Overview: LiLAC Group (LILA/LILAB/LILAK) *(Pre-Cable&Wireless Acquisition)

LiLAC Group (LILA/LILAB/LILAK)

Betting on industry’s best operators rolling up the highly fragmented Latin American cable assets

January 6, 2016

***Cable & Wireless (CWC) + consolidated "NewCo" valuation in progress....will provide updates***

About LiLAC:

LiLAC is a “tracking stock” created June 24, 2015 to provide investors a more pure-play capability on the Liberty Latin America and Caribbean cable assets, which were historically consolidated under the Liberty Global company. As the Latin American and Caribbean assets were such a small component of overall Liberty Global, as well as investors were generally less familiar with these assets, they received little focus and attention from investors. Management at Liberty believed the creation of a tracking stock was appropriate to ‘show’ investors that these assets were valuable as well as give investors a pure-play opportunity in the expected consolidation of Latin American and Caribbean cable and telecom assets in the next 5-10 years.

LiLAC is not a separate entity, and shareholders of LILA/LILAB/LILAK are ultimately shareholders of Liberty Global Plc.

There is an additional “forced selling” investment opportunity as the LiLAC tracking stock is given to current Liberty Global shareholders at a ratio of 1 LiLAC share for every 20 Liberty Global shares owned. For most investors, the LiLAC ownership would likely be too small in relation to their portfolio, and thus these shares would be discarded without much analysis or investment rationale.

As of current, LiLAC consists of 100% ownership of VTR (Chile cable operator) and 60% of Liberty Cablevision Puerto Rico (40% owned by Searchlight Capital).

What makes Latin America attractive:

·         Highly fragmented in Latin America and Caribbean landscape, ripe for consolidation

·         Liberty already has presence – Puerto Rico & Chile – thus not new to the region, understands the risks

·         Low broadband and Pay-TV penetration represents strong growth opportunity, almost similar to where Europe was 10-15 years ago

·         Improving soci-economic backdrop leads to strong underlying demand and growth

·         Foreign exchange headwinds and market volatility creates opportunity for strategic acquirer (similar to Liberty’s announcement of CWC)

·         Across certain markets, large market share by satellite companies (DISH and DirecTV), which provides opportunity to take market share as Liberty can offer broadband and comparable TV product (similar to cable companies in the United States in 2015 to current)

Mike Fries (Q3/2015): “..As we rolled out our Lat Am tracker, we did mention that in our opinion, this region is underpenetrated in broadband and pay-TV and is likely to experience above-average growth, just look at our own assets, and is ripe for consolidation, particularly by experienced and well-capitalized operators…”

Mergers & Acquisition strategy:

Liberty has stated multiple times they will not start from an asset-level viewpoint, but rather will look at the markets in Latin America and where they could potentially be the #1 or #2 cable operator. Otherwise, they will not enter the market, as they desire scale advantages (customer service, advertising, size, programming, capital expenditures).

In summarization:

1.       Start at country-by-country basis

2.       Can, through M&A, Liberty become the #1 or #2 cable operator

3.       If yes, look to enter market and start evaluating the assets in the market

4.       Be an advantageous acquirer

5.       Build scale through combination of customer growth, more RGUs, increase penetration, etc.

6.       Use parent-company Liberty Global as a mature corporation to obtain funding for the deals (can use LILA stock, LBTYA stock, add to LBTYA debt or company level debt)

7.       Use Liberty’s M&A experience to be opportunistic in entering markets and increasing scale

Mike Fries (Dec. 2015 UBS): (paraphrased) “We like the region of Latin America which is why we created the tracking stock  - “LILA, LILAK”. 2 great assets down there, which are growing high-single digit to low-double-digit EBITDA (VTR and Liberty Puerto Rico). These 2 current assets are “sub scale”. We are trying to find ways to build a platform that has scale. The CWC deal brings that scale needed. They are the #1 fixed/broadband provider in 7 out of 18 countries. They have a massive sub-sea cable business that feeds those markets as well as our markets. They are heavily invested in mobile. Together, the CWC business with Liberty (LILA/K) gives us the scale and opportunity for growth. Think it will be low double-digit EBITDA growth. We have audited synergies of $125m on top of $145m of one-off capital expenditure synergies. By the way, there are two levels of synergy we can’t talk about. We’d like to but, but that’s how the U.K. works. Think the total synergy story is really attractive.”

Mike Fries (2012 commenting on OneLink acquisition): “Consistent with our strategy of consolidating markets within our footprint, this transaction will make us the leading provider of cable services in Puerto Rico, passing approximately 70 percent of the cable homes on the island and adding substantial scale to our existing operation.”

Eric Zinterhofer (co-founder of Searchlight, commenting on Choice acquisition in 2015): “Eric Zinterhofer, co-founder of Searchlight, said, “We are excited about the opportunity to bring next-generation video capability and enhanced broadband services to Choice’s customers. Furthermore, through the creation of an island-wide cable operator, there are significant opportunities to drive scale benefits and develop incremental residential and commercial business opportunities in Puerto Rico.”





Chile: "VTR"

Background:

Liberty Global owned 80% of VTR until March 2014 when they acquired the remaining 20% from “Corp Group” for approx. $422 million (using 10.1 million shares at $41.80 per share of LBTYK stock).

Overview of the Market:

VTR is the largest cable television provider based on subscribers with 1,026,200 video subscribers at the end of Q3 2015. At the end of 2014, there were 2.8 million total video subscribers in Chile. VTR had a 35.9% market share, Telefonica (Movistar) was at 21.1% market share, and Claro Chile (subsidiary of America Movil) and DirecTV were even at 16.4% market share.

Television:

The Pay-TV market in Chile has expanded at a 11.5% CAGR from 2008 to 2014, going from 1.46m subscribers to 2.81m subscribers, as well as increasing the penetration in the country from 34.7% in 2009 to 48.6% in 2014. Despite the robust market growth of 11.5%, VTR was essentially a non-participant, only growing 2.1% from 2008 to 2014.

VTR is only available to about 60-65% of the Chilean television market, and in that footprint they have a strong ~57% market share compared to the closest competitor, Movistar (Telefonica) having about 19% market share.  

In my conversations with Liberty, the likely reason for the divergence in growth of the Pay-TV market and VTR’s subscriber growth is that VTR caters to the higher end market and does not offer a low-cost option similar to Claro and DirecTV. With the exception of DirecTV, who owns some soccer programming rights in Latin America, there is no differentiation in TV offerings across the providers. Additionally, piracy was very high in Chile until about a couple of years, and it is logical that the people that pirated television would mostly migrate to a low-cost option where VTR does not have a viable product.

Broadband:

There are approx. 5 internet providers in Chile – Movistar, VTR, Grupo Calro, Grupo GTD, and Grupo ENTEL. However, the market is essentially a duopoly, with Movistar commanding a 39.0% market share at the end of 2014 and VTR having a 37.2% share; combined, these two companies control over ¾ of the internet subscribers in Chile. While they seem comparable from a market share standpoint, their broadband products are night and day. VTR offers 40 mbps for ~ $70/month versus Movistar offering only 15 mbps as a DSL provider.

The subscriber growth in broadband was 11.4% CAGR from 2006 to 2014 to about 2.5 million subscribers. VTR has attained a similar growth rate at 10.5% over that time period.

Opportunities:

• Newbuild: Currently VTR is expands homes passed by about 50,000 – 60,000 due to just market growth; however, VTR will likely expand homes passed at a pace faster than traditional. A decent rule of thumb for thinking about the capital needed to expand could be to start with Liberty in U.K. which costs about $600 - $620 per newbuild home. In Chile, it is much cheaper, maybe half of that. The HFC costs are the same but the labor costs are much lower and the infrastructure in Latin America is easier to access because it is above-ground (utility poles) whereas Europe is mostly underground.
• Continued market growth: broadband penetration is estimated to be 51% in 2015, up from 44% in 2014, and expected to be 59% in 2017. Pay-TV penetration is expected to be 79% by 2017, up from an estimated 69% in 2015 and 54% in 2013.
• Mobile opportunity: Currently VTR has only ~1% market share in Chile through their MVNO relationship. The top mobile operators are Claro, Movistar and Entel PCS and five that use the MVNO model.
• Next generation Set-top Box: Began rolling it out in late 2015, could get 10-15% bump in ARPU once fully deployed.
• Churn: offering a quad-play (TV + internet + telephony + mobile) should really lower churn, accelerate growth. In the UK churn was about 14%, with the introduction of the quad-play, churn is said to be about 5%. VTR has a MVNO relationship with Telefonica to offer the mobile service.
• Margin improvement: lower churn, improved mobile growth (higher margin, low capex due to MVNO relationship) and scale improvements

Risks:

• Chilean Peso (CLP) currency headwinds
• Chilean economy reliance on exporting commodities – copper specifically
• Lower than expected mobile growth
• Lower than expected future penetration rates, thus growth slowing combined with no pricing power
• lower multiple due to FX headwinds, some countries tied to commodities
• Declining population

Other notes:

•  Lack of pricing power: due to inflation of >4% in Chile, almost everyone in the market raises prices by the CPI, but not above it. Twice a year that take price increases, at CPI levels only.
• Programming costs mixed USD/CLP: About 45%-55% of VTR’s programming is US content and in USD, which behaves similarly to the U.S. Pay-TV headwinds in programming cost growth. The remaining 45-55% is local content and not very inflationary.
• VTR is thought as being the highest quality asset in Latin America by Liberty. There are no capacity issues, its true HFC cables, could easily get 120 mbps speeds right now. Once DOCSIS 3.1 gets introduced, VTR could get to over 1 gbps in speed for very little additional capital expenditure, roughly an additional $20 per home to upgrade from 3.0 to 3.1.
• Capital Expenditures – est. 2015 to be between 17-19%
• Some margin improvement in VTR from 2014 to 2015 was the reduction of more than 400 employees in November 2014 through January 2016

Puerto Rico: “Liberty Cablevision of Puerto Rico (LCPR)”

Background:

LiLAC became the largest cable operator in Puerto Rico mostly through mergers and acquisitions of the #1 and #3 operators (Liberty Cablevision “LCPR” was #2). What was originally Liberty Cablevision of Puerto Rico LLC, a cable operator and subsidiary of the Liberty Global company, they acquired “OneLink Communications” in 2012 with Searchlight Capital Partners LP and “Choice Cable TV” in the summer of 2015.

With the acquisition of “OneLink” in 2012, Liberty contributed their assets in Liberty Cablevision and Searchlight Capital put up the cash, resulting in a cable company that would be 60% owned by Liberty and 40% by Searchlight. The newly formed entity would be the largest cable operator in Puerto Rico with about 700,000 homes passed and RGUs approaching 500,000 (one source had it at 480,000 RGUs). While terms were not announced, Liberty Global had said the transaction values OneLink (before transaction costs) at about $585 million.

In December of 2014 Liberty announced the acquisition of “Choice Cable TV” in a deal valued at approximately $272.5 million, an estimate of 6.1 times Choice’s projected 2015 operating cash flow, after adjusting for synergies and integration. The acquisition was funded through incremental debt borrowings.

Overview of the financials:

Liberty Puerto Rico has generated revenues of ~$350m over the last year, with a most recent OIBDA margin of 44.4%, a large improvement from the pre-OneLink and pre-Choice days of high-20%. Prior to the Choice acquisition, there were about 2.1 RGU’s per customer relationship. Since Choice was mostly a broadband provider, the RGU per customer relationship is now 1.93 at the end of Q3/2015. ARPU as of the last quarter was $78.66, down from $85 in prior quarters, due to the acquisition of Choice and most Choice subscribers were broadband-only subs.

Despite the decline sequentially in ARPU, margins should improve due to scale and improved efficiency of the infrastructure (more bundled packages across all assets – Liberty, OneLink, and Choice)

Overview of the market:

Puerto Rico could be viewed as a much simpler competitive environment versus Liberty’s other assets. In Puerto Rico, there are only 2 cable operators on the island – Liberty and Claro – and Liberty is viewed as far superior as Claro’s footprint is 85% DSL-based infrastructure. Of the remaining 15% non-DSL, about half of that is actual fiber based (thus faster speeds). Due to the fact there are only 2 internet providers, Liberty has a strong market share of ~53% versus Claro’s ~47%.

Liberty’s primary competition for video services are DISH Network and DirecTV.

Broadband:

• Only 2 providers: Claro (~47% share) and Liberty (~53% share)
• Claro (Puerto Rico telecom) has 85% of footprint as DSL-infrastructure, a far inferior product to Liberty’s fiber deep hybrid-fiber-coaxial cables
•  Liberty’s base package offers 20 mbps vs. 5 mbps (English package)/ 3 mbps (Spanish package) for Claro

Subscriber Statistics:

As of the end of Q3/2015, Liberty provided a total of 769,300 RGUs across the cable footprint of 1,068,200 homes passed in Puerto Rico. The growth in RGU’s has largely come from acquisition; for example, the Choice acquisition in 2015 added an additional 355,300 homes passed (about 50% increase in footprint prior to deal) and 155,900 RGUs (from about 580,000 prior to acquisition).

“Choice” acquisition - 2015

The “Choice” acquisition was advantageous for Liberty as “Choice” had a sizable footprint in Puerto Rico but was predominantly a broadband provider (91,400 subs) over being a Pay-TV provider (48,600 subs). Since they were focused mostly on broadband, this acquisition gives Liberty the ability to offer bundles to legacy-Choice subscribers, which would increase ARPU, optimize the infrastructure, and decrease churn for that subscriber base. Additionally, they now have an island-wide footprint, which opens up B2B business opportunities. For example, if a business – a retailer, bank, etc. – has operations across the island and are looking at TV, internet, and telephone, Liberty can offer them that opportunity, whereas prior to the Choice acquisition they were unable to have this scale advantage. Lastly, as they are now island-wide, they can advertise and market across the island, whereas they couldn’t prior to the Choice acquisition.

Opportunities:

• Newbuild – but less so, as they already cover over 80% of the island. Given some demographics and the economics surrounding those demographics, a portion of the homes in Puerto Rico won’t be built to. Expect small scale newbuild over time.
• Bundle packages/Decrease Churn – with acquisition of Choice in 2015, should be able to offer more comprehensive bundles to the legacy Choice subscribers
• B2B opportunities – Liberty has island-wide footprint, giving them the ability to offer services to business that operate island-wide (Q3 2015 B2B business (including SOHO) grew over 20% on rebased basis Y/Y)
• Pricing power – in Q2/2015 raised prices in broadband by 8% and TV by 3% (pricing power in real terms different than Chile market/VTR)
• Increase market share & penetration – Liberty has one competitor in Puerto Rico (Claro) which is a DSL product. Liberty has internet speeds 4-7x faster than Claro, with the opportunity to go to 120 mbps.

Risks:

•  English package includes a lot of US programming, thus the cost is about 50% higher than the Spanish speaking package, may be unaffordable to people, they would stick to broadband only
• Geographical – hurricane or tropical storm damaging cable assets as most are above ground
•  Claro builds out the non-DSL footprint and increase fiber infrastructure. Would compete better versus Liberty as Claro already has monopoly on telephone, could be easier to cross-sell
• Country debt problems could cripple the consumer as potential increases in taxes decreases disposable income
• population decline

Searchlight Capital – the 40% owner of Puerto Rico assets

Searchlight is a private investment firm founded in 2010 by senior partners formerly with industry leading investment management firms. Searchlight Capital Partners currently manages over $860 million, invests in a wide range of industries in North America and Europe, and has offices in New York, London and Toronto. For more information, please visit www.searchlightcap.com.

Sources:

12/10/2014 – Liberty Global buys “Choice Cable TV” http://www.bizjournals.com/denver/news/2014/12/10/liberty-global-buys-cable-tv-business-in-puerto.html

11/9/2012 – Liberty Global buys OneLink Communications http://www.bizjournals.com/denver/news/2012/11/09/liberty-global-partner-buy-puerto.html

Press Release - OneLink acquisition http://www.libertyglobal.com/pdf/press-release/11-09-press-release-final-puerto-rico.pdf

Press Release – Choice https://www.libertyglobal.com/pdf/press-release/12-10-Acquisition-of-Choice-FINAL.pdf

Liberty Puerto Rico – website https://www.libertypr.com/offers.aspx

Liberty LiLAC June 2015 presentation http://www.libertyglobal.com/pdf/presentations/LiLAC-Group-Presentation-June-2015-FINAL.pdf

Reviews on Puerto Rico - http://newtopuertorico.com/internet-service-providers-in-puerto-rico/

Liberty acquires 20% of VTR http://www.libertyglobal.com/pdf/press-release/03-14-VTR-FINAL.pdf

May 27, 2015 8-K http://www.sec.gov/Archives/edgar/data/1570585/000157058515000101/exhibit991-trackerxq42014r.htm

Additional Notes:

Programming costs for Chile = ~$80m annualized, with 48%- 53% denominated in US Dollars

Corporate Expenses shared by Liberty Global (LBTYA)

Choice Acquisition:


Disclosure:
I own shares of LiLAC through "LILA" shares

Cord-cutting: Myth or Reality? -- (Data through Q3/2015)

Through Q3/2015, based on the filings of 9 pay-TV companies (a total of 86.1 million video subscribers), as well as some estimates of the number of Sling TV subscribers in DISH Networks video numbers*, Q3/2015 had the largest year-over-year loss in subscribers ever, and the second worst sequential quarter ever (Q2/2015 was the worst). Is this a full on decline in all pay-TV provider video subscribers, or is this isolated to a few companies that are simply under-performing the industry?

Based on the numbers from these 9 company filings, the year-over-year decline in Pay-TV subscribers is largely attributed to declines at DISH Network (estimate 6 straight quarters of declines in residential video subscribers) and U-Verse (AT&T). After a large decline in video subscribers at DirecTV in Q2/2015 of 133,000 from the prior quarter, they actually added an estimated 5,000 net subs in Q3/2015.

U.S. Pay-TV video subscriber growth with the third consecutive quarter of declines

Q3/2015 - the worst quarterly decline every; Q2/2015 was the worst.

Cable companies actually had the best aggregate quarter since I began looking at data in 2007, with year-over-year declines of 0.9%.  Satellite companies - DISH and DirecTV - had the worst quarter with year-over-year losses of 1.3%. The telco's - AT&T U-Verse and Verizon FiOS - saw the slowest growth in video subscribers ever with only 2.5% year-over-year growth, to a total of 11.661 million subs.

Which companies did the best in Q3/2015:

1. Verizon FiOS (VZ)                                 +42,000
2. Charter Communications (CHTR)          +12,000
3. DirecTV (T)                                         +5,000

Which companies did the worst in Q3/2015:

1. DISH Networks (DISH)                          -178,000
2. AT&T U-Verse (T)                               -117,000
3. Comcast (CMCSA)                               -48,000

Cable companies with the best quarter in many years

Satellite companies with the worst Y/Y quarter ever

Thoughts:

I continue to believe that, while it is clear that the pay-TV industry in the U.S. is not a growth engine from a subscriber increase standpoint, it looks as if the infrastructure/structural advantages of the cable companies and telco's are taking video subscriber share from the satellite companies  - DISH and DirecTV. More specifically, it looks as if the cable companies are continuing to rebound and will soon completely stabilize video subscriber numbers and possibly have net additions. 

As DirecTV and DISH cannot provide some of the customer essentials - namely high speed internet -as well as cable companies investing heavily in both increasing their broadband speeds and video products (X1, Worldbox/Spectrum, TV Anywhere,Wi-Fi hotspots), cable is no longer in an inferior position to a majority of the U.S. population. Where satellite once had far superior video viewing -channels, HD,quality - the cable companies have finally caught up and will likely surpass them as they continue with improved customer service and video user interface. 

Comparing the growth in Netflix (NFLX) to the Pay-TV industry as a whole, the growth in Netflix far exceeds the subscriber declines in video subscribers. Many in the Pay-TV industry view Netflix (NFLX) as both friend and foe. Foe due to Netflix being a much lower cost alternative video subscription to traditional TV, but a friend because Netflix consumes a lot of home bandwidth data (37% of all North American traffic) and the cable companies benefit as they offer the infrastructure Netflix needs to provide their product to customers. Considering the low price points, as well as the improvement in cable video subscribers, it looks as if Netflix is a complimentary service to the current cable bundle subscription.

CHTR expects to have video net additions in 2015

While NFLX growth in US is slowing, it is still growing mid-teens year-over-year

Price points for Netflix (NFLX) - low enough to not fully cannibalize linear TV subscription,is more a complimentary subscription

Companies included:
Charter Communications (CHTR)
Comcast (CMCSA)
Cablevision (CVC)
Time Warner Cable (TWC)
DirecTV
AT&T (T)
Verizon (VZ)
Mediacom
DISH Networks (DISH)

Links:

http://recode.net/2015/11/09/sling-tvs-near-death-experience/

Liberty-company related notes: CEO Greg Maffei on SiriusXM (SIRI), Liberty Media (LMCA), Liberty Ventures (LVTNA) at Citi Conf. (01/06/2016)

Liberty-company related notes: SiriusXM (SIRI),  Liberty Media (LMCA), Liberty Ventures (LVTNA), Charter Communications (CHTR)

Citi Global Internet, Media and Telecommunication Conference

January 6, 2016

Liberty Media (LMCA)
Speaker: Greg Maffei (CEO)

Goals for 2016:

• Close CHTR merger with TWC/BHN
• Complete the transactions announced at Investor Day
• Narrow the discount at Liberty Media (LMCA)

 Businesses tied to economy?

• Most seemingly less tied to pure GDP growth
• High-yield markets impact somewhat because of financing
• Debt markets can create opportunities, look at CHTR low financings
• Most of big assets we have are U.S. – focused
• TripAdvisor, QVC has some big foreign currency risk elements
• Zulily and CHTR – currency less a factor
• Liberty businesses are mostly dominated by the microeconomic environment
• We spend a lot of time thinking about the impact of digital and mobile

 Charter (CHTR):

• When we originally invested we thought it was not as fully valued as we thought
• Thought cable was well-positioned, CHTR in particular
• Today, think radio has probably been discounted
• Problem is they all have screwed up capital structures and there’s no way to invest in some

 Linear video marketplace – market is bearish – is this rational?

• Most of the time these cash flows last longer than people think – been our experience, see DirecTV (DTV)
• Is there great growth prospects – less clear on this.

 Liberty Media (LMCA)

• 3 trackers – SiriusXM + Braves (and real estate) + remaining assets inside LMCA
• Trackers will trade probably in second quarter, early second Qtr

 Atlanta Braves:

• Thought the presence of the stadium create unique opportunity for real estate to generate attractive RoR
• Tenants have signed up, hotel, major office complex, number of retailers
• New field will cost $650 - $670m, we are paying about $220m
• Mixed-use facility - $550m in cost and paying 80% preleverage
• Hope to see revenues and CF for Braves
• Think investors will value the Braves in two ways – Braves team value + mixed-use real estate
• S-4 – team generates about $250m revenues and very little net income
• Revenues from Braves come from rights fees (TV is majority, less so radio), ticket sales and sponsorships
• Redid the TV deal 14-15 months ago, has a series of escalating rate, real kicker is in 2027
• In 2027 rates will likely be well below market, we inherited this contract when purchased Braves from Time Warner; in addition, we will own more of the parking and ancillary revenue streams, the SunTrust, etc.
• Been many transactions lately where teams sold at valuations as multiples of revenues – look at the CF for the Braves, add it big bump in 2027
• Teams have expanded dramatically in price -  look at the Dodgers (note: sold for $2.15 billion in 2012-- Link)
• If someone wanted to buy the Braves, for tax reasons, unlikely to sell for cash

 Liberty Media (LMCA) – tracker

• 34% stake in Live Nation (LYV) + 20% Braves asset + venture portfolio assets like Tastemade, etc.
• Put the 20% Braves assets to have a potential source of funding, to raise capital, can sell that stock on a tax-free basis
• We like writing big checks, and having more capital is good (look at CHTR)
• Not that many people that can write a $3b  - $5b check into a non-control situation. Warren Buffett can do it, but he doesn’t play much in TMT.
• Would want to inject a lot of capital if there’s another downturn, that’s the kind of deal we like to do

 Live Nation (LYV)

• 34.4% stake in LYV
• Very strong management team, built a true leadership position in the promotion business
• Opportunities to, on the biggest global tours, to fill their portfolio where we may own the global tour, but we still need to outsource portions of it
• Continue to  buy either new promoters or buy new companies – concert co’s to help us in different markets
• Bought a bunch of festivals last few years
• Opportunities to use that scale and grow over time and increase stake in secondary market
• Bunch of ancillary benefits that come from e-commerce and sponsorship
• Goals: consolidate global concerts and festivals, consolidate global ticketing, organic growth in secondary ticketing and sponsorship, emerging content offers like Vice, Yahoo
• Strength in global concert promotion is what enables us to have strength in ticketing
• Key to other components is that LYV has strength in concerts
• Don’t think the 2016 concert slate will be a disaster, but we have a long-term view
• Added to LYV at price we thought was attractive at the time
• Relationship with Vivendi is complicated; keep in mind we have a $1.1 billion judgment against them

 Other Notes:

• Continue to look to aim towards tax-efficiency I non-core assets like Viacom
• We don’t like to pay taxes
• If we saw an opportunity to utilize some cash in a better fashion, we might choke and generate cash and just pay the taxes
• Think there are synergies between LYV and SIRI, but the rate probably won’t make me happy
• Disruption of Expedia by Airbnb? Question is has Airbnb generated incremental demand – probably. But it’s some sort of substitution. Probably have some demand shifted to Airbnb, no doubt.
• Hearing on Vivendi litigation – March 2016
• We want to build some liquidity to write big checks
• Businesses that we like, probably won’t change: subscription, free cash flow oriented businesses, try to stay away from ad-based businesses due to comfort
• LYV is not a subscription business but there were other reasons we liked it

 SiriusXM:

• Tried to combine tracker and a company before and didn’t work, maybe will in the future
• Ultimately, longer-term perspective is that it’s likely Sirius ends up being 100% controlled by Liberty; we are at 61% or so now
• The connected car is actually a positive for SiriusXM, not a negative like the market thinks
• Advantage could be the use of satellite, but could get reduced when cars get connected
• Other advantages: content, exclusivity, differentiation, etc.
• Also could be a hedge where is cars are connected and we don’t need the spectrum, could monetize it – so it’s a hedge on value
• SIRI bought back about $2b in stock last year; had FCF for only about 60% of that, had to borrow remaining 40%
• Leverage at <4.0x, looking to move it up slowly