There are a number of methods investors can utilize to monitor their investments – read the company’s press releases and SEC filings, attend annual meetings, and listen to the earnings calls typically held four times a year. Another source of information would be presentations to the analyst community, where a company executive participates in an extended Q&A session, and the interviewer gets the opportunity to ask more follow-up questions. One such recent event was the Bank of America (BAC) conference where Sirius XM Holdings (SIRI) CFO David Frear participated.
My Background
Rather than burying my disclosures in small print at the end of this article, I believe it is useful to discuss my ownership, trading style, and holdings in some detail. This should allow the reader to make a more informed opinion about any bias that may creep into my observations. First, I bought shares in the company far too soon, planning on using covered calls to generate substantial current income. As the potential merger with XM dragged on and the credit crunch that led to the Great Recession drove the company towards bankruptcy more than a decade ago, I watched as the initial six-figure investment approached a six-figure loss.
A bailout package from Liberty Media that included a half-billion-dollar loan at 15% interest and convertible preferred stock that could be exchanged for 40% of the common stock saved the company, and that potential six-figure loss eventually turned into a six-figure gain. Along the way, I found Seeking Alpha to be a useful platform for access to transcripts of the conference calls and presentations. More importantly, I was able to gain insights from authors and other investors from the articles and comments.
Second, I eventually began writing my own comments more than a decade ago, and started writing articles on Sirius more than nine years ago. I have owned shares in the company during that entire time. Third, while almost all of my initial large position was sold a long time ago, I still retain a couple of very small positions purchased pre-merger.
Fourth, aside from those small, long-term positions, I am now more interested in trading large blocks of shares. I currently hold two such blocks. Both were intended to be short-term trades. One has a cost basis in the high six-dollar range and is obviously currently underwater. The other was purchased at just over $6 and has had multiple covered calls (using monthly calls and a $6 strike) written against it. Those short-term calls (including one expiring in September) have placed that net position firmly in the black.
I expect to continue selling calls and trading large blocks of shares, and may do so at any time. It is up to the reader to decide whether these positions have injected any bias in this article.
Key Takeaways
Towards the beginning of the interview, Frear was asked to describe the Sirius business. He essentially broke it down into three sections:
- The traditional satellite radio business, which he referred to as a subscription-based linear programming offer
- The Pandora streaming business, which is a combined subscription and advertising-based offering
- An advertising business
Not only was the advertising business considered a separate line (more on this below), but notably absent from the list was the Sirius Connected Vehicle Services (or CVS) business.
Connected Vehicle Services
CVS has been a topic I’ve covered extensively in the past. It was an acquisition that significantly underperformed initial expectations, although it had finally appeared to be growing steadily. It had also been a topic that the analysts had stopped asking about. This particular exclusion may have been to avoid any discussion about the slight decline in the CVS subscription revenue in Q2 of 2020 (see below):
| Quarterly CVS Subscriber Revenue (in 000’s) | ||||
| Q1 2014 | Q2 2014 | Q3 2014 | Q4 2014 | |
| Current Quarter | $18,632 | $22,314 | $22,421 | $24,884 |
| YTD 2014 | $40,947 | $63,368 | $88,252 | |
| Q1 2015 | Q2 2015 | Q3 2015 | Q4 2015 | |
| $23,089 | $24,766 | $25,170 | $25,428 | |
| YTD 2015 | $47,855 | $73,025 | $98,453 | |
| Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | |
| $24,698 | $21,862 | $21,713 | $20,031 | |
| YTD 2016 | $46,560 | $68,273 | $88,304 | |
| Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | |
| $20,203 | $20,655 | $20,644 | $22,344 | |
| YTD 2017 | $40,858 | $61,502 | $83,846 | |
| Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | |
| $24,835 | $26,310 | $30,095 | $30,181 | |
| YTD 2018 | $51,145 | $81,240 | $111,421 | |
| Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | |
| $36,000 | $38,000 | $41,000 | $43,000 | |
| YTD 2019 | $75,000 | $116,000 | $159,000 | |
| Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | |
| $44,000 | $42,000 | |||
| YTD 2020 | $86,000 | |||
| Source: Chart by Crunching Numbers from company’s quarterly filings | ||||
That business had been demonstrating consecutive quarterly subscription revenue growth for more than two years until the latest dip. As an observation, I suspect that part of the decline may be tied to the sharp drop in new vehicle sales (and related paid promo trials) or to users driving much less over the past several months.
Perhaps, another reason for the drop, and a reason the topic was avoided by Frear, was due to this item in the company’s recent 10Q:
(4) Restructuring Costs In May 2020, we terminated the Automatic service, which was part of our connected services business. During the three and six months ended June 30, 2020, we recorded $24 of restructuring expenses primarily related to the write down of property and equipment, definite lived intangible assets and certain other assets in Acquisition and restructuring costs in our unaudited consolidated statements of comprehensive income. The termination of the Automatic service does not meet the requirements to be reported as a discontinued operation in our unaudited consolidated statements of comprehensive income because the termination of the service does not represent a strategic shift that will have a major effect on our operations and financial results.
The Automatic acquisition cost $115 million in 2017 and had become part of the CVS business, one of the three separately reported segments of Sirius XM Holdings. Management rarely likes to talk too much about failures.
Advertising
This was a topic that was addressed at length. It had been a small part of the traditional Sirius satellite radio business, a business that began primarily as an ad-free music offering. Eventually, sports, news, talk and weather expanded the company’s offerings beyond ad-free music, although advertising revenue was still a relatively small part of the company and wouldn’t exceed $100 million in annual revenue until 2014. It would be another five years before the Sirius portion of ad revenue would double to more than $200 million in 2019. By comparison, the Pandora ad revenue last year was $1.2 billion.
The acquisition of Pandora had prompted Sirius to view advertising as a significant growth opportunity in the world of digital audio listening. Frear loosely discussed the opportunity as a $225 billion market, although there was little additional follow-up on the addressable portion of that market. Some of the pieces include Pandora’s AdsWizz, and the recently announced purchase of Stitcher for,
a cash payment of $265 million to Scripps. The agreement provides that SiriusXM will potentially make up to $60 million in additional contingent payments based on Stitcher achieving certain financial metrics in 2020 and 2021.
And, earlier this year, there was this announcement that
SoundCloud and SiriusXM Holdings Inc. (NASDAQ: SIRI) announced today that the leading U.S. audio entertainment company, SiriusXM, has invested $75 million in SoundCloud, the world’s largest open audio platform. SoundCloud will use this additional investment to accelerate its product development and enhance the services that fuel its global community of creators and listeners.
… The minority investment follows the highly successful ad sales relationship between SoundCloud and Pandora, a subsidiary of SiriusXM, which started in 2019. The agreement enables advertisers and brands to purchase SoundCloud’s U.S. ad inventory directly through Pandora, leveraging the company’s direct sales capabilities, targeting data, and audio programmatic platform. Together, SoundCloud and Pandora’s combined U.S. audience offering reaches more than 100 million unique listeners, creating the largest digital audio advertising marketplace.
It remains to be seen how much success the company will have fitting all the pieces together, and whether they can make much of a dent in the $225 billion market.
Other
Frear noted that the company had always given out guidance, but that the COVID-19 pandemic had forced several shifts in the company’s operations, greatly reduced its visibility for the remainder of the year, and left it little choice but to pull its guidance. He also expressed surprise that the business appeared to be rebounding strongly and how well the company had transitioned to one where employees were able to operate effectively without having to come into the office. He also saw a need to rethink not only how much office space was needed, but also the size of the company’s Travel & Entertainment budget.
Satellite launches won’t mean much in terms of enhanced capabilities. Although generating somewhat more power, the number of stations would still be around 175.
Categorized 360L as a combination of IP and satellite connectivity that would essentially bring the capabilities of the Sirius smartphone app inside the car. That includes accessing more data about the user listening in the car and should tie in nicely with the enhanced advertising capabilities.
Sirius has been chewing through billions of dollars of tax loss carryforwards for more than a decade. Next year, Sirius expects to became a partial Federal taxpayer, and eventually, a full Federal taxpayer in 2022.
Frear was not concerned about Liberty’s ownership percentage (~73%), although he noted that Liberty would benefit from dividend payments becoming tax-free at 80%. Regardless, it would be a board matter, and not one that management would be spending a lot of time on.
Summary
The focus on the advertising opportunity was probably the most important part of the discussion, and I would urge serious Sirius investors to listen to the interview by going to the Events portion of Investor Relations on the Sirius website. For me, there were enough positive aspects with respect to potential T&E cost savings, the advertising opportunity, comments about guidance, and the possible future cost savings if work from home proves to be effective over the long term. Enough, in fact, to become slightly more bullish, especially while the share price remains below $6.
Disclosure: I am/we are long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have several small positions in various accounts (combined less than 1000 shares) and two large trading blocks, one with September covered calls with a September 18th $6 strike. Dividends are automatically reinvested in all accounts.
