Sirius XM Holdings Inc. (SIRI) Earnings Call Transcript

Greetings. Welcome to the Liberty Media and SiriusXM joint investor conference call. At this time, all participants are in listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I'll now turn the conference over to Hooper Stevens, Senior Vice President of Investor Relations and Finance. Mr. Stevens, you may begin.

Good morning. Shane and I would like to thank you for joining us. Welcome to today's webcast, where we will be discussing the transaction between Liberty Media and SiriusXM to combine the Liberty SiriusXM tracking stock group with SiriusXM to create a new public company. I would like to remind everyone that certain statements made during the call might be forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based upon management's current beliefs and expectations and necessarily depend upon assumptions, data or methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For more information about those risks and uncertainties, please view SiriusXM's SEC filings. We advise listeners to not rely unduly on forward-looking statements and disclaim any intent or obligation to update them. As you listen to today's call, we will also invite you to follow along with the corresponding investor presentation, which can be found in the Presentation sections of both Liberty Media's and SiriusXM's Investor Relations website. On today's call, you'll hear from Greg Maffei, President and Chief Executive Officer of Liberty Media and Chairman of the SiriusXM Board of Directors; and Jennifer Witz, Chief Executive Officer of SiriusXM, and we have additional management representatives from Liberty and SiriusXM if needed. I'll now turn the call over to Greg.

Good morning, and thank you. Sorry, background noise there. Turning to Slide 5. Super excited to be announcing this deal today. Exciting transaction between Liberty and SIRI, Liberty first invested in it in 2009 and has worked alongside management across multiple [ locations ] in the business strategy. When we first invested, Liberty -- SIRI had 19 million [Technical Difficulty], and new vehicle penetration was 46%. Today -- hold on, I apologize. [Technical Difficulty] Sorry, continuing [indiscernible] to decline. New vehicle penetration was under -- was 46%. Today, SIRI, the leading subscription business, has 34 million subs. Penetration is in the low 80s and continue to deliver unique and growing content in and out of the car and influence on next-generation platforms. This has been an incredible investment for Liberty. Our initial preferred stock of [ $12,500 ], which was -- had about a 40 -- or just over 40% [ instrument ]. Company's now worth nearly $13 billion. We have made some subsequent investments. But with repurchases and dividends, Liberty has more than fully recouped our invested capital and still hold $15 billion of equity going to our shareholders. We've been a great investment for all shareholders. The total return on SIRI since Liberty invested has been over 5,000%, and the business is extremely well positioned for future growth. Let me turn you to Slide 6. In today's transaction, we will do -- will rationalize the dual corporate structure between LSXM and SIRI and create a cleaner, simplified entity. We believe the company will be better positioned, going forward, for the future focused on the IR story based on the business rather than Liberty's ownership and what will happen to it. We think there'll be many benefits for creating for shareholders on this slide, outlined, including enhanced trading liquidity and float, a reduced short interest, a broader investor base with great liquidity. And in an asset-backed stock, we will eliminate the multi-class structure to 1 SIRI investment class, 1 SIRI stock class, going to provide greater strategic flexibility and independence. We think there's an expanded chance of inclusion in any of the indices, and it addresses the discount to net asset value, which is consumed in many of our discussions. Let me turn you to Slide 7, if I could, for a quick review of the transaction. Outlined in more detail in the appendix, but here, I want to point out that this is redemptive split of LSXM from Liberty to form new SplitCo, new SIRI. SplitCo will acquire SiriusXM in all stock transaction to form this New SIRI. And in the split-off, LSXM shareholders receive 1 year of New [ SiriXM ] for every share of SiriusXM previously held adjusted for the net liabilities we have at LSXM. This will result in an exchange ratio estimated to be 8.4 shares of new SiriusXM per share of LSXM, subject to some minor adjustments that will happen to close based on outstanding cash balances and debt balances, et cetera. The estimate is based on the assumed debt -- assumed net debt, as I said, as of Q2 '24 at LSXM and note modest various fees and expenses. The SIRI minority shareholders will receive 1 share of New SIRI for each year of SIRI they hold today in the [indiscernible]. So New SiriusXM, as I said, will have 1 single class of shares with 1 vote. This will be a tax-free transaction. It is subject to some required approvals, including the majority vote of LSXM shareholders and [ GAAP ] opinions on our respective counsels. And as we have noted, we expect to close this transaction in some time early in the third quarter of 2024. So let me turn you to Slide 8. This outlines the simplified ownership structure at New SiriusXM. We believe this should eliminate the market overhang and ambiguity regarding the long-term shareholder relationship and believe the former LSXM shareholders will own 81% of the combined company, going forward, and the former SIRI public shareholders will own 19%. I'm looking forward to remaining invested personally and my continued involvement as Chairman of the Board of the New SIRI. This simplified structure better positions SIRI for the future, for management and shareholders. We appreciate the work of management and the Special Committee in getting this deal done. I look forward to a continued partnership with Jennifer, and I'm going to turn it over to her to let you have a few more details about how well positioned SIRI is for the future and how well the business will do.

Thank you, Greg, and good morning, everyone. We're now on Page 9. We are very pleased to have reached this agreement and are excited about how it positions SiriusXM for the future. I want to spend a moment just discussing how we got here and why we find this transaction compelling. After careful consideration, the Special Committee working with its independent advisers, determined that this transaction with Liberty Media is in the best interest of SiriusXM and its stockholders and made a recommendation to the full SiriusXM Board of Directors, which unanimously approved the transaction. In short, for SiriusXM, as Greg mentioned, this transaction provides greater strategic flexibility, a broader potential investor base, additional trading liquidity and float and an opportunity for more index inclusion, all of which we believe will help increase stockholder value. This is an important time for SiriusXM and one that will set the stage for the next phase in our value-creation story. And I want to touch on some of the key elements of our strategy to transform the company for long-term growth. SiriusXM is the leader in audio entertainment in North America. We offer a differentiated service, centered on our human-curated live and exclusive content, which has enabled us to build this leading position in and out of the car. Our unique content portfolio is underpinned by our exclusive channels, partnerships and personalities across music, news, talks, sports, entertainment and comedy. In music, we have exclusive artists and brand channels that super serve our passionate listeners, including The Beatles Channel, Life with John Mayer and TikTok Radio, complemented by our homegrown music channels like Hits 1, Hip-Hop Nation and Octane, just to name a few. Beyond music, we continue to build out our portfolio of content on SiriusXM and through broader podcast distribution with leading hosts like Howard Stern, Conan O'Brien, Kevin Hart, Megyn Kelly and our recently announced agreement with James Corden. And lastly, we deliver consumers exceptional value as a one-stop destination for sports fans. No other audio provider offers as much live sports content as to SiriusXM. You would need 6 subscriptions to streaming video services to get access to all the games SiriusXM offers. Beyond curating the best content and audio, SiriusXM benefits from a large subscriber base with 34 million paid subscribers in the U.S. and very low churn. We have 155 million enabled vehicles on the road. We've made meaningful progress in the continued rollout of our 360L platform, and we have an expanding EV footprint, including a new deal we announced with Rivian last week. Building on our differentiated content, we are debuting our next-generation streaming platform this week with the launch of our new app. We are confident that this next-generation platform will meet consumers' demands for a more personalized, easy-to-use listening experience, both in and out of the car. We're building a set of solutions geared towards providing improved personalization and discovery in our products and in our marketing efforts. This new platform will serve as a foundation for further product enhancements and integrations, going forward. That will drive customer acquisition, engagement and ultimately, retention, which all translate into future subscriber growth. At SiriusXM, we are fortunate to have a loyal and engaged core audience, who are Gen X and older. They represent about 25% of the market and are a large and very affluent consumer group. While we are well penetrated today in this segment, there is still room for growth here. And we are incredibly focused on delivering a better user experience to appeal to our target growth audience as well, a younger more diverse demographic, comprising an additional 25% of the market, and we see a significant opportunity to improve penetration in this segment. We've conducted a large amount of research around what this audience is looking for and what has held them back from subscribing to SiriusXM in the past. And we know that a compelling price point is critical, and we're launching a new 9.99 streaming-only package to help capture demand across more listeners in more demographics. We also know that they are looking for the type of differentiated content that SiriusXM has to offer. And our next-generation platform and new streaming products were designed with this group's needs for personalization and discovery in mind. In addition to our robust subscription offering, SiriusXM today has a nearly $2 billion advertising business that reaches 150 million listeners across SiriusXM, Pandora and our broader podcast and off-platform ad network. We have invested significantly in advertising capabilities, creating a unique value proposition for advertisers to reach our scaled and diverse listener base. Core to this strategy is our streaming network that aggregates listeners across our owned-and-operated properties, SiriusXM and Pandora as well as a number of partner properties. We also have one of the largest podcast networks, with more shows in the top 50 than any other company. All of this supports our ability to deliver durable results, including our industry-leading EBITDA margins. And we hope this transaction enhances the visibility of this trajectory to analysts and investors. Turning to Page 10, we are pleased to be entering into this transaction from a position of financial strength. Underlying our strong financials is our solid balance sheet, which enables SiriusXM to pursue our growth initiatives while rapidly deleveraging and returning capital to stockholders at the same time. In terms of our capital allocation priorities, we expect to continue investing to drive long-term growth, including in our next-generation platform with our first launch coming this week as well as our next fleet of satellites. Although the transaction will result in elevated net debt levels for SiriusXM, following the transaction, the company will be well positioned to rapidly delever using free cash flow above and beyond our recurring dividend to reduce debt. We expect to return to our target low to mid-3x leverage range sometime between the middle and end of 2025. We do not expect any change to our existing dividend policy, and we anticipate deemphasizing share repurchases, although we will look to be opportunistic on this front as we focus on achieving our deleveraging goals. Turning to Page 11, just before we open the call to Q&A, I want to emphasize a few key points. We see this as a highly beneficial transaction for all shareholders. There is meaningful opportunity ahead for SiriusXM as the leader in audio entertainment in North America as we leverage our next-generation technology platform. We are delivering strong financial results while simultaneously investing in our future as we enter this next phase of value creation. And finally, our strong free cash flow generation abilities have been a cornerstone of our value proposition, and we are well positioned to rapidly delever and deliver returns to our stockholders. I'm thankful for our strong partnership with Liberty all these years, and I look forward to continuing to work closely with Greg in his role of Chair of the Board, and I appreciate the work the Special Committee has done in getting us to this transaction. And I'll now turn the call back over to the operator, so we can begin the Q&A portion of today's call.

[Operator Instructions] And our first question today is from the line of Vijay Jayant with Evercore ISI.

This is [ Ashan ] on the line for Vijay. I guess historically, Sirius run its leverage at the lower end of the low to mid-3 target range. Should we expect you guys to get back to this range before you start buying back stock?

So I'd say -- so [ Ashan ], I'd say that we are very focused on the low to mid-3x leverage ratio, and we're sticking to that. And some -- the reason for the range of mid- to late [ 25 ] is that we do want to be opportunistic on share repurchases. But other than that, we are very focused on the long-term leverage ratio that we've stated for the company.

Yes. If I could just add to Jennifer, SiriusXM has the free cash flow capabilities to handle this leverage. We have a target to get down to 3.5 to low 3s. And we can get there in a meaningfully quick time frame and still achieve, I think, some share repurchase if we see opportunities, just as she said, because it's -- the free cash flow capabilities are so strong here.

Our next question comes from the line of Steven Cahall with Wells Fargo.

A few for me. Maybe first, just Jennifer, you talked about the investments in next gen as well as satellites. I was wondering if you have any discretion over the cash flow profile of the CapEx for the satellite build as you manage through this period of debt reduction with a little bit of opportunistic share repurchase? And then additionally, I think the initial proposal might have included a cash dividend payment to SIRI shareholders. Just curious if there's any context on why the Board ultimately decided for, I think, a bigger equity stake rather than the cash portion? And then finally, I apologize, there's a lot of complexity in here. I just see that the share count is going to come down by a little bit through this transaction. Can you just help us understand where kind of those diluted shares go in that?

Jennifer, you want to handle one and I'll handle the back half?

Yes. So I would say, Steven, we don't have a lot of discussion around the satellite CapEx. Those are our forecasts that are built out, which we've provided some external guidance on the CapEx that we would expect over the next several years on that front. And that's really guided, based on milestones and contractual payments. But we do have a material reduction and expect to be at or near zero in satellite CapEx in 2028 and probably run at that level for several years after that.

So as far as the changing of the transaction, I'll let Jennifer add as well. I think there was a consensus that a transaction which brought less debt, that had a share repurchase at attractive prices for SiriusXM and was able to execute more quickly if the spend if this [ transacts ] and will compare to the cash dividend transacting was more attractive. And the fact that there will be this share repurchase effectively, retirement of those shares to offset the debt at the SiriusXM means that results in lower share count at SiriusXM.

Yes, agree on that, that we're pleased that the leverage is lower than it might have been and that the share count is lower.

Our next question is from the line of Stephen Laszczyk with Goldman Sachs.

Maybe two questions. First for Greg, could you remind us what regulatory approvals, if any, are needed to complete this deal? And how we should expect to see those play out from our end over the next couple of quarters? And then maybe just a follow-up on share repurchases. Jennifer, once you hit your leverage target of low to mid-3s towards the tail end of 2025, how do you think about ramping capital returns post that? Share repurchases have been a big part of the SiriusXM story in the past. I'm curious if that would be your preferred way? Or do you think the dividend could play a larger component of that over the long term?

Stephen, thanks. I'll touch on the approvals. I think we'll need HSR, which we think is relatively pro forma. We'll need [ SEC ] approval for the transfer of license, is also relatively pro forma. And then there will be no vote of the SIRI shareholders, but there will be a vote of the LSXM shareholders. So we'll need a proxy to get through the SEC, and that's probably the longest item to get done.

Okay. And just in terms of future [ state ] share repurchases, we want to be opportunistic. I don't know that we can say specifically what we're going to do after the end of '25. But we've always had a mix of dividends and share repurchases. And so we would expect us to have that going forward. And just the nature of that mix will depend on a lot of factors, going into '26, market conditions and where we are in our overall capital structure. We do -- we don't have any maturities until 2026, so we are really well positioned in terms of our overall capital structure. But again, we'll be opportunistic on overall capital returns. And as Greg has highlighted, we have very strong free cash flow to enable that and continue that, going forward.