Liberty Media Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods. Liberty is primarily engaged in media, communications and entertainment through its controlling interest in Sirius XM, Braves Holdings, and investments including Live Nation.
On April 15, 2016, Liberty completed its recapitalization into three tracking-stock groups: Liberty SiriusXM, Liberty Braves and Liberty Media. These groups are not separate legal entities; holders remain shareholders of Liberty and are subject to the parent company’s risks and liabilities.
Financial performance and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $1,366 million | $1,222 million | $2,570 million | $2,303 million |
| Operating income | $328 million | $171 million | $1,109 million | $416 million |
| Net earnings | $140 million | $99 million | $567 million | $118 million |
| Net earnings attributable to Liberty stockholders | $80 million | $61 million | $445 million | $42 million |
| Adjusted OIBDA | $455 million | $418 million | $846 million | $791 million |
| Cash flow from operations | Not separately provided | Not separately provided | $1,187 million | $682 million |
- Revenue increased 12% year over year in both the quarter and six-month period. Sirius XM contributed $1,235 million of Q2 revenue and $2,435 million for the six months.
- Q2 operating margin was approximately 24.0%, compared with 14.0% in the prior-year quarter. The six-month operating margin was approximately 43.2%, compared with 18.1% in 2015.
- Q2 net margin was approximately 10.2%, compared with 8.1% in 2015. Six-month net margin was approximately 22.1%, compared with 5.1% in 2015.
- Adjusted OIBDA margin was approximately 33.3% in Q2 2016 versus 34.2% in Q2 2015, and 32.9% for the six months versus 34.3% in 2015.
- Sirius XM had approximately 30.6 million subscribers at June 30, 2016, up approximately 3% from December 31, 2015, including 25.1 million self-pay and 5.5 million paid promotional subscribers.
Cash flow, liquidity and debt
- Cash and cash equivalents increased to $1,229 million at June 30, 2016 from $201 million at December 31, 2015.
- Operating cash flow of $1,187 million was partly offset by $86 million of investing cash outflows and $73 million of financing cash outflows, producing a $1,028 million increase in cash.
- Capital expenditures were $160 million for the six months, including $92 million incurred by Braves Holdings for the new ballpark and adjacent mixed-use development.
- Total debt was $7,582 million principal, with $7,275 million classified as long-term debt and $256 million classified as current debt. Long-term debt increased from $6,626 million at year-end 2015.
- Sirius XM issued $1.0 billion of 5.375% senior notes due 2026. Sirius XM also had $1.75 billion of availability under its secured revolving credit facility.
- Liberty had a $250 million margin loan outstanding and $1.0 billion of undrawn availability; the margin loan was scheduled to mature October 25, 2016 and was secured by Sirius XM and Live Nation shares.
- Management stated that available liquidity was sufficient for projected uses of cash, but Liberty does not have a debt rating and has limited ready access to Sirius XM cash because of Sirius XM’s separate public-company structure and noncontrolling interests.
Material changes versus the prior comparable period
- Sirius XM revenue increased $116 million in Q2 and $240 million for the six months, driven primarily by higher subscriber volumes and subscription-rate changes. Sirius XM Adjusted OIBDA increased to $451 million in Q2 from $420 million and to $890 million for the six months from $824 million.
- Sirius XM royalty expense increased materially because of higher revenue subject to sharing agreements, the 5% statutory royalty-rate increase, and ongoing costs related to pre-1972 sound recordings.
- Consolidated six-month operating income benefited from a $511 million net pre-tax gain from the Vivendi litigation settlement. Liberty received a $775 million payment before legal fees and amounts payable to Liberty Global.
- The prior-year periods included a $108 million Sirius XM legal-settlement expense related to the Capitol Records litigation. Additional amortization of that settlement reduced revenue-share and royalty expense by $10 million in Q2 and $20 million for the six months in 2016.
- Braves Holdings revenue increased to $131 million in Q2 from $103 million, principally because of 44 home games versus 35 in the prior-year period. However, six-month Adjusted OIBDA declined to negative $24 million from negative $16 million due to player-related costs and development activity.
- The fully subscribed Liberty Braves rights offering issued 15.8 million Series C shares and generated $203 million. Approximately $150 million was used to repay the Intergroup Note and accrued interest; the remaining proceeds were reserved for future development costs.
- Subsidiary share repurchases totaled approximately $996 million during the six months, while Liberty itself made no common-stock repurchases during Q2. Approximately $1.3 billion remained available under the Liberty repurchase authorization at June 30, 2016.
Guidance, outlook, risks and unusual items
- Management did not provide a formal quantitative earnings or revenue forecast. It expected to fund projected uses through cash on hand, operating cash flow, borrowing capacity, asset monetizations and equity issuances where applicable.
- Braves Holdings expected approximately $350 million of additional 2016 capital expenditures for the new ballpark and adjacent mixed-use development, excluding amounts funded by the Authority and joint-venture partners.
- Sirius XM expected cash uses to include debt service, capital expenditures, working capital, legal settlements, share repurchases and strategic opportunities. Its planned acquisition of additional Sirius XM Canada interests was expected to close by the end of 2016, subject to shareholder, court and regulatory approvals, with an expected contribution of approximately $275 million if consideration were paid entirely in cash.
- Sirius XM’s TCPA class-action settlement memorandum contemplated $35 million of cash, free three-month Select service for participating class members and vendor-practice changes; definitive documentation and court approval were not assured.
- The SoundExchange proceeding alleges underpayment of royalties and seeks at least $50 million and potentially $100 million or more, plus interest and costs. The filing states that the reasonably possible loss cannot be estimated.
- Key operating risks include dependence on automakers, subscriber retention and acquisition, rising music royalties, competition, technology and satellite failures, cybersecurity, regulatory changes, indebtedness, market volatility and pending litigation.
- Unusual items affecting comparability include the $511 million Vivendi settlement gain, the prior-year $108 million Sirius XM legal settlement expense, fair-value gains and losses on securities and derivatives, and the April 2016 tracking-stock recapitalization.
Important facts for investors to verify
- Reconcile the six-month earnings improvement for the $511 million Vivendi settlement and assess sustainable operating earnings excluding that item.
- Review Sirius XM subscriber growth, self-pay trends, churn, promotional activity and the effect of higher royalty rates on future margins.
- Assess debt maturities, variable-rate exposure, collateral requirements and refinancing of the $250 million margin loan.
- Monitor Braves Holdings’ remaining ballpark and mixed-use development commitments, financing and potential cost overruns.
- Track the Sirius XM Canada transaction, including required approvals, consideration mix and expected cash funding.
- Evaluate the potential financial impact of the SoundExchange matter, TCPA settlement and other contingencies for which the filing does not provide a clear loss estimate.
- Understand the economic and legal differences among the three tracking stocks, including the absence of direct shareholder claims on group-specific assets.