Liberty Media Corporation: Q1 2016 Form 10-Q Summary
Business context and reporting period
Liberty Media Corporation is a media, communications and entertainment holding company whose principal consolidated operating subsidiary is Sirius XM Holdings Inc. It also owns Braves Holdings, equity-method investments including Live Nation Entertainment, and public-market investments. This unaudited Form 10-Q covers the three months ended March 31, 2016, with comparison to the three months ended March 31, 2015.
The company completed its recapitalization into Liberty SiriusXM, Liberty Braves and Liberty Media tracking stocks on April 15, 2016, after the reporting date. The groups are not separate legal entities; holders remain stockholders of Liberty Media and remain exposed to the company’s consolidated liabilities.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $1,204 million | $1,081 million | +$123 million, approximately 11% |
| Adjusted OIBDA | $391 million | $373 million | +$18 million, approximately 5% |
| Operating income | $781 million | $245 million | +$536 million |
| Earnings before taxes | $684 million | $105 million | +$579 million |
| Net earnings attributable to Liberty stockholders | $365 million | $(19) million | +$384 million |
| Diluted earnings per share | $1.08 | $(0.06) | Improved |
| Cash flow from operations | $814 million | $315 million | +$499 million |
Revenue was $1.204 billion, producing an operating margin of approximately 64.9% versus 22.7% in the prior-year quarter. The comparison is heavily affected by a $511 million net gain from the Vivendi legal settlement. Adjusted OIBDA margin was approximately 32.5% versus 34.5%, while net margin attributable to Liberty stockholders was approximately 30.3% versus negative 1.8%.
- Sirius XM revenue was $1.200 billion versus $1.076 billion. Stand-alone Sirius XM revenue was $1.201 billion, Adjusted OIBDA was $440 million, and operating income was $348 million.
- Sirius XM had approximately 30.0 million subscribers at March 31, 2016, up from 29.6 million at December 31, 2015; approximately 24.6 million were self-pay subscribers and 5.4 million were paid promotional subscribers.
- Sirius XM Adjusted OIBDA reported by Liberty increased to $439 million from $404 million, primarily reflecting revenue growth, but revenue share and royalties increased 18%, including $10 million of amortization related to the Capitol Records settlement.
- Braves Holdings revenue declined to $4 million from $5 million and Adjusted OIBDA declined to negative $36 million from negative $21 million. Higher player-related and stadium-related expenses drove the deterioration.
- Cash and cash equivalents increased to $602 million at March 31, 2016 from $201 million at December 31, 2015. Total assets were $30.326 billion and total equity was $18.085 billion.
- Total debt principal was approximately $7.156 billion, including $6.011 billion attributed to the SiriusXM group, $108 million to the Braves group and $1.037 billion to the Liberty Media group. Long-term debt was $6.862 billion.
- Liberty reported $500 million of corporate and other cash and $440 million of unencumbered fair-value-option securities. Management stated that available liquidity was sufficient for projected uses, but Liberty has no debt rating and does not have ready access to all Sirius XM cash because of Sirius XM’s separate public-company status and noncontrolling interest.
Material changes versus the prior comparable period
- The primary earnings change was the $511 million net pre-tax Vivendi settlement gain. Liberty received a $775 million payment, net of legal fees and amounts payable to Liberty Global.
- Operating performance improved at Sirius XM, with Liberty-reported Adjusted OIBDA increasing $35 million, partially offset by a $15 million decline at Braves Holdings and a $2 million increase in corporate costs.
- Interest expense increased to $84 million from $77 million because of higher average subsidiary debt.
- Share of losses from affiliates improved to a $12 million loss from a $37 million loss, primarily because Sirius XM Canada shifted from a $7 million loss to $7 million of earnings; the Live Nation-related loss was $17 million.
- Cash flow from operations increased substantially, helped by the settlement proceeds and a $223 million increase in payables and other liabilities.
- Financing cash flow was negative $288 million, including $594 million of subsidiary share repurchases, partially offset by $335 million of debt borrowings.
Guidance, outlook, risks and unusual items
- Management expected Braves Holdings to spend approximately $550 million during the remainder of 2016 on the new ballpark and adjacent mixed-use development, excluding amounts funded by the Authority. Braves Holdings had spent approximately $326 million on the ballpark and $130 million on mixed-use development as of March 31, 2016.
- Liberty intended to conduct a subscription rights offering for Series C Liberty Braves common stock at a 20% discount to the volume-weighted average trading price. Proceeds were expected to repay the $101 million Intergroup Note and support working capital; the timing and terms remained subject to conditions.
- Sirius XM entered into an April 5, 2016 memorandum of understanding to settle TCPA class actions for $35 million in cash, plus free service for participating class members and call-center system modifications. The definitive agreement and court approval were not assured.
- SoundExchange continued to pursue claims alleging Sirius XM underpaid statutory royalties for 2007–2012. The potential loss was not reasonably estimable; SoundExchange sought at least $50 million and potentially $100 million or more, plus fees and interest.
- Key risks include Sirius XM’s substantial debt, dependence on automakers and subscriber retention, increasing music royalties, satellite and information-technology failures, cybersecurity and regulatory exposure, competition from terrestrial and internet audio services, and restrictions on access to subsidiary cash.
- Braves-related risks include construction cost overruns, significant planned borrowing, MLB debt and operating rules, the December 2016 expiration of the collective bargaining agreement, uncertain attendance and on-field performance, and the company’s limited prior experience managing a mixed-use development.
- Market-price risk was significant: a 10% decline in available-for-sale equity securities would have reduced value by approximately $50 million, while a 10% decline in publicly traded Live Nation and Sirius XM Canada holdings would have reduced aggregate value by approximately $155 million.
Most important facts for investors to verify
- Separate the recurring operating improvement from the nonrecurring $511 million Vivendi settlement gain.
- Reconcile Liberty’s consolidated results with Sirius XM’s stand-alone results and account for Sirius XM’s approximately 37% noncontrolling interest.
- Review debt maturities, collateralized margin loans, credit-facility availability and applicable covenants; the filing states that all covenants were satisfied at March 31, 2016.
- Assess the funding plan, remaining commitments and cost-overrun exposure for the Braves ballpark and mixed-use development.
- Monitor completion and court approval of the TCPA settlement and developments in the SoundExchange royalty proceedings.
- Evaluate the economic and governance implications of the new tracking-stock structure, including inter-group obligations, proposed Braves rights offering and the board’s discretion to reattribute assets or liabilities.
- Confirm the effect of subsequent events after March 31, 2016, particularly the April 15 tracking-stock recapitalization and related amendments to the convertible notes and hedging instruments.