Sirius XM Holdings Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context
Sirius XM provides subscription satellite and internet audio services and connected-vehicle services. At quarter-end it reported approximately 32.0 million subscribers: 26.7 million self-pay and 5.4 million paid promotional. Liberty Media beneficially owned approximately 68% of its common stock, making Sirius XM a controlled company under Nasdaq rules.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Revenue | $1,347.6 | $1,235.6 | $2,641.6 | $2,436.6 |
| Operating income | $416.4 | $362.2 | $810.2 | $710.4 |
| Net income | $202.1 | $175.0 | $409.2 | $347.4 |
| Adjusted EBITDA (non-GAAP) | $521.9 | $467.8 | $1,023.7 | $909.1 |
| Free cash flow (non-GAAP) | $416.7 | $394.9 | $665.7 | $723.2 |
- Q2 revenue increased 9%, operating income 15%, net income 16%, and adjusted EBITDA 12% year over year. H1 revenue rose 8%, operating income 14%, net income 18%, and adjusted EBITDA 13%.
- Q2 operating and net margins were approximately 30.9% and 15.0%, versus 29.3% and 14.2% a year earlier. H1 margins were approximately 30.7% and 15.5%, versus 29.2% and 14.3%.
- Subscriber revenue increased 8% in Q2 and 7% in H1, primarily reflecting 5% growth in average subscribers and a 3% increase in average monthly revenue per subscriber (ARPU). Q2 ARPU was $13.22 versus $12.78.
- Advertising revenue grew 20% in Q2 and 17% in H1. Higher revenue share and royalty costs, programming costs, sales and marketing, engineering, and depreciation partly offset revenue growth.
- Q2 diluted EPS was $0.04, unchanged year over year; H1 diluted EPS was $0.09 versus $0.07.
Cash flow, debt and liquidity
- H1 cash from operations was $792.5 million, nearly flat against $794.3 million. Investing cash outflow was $667.7 million, including the Pandora investment, Sirius XM Canada-related funding and acquisition of Automatic. Financing cash outflow was $296.1 million.
- Cash declined to $42.7 million from $213.9 million at year-end 2016. Property and equipment additions were $119.5 million in H1, up from $67.2 million, largely reflecting satellite construction.
- H1 free cash flow fell 8%, which management attributed to a legal-settlement payment, higher capital spending—particularly satellite construction—and interest-payment timing, partly offset by stronger operations.
- Debt carrying value was $6.466 billion, up from $5.856 billion at December 31, 2016. The company had $750 million available under its revolving credit facility and reported compliance with debt covenants. Stockholders’ deficit was $1.042 billion.
- H1 capital returns included $783.8 million of share repurchases and $93.6 million of dividends. The board had $1.25 billion remaining under its $10 billion repurchase authorization and expected regular quarterly dividends totaling $0.04 per share annually.
Material changes, outlook and notable items
- Subscriber net additions slowed: 445,000 in Q2 versus 587,000 a year earlier; H1 additions were 702,000 versus 1.052 million. Total subscribers nevertheless rose 5% year over year. Self-pay monthly churn improved to 1.7% in Q2 from 1.8%; new-vehicle conversion was 40%.
- On April 18, Sirius XM acquired connected-vehicle company Automatic for approximately $107.5 million net of cash acquired. The preliminary allocation included $85.1 million of goodwill and $14.7 million of amortizable intangibles.
- On May 25, Sirius XM recapitalized Sirius XM Canada, taking a 70% equity interest but 33% voting interest; it accounts for the business under the equity method. The transaction included cash, 35 million Sirius XM shares and a $130.8 million, 15-year loan bearing 7.62% interest. New long-term service and advisory agreements provide fees based on Canada’s gross revenue.
- Sirius XM agreed to invest $480 million for preferred stock representing a stated 19% interest in Pandora (approximately 16% on an as-converted basis). $172.5 million had been invested by June 30; the remaining $307.5 million was subject to closing conditions, including regulatory clearance. The preferred stock carries a 6% cumulative dividend if declared and conversion, redemption and governance provisions.
- After quarter-end, Sirius XM issued $2.0 billion of new notes: $750 million of 3.875% notes due 2022 and $1.25 billion of 5.00% notes due 2027. It redeemed $500 million of 4.25% notes in July and planned to redeem $600 million of 5.75% notes in August. The 4.25% redemption was expected to generate an approximately $8.4 million extinguishment loss in Q3; the 5.75% redemption an approximately $21.0 million loss.
- Management said it expected to fund operating needs, capital expenditures, debt service, legal settlements and shareholder returns with existing cash, operating cash flow and facility borrowings, and believed liquidity and debt capacity were sufficient for anticipated needs. It expected subscriber revenue to benefit from subscriber growth, rate increases and additional services. No quantified full-year revenue or earnings guidance is provided in the supplied filing text; management estimated a 37.4% effective tax rate for 2017.
- SoundExchange seeks at least $50 million and potentially $100 million or more, plus interest, late fees and legal costs, over alleged royalty underpayments. The Copyright Royalty Board withdrew its January 2017 ruling and requested further briefing. Sirius XM estimated reasonably possible additional loss at $0–$70 million plus interest or late fees, considered it not probable, and recorded no additional liability.
- Other notable exposures include $10.9 billion of contractual cash commitments as of June 30, 2017, including debt, interest, programming, satellite and lease commitments. Management cited competition, subscriber retention, reliance on the auto industry, satellite or systems failures, regulation, litigation, cybersecurity, significant debt and Liberty Media’s control among material risks.
Most important facts for investors to verify
- Whether subscriber additions recover and self-pay growth, churn and conversion sustain recurring revenue growth.
- Whether cash generation can support rising capital investment, debt service, shareholder returns and strategic investments; note that reported free cash flow is non-GAAP and excludes acquisition and strategic-investment cash outflows.
- Completion and terms of Pandora’s additional investment closing, and the performance and accounting treatment of the Pandora and Sirius XM Canada investments.
- Execution and cost of the debt refinancing, including redemption premiums, extinguishment losses, interest expense and facility availability.
- Developments in the SoundExchange dispute and any resulting royalty liability beyond amounts already accrued.
- Progress and costs of SXM-7 and SXM-8 construction, and the company’s ability to manage programming royalties and other contractual commitments.