Liberty Media Corporation — Q2 2018 Form 10-Q Summary
Business context and reporting period
Liberty Media operates through interests in media, communications and entertainment businesses, primarily SIRIUS XM, Formula 1, Braves Holdings and equity affiliates including Live Nation. The filing covers the quarter and six months ended June 30, 2018; financial statements are unaudited. Liberty’s three tracking-stock groups are not separate legal entities and holders remain subject to the risks and liabilities of the parent company.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2,199 million | $2,140 million | $3,716 million | $3,535 million |
| Operating income | $374 million | $422 million | $601 million | $681 million |
| Net earnings | $255 million | $156 million | $468 million | $200 million |
| Net earnings attributable to Liberty stockholders | $172 million | $94 million | $303 million | $73 million |
| Adjusted OIBDA | $727 million | $698 million | $1,216 million | $1,165 million |
| Cash flow from operating activities | Not separately provided | Not separately provided | $1,268 million | $739 million |
Revenue increased 3% year over year in the quarter and 5% for the six-month period. Operating margin was approximately 17.0% in Q2 2018 versus 19.7% in Q2 2017; six-month operating margin was approximately 16.2% versus 19.3%. Adjusted OIBDA margin was approximately 33.1% in Q2 2018 versus 32.6% in Q2 2017, and 32.7% versus 33.0% for the six-month periods.
- Segment performance: Q2 revenue and Adjusted OIBDA were $1,432 million and $536 million for SIRIUS XM, $182 million and $63 million for Braves Holdings, and $585 million and $128 million for Formula 1.
- Balance sheet: Total assets were $41.8 billion at June 30, 2018, compared with $42.0 billion at December 31, 2017. Cash and cash equivalents were $485 million, down from $1.029 billion. Total debt was approximately $13.27 billion, including $18 million classified as current.
- Liquidity: Group-attributed cash totaled approximately $485 million, comprising $174 million for Liberty SiriusXM Group, $113 million for Braves Group and $198 million for Formula One Group. Available borrowing capacity included $900 million under the Liberty SiriusXM margin loan, $150 million under the Live Nation Margin Loan and $1.75 billion under SIRIUS XM’s revolving credit facility.
- Equity and investments: Investments in debt and equity securities were $1.429 billion and equity-method investments were $1.659 billion. Live Nation had a June 30 carrying value of $751 million and reported fair value of $3.383 billion.
Material changes versus the prior comparable period
- SIRIUS XM revenue rose $84 million in Q2 and $165 million for the six-month period. Subscribers reached approximately 33.5 million at June 30, 2018, up from 32.7 million at December 31, 2017.
- SIRIUS XM Adjusted OIBDA increased to $542 million from $519 million in Q2 and to $1.072 billion from $1.019 billion for six months. However, operating income declined because of a $69 million SoundExchange legal-settlement charge, higher stock-based compensation and depreciation and amortization.
- Formula 1 revenue declined $31 million in Q2 and $13 million for six months. Pro forma comparisons indicate lower primary revenue and higher selling, general and administrative costs; Formula 1 Adjusted OIBDA fell to $134 million from $169 million in Q2 and to $137 million from $177 million for six months.
- Braves Holdings revenue increased $6 million in Q2 and $29 million for six months. Adjusted OIBDA improved to $64 million from $28 million in Q2 and to $31 million from breakeven for six months, primarily due to lower player salaries and higher development revenue.
- Net earnings benefited from realized and unrealized financial-instrument gains of $58 million in Q2 and $211 million for six months, versus losses of $49 million and $61 million, respectively, in the prior-year periods.
- Operating cash flow increased $529 million to $1.268 billion for the first six months. Investing cash use was $300 million versus $2.468 billion in the prior year, which included $1.647 billion paid for the Formula 1 acquisition. Financing cash use was $1.451 billion versus $1.906 billion of cash provided in the prior year.
Guidance, outlook, risks and unusual items
- Management states that available liquidity is expected to be sufficient for projected uses of cash. Expected uses include investment in businesses, debt service, potential share repurchases, SIRIUS XM capital expenditures and legal settlements, Formula 1 debt service and Braves Holdings development expenditures.
- SIRIUS XM stated that it expected regular quarterly dividends aggregating $0.044 per share annually; its board declared a $0.011-per-share dividend payable August 31, 2018.
- SIRIUS XM settled SoundExchange claims covering January 1, 2007 through December 31, 2017. It accrued $69 million in Q2 operating expense and paid the remaining settlement amount, resulting in a $150 million lump-sum payment on July 6, 2018.
- Liberty adopted ASC 606 revenue recognition effective January 1, 2018 using the modified retrospective method. The adoption increased opening retained earnings by $41 million and had no material effect on reported six-month net earnings, although it changed revenue and expense presentation and timing.
- The company expects to adopt the new lease standard on January 1, 2019. The filing does not provide a clear quantified estimate of its effect.
- Key risks include subscriber demand and churn, dependence on automakers, competition, increasing music royalties, satellite and information-technology failures, regulatory changes, cybersecurity, acquisition integration, market and interest-rate volatility, significant indebtedness and litigation or tax matters.
- Liberty’s debt is exposed to variable rates, and marketable securities and Live Nation shares are exposed to equity-market risk. A 10% decline in marketable debt and equity securities would have reduced their value by approximately $136 million; a 10% decline in Live Nation’s market price would have reduced its implied value by approximately $338 million.
Important facts for investors to verify
- Reconcile consolidated results with the attributed economics and liabilities of the Liberty SiriusXM, Braves and Formula One tracking-stock groups.
- Assess the sustainability of SIRIUS XM’s Adjusted OIBDA growth against higher royalty rates, subscriber acquisition and marketing costs, and the approximately 30% SIRIUS XM noncontrolling interest.
- Review debt maturities, variable-rate exposure, collateral requirements and covenant compliance; management reported compliance with all debt covenants at June 30, 2018.
- Evaluate the effect of the $150 million SoundExchange settlement and any remaining legal, tax or indemnification contingencies.
- Confirm the valuation and liquidity of pledged Live Nation, SIRIUS XM, AT&T and other securities, as well as the availability of margin-loan capacity.
- Consider seasonality: Formula 1 revenue and costs depend on race timing, while Braves Holdings is concentrated in the second and third quarters.