Liberty Media Corporation 2016 Q3 Form 10-Q Summary
Business context and reporting period
Liberty Media Corporation reported unaudited consolidated results for the three and nine months ended September 30, 2016. Its principal operating subsidiary is Sirius XM; other significant interests include Braves Holdings, Live Nation, Sirius XM Canada, and public-company investments. On April 15, 2016, Liberty completed a recapitalization into Liberty SiriusXM, Liberty Braves, and Liberty Media tracking stock groups. These groups are not separate legal entities, and holders remain subject to the risks and liabilities of the parent company.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $1.385 billion | $1.284 billion | $3.955 billion | $3.587 billion |
| Operating income | $352 million | $321 million | $1.461 billion | $737 million |
| Adjusted OIBDA | $485 million | $473 million | $1.331 billion | $1.264 billion |
| Net earnings | $169 million | $41 million | $738 million | $159 million |
| Net earnings attributable to Liberty stockholders | $115 million | $(22) million | $561 million | $20 million |
| Operating margin | 25.4% | 25.0% | 36.9% | 20.5% |
| Adjusted OIBDA margin | 35.0% | 36.8% | 33.7% | 35.2% |
Subscriber revenue was $1.069 billion in Q3 and $3.110 billion for the first nine months. Sirius XM reported approximately 31.0 million subscribers at September 30, 2016, including 25.5 million self-pay and 5.5 million paid promotional subscribers.
- Cash and cash equivalents were $940 million at September 30, 2016, compared with $201 million at December 31, 2015.
- Net cash provided by operating activities was $1.651 billion for the first nine months, compared with $893 million in the prior-year period.
- Investing cash flow was $(1.010) billion, primarily reflecting $762 million of investments in and loans to investees, $318 million of capital expenditures, and $258 million of purchases of short-term investments.
- Financing cash flow was $98 million, including $2.019 billion of debt borrowings, $876 million of debt repayments, $1.225 billion of subsidiary share repurchases, and $203 million of proceeds from the Liberty Braves rights offering.
- Total debt principal was approximately $8.099 billion; carrying value was $8.119 billion, including $609 million classified as current. Long-term debt carrying value was $7.510 billion.
- Total equity was $17.993 billion, including $6.288 billion of noncontrolling interests.
Material changes versus the prior comparable period
- Revenue increased 7.9% in Q3 and 10.3% for the first nine months, driven primarily by Sirius XM revenue growth.
- Operating income increased $31 million in Q3 and $724 million for the first nine months. The nine-month comparison benefited substantially from the $511 million net gain on the Vivendi legal settlement in 2016 and the absence of a $108 million Sirius XM legal settlement expense recorded in 2015.
- Adjusted OIBDA increased $12 million in Q3 and $67 million for the first nine months. Sirius XM growth was partly offset by lower Adjusted OIBDA from Braves Holdings and Liberty Media corporate activities.
- Interest expense increased to $98 million in Q3 and $272 million for the first nine months, reflecting higher average debt balances.
- Realized and unrealized losses on financial instruments improved to a $7 million gain in Q3 from a $200 million loss in Q3 2015, but remained a $33 million loss for the first nine months versus a $188 million loss in the prior-year period.
- Stock-based compensation declined to $109 million for the first nine months from $147 million, primarily because prior-year Sirius XM purchase-accounting amortization had ended.
- Braves Holdings continued construction of its new ballpark and adjacent mixed-use development. It incurred approximately $186 million of related capital expenditures during the first nine months and expects approximately $190 million more during the remainder of 2016.
Guidance, outlook, management commentary, risks and unusual items
- Liberty expects the Formula 1 transaction to close in the first quarter of 2017, subject to regulatory, third-party, and Liberty stockholder approvals. The contemplated transaction value is approximately $8.0 billion, with consideration including cash, newly issued Liberty Media tracking stock, and an exchangeable debt instrument.
- Liberty acquired an initial minority interest in Formula 1 for $746 million in cash in September 2016. The investment was accounted for as a cost investment pending the anticipated acquisition of control.
- Management stated that available liquidity was sufficient for projected uses of cash. Sources include cash, subsidiary operating cash flow, asset monetizations, debt capacity, equity issuances, and dividends or interest receipts; however, Liberty noted that it has limited direct access to Sirius XM cash because of Sirius XM’s separate public-company structure and noncontrolling interest.
- Sirius XM announced its first quarterly dividend of $0.01 per share, with management expecting regular quarterly dividends totaling $0.04 per share annually.
- Sirius XM’s first-quarter and nine-month results continued to include amortization related to the Capitol Records settlement, including $10 million and $30 million of revenue-share expense, respectively, in 2016.
- Sirius XM agreed to a $35 million settlement payment in the TCPA class actions, subject to final court approval. The company also faces a pending SoundExchange royalty matter seeking at least $50 million and potentially $100 million or more; the filing states that a reasonably possible loss range cannot be estimated.
- Formula 1 execution risks include regulatory and stockholder approvals, transaction costs, management distraction, restrictive interim covenants, financing needs, and the possibility that Liberty ultimately retains only a minority interest if the transaction is not completed.
- Other risks include subscriber retention and acquisition, dependence on automakers, rising music royalties, satellite or information-technology failures, leverage and interest-rate exposure, market-value changes in public investments, regulatory matters, and litigation.
- Liberty early adopted share-based-payment accounting guidance, recording a $66 million cumulative adjustment to retained earnings at January 1, 2016. The filing does not provide a clear comparable-period impact on earnings from this adoption.
Important facts for investors to verify
- Completion conditions, financing structure, dilution, and final consideration for the Formula 1 acquisition and the proposed renaming of the Liberty Media Group to the Formula One Group.
- Sirius XM subscriber growth, churn, average revenue per subscriber, royalty rates, repurchases, and the sustainability of the newly announced dividend.
- Debt maturities, covenant compliance, collateral values, and the refinancing of the Liberty margin loan completed after September 30, 2016.
- Remaining funding requirements and completion risks for the Braves ballpark and mixed-use development.
- Potential exposure from the SoundExchange proceeding, TCPA settlement approval, other litigation, and tax contingencies.
- The effect of tracking-stock attribution, intergroup interests, noncontrolling interests, convertible notes, warrants, and potential dilution on each tracking stock’s economic value.
- Controls and procedures were reported effective as of September 30, 2016, with no material change in internal control over financial reporting.