Sirius XM Holdings Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited; amounts below are USD millions unless otherwise stated.
Business context
Sirius XM provides subscription satellite and internet radio, connected-vehicle services, advertising, and radio equipment. It reported one operating segment. Liberty Media beneficially owned more than 50% of the company and Sirius XM was a NASDAQ “controlled company.” At quarter-end, Sirius XM reported approximately 29.0 million subscribers, including 23.8 million self-pay and 5.1 million paid promotional subscribers.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $1,169.7 | $1,057.1 | $3,373.9 | $3,090.1 |
| Operating income | $351.6 | $294.0 | $884.8 | $826.0 |
| Net income | $166.6 | $136.2 | $375.1 | $350.1 |
| Diluted earnings per share | $0.03 | $0.02 | $0.07 | $0.06 |
| Adjusted EBITDA (non-GAAP) | $447.2 | $381.3 | $1,261.4 | $1,086.5 |
Q3 revenue increased 11%, operating income 20%, and net income 22% year over year. Nine-month revenue rose 9%, operating income 7%, and net income 7%. Approximate operating margins were 30.1% in Q3 2015 versus 27.8% in Q3 2014, and 26.2% versus 26.7% for the nine-month periods. Subscriber revenue was the largest revenue source, up 8% in Q3 and 7% year to date. Advertising revenue grew 31% and 22%, respectively; other revenue grew 28% and 22%.
Growth reflected subscriber-base expansion, subscription-rate increases, advertising sales, and connected-vehicle and Canadian affiliate revenue. Revenue share and royalties increased 17% in Q3 and 31% year to date, driven by higher revenue subject to royalties, a 5.3% statutory royalty-rate increase, and the pre-1972 recording settlement. Nine-month interest expense rose 13% to $221.9 million, mainly due to higher average debt.
Cash flow, liquidity and debt
- Cash from operations for the first nine months was $901.0 million, compared with $888.2 million. Capital expenditures were $90.9 million; investing cash outflow was $94.9 million.
- Reported free cash flow, a non-GAAP measure, was $1,016.0 million for nine months, up 23%. This measure adds back the $210 million pre-1972 sound-recording settlement payment and should not be read as GAAP operating cash flow or as cash after debt maturities.
- Cash and equivalents were $152.5 million at September 30, 2015. Total debt was $5.406 billion, up from $4.501 billion at year-end 2014. The company issued $1.0 billion of 5.375% senior notes due 2025 and amended its revolving facility, increasing capacity to $1.75 billion and extending maturity to 2020. $1.46 billion remained available to borrow.
- The company repurchased and retired $1.648 billion of stock during the nine-month period. The board authorized an additional $2.0 billion of repurchases in August, bringing total authorization to $8.0 billion; $2.068 billion remained available at quarter-end. Stock repurchases were a major use of financing cash.
- Stockholders’ equity fell to $60.9 million from $1.310 billion at December 31, 2014, primarily reflecting the scale of share repurchases and retirement. The company said it was in compliance with debt covenants.
Operating trends, outlook and risks
Net subscriber additions were 525,000 in Q3 and 1.649 million for the first nine months, compared with 433,000 and 1.175 million in the prior-year periods. Q3 average self-pay monthly churn was 1.9%, unchanged; ARPU was $12.67 versus $12.47. Management attributed subscriber growth to OEM shipments with paid trials, trial conversions, and inactive-radio activations, partly offset by deactivations and effects of an FCC order concerning the Telephone Consumer Protection Act.
No specific consolidated earnings or revenue guidance is provided in the supplied filing text. Management expected subscriber revenue to rise with subscriber growth, rate increases, and additional services; it also anticipated growth in advertising and U.S. Music Royalty Fee revenue. Management expected royalty costs to increase, with further expense from the pre-1972 settlement, and anticipated increases in several growth-related costs. It stated that existing cash, operating cash flow, and available borrowing capacity were expected to fund operating needs, capital spending, legal settlements, debt service, and repurchases.
In June 2015, Sirius XM settled a separate pre-1972 recordings case for $210 million, paid in July. The settlement covers recordings claimed by companies representing approximately 85% of the recordings historically played; the remaining service-period amount is being amortized through 2017. Other pre-1972 recording suits include adverse rulings in California and New York under appeal, a favorable Florida ruling under appeal, and additional putative class actions. The company also faces TCPA class actions. It said the reasonably possible loss range for these matters was not estimable and warned outcomes could materially affect results, financial condition, or cash flows.
Other risks identified include competition, subscriber retention, dependence on the automotive industry, music royalty costs, satellite or IT-system failures, regulation and consumer-protection laws, litigation, intellectual-property claims, and substantial indebtedness. Liberty Media’s controlling ownership may mean its interests differ from those of other shareholders. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Subscriber growth quality: self-pay additions, paid promotional mix, churn, conversion rates, and the effect of FCC-related limits on outbound calling.
- Debt and capital allocation: total leverage, revolving-credit availability, debt covenants, interest burden, and continued repurchases relative to cash generation.
- Royalty economics: statutory rate increases and the remaining expense and cash implications of the pre-1972 settlement.
- Legal exposure: developments in TCPA, SoundExchange, Flo & Eddie, and Sheridan matters, for which potential losses were not estimable.
- Non-GAAP measures: reconcile adjusted EBITDA and free cash flow to GAAP results, particularly the $210 million settlement add-back in free cash flow.