Sirius XM Holdings Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited consolidated results; dollar amounts below are in millions unless stated. Sirius XM provides subscription satellite and internet radio, advertising, equipment and connected-vehicle services. Liberty Media owned more than 50% of the company.
Financial and operating performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $1,123.2 (+8%) | $1,035.3 | $2,204.2 (+8%) | $2,033.1 |
| Operating income | $219.4 | $284.6 | $533.2 | $532.0 |
| Net income | $102.8 | $120.0 | $208.5 | $213.9 |
| Diluted earnings per share | $0.02 | $0.02 | $0.04 | $0.04 |
| Operating margin | 19.5% | 27.5% | 24.2% | 26.2% |
| Adjusted EBITDA (non-GAAP) | $415.0 (+12%) | $370.4 | $814.2 (+15%) | $705.2 |
| Free cash flow (non-GAAP) | $370.9 (+11%) | $335.0 | $647.1 (+16%) | $557.8 |
Q2 revenue growth included subscriber revenue of $940.1 million (+7%), advertising revenue of $28.8 million (+13%), equipment revenue of $29.3 million (+6%) and other revenue of $125.0 million (+20%). The company ended June with 28.4 million subscribers, including 23.4 million self-pay subscribers; year-over-year subscriber growth was 8%. First-half net additions were 1.12 million versus 742,000. Monthly self-pay churn improved to 1.7% from 1.9%; new-vehicle conversion eased to 41% from 42%.
First-half cash from operations was $712.3 million, compared with $592.1 million. Capital expenditures were $61.2 million; cash used in investing was $65.2 million. Cash rose to $294.1 million from $147.7 million at year-end 2014. Current assets were $1.63 billion and current liabilities $2.59 billion; current liabilities include substantial deferred subscriber revenue.
Total debt was $5.12 billion at June 30, up from $4.50 billion at year-end; net debt was approximately $4.82 billion. Long-term debt was $5.11 billion. The amended revolving facility had a $1.75 billion capacity, all available at quarter-end, and maturity extended to June 2020. The company reported compliance with debt covenants. First-half interest expense increased 19% to $145.3 million. Contractual cash commitments totaled $8.88 billion, including $2.31 billion of future cash interest.
Changes, unusual items and management outlook
- Revenue growth was supported by subscriber growth, higher subscription rates and music royalty fees, plus connected-vehicle revenue. Management expected subscriber, advertising and other revenue to continue growing; equipment revenue was expected to fluctuate with OEM production.
- Operating income fell 23% in Q2 despite higher revenue, chiefly because revenue share and royalties increased 66% to $331.5 million. This included $107.7 million of expense recognized for the pre-1972 sound-recording settlement, alongside higher revenue-linked royalties and a 5.3% increase in statutory royalty rates. Management expected additional settlement-related expense of $19.1 million in the remainder of 2015 and $83.3 million in 2016–2017.
- The company agreed to pay $210 million to settle the Capitol Records pre-1972 recordings case, due by July 31, 2015. The settlement resolved past claims from participating plaintiffs and permitted use of their recordings through 2017; further licensing from 2018 would require negotiation or arbitration. Other related litigation remained unresolved, and potential losses were not reasonably estimable.
- First-half net income was slightly lower year over year, while adjusted EBITDA and free cash flow increased. Adjusted EBITDA excludes specified items, including the settlement expense; these non-GAAP measures should not be treated as substitutes for GAAP results.
- Management estimated a 38.3% effective tax rate for full-year 2015. Tax-law changes affected deferred tax assets and the valuation allowance. No other numerical full-year financial guidance was provided in the supplied filing text.
- In the first half, the company issued $1.0 billion of 5.375% notes due 2025, increased revolving credit capacity, and repurchased $1.09 billion of shares. Of the $6.0 billion authorized repurchase program, $620.9 million remained available at June 30. Management said it expected to fund operations, investment, debt obligations and repurchases through cash, operating cash flow and borrowing capacity.
- Key risks include competition and subscriber retention, dependence on automakers, rising music royalties, satellite or systems disruption, significant indebtedness, litigation, and Liberty Media’s control. 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
- Whether subscriber additions, churn and conversion trends continue, and how pricing and promotional discounts affect subscriber revenue and ARPU.
- The ongoing impact of music royalty rates and the $210 million settlement on GAAP margins, cash flow and future licensing costs.
- Developments in the Flo & Eddie, SoundExchange and TCPA matters; the filing states potential losses in certain cases cannot be reasonably estimated.
- Debt levels, interest costs, revolving-facility usage and covenant headroom, particularly alongside ongoing share repurchases.
- The comparability and assumptions behind adjusted EBITDA and free cash flow, which are non-GAAP measures and exclude certain costs.