Liberty Media Corporation 2019 Q2 Form 10-Q Summary
Business context and reporting period
Liberty Media Corporation is a diversified media, communications and entertainment company with three tracking-stock groups: Liberty SiriusXM, Liberty Braves and Liberty Formula One. Principal businesses include SIRIUS XM Holdings, Pandora, Formula 1, Braves Holdings and an equity-method investment in Live Nation. The filing covers the three and six months ended June 30, 2019, compared with the same periods in 2018. Results are unaudited and reported under U.S. GAAP.
Pandora was acquired by SIRIUS XM Holdings on February 1, 2019, and its results are included in Liberty’s consolidated results from that date. Tracking-stock groups are not separate legal entities; holders have claims on Liberty as a whole rather than direct ownership of the attributed businesses or assets.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $2.805 billion, versus $2.199 billion | $4.817 billion, versus $3.716 billion |
| Operating income | $461 million, versus $374 million | $661 million, versus $601 million |
| Operating margin | 16.4%, versus 17.0% | 13.7%, versus 16.2% |
| Adjusted OIBDA | $815 million, versus $727 million | $1.429 billion, versus $1.216 billion |
| Adjusted OIBDA margin | 29.1%, versus 33.1% | 29.7%, versus 32.7% |
| Net earnings attributable to Liberty stockholders | $116 million, versus $172 million | $(42) million, versus $303 million |
| Net earnings attributable to Liberty stockholders per share | Liberty SiriusXM $0.52; Braves $0.51; Formula One $(0.33) | Liberty SiriusXM $0.71; Braves $(0.88); Formula One $(0.97) |
| Net cash provided by operating activities | Not separately provided for the quarter | $1.172 billion, versus $1.268 billion |
Revenue growth was driven primarily by the Pandora acquisition and higher revenue from SIRIUS XM, Formula 1 and Braves Holdings. SIRIUS XM Holdings contributed $1.977 billion of second-quarter revenue, Formula 1 contributed $620 million and Braves Holdings contributed $208 million.
At June 30, 2019, cash and cash equivalents were $697 million, compared with $358 million at December 31, 2018. Including restricted cash, total cash, cash equivalents and restricted cash was $751 million. Total assets were $43.700 billion and total equity was $22.481 billion.
Total debt was approximately $14.424 billion at June 30, 2019, including $13 million classified as current. Long-term debt was $14.411 billion, compared with $13.371 billion at year-end 2018. Liberty and its subsidiaries were in compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Second-quarter revenue increased $606 million, or approximately 28%; six-month revenue increased $1.101 billion, or approximately 30%.
- Second-quarter operating income increased $87 million, while six-month operating income increased $60 million.
- Adjusted OIBDA increased $88 million in the quarter and $213 million for the six months. SIRIUS XM Holdings and Formula 1 were the principal contributors.
- Net earnings attributable to Liberty stockholders declined in the quarter because of higher interest expense and a $145 million unfavorable change in realized and unrealized gains and losses on financial instruments. The six-month period shifted to a $42 million loss from $303 million of earnings, primarily reflecting a $396 million unfavorable change in financial-instrument gains and losses, higher interest expense and higher taxes.
- Pandora contributed $441 million of revenue and a $56 million net loss in the second quarter, and $692 million of revenue and a $178 million net loss from the acquisition date through June 30.
- Pro forma combined SIRIUS XM and Pandora revenue increased 9% in the second quarter and 9% for the six months; pro forma Adjusted OIBDA increased 22% and 24%, respectively.
- SIRIUS XM revenue increased approximately 7% in the quarter and 8% for the six months on higher subscriber revenue, advertising and equipment revenue. Daily weighted-average subscribers increased 3%.
- Formula 1 revenue increased $35 million in the quarter and $167 million for the six months. Formula 1 operating income improved to $26 million in the quarter and a $21 million loss for the six months, versus a $95 million loss in the prior-year six-month period.
- Liberty repurchased 2.2 million Series C Liberty SiriusXM shares during the quarter for approximately $84 million; six-month repurchases totaled $306 million.
Cash flow, liquidity and capital allocation
- Operating cash flow was $1.172 billion for the first six months, down from $1.268 billion, primarily reflecting lower earnings and changes in operating assets and liabilities.
- Investing activities generated $512 million, including $373 million of investment-sale proceeds and $313 million of cash acquired in the Pandora transaction, partly offset by $221 million of capital expenditures.
- Financing activities used $1.385 billion, including $2.387 billion of debt repayments, $306 million of Liberty SiriusXM share repurchases and $1.474 billion of subsidiary share repurchases, partly offset by $2.879 billion of borrowings.
- Available borrowing capacity included $875 million under the SIRIUS XM Holdings margin loan, $600 million under the Live Nation margin loan and $1.749 billion under the SIRIUS XM revolving credit facility.
- Liberty reported $361 million of unencumbered marketable equity securities and no corporate debt rating. Management stated that available liquidity sources are sufficient for projected uses, including debt service, investments, potential share repurchases and subsidiary operating needs.
- Cash at the tracking-stock group level was approximately $236 million for Liberty SiriusXM, $127 million for Braves and $334 million for Formula One. Access to subsidiary cash may be restricted by noncontrolling interests, debt covenants, tax considerations or operating requirements.
Guidance, outlook, commentary and risks
The filing does not provide formal consolidated revenue, earnings or Adjusted OIBDA guidance. Management expects Liberty’s projected cash uses to be funded through cash on hand, operating cash flow, asset monetizations, dividends and available borrowing capacity. SIRIUS XM Holdings expects regular quarterly dividends totaling approximately $0.0484 per share annually, subject to future board declarations.
Management’s outlook assumes continued operating cash generation from SIRIUS XM, Formula 1 and Braves Holdings. Formula 1 results are seasonal, with most events and related revenue occurring from March through November. Braves Holdings is also seasonal, with most revenue recognized in the second and third quarters.
- Pandora integration, anticipated synergies and the ability to achieve expected operating benefits remain important execution factors. Pandora’s acquisition accounting remains preliminary, including certain asset, contingency and tax balances.
- SIRIUS XM faces risks from subscriber retention, competition, automaker dependence, content royalties, satellite or technology failures, data security and regulatory requirements.
- Liberty is exposed to stock-price and interest-rate volatility through marketable securities, exchangeable debt, derivatives, margin loans and its Live Nation investment. A 10% decline in marketable securities would reduce their value by approximately $36 million; a 10% decline in the Live Nation share price would reduce the value of that exposure by approximately $461 million.
- Debt levels and variable-rate borrowings may constrain financial flexibility. Formula 1 had approximately $2.9 billion outstanding under its Senior Loan Facility, while SIRIUS XM and Braves Holdings also have secured or covenant-based debt.
- SIRIUS XM agreed to a $25 million settlement fund for a Telephone Consumer Protection Act class action, subject to court approval. The charge was excluded from Adjusted OIBDA.
- Pandora remains involved in litigation concerning public performance royalties for pre-1972 sound recordings. Pandora made payments and filings under the Music Modernization Act in July 2019 to pursue a federal preemption defense; the litigation outcome remains uncertain.
- Other risks include litigation and tax contingencies, changing consumer demand, regulatory changes, economic conditions, cybersecurity, political and geopolitical events, supplier disruptions and intellectual-property claims.
Most important facts an investor should verify
- Whether Pandora integration produces the expected revenue growth, cost efficiencies and improvement from its reported six-month net loss.
- The sustainability of SIRIUS XM subscriber growth, advertising growth and dividend distributions, and the effect of higher royalty costs.
- Liberty’s consolidated debt maturity profile, refinancing needs, margin-loan collateral and restrictions on subsidiary cash transfers.
- The effect of mark-to-market gains and losses on exchangeable debt, bond hedges, derivatives and other financial instruments on reported earnings.
- The final purchase-price allocation for Pandora, including goodwill, intangible assets, tax balances and contingencies.
- The resolution and financial impact of Pandora’s pre-1972 recording litigation and the final approval of the SIRIUS XM TCPA settlement.
- The distinction between Liberty’s tracking-stock economics and direct ownership of SIRIUS XM, Braves or Formula 1 assets, including the 15.1% Formula One Group intergroup interest in the Braves Group.