Sirius XM Holdings Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; unaudited consolidated results. Dollar amounts below are in millions unless stated otherwise. Sirius XM provides subscription satellite and internet radio and connected-vehicle services. Liberty Media beneficially owned approximately 65% of common shares and the company identified itself as a controlled company.
Financial and operating performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1,277.6 | $1,169.7 | $3,714.2 | $3,373.9 |
| Operating income | $392.2 | $351.6 | $1,102.6 | $884.8 |
| Net income | $193.9 | $166.6 | $541.3 | $375.1 |
| Diluted EPS | $0.04 | $0.03 | $0.11 | $0.07 |
| Adjusted EBITDA (non-GAAP) | $491.9 | $447.2 | $1,401.0 | $1,261.4 |
| Free cash flow (non-GAAP) | $356.5 | $368.9 | $1,079.7 | $1,016.0 |
- Revenue grew 9% in Q3 and 10% year to date. Subscriber revenue rose 10% in both periods, reflecting subscriber growth and higher average revenue per subscriber (ARPU). Advertising revenue increased 3% in Q3 and 12% year to date.
- Operating margin was approximately 30.7% in Q3 versus 30.1% a year earlier, and 29.7% for the nine months versus 26.2%. Net margin was approximately 15.2% and 14.2% for Q3, respectively, and 14.6% and 11.1% year to date.
- Net cash from operations was $1,216.1 for the nine months, up from $901.0. Investing used $136.4, including $132.2 of property and equipment additions. Financing used $619.1, including $1,225.3 of share repurchases, partly offset by debt issuance and facility borrowings. Cash ended at $572.4, compared with $111.8 at year-end 2015.
- At September 30, total debt carrying value was $6,110.2, including $358.7 classified as current maturities. Cash was $572.4; the filing reports $1,750.0 available under the revolving credit facility. Interest expense was $89.1 in Q3 and $250.9 year to date, up 16% and 13%, respectively. The company was in compliance with debt covenants.
- Current assets were $1,041.4 and current liabilities $2,902.0; current liabilities include $1,811.3 of deferred revenue. Stockholders’ deficit was $506.5.
- Subscribers totaled approximately 31.0 million, up 7% year over year: 25.5 million self-pay and 5.5 million paid promotional. Q3 net additions were 345,000, down 34%; self-pay monthly churn was 1.9%. Q3 ARPU increased 3% to $13.04.
Material changes versus the prior comparable period
- Net income increased 16% in Q3 and 44% for the nine months. Year-to-date growth included a lower effective tax rate versus 2015, which had been affected by state and local tax-law changes.
- Operating expenses rose 8% in Q3 and 5% year to date. Programming and content costs increased 18% and 19%, respectively; general and administrative costs rose 34% and 14%, with Q3 comparisons affected by insurance recoveries related to a legal settlement in 2015. Q3 subscriber acquisition costs declined 10%.
- Net additions slowed, principally because of slower growth in paid promotional subscribers associated with vehicle sales; year-to-date self-pay net additions also declined 4%. New-vehicle conversion rates were 40% in Q3 and 39% year to date, versus 41% in both prior periods.
- Q3 free cash flow declined 3%, principally reflecting satellite construction spending and a TCPA settlement payment; nine-month free cash flow increased 6%.
- The company issued $1.0 billion of 5.375% senior notes due 2026 in May. It repurchased $1,214.1 of shares in the first nine months, versus $1,647.7 a year earlier.
Outlook, significant events and risks
- No specific full-year revenue or earnings guidance is provided. Management expects subscriber revenue to grow with subscriber-base expansion, rate increases and additional services; it estimated a 2016 annual effective tax rate of approximately 32%, including an expected fourth-quarter federal R&D tax credit.
- Management stated it expected to meet funding needs through cash, operating cash flow and facility borrowings, and believed liquidity and debt capacity were sufficient for planned needs, repurchases and strategic opportunities. It also anticipated higher costs in several areas, including programming, marketing, engineering and general and administrative expenses.
- On October 1, 2016, the company redeemed $650 million principal amount of 5.875% notes for approximately $669.1 million, funded with $359.1 million of cash and $310.0 million of additional revolver borrowings. It expected to record an approximately $24.2 million debt-extinguishment loss in Q4.
- After quarter-end, the board authorized an additional $2.0 billion of repurchases, bringing total authorization to $10.0 billion. It also declared the first quarterly dividend of $0.01 per share, with an expected annual rate of $0.04 per share. The company said additional repurchases could be funded with cash, operating cash flow and future borrowings.
- The proposed Sirius XM Canada transaction remained subject to Canadian regulatory approval and was expected to close in Q4 2016. Sirius XM expected to contribute approximately $275 million if all shareholders elected cash consideration; its anticipated interest after closing was 70% economic and 33% voting.
- TCPA class-action settlements were subject to final court approval; the company had paid $35 million into a settlement fund and agreed to offer participating class members three months of Select service and modify certain vendor practices. A separate SoundExchange proceeding sought $50–$100 million or more, plus fees and interest; the decision was pending and no provision was recorded where losses were not considered probable and estimable.
- Key disclosed risks include competition and subscriber retention, reliance on the automotive industry, satellite or systems failures, regulation and consumer-protection laws, litigation, intellectual-property claims, significant indebtedness and restrictive covenants, and Liberty Media’s control. The company noted five of six owned satellites were operating at quarter-end and planned to deorbit the unused, fully depreciated SIRIUS FM-1 in Q4.
- The company early adopted share-based compensation accounting guidance in Q3, recording a $293.9 million cumulative adjustment to deferred tax assets and accumulated deficit as of January 1, 2016. Management 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 growth, conversion, churn and ARPU trends continue, particularly given slower net additions and lower new-vehicle conversion.
- Cash generation after satellite investment, settlement payments, debt service and planned share repurchases and dividends; free cash flow is a non-GAAP measure and does not deduct debt maturities.
- Debt levels, variable-rate revolver exposure, covenant headroom and the cash and borrowing effects of the October note redemption and subsequent capital returns.
- Final approval and outcome of the TCPA settlement, the pending SoundExchange decision and related potential costs.
- Regulatory approval, final consideration mix and funding requirements for the Sirius XM Canada transaction.
- Growth in programming, royalty and corporate costs, including scheduled increases in statutory music royalty rates and remaining pre-1972 settlement expense.