Sirius XM Holdings Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are primarily with 2014. The company provides subscription satellite and internet radio, advertising, equipment, ancillary and connected-vehicle services. It reported approximately 29.6 million subscribers at year-end. Liberty Media owned more than 50% of the common stock.
Financial and operating performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $4.570 billion | $4.181 billion | +9% |
| Operating income | $1.179 billion | $1.120 billion | +5% |
| Operating margin | 25.8% | 26.8% | Down about 1.0 percentage point |
| Net income | $510 million | $493 million | +3% |
| Diluted earnings per share | $0.09 | $0.08 | Up $0.01 |
| Cash from operating activities | $1.244 billion | $1.253 billion | Down $9 million |
| Adjusted EBITDA (non-GAAP) | $1.658 billion | $1.468 billion | +13% |
| Free cash flow (non-GAAP) | $1.315 billion | $1.156 billion | +14% |
Subscriber revenue rose 8%, to $3.825 billion, with subscriber growth and selected rate increases. Advertising revenue increased 21%, and other revenue rose 22%, partly reflecting the U.S. Music Royalty Fee and connected-vehicle activity. Operating expenses increased 11%; revenue share and royalties rose 28%, including costs related to pre-1972 recording settlements and higher statutory royalties. Net margin was approximately 11.2%, versus 11.8% in 2014.
Year-end self-pay subscribers were 24.3 million and paid promotional subscribers were 5.3 million. Net subscriber additions increased to 2.283 million from 1.752 million. Average self-pay monthly churn improved to 1.8% from 1.9%; new-vehicle conversion declined to 40% from 41%. ARPU increased to $12.53 from $12.38.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $112 million, down from $148 million. The company reported $1.410 billion available under its $1.750 billion revolving credit facility.
- Debt principal was approximately $5.5 billion, versus $4.5 billion in 2014; long-term debt, net of current maturities and issuance costs, was $5.444 billion. The increase included issuance of $1.0 billion of 5.375% senior notes due 2025. The company also borrowed under and repaid its revolving facility during the year.
- Current assets were $562 million and current liabilities were $2.496 billion; current liabilities include $1.772 billion of deferred revenue. Stockholders’ equity shifted from $1.310 billion to a deficit of $166 million, reflecting substantial share repurchases and other equity movements.
- Financing activities used $1.141 billion, including $2.018 billion spent repurchasing and retiring shares. Since December 2012, cumulative repurchases were $6.3 billion, with $1.699 billion remaining authorized. The company paid no regular dividend.
- The company said it was in compliance with debt covenants at year-end. Its revolving facility includes a maximum total leverage ratio of 5.0 to 1.0 and restricts certain additional debt, dividends and other actions.
Reported operating cash flow was slightly lower year over year. Management’s $1.315 billion free-cash-flow measure is non-GAAP and excludes the $210 million cash payment for the pre-1972 recording settlement; it should not be treated as cash available after debt maturities.
Material changes, outlook and risks
- Revenue grew 9%, while operating income grew 5%; higher royalty costs, including a $128 million 2015 expense associated with pre-1972 recording settlements, weighed on operating results. The $210 million settlement payment was made in July 2015 and covered record companies claiming rights to about 85% of the pre-1972 recordings historically played.
- Management expected subscriber revenue to rise with subscriber growth, selected rate increases and additional services; it also anticipated continued advertising growth. It expected royalties to increase with revenue and statutory rates, and expected spending on subscriber retention, marketing, engineering and infrastructure to continue. No specific quantified company-wide earnings or revenue guidance is provided in the supplied filing text.
- Satellite recording royalties were 10% of applicable gross revenue in 2015 and were scheduled to rise to 10.5% in 2016 and 11% in 2017. Internet streaming rates also changed beginning in 2016. Further music-rights litigation and licensing changes could increase costs.
- Several TCPA class actions and suits concerning pre-1972 recordings remained pending. SoundExchange alleged historical royalty underpayments and sought at least $50 million, potentially $100 million or more, plus other amounts; the matter had been referred to the Copyright Royalty Board. The company said outcomes were uncertain and did not record losses where they were not probable and estimable.
- Key business risks include competition from free and internet-based audio, dependence on automakers and vehicle sales, subscriber churn and conversion, data security and regulatory compliance, and high leverage. Satellite failure is a particular exposure: satellites were uninsured, several Sirius satellites were beyond their depreciable lives, and the planned constellation transition could affect coverage.
- Liberty Media’s majority ownership gives it significant influence over shareholder matters. The company is a Nasdaq “controlled company” and relies on exemptions from certain governance requirements.
Most important facts for investors to verify
- Whether subscriber additions, conversion, churn and ARPU trends support continued subscription-revenue growth.
- How statutory royalty increases and remaining pre-1972 recording claims affect future costs and cash flows.
- Debt maturities, interest costs, revolving-facility availability and covenant headroom, alongside the scale and funding of further buybacks.
- Satellite fleet reliability, coverage effects from the planned transition and investment needs; satellites are not insured in orbit.
- Progress and economics of the planned SXM17 in-vehicle product, which the company expected automakers to begin including as early as 2017.
- Developments in TCPA litigation, the SoundExchange proceeding and uncertain tax positions.