Liberty Media Corporation 2017 Q3 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Liberty operates through three tracking stock groups: Liberty SiriusXM, Liberty Braves and Liberty Formula One. Principal businesses include SIRIUS XM, Formula 1, Braves Holdings and equity investments including Live Nation. Tracking stocks are not separate legal entities; holders remain subject to the risks and liabilities of Liberty Media Corporation as a whole.
Liberty began consolidating Formula 1 on January 23, 2017, following its acquisition of Delta Topco. The acquisition significantly affects year-over-year comparability.
Financial Performance and Key Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $2.065 billion | $1.385 billion | $5.600 billion | $3.955 billion |
| Operating income | $382 million | $352 million | $1.063 billion | $1.461 billion |
| Net earnings | $261 million | $169 million | $461 million | $738 million |
| Net earnings attributable to Liberty stockholders | $168 million | $115 million | $241 million | $561 million |
| Adjusted OIBDA | $695 million | $485 million | $1.860 billion | $1.331 billion |
| Cash flow from operating activities | Not separately provided | Not separately provided | $1.313 billion | $1.651 billion |
- Q3 operating margin was approximately 18.5%; nine-month operating margin was approximately 19.0%.
- Q3 Adjusted OIBDA margin was approximately 33.7%; nine-month Adjusted OIBDA margin was approximately 33.2%.
- Q3 net margin was approximately 12.6%; nine-month net margin was approximately 8.2%.
- Revenue increased 49% in Q3 and 42% for the nine-month period. Formula 1 contributed $501 million in Q3 and $1.213 billion year-to-date.
- Interest expense increased to $159 million in Q3 and $448 million year-to-date, versus $98 million and $272 million, respectively, in the prior-year periods.
- Share of earnings of affiliates increased to $155 million in Q3 and $167 million year-to-date, including contributions from Live Nation, SIRIUS XM Canada and other affiliates.
Segment Performance
| Segment | Q3 2017 Revenue | Q3 2017 Adjusted OIBDA | 9M 2017 Revenue | 9M 2017 Adjusted OIBDA |
|---|---|---|---|---|
| SIRIUS XM | $1.379 billion | $549 million | $4.021 billion | $1.568 billion |
| Braves Group | $185 million | $48 million | $366 million | $46 million |
| Formula One Group | $501 million | $104 million | $1.213 billion | $259 million |
- SIRIUS XM subscribers reached approximately 32.2 million at September 30, 2017, up from 31.3 million at December 31, 2016. Self-pay subscribers were approximately 27.0 million and paid promotional subscribers were approximately 5.2 million.
- SIRIUS XM revenue increased primarily from subscriber growth, rate increases, higher advertising and connected-vehicle revenue, and new SIRIUS XM Canada service arrangements.
- Formula 1 pro forma revenue was $501 million in Q3 and $1.214 billion year-to-date, while pro forma Adjusted OIBDA was $111 million and $288 million, respectively. The business remained affected by event timing, foreign exchange and acquisition-related amortization.
- Braves revenue increased with the move to the new ballpark. Nine-month operating loss was $41 million, reflecting higher player, stadium, selling and administrative costs, stock compensation and depreciation.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $783 million at September 30, 2017, compared with $562 million at December 31, 2016.
- Total debt principal was approximately $13.243 billion, compared with $8.018 billion at year-end 2016. Reported long-term debt was $13.445 billion, including fair-value adjustments and current debt classification.
- Liberty reported $1.313 billion of operating cash flow, $2.914 billion of investing cash outflows and $1.815 billion of financing cash inflows during the first nine months.
- Investing outflows included $1.647 billion of net cash paid for the Formula 1 acquisition, $760 million of investments in and loans to investees, and $407 million of capital expenditures.
- Available borrowing capacity included $500 million under the SiriusXM margin-loan revolver, $150 million under the Live Nation Margin Loan and $1.460 billion under the SIRIUS XM revolving credit facility.
- Unencumbered liquidity included approximately $234 million of cash attributed to the SiriusXM Group, $129 million attributed to the Braves Group, $420 million attributed to the Formula One Group and $402 million of Formula One Group fair-value option securities.
- Management stated that available liquidity was sufficient for projected uses of cash. Access to subsidiary cash may be limited by noncontrolling interests, subsidiary requirements, debt covenants and restricted-payment tests.
Material Changes Versus the Prior Comparable Period
- Formula 1 became a consolidated business in 2017, adding substantial revenue, assets, debt and amortization expense. Formula 1 contributed approximately $225 million of net loss since acquisition, including approximately $287 million of amortization.
- Goodwill increased to $18.395 billion from $14.345 billion, and amortizable intangible assets increased to $6.242 billion from $1.072 billion, primarily because of the Formula 1 acquisition.
- Operating income declined by $398 million for the nine-month period despite higher revenue, primarily because 2016 included a $511 million net gain from the Vivendi legal settlement.
- Adjusted OIBDA increased $210 million in Q3 and $529 million year-to-date, reflecting improvements across SIRIUS XM, Braves Holdings and Formula 1.
- Operating cash flow declined $338 million year-to-date, primarily reflecting the absence of the favorable 2016 settlement-related effects and working-capital changes.
- SIRIUS XM issued new debt and redeemed several older notes during the third quarter. The transactions included $2.5 billion of new notes and redemptions totaling approximately $1.539 billion, with $43 million of related debt-extinguishment losses.
- SIRIUS XM invested $480 million in Pandora convertible preferred stock and completed a $309 million SIRIUS XM Canada transaction, including cash and SIRIUS XM shares.
- Liberty issued $1.938 billion of Series C Liberty Formula One common stock in connection with private-placement and acquisition-related transactions.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal consolidated revenue or earnings guidance. Management expects SIRIUS XM to continue regular quarterly dividends, with an indicated aggregate annual amount of $0.044 per share, subject to board approval and other conditions. Management expects Formula 1 to fund debt service and business investment with cash on hand and operating cash flow, and expects Braves Holdings to use cash, operating cash flow and borrowing capacity for remaining development expenditures.
- Major risks include subscriber retention and consumer demand, dependence on automakers, competition, rapid technological change, satellite or information-system failure, music-rights costs, regulation, cybersecurity, indebtedness and the integration and performance of Formula 1.
- MLB commenced an investigation into alleged violations involving the Atlanta Braves’ acquisition of international players. Potential penalties could include fines, unwinding agreements or future acquisition restrictions; the filing does not provide a reliable estimate of exposure.
- SIRIUS XM faces SoundExchange royalty claims. The estimable portion of reasonably possible additional loss was stated as $0 to $85 million, plus interest or late fees; no additional liability was recorded because loss was not considered probable.
- Formula 1 acquisition accounting remained preliminary at September 30, 2017 and could change, particularly for intangible assets, liabilities and tax balances.
- Formula 1 revenue and expenses are seasonal because most events occur from March through November.
- Future amortization expense on existing finite-lived intangible assets was estimated at $149 million for the remainder of 2017, $668 million in 2018 and $566 million in 2019.
- Liberty is exposed to market-value changes in its investment portfolio. A 10% decline in available-for-sale securities would have reduced their aggregate value by approximately $105 million; a 10% decline in Live Nation’s share price would have reduced the value of Liberty’s interest by approximately $303 million.
- The company plans to adopt the new revenue-recognition standard using the modified retrospective method on January 1, 2018. SIRIUS XM expects subscriber revenue to decline by less than 3% on adoption, with no expected effect on net earnings.
Important Facts for Investors to Verify
- Reconcile consolidated results with the attributed financial information for the SiriusXM, Braves and Formula One tracking stock groups.
- Assess Formula 1’s normalized results excluding acquisition accounting, seasonality and preliminary purchase-price allocation adjustments.
- Review debt maturities, variable-rate exposure, collateral pledges, covenants and the limited access to subsidiary cash.
- Monitor SIRIUS XM subscriber growth, churn, average revenue per subscriber, royalty costs and the effect of the new revenue standard.
- Track the SoundExchange proceedings and the Atlanta Braves MLB investigation for potential cash costs, penalties or restrictions.
- Evaluate the sustainability of Adjusted OIBDA in light of rising depreciation, amortization, stock compensation and interest expense.
- Consider the legal and economic limitations of tracking stocks, including the board’s ability to reattribute assets or conduct split-offs or spin-offs without approval from all tracking-stock holders.