Liberty Media Corporation: Q1 2015 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2015. Liberty Media operates primarily in media, communications and entertainment, with Sirius XM Holdings as its principal consolidated subsidiary and reportable segment. Other holdings include the Atlanta Braves, Live Nation and public-market investments.
The November 2014 Broadband Spin-Off removed Liberty’s former interests in Charter Communications, Time Warner Cable and TruePosition from current-period results. Prior-period comparisons therefore include certain businesses that are no longer part of Liberty.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $1,081 million | $1,011 million | +$70 million, approximately 7% |
| Operating income | $245 million | $155 million | +$90 million |
| Operating margin | 22.7% | 15.3% | Improved |
| Adjusted OIBDA | $373 million | $294 million | +$79 million, approximately 27% |
| Adjusted OIBDA margin | 34.5% | 29.1% | Improved |
| Earnings before income taxes | $105 million | $(35) million | Improved by $140 million |
| Net earnings | $19 million | $72 million | Down $53 million |
| Net earnings attributable to Liberty stockholders | $(19) million | $22 million | Declined $41 million |
| Basic and diluted EPS | $(0.06) | $0.06 | Declined |
| Cash flow from operating activities | $315 million | $294 million | +$21 million |
Revenue growth was driven primarily by Sirius XM, which contributed $1,076 million, compared with $988 million in the prior-year period. Sirius XM reported 27.7 million subscribers at March 31, 2015, including 22.9 million self-pay and 4.8 million paid promotional subscribers.
Sirius XM standalone revenue increased to $1,081 million from $998 million, while standalone Adjusted OIBDA increased to $398 million from $334 million. Subscriber revenue increased approximately 7%, and other revenue increased approximately 16%, supported by royalty-fee revenue, connected-vehicle services and advertising.
Interest expense increased to $77 million from $53 million, primarily because of higher average Sirius XM debt. Losses on financial instruments improved to $28 million from $65 million, but the company recorded an $86 million income-tax expense versus a $107 million benefit in the prior-year period. The 2015 tax expense was affected by a District of Columbia tax-law change and a higher valuation allowance against related deferred tax assets.
Cash flow, liquidity and debt
- Cash and cash equivalents increased to $1.172 billion at March 31, 2015 from $681 million at December 31, 2014.
- Operating activities provided $315 million; investing activities provided $144 million; and financing activities provided $32 million.
- Investing cash inflows included $113 million from investment sales and $136 million from sales of short-term investments. Capital expenditures were $64 million.
- Financing inflows included $1.275 billion of debt borrowings, partly offset by $658 million of debt repayments, $58 million of Liberty share repurchases and $535 million of subsidiary share repurchases.
- Total debt principal was $6.521 billion, including $6.161 billion of fixed-rate debt and $360 million of variable-rate debt. Long-term debt on the balance sheet was $6.213 billion, with $258 million classified as current.
- Sirius XM issued $1.0 billion of 5.375% senior notes due 2025. Sirius XM had $1.25 billion available under its secured revolving credit facility.
- Liberty’s margin loan had $250 million outstanding, $750 million of revolver availability and a maturity date of October 28, 2015. The loan was secured by shares of Sirius XM, Live Nation, Time Warner and Time, with aggregate collateral values disclosed at approximately $1.194 billion.
- Unencumbered liquidity included $690 million of corporate and other cash, $282 million of corporate and other fair-value-option securities, and $482 million of Sirius XM cash. Management cautioned that Liberty does not have ready access to all Sirius XM cash because of Sirius XM’s separate public-company status and approximately 43% noncontrolling interest.
Material changes, outlook and unusual items
- Consolidated Adjusted OIBDA and operating income benefited from improved Sirius XM operating performance, operating efficiencies, lower corporate costs and the absence of TruePosition results following the Broadband Spin-Off.
- Liberty sold 1.3 million Viacom shares for approximately $86 million and sold its remaining Barnes & Noble preferred stock for approximately $27 million.
- Liberty repurchased approximately 1.568 million Series A shares during the quarter for approximately $58 million. Approximately $569 million remained available under the authorized repurchase programs at March 31, 2015.
- Atlanta Braves stadium and mixed-use development costs are expected to be substantial. The ballpark is expected to cost approximately $672 million, plus approximately $50 million of related costs; the mixed-use development is expected to cost approximately $452 million. Approximately $131 million had been spent on the projects through March 31, 2015, and approximately $130 million of additional 2015 capital expenditures was expected for the remainder of the year, excluding amounts funded by the Authority.
- Management expects to fund projected uses with cash on hand, operating cash flow, asset monetizations and available borrowing capacity. No formal consolidated revenue or earnings guidance was provided in the filing.
- Forward-looking risks include subscriber demand and churn, dependence on automakers, competition, rising music royalties, technology and satellite failures, cybersecurity, regulation, access to capital, leverage, strategic relationships and litigation outcomes.
Risks, contingencies and unusual items
- Sirius XM faces litigation concerning public performance of pre-1972 sound recordings, SoundExchange royalty calculations and alleged violations of the Telephone Consumer Protection Act. Potential losses were not reasonably estimable and could materially affect results, cash flows or financial condition.
- Liberty is pursuing litigation against Vivendi. A prior judgment was approximately €945 million including prejudgment interest, but any ultimate recovery remains uncertain and has not been recognized in the financial statements pending final resolution.
- Atlanta Braves player and coach contracts involved aggregate guaranteed commitments of $414 million at March 31, 2015, including $88 million payable in 2015.
- Liberty and Sirius XM were reported to be in compliance with all debt covenants.
- Market exposure is significant: a 10% decline in available-for-sale equity securities would reduce their aggregate value by approximately $62 million, while a 10% decline in the market value of publicly traded equity-method investments in Live Nation and Sirius XM Canada would reduce aggregate value by approximately $156 million.
- Stock-based compensation expense was $44 million in the quarter. Unrecognized compensation cost was approximately $69 million for Liberty awards and $198 million for Sirius XM awards.
Facts investors should verify
- Reconcile Liberty’s consolidated results with Sirius XM’s standalone results and assess the effect of purchase-accounting adjustments.
- Adjust year-over-year comparisons for the Broadband Spin-Off and confirm that discontinued or spun-off businesses are not being treated as continuing operations.
- Review Sirius XM subscriber growth, self-pay trends, churn, promotional subscribers, royalty rates and dependence on automaker distribution.
- Monitor debt maturities, the October 2015 Liberty margin-loan maturity, collateral values, refinancing needs and access to Sirius XM cash.
- Assess the funding requirements and construction risks associated with the Atlanta Braves ballpark and mixed-use development.
- Track the pre-1972 recording, SoundExchange and TCPA matters, for which the filing provides no clear loss estimate.
- Evaluate volatility from fair-value changes in investments, derivatives, convertible notes and bond hedges when interpreting earnings.