Sirius XM Holdings Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. The filing presents unaudited consolidated results; dollar amounts below are in millions unless otherwise noted. Sirius XM provides subscription satellite radio, digital services and connected-vehicle services. Liberty Media owned more than 50% of the company and it qualified as a controlled company.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Change | Six months 2014 | Six months 2013 |
|---|---|---|---|---|---|
| Revenue | $1,035.3 | $940.1 | +10% | $2,033.1 | $1,837.5 |
| Operating income | $284.6 | $267.7 | +6% | $532.0 | $514.7 |
| Net income | $120.0 | $125.5 | -4% | $213.9 | $249.1 |
| Diluted EPS | $0.02 | $0.02 | No change | $0.04 | $0.04 |
| Adjusted EBITDA (non-GAAP) | $370.4 | $283.0 | +31% | $705.2 | $544.9 |
| Free cash flow (non-GAAP) | $335.0 | $236.6 | +42% | $557.8 | $379.0 |
Q2 operating margin was approximately 27.5%, versus 28.5% a year earlier; net margin was approximately 11.6%, versus 13.4%. For the first half, operating margin was approximately 26.2% versus 28.0%, and net margin was approximately 10.5% versus 13.6%. Adjusted EBITDA and free cash flow are company-defined non-GAAP measures, not substitutes for GAAP results.
- Q2 revenue growth reflected higher subscriber counts and rates, advertising, equipment and ancillary revenue. Subscriber revenue rose 8%; other revenue rose 22%, partly reflecting the U.S. Music Royalty Fee.
- Operating expenses rose 12% in Q2. Revenue share and royalties increased 28%, including the effect of a 5.6% increase in the statutory sound-recording royalty rate and the absence of prior-year purchase-accounting benefits.
- Net income declined despite higher operating income, principally as interest expense increased 36% in Q2 and the company recorded derivative losses tied to the Liberty Media share repurchase agreement. First-half net income also included a $34.5 million derivative loss; the prior-year period included a $16.4 million debt-extinguishment loss.
Cash, debt and liquidity
- Cash and cash equivalents were $170.0 million at June 30, 2014, up from $134.8 million at year-end 2013. First-half operating cash flow was $592.1 million, compared with $442.0 million; capital expenditures were $58.4 million.
- Cash used in financing was $523.8 million, mainly reflecting $1,532.2 million of common-stock repurchases, partly offset by new debt proceeds and repayments. Cash used in investing was $33.1 million; it included a $24.2 million return of capital from the Canadian investment.
- Debt carrying value totaled $4.624 billion, up from $3.602 billion at December 31, 2013. The company issued $1.5 billion of 6.00% senior notes due 2024 in May and repaid $905.8 million of long-term borrowings and revolving-credit borrowings during the first half. The $1.25 billion revolving facility was undrawn and available at quarter-end.
- Current maturities included $497.9 million of non-related-party debt; the 7% Exchangeable Notes, with approximately $502 million principal, mature December 1, 2014. The company said it was in compliance with debt covenants. It expects to fund operating needs, debt service, repurchases and strategic opportunities with cash, operating cash flow and credit-facility capacity.
- Contractual cash commitments totaled $8.039 billion, including debt, interest, programming, leases and other commitments; this excludes uncertain future revenue-sharing costs and a $1.4 million reserve for uncertain tax positions.
Operating trends, outlook and risks
- Subscribers totaled 26.30 million at June 30, up 5% year over year, including 21.64 million self-pay subscribers. First-half net additions fell 36% to 742,271; Q2 self-pay monthly churn rose to 1.8% from 1.7%, and new-vehicle conversion fell to 42% from 45%.
- ARPU rose to $12.36 in Q2 from $12.28. Management attributed the increase to the music royalty fee and subscription-rate changes, partly offset by discounts and other factors. SAC per installation declined to $33 from $47.
- Management expected subscriber, advertising, equipment and other revenue to benefit from subscriber growth, rates, OEM activity and ancillary services. It also anticipated pressure or increases in several expense categories, including royalties, customer service, marketing, engineering and general and administrative costs. No specific full-year revenue, earnings or cash-flow guidance was provided in the filing.
- The board had authorized $4.0 billion of repurchases through June 30 and approved an additional $2.0 billion in July. The company had $684.7 million remaining under the earlier authorization at quarter-end, excluding the July increase. A $600 million accelerated repurchase was expected to settle by August 1; 35 million shares were repurchased for $120.0 million from July 1 through July 25.
- Risks include competition, subscriber retention and vehicle-industry dependence, satellite or technology failures, rising music royalties, indebtedness, consumer-protection and regulatory matters, and Liberty Media’s control. A multistate group of 32 state attorneys general, as well as Florida and New York, were investigating consumer practices; management believed the investigations were unlikely to have a material adverse effect.
- Satellite-related matters include temporary FCC authority to operate and deorbit XM-1 and XM-2, and a pending renewal application for the XM-4 license expiring in December 2014. Management expected renewal in due course. Management reported no goodwill or indefinite-lived intangible impairment indicators and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether subscriber additions, churn and new-vehicle conversion stabilize, and how those trends affect subscription revenue and ARPU.
- Whether royalty and revenue-share cost growth continues to outpace revenue growth, and how much prior-year purchase-accounting benefits distort comparisons.
- How the 2014 debt issuance, December Exchangeable Notes maturity, leverage and ongoing share repurchases affect interest expense and liquidity.
- The final settlement and share count under the $600 million accelerated repurchase, and the pace and funding of the expanded repurchase authorization.
- Developments in the state consumer investigations and the XM-4 FCC license renewal, alongside satellite operating and replacement risks.