Sirius XM Holdings Inc. — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; it also reports unaudited fourth-quarter results. Sirius XM provides subscription satellite and internet radio and connected-vehicle services. It reported approximately 31.3 million subscribers at year-end, including 26.0 million self-pay and 5.4 million paid promotional subscribers. Liberty Media owned approximately 67% of the company.
Financial and operating performance
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $5,017.2 million | $4,570.1 million | +10% |
| Operating income | $1,432.1 million | $1,178.7 million | +22% |
| Net income | $745.9 million | $509.7 million | +46% |
| Diluted earnings per share | $0.15 | $0.09 | Up |
| Operating margin | 28.5% | 25.8% | +2.7 percentage points |
| Net margin | 14.9% | 11.2% | +3.7 percentage points |
| Net cash from operating activities | $1,719.2 million | $1,244.1 million | +$475.2 million |
| Free cash flow (non-GAAP) | $1,509.1 million | $1,315.2 million | +15% |
| Adjusted EBITDA (non-GAAP) | $1,875.8 million | $1,657.6 million | +13% |
Revenue growth was led by subscription revenue, up 10% to $4,196.9 million, reflecting an 8% increase in average subscribers and a 3% increase in average monthly revenue per subscriber (ARPU) to $12.91. Advertising revenue rose 13% to $138.2 million. Subscriber net additions declined 23% to 1.752 million; self-pay monthly churn increased to 1.9% from 1.8%, and new-vehicle conversion eased to 39% from 40%.
Fourth-quarter 2016 revenue was $1,303.0 million versus $1,196.1 million in fourth-quarter 2015; operating income was $329.6 million versus $293.9 million, and net income was $204.6 million versus $134.6 million.
Balance sheet, cash flow and capital allocation
- Year-end cash and cash equivalents were $213.9 million, compared with $111.8 million a year earlier. Total assets were $8,003.6 million.
- Debt principal was approximately $5.9 billion, including $390 million drawn on a $1.75 billion revolving facility; $1.36 billion remained available. The company reported compliance with debt covenants. Debt fair value was estimated at $6.0 billion.
- Current assets were $642.6 million and current liabilities $2,668.6 million, including $1,832.6 million of current deferred revenue. The reported current-liability balance therefore includes substantial unearned subscription revenue.
- Capital expenditures were $205.8 million, up from $134.9 million, primarily reflecting satellite construction and infrastructure spending. Management expects significant replacement-satellite costs to continue.
- Financing cash outflows included $1,673.5 million of share repurchases and a $48.1 million dividend. The company had $2.0 billion remaining under its $10.0 billion repurchase authorization. It began quarterly dividends at $0.01 per share, with management expecting $0.04 per share annually, subject to board discretion.
- Stockholders’ deficit was $792.0 million. The 2016 balance reflects, among other items, repurchases and a $293.9 million cumulative accounting adjustment related to share-based compensation.
Material changes and unusual items
- Operating income and net income increased faster than revenue. Reported net income benefited from a lower effective tax rate: 31.7% in 2016 versus 42.9% in 2015. The 2016 rate included a $66.3 million research-and-development tax credit.
- Revenue share and royalty expense rose 7%, including a 0.5 percentage-point increase in the statutory royalty rate for post-1972 sound recordings and $45.9 million of music-royalty legal settlements and reserves. The 2015 comparison included $128.3 million of expense related to the Capitol Records pre-1972 settlement.
- The company recorded a $24.2 million loss on extinguishment of debt after redeeming $650 million of 5.875% notes due 2020. It issued $1.0 billion of 5.375% notes due 2026.
- Cash flow from operations increased substantially; management attributed the improvement to operating performance. Free cash flow is a company-defined non-GAAP measure and excludes the $210 million pre-1972 recording settlement payment made in 2015.
- Sirius XM contracted for two replacement satellites, SXM-7 and SXM-8, planned for launch in 2019 and 2020. It has no in-orbit satellite insurance.
- The proposed Sirius XM Canada transaction would increase Sirius XM’s expected economic interest from approximately 37% to 70%, while leaving it with 33% voting interest. The deal remained subject to Canadian regulatory approval and was expected to close early in the second quarter of 2017; the expected contribution was approximately $275 million if all consideration were cash.
Outlook, risks and contingencies
Management expects subscription revenue to benefit from subscriber growth, rate increases and sales of additional services; it also anticipates continued advertising growth. Management expects programming, royalty, sales and marketing, and engineering costs to rise in areas, while subscriber acquisition costs may fluctuate with vehicle installations. The filing provides no specific numerical earnings or revenue guidance.
- SoundExchange: The Copyright Royalty Board’s January 2017 ruling found that some Premier-package revenue exclusions were improper, while the company’s interpretation concerning pre-1972 recordings was correct. The company disclosed a reasonably possible additional loss of $0–$70 million, plus interest and late fees; it considered the loss not probable and recorded no additional liability. The case and potential damages proceedings remain unresolved.
- TCPA settlement: Class-action claims concerning telemarketing calls were settled for a $35 million payment, with eligible participants also offered three months of Select service.
- Copyright costs: Satellite sound-recording royalties rise to 11% of applicable gross revenue in 2017; the rate-setting proceeding for 2018–2022 was underway. Music-rights licensing changes could increase costs or limit content availability.
- Business risks: Competition from free terrestrial radio and internet audio, subscriber churn and conversion, dependence on automotive sales and automaker relationships, and potential interference or technology changes could pressure growth and margins.
- Operational and governance risks: Satellite failure, outages, cybersecurity incidents, regulation and consumer-protection litigation are identified risks. Liberty Media’s controlling ownership may give it influence that differs from other shareholders’ interests. The company’s debt also limits financial flexibility.
Most important facts for investors to verify
- Whether subscriber net additions, self-pay churn and new-vehicle conversion stabilize or deteriorate further.
- Whether revenue and margin growth persists after accounting for royalty increases, programming costs and legal-related charges.
- The outcome and ultimate financial exposure of the SoundExchange matter, including any appeal, damages, interest or late fees.
- Satellite replacement spending, launch timing and performance of the existing fleet, particularly given the lack of in-orbit insurance.
- Debt maturities, interest costs, revolver availability and the sustainability of repurchases and dividends relative to cash generation.
- Completion terms and regulatory approval of the Sirius XM Canada transaction, including cash funding and voting control.
- The effects of the share-based payment accounting change and non-GAAP adjustments when comparing reported earnings and free cash flow.