Sirius XM Holdings Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited consolidated results. Unless noted, financial amounts below are U.S. dollars in millions. Sirius XM provides subscription satellite and internet radio and connected-vehicle services. Liberty Media beneficially owned more than 50% of common stock, making Sirius XM a controlled company.
Financial and operating performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $1,235.6 | $1,123.2 | $2,436.6 | $2,204.2 |
| Operating income | $362.2 | $219.4 | $710.4 | $533.2 |
| Net income | $173.0 | $102.8 | $344.4 | $208.5 |
| Diluted EPS | $0.03 | $0.02 | $0.07 | $0.04 |
| Adjusted EBITDA, non-GAAP | $467.8 | $415.0 | $909.1 | $814.2 |
| Free cash flow, non-GAAP | $394.9 | $370.9 | $723.2 | $647.1 |
Q2 operating margin was approximately 29.3% versus 19.5%; first-half operating margin was 29.2% versus 24.2%. Net margin was approximately 14.0% versus 9.2% for Q2 and 14.1% versus 9.5% for the first half. These calculated margins use reported GAAP revenue and income.
- First-half operating cash flow was $794.3 million, up from $712.3 million. Investing cash use was $71.1 million; financing cash use was $358.5 million.
- Cash and equivalents were $476.5 million at June 30, versus $111.8 million at December 31, 2015. The $364.6 million increase reflects net cash flows for the period.
- Balance-sheet debt, including current maturities, was approximately $6.10 billion, up from approximately $5.45 billion at year-end. The company issued $1.0 billion of 5.375% senior notes due 2026 and repaid or refinanced borrowings. The $1.75 billion revolving facility was undrawn and available at quarter-end; debt covenants were met.
- Current assets were $933.4 million and current liabilities $2,538.8 million. Current liabilities include $1,815.4 million of deferred revenue. Stockholders’ deficit was $775.1 million.
- Revenue grew 10% in Q2 and 11% in the first half. Subscriber revenue increased 10% in both periods; advertising revenue rose 16% and 17%, respectively. At June 30, subscribers totaled 30.6 million, including 25.1 million self-pay subscribers.
- Adjusted EBITDA rose 13% in Q2 and 12% in the first half. Free cash flow rose 6% and 12%, respectively. Both are non-GAAP measures; free cash flow does not deduct required debt maturities.
Material changes versus comparable periods
- Net additions declined to 587,000 in Q2 from 692,000, and to 1.052 million in the first half from 1.123 million. Self-pay monthly churn increased to 1.8% from 1.6% in Q2 and from 1.7% for the first half; new-vehicle conversion fell to 40% from 41% in Q2 and to 39% from 41% for the first half.
- ARPU increased to $12.78 in Q2 from $12.42 and to $12.72 for the first half from $12.34, primarily reflecting subscription-rate increases, partly offset by discounts.
- Operating income growth reflected higher revenue and lower revenue-share and royalty expense, including the absence of a $107.7 million pre-1972 sound-recording settlement charge recorded in Q2 2015. First-half royalty expense was also lower year over year, partly for the same reason.
- Programming and content expense increased 21% in Q2 and 20% in the first half, principally due to renewed licenses and personnel costs. Satellite and transmission expense increased, including a $12.9 million loss on disposal of obsolete satellite parts in 2016.
- Interest expense increased 11% in Q2 and in the first half, primarily due to higher average debt. The first-half effective tax rate was 38.7%, versus 46.9% in 2015; management estimated a 38.0% full-year 2016 rate.
- The company repurchased and retired $995.6 million of stock in the first half. At June 30, $707.5 million remained authorized under the $8.0 billion repurchase program.
Outlook, risks and unusual items
- No full-year revenue, earnings, EBITDA, or subscriber guidance is stated in the provided filing text. Management expected subscriber revenue to benefit from subscriber growth, rate increases and additional services, while noting that operating costs in several areas were expected to rise with subscriber growth and investment.
- Management said existing cash, operating cash flow and borrowing capacity were expected to fund operating needs, capital expenditures, interest, taxes, legal settlements, scheduled debt maturities and potential repurchases or strategic opportunities.
- A proposed Sirius XM Canada transaction, announced May 12, 2016, would increase Sirius XM’s expected economic interest from approximately 37% to 70%, while voting interest would be 33%. Sirius XM expected to contribute about $275 million assuming cash elections. The transaction required shareholder, court and Canadian regulatory approvals and was expected to close by the end of Q4 2016, subject to approvals.
- Several TCPA purported class actions were subject to a settlement memorandum of understanding: proposed $35 million cash payment, three months of Select service for participating class members, and changes to certain vendor practices. A definitive agreement and court approval were not assured.
- SoundExchange sought at least $50 million and up to $100 million or more, plus interest, fees and costs, in a dispute over historical sound-recording royalties. The company reported no provision where losses were not probable and estimable and said it intended to defend the matter.
- The company reported eight owned satellites, five operating; three older satellites were no longer used for radio transmission and were planned for deorbiting during 2016. It identified satellite failure, competition, auto-industry dependence, subscriber retention, regulation, litigation, technology and cybersecurity among material risks. The filing reported no material change to the risk factors in its 2015 Form 10-K.
- The company planned to early adopt stock-compensation accounting guidance in Q3 2016 and expected approximately $300 million of additional tax-effected net operating losses, increasing deferred tax assets and reducing accumulated deficit.
Important facts for investors to verify
- Subscriber trends: net additions, self-pay churn, new-vehicle conversion and the impact of promotions and discounts on ARPU.
- Debt and capital allocation: debt growth and interest costs, the undrawn revolver and continued stock repurchases relative to cash generation and maturities.
- Whether the Sirius XM Canada transaction received required approvals, its final consideration mix and funding requirements.
- Resolution and financial exposure of the TCPA settlement and SoundExchange royalty dispute.
- Satellite reliability and deorbiting plans, alongside the expected timing and effect of the proposed tax-accounting adoption.