Sirius XM Holdings Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless stated otherwise. Unaudited consolidated results cover Holdings and its subsidiaries. Sirius XM provides subscription satellite and internet radio and connected-vehicle services. Liberty Media beneficially owned approximately 68% of common shares.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $1,294.1 million | $1,201.0 million | +8% |
| Operating income | $393.8 million | $348.2 million | +13% |
| Operating margin | 30.4% | 29.0% | +1.4 percentage points |
| Net income | $207.1 million | $172.4 million | +20% |
| Net margin | 16.0% | 14.4% | +1.6 percentage points |
| Diluted EPS | $0.04 | $0.03 | Higher |
| Net cash from operating activities | $309.3 million | $362.2 million | Down $52.9 million |
| Free cash flow (non-GAAP) | $248.9 million | $328.2 million | Down 24% |
| Adjusted EBITDA (non-GAAP) | $501.8 million | $441.4 million | Up 14% |
Subscriber revenue rose 7% to $1,078.3 million, reflecting a 5% increase in daily weighted average subscribers and a 2% increase in average monthly revenue per subscriber (ARPU), to $12.95. Advertising revenue increased 14% to $36.0 million; other revenue increased 13% to $150.1 million, helped by music royalty fees and connected-vehicle services.
Operating expenses increased 6% to $900.2 million. Revenue share and royalties rose 10%, partly because the statutory royalty rate for post-1972 recordings increased from 10.5% to 11%; programming and content costs rose 12%. Subscriber acquisition costs fell 4%, and sales and marketing rose 9%. Q1 net additions were 257,000 versus 465,000; self-pay monthly churn improved to 1.8% from 1.9%, while self-pay subscribers reached 26.2 million and total subscribers approximately 31.6 million.
Cash and equivalents were $230.5 million at March 31, 2017, compared with $213.9 million at year-end 2016. Total debt was approximately $5.995 billion, including $530 million drawn under the revolving credit facility; $1.22 billion remained available. Cash provided by operations declined amid timing of interest, legal settlement, OEM and vendor payments. Capital expenditures were $53.4 million, versus $30.2 million in Q1 2016. The company reported a stockholders’ deficit of $921.1 million. It was in compliance with debt covenants, including the 5.0-to-1.0 maximum leverage covenant.
Material changes and capital allocation
- Revenue and earnings grew, but net additions and free cash flow declined year over year. Management attributed lower net additions mainly to fewer automaker shipments with paid promotional subscriptions and lower self-pay additions.
- Cash used for share repurchases was $306.0 million, compared with $594.5 million in Q1 2016; the company also paid a $47.1 million dividend. About $1.728 billion remained under the $10 billion repurchase authorization.
- On April 18, 2017, the company acquired connected-vehicle device and app company Automatic Labs for approximately $115 million in cash. It also declared a further $0.01-per-share quarterly dividend, payable May 31, 2017.
- The proposed Sirius XM Canada transaction was expected to close in May 2017. Sirius XM expected to contribute approximately $275 million if shareholders elected all cash; the amount would decline with stock-based elections. After closing, Sirius XM expected to hold 70% of the equity and 33% of the voting interest.
Outlook, risks and unusual items
No broad numerical revenue or earnings guidance is provided in the filing. Management expected subscriber revenue to benefit from subscriber growth, selected rate increases and additional services; advertising revenue was expected to grow. Management also anticipated higher programming, marketing, engineering and certain support costs, while expecting lower connected-vehicle wireless costs and lower chipset subsidies over time. The company estimated a 37.3% effective tax rate for full-year 2017 and said it expected regular quarterly dividends totaling $0.04 per share annually, subject to board decisions.
Management said existing cash, operating cash flow and credit-facility borrowing capacity should fund operating needs, capital expenditures, debt service, legal settlements and planned capital returns, while noting that funding capacity depends on operating and market conditions. The company had $10.505 billion of contractual cash commitments, including debt, interest, programming, satellite and lease commitments; variable revenue-sharing costs were not included. Free cash flow is a non-GAAP measure and does not deduct debt maturities.
- SoundExchange royalty litigation: SoundExchange seeks at least $50 million and up to $100 million or more, plus interest, late fees and costs. The Copyright Royalty Board withdrew its January 2017 ruling in March and requested briefs on jurisdiction. The company estimated a reasonably possible additional loss of $0–$70 million, plus interest or late fees; it considered such a loss not probable and recorded no additional liability.
- Business risks: The filing highlights competition, subscriber retention, dependence on the auto industry, satellite and technology disruptions, regulation, intellectual-property claims, data security, significant indebtedness and Liberty Media’s controlling influence. The company reported no material change to previously disclosed risk factors.
- Other items: Free cash flow fell partly because of payment timing, a legal settlement payment and higher satellite construction spending. The company was building replacement satellites SXM-7 and SXM-8. No goodwill or indefinite-lived intangible impairment indicators were identified.
Key facts for investors to verify
- Whether subscriber additions recover, particularly paid promotional additions, and whether churn and conversion trends persist.
- Whether revenue growth translates into sustained operating cash flow and free cash flow after satellite investment, interest and legal payments.
- Debt levels, revolver availability, interest-rate exposure and continued covenant compliance.
- Developments and potential financial exposure in the SoundExchange matter, including any change to the estimated loss range.
- Closing terms and funding for the Sirius XM Canada transaction, and the integration and returns of the Automatic Labs acquisition.
- Repurchase and dividend pace relative to liquidity and investment requirements; reported adjusted EBITDA and free cash flow are non-GAAP measures and should be assessed alongside GAAP results.