Liberty Media Corporation — Q3 2019 Form 10-Q Summary
Business context and reporting period
Liberty Media reported unaudited consolidated results for the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Its principal businesses are SIRIUS XM Holdings, including Pandora acquired on February 1, 2019; Formula 1; and Braves Holdings, which owns the Atlanta Braves and related stadium and mixed-use development assets. The company issues tracking stocks for the Liberty SiriusXM, Liberty Braves and Liberty Formula One groups; these groups are not separate legal entities, and holders have claims against Liberty Media as a whole.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $2,856 million | $2,315 million | $7,673 million | $6,031 million |
| Operating income | $507 million | $531 million | $1,168 million | $1,132 million |
| Net earnings | $262 million | $366 million | $327 million | $834 million |
| Net earnings attributable to Liberty stockholders | $193 million | $268 million | $151 million | $571 million |
| Adjusted OIBDA | $854 million | $811 million | $2,283 million | $2,027 million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $1,770 million | $1,635 million |
- Revenue increased 23% in Q3 and 27% for the nine-month period, primarily because Pandora was consolidated beginning February 1, 2019, together with growth at SIRIUS XM and Braves Holdings. Reported operating income declined 5% in Q3 but increased 3% for the nine months.
- Approximate consolidated margins were 17.8% operating and 9.2% net earnings in Q3; nine-month margins were 15.2% and 4.3%, respectively. Net earnings attributable to Liberty stockholders represented approximately 6.8% of Q3 revenue and 2.0% of nine-month revenue.
- Adjusted OIBDA margin was approximately 29.9% in Q3 and 29.8% for the nine-month period. Adjusted OIBDA increased $43 million in Q3 and $256 million for the nine months.
- Q3 revenue contributions were SIRIUS XM Holdings $2,011 million, Formula 1 $633 million and Braves Holdings/other $212 million. Nine-month contributions were $5,732 million, $1,499 million and $442 million, respectively.
- As of September 30, 2019, cash and cash equivalents were $694 million, compared with $358 million at December 31, 2018. Cash, cash equivalents and restricted cash totaled $773 million.
- Total long-term debt was $14,707 million at September 30, 2019, compared with $13,371 million at year-end 2018. Total debt carrying value, including current debt, was $14,721 million.
- Liberty reported $386 million of unencumbered marketable equity securities, $800 million of available capacity under its SIRIUS XM Holdings margin loan and $600 million under its Live Nation margin loan.
- Consolidated equity-method investments totaled $1,698 million, including $792 million of Live Nation carrying value and $632 million of SIRIUS XM Canada carrying value.
Cash flow, financing and liquidity
- Operating cash flow increased to $1,770 million from $1,635 million. Investing activities provided $410 million, compared with cash usage of $382 million in the prior-year period, primarily reflecting investment-sale proceeds and cash acquired in the Pandora transaction.
- Financing activities used $1,854 million. Major uses included $4,345 million of debt repayments, $374 million of Liberty SiriusXM Series C repurchases and $1,959 million of subsidiary share repurchases. Debt borrowings totaled $5,018 million.
- Capital expenditures were $338 million for the nine months, compared with $265 million in 2018.
- SIRIUS XM Holdings paid $167 million of dividends during the nine months, of which Liberty received $115 million. Management stated that available liquidity is expected to cover projected uses, including debt service, capital expenditures, investments, share repurchases and subsidiary operating needs.
Material changes versus the prior comparable period
- Pandora acquisition: SIRIUS XM Holdings acquired Pandora for approximately $2.9 billion of total consideration, including $2.285 billion of newly issued SIRIUS XM stock, cancellation of a $524 million preferred-stock investment and $70 million of replacement equity awards. Pandora contributed $447 million of Q3 revenue and $1.139 billion of nine-month revenue, but also a reported $47 million Q3 net loss and $225 million nine-month net loss.
- SIRIUS XM Holdings: Actual revenue increased 37% in Q3 and 34% for the nine months, including Pandora. Pro forma combined revenue increased 7% in Q3 and 8% for the nine months. SIRIUS XM had approximately 34.6 million subscribers; Pandora had approximately 6.3 million subscribers and 63.1 million monthly active users at September 30, 2019.
- Formula 1: Nine-month revenue increased 11% and Adjusted OIBDA increased from $295 million to $372 million. Operating income improved from a $56 million loss to $23 million of income. Q3 revenue decreased 2%, partly because the current period included one fewer event.
- Braves Holdings: Nine-month revenue increased 8%, but Adjusted OIBDA declined from $100 million to $73 million and operating income declined from $34 million to $12 million. Higher player salaries, baseball operations, revenue-sharing obligations and stadium costs more than offset revenue growth.
- Profitability and non-operating items: Interest expense increased to $495 million from $453 million for the nine months. Net financial-instrument losses were $171 million versus a $180 million gain in 2018, primarily due to fair-value changes in debt, derivatives and related hedges. The effective tax rate increased to 40.9% from 13.8% for the nine months.
- Capital structure: SIRIUS XM issued $1.25 billion of 5.50% notes due 2029 and $1.5 billion of 4.625% notes due 2024, using proceeds and cash to redeem its $1.49 billion of 6% notes due 2024. Formula 1 refinanced its revolving facility, reducing its applicable borrowing spread to LIBOR plus 2.0%.
Guidance, outlook, management commentary and risks
The filing does not provide a clear numerical consolidated revenue or earnings forecast. Management expects Liberty's projected uses of cash to include investments, debt service, potential margin-loan repayment and share repurchases. SIRIUS XM is expected to fund operations, capital expenditures, debt service, dividends and repurchases primarily through operating cash flow, cash on hand and its credit facility. Formula 1 is expected to rely on operating cash flow and cash on hand, while Braves Holdings expects additional development and spring-training expenditures funded through operating cash flow, existing facilities and potential construction loans.
- Key risks include subscriber demand and churn, dependence on automakers, competition, rising music royalties, successful Pandora integration, technology and satellite failures, cybersecurity and privacy incidents, regulatory changes, economic conditions, foreign-currency exposure, litigation and the ability to service significant debt.
- Liberty's cash access is constrained by subsidiary ownership and noncontrolling interests. SIRIUS XM cash is not freely available to Liberty, and Formula 1 distributions depend on compliance with its restricted-payment test.
- Liberty and its subsidiaries were in compliance with applicable debt covenants at September 30, 2019. Formula 1 had $2.9 billion outstanding under its senior loan facility and no borrowings under its $500 million revolving facility.
- The company adopted ASC 842 lease accounting in 2019, recognizing $471 million of operating lease right-of-use assets and $499 million of operating lease liabilities at September 30, 2019, plus $127 million of finance lease liabilities.
- SIRIUS XM recorded a $25 million charge for settlement of Telephone Consumer Protection Act litigation, excluded from Adjusted OIBDA. Pandora-related acquisition and other costs totaled $83 million for the nine months.
- Pandora's pre-1972 sound-recording litigation remains unresolved. The Ninth Circuit remanded the principal case in October 2019 for further proceedings, and other related cases remained stayed.
- At September 30, 2019, a 10% decline in Liberty's marketable securities would have reduced their aggregate value by approximately $39 million; a 10% decline in Live Nation's share price would have reduced the value of pledged shares by approximately $462 million.
Most important facts an investor should verify
- Whether Pandora integration achieves expected revenue growth, cost synergies and improved profitability, given its reported losses and substantial acquired goodwill and intangible assets.
- The maturity profile, interest-rate exposure and covenant requirements of approximately $14.7 billion of long-term debt, including margin loans and Formula 1's senior loan facility.
- Actual cash available to Liberty parent versus cash held by SIRIUS XM, Formula 1 and Braves Holdings, including restrictions on upstreaming subsidiary cash.
- The sustainability of SIRIUS XM subscriber growth, Pandora monetization, advertising trends and music royalty costs.
- Formula 1's event calendar, foreign-exchange exposure, contractual revenue recognition and team-payment obligations.
- Braves Holdings' development commitments, guaranteed player and executive contracts totaling $399 million, and related financing needs.
- The resolution and ultimate cost of the Pandora sound-recording litigation and the final approval and implementation of the TCPA settlement.
- The effect of fair-value gains and losses, tax-rate changes, stock-based compensation and acquisition accounting on reported earnings versus Adjusted OIBDA and operating cash flow.