Sirius XM Holdings Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results. The company provides subscription satellite and internet radio and connected-vehicle services. Liberty Media beneficially owned approximately 71% of its common stock.
Financial and operating performance
Dollar amounts below are in millions except per-share data and operating metrics. Year-over-year comparisons are with Q1 2017.
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $1,375.1 | $1,294.1 | +6% |
| Operating income | $423.6 | $393.8 | +8% |
| Operating margin | 30.8% | 30.4% | +0.4 percentage points |
| Net income | $289.4 | $207.1 | +40% |
| Net margin | 21.0% | 16.0% | +5.0 percentage points |
| Diluted EPS | $0.06 | $0.04 | — |
| Operating cash flow | $414.7 | $309.3 | +$105.4 |
| Capital expenditures | $81.4 | $53.4 | +$28.0 |
| Free cash flow (non-GAAP) | $326.5 | $248.9 | +31% |
| Adjusted EBITDA (non-GAAP) | $531.8 | $501.8 | +6% |
Subscriber revenue was $1,117.1 million (+4%); advertising revenue $42.0 million (+17%); equipment revenue $35.1 million (+18%); and music royalty fee and other revenue $180.9 million (+20%). The company reported approximately 33.1 million subscribers (+5%), including 27.7 million self-pay subscribers (+6%). Quarterly net additions were 330,000, average self-pay monthly churn was 1.8%, and ARPU was $12.95, unchanged year over year.
At March 31, 2018, cash and cash equivalents were $78.5 million (cash, cash equivalents and restricted cash totaled $88.8 million). Long-term debt was $6,807.4 million and current maturities were $4.9 million. The revolving credit facility had $1,385 million available; the company reported compliance with debt covenants. Total liabilities were $9,863.8 million, exceeding total assets of $8,299.3 million; stockholders’ deficit was $1,564.5 million.
Financing cash outflows included $308.8 million for share repurchases and $49.4 million for dividends, partly offset by $65.0 million of net revolving-facility borrowings. The company declared a quarterly dividend of $0.011 per share and said the board expected regular quarterly dividends totaling $0.044 per share annually. At quarter-end, $2,328.2 million remained under the $12 billion repurchase authorization.
Material changes and unusual items
- Revenue grew 6%, while operating expenses increased 6%. Revenue share and royalty expense rose 12%, primarily reflecting the statutory sound-recording royalty rate increase from 11% to 15.5%, partly offset by the accounting presentation change described below.
- Net income benefited from a lower effective tax rate (21.7%, versus 35.5%) following U.S. tax reform and from $31.4 million of unrealized gains on the Pandora investment. Interest expense increased 10% to $89.8 million, primarily due to higher average debt.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method; prior-year figures were not restated. Adoption reduced reported Q1 2018 subscriber revenue by $24.4 million and revenue-share expense by $22.1 million, and increased net income by approximately $1.0 million versus the prior accounting. Accordingly, reported revenue growth and some comparisons are affected by the accounting change.
- Cash from operations increased, but additions to property and equipment rose to $81.4 million, including increased spending on replacement satellites SXM-7 and SXM-8. The company owned five satellites at quarter-end.
Outlook, risks and contingencies
- Management expected 2018 effective tax rate to be approximately 24%. It anticipated subscriber revenue growth with subscriber-base growth, rate increases and additional services; advertising growth; and higher equipment royalties as new chipsets are introduced.
- Management expected royalty costs to rise with revenue and the 15.5% statutory rate through 2022. It also anticipated higher spending in areas including programming, marketing, engineering and streaming, while subscriber acquisition costs were expected to vary with installations.
- Management said available cash, operating cash flow and borrowing capacity should fund operating needs, capital spending, debt service, repurchases, dividends and strategic opportunities. This outlook depends on operating performance and economic, competitive and other factors; no specific full-year revenue, EBITDA or free-cash-flow guidance is provided in the supplied filing text.
- SoundExchange lawsuits allege royalty underpayments. One action seeks $50 million to $100 million or more, plus interest and costs; a second seeks damages to be determined. The company disputes the claims and said, as of March 31, 2018, an additional loss beyond recorded liabilities was considered remote. A TCPA class action also alleges unlawful telemarketing; potential statutory damages are claimed per violation, and the company says it has defenses.
- Disclosed risks include competition, subscriber retention and acquisition, dependence on automakers, satellite or system disruption, regulation and intellectual-property claims, indebtedness and restrictive covenants, litigation, and Liberty Media’s controlling influence. Pandora and the Canadian investment are exposed to valuation and foreign-exchange risk.
Important facts for investors to verify
- Reconcile the ASC 606 presentation change when assessing revenue, royalty costs, ARPU and subscriber acquisition cost trends against prior periods.
- Assess the sustainability of earnings growth apart from the $31.4 million Pandora fair-value gain and the lower tax rate.
- Review debt maturities, floating-rate exposure, covenant headroom, and the company’s capacity to fund capital returns alongside satellite investment.
- Track the SoundExchange and TCPA proceedings, including potential damages, appeals and any changes to the company’s loss assessments.
- Evaluate subscriber additions, conversion, churn and ARPU trends, and confirm whether management’s stated expectations are supported by subsequent results.