Sirius XM Holdings Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited, consolidated U.S. GAAP results. Comparisons are with Q1 2015 unless stated otherwise. Amounts below are in U.S. dollars; financial statement figures are rounded to millions.
Business context and operating performance
Sirius XM provides subscription satellite and internet radio, connected-vehicle services, and related products. Subscription fees are its primary revenue source. At quarter-end, it reported 30.1 million subscribers, including 24.6 million self-pay and 5.4 million paid promotional subscribers. Liberty Media owned more than 50% of the company.
Financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $1,201.0 million | $1,081.0 million | +11% |
| Operating income | $348.2 million | $313.8 million | +11% |
| Operating margin | 29.0% | 29.0% | Roughly flat |
| Net income | $171.3 million | $105.7 million | +62% |
| Diluted EPS | $0.03 | $0.02 | Increased |
| Operating cash flow | $362.2 million | $310.0 million | +$52.2 million |
| Capital expenditures | $30.2 million | $29.8 million | +$0.3 million |
| Free cash flow (non-GAAP) | $328.2 million | $276.2 million | +19% |
| Adjusted EBITDA (non-GAAP) | $441.4 million | $399.2 million | +11% |
Net margin rose to approximately 14.3% from 9.8%. The stronger net-income growth reflected lower income tax expense as well as operating growth: the effective tax rate was 39.0%, versus 56.8% in Q1 2015. The prior-year rate was elevated mainly by a District of Columbia tax-law change and related valuation allowance.
Revenue, costs, liquidity and debt
- Subscriber revenue increased 11% to $1,009.7 million, driven mainly by 9% growth in the daily weighted average subscriber count and selected subscription rate increases. Advertising revenue rose 17% to $31.5 million; other revenue rose 13% to $132.7 million.
- Operating expenses increased 11% to $852.8 million. Revenue share and royalties rose 18% and programming and content costs rose 20%, outpacing revenue growth in those categories. General and administrative expense decreased 3%.
- Cash and cash equivalents were $102.0 million at March 31, down from $111.8 million at year-end. Operating cash flow improved, but financing used $338.1 million, principally reflecting $594.5 million of share repurchases and debt repayments, partly offset by borrowings.
- Debt carrying value, including current maturities, was approximately $5.715 billion. The company had $600 million drawn under its $1.75 billion revolving credit facility, with $1.15 billion available. It reported compliance with debt covenants; the facility’s maximum total leverage ratio is 5.0 to 1.0.
- Current assets were $562.2 million and current liabilities $2.504 billion; current liabilities include substantial deferred subscription revenue. Total stockholders’ deficit widened to $563.9 million from $166.5 million, with repurchases contributing materially.
- The company repurchased 159.0 million shares for $588.5 million in Q1. At quarter-end, $1.110 billion remained under its $8 billion repurchase authorization.
Material changes, outlook and notable items
- Subscriber count increased 8% year over year, and quarterly net additions rose to 465,000 from 431,000. However, monthly self-pay churn increased to 1.9% from 1.8%, while new-vehicle conversion fell to 38% from 40%. ARPU increased to $12.66 from $12.26.
- Management expected subscriber revenue to grow with subscriber-base expansion, rate increases and additional services; it also anticipated growth in advertising and U.S. Music Royalty Fee revenue. It expected several expense categories to rise as the subscriber base and service offerings expand. No full-year revenue, earnings or cash-flow guidance is provided in the filing text.
- Management estimated a 37.9% effective tax rate for full-year 2016. Revenue share and royalty costs were expected to increase; the company expected to recognize $30.1 million of expense related to its pre-1972 sound-recording settlement for the remainder of 2016 and $43.4 million in 2017.
- On April 5, 2016, after quarter-end, the company signed a memorandum of understanding to settle purported TCPA class actions for $35 million in cash, plus a three-month Select-service option for participating class members and call-center system changes. A definitive agreement and court approval remained outstanding.
- SoundExchange alleged underpaid royalties for 2007–2012 and sought at least $50 million to $100 million or more, plus other amounts. The company said it believed it had substantial defenses; it made no provision for losses it did not consider probable and estimable.
- The company had eight operating satellites at quarter-end. Three older satellites were no longer used for transmission as of April 7, 2016, and were planned for deorbit during 2016. Management reported no impairment indicators for goodwill or indefinite-lived intangible assets at quarter-end.
- Management said existing cash, operating cash flow and available credit were expected to fund operating needs, capital spending, legal settlements, interest, taxes and scheduled debt maturities, as well as repurchases and strategic opportunities. It cautioned that actual performance could be affected by competition, subscriber retention, auto-industry conditions, litigation, regulation, technology and satellite or systems failures.
Most important facts for investors to verify
- Whether the TCPA settlement received definitive documentation and court approval, and the resulting cash and service costs.
- Developments in the SoundExchange royalty proceeding and the ultimate financial exposure, if any.
- Subscriber additions, churn, vehicle conversion and ARPU trends, particularly whether rate increases offset retention pressures.
- Debt, interest costs, covenant headroom and the sustainability of large repurchases relative to cash generation and liquidity.
- Royalty, programming and other subscriber-growth costs, including the expected pre-1972 recording settlement expense.