Sirius XM Holdings Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Dollar amounts below are in millions unless stated otherwise. Sirius XM provides subscription-based satellite radio and connected-vehicle services; Liberty Media owned more than 50% of the company.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,057.1 | $961.5 | $3,090.1 | $2,799.0 |
| Operating income | $294.0 | $284.5 | $826.0 | $799.2 |
| Net income | $136.2 | $62.9 | $350.1 | $312.0 |
| Diluted EPS | $0.02 | $0.01 | $0.06 | $0.05 |
| Adjusted EBITDA (non-GAAP) | $381.3 | $295.7 | $1,086.5 | $840.6 |
| Free cash flow (non-GAAP) | $267.3 | $245.3 | $825.1 | $624.3 |
Q3 revenue grew 10%, led by subscriber revenue (+8%), other revenue (+21%) and equipment revenue (+29%). Nine-month revenue also rose 10%. Net income increased 117% in Q3, partly because Q3 2013 included a $108.0 million debt-extinguishment loss; nine-month net income rose 12%. Operating income increased only 3% in both comparisons as operating expenses rose 13%. Operating margin was approximately 27.8% in Q3 versus 29.6% a year earlier, and 26.7% for nine months versus 28.6%.
Adjusted EBITDA increased 29% in both periods; its margin was approximately 36.1% in Q3 versus 30.8%, and 35.2% for nine months versus 30.0%. These are non-GAAP measures and exclude specified items, including share-based compensation and certain purchase-accounting adjustments.
Cash, debt and liquidity
- Cash and cash equivalents were $103.6 million at September 30, 2014, down from $134.8 million at year-end 2013.
- Nine-month operating cash flow was $888.2 million, up from $744.3 million. Investing used $61.9 million; financing used $857.5 million. Capital expenditures were $87.2 million.
- Debt carrying value was $4,769.1 million, compared with $3,601.6 million at year-end. The company issued $1.5 billion of 6.00% senior notes due 2024; the $145 million revolving-credit borrowing left $1.105 billion available. The company reported compliance with debt covenants.
- Interest expense was $197.0 million for nine months, up 31%, principally due to higher average debt and reduced interest capitalization. The revolving facility carries a variable LIBOR-based rate; most listed notes bear fixed rates.
- Contractual cash commitments totaled $8.063 billion, including $4.812 billion of debt principal and $1.936 billion of cash interest. Management said existing cash, operating cash flow and available borrowing capacity should meet anticipated funding needs, including repurchases.
Operating trends and changes
- Ending subscribers increased 5% year over year to 26.7 million, including 22.0 million self-pay subscribers. Nine-month net additions fell 30% to 1.18 million.
- Monthly self-pay churn increased to 1.9% from 1.8%; new-vehicle conversion declined to 41% in Q3 from 44%. Management attributed weaker additions partly to higher churn, vehicle-trial migrations, lower paid promotional growth and contract changes.
- ARPU rose to $12.47 in Q3 from $12.29, supported by subscription-rate increases and the music royalty fee. Subscriber acquisition cost per installation fell to $35 from $45, reflecting improved OEM rates.
- Revenue share and royalties rose 26% in Q3 and 28% for nine months. Prior-year comparisons benefited from merger-related deferred-credit amortization, which had ended by 2014. Customer service, sales and marketing, and general and administrative costs also increased, including costs related to the connected-vehicle business acquired from Agero.
- The company repurchased approximately 570 million shares for $2.006 billion during the first nine months and had $2.232 billion remaining under its $6 billion authorization. Repurchases were funded in part through debt issuance and borrowing; subsequent to quarter-end, it repurchased additional shares and completed an accelerated repurchase.
Outlook, risks and unusual items
- No specific full-year revenue, earnings or cash-flow guidance was provided. Management expected subscriber revenue to benefit from subscriber growth, connected-vehicle services and rate changes; it also anticipated growth in advertising and music royalty-fee revenue. Several operating costs, including marketing, customer service, engineering and G&A, were expected to increase.
- Management identified competition, subscriber retention, dependence on the automotive industry, satellite or systems failures, rising music royalties, cybersecurity, regulatory and consumer-protection requirements, indebtedness, and intellectual-property litigation as risks. It cautioned that interim results are not necessarily indicative of full-year results.
- Pre-1972 sound-recording cases present an evolving legal risk: California courts issued adverse rulings in September and October 2014 on performance rights under state law; Sirius XM said it would appeal. Plaintiffs seek more than $100 million in compensatory damages in each specified action, plus other relief. The company separately said state consumer-practice investigations were not expected to have a material adverse effect.
- A $34.5 million derivative-related loss arose from the Liberty Media share-repurchase agreement. A $2.3 million impairment loss was recorded on the M-Way investment. No goodwill or indefinite-lived intangible impairment was recorded.
- The estimated 2014 annual effective tax rate was 39.1%; the nine-month effective rate was 41.9%, partly reflecting the derivative loss. The company identified proposed tax legislation as a possible source of deferred-tax-asset and tax-rate impacts.
Important facts for investors to verify
- Whether subscriber additions, churn and vehicle conversion stabilize, and whether rate increases support continued ARPU growth.
- How higher royalties, customer-service costs and other operating expenses affect GAAP operating margins and cash generation.
- Debt levels, interest costs, refinancing and covenant headroom, alongside ongoing share repurchases and the company’s stated liquidity expectations.
- Developments and potential financial exposure in the pre-1972 sound-recording litigation and consumer investigations.
- The performance and contribution of the Agero connected-vehicle business, including its subscriber and revenue trends, which are not included in the reported satellite subscriber count.