Sirius XM Holdings Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in millions, except per-share and subscriber data. Sirius XM operates satellite and streaming audio services, connected-vehicle offerings, and Pandora’s ad-supported and subscription streaming business. At quarter-end, Sirius XM had 34.8 million subscribers; Pandora had 6.3 million subscribers and 60.9 million monthly active users.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $1,952 | $1,744 | +12% |
| Operating income | $468 | $333 | +41% |
| Net income | $293 | $162 | +81% |
| Diluted earnings per share | $0.07 | $0.03 | Up |
| Cash from operating activities | $416 | $396 | +$20 |
| Adjusted EBITDA (non-GAAP, pro forma comparison) | $639 | $567 | +13% |
| Free cash flow (non-GAAP) | $348 | $300 | +16% |
Operating margin was approximately 24% and net margin approximately 15%, calculated from reported results. Revenue mix included subscriber revenue of $1,585 (+9%), advertising revenue of $285 (+36%), equipment revenue of $41 (flat), and other revenue of $41 (+14%). Pandora revenue was $369, up 47% on reported results; the prior-year reported period included Pandora only from its February 1, 2019 acquisition date.
At March 31, cash and cash equivalents were $40 (cash, cash equivalents and restricted cash totaled $52); current assets were $883 and current liabilities $3,102. Debt principal was $7,858, with balance-sheet long-term debt of $7,847 and current maturities of $2. Interest expense was $99. The $1.75 billion revolving facility had no borrowings and approximately $1.749 billion available, net of letters of credit. The company reported covenant compliance. Its total-liabilities balance exceeded total assets, leaving a stockholders’ deficit of $747.
Changes versus the prior comparable period
- Reported revenue and earnings increased, but comparisons are affected by Pandora being consolidated for the full 2020 quarter and only from February 1 in 2019. On a pro forma basis, revenue rose 5% to $1,954 and net income rose 62% to $293, versus $1,860 and $181.
- Sirius XM subscriber revenue rose 6%, supported by a 2% increase in daily weighted-average subscribers and higher subscription and music royalty fees. Pandora advertising revenue rose 4% pro forma, while Pandora subscriber revenue fell 4% pro forma.
- Operating expenses increased 5% to $1,484. The prior-year period included $76 of acquisition-related costs; 2020 had none. General and administrative expense also benefited from the absence of a $25 Do-Not-Call legal reserve recorded in Q1 2019.
- Operating cash flow increased to $416. Investing activities used $145, including the $75 SoundCloud investment; financing activities used $339, including $243 of share repurchases and $59 of dividends. Cash including restricted cash declined by $68 during the quarter.
- Quarter-end Sirius XM subscribers rose 2% year over year, but quarterly net additions were negative 143, versus positive 132 a year earlier. Pandora monthly active users fell 8% and ending subscribers fell 9% year over year.
Outlook, risks and unusual items
- COVID-19: Management said the pandemic had not materially affected Q1 revenue or expenses, but expected a material adverse business impact. It cited potential pressure on vehicle-related subscriber growth, advertising, equipment sales and other revenue, as well as possible higher bad debt and supply-chain, call-center and satellite-delivery disruption. Management anticipated some expense reductions but said content costs would not be significantly affected. The ultimate impact remained uncertain.
- Management stated it expected sufficient cash and borrowing capacity for anticipated funding needs, including satellite construction, dividends, repurchases and strategic opportunities. The filing does not provide a specific revenue or earnings forecast. It estimated a 2020 effective tax rate of approximately 23%.
- In April, the company announced it would discontinue its Automatic product and expected an impairment and restructuring charge in Q2 2020. The board also declared a $0.01331 per-share quarterly dividend payable May 29, 2020.
- Material exposures include substantial debt and restrictive covenants; music royalty rates and the pending 2021–2025 webcasting rate proceeding, delayed by COVID-19; pre-1972 sound-recording litigation; and dependence on vehicle sales, advertising demand, third parties and satellite operations. The company said it believed it had substantial defenses in the litigation and did not expect other pending matters to have a material adverse effect.
- Other notable items: the company invested $75 in SoundCloud; recognized a $7 one-time lawsuit settlement in other income; and recorded a $25 foreign-currency translation loss, net of tax, in comprehensive income.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter subscriber trends, advertising demand, bad debt, vehicle-related sales and operating costs.
- Debt maturities, interest costs, covenant headroom and actual liquidity available under the revolving facility.
- Whether negative quarterly Sirius XM net additions and declines in Pandora users and subscribers persist.
- The timing and amount of the Automatic discontinuation impairment and restructuring charge.
- Outcomes and potential financial exposure from the webcasting royalty proceeding and sound-recording litigation.
- Capital returns: the company repurchased $243 of shares in Q1, had $924 remaining under its repurchase authorization, and continued to indicate an expected annual dividend of $0.05324 per share.