Sirius XM Holdings Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited, consolidated results. Sirius XM Holdings operates satellite and streaming audio services and Pandora, including advertising, subscriptions, connected-vehicle services, and podcast operations. Figures are in millions of dollars unless stated otherwise.
Financial and operating performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $2,159 | $1,874 | $4,217 | $3,826 |
| Operating income | $658 | $415 | $912 | $883 |
| Net income | $433 | $243 | $652 | $536 |
| Operating cash flow | $636 | $591 | $928 | $1,007 |
| Free cash flow (non-GAAP) | $550 | $503 | $761 | $851 |
| Adjusted EBITDA (non-GAAP) | $700 | $615 | $1,381 | $1,254 |
Q2 revenue grew 15%, operating income 59%, and net income 78% year over year. Operating margin was approximately 30.5%, versus 22.2% a year earlier; net margin was approximately 20.1%, versus 13.0%. Q2 diluted EPS was $0.10, compared with $0.05. For the first half, revenue rose 10%, net income 22%, and adjusted EBITDA 10%, while free cash flow fell 11%.
Q2 growth was led by Pandora advertising revenue, up 82% to $383, and Pandora subscriber revenue, up 6% to $133. Sirius XM revenue grew 7% to $1,643, including subscriber revenue growth of 4%. Advertising recovery and higher sell-through and pricing aided results. Sirius XM self-pay subscribers increased 3% year over year to 31.4 million, while total Sirius XM subscribers rose 1% to 34.5 million. Pandora subscribers rose 4% to 6.6 million, but monthly active users fell 7% to 55.1 million and ad-supported listening hours declined 8% in Q2.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $1,124 at June 30, 2021, versus $71 at December 31, 2020. Total assets were $11,201 and stockholders’ deficit was $2,515.
- Debt carrying value was approximately $9,845 before deferred financing costs. The company issued $2,000 principal amount of 4.00% notes due 2028 and gave notice to redeem $1,000 of 3.875% notes due 2022. No borrowings were outstanding under the $1,750 revolving credit facility; $1,749 was available, net of letters of credit.
- Management said existing cash, operating cash flow, and borrowing capacity should fund expected operating needs, capital expenditures, debt service, dividends, and repurchases. The company reported compliance with debt covenants. Current liabilities exceeded current assets, largely reflecting deferred revenue and the notes classified as current for redemption.
- First-half financing included $856 of share repurchases and $121 of dividends. The board later authorized another $2,000 of repurchases, raising total program authorization to $18,000; the company also declared a quarterly dividend of $0.014641 per share.
Material changes, outlook and risks
- SXM-7 satellite: In-orbit failures led to a $220 impairment charge in the first half. The company recorded $140 of insurance recoveries, including $123 receivable at quarter-end; timing and amount of the remaining recovery were uncertain. Management said service was not expected to be affected. SXM-8 launched successfully in June and was expected to enter service in Q3 2021 after testing.
- Other unusual items: First-half results included $25 of office-lease restructuring charges and $3 of acquisition costs. The Q2 impairment, restructuring and acquisition line was a net credit of $136, primarily reflecting SXM-7 insurance recoveries. A $95 state tax audit settlement benefit contributed to the unusually low 9.1% first-half effective tax rate; management estimated a full-year 2021 rate of approximately 17%.
- Operating outlook: Management expected Sirius XM subscriber revenue and advertising to grow, equipment revenue to be relatively flat, and other revenue and Pandora subscriber revenue to remain relatively flat. Pandora advertising revenue was expected to increase, partly from off-platform opportunities. Management also anticipated increases in several content, royalty, marketing, technology, and operating costs. These are qualitative expectations, not quantified earnings guidance.
- Key risks and contingencies: Competition, subscriber retention, declining Pandora active users, advertising monetization, vehicle production and semiconductor supply, COVID-19 effects, satellite reliability, music licensing costs, data security, and significant indebtedness. The Copyright Royalty Board’s initial 2021 webcasting rates increased approximately 17% for non-subscription and 8% for subscription transmissions versus 2020; appeals remained possible. Pandora’s pre-1972 sound-recording litigation was ongoing. The filing reported no material changes to previously disclosed risk factors.
- Liberty Media beneficially owned approximately 78% of common shares, making Sirius XM a controlled company. The filing said Liberty could exceed the 80% threshold for a consolidated tax group during 2021.
Important facts for investors to verify
- Whether and when the remaining SXM-7 insurance recovery is collected, and whether satellite service remains unaffected.
- Whether Pandora’s advertising recovery can persist despite falling monthly active users and listening hours, and rising music licensing costs.
- Free cash flow conversion and capital spending, given first-half operating cash flow and free cash flow declined year over year.
- Debt maturities, refinancing and interest-rate exposure, including the LIBOR transition affecting the revolving facility.
- Potential effects of CRB rate changes, pending sound-recording litigation, and any change in Liberty Media’s ownership or tax-group status.