Sirius XM Holdings Inc. — 2018 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2018; it is not a standalone fourth-quarter filing. Sirius XM provides subscription satellite radio, streaming audio and video, and connected-vehicle services. It reported approximately 34.0 million subscribers, including 28.9 million self-pay and 5.1 million paid promotional subscribers. Liberty Media owned approximately 73% of common stock.
Financial and operating performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $5,770.7 million | $5,425.1 million | +6% |
| Operating income / margin | $1,726.9 million / 29.9% | $1,640.9 million / 30.2% | Income +5% |
| Net income | $1,175.9 million | $647.9 million | +81% |
| Adjusted EBITDA / margin | $2,240.4 million / 38.8% | $2,115.9 million / 39.0% | +6% |
| Operating cash flow | $1,880.4 million | $1,855.6 million | +$24.8 million |
| Free cash flow | $1,517.1 million | $1,559.8 million | −3% |
| Cash and cash equivalents at year-end | $54.4 million | $69.0 million | −$14.6 million |
| Long-term debt, net | $6,884.5 million | $6,741.2 million | +$143.3 million |
Revenue growth reflected a 5% increase in daily weighted-average subscribers, higher advertising and equipment revenue, and increased music royalty fee and other revenue. Ending subscribers rose 4% to 34.0 million; self-pay subscribers grew 5%, while paid promotional subscribers declined 2%. Average monthly self-pay churn improved to 1.7% from 1.8%; new-vehicle conversion eased to 39% from 40%. ARPU was $13.34, up 1%, though adoption of the new revenue standard reduced reported 2018 ARPU by $0.24.
Net income increased substantially in part because 2017 included a $184.6 million tax charge to revalue deferred tax assets after U.S. tax reform. The 2018 effective tax rate was 17.2%, versus 48.7% in 2017; management estimated an approximately 24.6% effective tax rate beginning in 2019. These effects make the year-over-year net-income comparison less indicative of underlying operating growth.
Cash used in investing activities was $379.3 million, including $355.7 million of additions to property and equipment. Cash used in financing was $1,515.1 million, mainly reflecting $1,314.3 million of share repurchases and $201.4 million of dividends. Free cash flow fell partly because of a $150 million cash payment resolving historical sound-recording royalty claims and higher satellite construction spending. Adjusted EBITDA and free cash flow are non-GAAP measures and should be considered alongside GAAP results.
Debt principal was approximately $6.9 billion, including $439 million drawn on a $1.75 billion revolving facility; $1.311 billion remained available. The company reported compliance with debt covenants. Stockholders’ deficit was $1,816.9 million. Liquidity also includes operating cash flow and borrowing capacity; reported cash alone was modest relative to debt and planned capital returns.
Material changes and unusual items
- The statutory satellite sound-recording royalty rate increased from 11% in 2017 to 15.5% in 2018. Revenue share and royalties rose 15% to $1,393.8 million. The company recorded a $69.1 million charge related to settlement of claims and audits covering 2007–2017; the settlement included a $150 million lump-sum cash payment.
- Adoption of ASC 606 in 2018 changed the presentation of certain OEM revenue-share payments and other items. Reported subscriber revenue was $94.8 million lower and revenue share and royalties expense $88.1 million lower than under the prior standard; management reported a $2.6 million net-income effect. Prior-year figures were not restated.
- Satellite and transmission expense increased 16%, mainly from higher wireless and streaming costs. Sales and marketing expense rose 11%, and engineering, design and development rose 10%, reflecting retention, acquisition, streaming and connected-vehicle investment.
- The company continued construction of replacement satellites SXM-7 and SXM-8, planned for launch in 2019 and 2020. Existing in-orbit satellites are not insured; insurance was obtained for the new satellites’ launch and first year in orbit.
- The Pandora merger agreement provides for 1.44 Sirius XM shares per Pandora common share. Pandora stockholders approved the agreement on January 29, 2019, after year-end; closing remained subject to customary conditions and was expected in the first quarter of 2019. The transaction was described as an all-stock deal initially valued at $3.5 billion.
- On January 29, 2019, the board authorized an additional $2.0 billion in repurchases, raising total authorization to $14.0 billion, and declared a quarterly dividend of $0.0121 per share.
Outlook, commentary and principal risks
Management expected subscriber revenue to grow with subscriber-base expansion, rate increases and additional services; advertising revenue to benefit from broader advertiser demand and more inventory; and equipment royalties to increase with new chipsets. It also anticipated higher programming, streaming, engineering, marketing and subscriber-acquisition spending. The filing provides no specific numerical revenue, earnings or cash-flow guidance for 2019; stated expectations generally exclude the proposed Pandora acquisition.
Key risks include intensifying competition from free radio, internet audio and integrated in-car platforms; subscriber churn, discounting and conversion performance; dependence on U.S. vehicle sales and automaker distribution; higher music-rights costs and unresolved BMI negotiations; satellite failure, interference and replacement-satellite execution; cybersecurity, privacy and system outages; regulatory and consumer-protection requirements; and execution and integration risks from Pandora. A TCPA class action alleging unlawful telemarketing was pending, with class certification unresolved; the company said it intended to defend the case. Liberty Media’s controlling stake may also limit the influence of other shareholders.
The company reported effective disclosure controls and internal control over financial reporting, with an unqualified auditor opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Whether the Pandora transaction closed on the expected timetable, and its final dilution, integration costs and realized benefits.
- Subscriber growth, self-pay churn, new-vehicle conversion and ARPU trends, including the effect of discounts and ASC 606 presentation.
- The sustained impact of the 15.5% sound-recording royalty rate, the historical settlement, and the outcome of music-rights negotiations.
- Debt maturities, interest costs, covenant headroom and liquidity after repurchases, dividends and satellite spending.
- Satellite SXM-7/SXM-8 delivery and launch progress, and operational exposure from uninsured in-orbit satellites.
- Resolution and potential financial exposure of the TCPA litigation and other contingencies.