Sirius XM Holdings Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
Sirius XM provides subscription satellite and internet audio, advertising, equipment, and connected-vehicle services. At June 30, it reported 33.5 million subscribers, including 28.2 million self-pay and 5.3 million paid promotional subscribers. Liberty Media beneficially owned approximately 70% of the company.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1,432.3 | $1,347.6 | $2,807.4 | $2,641.6 |
| Operating income | $361.6 | $416.4 | $785.2 | $810.2 |
| Net income | $292.4 | $202.1 | $581.8 | $409.2 |
| Diluted EPS | $0.06 | $0.04 | $0.13 | $0.09 |
| Adjusted EBITDA (non-GAAP) | $543.4 | $521.9 | $1,075.3 | $1,023.7 |
| Free cash flow (non-GAAP) | $486.2 | $416.7 | $812.7 | $665.7 |
- Q2 revenue rose 6%; subscriber revenue increased 3%, advertising 18%, equipment 24%, and music royalty fee and other revenue 26%. Subscriber growth, higher advertising sales and rates, chipset royalties, connected-vehicle services, and higher music royalty fees contributed.
- Q2 operating income fell 13% as operating expenses grew 15%, including higher revenue-share and royalty costs. The operating margin was approximately 25.2%, versus 30.9% a year earlier.
- Net income increased despite lower operating income, helped by an $86.1 million unrealized gain on the Pandora investment and lower income tax expense. The six-month Pandora fair-value gain was $117.4 million.
- Q2 adjusted EBITDA increased 4%; six-month adjusted EBITDA increased 5%. These are non-GAAP measures and exclude specified items, including share-based compensation and sound-recording legal settlements.
- Six-month cash from operations was $994.1 million, compared with $792.5 million. Capital expenditures were $174.3 million, up from $119.5 million. Cash, cash equivalents and restricted cash totaled $74.5 million at period-end; unrestricted cash and equivalents were $63.5 million.
- At June 30, balance-sheet debt was $6.448 billion, comprising $4.7 million current and $6.443 billion long-term debt. The $1.75 billion revolving facility was undrawn, and the company reported compliance with debt covenants. Its leverage covenant caps total debt to operating cash flow at 5.0 to 1.0.
- Current assets were $481.3 million and current liabilities $2.943 billion, including $1.935 billion of current deferred revenue. Stockholders’ deficit was $1.371 billion.
Material changes versus the prior comparable period
- Revenue grew 6% in both the quarter and first half, while operating income declined 13% in Q2 and 3% in the first half.
- Q2 revenue-share and royalty expense rose 38%. Drivers included a $69.1 million charge related to the SoundExchange settlement, the statutory royalty rate increase from 11% in 2017 to 15.5% in 2018, and higher revenue subject to automaker sharing.
- The company adopted the new revenue standard in 2018 using the modified retrospective method; 2017 comparatives were not restated. Adoption reduced reported subscriber revenue by $23.8 million in Q2 and $48.2 million in the first half, with related presentation changes to expenses. Management said the overall financial-statement impact was not material.
- Average self-pay monthly churn improved to 1.6% in Q2 from 1.7%; new-vehicle consumer conversion declined to 39% from 40%. Self-pay subscribers increased 6% year over year, while paid promotional subscribers declined 1%.
- Six-month repurchases and retirements were $334.2 million, versus $783.8 million in 2017. The company also paid $98.7 million in dividends.
Outlook, commentary, and risks
- Management expected subscriber revenue to benefit from subscriber growth, pricing and additional services; advertising revenue to grow with sales and channel expansion; and equipment revenue to benefit from new-chipset royalties. It also expected royalty costs, programming, sales and marketing, engineering, and general and administrative expenses to increase in specified areas.
- Management estimated a 2018 effective tax rate of approximately 22%. It expected regular quarterly dividends totaling $0.044 per share annually; a $0.011-per-share dividend was declared in July for payment in August.
- Management said existing cash, operating cash flow and revolver capacity should fund operating needs, satellite investment, legal settlements, debt service, dividends, repurchases and strategic opportunities. It noted funding capacity depends on future performance and other economic and competitive factors.
- A $150 million one-time SoundExchange settlement payment was made July 6, 2018, resolving claims and audits for 2007–2017. The filing states that $69.1 million was recorded as a Q2 charge; investors should distinguish the recognized expense from the cash payment.
- Other risks include competition and subscriber retention, dependence on the auto industry and satellite reliability, regulatory and intellectual-property matters, cybersecurity and technology interruptions, substantial indebtedness, and Liberty Media’s controlling influence. A TCPA class-action suit remained pending; the company said it intended to defend it. The filing reported no material changes to the risk factors in its 2017 Form 10-K.
- Contractual cash commitments totaled $11.15 billion, including debt, interest, programming, satellite, royalty and lease commitments. The filing notes that certain future variable-cost arrangements are difficult to estimate and may be substantial.
Most important facts for investors to verify
- Whether subscriber growth, churn and new-vehicle conversion trends continue, and how they affect recurring revenue.
- How much reported earnings and other income depend on non-cash Pandora fair-value gains, and the valuation assumptions behind that investment.
- The continuing effect of higher royalty rates and the SoundExchange settlement on margins, including the relationship between the $69.1 million charge and the $150 million cash payment.
- Cash generation after satellite capital expenditures, debt service, repurchases and dividends; free cash flow is non-GAAP and does not deduct required debt maturities.
- Debt covenant headroom, upcoming maturities and the company’s ability to sustain capital returns alongside satellite and other investment needs.
- Comparability of 2018 results with 2017 following adoption of the revenue standard, including the effects on reported revenue and operating metrics.