Sirius XM Holdings Inc. — Q2 2020 Form 10-Q
Business context and period. This unaudited report covers the quarter and six months ended June 30, 2020. Sirius XM operates subscription satellite and streaming audio services and connected-vehicle offerings; Pandora provides streaming audio, subscriptions, and advertising. At quarter-end, Sirius XM reported approximately 34.3 million subscribers, while Pandora had 6.3 million subscribers and 59.6 million monthly active users. Liberty Media beneficially owned approximately 73% of the company.
Financial performance
Amounts below are in millions, except per-share data, percentages, and subscriber figures. Quarterly comparisons are against Q2 2019.
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Total revenue | $1,874 | $1,977 | Down 5% |
| Operating income | $415 | $439 | Down 5% |
| Operating margin | 22.2% | 22.2% | Approximately flat |
| Net income | $243 | $263 | Down 8% |
| Diluted EPS | $0.05 | $0.06 | Down $0.01 |
| Adjusted EBITDA (non-GAAP) | $615 | $618 | Down less than 1% |
| Free cash flow (non-GAAP) | $503 | $474 | Up 6% |
- Quarterly revenue pressure came mainly from Pandora advertising, down 31% to $211, and Sirius XM advertising, down 52% to $25. Subscriber revenue rose 3% to $1,578, while equipment revenue declined 39% to $25.
- For the six months, reported revenue was $3,826 versus $3,721; operating income was $883 versus $772; and net income was $536 versus $425. Diluted EPS was $0.12 versus $0.09. Adjusted EBITDA was $1,254 versus $1,184, and free cash flow was $851 versus $774.
- The six-month year-over-year comparison is affected by Pandora being consolidated only from February 1 in 2019. Management also provided pro forma results: six-month pro forma revenue was $3,830 in 2020 versus $3,839 in 2019, and net income was $536 versus $446.
- Six-month operating cash flow was $1,007 versus $941. Capital expenditures were $149, and cash used in investing activities was $265. Financing activities provided $919, including net proceeds from the 2030 notes, partly offset by $399 of repurchases and $117 of dividends.
Balance sheet, debt, and liquidity
- At June 30, cash and cash equivalents were $1,770, compared with $106 at December 31, 2019. Current assets totaled $2,495 and current liabilities $4,552; current liabilities include $1,833 of deferred revenue and $1,492 of current debt maturities.
- Debt carrying value was approximately $9,333 in total: $1,492 current and $7,841 long-term. The debt schedule lists $9,344 of principal. The company issued $1,500 principal amount of 4.125% senior notes due 2030 in June. No borrowings were outstanding under the $1,750 revolving credit facility; $1,749 was available after letters of credit.
- Stockholders’ deficit was $668. The company repurchased $408 of stock and paid $117 of dividends in the first half. Its June-end repurchase authorization had $759 remaining; the board later added $2,000 of authorization in July.
- Management said it believed cash and borrowing capacity were sufficient for expected needs, including satellite investment, debt service, repurchases, dividends, and strategic opportunities. The company was in compliance with debt covenants at quarter-end.
Material changes, outlook, and risks
- COVID-19 effects: Management said the pandemic’s effects emerged materially in Q2 and remained uncertain. Vehicle production and installations fell sharply, and advertising spending weakened. Pandora advertising revenue was down approximately 41% year over year in April, 36% in May, and 18% in June; ad-supported listener hours improved over the quarter but remained lower year over year.
- Sirius XM reported 264,000 net new self-pay subscribers in Q2, while total net subscriber additions were negative 516,000, chiefly reflecting a 780,000 decline in paid promotional subscribers. Average self-pay monthly churn improved to 1.6% from 1.7% a year earlier. New-car installations were down 57% for the quarter.
- Pandora monthly active users declined 8% year over year; ending subscribers fell 9%. Pandora advertising RPM declined 31% to $55.23 per thousand listener hours. Management cited changed commuting patterns, lower user engagement, and reduced advertiser demand.
- Management expected the pandemic to weigh on vehicle-related subscriber opportunities, advertising, equipment, and other revenue. It also expected lower subscriber acquisition, marketing, and some operating costs, but said content commitments and depreciation would not be significantly affected. No specific revenue or earnings guidance was provided. The company estimated a 2020 effective tax rate of approximately 23%.
- Automatic Labs service was terminated in May, resulting in $24 of restructuring charges, primarily asset write-downs. Simplecast was acquired in June for $28. In July, the company completed the redemption of $1.5 billion of 2023 and 2025 notes using proceeds from the 2030 issue and cash; it expected an approximately $40 debt-extinguishment loss in Q3.
- In July, Sirius XM agreed to acquire Stitcher for $265 cash, with up to $60 in contingent payments; closing was expected in Q3, subject to approvals and customary conditions.
- Risks include continued pandemic disruption, auto-industry dependence, advertising weakness, competition and subscriber retention, Pandora’s declining ad-supported user base, substantial indebtedness, satellite reliability, music licensing costs and litigation. The company reported pending pre-1972 recording litigation and a delayed Copyright Royalty Board proceeding for 2021–2025 webcasting rates; management said the other disclosed legal matters were not likely to have a material adverse effect. The 2020 notes maturity and July redemptions merit attention alongside future debt-service obligations.
Important facts for investors to verify
- Whether auto sales, installations, trial starts, advertising demand, and Pandora engagement recovered after quarter-end, and how these trends affected subscriber and advertising revenue.
- The basis for reported versus pro forma comparisons, especially the different Pandora consolidation periods in first-half 2019.
- Cash and debt after the July note redemptions, including the Q3 extinguishment charge and the remaining 2020 debt maturity.
- Capital allocation plans: repurchases, dividends, the Stitcher purchase and contingent consideration, and satellite construction and launch spending.
- Potential changes to music royalty rates after the CRB proceeding, and developments in the pre-1972 recording litigation and other contingencies.