Business context and reporting period
Sirius XM Holdings Inc. reported unaudited results for the quarter and nine months ended September 30, 2019. The company operates its Sirius XM satellite-radio and connected-vehicle business and Pandora’s streaming and digital-audio advertising business. Pandora was acquired on February 1, 2019; consequently, reported 2019 results include Pandora only after acquisition, while 2018 reported results do not. Pro forma comparisons assume Pandora was included in both periods and are generally more informative for year-over-year trends.
At quarter-end, Sirius XM had 34.6 million subscribers; Pandora had 6.3 million subscribers and 63.1 million monthly active users. Liberty Media owned approximately 71% of common shares and the company qualified as a controlled company.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Reported revenue | $2,011 | $1,467 | $5,732 | $4,275 |
| Reported operating income | $476 | $483 | $1,248 | $1,268 |
| Reported net income | $246 | $343 | $671 | $925 |
| Pro forma revenue | $2,013 | $1,887 | $5,852 | $5,404 |
| Pro forma net income | $245 | $317 | $690 | $608 |
| Adjusted EBITDA, pro forma | $657 | $585 | $1,841 | $1,539 |
| Free cash flow, non-GAAP | $465 | $288 | $1,239 | $1,101 |
Pro forma revenue increased 7% for the quarter and 8% year to date; pro forma net income decreased 23% in the quarter but increased 13% year to date. Adjusted EBITDA rose 12% and 20%, respectively. Reported operating income was nearly flat in the quarter and down 2% year to date, while comparisons are affected by Pandora’s inclusion and acquisition-related accounting. Q3 reported operating margin was approximately 23.7%; pro forma operating margin was approximately 23.5%, versus 21.7% in the prior-year pro forma quarter.
For the first nine months, operating cash flow was $1.485 billion, capital expenditures were $239 million, and cash and restricted cash totaled $90 million at period-end ($79 million of cash and cash equivalents on the balance sheet). Total debt was $7.906 billion, up from $6.888 billion at year-end 2018. The company reported $65 million drawn on its $1.75 billion revolving facility and $1.684 billion available for borrowing. Current assets were $936 million and current liabilities $3.251 billion; current liabilities include substantial deferred revenue.
Net income per diluted share was $0.05 for Q3 and $0.15 for the nine-month period, versus $0.07 and $0.20, respectively, in 2018. The company paid $1.966 billion to repurchase shares and $167 million in dividends in the first nine months.
Material changes versus the prior period
- The Pandora acquisition added $447 million of revenue and $1.139 billion of revenue in the reported Q3 and nine-month periods, respectively. Pandora contributed a $47 million net loss in Q3 and a $225 million net loss since acquisition. Pro forma figures show consolidated growth excluding the acquisition-period mismatch.
- Pandora’s Q3 pro forma revenue grew 7%; advertising revenue increased 8%. However, Pandora monthly active users fell 8% year over year, and subscribers declined 7%. Its ad-supported listener hours fell 8% in Q3 and 9% year to date, while advertising revenue per thousand listener hours increased.
- Sirius XM subscriber revenue grew 6% in Q3 and 8% year to date, supported by higher music royalty fees and a 3% increase in weighted-average subscribers. Q3 ending subscribers rose 3% year over year; self-pay monthly churn improved to 1.7% from 1.8%.
- Reported operating expenses increased 56% in Q3, primarily reflecting Pandora consolidation and higher sales, engineering, and administrative expenses. Reported nine-month expenses also included $83 million in acquisition and related costs.
- Debt refinancing included issuing $1.25 billion of 5.5% notes due 2029 and $1.5 billion of 4.625% notes due 2024, alongside redeeming $1.5 billion of 6.0% notes due 2024. The redemption and Pandora note repurchase contributed a $57 million year-to-date debt-extinguishment loss.
Outlook, commentary, risks and unusual items
- Management estimated a 2019 effective tax rate of approximately 24%. It expects to fund operations, capital expenditures, debt service, and shareholder returns from cash, operating cash flow, and borrowing capacity, and said it believes liquidity and debt capacity are sufficient for estimated funding needs.
- Management expects Sirius XM subscriber revenue and advertising revenue to grow, and expects Pandora advertising revenue to benefit from off-platform opportunities. Pandora subscription revenue was expected to remain relatively flat, in part due to expiration of a T-Mobile promotional trial. Management anticipated higher marketing, engineering, administrative, content, and streaming-related costs.
- Capital commitments include satellite construction and launch, programming and content, and other contractual obligations. The filing reports $12.909 billion of aggregate contractual cash commitments, including debt and interest, through periods extending beyond 2023; future variable costs are not fully captured. Replacement satellites SXM-7 and SXM-8 are under construction.
- A $25 million settlement fund for a Do-Not-Call class action was paid in 2019, subject to final court approval, with additional telemarketing-practice changes required. Pandora’s pre-1972 sound-recording litigation remains active; in October 2019 the Ninth Circuit remanded the Flo & Eddie case for further proceedings after finding factual questions unresolved.
- Other key risks cited include competition, subscriber and listener retention, advertising monetization, music licensing and royalty rates, reliance on the automotive industry and third parties, satellite failure or interference, privacy and cybersecurity, indebtedness and restrictive covenants, litigation, and the risks of realizing acquisition benefits.
- Unusual and comparison-sensitive items include acquisition accounting and costs, prior-year fair-value gains and losses on the Pandora investment, debt-extinguishment losses, a $25 million legal settlement, and differences in tax benefits. Adjusted EBITDA and free cash flow are non-GAAP measures and are not substitutes for GAAP results; free cash flow does not deduct debt maturities.
Important facts for investors to verify
- Review pro forma results and segment disclosures to distinguish underlying trends from Pandora’s acquisition-related contribution and purchase-accounting adjustments.
- Track Pandora’s declining monthly active users, listener hours, and subscribers against improving ad monetization and the expected impact of the expired T-Mobile promotion.
- Assess debt maturities, interest expense, refinancing needs, covenant headroom, and the company’s continued share repurchases and dividends relative to cash generation.
- Monitor satellite construction and operating risks, content royalty obligations, contractual commitments, and unresolved pre-1972 recording litigation; confirm final approval and implementation of the Do-Not-Call settlement.
- Compare GAAP cash flows and earnings with management’s non-GAAP adjusted EBITDA and free-cash-flow measures, including the adjustments used in each reconciliation.