Sirius XM Holdings Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited consolidated results compared with Q1 2022. Sirius XM operates its satellite-radio and connected-vehicle business alongside Pandora and off-platform audio and advertising. Liberty Media beneficially owned approximately 83% of the common stock.
Financial and operating results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $2.144 billion | $2.186 billion | Down 2% |
| Operating income | $412 million | $510 million | Down 19% |
| Net income | $233 million | $309 million | Down 25% |
| Diluted EPS | $0.06 | $0.08 | Down $0.02 |
| Segment gross profit | $1.129 billion | $1.207 billion | Down 6% |
| Adjusted EBITDA (non-GAAP) | $625 million | $690 million | Down 9% |
| Operating cash flow | $350 million | $355 million | Down $5 million |
| Free cash flow (non-GAAP) | $144 million | $258 million | Down 44% |
Operating margin was approximately 19.2%, versus 23.3% in Q1 2022; segment gross margin was approximately 52.7%, versus 55.2%. Revenue fell in both segments: Sirius XM revenue was $1.682 billion, down 2%, and Pandora and Off-platform revenue was $462 million, down 1%. Sirius XM subscriber revenue declined 1%; total advertising revenue declined 2%.
Cash, debt and liquidity: Cash and cash equivalents were $53 million at quarter-end; cash, cash equivalents and restricted cash totaled $61 million. Debt principal was $9.523 billion, with carrying value of approximately $9.5 billion. The company had $210 million outstanding under its revolving credit facility and $1.540 billion available to borrow. It reported compliance with debt covenants; the facility’s maximum total leverage ratio is 5.0-to-1.0. Stockholders’ deficit was $3.259 billion.
Material changes and drivers
- Profitability weakened as revenue declined and revenue share and royalties increased. Consolidated cost of services rose 4% to $1.024 billion, while operating expenses rose 3% to $1.732 billion.
- Sales and marketing fell 18% to $224 million, partly offsetting higher royalties, programming costs, engineering and general and administrative expenses. G&A increased 20%, primarily due to litigation, personnel and software costs.
- Q1 included $32 million of impairment, restructuring and acquisition costs, versus none in the prior-year quarter. This included a $23 million workforce-reduction charge, a $5 million office lease-asset impairment and other related costs. The company reduced its workforce by approximately 475 roles, or 8%.
- Pandora monthly active users declined 8% to 46.7 million; Pandora subscribers declined 2% to 6.2 million. Sirius XM ended the quarter with 34.0 million subscribers, up 70,000 year over year, but recorded net subscriber losses of 281,000 in Q1 versus losses of 79,000 a year earlier.
- Sirius XM average self-pay monthly churn remained 1.6%; ARPU declined 2% to $15.29. Pandora ad-supported listener hours fell 4%, and advertising revenue per thousand listener hours fell 5%.
- Capital spending on property and equipment was $205 million, versus $97 million in Q1 2022, including $127 million for satellite construction. Management attributed the free-cash-flow decline primarily to higher satellite construction and severance payments.
Outlook, commentary and risks
- Management expects Sirius XM subscriber revenue to increase with service price increases, advertising revenue to remain relatively flat, and equipment and connected-vehicle-related revenue to decline. Pandora subscription revenue is expected to remain relatively flat; Pandora and Off-platform advertising revenue is expected to increase with podcast growth.
- Management expects Sirius XM royalty costs to rise with higher statutory webcasting rates and subscription revenue. It expects near-term sales and marketing costs to decrease, then increase in the latter half of 2023. The company estimated a 2023 effective tax rate of approximately 23%.
- Management expects to fund operations, capital spending, interest, taxes and scheduled debt maturities with cash, operating cash flow and revolver borrowings, and believes available liquidity and debt capacity are sufficient for anticipated needs. It also expects to continue considering dividends, repurchases and strategic investments; these plans depend on business and market conditions.
- Significant risks cited include competition, subscriber retention, reliance on auto-industry installations and third parties, advertising demand, content licensing and royalty costs, satellite failure or interference, economic conditions, cybersecurity and privacy, and substantial indebtedness. Variable-rate revolver borrowings expose the company to interest-rate changes.
- A Pandora lawsuit concerning pre-1972 sound recordings remained pending; summary-judgment briefing was complete. The company said other identified legal matters were not expected to have a material adverse effect, but outcomes remain uncertain. Contractual cash commitments totaled $14.972 billion, including debt, interest, satellite, content, lease and royalty commitments; variable-cost arrangements may add to future costs.
- Liberty Media’s controlling ownership and the company’s controlled-company status may affect governance and minority-stockholder influence. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether declining margins, Pandora audience measures and Q1 subscriber losses stabilize, and whether price changes and podcast growth deliver the revenue improvement management anticipates.
- How much of the $144 million of non-GAAP free cash flow remains after debt maturities, dividends, repurchases and planned satellite investment; free cash flow excludes debt-principal payments.
- The cost, schedule and funding needs for SXM-9 through SXM-12, and whether satellite construction and other capital spending remain elevated.
- Debt maturities, floating-rate borrowing costs, covenant headroom and refinancing needs, particularly the $500 million term loan due in April 2024 and Pandora convertible notes due in December 2023.
- Developments in the pre-1972 recordings litigation, content-royalty obligations and other contingencies, as well as the execution and realized savings from the workforce restructuring.