Sirius XM Holdings Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2021; comparisons are with the third quarter and first nine months of 2020. Dollar amounts are in millions unless noted. The company operates Sirius XM and Pandora audio businesses.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $2,198 (+9%) | $2,025 | $6,415 (+10%) | $5,851 |
| Operating income | $628 | $478 | $1,540 | $1,361 |
| Net income | $343 | $272 | $995 | $808 |
| Diluted EPS | $0.08 | $0.06 | $0.24 | $0.18 |
| Operating margin | 28.6% | 23.6% | 24.0% | 23.3% |
| Net margin | 15.6% | 13.4% | 15.5% | 13.8% |
| Adjusted EBITDA | $719 (+9%) | $661 | $2,101 (+10%) | $1,915 |
| Free cash flow | $588 | $361 | $1,349 | $1,212 |
Q3 advertising revenue rose 31% to $451, led by Pandora, up 32% to $404; subscriber revenue increased 5% to $1,666. Nine-month advertising revenue rose 43% to $1,235. Management cited improved ad pricing and sell-through, higher Sirius XM self-pay revenue and Stitcher/AdsWizz contributions. Advertising recovery and satellite insurance proceeds aided reported results and cash generation.
Operating cash flow was $1,371 for the first nine months, down from $1,450. Investing activities used $50, including $244 of capital spending, partly offset by $225 in satellite insurance recoveries. Financing activities used $1,232, including $1,174 of share repurchases and $180 of dividends. Cash and cash equivalents were $164 at quarter-end ($172 including restricted cash).
Debt principal totaled $8,840, with carrying-value long-term debt of $8,827. The company had no Credit Facility borrowings and $1,749 available under its $1,750 facility, after letters of credit. Total liabilities were $12,649 and stockholders’ deficit was $2,555. The company reported compliance with debt covenants; the filing does not state a current leverage ratio.
Material changes and operating trends
- Sirius XM revenue rose 5% in Q3; self-pay subscribers increased 5% year over year to 31.985 million, but total Sirius XM subscribers declined 170,000 to 34.265 million as paid promotional subscribers fell 42%. Q3 net additions were negative 212,000. Self-pay churn improved to 1.5% from 1.7%, and ARPU rose to $14.84 from $14.15.
- Pandora revenue increased 23% to $538 million in Q3, driven mainly by 32% higher advertising revenue. Monthly active users declined 10% to 52.618 million; subscribers increased 2% to 6.523 million. Ad-supported listening hours fell 7%, while advertising revenue per thousand listener hours rose 29%.
- Q3 operating income growth included a $95 million net benefit in impairment, restructuring and acquisition costs, principally from SXM-7 insurance proceeds and a Stitcher contingent-consideration remeasurement. Nine-month operating costs include a $220 million SXM-7 impairment and an offsetting $220 million insurance recovery.
- In August, Sirius XM redeemed $3.5 billion of notes and recorded an $83 million debt-extinguishment loss. It issued $2.5 billion of 2026 and 2031 notes; other outstanding notes include $2.0 billion due 2028. The Credit Facility maturity was extended to August 2026.
- The company repurchased $1.174 billion of shares in the first nine months and paid $180 million in dividends. Shares outstanding declined from 4.173 billion at year-end 2020 to 4.018 billion at September 30, 2021.
Outlook, risks and contingencies
- Management expects Sirius XM subscriber revenue to increase with pricing and additional services, and advertising revenue to grow; it expects Pandora subscriber revenue to remain relatively flat and Pandora advertising revenue to increase. These are directional expectations, not quantified revenue or earnings guidance.
- Management estimated a 2021 effective tax rate of approximately 16%; the nine-month rate was 13.6%, primarily reflecting a $95 million state tax audit settlement benefit and share-based compensation tax benefits.
- Management said cash, operating cash flow and debt capacity should fund operating needs, capital spending, debt service, replacement satellites, repurchases, dividends and strategic opportunities. It expected regular quarterly dividends totaling $0.087846 per share annually. A $0.0219615-per-share dividend was declared for payment in November 2021.
- The semiconductor shortage constrained vehicle production and radio chipset availability, affecting vehicle deliveries, equipment revenue and subscriber acquisition. Other disclosed risks include competition, subscriber retention, Pandora’s declining monthly active users, music licensing costs, satellite failure, COVID-19 effects, cybersecurity and privacy, and substantial indebtedness.
- The SXM-7 satellite was determined to be a total loss; the company collected $225 million of insurance proceeds. SXM-8 entered service in September 2021. The company also recorded $25 million of office-lease restructuring charges during the first nine months.
- Flo & Eddie litigation concerning pre-1972 sound recordings remained pending against Pandora. The company cited a favorable Ninth Circuit ruling in a related Sirius XM case and said it believed the ruling narrowed the Pandora claims; it intends to defend the case. The filing does not quantify a reasonably possible loss.
- Contractual cash commitments totaled $14.788 billion, including $8.943 billion of debt obligations, $2.893 billion of cash interest and $1.377 billion for programming and content. Variable future costs may be substantial. Liberty Media owned approximately 79% of the company and retained significant influence.
Important facts for investors to verify
- Whether Pandora’s higher ad monetization can offset ongoing declines in monthly active users and listening hours, and the effect of rising content royalties.
- How persistent semiconductor shortages and automaker production changes affect Sirius XM subscriber additions, equipment sales and acquisition costs.
- The sustainability of cash flow and earnings excluding the SXM-7 insurance recovery, other unusual items and tax benefits; free cash flow is a non-GAAP measure and does not deduct debt maturities.
- Debt refinancing, interest expense and covenant capacity, including the variable-rate Credit Facility and the LIBOR transition.
- Progress and potential cost of the Pandora sound-recording litigation, Stitcher contingent payments and other legal or contractual exposures.
- Future capital allocation: repurchases, dividends, satellite investment and any borrowing used to fund shareholder returns.