Sirius XM Holdings Inc. — Q1 2021 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2021, compared with Q1 2020. Sirius XM operates satellite and streaming audio services; Pandora provides ad-supported and subscription streaming. The company reported approximately 34.5 million Sirius XM subscribers and 6.5 million Pandora subscribers at quarter-end. Amounts below are in millions of dollars unless stated otherwise.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $2,058 | $1,952 | +5% |
| Income from operations | $254 | $468 | -46% |
| Net income | $219 | $293 | -25% |
| Diluted EPS | $0.05 | $0.07 | Down $0.02 |
| Adjusted EBITDA (non-GAAP) | $682 | $639 | +7% |
| Operating cash flow | $292 | $416 | -$124 |
| Free cash flow (non-GAAP) | $211 | $348 | -39% |
Operating margin was approximately 12.3%, versus 24.0% in the prior-year quarter; net margin was approximately 10.6%, versus 15.0%. The operating income decline principally reflects $245 of impairment and restructuring charges, including a $220 SXM-7 satellite impairment and $25 of office lease exit costs. Adjusted EBITDA excludes these charges.
- Revenue mix: Subscriber revenue rose 2% to $1,611; advertising revenue rose 24% to $354, led by Pandora’s 29% increase to $312. Equipment revenue increased 39% to $57. Other revenue declined 12% to $36.
- Segment gross profit: Sirius XM reported $993, compared with $990; Pandora reported $137, compared with $123. Combined segment gross profit was $1,130, compared with $1,113.
- Cash and liquidity: Cash and cash equivalents were $59 at March 31, 2021, down from $71 at year-end; cash, cash equivalents and restricted cash totaled $67. The company had $726 available under its revolving credit facility.
- Debt: Total debt principal was approximately $8.9 billion, including $1.023 billion drawn on the revolving facility. Long-term debt on the balance sheet was $8.878 billion, with $1 million current. The company was in compliance with debt covenants.
- Capital returns: The company repurchased $522 of stock and paid $61 in dividends during the quarter. Approximately $1.076 billion remained under the repurchase authorization.
Material changes versus Q1 2020
- Revenue grew 5%, with the strongest reported growth in Pandora advertising, supported by improved sell-through and pricing, AdsWizz and Stitcher. Management also cited recovery in vehicle production.
- Operating expenses increased 22% to $1,804, primarily because Q1 2021 included the $245 impairment and restructuring charge; operating income consequently fell 46%.
- Net income also reflected a $62 income tax benefit, versus an $80 tax expense in Q1 2020. The 2021 benefit included a $95 state tax audit settlement benefit.
- Operating cash flow decreased by $124 and free cash flow by $137. Management attributed the free cash flow decline to lower OEM receipts, higher interest payments, higher property and equipment spending, and higher marketing payments.
- Sirius XM self-pay subscribers increased 3% year over year, but total Sirius XM subscribers declined 1% to 34.499 million as paid promotional subscribers fell 26%. Pandora subscribers rose 3% to 6.456 million, while monthly active users declined 8% to 55.870 million.
Outlook, commentary and risks
- Management estimated a 2021 effective tax rate of approximately 16%. The filing provides qualitative expectations for several revenue and expense lines but no broad numerical full-year financial guidance.
- Management said the pandemic had not materially affected Q1 revenue and expenses, noted recovery in vehicle sales and advertising, and stated that liquidity and access to capital had not been impaired. It cautioned that the pandemic’s full effects remained uncertain.
- SXM-7 suffered payload failures and was deemed a total loss, producing a $220 impairment. Insurance coverage is $225; the company notified underwriters and expected to file a claim in Q2, but could not reliably estimate the timing or amount of any recovery. Management did not expect service disruption and expected SXM-8 to launch in 2021.
- The company cited competition, subscriber retention, auto-industry dependence, Pandora user declines, music licensing costs, satellite reliability, significant indebtedness and litigation among its risks. LIBOR transition could affect variable-rate borrowing costs.
- A Copyright Royalty Board determination on statutory webcasting rates for 2021–2025 was expected by June 14, 2021; proposed rates from the company were below SoundExchange’s proposals. Pandora also continued to defend litigation concerning pre-1972 recordings.
- Liberty Media owned approximately 77% of the company. The filing said Liberty could exceed 80% ownership during 2021, potentially placing the companies in the same consolidated federal tax group under a tax-sharing agreement.
Important facts for investors to verify
- Whether and when insurance recoveries for SXM-7 become probable and estimable, and whether the failure affects replacement-satellite plans or costs.
- Whether Sirius XM’s subscriber trends improve, particularly promotional subscriber declines, and whether Pandora’s monthly active user decline continues.
- Whether advertising growth and vehicle production recovery persist, and how music royalties and other revenue-linked costs affect margins.
- Whether operating cash flow and free cash flow recover after the Q1 decline, alongside substantial debt, interest commitments, repurchases and dividends.
- The final webcasting royalty determination and developments in the pre-1972 sound-recording litigation.
- The sustainability of reported net income given the $95 state tax audit settlement benefit and the unusually large impairment and restructuring charges.