Sirius XM Holdings Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results cover Sirius XM and Pandora. Amounts below are in millions unless stated otherwise.
Business context and reporting period
The company operates subscription satellite and streaming audio businesses under Sirius XM and Pandora, alongside advertising, connected-vehicle and related services. At quarter-end, Sirius XM had approximately 34.4 million subscribers; Pandora had 6.4 million subscribers and 58.6 million monthly active users. Liberty Media owned approximately 74% of the company, making it a controlled company under Nasdaq rules.
Financial and operating results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $2,025 | $2,011 | $5,851 | $5,732 |
| Operating income | $478 | $476 | $1,361 | $1,248 |
| Net income | $272 | $246 | $808 | $671 |
| Diluted EPS | $0.06 | $0.05 | $0.18 | $0.15 |
| Adjusted EBITDA (non-GAAP) | $661 | $657 | $1,915 | $1,841 |
| Free cash flow (non-GAAP) | $361 | $465 | $1,212 | $1,239 |
Q3 operating margin was approximately 23.6% versus 23.7%; net margin was approximately 13.4% versus 12.2%. For the nine-month periods, operating margin was approximately 23.3% versus 21.8%, and net margin approximately 13.8% versus 11.7%.
- Revenue mix and trends: Q3 subscriber revenue increased 2.4% to $1,594, while advertising revenue fell 5.7% to $345. Nine-month subscriber revenue rose to $4,757, but advertising revenue declined to $866. Q3 reported revenue rose 0.7%; nine-month reported revenue rose 2.1%. The nine-month comparison is affected by Pandora being consolidated only from February 1, 2019; pro forma revenue was $5,857 versus $5,852.
- Profit and costs: Q3 operating income was nearly flat; net income increased 11%. Nine-month operating income rose 9% and net income rose 20%. Lower acquisition/restructuring costs and lower interest expense helped Q3 comparisons. Reported nine-month results included $24 of 2020 restructuring costs, versus $83 of acquisition and restructuring costs in 2019.
- Cash flow: Nine-month operating cash flow was $1,450 versus $1,485; capital additions were $230 versus $239. Company-reported free cash flow declined 2% to $1,212. Management attributed the decline mainly to higher interest payments, lower advertising receipts and paid promotional trial receipts.
- Liquidity and debt: Cash and cash equivalents were $33 at September 30, 2020, with another $11 of restricted cash. Approximately $1,749 was available under the $1,750 revolving facility, with no borrowings outstanding. Debt carrying value was approximately $7.85 billion. Current assets of $829 were below current liabilities of $3,014, including $1,792 of current deferred revenue. The company reported compliance with debt covenants; its credit facility includes a maximum total leverage ratio of 5.0x.
- Capital returns: The company repurchased $870 of stock and paid $175 of dividends in the first nine months. It had $2,272 remaining under its repurchase authorization and declared a subsequent quarterly dividend of $0.014641 per share.
Material changes versus comparable periods
- Sirius XM subscriber revenue grew, supported by price increases and higher music royalty fees. Sirius XM advertising revenue fell 24% in Q3 and 28% year to date, mainly due to pandemic-related weakness and disruption to live sports.
- Pandora Q3 advertising revenue fell 3%; year-to-date it declined 11% on a pro forma basis. Pandora monthly active users decreased 7% year over year, while ending subscribers increased 2% to 6.4 million. Ad-supported listener hours declined 6% in Q3 and 7% year to date.
- Sirius XM ended the quarter with 34.435 million subscribers, down 119,000 year over year. Self-pay subscribers grew 3%, but paid promotional subscribers fell 20%. Q3 net additions were 186,000; nine-month net additions were negative 473,000. Self-pay monthly churn was 1.7% in both comparable periods.
- In June, the company issued $1.5 billion of 4.125% senior notes due 2030 and used proceeds to redeem $1.5 billion of earlier-maturing notes. The redemptions generated a $40 loss on extinguishment of debt.
- Free cash flow and cash balances declined, while the company continued substantial share repurchases and dividends. The stockholders’ deficit was $911 at quarter-end.
Outlook, commentary, risks and unusual items
- Management reported a recovery in new-vehicle sales and recent increases in advertising orders, but said the timing of a return to pre-pandemic advertising levels remained uncertain. It expected the pandemic’s effects to depend on economic conditions and other factors; the full impact was not yet clear.
- Management expected a 2020 effective tax rate of approximately 23%. It anticipated subscriber revenue growth from subscriber-base expansion, pricing and additional services; advertising recovery; and relatively flat other revenue. It also expected certain marketing, engineering, general and administrative, programming, royalty and streaming-related costs to increase.
- The company stated it believed cash, operating cash flow and borrowing capacity were sufficient for anticipated needs, including satellite construction, dividends, repurchases and strategic opportunities. This is management’s outlook, not a guarantee.
- Automatic Labs service was terminated in May, resulting in $24 of nine-month restructuring costs. Simplecast was acquired for $28 in cash in June. After quarter-end, the company closed its Stitcher acquisition on October 16 for $272 in cash, with up to $60 of contingent payments possible.
- Contractual cash commitments totaled $12.458 billion, including debt obligations, interest, leases, programming, satellite and other commitments; the table excluded $26 of reserves for uncertain tax positions. The company also disclosed a $45 surety bond and noted that variable-cost arrangements could be substantial.
- Legal and regulatory items include Pandora litigation involving pre-1972 recordings and a Copyright Royalty Board proceeding to set 2021–2025 webcasting rates; an initial determination was expected in the first half of 2021. Management said it intended to defend the litigation and did not expect other ordinary-course matters to have a material adverse effect.
- Other material risks identified include competition, subscriber and listener retention, Pandora’s declining ad-supported user base, advertising-market conditions, dependence on automakers and satellites, music-rights costs, privacy and cybersecurity, significant indebtedness, litigation, and Liberty Media’s control. Management reported no expected near-term difficulty meeting debt covenants from COVID-19 effects.
Important facts for investors to verify
- Whether Sirius XM subscriber trends and Pandora’s monthly active users, listening hours and advertising monetization stabilize or deteriorate.
- The pace of advertising recovery and the continuing effects of COVID-19 on vehicle sales, promotional trials and discretionary spending.
- Debt service and refinancing exposure, covenant headroom, and the company’s ability to sustain capital returns while funding satellite and strategic investments.
- The final cost and performance conditions for Stitcher, and the returns from the Simplecast and SoundCloud investments.
- Outcomes of the webcasting royalty-rate proceeding and pre-1972 recording litigation, and any resulting changes in content costs or liabilities.
- Comparability of reported year-to-date results with 2019, given Pandora’s different consolidation period; non-GAAP EBITDA and free cash flow should also be considered alongside GAAP results.