Sirius XM Holdings Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company operates Sirius XM and Pandora; Pandora was acquired on February 1, 2019. Unless noted, amounts are in millions of dollars. Reported 2019 results include Pandora only from the acquisition date, so comparisons with 2018 are not like-for-like.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1,977 | $1,432 | $3,721 | $2,807 |
| Operating income | $439 | $362 | $772 | $785 |
| Net income | $263 | $293 | $425 | $582 |
| Diluted EPS | $0.06 | $0.06 | $0.09 | $0.13 |
| Adjusted EBITDA, non-GAAP | $618 | $507 | $1,184 | $954 |
| Free cash flow, non-GAAP | $474 | $486 | $774 | $813 |
- On a pro forma basis assuming Pandora was owned from January 1, 2018, revenue was $1,979 versus $1,819 in Q2 (+9%) and $3,839 versus $3,516 for the first half (+9%). Pro forma net income was $265 versus $143 in Q2 and $446 versus $291 for the first half. These estimates include acquisition accounting adjustments and are not actual historical results.
- Reported operating margin was approximately 22.2% in Q2 versus 25.3% a year earlier, and 20.7% for the first half versus 28.0%. Revenue grew, but reported comparisons reflect Pandora’s inclusion and acquisition-related costs.
- Six-month operating cash flow was $941, down from $994. Capital expenditures were $160; cash from investing activities was $209, including $313 received with the Pandora acquisition. Cash from financing activities was negative $989, including $1,474 of share repurchases and $113 of dividends.
- At June 30, cash and cash equivalents were $215 ($226 including restricted cash). Current assets were $1,082 and current liabilities $3,264; current liabilities include $1,974 of deferred revenue. The company reported no revolver borrowings and $1,749 available under its $1,750 credit facility.
- Long-term debt was $7,843, with $3 of current maturities; the debt table reports total debt of $7,855 including finance leases and before relevant balance-sheet deductions. Six-month interest expense was $187. Stockholders’ deficit was $489.
Material changes and operating performance
- Consolidated revenue rose 38% in Q2 and 33% for the first half as reported, primarily reflecting Pandora consolidation. Sirius XM revenue grew 7% in Q2 and 8% in the first half; on a pro forma basis, Pandora revenue grew 15% in Q2 and 14% for the first half.
- Q2 net income fell 10% and first-half net income fell 27% year over year. Comparisons were affected by 2018 unrealized gains on the Pandora preferred-stock investment, which was canceled at acquisition, as well as higher 2019 interest, acquisition costs, amortization, and taxes.
- Adjusted EBITDA increased 22% in Q2 and 24% for the first half, while free cash flow declined 2% and 5%, respectively. Management attributed the free-cash-flow decline to lower operating cash flow, including Pandora and a legal-settlement payment, partly offset by lower satellite construction spending.
- Sirius XM ended the quarter with 34.345 million subscribers, up 3% year over year; Q2 net additions fell to 174,000 from 429,000, and monthly self-pay churn increased to 1.7% from 1.6%. Pandora had 6.957 million subscribers, up 16%, but active users fell 9% to 64.948 million; ad-supported listener hours declined 10%.
- Pandora acquisition accounting added $1,562 of goodwill and $1,107 of intangible assets. The purchase-price allocation remained preliminary. Pandora contributed $441 of revenue and a $56 net loss in Q2 after acquisition, and $692 of revenue and a $178 net loss for the six-month reported period.
Outlook, risks, contingencies, and unusual items
- Management estimated a 2019 effective tax rate of approximately 23%. It expected subscriber revenue to benefit from subscriber growth, pricing and additional services, while anticipating higher sales and marketing, engineering and development, and general and administrative costs as the business grows. No comprehensive numerical earnings or revenue guidance is provided in the supplied filing text.
- Management said available cash, operating cash flow and borrowing capacity should fund operations, capital spending, debt service, repurchases, dividends and strategic opportunities. The company expects significant satellite-related commitments and is constructing replacement satellites SXM-7 and SXM-8.
- The company issued $1,250 of 5.50% notes due 2029 in June. After quarter-end, it issued $1,500 of 4.625% notes due 2024 and redeemed $1,500 of 6.00% notes due 2024 on July 18. The redemption is expected to produce an approximately $56 loss on extinguishment in Q3 2019.
- The board had authorized $14 billion of repurchases; $1.824 billion remained available at June 30. The company repurchased $1,502 of shares in the first half and declared a $0.0121 per-share dividend for payment in August. Management expects regular quarterly dividends totaling $0.0484 per share annually, but may change the policy.
- The company settled a Do-Not-Call class action for $25, recorded a first-half reserve, and the settlement remained subject to final court approval. Pandora’s pre-1972 sound-recording cases remain pending; Pandora asserted a federal preemption defense under the Music Modernization Act. The filing states other matters are not expected to have a material adverse effect.
- Key stated risks include competition, subscriber and listener retention, advertising monetization, music licensing costs, satellite failure or interference, reliance on automakers and third parties, privacy and cybersecurity, acquisition integration and benefits, substantial indebtedness and litigation. Liberty Media owned approximately 70% of the common stock; the company is a controlled company under Nasdaq rules.
Most important facts for investors to verify
- Use pro forma rather than unadjusted reported comparisons to assess underlying post-acquisition growth, and review the assumptions and purchase-accounting adjustments.
- Track subscriber additions, churn and Pandora active users and listening hours, alongside advertising monetization and licensing costs.
- Reconcile reported cash generation with repurchases, dividends, satellite investment and debt obligations; confirm available revolver capacity and covenant compliance.
- Assess the effect of the July debt issuance and redemption, including the expected Q3 extinguishment loss and resulting interest costs.
- Monitor final approval and implementation of the $25 Do-Not-Call settlement, the Pandora sound-recording litigation, and completion of the preliminary Pandora purchase-price allocation.