Sirius XM Holdings Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Amounts are in millions of dollars unless otherwise stated. The company operates SiriusXM and Pandora and Off-platform audio businesses. At quarter-end it reported approximately 34.0 million SiriusXM subscribers and 6.2 million Pandora subscribers. Liberty Media beneficially owned approximately 83% of common shares.
Financial and operating performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $2,250 | $2,253 | $4,394 | $4,440 |
| Operating income | $479 | $496 | $891 | $1,006 |
| Net income | $310 | $292 | $543 | $601 |
| Diluted EPS | $0.08 | $0.07 | $0.14 | $0.15 |
| Adjusted EBITDA (non-GAAP) | $702 | $679 | $1,327 | $1,369 |
| Free cash flow (non-GAAP) | $323 | $435 | $467 | $693 |
| Operating cash flow | Not separately presented for Q2 in the summary table | $801 | $888 |
Q2 operating margin was approximately 21.3% versus 22.0% a year earlier; net margin was approximately 13.8% versus 13.0%. First-half operating margin was approximately 20.3% versus 22.7%, and net margin approximately 12.4% versus 13.5%.
- Revenue mix: Q2 subscriber revenue was $1,725, advertising $445, equipment $47 and other revenue $33. First-half revenue declined 1%; SiriusXM segment revenue fell 1%, and Pandora and Off-platform revenue fell 1%.
- Cash and investment: First-half capital expenditures were $333, including $174 for satellite construction; cash and cash equivalents were $51 at June 30. Cash, cash equivalents and restricted cash totaled $59.
- Debt and liquidity: Debt carrying value was approximately $9,433, including $525 classified as current; long-term debt was $8,908. The revolving facility had $223 drawn and $1,527 available. The company reported compliance with debt covenants. Total stockholders’ deficit was $3,111.
- Capital returns: First-half dividends paid were $188 and common stock repurchases were $199. The board had $1,240 remaining under its repurchase authorization at June 30 and declared a $0.0242-per-share dividend payable in August.
Changes versus comparable periods
- Q2 revenue was essentially flat, while operating income declined 3%. Net income rose 6%, aided by income tax expense falling to $62 from $96; the effective tax rate fell to 16.7% from 24.7%.
- First-half net income fell 10% and operating income fell 11%. Lower sales and marketing costs were more than offset by lower revenue, higher royalty and revenue-share costs, increased engineering and general and administrative expense, and restructuring and impairment charges.
- Adjusted EBITDA increased 3% in Q2 but decreased 3% for the first half. Free cash flow fell 26% in Q2 and 33% in the first half, primarily due to higher cash taxes and satellite capital spending.
- SiriusXM ended the quarter with 34.047 million subscribers, up 16,000 year over year: self-pay subscribers fell 130,000 while paid promotional subscribers rose 146,000. First-half SiriusXM net additions were negative 258,000. Pandora monthly active users declined 6% to 47.419 million; Pandora subscribers declined 1% to 6.229 million.
Outlook, commentary and risks
- Management expected SiriusXM subscriber revenue to benefit from price increases, but noted lower paid promotional rates from automakers and declines in connected-vehicle revenue. It expected SiriusXM advertising revenue to improve through brand co-selling, while equipment and other revenue were expected to decline.
- For Pandora and Off-platform, management expected subscriber revenue to remain relatively flat and advertising revenue to grow from podcast and programmatic sales. It also anticipated higher podcast-related revenue-share and content costs.
- Management expected higher SiriusXM transmission expense as use of 360L and streaming grows, and higher engineering and development expense. It anticipated increased sales and marketing spending in the second half of 2023 and estimated a full-year 2023 effective tax rate of approximately 22%.
- The company said current cash, operating cash flow and borrowing capacity should fund operations, capital spending, debt service and planned capital returns. Contractual cash commitments totaled $14,983, including debt, interest, satellites, programming, leases and other commitments; this excludes $109 of reserves for uncertain tax positions.
- Material risks include competition and subscriber retention, declining Pandora users and advertising demand, reliance on automakers and third parties, music rights and royalty costs, satellite reliability, economic and supply-chain conditions, data security, significant indebtedness and restrictive covenants. Variable-rate revolver borrowings expose the company to interest-rate changes.
- Unusual items included a workforce reduction of approximately 475 roles (8%) and related restructuring charges, impairment charges primarily tied to terminated software projects and vacated office space, and $24 of Q2 legal settlement expense. Pandora obtained summary judgment in the Flo & Eddie pre-1972 recordings case on July 25, 2023; the time to appeal had not expired when reported.
Important facts for investors to verify
- Whether subscriber trends—especially SiriusXM self-pay losses and Pandora’s declining monthly active users—stabilize, and whether pricing and promotional changes sustain subscriber revenue.
- Whether advertising recovery, podcast and programmatic growth can offset weaker streaming engagement and increased royalty, revenue-share and content costs.
- Whether lower first-half free cash flow persists as satellite construction spending and cash taxes remain elevated.
- Debt maturities and refinancing needs, including the $20 million remaining Pandora convertible notes due December 2023 and the $500 million incremental term loan due April 2024; also monitor variable borrowing costs and covenant headroom.
- Execution and cost effects of the workforce restructuring, software-project impairments and planned second-half marketing and technology investment.
- The appeal status and any further financial exposure in the Flo & Eddie matter, as well as other litigation and music-licensing disputes.
- Capital returns relative to cash generation, debt obligations and the company’s substantial contractual commitments.