Sirius XM Holdings Inc. — Q3 2018 Form 10-Q
Business context and period. Unaudited results cover the quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Sirius XM provides subscription satellite radio, streaming and connected-vehicle services; subscription fees are its principal revenue source. Liberty Media owned approximately 71% of outstanding common stock, making Sirius XM a controlled company.
Financial and operating performance
Amounts below are in millions of dollars except per-share and subscriber data. Margins are calculated from reported GAAP figures.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1,467.4 | $1,379.6 | $4,274.8 | $4,021.2 |
| Operating income | $482.6 | $434.0 | $1,267.8 | $1,244.2 |
| Operating margin | 32.9% | 31.5% | 29.7% | 30.9% |
| Net income | $343.0 | $275.7 | $924.8 | $684.9 |
| Net margin | 23.4% | 20.0% | 21.6% | 17.0% |
| Diluted EPS | $0.07 | $0.06 | $0.20 | $0.14 |
| Adjusted EBITDA (non-GAAP) | $589.3 | $550.6 | $1,664.6 | $1,574.3 |
| Free cash flow (non-GAAP) | $287.6 | $433.8 | $1,100.3 | $1,099.5 |
- Cash flow and liquidity: Nine-month operating cash flow was $1,346.4 million, versus $1,313.8 million. Investing cash outflow was $251.3 million and financing cash outflow was $1,117.5 million. September 30 cash and cash equivalents were $46.0 million; including restricted cash, cash totaled $57.0 million. The company reported $1,632 million available under its revolving credit facility and said existing cash, operating cash flow and borrowing capacity should meet expected funding needs.
- Debt: Debt carrying value was $6,566.6 million, including $118 million outstanding on the $1.75 billion revolving facility; long-term debt on the balance sheet was $6,562.2 million. The facility matures in June 2023. The company reported compliance with debt covenants, including a maximum total leverage ratio of 5.0:1.
- Subscribers: 33.7 million total subscribers at quarter-end, up 5% year over year; 28.5 million were self-pay and 5.2 million paid promotional. Q3 net additions were 198,000; nine-month net additions were 957,000. Monthly self-pay churn was 1.8% for Q3, and new-vehicle conversion was 39%.
Changes versus the comparable periods
- Q3 revenue rose 6%, operating income 11%, net income 24% and adjusted EBITDA 7% year over year. For the first nine months, revenue rose 6%, operating income 2%, net income 35% and adjusted EBITDA 6%.
- Subscriber revenue increased 2% in Q3 and 3% for nine months, primarily reflecting a higher average subscriber count. Advertising revenue increased 11% and 15%, respectively; equipment revenue increased 26% and 23%; music royalty fee and other revenue increased 28% and 25%.
- Revenue share and royalties increased 16% in Q3 and 22% for nine months, reflecting higher statutory royalty rates, revenue subject to sharing and, for the nine-month period, a $69.1 million SoundExchange settlement charge. Subscriber acquisition costs declined 8% and 5%, respectively.
- Net income benefited from lower effective taxes: 3.3% in Q3 and 14.9% for nine months, versus 28.3% and 33.3% in 2017. The 2018 rates reflected the Tax Act’s lower federal rate, share-based compensation tax benefits and state research credits. Pandora investment fair-value changes also made quarterly other income volatile: a $43.6 million unrealized loss in Q3 2018 versus a $72.2 million gain in Q3 2017.
- Nine-month free cash flow was essentially flat year over year; Q3 free cash flow fell 34%, mainly due to the $150 million SoundExchange settlement payment and vendor-payment timing. The company repurchased $650.9 million of stock and paid $148.0 million of dividends during the first nine months.
Outlook, risks and unusual items
- Management expected subscriber revenue to benefit from subscriber growth, pricing and additional services; advertising and equipment revenue were also expected to grow. It anticipated higher costs in areas including royalties, programming, streaming, marketing and product development. The filing does not provide full-year revenue or EBITDA guidance; it estimates a 2018 effective tax rate of approximately 17%.
- The company agreed in September 2018 to acquire Pandora in an all-stock transaction at an exchange ratio of 1.44 Sirius XM shares per Pandora share. The transaction was initially valued at $3.5 billion and was expected to close in Q1 2019, subject to shareholder, antitrust and other conditions. Pandora could owe a termination fee of $105 million in specified circumstances, with a lower $52.5 million fee under a specified early termination scenario.
- The $150 million SoundExchange payment settled claims and audits covering sound-recording royalties for 2007–2017. A TCPA class action remains pending, including a motion for class certification; the filing does not provide a clear estimate of potential loss. Management said other disclosed legal matters were not expected to have a material adverse effect.
- Contractual cash commitments totaled approximately $11.0 billion, including debt obligations, interest, programming, satellite, royalty and lease commitments. Additional variable-cost obligations may be substantial. The company also reported a $45 million surety bond.
- Principal disclosed risks include competition, subscriber retention and acquisition, dependence on the auto industry, satellite or technology disruption, significant indebtedness and restrictive covenants, litigation, and uncertainty around realizing benefits from acquisitions. The company reported no material changes to previously disclosed risk factors.
- The company adopted the new revenue standard in 2018 using the modified retrospective method; 2017 comparatives were not restated. The standard reduced reported subscriber revenue by $24.1 million in Q3 and $72.3 million for nine months versus the prior accounting treatment, so reported growth and operating metrics are not fully comparable without considering the adjustment.
Important facts for investors to verify
- Progress toward closing the Pandora acquisition, required approvals, final consideration and expected funding or integration effects.
- Underlying subscriber and revenue trends alongside the revenue-standard presentation effect; monitor churn, vehicle conversion and pricing.
- Cash generation after satellite investment and the one-time royalty settlement; assess the sustainability of repurchases and dividends against debt and contractual commitments.
- Debt levels, revolving-facility usage, covenant headroom and exposure to variable interest rates.
- Resolution and potential exposure in the TCPA litigation, and any other material legal or regulatory developments.