Sirius XM Holdings Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Dollar amounts are in millions except per-share data and subscriber metrics.
Business context
Sirius XM operates satellite and streaming audio services; Pandora operates ad-supported and subscription music services. Sirius XM had 34.2 million subscribers and Pandora had 6.9 million subscribers and 66.0 million active users at quarter-end. Pandora became an indirect wholly owned subsidiary on February 1, 2019. Accordingly, reported Q1 2019 results include Pandora only from that date, while Q1 2018 results exclude it; reported year-over-year comparisons are therefore not fully comparable. Liberty Media held approximately 68% of the common stock.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $1,744 | $1,375 |
| Operating income | $333 | $423 |
| Net income | $162 | $289 |
| Diluted EPS | $0.03 | $0.06 |
| Operating cash flow | $396 | $415 |
| Capital expenditures | $90 | $81 |
| Free cash flow (non-GAAP) | $300 | $327 |
Reported revenue rose 27%, but included $251 of Pandora revenue for February and March. Sirius XM revenue increased 9% to $1,493. Reported operating margin was approximately 19.1%, versus 30.8% in Q1 2018; reported net margin was approximately 9.3%, versus 21.0%. These comparisons are affected by the acquisition and one-time items.
Management’s acquisition-adjusted pro forma results, assuming Pandora had been included in both periods, show revenue of $1,860 versus $1,697, net income of $181 versus $172, and adjusted EBITDA (non-GAAP) of $567 versus $447. Pro forma figures are estimates, not reported GAAP results, and are not necessarily indicative of future results.
At March 31, cash and cash equivalents were $62; cash, cash equivalents and restricted cash totaled $73. Current assets were $907 and current liabilities $3,206, including $1,994 of current deferred revenue. Debt principal was approximately $7.28 billion; debt carrying value was approximately $7.19 billion. The revolving facility had $582 outstanding and $1,167 available. The company reported compliance with debt covenants. Operating cash flow declined $19 year over year; free cash flow declined 8% to $300.
Material changes and unusual items
- The Pandora acquisition involved $2,879 of total consideration, including $2,355 in stock consideration and cancellation of a $524 preferred-stock investment; $313 of cash was acquired. The company issued 392 million shares and recorded $1,541 of acquisition-related goodwill. Purchase accounting remains preliminary.
- Operating expenses increased 48% to $1,411, including $76 of acquisition and related costs, higher depreciation and amortization, and expenses from Pandora’s consolidation. The company also recorded a $25 legal settlement reserve.
- Net income fell to $162 from $289. In addition to the acquisition and expense effects, Q1 2018 included a $31 unrealized gain on the Pandora investment; Q1 2019 recorded only $1 of other income.
- The company repurchased $604 of stock and paid $57 of dividends. It also repurchased $151 principal amount of Pandora’s 2020 convertible notes, with a $1 extinguishment loss.
- Adoption of the new lease standard added $428 of operating lease right-of-use assets and $443 of operating lease liabilities at quarter-end; adoption did not affect the income statement or cash flows.
Outlook, commentary and risks
Management estimated a 2019 effective tax rate of approximately 24%. It expected Sirius XM subscriber revenue to benefit from subscriber growth, pricing and additional services; Pandora subscription revenue to benefit from paid-subscriber growth; and Pandora advertising revenue to benefit in part from off-platform advertising. Management also anticipated increased marketing and product-development spending and expected subscriber acquisition costs to fluctuate with vehicle installations. The board expected regular quarterly dividends totaling $0.0484 per share annually, subject to board discretion. The filing provides no clear numerical full-year revenue, earnings or cash-flow guidance.
Key risks include competition for listeners and advertising, Pandora’s declining active users and ad-supported listener hours, music royalty rates and licensing renewals, subscriber churn and reliance on the automotive industry, satellite reliability and replacement-satellite delivery, acquisition integration, privacy and cybersecurity, and substantial indebtedness. A proposed $25 settlement of a telemarketing class action remained subject to a definitive agreement and court approval. Pandora-related litigation over pre-1972 recordings remained pending; the company said it intended to defend those cases. The company cited a 5.0-to-1.0 maximum leverage covenant under its revolving facility and reported compliance at quarter-end.
Important facts for investors to verify
- Separate the reported results from the acquisition-adjusted pro forma figures; confirm the effects of Pandora consolidation and preliminary purchase accounting.
- Track Sirius XM subscriber additions and churn, and Pandora paid subscribers, active users and listener hours to assess revenue quality and user engagement.
- Monitor debt, revolver availability, cash generation and capital returns, including whether buybacks and dividends remain supportable alongside satellite investment and debt obligations.
- Follow music royalty and licensing developments, the Do-Not-Call settlement approval, pre-1972 recording litigation and integration progress.
- Assess the sustainability of adjusted EBITDA and free cash flow, which are non-GAAP measures and exclude specified costs; review their reconciliations to GAAP results.