Sirius XM Holdings Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Amounts are in millions except per-share and subscriber data. The company operates Sirius XM and Pandora and Off-platform audio businesses. Liberty Media beneficially owned approximately 82% of the common stock.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $2,280 | $2,198 | $6,720 | $6,415 |
| Operating income | $467 | $628 | $1,474 | $1,540 |
| Net income | $247 | $343 | $848 | $995 |
| Diluted EPS | $0.06 | $0.08 | $0.21 | $0.24 |
| Adjusted EBITDA (non-GAAP) | $720 | $719 | $2,091 | $2,101 |
| Free cash flow (non-GAAP) | $329 | $588 | $1,022 | $1,349 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1,300 | $1,371 |
- Q3 revenue grew 4%; nine-month revenue grew 5%. Subscriber revenue was the main growth driver, while advertising also increased. Q3 Sirius XM subscriber revenue rose 5%, primarily on higher ARPU; Pandora and Off-platform revenue was flat.
- Profitability declined despite revenue growth. Q3 operating income fell 26% and net income fell 28%; nine-month net income declined 15%. Q3 operating margin was approximately 20.5%, versus 28.6% a year earlier. Increased operating costs, a $69 impairment/restructuring/acquisition charge versus a $95 net benefit in Q3 2021, and higher income tax expense were significant factors.
- Adjusted EBITDA was essentially flat in Q3 and down slightly for nine months. Management attributed the pressure to higher royalties and revenue share, subscriber acquisition, programming/content, and marketing costs offsetting revenue growth.
- Free cash flow declined 44% in Q3 and 24% year to date. The company cited higher podcast content and tax payments and the prior-year satellite insurance recoveries as key reasons for the year-to-date reduction.
Balance sheet, debt and capital allocation
- At September 30, 2022, cash and cash equivalents were $39; cash, cash equivalents and restricted cash totaled $48. Total current assets were $1,032 and current liabilities were $2,751.
- Total debt principal was $9,795 and carrying value was $9,784, including $9,782 classified as long-term debt and $2 current maturities. Long-term debt increased from $8,832 at December 31, 2021, reflecting 2022 borrowings. Debt fair value was $8,561.
- The company had $421 outstanding on its revolving credit facility and $1,329 available to borrow. It reported compliance with debt covenants; the facility’s maximum total leverage ratio is 5.0 to 1.0.
- Nine-month investing cash outflow was $415, including $279 of property and equipment additions and $136 for acquisitions. Financing cash outflow was $1,036. The company paid $1,245 in dividends, including a $987 special dividend, and repurchased and retired $599 of shares.
- Stockholders’ deficit was $3,616. The board’s $18 billion repurchase authorization had $1,486 remaining at September 30. The company stated it expected to fund operating needs, capital expenditures, debt service, and planned capital returns with cash, operating cash flow and borrowing capacity.
Operating trends, outlook and notable items
- Sirius XM ended the quarter with 34.17 million subscribers, down 95,000 year over year: self-pay subscribers increased 239,000, while paid promotional subscribers fell 334,000. Q3 net additions were 138,000; monthly self-pay churn was 1.5%. ARPU rose 6% to $15.72.
- Pandora and Off-platform had 48.77 million monthly active users, down 7%, and 6.27 million subscribers, down 4%. Advertising listener hours declined 5% in Q3, while advertising revenue per thousand listener hours fell 5% to $103.32.
- Management expected Sirius XM subscriber revenue to increase with average pricing and self-pay subscriber growth; Sirius XM advertising to grow; and equipment revenue to decrease amid semiconductor shortages and higher chipset costs. Pandora and Off-platform advertising and subscription revenue were expected to remain relatively flat, with macroeconomic trends cited for advertising. These are business-specific expectations, not consolidated revenue or earnings guidance.
- Management estimated a 2022 effective tax rate of approximately 26%. The nine-month 2022 effective rate was 26.6%, compared with 13.6% in 2021, when a $95 state tax audit settlement benefit contributed to the lower rate. Higher 2022 tax expense also reflected expected expiration of certain state and local net operating losses.
- The company recorded $68 of restructuring and impairment charges in Q3, primarily for terminated software projects ($43), vacated office assets ($20), and personnel severance ($5). It acquired businesses for $136 cash in the nine months and recorded $98 of acquisition-related goodwill.
- A Pandora class action concerning pre-1972 sound recordings remained pending. The parties scheduled summary judgment briefing after the Ninth Circuit directed expedited consideration; the filing does not quantify a potential loss. The company said other matters were not likely to have a material adverse effect.
- Risks highlighted include supply-chain and semiconductor constraints, competition, subscriber retention and Pandora user declines, dependence on the auto industry and satellites, content and music royalty costs, advertising-market conditions, cybersecurity and privacy, substantial indebtedness, litigation, and Liberty Media’s control. Variable-rate facility borrowings expose the company to interest-rate and benchmark-transition risk.
Most important facts for investors to verify
- Whether Sirius XM self-pay additions and ARPU can offset declining paid promotional subscribers, and whether Pandora’s listener and subscriber declines continue.
- Whether operating margins and free cash flow stabilize as royalty, content, marketing, acquisition and infrastructure costs evolve.
- Debt maturities, variable-rate exposure, covenant headroom, and the company’s ability to sustain dividends and repurchases with $39 of unrestricted cash at quarter end.
- Semiconductor availability and costs, satellite replacement commitments, and the outcome of the pending pre-1972 recordings litigation.
- The basis and implications of management’s approximately 26% full-year 2022 tax-rate estimate and the effect of Liberty Media’s control and related-party arrangements.