SIRIUS XM HOLDINGS INC. All amounts referenced in this Item 2 are in millions, except subscriber amounts are in thousands and per subscriber and per installation amounts are in ones, unless otherwise stated. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year endedDecember 31, 2019 . This Quarterly Report on Form 10-Q presents information forSirius XM Holdings Inc. ("Holdings"). The terms "Holdings," "we," "us," "our," and "our company" as used herein, and unless otherwise stated or indicated by context, refer toSirius XM Holdings Inc. and its subsidiaries. "Sirius XM" refers to our wholly owned subsidiarySirius XM Radio Inc. and its subsidiaries. "Pandora" refers toSirius XM's wholly owned subsidiaryPandora Media, LLC (the successor toPandora Media, Inc. ) and its subsidiaries. Holdings has no operations independent ofSirius XM and Pandora. 33 -------------------------------------------------------------------------------- Table of Contents Special Note Regarding Forward-Looking Statements The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in forward-looking statements made in this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time. Any statements about our beliefs, plans, objectives, expectations, assumptions, future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "intend," "plan," "projection" and "outlook." Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time, including the risk factors described under "Risk Factors" in Part I, Item 1A, of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , the risk factor described under "Risk Factors" in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 , and "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein and in Part II, Item 7, of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Among the significant factors that could cause our actual results to differ materially from those expressed in the forward-looking statements are: •The current COVID-19 pandemic has, and may continue to, adversely impact our business •We face substantial competition and that competition is likely to increase over time •If our efforts to attract and retain subscribers and listeners, or convert listeners into subscribers, are not successful, our business will be adversely affected •Our Pandora ad-supported business has suffered a loss of monthly active users, which may adversely affect our Pandora business •Privacy and data security laws and regulations may hinder our ability to market our services, sell advertising and impose legal liabilities •We engage in extensive marketing efforts and the continued effectiveness of those efforts are an important part of our business •Consumer protection laws and our failure to comply with them could damage our business •A substantial number of ourSirius XM subscribers periodically cancel their subscriptions and we cannot predict how successful we will be at retaining customers •Our ability to profitably attract and retain subscribers to ourSirius XM service as our marketing efforts reach more price-sensitive consumers is uncertain •Our failure to convince advertisers of the benefits of our Pandora ad-supported service could harm our business •If we are unable to maintain revenue growth from our advertising products, particularly in mobile advertising, our results of operations will be adversely affected •If we fail to accurately predict and play music, comedy or other content that our Pandora listeners enjoy, we may fail to retain existing and attract new listeners •If we fail to protect the security of personal information about our customers, we could be subject to costly government enforcement actions and private litigation and our reputation could suffer •Interruption or failure of our information technology and communications systems could impair the delivery of our service and harm our business •We rely on third parties for the operation of our business, and the failure of third parties to perform could adversely affect our business •Our business depends in part upon the auto industry •Our Pandora business depends in part upon consumer electronics manufacturers •The market for music rights is changing and is subject to significant uncertainties •Our ability to offer interactive features in our Pandora services depends upon maintaining licenses with copyright owners •The rates we must pay for "mechanical rights" to use musical works on our Pandora service have increased substantially and these new rates may adversely affect our business •Failure of our satellites would significantly damage our business •Our Sirius XM service may experience harmful interference from wireless operations •Failure to comply with FCC requirements could damage our business •Economic conditions, including advertising budgets and discretionary spending, may adversely affect our business and operating results •If we are unable to attract and retain qualified personnel, our business could be harmed •We may not realize the benefits of acquisitions or other strategic investments and initiatives, including the acquisitions of Pandora and Simplecast •Our use of pre-1972 sound recordings on our Pandora service could result in additional costs 34 -------------------------------------------------------------------------------- Table of Contents •We may from time to time modify our business plan, and these changes could adversely affect us and our financial condition •We have a significant amount of indebtedness, and our debt contains certain covenants that restrict our operations •Our facilities could be damaged by natural catastrophes or terrorist activities •The unfavorable outcome of pending or future litigation could have an adverse impact on our operations and financial condition •Failure to protect our intellectual property or actions by third parties to enforce their intellectual property rights could substantially harm our business and operating results •Some of our services and technologies may use "open source" software, which may restrict how we use or distribute our services or require that we release the source code subject to those licenses •Rapid technological and industry changes and new entrants could adversely impact our services •Existing or future laws and regulations could harm our business •We may be exposed to liabilities that other entertainment service providers would not customarily be subject to •Our business and prospects depend on the strength of our brands •We are a "controlled company" within the meaning of the NASDAQ listing rules and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements •While we currently pay a quarterly cash dividend to holders of our common stock, we may change our dividend policy at any time •Our principal stockholder has significant influence, including over actions requiring stockholder approval, and its interests may differ from the interests of other holders of our common stock Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any of these forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or otherwise, except as required by law. New factors emerge from time to time, and it is not possible for us to predict which will arise or to assess with any precision the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Special Note Regarding the Impact of the COVID-19 Pandemic on Our Business and Operations The statements set forth below should be read in combination with the information contained in this Item 2., "Management's Discussion and Analysis of Financial Condition and Results of Operations," contained in this Quarterly Report on Form 10-Q. General In general, the COVID-19 pandemic, coupled with government issued stay-at-home orders, has had, and is continuing to have, a widespread and broad reaching effect on the economy. Beginning in late March, automakers idled plants and certain auto dealers have closed their retail operations. Vehicle sales have declined, sporting events have been cancelled, theaters remain closed and concerts have been postponed indefinitely. The impact of the COVID-19 pandemic on the travel industry has been far-reaching, adversely affecting airlines, hotels, cruise ships and theme parks. Unemployment rates, while improving, remain high as non-essential businesses have been closed and workers have been furloughed. Similarly, although media spending by businesses is recovering, spending continues to be down sharply compared to prior periods. While certain regions ofthe United States are in various phases of reopening, which includes the resumption of production for automakers and the reopening of many auto dealer locations, it is unclear what an economic recovery will look like after this historic shutdown of the economy asthe United States continues to struggle with rolling outbreaks of the virus. Against this background and these broad-based economic effects, the full extent to which the COVID-19 pandemic may negatively impact our business is still uncertain. The scope of the effects of the COVID-19 pandemic on our businesses depends on many factors beyond our control, and the effects are difficult to assess or predict with meaningful precision both generally and specifically as to ourSirius XM and Pandora businesses. The COVID-19 pandemic did not have a material effect on our revenues and expenses for the first quarter endedMarch 31, 2020 , with the effects on our business first emerging in the quarter endedJune 30, 2020 , primarily as discussed below under "Business Performance Update".
Liquidity
To date, the COVID-19 pandemic and its related economic impact has not affected our capital and financial resources, including our liquidity position. We believe that we have sufficient cash and cash equivalents, as well as debt capacity, to cover
35
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our estimated short-term and long-term funding needs, including amounts
necessary to construct, launch and insure replacement satellites, as well as
fund future stock repurchases, future dividend payments and pursue strategic
opportunities. After initially halting our stock repurchase program, we resumed
repurchasing of our common stock again during the quarter ended June 30, 2020
and expect to continue repurchasing our common stock subject to numerous
factors, including but not limited to market conditions. We have not suspended
our quarterly common stock dividend payments as a result of the COVID-19
pandemic. As of June 30, 2020 , prior to the redemption of the $500 aggregate
principal amount of outstanding 4.625% Notes and the $1,000 aggregate principal
amount of outstanding 5.375% Notes on July 9, 2020 , we had approximately $1,770
of cash on hand and $1,749 was available for future borrowing under our
revolving credit facility (after giving effect to outstanding letters of
credit).
The COVID-19 pandemic to date has not impacted our ability to access our
traditional funding sources. The pandemic has not increased our costs of or
reduced our access to capital under our revolving credit facility or the debt
capital markets, and we do not believe it is reasonably likely to do so in the
near-term. In addition, we do not expect the pandemic to affect our ongoing
ability to meet the covenants in our debt instruments, including under our
revolving credit facility. During the three months ended June 30, 2020 , our
subsidiary, Sirius XM , completed an offering of $1,500 of 4.125% Senior Notes
due 2030. Subsequent to quarter end, on July 9, 2020 , Sirius XM used the net
proceeds from this offering, together with cash on hand, to redeem all of its
outstanding 5.375% Senior Notes due 2025 at a redemption price of 102.688% of
the principal amount thereof plus accrued and unpaid interest thereon to, but
excluding, the redemption date and to redeem all of its outstanding 4.625%
Senior Notes due 2023 at a redemption price of 100.771% of the principal amount
thereof plus accrued and unpaid interest thereon to, but excluding, the
redemption date. This financing was executed consistent with our past practices
to opportunistically extend the maturities of our existing debt and not in
response to the COVID-19 pandemic.
Business Performance Update
We remain focused on the well-being of our employees, customers and all those we serve while also taking responsive measures to adapt to the current environment. We have undertaken and are generally in the process of making a diverse range of operational adjustments in response to the effects of COVID-19 pandemic. We have taken actions to help ensure the continuity of our audio entertainment service through the COVID-19 pandemic, including activating our business continuity plans and implementing measures to enable employees to work remotely. From a customer care and support perspective, we have adjusted our operations with call center vendors as a result of their inability to fully staff their operations. These adjustments have included shifting call center demand to "chat" platforms, activating interactive voice response (or "IVR") systems and online capabilities, and working with call center vendors to increase the capability for customer service agents to work remotely. We are focused on optimizing customer support performance in this new environment.
Included below is information regarding certain trends related to our
Sirius XM Business. Sales of new cars inthe United States were down approximately 48% in April compared toApril 2019 , to a seasonally adjusted annual rate of 8.6, recovering to 12.2 in May, and 13.0 in June. Used vehicle trial starts were down 5% for the quarter endedJune 30, 2020 compared to the quarter endedJune 30, 2019 , and up 15% for the month ofJune 2020 compared toJune 2019 . For the first time in our history used car trial starts exceeded new car trial starts in the second quarter. Our aggregateSirius XM trial subscription starts in the second quarter declined and that will result in fewer opportunities in the third quarter to convert consumers from trial subscriptions to self-pay subscriptions. During the second quarter, while we experienced some decline in the rate at which purchasers and lessees of new cars converted from trial subscribers to self-pay subscribers of our satellite radio service, the decline was less than we originally expected. Similarly, used car conversion rates showed only a small impact from the COVID-19 pandemic. After a temporary lull, consumer response to our marketing campaigns has rebounded. Our average self-pay monthly subscriber churn rates decreased from 1.8% during the quarter endedMarch 31, 2020 to 1.6% for the three months endedJune 30, 2020 . Vehicle related churn (churn resulting from a vehicle transaction by a consumer) and non-pay churn decreased during the second quarter, partially offset by an increase in voluntary churn (that is, churn resulting from consumers proactively canceling).
Against this background, we reported 264 thousand net new self-pay subscribers
for the quarter ended
During the quarter endedJune 30, 2020 , the penetration rate of satellite radios in new vehicle sales was approximately 77%, an increase of nearly 500 basis points compared to the prior year period. This increase was due to rising penetration rate at certain OEMs, a favorable model-mix and a reduction in fleet vehicle sales as a percentage of total sales. Installations decreased 57% for the quarter endedJune 30, 2020 compared to the quarter endedJune 30, 2019 , but have begun to recover as installations were down approximately 81% in April, 75% in May and 26% in June, compared to the same periods last year, as automakers reopened factories in May and ramped up production. 36 -------------------------------------------------------------------------------- Table of Contents Pandora Business. Advertising revenue from our Pandora business has declined markedly sincemid-March 2020 . Several categories of advertisers cancelled or paused orders during the second quarter, and while we have seen recent increases in advertising orders, the outlook for future advertising revenue is uncertain. Pandora advertising revenue was down approximately 41% in April, 36% in May and 18% in June from the same periods last year. Ad supported listener hours on our Pandora services decreased markedly following the implementation of stay-at-home orders inmid-March 2020 , but improved during the second half of the quarter endedJune 30, 2020 to modest declines on a year over year basis. Ad supported listener hours were down approximately 10% in April, 4% in May and 3% in June from the same periods last year.
Potential Impact on our Results of Operations
It is difficult to predict how the COVID-19 pandemic will affect our company in the long-term. Based on what we have observed to date, however, we have attempted below to provide an explanation of how the pandemic has affected, and will likely continue to affect, our business, including our revenue and expenses, over the next six months. We presently believe that the COVID-19 pandemic and its related economic impact has and will likely continue to: •adversely affect our subscriber revenue due to the decline in sales of vehicles, reduced drive time, and the inability of our vendors to fully staff call centers; •cause a decline in advertising revenues in our Pandora andSirius XM businesses as third parties pull back on advertising spending generally; •have an adverse effect on our equipment revenue and the sale of satellite radios, components and accessories; •negatively impact our other revenue as the pandemic is anticipated to have similar adverse effects onSirius XM Canada and its service as well as adversely affect our connected services business; •reduce our revenue share and royalties expenses, although in our Pandora ad-supported service royalty reductions may not be commensurate with the decline in ad revenues; •not significantly affect our programming and content expenses as we expect to continue to honor our agreements to acquire, create, promote and produce content, including our obligations in some cases to sports leagues that have cancelled significant portions of their seasons; •reduce our customer service and billing costs as we may experience lower costs as a result of the inability of our vendors to fully staff the operation and management of customer service centers and the move of some customer service interactions to digital channels, although such cost reductions may be partially offset by increased bad debt expense; •not significantly affect our transmission expenses and costs of equipment expenses; •reduce subscriber acquisition costs as hardware subsidies paid to radio manufacturers, distributors and automakers and subsidies paid for chipsets and certain other components used in manufacturing radios are expected to decline as a result of a reduction in vehicle production; •decrease sales and marketing expenses as the reduction in auto sales is anticipated to reduce trial subscription starts, the volume of our marketing campaigns and the associated expenses related to direct mail, outbound telemarketing and email communications, and as we may reduce our spending on marketing, advertising, media and production, and digital performance media; •reduce our engineering, design and development expenses as a slower pace of hiring may slow the development of new products and services, including streaming and connected vehicle services, and research and development efforts in the ordinary course; •reduce our general and administrative expenses as a result of reductions in compensation, travel and entertainment and other costs; and •not affect our depreciation and amortization expenses. Other Potential Impacts We have taken actions to help ensure that our audio entertainment service will continue uninterrupted through the COVID-19 pandemic, including activating our business continuity plans and implementing steps to enable employees to work remotely. The impact of these actions on our workforce are also difficult to assess, but the experience has presented new challenges for our employees as they balance the demands of the pandemic with their daily operational role. To date, however, we do not believe that these remote work arrangements have adversely affected our ability to maintain our financial reporting systems, internal control over financial reporting and disclosure controls and procedures. In addition, we do not expect to encounter any significant challenges to our ability to maintain these systems and controls. 37 -------------------------------------------------------------------------------- Table of Contents We also do not expect the pandemic to affect the assets on our balance sheet and our ability to timely account for those assets. For example, we do not anticipate making any significant changes as a result of the pandemic in judgments in determining the fair-value of assets measured in accordance with generally accepted accounting principles. In addition, we do not anticipate any material impairments with respect to goodwill, indefinite life and definite life intangible assets, right of use assets or investments, increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that would have an adverse impact on our financial statements. We are taking advantage of recent Federal tax relief to defer our portion of the social security payroll tax. This tax relief will not have a material impact on our liquidity position in either the short- or long-term. We have not received any financial assistance in the form of loans under the CARES Act. You should not place undue reliance on any of our forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or otherwise, except as required by law. New factors emerge from time to time, and it is not possible for us to predict which will arise or to assess with any precision the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. For additional discussion of the risks to our business related to the COVID-19 pandemic, see "Risk factors-Risks related to our business-The current coronavirus (COVID-19) pandemic is adversely impacting our business" contained in our Quarterly Report on Form 10-Q for the three months endedMarch 31, 2020 . To the extent the COVID-19 pandemic or any other global health crisis does adversely impact our business or financial condition, it may also have the effect of heightening many of the other "Risk factors" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and in our Quarterly Report on Form 10-Q for the three months endedMarch 31, 2020 .
Executive Summary
We operate two complementary audio entertainment businesses - our
Sirius XM OurSirius XM business features music, sports, entertainment, comedy, talk, news, traffic and weather channels, as well as infotainment services, inthe United States on a subscription fee basis. TheSirius XM service is distributed through our two proprietary satellite radio systems and through the internet via applications for mobile devices, home devices and other consumer electronic equipment. Satellite radios are primarily distributed through automakers, retailers and our website. OurSirius XM service is also available through our user interface, which we call "360L," that combines our satellite and streaming services into a single, cohesive in-vehicle entertainment experience. The primary source of revenue from ourSirius XM business is generated from subscription fees, with most of our customers subscribing to monthly, quarterly, semi-annual or annual plans. We also derive revenue from advertising on select non-music channels, direct sales of our satellite radios and accessories, and other ancillary services. As ofJune 30, 2020 , ourSirius XM business had approximately 34.3 million subscribers. In addition to our audio entertainment businesses, we provide connected vehicle services to several automakers. These services are designed to enhance the safety, security and driving experience of consumers. We also offer a suite of data services that includes graphical weather, fuel prices, sports schedules and scores and movie listings, a traffic information service that includes information as to road closings, traffic flow and incident data to consumers with compatible in-vehicle navigation systems, and real-time weather services in vehicles, boats and planes. InMay 2020 , we terminated theAutomatic Labs Inc. ("Automatic") service, which was part of our connected services business. Automatic operated a service for consumers and auto dealers and offered an install-it-yourself adapter and mobile application, which transformed older vehicles into connected vehicles. During the three and six months endedJune 30, 2020 , we recorded$24 of restructuring expenses in our unaudited consolidated statements of comprehensive income related to this termination of the service.Sirius XM also holds a 70% equity interest and 33% voting interest inSirius XM Canada Holdings Inc. ("Sirius XM Canada").Sirius XM Canada's subscribers are not included in our subscriber count or subscriber-based operating metrics. 38
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Pandora
Our Pandora business operates a music, comedy and podcast streaming discovery platform, offering a personalized experience for each listener wherever and whenever they want to listen, whether through mobile devices, car speakers or connected devices. Pandora enables listeners to create personalized stations and playlists, discover new content, hear artist- and expert-curated playlists, podcasts and selectSirius XM content as well as search and play songs and albums on-demand. Pandora is available as an ad-supported radio service, a radio subscription service, called Pandora Plus, and an on-demand subscription service, called Pandora Premium. As ofJune 30, 2020 , Pandora had approximately 6.3 million subscribers. The majority of revenue from our Pandora business is generated from advertising on our Pandora ad-supported radio service. Pandora is the exclusive US ad sales representative forSoundCloud . Through this arrangement Pandora offers advertisers the ability to execute campaigns in the US across the Pandora andSoundCloud listening platforms. In addition, throughAdsWizz , Pandora provides a comprehensive digital audio advertising technology platform, which connects audio publishers and advertisers with a variety of ad insertion, campaign trafficking, yield optimization, programmatic buying, marketplace and podcast monetization solutions. As ofJune 30, 2020 , our Pandora business had approximately 59.6 million monthly active users. OnJune 16, 2020 ,Sirius XM acquired Simplecast for$28 in cash. Simplecast is a podcast management and analytics platform, powering podcasts from creators and brands. Refer to Note 3 to our unaudited consolidated financial statements in Part I, Item I, of this Quarterly Report on Form 10-Q for more information on this acquisition. InFebruary 2020 ,Sirius XM completed a$75 investment inSoundCloud .SoundCloud is the world's largest open audio platform, with a connected community of creators, listeners, and curators.SoundCloud's platform enables its users to upload, promote, share and create audio entertainment. The minority investment complements the existing ad sales relationship betweenSoundCloud and Pandora. Liberty Media As ofJune 30, 2020 , Liberty Media beneficially owned, directly and indirectly, approximately 73% of the outstanding shares of our common stock. As a result, we are a "controlled company" for the purposes of the NASDAQ corporate governance requirements. Results of Operations Actual Results Set forth below are our results of operations for the three and six months endedJune 30, 2020 compared with the three and six months endedJune 30, 2019 . The discussion of our results of operations for the three and six months endedJune 30, 2020 and the three months endedJune 30, 2019 includes the financial results of Pandora for the entire period, while the results of operations for the six months endedJune 30, 2019 includes the financial results of Pandora from the date of the Pandora Acquisition,February 1, 2019 . The inclusion of Pandora's results in the six months endedJune 30, 2020 for the entire period may render direct comparisons with results for prior year period less meaningful. The results of operations are presented for each of our reporting segments for revenue and cost of services and on a consolidated basis for all other items. 39
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2020 vs 2019 Change
For the Three Months Ended June For the Six Months Ended
30, June 30 , Three Months Six Months
2020 2019 2020 2019 Amount % Amount %
Revenue
Sirius XM:
Subscriber revenue $ 1,453 $ 1,402 $ 2,910 $ 2,772 $ 51 4 % $ 138 5 %
Advertising revenue 25 52 69 98 (27) (52) % (29) (30) %
Equipment revenue 25 41 66 82 (16) (39) % (16) (20) %
Other revenue 35 41 76 77 (6) (15) % (1) (1) %
Total Sirius XM revenue 1,538 1,536 3,121 3,029 2 - % 92 3 %
Pandora:
Subscriber revenue 125 135 253 223 (10) (7) % 30 13 %
Advertising revenue 211 306 452 469 (95) (31) % (17) (4) %
Total Pandora revenue 336 441 705 692 (105) (24) % 13 2 %
Total consolidated revenue 1,874 1,977 3,826 3,721 (103) (5) % 105 3 %
Cost of services
Sirius XM:
Revenue share and royalties 365 360 731 707 5 1 % 24 3 %
Programming and content 104 113 216 215 (9) (8) % 1 - %
Customer service and billing 99 99 192 197 - - % (5) (3) %
Transmission 30 25 57 50 5 20 % 7 14 %
Cost of equipment 4 6 8 12 (2) (33) % (4) (33) %
Total Sirius XM cost of services 602 603 1,204 1,181 (1) - % 23 2 %
Pandora:
Revenue share and royalties 222 240 426 385 (18) (8) % 41 11 %
Programming and content 6 3 12 7 3 100 % 5 71 %
Customer service and billing 23 21 48 36 2 10 % 12 33 %
Transmission 13 15 26 21 (2) (13) % 5 24 %
Total Pandora cost of services 264 279 512 449 (15) (5) % 63 14 %
Total consolidated cost of
services 866 882 1,716 1,630 (16) (2) % 86 5 %
Subscriber acquisition costs 48 104 147 212 (56) (54) % (65) (31) %
Sales and marketing 217 232 442 415 (15) (6) % 27 7 %
Engineering, design and
development 61 74 132 128 (13) (18) % 4 3 %
General and administrative 119 120 226 255 (1) (1) % (29) (11) %
Depreciation and amortization 124 119 256 226 5 4 % 30 13 %
Acquisition and restructuring
costs 24 7 24 83 17 243 % (59) (71) %
Total operating expenses 1,459 1,538 2,943 2,949 (79) (5) % (6) - %
Income from operations 415 439 883 772 (24) (5) % 111 14 %
Other (expense) income:
Interest expense (102) (97) (201) (187) (5) (5) % (14) (7) %
Loss on extinguishment of debt - - - (1) - nm 1 nm
Other income (expense) 4 (3) 8 (2) 7 233 % 10 500 %
Total other (expense) income (98) (100) (193) (190) 2 2 % (3) (2) %
Income before income taxes 317 339 690 582 (22) (6) % 108 19 %
Income tax expense (74) (76) (154) (157) 2 3 % 3 2 %
Net income $ 243 $ 263 $ 536 $ 425 $ (20) (8) % $ 111 26 %
nm - not meaningful
40-------------------------------------------------------------------------------- Table of Contents Sirius XM Revenue Refer to page 45 for our discussion onSirius XM revenue. Pandora Revenue The six months endedJune 30, 2020 includes Pandora's revenue for the entire period while the six months endedJune 30, 2019 includes Pandora's revenue from the acquisition date,February 1, 2019 . Refer to page 45 for our discussion on Pandora revenue. Sirius XM Cost of Services Refer to page 46 for our discussion onSirius XM cost of services.Pandora Cost of Services The six months endedJune 30, 2020 includes Pandora's cost of services for the entire period while the six months endedJune 30, 2019 includes Pandora's cost of services from the acquisition date,February 1, 2019 . Refer to page 46 for our discussion on Pandora cost of services. Operating Costs Subscriber Acquisition Costs are costs associated with our satellite radio service and include hardware subsidies paid to radio manufacturers, distributors and automakers; subsidies paid for chipsets and certain other components used in manufacturing radios; device royalties for certain radios and chipsets; product warranty obligations; and freight. The majority of subscriber acquisition costs are incurred and expensed in advance of acquiring a subscriber. Subscriber acquisition costs do not include advertising costs, marketing, loyalty payments to distributors and dealers of satellite radios or revenue share payments to automakers and retailers of satellite radios. For the three months endedJune 30, 2020 and 2019, subscriber acquisition costs were$48 and$104 , respectively, a decrease of 54%, or$56 , and decreased as a percentage of total revenue. For the six months endedJune 30, 2020 and 2019, subscriber acquisition costs were$147 and$212 , respectively, a decrease of 31% or$65 , and decreased as a percentage of total revenue. The decreases were driven by a decline in OEM installations as a result of the COVID-19 pandemic as well as lower hardware subsidies as certain subsidy rates decreased. Sales and Marketing includes costs for marketing, advertising, media and production, including promotional events and sponsorships; cooperative and artist marketing; and personnel related costs including salaries, commissions, and sales support. Marketing costs include expenses related to direct mail, outbound telemarketing, email communications, and digital performance media. For the three months endedJune 30, 2020 and 2019, sales and marketing expenses were$217 and$232 , respectively, a decrease of 6%, or$15 , and decreased as a percentage of total revenue. For the six months endedJune 30, 2020 and 2019, sales and marketing expenses were$442 and$415 , respectively, an increase of 7% or$27 , and increased as a percentage of total revenue. The decrease for the three-month period was primarily due to lower personnel-related costs and lower travel and entertainment costs; partially offset by additional subscriber communications and acquisition campaigns. The increase for the six-month period was primarily due to the inclusion of Pandora for a full six months in the 2020 period, and additional subscriber communications, streaming services and products, retention programs and acquisition campaigns; partially offset by lower travel and entertainment costs. Engineering, Design and Development consists primarily of compensation and related costs to develop chipsets and new products and services, including streaming and connected vehicle services, research and development for broadcast information systems and the design and development costs to incorporateSirius XM radios into new vehicles manufactured by automakers. For the three months endedJune 30, 2020 and 2019, engineering, design and development expenses were$61 and$74 , respectively, a decrease of 18%, or$13 , and decreased as a percentage of total revenue. For the six months endedJune 30, 2020 and 2019, engineering, design and development expenses were$132 and$128 , respectively, an increase of 3% or$4 , and increased as a percentage of total revenue. The decrease for the three-month period was driven by lower 41 -------------------------------------------------------------------------------- Table of Contents personnel-related costs. The increase for the six-month period was primarily due to the inclusion of Pandora for a full six months in the 2020 period as well as higher data costs. General and Administrative primarily consists of compensation and related costs for personnel and facilities, and include costs related to our finance, legal, human resources and information technologies departments. For the three months endedJune 30, 2020 and 2019, general and administrative expenses were$119 and$120 , respectively, a decrease of 1%, or$1 , but increased as a percentage of total revenue. For the six months endedJune 30, 2020 and 2019, general and administrative expenses were$226 and$255 , respectively, a decrease of 11% or$29 , and decreased as a percentage of total revenue. The decrease for the three-month period was driven by the closure of a sales and use tax audit, offset by higher legal costs. The decrease for the six-month period was primarily driven by a one-time$25 legal settlement reserve associated with Do-Not-Call litigation recorded in the first quarter of 2019 and the closure of a sales and use tax audit in the second quarter of 2020, partially offset by higher legal costs and the inclusion of Pandora for a full six months in the 2020 period. Depreciation and Amortization represents the recognition in earnings of the cost of assets used in operations, including our satellite constellations, property, equipment and intangible assets, over their estimated service lives. For the three months endedJune 30, 2020 and 2019, depreciation and amortization expense was$124 and$119 , respectively, an increase of 4%, or$5 . For the six months endedJune 30, 2020 and 2019, depreciation and amortization expense was$256 and$226 , respectively, an increase of 13% or$30 . The increase was driven by additional assets placed in-service. The increase for the six-month period was also impacted by the inclusion of Pandora for a full six months. Acquisition and Restructuring Costs represents expenses associated with the acquisitions of Pandora and Simplecast and restructuring costs. For the three months endedJune 30, 2020 and 2019, acquisition and restructuring costs were$24 and$7 , respectively. For the six months endedJune 30, 2020 and 2019, acquisition and restructuring costs were$24 and$83 , respectively. The acquisition and restructuring costs for the three and six months endedJune 30, 2020 include costs associated with the termination of the Automatic service and costs associated with the acquisition of Simplecast. The acquisition and restructuring costs for the three and six months endedJune 30, 2019 include costs associated with the Pandora Acquisition as well as related reorganization costs. Other (Expense) Income Interest Expense includes interest on outstanding debt. For the three months endedJune 30, 2020 and 2019, interest expense was$102 and$97 , respectively. For the six months endedJune 30, 2020 and 2019, interest expense was$201 and$187 , respectively. The increase was primarily driven by higher average debt due to the issuances ofSirius XM's 5.500% Senior Notes due 2029, 4.625% Senior Notes due 2024, and the 4.125% Senior Notes due 2030; partially offset by the redemption ofSirius XM's 6.00% Senior Notes due 2024, redemption of the Pandora convertible notes in 2019, and lower interest rates. Loss on Extinguishment of Debt includes losses incurred as a result of the redemption of certain debt. We recorded a$1 loss on extinguishment of debt during the six months endedJune 30, 2019 . The loss was due to the repurchase of$151 principal amount of Pandora's 1.75% Convertible Senior Notes due 2020. There was no loss on extinguishment of debt during the three and six months endedJune 30, 2020 . Other Income (Expense) primarily includes realized and unrealized gains and losses from our Deferred Compensation Plan and other investments, interest and dividend income, our share of the income or loss from equity investments inSirius XM Canada andSoundCloud , and transaction costs related to non-operating investments. For the three months endedJune 30, 2020 and 2019, other income (expense) was$4 and$(3) , respectively. For the six months endedJune 30, 2020 and 2019, other income (expense) was$8 and$(2) , respectively. During the six months endedJune 30, 2020 , we recorded a one-time lawsuit settlement of$7 . 42 -------------------------------------------------------------------------------- Table of Contents Income Taxes Income Tax Expense includes the change in our deferred tax assets, current federal and state tax expenses, and foreign withholding taxes. For the three months endedJune 30, 2020 and 2019, income tax expense was$74 and$76 , respectively, and$154 and$157 for the six months endedJune 30, 2020 and 2019, respectively. Our effective tax rate for the three months endedJune 30, 2020 and 2019 was 23.3% and 22.4%, respectively. Our effective tax rate for the six months endedJune 30, 2020 and 2019 was 22.3% and 27.0%, respectively. The effective tax rates for the three and six months endedJune 30, 2020 were primarily impacted by federal and state tax credits and the recognition of excess tax benefits related to share-based compensation. The effective tax rate for the three months endedJune 30, 2019 was primarily impacted by the recognition of excess tax benefits related to share-based compensation. The effective tax rate for the six months endedJune 30, 2019 was primarily impacted by the increase to the valuation allowance related to certain federal research and development credits that are no longer expected to be realizable. We estimate our effective tax rate for the year endingDecember 31, 2020 will be approximately 23%. In connection with the Pandora Acquisition, we acquired gross net operating loss ("NOLs") carryforwards of approximately$1,287 for federal income tax purposes. These NOL carryforwards are available to offset future taxable income. The acquired NOLs are limited annually by Section 382 of the Internal Revenue Code but we expect to fully utilize those NOLs within the carryforward period. Unaudited Pro Forma Results Set forth below are our pro forma results of operations for the three and six months endedJune 30, 2020 compared with the three and six months endedJune 30, 2019 . These pro forma results are based on estimates and assumptions, which we believe are reasonable. They are not the results that would have been realized had the Pandora Acquisition actually occurred onJanuary 1, 2019 and are not indicative of our consolidated results of operations in future periods. The pro forma results primarily include adjustments related to amortization of acquired intangible assets, depreciation of property and equipment, acquisition costs, fair value gain or loss on the Pandora investment and associated tax impacts. Pro forma adjustments are not included for the acquisition of Simplecast. Please refer to the Footnotes to Results of Operations (pages 49 through 54) following our discussion of results of operations. 43
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Table of Contents
2020 vs 2019 Change
For the Six Months Ended
For the Three Months Ended June 30 , June 30 , Three Months Six Months
2020 2019 2020 2019 Amount % Amount %
Revenue (Pro Forma) (Pro Forma) (Pro Forma) (Pro Forma)
Sirius XM:
Subscriber revenue $ 1,453 $ 1,402 $ 2,910 $ 2,772 $ 51 4 % $ 138 5 %
Advertising revenue 25 52 69 98 (27) (52) % (29) (30) %
Equipment revenue 25 41 66 82 (16) (39) % (16) (20) %
Other revenue 37 43 80 81 (6) (14) % (1) (1) %
Total Sirius XM revenue 1,540 1,538 3,125 3,033 2 - % 92 3 %
Pandora:
Subscriber revenue 125 135 253 269 (10) (7) % (16) (6) %
Advertising revenue 211 306 452 537 (95) (31) % (85) (16) %
Total Pandora revenue 336 441 705 806 (105) (24) % (101) (13) %
Total consolidated revenue 1,876 1,979 3,830 3,839 (103) (5) % (9) - %
Cost of services
Sirius XM:
Revenue share and royalties 365 360 731 707 5 1 % 24 3 %
Programming and content 104 113 216 215 (9) (8) % 1 - %
Customer service and billing 99 99 192 197 - - % (5) (3) %
Transmission 30 25 57 50 5 20 % 7 14 %
Cost of equipment 4 6 8 12 (2) (33) % (4) (33) %
Total Sirius XM cost of
services 602 603 1,204 1,181 (1) - % 23 2 %
Pandora:
Revenue share and royalties 224 246 430 463 (22) (9) % (33) (7) %
Programming and content 6 3 12 7 3 100 % 5 71 %
Customer service and billing 23 21 48 44 2 10 % 4 9 %
Transmission 13 15 26 26 (2) (13) % - - %
Total Pandora cost of services 266 285 516 540 (19) (7) % (24) (4) %
Total consolidated cost of
services 868 888 1,720 1,721 (20) (2) % (1) - %
Subscriber acquisition costs 48 104 147 212 (56) (54) % (65) (31) %
Sales and marketing 217 232 442 451 (15) (6) % (9) (2) %
Engineering, design and
development 61 74 132 142 (13) (18) % (10) (7) %
General and administrative 119 120 226 271 (1) (1) % (45) (17) %
Depreciation and amortization 124 119 256 241 5 4 % 15 6 %
Acquisition and restructuring
costs 24 - 24 - 24 nm 24 nm
Total operating expenses 1,461 1,537 2,947 3,038 (76) (5) % (91) (3) %
Income from operations 415 442 883 801 (27) (6) % 82 10 %
Other (expense) income:
Interest expense (102) (97) (201) (189) (5) (5) % (12) (6) %
Loss on extinguishment of debt - - - (1) - nm 1 100 %
Other income (expense) 4 (3) 8 (1) 7 233 % 9 900 %
Total other (expense) income (98) (100) (193) (191) 2 2 % (2) (1) %
Income before income taxes 317 342 690 610 (25) (7) % 80 13 %
Income tax expense (74) (77) (154) (164) 3 4 % 10 6 %
Net income $ 243 $ 265 $ 536 $ 446 $ (22) (8) % $ 90 20 %
Adjusted EBITDA $ 615 $ 618 $ 1,254 $ 1,184 $ (3) - % $ 70 6 %
nm - not meaningful
44-------------------------------------------------------------------------------- Table of Contents Sirius XM Revenue Sirius XM Subscriber Revenue includes fees charged for self-pay and paid promotional subscriptions,U.S. Music Royalty Fees and other ancillary fees. For the three months endedJune 30, 2020 and 2019, subscriber revenue was$1,453 and$1,402 , respectively, an increase of 4%, or$51 . For the six months endedJune 30, 2020 and 2019, subscriber revenue was$2,910 and$2,772 , respectively, an increase of 5% or$138 . The increases were primarily driven by higher self-pay revenue as a result of increases in certain subscription plans and higherU.S. Music Royalty Fees due to a higher music royalty rate. Sirius XM Advertising Revenue includes the sale of advertising onSirius XM's non-music channels. For the three months endedJune 30, 2020 and 2019, advertising revenue was$25 and$52 , respectively, a decrease of 52%, or$27 . For the six months endedJune 30, 2020 and 2019, advertising revenue was$69 and$98 , respectively, a decrease of 30% or$29 . The decreases were due to lower advertising spend as a result of the impact of the COVID-19 pandemic primarily on news and sports channels related to the cancellation of live sporting events. Sirius XM Equipment Revenue includes revenue and royalties from the sale of satellite radios, components and accessories. For the three months endedJune 30, 2020 and 2019, equipment revenue was$25 and$41 , respectively, a decrease of 39% or$16 . For the six months endedJune 30, 2020 and 2019, equipment revenue was$66 and$82 , respectively, a decrease of 20% or$16 . The decreases were driven by lower royalty revenue as new vehicle production decreased due to the impact of the COVID-19 pandemic and by lower direct sales to consumers. Sirius XM Other Revenue includes service and advisory revenue from ourSirius XM Canada , our connected vehicle services, and ancillary revenues. For the three months endedJune 30, 2020 and 2019, other revenue was$37 and$43 , respectively, a decrease of 14%, or$6 . For the six months endedJune 30, 2020 and 2019, other revenue was$80 and$81 , respectively, a decrease of 1% or$1 . The decrease for the three-month period was primarily driven by lower revenue generated by our connected vehicle services, lower revenue fromSirius XM Canada and lower revenue from our rental car arrangements. The decrease for the six-month period was driven by lower revenue fromSirius XM Canada and lower revenue from our rental car arrangements, partially offset by higher revenue generated from our connected vehicle services. Pandora Revenue Pandora Subscriber Revenue includes fees charged for Pandora Plus and Pandora Premium subscriptions. For the three months endedJune 30, 2020 and 2019, Pandora subscriber revenue was$125 and$135 , respectively, a decrease of 7%, or$10 . For the six months endedJune 30, 2020 and 2019, Pandora subscriber revenue was$253 and$269 , respectively, a decrease of 6% or$16 . The decreases were primarily due to the expiration of the one-year promotional subscriptions generated through an expired agreement with T-Mobile. Pandora Advertising Revenue is generated primarily from audio, display and video advertising. For the three months endedJune 30, 2020 and 2019, Pandora advertising revenue was$211 and$306 , respectively, a decrease of 31%, or$95 . For the six months endedJune 30, 2020 and 2019, Pandora advertising revenue was$452 and$537 , respectively, a decrease of 16% or$85 . The decreases were primarily due to lower advertising spend as a result of the impact of the COVID-19 pandemic. Total Consolidated Revenue Total Consolidated Revenue for the three months endedJune 30, 2020 and 2019, was$1,876 and$1,979 , respectively, a decrease of 5%, or$103 . Total Consolidated Revenue for the six months endedJune 30, 2020 and 2019, was$3,830 and$3,839 , respectively, a slight decrease of$9 . 45 -------------------------------------------------------------------------------- Table of Contents Sirius XM Cost of Services Sirius XM Cost of Services includes revenue share and royalties, programming and content, customer service and billing and transmission expenses. Sirius XM Revenue Share and Royalties include royalties for transmitting content, including streaming royalties, as well as automaker, content provider and advertising revenue share. For the three months endedJune 30, 2020 and 2019, revenue share and royalties were$365 and$360 , respectively, an increase of 1%, or$5 , and increased as a percentage of totalSirius XM revenue. For the six months endedJune 30, 2020 and 2019, revenue share and royalties were$731 and$707 , respectively, an increase of 3%, or$24 , and increased as a percentage of totalSirius XM revenue. The increases were driven by overall greater revenues subject to music royalties and revenue share. Sirius XM Programming and Content includes costs to acquire, create, promote and produce content. We have entered into various agreements with third parties for music and non-music programming that require us to pay license fees and other amounts. For the three months endedJune 30, 2020 and 2019, programming and content expenses were$104 and$113 , respectively, a decrease of 8%, or$9 , and decreased as a percentage of totalSirius XM revenue. For the six months endedJune 30, 2020 and 2019, programming and content expenses were$216 and$215 , respectively, a slight increase of$1 , but decreased as a percentage of totalSirius XM revenue. The decrease for the three-month period was driven by one-time benefits for reduced sports programming as a result of shortened sports seasons and lower live event programming costs due to the COVID-19 pandemic. The increase for the six-month period was primarily driven by higher content licensing costs as well as greater personnel-related costs partially offset by one-time benefits for reduced sports programming as a result of shortened sports seasons due to the COVID-19 pandemic. Sirius XM Customer Service and Billing includes costs associated with the operation and management of internal and third-party customer service centers, and our subscriber management systems as well as billing and collection costs, bad debt expense, and transaction fees. For the three months endedJune 30, 2020 and 2019, customer service and billing expenses were$99 . For the six months endedJune 30, 2020 and 2019, customer service and billing expenses were$192 and$197 , respectively, a decrease of 3%, or$5 , and decreased as a percentage of totalSirius XM revenue. The decline for the six-month period was driven by reduced staffing resulting from stay at home orders issued in countries in which we or our vendors operate call centers and lower transaction costs from a one-time recovery of fees, partially offset by higher bad debt expense. Sirius XM Transmission consists of costs associated with the operation and maintenance of our terrestrial repeater networks; satellites; satellite telemetry, tracking and control systems; satellite uplink facilities; studios; and delivery of our Internet streaming and connected vehicle services. For the three months endedJune 30, 2020 and 2019, transmission expenses were$30 and$25 , respectively, an increase of 20%, or$5 , and increased as a percentage of totalSirius XM revenue. For the six months endedJune 30, 2020 and 2019, transmission expenses were$57 and$50 , respectively, an increase of 14%, or$7 , and increased as a percentage of totalSirius XM revenue. The increases were primarily driven by higher cloud hosting and wireless costs associated with our streaming services. Sirius XM Cost of Equipment includes costs from the sale of satellite radios, components and accessories and provisions for inventory allowance attributable to products purchased for resale in our direct to consumer distribution channels. For the three months endedJune 30, 2020 and 2019, cost of equipment was$4 and$6 , respectively, a decrease of 33%, or$2 , but increased as a percentage of equipment revenue. For the six months endedJune 30, 2020 and 2019, cost of equipment was$8 and$12 , respectively, a decrease of 33%, or$4 , and decreased as a percentage of equipment revenue. The decreases were primarily due to lower direct sales to consumers and lower inventory reserves.Pandora Cost of ServicesPandora Cost of Services includes revenue share and royalties, programming and content, customer service and billing, and transmission expenses. 46 -------------------------------------------------------------------------------- Table of Contents Pandora Revenue Share and Royalties includes licensing fees paid for streaming music or other content to our subscribers and listeners as well as revenue share paid to third party ad servers. We make payments to third party ad servers for the period the advertising impressions are delivered or click-through actions occur, and accordingly, we record this as a cost of service in the related period. For the three months endedJune 30, 2020 and 2019, revenue share and royalties were$224 and$246 , respectively, a decrease of 9%, or$22 , but increased as a percentage of total Pandora revenue. For the six months endedJune 30, 2020 and 2019, revenue share and royalties were$430 and$463 , respectively, a decrease of 7%, or$33 , but increased as a percentage of total Pandora revenue. The decrease for the three-month period was primarily due to lower listening hours, lower subscriber revenue, and lower costs resulting from the presence of minimum guarantees associated with direct license agreements with major record labels in the prior year. The decrease for the six-month period was primarily driven by a reversal of a pre-acquisition reserve of$16 for royalties during the first quarter of 2020, lower listening hours, lower subscriber revenue, and lower costs resulting from the presence of minimum guarantees associated with direct license agreements with major record labels in the prior year. Pandora Programming and Content includes costs to produce live listener events and promote content. For the three months endedJune 30, 2020 and 2019, programming and content expenses were$6 and$3 , respectively, an increase of 100%, or$3 , and increased as a percentage of total Pandora revenue. For the six months endedJune 30, 2020 and 2019, programming and content expenses were$12 and$7 , respectively, an increase of 71%, or$5 , and increased as a percentage of total Pandora revenue. The increases were primarily attributable to higher personnel-related costs. Pandora Customer Service and Billing includes transaction fees on subscription purchases through mobile app stores, and bad debt expense. For the three months endedJune 30, 2020 and 2019, customer service and billing expenses were$23 and$21 , respectively, an increase of 10%, or$2 , and increased as a percentage of total Pandora revenue. For the six months endedJune 30, 2020 and 2019, customer service and billing expenses were$48 and$44 , respectively, an increase of 9%, or$4 , and increased as a percentage of total Pandora revenue. The increases were primarily driven by higher bad debt expense. Pandora Transmission includes costs associated with content streaming, maintaining our streaming radio and on-demand subscription services and creating and serving advertisements through third-party ad servers. For the three months endedJune 30, 2020 and 2019, transmission expenses were$13 and$15 , respectively, a decrease of 13%, or$2 , but increased as a percentage of total Pandora revenue. For both the six months endedJune 30, 2020 and 2019, transmission expenses were$26 . The decrease for the three-month period was driven by lower streaming and personnel-related costs. Operating Costs Subscriber Acquisition Costs are costs associated with our satellite radio service and include hardware subsidies paid to radio manufacturers, distributors and automakers; subsidies paid for chipsets and certain other components used in manufacturing radios; device royalties for certain radios and chipsets; product warranty obligations; and freight. The majority of subscriber acquisition costs are incurred and expensed in advance of acquiring a subscriber. Subscriber acquisition costs do not include advertising costs, marketing, loyalty payments to distributors and dealers of satellite radios or revenue share payments to automakers and retailers of satellite radios. For the three months endedJune 30, 2020 and 2019, subscriber acquisition costs were$48 and$104 , respectively, a decrease of 54%, or$56 , and decreased as a percentage of total revenue. For the six months endedJune 30, 2020 and 2019, subscriber acquisition costs were$147 and$212 , respectively, a decrease of 31%, or$65 , and decreased as a percentage of total revenue. The decreases were driven by a decline in OEM installations as a result of the COVID-19 pandemic as well as lower hardware subsidies as certain subsidy rates decreased. Sales and Marketing includes costs for marketing, advertising, media and production, including promotional events and sponsorships; cooperative and artist marketing; and personnel related costs including salaries, commissions, and sales support. Marketing costs include expenses related to direct mail, outbound telemarketing, email communications, and digital performance media. 47 -------------------------------------------------------------------------------- Table of Contents For the three months endedJune 30, 2020 and 2019, sales and marketing expenses were$217 and$232 , respectively, a decrease of 6%, or$15 , and decreased as a percentage of total revenue. For the six months endedJune 30, 2020 and 2019, sales and marketing expenses were$442 and$451 , respectively, a decrease of 2%, or$9 , and decreased as a percentage of total revenue. The decreases was primarily due to lower personnel-related costs and lower travel and entertainment costs, partially offset by additional subscriber communications and acquisition campaigns. Engineering, Design and Development consists primarily of compensation and related costs to develop chipsets and new products and services, including streaming and connected vehicle services, research and development for broadcast information systems and costs associated with the incorporation of our radios into new vehicles manufactured by automakers. For the three months endedJune 30, 2020 and 2019, engineering, design and development expenses were$61 and$74 , respectively, a decrease of 18%, or$13 , and decreased as a percentage of total revenue. For the six months endedJune 30, 2020 and 2019, engineering, design and development expenses were$132 and$142 , respectively, a decrease of 7%, or$10 , and decreased as a percentage of total revenue. The decreases were driven by lower personnel-related costs, partially offset by higher data costs. General and Administrative primarily consists of compensation and related costs for personnel and facilities, and include costs related to our finance, legal, human resources and information technologies departments. For the three months endedJune 30, 2020 and 2019, general and administrative expenses were$119 and$120 , respectively, a decrease of 1%, or$1 , but increased as a percentage of total revenue. For the six months endedJune 30, 2020 and 2019, general and administrative expenses were$226 and$271 , respectively, a decrease of 17%, or$45 , and decreased as a percentage of total revenue. The decrease for the three-month period was driven by the closure of a sales and use tax audit offset by higher legal costs. The decrease for the six-month period was primarily driven by a one-time$25 legal settlement reserve associated with Do-Not-Call litigation recorded in the first quarter of 2019, lower personnel costs, and the closure of a sales and use tax audit in the second quarter of 2020, partially offset by higher legal costs. Depreciation and Amortization represents the recognition in earnings of the cost of assets used in operations, including our satellite constellations, property, equipment and intangible assets, over their estimated service lives. For the three months endedJune 30, 2020 and 2019, depreciation and amortization expense was$124 and$119 , respectively, an increase of 4%, or$5 . For the six months endedJune 30, 2020 and 2019, depreciation and amortization expense was$256 and$241 , respectively, an increase of 6%, or$15 . The increases were driven by additional assets placed in-service. Acquisition and Restructuring Costs represents expenses associated with the termination of the Automatic service and the acquisition of Simplecast. For the both the three and six months endedJune 30, 2020 , acquisition and restructuring costs were$24 . The acquisition and restructuring costs for the three and six months endedJune 30, 2020 include costs associated with the termination of the Automatic service and costs associated with the acquisition of Simplecast. There were no acquisition and restructuring costs for the three and six months endedJune 30, 2019 . Other (Expense) Income Interest Expense includes interest on outstanding debt. For the three months endedJune 30, 2020 and 2019, interest expense was$102 and$97 , respectively, an increase of 5%, or$5 . For the six months endedJune 30, 2020 and 2019, interest expense was$201 and$189 , respectively, an increase of 6%, or$12 . The increases were primarily driven by higher average debt due to the issuances of the 5.500% Senior Notes due 2029, the 4.625% Senior Notes due 2024 and the 4.125% Senior Notes due 2030; partially offset by the redemption of the 6.00% Senior Notes due 2024 and lower average interest rates. Loss on Extinguishment of Debt, includes losses incurred as a result of the redemption of certain debt. We recorded a$1 loss during the six months endedJune 30, 2019 . The loss was due to the repurchase of$151 principal amount of Pandora's 1.75% Convertible Senior Notes due 2020. There was no loss on extinguishment of debt during the six months endedJune 30, 2020 . 48 -------------------------------------------------------------------------------- Table of Contents Other Income (Expense) primarily includes realized and unrealized gains and losses from our Deferred Compensation Plan and other investments, interest and dividend income, our share of the income or loss from our equity investments inSirius XM Canada andSoundCloud , and transaction costs related to non-operating investments. For the three months endedJune 30, 2020 and 2019, other income (expense) was$4 and$(3) , respectively. For the six months endedJune 30, 2020 and 2019, other income (expense) was$8 and$(1) , respectively. During the six months endedJune 30, 2020 , we recorded a one-time lawsuit settlement of$7 . Income Taxes Income Tax Expense includes the change in our deferred tax assets, current federal and state tax expenses, and foreign withholding taxes. For the three months endedJune 30, 2020 and 2019, income tax expense was$74 and$77 , respectively, and$154 and$164 for the six months endedJune 30, 2020 and 2019, respectively. Our effective tax rate for the three months endedJune 30, 2020 and 2019 was 23.3% and 22.5%, respectively. Our effective tax rate for the six months endedJune 30, 2020 and 2019 was 22.3% and 26.9%, respectively. The effective tax rates for the three and six months endedJune 30, 2020 were primarily impacted by federal and state tax credits and the recognition of excess tax benefits related to share-based compensation. The effective tax rate for the three months endedJune 30, 2019 was primarily impacted by the recognition of excess tax benefits related to share-based compensation. The effective tax rate for the six months endedJune 30, 2019 was primarily impacted by the increase to the valuation allowance related to certain federal research and development credits that are no longer expected to be realizable. We estimate our effective tax rate for the year endingDecember 31, 2020 will be approximately 23%. In connection with the Pandora Acquisition, we acquired gross NOL carryforwards of approximately$1,287 for federal income tax purposes. These NOL carryforwards are available to offset future taxable income. The acquired NOLs are limited annually by Section 382 of the Internal Revenue Code but we expect to fully utilize those NOLs within the carryforward period. Footnotes to Pro Forma Results of Operations The following tables reconcile our results of operations as reported to our pro forma results of operations for the three and six months endedJune 30, 2020 and 2019 which includes the Pandora pre-acquisition financial information for the applicable periods and the effects of purchase price accounting. These pro forma results are based on estimates and assumptions, which we believe are reasonable. They are not the results that would have been realized had the Pandora Acquisition actually occurred onJanuary 1, 2019 and are not indicative of our consolidated results of operations in future periods. The pro forma results primarily include adjustments related to amortization of acquired intangible assets, depreciation of property and equipment, acquisition costs, fair value gain or loss on the Pandora investment and associated tax impacts. 49
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Table of Contents
Unaudited for the Three Months Ended
Predecessor
Financial Purchase Price
As Reported Information Accounting Adjustments Ref Pro Forma
Revenue
Sirius XM:
Subscriber revenue $ 1,453 $ - $ - $ 1,453
Advertising revenue 25 - - 25
Equipment revenue 25 - - 25
Other revenue 35 - 2 (a) 37
Total Sirius XM revenue 1,538 - 2 1,540
Pandora:
Subscriber revenue 125 - - 125
Advertising revenue 211 - - 211
Total Pandora revenue 336 - - 336
Total consolidated revenue 1,874 - 2 1,876
Cost of services
Sirius XM:
Revenue share and royalties 365 - - 365
Programming and content 104 - - 104
Customer service and billing 99 - - 99
Transmission 30 - - 30
Cost of equipment 4 - - 4
Total Sirius XM cost of services 602 - - 602
Pandora:
Revenue share and royalties 222 - 2 (b) 224 Programming and content 6 - - 6 Customer service and billing 23 - - 23 Transmission 13 - - 13 Total Pandora cost of services 264 - 2 266 Total consolidated cost of services 866 - 2 868 Subscriber acquisition costs 48 - - 48 Sales and marketing 217 - - 217 Engineering, design and development 61 - - 61 General and administrative 119 - - 119 Depreciation and amortization 124 - - 124 Acquisition and restructuring costs 24 - - 24 Total operating expenses 1,459 - 2 1,461 Income from operations 415 - - 415 Other (expense) income: Interest expense (102) - - (102) Loss on extinguishment of debt - - - - Other (expense) income 4 - - 4 Total other (expense) income (98) - - (98) Income before income taxes 317 - - 317 Income tax expense (74) - - (74) Net income$ 243 $ - $ -$ 243 (a) This adjustment eliminates the impact of additional revenue associated with certain programming agreements recorded as part of the merger of Sirius and XM (the "XM Merger"). (b) This adjustment includes the impact of additional expense associated with minimum guarantee royalty contracts recorded as part of the Pandora Acquisition. 50
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Table of Contents
Unaudited for the Three Months Ended
Predecessor
Financial Purchase Price
As Reported Information Accounting Adjustments Ref Pro Forma
Revenue
Sirius XM:
Subscriber revenue $ 1,402 $ - $ - $ 1,402
Advertising revenue 52 - - 52
Equipment revenue 41 - - 41
Other revenue 41 - 2 (c) 43
Total Sirius XM revenue 1,536 - 2 1,538
Pandora:
Subscriber revenue 135 - - 135
Advertising revenue 306 - - 306
Total Pandora revenue 441 - - 441
Total consolidated revenue 1,977 - 2 1,979
Cost of services
Sirius XM:
Revenue share and royalties 360 - - 360
Programming and content 113 - - 113
Customer service and billing 99 - - 99
Transmission 25 - - 25
Cost of equipment 6 - - 6
Total Sirius XM cost of services 603 - - 603
Pandora:
Revenue share and royalties 240 - 6 (d) 246 Programming and content 3 - - 3 Customer service and billing 21 - - 21 Transmission 15 - - 15 Total Pandora cost of services 279 - 6 285 Total consolidated cost of services 882 - 6 888 Subscriber acquisition costs 104 - - 104 Sales and marketing 232 - - 232 Engineering, design and development 74 - - 74 General and administrative 120 - - 120 Depreciation and amortization 119 - - 119 Acquisition and restructuring costs 7 - (7) (e) - Total operating expenses 1,538 - (1) 1,537 Income from operations 439 - 3 442 Other (expense) income: Interest expense (97) - - (97) Loss on extinguishment of debt - - - - Other (expense) income (3) - - (3) Total other (expense) income (100) - - (100) Income before income taxes 339 - 3 342 Income tax expense (76) - (1) (f) (77) Net income$ 263 $ - $ 2$ 265 (c) This adjustment eliminates the impact of additional revenue associated with certain programming agreements recorded as part of the XM Merger. (d) This adjustment includes the impact of additional expense associated with minimum guarantee royalty contracts recorded as part of the Pandora Acquisition. (e) This adjustment eliminates the impact of acquisition and other related costs. (f) This adjustment to income taxes was calculated by applyingSirius XM's statutory tax rate atJune 30, 2019 to the pro forma adjustments of$3 . 51
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Table of Contents
Unaudited for the Six Months Ended
Predecessor
Financial Purchase Price
As Reported Information Accounting Adjustments Ref Pro Forma
Revenue
Sirius XM:
Subscriber revenue $ 2,910 $ - $ - $ 2,910
Advertising revenue 69 - - 69
Equipment revenue 66 - - 66
Other revenue 76 - 4 (g) 80
Total Sirius XM revenue 3,121 - 4 3,125
Pandora:
Subscriber revenue 253 - - 253
Advertising revenue 452 - - 452
Total Pandora revenue 705 - - 705
Total consolidated revenue 3,826 - 4 3,830
Cost of services
Sirius XM:
Revenue share and royalties 731 - - 731
Programming and content 216 - - 216
Customer service and billing 192 - - 192
Transmission 57 - - 57
Cost of equipment 8 - - 8
Total Sirius XM cost of services 1,204 - - 1,204
Pandora:
Revenue share and royalties 426 - 4 (h) 430
Programming and content 12 - - 12
Customer service and billing 48 - - 48
Transmission 26 - - 26
Total Pandora cost of services 512 - 4 516
Total consolidated cost of services 1,716 - 4 1,720
Subscriber acquisition costs 147 - - 147
Sales and marketing 442 - - 442
Engineering, design and development 132 - - 132
General and administrative 226 - - 226
Depreciation and amortization 256 - - 256
Acquisition and restructuring costs 24 - - 24
Total operating expenses 2,943 - 4 2,947
Income from operations 883 - - 883
Other (expense) income:
Interest expense (201) - - (201)
Loss on extinguishment of debt - - - -
Other (expense) income 8 - - 8
Total other (expense) income (193) - - (193)
Income before income taxes 690 - - 690
Income tax expense (154) - - (154)
Net income $ 536 $ - $ - $ 536
(g) This adjustment eliminates the impact of additional revenue associated with
certain programming agreements recorded as part of the XM Merger.
(h) This adjustment includes the impact of additional expense associated with
minimum guarantee royalty contracts recorded as part of the Pandora Acquisition.
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Unaudited for the Six Months Ended
Predecessor
Financial Purchase Price
As Reported Information (i) Accounting Adjustments Ref Pro Forma
Revenue
Sirius XM:
Subscriber revenue $ 2,772 $ - $ - $ 2,772
Advertising revenue 98 - - 98
Equipment revenue 82 - - 82
Other revenue 77 - 4 (j) 81
Total Sirius XM revenue 3,029 - 4 3,033
Pandora:
Subscriber revenue 223 46 - 269
Advertising revenue 469 68 - 537
Total Pandora revenue 692 114 - 806
Total consolidated revenue 3,721 114 4 3,839
Cost of services
Sirius XM:
Revenue share and royalties 707 - - 707
Programming and content 215 - - 215
Customer service and billing 197 - - 197
Transmission 50 - - 50
Cost of equipment 12 - - 12
Total Sirius XM cost of services 1,181 - - 1,181
Pandora:
Revenue share and royalties 385 71 7 (k) 463
Programming and content 7 - - 7
Customer service and billing 36 8 - 44
Transmission 21 5 - 26
Total Pandora cost of services 449 84 7 540
Total consolidated cost of services 1,630 84 7 1,721
Subscriber acquisition costs 212 - - 212
Sales and marketing 415 36 - 451
Engineering, design and development 128 14 - 142
General and administrative 255 16 - 271
Depreciation and amortization 226 6 9 (l) 241
Acquisition and restructuring costs 83 1 (84) (m) -
Total operating expenses 2,949 157 (68) 3,038
Income from operations 772 (43) 72 801
Other (expense) income:
Interest expense (187) (2) - (189)
Loss on extinguishment of debt (1) - - (1)
Other (expense) income (2) 1 - (1)
Total other (expense) income (190) (1) - (191)
Income before income taxes 582 (44) 72 610
Income tax expense (157) - (7) (n) (164)
Net income $ 425 $ (44) $ 65 $ 446
(i) Represents Pandora's results for the period January 1, 2019 through January
31, 2019 .
(j) This adjustment eliminates the impact of additional revenue associated with
certain programming agreements recorded as part of the XM Merger.
(k) This adjustment includes the impact of additional expense associated with
minimum guarantee royalty contracts recorded as part of the Pandora Acquisition.
(l) This adjustment includes the impact of the additional amortization
associated with the acquired intangible assets recorded as part of the Pandora
Acquisition that are subject to amortization, partially offset by normal
depreciation associated with assets revalued in purchase accounting.
(m) This adjustment eliminates the impact of acquisition and other related
costs.
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(n) This adjustment to income taxes was calculated by applying
Key Financial and Operating Performance Metrics In this section, we present certain financial performance measures some of which are presented as Non-GAAP items, which include free cash flow and adjusted EBITDA. We also present certain operating performance measures. Our adjusted EBITDA excludes the impact of share-based payment expense and certain purchase price accounting adjustments related to the XM Merger and the Pandora Acquisition. Additionally, when applicable, our adjusted EBITDA metric excludes the effect of significant items that do not relate to the on-going performance of our business. We use these Non-GAAP financial and operating performance measures to manage our business, to set operational goals and as a basis for determining performance-based compensation for our employees. See the accompanying glossary on pages 60 through 63 for more details and for the reconciliation to the most directly comparable GAAP measure (where applicable). We believe these Non-GAAP financial and operating performance measures provide useful information to investors regarding our financial condition and results of operations. We believe these Non-GAAP financial and operating performance measures may be useful to investors in evaluating our core trends because they provide a more direct view of our underlying costs. We believe investors may use our adjusted EBITDA to estimate our current enterprise value and to make investment decisions. We believe free cash flow provides useful supplemental information to investors regarding our cash available for future subscriber acquisitions and capital expenditures, to repurchase or retire debt, to acquire other companies and our ability to return capital to stockholders. By providing these Non-GAAP financial and operating performance measures, together with the reconciliations to the most directly comparable GAAP measure (where applicable), we believe we are enhancing investors' understanding of our business and our results of operations. Our Non-GAAP financial measures should be viewed in addition to, and not as an alternative for or superior to, our reported results prepared in accordance with GAAP. In addition, our Non-GAAP financial measures may not be comparable to similarly-titled measures by other companies. Please refer to the glossary (pages 60 through 63) for a further discussion of such Non-GAAP financial and operating performance measures and reconciliations to the most directly comparable GAAP measure (where applicable). Subscribers and subscription related revenues and expenses associated with our connected vehicle services andSirius XM Canada are not included inSirius XM's subscriber count or subscriber-based operating metrics. Set forth below are our subscriber balances as ofJune 30, 2020 compared toJune 30, 2019 . As of June 30, 2020 vs 2019 Change (subscribers in thousands) 2020 2019 Amount %Sirius XM Self-pay subscribers 30,311 29,336 975 3 % Paid promotional subscribers 3,939 5,009 (1,070) (21) % Ending subscribers 34,250 34,345 (95) - % Traffic users 9,414 9,150 264 3 % Sirius XM Canada subscribers 2,607 2,702 (95) (4) % Pandora Monthly active users - all services 59,604 64,948 (5,344) (8) % Self-pay subscribers 6,256 6,224 32 1 % Paid promotional subscribers 46 733 (687) (94) % Ending subscribers 6,302 6,957 (655) (9) %
The following table contains our Non-GAAP pro forma financial and operating
performance measures which are based on our adjusted results of operations for
the three and six months ended
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2020 vs 2019 Change
For the Three Months Ended June For the Six Months Ended
30, June 30 , Three Months Six Months
(subscribers in thousands) 2020 2019 2020 2019 (1) Amount % Amount %
Sirius XM
Self-pay subscribers 264 290 333 421 (26) (9) % (88) (21) %
Paid promotional
subscribers (780) (116) (992) (115) (664) 572 % (877) 763 %
Net additions (516) 174 (659) 306 (690) (397) % (965) (315) %
Weighted average number of
subscribers 34,288 34,126 34,556 34,071 162 - % 485 1 %
Average self-pay monthly
churn 1.6 % 1.7 % 1.7 % 1.7 % (0.1) % (6) % - % - %
ARPU (2) $ 13.96 $ 13.83 $ 13.95 $ 13.67 $ 0.13 1 % $ 0.28 2 %
SAC, per installation $ 20.14 $ 22.74 $ 20.14 $ 23.40 $ (2.60) (11) % $ (3.26) (14) %
Pandora
Self-pay subscribers 40 64 91 310 (24) (38) % (219) (71) % Paid promotional subscribers (4) (3) (3) (23) (1) 33 % 20 (87) % Net additions (3) 36 61 88 287 (25) (41) % (199) (69) % Weighted average number of subscribers 6,223 6,873 6,233 6,791 (650) (9) % (558) (8) % ARPU$ 6.70 $ 6.53 $ 6.77 $ 6.61 $ 0.17 3 %$ 0.16 2 % Ad supported listener hours (in billions) 3.29 3.49 6.41 6.91 (0.20) (6) % (0.50) (7) % Advertising revenue per thousand listener hours (RPM)$ 55.23 $ 80.14 $ 61.23 $ 71.46 $ (24.91) (31) %$ (10.23) (14) % Licensing costs per thousand listener hours (LPM)$ 37.16 $ 37.91 $ 37.12 $ 37.28 $ (0.75) (2) %$ (0.16) - % Licensing costs per paid subscriber (LPU)$ 4.06 $ 4.16 $ 4.08 $ 4.06 $ (0.10) (2) %$ 0.02 - %Total Company Adjusted EBITDA$ 615 $ 618 $ 1,254 $ 1,184 $ (3) - %$ 70 6 % Free cash flow (4)$ 503 $ 474 $ 851 $ 774 $ 29 6 %$ 77 10 % (1) Includes Pandora's results for the six-month period, including pre-acquisition results for the periodJanuary 1, 2019 throughJanuary 31, 2019 . (2) ARPU forSirius XM excludes subscriber revenue from our connected vehicle services of$42 and$38 for the three months and$86 and$75 for the six months endedJune 30, 2020 and 2019, respectively. (3) Amounts may not sum as a result of rounding. (4) Free cash flow has not been adjusted for Pandora's pre-acquisition results.Sirius XM Subscribers. AtJune 30, 2020 ,Sirius XM had approximately 34,250 subscribers, a decrease of 95, from the approximately 34,345 subscribers as ofJune 30, 2019 . The decrease in subscribers was primarily due to the decrease in paid promotional, partially offset by growth in our self-pay subscriber base from subsequent owner trial conversions as well as subscriber win back programs. For the three months endedJune 30, 2020 and 2019, net subscriber additions were (516) and 174, respectively. For the six months endedJune 30, 2020 and 2019, net subscriber additions were (659) and 306, respectively. Paid promotional subscribers decreased due to declines in shipments and trial subscription starts from automakers offering paid subscriptions due to the COVID-19 pandemic. Self-pay net additions decreased year over year as increases in subsequent owner trial conversions and reductions in vehicle related and non-pay churn were offset by reduced additions from win back programs, new car conversions, and aftermarket programs as well as increases in voluntary churn. Traffic Users. We offer services that provide graphic information as to road closings, traffic flow and incident data to consumers with compatible in-vehicle navigation systems. AtJune 30, 2020 ,Sirius XM had approximately 9,414 traffic users, an increase of 264 users, or 3%, from the approximately 9,150 traffic users as ofJune 30, 2019 . 55 -------------------------------------------------------------------------------- Table of Contents Sirius XM Canada Subscribers. AtJune 30, 2020 ,Sirius XM Canada had approximately 2,607 subscribers, a decrease of 95, or 4%, from the approximately 2,702Sirius XM Canada subscribers as ofJune 30, 2019 . Average Self-pay Monthly Churn is derived by dividing the monthly average of self-pay deactivations for the period by the average number of self-pay subscribers for the period. (See accompanying glossary on pages 60 through 63 for more details.) For the three months endedJune 30, 2020 and 2019, our average self-pay monthly churn rate was 1.6% and 1.7%, respectively. For both the six months endedJune 30, 2020 and 2019, our average self-pay monthly churn rate was 1.7%. The decrease for the three-month period was primarily driven by lower vehicle and non-pay churn, partially offset by increased voluntary churn. ARPU is derived from total earnedSirius XM subscriber revenue (excluding revenue derived from our connected vehicle services) and net advertising revenue, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. (See the accompanying glossary on pages 60 through 63 for more details.) For the three months endedJune 30, 2020 and 2019, subscriber ARPU -Sirius XM was$13.96 and$13.83 , respectively. For the six months endedJune 30, 2020 and 2019, subscriber ARPU -Sirius XM was$13.95 and$13.67 , respectively. The increase was driven by an increase in certain subscription rates and theU.S. Music Royalty Fee. SAC, Per Installation, is derived from subscriber acquisition costs and margins from the sale of radios, components and accessories (excluding connected vehicle services), divided by the number of satellite radio installations in new vehicles and shipments of aftermarket radios for the period. (See the accompanying glossary on pages 60 through 63 for more details.) For the three months endedJune 30, 2020 and 2019, SAC, per installation, was$20.14 and$22.74 , respectively. For the six months endedJune 30, 2020 and 2019, SAC, per installation, was$20.14 and$23.40 , respectively The decreases were driven by reductions to OEM hardware subsidy rates. Pandora Monthly Active Users. AtJune 30, 2020 , Pandora had approximately 59,604 monthly active users, a decrease of 5,344 monthly active users, or 8%, from the 64,948 monthly active users as ofJune 30, 2019 . The decrease in monthly active users was driven by declines in user engagement related to changes in commuting patterns, an increase in ad-supported listener churn and a decrease in the number of new users. Subscribers. AtJune 30, 2020 , Pandora had approximately 6,302 subscribers, a decrease of 655, or 9%, from the approximately 6,957 as ofJune 30, 2019 . For the three months endedJune 30, 2020 and 2019, net subscriber additions were 36 and 61, respectively. For the six months endedJune 30, 2020 and 2019, net subscriber additions were 88 and 287, respectively. The net subscriber decrease was driven by fewer trial starts. ARPU is defined as average monthly revenue per paid subscriber on our Pandora subscription services. (See the accompanying glossary on pages 60 through 63 for more details.) For the three months endedJune 30, 2020 and 2019, subscriber ARPU - Pandora was$6.70 and$6.53 , respectively. For the six months endedJune 30, 2020 and 2019, subscriber ARPU - Pandora was$6.77 and$6.61 , respectively. The increases in subscriber ARPU were primarily driven by the expiration of a lower rate T-Mobile plan and an increase in Pandora Premium plans. Ad supported listener hours are a key indicator of our Pandora business and the engagement of our Pandora listeners. We include ad supported listener hours related to Pandora's non-radio content offerings in the definition of listener hours. For the three months endedJune 30, 2020 and 2019, ad supported listener hours were 3,286 and 3,490, respectively. For the six months endedJune 30, 2020 and 2019, ad supported listener hours were 6,412 and 6,910, respectively. The decrease in ad supported listener hours was primarily driven by the decline in monthly active users, partially offset by higher hours per active user. RPM is a key indicator of our ability to monetize advertising inventory created by our listener hours on the Pandora services. Ad RPM is calculated by dividing advertising revenue by the number of thousands of listener hours of our Pandora advertising-based service. 56 -------------------------------------------------------------------------------- Table of Contents For the three months endedJune 30, 2020 and 2019, RPM was$55.23 and$80.14 , respectively. For the six months endedJune 30, 2020 and 2019, RPM was$61.23 and$71.46 , respectively. The decreases were a result of lower sell-through percentages as a result of the COVID-19 pandemic. LPM is tracked for our non-subscription, ad-supported service across all Pandora delivery platforms. The content acquisition costs included in our ad LPM calculations are based on the rates set by our license agreements with record labels, performing rights organizations and music publishers or the applicable rates set by the Copyright Royalty Board if we have not entered into a license agreement with the copyright owner of a particular sound recording. For the three months endedJune 30, 2020 and 2019, LPM was$37.16 and$37.91 , respectively. For the six months endedJune 30, 2020 and 2019, LPM was$37.12 and$37.28 , respectively. The decreases were primarily a result of lower advertising revenue from the COVID-19 pandemic impact due to lower sell-through percentages and lower CPM rates. LPU is defined as average monthly licensing costs per paid subscriber on our Pandora subscription services. LPU is a key measure of our ability to manage costs for our subscription services. For the three months endedJune 30, 2020 and 2019, LPU was$4.06 and$4.16 , respectively. For the six months endedJune 30, 2020 and 2019, LPU was$4.08 and$4.06 , respectively. The decrease for the three-month period was driven by minimum guarantees associated with our direct license agreements with major record labels in the prior year. The increase for the six-month period was due to increased publisher rates offset by minimum guarantees associated with our direct license agreements with major record labels in the prior year.Total Company Adjusted EBITDA. Adjusted EBITDA is defined as net income before interest expense, income tax expense and depreciation and amortization, adjusted for pro forma information which includes of the predecessor periods. (Pandora's results for the periodJanuary 1, 2019 throughJanuary 31, 2019 .) Adjusted EBITDA excludes the impact of other expense (income), loss on extinguishment of debt, other non-cash charges, such as certain purchase price accounting adjustments, share-based payment expense, legal settlements and reserves, and acquisition and restructuring costs (if applicable). (See the accompanying glossary on pages 60 through 63 for a reconciliation to GAAP and for more details.) For the three months endedJune 30, 2020 and 2019, adjusted EBITDA was$615 and$618 , respectively, a decrease of 0%, or$3 . For the six months endedJune 30, 2020 and 2019, adjusted EBITDA was$1,254 and$1,184 , respectively, an increase of 6%, or$70 . The increase was due to growth inSirius XM subscriber revenue from higherU.S. Music Royalty Fee as a result of a higher music royalty rate and an increase in the daily weighted average number of subscribers, lower revenue share costs, personnel-related costs and subscriber acquisition costs; partially offset by lower advertising revenue. Free Cash Flow includes cash provided by operations, net of additions to property and equipment, and restricted and other investment activity. (See the accompanying glossary on pages 60 through 63 for a reconciliation to GAAP and for more details.) For the three months endedJune 30, 2020 and 2019, free cash flow was$503 and$474 , respectively, an increase of$29 , or 6%. For the six months endedJune 30, 2020 and 2019, free cash flow was$851 and$774 , respectively, an increase of$77 , or 10%. The increases were driven by growth in operating performance as well as lower capital expenditures. We paid a one-time amount of$25 for a legal settlement during the six months endedJune 30, 2019 . 57 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Cash Flows for the six months endedJune 30, 2020 compared with the six months endedJune 30, 2019 . The following table presents a summary of our cash flow activity for the periods set forth below: For the Six Months Ended June 30, 2020 2019 2020 vs 2019 Net cash provided by operating activities$ 1,007 $ 941 $ 66 Net cash (used in) provided by investing activities (265) 209 (474) Net cash provided by (used in) financing activities 919 (989) 1,908 Net increase in cash, cash equivalents and restricted cash 1,661 161 1,500 Cash, cash equivalents and restricted cash at beginning of period 120 65 55 Cash, cash equivalents and restricted cash at end of period$ 1,781 $ 226 $ 1,555 Cash Flows Provided by Operating Activities Cash flows provided by operating activities increased by$66 to$1,007 for the six months endedJune 30, 2020 from$941 for the six months endedJune 30, 2019 . Our largest source of cash provided by operating activities is cash generated by subscription and subscription-related revenues. We also generate cash from the sale of advertising on Pandora, advertising on certain non-music channels onSirius XM and the sale of satellite radios, components and accessories. Our primary uses of cash from operating activities include revenue share and royalty payments to distributors, programming and content providers, and payments to radio manufacturers, distributors and automakers. In addition, uses of cash from operating activities include payments to vendors to service, maintain and acquire listeners and subscribers, general corporate expenditures, and compensation and related costs. We paid a one-time amount of$25 for a legal settlement during the six months endedJune 30, 2019 . Cash Flows (Used in) Provided by Investing Activities Cash flows used in investing activities in the six months endedJune 30, 2020 were primarily due to our$75 investment inSoundCloud , the acquisition of Simplecast of$28 , spending primarily for capitalized software and hardware, and to construct replacement satellites. Cash flows provided by investing activities in the six months endedJune 30, 2019 were primarily due to cash received of$313 from the Pandora Acquisition and from the sale of short-term investments of$72 , partially offset by additional spending primarily for capitalized software and hardware, and to construction replacement satellites. We spent$109 and$92 on capitalized software and hardware as well as$20 and$36 to construct replacement satellites during the six months endedJune 30, 2020 and 2019, respectively. Cash Flows Provided by (Used in) Financing Activities Cash flows provided by (used in) financing activities consists of the issuance and repayment of long-term debt, the purchase of common stock under our share repurchase program, the payment of cash dividends and taxes paid in lieu of shares issued for stock-based compensation. Proceeds from long-term debt have been used to fund our operations, construct and launch new satellites, invest in other infrastructure improvements and purchase shares of our common stock. Cash flows provided by financing activities in the six months endedJune 30, 2020 were primarily due to the issuance of$1,483 in aggregate principal amount of 4.125% Senior Notes due 2030, net of costs; partially offset by purchase and retirement of shares of our common stock under our repurchase program for$399 , the payment of cash dividends of$117 , and payment of$43 for taxes paid in lieu of shares issued for share-based compensation. Cash flows used in financing activities in the six months endedJune 30, 2019 were primarily due to the purchase and retirement for$1,474 of shares of our common stock under our repurchase program, repayment under the Credit Facility of$439 , the repurchase for$152 of Pandora's 1.75% Convertible Senior Notes due 2020, the payment of cash dividends of$113 and payment of$47 for taxes paid in lieu of shares issued for share-based compensation, partially offset by the issuance of$1,236 in aggregate principal amount ofSirius XM's 5.500% Senior Notes due 2029, net of costs. Future Liquidity and Capital Resource Requirements Based upon our current business plans, we expect to fund operating expenses, capital expenditures, including the construction of replacement satellites, working capital requirements, interest payments, taxes and scheduled maturities of our 58 -------------------------------------------------------------------------------- Table of Contents debt with existing cash, cash flow from operations and borrowings under our Credit Facility. Additionally, we used our cash balance as ofJune 30, 2020 (including net proceeds from the issuance of the 4.125% Senior Note due 2030) to redeem our 5.375% Senior Notes due 2025 and 4.625% Senior Notes due 2023 onJuly 9, 2020 . As ofJune 30, 2020 ,$0 was outstanding under our Credit Facility. As the amount available for future borrowing is reduced by$1 related to letters of credit issued for the benefit of Pandora,$1,749 was available for future borrowing under our Credit Facility. We believe that we have sufficient cash and cash equivalents, as well as debt capacity, to cover our estimated short-term and long-term funding needs, including amounts to construct, launch and insure replacement satellites, as well as fund future stock repurchases, future dividend payments and pursue strategic opportunities. Our ability to meet our debt and other obligations depends on our future operating performance and on economic, financial, competitive and other factors. We continually review our operations for opportunities to adjust the timing of expenditures to ensure that sufficient resources are maintained. We regularly evaluate our business plans and strategy. These evaluations often result in changes to our business plans and strategy, some of which may be material and significantly change our cash requirements. These changes in our business plans or strategy may include: the acquisition of unique or compelling programming; the development and introduction of new features or services; significant new or enhanced distribution arrangements; investments in infrastructure, such as satellites, equipment or radio spectrum; and acquisitions and investments, including acquisitions and investments that are not directly related to our existing business. We may from time to time purchase our outstanding debt through open market purchases, privately negotiated transactions or otherwise. Purchases or retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Capital Return Program As ofJune 30, 2020 , our board of directors had authorized for repurchase an aggregate of$14,000 of our common stock. As ofJune 30, 2020 , our cumulative repurchases sinceDecember 2012 under our stock repurchase program totaled 3,117 shares for$13,241 , and$759 remained available for additional repurchases under our existing stock repurchase program authorization. OnJuly 14, 2020 , our board of directors approved an additional$2,000 of common stock repurchases, increasing our total authorization to$16,000 since the inception of the program. Shares of common stock may be purchased from time to time on the open market and in privately negotiated transactions, including in accelerated stock repurchase transactions and transactions with Liberty Media and its affiliates. We intend to fund the additional repurchases through a combination of cash on hand, cash generated by operations and future borrowings. The size and timing of any purchases will be based on a number of factors, including price and business and market conditions. OnJuly 14, 2020 , our board of directors declared a quarterly dividend in the amount of$0.01331 per share of common stock payable onAugust 31, 2020 to stockholders of record as of the close of business onAugust 7, 2020 . Our board of directors expects to declare regular quarterly dividends, in an aggregate annual amount of$0.05324 per share of common stock. Debt Covenants The indentures governingSirius XM's senior notes and Pandora's convertible notes and the agreement governing the Sirius XM Credit Facility include restrictive covenants. As ofJune 30, 2020 , we were in compliance with such covenants. For a discussion of our "Debt Covenants," refer to Note 13 to our unaudited consolidated financial statements in Part I, Item I, of this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements We do not have any significant off-balance sheet arrangements other than those disclosed in Note 16 to our unaudited consolidated financial statements in Part I, Item I, of this Quarterly Report on Form 10-Q that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. Contractual Cash Commitments For a discussion of our "Contractual Cash Commitments," refer to Note 16 to our unaudited consolidated financial statements in Part I, Item I, of this Quarterly Report on Form 10-Q. 59 -------------------------------------------------------------------------------- Table of Contents Related Party Transactions For a discussion of "Related Party Transactions," refer to Note 12 to our unaudited consolidated financial statements in Part I, Item I, of this Quarterly Report on Form 10-Q. Critical Accounting Policies and Estimates For a discussion of our "Critical Accounting Policies and Estimates," refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . There have been no material changes to our critical accounting policies and estimates sinceDecember 31, 2019 . Glossary Monthly active users - the number of distinct registered users on the Pandora services, including subscribers, which have consumed content within the trailing 30 days to the end of the final calendar month of the period. The number of monthly active users on the Pandora services may overstate the number of unique individuals who actively use our Pandora service, as one individual may use multiple accounts. To become a registered user on the Pandora services, a person must sign-up using an email address or phone number, or access our service using a device with a unique identifier, which we use to create an account for our service. Average self-pay monthly churn - theSirius XM monthly average of self-pay deactivations for the period divided by the average number of self-pay subscribers for the period. Adjusted EBITDA - EBITDA is defined as net income before interest expense, income tax expense and depreciation and amortization. We adjust EBITDA to exclude the impact of other expense (income) as well as certain other charges discussed below. Adjusted EBITDA is a Non-GAAP financial measure that excludes or adjusts for (if applicable): (i) certain adjustments as a result of the purchase price accounting for the XM Merger and the Pandora Acquisition, (ii) predecessor net income adjusted for certain expenses, including depreciation and amortization, other income (loss), and share-based payment expense forJanuary 2019 , (iii) share-based payment expense and (iv) other significant operating expense (income) that do not relate to the on-going performance of our business. We believe adjusted EBITDA is a useful measure of the underlying trend of our operating performance, which provides useful information about our business apart from the costs associated with our capital structure and purchase price accounting. We believe investors find this Non-GAAP financial measure useful when analyzing our past operating performance with our current performance and comparing our operating performance to the performance of other communications, entertainment and media companies. We believe investors use adjusted EBITDA to estimate our current enterprise value and to make investment decisions. As a result of large capital investments in our satellite radio system, our results of operations reflect significant charges for depreciation expense. We believe the exclusion of share-based payment expense is useful as it is not directly related to the operational conditions of our business. We also believe the exclusion of the legal settlements and reserves, acquisition related costs, and loss on extinguishment of debt, to the extent they occur during the period, is useful as they are significant expenses not incurred as part of our normal operations for the period. 60 -------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA has certain limitations in that it does not take into account the impact to our statements of comprehensive income of certain expenses, including share-based payment expense and certain purchase price accounting for the XM Merger and the Pandora Acquisition. We endeavor to compensate for the limitations of the Non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the Non-GAAP measure. Investors that wish to compare and evaluate our operating results after giving effect for these costs, should refer to net income as disclosed in our unaudited consolidated statements of comprehensive income. Since adjusted EBITDA is a Non-GAAP financial performance measure, our calculation of adjusted EBITDA may be susceptible to varying calculations; may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. The reconciliation of net income to the adjusted EBITDA is calculated as follows: For the Six Months Ended For the Three Months Ended June 30, June 30, 2020 2019 2020 2019 Net income: $ 243$ 263 $ 536 $ 425 Add back items excluded from Adjusted EBITDA: Legal settlements and reserves - - (16) 25 Acquisition and restructuring costs (1) 24 7 24 83 Share-based payment expense 52 57 107 106 Depreciation and amortization 124 119 256 226 Interest expense 102 97 201 187 Loss on extinguishment of debt - - - 1 Other expense (income) (4) 3 (8) 2 Income tax expense 74 76 154 157 Purchase price accounting adjustments: Revenues 2 2 4 4 Operating expenses (2) (6) (4) (7) Pro forma adjustments (2) - - - (25) Adjusted EBITDA $ 615$ 618 $ 1,254 $ 1,184 (1) Acquisition and restructuring costs include$21 of share-based compensation expense for the six months endedJune 30, 2019 . (2) Pro forma adjustment for six months endedJune 30, 2019 includes Pandora's Net income for the six months endedJune 30, 2019 of$(44) plus Depreciation and amortization of$6 , Share-based payment expense of$11 , Acquisition and other related costs of$1 , and Interest expense of$2 , offset by Other expense (income) of$1 . 61 -------------------------------------------------------------------------------- Table of Contents Free cash flow - is derived from cash flow provided by operating activities, net of additions to property and equipment and purchases of other investments. Free cash flow is a metric that our management and board of directors use to evaluate the cash generated by our operations, net of capital expenditures and other investment activity. In a capital intensive business, with significant investments in satellites, we look at our operating cash flow, net of these investing cash outflows, to determine cash available for future subscriber acquisition and capital expenditures, to repurchase or retire debt, to acquire other companies and to evaluate our ability to return capital to stockholders. We exclude from free cash flow certain items that do not relate to the on-going performance of our business, such as cash flows related to acquisitions, strategic and short-term investments, and net loan activity with related parties and other equity investees. We believe free cash flow is an indicator of the long-term financial stability of our business. Free cash flow, which is reconciled to "Net cash provided by operating activities," is a Non-GAAP financial measure. This measure can be calculated by deducting amounts under the captions "Additions to property and equipment" and deducting or adding Restricted and other investment activity from "Net cash provided by operating activities" from the unaudited consolidated statements of cash flows. Free cash flow should be used in conjunction with other GAAP financial performance measures and may not be comparable to free cash flow measures presented by other companies. Free cash flow should be viewed as a supplemental measure rather than an alternative measure of cash flows from operating activities, as determined in accordance with GAAP. Free cash flow is limited and does not represent remaining cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt maturities. We believe free cash flow provides useful supplemental information to investors regarding our current cash flow, along with other GAAP measures (such as cash flows from operating and investing activities), to determine our financial condition, and to compare our operating performance to other communications, entertainment and media companies. Free cash flow is calculated as follows: For the Three Months Ended June For the Six Months Ended 30, June 30, 2020 2019 2020 2019 Cash Flow information Net cash provided by operating activities$ 591 $ 545 $ 1,007 $ 941 Net cash (used in) provided by investing activities$ (120) $ (75) $ (265) $ 209 Net cash used in financing activities$ 1,258 $ (317) $ 919 $ (989) Free Cash Flow Net cash provided by operating activities$ 591 $ 545 $ 1,007 $ 941 Additions to property and equipment (87) (70) (149) (160) Purchases of other investments (1) (1) (7) (7) Free cash flow$ 503 $ 474 $ 851 $ 774 ARPU - Sirius XM ARPU is derived from total earned subscriber revenue (excluding revenue associated with our connected vehicle services) and advertising revenue, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. Pandora ARPU is defined as average monthly subscriber revenue per paid subscriber on our Pandora subscription services. Subscriber acquisition cost, per installation - or SAC, per installation, is derived from subscriber acquisition costs and margins from the sale of radios and accessories (excluding connected vehicle services), divided by the number of satellite radio installations in new vehicles and shipments of aftermarket radios for the period. SAC, per installation, is calculated as follows: For the Three Months Ended June For the Six Months Ended 30, June 30, 2020 2019 2020 2019 Subscriber acquisition costs, excluding connected vehicle services$ 48 $ 104 $ 147 $ 212 Less: margin from sales of radios and accessories, excluding connected vehicle services (21) (34) (58) (68)$ 27 $ 70 $ 89 $ 144 Installations 1,320 3,078 4,403 6,155 SAC, per installation (a)$ 20.14 $ 22.74 $ 20.14 $ 23.40
(a)Amounts may not recalculate due to rounding.
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Table of Contents Ad supported listener hours - is based on the total bytes served over our Pandora advertising supported platforms for each track that is requested and served from our Pandora servers, as measured by our internal analytics systems, whether or not a listener listens to the entire track. For non-music content such as podcasts, episodes are divided into approximately track-length parts, which are treated as tracks. To the extent that third-party measurements of advertising hours are not calculated using a similar server-based approach, the third-party measurements may differ from our measurements. RPM - is calculated by dividing advertising revenue, excludingAdsWizz and other off-platform revenue, by the number of thousands of listener hours on our Pandora advertising-based service. LPM - is calculated by dividing advertising licensing costs by the number of thousands of listener hours on our Pandora advertising-based service. LPU - is calculated by dividing subscriber licensing costs by the number of paid subscribers on our Pandora subscription services.
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