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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Sirius XM Holdings Inc.    SIRI

SIRIUS XM HOLDINGS INC.

(SIRI)
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SIRIUS XM : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

10/22/2020 | 11:26am EST
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 ended
December 31, 2019.
This Quarterly Report on Form 10-Q presents information for Sirius 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 to
Sirius XM Holdings Inc. and its subsidiaries. "Sirius XM" refers to our wholly
owned subsidiary Sirius XM Radio Inc. and its subsidiaries. "Pandora" refers to
Sirius XM's wholly owned subsidiary Pandora Media, LLC (the successor to Pandora
Media, Inc.) and its subsidiaries. Holdings has no operations independent of
Sirius XM and Pandora.

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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
ended December 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 ended March 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 ended December 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 our Sirius 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 our Sirius 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
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•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, has had, and is continuing to have, a
widespread and broad reaching effect on the economy. Vehicle sales have declined
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. Similarly, although media spending by businesses is
recovering, spending continues to be down compared to prior periods. While
certain regions of the United States are in various phases of reopening, it
remains unclear what a full economic recovery will look like as the 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 our Sirius XM and Pandora businesses. The COVID-19 pandemic did not have a
material effect on our revenues and expenses for the first quarter ended March
31, 2020, with the effects on our business first emerging in the quarter ended
June 30, 2020. Refer to the discussion below under "Business Performance Update"
for an update on the impact on our business during the quarter ended September
30, 2020.

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 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. We expect to
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continue repurchasing our common stock. These repurchases are 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 September 30, 2020, we had approximately $33 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 in 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.

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.
Against the backdrop of the COVID-19 pandemic we are seeing certain positive
trends in certain key indicators that support our business. For example, in the
quarter ended September 30, 2020, new vehicle sales recovered compared to the
prior three and six month periods. Similarly, we have seen recent increases in
advertising orders, although the outlook for advertising revenue remains
uncertain and we cannot reasonably predict when advertising activity will return
to pre-pandemic levels. For more information regarding the trends in our
businesses, including the trends in revenues and expenses, see the information
contained under "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contained in this Quarterly Report on Form 10-Q.

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.

We have undertaken and are continually in the process of making a diverse range
of operational adjustments in response to the effects of COVID-19 pandemic. From
a customer care and support perspective, we have adjusted our operations with
call center vendors. 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.

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 ended March 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
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many of the other "Risk factors" included in our Annual Report on Form 10-K for
the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for
the three months ended March 31, 2020.

Executive Summary We operate two complementary audio entertainment businesses - our Sirius XM business and our Pandora business.


Sirius XM
Our Sirius XM business features music, sports, entertainment, comedy, talk,
news, traffic and weather channels, as well as infotainment services, in the
United States on a subscription fee basis. The Sirius 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. Our Sirius 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 our Sirius 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 of September 30, 2020, our Sirius XM business had
approximately 34.4 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.
In May 2020, we terminated the Automatic 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 nine months ended September 30, 2020, we recorded $24 of restructuring
expenses in our unaudited consolidated statements of comprehensive income
related to this termination of the service. We did not record any restructuring
expenses during the three months ended September 30, 2020.
Sirius XM also holds a 70% equity interest and 33% voting interest in Sirius XM
Canada Holdings Inc. ("Sirius XM Canada"). Sirius XM Canada's subscribers are
not included in our subscriber count or subscriber-based operating metrics.

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 select Sirius 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 of September 30, 2020, Pandora had
approximately 6.4 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 for SoundCloud.
Through this arrangement Pandora offers advertisers the ability to execute
campaigns in the US across the Pandora and SoundCloud listening platforms. In
addition, through AdsWizz, 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 of
September 30, 2020, our Pandora business had approximately 58.6 million monthly
active users.
On June 16, 2020, Sirius XM acquired Simplecast for $28 in cash. Simplecast is a
podcast management and analytics platform. 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.
In February 2020, Sirius XM completed a $75 investment in SoundCloud. 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,
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Table of Contents promote, share and create audio entertainment. The minority investment complements the existing ad sales relationship between SoundCloud and Pandora.


Liberty Media
As of September 30, 2020, Liberty Media beneficially owned, directly and
indirectly, approximately 74% 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 nine months
ended September 30, 2020 compared with the three and nine months ended
September 30, 2019. The discussion of our results of operations for the three
and nine months ended September 30, 2020 and the three months ended
September 30, 2019 includes the financial results of Pandora for the entire
period, while the results of operations for the nine months ended September 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 nine
months ended September 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.
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                                                                                                                                          2020 vs 2019 Change
                                For the Three Months Ended                          For the Nine Months Ended
                                       September 30,                                      September 30,                                                       Three Months                         Nine Months
                                   2020              2019             2020                2019                      Amount              %                 Amount                %
Revenue
Sirius XM:
Subscriber revenue             $   1,462$ 1,424$ 4,372$        4,196$     38               3  %       $      176                   4  %
Advertising revenue                   39               51              108                     149                     (12)            (24) %              (41)                (28) %
Equipment revenue                     47               45              113                     127                       2               4  %              (14)                (11) %
Other revenue                         39               44              115                     121                      (5)            (11) %               (6)                 (5) %
Total Sirius XM revenue            1,587            1,564            4,708                   4,593                      23               1  %              115                   3  %

Pandora:

Subscriber revenue                   132              132              385                     355                       -               -  %               30                   8  %
Advertising revenue                  306              315              758                     784                      (9)             (3) %              (26)                 (3) %
Total Pandora revenue                438              447            1,143                   1,139                      (9)             (2) %                4                   -  %
Total consolidated revenue         2,025            2,011            5,851                   5,732                      14               1  %              119                   2  %
Cost of services
Sirius XM:
Revenue share and royalties          369              358            1,100                   1,065                      11               3  %               35                   3  %
Programming and content              114              113              330                     328                       1               1  %                2                   1  %
Customer service and billing          99               99              291                     296                       -               -  %               (5)                 (2) %
Transmission                          33               29               90                      79                       4              14  %               11                  14  %
Cost of equipment                      5                8               13                      20                      (3)            (38) %               (7)                (35) %
Total Sirius XM cost of
services                             620              607            1,824                   1,788                      13               2  %               36                   2  %
Pandora:
Revenue share and royalties          233              234              659                     619                      (1)              -  %               40                   6  %
Programming and content                9                3               21                      10                       6             200  %               11                 110  %
Customer service and billing          20               20               68                      56                       -               -  %               12                  21  %
Transmission                          13               17               39                      38                      (4)            (24) %                1                   3  %
Total Pandora cost of services       275              274              787                     723                       1               -  %               64                   9  %
Total consolidated cost of
services                             895              881            2,611                   2,511                      14               2  %              100                   4  %
Subscriber acquisition costs         110              101              257                     313                       9               9  %              (56)                (18) %
Sales and marketing                  222              233              664                     648                     (11)             (5) %               16                   2  %
Engineering, design and
development                           64               78              196                     206                     (14)            (18) %              (10)                 (5) %
General and administrative           131              124              357                     379                       7               6  %              (22)                 (6) %
Depreciation and amortization        125              118              381                     344                       7               6  %               37                  11  %
Acquisition and restructuring
costs                                  -                -               24                      83                       -                 nm              (59)                (71) %
Total operating expenses           1,547            1,535            4,490                   4,484                      12               1  %                6                   -  %
Income from operations               478              476            1,361                   1,248                       2               -  %              113                   9  %
Other (expense) income:
Interest expense                     (96)            (104)            (297)                   (291)                      8               8  %               (6)                 (2) %
Loss on extinguishment of debt       (40)             (56)             (40)                    (57)                     16              29  %               17                  30  %
Other income (expense)                 2                -               10                      (2)                      2                 nm               12                 600  %
Total other (expense) income        (134)            (160)            (327)                   (350)                     26              16  %               23                   7  %
Income before income taxes           344              316            1,034                     898                      28               9  %              136                  15  %
Income tax expense                   (72)             (70)            (226)                   (227)                     (2)             (3) %                1                   -  %
Net income                     $     272$   246$   808          $          671                $     26              11  %       $      137                  20  %


nm - not meaningful

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Sirius XM Revenue
Refer to page 44 for our discussion on Sirius XM revenue.
Pandora Revenue
The nine months ended September 30, 2020 includes Pandora's revenue for the
entire period while the nine months ended September 30, 2019 includes Pandora's
revenue from the acquisition date, February 1, 2019. Refer to page 44 for our
discussion on Pandora revenue.
Sirius XM Cost of Services
Refer to page 45 for our discussion on Sirius XM cost of services.
Pandora Cost of Services
The nine months ended September 30, 2020 includes Pandora's cost of services for
the entire period while the nine months ended September 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 ended September 30, 2020 and 2019, subscriber acquisition
costs were $110 and $101, respectively, an increase of 9%, or $9, and increased
as a percentage of total revenue. For the nine months ended September 30, 2020
and 2019, subscriber acquisition costs were $257 and $313, respectively, a
decrease of 18% or $56, and decreased as a percentage of total revenue. The
increase for the three month period was driven by higher OEM installations as
automakers pushed to produce pre-COVID-19 volumes, partially offset by lower
hardware subsidies as certain subsidy rates decreased. The decrease for the nine
month period was 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.
We expect subscriber acquisition costs to fluctuate with OEM installations;
however, the subsidized chipsets cost is
expected to decline as we transition to a new generation of chipsets. We intend
to continue to offer subsidies and other
incentives to induce OEMs to include our technology in their vehicles.
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, social media, television and
digital performance media.
For the three months ended September 30, 2020 and 2019, sales and marketing
expenses were $222 and $233, respectively, a decrease of 5%, or $11, and
decreased as a percentage of total revenue. For the nine months ended
September 30, 2020 and 2019, sales and marketing expenses were $664 and $648,
respectively, an increase of 2% or $16, and increased as a percentage of total
revenue. The decrease for the three month period was primarily due to lower
travel and entertainment and personnel-related costs. The increase for the nine
month period was primarily due to the inclusion of Pandora for a full nine
months in 2020, and additional subscriber communications, streaming services and
products, retention programs and acquisition campaigns; partially offset by
lower travel and entertainment costs.
We anticipate that sales and marketing expenses will increase as we expand
programs to retain our existing subscribers,
win back former subscribers, and attract new subscribers and listeners.
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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 incorporate Sirius
XM radios into new vehicles manufactured by automakers.
For the three months ended September 30, 2020 and 2019, engineering, design and
development expenses were $64 and $78, respectively, a decrease of 18%, or $14,
and decreased as a percentage of total revenue. For the nine months ended
September 30, 2020 and 2019, engineering, design and development expenses were
$196 and $206, respectively, a decrease of 5% or $10, and decreased as a
percentage of total revenue. The decreases were driven by lower
personnel-related costs. The decrease for the nine-month period was partially
offset by the inclusion of Pandora for a full nine months in 2020.
We expect engineering, design and development expenses to increase in future
periods as we continue to develop our infrastructure, products and services.
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 ended September 30, 2020 and 2019, general and
administrative expenses were $131 and $124, respectively, an increase of 6%, or
$7, and increased as a percentage of total revenue. For the nine months ended
September 30, 2020 and 2019, general and administrative expenses were $357 and
$379, respectively, a decrease of 6% or $22, and decreased as a percentage of
total revenue. The increase for the three month period was primarily driven by
higher personnel-related and legal costs. The decrease for the nine month period
was driven by a one-time $25 legal settlement reserve associated with
Do-Not-Call litigation recorded in the first quarter of 2019, lower
personnel-related costs, the closure of a sales and use tax audit in the second
quarter of 2020, and lower travel and entertainment costs, partially offset by
the inclusion of Pandora for a full nine months in 2020 and higher legal costs.
We expect our general and administrative expenses to increase to support the
growth of our business.
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 ended September 30, 2020 and 2019, depreciation and
amortization expense was $125 and $118, respectively, an increase of 6%, or $7.
For the nine months ended September 30, 2020 and 2019, depreciation and
amortization expense was $381 and $344, respectively, an increase of 11% or $37.
The increase was driven by additional assets placed in-service. The increase for
the nine month period was also impacted by the inclusion of Pandora for a full
nine months in 2020.
Acquisition and Restructuring Costs represents expenses associated with the
acquisitions of Pandora and Simplecast and restructuring costs.
For the three months ended September 30, 2020 and 2019, there were no
acquisition and restructuring costs. For the nine months ended September 30,
2020 and 2019, acquisition and restructuring costs were $24 and $83,
respectively. The acquisition and restructuring costs for the nine months ended
September 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 nine months ended September 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 ended September 30, 2020 and 2019, interest expense was $96
and $104, respectively. For the nine months ended September 30, 2020 and 2019,
interest expense was $297 and $291, respectively. The decrease for the three
month period was primarily driven by lower average debt and interest rates. The
increase for the nine month period was primarily driven by higher average debt
due to the issuances of Sirius 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 of Sirius XM's 6.00% Senior Notes due 2024, redemption of the Pandora
convertible notes in 2019, and lower interest rates.
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Loss on Extinguishment of Debt includes losses incurred as a result of the
redemption of certain debt.
We recorded a $40 loss on extinguishment of debt during the three and nine
months ended September 30, 2020 and losses on extinguishment of debt of $56 and
$57 during the three and nine months ended September 30, 2019, respectively The
loss on extinguishment of debt recorded in 2020 was due to the redemption of
$500 principal amount of Sirius XM's 4.625% Senior Notes due 2023 and $1,000
principal amount of Sirius XM's 5.375% Senior Notes due 2025. The loss recorded
in 2019 was due to the repurchase of $151 principal amount of Pandora's 1.75%
Convertible Senior Notes due 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 in
Sirius XM Canada and SoundCloud, and transaction costs related to non-operating
investments.
For the three months ended September 30, 2020 and 2019, other income (expense)
was $2 and $0, respectively. For the nine months ended September 30, 2020 and
2019, other income (expense) was $10 and $(2), respectively. During the nine
months ended September 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 ended September 30, 2020 and 2019, income tax expense was
$72 and $70, respectively, and $226 and $227 for the nine months ended
September 30, 2020 and 2019, respectively.
Our effective tax rate for the three months ended September 30, 2020 and 2019
was 20.9% and 22.2%, respectively. Our effective tax rate for the nine months
ended September 30, 2020 and 2019 was 21.9% and 25.3%, respectively. The
effective tax rates for the three and nine months ended September 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 ended September 30, 2019 was primarily impacted by the
recognition of excess tax benefits related to share-based compensation. The
effective tax rate for the nine months ended September 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 ending December 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 nine
months ended September 30, 2020 compared with the three and nine months ended
September 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 on
January 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.
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                                                                                                                                                     2020 vs 2019 Change
                                    For the Three Months Ended                                 For the Nine Months Ended
                                          September 30,                                              September 30,                                                       Three Months                         Nine Months
                                    2020                2019                  2020                   2019                      Amount             %                 Amount                 %
Revenue                         (Pro Forma)          (Pro Forma)           (Pro Forma)            (Pro Forma)
Sirius XM:
Subscriber revenue              $   1,462$      1,424$      4,372$        4,196$     38              3  %       $      176                    4  %
Advertising revenue                    39                    51                   108                     149                     (12)           (24) %              (41)                 (28) %
Equipment revenue                      47                    45                   113                     127                       2              4  %              (14)                 (11) %
Other revenue                          41                    46                   121                     127                      (5)           (11) %               (6)                  (5) %
Total Sirius XM revenue             1,589                 1,566                 4,714                   4,599                      23              1  %              115                    3  %
Pandora:
Subscriber revenue                    132                   132                   385                     401                       -              -  %              (16)                  (4) %
Advertising revenue                   306                   315                   758                     852                      (9)            (3) %              (94)                 (11) %
Total Pandora revenue                 438                   447                 1,143                   1,253                      (9)            (2) %             (110)                  (9) %
Total consolidated revenue          2,027                 2,013                 5,857                   5,852                      14              1  %                5                    -  %
Cost of services
Sirius XM:
Revenue share and royalties           369                   358                 1,100                   1,065                      11              3  %               35                    3  %
Programming and content               114                   113                   330                     328                       1              1  %                2                    1  %
Customer service and billing           99                    99                   291                     296                       -              -  %               (5)                  (2) %
Transmission                           33                    29                    90                      79                       4             14  %               11                   14  %
Cost of equipment                       5                     8                    13                      20                      (3)           (38) %               (7)                 (35) %
Total Sirius XM cost of
services                              620                   607                 1,824                   1,788                      13              2  %               36                    2  %
Pandora:
Revenue share and royalties           235                   238                   665                     701                      (3)            (1) %              (36)                  (5) %
Programming and content                 9                     3                    21                      10                       6            200  %               11                  110  %
Customer service and billing           20                    20                    68                      64                       -              -  %                4                    6  %
Transmission                           13                    17                    39                      43                      (4)           (24) %               (4)                  (9) %
Total Pandora cost of services        277                   278                   793                     818                      (1)             -  %              (25)                  (3) %
Total consolidated cost of
services                              897                   885                 2,617                   2,606                      12              1  %               11                    -  %
Subscriber acquisition costs          110                   101                   257                     313                       9              9  %              (56)                 (18) %
Sales and marketing                   222                   233                   664                     684                     (11)            (5) %              (20)                  (3) %
Engineering, design and
development                            64                    78                   196                     220                     (14)           (18) %              (24)                 (11) %
General and administrative            131                   124                   357                     395                       7              6  %              (38)                 (10) %
Depreciation and amortization         125                   118                   381                     359                       7              6  %               22                    6  %
Acquisition and restructuring
costs                                   -                     -                    24                       -                       -                nm               24                      nm
Total operating expenses            1,549                 1,539                 4,496                   4,577                      10              1  %              (81)                  (2) %
Income from operations                478                   474                 1,361                   1,275                       4              1  %               86                    7  %
Other (expense) income:
Interest expense                      (96)                 (104)                 (297)                   (293)                      8              8  %               (4)                  (1) %
Loss on extinguishment of debt        (40)                  (56)                  (40)                    (57)                     16             29  %               17                   30  %
Other income (expense)                  2                     -                    10                      (1)                      2                nm               11                 1100  %
Total other (expense) income         (134)                 (160)                 (327)                   (351)                     26             16  %               24                    7  %
Income before income taxes            344                   314                 1,034                     924                      30             10  %              110                   12  %
Income tax expense                    (72)                  (69)                 (226)                   (234)                     (3)            (4) %                8                    3  %
Net income                      $     272$        245$        808          $          690                $     27             11  %       $      118                   17  %

Adjusted EBITDA                 $     661$        657$      1,915$        1,841$      4              1  %       $       74                    4  %


nm - not meaningful

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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 ended September 30, 2020 and 2019, subscriber revenue was
$1,462 and $1,424, respectively, an increase of 3%, or $38. For the nine months
ended September 30, 2020 and 2019, subscriber revenue was $4,372 and $4,196,
respectively, an increase of 4% or $176. The increases were primarily driven by
higher self-pay revenue as a result of increases in certain subscription plans
and higher U.S. Music Royalty Fees due to a higher music royalty rate, partially
offset by lower paid promotional revenue.
We expect subscriber revenues to increase based on the growth of our subscriber
base, increases in the average price charged and the sale of additional services
to subscribers.
Sirius XM Advertising Revenue includes the sale of advertising on Sirius XM's
non-music channels.
For the three months ended September 30, 2020 and 2019, advertising revenue was
$39 and $51, respectively, a decrease of 24%, or $12. For the nine months ended
September 30, 2020 and 2019, advertising revenue was $108 and $149,
respectively, a decrease of 28% or $41. The decreases were due to lower
advertising 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.
We expect our Sirius XM advertising revenue to grow as we continue our recovery
to pre-COVID-19 levels.
Sirius XM Equipment Revenue includes revenue and royalties from the sale of
satellite radios, components and accessories.
For the three months ended September 30, 2020 and 2019, equipment revenue was
$47 and $45, respectively, an increase of 4% or $2. For the nine months ended
September 30, 2020 and 2019, equipment revenue was $113 and $127, respectively,
a decrease of 11% or $14. The increase for the three month period was driven by
higher royalty revenue as new vehicle production increased as automakers pushed
to get back to pre-COVID-19 levels. The decrease for the nine month period was
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.
We expect equipment revenue to increase as royalty revenue associated with
certain new chipsets increases.
Sirius XM Other Revenue includes service and advisory revenue from our Sirius XM
Canada, our connected vehicle services, and ancillary revenues.
For the three months ended September 30, 2020 and 2019, other revenue was $41
and $46, respectively, a decrease of 11%, or $5. For the nine months ended
September 30, 2020 and 2019, other revenue was $121 and $127, respectively, a
decrease of 5% or $6. The decreases were primarily driven by lower revenue
generated by our connected vehicle services.
We expect other revenue to remain relatively flat.
Pandora Revenue
Pandora Subscriber Revenue includes fees charged for Pandora Plus and Pandora
Premium subscriptions.
For the three months ended September 30, 2020 and 2019, Pandora subscriber
revenue was $132. For the nine months ended September 30, 2020 and 2019, Pandora
subscriber revenue was $385 and $401, respectively, a decrease of 4% or $16. For
the three month period, higher revenue from growth in Pandora Premium plans was
offset by a decrease due to the expiration in 2019 of the one-year promotional
subscriptions generated through an expired agreement with T-Mobile. The decrease
for the nine month period was primarily due to the expiration of the one-year
promotional subscriptions generated through an expired agreement with T-Mobile.
We expect Pandora subscriber revenues to increase with growth of our Pandora
subscriber base.
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Pandora Advertising Revenue is generated primarily from audio, display and video
advertising from on-platform and off-platform advertising.
For the three months ended September 30, 2020 and 2019, Pandora advertising
revenue was $306 and $315, respectively, a decrease of 3%, or $9. For the nine
months ended September 30, 2020 and 2019, Pandora advertising revenue was $758
and $852, respectively, a decrease of 11% or $94. The decreases were primarily
due to lower advertising as a result of the impact of the COVID-19 pandemic.
We expect our advertising revenue to increase due to our off-platform
advertising opportunities and as we continue to recover to pre-COVID-19 levels.
Total Consolidated Revenue
Total Consolidated Revenue for the three months ended September 30, 2020 and
2019, was $2,027 and $2,013, respectively, an increase of 1%, or $14. Total
Consolidated Revenue for the nine months ended September 30, 2020 and 2019, was
$5,857 and $5,852, respectively, an increase of $5.
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 ended September 30, 2020 and 2019, revenue share and
royalties were $369 and $358, respectively, an increase of 3%, or $11, and
increased as a percentage of total Sirius XM revenue. For the nine months ended
September 30, 2020 and 2019, revenue share and royalties were $1,100 and $1,065,
respectively, an increase of 3%, or $35, and increased as a percentage of total
Sirius XM revenue. The increases were driven by overall greater revenues subject
to music royalties and revenue share.
We expect our Sirius XM revenue share and royalty costs to increase as our
revenues grow.
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 ended September 30, 2020 and 2019, programming and content
expenses were $114 and $113, respectively, an increase of 1%, or $1, and
decreased as a percentage of total Sirius XM revenue. For the nine months ended
September 30, 2020 and 2019, programming and content expenses were $330 and
$328, respectively, a slight increase of $2, but decreased as a percentage of
total Sirius XM revenue. The increase for the three month period was driven by
higher content licensing costs. The increase for the nine 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.
We expect our Sirius XM programming and content expenses to increase as we offer
additional programming and renew
or replace expiring agreements.
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 ended September 30, 2020 and 2019, customer service and
billing expenses were $99. For the nine months ended September 30, 2020 and
2019, customer service and billing expenses were $291 and $296, respectively, a
decrease of 2%, or $5, and decreased as a percentage of total Sirius XM revenue.
The decrease for the nine-month period was driven by reduced staffing resulting
from stay at home orders issued in countries in which our vendors operate call
centers.
We expect our Sirius XM customer service and billing expenses to increase as our
subscriber base grows.
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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 ended September 30, 2020 and 2019, transmission expenses
were $33 and $29, respectively, an increase of 14%, or $4, and increased as a
percentage of total Sirius XM revenue. For the nine months ended September 30,
2020 and 2019, transmission expenses were $90 and $79, respectively, an increase
of 14%, or $11, and increased as a percentage of total Sirius XM revenue. The
increases were primarily driven by higher cloud hosting and wireless costs
associated with our 360L platform and our streaming and connected vehicle
services.
We expect our Sirius XM transmission expenses to increase as costs associated
with our 360L platform and investments in internet streaming grow.
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 ended September 30, 2020 and 2019, cost of equipment was $5
and $8, respectively, a decrease of 38%, or $3, and decreased as a percentage of
equipment revenue. For the nine months ended September 30, 2020 and 2019, cost
of equipment was $13 and $20, respectively, a decrease of 35%, or $7, and
decreased as a percentage of equipment revenue. The decreases were primarily due
to lower direct sales to consumers and lower inventory reserves.
We expect our Sirius XM cost of equipment to fluctuate with the sales of our
satellite radios.
Pandora Cost of Services
Pandora Cost of Services includes revenue share and royalties, programming and
content, customer service and billing, and transmission expenses.
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 ended September 30, 2020 and 2019, revenue share and
royalties were $235 and $238, respectively, a decrease of 1%, or $3, but
increased as a percentage of total Pandora revenue. For the nine months ended
September 30, 2020 and 2019, revenue share and royalties were $665 and $701,
respectively, a decrease of 5%, or $36, but increased as a percentage of total
Pandora revenue. The decrease for the three month period was primarily due to
lower listening hours. The decrease for the nine 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, and lower costs resulting from
the presence of minimum guarantees associated with direct license agreements
with major record labels which ended in 2019.
We expect our Pandora revenue share to increase as off-platform revenue
increases and our royalty costs to increase due to higher music royalty rates.
Pandora Programming and Content includes costs to produce live listener events
and promote content.
For the three months ended September 30, 2020 and 2019, programming and content
expenses were $9 and $3, respectively, an increase of 200%, or $6, and increased
as a percentage of total Pandora revenue. For the nine months ended
September 30, 2020 and 2019, programming and content expenses were $21 and $10,
respectively, an increase of 110%, or $11, and increased as a percentage of
total Pandora revenue. The increases were primarily attributable to higher
production costs and personnel-related costs.
We expect our Pandora programming and content costs to increase as we offer
additional programming and continue to
produce live listener events and promotions.
Pandora Customer Service and Billing includes transaction fees on subscription
purchases through mobile app stores, and bad debt expense.
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For the three months ended September 30, 2020 and 2019, customer service and
billing expenses were $20, remaining relatively flat, but increased as a
percentage of total Pandora revenue. For the nine months ended September 30,
2020 and 2019, customer service and billing expenses were $68 and $64,
respectively, an increase of 6%, or $4, and increased as a percentage of total
Pandora revenue. The increase was primarily driven by higher bad debt expense,
partially offset by lower transaction costs.
We expect our Pandora customer service and billing costs to increase as our
subscriber base grows.
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 ended September 30, 2020 and 2019, transmission expenses
were $13 and $17, respectively, a decrease of 24%, or $4, and decreased as a
percentage of total Pandora revenue. For the nine months ended September 30,
2020 and 2019, transmission expenses were $39 and $43, respectively, a decrease
of 9%, or $4, and decreased as a percentage of total Pandora revenue. The
decreases were driven by lower streaming costs driven by lower listener hours.
We expect our Pandora transmission costs to fluctuate with changes in listener
hours.
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 ended September 30, 2020 and 2019, subscriber acquisition
costs were $110 and $101, respectively, an increase of 9%, or $9, and increased
as a percentage of total revenue. For the nine months ended September 30, 2020
and 2019, subscriber acquisition costs were $257 and $313, respectively, a
decrease of 18%, or $56, and decreased as a percentage of total revenue. The
increase for the three month period was driven by higher OEM installations as
automakers pushed to regain pre-COVID-19 volumes, partially offset by lower
hardware subsidies as certain subsidy rates decreased. The decrease for the nine
month period was 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.
We expect subscriber acquisition costs to fluctuate with OEM installations;
however, the subsidized chipsets cost is
expected to decline as we transition to a new generation of chipsets. We intend
to continue to offer subsidies and other
incentives to induce OEMs to include our technology in their vehicles.
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, social media, television and
digital performance media.
For the three months ended September 30, 2020 and 2019, sales and marketing
expenses were $222 and $233, respectively, a decrease of 5%, or $11, and
decreased as a percentage of total revenue. For the nine months ended
September 30, 2020 and 2019, sales and marketing expenses were $664 and $684,
respectively, a decrease of 3%, or $20, and decreased as a percentage of total
revenue. The decreases were primarily due to lower personnel-related costs and
lower travel and entertainment costs, partially offset by additional subscriber
communications and acquisition campaigns.
We anticipate that sales and marketing expenses will increase as we expand
programs to retain our existing subscribers,
win back former subscribers, and attract new subscribers and listeners.
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.
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For the three months ended September 30, 2020 and 2019, engineering, design and
development expenses were $64 and $78, respectively, a decrease of 18%, or $14,
and decreased as a percentage of total revenue. For the nine months ended
September 30, 2020 and 2019, engineering, design and development expenses were
$196 and $220, respectively, a decrease of 11%, or $24, and decreased as a
percentage of total revenue. The decreases were driven by lower
personnel-related costs.
We expect engineering, design and development expenses to increase in future
periods as we continue to develop our
infrastructure, products and services.
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 ended September 30, 2020 and 2019, general and
administrative expenses were $131 and $124, respectively, an increase of 6%, or
$7, and increased as a percentage of total revenue. For the nine months ended
September 30, 2020 and 2019, general and administrative expenses were $357 and
$395, respectively, a decrease of 10%, or $38, and decreased as a percentage of
total revenue. The increase for the three month period was primarily driven by
higher personnel-related costs. The decrease for the nine 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-related costs, and the closure of a sales and use tax audit in the
second quarter of 2020, partially offset by higher legal costs.
We expect our general and administrative expenses to increase to support the
growth of our business.
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 ended September 30, 2020 and 2019, depreciation and
amortization expense was $125 and $118, respectively, an increase of 6%, or $7.
For the nine months ended September 30, 2020 and 2019, depreciation and
amortization expense was $381 and $359, respectively, an increase of 6%, or $22.
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 three months ended September 30, 2020, there were no acquisition and
restructuring costs. For the nine months ended September 30, 2020, acquisition
and restructuring costs were $24. The acquisition and restructuring costs for
the nine months ended September 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 nine months ended September 30, 2019.
Other (Expense) Income
Interest Expense includes interest on outstanding debt.
For the three months ended September 30, 2020 and 2019, interest expense was $96
and $104, respectively, a decrease of 8%, or $8. For the nine months ended
September 30, 2020 and 2019, interest expense was $297 and $293, respectively,
an increase of 1%, or $4. The decrease for the three month period was primarily
driven by lower average debt and lower average interest rates. The increase for
the nine month period was 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 $40 loss on extinguishment of debt during the three and nine
months ended September 30, 2020 and losses on extinguishment of debt of $56 and
$57 loss during the three and nine months ended September 30, 2019,
respectively. The loss on extinguishment of debt recorded in 2020 was due to the
redemption of $500 principal amount of Sirius XM's 4.625% Senior Notes due 2023
and $1,000 principal amount of Sirius XM's 5.375% Senior Notes due 2025. The
loss on extinguishment of debt recorded in 2019 was due to the repurchase of
$151 principal amount of Pandora's 1.75% Convertible Senior Notes due 2020.
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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 in
Sirius XM Canada and SoundCloud, and transaction costs related to non-operating
investments.
For the three months ended September 30, 2020 and 2019, other income (expense)
was $2 and $0, respectively. For the nine months ended September 30, 2020 and
2019, other income (expense) was $10 and $(1), respectively. During the nine
months ended September 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 ended September 30, 2020 and 2019, income tax expense was
$72 and $69, respectively, and $226 and $234 for the nine months ended
September 30, 2020 and 2019, respectively.
Our effective tax rate for the three months ended September 30, 2020 and 2019
was 20.9% and 22.0%, respectively. Our effective tax rate for the nine months
ended September 30, 2020 and 2019 was 21.9% and 25.3%, respectively. The
effective tax rates for the three and nine months ended September 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 ended September 30, 2019 was primarily impacted by the
recognition of excess tax benefits related to share-based compensation. The
effective tax rate for the nine months ended September 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 ending December 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 nine months ended September 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 on January 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.
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for the Three Months Ended September 30, 2020

                                                                  Predecessor            Purchase Price
                                                                   Financial               Accounting
                                             As Reported          Information             Adjustments             Ref           Pro Forma
Revenue
Sirius XM:
Subscriber revenue                           $   1,462          $          -          $               -                       $    1,462
Advertising revenue                                 39                     -                          -                               39
Equipment revenue                                   47                     -                          -                               47
Other revenue                                       39                     -                          2          (a)                  41
Total Sirius XM revenue                          1,587                     -                          2                            1,589
Pandora:
Subscriber revenue                                 132                     -                          -                              132
Advertising revenue                                306                     -                          -                              306
Total Pandora revenue                              438                     -                          -                              438
Total consolidated revenue                       2,025                     -                          2                            2,027
Cost of services
Sirius XM:
Revenue share and royalties                        369                     -                          -                              369
Programming and content                            114                     -                          -                              114
Customer service and billing                        99                     -                          -                               99
Transmission                                        33                     -                          -                               33
Cost of equipment                                    5                     -                          -                                5
Total Sirius XM cost of services                   620                     -                          -                              620
Pandora:
Revenue share and royalties                        233                     -                          2          (b)                 235
Programming and content                              9                     -                          -                                9
Customer service and billing                        20                     -                          -                               20
Transmission                                        13                     -                          -                               13
Total Pandora cost of services                     275                     -                          2                              277
Total consolidated cost of services                895                     -                          2                              897
Subscriber acquisition costs                       110                     -                          -                              110
Sales and marketing                                222                     -                          -                              222
Engineering, design and development                 64                     -                          -                               64
General and administrative                         131                     -                          -                              131
Depreciation and amortization                      125                     -                          -                              125
Acquisition and restructuring costs                  -                     -                          -                                -
Total operating expenses                         1,547                     -                          2                            1,549
Income from operations                             478                     -                          -                              478
Other (expense) income:
Interest expense                                   (96)                    -                          -                              (96)
Loss on extinguishment of debt                     (40)                    -                          -                              (40)
Other income (expense)                               2                     -                          -                                2
Total other (expense) income                      (134)                    -                          -                             (134)
Income before income taxes                         344                     -                          -                              344
Income tax expense                                 (72)                    -                          -                              (72)
Net income                                   $     272          $          -          $               -                       $      272


(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.
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                                                               Unaudited 

for the Three Months Ended September 30, 2019

                                                                  Predecessor           Purchase Price
                                                                   Financial              Accounting
                                             As Reported          Information            Adjustments            Ref           Pro Forma
Revenue
Sirius XM:
Subscriber revenue                           $   1,424          $          -          $             -                       $    1,424
Advertising revenue                                 51                     -                        -                               51
Equipment revenue                                   45                     -                        -                               45
Other revenue                                       44                     -                        2          (c)                  46
Total Sirius XM revenue                          1,564                     -                        2                            1,566
Pandora:
Subscriber revenue                                 132                     -                        -                              132
Advertising revenue                                315                     -                        -                              315
Total Pandora revenue                              447                     -                        -                              447
Total consolidated revenue                       2,011                     -                        2                            2,013
Cost of services
Sirius XM:
Revenue share and royalties                        358                     -                        -                              358
Programming and content                            113                     -                        -                              113
Customer service and billing                        99                     -                        -                               99
Transmission                                        29                     -                        -                               29
Cost of equipment                                    8                     -                        -                                8
Total Sirius XM cost of services                   607                     -                        -                              607
Pandora:
Revenue share and royalties                        234                     -                        4          (d)                 238
Programming and content                              3                     -                        -                                3
Customer service and billing                        20                     -                        -                               20
Transmission                                        17                     -                        -                               17
Total Pandora cost of services                     274                     -                        4                              278
Total consolidated cost of services                881                     -                        4                              885
Subscriber acquisition costs                       101                     -                        -                              101
Sales and marketing                                233                     -                        -                              233
Engineering, design and development                 78                     -                        -                               78
General and administrative                         124                     -                        -                              124
Depreciation and amortization                      118                     -                        -                              118
Acquisition and restructuring costs                  -                     -                        -                                -
Total operating expenses                         1,535                     -                        4                            1,539
Income from operations                             476                     -                       (2)                             474
Other (expense) income:
Interest expense                                  (104)                    -                        -                             (104)
Loss on extinguishment of debt                     (56)                    -                        -                              (56)
Other income (expense)                               -                     -                        -                                -
Total other (expense) income                      (160)                    -                        -                             (160)
Income before income taxes                         316                     -                       (2)                             314
Income tax expense                                 (70)                    -                        1          (e)                 (69)
Net income                                   $     246          $          -          $            (1)                      $      245


(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 to income taxes was calculated by applying Sirius XM's
statutory tax rate at September 30, 2019 to the pro forma adjustments of $(2).


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                                                                 Unaudited 

for the Nine Months Ended September 30, 2020

                                                                  Predecessor            Purchase Price
                                                                   Financial               Accounting
                                             As Reported          Information             Adjustments             Ref           Pro Forma
Revenue
Sirius XM:
Subscriber revenue                           $   4,372          $          -          $               -                       $    4,372
Advertising revenue                                108                     -                          -                              108
Equipment revenue                                  113                     -                          -                              113
Other revenue                                      115                     -                          6          (f)                 121
Total Sirius XM revenue                          4,708                     -                          6                            4,714
Pandora:
Subscriber revenue                                 385                     -                          -                              385
Advertising revenue                                758                     -                          -                              758
Total Pandora revenue                            1,143                     -                          -                            1,143
Total consolidated revenue                       5,851                     -                          6                            5,857
Cost of services
Sirius XM:
Revenue share and royalties                      1,100                     -                          -                            1,100
Programming and content                            330                     -                          -                              330
Customer service and billing                       291                     -                          -                              291
Transmission                                        90                     -                          -                               90
Cost of equipment                                   13                     -                          -                               13
Total Sirius XM cost of services                 1,824                     -                          -                            1,824
Pandora:
Revenue share and royalties                        659                     -                          6          (g)                 665
Programming and content                             21                     -                          -                               21
Customer service and billing                        68                     -                          -                               68
Transmission                                        39                     -                          -                               39
Total Pandora cost of services                     787                     -                          6                              793
Total consolidated cost of services              2,611                     -                          6                            2,617
Subscriber acquisition costs                       257                     -                          -                              257
Sales and marketing                                664                     -                          -                              664
Engineering, design and development                196                     -                          -                              196
General and administrative                         357                     -                          -                              357
Depreciation and amortization                      381                     -                          -                              381
Acquisition and restructuring costs                 24                     -                          -                               24
Total operating expenses                         4,490                     -                          6                            4,496
Income from operations                           1,361                     -                          -                            1,361
Other (expense) income:
Interest expense                                  (297)                    -                          -                             (297)
Loss on extinguishment of debt                     (40)                    -                          -                              (40)
Other income (expense)                              10                     -                          -                               10
Total other (expense) income                      (327)                    -                          -                             (327)
Income before income taxes                       1,034                     -                          -                            1,034
Income tax expense                                (226)                    -                          -                             (226)
Net income                                   $     808          $          -          $               -                       $      808


(f)  This adjustment eliminates the impact of additional revenue associated with
certain programming agreements recorded as part of the XM Merger.
(g)  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 Nine Months Ended September 30, 2019

                                                                    Predecessor              Purchase Price
                                                                     Financial                 Accounting
                                             As Reported          Information (h)             Adjustments            Ref           Pro Forma
Revenue
Sirius XM:
Subscriber revenue                           $   4,196          $               -          $             -                       $    4,196
Advertising revenue                                149                          -                        -                              149
Equipment revenue                                  127                          -                        -                              127
Other revenue                                      121                          -                        6          (i)                 127
Total Sirius XM revenue                          4,593                          -                        6                            4,599
Pandora:
Subscriber revenue                                 355                         46                        -                              401
Advertising revenue                                784                         68                        -                              852
Total Pandora revenue                            1,139                        114                        -                            1,253
Total consolidated revenue                       5,732                        114                        6                            5,852
Cost of services
Sirius XM:
Revenue share and royalties                      1,065                          -                        -                            1,065
Programming and content                            328                          -                        -                              328
Customer service and billing                       296                          -                        -                              296
Transmission                                        79                          -                        -                               79
Cost of equipment                                   20                          -                        -                               20
Total Sirius XM cost of services                 1,788                          -                        -                            1,788

Pandora:

Revenue share and royalties                        619                         71                       11          (j)                 701
Programming and content                             10                          -                        -                               10
Customer service and billing                        56                          8                        -                               64
Transmission                                        38                          5                        -                               43
Total Pandora cost of services                     723                         84                       11                              818
Total consolidated cost of services              2,511                         84                       11                            2,606
Subscriber acquisition costs                       313                          -                        -                              313
Sales and marketing                                648                         36                        -                              684
Engineering, design and development                206                         14                        -                              220
General and administrative                         379                         16                        -                              395
Depreciation and amortization                      344                          6                        9          (k)                 359
Acquisition and restructuring costs                 83                          1                      (84)         (l)                   -
Total operating expenses                         4,484                        157                      (64)                           4,577
Income from operations                           1,248                        (43)                      70                            1,275
Other (expense) income:
Interest expense                                  (291)                        (2)                       -                             (293)
Loss on extinguishment of debt                     (57)                         -                        -                              (57)
Other income (expense)                              (2)                         1                        -                               (1)
Total other (expense) income                      (350)                        (1)                       -                             (351)
Income before income taxes                         898                        (44)                      70                              924
Income tax expense                                (227)                         -                       (7)         (m)                (234)
Net income                                   $     671          $             (44)         $            63                       $      690


(h)  Represents Pandora's results for the period January 1, 2019 through January
31, 2019.
(i)  This adjustment eliminates the impact of additional revenue associated with
certain programming agreements recorded as part of the XM Merger.
(j)  This adjustment includes the impact of additional expense associated with
minimum guarantee royalty contracts recorded as part of the Pandora Acquisition.
(k)  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.
(l)  This adjustment eliminates the impact of acquisition and other related
costs.
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(m)  This adjustment to income taxes was calculated by applying Sirius XM's
statutory tax rate at September 30, 2019 to the pro forma adjustments of $70 and
Pandora's loss before income tax of $44.


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 and Sirius
XM Canada are not included in Sirius XM's subscriber count or subscriber-based
operating metrics.
Set forth below are our subscriber balances as of September 30, 2020 compared to
September 30, 2019.
                                                        As of September 30,                                                        2020 vs 2019 Change
(subscribers in thousands)                     2020                            2019                           Amount                     %
Sirius XM
Self-pay subscribers                            30,480                            29,637                           843                        3  %
Paid promotional subscribers                     3,955                             4,917                          (962)                     (20) %
Ending subscribers                              34,435                            34,554                          (119)                       -  %
Traffic users                                    9,430                             9,378                            52                        1  %
Sirius XM Canada subscribers                     2,612                             2,706                           (94)                      (3) %

Pandora
Monthly active users - all services             58,583                            63,100                        (4,517)                      (7) %
Self-pay subscribers                             6,361                             6,257                           104                        2  %
Paid promotional subscribers                        43                                45                            (2)                      (4) %
Ending subscribers                               6,404                             6,302                           102                        2  %

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 nine months ended September 30, 2020 and 2019.

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                                                                                                                                         2020 vs 2019 Change
                              For the Three Months Ended                             For the Nine Months
                                     September 30,                                   Ended September 30,                                                      Three Months                       Nine Months
(subscribers in thousands)       2020               2019             2020               2019 (1)                    Amount              %               Amount               %
Sirius XM
Self-pay subscribers              169                302              502                  723                        (133)             (44) %             (221)             (31) %
Paid promotional
subscribers                        17                (92)            (975)                (207)                        109             (118) %             (768)             371  %
Net additions                     186                210             (473)                 516                         (24)             (11) %             (989)            (192) %
Weighted average number of
subscribers                    34,330             34,397           34,480               34,181                         (67)               -  %              299                1  %
Average self-pay monthly
churn                             1.7    %           1.7  %           1.7  %               1.7      %                    -  %             -  %                -  %             -  %
ARPU (2)                    $   14.15$ 13.90$ 14.02$     13.75$   0.25                2  %       $     0.27                2  %
SAC, per installation       $   20.98$ 21.01$ 20.49$     22.62$  (0.03)               -  %       $    (2.13)              (9) %

Pandora

Self-pay subscribers              105                 33              196                  343                          72              218  %             (147)             (43) %
Paid promotional
subscribers                        (3)              (688)              (6)                (711)                        685             (100) %              705              (99) %
Net additions                     102               (655)             190                 (368)                        757             (116) %              558             (152) %
Weighted average number of
subscribers                     6,376              6,753            6,281                6,778                        (377)              (6) %             (497)              (7) %
ARPU                        $    6.83$  6.46$  6.79$      6.56$   0.37                6  %       $     0.23                4  %
Ad supported listener hours
(in billions)                    3.12               3.32             9.53                10.23                       (0.20)              (6) %            (0.70)              (7) %
Advertising revenue per
thousand listener hours
(RPM)                       $   84.46$ 85.33$ 68.83$     75.96$  (0.87)              (1) %       $    (7.13)              (9) %
Licensing costs per
thousand listener hours
(LPM)                       $   40.16$ 39.05$ 38.11$     37.83$   1.11                3  %       $     0.28                1  %
Licensing costs per paid
subscriber (LPU)            $    4.19$  4.09$  4.12$      4.07$   0.10                2  %       $     0.05                1  %

Total Company
Adjusted EBITDA             $     661$   657$ 1,915$     1,841$      4                1  %       $       74                4  %
Free cash flow (3)          $     361$   465$ 1,212$     1,239$   (104)             (22) %       $      (27)              (2) %


(1)  Includes Pandora's results for the nine month period, including
pre-acquisition results for the period January 1, 2019 through January 31, 2019.
(2)  ARPU for Sirius XM excludes subscriber revenue from our connected vehicle
services of $44 and $41 for the three months and $130 and $116 for the nine
months ended September 30, 2020 and 2019, respectively.
(3)  Free cash flow has not been adjusted for Pandora's pre-acquisition results.
Sirius XM
Subscribers. At September 30, 2020, Sirius XM had approximately 34,435
subscribers, a decrease of 119, from the approximately 34,554 subscribers as of
September 30, 2019. The decrease was due to the decrease in paid promotional
subscribers, 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 ended September 30, 2020 and 2019, net subscriber additions
were 186 and 210, respectively. For the nine months ended September 30, 2020 and
2019, net subscriber additions were (473) and 516, respectively. For the three
month period, paid promotional subscribers increased as shipments and trial
subscription starts from automakers offering paid subscriptions rebounded from
the impact of the COVID-19 pandemic. For the nine month period, paid promotional
subscribers decreased as shipments and trial subscription starts from automakers
offering paid subscriptions declined as a result of 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.
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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. At September 30, 2020, Sirius XM had approximately 9,430
traffic users, an increase of 52 users, or 1%, from the approximately 9,378
traffic users as of September 30, 2019.
Sirius XM Canada Subscribers. At September 30, 2020, Sirius XM Canada had
approximately 2,612 subscribers, a decrease of 94, or 3%, from the approximately
2,706 Sirius XM Canada subscribers as of September 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 both the three months ended September 30, 2020 and 2019, our average
self-pay monthly churn rate was 1.7%. For both the nine months ended
September 30, 2020 and 2019, our average self-pay monthly churn rate was 1.7%.
Lower vehicle and non-pay churn was offset by increased voluntary churn.
ARPU is derived from total earned Sirius 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 ended September 30, 2020 and 2019, subscriber ARPU - Sirius
XM was $14.15 and $13.90, respectively. For the nine months ended September 30,
2020 and 2019, subscriber ARPU - Sirius XM was $14.02 and $13.75, respectively.
The increase was driven by an increase in certain subscription rates and the
U.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 ended September 30, 2020 and 2019, SAC, per installation,
was $20.98 and $21.01, respectively. For the nine months ended September 30,
2020 and 2019, SAC, per installation, was $20.49 and $22.62, respectively. The
decreases were driven by reductions to OEM hardware subsidy rates.
Pandora
Monthly Active Users. At September 30, 2020, Pandora had approximately 58,583
monthly active users, a decrease of 4,517 monthly active users, or 7%, from the
63,100 monthly active users as of September 30, 2019. The decrease in monthly
active users was driven by an increase in ad-supported listener churn and a
decrease in the number of new users.
Subscribers. At September 30, 2020, Pandora had approximately 6,404 subscribers,
an increase of 102, or 2%, from the approximately 6,302 as of September 30,
2019.
For the three months ended September 30, 2020 and 2019, net subscriber additions
were 102 and (655), respectively. For the nine months ended September 30, 2020
and 2019, net subscriber additions were 190 and (368), respectively. The
increases were a result of the expiration of an agreement with T-Mobile during
the nine months ended September 30, 2019.
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 ended September 30, 2020 and 2019, subscriber ARPU -
Pandora was $6.83 and $6.46, respectively. For the nine months ended
September 30, 2020 and 2019, subscriber ARPU - Pandora was $6.79 and $6.56,
respectively. The increases in subscriber ARPU were primarily driven by the
expiration of a lower rate T-Mobile plan in 2019 and a continued shift in
subscriber mix toward more 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 ended September 30, 2020 and 2019, ad supported listener
hours were 3,120 and 3,320, respectively. For the nine months ended
September 30, 2020 and 2019, ad supported listener hours were 9,530 and 10,230,
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.
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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.
For the three months ended September 30, 2020 and 2019, RPM was $84.46 and
$85.33, respectively. For the nine months ended September 30, 2020 and 2019, RPM
was $68.83 and $75.96, 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 ended September 30, 2020 and 2019, LPM was $40.16 and
$39.05, respectively. For the nine months ended September 30, 2020 and 2019, LPM
was $38.11 and $37.83, respectively. The increases were primarily due to an
increase in track 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 ended September 30, 2020 and 2019, LPU was $4.19 and $4.09,
respectively. For the nine months ended September 30, 2020 and 2019, LPU was
$4.12 and $4.07, respectively. The increases were due to increased Pandora
subscriber ARPU.
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 period January 1, 2019 through January 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 ended September 30, 2020 and 2019, adjusted EBITDA was $661
and $657, respectively, an increase of 1%, or $4. For the nine months ended
September 30, 2020 and 2019, adjusted EBITDA was $1,915 and $1,841,
respectively, an increase of 4%, or $74. The increases were driven by higher
subscriber revenue and lower travel and entertainment, partially offset by lower
advertising revenue and higher revenue share and royalties. The nine month
period was also impacted by lower subscriber acquisitions costs.
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 ended September 30, 2020 and 2019, free cash flow was $361
and $465, respectively, a decrease of $104, or 22%. For the nine months ended
September 30, 2020 and 2019, free cash flow was $1,212 and $1,239, respectively,
a decrease of $27, or 2%.  The decreases were driven by higher interest payments
primarily due to timing, lower ad revenue receipts and paid promotional trial
receipts. We paid a one-time amount of $25 for a legal settlement during the
nine months ended September 30, 2019

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Liquidity and Capital Resources
Cash Flows for the nine months ended September 30, 2020 compared with the nine
months ended September 30, 2019.
The following table presents a summary of our cash flow activity for the periods
set forth below:
                                                  For the Nine Months Ended September
                                                                  30,
                                                       2020                  2019                    2020 vs 2019

Net cash provided by operating activities $ 1,450 $

   1,485                $         (35)
Net cash (used in) provided by investing
activities                                                (344)                 126                         (470)
Net cash used in financing activities                   (1,182)              (1,586)                         404
Net (decrease) increase in cash, cash
equivalents and restricted cash                            (76)                  25                         (101)
Cash, cash equivalents and restricted cash at
beginning of period                                        120                   65                           55
Cash, cash equivalents and restricted cash at
end of period                                    $          44          $        90                $         (46)


Cash Flows Provided by Operating Activities
Cash flows provided by operating activities decreased by $35 to $1,450 for the
nine months ended September 30, 2020 from $1,485 for the nine months ended
September 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 through our Pandora business, advertising on certain
non-music channels on Sirius 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 nine months ended September 30, 2019.
Cash Flows (Used in) Provided by Investing Activities
Cash flows used in investing activities in the nine months ended September 30,
2020 were primarily due to our $75 investment in SoundCloud, 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 nine months ended September 30, 2019 were primarily due to cash received
of $313 from the Pandora Acquisition and from the sale of short-term investments
of $73, partially offset by additional spending primarily for capitalized
software and hardware, and to construct replacement satellites. We spent $167
and $146 on capitalized software and hardware as well as $36 and $46 to
construct replacement satellites during the nine months ended September 30, 2020
and 2019, respectively.
Cash Flows Used in Financing Activities
Cash flows 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 used in financing activities in the nine months ended September 30,
2020 were primarily due to the redemption of Sirius XM's 4.625% Senior Notes due
2023 in the aggregate amount of $507 and Sirius XM's 5.375% Senior Notes due
2025 in the aggregate amount of $1,039, the purchase and retirement of shares of
our common stock under our repurchase program for $870, the payment of cash
dividends of $175, and payment of $81 for taxes paid in lieu of shares issued
for share-based compensation; partially offset by the issuance of $1,481 in
aggregate principal amount of Sirius XM's 4.125% Senior Notes due 2030, net of
costs. Cash flows used in financing activities in the nine months ended
September 30, 2019 were primarily due to the purchase and retirement for $1,959
of shares of our common stock under our repurchase program, the redemption of
Sirius XM's 6.00% Senior Notes due 2024 in the aggregate amount of $1,546,
repayment under the Credit Facility of $374, the repurchase for $152 of
Pandora's 1.75% Convertible Senior Notes due 2020, the payment of cash dividends
of $167 and payment of $104 for taxes paid in lieu of shares issued for
share-based compensation, partially offset by the issuance of $1,481 in
aggregate principal amount of Sirius XM's 4.625% Senior Notes due 2024 and the
issuance of $1,234 in aggregate principal amount of Sirius XM's 5.500% Senior
Notes due 2029, net of costs.
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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 debt with existing cash, cash flow from operations and borrowings under
our Credit Facility. As of September 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 of September 30, 2020, our board of directors had authorized for repurchase
an aggregate of $16,000 of our common stock. As of September 30, 2020, our
cumulative repurchases since December 2012 under our stock repurchase program
totaled 3,203 shares for $13,728, and $2,272 remained available for additional
repurchases under our existing stock repurchase program authorization.
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.
On October 6, 2020, our board of directors declared a quarterly dividend in the
amount of $0.014641 per share of common stock payable on November 30, 2020 to
stockholders of record as of the close of business on November 6, 2020. Our
board of directors expects to declare regular quarterly dividends, in an
aggregate annual amount of $0.058564 per share of common stock.
Debt Covenants
The indentures governing Sirius XM's senior notes and Pandora's convertible
notes and the agreement governing the Sirius XM Credit Facility include
restrictive covenants. As of September 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.
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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.
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 ended December 31,
2019. There have been no material changes to our critical accounting policies
and estimates since December 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 - the Sirius 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 for January
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.
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Adjusted EBITDA has certain limitations in that it does not take into account
the impact to our unaudited consolidated 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 Three Months Ended September                             For the Nine Months Ended
                                                      30,                                                    September 30,
                                           2020                   2019                 2020                   2019
Net income:                          $          272          $       246$       808          $            671
Add back items excluded from
Adjusted EBITDA:
Legal settlements and reserves                    -                    -                  (16)                       25
Acquisition and restructuring costs
(1)                                               -                    -                   24                        83
Share-based payment expense (3)                  58                   65                  165                       171
Depreciation and amortization                   125                  118                  381                       344
Interest expense                                 96                  104                  297                       291
Loss on extinguishment of debt                   40                   56                   40                        57
Other expense (income)                           (2)                   -                  (10)                        2
Income tax expense                               72                   70                  226                       227
Purchase price accounting
adjustments:
Revenues                                          2                    2                    6                         6
Operating expenses                               (2)                  (4)                  (6)                      (11)
Pro forma adjustments (2)                         -                    -                    -                       (25)
Adjusted EBITDA                      $          661          $       657$     1,915          $          1,841


(1)   Acquisition and restructuring costs include $21 of share-based
compensation expense for the nine months ended September 30, 2019.
(2)   Pro forma adjustment for nine months ended September 30, 2019 includes
Pandora's Net income for the nine months ended September 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.
(3)Allocation of share-based payment expense:
                                                                                                                         For the Nine Months
                                        For the Three Months Ended September 30,                                         Ended September 30,
(in millions)                                   2020                     2019                            2020                 2019
Programming and content                $                  9          $        8$       24$        22
Customer service and billing                              1                   1                               4                    3
Transmission                                              1                   2                               4                    5
Sales and marketing                                      17                  23                              50                   57
Engineering, design and development                      11                  15                              31                   37
General and administrative                               19                  16                              52                   47
Total share-based payment expense      $                 58          $       65$      165$       171


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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 September                               For the Nine Months
                                                     30,                                               Ended September 30,
                                          2020                  2019                 2020                   2019
Cash Flow information
Net cash provided by operating
activities                          $         443          $       544$     1,450          $         1,485
Net cash (used in) provided by
investing activities                $         (79)         $       (83)$      (344)         $           126
Net cash used in financing
activities                          $      (2,101)$      (597)$    (1,182)$        (1,586)
Free Cash Flow
Net cash provided by operating
activities                          $         443          $       544$     1,450          $         1,485
Additions to property and equipment           (81)                 (79)                (230)                    (239)
Purchases of other investments                 (1)                   -                   (8)                      (7)
Free cash flow                      $         361          $       465$     1,212          $         1,239


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.
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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 September                            For the Nine Months Ended
                                                         30,                                                   September 30,
                                               2020                 2019                 2020                   2019
Subscriber acquisition costs, excluding
connected vehicle services               $         110          $      101$       257          $            313
Less: margin from sales of radios and
accessories, excluding connected vehicle
services                                           (43)                (38)                (101)                     (106)
                                         $          67          $       63$       156          $            207
Installations                                    3,212               2,998                7,615                     9,153
SAC, per installation (a)                $       20.98$    21.01$     20.49          $          22.62


(a)Amounts may not recalculate due to rounding.
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, excluding AdsWizz 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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