Sirius XM Holdings Inc. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013. This is an annual filing, not a standalone Q4 report; quarterly figures are included where relevant. Holdings completed a reorganization on November 15, 2013, becoming the publicly traded parent of Sirius XM Radio Inc. The consolidated results principally reflect the radio business. Unless noted, financial amounts below are in U.S. dollars.
Business context
Sirius XM provides subscription satellite and internet audio services, distributed mainly through automakers, and offers connected-vehicle services. It reported 25.56 million subscribers at year-end, including 21.08 million self-pay and 4.48 million paid promotional subscribers. Connected-vehicle subscribers are excluded from that count. Liberty Media owned more than 50% of Holdings.
Financial and operating results
| Metric | FY 2013 | FY 2012 | Change / context |
|---|---|---|---|
| Revenue | $3.799 billion | $3.402 billion | Up 12%; subscriber revenue rose 11% to $3.285 billion |
| Operating income | $1.045 billion | $872 million | Up 20%; operating margin was approximately 27.5%, versus 25.6% |
| Net income | $377 million | $3.473 billion | Down 89%; 2012 included a $3.196 billion non-cash tax valuation allowance release |
| Diluted EPS | $0.06 | $0.51 | Comparability is affected by the 2012 tax benefit and changing share count |
| Adjusted EBITDA | $1.166 billion | $920 million | Up 27%; non-GAAP measure |
| Operating cash flow | $1.103 billion | $807 million | Up $296 million |
| Free cash flow | $927 million | $709 million | Up $218 million; non-GAAP measure |
| Cash and equivalents | $135 million | $521 million | Down $386 million |
| Debt | Approximately $3.6 billion | Approximately $2.4 billion | Year-end carrying amount; $790 million remained available under the revolving facility |
Revenue growth reflected a 9% increase in the daily weighted average subscriber base, prior subscription-rate increases, premium services, and the connected-vehicle acquisition. ARPU increased to $12.27 from $12.00. Self-pay monthly churn improved to 1.8% from 1.9%, while new-vehicle conversion eased to 44% from 45%. Net subscriber additions fell 17% to 1.66 million, partly because of an OEM shift from paid to unpaid trials and increased deactivations.
Revenue share and royalties rose 23% to $678 million, outpacing revenue growth; sales and marketing rose 17% to $291 million. The company reported a $190.6 million loss on debt extinguishment, mainly from redeeming high-coupon notes. Holdings’ net income includes a $20.4 million derivative loss related to its Liberty Media share-repurchase agreement. Sirius XM Radio Inc.’s separate statements also include a $466.8 million fair-value charge on exchangeable notes; that charge is eliminated from Holdings’ consolidated results.
Cash, debt and capital allocation
Cash from operations increased, but investing outflows rose to $701 million, including $525 million net cash paid for Agero’s connected-vehicle business and higher satellite and infrastructure spending. Financing outflows were $788 million, driven mainly by $1.762 billion of share repurchases and debt redemptions, partly offset by new debt issuance. The company issued several notes in 2013 at coupons ranging from 4.25% to 5.875% and redeemed its 8.75% and 7.625% notes. Year-end debt included $460 million drawn on a $1.25 billion secured revolver. Debt covenants were met at year-end.
Management said existing cash, operating cash flow and borrowing capacity were expected to cover operating needs, capital expenditures, debt service, repurchases and strategic opportunities. The filing does not provide a specific numerical earnings or revenue forecast. Holdings’ board had authorized $4 billion of repurchases; $2.238 billion remained available at year-end. The company also expected a further $340 million repurchase from Liberty Media on April 25, 2014, at $3.66 per share, following a deferral.
Outlook, risks and unusual items
- Management expected subscriber revenue to grow with the subscriber base, connected-vehicle services, plan mix and additional revenue streams; certain subscription rates increased in January 2014.
- Sound-recording royalty rates were set to rise from 9.0% of qualifying gross revenue in 2013 to 9.5% in 2014, reaching 11% in 2017. Management expected royalty costs to increase as rates and revenue grow.
- On November 4, 2013, Sirius XM acquired Agero’s connected-vehicle business for approximately $525 million net of acquired cash. The initial purchase-price allocation included $389 million of goodwill and $231 million of amortizable intangibles; final working-capital calculations remained in negotiation.
- On January 3, 2014, Liberty Media proposed a non-binding transaction to exchange public Holdings shares for non-voting Liberty Series C shares at a stated 0.0760 exchange ratio. A special committee was evaluating the proposal; required approvals and definitive documentation were outstanding, and completion and terms were uncertain.
- Key business risks include competition from free terrestrial radio and internet audio, dependence on auto sales and automaker installations, subscriber churn and conversion, satellite reliability, technology and data-security risks, and increasing music royalties.
- A multistate group of 32 state attorneys general, as well as Florida and New York, was investigating subscription cancellation, automatic renewal, billing, refunds and solicitation practices. The company said it was cooperating and believed its practices complied with applicable law. The filing also described other litigation, including intellectual-property and consumer matters.
- Satellite risks include aging or degraded components and expiring in-orbit insurance coverage. The company reported no 2013 goodwill or indefinite-lived intangible impairment. KPMG issued unqualified opinions on the consolidated financial statements and internal controls.
Investor verification priorities
- Review the full debt maturity schedule, refinancing needs and covenant headroom, particularly the 2014 exchangeable notes and revolver usage.
- Assess whether operating cash flow and free cash flow remain sufficient after repurchases, satellite investment, acquisition spending and debt service; free cash flow is non-GAAP and excludes debt maturities.
- Track subscriber net additions, self-pay churn, promotional-trial conversion and ARPU, including the effects of pricing, discounts and trial-plan changes.
- Monitor the rising statutory music royalty rate and its effect on margins and cash generation.
- Follow the Liberty Media proposal, related-party repurchases and governance implications of Liberty’s majority ownership.
- Check subsequent disclosures on the Agero integration and final purchase-price allocation, state consumer investigations, and satellite condition and insurance decisions.