Sirius XM Radio Inc. — 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone Q4 filing; selected Q4 figures are noted below. Sirius XM provides subscription satellite and internet audio services, distributed primarily through automakers. It reported 23.9 million subscribers at year-end.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $3.402 billion | $3.015 billion | +13% |
| Operating income | $872 million | $676 million | +29% |
| Operating margin | 25.6% | 22.4% | +3.2 percentage points |
| Net income | $3.473 billion | $427 million | Primarily reflects a large tax benefit |
| Operating cash flow | $807 million | $544 million | +48% |
| Free cash flow (non-GAAP) | $709 million | $416 million | +71% |
| Adjusted EBITDA (non-GAAP) | $920 million | $731 million | +26% |
Revenue growth reflected a 9% increase in daily weighted-average subscribers, subscription price increases beginning in January 2012, and higher premium-service subscriptions. Subscriber revenue rose 14%; advertising revenue rose 12%. The statutory sound-recording royalty rate was 8.0% in 2012, up from 7.5% in 2011.
Profit quality: The $3.473 billion reported net income included a $2.998 billion income tax benefit, principally from releasing a $3.196 billion deferred-tax valuation allowance after management concluded deferred tax assets were more likely than not to be realized. Pretax income was $474 million, versus $441 million in 2011. The company also recorded a $133 million loss on debt extinguishment.
Balance sheet and funding: Cash and cash equivalents were $521 million, down from $774 million. Total debt carrying value was $2.435 billion (approximately $2.5 billion principal); net debt was about $1.914 billion. The $1.25 billion five-year secured revolver was undrawn at year-end. Current assets were $1.828 billion and current liabilities $2.315 billion, including substantial deferred revenue. Management stated existing cash, operating cash flow and available credit were expected to cover funding needs. Debt covenants were in compliance at year-end.
Changes versus comparable periods
- Net subscriber additions increased to 2.01 million from 1.70 million. Self-pay subscribers reached 19.57 million; average monthly self-pay churn remained 1.9%, while new-vehicle conversion held at 45%.
- ARPU increased to $12.00 from $11.58. Adjusted EBITDA and free cash flow both increased substantially; management attributed the cash-flow improvement to stronger operations and lower satellite construction spending.
- Operating expenses rose 8%, led by higher revenue sharing and royalties, subscriber acquisition, customer service, sales and marketing costs. Programming and content costs declined slightly.
- The company repaid its 13% Senior Notes due 2013 and 9.75% Senior Secured Notes due 2015, partly funded by issuing $400 million of 5.25% notes due 2022. Interest expense fell 13%.
- Q4 2012 revenue was $892 million versus $784 million in Q4 2011; operating income was $213 million versus $154 million, and net income was $156 million versus $71 million.
Outlook, risks and unusual items
- The filing gives no specific numerical full-year 2013 revenue or earnings guidance. Management expected subscriber revenue to benefit from subscriber growth, pricing and service mix, while anticipating growth-related increases in several operating costs.
- The company expected to launch the FM-6 satellite in mid-2013. Satellite failures, aging equipment and solar-array degradation remain risks; insurance covers only certain satellites and would not fully cover replacement or business interruption losses.
- Sound-recording royalty rates are scheduled to rise to 9.0% in 2013, 9.5% in 2014, and 11.0% in 2017, increasing cost pressure.
- Competition from free AM/FM radio, internet audio, smartphone services and connected-car systems could constrain subscriber growth, pricing and cash generation. Subscriber acquisition depends significantly on vehicle sales and automaker participation.
- Liberty Media beneficially owned approximately 50.21% of shares as of January 2013 and obtained de jure control approval. A resulting fundamental-change provision gave holders of $550 million of 7% exchangeable notes an offer to require repurchase or exchange; the company said it had resources to fund repurchases.
- The company paid its first special dividend, $0.05 per share, totaling approximately $327 million, and approved a $2 billion share-repurchase program expected to begin in 2013. It did not intend to pay recurring dividends; debt covenants limit dividends.
- Former CEO Mel Karmazin left in December 2012; James E. Meyer became CEO, with a permanent successor search underway. State Attorneys General in 31 states, Florida and New York were investigating consumer practices including cancellations, renewals, billing and solicitation. Howard Stern’s production company and agent appealed a dismissed contract case.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and financial-reporting controls at year-end.
Most important facts for investors to verify
- How much of future earnings and cash taxes depend on realizing the deferred tax assets and using net operating loss carryforwards.
- Progress toward the FM-6 launch, satellite operating lives, and any changes to insurance coverage or expected capital spending.
- The effect of rising music royalty rates and other cost increases on margins and free cash flow.
- Subscriber additions, self-pay churn, promotional-trial conversion and ARPU trends, particularly as vehicle sales and competition change.
- The eventual cost and share impact of the $2 billion repurchase authorization and the exchangeable-note fundamental-change offer.
- Developments in the state consumer-practices investigations, CEO succession, and Liberty Media’s control and related-party influence.