Sirius XM Radio Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; unaudited. The filing registrant is Sirius XM Radio Inc., notwithstanding the request metadata naming Sirius XM Holdings Inc. Dollar figures below are in millions unless stated otherwise.
Business context
The company provides subscription satellite radio services in the U.S. through the SIRIUS and XM systems, with distribution led by automakers, plus retail, online and ancillary offerings. Subscription fees are its principal revenue source. It reported 19.86 million subscribers at quarter-end, including 9.64 million SIRIUS and 10.22 million XM subscribers.
Financial and operating performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $717.5 | $618.7 | $2,081.1 | $1,796.5 |
| Operating income | $143.1 | $66.4 | $393.8 | $144.7 |
| Net income (loss) | $67.6 | ($151.5) | $124.5 | ($363.8) |
| Diluted EPS | $0.01 | ($0.04) | $0.02 | ($0.15) |
| Adjusted EBITDA, non-GAAP | $169.7 | $106.1 | $481.8 | $347.2 |
| Free cash flow, non-GAAP | $62.0 | $26.7 | $43.1 | $35.8 |
- Q3 revenue grew 16%; nine-month revenue rose 16%. Subscriber revenue increased 6% in both periods. Other revenue rose sharply, primarily reflecting the U.S. Music Royalty Fee introduced in Q3 2009; advertising and equipment revenue also increased.
- Calculated GAAP operating margin improved to about 19.9% in Q3 from 10.7%, and to 18.9% for the nine months from 8.1%. Net income turned positive, aided in part by substantially lower debt-extinguishment losses than in 2009.
- Adjusted EBITDA grew 60% in Q3 and 39% year to date. These are company-defined non-GAAP measures; the filing cautions they are not substitutes for GAAP results.
- Subscriber additions improved: 334,727 net additions in Q3 versus 102,295 a year earlier; 1.09 million net additions year to date versus a loss of 488,126. Average self-pay monthly churn was 1.9% versus 2.0% in Q3 and 2.1% year to date. Conversion rates were 48.1% and 46.6%, respectively.
- For the nine months, operating cash flow was $291.0, capital expenditures were $257.4, and cash declined $67.2 to $316.3. Adjusted free cash flow was $43.1 for the nine months; it includes investment activity under the company’s definition.
- At September 30, total debt carrying value was $3,027.4, including $358.7 of related-party debt; cash was $316.3. Current assets of $778.6 compared with current liabilities of $2,056.4. Management reported covenant compliance.
Material changes and financing
- Debt carrying value declined from $3,077.2 at December 31, 2009. During 2010, the company issued $800 million of 8.75% notes due 2015 and used proceeds, among other things, to repay a term loan and redeem $500 million of 9.625% notes due 2013. XM also redeemed its 10% PIK notes due 2011.
- After quarter-end, on October 27, XM issued $700 million of 7.625% notes due 2018 and purchased $489.1 million principal amount of its 11.25% notes due 2013 for $567.9 million, including accrued interest and consent payments. The tender offer could purchase further notes through its scheduled November 9 expiration. These transactions were not reflected in September 30 debt balances or contractual-obligation totals.
- Series A preferred shares converted into 24.8 million common shares in September. Series B preferred stock held by Liberty Media remained outstanding and was convertible into approximately 2.587 billion common shares, creating substantial potential dilution.
- Capital spending increased, principally for satellite construction and launch vehicles. Property and equipment under construction was $643.6 at quarter-end; XM-5 launched on October 14, 2010.
Outlook, risks and contingencies
- Management said existing cash and expected operating cash flow should fund operating needs, capital spending, interest, taxes and scheduled debt maturities, while noting projections contain significant uncertainties and either SIRIUS or XM may need financing if its own funds are insufficient.
- Management expected subscriber revenue to depend on subscriber growth, churn, conversion, pricing, promotions and plan mix. It expected royalty costs to rise as statutory sound-recording rates increase from 7% in 2010 to 7.5% in 2011 and 8% in 2012; the next rate-setting proceeding was scheduled to begin in January 2011.
- Key business risks include substantial debt, reliance on automakers and other third parties, satellite component failures and competition. The company highlighted upcoming expirations of agreements with Howard Stern in December 2010, the NFL after the 2010 season and NASCAR in December 2011; renewal terms or retention of these providers were not assured.
- State consumer-practice investigations were underway, including a multistate inquiry into cancellation, automatic renewal, billing, refunds and solicitation, a Florida investigation, and a Missouri telemarketing action. The company said it was cooperating and believed its practices complied with applicable law.
- Copyright disputes involving advanced recording features remained subject to settlements or negotiations. The filing says outcomes and potential business impact could not be assured. Contractual cash commitments totaled $5.28 billion, including debt principal and interest; the filing also notes variable-cost arrangements may add future obligations.
- The FCC’s merger approval conditions affect programming and the company’s ability to increase prices. Management’s expense expectations included higher subscriber-acquisition costs with additions and OEM installations, and future investment in products, infrastructure and satellites.
Most important facts for investors to verify
- Whether Q3 subscriber growth, conversion and churn trends continued, and how much growth came from self-paying versus paid-promotional subscribers.
- The effect of the October 2010 refinancing and note tender on debt, interest expense, liquidity and remaining maturities.
- Whether operating cash flow can support satellite capital expenditures and substantial scheduled debt service without additional financing.
- The sustainability of revenue and adjusted EBITDA growth, distinguishing recurring subscription performance from the Music Royalty Fee and purchase-accounting adjustments.
- Results of content renewals, the royalty-rate proceeding, consumer investigations and copyright matters, including any resulting costs or subscriber effects.
- Potential dilution from convertible securities, Series B preferred stock, warrants, options and the outstanding share-lending arrangement.