Sirius XM Radio Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; comparative periods ended June 30, 2009. The filing is for Sirius XM Radio Inc., which reports its SIRIUS and XM businesses on a consolidated basis. Unless noted otherwise, financial amounts below are in millions of dollars.
Business context and operating performance
The company provides subscription satellite radio in the United States, distributed mainly through automakers, retail, and online channels. It reported 19.53 million subscribers at quarter-end, including 9.47 million SIRIUS and 10.06 million XM subscribers.
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $699.8 | $590.8 | $1,363.5 | $1,177.8 |
| Operating income | $125.6 | $37.2 | $250.8 | $78.3 |
| Net income (loss) | $15.3 | $(159.6) | $56.9 | $(212.3) |
| Operating margin | 18.0% | 6.3% | 18.4% | 6.6% |
| Adjusted EBITDA (non-GAAP) | $154.3 | $132.2 | $312.1 | $241.1 |
| Adjusted EBITDA margin (non-GAAP) | 21.9% | 21.8% | 22.7% | 19.9% |
| Net cash from operations | Not clearly stated for quarter | Not clearly stated for quarter | $141.0 | $136.9 |
Q2 diluted and basic EPS were each reported as $0.00, rounded to cents; first-half basic EPS was $0.02 and diluted EPS $0.01. First-half 2009 loss per share was $(0.11), including a $186.2 million preferred-stock beneficial conversion feature in the common-stockholder loss calculation.
Revenue, cash flow, debt and liquidity
- Q2 revenue rose 18% year over year; first-half revenue rose 16%. Subscription revenue increased 7% in Q2 and 5% in the first half. Advertising and equipment revenue also grew.
- Other revenue was $63.8 million in Q2 and $119.3 million in the first half, up sharply from 2009, primarily due to the U.S. Music Royalty Fee introduced in 2009. Adjusted revenue, a non-GAAP measure, was $705.6 million in Q2 and $1,376.1 million in the first half.
- First-half capital expenditures were $169.3 million, chiefly for satellites and launch vehicles. Operating cash flow less capital expenditures was negative $28.3 million on the cash-flow statement; the company’s separately defined non-GAAP free cash flow was negative $18.9 million, versus positive $9.0 million in first-half 2009.
- Cash and cash equivalents were $258.9 million at June 30, down from $383.5 million at year-end 2009. Total current assets were $760.2 million and current liabilities $2,041.9 million; current liabilities include substantial deferred revenue and deferred contract credits.
- Debt carrying value was $3,028.2 million at June 30, compared with $3,077.2 million at year-end; its disclosed fair value was $3,248.1 million. Cash interest paid in the first half was $128.2 million. The company reported compliance with financial debt covenants.
- In 2010 the company issued $800 million of 8.75% notes due 2015 and used proceeds in part to repay a term loan and redeem 9.625% notes due 2013. It also redeemed XM’s $113.7 million 10% PIK notes in June. First-half financing cash flow was negative $105.8 million, reflecting debt repayments and refinancing activity.
Material changes versus prior period
- Subscriber count increased 6% year over year to 19.53 million. Q2 net additions were 583,249, compared with net losses of 185,999 a year earlier; first-half net additions were 754,690 versus net losses of 590,421.
- Q2 gross additions grew 46%, while deactivations fell 8%. Self-pay monthly churn improved to 1.8% from 2.0%, and conversion rose to 46.7% from 44.3%.
- Subscriber acquisition costs rose 63% in Q2 and 42% for the first half, primarily reflecting more gross additions and OEM installations. First-half adjusted EBITDA increased 29%, supported by higher revenue and subscriber growth.
- Operating income improved substantially, while net income turned positive in both comparative periods. Lower interest expense and smaller debt-extinguishment losses helped; Q2 2010 still included $31.9 million of debt-extinguishment losses.
- Cash declined despite higher operating cash flow, as capital spending and net debt repayments consumed cash. First-half capital expenditures rose $41.5 million year over year.
Outlook, commentary and risks
- Management stated that, based on current plans, existing cash, cash equivalents and marketable securities, together with operating cash flow, should cover anticipated operating needs, capital expenditures, interest and scheduled debt maturities. This is a company assessment, not numerical earnings guidance; no specific full-year revenue or profit target is provided in the supplied filing text.
- Expected investment includes continued construction and launch of XM-5 and FM-6 satellites. Contractual capital expenditures were estimated at $82.5 million for the rest of 2010 and $67.8 million for 2011, plus $60.3 million over the following five years.
- Management expects subscriber-related revenue to depend on subscriber growth, churn, conversion, pricing and plan mix. Costs may rise with OEM installations, content and royalty payments, marketing, and satellite additions. Sound-recording royalty rates were scheduled to rise to 7.5% in 2011 and 8.0% in 2012; a rate-setting proceeding was scheduled to begin in January 2011.
- Important content agreements were approaching expiration: Howard Stern in December 2010, the NFL after the 2010–2011 season, and NASCAR in December 2011. Renewal discussions had begun, but the filing cautions that renewals may not be secured on acceptable terms.
- Principal disclosed risks include dependence on automakers and other distribution partners, substantial indebtedness, satellite useful life and component failures (some satellites are uninsured), competition from other audio and digital services, and possible limits on transferring capital between SIRIUS and XM, which operates as an unrestricted subsidiary under certain debt agreements.
- Commitments and contingencies included $5.40 billion of expected contractual cash commitments, including principal, interest, programming, satellite, marketing and lease obligations. Copyright disputes over advanced recording features remained subject to settlement discussions; an FCC merger-order reconsideration petition also remained pending. The company said ordinary-course lawsuits were not expected to have a material adverse effect.
- After quarter-end, XM issued a notice to redeem its $5.26 million of 9.75% notes due 2014 at 104.875% plus accrued interest on August 16, 2010.
Most important facts for investors to verify
- Whether subscriber additions, churn and promotional-trial conversion remain favorable, and how much growth converts into self-paying subscribers.
- Whether subscriber acquisition spending and OEM subsidies can be sustained while preserving adjusted EBITDA and cash generation.
- Debt maturities, interest costs, refinancing needs, covenant headroom and the company’s ability to meet contractual commitments from operating cash flow.
- Satellite construction and launch costs, satellite reliability and insurance coverage, and the impact of future capital spending on liquidity.
- Renewal outcomes and costs for the Stern, NFL and NASCAR programming agreements, and the effects of royalty-rate changes.
- The composition of revenue growth: in particular, the recurring contribution and timing of the U.S. Music Royalty Fee, and the effect of purchase-accounting adjustments.
- How non-GAAP adjusted EBITDA and free cash flow reconcile to GAAP results; these measures exclude specified items and should not be treated as substitutes for GAAP earnings or cash flow.
- Potential dilution and governance implications: the filing reports substantial shares reserved for conversion and awards, including Liberty Media’s convertible Series B preferred stock.