Sirius XM Radio Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The filing is by Sirius XM Radio Inc.; management expected a share-for-share reorganization under a new parent, Sirius XM Holdings Inc., before year-end. Unless otherwise noted, amounts below are in millions of dollars.
Business context and operating performance
The company provides subscription satellite radio and related internet, advertising, equipment and data services. Automakers are its principal subscriber-acquisition channel. At quarter-end it reported 25.58 million subscribers, including 20.67 million self-pay subscribers; Liberty Media owned more than 50% of common stock.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $961.5 | $867.4 | $2,799.0 | $2,509.6 |
| Operating income | $284.5 | $231.7 | $799.2 | $658.9 |
| Operating margin | 29.6% | 26.7% | 28.6% | 26.3% |
| Net income | $62.9 | $74.5 | $312.0 | $3,316.5 |
| Adjusted EBITDA (non-GAAP) | $295.7 | $244.6 | $840.6 | $689.9 |
| Free cash flow (non-GAAP) | $245.3 | $195.2 | $624.3 | $440.0 |
Q3 revenue rose 11%, led by 10% growth in subscriber revenue. Nine-month revenue rose 12%. Net subscriber additions were 513,078 in Q3 versus 445,921 a year earlier; average self-pay monthly churn improved to 1.8% from 2.0%. ARPU was $12.29 versus $12.14. Adjusted EBITDA increased 21% in Q3 and 22% year to date.
GAAP net income declined 16% in Q3 despite higher revenue and operating income, principally reflecting income tax expense and a substantial debt-extinguishment loss. The nine-month comparison is unusually distorted: 2012 included a roughly $3.014 billion tax benefit from releasing substantially all deferred-tax valuation allowances.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $744.3 million, capital expenditures were $118.2 million, and net cash used in investing activities was $120.0 million. Financing activities used $428.5 million, including $1.602 billion of share repurchases; cash increased $195.8 million.
- Cash and cash equivalents were $716.8 million at September 30, up from $520.9 million at December 31, 2012.
- Total debt carrying value was $3.711 billion, up from $2.435 billion at year-end 2012. Current maturities were $538.9 million. The $1.25 billion secured revolving facility had $1.21 billion available; the company reported compliance with debt covenants.
- Interest expense declined to $54.6 million in Q3 and $150.5 million for nine months, from $70.0 million and $219.8 million, respectively. Management said lower interest rates drove the declines, but expected interest expense to rise as new debt and total borrowings increased.
Material developments, outlook and risks
- The company issued new notes in 2013 and redeemed or repurchased higher-coupon debt. Q3 included a $108.0 million debt-extinguishment loss. After quarter-end, it redeemed the remaining $539.6 million principal of its 7.625% notes for approximately $618 million, including premium and accrued interest, and expected an additional loss of about $66 million.
- On August 14, 2013, it agreed to acquire Agero’s connected-vehicle business for approximately $530 million in cash, expected to close in Q4 subject to regulatory and customary conditions. Management expected to fund it with cash and revolver borrowings.
- The board authorized an additional $2.0 billion repurchase program after quarter-end. The company agreed to repurchase $500 million of shares from Liberty Media in installments through April 2014. This follows $1.602 billion of repurchases in the first nine months.
- Management expected subscriber revenue to grow with subscriber-base expansion, pricing and service mix, and believed cash, operating cash flow and borrowing capacity would cover funding needs. No specific earnings or revenue guidance was provided. The FM-6 satellite launch was scheduled for Q4 2013; management noted contingency planning for replacement satellite components if FM-6 did not enter service successfully.
- Key risks include competition; dependence on automakers; subscriber retention; rising music royalties (the statutory rate was 9.0% in 2013 and scheduled to reach 9.5% in 2014); satellite or technology failure; substantial indebtedness; and execution and integration risks from acquisitions. A multistate group of 32 attorneys general, along with Florida and New York, was investigating consumer practices involving cancellations, renewals, billing, refunds and solicitation. The company said it was cooperating and believed its practices complied with applicable law.
Important facts for investors to verify
- Whether the Agero transaction closed on expected terms and how it was funded, including resulting debt and integration costs.
- The actual cash cost and loss on the October 2013 note redemption, and subsequent interest expense and debt levels.
- Repurchase execution and remaining liquidity after the additional authorization, including the planned Liberty Media transactions and related-party governance considerations.
- FM-6 launch and operational status, and any spending on replacement satellite components.
- Subscriber growth, churn, conversion rates and the effect of the scheduled royalty-rate increase on margins.
- Developments or potential financial exposure from the state consumer-practices investigations.
- The non-GAAP nature of adjusted EBITDA and free cash flow; free cash flow does not deduct required debt maturities. Compare these measures with GAAP results and cash obligations.