Sirius XM Radio Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. The filing is by Sirius XM Radio Inc., not Sirius XM Holdings Inc. Unless otherwise stated, dollar amounts below are in millions.
Business context
The company provides subscription satellite radio and related internet, data, advertising, equipment and ancillary services. Automakers are a principal subscriber-acquisition channel. At quarter-end, Sirius XM reported 24.35 million subscribers: 19.87 million self-pay and 4.48 million paid promotional. Liberty Media beneficially owned more than 50% of common stock. A proposed holding-company reorganization had not been approved and remained uncertain.
Financial and operating performance
- Revenue: $897.4, up 11.5% from $804.7. Subscriber revenue was $783.3, up 12%; advertising revenue $20.2, up 8%; equipment revenue $18.2, up 7%; and other revenue $75.7, up 10%.
- Operating income: $246.9, up 24% from $199.2. Operating margin was approximately 27.5%, versus 24.8%.
- Net income: $123.6, up 15% from $107.8; diluted EPS was $0.02 in both periods. Net margin was approximately 13.8%, versus 13.4%.
- Adjusted EBITDA (non-GAAP): $261.9, up 26% from $208.2. Free cash flow (non-GAAP): $142.5, versus $14.8, calculated as operating cash flow less capital expenditures.
- Cash flow: Operating cash flow was $168.9, versus $39.9; capital expenditures were $26.4. Financing cash outflow was $456.7, principally reflecting share repurchases. Cash declined $314.2 to $206.7 from year-end.
- Liquidity and debt: Total debt carrying value was $2,388.3, including $209.1 of related-party debt; cash was $206.7. The $1.25 billion secured revolving credit facility was undrawn. The company reported compliance with debt covenants and said available cash, operating cash flow and borrowing capacity should meet expected funding needs.
- Balance sheet: Current assets were $1,599.3 and current liabilities $2,255.1. Current liabilities include $1,516.6 of deferred revenue, largely reflecting advance subscription payments. Total assets were $8,643.2 and stockholders’ equity $3,737.4.
Changes versus Q1 2012
- Subscriber growth and pricing contributed to revenue gains: net additions rose to 452,890 from 404,596, and quarter-end subscribers increased 9% year over year. ARPU rose to $12.05 from $11.77.
- Operating expenses grew 7% to $650.5, slower than revenue. Customer service and billing expense rose 21%, revenue share and royalties 12%, and sales and marketing 13%; general and administrative expense fell 6%.
- Interest expense decreased 40% to $46.2, mainly due to lower average debt and interest rates. Q1 2012 included a $10.0 million debt-extinguishment loss; Q1 2013 had none.
- Income tax expense increased to $79.0 from $2.8. The 2013 estimated annual effective tax rate was 38.5%; the prior-year period benefited from release of deferred-tax valuation allowances.
- Average self-pay monthly churn edged up to 2.0% from 1.9%, while new-vehicle consumer conversion declined to 44% from 45%.
Outlook, risks and unusual items
- No formal numeric earnings or revenue guidance is provided. Management expects subscriber revenue to grow with subscriber growth, pricing and plan mix, and expects advertising revenue to benefit from advertiser demand. It also anticipates higher customer-service, marketing, engineering and certain satellite/transmission costs.
- Management expects to launch the FM-6 satellite in 2013; the launch and related construction are a significant planned capital commitment. Depreciation is expected to rise after the satellite enters service. Several satellites had reached or were expected to reach the end of their depreciable lives in 2013.
- The $2.0 billion share-repurchase authorization had $1,506.4 million remaining at March 31. The company repurchased 157.2 million shares for $493.6 million during the quarter, at an average $3.14 per share. Liberty Media did not participate.
- Contractual cash commitments totaled $4,452.4 million, including debt principal, interest, programming, satellite/transmission and lease obligations; the schedule excludes uncertain-tax-position reserves and variable-cost arrangements.
- Risks highlighted include dependence on automakers, competition, subscriber retention, satellite or systems failure, rising music royalties, indebtedness and covenant constraints, consumer-protection regulation, and Liberty Media’s significant influence. State attorneys general were investigating subscription cancellation, renewals, billing, refunds and solicitation practices; the company said it was cooperating and believed its practices complied with law.
- A lawsuit involving Howard Stern’s production company and agent was dismissed, and the dismissal was affirmed on appeal in April 2013. The company reported no other proceedings it believed likely to have a material adverse effect. No material change to previously disclosed risk factors was reported.
Key facts for investors to verify
- Whether subscriber additions can continue while churn rises and new-vehicle conversion declines.
- How the 38.5% estimated tax rate and substantial deferred-tax assets affect future reported earnings and cash taxes.
- Whether ongoing repurchases are supportable given the cash decline, debt obligations and remaining authorization.
- FM-6 launch timing, related spending, and the condition and useful lives of the existing satellite fleet.
- Developments in the state consumer-practices investigations and any effect on customer acquisition, billing or retention.
- Liberty Media’s control, related-party exposure, and whether the proposed reorganization receives board and regulatory approval.