Sirius XM Radio Inc. — Q1 2012 Form 10-Q
Business context and reporting period. The filing covers the unaudited three months ended March 31, 2012, compared with Q1 2011. Sirius XM provides subscription-based satellite and internet radio services in the United States. Unless otherwise stated, financial amounts below are in U.S. dollars; reported financial-statement amounts are converted from thousands to millions.
Financial and operating performance
- Revenue: $804.7 million, up 11% from $723.8 million. Subscriber revenue was $700.2 million, up 13%, driven by subscriber growth, January 2012 rate increases and premium services.
- Profitability: Operating income was $199.2 million, up 21%; operating margin was 24.8%, versus 22.7%. Net income was $107.8 million, up 38%; net margin was 13.4%, versus 10.8%. Diluted EPS was $0.02 versus $0.01.
- Adjusted EBITDA: $208.2 million, up 15% from $181.4 million. This is a company-defined non-GAAP measure and excludes specified items, including share-based compensation and purchase-accounting adjustments.
- Cash flow: Operating cash flow was $39.9 million, compared with $18.1 million. Capital expenditures were $25.2 million, down from $35.0 million. Company-defined free cash flow was $14.8 million, versus negative $16.9 million.
- Cash and liquidity: Cash and cash equivalents were $746.6 million at quarter-end, down from $774.0 million at year-end. Current assets were $1.337 billion and current liabilities $2.237 billion.
- Debt: Carrying value of debt was $2.957 billion, including $329.6 million of related-party debt, versus $3.014 billion at December 31, 2011. Interest expense, net of capitalized amounts, was $77.0 million. The company reported compliance with debt covenants.
- Subscribers: Ending subscribers were 22.30 million, up 8% year over year, including 18.21 million self-pay subscribers. Quarterly net additions were 404,596 versus 373,064; self-pay monthly churn improved to 1.9% from 2.0%. New-vehicle conversion was 45% in both periods.
Material changes versus Q1 2011
- Revenue grew 11%, while operating expenses rose 8% to $605.5 million. Revenue share and royalties increased 24%, subscriber acquisition costs 10%, and sales and marketing 22%; programming and content costs decreased 4%.
- Higher operating income supported increased net income, though total other expense rose to $88.7 million from $84.5 million, including a larger debt-extinguishment loss.
- Operating cash flow improved, and capital spending declined, primarily due to lower FM-6 satellite and launch-vehicle construction costs.
Outlook, management commentary, risks and unusual items
- Management said existing cash and expected operating cash flow should fund operating expenses, capital expenditures, working capital, interest, taxes and scheduled debt maturities. This is a liquidity assessment, not quantified earnings guidance.
- The company expected subscriber and revenue growth to influence future costs; it also anticipated higher engineering and development spending and higher depreciation after the FM-6 satellite is completed and launched. Capitalization of related interest is expected to end after launch, increasing reported interest expense.
- Management retained a full valuation allowance against deferred tax assets, citing cumulative historical losses, despite recent positive earnings and taxable income. It said continued positive performance could permit a material valuation-allowance reduction in Q2 2012, favorably affecting net income and equity; no amount or outcome was assured.
- In Q1, the company repurchased portions of its 13% notes due 2013 and 9.75% secured notes due 2015, recording a combined $10.0 million debt-extinguishment loss. In April 2012, it repurchased another $62.7 million principal amount of 13% notes for $73.6 million including accrued interest; it expected an approximately $11.6 million loss in Q2.
- Contractual cash commitments totaled $5.356 billion, including scheduled debt principal, interest, programming, satellite, marketing and lease obligations. The schedule excluded the April 2012 note repurchase.
- Risks highlighted include competition, dependence on automakers and third parties, satellite reliability, subscriber retention, music royalties, substantial indebtedness, litigation, technology and cybersecurity risks, FCC compliance, and Liberty Media’s significant influence. State attorneys general were investigating consumer practices. The settled Blessing case remained subject to appeals; the One Twelve/Buchwald case was dismissed in April 2012, with an appeal filed.
- Disclosure controls were judged effective at quarter-end, with no material change in internal control over financial reporting reported during the quarter.
Important facts for investors to verify
- Whether subscriber growth, churn and vehicle conversion remain supportive of subscription revenue and whether promotional activity affects subscriber mix and acquisition costs.
- Whether operating cash generation is sufficient to meet debt service and the substantial contractual commitments, particularly upcoming maturities and interest obligations.
- Progress, costs and timing for FM-6 construction and launch, including the effect on capital spending, depreciation and interest expense.
- Whether the company releases any deferred-tax valuation allowance in Q2 2012, and the resulting impact on reported earnings and equity.
- Results of the consumer-practices investigations and appeals, as well as the outcome of the April 2012 debt repurchase and its expected extinguishment loss.