Sirius XM Radio Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; financial statements are unaudited. The filing registrant is Sirius XM Radio Inc.
Business context
The company provides subscription satellite radio and related services in the U.S., with distribution primarily through automakers, as well as Internet, retail and other channels. At quarter-end it reported 23.37 million subscribers: 19.04 million self-pay and 4.32 million paid promotional.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $867.4m | $762.6m | $2,509.6m | $2,230.8m |
| Operating income | $231.7m | $184.5m | $658.9m | $521.6m |
| Operating margin | 26.7% | 24.2% | 26.3% | 23.4% |
| Net income | $74.5m | $104.2m | $3,316.5m | $355.6m |
| Operating cash flow | Not presented quarterly here | Not presented quarterly here | $513.5m | $328.6m |
| Adjusted EBITDA (non-GAAP) | $244.6m | $197.3m | $689.9m | $563.7m |
| Free cash flow (non-GAAP) | $195.2m | $75.4m | $440.0m | $223.9m |
Q3 revenue increased 14%, driven mainly by subscriber revenue growth; operating income rose 26%. Q3 net income declined 28%, principally reflecting a $107.1m loss on debt extinguishment. Nine-month net income included a $3.013bn non-cash tax benefit from releasing substantially all of the deferred-tax valuation allowance; it is not representative of recurring operating earnings. Nine-month diluted EPS was $0.49 versus $0.05, and Q3 diluted EPS was $0.01 versus $0.02.
Revenue growth reflected a 9% increase in daily weighted-average subscribers, subscription price increases effective January 2012 and premium-service sales. Q3 adjusted ARPU rose to $12.14 from $11.66. Nine-month net subscriber additions were 1.47m versus 1.16m; Q3 self-pay monthly churn increased to 2.0% from 1.9%.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $556.3m at September 30, 2012, down from $774.0m at December 31, 2011.
- Debt carrying value was $2.435bn, compared with $3.014bn at year-end 2011. The company issued $400m of 5.25% senior notes due 2022 and repaid its remaining 13% notes due 2013 and 9.75% secured notes due 2015, recognizing $132.7m in nine-month extinguishment losses.
- Nine-month cash flows were $513.5m from operations, $73.5m used in investing and $657.7m used in financing; cash decreased $217.7m. Capital expenditures were $73.5m.
- Management said existing cash and operating cash flow should fund expected needs. Contractual cash commitments totaled $4.64bn, including debt principal, interest, programming, satellite and lease commitments. The company reported compliance with debt covenants.
Outlook, risks and notable items
- No specific full-year financial guidance was provided. Management expected subscriber and advertising revenue to grow with subscriber expansion, and noted that expenses may rise with subscriber acquisition, marketing, technology investment and the FM-6 satellite launch, expected in 2013.
- The Copyright Royalty Board was expected to decide future sound-recording royalty rates in December 2012. The company paid a statutory rate of 8.0% of applicable gross revenue in Q3 2012, versus 7.5% in Q3 2011.
- Key risks include competition, reliance on automakers and third parties, subscriber retention, satellite reliability, potential increases in music royalties, FCC compliance, litigation, technology and cybersecurity risks, and substantial indebtedness. Management reported no material changes to previously disclosed risk factors.
- Thirty-one state attorneys general and separate Florida and New York investigations concerned consumer practices including cancellations, automatic renewals, billing and solicitation. The company said it was cooperating and believed its practices complied with applicable law. Appeals were pending in the settled Blessing subscriber case; the One Twelve/Don Buchwald contract dismissal was also appealed.
- Liberty Media converted 6.25m Series B preferred shares into approximately 1.293bn common shares in September. Common shares outstanding increased to 5.192bn from 3.753bn at year-end; Liberty reported owning approximately 1.904bn shares as of October 25. The filing also disclosed ongoing discussions with Liberty about possible transactions, with no agreement reached.
Important facts for investors to verify
- Separate recurring operating performance from the unusually large, non-cash deferred-tax valuation-allowance release and debt-extinguishment losses.
- Review debt maturities, interest burden and the effect of future refinancing or repayment activity on liquidity.
- Track subscriber additions, self-pay churn, promotional-trial conversion and ARPU to assess the durability and economics of growth.
- Monitor the royalty-rate decision, FM-6 launch and associated costs, and the outcome of the consumer-practice investigations and appeals.
- Assess dilution, governance and related-party implications of Liberty Media’s preferred-stock conversion, ownership and continuing discussions.
- Interpret adjusted EBITDA and free cash flow alongside GAAP results; both are non-GAAP measures, and free cash flow does not deduct required debt maturities.