Sirius XM Radio Inc. — Q2 2012 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2012. Sirius XM provides subscription satellite and internet radio services, with automakers a major distribution and subscriber-acquisition channel. The filing reports 22.9 million subscribers at quarter-end, including 18.7 million self-pay subscribers.
Financial performance
Amounts below are in millions of dollars unless otherwise noted. Results are unaudited.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $837.5 | $744.4 | $1,642.3 | $1,468.2 |
| Operating income | $227.9 | $173.0 | $427.2 | $337.2 |
| Operating margin | 27.2% | 23.2% | 26.0% | 23.0% |
| Net income | $3,134.2 | $173.3 | $3,241.9 | $251.4 |
| Adjusted EBITDA (non-GAAP) | $237.1 | $185.1 | $445.3 | $366.5 |
- Revenue growth: Q2 revenue rose 13%; subscriber revenue increased 14% to $730.3 million. Management attributed growth mainly to a 9% increase in daily weighted-average subscribers, January 2012 subscription-price increases, and higher premium-service sales. Q2 advertising revenue rose 14%; equipment revenue fell 4%.
- Profit and unusual item: GAAP net income includes a $2,989 million discrete, non-cash tax benefit from releasing substantially all of the deferred-tax valuation allowance. Consequently, reported earnings and EPS are not representative of underlying operating performance. Q2 income before taxes was $137.6 million, compared with $175.9 million a year earlier; the prior-year period included a gain related to the Canada merger. Q2 diluted EPS was $0.48 versus $0.03.
- Operating costs: Q2 operating expenses rose 7%, slower than revenue growth. Revenue share and royalties, subscriber acquisition, sales and marketing, and customer service costs increased; programming and content and engineering and development costs declined. Revenue-share and royalty costs also reflected a 7% increase in the statutory sound-recording royalty rate.
- Cash flow and liquidity: For the first half, operating cash flow was $293.7 million, capital expenditures were $48.9 million, and the company reported non-GAAP free cash flow of $244.8 million, up from $148.6 million. Cash and equivalents were $868.3 million at June 30, up from $774.0 million at year-end. Current liabilities exceeded current assets by about $100.6 million; current liabilities include substantial deferred subscription revenue.
- Debt: Total debt carrying value was $2,878.8 million, down from $3,014.0 million at December 31, 2011. First-half repayments included purchases of 13% notes due 2013 and 9.75% secured notes due 2015; the company recorded $25.6 million of debt-extinguishment losses. Debt fair value was approximately $3,343.1 million. The company reported covenant compliance at quarter-end.
Material changes versus the prior comparable period
- Subscribers increased 9% year over year to 22.9 million. First-half net additions rose 24% to 1.03 million; self-pay monthly churn remained 1.9%, and new-vehicle conversion remained 45%.
- Q2 adjusted EBITDA increased 28%; first-half adjusted EBITDA increased 22%. Management linked the gains to subscriber and revenue growth, partly offset by higher royalties, subscriber acquisition spending, and marketing.
- First-half operating cash flow increased $80.2 million year over year, while capital expenditures fell $26.4 million, primarily due to lower FM-6 satellite construction spending.
- Debt carrying value declined by $135.2 million from year-end. Q2 interest expense decreased 4%, while debt-extinguishment losses increased materially because of note repurchases.
Outlook, risks, and contingencies
- Outlook: The filing provides no specific numerical earnings or revenue guidance. Management expected subscriber revenue to benefit from subscriber growth, pricing, and premium services, while noting that costs may rise with subscriber additions, marketing programs, and the FM-6 launch. Management stated that existing cash and operating cash flow should cover estimated funding needs.
- Capital commitments: Contractual cash commitments totaled $5,157.0 million, including $2,932.5 million of debt principal and $850.8 million of cash interest. These commitments include programming, leases, satellite and transmission, and other obligations. FM-6 launch-related spending was expected to continue, largely into 2013.
- Subsequent event: On July 25, 2012, the company announced plans to redeem all outstanding 9.75% senior secured notes on September 1, 2012, at 104.875% of principal plus accrued interest.
- Risks and legal matters: Key risks include competition, reliance on automakers, satellite failure, subscriber retention, music royalties, substantial indebtedness, FCC compliance, technology changes, cybersecurity, and litigation. State attorneys general were investigating consumer practices. Appeals were pending in the settled Blessing subscriber case; the company had won summary judgment in the Howard Stern-related contract case, which plaintiffs appealed. The company said other proceedings were not expected to have a material adverse effect.
- Liberty Media: Liberty held significant governance and financing influence, including convertible preferred stock, and the company disclosed discussions about possible transactions with Liberty without an agreed transaction.
Important facts for investors to verify
- Separate recurring operating results from the $2,989 million non-cash tax benefit when assessing reported net income and EPS.
- Review the assumptions supporting deferred-tax-asset realizability and the remaining valuation allowance of approximately $119.3 million.
- Track subscriber additions, promotional-trial deactivations, churn, conversion, ARPU, and subscriber-acquisition costs.
- Assess debt maturities, refinancing or redemption costs, covenant restrictions, and the planned September 2012 redemption of the 9.75% notes.
- Monitor FM-6 launch timing and costs, satellite fleet condition, royalty rates, and material legal or regulatory developments.