Sirius XM Radio Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2011, with year-to-date results for the nine months ended September 30, 2011, compared with 2010. The filing’s registrant is Sirius XM Radio Inc.; the request metadata identifies Sirius XM Holdings Inc.
Business context and reporting period
The company provides subscription satellite and internet audio services, with distribution substantially linked to automakers, retailers and other third parties. It reported 21.35 million subscribers at quarter-end, up 7% year over year. In October 2011, it launched the first phase of Sirius XM 2.0, including additional channels and technology intended to provide 25% more bandwidth capacity. In June, the Canadian Sirius and XM operations combined; Sirius XM Radio holds approximately 38% of the combined company’s equity.
Financial performance and position
Amounts below are in millions, except per-share data and subscriber metrics. Margins are calculated from reported GAAP figures.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $762.6 | $717.5 | $2,230.8 | $2,081.1 |
| Operating income | $184.5 | $143.1 | $521.6 | $393.8 |
| Operating margin | 24.2% | 19.9% | 23.4% | 18.9% |
| Net income | $104.2 | $67.6 | $355.6 | $124.5 |
| Net margin | 13.7% | 9.4% | 15.9% | 6.0% |
| Diluted EPS | $0.02 | $0.01 | $0.05 | $0.02 |
| Adjusted EBITDA (non-GAAP) | $197.3 | $169.7 | $563.7 | $481.8 |
- Q3 revenue rose 6%; subscriber revenue increased 8%, advertising revenue 18%, while equipment revenue fell 13% and other revenue fell 6%. For the nine months, revenue grew 7%.
- Subscriber revenue growth reflected an 8% increase in daily weighted average subscribers and stronger premium-service sales, partly offset by discounts. ARPU declined to $11.66 from $11.81 in Q3 and to $11.57 from $11.70 year to date.
- Q3 operating income increased 29%; nine-month operating income increased 32%. Programming and content costs fell, while customer service and billing costs increased with subscriber growth. Adjusted EBITDA, a company-defined non-GAAP measure, grew 16% in Q3 and 17% year to date.
- Nine-month net income included an $84.9 million gain from the Canadian combination, recorded in interest and investment income. Net income also reflects debt-extinguishment losses of $7.2 million, versus $34.7 million in the prior-year period.
- Nine-month operating cash flow was $328.6 million, versus $291.0 million. Capital expenditures were $115.1 million, down from $257.4 million; company-defined free cash flow was $223.9 million, versus $43.1 million. Free cash flow is non-GAAP and does not deduct debt maturities.
- Cash and equivalents were $604.6 million at September 30, 2011, versus $586.7 million at December 31, 2010. Current assets were $1,033.2 million and current liabilities $2,157.6 million (current ratio approximately 0.48).
- Total debt carrying value was $3,031.2 million, down from $3,217.6 million at year-end 2010; this includes $328.0 million of related-party debt held by Liberty Media. The filing reports debt fair value of approximately $3,409.3 million. The company was in compliance with debt covenants.
Material changes versus the prior comparable period
- Subscriber count increased by 1.49 million year over year; self-pay subscribers rose 7%. Average monthly self-pay churn remained 1.9%, while Q3 conversion declined to 44.4% from 48.1%.
- Operating and net profitability improved, but the nine-month net-income comparison was materially aided by the one-time Canada Merger gain. Adjusted EBITDA growth provides a separate operating comparison but excludes specified costs and purchase-accounting effects.
- Capital spending declined substantially following the XM-5 launch in late 2010. The company continued construction of the FM-6 satellite.
- Debt declined, including repayment of the remaining $36.7 million principal of 11.25% notes in January 2011 and repurchases of 3.25% convertible notes. The remaining $23.9 million of those convertible notes was repaid at maturity in October 2011.
Outlook, commentary, risks and unusual items
- Management stated it believed available cash and operating cash flow would cover estimated funding needs, including operating costs, capital expenditures, interest, taxes and scheduled debt maturities. This is subject to operating performance and economic, financial and competitive conditions.
- The company announced an increase in certain subscription rates beginning January 2012. It also expected future programming and content costs to decline as agreements expire or are renewed on more cost-effective terms; customer-service, engineering and certain satellite-related costs may rise.
- FM-6 was anticipated to launch in the first quarter of 2012. Management expected interest expense to rise after launch as satellite-construction interest capitalization ends, partly offset by debt repayments.
- At December 31, 2010, the company had $3.5 billion of valuation allowances against deferred tax assets. Management said continued taxable income could permit a significant valuation-allowance reduction in 2012, producing an income-tax benefit; realization was not assured.
- Contractual cash commitments totaled $5.52 billion, including $3.11 billion of debt obligations and $1.12 billion of scheduled cash interest. Variable future costs tied to subscribers and other activities may be substantial. The filing reported no other significant off-balance-sheet arrangements reasonably likely to materially affect the company.
- Key risks include substantial indebtedness, competition from other audio and digital services, subscriber retention and ARPU, reliance on automakers and other third parties, economic conditions, and satellite useful life; most satellites were not insured.
- Legal matters included multistate and Florida investigations into consumer practices and a Missouri consumer-protection action. A subscriber class settlement was approved, but appeals were filed by 11 individuals. Howard Stern’s production company and agent alleged breach of contract and sought undetermined damages; the company disputed the claims.
- Liberty Media’s Series B preferred stock was convertible into approximately 2.59 billion common shares and carried voting rights on an as-converted basis. Separately, 202.4 million shares loaned under share-lending agreements were returned in October 2011 and retired, with the share count impact to be reflected in the fourth quarter.
Important facts for investors to verify
- How much of reported nine-month earnings growth was driven by recurring operations versus the $84.9 million Canada Merger gain and other purchase-accounting adjustments.
- Whether subscriber growth can continue while ARPU and vehicle trial-to-paid conversion remain under pressure; monitor self-pay churn, conversion and subscriber mix.
- The terms and scope of the announced January 2012 rate changes, particularly in light of the class settlement’s restrictions on certain price increases; also check the status of the pending settlement appeals.
- Debt maturities, cash interest burden, covenant headroom and the company’s ability to meet the $5.52 billion of disclosed contractual commitments.
- FM-6 launch timing, remaining satellite capital needs and the expected effect of ending interest capitalization on reported interest expense.
- Potential dilution from convertible securities, preferred stock, options and other reserved shares, including the effect of the returned and retired share-loan shares.
- Whether taxable income continues and any valuation-allowance release is actually recognized; management’s 2012 possibility is not a committed forecast.