Sirius XM Radio Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless noted. The filing is by Sirius XM Radio Inc. (the operating company), and its statements are unaudited. Sirius XM broadcasts subscription radio by satellite and also offers online and mobile service. It reported 20.56 million subscribers at quarter-end. In January 2011, XM Satellite Radio Inc. merged into Sirius XM Radio Inc.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 / prior date | Change |
|---|---|---|---|
| Total revenue | $723.8 million | $663.8 million | Up 9% |
| Operating income | $164.2 million | $125.1 million | Up 31%; operating margin 22.7% vs. 18.9% |
| Net income | $78.1 million | $41.6 million | Up 88%; diluted EPS $0.01 vs. $0.01 |
| Adjusted EBITDA (non-GAAP) | $181.4 million | $157.8 million | Up 15%; adjusted EBITDA margin about 24.9% vs. 23.6% |
| Cash from operations | $18.1 million | Cash used: $37.7 million | Improved $55.8 million |
| Capital expenditures | $35.0 million | $99.0 million | Down $64.0 million |
| Free cash flow (non-GAAP) | $(16.9) million | $(127.2) million | Improved $110.3 million; remained negative |
| Cash and cash equivalents | $433.7 million | $586.7 million at Dec. 31, 2010 | Down $153.0 million |
| Total debt, carrying value | $3,093.4 million | $3,217.6 million at Dec. 31, 2010 | Down $124.2 million |
| Stockholders’ equity | $298.6 million | $207.6 million at Dec. 31, 2010 | Up $91.0 million |
Subscriber revenue rose 7% to $622.4 million; advertising increased 14% to $16.6 million, equipment revenue rose 11% to $15.9 million, and other revenue increased 24% to $69.0 million. Other revenue growth primarily reflected more subscribers paying the U.S. Music Royalty Fee and increased Sirius Canada royalties.
Current assets were $878.5 million and current liabilities were $2,211.5 million at March 31, 2011. The resulting current ratio was approximately 0.40; current liabilities include substantial deferred revenue and deferred credits. Debt carrying value was below its estimated fair value of approximately $3,683.3 million. The company said it was in compliance with debt covenants.
Changes and operating trends
- Ending subscribers increased 9% year over year to 20.56 million. Q1 net additions were 373,064, compared with 171,441 a year earlier; gross additions rose 19%. Self-pay monthly churn remained 2.0%, while the vehicle trial-to-paid conversion rate eased to 44.7% from 45.2%.
- Daily weighted average subscribers rose 8%. Adjusted ARPU (non-GAAP) was $11.52, compared with $11.48. Subscriber acquisition cost per gross addition improved to $57 from $59; customer service and billing cost per average subscriber increased to $1.08 from $0.99.
- Operating expenses rose 4%, slower than revenue growth. Subscriber acquisition costs increased 18% and customer service and billing costs rose 17%; programming and content costs declined 7%.
- Net income improved despite broadly stable interest expense; the debt-extinguishment loss increased to $6.0 million from $2.5 million. The company purchased $94.1 million principal of its 3.25% convertible notes in February and retired the remaining 11.25% secured notes in January.
- Cash declined primarily as financing cash outflows, including $133.1 million of debt repayments and premiums, exceeded operating cash inflows. Lower capital spending reflected the October 2010 launch of XM-5.
Outlook, risks and unusual items
- Outlook: No quantified full-year revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management said it believed available cash and operating cash flow would meet estimated funding needs, including operating costs, capital expenditures, interest, taxes and scheduled debt maturities. It cautioned that projections rely on assumptions and contain significant uncertainties.
- Management expected customer care costs to rise with subscriber growth; sales and marketing, engineering and development, general and administrative costs, and depreciation and amortization could also increase. It expected satellite and transmission costs to decline with fleet and repeater-network efficiencies. Statutory sound-recording royalty rates were 7.5% in Q1 2011 and scheduled to rise to 8.0% in 2012.
- Expected contractual cash commitments totaled $5.87 billion, including $3.19 billion of debt principal and $1.27 billion of cash interest. The schedule included $73.965 million of notes repurchased after quarter-end and did not reflect that repurchase in projected interest payments. Capital spending commitments were approximately $107.6 million for the remainder of 2011, largely associated with FM-6 and its launch vehicle.
- In April 2011, the company repurchased $73.965 million principal of 3.25% notes at 101% of principal plus accrued interest and expected to record an approximately $1.2 million extinguishment loss in Q2.
- Key disclosed risks include substantial indebtedness, subscriber retention and churn, competition from other audio and entertainment services, reliance on automakers and other third parties, potential supply-chain effects from the Japan disaster, and satellite useful life; most satellites were not insured. Debt agreements restrict additional debt, liens, distributions and other actions, and a continuing default could accelerate repayment.
- Legal matters include multistate and Florida consumer-practices investigations, a Missouri telemarketing action, class-action antitrust claims that remained pending after partial dismissal in March 2011, and a contract suit by Howard Stern’s production company and agent. The company said it intended to defend the claims; potential exposure is not quantified clearly in the filing text. It also disclosed a shareholder derivative action stayed pending the antitrust case.
- Management reported no goodwill or indefinite-lived intangible impairment indicators in the quarter, no material change in internal control over financial reporting, and effective disclosure controls.
Investor verification points
- Confirm subscriber growth quality and sustainability, including self-pay additions, promotional subscribers, churn, conversion, and the effect of OEM vehicle sales.
- Assess cash generation after capital spending: operating cash flow was positive, but reported free cash flow remained negative and cash balances fell materially.
- Review debt maturities, interest burden, refinancing needs, covenant restrictions, and the effect of the April note repurchase; distinguish debt carrying value from principal obligations.
- Reconcile GAAP results with adjusted EBITDA, adjusted revenue and free cash flow. These are non-GAAP measures and exclude specified purchase-accounting and share-based compensation effects.
- Monitor rising subscriber-acquisition and customer-care costs, scheduled royalty-rate increases, FM-6 spending, and whether management’s liquidity expectations are borne out.
- Track outcomes and possible financial exposure from the consumer investigations, antitrust litigation and Stern-related contract claims; the filing does not quantify a clear aggregate loss estimate.