Sirius XM Radio Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011, with comparisons to 2010 and 2009. Although the request identifies “Sirius XM Holdings Inc.,” the filing registrant is Sirius XM Radio Inc. The filing reports annual results, not a standalone fourth-quarter report.
Business context
The company provides subscription satellite and Internet radio in the United States, with programming distributed principally through automakers, as well as retail, online and rental-car channels. It reported 21.9 million subscribers at year-end. Subscription fees are its primary revenue source.
Key financial metrics
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Revenue | $3.015 billion | $2.817 billion | +7% |
| Operating income | $676.1 million | $465.4 million | +45% |
| Net income attributable to common stockholders | $427.0 million | $43.1 million | Up from $0.01 to $0.11 per basic share |
| Operating margin | 22.4% | 16.5% | Improved |
| Operating cash flow | $543.6 million | $512.9 million | +6% |
| Capital expenditures | $137.4 million | $311.9 million | Down $174.4 million |
| Free cash flow (non-GAAP) | $415.7 million | $210.5 million | Nearly doubled |
| Adjusted EBITDA (non-GAAP) | $731.0 million | $626.3 million | +17% |
| Cash and cash equivalents at year-end | $774.0 million | $586.7 million | +$187.3 million |
| Debt carrying value at year-end | $3.014 billion | $3.218 billion | Down $203.6 million |
Subscriber revenue rose 8% to $2.595 billion, largely with growth in average subscribers. Advertising revenue increased 14% to $73.7 million; equipment revenue was essentially flat at $71.1 million. ARPU, a non-GAAP operating metric, declined to $11.58 from $11.73, while self-pay monthly churn remained 1.9%. The company reported 1.70 million net subscriber additions, versus 1.42 million in 2010.
Current assets were $1.277 billion and current liabilities $2.248 billion. Current liabilities included $1.334 billion of deferred revenue; the current ratio alone therefore does not describe the timing or cash character of the company’s obligations. Stockholders’ equity was $704.1 million, versus $207.6 million in 2010. The company paid no common dividends.
Material changes versus the prior comparable period
- Revenue and operating income grew as the subscriber base expanded; operating expenses edged down 1% despite higher subscriber acquisition, royalty and customer service costs.
- Net income increased substantially, reflecting higher operating income, much lower debt-extinguishment losses ($7.2 million versus $120.1 million) and a $73.97 million gain in interest and investment income. The latter included a $75.8 million gain related to the Canadian combination transaction.
- Free cash flow improved mainly because capital expenditures fell following the 2010 XM-5 launch; operating cash flow increased more modestly.
- The company repaid the remaining 11.25% senior secured notes and its 3.25% convertible notes in 2011. Total debt carrying value declined, though substantial principal and interest obligations remained.
- The June 2011 Canadian merger left Sirius XM with approximately 38% equity and 25% voting interest in Sirius XM Canada, accounted for under the equity method.
Outlook, commentary, risks and unusual items
- Pricing and royalties: The basic subscription price increased from $12.95 to $14.49 per month on January 1, 2012. The sound-recording royalty rate was 7.5% in 2011 and is scheduled to rise to 8.0% in 2012. A proceeding for 2013–2017 was pending: Sirius XM requested a rate below 7%, while SoundExchange sought rates beginning at 12% and rising to as much as 20%; a hearing was scheduled for 2012.
- Satellite investment: FM-6 was expected to launch in the first half of 2012. The company estimated satellite and transmission commitments of $60.5 million in 2012 and $5.5 million in 2013, plus $48.5 million thereafter. Management said available cash, cash equivalents and marketable securities, together with operating cash flow, were expected to meet estimated funding needs.
- Debt and control: The filing gives approximately $3.1 billion of principal debt and identifies restrictive debt covenants; the company reported covenant compliance at year-end. Liberty Media held convertible preferred stock representing conversion into approximately 2.587 billion common shares and had significant influence, consent rights over specified actions and board designation rights.
- Principal operating risks: Competition from free terrestrial radio, Internet audio and connected-car systems; dependence on automakers and vehicle sales; subscriber conversion, churn and discounting; music royalty costs; and satellite failure, aging satellites and launch risk. Three Sirius satellites had solar-array degradation, and insurance did not cover the full cost or business interruption from a loss.
- Legal and regulatory matters: Multiple state attorneys general were investigating consumer practices, including cancellation, renewals, billing and solicitation; Missouri had brought a telemarketing action. A separate Howard Stern production company and agent contract dispute sought undetermined damages. The filing states the company disputed the claims; outcomes were uncertain.
- Taxes and non-GAAP measures: The company retained a full valuation allowance against deferred tax assets, including approximately $3.36 billion of valuation allowance, despite reporting taxable income in 2011. Management said a valuation-allowance release could become possible if earnings trends continued, but no release was recorded. Adjusted EBITDA and free cash flow are non-GAAP measures and should be considered alongside GAAP results; free cash flow does not deduct required debt maturities.
Most important facts for investors to verify
- Whether subscriber additions, 45% new-vehicle conversion and 1.9% self-pay monthly churn persist after the January 2012 price increase.
- The final 2013–2017 sound-recording royalty rate and its effect on margins and cash generation.
- FM-6 launch timing, cost and performance, and the condition and useful lives of existing satellites.
- Debt maturities, cash interest requirements, covenant headroom and the company’s ability to sustain free cash flow after capital spending normalizes.
- Whether the Canadian merger gain is non-recurring and how the Canadian affiliate contributes to ongoing earnings and cash flows.
- Developments and potential financial exposure in the state consumer investigations and the Stern-related litigation.
- Any future change to the deferred-tax valuation allowance; the filing’s possible 2012 benefit was conditional, not recorded guidance.