Sirius XM Radio Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing is by Sirius XM Radio Inc. (not Sirius XM Holdings Inc.). Financial amounts below are in U.S. dollars; unless otherwise indicated, millions. The company provides subscription satellite radio, internet audio and related services. It reported 20.2 million subscribers at year-end and distributes principally through automakers, retailers and its websites.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 | Change / context |
|---|---|---|---|
| Total revenue | $2,817 | $2,473 | Up 14% |
| Operating income | $465 | $228 | Up 104%; operating margin approximately 16.5%, versus 9.2% |
| Net income (loss) | $43 | $(352) | Returned to GAAP profitability; diluted EPS was $0.01 |
| Adjusted EBITDA (non-GAAP) | $626 | $463 | Up 35%; approximately 22.1% of adjusted revenue |
| Cash from operating activities | $513 | $434 | Up 18% |
| Capital expenditures | $312 | $249 | Primarily satellite construction and launch spending |
| Free cash flow (company-defined, non-GAAP) | $210 | $185 | Up $25 |
| Cash and cash equivalents at year-end | $587 | $383 | Up $203 during 2010 |
| Debt | $3,218 carrying value; approximately $3.3 billion principal | $3,077 carrying value | Substantial debt burden; reported fair value of debt was approximately $3,723 |
Current assets were $992 million and current liabilities $2,350 million at year-end. Current liabilities include substantial deferred subscription revenue. The company stated it had sufficient cash and expected operating cash flow to fund operating needs, capital spending, interest and scheduled debt maturities. It was in compliance with debt covenants and had no significant off-balance-sheet arrangements identified as likely to materially affect its financial position.
Material changes versus the prior year
- Subscribers increased by 1.42 million to 20.19 million, compared with a net loss of 231,098 subscribers in 2009. Gross additions rose 25%; OEM subscriber additions drove growth.
- GAAP revenue grew 14%. Subscriber revenue rose 6% to $2,414 million; advertising revenue rose 25% to $65 million; equipment revenue rose 42% to $71 million. Other revenue increased to $267 million, primarily reflecting a full year of the U.S. Music Royalty Fee.
- Adjusted ARPU increased to $11.73 from $10.95. The company attributed the increase to the royalty fee, “Best of” programming, reduced discounts and improved advertising, partly offset by more promotional subscribers.
- Self-pay monthly churn improved to 1.9% from 2.0%; promotional-trial conversion increased to 46.2% from 45.4%.
- Subscriber acquisition costs rose 21% to $413 million as gross additions and OEM installations increased, while adjusted acquisition cost per gross addition improved to $59 from $63.
- Interest expense declined 6% to $296 million. The company issued $800 million of 8.75% notes due 2015 and $700 million of 7.625% notes due 2018, and used proceeds and other funds to refinance or repay debt. It recorded a $120 million loss on debt extinguishments.
- 2010 net income contrasted with 2009’s net loss; 2008 included a $4,766 million goodwill impairment charge. In 2010, no goodwill impairment was recorded.
Outlook, commentary and risks
- Management gave no specific numerical revenue or earnings guidance. It expected advertising revenue to grow with subscriber growth and the advertising market; subscriber revenue to depend on subscriber growth, churn, pricing, promotions and plan mix; and acquisition, marketing, engineering and general and administrative costs to vary or rise in areas supporting growth.
- The company expected approximately $120 million of satellite and transmission commitments in 2011, principally related to FM-6 and related launch arrangements. It expected to launch its sixth SIRIUS satellite in the fourth quarter of 2011.
- Music royalty rates under the existing statutory schedule rose from 7.0% of qualifying gross revenue in 2010 to 7.5% in 2011 and 8.0% in 2012. A new rate-setting proceeding began in January 2011. The company reduced the monthly U.S. Music Royalty Fee on its base $12.95 package to $1.40 effective December 6, 2010; certain package prices and channel offerings remained subject to FCC restrictions through July 28, 2011.
- Key business risks include competition from free terrestrial radio, internet audio and smartphone services; dependence on automakers and vehicle sales; subscriber retention and ARPU; approximately $3.3 billion of debt and restrictive covenants; satellite reliability and limited insurance; rising music royalties; and technology and third-party execution risks.
- Three SIRIUS satellites had experienced solar-array circuit failures, although current operations were not affected. The company recorded a $56 million impairment of its stored FM-4 spare after XM-5 launched; most satellites were not insured for their full replacement cost or business-interruption losses.
- Legal matters include a multistate consumer-practices investigation, a Florida investigation, a Missouri telemarketing action and subscriber class litigation concerning pricing changes and the Music Royalty Fee. The company disputed the allegations; the subscriber case had a May 2011 trial scheduled. The filing does not provide a clear estimate of potential losses for these matters.
- Liberty Media’s Series B preferred stock was convertible into approximately 2.587 billion common shares and gave Liberty significant influence, including consent rights over certain financing and equity actions. The filing also disclosed approximately $8.1 billion of federal net operating loss carryforwards, whose future use could be limited by ownership changes.
Most important facts for investors to verify
- Whether subscriber gains, churn and promotional-trial conversion remained sustainable, and whether ARPU growth reflects durable pricing and service value rather than fees or plan mix.
- Cash generation after satellite investment, the level and timing of debt maturities and interest payments, and the effect of subsequent debt repurchases and refinancing.
- Future sound-recording royalty rates and the economics of the Music Royalty Fee and FCC pricing restrictions.
- Satellite operating condition, insurance coverage, and the timing, cost and successful launch of FM-6.
- Developments and potential financial exposure from consumer investigations and subscriber litigation.
- Dilution and governance effects of Liberty Media’s convertible preferred stock and other potential common-share issuances.
- Quarterly volatility: the company reported a fourth-quarter 2010 net loss of $81 million despite full-year net income of $43 million; verify the causes and whether any items recur.