Sirius XM Radio Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; unaudited. The supplied filing is for Sirius XM Radio Inc., not Sirius XM Holdings Inc. The filing discusses a possible future holding-company reorganization, but says the board had not approved it and timing was uncertain.
Business context
The company provides subscription satellite radio and related internet, advertising, equipment, data and other services. At quarter-end it reported 25.07 million subscribers, including 20.30 million self-pay and 4.77 million paid promotional subscribers. Liberty Media beneficially owned more than 50% of its common stock.
Financial and operating highlights
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $940.1m | $837.5m | $1,837.5m | $1,642.3m |
| Operating income | $267.7m | $227.9m | $514.7m | $427.2m |
| Net income | $125.5m | $3,134.2m | $249.1m | $3,241.9m |
| Adjusted EBITDA (non-GAAP) | $283.0m | $237.1m | $544.9m | $445.3m |
| Free cash flow (non-GAAP) | $236.6m | $230.0m | $379.0m | $244.8m |
- Q2 revenue rose 12%; subscriber revenue increased 12%, primarily reflecting a larger subscriber base, rate increases and premium-service growth. Q2 operating income increased 17%; operating margin was approximately 28.5%, versus 27.2% a year earlier.
- Net income comparisons are distorted by the 2012 release of substantially all deferred-tax valuation allowances, which generated a $2,996.5m tax benefit in Q2 2012 and $2,993.7m for the first half. 2013 tax expense was $76.7m in Q2 and $155.7m for the first half; management estimated a 38.2% effective tax rate for 2013.
- Q2 adjusted EBITDA increased 19%; first-half adjusted EBITDA increased 22%. These are non-GAAP measures and exclude specified purchase-accounting adjustments, share-based compensation and other items.
- First-half operating cash flow was $442.0m, versus $293.7m; capital expenditures were $63.0m, versus $48.9m. Cash and equivalents were $651.8m at June 30, up from $520.9m at year-end.
- Carrying value of total debt was $3.25bn, up from $2.44bn at year-end. The company issued $1.0bn of notes in May 2013, partly used to refinance debt; first-half interest expense fell to $95.9m from $149.7m. The $1.25bn revolving facility had no borrowings outstanding and was fully available at quarter-end. Debt covenants were reported in compliance.
- During the first half, the company repurchased 352.6m shares for $1.14bn under its $2.0bn program; $856.2m remained available at June 30. It also repurchased portions of its 8.75% and 7.625% notes.
Material changes and management commentary
- Subscribers reached 25.07m, up 9% year over year; first-half net additions were 1.17m versus 1.03m. Q2 self-pay monthly churn improved to 1.7% from 1.9%; new-vehicle conversion was 45%, unchanged year over year.
- ARPU was $12.28 in Q2 versus $11.97. Management attributed growth to the music royalty fee, subscription-rate increases and premium services, partly offset by discounts and fully recognized lifetime plans.
- Expense trends were mixed: customer service and billing, sales and marketing, and engineering costs increased; general and administrative costs declined. Revenue share and royalties rose with revenue and the statutory sound-recording royalty rate. Management expected the statutory rate to rise to 9.5% in 2014.
- Management said it expected to fund operating needs, capital spending, debt service and repurchases through cash, operating cash flow and revolver capacity, and believed resources were sufficient for planned needs and strategic opportunities. The filing provides no formal full-year revenue, earnings or subscriber guidance.
Outlook, risks and unusual items
- The FM-6 satellite launch, previously scheduled for August 2013, was delayed after a third-party launch failure; no new launch date had been set. The company had ordered long-lead parts and said it might accelerate construction of a replacement satellite if FM-6 could not enter service.
- As of June 30, contractual cash commitments totaled $5.58bn, including $3.28bn of debt principal, $1.04bn of interest, and substantial programming, lease and satellite-related obligations. Variable-cost arrangements could add to future costs.
- A multistate group of 32 state attorneys general, as well as Florida and New York, was investigating consumer practices involving cancellations, renewals, billing, refunds and solicitation. The company said it was cooperating and believed its practices complied with applicable law. It did not consider other disclosed lawsuits likely to have a material adverse effect.
- Key risks cited include competition, dependence on automakers, subscriber retention, satellite failure, rising music royalties, indebtedness, regulation, consumer-protection enforcement, cybersecurity and Liberty Media’s significant influence. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- Subsequent to quarter-end and through July 24, the company repurchased $74.5m principal of debt and 38.4m shares for $136.3m.
Investor verification checklist
- Reconcile reported net income with the prior-year tax valuation-allowance release; assess recurring earnings using GAAP results alongside clearly reconciled non-GAAP measures.
- Review debt maturities, interest burden, leverage covenant headroom, and the financing of continued share repurchases.
- Monitor subscriber additions, self-pay churn, vehicle conversion, promotional-trial mix and ARPU for evidence of sustainable subscriber economics.
- Confirm FM-6 launch timing, replacement-satellite contingencies and related capital requirements.
- Track outcomes of the state consumer-practices investigations and any resulting costs or changes to customer policies.
- Assess Liberty Media’s control, related-party arrangements and any progress toward the proposed holding-company reorganization.