Sirius XM Radio Inc. — Q2 2011 Form 10-Q
Period: Three and six months ended June 30, 2011; comparisons are to the corresponding 2010 periods. The supplied filing is for Sirius XM Radio Inc., not an entity named Sirius XM Holdings Inc. Financial statement amounts below are in U.S. dollars; amounts converted from thousands are shown in millions unless stated otherwise.
Business context and reporting period
The company provides subscription satellite radio in the United States, with additional Internet and mobile offerings and revenue from advertising, equipment, and related services. It distributes radios through automakers, retailers, and its website. At June 30, 2011, it reported 21.02 million subscribers. In June, its Canadian affiliates combined; Sirius XM received a 38% equity interest in the resulting company and accounts for it under the equity method.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $744.4m | $699.8m | $1,468.2m | $1,363.5m |
| Operating income | $173.0m | $125.6m | $337.2m | $250.8m |
| Net income | $173.3m | $15.3m | $251.4m | $56.9m |
| Adjusted EBITDA (non-GAAP) | $185.1m | $154.3m | $366.5m | $312.1m |
| Free cash flow (non-GAAP) | $165.4m | $108.3m | $148.6m | $(18.9)m |
Revenue rose 6% in Q2 and 8% for the first half. Subscriber revenue grew 6% and 7%, respectively, primarily with 8% growth in daily weighted-average subscribers. Advertising revenue increased 15% in both periods. Operating margin was approximately 23.2% in Q2 versus 18.0% a year earlier; first-half operating margin was approximately 23.0% versus 18.4% (calculated from reported figures).
Net income included an $83.7 million gain from the Canadian combination, recorded in interest and investment income. That gain was a major contributor to the year-over-year increase in net income; Q2 interest and investment income was $80.2 million, compared with $0.4 million in Q2 2010. Interest expense remained substantial at $76.2 million for Q2 and $154.4 million for the first half. Diluted EPS was $0.03 for Q2 and $0.04 for the first half, versus $0.00 and $0.01, respectively.
Six-month operating cash flow was $213.5 million, compared with $141.0 million; capital expenditures were $75.3 million, down from $169.3 million. Reported non-GAAP free cash flow was $148.6 million, versus negative $18.9 million. It includes restricted and other investment activity and is not cash remaining after debt maturities. Cash and equivalents were $528.3 million at June 30, down from $586.7 million at year-end.
Reported debt carrying value, including related-party debt, was $3.025 billion, compared with $3.218 billion at year-end; the filing reports debt fair value of approximately $3.489 billion. Cash less carrying-value debt implies net debt of approximately $2.497 billion. Current liabilities were $2.171 billion, including $1.296 billion of current deferred revenue; this customer-related deferred revenue is a significant part of the liability balance. The company said it was in compliance with debt covenants. Its debt restricts, among other matters, additional borrowing and certain investments, dividends, and transactions.
Material changes versus prior comparable periods
- Subscribers reached 21.02 million, up 8% year over year, but Q2 net additions declined to 452,147 from 583,249. Gross additions rose, while deactivations increased.
- Monthly self-pay churn increased to 1.9% from 1.8% in Q2; the vehicle-owner conversion rate fell to 45.2% from 46.7%. ARPU declined to $11.53 from $11.81.
- Adjusted EBITDA increased 20% in Q2 and 17% for the first half. The company attributed growth principally to subscriber and revenue growth, partly offset by higher royalties and customer-service costs.
- Debt carrying value decreased, including repayment of the remaining 11.25% secured notes and purchases of $168.1 million principal of 3.25% convertible notes during 2011. The 3.25% notes had $23.9 million carrying value remaining at June 30 and mature in October 2011.
- Capital expenditures fell following the XM-5 satellite launch in late 2010. Cash decreased by $58.4 million during the first half, mainly reflecting financing outflows, including debt repayment.
Outlook, commentary, risks, and unusual items
- The filing provides no formal quantified full-year revenue, earnings, or subscriber guidance. Management said existing cash and expected operating cash flow should cover estimated operating needs, capital expenditures, interest, taxes, and scheduled debt maturities, while noting projections contain significant uncertainties.
- Management anticipated an FM-6 satellite launch in Q4 2011. It expected future depreciation and amortization to rise with XM-5 and FM-6, and royalty costs to increase; the statutory sound-recording royalty rate was 7.5% for the first half of 2011 and is scheduled to reach 8.0% in 2012.
- The company identified competition, subscriber retention and ARPU, dependence on automakers and other distribution partners, possible supply-chain effects from the Japan disaster, substantial indebtedness, and satellite useful life (most satellites uninsured) as important risks. Equipment revenue was affected by the Japan disaster’s impact on automakers.
- Contractual cash commitments totaled $5.649 billion, including $3.114 billion of debt principal and $1.182 billion of cash interest. Programming and content commitments were $802.9 million. Variable-cost arrangements may add to future costs.
- A settlement of the Blessing subscriber class action was contingent on court approval. It included restrictions on certain price increases and fee changes through December 31, 2011, limited free service for eligible former subscribers, and up to $13 million in plaintiffs’ counsel fees and expenses to which the company agreed not to object; no other class or counsel cash payment was required. The company denied wrongdoing.
- State consumer-practice investigations and a Missouri action remained outstanding. A separate contract action by Howard Stern’s production company and agent sought damages in an amount not specified in the filing; the company said it would defend the case.
Most important facts for investors to verify
- How much of reported earnings and cash generation reflects recurring operations versus the $83.7 million Canadian transaction gain and related merger-accounting effects.
- The maturity and refinancing or repayment plan for near-term debt, particularly the October 2011 convertible notes and approximately $780 million of 2013 debt obligations shown in the commitment schedule.
- Whether subscriber growth can continue alongside improving churn, conversion, and ARPU, and how promotional plans affect subscriber economics.
- Actual FM-6 launch timing and spending, future satellite capital needs, and the impact of increasing royalty rates and contractual commitments.
- Final approval and costs of the Blessing settlement, and potential exposure from the consumer investigations and Stern-related litigation.
- The assumptions and exclusions behind non-GAAP adjusted EBITDA and free cash flow; these measures are supplemental and are not substitutes for GAAP results or cash available after debt service.