Sirius XM Radio Inc. ( NASDAQ:SIRI ): Current price $3.95
Shares 
are up about 3 percent Thursday after Sirius’ board confirmed an additional $2 billion stock repurchase . The satellite radio provider said announced that it will pay for the repurchases through available cash, future cash flow from operations, and future borrowings. Sirius can purchase the shares on the open market or in privately negotiated transactions, including potential arrangements with Liberty Media and its affiliates, from which the company also said that it will repurchase $500 million shares.
Sirius XM Radio Inc. ( NASDAQ:SIRI ): Current price $3.95
Form 10-Q for SIRIUS XM RADIO INC.
26-Jul-2013
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All dollar amounts referenced in this Item 2 are in thousands, unless otherwise stated)
Special Note Regarding Forward-Looking Statements
The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in forward-looking statements made in this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time. Any statements about our beliefs, plans, objectives, expectations, assumptions, future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "intend," "plan," "projection" and "outlook." Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time, particularly the risk factors described under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012 and "Management's Discussion and Analysis of Financial Condition and Results or Operations" herein and in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012.
Among the significant factors that could cause our actual results to differ materially from those expressed in the forward-looking statements are:
? we face substantial competition and that competition is likely to increase over time;
? our business depends in large part upon automakers;
? general economic conditions can affect our business;
? failure of our satellites would significantly damage our business;
? our ability to attract and retain subscribers at a profitable level in the future is uncertain;
? royalties for music rights have increased and may continue to do so in the future;
? our business could be adversely affected if we fail to attract and retain qualified executive officers;
? the unfavorable outcome of pending or future litigation could have a material adverse effect;
? rapid technological and industry changes could adversely impact our services;
? failure of third parties to perform could adversely affect our business;
? changes in consumer protection laws and their enforcement could damage our business;
? failure to comply with FCC requirements could damage our business;
? other existing or future government laws and regulations could harm our business;
? interruption or failure of our information technology and communication systems could negatively impact our results and brand;
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? if we fail to protect the security of personal information about our customers, we could be subject to costly government enforcement actions or private litigation and our reputation could suffer;
? we may from time to time modify our business plan, and these changes could adversely affect us and our financial condition;
? our indebtedness could adversely affect our operations and could limit our ability to react to changes in the economy or our industry;
? our broadcast studios, terrestrial repeater networks, satellite uplink facilities or other ground facilities could be damaged by natural catastrophes or terrorist activities;
? our principal stockholder has significant influence over our management and over actions requiring stockholder approval and its interests may differ from the interests of other holders of common stock;
? we are a "controlled company" within the meaning of the NASDAQ listing rules and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements; and
? our business may be impaired by third-party intellectual property rights.
Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any of these forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise or to assess with any precision the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Executive Summary
We broadcast our music, sports, entertainment, comedy, talk, news, traffic and weather channels, as well as infotainment services in the United States on a subscription fee basis through our two proprietary satellite radio systems. Subscribers can also receive our music and other channels, plus new features such as SiriusXM On Demand and MySXM, over the Internet, including through applications for mobile devices.
We have agreements with every major automaker ("OEMs") to offer satellite radios as factory or dealer-installed equipment in their vehicles from which we acquire a majority of our subscribers. We also acquire subscribers through marketing campaigns to owners of factory-installed satellite radios that are not currently subscribing to our services. Additionally, we distribute our satellite radios through retail locations nationwide and through our website. Satellite radio services are also offered to customers of certain daily rental car companies.
As of June 30, 2013, we had 25,068,988 subscribers of which 20,297,736 were self-pay subscribers and 4,771,252 were paid promotional subscribers. Our subscriber totals include subscribers under our regular pricing plans; discounted pricing plans; subscribers that have prepaid, including payments either made or due from automakers for subscriptions included in the sale or lease price of a vehicle; certain radios activated for daily rental fleet programs; subscribers to our Internet services who do not also have satellite radio subscriptions; and certain subscribers to our weather, traffic, data and Backseat TV services.
Our primary source of revenue is subscription fees, with most of our customers subscribing on an annual, semi-annual, quarterly or monthly basis. We offer discounts for prepaid and long-term subscription plans, as well as discounts for multiple subscriptions. We also derive revenue from other subscription-related fees, the sale of advertising on select non-music channels, the direct sale of satellite radios, components and accessories, and other ancillary services, such as our Internet radio, Backseat TV, data, traffic and weather services.
In certain cases, automakers and dealers include a subscription to our radio services in the sale or lease price of new vehicles or previously owned vehicles. The length of these trial subscriptions varies but is typically three to twelve months. We receive subscription payments for these trials from certain automakers. We also reimburse various automakers for certain costs associated with satellite radios installed in their vehicles.
Liberty Media Corporation beneficially owned as of June 30, 2013, directly and indirectly, over 50% of the outstanding shares of our common stock. Liberty Media owns interests in a broad range of media, communications and entertainment businesses, including its subsidiaries, Atlanta National League Baseball Club, Inc. and TruePosition, Inc., its
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interests in Charter Communications, Live Nation Entertainment, Barnes & Noble, and minority equity investments in Time Warner Inc. and Viacom.
We also have an equity interest in Sirius XM Canada which offers satellite radio services in Canada. Subscribers to the Sirius XM Canada service are not included in our subscriber count.
We have been discussing with our board of directors the desirability of undertaking a corporate reorganization that would create a new holding company structure pursuant to which: Sirius XM Radio Inc., its business operations and its subsidiaries, would operate as a wholly owned subsidiary of the new holding company. However, no action has yet been taken by our board of directors to approve any reorganization. As a consequence, the timing of any such reorganization, if it were to occur, is uncertain. The business operations of our company - Sirius XM Radio Inc. - and its subsidiaries would not change as a result of the reorganization. As part of such a reorganization, we would form a new parent company, called Sirius XM Holdings Inc. Outstanding shares of our common stock would be automatically converted, on a share for share basis, into identical shares of common stock of Sirius XM Holdings Inc. The certificate of incorporation, the bylaws, the executive officers and the board of directors of the new holding company would be the same as those of our company in effect immediately prior to the reorganization. The common stock of the new holding company would continue to be listed on the NASDAQ Global Select Market.
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Results of Operations
Set forth below are our results of operations for the three and six months ended
June 30, 2013 compared with the three and six months ended June 30, 2012.
Unaudited 2013 vs 2012 Change 2013 vs 2012 Change
For the Three Months Ended June 30, For the Six Months Ended June 30, Three Months Six Months
2013 2012 2013 2012 Amount % Amount %
Revenue:
Subscriber revenue $ 814,718 $ 730,285 $ 1,598,060 $ 1,430,526 $ 84,433 12 % $ 167,534 12 %
Advertising
revenue 21,757 20,786 41,968 39,456 971 5 % 2,512 6 %
Equipment revenue 18,443 16,417 36,599 33,370 2,026 12 % 3,229 10 %
Other revenue 85,192 70,055 160,881 138,912 15,137 22 % 21,969 16 %
Total revenue 940,110 837,543 1,837,508 1,642,264 102,567 12 % 195,244 12 %
Operating
expenses:
Cost of services:
Revenue share and
royalties 155,859 135,426 304,390 267,537 20,433 15 % 36,853 14 %
Programming and
content 70,381 65,169 144,991 135,265 5,212 8 % 9,726 7 %
Customer service
and billing 80,290 68,679 160,684 134,866 11,611 17 % 25,818 19 %
Satellite and
transmission 19,493 17,551 39,188 35,661 1,942 11 % 3,527 10 %
Cost of equipment 5,442 7,150 12,469 12,956 (1,708 ) (24 )% (487 ) (4 )%
Subscriber
acquisition costs 129,992 119,475 246,103 235,596 10,517 9 % 10,507 4 %
Sales and
marketing 68,058 57,422 133,956 115,781 10,636 19 % 18,175 16 %
Engineering,
design and
development 15,052 6,272 29,894 18,962 8,780 140 % 10,932 58 %
General and
administrative 60,392 65,664 116,732 125,550 (5,272 ) (8 )% (8,818 ) (7 )%
Depreciation and
amortization 67,415 66,793 134,433 132,910 622 1 % 1,523 1 %
Total operating
expenses 672,374 609,601 1,322,840 1,215,084 62,773 10 % 107,756 9 %
Income from
operations 267,736 227,942 514,668 427,180 39,794 17 % 87,488 20 %
Other income
(expense):
Interest expense,
net of amounts
capitalized (49,728 ) (72,770 ) (95,902 ) (149,742 ) 23,042 32 % 53,840 36 %
Loss on
extinguishment of
debt and credit
facilities, net (16,377 ) (15,650 ) (16,377 ) (25,621 ) (727 ) (5 )% 9,244 36 %
Interest and
investment income
(loss) 294 (1,728 ) 1,932 (2,871 ) 2,022 117 % 4,803 167 %
Other income
(loss) 256 (173 ) 502 (749 ) 429 248 % 1,251 167 %
Total other
expense (65,555 ) (90,321 ) (109,845 ) (178,983 ) 24,766 27 % 69,138 39 %
Income before
income taxes 202,181 137,621 404,823 248,197 64,560 47 % 156,626 63 %
Income tax
(expense) benefit (76,659 ) 2,996,549 (155,699 ) 2,993,747 (3,073,208 ) (103 )% (3,149,446 ) (105 )%
Net income $ 125,522 $ 3,134,170 $ 249,124 $ 3,241,944 $ (3,008,648 ) (96 )% $ (2,992,820 ) (92 )%
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Total Revenue
Subscriber Revenue includes subscription, activation and other fees.
? For the three months ended June 30, 2013 and 2012, subscriber
revenue was $814,718 and $730,285, respectively, an increase of 12%,
or $84,433. For the six months ended June 30, 2013 and 2012,
subscriber revenue was $1,598,060 and $1,430,526, respectively, an
increase of 12%, or $167,534. These increases were primarily
attributable to a 9% increase in the daily weighted average number
of subscribers, the impact of the increase in certain of our
subscription rates beginning in January 2012 as more subscribers
migrate to the higher rate, and an increase in subscriptions to
premium services, including data services and Internet streaming.
These increases were partially offset by subscription discounts
offered through customer acquisition and retention programs, and an
increasing number of lifetime subscription plans that have reached
full revenue recognition.
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We expect subscriber revenues to grow based on the growth of our subscriber base, promotions, subscription plan mix, and identification of additional revenue streams from subscribers.
Advertising Revenue includes the sale of advertising on certain non-music channels, net of agency fees. Agency fees are based on a contractual percentage of the gross advertising revenue.
? For the three months ended June 30, 2013 and 2012, advertising
revenue was $21,757 and $20,786, respectively, an increase of 5%, or
$971. For the six months ended June 30, 2013 and 2012, advertising
revenue was $41,968 and $39,456, respectively, an increase of 6%, or
$2,512. These increases were primarily due to a greater number of
spots sold and broadcast, and increases in the rates charged per
spot.
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We expect our advertising revenue to grow as advertisers are attracted to our national platform and growing subscriber base.
Equipment Revenue includes revenue and royalties from the sale of satellite radios, components and accessories.
? For the three months ended June 30, 2013 and 2012, equipment revenue
was $18,443 and $16,417, respectively, an increase of 12%, or
$2,026. For the six months ended June 30, 2013 and 2012, equipment
revenue was $36,599 and $33,370, respectively, an increase of 10%,
or $3,229. These increases were driven by higher OEM production and
mix of royalty eligible vehicles and, to a lesser extent, higher
sales of aftermarket radios to distributors.
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We expect equipment revenue to fluctuate based on OEM production for which we receive royalty payments for our technology and, to a lesser extent, on the volume and mix of equipment sales in our aftermarket and direct to consumer business.
Other Revenue includes amounts earned from subscribers for the U.S. Music Royalty Fee, revenue from our Canadian affiliate and ancillary revenues.
? For the three months ended June 30, 2013 and 2012, other revenue was
$85,192 and $70,055, respectively, an increase of 22%, or $15,137.
For the six months ended June 30, 2013 and 2012, other revenue was
$160,881 and $138,912, respectively, an increase of 16%, or $21,969.
These increases were driven by the U.S. Music Royalty Fee as our
subscriber base increased and subscribers on the 12.5% rate
increased. The increase was also partially driven by higher royalty
revenue from Sirius XM Canada, as their self-pay subscriber base
grew.
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We expect other revenue to increase as our subscriber base drives higher U.S. Music Royalty Fees as more subscribers migrate to the higher rate and as the performance of our Canadian affiliate improves.
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Operating Expenses
Revenue Share and Royalties include distribution and content provider revenue
share, advertising revenue share, and broadcast and web streaming royalties.
Advertising revenue share is recognized in revenue share and royalties in the
period in which the advertising is broadcast.
? For the three months ended June 30, 2013 and 2012, revenue share and
royalties were $155,859 and $135,426, respectively, an increase of
15%, or $20,433, and increased as a percentage of total revenue. For
the six months ended June 30, 2013 and 2012, revenue share and
royalties were $304,390 and $267,537, respectively, an increase of
14%, or $36,853, and increased as a percentage of total revenue.
These increases were primarily attributable to greater revenues
subject to royalty and/or revenue sharing arrangements, a 12.5%
increase in the statutory royalty rate for the performance of sound
recordings, and increased OEM revenue share, partially offset by an
increase in the benefit to earnings from the amortization of
deferred credits on executory contracts initially recognized in
purchase price accounting associated with the Merger.
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We expect our revenue share and royalty costs to increase as our revenues grow. Under the terms of the Copyright Royalty Board's decision, we paid royalties of 9.0% and 8.0% of gross revenues, subject to certain exclusions, for the three and six months ended June 30, 2013, and 2012, respectively, and will pay 9.5% in 2014. The deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger are expected to provide increasing benefits to revenue share and royalties through the expiration of the acquired executory contracts in 2013.
Programming and Content includes costs to acquire, create, promote and produce content. We have entered into various agreements with third parties for music and non-music programming that require us to pay license fees and other amounts.
? For the three months ended June 30, 2013 and 2012, programming and
content expenses were $70,381 and $65,169, respectively, an increase
of 8%, or $5,212, but decreased as a percentage of total revenue.
For the six months ended June 30, 2013 and 2012, programming and
content expenses were $144,991 and $135,265, respectively, an
increase of 7%, or $9,726, but decreased as a percentage of total
revenue. These increases were primarily due to reductions in the
benefit to earnings from purchase price accounting adjustments
associated with the Merger attributable to the amortization of the
deferred credit on acquired programming executory contracts and
increased personnel costs.
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Excluding the impact from purchase accounting adjustments, based on our current programming offerings, we expect our programming and content expenses to decrease as agreements expire and are renewed or replaced on cost effective terms, offset by increases as we offer additional programming. The impact of purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on acquired programming executory contracts will continue to decline, in absolute amount and as a percentage of reported programming and content costs, through 2015. Substantially all of the deferred credits on executory contracts will be amortized by the end of 2013.
Customer Service and Billing includes costs associated with the operation and management of third party customer service centers, and our subscriber management systems as well as billing and collection costs, transaction fees and bad debt expense.
? For the three months ended June 30, 2013 and 2012, customer service
and billing expenses were $80,290 and $68,679, respectively, an
increase of 17%, or $11,611, and increased as a percentage of total
revenue. For the six months ended June 30, 2013 and 2012, customer
service and billing expenses were $160,684 and $134,866,
respectively, an increase of 19%, or $25,818, and increased as a
percentage of total revenue. These increases were primarily due to
efforts to improve our customer service experience, resulting in
higher spend on customer service agents, staffing and training,
higher subscriber volume driving increased subscriber contacts,
increased bad debt expense and higher technology costs.
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We expect our customer service and billing expenses to increase as our subscriber base grows and as we continue to improve the customer service experience for our subscribers.
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Satellite and Transmission consists of costs associated with the operation and maintenance of our satellites; satellite telemetry, tracking and control systems; terrestrial repeater networks; satellite uplink facilities; broadcast studios; and delivery of our Internet streaming service.
? For the three months ended June 30, 2013 and 2012, satellite and
transmission expenses were $19,493 and $17,551, respectively, an
increase of 11%, or $1,942, but remained flat as a percentage of
total revenue. For the six months ended June 30, 2013 and 2012,
satellite and transmission expenses were $39,188 and $35,661,
respectively, an increase of 10%, or $3,527, but remained flat as a
percentage of total revenue. These increases were primarily due to
increased costs associated with our streaming operations and
in-orbit insurance.
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We expect overall satellite and transmission expenses to increase as we enhance our Internet-based service and add functionality, expand our terrestrial repeater network, launch our FM-6 satellite and incur in-orbit insurance costs.
Cost of Equipment includes costs from the sale of satellite radios, components and accessories and provisions for inventory allowance attributable to products purchased for resale in our direct to consumer distribution channels.
? For the three months ended June 30, 2013 and 2012, cost of equipment
was $5,442 and $7,150, respectively, a decrease of 24%, or $1,708,
and decreased as a percentage of equipment revenue. For the six
months ended June 30, 2013 and 2012, cost of equipment was $12,469
and $12,956, respectively, a decrease of 4%, or $487, and decreased
as a percentage of equipment revenue. These decreases were primarily
due to lower average cost per product sold and lower inventory
reserves, partially offset by higher direct to consumer volume for
the current periods compared to the prior year periods.
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We expect cost of equipment to vary with changes in sales, supply chain management and inventory valuations.
Subscriber Acquisition Costs include hardware subsidies paid to radio manufacturers, distributors and automakers, including subsidies paid to automakers who include a satellite radio and subscription to our service in the sale or lease price of a new vehicle; subsidies paid for chip sets and certain other components used in manufacturing radios; device royalties for certain radios and chip sets; commissions paid to automakers as incentives to purchase, install and activate satellite radios; product warranty obligations; freight; and provisions for inventory allowances attributable to inventory consumed in our OEM and retail distribution channels. The majority of subscriber acquisition costs are incurred and expensed in advance of, or concurrent with, acquiring a subscriber. Subscriber acquisition costs do not include advertising, marketing, loyalty payments to distributors and dealers of satellite radios or revenue share payments to automakers and retailers of satellite radios.
? For the three months ended June 30, 2013 and 2012, subscriber
acquisition costs were $129,992 and $119,475, respectively, an
increase of 9%, or $10,517, but decreased as a percentage of total
. . .
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