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| SIRI > SEC Filings for SIRI > Form 10-K on 10-Mar-2009 | All Recent SEC Filings |
10-Mar-2009
Annual Report
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. Actual results and the timing of events could differ materially from those projected in forward-looking statements due to a number of factors, including those described under "Item 1A - Risk Factors" and elsewhere in this Annual Report. See "Special Note Regarding Forward-Looking Statements."
(All dollar amounts referenced in this Item 7 are in thousands, unless otherwise stated)
Executive Summary
We broadcast in the United States our music, sports, news, talk, entertainment, traffic and weather channels for a subscription fee through our proprietary satellite radio systems - the SIRIUS system and the XM system. On July 28, 2008, our wholly owned subsidiary, Vernon Merger Corporation, merged (the "Merger") with and into XM Satellite Radio Holdings Inc. and, as a result, XM Satellite Radio Holdings Inc. is now our wholly owned subsidiary. The SIRIUS system consists of three in-orbit satellites, approximately 120 terrestrial repeaters that receive and retransmit signals, satellite uplink facilities and studios. The XM system consists of four in-orbit satellites, over 700 terrestrial repeaters that receive and retransmit signals, satellite uplink facilities and studios. Subscribers can also receive certain of our music and other channels over the Internet.
Our satellite radios are primarily distributed through automakers ("OEMs"); through more than 19,000 retail locations; and through our websites. We have agreements with every major automaker to offer SIRIUS or XM satellite radios as factory or dealer-installed equipment in their vehicles. SIRIUS and XM radios are also offered to customers of rental car companies, including Hertz and Avis.
As of December 31, 2008, we had 19,003,856 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 prepaid subscriptions included in the sale or lease price of a new vehicle; active SIRIUS radios under our agreement with Hertz; active XM radios under our agreement with Avis; subscribers to SIRIUS Internet Radio and XM Internet Radio, our Internet services; and certain subscribers to our weather, traffic, data and video 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 pre-paid and long-term subscriptions as well as discounts for multiple subscriptions on each platform. In 2009, we increased the discounted price for additional subscriptions from $6.99 per month to $8.99 per month. We also derive revenue from activation fees, the sale of advertising on select non-music channels, the direct sale of satellite radios and accessories, and other ancillary services, such as our Backseat TV, data and weather services.
In certain cases, automakers include a subscription to our radio services in the sale or lease price of vehicles. The length of these prepaid subscriptions varies, but is typically three to twelve months. In many cases, we receive subscription payments from automakers in advance of the activation of our service. We also reimburse various automakers for certain costs associated with satellite radios installed in their vehicles.
We also have an interest in the satellite radio services offered in Canada. Subscribers to the SIRIUS Canada service and the XM Canada service are not included in our subscriber count.
On August 5, 2008, Sirius Satellite Radio Inc. changed its name to Sirius XM Radio Inc. XM Satellite Radio Holdings Inc., together with its subsidiaries, is operated as an unrestricted subsidiary under the agreements governing our existing indebtedness. As an unrestricted subsidiary, transactions between the companies are required to comply with various contractual provisions in our respective debt instruments.
Unaudited Pro Forma Information
The following discussion of our pro forma information includes non-GAAP financial results and measures that assume the Merger occurred on January 1, 2006. These financial results exclude the impact of purchase price accounting adjustments and refinancing transactions. We believe this non-GAAP financial information provides meaningful supplemental information regarding our operating performance and is used for internal management purposes, when publicly providing the
business outlook, and as a means to evaluate period-to-period comparisons. Please refer to the footnotes (pages 55 to 69) following our discussion of results of operations for the definitions and further discussion of usefulness of such non-GAAP financial measures.
Subscriber and Key Operating Metrics. The following tables contain our pro forma subscribers and key operating metrics for the years ended December 31, 2008, 2007 and 2006:
Unaudited Pro Forma Annual Subscribers and Metrics:
Unaudited Pro Forma
For the Years Ended December 31,
2008 2007 2006
Beginning subscribers 17,348,622 13,653,107 9,249,517
Gross subscriber additions 7,710,306 8,077,674 7,629,645
Deactivated subscribers (6,055,072 ) (4,382,159 ) (3,226,055 )
Net additions 1,655,234 3,695,515 4,403,590
Ending subscribers 19,003,856 17,348,622 13,653,107
Retail 8,905,087 9,238,715 8,454,581
OEM 9,995,953 8,033,268 5,169,372
Rental 102,816 76,639 29,154
Ending subscribers 19,003,856 17,348,622 13,653,107
Retail (333,628 ) 784,135 2,388,124
OEM 1,962,685 2,863,895 2,057,744
Rental 26,177 47,485 (42,278 )
Net additions 1,655,234 3,695,515 4,403,590
Unaudited Pro Forma
For the Years Ended December 31,
2008 2007 2006
Average self-pay monthly churn (1)(7) 1.8 % 1.7 % 1.7 %
Conversion rate (2)(7) 47.5 % 50.9 % 51.9 %
ARPU (3)(7) $ 10.51 $ 10.61 $ 10.82
SAC, as adjusted, per gross subscriber
addition (4)(7) $ 74 $ 86 $ 89
Customer service and billing expenses, as
adjusted, per average subscriber (5)(7) $ 1.11 $ 1.18 $ 1.31
Total revenue $ 2,436,740 $ 2,058,608 $ 1,570,652
Free cash flow (6)(7) $ (551,771 ) $ (504,869 ) $ (1,234,435 )
Adjusted income (loss) from operations (8) $ (136,298 ) $ (565,452 ) $ (679,312 )
Net loss $ (902,335 ) $ (1,247,633 ) $ (1,823,739 )
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Subscribers. We ended 2008 with 19,003,856 subscribers, an increase of 10% from the 17,348,622 subscribers as of December 31, 2007. Gross subscriber additions decreased approximately 5% during 2008 from 2007. Domestic auto sales fell 18% to 13.2 million in 2008 from 16.1 million in 2007. The growth in OEM gross additions was offset by declines in retail gross additions. Deactivation rates for self-pay subscriptions were 1.8%; deactivations due to non-conversions of subscribers in paid promotional trial periods increased as production penetration rates increased.
ARPU. Total ARPU for the year ended December 31, 2008 was $10.51 compared to $10.61 for the year ended December 31, 2007. The decrease was driven by an increase in the mix of discounted OEM promotional subscriptions, subscriber winback programs, second subscribers and a decline in net advertising revenue per average subscriber.
SAC, As Adjusted, Per Gross Subscriber Addition. SAC, as adjusted, per gross subscriber addition improved by 14% to $74 from $86 for the years ended December 31, 2008 and 2007, respectively. The decrease was primarily driven by lower retail and OEM subsidies due to better product economics and improved equipment margin.
Customer Service and Billing Expenses, As Adjusted, Per Average Subscriber. Customer service and billing expenses, as adjusted, per average subscriber improved 6% to $1.11 for the year ended December 31, 2008 compared with $1.18 for the year ended December 31, 2007. The decline was primarily due to efficiencies across a larger subscriber base.
Unaudited Pro Forma Results of Operations. Set forth below are certain pro forma items that give effect to the Merger as if it had occurred on January 1, 2006. The pro forma information below does not give effect to any adjustments as a result of the purchase price accounting for the Merger, nor the goodwill impairment charge taken during 2008. See footnote 8 for a reconciliation of net loss to adjusted income (loss) from operations.
Unaudited Pro Forma
For the Years Ended December 31,
2008 2007 2006
Total revenue $ 2,436,740 $ 2,058,608 $ 1,570,652
Operating expenses:
Satellite and transmission 99,185 101,721 105,768
Programming and content 446,638 401,461 352,968
Revenue share and royalties 477,962 403,059 218,928
Customer service and billing 244,195 217,402 179,183
Cost of equipment 66,104 97,820 84,182
Sales and marketing 342,296 413,084 414,984
Subscriber acquisition costs 577,126 654,775 644,578
General and administrative 267,032 271,831 172,785
Engineering, design and development 52,500 62,907 87,505
Depreciation and amortization 245,571 293,976 274,629
Share-based payment expense 124,619 165,099 505,964
Restructuring and related costs 10,434 - -
Total operating expenses 2,953,662 3,083,135 3,041,474
Loss from operations (516,922 ) (1,024,527 ) (1,470,822 )
Other expense (381,425 ) (221,610 ) (350,866 )
Loss before income taxes (898,347 ) (1,246,137 ) (1,821,688 )
Income tax expense (3,988 ) (1,496 ) (2,051 )
Net loss $ (902,335 ) $ (1,247,633 ) $ (1,823,739 )
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Highlights for the Year Ended December 31, 2008. Our revenue grew 18%, or by $378,132, in the year ended December 31, 2008. This revenue growth was driven by our 17% growth in average subscribers. This increase, combined with lower fixed costs, particularly in the fourth quarter, resulted in improved adjusted loss from operations of ($136,298) in 2008 versus ($565,452) in 2007, as increases in our variable costs were more than offset by decreases in other operating expenses. Total operating expenses, excluding restructuring, depreciation and share-based payment expense and a $27,500 one-time Merger related payment to a programming provider, decreased by 3%, or $78,522, during 2008.
Programming and content costs for the year ended December 31, 2008 increased 11%, or $45,177, including a one-time payment to a programming provider of $27,500 due upon completion of the Merger. Excluding this one-time payment, programming costs increased by 4% or $17,677.
Revenue share and royalties increased by 19%, or $74,903, over the prior year, maintaining a flat percentage of revenue of approximately 20% in 2008 and 2007. Customer service and billing costs increased 12%, or $26,793, from the prior year due to a larger subscriber base, mitigated by scale efficiencies. Cost of equipment declined by 32%, or $31,716, as compared to the prior year as a result of lower product costs. Sales and marketing costs declined 17%, or $70,788, due to reduced advertising and cooperative marketing spend, offset in part by higher customer retention spending. As a percentage of revenue, sales and marketing costs improved from 20% in 2007 to 14% in 2008.
Subscriber acquisition costs declined nearly 12%, or $77,649, and as a percentage of revenue improved from 32% to 24%. This improvement was primarily driven by a 14% improvement in SAC, as adjusted, per gross addition due to improved product economics and lower retail and OEM subsidies. Subscriber acquisition costs also declined as a result of the 5% decline in gross additions during 2008.
General and administrative costs decreased 2%, or $4,799, and declined as a percent of revenue, reflecting lower one time costs in connection with the Merger in the prior year and early integration savings in 2008. Engineering, design and development costs decreased 17%, or $10,407, due to fewer OEM platform launches and lower product development costs.
Other expenses increased by $159,815 or 72% as compared to 2007 as a result of higher interest expense and loss from redemption of debt during 2008.
Unaudited Pro Forma Fourth Quarter Subscribers and Metrics:
The following tables contain our pro forma subscribers and key operating metrics
for the three months ended December 31, 2008, 2007 and 2006:
Unaudited Pro Forma
For the Three Months Ended December 31,
2008 2007 2006
Beginning subscribers 18,920,911 16,234,070 12,305,181
Gross subscriber additions 1,713,210 2,336,640 2,292,172
Deactivated subscribers (1,630,265 ) (1,222,088 ) (944,246 )
Net additions 82,945 1,114,552 1,347,926
Ending subscribers 19,003,856 17,348,622 13,653,107
Retail 8,905,087 9,238,715 8,454,581
OEM 9,995,953 8,033,268 5,169,372
Rental 102,816 76,639 29,154
Ending subscribers 19,003,856 17,348,622 13,653,107
Retail (131,333 ) 314,908 830,153
OEM 218,249 791,356 535,854
Rental (3,971 ) 8,288 (18,081 )
Net additions 82,945 1,114,552 1,347,926
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Unaudited Pro Forma
For the Three Months Ended December 31,
2008 2007 2006
Average self-pay monthly churn (1)(7) 1.8 % 1.7 % 1.7 %
Conversion rate (2)(7) 44.2 % 51.4 % 49.8 %
ARPU (7)(10) $ 10.60 $ 10.42 $ 10.82
SAC, as adjusted, per gross subscriber
addition (7)(11) $ 70 $ 83 $ 90
Customer service and billing expenses, as
adjusted, per average subscriber (7)(12) $ 1.18 $ 1.30 $ 1.42
Total revenue $ 644,108 $ 557,515 $ 450,502
Free cash flow (7)(13) $ 25,877 $ 5,405 $ (33,788 )
Adjusted income (loss) from operations (14) $ 31,797 $ (224,143 ) $ (236,628 )
Net loss $ (248,468 ) $ (405,041 ) $ (502,321 )
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Subscribers. We ended the fourth quarter 2008 with 19,003,856 subscribers, an increase of 10% from the 17,348,622 subscribers as of December 31, 2007. Gross subscriber additions decreased about 27% in the fourth quarter of 2008 from the fourth quarter of 2007. Gross additions in our OEM channel were approximately 13% lower in the fourth quarter versus the prior year period, with higher production penetration failing to offset declines in auto sales. Auto sales fell 35% in the fourth quarter of 2008 to 2.5 million from 3.8 million in the fourth quarter of 2007. The decline in OEM gross additions was also accompanied by declines in retail gross additions. Deactivations for self-pay subscriptions remained relatively consistent at 1.8% per month; deactivations due to non-conversions of subscribers in paid promotional trial periods increased as production penetration rates increased.
ARPU. Total ARPU for the three months ended December 31, 2008 was $10.60, compared to $10.42 for the three months ended December 31, 2007. The increase was driven by the start of our "Best of" package sales, most of which were at the $16.99 price point, and by lower OEM inventories. These factors were partially offset by an increase in the mix of discounted OEM promotional trials, subscriber winback programs, second subscribers and a decline in net advertising revenue per average subscriber.
SAC, As Adjusted, Per Gross Subscriber Addition. SAC, as adjusted, per gross subscriber addition was $70 and $83 for the three months ended December 31, 2008 and 2007, respectively. The decrease was primarily driven by lower retail and OEM subsidies due to better product economics and improved equipment margin.
Customer Service and Billing Expenses, As Adjusted, Per Average Subscriber. Customer service and billing expenses, as adjusted, per average subscriber declined 9% to $1.18 for the three months ended December 31, 2008 compared with $1.30 for the three months ended December 31, 2007. The decline was primarily due to efficiencies across a larger subscriber base.
Unaudited Pro Forma Results of Operations. Set forth below are certain pro forma items that give effect to the Merger as if it had occurred on January 1, 2006. The pro forma information below does not give effect to any adjustments as a result the purchase price accounting for the Merger, nor the goodwill impairment charge taken during 2008. See footnote 14 for a reconciliation of net loss to adjusted income (loss) from operations.
Unaudited Pro Forma
For the Three Months Ended December 31,
2008 2007 2006
Total revenue $ 644,108 $ 557,515 $ 450,502
Operating expenses:
Satellite and transmission 22,851 23,697 23,609
Programming and content 105,215 109,076 97,990
Revenue share and royalties 122,711 163,541 64,467
Customer service and billing 67,036 65,006 53,980
Cost of equipment 18,084 37,334 42,630
Sales and marketing 81,712 123,711 146,650
Subscriber acquisition costs 132,731 180,767 189,868
General and administrative 51,591 64,223 49,326
Engineering, design and development 10,380 14,303 18,610
Depreciation and amortization 49,519 75,045 71,538
Share-based payment expense 24,945 52,897 68,649
Restructuring and related costs 2,977 - -
Total operating expenses 689,752 909,600 827,317
Loss from operations (45,644 ) (352,085 ) (376,815 )
Other expense (202,649 ) (52,055 ) (124,113 )
Loss before income taxes (248,293 ) (404,140 ) (500,928 )
Income tax expense (175 ) (901 ) (1,393 )
Net loss $ (248,468 ) $ (405,041 ) $ (502,321 )
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Highlights for the Three Months Ended December 31, 2008. Our revenue grew 16%, or by $86,593, in the three months ended December 31, 2008 compared to the three months ended December 31, 2007. This revenue growth was driven primarily by our 13% growth in average subscribers. Advertising revenue in the fourth quarter fell by approximately 23% due to advertisers reduced spending while other revenue decreased by 5%. This increased revenue was accompanied by lower operating costs, as described below, resulting in a significantly improved adjusted loss from operations of $31,797 compared to ($224,143) in the fourth quarter of 2007. Total operating expenses, excluding goodwill impairment, restructuring, depreciation and share-based payment expense, decreased by 22%, or $169,347, in the quarter.
Programming and content costs decreased by 4%, or $3,861, from the prior year's quarter as a result of Merger related savings.
Revenue share and royalties, respectively representing approximately 19% and 29% of revenue during 2008 and 2007, decreased by 25%, or $40,830, over the prior year's quarter. The prior period included a charge of $52,440 resulting from the decision in January 2008 of the Copyright Royalty Board to increase royalties to the music industry commencing January 1, 2007. Adjusting for the royalty accrual in the fourth quarter of 2007, Revenue share and royalties increased 10%, or $11,610, from the fourth quarter of 2007. Customer service and billing costs increased 3%, or $2,030, from the prior year's quarter, reflecting higher subscriber totals and improved scale efficiencies. Cost of equipment declined by 52% or $19,250 as compared to the prior year's quarter as a result of lower product costs.
Sales and marketing cost declined 34%, or $41,999, over the prior year's quarter due to reduced advertising and cooperative marketing spend and Merger related savings, offset in part by higher customer retention spending. Sales and marketing costs were 13% of revenue in the fourth quarter of 2008 compared to 22% of revenue in the fourth quarter 2007.
Subscriber acquisition costs declined 27%, or $48,036, and as a percent of revenue improved from 32% to 21% over the prior year's quarter. This improvement was driven by 27% lower gross additions in the fourth quarter.
General and administrative costs decreased 20%, or $12,632, and declined as a percent of revenue from 12% to 8% over the prior year's quarter, reflecting lower Merger costs and savings from the integration of administrative functions. Engineering, design and development costs decreased 27%, or $3,923, due to lower product development costs and Merger savings.
Other expenses increased by $150,594 or 289% as compared to prior year's quarter as a result of higher interest expense and loss from redemption of debt during 2008.
Actual Results of Operations
Our discussion of our results of operations, along with the selected financial information in the tables that follow, includes the following non-GAAP financial measures: average monthly self-pay churn; conversion rate; average monthly revenue per subscriber, or ARPU; SAC, as adjusted, per gross subscriber addition; customer service and billing expenses, as adjusted, per average subscriber; free cash flow; and adjusted income (loss) from operations. We believe these non-GAAP financial measures provide meaningful supplemental information regarding our operating performance and are used for internal management purposes, when publicly providing the business outlook, and as a means to evaluate period-to-period comparisons. Please refer to the footnotes following our discussion of results of operations for the definitions and further discussion of usefulness of such non-GAAP financial measures.
The discussion of our results of operations for the years ended December 31, 2008, 2007 and 2006 includes the financial results of XM from the date of the Merger. The inclusion of these results may render direct comparisons with results for prior periods less meaningful. Accordingly, the discussion below addresses trends we believe are significant.
Unaudited Actual
For the Years Ended December 31,
2008 2007 2006
Beginning subscribers 8,321,785 6,024,555 3,316,560
Gross subscriber additions 14,954,112 4,183,901 3,758,159
Deactivated subscribers (4,272,041 ) (1,886,671 ) (1,050,164 )
Net additions 10,682,071 2,297,230 2,707,995
Ending subscribers 19,003,856 8,321,785 6,024,555
Retail 8,905,087 4,640,710 4,041,826
OEM 9,995,953 3,665,631 1,959,009
Rental 102,816 15,444 23,720
Ending subscribers 19,003,856 8,321,785 6,024,555
Retail 4,264,378 598,884 1,576,463
OEM 6,330,321 1,706,622 1,135,316
Rental 87,372 (8,276 ) (3,784 )
Net additions 10,682,071 2,297,230 2,707,995
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