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| SIRI > SEC Filings for SIRI > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
(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 our Annual Report on Form 10-K for the year ended December 31, 2008 (the "Form 10-K"), and in other reports and documents published by us from time to time, particularly the risk factors described under "Business - Risk Factors" in Item 1A of the Form 10-K.
Among the significant factors that could cause our actual results to differ materially from those expressed in the forward-looking statements are:
• the substantial indebtedness of SIRIUS, XM Holdings and XM;
• the possibility that the benefits of the merger with XM Holdings may not be fully realized or may take longer to realize; and the risks associated with the undertakings made to the FCC and the effects of those undertakings on the business of XM and SIRIUS in the future;
• the useful life of our satellites, which have experienced component failures including, with respect to a number of satellites, failures on their solar arrays, and, in certain cases, are not insured;
• our dependence upon automakers, many of which have experienced a dramatic drop in sales and are in financial distress, and other third parties, such as manufacturers and distributors of satellite radios, retailers and programming providers; and
• the competitive position of SIRIUS and XM versus other forms of audio and video entertainment including terrestrial radio, HD radio, internet radio, mobile phones, iPods and other MP3 devices, and emerging next-generation networks and technologies.
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 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 March 31, 2009, we had 18,599,434 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; certain radios activated for daily rental fleet programs; subscribers to SIRIUS Internet Radio and XM Radio Online, our Internet services; and certain subscribers to our weather, traffic, data and video 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.
We entered into several agreements which improved our financial position. We entered into an agreement with General Motors to extend the term of XM's distribution agreement to 2020 and to improve the economic terms of the arrangement. We entered into agreements with certain other third parties to, among other things, restructure lump sum payments coming due; eliminate escrow arrangements in exchange for prepayment of the amount released; and extend agreements. We may enter into similar agreements with additional third parties.
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
Our discussion of our unaudited pro forma information includes non-GAAP financial results that assume the Merger occurred on January 1, 2007. These financial results exclude the impact of purchase price accounting adjustments and refinancing transactions. The discussion also includes the following non-GAAP financial measures: average self-pay monthly churn; conversion rate; average monthly revenue per subscriber, or ARPU; subscriber acquisition cost, or 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 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 50 through 56) following our discussion of results of operations for the definitions and a further discussion of the usefulness of such non-GAAP financial information.
Subscribers and Key Operating Metrics. The following tables contain our pro forma subscribers and key operating metrics for the three months ended March 31, 2009 and 2008:
Unaudited Actual and Pro Forma Quarterly Subscribers and Metrics:
Unaudited
Three Months Ended
March 31,
2009 2008
(Actual) (Proforma)
Beginning subscribers 19,003,856 17,348,622
Gross subscriber additions 1,338,961 2,041,656
Deactivated subscribers (1,743,383 ) (1,415,747 )
Net additions (404,422 ) 625,909
Ending subscribers 18,599,434 17,974,531
Retail 8,537,056 9,189,927
OEM 9,958,349 8,692,319
Rental 104,029 92,285
Ending subscribers 18,599,434 17,974,531
Retail (368,031 ) (48,788 )
OEM (37,604 ) 659,051
Rental 1,213 15,646
Net additions (404,422 ) 625,909
Self-pay 15,436,410 14,313,406
Paid promotional 3,163,024 3,661,125
Ending subscribers 18,599,434 17,974,531
Self-pay (113,247 ) 440,060
Paid promotional (291,175 ) 185,849
Net additions (404,422 ) 625,909
Unaudited Pro Forma
Three Months Ended
March 31,
2009 2008
Average self-pay monthly churn (1)(7) 2.2 % 1.9 %
Conversion rate (2)(7) 44.9 % 51.0 %
ARPU (3)(7) $ 10.43 $ 10.48
SAC, as adjusted, per gross subscriber addition
(4)(7) $ 61 $ 82
Customer service and billing expenses, as adjusted,
per average subscriber (5)(7) $ 1.06 $ 1.14
Total revenue $ 605,480 $ 578,804
Free cash flow (6)(7) $ (3,646 ) $ (311,099 )
Adjusted income (loss) from operations (8) $ 108,841 $ (70,154 )
Net loss $ (62,877 ) $ (233,387 )
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Note: See pages 50 through 56 for footnotes.
Subscribers. At March 31, 2009 we had 18,599,434 subscribers, an increase of 624,903 subscribers, or 3%, from the 17,974,531 subscribers as of March 31, 2008. Self-pay subscribers increased 1,123,004 since March 31, 2008 while subscribers in paid promotional trials fell 498,101, reflecting the decline in North American auto sales. Gross subscriber additions decreased approximately 34% during the three months ended March 31, 2009 compared to the three months ended March 31, 2008. OEM gross subscriber additions decreased due to the 38% decline in the North American automobile sales and retail gross subscriber additions decreased due to declines in consumer spending. Deactivation rates for self-pay subscriptions increased to 2.2% per month in the quarter reflecting reductions in consumer discretionary spending and subscriber response to our recent increase in prices for multi-subscription accounts, the institution of a monthly charge for our streaming service and channel line-up changes in November 2008;
ARPU. Total ARPU was $10.43 and $10.48 for the three months ended March 31, 2009 and 2008, respectively. The decrease was driven mainly by a decrease in net advertising revenue per average subscriber, offset by an increase due to the sale of "Best of" programming.
SAC, As Adjusted, Per Gross Subscriber Addition. SAC, as adjusted, per gross subscriber addition was $61 and $82 for the three months ended March 31, 2009 and 2008, respectively. The decrease was primarily driven by fewer OEM installations relative to gross subscriber additions, improved OEM subsidies and higher aftermarket inventory reserves in the three months ended March 31, 2008 compared to the three months ended March 31, 2009.
Customer Service and Billing Expenses, As Adjusted, Per Average Subscriber. Customer service and billing expenses, as adjusted, per average subscriber was $1.06 and $1.14 for the three months ended March 31, 2009 and 2008, respectively. The decline was primarily due to efficiencies across a larger subscriber base.
Adjusted Income (Loss) from Operations. Our adjusted income (loss) from operations was $108,841 and ($70,154) for the three months ended March 31, 2009 and 2008, respectively. Adjusted income (loss) from operations was favorably impacted by the $26,676 increase in revenues and the $152,319 decrease in expenses included in adjusted income (loss) from operations.
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, 2007. 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 (pages 51 to 52) for a reconciliation of net loss to adjusted income (loss) from operations.
Unaudited Pro Forma
Three Months Ended
March 31,
2009 2008
Revenue:
Subscriber revenue, including effects of rebates $ 573,081 $ 536,509
Advertising revenue, net of agency fees 12,304 17,526
Equipment revenue 9,909 10,384
Other revenue 10,186 14,385
Total revenue 605,480 578,804
Operating expenses:
Satellite and transmission 19,741 25,731
Programming and content 96,678 107,922
Revenue share and royalties 121,261 111,142
Customer service and billing 59,262 60,067
Cost of equipment 7,993 16,139
Sales and marketing 51,008 79,080
Subscriber acquisition costs 83,710 161,334
General and administrative 48,575 71,478
Engineering, design and development 8,411 16,065
Depreciation and amortization 51,483 72,389
Share-based payment expense 21,500 39,766
Restructuring and related costs 614 -
Total operating expenses 570,236 761,113
Income (loss) from operations 35,244 (182,309 )
Other expense (97,006 ) (50,204 )
Loss before income taxes (61,762 ) (232,513 )
Income tax expense (1,115 ) (874 )
Net loss $ (62,877 ) $ (233,387 )
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Satellite and transmission costs decreased 23%, or $5,990, in the three months ended March 31, 2009 compared to the same period in 2008 due to reductions in maintenance costs, repeater lease expense, and personnel costs. Programming and content costs decreased 10%, or $11,244, in the three months ended March 31, 2009 compared to the same period in 2008, due mainly to reductions in personnel and on-air talent costs as well as savings on various content agreements. Revenue share and royalties increased by 9%, or $10,119, while maintaining a relatively flat percentage of revenue in the three months ended March 31, 2009 compared to the same period in 2008. Customer service and billing costs decreased by $805 in the three months ended March 31, 2009 compared to the same period in 2008 due to scale efficiencies over a larger subscriber base. Cost of equipment decreased by 50%, or $8,146, in the three months ended March 31, 2009 compared to the same period in 2008 as a result of a decrease in our direct to customer sales and lower inventory write-downs. Sales and marketing costs decreased 35%, or $28,072, and have decreased as a percentage of revenue from 14% to 8% in the three months ended March 31, 2009 compared to the same period in 2008 due to reduced advertising and cooperative marketing spend, as well as, reductions to personnel costs and third party distribution support expenses.
Subscriber acquisition costs decreased 48%, or $77,624, and decreased as a percentage of revenue from 28% to 14% in the three months ended March 31, 2009 compared to the same period in 2008. This improvement was driven by a 26% improvement in SAC, as adjusted, per gross addition due to fewer OEM installations relative to gross subscriber additions, improved OEM subsidies and higher aftermarket inventory reserves in the three months ended March 31, 2008 compared to the three months ended March 31, 2009. Subscriber acquisition costs also decreased as a result of the 34% decline in gross additions during the three months ended March 31, 2009.
General and administrative costs decreased 32%, or $22,903, mainly due to the absence of charges related to certain legal and regulatory matters incurred in 2008 and lower personnel costs. Engineering, design and development costs decreased 48%, or $7,654, in the three months ended March 31, 2009 compared to the same period in 2008, due to lower costs associated with manufacturing of radios, OEM tooling and manufacturing, and personnel.
Other expenses increased 93%, or $46,802, in the three months ended March 31, 2009 compared to the same period in 2008 driven mainly by an increase in interest expense of $25,390 and loss from redemption of debt of $17,957. Interest expense increased due primarily to the issuance of the 13% Senior Notes due 2013 and the 7% Exchangeable Senior Subordinated Notes due 2014 in the third quarter of 2008.
Our discussion of our unaudited actual results of operations includes the following non-GAAP financial measures: average self-pay monthly churn; conversion rate; average monthly revenue per subscriber, or ARPU; subscriber acquisition cost, or 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 (pages 50 to 56) following our discussion of results of operations for the definitions and a further discussion of the usefulness of such non-GAAP financial measures.
The discussion of our results of operations for the three months ended March 31, 2009 and 2008 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.
Subscriber and Key Operating Metrics. The following tables contain our actual subscribers and key operating metrics for the three months ended March 31, 2009 and 2008:
Unaudited Actual Quarterly Subscribers and Metrics:
Unaudited Actual
Three Months Ended
March 31,
2009 2008
Beginning subscribers 19,003,856 8,321,785
Gross subscriber additions 1,338,961 1,003,422
Deactivated subscribers (1,743,383 ) (680,888 )
Net additions (404,422 ) 322,534
Ending subscribers 18,599,434 8,644,319
Retail 8,537,056 4,643,215
OEM 9,958,349 3,986,818
Rental 104,029 14,286
Ending subscribers 18,599,434 8,644,319
Retail (368,031 ) 2,506
OEM (37,604 ) 321,186
Rental 1,213 (1,158 )
Net additions (404,422 ) 322,534
Self-pay 15,436,410 5,897,669
Paid promotional 3,163,024 2,746,650
Ending subscribers 18,599,434 8,644,319
Self-pay (113,247 ) 212,605
Paid promotional (291,175 ) 109,929
Net additions (404,422 ) 322,534
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Unaudited Actual
Three Months Ended
March 31,
2009 2008
Average self-pay monthly churn (1)(7) 2.2 % 2.1 %
Conversion rate (2)(7) 44.9 % 47.1 %
ARPU (7)(10) $ 10.13 $ 10.42
SAC, as adjusted, per gross subscriber addition (7)(11) $ 53 $ 91
Customer service and billing expenses, as adjusted, per
average subscriber (7)(12) $ 1.06 $ 1.05
Total revenue $ 586,979 $ 270,350
Free cash flow (7)(13) $ (3,646 ) $ (186,535 )
Adjusted income (loss) from operations (14) $ 144,221 $ (39,457 )
Net loss $ (50,411 ) $ (104,118 )
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Note: See pages 50 through 56 for footnotes.
Subscribers. At March 31, 2009 we had 18,599,434 subscribers, an increase of 115% from the 8,644,319 subscribers as of March 31, 2008. The increase was principally a result of the 9,716,070 subscribers acquired in the Merger. Gross additions increased 33% due to the inclusion of XM in our operating results for the quarter, offset in part by declines in retail and OEM gross subscriber additions resulting from declines in North American automotive sales and the effects of reduced consumer spending. Deactivations include the results of XM from the date of the Merger. The deactivation rate for self-pay subscriptions increased while the conversion rate for subscribers in paid promotional trial periods decreased. We believe the decrease resulted from a combination of factors, including reductions in consumer discretionary spending, the subscriber response to our recent increase in prices for multi-subscription accounts, the institution of a monthly charge for our Internet service and our channel line-up changes in November 2008.
ARPU. Total ARPU was $10.13 and $10.42 for the three months ended March 31, 2009 and 2008, respectively. The decrease was driven by the effect of purchase price accounting adjustments, subscriber winback programs and a decline in net advertising revenue per average subscriber as subscriber growth exceeded the growth in ad revenues.
We expect ARPU to fluctuate based on promotions, rebates offered to subscribers and corresponding take-rates, plan mix, subscription prices, advertising sales and the identification of additional revenue from subscribers.
SAC, As Adjusted, Per Gross Subscriber Addition. SAC, as adjusted, per gross subscriber addition was $53 and $91 for the three months ended March 31, 2009 and 2008, respectively. The decrease was primarily driven by improved OEM subsidies, higher aftermarket inventory reserves in the three months ended March 31, 2008 compared to the three months ended March 31, 2009 and improved equipment margins.
We expect SAC, as adjusted, per gross subscriber addition to decline as the costs of subsidized components of SIRIUS and XM radios decrease in the future. Our SAC, as adjusted, per gross subscriber addition will be impacted by our . . .
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