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SIRI > SEC Filings for SIRI > Form 10-Q on 1-May-2012All Recent SEC Filings

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Form 10-Q for SIRIUS XM RADIO INC.


1-May-2012

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


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Form 10-K for the year ended December 31, 2011 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, 2011.

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 may increase;

failure to comply with FCC requirements could damage our business;

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 other third parties to perform could adversely affect our business;

changes in consumer protection laws and their enforcement could damage our business;

interruption or failure of our information technology and communication systems could negatively impact our results and brand;

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 substantial indebtedness could adversely affect our operations and could limit our ability to react or 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;

electromagnetic interference from others could damage our business;

our business may be impaired by third-party intellectual property rights;

Liberty Media Corporation has significant influence over our business and affairs and its interest may differ from ours; and

our net operating loss carryforwards could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.

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, news, talk, entertainment, traffic and weather channels, as well as infotainment services in the United States on a subscription fee basis through two proprietary satellite radio systems. Subscribers can also receive certain of our music and other channels 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. We also acquire subscribers through the sale and lease of previously owned vehicles with factory-installed satellite radios. 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 March 31, 2012, we had 22,297,420 subscribers of which 18,208,090 were self-pay subscribers and 4,089,330 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 and dealers for subscriptions included in the sale or lease price of a vehicle; activated radios in daily rental fleet vehicles; certain subscribers to our Internet services; and certain subscribers to our Backseat TV, data, traffic, and weather services.


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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 on each platform. We also derive revenue from activation and 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 include a subscription to our radio services in the sale or lease price of new and previously owned 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 equity interest in the satellite radio services offered in Canada. Subscribers to the Sirius XM Canada service are not included in our subscriber count. In June 2011, Canadian Satellite Radio Holdings Inc. ("CSR"), the parent company of XM Canada, and Sirius Canada completed a transaction to combine their operations (the "Canada Merger").

Results of Operations

Set forth below are our results of operations for the three months ended
March 31, 2012 compared with the three months ended March 31, 2011.
                                             Unaudited
                                        For the Three Months
                                          Ended March 31,               2012 vs 2011 Change
                                        2012            2011           Amount             %
Revenue:
Subscriber revenue                  $   700,242     $  622,437     $     77,805             13  %
Advertising revenue, net of agency
fees                                     18,670         16,558            2,112             13  %
Equipment revenue                        16,953         15,867            1,086              7  %
Other revenue                            68,857         68,977             (120 )            -  %
Total revenue                           804,722        723,839           80,883             11  %
Operating expenses:
Cost of services:
Revenue share and royalties             132,111        106,929           25,182             24  %
Programming and content                  70,095         72,959           (2,864 )           (4 )%
Customer service and billing             66,187         65,836              351              1  %
Satellite and transmission               18,110         18,560             (450 )           (2 )%
Cost of equipment                         5,806          6,405             (599 )           (9 )%
Subscriber acquisition costs            116,121        105,270           10,851             10  %
Sales and marketing                      58,361         47,819           10,542             22  %
Engineering, design and development      12,690         11,135            1,555             14  %
General and administrative               59,886         56,354            3,532              6  %
Depreciation and amortization            66,117         68,400           (2,283 )           (3 )%
Total operating expenses                605,484        559,667           45,817              8  %
Income from operations                  199,238        164,172           35,066             21  %
Other income (expense):
Interest expense, net of amounts
capitalized                             (76,971 )      (78,218 )          1,247              2  %
Loss on extinguishment of debt and
credit facilities, net                   (9,971 )       (5,994 )         (3,977 )          (66 )%
Interest and investment loss             (1,142 )       (1,884 )            742             39  %
Other (loss) income                        (578 )        1,617           (2,195 )         (136 )%
Total other expense                     (88,662 )      (84,479 )         (4,183 )           (5 )%
Income before income taxes              110,576         79,693           30,883             39  %
Income tax expense                       (2,802 )       (1,572 )         (1,230 )          (78 )%
Net income                          $   107,774     $   78,121     $     29,653             38  %

Total Revenue

Subscriber Revenue includes subscription, activation and other fees.

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            For the three months ended March 31, 2012 and 2011, subscriber
             revenue was $700,242 and $622,437, respectively, an increase of 13%,
             or $77,805. The increase was primarily attributable to a 9% increase
             in daily weighted average subscribers, the increase in certain of
             our subscription rates beginning in January 2012, and an increase in
             sales of premium services, including Premier packages, data services
             and streaming. The increase was partially offset by the impact of
             subscription discounts offered through customer acquisition and
             retention programs.

The future growth of subscriber revenue will be dependent upon the growth of our subscriber base, promotions, rebates offered to subscribers and corresponding take-rates, plan mix, subscription prices and identification of additional revenue streams from subscribers.

Advertising Revenue includes the sale of advertising on our non-music channels, net of agency fees. Agency fees are based on a contractual percentage of the gross advertising billing revenue.

            For the three months ended March 31, 2012 and 2011, advertising
             revenue was $18,670 and $16,558, respectively, an increase of 13%,
             or $2,112. The increase was primarily due to increases in the number
             of advertising spots sold as well as the rate charged per spot.

Our advertising revenue is subject to fluctuation based on the effectiveness of our sales efforts and the national economic environment. We expect advertising revenue to grow as advertisers are attracted by the increase in our subscriber base.

Equipment Revenue includes revenue and royalties from the sale of satellite radios, components and accessories.

            For the three months ended March 31, 2012 and 2011, equipment
             revenue was $16,953 and $15,867 respectively, an increase of 7%, or
             $1,086. The increase was driven by royalties from higher OEM
             production.

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 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 March 31, 2012 and 2011, other revenue
             was $68,857 and $68,977, respectively, a decrease of $120. The
             decrease was primarily due to the December 2010 reduction in the
             U.S. Music Royalty Fee rate from 15.3% to 10.8%, partially offset by
             increased royalty revenue from Sirius XM Canada, an increase in
             subscribers and the increase in certain subscription rates.

Other revenue is dependent upon the amount of the U.S. Music Royalty Fee and the royalty from our Canadian affiliate. Other revenue will fluctuate as our subscriber base changes, as additional subscribers cycle to the lower rate of the U.S. Music Royalty Fee, as the increase in certain subscription rates cycle through to subscriptions, and based on the performance of our Canadian affiliate.

Operating Expenses

 Revenue Share and Royalties include distribution and content provider revenue
share, advertising revenue share, residuals and broadcast and web streaming
royalties. Residuals are monthly fees paid based upon the number of subscribers
using satellite radios purchased from retailers. Advertising revenue share is
recognized in revenue share and royalties in the period in which the advertising
is broadcast.

            For the three months ended March 31, 2012 and 2011, revenue share
             and royalties were $132,111 and $106,929, respectively, an increase
             of 24%, or $25,182 and increased as a percentage of total revenue.
             The increase was primarily attributable to an increase in our
             revenues subject to royalty and/or revenue sharing arrangements and
             a 7% increase in the statutory royalty rate for the performance of
             sound recordings, partially offset by a $4,913 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 8.0% and 7.5% of gross revenues, subject to certain exclusions, for the three months ended March 31, 2012 and 2011, respectively. 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, purchase advertising on media properties owned or controlled by the licensor, which is allocated to sales and marketing, and pay other guaranteed amounts.

            For the three months ended March 31, 2012 and 2011, programming and
             content expenses were $70,095 and $72,959, respectively, a decrease
             of 4%, or $2,864, and decreased as a percentage of total revenue.
             The decrease was primarily due to savings in content agreements,
             partially offset by increases in personnel costs and a $1,122
             reduction 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.

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 more cost effective terms. 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 March 31, 2012 and 2011, customer service
             and billing expenses were $66,187 and $65,836, respectively, an
             increase of 1%, or $351, but decreased as a percentage of total
             revenue. The increase was primarily due to higher call volume due to
             the increases in total subscribers, billing and collection costs and
             personnel costs, partially offset by lower bad debt expense.

We expect our customer service and billing expenses to increase as our subscriber base grows.

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 March 31, 2012 and 2011, satellite and
             transmission expenses were $18,110 and $18,560, respectively, a
             decrease of 2%, or $450, and decreased as a percentage of total
             revenue. The decrease was primarily due to a reduction in in-orbit
             satellite insurance expense, partially offset by increased repeater
             network costs.

We expect overall satellite and transmission expenses to increase as we add enhanced internet-based features and functionality, while costs associated with our in-orbit satellite fleet remain relatively flat.

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 March 31, 2012 and 2011, cost of
             equipment was $5,806 and $6,405, respectively, a decrease of 9%, or
             $599, and remained flat as a percentage of total revenue but
             decreased as a percentage of equipment revenue. The decrease was
             primarily due to lower direct to consumer sales.

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


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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 retailers and 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, loyalty payments to distributors and dealers of satellite radios and revenue share payments to automakers and retailers of satellite radios.

            For the three months ended March 31, 2012 and 2011, subscriber
             acquisition costs were $116,121 and $105,270, respectively, an
             increase of 10%, or $10,851, and decreased as a percentage of total
             revenue. The increase was primarily a result of the 5% increase in
             gross subscriber additions and subsidies related to increased OEM
             installations occurring in advance of acquiring the subscriber,
             partially offset by improved OEM subsidy rates per vehicle and a
             $2,429 increase in the benefit to earnings from the amortization of
             the deferred credit for acquired executory contracts recognized in
             purchase price accounting associated with the Merger.

We expect total subscriber acquisition costs to fluctuate with increases or decreases in OEM installations and changes in our gross subscriber additions. Changes in contractual OEM subsidy rates and the cost of subsidized radio components will also impact total subscriber acquisition costs. The impact of purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit for acquired executory contracts will vary, in absolute amount and as a percentage of reported subscriber acquisition costs, through the expiration of the acquired contracts in 2013. We intend to continue to offer subsidies, commissions and other incentives to acquire subscribers.

Sales and Marketing includes costs for advertising, media and production, including promotional events and sponsorships; cooperative marketing; customer retention and personnel. Cooperative marketing costs include fixed and variable payments to reimburse retailers and automakers for the cost of advertising and other product awareness activities performed on our behalf.

            For the three months ended March 31, 2012 and 2011, sales and
             marketing expenses were $58,361 and $47,819, respectively, an
             increase of 22%, or $10,542, and increased as a percentage of total
             revenue. The increase was primarily due to additional subscriber
             communications and retention programs associated with a greater
             number of subscribers and promotional trials, and higher OEM
             cooperative marketing.

Sales and marketing expenses will fluctuate on a quarterly basis as we launch seasonal advertising and promotional initiatives to attract new subscribers, and launch and expand programs to retain our existing subscribers and win-back former subscribers. The impact of purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on acquired sales and marketing contracts will continue to decline, in absolute amount and as a percentage of reported sales and marketing costs, through 2013.

Engineering, Design and Development includes costs to develop chip sets and new products, research and development for broadcast information systems and costs associated with the incorporation of our radios into vehicles manufactured by automakers.

            For the three months ended March 31, 2012 and 2011, engineering,
             design and development expenses were $12,690 and $11,135,
             respectively, an increase of 14% or $1,555, and remained flat as a
             percentage of total revenue. The increase was due to higher product
             development costs and costs related to enhanced subscriber features
             and functionality as well as higher personnel costs.

We expect engineering, design and development expenses to increase in future periods as we develop our next generation chip sets and products.

General and Administrative includes executive management, rent and occupancy, finance, legal, human resources, information technology, insurance and investor relations costs.

            For the three months ended March 31, 2012 and 2011, general and
             administrative expense was $59,886 and $56,354, respectively, an
             increase of 6% or $3,532, and remained flat as a percentage of total
             revenue. The increase was primarily due to higher facility and legal
             costs, partially offset by lower litigation settlement charges.

We expect our general and administrative expenses to increase in future periods primarily as a result of enhanced


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information technology and personnel costs to support the growth of our business.

Depreciation and Amortization represents the systematic recognition in earnings of the acquisition cost of assets used in operations, including our satellite constellations, property, equipment and intangible assets, over their estimated service lives.

            For the three months ended March 31, 2012 and 2011, depreciation and
             amortization expense was $66,117 and $68,400, respectively, a
             decrease of 3% or $2,283, and decreased as a percentage of total
             revenue. The decrease was primarily due to a reduction in the
             amortization of subscriber relationships and depreciation recognized
             on assets placed in-service as certain assets reach the end of their
             estimated service lives.

We expect depreciation expenses to increase in future periods as we complete construction and launch our FM-6 satellite, which will be partially offset by reduced amortization associated with the stepped-up basis in assets acquired in the Merger (including intangible assets, satellites, property and equipment) through the end of their estimated service lives, principally through 2017.

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