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SIRI > SEC Filings for SIRI > Form 10-Q on 7-Aug-2012All Recent SEC Filings

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Form 10-Q for SIRIUS XM RADIO INC.


7-Aug-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 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;


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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 or 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 June 30, 2012, we had 22,919,462 subscribers of which 18,670,966 were self-pay subscribers and 4,248,496 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; 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.

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. As of May 31, 2012, Sirius XM Canada had 2,116,800 subscribers. 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").


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Results of Operations

Set forth below are our results of operations for the three and six months ended
June 30, 2012 compared with the three and six months ended June 30, 2011.
                                                  Unaudited                                      2012 vs 2011 Change          2012 vs 2011 Change
                   For the Three Months Ended
                            June 30,                  For the Six Months Ended June 30,              Three Months                  Six Months
                       2012            2011              2012                   2011             Amount           %            Amount           %
Revenue:
Subscriber
revenue           $    730,285      $ 639,642     $      1,430,526       $      1,262,080     $    90,643          14  %   $    168,446         13  %
Advertising
revenue, net of
agency fees             20,786         18,227               39,456                 34,785           2,559          14  %          4,671         13  %
Equipment revenue       16,417         17,022               33,370                 32,889            (605 )        (4 )%            481          1  %
Other revenue           70,055         69,506              138,912                138,482             549           1  %            430          -  %
Total revenue          837,543        744,397            1,642,264              1,468,236          93,146          13  %        174,028         12  %
Operating
expenses:
Cost of services:
Revenue share and
royalties              135,426        116,741              267,537                223,670          18,685          16  %         43,867         20  %
Programming and
content                 65,169         67,399              135,265                140,358          (2,230 )        (3 )%         (5,093 )       (4 )%
Customer service
and billing             68,679         62,592              134,866                128,429           6,087          10  %          6,437          5  %
Satellite and
transmission            17,551         18,998               35,661                 37,558          (1,447 )        (8 )%         (1,897 )       (5 )%
Cost of equipment        7,150          7,601               12,956                 14,006            (451 )        (6 )%         (1,050 )       (7 )%
Subscriber
acquisition costs      119,475        105,162              235,596                210,432          14,313          14  %         25,164         12  %
Sales and
marketing               57,422         51,442              115,781                 99,261           5,980          12  %         16,520         17  %
Engineering,
design and
development              6,272         13,939               18,962                 25,074          (7,667 )       (55 )%         (6,112 )      (24 )%
General and
administrative          65,664         60,479              125,550                116,831           5,185           9  %          8,719          7  %
Depreciation and
amortization            66,793         67,062              132,910                135,462            (269 )         -  %         (2,552 )       (2 )%
Total operating
expenses               609,601        571,415            1,215,084              1,131,081          38,186           7  %         84,003          7  %
Income from
operations             227,942        172,982              427,180                337,155          54,960          32  %         90,025         27  %
Other income
(expense):
Interest expense,
net of amounts
capitalized            (72,770 )      (76,196 )           (149,742 )             (154,414 )         3,426           4  %          4,672          3  %
Loss on
extinguishment of
debt and credit
facilities, net        (15,650 )       (1,212 )            (25,621 )               (7,206 )       (14,438 )    (1,191 )%        (18,415 )     (256 )%
Interest and
investment (loss)
income                  (1,728 )       80,182               (2,871 )               78,298         (81,910 )      (102 )%        (81,169 )     (104 )%
Other (loss)
income                    (173 )          183                 (749 )                1,799            (356 )      (195 )%         (2,548 )     (142 )%
Total other
(expense) income       (90,321 )        2,957             (178,983 )              (81,523 )       (93,278 )    (3,154 )%        (97,460 )     (120 )%
Income before
income taxes           137,621        175,939              248,197                255,632         (38,318 )       (22 )%         (7,435 )       (3 )%
Income tax
benefit (expense)    2,996,549         (2,620 )          2,993,747                 (4,192 )     2,999,169          nm         2,997,939         nm
Net income        $  3,134,170      $ 173,319     $      3,241,944       $        251,440     $ 2,960,851       1,708  %   $  2,990,504      1,189  %

nm - not meaningful


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Total Revenue

Subscriber Revenue includes subscription, activation and other fees.

            For the three months ended June 30, 2012 and 2011, subscriber
             revenue was $730,285 and $639,642, respectively, an increase of 14%,
             or $90,643. For the six months ended June 30, 2012 and 2011,
             subscriber revenue was $1,430,526 and $1,262,080, respectively, an
             increase of 13%, or $168,446. These increases were 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 subscription discounts offered
             through customer acquisition and retention programs.

We expect subscriber revenues to grow based on 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 revenue.

            For the three months ended June 30, 2012 and 2011, advertising
             revenue was $20,786 and $18,227, respectively, an increase of 14%,
             or $2,559. For the six months ended June 30, 2012 and 2011,
             advertising revenue was $39,456 and $34,785, respectively, an
             increase of 13%, or $4,671. These increases were primarily due to a
             greater number of advertising spots sold and broadcast 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 June 30, 2012 and 2011, equipment revenue
             was $16,417 and $17,022, respectively, a decrease of 4%, or $605.
             For the six months ended June 30, 2012 and 2011, equipment revenue
             was $33,370 and $32,889, respectively, an increase of 1%, or $481.
             The quarter over quarter decrease was driven by lower aftermarket
             volume and direct to consumer sales, partially offset by royalties
             from higher OEM production. The increase for the six month period
             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 June 30, 2012 and 2011, other revenue was
             $70,055 and $69,506, respectively, an increase of $549. For the six
             months ended June 30, 2012 and 2011, other revenue was $138,912 and
             $138,482, respectively, an increase of $430. Revenues from the U.S.
             Music Royalty Fee increased as the number of subscribers increased,
             but were offset by decreased royalty revenue from Sirius XM Canada.
             The decrease for the three and six month periods in the royalty
             revenue from Sirius XM Canada was the result of more days of sales
             in the three month period ended June 30, 2011 as a result of the
             timing of the Canada Merger.

Other revenue is dependent upon the amount of the U.S. Music Royalty Fee and the royalty from our Canadian affiliate. We expect other revenue to increase as our subscriber base drives higher U.S. Music Royalty Fees and as the performance of our Canadian affiliate improves.

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, 2012 and 2011, revenue share and royalties were $135,426 and $116,741,


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respectively, an increase of 16%, or $18,685, and increased as a percentage of total revenue. For the six months ended June 30, 2012 and 2011, revenue share and royalties were $267,537 and $223,670, respectively, an increase of 20%, or $43,867, and increased as a percentage of total revenue. These increases were primarily attributable to greater 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 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.

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 and six months ended June 30, 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 June 30, 2012 and 2011, programming and
             content expenses were $65,169 and $67,399, respectively, a decrease
             of 3%, or $2,230, and decreased as a percentage of total revenue.
             For the six months ended June 30, 2012 and 2011, programming and
             content expenses were $135,265 and $140,358, respectively, a
             decrease of 4%, or $5,093, and decreased as a percentage of total
             revenue. These decreases were primarily due to savings in content
             agreements, partially offset by increases in personnel costs and
             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.

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 June 30, 2012 and 2011, customer service
             and billing expenses were $68,679 and $62,592, respectively, an
             increase of 10%, or $6,087, but remained flat as a percentage of
             total revenue. For the six months ended June 30, 2012 and 2011,
             customer service and billing expenses were $134,866 and $128,429,
             respectively, an increase of 5%, or $6,437, but decreased as a
             percentage of total revenue. These increases were primarily due to
             higher call volume, billing and collection costs and personnel costs
             due to the increases in total subscribers. The increase for the six
             month period was 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 June 30, 2012 and 2011, satellite and
             transmission expenses were $17,551 and $18,998, respectively, a
             decrease of 8%, or $1,447, and decreased as a percentage of total
             revenue. For the six months ended June 30, 2012 and 2011, satellite
             and transmission expenses were $35,661 and $37,558, respectively, a
             decrease of 5%, or $1,897, and decreased as a percentage of total
             revenue. These decreases were primarily due to a reduction in
             in-orbit satellite insurance expense.

We expect overall satellite and transmission expenses to increase following the launch of our FM-6 satellite, and as we add enhanced Internet-based features and functionality to our service.

Cost of Equipment includes costs from the sale of satellite radios, components and accessories and provisions for inventory


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allowance attributable to products purchased for resale in our direct to consumer distribution channels.

            For the three months ended June 30, 2012 and 2011, cost of equipment
             was $7,150 and $7,601, respectively, a decrease of 6%, or $451, and
             remained flat as a percentage of total revenue but decreased as a
             percentage of equipment revenue. For the six months ended June 30,
             2012 and 2011, cost of equipment was $12,956 and $14,006,
             respectively, a decrease of 7%, or $1,050, and remained flat as a
             percentage of total revenue and decreased as a percentage of
             equipment revenue. These decreases were primarily due to lower
             direct to consumer sales, partially offset by higher inventory
             reserves.

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 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 June 30, 2012 and 2011, subscriber
             acquisition costs were $119,475 and $105,162, respectively, an
             increase of 14%, or $14,313, and remained flat as a percentage of
             total revenue. For the six months ended June 30, 2012 and 2011,
             subscriber acquisition costs were $235,596 and $210,432,
             respectively, an increase of 12%, or $25,164, but remained flat as a
             percentage of total revenue. These increases were primarily a result
             of higher 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 increases 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 June 30, 2012 and 2011, sales and
             marketing expenses were $57,422 and $51,442, respectively, an
             increase of 12%, or $5,980, and remained flat as a percentage of
             total revenue. For the six months ended June 30, 2012 and 2011,
             sales and marketing expenses were $115,781 and $99,261,
. . .
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