Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SIRI > SEC Filings for SIRI > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for SIRIUS XM RADIO INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SIRIUS XM RADIO INC.


1-Nov-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 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 to changes in the economy or our industry;

our broadcast studios, terrestrial repeater networks, satellite uplink facilities or other ground facilities could be damaged by natural catastrophes or terrorist activities;

electromagnetic interference from others could damage our business;

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

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

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.


Table Of Contents

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 from which we acquire the majority of our subscribers. We also acquire subscribers through the sale or lease of previously owned vehicles with factory-installed satellite radios. Additionally, we distribute our satellite radios through retail locations nationwide and through our website. Satellite radio services are also offered to customers of certain daily rental car companies.

As of September 30, 2012, we had 23,365,383 subscribers of which 19,041,519 were self-pay subscribers and 4,323,864 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 Sirius XM Canada which offers satellite radio services in Canada. Subscribers to the Sirius XM Canada service are not included in our subscriber count.


Table Of Contents

Results of Operations

Set forth below are our results of operations for the three and nine months
ended September 30, 2012 compared with the three and nine months ended
September 30, 2011.
                                               Unaudited                                     2012 vs 2011 Change            2012 vs 2011 Change
                    For the Three Months Ended           For the Nine Months Ended
                           September 30,                       September 30,                     Three Months                   Nine Months
                      2012               2011             2012               2011            Amount            %             Amount            %
Revenue:
Subscriber
revenue          $   757,672         $   660,837     $  2,188,199       $  1,922,917     $     96,835           15  %   $      265,282         14  %
Advertising
revenue, net of
agency fees           20,426              18,810           59,881             53,595            1,616            9  %            6,286         12  %
Equipment
revenue               17,813              15,504           51,183             48,392            2,309           15  %            2,791          6  %
Other revenue         71,449              67,399          210,362            205,882            4,050            6  %            4,480          2  %
Total revenue        867,360             762,550        2,509,625          2,230,786          104,810           14  %          278,839         12  %
Operating
expenses:
Cost of
services:
Revenue share
and royalties        141,834             117,043          409,371            340,713           24,791           21  %           68,658         20  %
Programming and
content               69,938              70,509          205,203            210,867             (571 )         (1 )%           (5,664 )       (3 )%
Customer service
and billing           77,768              64,239          212,635            192,667           13,529           21  %           19,968         10  %
Satellite and
transmission          18,319              19,681           53,980             57,238           (1,362 )         (7 )%           (3,258 )       (6 )%
Cost of
equipment              6,345               5,888           19,301             19,894              457            8  %             (593 )       (3 )%
Subscriber
acquisition
costs                112,418             107,279          348,014            317,711            5,139            5  %           30,303         10  %
Sales and
marketing             60,676              55,210          176,457            154,471            5,466           10  %           21,986         14  %
Engineering,
design and
development           13,507              14,175           32,468             39,249             (668 )         (5 )%           (6,781 )      (17 )%
General and
administrative        68,235              58,635          193,786            175,469            9,600           16  %           18,317         10  %
Depreciation and
amortization          66,571              65,403          199,481            200,865            1,168            2  %           (1,384 )       (1 )%
Total operating
expenses             635,611             578,062        1,850,696          1,709,144           57,549           10  %          141,552          8  %
Income from
operations           231,749             184,488          658,929            521,642           47,261           26  %          137,287         26  %
Other income
(expense):
Interest
expense, net of
amounts
capitalized          (70,035 )           (75,316 )       (219,777 )         (229,730 )          5,281            7  %            9,953          4  %
Loss on
extinguishment
of debt and
credit
facilities, net     (107,105 )                 -         (132,726 )           (7,206 )       (107,105 )         nm            (125,520 )       nm
Interest and
investment
(loss) income           (321 )               292           (3,192 )           78,590             (613 )       (210 )%          (81,782 )     (104 )%
Other income
(loss)                   113                 435             (637 )            2,235             (322 )        (74 )%           (2,872 )     (129 )%
Total other
expense             (177,348 )           (74,589 )       (356,332 )         (156,111 )       (102,759 )       (138 )%         (200,221 )     (128 )%
Income before
income taxes          54,401             109,899          302,597            365,531          (55,498 )        (50 )%          (62,934 )      (17 )%
Income tax
benefit
(expense)             20,113              (5,714 )      3,013,860             (9,907 )         25,827           nm           3,023,767         nm
Net income       $    74,514         $   104,185     $  3,316,457       $    355,624     $    (29,671 )        (28 )%   $    2,960,833        833  %

nm - not meaningful


Table Of Contents

Total Revenue

Subscriber Revenue includes subscription, activation and other fees.

For the three months ended September 30, 2012 and 2011, subscriber revenue was $757,672 and $660,837, respectively, an increase of 15%, or $96,835. For the nine months ended September 30, 2012 and 2011, subscriber revenue was $2,188,199 and $1,922,917, respectively, an increase of 14%, or $265,282. 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 internet 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 certain non-music channels, net of agency fees. Agency fees are based on a contractual percentage of the gross advertising revenue.

For the three months ended September 30, 2012 and 2011, advertising revenue was $20,426 and $18,810, respectively, an increase of 9%, or $1,616. For the nine months ended September 30, 2012 and 2011, advertising revenue was $59,881 and $53,595, respectively, an increase of 12%, or $6,286. These increases were primarily due to a greater number of advertising spots sold and broadcast, as well as the increases in rates charged per spot.

We expect our 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 September 30, 2012 and 2011, equipment revenue was $17,813 and $15,504, respectively, an increase of 15%, or $2,309. For the nine months ended September 30, 2012 and 2011, equipment revenue was $51,183 and $48,392, respectively, an increase of 6%, or $2,791. These increases were driven by royalties from higher OEM production, partially offset by lower aftermarket and direct to consumer sales.

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 September 30, 2012 and 2011, other revenue was $71,449 and $67,399, respectively, an increase of 6%, or $4,050. For the nine months ended September 30, 2012 and 2011, other revenue was $210,362 and $205,882, respectively, an increase of 2%, or $4,480. These increases were driven by revenues from the U.S. Music Royalty Fee as the number of subscribers increased, and higher royalty revenue from Sirius XM Canada.

Other revenue is dependent upon 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 September 30, 2012 and 2011, revenue share and royalties were $141,834 and $117,043, respectively, an increase of 21%, or $24,791, and increased as a percentage of total revenue. For the nine months ended September 30, 2012 and 2011, revenue share and royalties were $409,371 and $340,713, respectively, an increase of 20%, or $68,658, and increased as a percentage of total revenue. These increases were


Table Of Contents

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 nine months ended September 30, 2012 and 2011, respectively. The Copyright Royalty Board will issue a decision on future royalty rates in December 2012. 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 September 30, 2012 and 2011, programming and content expenses were $69,938 and $70,509, respectively, a decrease of 1%, or $571, and decreased as a percentage of total revenue. For the nine months ended September 30, 2012 and 2011, programming and content expenses were $205,203 and $210,867, respectively, a decrease of 3%, or $5,664, 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 September 30, 2012 and 2011, customer service and billing expenses were $77,768 and $64,239, respectively, an increase of 21%, or $13,529, and increased as a percentage of total revenue. For the nine months ended September 30, 2012 and 2011, customer service and billing expenses were $212,635 and $192,667, respectively, an increase of 10%, or $19,968, but remained flat as a percentage of total revenue. These increases were primarily due to longer average handle time per call, higher contact rates and higher technology costs. The increase for the nine month period was partially offset by fewer calls per subscriber, lower bad debt expense and lower third party collection costs.

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 September 30, 2012 and 2011, satellite and transmission expenses were $18,319 and $19,681, respectively, a decrease of 7%, or $1,362, and decreased as a percentage of total revenue. For the nine months ended September 30, 2012 and 2011, satellite and transmission expenses were $53,980 and $57,238, respectively, a decrease of 6%, or $3,258, 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 service and functionality.

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.


Table Of Contents

For the three months ended September 30, 2012 and 2011, cost of equipment was $6,345 and $5,888, respectively, an increase of 8%, or $457, and remained flat as a percentage of total revenue but decreased as a percentage of equipment revenue. For the nine months ended September 30, 2012 and 2011, cost of equipment was $19,301 and $19,894, respectively, a decrease of 3%, or $593, and remained flat as a percentage of total revenue and decreased as a percentage of equipment revenue. The increase for the three month period was driven by the mix of radios with higher average costs sold, compared to the prior year. The decrease in the nine month period was primarily due to lower direct to consumer sales, partially offset by higher inventory reserves and radios sold with higher average costs.

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 or revenue share payments to automakers and retailers of satellite radios.

For the three months ended September 30, 2012 and 2011, subscriber acquisition costs were $112,418 and $107,279, respectively, an increase of 5%, or $5,139, and decreased as a percentage of total revenue. For the nine months ended September 30, 2012 and 2011, subscriber acquisition costs were $348,014 and $317,711, respectively, an increase of 10%, or $30,303, but decreased as a percentage of total revenue. These increases were primarily a result of higher 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 September 30, 2012 and 2011, sales and marketing expenses were $60,676 and $55,210, respectively, an increase of 10%, or $5,466, and remained flat as a percentage of total revenue. For the nine months ended September 30, 2012 and 2011, sales and marketing expenses were $176,457 and $154,471, respectively, an increase of 14%, or $21,986, and remained flat as a percentage of total revenue. These increases were 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 increase 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 September 30, 2012 and 2011, engineering, design and development expenses were $13,507 and $14,175, respectively, a decrease of 5%, or $668, and decreased as a percentage of total revenue. For


Table Of Contents

the nine months ended September 30, 2012 and 2011, engineering, design and development expenses were $32,468 and $39,249, respectively, a decrease of 17%, or $6,781, and decreased as a percentage of total revenue. The decrease for the three month period was driven primarily by lower product development costs. The decrease for the nine month period was due to a reversal of certain non-recurring engineering charges, partially offset by higher product development costs, costs related to the development of enhanced subscriber features and functionality for our service and 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. . . .

  Add SIRI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SIRI - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.