Sirius XM Holdings Inc. (SIRI)

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Sirius XM Radio Inc. (SIRI)

Q3 2010 Earnings Call

November 4, 2010 8:00 am ET


William Prip - SVP of IR

Mel Karmazin - CEO

David Frear - EVP and CFO

Jim Meyer - President, Operations and Sales

Scott Greenstein - President and Chief Content Officer


David Gober - Morgan Stanley

Lev Polinsky - JPMorgan

Barton Crockett - Lazard Capital Markets

John Tinker - Maxim

Matthew Harrigan - Wunderlich Securities

Leah Pilla - Knight Capital



Good morning and welcome to the SIRIUS XM Radio's third quarter 2010 earnings conference call. (Operator Instructions) At this time, I'd like to turn the call over to William Prip, Senior Vice President, Treasurer and Investor Relations.

William Prip

Good morning, everyone. And welcome to SIRIUS XM Radio's earnings conference call. Today Mel Karmazin, our CEO will be joined by David Frear, our EVP and CFO. They will review SIRIUS XM's third quarter 2010 financial results. At the conclusion of our prepared remarks, management will be glad to take your questions. Jim Meyer, President, Operations and Sales; and Scott Greenstein, President and Chief Content Officer, will also be available for the Q&A portion of the call.

First, I would like to remind everyone that certain statements made during this call might be forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based on management's current views and expectations and necessarily depend upon assumptions, data or methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties and could cause actual results to differ materially.

For more information about those risks and uncertainties, please see SIRIUS XM's SEC filings. We advise listeners not to rely unduly on forward-looking statements and disclaim any intent or obligation to update them. As we begin, I would like advise our listeners that today's results will include discussions of both actual results and adjusted results. All discussions of adjusted operating results exclude the effects of stock based compensation and certain purchase price accounting adjustments.

With that I'll hand the call over to Mel Karmazin.

Mel Karmazin

Thanks, Will. Good morning, everyone. Our earnings release this morning continues to demonstrate the strengths of SIRIUS XMs business model. In fact, today we are stronger than ever. We have more subscribers, more revenue and more adjusted EBITDA than ever in the history of satellite radio.

Previously, we told you that 2010 would be the first year since the merger that investors could get a real indication of how good our business can be, and our third quarter clearly demonstrates this proposition. The company added 335,000 net subscribers this quarter or more than three times the 102,000 subscribers we added during the same quarter last year.

Perhaps a more important subscriber metric is the increase in our self-pay subscriber base. We added 258,000 self-pay subscribers this third quarter versus 35,000 a year ago, which represents a sevenfold increase. At the end of 2010, our self-pay base and our total sub count are at record levels.

The phenomenal performance of our self-paid base was driven by an increase in conversion rate from 46.2 to 48.1, the highest level since the merger over two years ago, and a decrease in churn from 2.0% to 1.9%. Importantly, our subscriber metrics improved, with higher ARPU which was up over 6% from 1109 to 1181, the highest level the company has ever delivered.

These subscriber metrics continue to prove that our service is one that consumers want and for which they are willing to pay. This strong subscriber performance has generated some impressive year-over-year financial metrics. Our adjusted revenue increased 15% to $722.5 million for the quarter, also representing a record quarter for SIRIUS XM.

Total cash operating expenses increased by 6% this quarter versus the same quarter last year. But if you exclude the increases in revenue share expense and SAC increases, which generally indicate healthy business performance for the period, we actually delivered lower cash operating expenses for the quarter compared to last year.

The combination of strong revenue performance and prudent cost management drove a 60% increase in adjusted EBITDA year-over-year, reaching $170 and representing a record quarter. Our adjusted EBITDA margin increased to 23% from 17% in the same period last year.

Free cash flow grew at an even more impressive 132% during the same period. The free cash flow metric in particular has experienced tremendous improvement over the years. In the third quarter of 2008, 2009 and 2010 our free cash flow went from negative 98 million to positive 26.7 million and now to 62 million, significant progress that is representative of the overall trajectory of our business.

Our incredible operational financial performance over the past several quarters is clearly a reflection of our competitive advantages, which include nearly complete coverage of the Continental United States. Not many companies can deliver content as ubiquitously as we can, and certainly no audio content provider out there today or any time in the near future will be able to match that.

A vast array of curated content delivered through 130 plus channels, we offer some programming that's of interest to every single consumer in America. Our long term OEM relationships ensure that we will continue to occupy prime real estate on the dashboard and a strong and stable subscription model as demonstrated by our very strong performance during extremely difficult macroeconomic environments over the past several quarters. Not only do these competitive advantages help explain our recent performance, but I also want to point out that these factors are not going away as we look forward. In fact, some of these competitive advantages will continue to improve and further differentiate our business from existing competitors and any potential competitors on the horizon.

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