SIRI

Sirius XM Holdings Inc. (SIRI)

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SIRIUS XM Radio (SIRI)

Q4 2010 Earnings Call

February 15, 2011 8:00 am ET

Executives

Paul Blalock - Senior Vice President of Investor Relations

Mel Karmazin - Chief Executive Officer and Director

James Meyer - President of Sales and Operations

William Prip -

David Frear - Chief Financial Officer and Executive Vice President

Analysts

David Gober - Morgan Stanley

Vijay Singh - Janco Partners, Inc.

Barton Crockett - Lazard Capital Markets LLC

Presentation

Operator

Good morning. And welcome to the SiriusXM Radio's Full Year and Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to William Prip, Senior Vice President, Treasurer and Investor Relations. Mr. Prip, please go ahead.

William Prip

Thank you Nikky. And good morning, everyone. Welcome to SiriusXM Radio's earnings conference call. Today Mel Karmazin, our CEO will be joined by David Frear, EVP and CFO. They will review SiriusXM's full year 2010 financial results. At the conclusion of our prepared remarks, management will be glad to take your questions. Jim Meyer, President of 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 the 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 beliefs 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 that could cause actual results to differ materially.

For more information about those risks and uncertainties, please see SiriusXM's SEC filings. We advise listeners to not rely unduly on forward-looking statements and disclaim any intent or obligation to update them.

As we begin, I would like to advise our listeners that the today's results will include discussions about 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. I will now hand the call over to Mel Karmazin.

Mel Karmazin

Thanks, Will. And good morning, everyone. 2010 was a remarkable year for satellite radio. If there ever any doubts about the viability of a SiriusXM, our 2010 results put those doubts to rest. Today, we have a respected brand that is coveted as a must have product for discerning American consumers. In addition, the business community at large cannot ignore the strong economic drivers inherent in our unique business model. Technology changes have transformed the media landscape over the past 10 years creating winners and losers along the way. I'm proud to say that we are clearly in the first camp.

We are no longer a long-shot concept and company. I believe we are increasingly viewed as a sure thing.

Let me quickly review the company's important financial results in 2010. Revenue grew by over 14% to $2.82 billion, a record for the company. At the same time, we managed our expenses aggressively allowing only a 7% increase in cash operating expenses. Most of the expense increases were revenue related or related to our growth in subscribers. Consequently, adjusted EBITDA grew by over 35% to $626 million, which was another record for the company. After only two years of positive adjusted EBITDA, our margin was 22%. We anticipate significant margin expansion in the years ahead with an operating margin over 40% at maturity.

As those investors who have known me for a long time appreciate, the most important measure of a business' success to me is free cash flow. It's free cash flow that enables you to pay down debt, make acquisitions or return capital to shareholders. In that regard, we generated $210 million of free cash flow in 2010. That's despite launching a satellite last year and paying for a great deal of the construction of another satellite that will launch later this year. Free cash flow was also a record amount for the company. That's two consecutive years of strong free cash flow generation, $185 million in 2009, and $210 million in 2010. What a difference from of the over $500 million of negative free cash flow in 2008. And free cash flow over the next several years should ramp dramatically given that we will not be spending any cash on satellite capital expenditures following this year's launch of SIRIUS 6 nor will we be a meaningful income tax payer.

Importantly, our operational metrics in 2010 were as gratifying as our financial results. Subscriber net additions were 1.4 million strong in 2010, representing a year-over-year growth rate of nearly 8%. That's pretty impressive growth for a business that had already scaled to be one of the largest subscriber businesses in this country by the end of 2009. We ended the year with $20.2 million subs, which was another record for SiriusXM.

In addition to the strong gross adds, principally a result of improved auto sales, I'm proud to say that this growth in our subscriber base was also the result of improvements in our subscriber metrics from its 2009 levels. The rate at which we converted consumers on trials to self-pay subscribers grew from 45.4% to 46.2% while we also reduced our self-pay churn from 2.0% from 1.9%. The fact that we grew our self-pay base by nearly 1 million subscribers is an astonishing achievement, 6x as many new customers chose to pay for our service in 2010 than in 2009.

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