SIRI

Sirius XM Holdings Inc. (SIRI)

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SIRIUS XM Radio (SIRI)

Q1 2011 Earnings Call

May 03, 2011 8:00 am ET

Executives

Mel Karmazin - Chief Executive Officer and Director

James Meyer - President of Sales and Operations

David Frear - Chief Financial Officer and Executive Vice President

Hooper Stevens -

Analysts

James Goss - Barrington Research Associates, Inc.

Benjamin Swinburne - Morgan Stanley

Murray Arenson - BGB Securities, Inc.

Barton Crockett - Lazard Capital Markets LLC

Leah Pilla - UBS

Presentation

Operator

Good morning, and welcome to the Sirius XM Radio's First Quarter 2011 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Hooper Stevens, Senior Director, Investor Relations and Finance. Mr. Stevens, please go ahead.

Hooper Stevens

Thank you, Jim, and good morning, everyone. Welcome to Sirius XM Radio's Earnings Conference Call. Today, Mel Karmazin, our Chief Executive Officer, will be joined by David Frear, our Executive Vice President and Chief Financial Officer. 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, 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 and 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 view SiriusXM'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 to advise our listeners that 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, Hooper. Thank you, all, for joining us today. This morning, I want to spend a few minutes discussing our operations, updating you on our guidance for 2011, reviewing the competitive landscape and discussing our balance sheet and how we think about the cash we are generating.

We are very pleased to report another strong quarter of subscriber revenue and adjusted EBITDA growth together with improving margins and increasing cash flow. We added 118% more subscribers in Q1 2011 than in Q1 2010. Net subscriber additions of more than 373,000 represented the strongest first quarter subscriber growth in the 3 years since Q1 2008.

Gross subscriber additions during the quarter were up 19% to $2,052,000 on the back of higher OEM sales and improved reactivations of radios. We ended the quarter with over 20.5 million paying subscribers, a new record, to maintain our position as one of the largest subscription entertainment businesses in the world.

Revenue grew by 9% to $724 million, driven primarily by higher subscriber count during the quarter. Adjusted cash operating expenses grew by 6.5%. The increase in cash operating expenses are all growth related: higher SAC, which is a function of increased car sales, and higher revenue share and royalties. All other cash operating expenses combined were flat year-over-year.

Our tight expense controls meant we were able to grow adjusted EBITDA by 15% to a record $181 million, more adjusted EBITDA than the company has ever recorded in a single quarter. This adjusted EBITDA record also resulted in the highest quarterly margin in our history at 24.9%, up from 22.1% for all of last year. We expect to see improving margins in the years to come with an adjusted EBITDA margin over 40% at maturity. We plan to get there by subscriber and revenue growth, coupled with our high incremental contribution margins and tight multiyear expense controls.

Strong operating performance should then lead to what I believe is the most important yardstick which -- by which any company's value can be judged, and that's free cash flow. And here, I'm pleased to report more good news, both in our performance and in our outlook for the future.

First quarter free cash flow improved by a strong $110 million when compared to the first quarter of last year. This was primarily driven by higher adjusted EBITDA and lower capital expenditures, both of which we expect to continue. Our outlook for free cash flow for the full year has improved, and we now expect it to approach $350 million compared to our prior expectation. This will be a 66% increase year-over-year in free cash flow.

Our self-pay monthly churn rate was 2%, which was flat year-over-year. Our conversion rate of 44.7% was down about 50 basis points year-over-year, driven by the changing mix of our radio installations among auto makers. We continue to work hard on improving these retention numbers further with a number of new initiatives that are in place right now. We expect that for the full year churn and conversion will be approximately flat when compared with 2010.

Content remains the name of the game for us. At the end of the day, access to the best radio on radio is what continues to grow our subscriber base. This year, we made a number of exciting content announcements, with some of the biggest names in music and entertainment: Tim McGraw, Metallica and Simon & Garfunkel.

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