SIRIUS XM Radio Inc. (Nasdaq: SIRI) reports Q3 EPS of breakeven, ex-items, 2 cents better than the consensus of a $0.02 loss. Revenues rose 3% to $630 million, above the consensus of $608.7 million. Shares are currently up 3%.
Highlights From SIRI's Q3 Conference Call:
SIRIUS XM affirmed its year 2009 guidance of over $400 million in pro forma full-year adjusted income from operations.
(CEO) We were also pleased this quarter that we grow subscribers and improved churn. Our subscriber base is large, loyal and satisfied, and is expanding again with a net addition of over 100,000 subscribers in the third quarter.
ARPU continues to grow because of the steps we've taken to improve the economics of this business.
Our revenue grew this quarter to a record Q3 revenue, the best ever in Satellite Radio history of $630 million.
Combining revenue growth with expense reduction allowed us to generate 106 million of adjusted EBITDA in Q3 of this year versus negative 37 million for the same quarter last year, a swing of $143 million.
Similarly, free cash flow for the quarter was $27 million versus negative 98 million, a substantial positive swing of approximately $125 million.
Today, we are conforming guidance for the year at over 400 million of adjusted EBITDA. The two satellite radios combined ended 2007 with an adjusted EBITDA loss of $565 million. Before the merger the two companies lost $565 million. After the merger, the company is going to report over $400 million, $1 billion turnaround in two years.
Simply put, our fixed cost base would not materially change whether we are serving 18.5 million, 20 million or 25 million subscribers or even 50 million subscribers for that matter.
The quarter highlights also include an improvement is self paid churn, which dropped below 2% for the first time this year at 196 for the third quarter it represents significant progress from the 2.2 reported for Q1 this year.
We ended the quarter with approximately $380 million in cash with only 82 million of debt due by the end of this year and no maturities next year.
The great thing about our relationship with the automakers is that they are very effective ways for us to market to potential customers. With penetration currently at 55% and conversion rates at 46.8%, we can be highly confident that new subscribers will be joining us as they are introduced to our service.
In addition, we just recently begun to aggressively pursue the used car market and believe that there is a tremendous opportunity to convert already installed, but dormant satellite radios into paying subscriptions.
Cash operating costs for the first nine months of 2009 were down almost $0.5 billion, or almost 25% from last year. We know how to squeeze cost out of the system, and you should look forward to more of that in the quarters to come.
We assumed a conservative estimate for 2010 of 11 million cars and light trucks. In that scenario, we will finish 2010 with an increase in net ads, our revenues growth mid-to-high single digits, we're forecasting growing adjusted EBITDA over 20%, and we will not only be free cash flow positive, we will increase Sirius XM free cash flow over the 2009 results.
In the first nine months of this year, we have now generated, $347 million of adjusted income from operations, a positive swing of 550 million from the first nine months of 2008.
Cash operating expenses year-to-date were $465 million lower than 2008, even if you isolate the impact of lower growth sales resulting from the automotive industry's slump, cash operating expenses were lower by $375 million in just nine months.
With the slight decline in churns in Q2, and an increase in auto sales, we were able to resume subscriber growth in the third quarter adding approximately 102,000 net subscribers to finish the quarter with 18.5 million.
Both our self-paid and commercial subscriber bases have increased since the end Q2, 35,000 and 67,000 respectively.
Our self-pay base was 15.5 million at the end of Q3 compared to 15.2 million a year prior, our paid promotional base is about 3.1 million at the end of Q3 compared to 3.7 million at the end of Q3 of '08 lower by nearly 700,000 subs due to the dramatic fall of with the North American auto sales.
We are particularly pleased with the uptick in our conversion rate in the third quarter moving up to approximately 47% from the 44 to 45%, we have been seen in the previous summer months.
Total revenue grew approximately 3% or $17 million versus the same period a year ago to 630 million primarily driven by a 3% increase in ARPU plus the collection of additional music recovery fee revenues, which are not included in our ARPU.
We achieve this revenue growth despite 1.7% decline in average subscribers versus the same period last year.
SIRIUS XM continues to deliver positive adjusted EBITDA reaching 106 million this quarter. The big driver was a 19% reduction in cash operating expenses bringing it down to $126 million lower than Q3 last year.
Satellite and Transmission declined 26%, programming 29%, Sales and Marketing 32%, G&A 36% and Engineering 8%. Revenue sharing royalties up 2%, slightly less than our revenue growth rate as we saw improvement from the renegotiated GM contract, which partially offset the effect of higher OEM mix and the higher performance royalties versus year ago.
The build of that XM 5 is largely complete and we expect to launch it on a Proton rocket next summer. Completing the refresh of the SIRIUS constellation will be the launch of SIRIUS 6 in late 2011, which will also go into geostationary orbit. Satellite CapEx excluding capitalized interests to support these programs is expected to be approximately 170 million in 2009; 220 million in 2010 and 125 million in 2011.
(Q&A) Couple of questions on the car market. So, one, I was wondering if you could give any sort of metrics on the kind of performance you're getting out of your programs with used car sales? And any sort of good ways to think about how big an opportunity that can be over time? And then you said there are about 600,000 unpaid trail subs at the end of this quarter. Can you give an indication of what that number looks like at the end of may be second quarter and first quarter also? Thank you very much. (A)On the used cars, we are learning quite a bit and frankly the way we forecast the number is, we've gone back and looked at how many cars have been built with satellite radio inception today. We then use kind of a industry-standard curve for when those cars transition. So for instance after four years, we know almost close to 55% to 60% have moved to the second owner. We then overlay that on what's been built, we look forward what things going to be built and we predict both the industry going forward year by year. I can tell you the industry between now and 2014 gross extensively. Our challenge in 2010 is to get our arms around effectively predicting how bif that market is and how to reach those subscribers. And I think you will hear more us in the quarters to come on that particular on. Dave, do you want come on the pay trails? (A)So on the pay trial, the figures that I have handy are a year ago as supposed to sequential quarters. So, what we should think about it is that a year ago we had little bit less than 400,000 unpaid trials and for the growth it's been a little bit more than 200,000 since a year ago. I think, you can expect that most of that growth came on as the automotive industry began rebounding from the lows that it hit at the end of last year, beginning of this year.
Question on the network architecture situation, how long do you think it will be before Sirius is using some one constellation of satellites to service the entire customer base? And has that timeframe changed since you first kind of started contemplating the original merger? (A)The answer to the second
question is that it hasn't changed. When we contemplate the merger and then when we finally announced that and began explain to people what was going to happen, one of the things that we told them is to not expect a -- really any meaningful satellite efficiencies from getting to one constellation for
really long time. And the way that we explained it is that it takes a long time to make changes in what the automakers put in cars. And so we have -- once you pick, I'd say, you were to decide to pick to go to one system, you -- once you made that choice, it will take a few years to roll it into production, and then a few years for them to actually ramp it up and get it through all the -- alter their plants. So it end up with several years before you begin really a meaningful transition of what's in the field, many of [indiscernible] cars in the field. So we've already got the spending out of the way for second-generation
satellite constellations in basically the next 24 months. And then those assets are good until beyond 2020. So we will face the decision from a spend perspective really and sort of about 7, 8 years time and what we want to do with respect to two versus one constellation. So the timing is still -- still what it was -- the time of the merger and it's still pretty far out. But what it does allow us to do is that there were near term savings so that by making the decision for Sirius to operate with two a geostationary satellites instead of three KEO [ph] satellites, that we basically cut one satellite and save a spare, because XM had already build a spare. So relative to the plans we have pre-merger, it takes about 400 million of CapEx out of the near term.
First one follow up on what was just being talked about. Do you use the same repeater system with the new Sirius to geostationary satellites in additions to the XM geostationary satellite? (A)That's a great question. And here also since the merger our engineers have been hard at work and really done, what I consider to be is very clever engineering. We are fully integrated now, the repeaters networks and in fact, we expect going forward to actually be able to operate repeaters that allow us very efficiently to
broadcast both streams. So, we're still working on the numbers, but we're confident that our repeater expenses are under control, and we'll not -- would not grow the way you would expect them to grow if you went to an all GEO versus HEO constellation.
And so do the elliptical orbiting satellites find the back up to the geostationary orbiting rather than the other way around in fact --? (A)I thank what happens is the lives of these are so difficult to predict, and we're actually at a very great situation, where we have a lot of options as to how ultimately that works, but I'll go back to David's comments, we are going to end up with two geostationary Sirius satellites, two geostationary XM satellite, and a spare that we will launch next summer in the middle which gives us a lot of flexibility. (A)Sure I think the way that you should think about it is that, right now since we turned out in Sirius V in September, we're operating there effectively a two GEO -- two HEO, one GEO operating configuration, we're likely to stay in that configuration until at least 2013, and then sometime between 2013 and 2015, which is roughly when the HEO, the first generation HEO constellation reaches it's end of life, we'll flip over to the two GEO mode supplemented by the expanded trust or refuse.
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