Robust 3Q for SIRIUS XM

SIRIUS XM Radio Inc. ( SIRI - Analyst Report ) declared robust financial results for the third quarter of 2012 with record high revenue, EBITDA (earnings before income, tax, depreciation, and amortization), and free cash flow. The outperformance was mainly buoyed by strong management execution based on rising auto industry sales. As per management, its growth momentum will further expand in the rest of 2012 and has raised financial outlook for the rest of 2012.

Quarterly GAAP net income was $74.5 million or 1 cent per share compared with a net income of $104.3 million or 2 cent per share in the prior-year quarter. However, third-quarter 2012 adjusted (excluding debt extinguishment charge of around $107.1 million) earnings per share of 3 cents were a penny above the Zacks Consensus Estimate. Quarterly total revenue of $867.4 million, exhibit an annualized growth of 14%, beating the Zacks Consensus Estimate of $864 million.

Quarterly total operating expenses were $635.6 million compared with $578.1 million in the year-ago quarter. Operating income, in the reported quarter, was around $231.8 million compared with $184.5 million in the year-ago quarter. Again, SIRIUS XM posted quarterly adjusted EBITDA of $244.6 million compared with $197.3 million in the prior-year quarter.

During the first three quarters of 2012, SIRIUS XM generated $513.5 million of cash from operations compared with $328.6 million in the prior-year period. Free cash flow in the reported period was a little over $434 million compared with $213.6 million in the year-ago period.

At the end of the third quarter of 2012, SIRIUS XM had $556.3 million of cash and cash equivalents and $2,226 million of outstanding debt compared with $774 million of cash and cash equivalents and $2,685.2 million of outstanding debt at the end of 2011. At the end of the previous quarter, debt-to-capitalization ratio was 0.35 compared with 0.79 at the end of 2011.

Segment Wise Results

Quarterly Subscriber revenue was $757.7 million, up 14.7% year over year. Advertising revenue was $20.4 million, up 8.6% year over year. Equipment revenue was slightly above $17.8 million, up 14.9% year over year. Other revenue was $71.4 million, up 6% year over year.

Subscriber Statistics

During the third quarter of 2012, SIRIUS XM added 445,921 (up 33.6% year over year) net subscribers, which raised the company’s total subscriber base to 23,365,383 at the end of September 30, 2012, up 9.4% year over year. Payment category wise, Self-Pay subscriber was 19,041,519 (up 8.6% year over year) while Paid Promotional subscriber was 4,323,864 (up 13.3% year over year).

Important Operating Metrics

In the third quarter of 2012, ARPU came in at $12.14 compared with $11.66 in the year-ago quarter. Average self-pay monthly churn rate was 2% compared with 1.9% in the prior-year quarter. Customer Conversion rate came in at 44%, remaining same year over year. Subscriber acquisition cost stood at $51 compared with $55 in the year-ago quarter.

Financial Outlook

Management projects full-year 2012 revenue of SIRIUS XM to be approximately $3.4 billion. Free cash flow for 2012 will be $700 million. The company estimated that it will add 1.8 million net new subscribers in 2012. Adjusted EBITDA, in 2012, is likely to reach $900 million.

Recommendation

SIRIUS XM is the largest broadcast radio service provider in the U.S. The company competes with free Internet radio service provider Pandora Media Inc. ( P - Snapshot Report ) . We maintain our long-term Neutral recommendation on SIRIUS XM. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.