ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All dollar amounts referenced in this Item 2 are in thousands, unless otherwise stated)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
Special Note Regarding Forward-Looking Statements
The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in forward-looking statements made in this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time. Any statements about our beliefs, plans, objectives, expectations, assumptions, future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “intend,” “plan,” “projection” and “outlook.” Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time, particularly the risk factors described under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the
year ended
December 31, 2013
and “Management’s Discussion and Analysis of Financial Condition and Results or Operations” herein and in Part II, Item 7 of our Annual Report on Form 10-K for the
year ended
December 31, 2013
.
Among the significant factors that could cause our actual results to differ materially from those expressed in the forward-looking statements are:
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we face substantial competition and that competition is likely to increase over time;
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our ability to attract and retain subscribers in the future is uncertain;
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our business depends in large part upon the auto industry;
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general economic conditions can affect our business;
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failure of our satellites would significantly damage our business;
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interruption or failure of our information technology and communications systems could negatively impact our results and our brand;
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if we fail to protect the security of personal information about our customers, we could be subject to costly government enforcement actions and private litigation and our reputation could suffer;
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royalties for music rights have increased and there can be no assurance they will not continue to increase in the future;
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the unfavorable outcome of pending or future litigation could have a material adverse effect;
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we may not realize the benefits of acquisitions or other strategic initiatives, including the acquisition of Agero’s connected vehicle business;
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rapid technological and industry changes could adversely impact our services;
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failure of third parties to perform could adversely affect our business;
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changes in consumer protection laws and their enforcement could damage our business;
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failure to comply with FCC requirements could damage our business;
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other existing or future government laws and regulations could harm our business;
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we may from time to time modify our business plan, and these changes could adversely affect us and our financial condition;
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our indebtedness could adversely affect our operations and could limit our ability to react to changes in the economy or our industry;
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our broadcast studios, terrestrial repeater networks, satellite uplink facilities or other ground facilities could be damaged by natural catastrophes or terrorist activities;
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our principal stockholder has significant influence over our management and over actions requiring general stockholder approval and its interests may differ from the interests of other holders of our common stock;
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we are a “controlled company” within the meaning of the NASDAQ listing rules and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements; and
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our business may be impaired by third-party intellectual property rights.
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Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any of these forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we
undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or otherwise, except as required by law. New factors emerge from time to time, and it is not possible for us to predict which will arise or to assess with any precision the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Executive Summary
We broadcast music, sports, entertainment, comedy, talk, news, traffic and weather channels, as well as infotainment services, in the United States on a subscription fee basis through our two proprietary satellite radio systems. Subscribers can also receive music and other channels, plus features such as SiriusXM On Demand and MySXM, over the Internet, including through applications for mobile devices. We are also a leader in providing connected vehicle applications and services. Our connected vehicle services are designed to enhance the safety, security and driving experience for vehicle owners while providing marketing and operational benefits to automakers and their dealers. Subscribers to our connected vehicle services are not included in our subscriber count.
We have agreements with every major automaker (“OEMs”) to offer satellite radios in their vehicles from which we acquire a majority of our subscribers. We also acquire subscribers through marketing to owners of factory-installed satellite radios that are not currently subscribing to our services. Additionally, we distribute our satellite radios through retail locations nationwide and through our website. Satellite radio services are also offered to customers of certain daily rental car companies.
As of
June 30, 2014
, we had
26,301,581
subscribers of which
21,635,008
were self-pay subscribers and
4,666,573
were paid promotional subscribers. Our subscriber totals include subscribers under our regular pricing plans; discounted pricing plans; subscribers that have prepaid, including payments either made or due from automakers for subscriptions included in the sale or lease price of a vehicle; subscribers to our Internet services who do not also have satellite radio subscriptions; and certain subscribers to our weather, traffic, data and Backseat TV services.
Our primary source of revenue is subscription fees, with most of our customers subscribing on an annual, semi-annual, quarterly or monthly basis. We offer discounts for prepaid and longer term subscription plans as well as discounts for multiple subscriptions. We also derive revenue from activation and other fees, the sale of advertising on select non-music channels, the direct sale of satellite radios and accessories, and other ancillary services, such as our weather, traffic, data and Backseat TV services.
In certain cases, automakers and dealers include a subscription to our radio services in the sale or lease price of new vehicles or previously owned vehicles. The length of these trial subscriptions varies but is typically three to twelve months. We receive subscription payments for these trials from certain automakers. We also reimburse various automakers for certain costs associated with satellite radios installed in new vehicles.
Liberty Media Corporation ("Liberty Media") beneficially owns, directly and indirectly, over
50%
of the outstanding shares of our common stock. As a result, we are a "controlled company" for the purposes of the NASDAQ corporate governance requirements. Liberty Media owns interests in a broad range of media, communications and entertainment businesses, including its subsidiaries, Atlanta National League Baseball Club, Inc. and TruePosition, Inc., interests in Charter Communications, Live Nation and minority equity investments in Time Warner Inc., Time Warner Cable, and Viacom.
We also have a 37% equity interest in Sirius XM Canada which offers satellite radio services in Canada. Subscribers to the Sirius XM Canada service are not included in our subscriber count.
Results of Operations
Set forth below are our results of operations for the
three and six months ended
June 30, 2014
compared with the
three and six months ended
June 30, 2013
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Unaudited
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2014 vs 2013 Change
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2014 vs 2013 Change
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For the Three Months Ended June 30,
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For the Six Months Ended June 30,
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Three Months
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Six Months
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(in thousands)
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2014
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2013
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2014
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2013
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Amount
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%
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Amount
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%
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Revenue:
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Subscriber revenue
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$
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878,160
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$
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814,718
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$
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1,729,596
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$
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1,598,060
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$
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63,442
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8
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%
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$
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131,536
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8
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%
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Advertising revenue
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25,498
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21,757
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47,712
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41,968
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3,741
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17
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%
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5,744
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14
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%
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Equipment revenue
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27,616
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18,443
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51,594
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36,599
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9,173
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50
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%
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14,995
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41
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%
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Other revenue
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104,071
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85,192
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204,154
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160,881
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18,879
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22
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%
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43,273
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27
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%
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Total revenue
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1,035,345
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940,110
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2,033,056
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1,837,508
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95,235
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10
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%
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195,548
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11
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%
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Operating expenses:
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Cost of services:
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Revenue share and royalties
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200,221
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155,859
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395,632
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304,390
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44,362
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28
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%
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91,242
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30
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%
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Programming and content
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69,570
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70,381
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144,440
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144,991
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(811
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(1
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)%
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(551
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0
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%
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Customer service and billing
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90,092
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80,290
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181,161
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160,684
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9,802
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12
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%
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20,477
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13
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%
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Satellite and transmission
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21,272
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19,493
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42,651
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39,188
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1,779
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9
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%
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3,463
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9
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%
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Cost of equipment
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12,030
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5,442
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19,834
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12,469
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6,588
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121
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%
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7,365
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59
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%
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Subscriber acquisition costs
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124,407
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129,992
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247,429
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246,103
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(5,585
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)
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(4
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)%
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1,326
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1
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%
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Sales and marketing
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77,759
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68,058
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154,086
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133,956
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9,701
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14
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%
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20,130
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15
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%
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Engineering, design and development
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15,630
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15,052
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31,541
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29,894
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578
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4
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%
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1,647
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6
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%
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General and administrative
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72,582
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60,392
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148,825
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116,732
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12,190
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20
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%
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32,093
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27
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%
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Depreciation and amortization
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67,204
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67,415
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135,471
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134,433
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(211
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)
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0
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%
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1,038
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1
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%
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Total operating expenses
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750,767
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672,374
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1,501,070
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1,322,840
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78,393
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12
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%
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178,230
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13
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%
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Income from operations
|
284,578
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|
267,736
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|
531,986
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514,668
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16,842
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6
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%
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17,318
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|
3
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%
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Other income (expense):
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Interest expense, net of amounts capitalized
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(67,521
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)
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(49,728
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)
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(121,613
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)
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(95,902
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)
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(17,793
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)
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(36
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)%
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(25,711
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)
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(27
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)%
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Loss on extinguishment of debt and credit facilities, net
|
—
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(16,377
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)
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|
—
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(16,377
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)
|
|
16,377
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|
|
100
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%
|
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16,377
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|
100
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%
|
Interest and investment (loss) income
|
(1,066
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)
|
|
294
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|
|
3,283
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|
|
1,932
|
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(1,360
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)
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|
(463
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)%
|
|
1,351
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|
70
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%
|
Loss on change in value of derivatives
|
(7,463
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)
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|
—
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|
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(34,485
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)
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—
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|
|
(7,463
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)
|
|
(100
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)%
|
|
(34,485
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)
|
|
(100
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)%
|
Other (loss) income
|
(1,745
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)
|
|
256
|
|
|
(1,652
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)
|
|
502
|
|
|
(2,001
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)
|
|
(782
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)%
|
|
(2,154
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)
|
|
(429
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)%
|
Total other expense
|
(77,795
|
)
|
|
(65,555
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)
|
|
(154,467
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)
|
|
(109,845
|
)
|
|
(12,240
|
)
|
|
(19
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)%
|
|
(44,622
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)
|
|
(41
|
)%
|
Income before income taxes
|
206,783
|
|
|
202,181
|
|
|
377,519
|
|
|
404,823
|
|
|
4,602
|
|
|
2
|
%
|
|
(27,304
|
)
|
|
(7
|
)%
|
Income tax expense
|
(86,822
|
)
|
|
(76,659
|
)
|
|
(163,570
|
)
|
|
(155,699
|
)
|
|
(10,163
|
)
|
|
(13
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)%
|
|
(7,871
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)
|
|
(5
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)%
|
Net income
|
$
|
119,961
|
|
|
$
|
125,522
|
|
|
$
|
213,949
|
|
|
$
|
249,124
|
|
|
$
|
(5,561
|
)
|
|
(4
|
)%
|
|
$
|
(35,175
|
)
|
|
(14
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)%
|
|
|
|
|
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Our results of operations discussed below include Sirius XM Connected Vehicle Services Inc. activity in 2014, as well as the impact of purchase price accounting adjustments associated with the July 2008 merger between our wholly owned subsidiary, Vernon Merger Corporation, and XM Satellite Radio Holdings Inc. (the "Merger"). The purchase price accounting adjustments related to the Merger, include the: (i) elimination of deferred revenue associated with the investment in XM Canada, (ii) recognition of deferred subscriber revenues not recognized in purchase price accounting, and (iii) elimination of the benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and programming providers. The deferred credits on executory contracts attributable to third party arrangements with an OEM included in revenue share and royalties, subscriber acquisition costs, and sales and marketing concluded with the expiration of the acquired contract during 2013. The impact of these purchase price accounting adjustments is detailed in our Adjusted Revenues and Operating Expenses tables on pages
37
through
44
of our glossary.
Total Revenue
Subscriber Revenue
includes subscription, activation and other fees.
For the
three months ended
June 30, 2014
and 2013, subscriber revenue was
$878,160
and
$814,718
, respectively,
an increase
of
8%
, or
$63,442
. For the
six months ended
June 30, 2014
and 2013, subscriber revenue was
$1,729,596
and
$1,598,060
, respectively,
an increase
of
8%
, or
$131,536
. The increases were primarily attributable to increases in the daily weighted average number of subscribers, the inclusion of subscription revenue generated by our connected vehicle business and the increase in certain of our subscription rates beginning in January 2014. These increases were partially offset by an increasing number of lifetime subscription plans that have reached full revenue recognition and a change in an agreement with an automaker.
We expect subscriber revenues to increase based on the growth of our subscriber base, including connected vehicle subscribers, changes in our subscription rates and the sale of additional services to subscribers.
Advertising Revenue
includes the sale of advertising on certain non-music channels.
For the
three months ended
June 30, 2014
and 2013, advertising revenue was
$25,498
and
$21,757
, respectively,
an increase
of
17%
, or
$3,741
. For the
six months ended
June 30, 2014
and 2013, advertising revenue was
$47,712
and
$41,968
, respectively,
an increase
of
14%
, or
$5,744
. The increase was primarily due to a greater number of advertising spots sold and broadcast.
We expect our advertising revenue to grow as more advertisers are attracted to our national platform and growing subscriber base and as we launch additional non-music channels.
Equipment Revenue
includes revenue and royalties from the sale of satellite radios, components and accessories.
For the
three months ended
June 30, 2014
and 2013, equipment revenue was
$27,616
and
$18,443
, respectively,
an increase
of
50%
, or
$9,173
. For the
six months ended
June 30, 2014
and 2013, equipment revenue was
$51,594
and
$36,599
, respectively,
an increase
of
41%
, or
$14,995
. The increase was driven by higher sales to distributors and royalties from OEM production, partially offset by lower per unit revenue on direct to consumer sales.
We expect equipment revenue to increase based on OEM production for which we receive royalty payments for our technology and, to a lesser extent, on the volume of equipment sales in our aftermarket and direct to consumer business.
Other Revenue
includes amounts earned from subscribers for the U.S. Music Royalty Fee, revenue from our Canadian affiliate and ancillary revenues.
For the
three months ended
June 30, 2014
and 2013, other revenue was
$104,071
and
$85,192
, respectively,
an increase
of
22%
, or
$18,879
. For the
six months ended
June 30, 2014
and 2013, other revenue was
$204,154
and
$160,881
, respectively,
an increase
of
27%
, or
$43,273
. The increase was driven by revenues from the U.S. Music Royalty Fee as the number of subscribers subject to the 12.5% rate increased along with an increase in subscribers.
We expect other revenue to increase as our subscriber base drives higher U.S. Music Royalty Fees and as the revenue of our Canadian affiliate grows.
Operating Expenses
Revenue Share and Royalties
include distribution and content provider revenue share, royalties for broadcasting performance content and web streaming, and advertising revenue share.
For the
three months ended
June 30, 2014
and 2013, revenue share and royalties were
$200,221
and
$155,859
, respectively,
an increase
of
28%
, or
$44,362
, and
increased
as a percentage of total revenue. For the
six months ended
June 30, 2014
and 2013, revenue share and royalties were
$395,632
and
$304,390
, respectively,
an increase
of
30%
, or
$91,242
, and
increased
as a percentage of total revenue. For the
three and six months ended
June 30, 2013, revenue share and royalties was positively impacted by benefits of
$40,831
and
$80,592
, respectively, to earnings from the amortization of deferred credits on executory contracts. The remainder of the increases were due, in part, to greater revenues subject to royalty and revenue sharing arrangements and a 5.6% increase in the statutory royalty rate for the performance of sound recordings.
We expect our revenue share and royalty costs to increase as our revenues grow, our royalty rates increase and as a result of the discontinued deferred credits on executory contracts associated with the Merger.
Programming and Content
includes costs to acquire, create, promote and produce content. We have entered into various agreements with third parties for music and non-music programming that require us to pay license fees and other amounts.
For the
three months ended
June 30, 2014
and 2013, programming and content expenses were
$69,570
and
$70,381
, respectively,
a decrease
of
1%
, or
$811
, and
decreased
as a percentage of total revenue. For the
six months ended
June 30, 2014
and 2013, programming and content expenses were
$144,440
and
$144,991
, respectively,
a decrease
of less than 1%, or
$551
, and
decreased
as a percentage of total revenue. The decreases were primarily due to the renewal of certain agreements at more cost effective terms, partially offset by a reduction in the benefit to earnings from the purchase price accounting adjustments associated with the Merger.
We expect our programming and content expenses to fluctuate as we offer additional programming, and renew or replace expiring agreements.
Customer Service and Billing
includes costs associated with the operation and management of internal and third party customer service centers, and our subscriber management systems as well as billing and collection costs, transaction fees and bad debt expense.
For the
three months ended
June 30, 2014
and 2013, customer service and billing expenses were
$90,092
and
$80,290
, respectively,
an increase
of
12%
, or
$9,802
, but
remained flat
as a percentage of total revenue. For the
six months ended
June 30, 2014
and 2013, customer service and billing expenses were
$181,161
and
$160,684
, respectively,
an increase
of
13%
, or
$20,477
, but
remained flat
as a percentage of total revenue. These increases were primarily due to the inclusion of costs associated with our connected vehicle services business and higher subscriber volume driving increased subscriber contacts.
We expect our customer service and billing expenses to increase as our subscriber base grows and as we attempt to improve the customer service experience for our subscribers.
Satellite and Transmission
consists of costs associated with the operation and maintenance of our terrestrial repeater networks; satellites; satellite telemetry, tracking and control systems; satellite uplink facilities; broadcast studios; and delivery of our Internet streaming service.
For the
three months ended
June 30, 2014
and 2013, satellite and transmission expenses were
$21,272
and
$19,493
, respectively,
an increase
of
9%
, or
$1,779
, but
remained flat
as a percentage of total revenue. For the
six months ended
June 30, 2014
and 2013, satellite and transmission expenses were
$42,651
and
$39,188
, respectively,
an increase
of
9%
, or
$3,463
, but
remained flat
as a percentage of total revenue. These increases were primarily due to increased satellite insurance expense and costs associated with our Internet streaming operations.
We expect overall satellite and transmission expenses to remain relatively unchanged as decreases in satellite insurance and Internet-based service costs are offset by increases in terrestrial repeater network and personnel costs.
Cost of Equipment
includes costs from the sale of satellite radios, components and accessories and provisions for inventory allowance attributable to products purchased for resale in our direct to consumer distribution channels.
For the
three months ended
June 30, 2014
and 2013, cost of equipment was
$12,030
and
$5,442
, respectively,
an increase
of
121%
, or
$6,588
, and
increased
as a percentage of equipment revenue. For the
six months ended
June 30, 2014
and 2013, cost of equipment was
$19,834
and
$12,469
, respectively,
an increase
of
59%
, or
$7,365
, and
increased
as a percentage of equipment revenue. These increases were primarily due to higher sales to distributors, partially offset by lower costs per unit on direct to consumer sales.
We expect cost of equipment to fluctuate with changes in sales and inventory valuations.
Subscriber Acquisition Costs
include hardware subsidies paid to radio manufacturers, distributors and automakers; subsidies paid for chip sets and certain other components used in manufacturing radios; device royalties for certain radios and chip sets; commissions paid to automakers and retailers; product warranty obligations; freight; and provisions for inventory allowances attributable to inventory consumed in our OEM and retail distribution channels. The majority of subscriber acquisition costs are incurred and expensed in advance of, or concurrent with, acquiring a subscriber. Subscriber acquisition costs do not include advertising, marketing, loyalty payments to distributors and dealers of satellite radios or revenue share payments to automakers and retailers of satellite radios.
For the
three months ended
June 30, 2014
and 2013, subscriber acquisition costs were
$124,407
and
$129,992
, respectively,
a decrease
of
4%
, or
$5,585
, and
decreased
as a percentage of total revenue. For the
six months ended
June 30, 2014
and 2013, subscriber acquisition costs were
$247,429
and
$246,103
, respectively,
an increase
of
1%
, or
$1,326
, but
decreased
as a percentage of total revenue. Improved OEM subsidy rates per vehicle and a change in a contract with an automaker decreased subscriber acquisition costs. In the second quarter of 2014, these decreases were partially offset by the elimination of the benefit to earnings in 2014 from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger and increased satellite radio installations in new vehicles. For the six month period, the amortization of the deferred credits and increased satellite radio installations were slightly greater than the decreases provided from the improved OEM subsidy rates and change in the contract with an automaker. For the three and six months ended June 30, 2013, the benefit to earnings from amortization of deferred credits were
$22,017
and
$44,022
, respectively.
We expect subscriber acquisition costs to fluctuate with OEM installations and aftermarket volume; however, the cost of subsidized radio components are expected to decline. We intend to continue to offer subsidies, commissions and other incentives to acquire subscribers.
Sales and Marketing
includes costs for customer acquisition and retention, advertising, media and production, including promotional events and sponsorships; cooperative marketing; and personnel. Customer acquisition and retention costs include expenses related to direct mail, outbound telemarketing and email communications.
For the
three months ended
June 30, 2014
and 2013, sales and marketing expenses were
$77,759
and
$68,058
, respectively,
an increase
of
14%
, or
$9,701
, and
increased
as a percentage of total revenue. For the
six months ended
June 30, 2014
and 2013, sales and marketing expenses were
$154,086
and
$133,956
, respectively,
an increase
of
15%
, or
$20,130
, and
increased
as a percentage of total revenue. These increases were primarily due to additional subscriber communications and retention programs associated with a greater number of subscribers and promotional trials, costs associated with our connected vehicle services business, and the elimination of the benefit to earnings in 2014 from the amortization of the deferred credit for acquired executory contracts recognized in purchase price accounting associated with the Merger. The benefits to earnings from the amortization of the deferred credit for acquired executory contracts for the
three and six months ended
June 30, 2013 were
$4,153
and
$8,319
, respectively.
We anticipate that sales and marketing expenses will increase as we expand programs to retain our existing subscribers, win back former subscribers, and attract new subscribers.
Engineering, Design and Development
consists primarily of compensation and related costs to develop chip sets and new products and services, research and development for broadcast information systems and costs associated with the incorporation of our radios into new vehicles manufactured by automakers.
For the
three months ended
June 30, 2014
and 2013, engineering, design and development expenses were
$15,630
and
$15,052
, respectively,
an increase
of
4%
, or
$578
, but remained flat as a percentage of total revenue. For the
six months ended
June 30, 2014
and 2013, engineering, design and development expenses were
$31,541
and
$29,894
, respectively,
an increase
of
6%
, or
$1,647
, but remained flat as a percentage of total revenue. These increases were driven primarily by costs associated with our connected vehicle services business, higher product development costs, and expenses related to the development of enhanced subscriber features and functionality for our service.
We expect engineering, design and development expenses to increase in future periods as we continue to develop our products and services.
General and Administrative
primarily consists of compensation and related costs for personnel and facilities, and include costs related to our finance, legal, human resources and information technologies departments.
For the
three months ended
June 30, 2014
and 2013, general and administrative expenses were
$72,582
and
$60,392
, respectively,
an increase
of
20%
or
$12,190
, and
increased
as a percentage of total revenue. For the
six months ended
June 30, 2014
and 2013, general and administrative expenses were
$148,825
and
$116,732
, respectively,
an increase
of
27%
or
$32,093
, and
increased
as a percentage of total revenue. These increases were primarily driven by costs associated with our connected vehicle services business, as well as higher legal, personnel, consulting and facilities costs.
We expect our general and administrative expenses to increase in future periods as a result of, among other things, enhanced information technology, on-going legal costs and personnel costs to support the growth of our business.
Depreciation and Amortization
represents the recognition in earnings of the acquisition cost of assets used in operations, including our satellite constellations, property, equipment and intangible assets, over their estimated service lives.
For the
three months ended
June 30, 2014
and 2013, depreciation and amortization expense was
$67,204
and
$67,415
, respectively,
a decrease
of less than 1%, or
$211
, and
decreased
as a percentage of total revenue. For the
six months ended
June 30, 2014
and 2013, depreciation and amortization expense was
$135,471
and
$134,433
, respectively,
an increase
of
1%
, or
$1,038
, but
decreased
as a percentage of total revenue. Decreased depreciation and amortization expense was driven by a reduction of amortization associated with the stepped-up basis in assets acquired in the Merger (including intangible assets, satellites, property and equipment) through the end of their estimated service lives and certain satellites reaching the end of their estimated service lives. These decreases were offset by the inclusion of costs associated with our connected vehicle services business, and additional assets placed in-service, including our FM-6 satellite.
Other Income (Expense)
Interest Expense, Net of Amounts Capitalized,
includes interest on outstanding debt, reduced by interest capitalized in connection with the construction of satellites and related launch vehicles.
For the
three months ended
June 30, 2014
and 2013, interest expense was
$67,521
and
$49,728
, respectively,
an increase
of
36%
, or
$17,793
. For the
six months ended
June 30, 2014
and 2013, interest expense was
$121,613
and
$95,902
, respectively,
an increase
of
27%
, or
$25,711
. The increase was primarily due to higher average debt and a reduction in interest capitalized following the launch of our FM-6 satellite. The increase was partially offset by lower average interest rates resulting from the redemption or repayment of higher interest rate debt throughout 2013.
We expect interest expense to increase in future periods to the extent our total debt outstanding increases.
Loss on Extinguishment of debt and Credit Facilities, Net,
includes losses incurred as a result of the conversion and retirement of certain debt.
For the
three and six months ended
June 30, 2014
and 2013, loss on extinguishment of debt and credit facilities, net, was
$0
and
$16,377
, respectively. During the
three and six months ended
June 30, 2013, a
$16,377
loss was recorded on the partial repayment of our then outstanding 7.625% Senior Notes due 2018 and 8.75% Senior Notes due 2015.
Interest and Investment (Loss) Income
includes realized gains and losses, interest income, and our share of the income or loss of Sirius XM Canada.
For the
three months ended
June 30, 2014
, interest and investment loss was
$1,066
compared to income of
$294
for the same period in 2013. For the
six months ended
June 30, 2014
and 2013, interest and investment income was
$3,283
and
$1,932
, respectively. The loss for the three months ended June 30, 2014 was due to the inclusion of our share of Sirius XM Canada's net loss. For the six months ended June 30, 2014, interest and investment income was primarily due to the inclusion of our share of Sirius XM Canada's net income, and the conversion of the Canadian debentures into shares of Sirius XM Canada, partially offset by the amortization expense related to our equity method intangible assets. The interest and investment income for 2013 was primarily due to the inclusion of our share of Sirius XM Canada's net income, partially offset by the amortization expense related to our equity method intangible assets.
Loss on Change In Value of Derivatives
represents the change in fair value of the commitments under the share repurchase agreement with Liberty Media, which are accounted for as a derivative.
For the
three and six months ended
June 30, 2014
, net loss on change in value of derivatives was
$7,463
and
$34,485
, respectively. The loss resulted from a change in the market value of our common stock to be purchased under the share repurchase agreement with Liberty Media. On April 25, 2014, we completed the final purchase installment under this share repurchase agreement and repurchased
$340,000
of our shares of common stock from Liberty Media at a price of
$3.66
per share.
Income Taxes
Income Tax Expense
includes the change in our deferred tax assets, foreign withholding taxes and current federal and state tax expenses.
For the
three months ended
June 30, 2014
and 2013, income tax expense was
$86,822
and
$76,659
, respectively. For the three months ended June 30, 2014, we estimate our annual effective tax rate for the
year ended
December 31, 2014
will be
39.0%
. For the
six months ended
June 30, 2014
and 2013, income tax expense was
$163,570
and
$155,699
, respectively. Our effective tax rate for the
six months ended
June 30, 2014
was
43.3%
due to the impact of the loss on the change in fair value of the derivative related to the share repurchase agreement.
Key Operating Metrics
In this section, we present certain financial performance measures that are not calculated and presented in accordance with generally accepted accounting principles in the United States (“Non-GAAP”). These Non-GAAP financial measures include: average monthly revenue per subscriber, or ARPU; customer service and billing expenses, per average subscriber; subscriber acquisition cost, or SAC, per installation; free cash flow; and adjusted EBITDA. These measures exclude the impact of share-based payment expense and certain purchase price accounting adjustments related to the Merger, which include the: (i) elimination of deferred revenue associated with the investment in XM Canada, (ii) recognition of deferred subscriber revenues not recognized in purchase price accounting, and (iii) elimination of the benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and programming providers. We use these Non-GAAP financial measures to manage our business, to set operational goals and as a basis for determining performance-based compensation for our employees.
Free cash flow is a metric that our management and board of directors use to evaluate the cash generated by our operations, net of capital expenditures and other investment activity. In a capital intensive business, with significant investments in satellites, we look at our operating cash flow, net of these investing cash outflows, to determine cash available for future subscriber acquisition and capital expenditures, to repurchase or retire debt, to acquire other companies and to evaluate our ability to return capital to stockholders. We believe free cash flow is an indicator of the long-term financial stability of our business. Free cash flow, which is reconciled to “Net cash provided by operating activities”, is a Non-GAAP financial measure. This measure can be calculated by deducting amounts under the captions "Additions to property and equipment" and deducting or adding Restricted and other investment activity from "Net cash provided by operating activities" from the unaudited consolidated statements of cash flows. Free cash flow should be used in conjunction with other GAAP financial performance measures and may not be comparable to free cash flow measures presented by other companies. Free cash flow should be viewed as a supplemental measure rather than an alternative measure of cash flows from operating activities, as determined in accordance with GAAP. Free cash flow is limited and does not represent remaining cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt
maturities. We believe free cash flow provides useful supplemental information to investors regarding our current and projected cash flow, along with other GAAP measures (such as cash flows from operating and investing activities), to determine our financial condition, and to compare our operating performance to other communications, entertainment and media companies.
We believe these Non-GAAP financial measures provide useful information to investors regarding our financial condition and results of operations. We believe investors find these Non-GAAP financial performance measures useful in evaluating our core trends because it provides a direct view of our underlying contractual costs. We believe investors use our current and projected adjusted EBITDA to estimate our current or prospective enterprise value and to make investment decisions. By providing these Non-GAAP financial measures, together with the reconciliations to the most directly comparable GAAP measure, we believe we are enhancing investors' understanding of our business and our results of operations.
These Non-GAAP financial measures should be viewed in addition to, and not as an alternative for or superior to, our reported results prepared in accordance with GAAP. In addition, these Non-GAAP financial measures may not be comparable to similarly-titled measures by other companies. Please refer to the glossary (pages
37
through
44
) for a further discussion of such Non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure.
The following table contains our key operating metrics based on our adjusted results of operations for the
three and six months ended
June 30, 2014
and 2013, respectively. Subscribers to our connected vehicle services are not included in our subscriber count:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
Unaudited
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
(in thousands, except for subscriber, per subscriber and per installation amounts)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Self-pay subscribers
|
|
21,635,008
|
|
|
20,297,736
|
|
|
21,635,008
|
|
|
20,297,736
|
|
Paid promotional subscribers
|
|
4,666,573
|
|
|
4,771,252
|
|
|
4,666,573
|
|
|
4,771,252
|
|
Ending subscribers
|
|
26,301,581
|
|
|
25,068,988
|
|
|
26,301,581
|
|
|
25,068,988
|
|
Self-pay subscribers
|
|
379,711
|
|
|
423,076
|
|
|
553,191
|
|
|
727,462
|
|
Paid promotional subscribers
|
|
95,761
|
|
|
292,686
|
|
|
189,080
|
|
|
441,190
|
|
Net additions
|
|
475,472
|
|
|
715,762
|
|
|
742,271
|
|
|
1,168,652
|
|
Daily weighted average number of subscribers
|
|
26,005,691
|
|
|
24,651,268
|
|
|
25,805,030
|
|
|
24,331,646
|
|
Average self-pay monthly churn
|
|
1.8
|
%
|
|
1.7
|
%
|
|
1.9
|
%
|
|
1.8
|
%
|
New vehicle consumer conversion rate
|
|
42
|
%
|
|
45
|
%
|
|
42
|
%
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
ARPU
|
|
$
|
12.36
|
|
|
$
|
12.28
|
|
|
$
|
12.27
|
|
|
$
|
12.16
|
|
SAC, per installation
|
|
$
|
33
|
|
|
$
|
47
|
|
|
$
|
34
|
|
|
$
|
47
|
|
Customer service and billing expenses, per average subscriber
|
|
$
|
1.05
|
|
|
$
|
1.08
|
|
|
$
|
1.07
|
|
|
$
|
1.09
|
|
Free cash flow
|
|
$
|
335,044
|
|
|
$
|
236,560
|
|
|
$
|
557,833
|
|
|
$
|
379,041
|
|
Adjusted EBITDA
|
|
$
|
370,437
|
|
|
$
|
282,979
|
|
|
$
|
705,220
|
|
|
$
|
544,850
|
|
Note: See pages 37 through 44 for glossary.
|
|
|
|
|
|
|
|
|
Subscribers.
At
June 30, 2014
, we had
26,301,581
subscribers, an increase of
1,232,593
subscribers, or
5%
, from the
25,068,988
subscribers as of
June 30, 2013
.
For the
three months ended
June 30, 2014
and
2013
, net additions were
475,472
and
715,762
, respectively, a decrease of
34%
, or
240,290
. For the
six months ended
June 30, 2014
and
2013
, net additions were
742,271
and
1,168,652
, respectively, a decrease of
36%
, or
426,381
. The decreases in self-pay net additions were due to increased churn associated with our larger subscriber base and vehicle turnover, partially offset by higher conversions from trial subscriptions. The decreases in paid promotional net additions were due to lower growth in auto sales and a change from paid to unpaid trials under a contract with an automaker.
Average Self-pay Monthly Churn
is derived by dividing the monthly average of self-pay deactivations for the period by the average number of self-pay subscribers for the period. (See accompanying glossary on pages
37
through
44
for more details.)
For the
three months ended
June 30, 2014
and
2013
, our average self-pay monthly churn rate was
1.8%
and
1.7%
, respectively. For the
six months ended
June 30, 2014
and
2013
, our average self-pay monthly churn rate was
1.9%
and
1.8%
, respectively. These increases for the three and six month periods were due to increased migrations of existing self-pay subscribers to unpaid vehicle trials.
New Vehicle Consumer Conversion Rate
is the percentage of owners and lessees of new vehicles that receive our service and convert to become self-paying subscribers after an initial promotional period. The metric excludes rental and fleet vehicles.
(See accompanying glossary on pages
37
through
44
for more details).
For the
three months ended
June 30, 2014
and
2013
, the new vehicle consumer conversion rate was
42%
and
45%
, respectively. For the
six months ended
June 30, 2014
and
2013
, the new vehicle consumer conversion rate was
42%
and
44%
, respectively. The decrease in the new vehicle consumer conversion rate for the three and six month periods were primarily due to an increased penetration rate and lower conversion of first-time satellite enabled car buyers.
ARPU
is derived from total earned subscriber revenue, excluding revenue derived from our connected vehicle services business, net advertising revenue and other subscription-related revenue, net of purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. (For a reconciliation to GAAP see the accompanying glossary on pages
37
through
44
for more details.)
For the
three months ended
June 30, 2014
and
2013
, ARPU was
$12.36
and
$12.28
, respectively. For the
six months ended
June 30, 2014
and
2013
, ARPU was
$12.27
and
$12.16
, respectively. These increases were driven primarily by the contribution of the U.S. Music Royalty Fee, and the impact of the increase in certain of our subscription rates beginning in January 2014. The positive result was partially offset by growth in subscription discounts offered through customer acquisition and retention programs, lifetime subscription plans that have reached full revenue recognition, and changes in contracts with an automaker and a rental car provider.
SAC, Per Installation,
is derived from subscriber acquisition costs and margins from the sale of radios, components and accessories, excluding purchase price accounting adjustments, divided by the number of satellite radio installations in new vehicles and shipments of aftermarket radios for the period. (For a reconciliation to GAAP see the accompanying glossary on pages
37
through
44
for more details.)
For the
three months ended
June 30, 2014
and
2013
, SAC, per installation, was
$33
and
$47
, respectively. For the
six months ended
June 30, 2014
and
2013
, SAC, per installation, was
$34
and
$47
, respectively. These decreases were primarily due to improvements in contractual OEM rates.
Customer Service and Billing Expenses, Per Average Subscriber,
is derived from total customer service and billing expenses, excluding connected vehicle customer service and billing expenses and share-based payment expense, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. (For a reconciliation to GAAP see the accompanying glossary on pages
37
through
44
for more details.)
For the
three months ended
June 30, 2014
and
2013
, customer service and billing expenses, per average subscriber, were
$1.05
and
$1.08
, respectively. For the
six months ended
June 30, 2014
and
2013
, customer service and billing expenses, per average subscriber, were
$1.07
and
$1.09
, respectively. These decreases were primarily driven by lower rates for foreign-based customer service agents and lower call volume per subscriber.
Free Cash Flow
includes the net cash provided by operations, additions to property and equipment, and restricted and other investment activity. (For a reconciliation to GAAP see the accompanying glossary on pages
37
through
44
for more details.)
For the
three months ended
June 30, 2014
and
2013
, free cash flow was
$335,044
and
$236,560
, respectively, an increase of
$98,484
. For the
six months ended
June 30, 2014
and
2013
, free cash flow was
$557,833
and
$379,041
, respectively, an increase of
$178,792
. These increases were primarily driven by higher net cash provided by operating activities from improved performance, higher collections from subscribers and distributors, and a special one-time dividend from Sirius XM Canada, partially offset by payments related to improvements to our terrestrial repeater network and higher interest payments.
Adjusted EBITDA.
EBITDA is defined as net income before interest and investment income (loss); interest expense, net of amounts capitalized; income tax benefit (expense) and depreciation and amortization. Adjusted EBITDA excludes the impact of other income and expense, losses on extinguishment of debt, loss on change in value of derivatives as well as certain other charges, such as goodwill impairment, certain purchase price accounting adjustments and share-based payment expense. (For a reconciliation to GAAP see the accompanying glossary on pages
37
through
44
for more details.)
For the
three months ended
June 30, 2014
and
2013
, adjusted EBITDA was
$370,437
and
$282,979
, respectively, an increase of
31%
, or
$87,458
. For the
six months ended
June 30, 2014
and 2013, adjusted EBITDA was
$705,220
and
$544,850
, respectively, an increase of
29%
, or
$160,370
. These increases were due to growth in adjusted revenues primarily due to the increase in our subscriber base and certain of our subscription rates, improved revenue share and OEM subsidy rates per vehicle, the renewal of certain programming and content agreements at more cost effective terms, and the inclusion of the results of our connected vehicle services business; partially offset by higher legal expenses and costs correlated to the growth in our revenues and subscriber base.
Liquidity and Capital Resources
Cash Flows for the
six months ended
June 30, 2014
compared with the
six months ended
June 30, 2013
.
As of
June 30, 2014
and
December 31, 2013
, we had
$169,980
and
$134,805
, respectively, of cash and cash equivalents. The following table presents a summary of our cash flow activity for the periods set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
(in thousands)
|
2014
|
|
2013
|
|
2014 vs. 2013
|
Net cash provided by operating activities
|
$
|
592,072
|
|
|
$
|
442,021
|
|
|
$
|
150,051
|
|
Net cash used in investing activities
|
(33,095
|
)
|
|
(62,980
|
)
|
|
29,885
|
|
Net cash used in financing activities
|
(523,802
|
)
|
|
(248,217
|
)
|
|
(275,585
|
)
|
Net increase in cash and cash equivalents
|
35,175
|
|
|
130,824
|
|
|
(95,649
|
)
|
Cash and cash equivalents at beginning of period
|
134,805
|
|
|
520,945
|
|
|
(386,140
|
)
|
Cash and cash equivalents at end of period
|
$
|
169,980
|
|
|
$
|
651,769
|
|
|
$
|
(481,789
|
)
|
Cash Flows Provided by Operating Activities
Cash flows provided by operating activities increased by
$150,051
to
$592,072
for the
six months ended
June 30, 2014
from
$442,021
for the
six months ended
June 30, 2013
. Our largest source of cash provided by operating activities is generated by subscription and subscription-related revenues. We also generate cash from the sale of advertising on certain non-music channels and the sale of satellite radios, components and accessories. Our primary uses of cash from operating activities include revenue share and royalty payments to distributors and content providers, and payments to radio manufacturers, distributors and automakers. In addition, uses of cash from operating activities include payments to vendors to service, maintain and acquire subscribers, general corporate expenditures, and compensation and related costs.
Cash Flows Used in Investing Activities
Cash flows used in investing activities are primarily due to additional spending to improve our terrestrial repeater network and for capitalized software, partially offset by the special one-time dividend received from our investment in Sirius XM Canada of $24,178. We expect to continue to incur significant costs to improve our terrestrial repeater network and broadcast and administrative infrastructure.
Cash Flows Used in Financing Activities
Cash flows used in financing activities consists of the issuance and repayment of long-term debt, cash used in our stock option program and the purchase of common stock under our share repurchase program. Proceeds from long-term debt, related party debt and equity issuances have been used to fund our operations, acquire the connected vehicle business of Agero, Inc., construct and launch new satellites and invest in other infrastructure improvements.
Cash flows used in financing activities in 2014 were primarily due to the purchase of shares of our common stock under our repurchase program for
$1,532,164
and repayments under the Credit Facility. In 2014, we issued $1,500,000 aggregate principal amount of 6.00% Senior Notes due 2024. Cash flows used in financing activities in 2013 were primarily due to the purchase of shares of our common stock under our share repurchase program for $1,108,616, and open market purchases of $29,013 of our 8.75% Senior Notes due 2015 and $100,650 of our 7.625% Senior Notes due 2018. In 2013, we issued $500,000 aggregate principal amount of 4.25% Senior Notes due 2020 and $500,000 aggregate principal amount of 4.625% Senior Notes due 2023.
Future Liquidity and Capital Resource Requirements
Based upon our current business plans, we expect to fund operating expenses, capital expenditures, working capital requirements, interest payments, taxes and scheduled maturities of our debt with existing cash, cash flow from operations and borrowings under our Credit Facility. We believe that we have sufficient cash and cash equivalents as well as debt capacity to cover our estimated short-term and long-term funding needs, stock repurchases and strategic opportunities.
Our ability to meet our debt and other obligations depends on our future operating performance and on economic, financial, competitive and other factors. We continually review our operations for opportunities to adjust the timing of expenditures to ensure that sufficient resources are maintained.
We regularly evaluate our business plans and strategy. These evaluations often result in changes to our business plans and strategy, some of which may be material and significantly change our cash requirements. These changes in our business plans or strategy may include: the acquisition of unique or compelling programming; the introduction of new features or services; significant new or enhanced distribution arrangements; investments in infrastructure, such as satellites, equipment or radio spectrum; and acquisitions, including acquisitions that are not directly related to our satellite radio business.
Stock Repurchase Program
As of
June 30, 2014
, our board of directors had approved
$4,000,000
for repurchases of our common stock. In July 2014, our board of directors approved an additional
$2,000,000
for repurchases of our common stock. Our board of directors did not establish an end date for this stock repurchase program. Shares of common stock may be purchased from time to time on the open market and in privately negotiated transactions, including transactions with Liberty Media and its affiliates.
On
October 9, 2013
, we entered into an agreement to repurchase
$500,000
of our common stock from Liberty Media. Pursuant to this agreement, we repurchased
$160,000
of our common stock from Liberty Media in
2013
. On April 25, 2014, we completed the final purchase installment and repurchased
92,888,561
shares of our common stock for
$340,000
from Liberty Media at a price of
$3.66
per share.
In May 2014, we entered into an accelerated share repurchase agreement ("ASR agreement") with a third-party financial institution to repurchase up to
$600,000
of our common stock. Under the ASR agreement we prepaid
$600,000
to the financial institution and received an initial delivery of
112,500,000
shares of our common stock. We retired these shares and recorded a
$354,375
reduction to stockholders' equity in the second quarter of 2014. The remaining
$245,625
under this ASR agreement is included in Additional paid-in capital within our unaudited consolidated balance sheets as of
June 30, 2014
. The ASR agreement is expected to mature no later than August 1, 2014 and will settle following maturity. The aggregate purchase price we will pay under the ASR agreement will be determined using a pre-agreed grid that references the volume-weighted average price (“VWAP”) of our common stock, and the total aggregate number of shares to be repurchased under the ASR agreement will be determined based on the VWAP of our common stock minus a discount during the term of the ASR agreement.
During the
six months ended
June 30, 2014
, we repurchased
188,419,584
additional shares of our common stock for
$612,903
, including fees and commissions, on the open market. Common stock repurchases are retired upon settlement. As of
June 30, 2014
,
$20,739
of common stock repurchases had not settled, nor been retired, and were recorded as Treasury stock within our unaudited consolidated balance sheets and unaudited consolidated statements of stockholders' equity.
As of
June 30, 2014
, our cumulative repurchases since December 2012 have totaled
914,066,011
shares for
$3,315,263
, and
$684,737
remained available under our stock repurchase program, which excludes the additional
$2,000,000
authorized by our board of directors in July 2014. We expect to fund future repurchases through a combination of cash on hand, cash generated by operations and future borrowings.
Debt Covenants
The indentures governing Sirius XM's senior notes and the agreement governing Sirius XM's Credit Facility include restrictive covenants. As of
June 30, 2014
, Sirius XM was in compliance with such indentures and agreement. For a discussion of our “Debt Covenants,” refer to Note 13 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We do not have any significant off-balance sheet arrangements other than those disclosed in Note 16 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Contractual Cash Commitments
For a discussion of our “Contractual Cash Commitments,” refer to Note 16 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
Related Party Transactions
For a discussion of “Related Party Transactions,” refer to Note 11 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
For a discussion of our "Critical Accounting Policies and Estimates," refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended
December 31, 2013
. There have been no material changes to our critical accounting policies and estimates since
December 31, 2013
.
Glossary
Adjusted EBITDA
- EBITDA is defined as net income before interest and investment income (loss); interest expense, net of amounts capitalized; income tax expense and depreciation and amortization. We adjust EBITDA to exclude the impact of other income and expense, loss on extinguishment of debt, loss on change in value of derivatives as well as certain other charges discussed below. This measure is one of the primary Non-GAAP financial measures on which we (i) evaluate the performance of our businesses, (ii) base our internal budgets and (iii) compensate management. Adjusted EBITDA is a Non-GAAP financial performance measure that excludes (if applicable): (i) certain adjustments as a result of the purchase price accounting for the Merger, (ii) depreciation and amortization and (iii) share-based payment expense. The purchase price accounting adjustments include: (i) the elimination of deferred revenue associated with the investment in XM Canada, (ii) recognition of deferred subscriber revenues not recognized in purchase price accounting, and (iii) elimination of the benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and programming providers. We believe adjusted EBITDA is a useful measure of the underlying trend of our operating performance, which provides useful information about our business apart from the costs associated with our physical plant, capital structure and purchase price accounting. We believe investors find this Non-GAAP financial measure useful when analyzing our results and comparing our operating performance to the performance of other communications, entertainment and media companies. We believe investors use current and projected adjusted EBITDA to estimate our current and prospective enterprise value and to make investment decisions. Because we fund and build-out our satellite radio system through the periodic raising and expenditure of large amounts of capital, our results of operations reflect significant charges for depreciation expense. The exclusion of depreciation and amortization expense is useful given significant variation in depreciation and amortization expense that can result from the potential variations in estimated useful lives, all of which can vary widely across different industries or among companies within the same industry. We also believe the exclusion of share-based payment expense is useful given the significant variation in expense that can result from changes in the fair value as determined using the Black-Scholes-Merton model which varies based on assumptions used for the expected life, expected stock price volatility and risk-free interest rates.
Adjusted EBITDA has certain limitations in that it does not take into account the impact to our statements of comprehensive income of certain expenses, including share-based payment expense and certain purchase price accounting for the Merger. We endeavor to compensate for the limitations of the Non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the Non-GAAP measure. Investors that wish to compare and evaluate our operating results after giving effect for these costs, should refer to net income as disclosed in our unaudited consolidated statements of comprehensive income. Since adjusted EBITDA is a Non-GAAP financial performance measure, our calculation of adjusted EBITDA may be susceptible to varying calculations; may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. The reconciliation of net income to the adjusted EBITDA is calculated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Net income (GAAP):
|
$
|
119,961
|
|
|
$
|
125,522
|
|
|
$
|
213,949
|
|
|
$
|
249,124
|
|
Add back items excluded from Adjusted EBITDA:
|
|
|
|
|
|
|
|
Purchase price accounting adjustments:
|
|
|
|
|
|
|
|
Revenues (see pages 39-42)
|
1,813
|
|
|
1,813
|
|
|
3,626
|
|
|
3,626
|
|
Operating expenses (see pages 39-42)
|
(945
|
)
|
|
(69,479
|
)
|
|
(1,890
|
)
|
|
(137,889
|
)
|
Share-based payment expense (GAAP)
|
17,787
|
|
|
15,494
|
|
|
36,027
|
|
|
30,012
|
|
Depreciation and amortization (GAAP)
|
67,204
|
|
|
67,415
|
|
|
135,471
|
|
|
134,433
|
|
Interest expense, net of amounts capitalized (GAAP)
|
67,521
|
|
|
49,728
|
|
|
121,613
|
|
|
95,902
|
|
Loss on extinguishment of debt and credit facilities, net (GAAP)
|
—
|
|
|
16,377
|
|
|
—
|
|
|
16,377
|
|
Interest and investment loss (income) (GAAP)
|
1,066
|
|
|
(294
|
)
|
|
(3,283
|
)
|
|
(1,932
|
)
|
Loss on change in value of derivatives (GAAP)
|
7,463
|
|
|
—
|
|
|
34,485
|
|
|
—
|
|
Other loss (income) (GAAP)
|
1,745
|
|
|
(256
|
)
|
|
1,652
|
|
|
(502
|
)
|
Income tax expense (GAAP)
|
86,822
|
|
|
76,659
|
|
|
163,570
|
|
|
155,699
|
|
Adjusted EBITDA
|
$
|
370,437
|
|
|
$
|
282,979
|
|
|
$
|
705,220
|
|
|
$
|
544,850
|
|
Adjusted Revenues and Operating Expenses
-
We define this Non-GAAP financial measure as our actual revenues and operating expenses adjusted to exclude the impact of certain purchase price accounting adjustments from the Merger and share-based payment expense. We use this Non-GAAP financial measure to manage our business, to set operational goals and as a basis for determining performance-based compensation for our employees. The following tables reconcile our actual revenues and operating expenses to our adjusted revenues and operating expenses for the
three and six months ended
June 30, 2014
and
2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited For the Three Months Ended June 30, 2014
|
(in thousands)
|
As Reported
|
|
Purchase Price Accounting Adjustments
|
|
Allocation of Share-based Payment Expense
|
|
Adjusted
|
Revenue:
|
|
|
|
|
|
|
|
Subscriber revenue
|
$
|
878,160
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
878,160
|
|
Advertising revenue
|
25,498
|
|
|
—
|
|
|
—
|
|
|
25,498
|
|
Equipment revenue
|
27,616
|
|
|
—
|
|
|
—
|
|
|
27,616
|
|
Other revenue
|
104,071
|
|
|
1,813
|
|
|
—
|
|
|
105,884
|
|
Total revenue
|
$
|
1,035,345
|
|
|
$
|
1,813
|
|
|
$
|
—
|
|
|
$
|
1,037,158
|
|
Operating expenses
|
|
|
|
|
|
|
|
Cost of services:
|
|
|
|
|
|
|
|
Revenue share and royalties
|
$
|
200,221
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
200,221
|
|
Programming and content
|
69,570
|
|
|
945
|
|
|
(2,254
|
)
|
|
68,261
|
|
Customer service and billing
|
90,092
|
|
|
—
|
|
|
(587
|
)
|
|
89,505
|
|
Satellite and transmission
|
21,272
|
|
|
—
|
|
|
(956
|
)
|
|
20,316
|
|
Cost of equipment
|
12,030
|
|
|
—
|
|
|
—
|
|
|
12,030
|
|
Subscriber acquisition costs
|
124,407
|
|
|
—
|
|
|
—
|
|
|
124,407
|
|
Sales and marketing
|
77,759
|
|
|
—
|
|
|
(3,407
|
)
|
|
74,352
|
|
Engineering, design and development
|
15,630
|
|
|
—
|
|
|
(1,937
|
)
|
|
13,693
|
|
General and administrative
|
72,582
|
|
|
—
|
|
|
(8,646
|
)
|
|
63,936
|
|
Depreciation and amortization (a)
|
67,204
|
|
|
—
|
|
|
—
|
|
|
67,204
|
|
Share-based payment expense
|
—
|
|
|
—
|
|
|
17,787
|
|
|
17,787
|
|
Total operating expenses
|
$
|
750,767
|
|
|
$
|
945
|
|
|
$
|
—
|
|
|
$
|
751,712
|
|
|
|
|
|
|
|
|
|
(a) Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the three months ended June 30, 2014 was $10,000.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited For the Three Months Ended June 30, 2013
|
(in thousands)
|
As Reported
|
|
Purchase Price Accounting Adjustments
|
|
Allocation of Share-based Payment Expense
|
|
Adjusted
|
Revenue:
|
|
|
|
|
|
|
|
Subscriber revenue
|
$
|
814,718
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
814,718
|
|
Advertising revenue
|
21,757
|
|
|
—
|
|
|
—
|
|
|
21,757
|
|
Equipment revenue
|
18,443
|
|
|
—
|
|
|
—
|
|
|
18,443
|
|
Other revenue
|
85,192
|
|
|
1,813
|
|
|
—
|
|
|
87,005
|
|
Total revenue
|
$
|
940,110
|
|
|
$
|
1,813
|
|
|
$
|
—
|
|
|
$
|
941,923
|
|
Operating expenses
|
|
|
|
|
|
|
|
Cost of services:
|
|
|
|
|
|
|
|
Revenue share and royalties
|
$
|
155,859
|
|
|
$
|
40,831
|
|
|
$
|
—
|
|
|
$
|
196,690
|
|
Programming and content
|
70,381
|
|
|
2,478
|
|
|
(1,639
|
)
|
|
71,220
|
|
Customer service and billing
|
80,290
|
|
|
—
|
|
|
(511
|
)
|
|
79,779
|
|
Satellite and transmission
|
19,493
|
|
|
—
|
|
|
(827
|
)
|
|
18,666
|
|
Cost of equipment
|
5,442
|
|
|
—
|
|
|
—
|
|
|
5,442
|
|
Subscriber acquisition costs
|
129,992
|
|
|
22,017
|
|
|
—
|
|
|
152,009
|
|
Sales and marketing
|
68,058
|
|
|
4,153
|
|
|
(3,182
|
)
|
|
69,029
|
|
Engineering, design and development
|
15,052
|
|
|
—
|
|
|
(1,634
|
)
|
|
13,418
|
|
General and administrative
|
60,392
|
|
|
—
|
|
|
(7,701
|
)
|
|
52,691
|
|
Depreciation and amortization (a)
|
67,415
|
|
|
—
|
|
|
—
|
|
|
67,415
|
|
Share-based payment expense
|
—
|
|
|
—
|
|
|
15,494
|
|
|
15,494
|
|
Total operating expenses
|
$
|
672,374
|
|
|
$
|
69,479
|
|
|
$
|
—
|
|
|
$
|
741,853
|
|
|
|
|
|
|
|
|
|
(a) Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the three months ended June 30, 2013 was $12,000.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited For the Six Months Ended June 30, 2014
|
(in thousands)
|
As Reported
|
|
Purchase Price Accounting Adjustments
|
|
Allocation of Share-based Payment Expense
|
|
Adjusted
|
Revenue:
|
|
|
|
|
|
|
|
Subscriber revenue
|
$
|
1,729,596
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,729,596
|
|
Advertising revenue
|
47,712
|
|
|
—
|
|
|
—
|
|
|
47,712
|
|
Equipment revenue
|
51,594
|
|
|
—
|
|
|
—
|
|
|
51,594
|
|
Other revenue
|
204,154
|
|
|
3,626
|
|
|
—
|
|
|
207,780
|
|
Total revenue
|
$
|
2,033,056
|
|
|
$
|
3,626
|
|
|
$
|
—
|
|
|
$
|
2,036,682
|
|
Operating expenses
|
|
|
|
|
|
|
|
Cost of services:
|
|
|
|
|
|
|
|
Revenue share and royalties
|
$
|
395,632
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
395,632
|
|
Programming and content
|
144,440
|
|
|
1,890
|
|
|
(4,469
|
)
|
|
141,861
|
|
Customer service and billing
|
181,161
|
|
|
—
|
|
|
(1,164
|
)
|
|
179,997
|
|
Satellite and transmission
|
42,651
|
|
|
—
|
|
|
(1,902
|
)
|
|
40,749
|
|
Cost of equipment
|
19,834
|
|
|
—
|
|
|
—
|
|
|
19,834
|
|
Subscriber acquisition costs
|
247,429
|
|
|
—
|
|
|
—
|
|
|
247,429
|
|
Sales and marketing
|
154,086
|
|
|
—
|
|
|
(6,973
|
)
|
|
147,113
|
|
Engineering, design and development
|
31,541
|
|
|
—
|
|
|
(3,863
|
)
|
|
27,678
|
|
General and administrative
|
148,825
|
|
|
—
|
|
|
(17,656
|
)
|
|
131,169
|
|
Depreciation and amortization (a)
|
135,471
|
|
|
—
|
|
|
—
|
|
|
135,471
|
|
Share-based payment expense
|
—
|
|
|
—
|
|
|
36,027
|
|
|
36,027
|
|
Total operating expenses
|
$
|
1,501,070
|
|
|
$
|
1,890
|
|
|
$
|
—
|
|
|
$
|
1,502,960
|
|
|
|
|
|
|
|
|
|
(a) Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the six months ended June 30, 2014 was $20,000.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited For the Six Months Ended June 30, 2013
|
(in thousands)
|
As Reported
|
|
Purchase Price Accounting Adjustments
|
|
Allocation of Share-based Payment Expense
|
|
Adjusted
|
Revenue:
|
|
|
|
|
|
|
|
Subscriber revenue
|
$
|
1,598,060
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,598,060
|
|
Advertising revenue
|
41,968
|
|
|
—
|
|
|
—
|
|
|
41,968
|
|
Equipment revenue
|
36,599
|
|
|
—
|
|
|
—
|
|
|
36,599
|
|
Other revenue
|
160,881
|
|
|
3,626
|
|
|
—
|
|
|
164,507
|
|
Total revenue
|
$
|
1,837,508
|
|
|
$
|
3,626
|
|
|
$
|
—
|
|
|
$
|
1,841,134
|
|
Operating expenses
|
|
|
|
|
|
|
|
Cost of services:
|
|
|
|
|
|
|
|
Revenue share and royalties
|
$
|
304,390
|
|
|
$
|
80,592
|
|
|
$
|
—
|
|
|
$
|
384,982
|
|
Programming and content
|
144,991
|
|
|
4,956
|
|
|
(3,281
|
)
|
|
146,666
|
|
Customer service and billing
|
160,684
|
|
|
—
|
|
|
(981
|
)
|
|
159,703
|
|
Satellite and transmission
|
39,188
|
|
|
—
|
|
|
(1,677
|
)
|
|
37,511
|
|
Cost of equipment
|
12,469
|
|
|
—
|
|
|
—
|
|
|
12,469
|
|
Subscriber acquisition costs
|
246,103
|
|
|
44,022
|
|
|
—
|
|
|
290,125
|
|
Sales and marketing
|
133,956
|
|
|
8,319
|
|
|
(6,243
|
)
|
|
136,032
|
|
Engineering, design and development
|
29,894
|
|
|
—
|
|
|
(3,281
|
)
|
|
26,613
|
|
General and administrative
|
116,732
|
|
|
—
|
|
|
(14,549
|
)
|
|
102,183
|
|
Depreciation and amortization (a)
|
134,433
|
|
|
—
|
|
|
—
|
|
|
134,433
|
|
Share-based payment expense
|
—
|
|
|
—
|
|
|
30,012
|
|
|
30,012
|
|
Total operating expenses
|
$
|
1,322,840
|
|
|
$
|
137,889
|
|
|
$
|
—
|
|
|
$
|
1,460,729
|
|
|
|
|
|
|
|
|
|
(a) Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for six months ended June 30, 2013 was $25,000.
|
ARPU
- is derived from total earned subscriber revenue, advertising revenue and other subscription-related revenue, excluding revenue associated with our connected vehicle business, net of purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. Other subscription-related revenue includes the U.S. Music Royalty Fee. ARPU is calculated as follows (in thousands, except for subscriber and per subscriber amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Subscriber revenue, excluding connected vehicle (GAAP)
|
$
|
855,846
|
|
|
$
|
814,718
|
|
|
$
|
1,688,649
|
|
|
$
|
1,598,060
|
|
Add: advertising revenue (GAAP)
|
25,498
|
|
|
21,757
|
|
|
47,712
|
|
|
41,968
|
|
Add: other subscription-related revenue (GAAP)
|
82,990
|
|
|
71,648
|
|
|
163,758
|
|
|
135,785
|
|
|
$
|
964,334
|
|
|
$
|
908,123
|
|
|
$
|
1,900,119
|
|
|
$
|
1,775,813
|
|
Daily weighted average number of subscribers
|
26,005,691
|
|
|
24,651,268
|
|
|
25,805,030
|
|
|
24,331,646
|
|
ARPU
|
$
|
12.36
|
|
|
$
|
12.28
|
|
|
$
|
12.27
|
|
|
$
|
12.16
|
|
Average self-pay monthly churn
- is defined as the monthly average of self-pay deactivations for the period divided by the average number of self-pay subscribers for the period.
Customer service and billing expenses, per average subscriber
- is derived from total customer service and billing expenses, excluding connected vehicle customer service and billing expenses and share-based payment expense, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. We believe the exclusion of share-based payment expense in our calculation of customer service and billing expenses, per average subscriber, is useful given the significant variation in expense that can result from changes in the fair market value of our common stock, the effect of which is unrelated to the operational conditions that give rise to variations in the components of our customer service and billing expenses. Customer service and billing expenses, per average subscriber, is calculated as follows (in thousands, except for subscriber and per subscriber amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Customer service and billing expenses, excluding connected vehicle (GAAP)
|
$
|
82,705
|
|
|
$
|
80,290
|
|
|
$
|
166,809
|
|
|
$
|
160,684
|
|
Less: share-based payment expense (GAAP)
|
(587
|
)
|
|
(511
|
)
|
|
(1,164
|
)
|
|
(981
|
)
|
|
$
|
82,118
|
|
|
$
|
79,779
|
|
|
$
|
165,645
|
|
|
$
|
159,703
|
|
Daily weighted average number of subscribers
|
26,005,691
|
|
|
24,651,268
|
|
|
25,805,030
|
|
|
24,331,646
|
|
Customer service and billing expenses, per average subscriber
|
$
|
1.05
|
|
|
$
|
1.08
|
|
|
$
|
1.07
|
|
|
$
|
1.09
|
|
Free cash flow
- is derived from cash flow provided by operating activities, capital expenditures and restricted and other investment activity. Free cash flow is calculated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Cash Flow information
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
$
|
340,682
|
|
|
$
|
273,106
|
|
|
$
|
592,072
|
|
|
$
|
442,021
|
|
Net cash used in investing activities
|
$
|
(5,638
|
)
|
|
$
|
(36,546
|
)
|
|
$
|
(33,095
|
)
|
|
$
|
(62,980
|
)
|
Net cash used in financing activities
|
$
|
(286,235
|
)
|
|
$
|
208,482
|
|
|
$
|
(523,802
|
)
|
|
$
|
(248,217
|
)
|
Free Cash Flow
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
$
|
340,682
|
|
|
$
|
273,106
|
|
|
$
|
592,072
|
|
|
$
|
442,021
|
|
Additions to property and equipment
|
(29,816
|
)
|
|
(36,546
|
)
|
|
(58,417
|
)
|
|
(62,980
|
)
|
Return of capital from investment in unconsolidated entity
|
24,178
|
|
|
—
|
|
|
24,178
|
|
|
—
|
|
Free cash flow
|
$
|
335,044
|
|
|
$
|
236,560
|
|
|
$
|
557,833
|
|
|
$
|
379,041
|
|
New vehicle consumer conversion rate
- is defined as the percentage of owners and lessees of new vehicles that receive our satellite radio service and convert to become self-paying subscribers after the initial promotion period. At the time satellite radio enabled vehicles are sold or leased, the owners or lessees generally receive trial subscriptions ranging from three to twelve months. We measure conversion rate three months after the period in which the trial service ends. The metric excludes rental and fleet vehicles.
Subscriber acquisition cost, per installation
- or SAC, per installation, is derived from subscriber acquisition costs and margins from the sale of radios and accessories, excluding purchase price accounting adjustments, divided by the number of satellite radio installations in new vehicles and shipments of aftermarket radios for the period. Purchase price accounting adjustments associated with the Merger include the elimination of the benefit of amortization of deferred credits on executory contracts recognized at the Merger date attributable to an OEM. SAC, per installation, is calculated as follows (in thousands, except for installation amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Subscriber acquisition costs (GAAP)
|
$
|
124,407
|
|
|
$
|
129,992
|
|
|
$
|
247,429
|
|
|
$
|
246,103
|
|
Less: margin from direct sales of radios and accessories (GAAP)
|
(15,586
|
)
|
|
(13,001
|
)
|
|
(31,760
|
)
|
|
(24,130
|
)
|
Add: purchase price accounting adjustments
|
—
|
|
|
22,017
|
|
|
—
|
|
|
44,022
|
|
|
$
|
108,821
|
|
|
$
|
139,008
|
|
|
$
|
215,669
|
|
|
$
|
265,995
|
|
Installations
|
3,279,564
|
|
|
2,973,267
|
|
|
6,358,074
|
|
|
5,684,160
|
|
SAC, per installation
|
$
|
33
|
|
|
$
|
47
|
|
|
$
|
34
|
|
|
$
|
47
|
|