XM Radio 2012 Annual Report Download - page 67

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•2011 vs. 2010: For the years ended December 31, 2011 and 2010, our average self-pay monthly churn
rate was 1.9%.
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 20 through 26 for more details).
•2012 vs. 2011: For the years ended December 31, 2012 and 2011, the new vehicle consumer conversion
rate was 45%.
•2011 vs. 2010: For the years ended December 31, 2011 and 2010, the new vehicle consumer conversion
rate was 45% and 46%, respectively. The decrease was primarily due to the changing mix of sales among
OEMs and operational issues impacting the timing of the receipt of customer information and prompt
marketing communications with buyers and lessees of vehicles.
Adjusted Results of Operations
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 of America (“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 gross subscriber addition; free
cash flow; and adjusted EBITDA. These measures exclude the impact of certain purchase price accounting
adjustments. 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.
The purchase price accounting adjustments include the elimination of the earnings benefit of deferred
revenue associated with our investment in Sirius XM Canada, the recognition of subscriber revenues not
recognized in purchase price accounting and the elimination of the earnings benefit of deferred credits on
executory contracts, which are primarily attributable to third party arrangements with an OEM and certain
programming providers.
Our adjusted EBITDA also reallocates share-based payment expense from functional operating expense line
items to a separate line within operating expenses. We believe the exclusion of share-based payment expense
from functional operating expenses is useful given the significant variation in expense that can result from
changes in the fair value as determined by the Black-Scholes-Merton model, which varies based on assumptions
used for the expected life, expected stock price volatility and risk-free interest rates, the effect of which is
unrelated to the operational conditions that give rise to variations in the components of our operating costs.
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 historical and current 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 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
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