XM Radio 2014 Annual Report Download - page 91

Key Operating Metrics
In this section, we present certain financial and operating performance measures that are not
calculated and presented in accordance with generally accepted accounting principles in the United
States (“Non-GAAP”). These metrics 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 audited 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 18 through 22) 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 years ended December 31, 2014, 2013 and 2012. Subscribers to our connected vehicle
services are not included in our subscriber count or subscriber-based operating metrics:
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