Management’s Discussion and Analysis - Sirius XM Canada · Canada. The Satellite radio service is...

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

Management’s discussion and analysis (“MD&A”) discusses the significant factors affecting the results of operations

and financial position of Sirius XM Canada Holdings Inc. (“SXM”, “we”, “us”, “our” or the “Company”).

This MD&A which is current as of November 14, 2013, should be read in conjunction with the Company’s audited

Consolidated Financial Statements dated August 31, 2013 and notes attached thereto and other recent securities

filings available on SEDAR at sedar.com.

The financial information presented herein has been prepared on the basis of IFRS and is expressed in Canadian

dollars unless otherwise noted.

The Class A Subordinate Voting Shares of SXM trade on the Toronto Stock Exchange (TSX) under the stock symbol

XSR.

Forward-Looking Disclaimer

This discussion contains certain information that may constitute forward-looking statements within the meaning of securities laws. These

statements relate to future events or future performance and reflect management’s expectations and assumptions regarding the growth,

results of operations, performance and business prospects and opportunities of the Company on a consolidated basis. In some cases,

forward-looking statements can be identified by terminology such as “may”, “would”, “could”, “will”, “should”, “expect”, “plan”, “intend”,

“anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue”, “seek” or the negative of these terms or other similar expressions

concerning matters that are not historical facts. In particular, statements regarding the Company’s objectives, plans and goals, including

future operating results, economic performance and subscriber recruitment efforts involve forward-looking statements. A number of factors

could cause actual events, performance or results to differ materially from what is projected in the forward-looking statements.

Although the forward-looking statements contained in this discussion are based on what management of the Company considers are

reasonable assumptions based on information currently available to it, there can be no assurance that actual events, performance or results

will be consistent with these forward-looking statements, and management’s assumptions may prove to be incorrect.

Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results,

performance or achievements of the Company to be materially different from any future results, performance or achievements expressed

or implied by the forward-looking statements. Our financial projections are based on estimates regarding expected future costs and expected

revenue, which are fully described in this MD&A.

Among the significant factors that could cause our results to differ from those expressed in the forward-looking statements are:

The Company’s reliance on its exclusive relationship with Sirius XM Radio Inc. (“Sirius XM”);

The Company’s competitive position versus other forms of audio and video entertainment;

The Company’s reliance on automakers and automobile industry sales in Canada;

General economic conditions in Canada;

The Company’s ability to manage customer attrition and average monthly subscription revenue per subscriber;

The impact of any application of or changes to governmental regulations, including any copyright legislation; and

The factors discussed in the section entitled “Risks and Uncertainties” of this MD&A and in the section entitled “Risk Factors” in

the Company’s Annual Information Form for the financial year ended August 31, 2013.

Other than as required by applicable Canadian securities law, the Company does not update or revise any forward-looking statements to

reflect new information, future events or otherwise. These forward-looking statements are subject to risks and uncertainties that could cause

actual results or events to differ materially from expectations. These include but are not limited to the risk factors included in this MD&A

(including those listed under the heading “Risks and Uncertainties”) in addition to the risks itemized in our Annual Information Form (“AIF”)

for the fiscal year ended August 31, 2013. Readers are advised to review these risk factors for a detailed discussion of the risks and

uncertainties affecting the Company’s business. Readers should not place undue reliance on forward-looking statements.


Year Ended August 31, 2013

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This MD&A contains the following sections:

Forward-Looking Disclaimer ......................................................................................................... 1 Overview.......................................................................................................................................... 2 Developments during the Year ...................................................................................................... 4 Financial and Operational Highlights ............................................................................................ 5 Summary of Financial and Operating Results .............................................................................. 7 Discussion of Financial and Operating Results ........................................................................... 10 Liquidity and Capital Resources .................................................................................................. 24 Off-Balance Sheet Arrangements................................................................................................ 27 Arrangements, Relationships and Transactions with Related Parties ...................................... 27 Critical Accounting Estimates and Judgments ........................................................................... 29 International Financial Reporting Standards (“IFRS”) .............................................................. 32 Risks and Uncertainties ................................................................................................................ 33 Outstanding Share Data and Other Information ....................................................................... 36 Definitions of Industry Terminology ........................................................................................... 37 Non-GAAP Financial Measures ................................................................................................... 38

Overview

Our Business and Strategy

SXM is one of the largest Canadian subscription based media companies as measured by the number of

subscribers, with 2.4 million subscribers1. We have the second highest radio revenues of any company in Canada

with an estimated 14% market share2. Our vision is to be the leading premium digital audio entertainment and

information service provider in Canada. Our strategy is founded on the principles of acquiring subscribers in a cost

effective manner, retaining subscribers through enhancing the value proposition to our subscribers and improving

business efficiencies.

Satellite Radio in Canada offers 120 - 130 channels, including commercial-free music as well as news, talk, sports and

children’s programming. This includes over 12 Canadian channels designed and developed from studios in Toronto,

Montreal and Vancouver. We continue to leverage our unique programming assets, such as our broadcasting

agreement with the Canadian Broadcasting Corporation (“CBC”) and the Canadian Football League (“CFL”). The

Company also has access to content through agreements between Sirius XM Radio Inc. and the National Hockey

League (“NHL”), the National Football League (“NFL”), Major League Baseball (“MLB”), Oprah Winfrey, Howard

Stern, NASCAR, the Professional Golfers’ Association of America (“PGA”) and others.

In-Vehicle: New and used car strategy

From an in-vehicle perspective the Company has a two-pronged strategy based on both new and pre-owned vehicles

to increase subscribers. Our target market in Canada includes more than 23 million registered vehicles on the road,

and approximately 1.77 million new vehicles forecasted to be sold in calendar year 20133. Currently all major

automobile manufacturers in Canada have agreements with SXM for the installation of satellite radios. We are the

leader in digital audio entertainment distribution and information delivered via satellite to new vehicles sold in

1 As per available information, October 2013. Data excludes the non-comparable business segments of the above companies (i.e. Wireless and

Wireline) and compares the relevant segments only. Source – Various company filings. 2 Based on the CRTC’s Communication Monitoring Report, published September 2013. 3 DesRosiers automotive report published in September 2013.



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Canada. The Satellite radio service is expected to be factory-installed in approximately 58% of new vehicles to be

sold in model year 2013. Currently it is estimated that there are approximately 5.0 million satellite radio enabled

vehicles in the marketplace as at August 31, 2013.

Aftermarket and other platforms

Along with the in-vehicle experience, consumers can also enjoy satellite radio out of their vehicles, using portable

radio receivers, by streaming content to the home, on their desktops and using apps built for mobile devices. SXM

satellite radio receivers are available at leading retailers across Canada such as Best Buy, Canadian Tire, Costco,

Future Shop, The Source, Wal-Mart, Target and other national, regional and independent retailers.

Base and Premier services

Our primary source of revenue is subscription fees, with most of our customers subscribing on a multi-year, annual,

quarterly, or monthly basis. Discounts are offered for long-term, prepaid subscription plans, as well as discounts for

multiple subscriptions. Other sources of revenue include music royalty fees, activation and other subscription-related

fees, advertising revenues, the direct sale of satellite radios and accessories through our call centres and website,

and other ancillary services such as data and weather services. As indicated below, the Company now offers a range

of additional services in addition to its base subscription offering.

In certain instances, automakers include a subscription to our radio services in the sale or lease of their vehicles.

The length of these prepaid subscriptions varies from three to twelve months. In certain instances we also receive

subscription payments from automakers in advance of our service being activated. We also reimburse various

automakers for certain costs associated with the installation of satellite radios in their vehicles. These costs which

we include as subsidy costs tend to follow seasonal patterns based on manufacturing schedules by the automakers

and tend to be higher in the second half of the fiscal year. Consequently operating income, EBITDA, Free Cash Flow

and other financial metrics may vary on a quarterly basis.

Strategic Goals

While we intend to continue our efforts to minimize costs in all areas of the business, our strategic priorities are to

grow the subscriber base through initiatives in three areas: New vehicles, pre-owned vehicles and advanced

technologies related to the SXM 2.0 architecture and increase profitability and free cash flow. Acquiring subscribers

through the new vehicle segment of the market remains our most attractive and significant opportunity to grow our

subscriber base.

The company is expected to benefit from strong fundamentals that underpin new vehicle sales which are expected

to generate steady growth of approximately 2% to 3% over the next few years, according to industry consultant

DesRosiers Automotive. Our goal is to increase penetration from the current level of approximately 58% to above

60% in the next couple of years.

Pre-owned vehicles have now emerged as a new and important opportunity for us. As initial purchasers begin to

trade in their satellite-radio equipped models for newer vehicles this leaves a significant number of satellite-equipped

used vehicles. The market for pre-owned vehicles can be divided in three categories: Certified Pre-owned (“CPO”),

Franchised Dealers and Non-Franchised & Private Sales. Our focus will be on the CPO and Franchised Dealers

categories as these areas provide the most significant opportunities given they have a higher proportion of vehicles

equipped with a satellite receiver. We continue to work hard to sign up both CPO programs with OEM partners

and franchised dealers. On the franchised dealer side, our focus is on high-volume, high-vehicle penetration dealers

– these are the dealers that really have the opportunity to grow trial subscribers in SiriusXM satellite equipped

vehicles. In the CPO segment, we anticipate adding an additional ten partners in 2014 in addition to the current

three we already have. On the Franchised Dealers side we have over 800 dealers that are now actively participating

in the program.



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Our third strategic imperative is continued innovation to ensure we remain relevant as the market for audio

entertainment evolves. We will continue to make investments in several areas of the business to ensure our

subscribers can consume our content via both satellite and Internet Protocol (“IP”) delivered technologies. We

believe SiriusXM’s two platforms (Satellite and IP) and service provides a significant advantage over IP-only

competitors.

Developments during the Year

Dividend Policy, Initiation of Quarterly Dividends and Special Dividend

To return value to the shareholders, on November 16, 2012, the Board of Directors instituted a dividend policy and

announced a special dividend and initiation of quarterly dividends equal to $0.0825 to all issued and outstanding Class

A Subordinate Voting Shares (“Class A Shares”) and Class C Non-Voting Shares (“Class C Shares”) and one-third

of $0.0825 to Class B Voting Shares (“Class B Shares”). After four dividend payments, including the special dividend,

On July 10, 2013, the Board of Directors announced an increase in the quarterly dividend payable under the policy

of approximately 27% to $0.1050 per Class A Share and Class C Share and $0.0350 per Class B Share, which was

paid on August 22, 2013.

Renewal of CRTC License

On November 16, 2012, the Canadian Radio-television and Telecommunications Commission (CRTC) renewed the

Company’s broadcast license for a six-year period expiring on August 31, 2018. The CRTC granted the Company’s

request to operate under a unified license for both the XM and Sirius broadcasting undertakings. Under the renewed

terms of the license, the Company must contribute to eligible initiatives under the CRTC’s Canadian Content

Development (CCD) framework; previously the Company had contributed under the former Canadian Talent

Development (CTD) regime. The Company’s CCD contribution obligations have been lowered to 4% of eligible

revenues, from a 5% CTD contribution requirement under the previous license. This renewal provides cost visibility

with regards to these fees for a six-year period and improves the Company’s cost structure.

Premier Programming and price increase

As of October 1, 2012, the Company increased its price on the primary monthly service package from $14.99 to

$15.99 at the time of customer subscription renewal. During the first quarter, the Company also introduced Premier

Programming for subscribers. New Premier subscriptions offer Sirius subscribers the ability to access an array of

premium XM content including the NHL, PGA Tour, Oprah Radio etc., while giving XM subscribers the ability to

access premium Sirius content including Howard Stern, NFL play-by-play and more. Premier subscriptions are

available at an additional monthly cost of $4.00. The Company also has a bundled price plan at a $21.99 per month.

With the launch of Satellite Radio 2.0, the Company enhanced its listener experience with the recent introduction

of new internet radio apps for Apple iOS and Android with more content, personalization, on-demand functionality

and access to more than 200 shows. These apps for Apple iOS and Android essentially extend the Company’s

entertainment offering beyond the home or vehicle. The internet radio service also offers on-demand functionality,

giving subscribers access to more than 200 shows. Pricing for SXM Internet Radio is $4.00 a month with a satellite

radio subscription.

The Company believes that a combination of the aforementioned price increase as well as incremental charges for

both its Premier Programming and Internet Radio service have resulted in a marginal increase to ARPU in fiscal 2013

and have also positively impacted revenue and Adjusted EBITDA, notwithstanding a marginal increase in churn.



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Recognition among Best Managed Companies and 500 Fastest Growing Companies

In February 2013, the Company was named as one of the Canada’s Best Managed Companies for the fourth

consecutive year. The Best Managed award and designation honours Canadian companies that have demonstrated

exceptional business results following a rigorous and independent evaluation process. The award is supported by

Deloitte, CIBC Commercial Banking, National Post, Queen's School of Business and MacKay CEO Forums. In June,

2013, the Company was recognized as one of the fastest growing companies in Canada (based on five-year revenue

growth) by Profit Magazine, which publishes its ranking of the 500 fastest growing companies in Canada.

Financial and Operational Highlights

The following are highlights for the three months (“quarter”) and year (“full year”) ended August 31, 2013 in

comparison to the quarter and full year results for the period ended August 31, 2012.

Fourth Quarter Ended August 31, 2013

Revenue increased by 11.2% to $75.7 million from $68.1 million; an improvement of $7.6 million;

EBITDA4 improved by 37.8% to $16.1 million from $11.7 million; an improvement of $4.4 million;

Adjusted EBITDA4, 5

improved by 35.6% to $16.6 million from $12.2 million; an improvement of $4.4 million;

Operating income improved by 134.7% to $7.1 million from $3.0 million; an improvement of $4.1 million;

Net income of $4.1 million compared to a net income of $6.1 million, a reduction of $2.0 million;

Earnings per share (EPS)6 of $0.03 compared to earnings per share of $0.05, a reduction of $0.02 per share.

Cash from operations increased by 42.3% to $14.8 million from $10.4 million; an improvement of $4.4 million;

Free Cash Flow4 increased by 14.0% to $9.7 million from $8.5 million; an improvement of $1.2 million.

Full Year Ended August 31, 2013

Revenue increased by 11.3% to $288.9 million from $259.6 million; an improvement of $29.3 million;

EBITDA increased by 55.8% to $66.2 million from $42.5 million; an improvement of $23.7 million;

Adjusted EBITDA increased by 47.6% to $68.7 million from $46.6 million; an improvement of $22.1 million;

Operating income improved by 978.6% to $30.7 million from $2.8 million; an improvement of $27.9 million;

Net income of $12.2 million compared to a net loss of $4.2 million; an improvement of $16.4 million;

Earnings per share6 of $0.10 compared to a loss per share of $0.03; an improvement of $0.13 per share.

Cash from operations increased by 46.7% to $60.3 million from $41.1 million; an improvement of $19.2 million;

4 Non-GAAP measure – See definition in the section entitled “Non-GAAP Financial Measures”. 5 A reconciliation of Operating Income to Adjusted EBITDA (a non-GAAP measure) is provided on page 18 under the table

entitled “Adjusted EBITDA Reconciliation”. 6 Earnings per share is based on both Basic and Diluted earnings per share.



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Free Cash Flow increased by 35.4% to $49.6 million from $36.6 million; an improvement of $13.0 million;

Ending Self-Paying Subscribers of 1,727,400 and Total Subscribers of 2,427,100.



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Summary of Financial and Operating Results

The following tables present a summary of the Company’s audited Consolidated Statement of Operations and

Balance Sheet as well as financial and operating metrics for the year ended August 31, 2013 (“full year”, “FY”), the

comparative periods ended August 31, 2012 along with the unaudited financial results for the three months ended

August 31, 2013 (“Quarter”, “Q4”) in comparison to the same period ended August 31, 2012. For more details,

please refer to the Company’s audited Consolidated Financial Statements as of August 31, 2013.

Three months ended Full year ended

Statement of Operations and Comprehensive

Income (Loss)

August 31,

2013

August 31,

2012

August 31,

2013

August 31,

2012

(in $ 000's, except earnings per share)

Revenue 75,739 68,119 288,901 259,620

Operating expenses

Operating costs 59,603 56,405 222,651 215,703

Integration. Severance and merger costs - 2 - 1,383

Depreciation and amortization 9,065 8,699 35,576 39,689

Operating income 7,071 3,013 30,675 2,844

Finance Costs, net

Interest income 175 133 686 361

Interest expense (3,513) (3,984) (15,411) (16,700)

Gain on revaluation of derivative 2,240 1,217 2,291 1,213

Foreign exchange (loss) (145) 336 (676) (210)

Finance Costs (1,244) (2,299) (13,109) (15,336)

Income (Loss) before income tax 5,828 714 17,565 (12,492)

Income tax (expense) recovery (1,750) 5,402 (5,375) 8,313

Net income (loss) and comprehensive income

(loss) 4,078 6,117 12,191 (4,179)

Basic and fully diluted (loss) earnings per share 0.03 0.05 0.10 (0.03)



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As at

Balance Sheet August 31, 2013 August 31, 2012

(in $ 000's)

ASSETS

Current assets

Cash, cash equivalents, and short-term investments 49,236 51,035

Accounts receivable 13,359 12,133

Prepaid expenses 6,779 3,361

Inventory 234 324

Total current assets 69,609 66,854

Long-term prepaids 100 79

Property and equipment 5,980 7,617

Intangible assets 152,217 175,986

Deferred tax asset 54,484 59,858

Goodwill 96,733 96,733

Total assets 379,122 407,128

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities

Trade and other payables 47,145 39,086

Due to related parties 9,621 6,776

Interest Payable 2,704 2,704

Current portion of deferred revenue 144,885 137,554

Provisions 1,328 1,286

Total current liabilities 205,684 187,406

Deferred revenue 17,105 21,019

Other long-term liabilities 1,669 6,903

Due to related parties 2,391 1,208

Long-term debt 143,707 144,993

Provisions 323 344

Total liabilities 370,879 361,873

Shareholders' equity

Share capital 151,975 148,393

Contributed surplus 6,161 5,058

Accumulated deficit (149,713) (108,196)

Total shareholders' equity 8,243 45,255

Total liabilities and shareholders' equity 379,122 407,128



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Summarized Financial Metrics August 31,

2013

August 31,

2012

August 31,

2013

August 31,

2012

(in $ 000's, except as indicated)

Net Income (loss) 4,078 6,117 12,191 (4,179)

EPS (Basic and Diluted) 0.03 0.05 0.10 (0.03)

EBITDA 16,136 11,712 66,250 42,533

EBITDA margin (%) 21.3% 17.2% 22.9% 16.4%

Adjusted EBITDA 16,570 12,220 68,722 46,562

Adjusted EBITDA margin (%) 21.9% 17.9% 23.8% 17.9%

Free Cash Flow 9,704 7,292 49,633 36,646

Net debt7 94,471 93,958 94,471 93,958

Net debt to Adjusted EBITDA (times) 1.37 2.02 1.37 2.02

7 As defined in the section entitled “Non GAAP Financial Measures”



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Discussion of Financial and Operating Results

The following table is a summary of the key subscriber metrics that the Company uses to help measure the

performance of its operations. Please refer to the section “Definitions of Industry Terminology” at the end of this

MD&A for an overview of the subscriber metrics noted below.


Summarized Operating Metrics August 31,

2013

August 31,

2012

August 31,

2013

August 31,

2012

(in 000's, except as indicated)

Ending Self-Pay Subscribers 1,727 1,584 1,727 1,584

Ending Total Subscribers 2,427 2,206 2,427 2,206

Average Self Pay Churn (%) 1.78% 1.71% 1.95% 1.92%

ARPU ($) $11.72 $11.65 $11.64 $11.60

SAC ($) $40 $46 $44 $49

CPGA ($) $76 $76 $73 $75


Subscriber Data August 31,

2013

August 31,

2012

August 31,

2013

August 31,

2012

Beginning Subscribers 2,321,900 2,116,900 2,206,200 1,983,100

Net Additions 105,200 89,300 220,900 223,100

Ending Subscribers 2,427,100 2,206,200 2,427,100 2,206,200

Self-Paying 1,727,400 1,584,400 1,727,400 1,584,400

Paid Promotional 567,800 516,500 567,800 516,500

Non Paid Promotional 131,900 105,300 131,900 105,300

Ending Subscribers 2,427,100 2,206,200 2,427,100 2,206,200

Self -Pay 63,200 77,400 143,000 191,600

Paid/Non Paid Net Additions 42,000 11,900 77,900 31,500

Total Net Additions 105,200 89,300 220,900 223,100

The following section compares the results of operations for the quarter ended August 31, 2013 to the quarter

ended August 31, 2012.



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Subscribers

As at August 31, 2013, we had total subscribers of 2,427,100, representing 1,727,400 Self-Paying Subscribers and

699,700 Paid Promotional Subscribers and Non Paid Promotional Subscribers. Self-Paying Subscribers increased 9.0%

versus the end of the fourth quarter of 2012, driven largely by growth in the number of OEM additions during the

period. OEM net additions decreased in the fourth quarter of 2013 compared to the fourth quarter of 2012 due to

the effects of higher churn, offset by higher subscribers from both win-back initiatives and the used-car initiative

announced earlier during the year. Paid Promotional Subscribers and Non-Paid Promotional Subscribers increased

by 12.5% compared to the corresponding period of 2012 due to an increase in the penetration rate and to an

increase in vehicle sales of approximately 3.4%. Trial subscribers in the Paid and Non Paying Promotional category

serve as the funnel for the net additions in future periods with timing of these additions dependent on the length of

the trial period with the OEM, which spans three to twelve months depending on the OEM agreement. Although,

the Company continues to grow its subscriber base, the pace of growth of the self-paying base has declined marginally

as we attempt to balance both subscriber growth and ARPU in order to maximize revenue and profitability.

Q4 2013 Q4 2012

1,727,400 1,584,400

699,700

621,800

Self Paying Paying & Non Paying Promotional

2,206,200

2,427,100



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Churn

Self-pay monthly churn increased to 1.78% in the fourth quarter of 2013 from 1.71% in the corresponding quarter

of 2012 due to a combination of the price change implemented in the first quarter and to changes to the pricing for

online listening. For the full year ended August 31, 2013, self-pay monthly churn was 1.95% compared to 1.92% for

the year ended August 31, 2012. Churn increased year-over-year on a full-year basis due primarily to the base

subscription price increase in addition to the changes to the pricing for online listening.

ARPU

ARPU was $11.72 and $11.65 for the fourth quarters of 2013 and 2012, respectively. The increase in ARPU relative

to the comparative quarter last year is due primarily to an increase in the base subscription price and also to one-

time credits, somewhat mitigated by the following:

Q4 2013 Q4 2012 FY 2013 FY 2012

1.78%1.71%

1.95%1.92%

Q4 2013 Q4 2012 FY 2013 FY 2012

$11.72$11.65 $11.64 $11.60



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(i) an increase in automotive Self-Paying Subscribers which have a lower ARPU due to higher price

discounts being offered to these subscribers;

(ii) revenue from some customers on lifetime plans being fully amortized;

(iii) discounted pricing on win-back initiatives.

ARPU is below the basic service price due to promotions offered to new OEM Self-Paying Subscribers, Paid

Promotional Subscriptions by automakers, family plan subscribers, discounts offered to renewing Self-Paying

subscribers across all channels and discounted multi-year plans that provide the Company with a working capital

benefit as long term subscriptions are paid for in advance. As the Company continues to increase its subscriber base,

it is anticipated that ARPU may fluctuate due to multi-year plans and promotional discounts offered to attract and

retain its Self-Paying subscriber base. In 2013, ARPU increased marginally as the positive effects of the pricing changes

more than offset the dilutive effects of the items mentioned above. On a full-year basis, ARPU was $11.64 for the

period ended August 31, 2013 compared to $11.60 for the period ended August 31, 2012.

Revenue

Revenue includes subscription revenue, activation fees, sale of merchandise through direct fulfillment channels,

advertising revenue from Canadian-produced channels and certain other revenue. Revenue also includes the impact

of fair value adjustments as a result of purchase price accounting.

Revenue ($ millions)

Fourth Quarter: Revenue increased by $7.6 million or 11.2%, to $75.7 million in the fourth quarter of

2013 from $68.1 million in the fourth quarter of 2012. The increase was attributable to the increase in

the subscriber base along with a modest increase in ARPU of 0.6%.

Full Year: Revenue increased by $29.3 million or 11.3% to $288.9 million in 2013 from $259.6 million

in 2012. The increase is due to the Company’s larger subscriber base and also to the slight increase in

ARPU.

Q4 2013 Q4 2012 FY 2013 FY 2012

$75.7$68.1

$288.9 $259.6



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Operating Expenses


Operating Expenses August 31, 2013 August 31, 2012 August 31, 2013 August 31, 2012

(in $000’s) % of

Revenue

% of Revenue

% of

Revenue

% of Revenue

Revenue share and royalties 23,083 30.5% 22,649 33.2% 89,870 31.1% 84,193 32.4%

Customer care & billing ops 4,813 6.4% 4,441 6.5% 19,352 6.7% 17,578 6.8%

Cost of merchandise 1,164 1.5% 849 1.2% 3,420 1.2% 3,052 1.2%

Broadcast and operations 468 0.6% 466 0.7% 1,651 0.6% 1,729 0.7%

Programming and content 1,688 2.2% 1,543 2.3% 7,683 2.7% 9,728 3.7%

Total cost of revenue 31,216 41.2% 29,947 44.0% 121,976 42.2% 116,280 44.8%

General and administrative 2,009 2.7% 2,548 3.7% 8,895 3.1% 11,223 4.3%

Information Technology 3,355 4.4% 2,145 3.1% 11,202 3.9% 11,604 4.5%

Stock based compensation 399 0.5% 333 0.5% 2,257 0.8% 1,493 0.6%

Overhead costs 5,763 7.6% 5,026 7.4% 22,355 7.7% 24,320 9.4%

Marketing support 1,709 2.3% 1,477 2.2% 7,431 2.6% 7,132 2.7%

Subsidies and distribution 11,067 14.6% 11,943 17.5% 42,872 14.8% 43,776 16.9%

Marketing 9,848 13.0% 8,012 11.8% 28,017 9.7% 24,194 9.3%

Marketing costs 22,624 29.9% 21,432 31.5% 78,320 27.1% 75,103 28.9%

Total operating expenses 59,603 78.7% 56,405 82.8% 222,651 77.1% 215,703 83.1%

Cost of Revenue

Cost of Revenue increased by $1.3 million or 4.2% to $31.2 million in the fourth quarter of 2013 from $29.9 million

in the fourth quarter of 2012. On a full-year basis, Cost of Revenue increased by $5.7 million or 4.9% to $122.0

million in 2013 from $116.3 million in 2012. The reasons for the increase in cost of revenue are discussed below.

Cost of revenue is comprised of the following:

Revenue share & royalties – This category includes license payments to Sirius XM, revenue share payments

to the OEM partners, CRTC fees, CRTC mandated CCD contributions, and copyright royalties payable to

rights holders for the public performance and the reproduction of musical works, performers’ performances

and sound recordings.

Fourth Quarter: Revenue share & royalties increased by $0.5 million or 1.9%, to $23.1 million in the

fourth quarter of 2013 from $22.6 million in the fourth quarter of 2012. Revenue share & royalties

increased due to higher revenue in the current quarter offset by a reduction in the CCD rate from 5%

to 4% compared to the corresponding period last year. As a percentage of total revenue, revenue share

& royalties decreased to 30.5% in the fourth quarter of 2013 from 33.2% in the fourth quarter of 2012.

The reduction in the CCD rate and the lower overall revenue share rate paid to various automakers

were the key drivers in the overall reduction in the revenue share and royalties rate. The Company

has revenue sharing arrangements with certain automotive partners with varying rate structures, thus

a change in vehicle mix of the underlying subscriber base due to market share changes by OEMs or a

change in the rate paid to each OEM will affect the overall revenue sharing rate.

Full Year: Revenue share and royalties increased by $5.7 million or 6.7% to $89.9 million in 2013 from

$84.2 in 2012. Revenue share & royalties increased in 2013 compared to 2012 due to higher revenues

in the current year. The increase in revenue share and royalties was mitigated by a lower CCD rate



TSX: XSR

and a lower overall revenue share rate paid to various automakers compared to last year. As a

percentage of total revenue, revenue share & royalties decreased to 31.1% in 2013 from 32.4% in the

same period prior year.

Customer care & billing operations – This category consists primarily of personnel and related costs

associated with the ongoing operations of call centres as well as credit card payment processing fees. The

Company operates onshore and offshore customer support centres through third party vendors.

Fourth Quarter: Customer care & billing operations costs increased by $0.4 million or 8.4% to $4.8

million in the fourth quarter of 2013 from $4.4 million in the fourth quarter of 2012. Customer care &

billing operations costs are primarily driven by the volume derived from the Company’s growing

subscriber base.

Full Year: Customer care & billing operations costs increased by $1.8 million or 10.1% to $19.4 million

in 2013 compared to $17.6 million in 2012 while Self-Paying subscribers increased 9.0% year-over-year.

Customer care & billing operations costs increased as a result of a higher volume of calls due to the

larger subscriber base. These costs are primarily driven by the volume derived from the Company’s

growing subscriber base as well as by incremental costs related to pricing changes implemented during

the year.

Monthly Customer Care and Billing Costs per Self-Paying Subscriber ($/Sub)

Fourth Quarter: As shown below, monthly customer care & billing costs per Self-Paying Subscriber

decreased slightly to $0.97 in the fourth quarter of 2013 from $1.00 in the fourth quarter of 2012 as

the increase in subscriber growth outpaced the increase in customer care costs as a portion of these

costs is fixed and in the short run does not increase with increase as the volume of calls increase.

Full Year: Customer care & billing costs per Self-Paying Subscriber decreased to $0.98 in 2013 from

$1.00 in 2012 as costs did not increase in proportion to the growth in the subscriber base.

Monthly Customer Care and Billing per Self-Paying Subscriber ($/Sub)

Q4 2013 Q4 2012 FY 2013 FY 2012

$0.97$1.00 $0.98 $1.00



TSX: XSR

Cost of merchandise – The Company sells merchandise directly to new subscribers, existing subscribers

who purchase additional radios, and to commercial accounts through our online store and call centres. Cost

of merchandise consists primarily of the cost of radios, accessories and related fulfillment costs associated

with the direct sale of this merchandise.

Fourth Quarter: Cost of merchandise increased by $0.4 million or 37.1% to $1.2 million in the fourth

quarter of 2013 from $0.8 million in the fourth quarter of 2012. These costs are primarily driven by

the volume of radios sold, which are mostly affected by promotional programs. Cost of merchandise

increased year-over-year primarily due to a 47.0% increase in sales volume.

Full Year: Cost of merchandise increased by $0.4 million or 12.1% to $3.4 million in 2013 compared

to $3.0 million in 2012. Cost of merchandise increased year-over-year due to a 21.0% increase in sales

volume.

Broadcast & operations – Broadcast expenses include costs associated with the management and

maintenance of systems, software, hardware, production and performance studios used in the creation and

distribution of Canadian-produced channels. Operations expenses include operating costs of facilities, the

terrestrial repeater network and information technology expenses related to the broadcast facilities.

Fourth Quarter: Broadcast & operations expenses remained unchanged at $0.5 million for the fourth

quarters of 2013 and 2012.

Full Year: Broadcast & operations expenses decreased by $0.1 million or 4.5% to $1.6 million in 2013

from $1.7 million in 2012. These expenses declined marginally compared to the same period prior year

due to the Company’s ongoing efforts to gain efficiencies in all areas of the business.

Programming & content – Includes the creative, production and licensing costs for live NHL programming

associated with the Company’s Canadian-produced channels, which includes third party content acquisition

that are driven by programming initiatives. Programming & content also includes licensing costs paid to the

CBC. The Company views programming & content as a cost of attracting and retaining subscribers. The NHL

License cost is amortized over the NHL season, which generally runs for a nine-month period beginning in

October of each year.

Fourth Quarter: Programming & content expenses increased by $0.2 million or 9.4%, to $1.7 million

in the fourth quarter of 2013 from $1.5 million in corresponding quarter of 2012. The increase is due

to additional programming costs associated with the launch of several new Canadian channels, including

Canada Talks, Canada Laughs and Multicultural Radio.

Full Year: Programming & content expenses decreased by $2.0 million or 21.0% to $7.7 million in 2013

from $9.7 million in 2012. The decrease is due to lower costs associated with the NHL license in the

current period offset by additional costs associated with the launch of several new Canadian channels.

During the year, the Company realized approximately $2.1 million in one-time savings due to the

shortened NHL season.

Marketing support – Marketing support includes staffing costs directly associated with facilitating the sale

of radio receivers through third party distribution channels, costs for converting OEM trial customers into

Self-Paying Subscribers, retention costs, costs incurred by win-back initiatives and costs associated with

marketing the SXM brand.



TSX: XSR

Fourth Quarter: Marketing support expenses increased by $0.2 million or 15.7% to $1.7 million in the

fourth quarter of 2013 from $1.5 million in the corresponding quarter of 2012 primarily due to higher

employee related costs.

Full Year: Marketing support expenses increased by $0.3 million or 4.2% to $7.4 million in 2013 from

$7.1 million in 2012 due primarily to higher employee related costs.

Subsidies – These direct costs include the subsidization of radios, commissions paid to retail partners for the

sale and activation of radios, chipset costs, warranty costs and certain promotional costs.

Fourth Quarter: Subsidy costs decreased by $0.8 million or 7.3% to $11.1 million in the fourth quarter

of 2013 from $11.9 million in the fourth quarter of 2012. Subsidy costs decreased due to a reduction

in hardware costs resulting from of a lower number of radios sold through the retail channel partially

offset by higher costs in the OEM channel as a result of a higher number of vehicles installed with

satellite receivers compared to the same period prior year.

Full Year: Subsidy costs decreased by $0.9 million or 2.1% to $42.9 million in the fourth quarter of

2013 from $43.8 million in the fourth quarter of 2012. Higher subsidy costs in the OEM channel

resulting from a higher volume of vehicles shipped during the current period versus the comparative

period last year were offset by lower average chipset costs and lower costs in the aftermarket channel

driven by lower commissions and promotional spending.

SAC

Subscriber Acquisition Costs8 – SAC was $40 and $46 for the fourth quarters of 2013 and 2012, respectively.

SAC decreased relative to the comparative quarter as a higher proportion of gross additions generated by

win-back activities in the current period compared to the corresponding period prior year. The Company

does not incur additional subsidy costs for customers acquired through the win-back channel. SAC also

decreased as a higher proportion of gross subscriber additions were generated through the OEM channel

8 Subscriber acquisition cost includes subsidy costs and net costs related to equipment sold directly to the consumer divided by total gross

additions excluding the Non-Paid Promotional Subscribers for the period.

Q4 2013 Q4 2012 FY 2013 FY 2012

$40

$46$44

$49



TSX: XSR

where the per-unit cost is lower for subscribers gained through this channel as compared to the per-unit cost

in the retail channel. While SAC may fluctuate on a quarterly basis, we anticipate that annual SAC will likely

remain within a narrow range going forward. On a full year basis, SAC was $44 and $49 for 2013 and 2012,

respectively. SAC decreased during the period as a higher proportion of gross additions was generated

through win-back activities in the current year compared to the corresponding period prior year. SAC also

decreased on a full-year basis as a higher proportion of gross subscriber additions was generated through the

OEM channel where the per unit costs is lower for subscribers gained through this channel as compared to

the subscribers gained through the retail channel.

Marketing – Includes costs related to communications associated with converting trial subscribers to Self-

Paying subscribers such as mailing and telephone costs, retail advertising through various media, co-operative

advertising with distribution partners, sponsorships, and ongoing market research. These costs fluctuate based

on the timing of these activities.

Fourth Quarter: Marketing expenses increased by $1.8 million or 22.9% to $9.8 million in the fourth

quarter of 2013 from $8.0 million in the comparable quarter in 2012 primarily due to a larger outbound

telemarketing campaign in respect of the Company’s free listening promotional program, higher spend

on media related advertising, higher costs to support the used vehicle program, and higher spending on

product development activities to support growth initiatives.

Full Year: Marketing expenses increased by $3.8 million or 16.1% to $28.0 million in 2013 from $24.2

million in 2012. This increase is due to higher spend on both outbound telemarketing campaigns and

free listening programs.

CPGA

Cost Per Gross Addition – CPGA remained flat at $76 for the fourth quarters of 2013 and 2012. CPGA remained

unchanged period-over-period as the effect from higher marketing and subsidy costs was offset by higher year-over-

year gross additions from win-back activities. The Company currently does not anticipate any meaningful changes in

CPGA as both SAC and variable marketing spend stabilize going forward. CPGA is generally lower for subscribers

gained through the pre-owned market as compared to subscribers gained through the new vehicle channel. On a full

year basis, CPGA was $73 and $75 for 2013 and 2012 respectively. CPGA declined in 2013 compared to the

Q4 2013 Q4 2012 FY 2013 FY 2012

$76 $76$73 $75



TSX: XSR

corresponding period in the prior year as the effect from a higher proportion of gross additions being generated by

win-back activities was more than offset by the effect of higher combined subsidy and marketing costs.

General & Administrative Expenses

General & administrative expenses primarily include compensation, public company costs, office occupancy

expenses and other corporate expenses.

Fourth Quarter: General & administrative expenses decreased by $0.5 million or 21.2% to $2.0 million

in the fourth quarter of 2013 from $2.5 million in the fourth quarter of 2012.The decrease is due to

lower legal expenses, lower employee related costs partially offset by higher facilities expenses. In the

comparative period prior year, the Company incurred significantly higher legal expenses in respect of

its CRTC license renewal, which was renewed for a six-year period expiring on August 31, 2018.

Full Year: General & administrative expenses decreased by $2.3 million or 20.7% to $8.9 million in

2013 from $11.2 million in 2012. In the prior year, the Company incurred significantly higher legal

expenses in respect of its CRTC license renewal, the preparation of a prospectus and to execute one-

time post-merger corporate harmonization projects.

Information Technology

Information Technology expenses primarily include costs related to our subscriber management systems, data

processing, communications cost, network infrastructure cost and people costs.

Fourth Quarter: Information technology expenses increased by $1.2 million or 56.4% to $3.3 million

in the fourth quarter of 2013 from $2.1 million in the fourth quarter of 2012. The increase is a result

of higher capitalization costs in the comparative period last year as internal staff and third parties spent

a significant portion of time working on capital projects primarily related to system enhancements to

update the Company’s Subscriber Management System (“SMS system”), while in the current quarter

third party costs were primarily related to non-capital projects. The increase in information technology

expenses is also due to higher consulting fees and higher costs due to increased headcount to support

the operation of our subscriber management systems.

Full Year: Information technology expenses decreased by $0.4 million or 3.5% to $11.2 million in 2013

from $11.6 million in 2012. The decrease is a result of increased capitalization of labor costs in the

current year as a larger proportion of employees’ time was dedicated to capital projects. Information

technology expenses also decreased due to a reduction in third party related costs and lower corporate

expenses partly offset by higher employee related costs resulting from an increase in headcount.

The Company will seek to realize further synergies by consolidating subscriber management systems across a single

platform. This consolidation initiative necessitates additional capital investment over the next 12 months.

Severance and merger costs

Severance and merger costs include restructuring costs incurred as a result of the merger.

Fourth Quarter: The Company did not incur any severance and merger costs in fourth quarter of

2013 compared to $0.1 million in the fourth quarter of 2012.

Full Year: The Company did not incur any severance and merger costs in 2013 compared to $1.4

million in 2012.



TSX: XSR

Stock-based Compensation

Stock-based compensation expenses are related to the issuance of stock options, Restricted Stock Units (RSUs) and

Performance Stock Units (PSUs). The PSUs are subject to minimum performance targets. The Company recognizes

a compensation expense in operating costs for the market value of each RSU and PSU at the date of grant. The

Company expects RSUs and PSUs to be settled through the payment of shares.

Fourth Quarter: Stock-based compensation expenses increased by $0.1 million to $0.4 million in the

fourth quarter of 2013 from $0.3 million in fourth quarter of 2012. The increase in stock-based

compensation is a result of RSUs and PSUs granted in the first quarter to certain employees. The

number of PSUs that may vest will vary based on the Company meeting specified non-market

performance targets, ranging from nil if minimum performance targets are not met, to a maximum of

366,700 units.

Full Year: Stock-based compensation expenses increased by $0.8 million to $2.3 million in 2013 from

$1.5 million in 2012. The increase in stock-based compensation is a result of a one-time expense of

$0.5 million associated with options granted to the Board of Directors in the first quarter which vested

immediately and RSUs and PSUs granted in the first quarter to the certain employees. Of the $2.3

million in stock based compensation expense, $1.7 million was expensed for the stock option based

awards, while $0.8 million was expensed in respect of RSUs and PSUs.

As of August 31, 2013, the Company had the following stock options outstanding:

Stock Options Outstanding

Weighted Average

Remaining Contractual

Life (years)

Weighted Average

Exercise Price Total Vested Unvested

At September 1, 2012 4.9 $3.40 3,226,975 1,212,950 2,014,025

Granted $4.76 749,700 225,000 524,700

Vested - - 500,050 (500,050)

Exercised $2.84 (790,750) (790,750) -

Forfeited $4.73 (747,825) (547,875) (199,950)

At August 31, 2013 5.2 $3.60 2,438,100 599,375 1,838,725

Restricted and Performance Stock Units

On November 16, 2012, the Company granted 200,190 RSUs and maximum 390,280 PSUs to some of its employees

as a form of incentive compensation. RSUs and PSUs cliff vest in three years, and can be settled in cash or shares at

the discretion of the Company’s Board of Directors. The PSUs are subject to minimum performance targets and

the amount of PSUs that may vest will vary based on the Company meeting specified performance targets, ranging

from nil if minimum performance targets are not met, to a maximum of 366,700 units. The grant date fair value for

both RSUs and PSUs is $4.71 per unit.

The RSUs and PSUs grant certain employees either a cash or share based payment equal to the weighted average

price of the Company’s common share on the Toronto Stock Exchange (“TSX”) in the five trading days preceding

the end of a three-year performance period multiplied by the number of units that vest. For the PSUs, the number

of units that vest will vary based on the achievement of non-market performance measures. The Company recognizes

compensation expense in operating costs for each RSU and PSU expected to vest equal to the market value of the

Company’s common share less the net present value of the expected dividend stream at the date on which RSUs



TSX: XSR

and PSUs are awarded to each participant. For PSUs expected to be settled in shares, the compensation expense is

prorated over the performance period reflecting changes in the number of PSUs expected to vest until the end of

the performance period based on the achievement of non-market performance measures. Forfeitures are estimated

at the grant date and are revised to reflect a change in expected or actual forfeitures.

Since the settlement method of the RSUs and PSUs is at the discretion of the Company’s Board of Directors, and

the Company does not have a prior practice of settling in cash and currently intends to settle the awards by issuing

shares, the Company accounts for RSUs and PSUs compensation related expense using the equity settlement

method.

As at August 31, 2013, the number of non-vested RSUs is 187,980 units. The number of PSUs that may vest based

on conditions existing at the balance sheet date is 265,857 units.

Depreciation and amortization

Fourth Quarter: Depreciation and amortization expenses increased by $0.4 million to $9.1 million in

the fourth quarter of 2013 from $8.7 million in the fourth quarter of 2012. The increase is a result of

an increase in amortization on activation fees resulting from a reduction in the amortization period

from 40 months to 20 months, amortization due to commencement of amortization of the SMS project

in the second quarter, accelerated amortization of leaseholds until December 2013 for one of the

previous studio locations offset by lower amortization of intangible assets of approximately $1.7 million

due to the end of the first term of an OEM contract.

Full Year: Depreciation and amortization expenses decreased by $4.1 million to $35.6 million in 2013

from $39.7 million in 2012. The decrease is a result of lower amortization of intangible assets of

approximately $5.3 million due to an OEM contract being fully amortized, full amortization of certain

repeater and equipment assets, partly offset by higher amortization due to the commencement of

amortization of the Company’s Subscriber Management System, an increase in amortization on

activation fees resulting from a reduction in the useful life and related amortization period from 40

months to 20 months and accelerated amortization of leaseholds related to Company’s previous studio

location.

EBITDA

Q4 2013 Q4 2012 FY 2013 FY 2012

$16.1

$11.7

$66.3

$42.5



TSX: XSR

The Company uses EBITDA and its variants such as Adjusted EBITDA, as included in the Non-GAAP Financial

Measures section, to gauge the performance of the business. The table below is a reconciliation of the Income

(loss) before taxes to EBITDA and Adjusted EBITDA.


Adjusted EBITDA: Reconciliation August 31,

2013

August 31,

2012

August 31,

2013

August 31,

2012

In ($ 000’s)

Income/(Loss) before income taxes 5,828 714 17,565 (12,492)

Net Interest expense & income 3,338 3,851 14,725 16,339

Foreign exchange loss & gain on revaluation

of derivatives (2,095) (1,553) (1,616) (1,003)

Operating income 7,071 3,013 30,675 2,844

Depreciation and amortization 9,065 8,699 35,576 39,689

EBITDA 16,136 11,712 66,250 42,533

Stock-based compensation 399 333 2,257 1,493

Integration, restructuring and merger costs - 2 - 1,383

Fair value adjustments* 35 173 215 1,152

Adjusted EBITDA 16,570 12,220 68,722 46,562

* Fair value adjustment relates to a reduction in revenue due to the valuation of deferred revenue under purchase price accounting.

Fourth Quarter: EBITDA improved by $4.4 million or 37.8% to $16.1 million in the fourth quarter of

2013 from $11.7 million in the fourth quarter of 2012. EBITDA improved compared to the same period

last year primarily due to a $7.6 million revenue improvement offset by higher Cost of Revenue of $1.3

million, higher general administrative and information technology costs of $0.7 million, higher marketing

expenses of $1.2 million and higher stock based compensation of $0.1 million. As a percentage of

revenue, EBITDA improved to 21.3% in the fourth quarter of 2013 from 17.2% in the fourth quarter

of 2012. The improvement in EBITDA is a function of operational leverage as costs do not increase in

lockstep with revenue leading to a higher proportion of profit flowing through to EBITDA.

Full Year: EBITDA improved by $23.8 million or 55.8% to $66.3 million in 2013 from $42.5 million in

2012. EBITDA improved year-over-year primarily due to a $29.3 million revenue improvement, lower

severance and merger costs of $1.4 million and lower support costs in general administrative and

information technology cost category of $2.7 million, offset primarily by higher Cost of Revenue of

$5.7 million, higher stock based compensation of $0.8 million and higher marketing costs of $3.2 million.

As a percentage of revenue, EBITDA improved to 22.9% in 2013 from 16.4% in 2012. The improvement

in EBITDA is a result of operational leverage as well as a one-time benefit of approximately $2.1 million

due to lower NHL license expense during the year. Excluding the one-time benefit of $2.1 million,

EBITDA margin would have been 22.2%.



TSX: XSR

Adjusted EBITDA

Adjusted EBITDA

Fourth Quarter: Adjusted EBITDA improved by $4.4 million or 35.6% to $16.6 million in the fourth

quarter of 2013 from $12.2 million in the fourth quarter 2012. Adjusted EBITDA improved compared

to the same period last year primarily due to a $7.6 million revenue improvement offset by higher Cost

of Revenue of $1.3 million, higher general administrative and information technology expenses of $0.7

million, and higher marketing costs of $1.2 million. As a percentage of revenue, Adjusted EBITDA

increased to 21.9% in the fourth quarter of 2013 from 17.9% in the fourth quarter of 2012.

Full Year: Adjusted EBITDA improved by $22.1 million or 47.6% to $68.7 million in 2013 from $46.6

million in 2012. Adjusted EBITDA improved compared to the same period last year primarily due to a

$29.3 million revenue improvement, lower general administrative and information technology costs of

$2.7 million, offset by higher Cost of Revenue of $5.7 million, and higher marketing costs of $3.2 million.

As a percentage of revenue, Adjusted EBITDA increased to 23.8% in 2013 from 17.9% in the

comparative period of 2012. The improvement in Adjusted EBITDA is due to both operational leverage

and to a one-time benefit of approximately $2.1 million due to lower NHL license expense during the

year. Excluding the one-time benefit of $2.1 million, the Adjusted EBITDA margin would have been

23.1%.

Income Taxes

Fourth Quarter: For the three months ended August 31, 2013, the Company incurred income tax

expense of $1.7 in fourth quarter of 2013 compared to an income tax recovery of $5.4 million in the

corresponding quarter of 2012.

Full Year: For the year ended August 31, 2013, the Company incurred income tax expense of $5.4

million in 2013 compared to an income tax recovery of $8.3 million for the year ended August 31,

2012. Income tax expense of $5.4 million is comprised of expense of $4.7 million due to the net income

in the current year and $0.7 million from non-deductible expenses. In 2012, income tax recovery of

$8.3 million is comprised of a recovery of $3.4 million due to the net loss in the year and $5.7 million

Q4 2013 Q4 2012 FY 2013 FY 2012

$16.6 $12.2

$68.7

$46.6



TSX: XSR

due to a change in the tax rate on the opening deferred taxes, partly offset by non-deductible expenses

of $0.9 million.

Liquidity and Capital Resources

Total cash, cash equivalents and short term investments at the end of the fourth quarter of fiscal 2013 were $49.2

million, a decrease of $2.3 million over the previous quarter. This decrease was mainly due to the payment of

dividends totaling $13.0 million and capital expenditures of $5.1 million, partly offset by cash flow from operations

of $14.8 million and $1.0 million of proceeds from the exercise of options. Cash flow from operations increased

$4.4 million or 42.3% as a result of higher revenues and an improvement in our EBITDA margin compared to the

same quarter prior year. Free Cash Flow increased by $1.2 million in the quarter compared to the same quarter last

year. The increase in Free Cash Flow was primarily due to the increase in cash flow from operations year-over-year

offset by higher capital expenditures primarily related to company’s SMS system. Our financial position remains

strong, driven by robust operating cash flow generation and modest capital expenditure requirements. However,

cash and cash equivalents are not expected to increase in lockstep with Free Cash Flow due to the expected payment

of cash dividends. The result of an improvement in our cash position is an improvement in our risk position through

debt deleveraging. Net debt to Adjusted EBITDA declined to 1.37 times in the current quarter ended August 31,

2013 from 2.02 times in the comparative quarter last year. Debt to Adjusted EBITDA declined to 2.09 times in the

quarter ended August 31, 2013 from 3.11 times in the comparative quarter last year. We expect an increase in

capital expenditure in fiscal years 2014 and 2015 as we unify our subscriber management system and upgrade our

repeater network but anticipate a decline in 2016 and beyond. A substantial portion of our existing debt obligations

does not mature until fiscal 2018 and we currently do not have other obligations requiring meaningful cash outflow

until fiscal 2015 when the Company’s $20 million in convertible debentures comes due.

The Company’s cash flows from operating, investing and financing activities are summarized in the following table:


Cash Flow Data August 31,

2013

August 31,

2012

August 31,

2013

August 31,

2012

(in $s)

Cash provided by operating activities 14,825,289 10,427,052 60,251,276 41,075,084

Cash used in investing activities (4,996,263) (1,911,194) (15,748,263) (4,428,916)

Cash provided by (used in) financing activities (12,056,207) 29,830 (51,459,178) (11,626,858)

Net Change in cash and cash equivalents (2,227,181) 8,545,688 (6,956,165) 25,019,310

Cash and cash equivalents, beginning of period 46,305,765 42,489,061 51,034,749 26,015,439

Cash and cash equivalents, end of period 44,078,584 51,034,749 44,078,584 51,034,749


Free Cash Flow August 31,

2013

August 31,

2012

August 31,

2013

August 31,

2012

Cash provided by operating activities 14,825,289 10,427,052 60,251,276 41,075,084

Capital expenditures (5,121,338) (1,911,194) (10,618,616) (4,428,916)

Free Cash Flow 9,703,952 8,515,858 49,632,660 36,646,168



TSX: XSR

Operating Activities – Cash flow from operating activities primarily consists of net income adjusted for certain non-

cash items including amortization, deferred tax expense or recovery, stock-based compensation, foreign exchange

gains and losses and the effect of changes in non-cash working capital and accruals for cash interest payments.

Fourth Quarter: During the current quarter, cash generated from operating activities was $14.8

million, consisting of net income of $4.1 million adjusted for net non-cash expenses and losses of $5.8

million and a $4.9 million increase in working capital. The increase in working capital in the period is

primarily due to a $3.2 million increase in trade payables and other liabilities primarily due to timing of

payments, an increase in deferred revenue of $0.9 million due to higher customer prepayments during

the period along with a decrease in other current assets of $0.8 million during the period.

Full Year: Cash generated from operating activities was $60.3 million, consisting of net income of $12.2

million adjusted for net non-cash expenses and losses of $42.7 million and a $5.4 million increase in

working capital. The increase in working capital is primarily due to an increase in deferred revenue of

$3.4 million due to customer prepayments during the period, and an increase in liabilities of $4.4 million,

which was partly offset by an increase in accounts receivable of $1.2 million and an increase in prepaid

expenses of $1.2 million.

Investing Activities – Cash flow from investing activities consists primarily of capital expenditures, purchases of

intangible assets relating to computer software, payment of activation fees and purchase of short term investments.

Fourth Quarter: During the current quarter, cash used in investing activities was $5.0 million consisted

$2.9 million for the purchase of property, equipment and intangible assets and $2.2 million for the

prepayment of property and equipment.

Full Year: Cash used in investing activities was $15.7 million related to the purchase of property and

equipment, intangible assets and short term investments. During the year, the Company invested $5.3

million in short term investments, $7.6 million of intangible assets, $2.2 million for the prepaying of

property plant and equipment and $0.8 million for purchase of property plant and equipment.

Financing Activities

Fourth Quarter: During the current quarter, cash used in financing activities was $12.1 million which

consisted of the payment of dividends of $13.0 million, partly offset by cash proceeds of $0.9 million

from the exercise of stock options.

Full Year: Cash used in financing activities was $51.5 million which consisted of dividend payments

totaling $53.7 million, partly offset by cash proceeds of $2.2 million from the exercise of stock options.

Dividend Policy

The Company’s goal is to maximize shareholder value by generating consistent Free Cash Flow by growing our

revenues primarily through subscriptions as well as maintaining effective cost controls, managing subscriber

acquisition costs and creating a long-term loyal customer base by offering high quality customer service.

The Company regularly assesses ways to deploy capital in the most effective manner and during the first quarter of

2013, the Company instituted a dividend policy. The amount and timing of any dividend is within the discretion of

the Board of Directors. The timing and the amount of dividend payments will depend on the Company’s financial

condition, compliance with the terms and conditions of the Company’s credit and contractual arrangements on an

on-going basis, general business conditions, and other factors that the Board of Directors considers to be relevant.

Subject to such conditions, the Company may pay a quarterly dividend on all of the issued and outstanding Class A

Shares and Class C Shares in the amount of $0.1050 per share, and on all of the issued and outstanding Class B



TSX: XSR

Shares in the amount of $0.0350 per share. No Class C Shares were issued and outstanding at any time, during the

fiscal year.

On July 10, 2013, the Company’s Board of Directors increased the quarterly dividend amount by approximately 27%

to $0.1050 per Class A Share or Class C Share and $0.0350 per Class B Share. This decision was made after a

thorough assessment of Management’s long term financial forecast. The amount of the dividend is subject to a

quarterly review with consideration given to Management’s updated financial forecast as well as the Board of

Directors’ view regarding the appropriate allocation of capital.

During the fiscal year 2013, the company declared and paid the following dividends to shareholders of each of its

Class A Shares and Class B Shares (Class B Shares are entitled to 1/3 the dividend amount per share relative to Class

A Shares and Class C Shares).

As at

Type Declaration Date Record Date Payment Date Dividend per Class A Share

Special November 16, 2012 November 28, 2012 January 2, 2013 $0.0825

Quarterly November 16, 2012 November 28, 2012 January 2, 2013 $0.0825

Quarterly January 14, 2013 January 25, 2013 March 1, 2013 $0.0825

Quarterly April 10, 2013 April 22, 2013 May 17, 2013 $0.0825

Quarterly July 10, 2013 July 22, 2013 August 22, 2013 $0.1050

Total $0.4350

Total Debt:

As at

Long term debt August 31, 2013 August 31, 2012

(in $s)

Senior Notes 124,199,370 125,961,507

Convertible Notes 19,507,824 19,031,312

Total long term debt 143,707,194 144,992,819

Senior notes - The Senior notes mature in 2018, and as at August 31, 2013, the principal amount outstanding is

$130.8 million. The Senior notes bear interest at 9.75% payable semi-annually on June 21 and December 21. The

Senior notes are redeemable at the option of the Company on or after June 21, 2014. Any redemption prior to

June 21, 2017 will include an applicable premium of up to 7.3% plus compensatory interest payments to June 21,

2014 for any redemption prior to June 21, 2014. The premium reduces with the passage of time.

Contained in the Company’s senior notes indenture are certain covenants including conditions to be met prior to

the distribution of dividends. The Company is currently in compliance with all conditions and expects to be compliant

before and after the payment of dividends.

Convertible notes - The Company has $20 million aggregate principal amount of 8.0% unsecured subordinated

Convertible notes, due September 12, 2014 outstanding. The interest is payable semi-annually on June 30 and

December 31 and the Convertible note holders may elect to receive interest payments in the form of Class A Shares

of the Company based on the market price of the Class A Shares at the time of the payment.



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The Convertible notes are convertible at the option of the debenture holders at any time at a conversion price of

$5.92 per share. The Convertible notes are redeemable at the option of the Company at any time provided certain

thresholds are met.

Contractual Commitments

The Company has entered into a number of leases and other contractual commitments. The following table

summarizes its outstanding contractual commitments as of August 31, 2013 (in $000’s):

As at August 31, 2013

Contracts and Commitments (1) – Consolidated Total Less than

1 Yr. 1-3 Yrs. 4-5 Yrs.

More than

5 Yrs.

(in $ 000's)

Operating leases 10,550 2,090 3,377 2,466 2,616

NHL agreement 19,700 12,200 7,500 - -

Principal on 9.75% senior notes 130,771 - - 130,771 -

Interest on 9.75% senior notes 63,751 12,750 25,500 25,500 -

Principal on 8.0% convertible notes 20,000 - 20,000 - -

Interest on 8.0% convertible notes 1,924 1,600 324 - -

Service provider agreements

CBC 19,300 2,500 4,200 4,200 8,400

Sirius XM 1,584 404 809 371 -

Others 15,421 10,587 3,883 952 -

Advertising and marketing (2) 9,892 5,583 2,464 1,721 124

Total 292,893 47,714 68,057 165,982 11,140

Notes:

1. The Company must pay certain royalties for the use of music under Canadian copyright law outlined in tariffs certified

by the Copyright Board of Canada. The Company also pays license royalties to Sirius XM and fees to certain OEMs.

These arrangements have not been included in the table above because the specific amounts payable are contingent on

the Company’s revenue and/or subscriber levels, which themselves are subject to various economic assumptions, future

results and cannot be estimated.

2. Includes amounts under agreement with: Corus Entertainment Inc. (Corus) for the purchase of $0.4 million of advertising

from Corus over the next year; and with GMCL for $3.0 million of advertising and marketing until November 2018.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Arrangements, Relationships and Transactions with Related Parties



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Related parties of the Company include shareholders with a significant interest in the Company. Significant

shareholders of the Company include Sirius XM, The Canadian Broadcasting Corporation (“CBC”), Slaight

Communications Inc. (“Slaight”), and Obelysk Media Inc. (“Obelysk” formerly known as JBM Properties Inc. and

CSRI Inc.), a company controlled by John I. Bitove. Related parties also include companies controlled or influenced

by these shareholders and members of the Board of Directors, management and immediate family members of

management or shareholders with significant influence.

The balances outstanding with the related parties are set out in Note 9 of the Company’s annual consolidated

financial statements.

Transactions with CBC – The Company has a 17-year agreement with the CBC effective until August 24,

2022. This agreement is a non-exclusive, non-transferable license agreement whereby the Company has

distribution rights to transmit channels currently owned by the CBC within Canada.

The incurred costs during the year ended August 31, 2013 primarily related to the CBC license agreement and

advertising was $3,165,443 (2012- $4,197,150).

As at August 31, 2013, amounts due to CBC related to the transactions described above also include a non-

interest bearing promissory note of $402,777 (2012 - $402,777).

Transactions with Slaight – As at August 31, 2013, amounts due to Slaight include non-interest bearing

promissory notes of $402,777 (2012 - $402,777).

Transactions with Sirius XM – In 2005, Sirius Canada, as one of the predecessors of the Company, entered

into a license and service agreement with Sirius XM whereby the Company acquired the right to distribute the

Sirius network channels owned or licensed by Sirius XM within Canada. In return, the Company is obligated to

pay Sirius XM a percentage of its gross revenue, to a maximum of 15%, and reimbursement of other charges

paid on Sirius’ behalf.

In 2011, the Company acquired a license and technical service agreement with Sirius XM whereby the Company

acquired the right to distribute the XM network channels owned or licensed by Sirius XM. In return, the

Company is obligated to pay Sirius XM a percentage of subscriber revenue (15%), activation charges, fees under

the Technical Service Agreement and reimbursement of other charges paid on SXM’s behalf.

The costs incurred during the year ended August 31, 2013 related to the Sirius XM agreements was $41,773,994

(2012 - $39,197,060).

In addition to the amounts expensed above for the year ended August 31, 2013, intangible assets of $5,537,697

(2012 - $2,672,703) relating to XM activation fees and computer software, net of amortization are presented

within the balance sheet. During the year ended August 31, 2013, cash payments related to these intangible

assets made to Sirius XM totaled $3,953,974 (2012 - 1,700,212).

As at August 31, 2013, amounts due to Sirius XM include a non-interest bearing promissory note of $402,778

(2012 - $402,778).

Transactions with John I. Bitove, Obelysk and its affiliates – In 2011, the Company entered into a

reimbursement agreement with Obelysk for the purchase of third party advertising services. The Company has

agreed to reimburse Obelysk a total amount of $208,000 over the next three years for these advertising services.



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The Company incurred costs from Obelysk and other entities affiliated with Obelysk and John I. Bitove, including

costs associated with the reimbursement agreement. These costs were related to advertising, business events,

use of a broadcast centre, and operating costs. During the year end ended August 31, 2013, the costs totaled

$97,985 (2012 - $143,252). As at August 31, 2013, the balance due was $21,000 (2012 - $15,478).

In 2012 the Company incurred costs on behalf of an entity affiliated with Obelysk and John I. Bitove for costs

related to management of a call centre operation. During the year ended August 31, 2012, the total cost

incurred was $36,534 which was reimbursed by Mobilicity.

Critical Accounting Estimates and Judgments

In our 2013 Annual Audited Consolidated Financial Statements and Notes thereto, as well as in our 2013 Annual

MD&A, we have identified the accounting policies and estimates that are critical to the understanding of our business

operations and our results of operations.

The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by

definition, seldom equal the actual results. The estimates and assumptions that are critical to the determination of

carrying values of assets and liabilities are addressed below.

Impairment of non-financial assets

The impairment test on non-financial assets, which are comprised primarily of property and equipment, intangible

assets and goodwill, is carried out by comparing the carrying value of a CGU that includes these assets to the

recoverable amount of a CGU. The recoverable amount of a CGU is the higher of fair value less costs to sell, and

its value in use.

Goodwill and indefinite lived intangibles are tested at least annually for impairment. For the purpose of impairment

testing, goodwill is tested for impairment using the fair value less cost to sell model at the operating segment level.

The business is managed as one operating segment based on how financial information is produced internally for the

purposes of making operating decisions.

In assessing the Company’s broadcast license for impairment, the Company compares the aggregate recoverable

amounts of the assets and related liabilities included in a CGU to its respective carrying amount. For the purpose of

the impairment test carried out during the year ended August 31, 2013 the CGU was equivalent to the Sirius XM

business. During the year, the Sirius and XM licenses were combined into one license which resulted in a change in

CGUs from the prior year. In the prior year, the CGUs, for purpose of testing the broadcast licenses, were at the

XM and Sirius levels.

In assessing both the goodwill and broadcast license for impairment, the Company compares the aggregate

recoverable amount consisting of the sum of its quoted equity market capitalization and the fair value of its debt to

the carrying value of its net assets excluding long term debt. An impairment charge is recognized to the extent that

the carrying value exceeds the recoverable amount. In the prior year, the recoverable amount of the XM and Sirius

CGUs was determined using a discounted cash flow model.

No impairment charges have arisen as a result of the reviews performed during the year ended August 31, 2013 or

August 31, 2012. Reasonably possible changes in key assumptions would not cause the recoverable amount of

goodwill or the broadcast license to fall below the carrying value.



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Stock-based Compensation

The estimated fair value of stock awards granted to employees as of the date of grant is recognized as compensation

expense over the period in which the related employee services are rendered. For stock options granted to non-

employees, the estimated fair value of stock awards granted to non-employees is recognized as expense over the

period in which the related goods or services are rendered. The determination of the fair value of stock awards

includes the use of option pricing models and the use of the following estimates: expected volatility, expected option

life and expected interest rates.

In addition to granting stock options, the Company also grants restricted stock units (“RSUs”) and performance

stock units (“PSUs”). For expenses associated with RSUs and PSUs, please see the section entitled “Stock-Based

Compensation” in the “Discussion of Financial and Operating Results” in this MD&A.

Revenue Recognition

Revenue from subscribers consists of our monthly subscription fee (including the music royalty fee), which is

recognized as the service is provided, and a non-refundable activation fee that is recognized on a pro-rata basis over

an estimated term of the subscriber relationship (currently 20 months), which is based upon management’s analysis

of historical churn rates. We continually review this estimate. If the actual term of our subscriber relationships is

significantly greater than our current estimate of 20 months, the period over which we recognize the non-refundable

activation fee will be extended to reflect the actual term of our subscriber relationships. Fees received in advance

are recognized as deferred revenue. Sales incentives, consisting of discounts and rebates to subscribers, offset earned

revenue.

Income taxes

The recognition of deferred tax assets is based on whether it is more likely than not that sufficient and suitable

taxable income will be available in the future against which the reversal of temporary differences can be deducted.

The Company’s assessment is based upon existing tax laws and estimates of future taxable income. If the assessment

of the company’s taxable income in the future increases or decreases, or its ability to utilize the underlying future

tax deductions changes, the Company would be required to recognize more or less of the tax deductions as deferred

tax assets, which would decrease or increase the income tax expense in the period in which this is determined.

As at August 31, 2013, the Company has recognized deferred tax assets of $54,483,616 (2012 - $59,858,394) on the

basis that realization of the tax benefit is probable. However, the Company has not recognized deferred tax assets

of $43,273,000 in respect of losses amounting to $163,294,000, on the basis that the Company does not have

sufficient evidence that it is probable they will be utilized.

For the year ended August 31, 2013 and August 31, 2012, deferred taxes were reported using a combined income

tax rate of 26.5%, based on the 2012 Ontario budget which froze the general income tax rate at 11.5%, until the

province returns to a balanced budget, and the expected timing of reversals.

At August 31, 2013, taxation years dating back to the period ended August 31, 2006 are open for review at the

discretion of various taxation authorities and are subject to audit uncertainties.

During October 2013, upon the completion of its audit of the 2006 taxation year, CRA is proposing to disallow the

deduction of non-capital losses and eligible capital expenditures related to deductions taken on payments made to

XM and certain OEMs. Should the Company not be successful in sustaining its filing position, the impact would be a

reduction in deferred tax assets of approximately $18,000,000 (representing tax losses and tax basis of $68,000,000).



TSX: XSR

In addition, unrecognized tax losses of $43,273,000 (representing tax losses of $163,294,000) would no longer be

available to be carried forward against future taxable income.

The Company obtained legal tax advice in filing its original tax position and continues to be confident of its filings.

The position continues to be supported by the Company’s tax legal advisors. The Company expects that the filing

position will be sustained upon full examination of the facts by CRA, or if required by the federal courts. The

Company will continue to vigorously defend its position and it believes it will be successful.

From time to time the Company may be engaged in legal proceedings or claims that have arisen in the ordinary

course of business. The outcome of all of the proceedings or claims against the Company, are subject to future

resolution, including the uncertainties of litigation. Based on information currently known to the Company,

management believes that the probable ultimate resolution of any such proceedings and claims will not have a

material adverse effect on the financial condition of the Company taken as a whole.

The CRA is proposing to reassess filing positions taken in a prior year and is proposing to assess material amounts

for withholding taxes and interest and penalties related to certain transactions which would be payable should the

Company’s filing position not be sustained. The Company has not recognized a provision for any amounts related

to the proposed amounts as it believes CRA’s proposal has no merit. The Company will continue to vigorously

defend its position and it believes it will be successful in defending its position.

The calculation of current and deferred taxes involves significant estimation and judgment in respect of certain items

whose tax treatment cannot be finally determined until resolution is reached with the Canada Revenue Agency

(“CRA”). The final resolution of the audit of the 2006 taxation year may result in adjustments to the recognized and

unrecognized deferred tax assets. Note 7 and note 19 of the Company’s annual consolidated financial statements

provide additional information regarding income taxes and any related contingencies.

Disclosure Controls and Procedures

Management has designed disclosure controls and procedures to provide reasonable assurance that material

information relating to the Company is made known to it by others. As at August 31, 2013, the Chief Executive

Officer and the Chief Financial Officer, with participation of the Company’s management, have concluded that the

design and operation of the Company’s disclosure controls and procedures were effective to provide that

information required to be disclosed by the Company in reports that it files or submits under the applicable Canadian

securities laws is (i) recorded, processed, summarized and reported within the time periods specified in applicable

rules and forms and (ii) accumulated and communicated to management, including our Chief Executive Officer and

Chief Financial Officer, to allow timely decisions regarding required disclosure. Due to the inherent limitations in

control systems and procedures, their evaluation can provide only reasonable, not absolute, assurance that such

disclosure controls and procedures are operating effectively. A control system, no matter how well conceived or

operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Changes in Internal Control over Financial Reporting

During the three months ended August 31, 2013, there were no changes in the Company’s internal controls over

financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal

control over financial reporting.



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International Financial Reporting Standards (“IFRS”)

Accounting standards issued but not yet effective

Certain pronouncements were issued by the IASB or IFRIC that are effective for accounting periods beginning on

or after January 1, 2013 unless otherwise noted. The Company has assessed the impact of these standards and

amendments listed below, and determined there are no material impacts to the Company’s financial statements.

IFRS 10, Consolidated Financial Statements replaces the guidance on “consolidation” in IAS 27 – Consolidated and

Separate Financial Statements and Standing Interpretations Committee (“SIC”) 12 – Consolidation – Special Purpose

Entities. The new standard contains a single consolidation model that identifies control as the basis for consolidation

for all types of entities, including special purpose entities. The new standard also sets out requirements for situations

when control is difficult to assess, including circumstances in which voting rights are not the dominant factor in

determining control.

IFRS 12, Disclosure of Interests in Other Entities establishes disclosure requirements for interests in other entities,

such as subsidiaries, joint arrangements, associates, and unconsolidated structured entities. The standard carries

forward existing disclosures and also introduces significant additional disclosure that address the nature of, and risks

associated with, an entity’s interests in other entities.

IAS 1, Presentation of Financial Statements was amended to require entities to group items presented in “other

comprehensive income” into two categories. Items will be grouped together based on whether those items will or

will not be classified to profit or loss in the future.

The following revised standards and amendments are effective for annual periods beginning on or after January 1,

2013 with earlier application permitted, unless otherwise noted. The Company has not yet assessed the impact of

these standards and amendments or determined whether it will early adopt them.

IFRS 9, Financial Instruments (Classification and Measurement) replaces the guidance on “classification and

measurement” of financial instruments in IAS 39 – Financial Instruments – Recognition and Measurement. The new

standard requires a consistent approach to the classification of financial assets and replaces the numerous categories

of financial assets in IAS 39 with two categories, measured at either amortized cost or at fair value. This is effective

for accounting periods beginning on or after January 1, 2015.

IFRS 13, Fair Value Measurement defines “fair value” and sets out in a single standard a framework for measuring fair

value and requires disclosures about fair value measurements. The new standard reduces complexity and improves

consistency by clarifying the definition of fair value and requiring its application to all fair value measurements.

IAS 32, Financial Instruments (Presentation) was amended to clarify existing application issues related to the offsetting

requirements. Specifically, the amendments clarify the meaning of “currently has a legally enforceable right of set-

off” and “simultaneously realization and settlement”.

IFRIC 21, Levies was issued to clarify that an entity recognizes a liability for a levy when the activity that triggers

payment, as identified by the relevant legislation, occurs. It also clarifies that a levy liability is accrued progressively

only if the activity that triggers payment occurs over a period of time, in accordance with the relevant legislation.

For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be

recognized before the specified minimum threshold is reached. This is effective for annual periods beginning on or

after January 1, 2014.



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Risks and Uncertainties

This section outlines some of the risks that could affect our business, financial condition and results of operations and

should be considered in connection with any forward looking statements in this document. For a detailed description

of risk factors associated with the Company, readers are advised to review the “Risk Factors” section of the Company’s

AIF dated November 14, 2013.

We rely on our exclusive relationship with Sirius XM for the provision of our Satellite Radio Services and

other offerings.

The Company has various agreements with Sirius XM to provide satellite digital audio radio services, or SDARS, in

Canada. Its success as a business depends on Sirius XM’s cooperation and its programming content, satellite network

and underlying technology, as well as Sirius XM’s operational and marketing efficacy, competitiveness, finances,

regulatory status and overall success in the U.S. Because of the Company’s dependency on Sirius XM, should Sirius

XM’s business suffer as a result of increased competition, increased costs of programming, satellite malfunctions,

regulatory changes, adverse effects of litigation or other factors, its business may suffer as well. Furthermore, a breach

of its agreement with Sirius XM or a failure by Sirius XM to perform its part of the agreement would have detrimental

financial consequences to the Company’s business. Although not material for several years, we may not be able to

renew or extend our agreements with Sirius XM on favorable terms.

We face substantial competition and that competition is likely to increase over time.

In seeking market acceptance, we encounter competition for both listeners and advertising revenues from many

sources including traditional and digital AM/FM radio, Internet-based audio providers; direct broadcast satellite

television audio service, and digital cable systems that carry audio service. Our ability to retain and attract subscribers

depends on our success in creating and providing popular or unique music, entertainment, news and sports

programming. Our subscribers can obtain certain similar content for free through terrestrial radio stations or Internet

radio services. Audio content delivered via the Internet, including through mobile devices, is increasingly competitive

with our services. A number of automakers and aftermarket manufacturers have introduced, or will shortly introduce,

factory-installed radios capable of accessing Internet delivered audio programming and music services

Unlike satellite radio, traditional AM/FM offers free broadcast reception supported by commercial advertising, rather

than by a subscription fee. Many radio stations offer information programming of a local nature, such as traffic and

weather reports, which we are not permitted to offer under our CRTC broadcasting license. To the extent that

consumers place a high value on these features of traditional AM/FM radio, we are at a competitive disadvantage to

the dominant providers of such audio entertainment services.

Internet radio and music services often have no geographic limitations and can provide listeners with radio

programming from across the country and around the world. Major media companies and online-only providers

make high fidelity digital streams available over the Internet for free, or in some cases, for less than the cost of

satellite radio subscriptions. We expect that improvements in higher bandwidth, faster mobile Internet connections,

and evolving features and programming selection will make Internet radio a more significant competitor in the future.

Mobile devices like smartphones and tablets, some of which have the capacity of interfacing with vehicles, have

become popular. These smartphones and other devices can typically play recorded or cached content and access

Internet radio via dedicated applications or browsers. The Apple iPhone, iPad, and iPod Touch, mobile devices using

Google’s Android platform, Microsoft’s Windows Phone platform, and Blackberry Ltd.’s Blackberry mobile devices

allow their users to download and purchase music through dedicated applications and built-in web browsers. These

applications are often free to the user and offer music and talk content as long as the user is subscribed to a



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sufficiently large mobile data plan. Leading audio smartphone radio applications available in Canada include Slacker,

Rdio, Stitcher, and TuneIn Radio. Certain of these applications also include advanced functionality, such as

personalization and song skipping, and allow the user to access large libraries of content and podcasts on demand.

Although presently available Internet radio and music services have drawbacks such as hardware requirements and

download bandwidth and network availability constraints, which we believe make satellite radio a more attractive

option to consumers, Internet-based radio and services are becoming increasingly competitive as quality improves

and costs are reduced. On October 1, 2012, the Company introduced a new Internet offering, SiriusXM Internet

Radio. SiriusXM Internet Radio offers subscribers exclusive Internet channels, and on-demand programming via

SiriusXM Internet Radio.

Third generation (“3G”) and Long Term Evolution (LTE) mobile networks have enabled a steady increase in the

audio quality and reliability of mobile audio streaming, and this is expected to further increase as LTE networks

become the standard. We expect that improvements from higher bandwidths, wider programming selection and

advancements in functionality are likely to continue making smartphone applications an increasingly significant

competitor.

A number of automakers have deployed or are planning to deploy integrated multimedia systems in dash boards,

such as Ford’s SYNC, Toyota’s Entune, and BMW/Mini’s Connected systems. These systems can combine control

of audio entertainment from a variety of sources, including traditional radio broadcasts, satellite radio, smartphone

applications and stored audio, with navigation and other advanced applications. Live Internet radio and other data is

typically pulled into the car via a Bluetooth link to an Internet-enabled smartphone, and the entire system may be

controlled by touchscreen or voice recognition. Other systems are equipped with their own dedicated mobile

Internet connection. These advanced systems enhance the attractiveness of our Internet-based competition by

making such applications more prominent, easier to access and safer to use in the car.

Rapid technological and industry changes could adversely impact our Satellite Radio Services.

The audio entertainment industry is characterized by rapid technological change, frequent new product innovations,

changes in customer requirements and expectations, and evolving standards. Competing technologies and services

may emerge quickly. If we are unable to keep pace with these changes, our business may be detrimentally affected.

Products using new technologies, or emerging industry standards, could make our Satellite Radio Services less

competitive in the marketplace.

Our business depends in large part upon automakers, whose sales are dependent on general

macroeconomic conditions.

The Company has agreements with majority of the Canadian auto manufacturers for factory installation of satellite

radios in new cars in Canada. We spend a significant amount of money on marketing expenditures towards auto

manufacturers’ initiatives, and purchasers of these new vehicles represent a substantial proportion of our subscriber

base. The sale and lease of these vehicles with satellite radios is an important source of subscribers for our Satellite

Radio Services.

Automotive sales and production are dependent on many factors, including the availability of consumer credit,

general economic conditions, consumer confidence, and fuel costs. To the extent vehicle sales by automakers decline

or the penetration of factory-installed satellite radios in those vehicles is reduced, subscriber growth for the

Company may be adversely impacted.

General economic conditions may adversely affect the Company’s financial results, financial position and

business



TSX: XSR

The Company’s business plans contain assumptions predicated on an economy that is expected to improve as it pertains

to vehicle sales. However there are no assurances that our assumptions will materialize. The Company’s ability to

continue to generate solid revenue growth and year-over-year improvement in financial results may be negatively

affected should Canadian demand for automobiles equipped with the satellite receiver decline in a significant manner.

Higher than expected costs of attracting new subscribers, higher subscriber turnover could each adversely

affect our financial performance and operating results.

We are still spending substantial funds on advertising, marketing and subsidizing costs of radio devices in transactions

with car and radio manufacturers, retailers and other parties to attract new subscribers. Our ability to maintain positive

free cash flow and remain profitable depends on our ability to continue to maintain or lower these acquisition costs. If

the costs of attracting new subscribers and retaining subscribers are greater than expected, our financial performance

and results of operations could be adversely affected.

We are experiencing, and expect to continue to experience, subscriber turnover, or churn. We cannot predict the

amount of churn we will experience over the longer term. If we are unable to retain our current subscribers, or the

cost of retaining subscribers is higher than we expect, our financial performance and operating results could be

adversely affected.

We must maintain and pay copyright license fees for music rights which may increase and become more costly

than expected.

We require music royalty arrangements with the following Canadian copyright collectives in order to operate our

Satellite Radio Services and online offerings: the Society of Composers, Authors and Music Publishers of

Canada/Société canadienne des auteurs, compositeurs et éditeurs de musique (SOCAN), Re:Sound, and CSI Inc.,

(CSI), the joint venture of The Canadian Musical Reproduction Rights Agency Ltd. (CMRRA) and The Society for the

Reproduction Rights of Authors, Composers and Publishers in Canada Inc./Société du droit de reproduction des

auteurs, compositeurs, et éditeurs au Canada (SODRAC) Inc. SOCAN administers the public performance right

with respect to musical works. Re:Sound administers the right to equitable remuneration for the public performance

and communication to the public by telecommunication of performers’ performances and sound recordings. CSI

administers the reproduction right with respect to musical works.

The Company’s online offerings are subject to SOCAN Tariff 22.D, which was certified for the years 1996-2006. The

Company continues to pay copyright royalties for its online use of musical works at the rates set out in Tariff 22.D.

SOCAN has since submitted successor tariffs for the subsequent years. SOCAN’s proposed rates are higher than the

certified Tariff 22.D rate. As the Company’s online offerings evolve or if the Copyright Board chooses to modify the

structure of SOCAN’s online tariffs, our online offerings may become subject to a different SOCAN tariff.

Re:Sound does not yet have a certified tariff and royalty rate for the public performance and communication to the

public of sound recordings and performers’ performances over the Internet, but has submitted proposed rates for

the years 2009, 2010, 2011, 2012, and 2013. Re:Sound’s proposed rates are very high and it is not clear whether

Re:Sound’s proposed tariffs capture our online activities. During the year the Copyright Board of Canada held a

hearing to consider Re:Sound’s proposed Internet tariffs for the years 2009 to 2012. Once certified, the Re:Sound

online tariff will be retroactive to 2009; and may apply to the Company’s online services.

On June 29, 2012, Parliament passed the Copyright Modernization Act (Bill C-11), an Act to amend the Copyright

Act (Canada). As of November 14, 2013, certain provisions of the Copyright Modernization Act relating to

protections afforded to sound recordings have yet to come into force. Under current Canadian copyright law,

American makers of sound recordings are not eligible for equitable remuneration for the public performance or

communication to the public of their sound recordings in Canada. As a result, the Company is not required to pay



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Re:Sound royalties for the use of United States sound recordings on the Satellite Radio Services or our online

offerings. Certain portions of the Copyright Modernization Act are likely to extend the right of equitable

remuneration to United States sound recordings. These provisions are set to come into force once the WIPO

Performances and Phonographs Treaty comes into force in Canada. It is expected that this will occur during calendar

2014, and that as a result of United States sound recordings becoming eligible for equitable remuneration, there will

be an increase in royalties the Company is required to pay to Re:Sound that may have a material impact on the

Company’s financial results. The Company believes that it has adequate initiatives planned to offset the potential

impact of such an increase.

The transition of some automaker partners from the Sirius Radio Service to the XM Radio Service may increase

our royalties payable to Sirius XM, which may impact our financial performance.

The Sirius Radio Service and XM Radio Service infrastructures are distinct platforms, operating on different

frequencies and servicing satellite radios specific to each network. As mentioned in “Recent Developments - Unified

Branding and Operations”, in the AIF, the Company is increasingly delivering services under the SiriusXM brand.

SiriusXM branded satellite radios operate on the XM Radio Service infrastructure. As a result, automakers that

previously installed Sirius Radio Service radios in their vehicles are migrating to XM Radio Service radios. Royalties

to Sirius XM for radio installed in these transitioning automakers are thus increasingly payable under the XM Licence

Agreement where previously they had been payable under the Sirius Licence Agreement. As the royalty rate under

the XM Licence Agreement is higher than that under the Sirius Licence Agreement, this transition may increase the

Company’s overall costs in providing the Satellite Radio Services, potentially impacting our financial performance.

Foreign currency risk

The Company is exposed to fluctuations of the Canadian dollar in relation to the US dollar due to its current liabilities

in respect of the NHL and other payments to Sirius XM, which are denominated in US dollars. Management has not

engaged in mitigating this risk through formal hedging strategies. A one percent change in the exchange rate represents

less than $0.3 million impact to the cash flows of the Company.

In addition to above mentioned risks, the Company also faces risks of disruption to its network infrastructure of

terrestrial repeaters due to natural disasters; risks of adverse impact of litigation, claims, copyright and other

infringements, risks related to change in regulation and consumer protection laws, and piracy of its content.

Outstanding Share Data and Other Information

The Company is authorized to issue an unlimited number of Class A Shares, an unlimited number of Class B Voting

Shares and an unlimited number of Class C Non-Voting shares. As at November 14, 2013, there were 75,853,212 fully

paid and non-assessable Class A Shares and 144,275,309 fully paid and non-assessable Class B Voting Shares outstanding.

There are currently no Class C Non-Voting shares outstanding. A total of 2,438,100 stock options were outstanding

under the Company’s stock option plan. Additional information concerning the Company, including our AIF for the

fiscal year ended August 31, 2013, is available on SEDAR at www.sedar.com.

Assuming conversion of the Class B Shares, which are convertible into Class A Shares on a 3 to 1 basis, the total

number of Class A Shares outstanding would be 123,944,981.

http://www.sedar.com/



TSX: XSR

Definitions of Industry Terminology

In addition to our results reported in accordance with IFRS, we use certain non-GAAP financial indicators, including

non-GAAP information and operating measures for internal planning purposes and as a basis for investors and

analysts to evaluate and compare the periodic operating performances and value similar companies in our industry,

although our metrics may not be comparable to similarly titled metrics of other companies. Subsequent to the closing

of the merger, the Company conducted a metrics review and realignment exercise. Therefore, some metrics may

not be comparable to metrics disclosed publicly by the Company prior to the consummation of the merger. Provided

below are the definitions of metrics.

(a) Average Monthly Subscription Revenue Per Subscriber (ARPU): derived from the total of earned

subscription revenue and the music royalty fee and activation fees, divided by the monthly weighted average

number of Self-Paying subscribers and a portion of the Paid-Promotional Subscribers where consumers have

already started to consume their promotional service. ARPU is a measure of operational performance and

not a measure of financial performance under IFRS. We believe ARPU is a useful measure of our operating

performance and is a significant basis used by management to measure the operating performance of our

business. This non-GAAP measure, which uses certain revenue line items from our Consolidated Statement

of Operations and Comprehensive Income, should be used in addition to, but not as a substitute for, the

analysis provided in the Consolidated Statement of Operations and Comprehensive Income. ARPU may

fluctuate based on promotions, changes in our subscription rates, as well as the adoption rate of annual and

multi-year prepayment plans, multi-radio discount plans (such as the family plan), commercial plans and

premium services.

(b) Cost Per Gross Addition (CPGA): includes the amounts in SAC, as well as marketing, which includes

advertising, media and other discretionary marketing expenses divided by the number of total gross

additions excluding Non-Paid Promotional subscribers. CPGA costs do not include the costs of marketing

staff. CPGA is a measure of operational performance and not a measure of financial performance under

IFRS. We believe CPGA is a useful measure of our operating performance and is a significant basis used by

management to measure the operating performance of our business. This non-GAAP measure, which uses

certain expense line items from our Consolidated Statement of Operations and Comprehensive Income,

should be used in addition to, but not as a substitute for, the analysis provided in our financial statements.

(c) Monthly customer care and billing costs per Self-Paying Subscriber: is calculated by dividing the total

customer care and billing costs by average Self-Paying subscribers for the period.

(d) OEM: refers to original equipment manufacturer. OEM, as it relates to the Company’s satellite radio

business, includes automotive manufacturers with which the Company has a contractual agreement in place

to factory install a satellite radio in the particular manufacturer’s vehicles.

(e) Self-pay churn: is defined as Self-Pay Subscriber deactivations for the period divided by the average number

of Self-Pay Subscribers for the period divided by the number of months in the period.

(f) Subscribers:

a. Self-Paying Subscribers: subscribers who are receiving and have paid or agreed to pay for

our satellite radio service by credit card, prepaid card or invoice.

b. Paid-Promotional Subscribers: Subscribers currently in a trial period and vehicles factory-

activated with one of the SXM services, whereby automakers have agreed to pay for all or a

portion of the trial period service.

c. Non-Paid Promotional Subscribers: subscribers currently in a trial period and vehicles

factory-activated with one of the SXM services, whereby the Company has agreed to



TSX: XSR

compensate certain automakers to install satellite radios and the automakers have agreed to

promote the trial period service to the consumer. Automakers are not paying for any portion

of the trial period service.

(g) Subscriber Acquisition Costs (SAC): includes Subsidies costs and net costs related to equipment sold

directly to the consumer divided by total gross additions excluding the Non-Paid Promotional Subscribers

for the period. SAC is a measure of operational performance and not a measure of financial performance

under IFRS. Management believes SAC is a useful measure of the operating performance of the business.

This non-GAAP measure, which uses certain expense line items from our Consolidated Statement of

Operations and Comprehensive Income, should be used in addition to, but not as a substitute for, the

analysis provided in the Consolidated Statement of Operations and Comprehensive Income. In our financial

statements, most of our Subscriber Acquisition Costs are captured in the marketing section.

(h) Subscription Revenue: consists primarily of monthly subscription fees (including Music Royalty Fee) for

our satellite radio service charged to consumers, commercial establishments and businesses that purchase

or lease vehicles for use in their business and is recognized as the service is provided. Promotions and

discounts are treated as a reduction to revenue over the term of the plan purchased by the Subscriber.

Subscription revenue growth is predominantly driven by growth in our subscriber base but is also affected

by fluctuations in the percentage of subscribers in our various discount plans, family plans as well as changes

in our subscription rates.

Non-GAAP Financial Measures

(a) EBITDA: is defined as earnings before interest income and expense, taxes, amortization, gain on revaluation

of derivatives and foreign exchange gains and losses.

(b) Adjusted EBITDA: is defined as earnings before integration, severance and merger costs, stock-based

compensation, interest income and expense, taxes, amortization, fair value adjustments arising due to

purchase price accounting, gain on revaluation of derivative and foreign exchange gains and losses.

(c) Free Cash Flow: is defined as cash provided by operating activities less capital expenditures for the purchase

of property and equipment and intangible assets.

(d) Cost of Revenue: includes revenue share and royalties, customer care and billing operations expenses, cost

of merchandise, broadcast and operations expenses and programming and content expenses.

(e) Net Debt: is defined as the total debt (Senior and Convertible Notes) less cash, cash equivalents and short

term investments.

(f) Net Debt to Adjusted EBITDA: is defined as the net debt at the end of the period divided by 12-months

of trailing adjusted EBITDA. This ratio is used by investors as a measure of company-specific risk.

Management’s Discussion and Analysis - Sirius XM Canada · Canada. The Satellite radio service is...

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