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Sirius XM (NASDAQ:SIRI) is a subscription-based business, and growing its subscriber base is an integral art of its success. Most active investors in Sirius XM have been seeing the monthly sales results in the auto sector, and are rightfully encouraged by what they are seeing. Car sales is the fuel of the Sirius XM subscriber engine. While auto sales are indeed good this year, we have to be cautious not to get too far ahead of ourselves.

The first bit of confusion I often see is the Seasonally Adjusted Annualized Rate (SAAR). This is a rate that adjusts the sales in any given month, takes into consideration the seasonality, and projects it to an annual number. By most accounts, the SAAR when November auto sales are announced will be about 15.1 or 15.2 million. That does not mean that we will see sales at that level for 2012. In fact, we will not. Through October, the 2012 new car sales stand at 11,984,119. November is expected to add another 1.1 million. This would bring the 2012 total to 13,084,119. Analyst expectations for this year vary, but are in the neighborhood of 14.5 million. That would mean that a December that brings about 1.4 million in sales would get the auto sector in line with expectations.

At the end of Q3, Sirius XM had net subscriber additions of 1,472,559. In order to get to the 2 million mark, the company needs to bring in about 530,000 subscribers to wrap up the year. On its face this seems an easy task, but there are some numbers to look at and digest. Below is the quarterly auto sales and subscriber data:

It is worth noting that last year, Sirius XM garnered 540,000 subscribers on new car sales of 3,255,946. However, the churn rate was slightly lower, and the take rate (subscribers converting from promotional subscriptions to self pay subscriptions) was slightly higher. It should also be noted that Q4 auto sales last year were in line with Q2, while this year, Q4 sales will likely be about 200,000 units shy of Q2 2012.

Essentially, the prospect of 2 million subscriber additions in 2012 is something that can happen. However, it is not the walk in the park that some may think. In theory, if churn, conversion, and retention efforts remain identical to Q3 (which had similar new car sales to what I am projecting for Q4), then the company would fall about 85,000 subscribers shy of 2 million. It should be noted that company guidance is for 1.8 million, so anything over that guidance is a win.

The bottom line here is that investors need to frame their expectations and ground them in reality. Over the past two days, I have received several emails with regard to Q4 subscribers, and I am seeing a common theme. Investors seem to be expecting about 600,000 to 650,000 net additions and a final subscriber number approaching 2.1 million.

The bottom line is that the company will have no trouble at all hitting guidance of 1.8 million. The company should be able to hit 1.9 million with relative ease. Hitting 2 million is more of a challenge, and hitting 2.1 million is essentially outside the realm of realistic thinking. Investors should consider 1.9 million a win, 2 million a playoff win, and 2.1 million a super bowl win.

Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Can Sirius XM Hit 2 Million Subscribers In 2012?