Sirius XM (SIRI) reported within its Q4 conference call on February 5th 2013 that self pay monthly churn had decreased quarter over quarter from 2.0% in Q3 2012, to 1.8% in Q4 2013. I'd like to zero in on this one portion of Sirius XM's report as I feel it bears a significant amount of attention due to what I feel are general misconceptions about the number.
Consider what I wrote last year on November 2nd in "Spurn That Concern Over Sirius XM's 2.0% Churn."
Investors should absolutely not be concerned with a reported increase in churn of 0.1% from quarter to quarter, or even year over year. A change of greater than 0.1% may be a valid reason to question "why?" but a change of 0.1% on a rounded figure is negligible.
The actual churn number that caused an increase to 2.0%? 1.954%, or 5/1000ths of a point from 1.949.
That's less than 1,000 subscribers churned away from being listed as 1.9%. Given the increase in auto sales seen this year, it falls within the realm of "completely and absolutely reasonable and acceptable." And as Seeking Alpha user hernje points out here, the churn rating for the most recent month, September, came in at 1.82%, or what would be reported as 1.8%. It's an average, folks, and it fluctuates.
So spurn that concern over Sirius XM's churn. There's little to worry about on a 0.1% variance.
Readers would do well to read that article in entirety to understand where I am coming from. The problem, as I see it, is that many make ominous statements or comments on simple month to month fluctuations in this churn number. Bears especially, such as users like "dukeufinstu" and "TimmyLurkBot" : will quickly latch onto this number if it moves up by 0.1%, standing up and screaming that subscribers are suddenly more dissatisfied and that subscriber dissatisfaction is increasing. Consider the comments after Q3 2012.
Will these bears now consider the decrease to 1.8% a big deal, and bullish? Probably not.
The fact of the matter is that this metric can and will fluctuate and what is most important here is the overall trend over a longer period of time. Let's look at this number in terms of something more familiar to investors: share price.
Two things should be immediately apparent here. One is that the share price has not moved in a straight line. Two is that the share price has trended up on average. If one whips out the magnifying glass and zooms into specific ranges, one could make a bearish argument about the stock. The problem here is that the stock really is not a bearish story. The share price has improved and the long term trend has remained intact.
The same can be said of Sirius XM's churn rating. While in Q3 of 2012 the number came in at 2.0%, and as we can see this number was 1.8% in Q4 :
Self-pay churn improves. Self-pay monthly churn was 1.8% in the fourth quarter of 2012, an improvement from 1.9% in the fourth quarter of 2011 and 2.0% in the third quarter of 2012.
It fluctuates, and what is important here is the long term story, not what happens in one or two months out of the year due to the many moving parts which contribute to the number. As a long term story Sirius XM has posted decreasing churn numbers, and as the title of this article says, in Q4 of 2012 it could be deduced that subscriber satisfaction increased over Q3.
I would caution investors to keep this number in long term perspective and understand moving forward that this number may fluctuate a few tenths of a percent on a quarter to quarter basis. This is normal, and as an investor I would not only be concerned about a multi quarter shift that showed a sustained increase in this churn number.
Churn of 1.8% is excellent, and shows, due to rounding, a 0.15% to 0.25% improvement over Q3's numbers. Can Sirius XM maintain this new churn figure? Could Sirius XM keep churn at 1.8% going forward through 2013? If it can, it would be a significant leading indicator of future performance of the company. Improvements in churn can and will go a very long way towards ensuring that subscriber increases are not increasingly offset by all deactivations (cancellations, users switching radios, users buying a new car, etc.). If churn can be managed, this will drive Sirius XM's net subscriber additions year over year, and thus result in increases across the board in other important metrics such as revenue and free cash flow as well as the often focused upon earnings per share.
It's my opinion that Q4 2012's reported 1.8% churn rating starts 2013 off with a bang, and assuages some of the concern that may have lingered just a bit from the 2.0% number reported in Q3. Spurning concern over Sirius XM's 2.0% churn appears to have been correct in the short term, and as a shareholder in Sirius XM I'll be thrilled if this improvement holds longer term through 2013.
Disclosure: I am long SIRI.
Additional disclosure: I am long SIRI $2 January Option Calls.