As new car sales for March are reported throughout the day, Sirius XM Radio (SIRI) investors might start to get excited as the totals for March, as well as the first quarter for 2013, should come in at levels not seen in more than 5 years. Is the excitement justified? And more importantly, should it drive the price of Sirius XM higher?
Most Sirius XM investors know that new car sales are the primary source of new subscribers for the company. According to comments earlier this month by the company CFO, David Frear, relationships with OEMs has resulted in:
...really tight integration with new car production that's gotten us up to now about 67%, 68% of the cars roll-off the line have a satellite radio factory installed.
These radios typically come with a trial that is free to the purchasers (or lessees) of the new vehicles. The expectation of Sirius XM is that there will be enough trial subscribers that will convert to self-pay subscribers and grow the installed base of paying consumers. Last year, 45% of these trial subscribers converted, although the figure dipped slightly to 44% in the fourth quarter.
New car sales of 1.04 million in January, 1.19 million in February and an expected 1.48 million in March would indicate that there were a total of 2.52 million new trials (3.71 million x 68% = 2.52 million) started in the first quarter. Eventually, 45%, or 1.13 million (45% x 2.52 million = 1.13 million), of these should convert to self-pay subscribers. Sounds fairly robust, doesn't it?
The problem is that Sirius XM also loses a lot of its self-pay subscribers each month. Sirius XM ended 2012 with 19,570,274 self-pay subscribers, and disclosed that, on average, it lost 1.9% of its self-pay subscribers each month. (The company refers to these cancellations as the self-pay monthly churn.) If the company maintains an average of 19.57 million self-pay subscribers for the quarter, and maintains a 1.9% self-pay monthly churn figure, the self-pay subscriber losses should exceed 1.11 million.
For simplicity, ignore for the moment that the new vehicle sales that took place in the first quarter won't add to the self-pay population until later in 2013 or even 2014. And that the additions would come from conversions of trials that began in 2012. On this basis, the net additions to the self-pay population would be less than 200,000, the smallest quarterly growth in more than 2 years.
Fortunately, the company has found a way to grow the self-pay population by aggressively pursuing the used car market. The company has not released enough information about the used car program to make solid forecasts, but using previously disclosed information, some crude guesstimates can be made. First, we know that the company exceeded the equivalent of 1 million Gross Subscriber Additions from the used car program in 2012 and expected to exceed 1.5 million in 2013. Second, we know that the conversion rate is less than that of new cars, perhaps 35%. Third, based on the increase in participating dealers and the proclivity of the company to issue conservative projections, the 1.5 million Gross Addition figure for 2013 is probably low.
So, if one assumes that the used car program is still building steam, it is plausible that as many as 350,000 used car trials were in place at year end 2012. Since these are three month trials, they would convert or cancel in Q1 2013. (Again there is a lag factor because of the way the company times conversion data, allowing an extra month to try and convince the trial subscriber to convert, but the difference should not be meaningful.) So, 35% of 350,000 would result in an additional 122,500 self-pay subscribers in Q1.
Sirius XM will also get additional self-pay subscribers from retail purchases of radios, including portables, as well as smart phone apps and other Internet subscriptions.
Sirius XM has projected 1.6 million self-pay net adds for 2013. Most of these will still come from new car sales, and 2013 new vehicle sales are off to a strong start. Whether the 1.6 million proves to be conservative or not remains to be seen, but one thing is becoming abundantly clear. The number of paying subscribers coming through the used car channel is becoming increasingly important to the company's growth.
The strong new car sales expected in 2013 will help drive the share price higher, but without a successful used car channel, those new car sales may not have been sufficient to drive the share price significantly higher in 2013.
Additional disclosure: In addition to my long positions, I have January 2014 $3.50 covered calls written against many of my long positions in Sirius XM. I also trade blocks of Sirius XM on a regular basis.