One of the bigger challenges Sirius XM (NASDAQ:SIRI) has is gaining new subscribers in an environment where there is so much audio entertainment available. With terrestrial radio, Internet radio, and the advent of smart phones there are many companies for the ears of consumers. One of the biggest advantages Sirius XM has is that it has a wealth of top tier content that falls into a wide spectrum of categories such as music, talk, sports, religion, and yes, even sex. Another distinct advantage is that the company has deals with automakers that put satellite radios in about 70% of new cars produced. This gives the satellite radio provider a golden opportunity to show off their stuff. Typically, about 45% of new car buyers exposed to a free trial of Sirius XM elect to stay with the service and become self paying subscribers.
The end of March has arrived and with it we have auto sales figures for not only the month but the first quarter as well. For March, auto sales came in at 1,452,749 units, the highest monthly sales figure in years. The first quarter sales came in at 3,685,712 units, also the highest quarter in years. Overall, 2013 is about 6% ahead of the pace set last year. Through one quarter last year auto sales stood at 3,469,301. Essentially, car sales are about 216,411 ahead of last year's numbers.
Translating auto sales into what the net addition for subscribers will be for Q1 is no easy task. However, because we do have some data to work with, and some reasonable assumptions, we can at least get a general idea of where things stand. There are some wild cards such as the growing used car channel that add to the mix, but we can get reasonably close.
Last year Sirius XM had 2,161,693 gross subscriber additions in the first quarter. At that point the used car channel was in its infancy. This year we have new car sales at stronger levels combined with a more mature used car channel. Simple assumptions using the company filings in comparison with auto sales would dictate that this year the gross additions number should be able to approach 2,650,000. In Q4 of last year the gross additions were at 2.552,00 on auto sales that were about 100,000 units less.
CHURN and DEACTIVATED UNITS
Churn and deactivated units are two separate categories. Churn is based on the self paying subscriber base, while deactivated units includes churn as well as radios that consumers do not convert to self paying status after a paid promotional period. Deactivated units will always be higher than churn.
Sirius XM will likely lose about 1,100,000 subscribers to churn. The company will likely lose about 1,100,000 to deactivated radios from expiring promotional periods. In total, we will see deactivated units at between about 2,200,000. Subtract this from the gross additions and you arrive at the NET subscriber additions.
NET SUBSCRIBER ADDITIONS
With some quick and simple math it appears that the NET subscriber additions for Q1 of 2013 will be about 450,000 units. Factors such as churn, retention programs, and a more robust than anticipated conversion rate on new and used cars can skew this number. Without digging deeply into my spreadsheets, I would place my current Q1 subscriber estimate at between 450,000 and 480,000 units.
As an investor, expect a good quarter out of Sirius XM when numbers are reported next month. Auto sales are pacing well and there is no reason to anticipate a wheel falling off the wagon. Stay tuned, things will get interesting as the year progresses.
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.