A flurry of new vehicle sales reports for May will cross the wire services and inundate the web early this week. The news will show across the board increases for the major US car companies. Analysts will look to these figures to gauge the health of the US and world economies. The sales are part of what Keynes referred to as a virtuous cycle - improved sales drive manufacturing across the entire supply chain, boosting income for employees who buy goods and services that drive further employment and economic expansion.
Sirius XM Radio (NASDAQ:SIRI) relies on new vehicle sales to attract subscribers. As sales rebounded from a low of 10.6 million units in 2009 to 14.8 million in 2012 and a projected increase to more than 15 million units for 2013, Sirius XM has benefited from increased exposure of its trial programs. And, it's not just the increasing vehicle sales that have pushed trial numbers higher, but also an increasing presence of Sirius and XM radios in new cars. The penetration rate of satellite radios has increased from 55% in 2009 to 67% in 2012.
Edmunds has just increased its annual sales forecast for 2013 to 15.5 million. Even with this increased forecast, the expected additions to the self-pay subscriber base from new vehicle sales may not be enough to offset cancellations from self-pay monthly churn. This is due to the behavior of subscribers, a pattern that has not changed significantly over the past several years. Approximately 45% of new car buyers will become self-pay subscribers at the conclusion of their free trails. The rest choose not to pay for radio.
The 15.5 million new vehicle sales will eventually generate 4.67 million new self-pay subscribers:
15.5 million x 67% penetration x 45% conversion = 4.67 million new self pay additions
What else should investors expect for 2013? There is no reason to expect the conversion or penetration rates to suddenly change. And, since the past three years have shown churn to be at 1.9%, there would be no reason to expect that figure to suddenly decrease. The drag on growth will be the increasing number of self-pay subscribers that continue to cancel at the rate of 1.9% per month (it actually rounded up to 2% in the first quarter).
Sirius XM finished 2012 with 19,570,274 self-pay subscribers, had grown to 19,874,660 by the end of the first quarter, and has guided to a full year growth of 1.6 million self-pay subscriber net additions. Assuming that the self-pay monthly churn returns to its recent historical level of 1.9% and that the self-pay subscribers for the year will average:
Q1 Average = (19,570,274 + 19,874,660) / 2 = 19,722,467 , and
Q2-Q4 Average = [(19,570,274 + 1,600,000) + 19,874,660)] /2 = 20,522,467, and
2013 Average = [ (.25 * 19,722,467) + (.75 * 20,522,467 ) = 20,322,467
Applying the self-pay monthly churn of 1.9% against the monthly average of 20,322,467 reveals that there will be 4.634 million cancellations.
Note that the 4.67 million new self-pay additions are just enough to cover the 4.63 million cancellations. And, that's if the 15.5 million sales figure is reached. If the churn rate remains at the 2.0% level of the first quarter or the conversion percentage remains at 44% achieved in the first quarter, there would be a shortfall of 300,000 self-pay net additions.
What should Sirius XM investors expect the conversion and self-pay churn rates to be? Should churn be 1.9% or 2%? Should conversions be 44% or 45%? According to CFO David Frear, when he discussed these metrics on the first quarter call:
Growth in gross additions was strong enough to more than offset the increased churn coming from our larger subscriber base. Self-pay churn rounded up to 2% in the quarter and the new car consumer conversion rate was 44% both consistent with our expectations.
If the less favorable rates are consistent with the company's expectations, where is growth going to come from? Fortunately, efforts to recruit dealers into the Sirius XM used car free trial program have been successful, and will drive the growth of Sirius XM. These efforts are expected to generate 1.5 million self-pay subscribers from more than 9,000 dealers in 2013.
Better than expected results reported today by Ford (NYSE:F) and Chrysler, as well as growth by General Motors (GM), is good news for both the economy and the companies involved. It is also important news for Sirius XM, but it is no longer sufficient to drive growth for the company. That will now be coming from the used car segment.
The slight uptick in the churn rate bears watching. Whether it is a normal fluctuation or the start of a trend towards a higher rate from the growing influence of the used car program won't be known for several more quarters.
Investors will have an opportunity to listen to Frear on Tuesday when he presents at the Bank of America Merrill Lynch Global Telecom and Media Conference. While I'm not expecting any news, it will be interesting to hear the questions on the minds of the analysts.
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.
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.