By Brandon Matthews
It’s not often that I would challenge an analyst on forecasted subscriber numbers. I have myself, on numerous occasions, referred to forecasting Sirius XM Radio (Nasdaq: SIRI) subscriber numbers as an exercise in futility. Sometimes there just seems to be no rhyme nor reason to the company’s reported numbers.
There are many reasons for this that stem mostly from different deals with different automakers. In cases such as Ford (NYSE: F) and Chrysler (NYSE: FIATY.PK), promotional subscriptions are counted at the factory level because the manufacturer pays for the trial subscription at that time. General Motors subscriptions, on the other hand, are counted at the time of sale. Other companies such as Toyota (NYSE: TM) are not counted until the customer converts to a self paid subscriber, and are excluded from reported promotional numbers. Further complicating matters are penetration rates not just among the OEMs, but within the individual car models.
It was reported Monday that Sirius XM shares were up on what appeared to be positive comments by Lazard Capital’s, Barton Crockett. The report went on to suggest that Crockett forecasts a loss of 160,000 net subscribers for Q1. I can only assume that last year's abysmal numbers are weighing heavily on projections. Let me say this. If Sirius XM posts even a net subscriber loss of one subscriber, I will sleep in my car for a week. It is simply not mathematically possible.
A common mistake when predicting subscriber growth is made by using the current quarter's auto sales numbers alone. Factory production numbers in the current quarter are just as important. It is even more important to look back at the preceding quarter’s sales results. For example, Sirius XM reported an exceptional fourth quarter which resulted in over 250k net subscriber additions. It was in the preceding quarter that new car sales spiked with the Cash for Clunkers program. The reason is that most trials are 90 days in duration, and most conversions therefore lag by one quarter.
Perhaps the most important factor lies in the promotional data supplied by Sirius XM, in which the number of subscribers in paid promotional periods has remained stable. The company goes out of its way to mention this little tidbit at each call, and for good reason. It is by far the most important barometer of subscriber growth.
Think of Sirius XM’s subscriber growth in terms of a bucket with a hole in the bottom, and you are constantly trying to fill it up. If more subs are coming out than are going in, it will result in net subscriber losses. The hole represents churn, while the inflow represents new promotional subscriptions. As long as the two flows remain even, subscriber growth through the promotional channels is flat.
Last year, the weakness in auto sales that occurred in Q4 2008 and Q1 2009 led to Sirius XM posting subscriber losses as new promotional subscriptions failed to keep pace with churn in Q1 and Q2. Simply put, the number of new promotional subscribers fell below the levels of the previous quarters.
Beginning with the second quarter of 2009, promotional subscriptions again began to outpace churn, which enabled Sirius XM to report positive subscriber growth in Q3. Recently, Sirius XM CFO David Frear suggested that churn will likely drop throughout 2010, indicating to me that the hole in the bucket is getting smaller.
Combining these facts with Sirius XM’s new Certified Preowned Programs, most of which were just launched in 2009, I am confident in stating that there is no chance that Sirius XM will post a subscriber loss for the first quarter. If the market views a slightly revised negative loss as positive, imagine its reaction when Sirius XM reports positive subscriber growth for a third consecutive quarter. Things are about to get interesting again..
Disclosure: Long SIRI