May Auto Sales to Boost Sirius XM Subscriber Numbers in Short-Term

| About: Sirius XM (SIRI)

While the headlines for auto sales in the month of May seemed grim, there was actually good news in those numbers that help Sirius XM (NASDAQ:SIRI) on a long term and short term basis. Yes, Sirius XM took a hit on the auto headlines. This happens because the Street is well aware that Sirius XM's bread and butter comes from satellite radios installed in cars.

The key for satellite radio investors is to understand that auto sales of 1 million per month are enough for the company to report good numbers across the board. In Q1 auto sales came in at 3.057 million, or an average of just over 1 million per month. With satellite radios being installed in about 60% of the vehicles produced, the company was able to garner about 1.8 million of their just over 2 million gross subscriber additions through the new car auto channel. This translated into net subscriber additions of just under 400,000.

While auto sales are important to Sirius XM, it is not as easy as simply looking at sales figures. There is a dynamic of how Sirius XM counts subscribers that perhaps many investors are not aware of. Each month I offer a report breaking down the OEM channel into three distinct categories: Leading, point-of-sale and trailing.

Before going into why Sirius XM will see a short term boost in subscribers I will take the time to define the categories:


This category is labeled leading because Sirius XM actually counts these radios as subscribers at the time of manufacture, not sale. The leading category is made up of companies like Ford (NYSE:F), Chrysler, Mercedes and BMW. When the OEM pays Sirius XM for a promotional subscription that money is booked in deferred revenue (a liability on the balance sheet). The car may sit on a dealer lot for 60 days being counted as a subscriber because the company has received payment. So even though a consumer is not yet listening to the satellite radio, the subscription is being counted on the subscriber rolls. This method allows the company the benefit of counting subscribers early. As with anything there is a drawback. The Average Revenue Per User (ARPU) gets impacted. Sirius XM cannot begin to pull money from deferred revenue and book it as revenue until a consumer buys the car. Thus, during that 60 day period that subscription is contributing $0 per month to revenue. If there are a lot of the $0s, it is a strain on ARPU.

Point of Sale

The point of sale category is so labeled because it represents a satellite radio subscription at the time the vehicle is sold to a consumer. GM and Honda (NYSE:HMC) would be examples of manufacturers that fit into this category. This method of counting subscribers is actually very clear cut and straight forward. The subscriber is counted because the OEM pays Sirius XM when a consumer buys the car.


Trailing subscribers are labeled this because they do not count as subscribers until after the three month promotional subscription and then only if they elect to become a self-paying subscriber. Manufacturers that fit into this category would include Toyota (NYSE:TM), Nissan (OTCPK:NSANF) and Hyundai (OTC:HYMLF). Essentially, Sirius XM receives no payment from the OEM or consumer during the three month trial. Because of this they cannot be counted as subscriber even though there is a consumer listening to the service. Because they are never counted as subscribers, they can never be counted as deactivation should the consumer elect to not keep the service after the trial period.

With the March disaster in Japan, several auto manufacturers have had substantial impacts on their ability to produce and sell cars. Other manufacturers less impacted have actually increased production. The nature of the three subscriber categories is weighted in such a way that the leading category is now making up over 40% of the auto sales numbers. These manufacturers are still selling cars, and by nature producing more cars on a percentage basis that the manufacturers in the other categories. This means that cars produced in Q2 will be called subscribers in Q2 if they are in the leading category and have a satellite radio installed.

What we typically like to see is a balance between the three categories. Obviously May shows us that the balance is out of whack in favor of near term subscriber growth. Given that the monthly average auto sales in Q1 was just over 1 million, and that so far in Q2 we are at 1.1 million the subscriber picture already looks more promising. Now consider that in Q1 the leading category accounted for 36% of the auto sales market compared to the current trend of almost 39% in Q2 and over 40% in May and you can see that Sirius XM will be getting a boost of promotional subscribers in Q2 at time of production.

The bottom line is that with these events happening it will be difficult for Sirius XM to keep guidance at 1.4 million net subscribers for 2011. The company will have to adjust guidance upward at some point. The only question is when that will happen.

Disclosure: I am long SIRI.