There is perhaps no better comparison of the subscriber picture at Sirius XM Satellite Radio (SIRI) than that which was presented in Q3 of 2011 as compared to Q3 of 2010. In the ultimate irony the company reported nearly the exact same number of NET subscriber additions with the third quarter of 2010 edging out the same quarter in 2011 by a mere 1,044.
Before we delve into the subscriber picture deeply it is important to note that an investment in Sirius XM is about much more than simply a subscriber number. It is about cash flow, capital expenditures, debt service, price increases, cost savings, and the bottom line. The company is on solid footing to produce good numbers going forward that will certainly be appreciated by the street, but in the end this business is about getting and keeping subscribers and for this reason a deeper look is necessary.
If we start with the fact that the end results in Q3 of 2010 were virtually identical to the end results in 2011, we can compare and contrast what happened with various data points to arrive at the given number. By doing this we can begin to see some of the challenges that Sirius XM faces as they move forward.
As you look at the data some very interesting dynamics begin to take shape:
- Despite higher gross additions this year over last by 186,000 units, the end result remained the same.
- While churn remained stable at 1.9%, the deactivations were 187,000 more this year than last. The lesson is that flat churn on a percentage basis sounds good, but because the base grows, the real number increases. It is important that the company deliver a higher gross number to offset the deactivations.
- The company is seeing more success in adding self-pay subscribers by about 105,000 units. This is likely attributable to higher success in the trailing category of promotional subscribers
- Paid promotional subscriptions is tailing down. Likely this is an anomaly with regard to the disaster in Japan changing the mix of subscribers.
- The company is having a more difficult time with conversion rate. They actually lost 3.7 points in the last year. This is attributable to the mix of cars that are satellite equipped being sold, a tougher competitive environment thanks to other services like Pandora, and economic factors (something to consider as the price increase is due to roll out in just a couple of months).
- Despite almost 158,000 more vehicles being sold this past Q3 over Q3 of 2010, the bottom line subscriber additions were flat.
As you can see, Sirius XM is being challenged by many factors, and while they are indeed still adding subscribers, it is becoming a more difficult task. The company can ill afford to rest on its laurels and it needs to see an improvement in the OEM channel. I used to say that 1 million cars sold per month allows the company to report decent numbers. With the take rate falling, it now appears that 1.1 million may now be the bottom line for the same effect. My concern is that the auto channel is having a difficult time getting up to that point, and that difficulty may continue for a few more months yet.
The solution is that Sirius XM needs to find alternative ways to improve the bottom line other than subscriber growth. Satellite Radio 2.0, some new retail radios, and a modest price increase in January of 2011 are all key ingredients in making the bottom line improve while we wait for the auto sector to recover to a point where subscriber growth can become a material difference again.
While these other factors are important, it is paramount to remember that this company makes their bread and butter by adding subscribers. If 2012 can bring in auto sales growth to over 13.4 million, then Sirius XM should have no trouble showing at least modest growth in the subscriber category.
There will certainly be some that read this piece and feel it is a bash of the company. It is not that at all. However, this issue is an "elephant in the room" and deserves to be monitored closely. Rather than ignore the challenges, it is best to understand them ahead of time. Sirius XM understands them, investors should as well. In the best circumstances the bottom line increases from price increases and new product offerings will keep the beast of the street fed and happy until the auto sector metrics that deliver subscribers, and ultimately drive the future, can improve in the mid 2012.
We have all looked at 2012 as a potential stellar year for Sirius XM. Because of limited capital expenditures as well as the timing and structure of their debt, the company is set up to impress already. Add a healthy auto sector to the mix and Sirius XM could be off to the races. The downside is that the race may start more slowly than people think because of the very issues discussed and the challenges of adding subscribers.
Disclosure: I am long SIRI.
