November Auto Sales Make It A Challenge For Sirius XM To Meet Subscriber Guidance

| About: Sirius XM (SIRI)

Only a few months ago I was in the mindset that Sirius XM (NASDAQ:SIRI) would easily meet their 2011 subscriber guidance of 1.6 million NET additions for the year. When Sirius XM presented their Q3 numbers with subscribers coming in at 333,000, I began to have a little bit of worry. Then, when Mel Karmazin spoke at the Liberty Media Investor Conference I decided to dig a bit deeper. The comment that Karmazin made that concerned me was that, "Sirius XM would bring in the most Q4 subscribers since the merger."

On its face that type of comment may seem bullish. However, Mel being a salesman, I have learned to think beyond the comments. You see, 2011 subscriber guidance dictates that Sirius XM needs to bring in 442,000 subscribers. Sirius XM's best Q4 since the merger is a much more humble number just above 328,000. Why would Mel make a comment that this would be the best Q4 for subscribers since the merger if what investors need to here was that the company will hit guidance? Why leave room for a miss of up to 114,000 subscribers?

As of right now November auto sales are on a pace for right about 1 million in sales, slightly less than we saw in October. Sirius XM's best quarter in 2011 was Q2. In that quarter auto sales were at almost 3.3 million and the company reported NET subscriber additions of just over 450,000, similar to the number needed in order for Sirius XM to meet their 1.6 million subscriber guidance.

The problem is that Q4 auto sales are trending well below the numbers put up in Q2. It is quite possible that Q4 auto sales could be a full 200,000 to 250,000 below what the auto sector delivered in Q2. This makes subscriber additions of over 442,000 that much harder to obtain.

Certainly Q4 is usually a good quarter for Sirius XM, but will retail sales be enough to boost the subscriber numbers to where they need to be?

Let's start off with the fact that Sirius XM will lose about 1,875,000 subscribers to deactivation. This implies that Gross subscriber additions need to be at 2,317,000, a number that the company has not seen all year! In their best quarter of 2011, Q2, the gross additions were 2,179,000. Q3 saw slightly less GROSS additions of 2,138,000.

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The big question investors need to ask is whether or not the retail channel can deliver enough subscribers to bring the GROSS ADDITIONS number up to 2,317,000, a number 138,000 higher than the best quarter this year, while the Q4 auto data is implying sales of about 3,060,000, a number 211,000 less than what was delivered in Sirius XM's best performance in Q2. Simply stated, the auto sales we are seeing so far in Q4 are falling short of what is needed to deliver enough subscribers.

Sirius XM does have several new used car deals that can help, but these are not yet well enough established to give us comfort. My confidence that Sirius XM will meet 2011 guidance took its biggest hit when Karmazin made a statement about the best Q4 subscriber number since the merger. This seems to be a bit of a hedge to me.

So what does Sirius XM need to do to pull off 442,000 subscribers in Q4?

1. Bring churn down to about 1.75%

2. Be aggressive on conversion and get that number up to 45.5% or better.

3. Push the retail channel - They need to get the Lynx on the market ASAP.

4. Offer up some great consumer deals.

5. Get the used car market ramped up ASAP.

The company can pull this off, but it is no longer a walk in the park. In fact, we need to see Gross Additions hit a level that has not yet been accomplished by the company in order to simply meet the guidance of 1.6 million.

Does this mean Sirius XM is falling from grace? Not yet, as investors will certainly begin to focus on the pending price increase as a reason to own this equity over the number of subscribers. Always remember though, it takes more subscribers to make the revenue line jump on an ongoing basis.

Disclosure: I am long SIRI.