"November delivered the highest SAAR rate since cash for clunkers."
"Auto sales rise to new two-year high."
With headlines like these it would seem that Sirius XM (SIRI) investors have little to worry about. In fact my email box filled up with people saying, "I told you so" and "you were wrong" in relation to my recent article, November Auto Sales Make It A Challenge For Sirius XM To Meet Subscriber Guidance, about the fact that the level of auto sales in November would impact Sirius XM.
That article was written prior to the official numbers, and nothing in the official news of the sales figures has done anything to change my mind at this point. One silver lining is that Edmunds has laid out some reasons for hope that this December could represent a good month for the auto sector.
The official sales figures for November are right about 995,000. So if auto sales were below 1 million how could this possibly be the best sales in almost two years?
The answer is that the headlines are not talking about actual sales, but rather the Seasonally Adjusted Annualized Rate (SAAR). SAAR is meaningless for Q4 and Sirius XM's guidance of 1.6 million subscribers. SAAR is a fictional number that carries many assumptions that if "X" cars sell in November then over the course of a year "Y" cars will sell. A fictional number announced in November does not bring in REAL subscribers. What SAAR does is give an indication of what next year will bring. November's SAAR of 13.6 million is good news for 2012.
So the question now is why I feel that Sirius XM is challenged when it comes to subscriber guidance? The answer is that what is happening in the auto sector is not favorable for the current quarter. Double digit production gains over last year are virtually meaningless. We need to see double digit quarter over quarter production gains from manufacturers that provide subscribers counted at the time of production. The biggest two Sirius XM partners that provide subscribers at production are Ford (F) and Chrysler. Some say growth is happening in the companies that bring subscribers at the time of production, but this is not at all the case. That growth happened with the disaster in Japan (between Q1 and Q2). Since then that category has been flat. These production partners are something I call the "leading" category.
- In Q1 the leading category accounted for 36.21% of the auto sales market
- In Q2 the leading category accounted for 39.82% of the auto sales market
- In Q3 the leading category accounted for 39.84% of the auto sales market
- So far in Q4 the leading category is accounting for 39.81% of the market.
Ford, the biggest member of the leading category, had previously announced that Q4 production would be 660,000 units. This was only 4,000 units higher than the 656,000 they produced in Q3. With their November sales call they raised that production number by 10,000 units to 674,000. That is not a substantial ramp up.
The other two subscriber categories are "Point of Sale" and "Trailing." Point of Sale delivers subscribers when a consumer buys a car, and Trailing partners deliver subscribers after the promotional period (typically three months) and then only if the consumer elects to become self-paying.
The category that is growing right now is the Trailing category. They are grabbing share away from the Point of sale category. This means that the growing segment in Q4 is delivering potential subscribers next year (too late for 2011 guidance) at the expense of Point of Sale partners that would be helpful to Sirius XM right now.
- In Q1 the Point of Sale Category accounted for 32.18% of the market
- In Q2 the Point of Sale category accounted for 32.09% of the market
- In Q3 the Point of Sale category accounted for 30.53% of the market
- So far in Q4 the Point of Sale category has accounted for 29.60%
As you can see the Point of Sale category is slipping. Meanwhile despite the disaster in Japan and the flooding in Thailand, the Trailing category is the mover and shaker.
- In Q1 the Trailing category accounted for 31.62% of the market
- In Q2 the Trailing category accounted for 28.09% of the market
- In Q3 the Trailing category accounted for 29.64% of the market
- So far in Q4 the Trailing category has accounted for 30.59% of the market
Another consideration that investors will want to make is the used car deals where Sirius XM equipped cars from any make are given promotional subscriptions from thousands of dealers. This program started this year and will now begin to bear fruit.
However, investors need to be clear that these promotional subscriptions are not counted in the subscriber numbers unless they become self-paying after the promotional period. This puts them into a trailing category of sorts. Karmazin stated that the company is having success in converting about 35% of these. This quarter will be the first in which these cars begin to make a meaningful impact. Despite this the same challenges I outlined earlier exist.
For investors interested in exactly how many cars each brand sold, they can refer to the chart in my article titled, "November Auto Sales - How They Impact Sirius XM." In addition I publish monthly articles with charts that investors can find on my site.
As stated before, the company is very capable of hitting their subscriber guidance. They simply need to hit on all cylinders, including:
- Stronger December sales that hit at least 1.15 million
- Reduce churn to a level near 1.75%
- Increase take rate to at least 45.5%
- Get the Lynx unit out in retail or at least promote the Edge unit
- Work on retention stronger than usual (could impact ARPU)
While some Sirius XM investors get frustrated with this type of reporting, they should understand what is at hand. The company will have deactivations approaching 1.875 million (if things are normal), and needs to have over 2.3 million gross additions (a record), Saying that meeting guidance is a challenge is not being a bear. It is reading the data in a prudent and realistic manner.