AutoNation Joins SiriusXM Used Car Program - What Does It Mean?

Jan. 5.12 | About: Sirius XM (SIRI)

On January 3rd SiriusXM (NASDAQ:SIRI) issued a press release announcing that AutoNation (NYSE:AN) would be participating in its pre-owned vehicle program. Under the program, "customers will be eligible to receive a 3-month SiriusXM subscription when they purchase a pre-owned vehicle with a factory-installed satellite radio, regardless of make or model, from participating AutoNation dealerships." The release also states that AutoNation is America's largest automotive retailer. It sounds like something Sirius investors should get excited about, doesn't it?

I was somewhat familiar with AutoNation and their CEO, Mike Jackson, who contributed a quote to the press release because I had heard him interviewed several times on WBBR radio. But I really didn't know how big they were or how many used cars they sold per year, so I decided to visit their web site and check out their financials. I was hoping to be able to find some data that could give an indication about the number of potential subscribers and the impact on the revenue of Sirius.

First of all, it was disappointing to see that AutoNation may not consider this particularly important. There was no press release on their web site and no apparent way to find out much about the program. However, there was information about the number of vehicles they sold over the past few years in the company's combination Annual Report and 10K:

Retail Vehicle Unit Sales

Year

2010

2009

2008

New

206,456

182,160

241,625

Used

160,126

133,990

166,897

Total

366,582

316,150

408,522

Click to enlarge

And, according to the third quarter 10-Q:

Year

Q3 2011 YTD

Q3 2010 YTD

New

163,843

153,305

Used

129,148

121,020

Total

292,991

274,325

Click to enlarge

Based on AutoNation's recent sales history, we can estimate about 170,000 used car sales per year. Since the used vehicle program free trial applies only to vehicles with factory installed radios, and knowing that the penetration rate for the period 2008-2010 averaged 55%, we can assume that the number of eligible vehicles for 2012 is 93,500. During the Liberty Media Corporation (NASDAQ:LMCA) 2011 Investor and Analyst Meeting on November 17th, Sirius CEO Mel Karmazin noted that the conversion rate for used cars was in the "mid to high 30" percent range. Applying a 38% conversion rate to the 93,500 eligible vehicles would result in less than 36,000 incremental self-pay subscribers after more than a full year. Applying the basic monthly subscription rate of $14.49 plus the Music Royalty Fee of $1.40 to those subscribers would show that program would eventually generate $500,000-$600,000 in incremental monthly revenue after the first full year.

The revenue impact in 2012 will be relatively insignificant. Not only will it take time to roll out the program to the "participating AutoNation dealerships," but there is also the lag from the three month free trial and the fact that there is a slow build-up to the eventual 36,000 self-pay subscribers - an average increase of 3,000 per month. Ignoring the roll-out to the participating dealers, using an average of months of revenue after the free trial, and taking the average over the year, would result in less than $3 million of incremental revenue in 2012:

($14.49 + $1.40) X (9 months / 2) x 36000 = $2.6 million

This is a number that gets lost in a company expected to generate $3.3 billion in revenue in 2012. Even if one considers that more than 90% of the incremental revenue could fall to Free Cash Flow (FCF), it is still a rounding error for a company expected to generate $700 million in FCF in 2012.

Over the long term it is good news for Sirius that AutoNation signed on to the pre-owned vehicle program. And while on the surface it sounds great that America's largest car retailer is participating, investors would do well to temper their near term enthusiasm based only on this one announcement.

Disclosure: I am long SIRI.

Additional disclosure: I am long SIRI. I also have $3 January 2012 covered calls against most of my Sirius position. I may initiate (or close) a buy stock/sell option position in Sirius, discussed in another article, at any time. I have no positions or plans to trade any of the other stocks mentioned in this article in the next 72 hours.