Seeking Alpha
Growth, value, special situations, momentum
Profile| Send Message|
( followers)  

As any long term Sirius XM (NASDAQ:SIRI) investor is aware, the company gets most of its exposure and thus subscribers through people buying satellite radio equipped cars. In the past, the exposure and marketing was pretty much limited to the new car market, but the company has been quite busy with some 6,000 car dealers in establishing and bolstering its used car initiative.

Still, new car sales are where the proverbial rubber meets the road for Sirius XM. Sirius XM is installed in about 65% of new cars manufactured. Edmunds is estimating that 15 million new cars will sell in 2013. This means that with sales of 15 million cars, the company will have a pool of just under 10 million potential customers in 2013 vs. about 9.2 million in 2012. That is great news.

Before moving forward there are some things we should understand:

  1. Not every satellite radio equipped car gets counted as a subscriber.
  2. The company can typically convert 45% of the paid promotional and unpaid promotional subscribers into subscribers.
  3. The company has self pay churn at about 23% annually, and fully loaded churn at about 31%.
  4. 100% of paid promotional subscriptions are counted as subscribers for at least three months.
  5. If a paid promotional subscriber does not become self paying, the deactivation is not counted as churn.
  6. Unpaid promotional subscribers do not count as subscribers during the promotional period, and only become counted if they elect to become self paying after the promotion.

Confused yet? The bottom line is that there will be about 800,000 more cars produced with satellite radio next year than there were this year. That potentially means that the company should garner at least 360,000 new subscribers next year over this year, without considering churn.

There are a few possible red herrings out there though that could impact the numbers next year. As many investors know, the new GM deal will take effect beginning in Q4 of 2013. Some analysts are modeling that the new deal will be more along the lines of an unpaid trial vs. a paid trial. What does this mean?

GM should sell about 800,000 cars in a quarter during 2012. Those 800,000 cars currently provide a virtually guaranteed 520,000 subscribers each quarter because they are paid promotions. This means they are counted. If GM were indeed to switch to an unpaid promotional structure, those 520,000 subs that would be seen in Q4 will not be counted at all during that quarter. In theory, 45% of those 520,000 (234,000) will be counted in Q1 of 2014. That means a potential short-term hit to the subscriber line.

Why bring this up now? We are likely only about five or six weeks away from Sirius XM offering up guidance for 2013. If the subscriber guidance seems light, the concept of a switch in the GM deal may have merit, and we will be able to better understand why. It is better to know the possibilities now rather than later. Sirius XM has given no detail as yet, so that is important to know as well.

Even with that, the used car market will be adding to the pool as well, which is good. While the new car sales market appears poised to grow about 5% next year, through used cars, Sirius XM may be able to bolster things a bit more.

Now that the existing subscriber base can cover costs and deliver a profit, each new subscriber sends more money to the bottom line. Thus, even if 2013 guidance seems modest, the dollars behind it will be very real.

Stay tuned.

Source: 2013 Auto Forecast At 15 Million - How Does It Impact Sirius XM?