Sirius XM's Q3 Subscriber Picture

Sep.27.12 | About: Sirius XM (SIRI)

There is little doubt that Sirius XM (NASDAQ:SIRI) will pass its 2012 subscriber guidance of 1.6 million net subscriber additions in 2012. In fact, the company is likely to approach that number in Q3, which ends this coming Sunday. I am fully expecting the company to announce raised subscriber guidance and the Q3 subscriber number next week. I anticipate this because the current guidance is painfully low at this point and needs to be adjusted.

As we approach the end of Q3 there seem to be many long-term SIRI investors that are expecting the company to match the 622,000 net subscriber additions that were announced for Q2. While this would be great news, I do not really see a mechanism that can deliver that type of number unless the already aggressive retention discounting takes on a new level aggressiveness.

Let's work the numbers rationally. In Q2 new car sales, the method by which most subscribers are added were at an impressive 3,801,607 units. In Q3 new car sales are expected to be 3,600,000. Essentially we are looking at car sales that are 200,000 less than last quarter. With 65% penetration, that would represent 130,000 fewer satellite radio equipped vehicles this quarter as compared to last. While overly simplistic, 66% of those would be counted as subscribers, which represents 85,000 fewer. In essence, just by the sales figures it will be hard to match last quarter.

Now let's consider churn. The 1.9% churn number Sirius XM uses is based on the self-paying pool of subscribers. That self-pay pool grew by a couple of hundred thousand last quarter, and should do so again. On an absolute basis, 1.9% of a bigger number results in higher churn.

What about the used car market? Yes, the company is garnering subscribers from the used car market. Some 6,600 dealers are offering three-month unpaid promotional subscriptions to consumers. These promotions are not counted in the subscriber number. It is only if they convert to self-pay status that they become part of the number. Auto sold at participating dealers in Q2 would be converting in Q3. The company has already stated that it expects to have 1,000,000 unpaid trials in 2012. The company has also stated that it is seeing conversion in the mid 30% range. For arguments sake we will use 40%. What that means is that out of the 1,000,000 unpaid promotional subscriptions, we will see about 400,000 become counted during 2012. On a straight line basis that represents about 100,000 subscriber additions per quarter. We saw that play out in Q2, and it should be similar in Q3.

The first thing investors should realize is that Q3 is typically weaker than Q2, and that the trend is not going to reverse this year. Rational expectations are that the absolute number will be smaller. That does not mean it is a negative. In fact, the company is performing quite well. One problem though, is that expectations seem to have drifted higher. When headlines throughout the quarter show a SAAR rate that is consistent, people begin to think that will mean the sub number will be consistent. While SAAR has indeed been at about 14 million for months now, the absolute sales do actually differ.

I see the potential that gross additions can come in at a level between 2,390,000 and 2,420,000. This compares to gross additions last quarter of 2,481,000. Meanwhile I see the total deactivated subscriber line coming in at 1,895,000 vs 1,858,000 last quarter. This would imply net subscriber additions for Q2 in the range of 495,000 to 525,000. This is a good performance by any measure.

Yes, there is potential that the used car channel could add to that number more than I have already accounted for, but not to a level that gets the subscriber number to match last quarter. Yes, retention efforts could be more aggressive, but those efforts come at the expense of the Average Revenue Per User (ARPU) metric.

Here is how I see this playing out:

The company will announce higher subscriber guidance in conjunction with the subscriber number and point out that the subscriber growth year over year is above the 50% level. By doing this the message will be positive and indicative of the growth the company is seeing. I anticipate this to happen next week.

With that, the next burning question is where 2012 subscriber guidance will be. At the low end of my model the subscriber total after Q3 will be about 1,520,000. The high end would be about 1,550,000. This would mean that we will be about 450,000 to 480,000 away from 2 million. I can realistically see the Q4 subscriber number being in the same proximity as the Q2 number of 622,000. If we consider that happening, the realistic number for 2012 will be in the neighborhood of 2.1 million for 2012. In my opinion there are two paths the company can take, and both are good:

As we know, CEO Mel Karmazin tends to be conservative. He could issue guidance of 1.9 million and be very safe, leaving room to update guidance six weeks later at the quarterly conference call to 2 million. This allows the company to get a bump twice. Once now, and once six weeks from now. It will also give them another six weeks of data to firm up final estimates for the year.

The second path is to offer guidance of 2 million now. That would be a bigger boost as it crosses another milestone number. While more aggressive, it is not so aggressive that the company will be in danger of missing. Depending on the following six weeks of data, the company may or may not adjust it from there. Likely they will have room to bump it up slightly from 2 million, but remember, they typically like to try to over-deliver.

I see the second path as being more likely. Guidance at 2 million. It will be a positive catalyst that the market will appreciate. In fact, it could set up a nice run for the stock. Happy trading.

Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.