An In-Depth Look At Sirius XM Subscriber Growth

| About: Sirius XM (SIRI)

Sirius XM Radio (NASDAQ:SIRI) reported first quarter subscriber growth at a run-rate well ahead of the annual guidance of 1.3 million net additions and, as a result, increased guidance for the year to 1.5 million. Here are some additional details from the Conference Call and the 10Q (all figures are compared to Q4 2011).

  • Total Subscribers grew by 404,596 to 22,297,420
  • Self-pay Subscribers grew by 299,348 to 18,208,090
  • Paid Promotional Subscribers grew by 105,248 to 4,089,330
  • Total trials grew from 5.4 million to 5.7 million, an increase of 0.3 million
  • Unpaid Trials grew by 0.2 million to 1.6 million
  • Self-pay Monthly Churn remained flat at 1.9%
  • ARPU increased from $11.61 to $11.77
  • Conversion rate increased to 45% from 44%.

The total subscribers, self-pay subscribers, paid promotional subscribers and unpaid trials are all at record levels. Churn has been higher and lower in the past, but is significantly below the company's guidance of 2.1%. ARPU is not a record and had been higher prior to a reduction in the Music Royalty Fee (MRF) in December of 2010. The conversion rate has been around 45% +/-2% for quite some time (management has stated in the past that the variance of the conversion rate is now a function of the OEM model mix).

Subscriber activity is the driver of the company's revenue, earnings and free cash flow. It would appear that Sirius investors should be happy with the results and they should be rewarded with an increase in the share price. When discussing the subscriber figures, CEO Mel Karmazin stated:

The consensus expectation for full year 2012 auto sales has climbed to about 14.3 million today from 13.7 million when we gave our initial guidance in February. This provides nice momentum for our growth this year, and we are also benefiting from our efforts in the used-car market. This year, we anticipate adding approximately 1 million self-pay additions to SiriusXM from our rapidly growing used-car market channel.

An increase in OEM sales, traction in the used car market and a churn rate below expectations are all good signs.

And, he added:

In February, we told investors that our subscriber guidance was conservative and -- but for the uncertainty around the price increase, the forecast would have been higher. While we still have a lot of work to do implementing this price increase and retaining subscribers as we compete against free terrestrial and free online competitors, this strong first quarter performance has made us comfortable in raising our full year net addition guidance from 1.3 million to 1.5 million. This increased guidance will put our paid subscriber base at 23.4 million by year end, an all-time record. And yes, we continue to be conservative, but are more optimistic than we were 3 months ago.

The one million used car sales component was new information and was certainly an eye-opener. CFO David Frear added:

Strong growth in new car conversion volumes was met with strong growth in subsequent owner additions to drive total self-pay growth additions up nearly 20% over the comparable period last year. We now have more than 5,000 dealers signed up to report sales of previously owned vehicles with satellite radios.

During the Q&A there was additional clarification on the used car front. Frear stated:

John Tinker - Maxim Group LLC, Research Division

Could you just elaborate a little more on the 1 million number you're using for the used-car estimate? How that ties into your 1.5 million guidance number for the full year for all net additions?


John, the 1 million used-car additions, you should think of as a gross additions figure and not a net additions figure. So it would be a component of your growth additions forecast for the year.


Right. But at this stage, I am assuming the gross is pretty close to the net. How is that actually working out at the moment?


We've been adding sort of second-owner additions for a few years now. And while the volumes are clearly ramping up and will continue to ramp up that you do have your normal self-pay churn that goes along with them. So for the most part, we haven't found material long-term differences in churn rates on second owners. And so we've got the churn roll off from stuff added a year ago, 2 years ago, as well as in the first quarter of this year will affect the rest of the year.

So, the company has apparently developed a robust used car channel, has a record number of unpaid trials ready to feed the subscriber population, has increased guidance and continues to tell Wall Street that guidance is conservative. At this point, it would appear that the 1.7 million net additions achieved last year is well within reach.

Average Monthly Revenue Per Subscriber (ARPU)

With the OEM channel and the used car channels firing on all cylinders (pun intended), one might have expected a pop in the share price. The market may have been disappointed in the ARPU. Perhaps the following paragraph from the 10Q provides some insight into why there is a bit less enthusiasm than might be expected.

ARPU increased primarily due to the increase in certain of our subscription rates beginning in January 2012, an increase in sales of premium services, including Premier packages, data services and streaming, partially offset by an increase in subscriber retention programs and in the number of subscribers on promotional plans and a decrease in the revenue from the U.S. Music Royalty Fee due to the December 2010 reduction in the rate from 15.3% to 10.8%.

Unfortunately, Sirius does not release details on how much of the $0.16 increase in ARPU is a result of the price increase and increased sales of premium packages. Nor do investors know how much of the drag on ARPU was from the small increase in Paid Promotional Subscribers, the continued phase-in of the MRF reduction and the increase in retention discounts. We can calculate that subscribers on promotional plans grew to 18.3% of the total from 18.2%, so that impact should have been minimal. And, we also know that the impact of the MRF and a larger jump in the number of subscribers on promotional plans resulted in a five cent decline in the prior quarter.

The only "fact" that we know about retention discounts is the following statement by Frear during the Q2 2011 conference call:

We find that, after some initial breakage at the end of that discounted plan term, that the subscribers, for the most part, overwhelmingly stay with us, and then they churn at the normal self-pay rate. So directly to your question, it's about 14% of the self-pay base. And it's -- the rate of increase has been -- has slowed considerably in the course of this year, that when we expanded it to the Sirius platform sort of around the late part of '09, we had some rapid expansion in it, but it's good, smart business for us.

I am concerned by statements about the continued increase in the use of retention discounts and customer acquisition programs. We have no idea what the current percentage is. It is not unusual to hear and read comments by subscribers about the deals offered when they called to cancel the service. I understand that receiving $25 for an additional six months is better than losing a subscriber, but the continued expansion of the program raises questions about how much benefit will accrue from the $1.54/month increase in the basic subscription fee.

A comment two weeks ago by Seeking Alpha member SaGriffie on a previous article clearly illustrates the issue:

CN, this is one of my big concerns with Sirius. My subs, I have two annual and one lifetime, were up for renewal on March 1. On 2/27 I called to cancel both annual subs and the associated internet feeds as an experiment. BTW, if this experiment failed, my wife would kill me and I'd have to call back on 2/28 and reactivate the subs, but Sirius gave me the 2 subs at 50% off, plus included the internet feed for free.

My wife was very happy, but I had mixed feelings. I saved money this year on my subscription, but it did not give me warm fuzzy feelings regarding my 20k+ shares.

So the real question is... Is something better than nothing when trying to salvage a cancellation? Do most people just let the subs auto renew and never think about it or does this happen all the time?

I don't pretend to know the answers to SaGriffie's first question. In this case Sirius left money on the table. Others have told me or written comments that they would, in fact, have terminated their subscription if it weren't for the six months for $25 offer. As to the second part of the second question, we know that 14% of the self pay subscribers were on retention discounts nine months ago and that the use of retention discounts have continued to increase.

In general, ARPU has suffered as subscriber growth continues to be fueled by discounting and in some cases the discounting is extensive.

Used Car Contribution

When Karmazin first stated "we anticipate adding approximately 1 million self-pay additions to SiriusXM from our rapidly growing used-car market channel," in his prepared remarks, I wondered - much like Tinker - what was going on. If Sirius was adding that many self pay additions, why wasn't the forecast for net additions much, much higher than the revised 1.5 million? The "clarifications" by Frear in the Q&A added some caveats and confusion. When Tinker was told to consider the 1 million as Gross Subscriber Additions, this did not make too much sense since free trials don't enter into the Gross Subscriber figure unless they convert to Self Pay Subscribers. So, let's assume that means they are part of the unpaid trial figure.

If the used car programs contribute 1 million trials, and we have previously been told that those trials convert at a percentage rate in the mid to high 30's, that indicates that they would add approximately 100,000 net additions per quarter. That would still be a pretty spectacular number. Except Frear started talking about an installed base of used cars that would also be churning out of the population. Since we have no idea what portion of the 18.2 million Self Pay Subscribers are "second-owner additions," we have no idea how many would of those 100,000 would be lost to churn from an installed base.

The bottom line is that we now know that there are 5,000 dealers in the used car program, but very little clarity about how much they are adding to the Self Pay Subscriber base.


Prior to the earnings release I wrote an article that the conference call and release was likely to be a non-event. The only question I had was whether the market had pegged an increase in subscriber guidance correctly. Based on the reaction of the share price, the market had built in the increase to 1.5 million.

The market hates uncertainty. Right now it is difficult to ascertain how much churn has been held in check by retention efforts. As the MRF reduction finishes working its way through the subscriber base and we get to see how much of the $1.54 per month increase shows up in ARPU, some of that uncertainty will be resolved. And, if we can ever get a straight answer on what is occurring with the used car program, more of that uncertainty will disappear.

Now if we could only find out what Liberty Media (LMCA) is planning to do...

Disclosure: I am long SIRI.

Additional disclosure: I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 covered calls. I may initiate (or close) a buy stock/sell option position in Sirius, discussed in another article, at any time.

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