As most invested in Sirius XM already know, the company announced outstanding subscriber metrics earlier today. On the face of things this would appear to be terrific news for Sirius XM Radio, but investors need to consider all facets of the quarter, and until we gain the perspective of the other quarterly metrics and how they relate, people should celebrate with the appropriate amount of conservatism. So far the numbers look great. If that proves out with the quarterly report, which I would speculate will happen, the street can then put their full appreciation on the quarter.
Sirius XM has passionate investors, and time after time, a glimmer of good news tends to send ecstatic investors off on a tangent of predicting massive price spikes. The market does not work that way, and in particular Sirius XM is subject to a large contingent of people who love to bet against the company. If the quarter does prove to be quite positive, and I believe it will, then those that bet on better stock performance will be rewarded (just be sure to keep things in check with realism).
The OEM channel is the primary source of subscriptions for Sirius XM. I have oft stated that auto sales of 1,000,000 per month can deliver across the board positives for Sirius XM. I believe we will see that demonstrated in early August when the company announces all of their numbers. Gradual growth in the OEM channel up to 14 million per year is what we want to see. The roller coaster effect of car sales can and does cause some roller coaster effect in satellite radio. Steady growth is what we want to see.
Sirius XM posted subscriber gains of nearly 600,000 subscribers. This is great news. They also posted a churn rate of 1.8% and a take rate in the OEM channel of 46.7%. All of these are positive developments. The additional subscribers delivered through auto sales that averaged 1 million per month in the quarter gave the company a lot of latitude and gave the company the ability to work retention programs more effectively and likely we will see positive metrics across the board.
We will likely see ARPU improve and overall revenue step up as well. One question mark will be SAC. Delivering subscribers from the OEM channel costs money. A rise in SAC is a distinct possibility, but investors should not fear that rise in cost. It is the company’s investment into future growth. The positive is that manufacturers are cutting down on inventory, so the numbers are not as high as they would have been in the past. By example, Chrysler is keeping about 70 to 80 days of inventory instead of 130 to 140 days. Thus, the spike in SAC is a realistic assumption given the subscriber numbers the company announced. Sirius XM warned of higher SAC on the last quarterly call, so when this news is reflected this quarter, there should be no surprise.
The beauty in the numbers Sirius XM released is in the wiggle room the company has in working penetration rates, marketing, and retention. June OEM sales delivered a SAAR rate of 11.08. This is down from the 11.6 that we saw in May. While car sales are indeed down, and while the SAAR does suggest a slower than anticipated recovery, satellite radio investors need only worry about one thing. Will OEM sales beat the 11 million for the year that Sirius XM’s guidance is based on? The short answer is that it appears that Sirius XM’s guidance is quite safe, and that the company can grow and even begin to flourish with current OEM trends. OEM sales may not satisfy analysts of the OEM channel, or even manufacturers themselves, but Mel Karmazin was conservative in guidance and SIRI investors can be happy from the perspective of satellite radio.
The news today was quite positive, and well received by the street. It was enough to spike the stock above $1.00. There are two sides to the market though, and those betting against the equity have their own perspective. Right now, the equity is still trading in that tug-of-war range between $0.90 and $1.10. Stay tuned…
Position – Long Sirius XM Radio