Since I am once again being attacked by Brandon Matthews, and since he is submitting that attack to sites such as Trefis, I will respond.
In preparation for the outline below, readers should first understand the back story by reading or re-reading the following articles:
- November Auto Sales Make It a Challenge For Sirius XM To Meet Subscriber Guidance - Spencer
- November Auto Sales Are In - How They Impact Sirius XM - Spencer
- Finalized November Confirm Sirius XM Concerns - Spencer
- Sirius XM's Q4 Guidance - What We Need To See - Spencer
- Analysis Confirms Sirius XM on Track To Meet Or Exceed Subscriber Guidance - Brandon
My response to Brandon's Article:
1. I did not call into question the company's ability to meet guidance. I simply stated that it would be a challenge. Typically most consider Mel Karmazin someone who "under-promises" and "over-delivers." Getting 442,000 subscribers in Q4 will not be a walk in the park.
2. I am not lazy at all. In fact, I broke out many Q4 numbers by doing the math and subtraction in the very article Brandon seems to disagree with.
3. Brandon seems to imply that I am of the opinion that auto sales are flat, and then proceeds to show year over year comparisons showing that sales are up. I NEVER stated auto sales were flat year over year. This is a figment of Brandon's imagination apparently designed to steer the reader in a particular direction. I am well aware of the auto sector, as I follow it quite closely. If you notice, in Brandon's own chart (shown in black), the auto sales in the second half of 2011 have been flat.
4. Brandon states that December Auto sales should come in between 3.2 and 3.3 million. Through November, Q4 auto sales are at just over 2 million. Thus Brandon is seeking a December with auto sales of 1.2 to 1.3 million. The best month this year was March with sales of 1,245,000. December would need to rise substantially from November in order to hit the numbers Brandon is seeking.
5. Brandon seems to randomly assign the following to auto sales so far this year:
- Q1 2011 =3 million
- Q2 2011 = 3.1 million
- Q3 2011 = 3.15 million
Using actual numbers that I track, here are the real figures.
- Q1 2011 - 3.05 million
- Q2 2011 - 3.27 million
- Q3 2011 - 3.18 million
Interesting that Brandon shows stepped growth happening and Q3 as the highest to date, but the actual numbers show Q2 as the highest to date. The issue here is that Brandon neglected to pull actual data and instead referred to a copy and pasted chart.
6. Brandon then goes on to say that I ignored production. I did nothing of the sort. In fact, I am the only writer who takes the time to break down production and how this impacts Sirius XM on a regular basis. This is important because some Sirius XM's OEM partners provide subscribers at the time of "production", while others are at "point of sale", and yet another category are "trailing" by at least three months. For example, at the time I wrote my article, Ford (a partner that supplies subscribers at production) had produced 656,000 vehicles in Q3. This was down from 710,000 units in Q2 (which I will address again later). The company's Q4 production was initially slated to rise from the 656,000 in Q3 to 660,000 in Q4. After my article Ford reported earnings and in that conference call, brought Q4 production up to 674,000 units (14,000 higher than they guided initially, 18,000 higher than Q3, but 36,000 less than Q2). Production from Ford, THE MAJOR player from Sirius XM partners that supply subs at production, has actually gone down from the peak.
7. Brandon then goes down the path of showing subscriber additions and churn for 2011:
- Q1 Net Subscriber Additions = 373,064, churn rate 2.0
- Q2 Net Subscriber Additions = 452,147, churn rate 1.9
- Q3 Net Subscriber Additions = 333,683, churn rate 1.9
He fails to show the reader deactivations for the year, which are as follows:
- Q1 2011 - 1,679,303
- Q2 2011 - 1,727,201
- Q3 2011 - 1,804,448
It is important to know that a flat churn rate does not mean the same in absolute numbers from quarter to quarter. Notice that even with the stated churn rate improving from 2.0% to 1.9% that the number of deactivated subscribers has gone up quarter after quarter. This happens because the company has a bigger pool to churn from each quarter. Q4 of 2011 will see a deactivation number that is greater than that which we saw in any previous quarter. Thus, if Sirius XM is going to have between 1,850,000 and 1,875,000 deactivated subscribers in Q4, they need to add between 2,292,000 and 2,317,000 subscribers in order to hit the 442,000 they need to deliver to hit guidance.
8. Brandon states, "As you can see, in the second quarter of this year, Sirius XM reported a greater number of net subscriber additions than it would need to report in the current quarter. Not only did the company report good results, it did so in the face of weak economic data, a Japanese Tsunami and flooding in Thailand which devastated the the economy and auto supplies."
What Brandon failed to note, and something that I wrote about extensively, is that while tragic, the disaster in Japan gave production geared OEM partners a boost in Q2. The impact of the disaster slanted results, supplying more subs in Q2 than otherwise would have been there, and less in Q3 than would have otherwise been there. Further, production partners, such as Ford produced more cars in Q2 than they will in Q4. Thus, in theory, Ford will supply less to the subscriber line in Q4 than they did in Q2.
9. In Q2, the quarter that Brandon says should be easy to beat, subscriber deactivations were 1.727 million. Gross additions came in at 2.179 million. We already know that deactivations will be between 113,000 and 138,000 higher than in Q2, and gross additions in that quarter were 111,000 to 136,000 LOWER than what we need to see this quarter. Thus, considering the two factors, we have a delta of between 224,000 and 274,000 that needs to be made up. Pretty important information to consider.
10. Brandon then posts a chart from Ward's auto world (without credit) that shows inventory. The problem with this chart is that it is not weighted, and does not consider weighted averages. By example, Ford and GM outsell Chrysler by a wide margin:
- GM YTD - 2,269,000
- Ford YTD - 1,936,000
- Chrysler YTD - 1,231,000
Of the 5,436,000 sold, Chrysler accounts for 23%, while Ford and GM make up 77%. GM's days of inventory is much more meaningful than Chrysler's 78 days as it relates to Sirius XM and the delivery of subscribers.
11. Brandon then quotes the gross additions number showing that it is going up. This is all well and good if the information he provided was correct. IT IS NOT. He quotes Gross additions of 6,350,621 for 2010. That actually happens to be the number of deactivated subscribers. The correct gross additions for 2010 was 7,768,827. In addition, had he thought a bit deeper he would see one of the very issues I addressed. In 2010 Sirius XM had gross additions of 7.77 million and NET additions of 1.4 million. In 2011 gross additions will come in at a number above 8.65 million. This is an impressive number, but that additional 950,000+ gross additions only added 200,000 to the NET subscriber line. In other words, gross additions had to improve by 1 million in order for net additions to improve by 200,000. Think about that.
12. Brandon then goes on to say that the addition of Latin programming should help reduce churn? Sirius XM has been lacking in Latin programming for years. People disappointed by the previous levels of Latin programming have already left long ago. People wanting Latin programming will just now be signing up. These new channels are not a churn reducer as much as they are an incentive to bring in new people. Churn is based on SELF-PAYING SUBSCRIBERS already in the pool.
13. Lastly, earlier this year it was Brandon Matthews that told all of his readers, and posted on message boards across the web, that Sirius XM would add 1,200,000 subscribers in Q1. He gave reason after reason why this would happen. My projection for Q1 was, "Simply stated, anything above 400,000 NET subscriber additions will be welcomed news from the street." The actual number in Q1 was 373,000.
In closing, I have not stated that Sirius XM will miss their subscriber numbers. I simply stated that it would be a challenge, and even outlined some things to watch for that the company could do to make it happen. Bear in mind that it is partners from the production and point of sale categories that matter in getting to the Q4 number needed to meet guidance. There is a distinct difference between calling for the company to miss and pointing out that something will be a challenge.