While September auto sales are not yet in the books, there is enough information to begin to look at the subscriber picture for Q3. Bear in mind, there is a lot of number crunching and assumptions in this piece, but it is worth while if we can begin to establish a range for the Q3 subscriber picture. The first thing to note is that Q3 has been strong in the OEM channels as it relates to SiriusXM. It is stronger than Q1, but weaker than Q2. In fact, auto sales should come in right about in the middle of the two previous quarters.
Some important data points:
- Q1 auto sales were at 3,469,301
- Q2 auto sales were at 3,801,607
- Q3 auto sales should come in at about 3,586,000
- Q1 SiriusXM gross subscriber additions were at 2,161,193
- Q1 SiriusXM deactivations were at 1,757,097
- Q2 SiriusXM gross subscriber additions were at 2,481,004
- Q2 SiriusXM deactivations were at 1,858,962
As you can see, the company has had an impressive ability to add gross additions. This hinges on a few factors of how the company derives subscribers, but we will stay away from that topic for the time being. It is also noteworthy that deactivations have grown as well. Gross additions saw an improvement of just under 15% (quarter over quarter) on OEM sales growth of just under 10% (quarter over quarter). Meanwhile deactivations grew about 7%. These metrics are a good sign for continued growth. Exactly what type of subscriber growth is what we want to assess now.
While very oversimplified, let’s look at the gross additions relative to car sales. This is far from an exact science, but what we are trying to establish is a ballpark. In Q1 the gross additions represented 62% of OEM sales. In Q2 that metric rose to 65%. I understand that the company is ramping up the used car channel, and that 3% pop actually supports that happening. Let’s assume that the used car channel is still helping, and that the 65% we saw in Q2 will become 68% in Q3. That would support gross additions of 2,438,000. This is slightly less than last quarter, but given the fact that Q3 has been weaker than Q2, it is justified.
Now that we have looked at the gross additions side of the equation, we need to consider the deactivations side. Deactivated subscribers encompass self pay churn as well as paid promotional subscribers leaving the service. In Q2 we had 1,858,962 deactivations. The law of numbers dictates that self pay churn of 1,9% will be a higher absolute number if the self pay subscriber is higher than the previous quarter. Thus, it is natural for deactivated subscribers to grow. The self pay base grew by 462,000 subscribers between Q1 and Q2. It is reasonable to assume that it will grow again, though by not as much. Staying simple, if we assume that the deactivated subscribers line grows by 3.5%, we will be looking at deactivated subscribers coming in at 1,924,000.
Thus, if gross additions come in at 2,438,000 and deactivated subscribers come in at 1,924,000, the subscriber number for Q3 will be 514,000. While that may not be the number many people want to hear, we have to consider that car sales in Q3 were not as strong as in Q2. The number does represent a middle ground between the 404,000 the company reported in Q12 and the 622,000 reported in Q2, and all things considered that is good progress. and it would put the company just 60,000 shy of its full year 2012 subscriber guidance.
Of course there are many things that come into play. Retention efforts, the OEM mix, the used car program, and retail sales all need consideration. This model is a very simple model that avoids all of the detail and spreadsheets that come into play on my more formalized model. From a napkin sketch look at things, I can see the company reporting between 510,000 and 540,000 subscribers for the quarter. We are still a week or so away from the end of the quarter, but lately Mel Karmazin has been announcing early. I know there are many looking for 600,000 or more, but realistically it is not in the cards unless there were some serious activity beyond the norm in retention.