August 2009 brought with it the peak in auto sales in the United States. For satellite radio, which relies heavily on the auto sector for subscribers, the news may bring a sigh of relief, but there are many things to consider.
Cash for Clunkers was a driver of sales, and increased foot traffic in dealerships, but the program has ended, and there are many who think sales will return to lower levels when $4,500 incentives are missing. In the first month of the program, 180,000 cars were sold with incentives. This represented about 18% of the sales figure in July (July sales approached 1,000,000). In August, 500,000 more cars sold under the program. This translates to about 40% of the cars sold in August (August sales were 1,260,000). Absent Cash For Clunkers, sales would have been flat, if not worse than 2008.
For satellite radio the news would seem to be bitter sweet. On one hand, there are now more satellite radio equipped cars in the channel than without the program. On the other hand, there is a vehicle shortage, and sites such as Edmunds are predicting terrible sales in September, thereby reversing the boost we saw in sales due to Cash for Clunkers.
Getting more specific, there are short and long term impacts. The boost in sales for July and August will add subscriptions. This will help in the long term. In the short term, the company Subscriber Acquisition Cost (SAC) will increase, and Average Revenue Per User (ARPU) will be impacted to the downside.
SAC will go up because the costs associated with a ramp up in production means that the company must invest into chipsets and pay vehicle installation subsidies. Simply stated, the company is investing money into radios that will translate into subscribers down the road. SAC will take a hit, but the pay-off comes when the trial subscriptions become self paying.
ARPU will take a hit because of the number of vehicles that are in production but not yet sold. Makers such as Chrysler, Ford, BMW, and Mercedes are counted as subscribers at the time of installation. The money for those subscriptions is deferred revenue (a liability) until an actual person buys the car. Durning this period of time (from production until sale) these subscribers are RPU averages. The more $0's you have, the lower the average. Long term, the company will generate subscriptions, but short term, these unsold cars hit the ARPU line in a negative way.
If sites such as Edmunds are correct in that September, and perhaps even October sales, will be bad, then we have not seen the jumpstart that would deliver a balanced flow between supply and demand. Had Cash for Clunkers lasted into September, the perception would be that increased sales would continue. That perception disappeared when the program closure came suddenly a bit over a week ago. Now, the benefit that would have been delivered by three months of stronger sales in a row for the auto sector has evaporated. This news is not lost to satellite radio investors.
The big winners in August were Hyundai, Ford, Toyota and Honda. All of these companies were able to post double digit gains. General Motors and Chrysler posted declines.
Hyundai - The company is near 100% installation, but the structure of the deal carries short term impacts in hopes of long term benefits. Radios are not counted as subscribers unless they elect to keep the service after the trial period. Thus, cars sold in Q3 will not hit subscriber roles until Q4 or Q1. For short term traders, strong sales by Hyundai in Q3 translate into costs.
Ford - Sales rose 17 percent to 176,323 in August. Ford subscribers are counted at production. A strong month for Ford means a boost in subscribers because the company needed to increase production to replace the cars sold. Many of the cars sold however, were already counted as subscribers in Q2 (when they were likely produced). Because much of Fords backlog of inventory are now in consumer hands, these subscriptions RPU. However, increased production will add $0's to the metric as well.
Toyota - This deal is similar to Hyundai, with similar impacts on the metrics.
Honda - Sales of Honda's help the subscriber line this quarter. Subscriptions are counted at the time of sale, and high sales in the quarter will help the subscriber metric.
GM - Similar to Honda in deal structure with similar impact on metrics.
Chrysler - Similar to Ford deal with similar impact on the metrics.
The bottom line is that sales will help the company report positive subscriber, but the long term key is a stable auto channel. Even with a Cash for Clunkers boost in sales the auto sector is still down 27.9 percent for the year to date. This fact is a weight on the equity.
My measure of success for Cash for Clunkers was whether or not it balanced out and stabalized the auto sector and reverses the downward trend. At this point it is pretty safe to say that the program did not meet that criteria. It was a success in getting a backlog of inventory sold, but outside the program sales were still not impressive. It has been argued that the Cash for Clunkers program may have simply encouraged people already planning to buy a new vehicles buy them a month or two earlier. This creates a see-saw effect that is not the health I am seeking in the channel. July and August saw 2,100,000 cars sold with 700,000 being part of the program. That is 33%. The real story will pan out over the next two months.
One challenge auto makers face is getting consumers into dealerships without the government incentives. Chrysler is offering $4,500 on select vehicles, but as yet other auto makers are not being so bold. GM's put sales were up 30 percent from July and were the best for the company this year, but they have not yet matched the offer put on the table by Chrysler.
In conclusion, we will see positive subscribers for Q3 with negative impacts to the SAC and ARPU lines due to the auto channel. Higher SAC costs in Q3 are typical. The company manufactures most of their hardware for retail in Q3, and manufacturing means more costs. Longer term, investors can see the reward of the monies invested by the company this quarter. The key thing to watch for is a stable auto channel.
Position - Long Sirius XM, No Position OEM's