September auto sales finished Q3 with a bang by besting virtually all analyst expectations and delivering 1,185,000 in sales, a SAAR rate of 14.9 million (the highest in 2012). For the quarter auto sales come in at 3,622,000. While September was not as high as August, and Q3 was not as good as Q2, the numbers are looking good both for the auto sector as well as SiriusXM. In fact, there is a better than decent shot that full 2012 auto sales will be about 200,000 units better than the current outlook.
A Look at 2012
For SiriusXM this spike in auto sales has been a major driver for new subscriber additions. This has provided great year over year comparisons that have perhaps gotten some a bit to excited about the future years, but there is the satellite radio equipped used car pipeline that should provide enough cushion to keep the growth rates high.
Right now auto sales for 2012 stand at 10,893,000 with analysts expecting the year to finish out at 14,400,000. This would imply that auto sales in Q4 need to come in at 3,507,000. In my opinion that can be accomplished with relative ease, as the fourth quarter historically mimics the second quarter. In Q2 of 2012 auto sales were at a brisk 3,801,000, a full 300,000 more than what would be needed to hit 14.4 million.
This begs a question. Why are analysts seeming to project a small slowdown in Q4? The answer is likely in the fact that this is an election year and the economy is still not what it ought to be. Let’s split the difference between the 3,507,000 needed to 14.4 million mark and the high end of 3,800,000. That would imply Q4 sales 3,653,000, a number that seems more conservative, but not outside the realm of what should be anticipated. That would put 2012 auto sales at 14.55 million, or about 155,000 higher than is being anticipated with current estimates.
Bearing that in mind, the company should have been able to add about 540,000 subscribers in Q3 and should be able to add at least an additional 590,000 or so in Q4. That would put the 2012 subscriber number at 2.15 million! This is well above current guidance of 1.6 million and the reason that I am clamoring for the company to boost the guidance now. Clearly SiriusXM will be approaching current full year guidance levels when it announces the Q3 number. In Q1 and in Q2 SiriusXM announced subscribers shortly after the quarter closed. Thus far SiriusXM has been silent on the Q3 subscriber number.
A Look At 2013
Auto sector analysts are currently expecting 2013 auto sales to be at 15 million. Again, I think the street is being a bit conservative. If 2012 delivers 14.5 million, the implied sector growth for 2013 only 3.5% for next year vs the 13% growth we will see in 2012. While a slowing of growth rates in the auto sector does seem realistic, I am hesitant to go all the way down to 3.5%. If the sector grows just 7% next year auto sales for 2013 would be in the neighborhood of 15.5 million instead of 15 million!
SiriusXM has not yet released guidance on subscribers for 2013. In trying to anticipate that number we need to look at what we expect for new car sales, anticipate the impact of a growing used car segment, and account for churn and promotional subscriber drop-offs. A quick back-of-the napkin sketch would imply that a minimum of 300,000 additional self pay subscribers would come into the rolls from new car sales as well as an additional 150,000 promotional subscribers. If we consider 15% growth in the used car market (this considers that the number of satellite radio equipped used cars in the market increases) and we get another 60,000. All told, it would appear that gross additions should be able to increase by about 500,000.
Now to consider churn. Even though the churn rate of 1.9% may remain pretty constant, the absolute number rises because it is based on a bigger base. Believe it or not, the that number could eat up about 300,000 out of the half million.
What I would look for is the company to start 2013 guidance off just below where it finishes full year 2012. That would imply subscriber additions guidance in 2013 of 2 million. It is also my opinion that the company will approach 2.3 million for the year in 2013.
SiriusXM saw the benefit of a substantial ramp up in auto sales in 2012. That rate of auto sales improvement will not be as aggressive in 2013. There will be growth, but it will be more moderate. That translates to satellite radio. The used car channel will now be growing at a faster and more meaningful clip, so that offsets the growing absolute number in churn. This essentially allows the company to mimic the improvement percentage of the new car sales market. I am anticipating that 2012 guidance will be raised to “approaching 2 million”, while the actual number could be 2.1 million. I am anticipating that in the Q3 call guidance for 2013 will be established at 2 million as well. Simply stated, the company is growing.