As most investors know, the auto sector carries a lot of importance to Sirius XM. It is from the auto channel that the company derives the vast majority of their subscriber base, and from that base that the company grows. Ironically there seems to often be a lot of confusion when the auto channel is discussed. Some confusion stems from simple misunderstandings while other pieces of confusion are born by writers or analysts that discuss the subject without fully being aware of what the term or metric really means. This article can serve as a long term reference for satellite radio investors. Seasoned investors may feel they already know a lot of this, but I will virtually guarantee that even the longest long will learn something from this piece.
SEASONALLY ADJUSTED ANNUALIZED RATE (SAAR)
Perhaps the biggest source of confusion I have seen lately is with the Seasonally Adjusted Annualized Rate (SAAR). The SAAR takes a step above simple annualized numbers by taking into account the seasonality associated with business. Business rarely remains steady throughout the course of the year. By example, In May 1.1 million vehicles were sold in the United States. Simple annualized math would determine that over the next 12 months 13.2 million vehicles will sell. The SAAR for May was 11.6 million. How can such a discrepancy exist? The answer is that auto sales fluctuate during the year. SAAR takes a look at historic data and gives credit and credence to that data. The simple gap between an 11.6 million May SAAR and a 13.2 million annualized rate should tell the story. Essentially, May is a stronger sales month for cars than several of the other months. If you see someone say the SAAR for 2010 is 11.6 million, or any other number be careful. There is no SAAR for 2010.
The other misunderstanding in SAAR is that people tend to think that the 11.6 SAAR number announced for May means that it is anticipated that 11.6 million cars are anticipated to sell in 2010. This could not be further from the truth! The 11.6 million SAAR announced for May is projecting sales for the next year, or more simply stated, until April of 2011. I have seen time and time again questions about how the street is expecting sales of only 11.6 million cars this year. In actuality the street is expecting 2010 sales to be about 12 million units. There is no such thing as a SAAR for 2010, 2011, or any year. SAAR uses data supplied by the U.S. Bureau of Economic Analysis to factor in the seasonality of auto sales to project 1 years worth of sales from any given month. Simply stated, use SAAR to look forward for a year.
This is a much more simplified way to project something, but is also not very accurate. If January saw car sales of 750,000, the annualized rate would be 9 million cars sold. Just because January sales are typically low does not mean that everyone should suddenly worry that the whole year is toast. January sales are typically low while other months are typically high. People tend to actualize because it is easy. The mistake is that they are failing to take into account that there are natural patterns with higher and lower sales throughout the year. The most common mistake I am seeing is people assuming that SAAR, described above, is the annualized rate for the current calendar year.
Production is an easy concept to understand. Unfortunately for satellite radio investors, it has been complicated by carrying differing levels of importance depending on manufacturer. I covered this in greater depth in another article titled In Depth Analysis of May 2010 Auto Sales and What It Means To SIRI. Production gets a little gray in satellite radio because some OEM's are counted as subscribers at production while others are not. As an investor in satellite radio, it behooves you to understand the subscriber counting process and the article linked above will shed light on this issue for readers.
Satellite radio investors tend to look simply at sales. Auto sales are important, but for SIRI investors, it is only part of the equation. By example, In May 2010 33% of the cars sold were brands that Sirius XM counts as a subscriber at the time of sale. By contrast 37% were brands that were already counted as subscribers when the car was produced, and 30% were brands that do not count as a subscriber until after the trial period is complete and then only if the consumer elects to become self paying.
The importance is placed on sales, but the reality is that production is just as important, and perhaps even more important than that is the balance of the mix of the various types of OEM subscribers.
Original Equipment Manufacturer (OEM)
OEM is the term that is used to define the manufacturers of cars. Ford, GM and Toyota are all OEM's. Sirius XM has deals with the OEM's not dealers (there are a few exceptions to this). People often think of the OEM channel as only new cars. The fact of the matter is that in terms of satellite radio, it applies to used cars as well. Once a radio is installed by an OEM, it will always be an OEM. This is true even if the car sells 10 times.
Certified Pre-Owned (CPO)
Certified pre-owned cars are cars that are certified by the OEM. Sirius XM has entered into various deals with OEM's to be included in their Certified Pre-Owned programs. Buyers of CPO cars typically get trial subscriptions to satellite radio. The importance here is that the deals are with the manufacturer and not the individual dealer. Sirius XM has more quality control by dealing with the OEM. Dealers could potential misrepresent the product. A CPO car is a car that has been through dozens of quality checks, falls within a certain number of miles, and will typically come with a longer warranty.
This term will come up in the context of certain OEM's. Ford, GM, and Chrysler all get some revenue each month from a satellite radio subscription installed in one of their cars. Toyota would be an example of an OEM that does not get a revenue share. The OEM's that get a revenue share typically install more satellite radio's, and have been installing them for a longer period of time. Because they install more radios, some may feel that they are better partners. This is not necessarily the case. By example, If GM gets 33% of the revenue on a $15 per month subscription and sells 100 satellite radio equipped cars, GM gets $500 and Sirius XM gets $1,000. It would take only 67 Toyota cars to be satellite equipped to deliver the same $1,000 in revenue to Sirius XM. From a revenue standpoint Toyota is the winner. From a subscriber numbers standpoint it is GM. The lesson here is that the best OEM partners in one category may not be the best in another. Thankfully Sirius XM has a healthy mix of the OEM's in each category. Do not be fooled into thinking Ford is a better OEM partner than Toyota. Currently Ford delivers more subscribers, but down the road, Sirius XM keeps more revenue from Toyota than they do from Ford.
Fleet sales is the purchase of vehicles by a business that meet a minimum requirement of units sold. Fleet sales include government, municipalities, businesses large and small, car rental companies, and many other entities. Fleet sales are often attributed to the government, and this tends to scare satellite radio investors. The government simply is not subscribing to satellite radio. This category should not be that scary. There are plenty of satellite radio sales incorporated into the fleet sales numbers. For example, when Hertz buys cars, many are satellite equipped because Hertz has a marketing deal with Sirius XM. While overall as a category fleet sales will not have as many satellite radios, they are an important contributor to Sirius XM's subscriber. base.
Take Rate or Conversion Rate
The Take rate is the number of people, on a percentage basis, who decide to become a self paying subscribers (defined below). The take rate for Sirius XM last quarter was about 46%. This means that slightly less than half of those exposed to satellite radio through a promotional period convert to self paying subscribers.
Self Paying Subscriber
Self paying subscribers can be defined in very simple terms. It is a subscriber who is paying for their own subscription.
This is an oft confused metric. Promotional subscribers are subscribers that are receiving satellite radio for free for a period of time from the OEM that installed the satellite radio ( i.e. a GM sub). It is important to note that there are people receiving satellite radio trial for free, but they are not counted as subscribers because Sirius XM has not received any payment for the subscription (i.e. Toyota). Simply stated, there are Toyota's, Nissan's, and Hyundai's driving down the road that are potential subscribers because people are are receiving a trial period upon buying the car.
The measure of how many satellite radios are installed relative to overall production. Satellite radio is installed in about 60% of the cars manufactured. Thus the penetration rate is 60%.
Subscriber Acquisition Cost (SAC)
SAC is a representation of costs associated with garnering a subscriber. In the OEM channel, Sirius XM typically pays for the chip sets, and in many cases pays an installation subsidy (see below), to the OEM to install a satellite radio. These costs would be part of the SAC line item.
Sirius XM sometimes pays an OEM money to get their hardware installed into vehicles. The subsidy varies depending on the OEM.
All in all having good clarity on the terms of the OEM channel will help investors better digest the various news stories during the quarter, and help investors better digest information released by the company each quarter. If nothing else, understanding SAAR is important because there is a lot of confusion out there on the subject.
Position - Long Sirius XM Radio