With the clock ticking on Chrysler to solve their debt woes, investors in Sirius XM have something to think about. Chrysler was a major player in the OEM channel for Sirius over the past few years, but slow sales, and slowed production have made Chrysler's contribution to the subscriber roles diminish.
Different OEM's have different deals, and the way OEM subscriber counts are tallied also differs. Sirius XM counts vehicles in which they receive payment for as a subscriber. This is the case whether the payment is from the OEM or the end user. Because Sirius XM receives payment from Chrysler at production, the subscription is counted prior to the car being sold to an end user. This would help boost subscriber numbers, but the trade off is a lower ARPU (average revenue per user). The reasoning is simple. The 1 year subscription that the end user receives from a Chrysler brand product does not start until the consumer buys a car. The payment received for the subscription from Sirius XM is booked as deferred revenue. Deferred revenue is a liability, and does not switch to revenue until the service contracted is delivered. Because cars do not roll directly off of the assembly line and sell, there is a period of time when cars will not show any revenue and thus the ARPU is impacted.
ARPU is the average revenue per user. If 400,000 Chrysler brand cars are in transit to dealers, or sitting on dealer lots, they are being counted as subscribers, but impacting ARPU because none of these vehicles would be generating revenue as yet.
At the end of February Chrysler's inventory represented a 151 day supply. Chrysler was second only to GM with a 161 day supply. To give perspective, the Chrysler supply on January 1, 2009 was 115 days. With consumer confidence in Chrysler likely low, sales have been hard to come buy. Even with slowed production, the inventory at Chrysler seems to be increasing.
The Chrysler deal has always been cash flow friendly:
1. Sirius XM pays a subsidy for a radio installation - Cash Out
2. Chrysler buys a one year subscription - Cash In
3. 45% to 55% of those subscribers become self paying.
Sirius XM could literally re-invest the cash they receive from Chrysler into more radios. Regardless of what the consumer does, each radio has had a 1 year subscription paid for, thus offsetting costs associated with the installation. If the Chrysler subscribers become self paying, the company as well as Chrysler gets a better return. If the Chrysler subscriber does not become self paying, the company at least got a 1 year subscription paid for.
Compared to the GM deal, the Chrysler deal is very SDARS friendly because of better returns on the investment into radios, combined with lower revenue shares. Should Chrysler falter today, there will be impact on subscriber roles, ARPU, SAC (subscriber acquisition costs), deferred revenue, as well as revenue.
Previously SiriusBuzz spoke of the changing landscape in auto sales. In that piece we focused on the GM side of the equation. This piece focuses on Chrysler. The bottom line is that if sales of these two brands fall off, and are replaced by other brands with more favorable deals, Sirius XM could see a substantial shift in many metrics. It is something investors should watch for.
In terms of subscribers, because of slowed auto production and sales, investors should be prepared for a negative subscriber number with the Q1 announcement. In Q4, the deactivations were 1.6 million with net subscribers added being about 80,000. There is no possible way, given the auto sales trends in Q1, that the company will report positive subscriber numbers. Investors should be prepared for deactivations in the neighborhood of 1.65 to 1.75 million. While this is bad news, there will be metrics where the street will see marked improvement. This will allow investors to look forward to the return of steady auto sales, and consumer confidence. If Sirius XM can weather the next few quarters, there is potential for good times ahead.
Position - Long Sirius XM, No Position OEM's