In late November and early December of 2011 I outlined that Sirius XM (NASDAQ:SIRI) getting to their subscriber guidance had some challenges. Some took these articles as me calling for the company to miss the numbers. It actually was nothing along those lines. What I outlined was concerns regarding the pace of sales and production vs. what the company needed to do to get to guidance. The whole mantra was that Sirius XM needed to be more aggressive on retention, see December sales of at least 1,150,000, and get some traction from the used car market in order to get to the numbers needed to meet guidance of 1.6 million.
Ultimately auto sales came in at impressive levels and the company beat their 1.6 million guidance by nearly 100,000 subscribers. Some of my critics were fast to point out that my “concern” over a miss was overblown. These people pointed to production in Q4 as the key driver of growth. I maintained that it was retention and the used car market that drove the number. Production certainly plays a role, but when compared to the barometer of previous quarters there was not a substantial movement in this category It would not be until the numbers were released that we could see where the pop in subscribers came from.
The company held their earnings report today, and we finally have some numbers to look at. Let’s start with deactivated subscribers and churn:
- In Q3 of 2011 Sirius XM had 1,804,448 deactivated subscribers on a self-pay number of 17,534,410.
- In Q3 churn was at 1.9%
- It stands to reason that if churn remains at 1.9% on a larger self-pay base in Q4 that the deactivated subscriber number would grow.
- In Q4 the churn remained at 1.9% yet the deactivated subscriber line went down from just over 1,804,448 million to 1,783,208.
- In Q4 the self pay subscriber line appreciated from 17,534,410 to 17,908,742.
How is it that the self pay base rises, churn remains the same, and yet the number of deactivated subscribers lowers? The answer is in decimal places. The company only reports 1 decimal place. In other words, churn of 1.94% can be reported as 1.9%. On the flip side, churn of 1.86% can also be reported as 1.9%. This could cause a substantial difference. This is clearly part of how the company actually reported a decrease in deactivated subscribers while maintaining level churn. Thus, it is clear that retention efforts were active during the quarter.
Another factor is in the daily weighted average of subscribers. With higher car sales as well as the holiday, the company likely adds more in the tail end of the quarter vs. the beginning. By all rights the deactivated subscribers should have been approaching at least 1,850,000. This is clear as can be. The company bettered deactivated subscribers somewhere in the range of 67,000 to 80,000. This retention is great, but hits the ARPU line. ARPU in Q4 actually dropped from Q3’s $11.66 to $11.61. Many were expecting that consumers would be locking in the $199 package and that ARPU would appreciate. Instead, it went down.
This is further indication that the company was discounting the service to a level that was negative on ARPU. These are the swings I spoke of. Hitting and beating the subscriber number was great, but it came at the expense of ARPU. As investors we want to see subs going up as well as ARPU.
Now we get to some other bits of information. Self Pay subscribers went from 364,000 to 374,000 despite a weaker previous quarter, and Paid Promotional subscribers went up by nearly 200,000 from the previous quarter. This would indicate strength in a few areas such as used cars on the self pay category, and strength in production and sales partners in the paid promotional category.
The question is whether it was production or sales that drove the numbers. We know that production was actually lower from Ford and Chrysler than it was in the strong Q2. Those numbers have been released. What we saw was a ramp from GM and Honda in December that was above that which we saw from many other partners. In fact sales in the point-of-sale category rose by some 50,000 units during Q4 as compared to Q2. Thus, production was essentially the same, but point-of-sale numbers saw marked improvement. As I pointed out in late November (when auto sales were seeing weakness), the sales figures were what mattered, because production was already established, and was on par with the comparable Q2. In the end, December sales were great, and that relieved some pressure.
After digesting the numbers it is clear that Sirius XM benefited from subscriber retention and point-of-sale numbers to deliver the great subscriber number. I had thought that the used car market was getting its wheels on, but I did give too much credit there.
The negative is that the company had heavier retention efforts than I once thought. Keeping the sub is great, but we do not want to see ARPU suffer. Clearly that happened. I will rework my used car model and tread forward comfortable in that a deeper understanding of this segment of Sirius XM’s growth has been achieved.