It was just yesterday that Sirius XM announced an impressive 583,000 new subscribers for Q2 2010. The number blew away analyst expectations, and left many scratching their heads on how the company saw such improvement over the 171,000 new subscribers they announced in Q1. The answer is a combination of things, but the biggest factor is in the company's customer retention. Sirius XM was able to decrease churn from 2.0% in Q1 to 1.8% in Q2. While two tenths of a point does not seem like much, it is actually quite substantial.
- In Q1 the company added 1,720,848 Gross subscribers.
- In Q1 the company reported 2% churn and thus had 1,549,407 deactivations
- In Q2 the company added about 2,020,000 Gross subscribers
- In Q2 the company reported 1.8% churn and thus deactivations will come in at about 1,437,000.
Even with more gross subscribers, and a progressively higher number of self paying subscribers the company reported fewer deactivations this quarter than last. Had churn remained at 2.0% for Q2, the deactivations could have been as high as 1,600,000 or more. The delta between 1.8% and 2.0% churn would be somewhere between 120,000 and 160,000 subscribers depending on how the quarter was weighted.
This factor alone accounts for a big lump in the subscriber numbers. Because Sirius XM improved retention by such a substantial margin, they were able to retain existing subscribers rather than going out and buying them with SAC dollars. Even if the company is having to discount their service to keep more subscribers, it is a process that is less expensive than going out and getting a new subscriber. If a new subscriber costs about $60 in SAC, and the company gives an existing subscriber $30 worth of incentives to stay, they are making out well.
What investors need to realize is that the mix of subs in the Net additions reported by Sirius XM is actually benefiting from subscriber retention. This news is even more positive than the subscriber number that impressed everyone. keeping what you have is always less expensive than going out and getting a new one.
With all of that being said, the Subscriber Acquisition Cost will go up. The company added 300,000 more gross subscribers in this quarter when compared to last. That will increase the SAC line item by at least $18 million. This is not a bad thing in that getting subscribers is the business Sirius XM is in. The only negative that could possibly be argued is that EBITDA will be impacted downward by these costs. SAC per gross addition will come in right near current levels of $60 (plus or minus $5 depending on the make-up of the gross additions.). This factor has a lot of people slightly confused. SAC will go up, but SAC per gross add will remain flat. It is simply a function of averages. The higher cost is being divided by a higher gross subscriber number.
Another factor that is improving and helped this issue slightly was the take rate moving upward. The company reported a take rate of 46.7% in Q2. This is up from 45.2% in Q1. In over-simplified terms, if gross adds from the OEM channel were 1.5 million the delta between these two take rates (45.2% and 46.7%) would be about 23,000 subscribers. The number may not seem impressive, but when trying to account for the big boost in numbers for Q2, and considered with the improved churn, the numbers start to fall into place much more nicely.
While the numbers explain a lot, the impressive feat is that the company had such a large improvement in churn and a modest improvement in take rate even in a down economy. Analysts will have to account for the costs associated with this new-found growth, but that will be quickly accomplished when the company announces the Q2 results in early August. We can expect higher revenue for Q2 as well, but expect a small dip in EBITDA as the ramp up in subscribers is a cost today that will pay "dividends" in the future. Sirius XM is well within striking distance and can even beat of their $550 million EBITDA projection for 2010.
Position - Long Sirius XM Radio