Great Churn Rate Boosts Sirius XM’s Subscriber Count
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.
Q1 2010
- In Q1 the company added 1,720,848 Gross subscribers.
- In Q1 the company reported 2% churn and thus had 1,549,407 deactivations
Q2 2010
- 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
Spencer,
Glad you finally see the light. For some to say sac was going to $74 was absurd but not as absurd as the stock only moving 6% for the week with great news vs. the overall market moving 5%. This is very bullish news and most companies would have flown much higher. But for Bank to say he keeps a $1 target is down right criminal. He had no chance to run new numbers and account for things. The stock should be 1.20- 1.25 right now with short potential to 1.50 or so.
Steve…..
I have always seen the light. Miller Tabak at $74 is way off base in my opinion. In my projection for SAC increase for Q2 I used $60 per gross addition. SAC as a line item will increase. People should know that because it will impact EBITDA by bringing it down some. These costs do impact cash from operations.
This is bullish news, but it is also only part of the story. SIRI no longer makes emotional moves upward like it did in the past. The spike should have perhaps hit 10% and then settled down, but as I have said, it can be reasonably argued that between $1.00 and $1.15 that the company is already fairly valued. Long term targets should see better prices, but in the short term this news does mean costs.
Bank keeping $1.00 may perhaps be more bearish than it should be, but a short term price of $1.50 would be a bit of a reach at this point. wait til after we see all Q2 numbers before making that kind of call. I am sure that analysts were burning up the phone lines today so thaey could crunch numbers.
For what its worth, Bank has been negative all the way up from 10 cents. He’s been behind the curve, his price targets behind the stock’s move up.
youknowwho,
You are right. His intentions are very obvious. He wanted a R/S and has benn pushing for it for sometime. Bank is definitely part of the problem.
ARPU is going to be a key figure. Hope to see a stable or rising figure. But the natural concern is did they discount heavily to decrease churn?
Going forward ARPU is going to be so key.
Excellent analysis, Spencer. As you say, the key is to make money on retaining subscribers, even with discounts…seems like SXM is focusing on the right areas.
MUSCLE13,
If they did discount heavily, I can live with that at least point. Some revenue is better then losing revenue. I believe next year we will get some price increases and that will help going forward.
at this point- sorry
My belief is a key to increasing ARPU and decreasing churn is getting Howard on the cellphone apps.
Personally there is nothing more important to this subscriber than taking Howard out of the car on my phone after a drive and not missing a beat by listening to Howard on the net when I get home.
There are millions just like me.
You need to get a life, buddy. And I doubt siriously about millions like you. I don’t give Howard a second of my time and I believe there are millions like me.
When Howard signed with Sirius they had 600 thousand subscribers. Today Sirius XM has over 19.5 million subscribers.
Anybody who follows the radio business knows how important Howard is to radio. Mel calls Howard the most important radio personality in the history of radio.
There certainly are millions like me.
And all those additional subscribers, 19.5 million, are because of Howard? You don’t believe that yourself.
I believe Howard is responsible for millions of subscribers. And G-D forbid if he chooses to compete with Sirius.
When Howard was on terrestrial he had well over 12 million people listening to his show regularly every single week.
Basically Howard is the Michael Jordan of radio. He changes the game himself.
Key word being terrestrial radio = “FREE RADIO”. You throw in paid subscriber radio and we’ve got a new ballgame. If I remember correctly Howard never brought the followers they expected to the party. I believe the numbers started dropping off @ the 5 million mark. So while I agree with you in part I don’t think Howard is a deal breaker for siri any longer. He’ really getting beyond his time. Younger generation isn’t interested in some old pervert groveling over some young babe on live radio.
If Howard ever decided to compete against Sirius then in my opinion Sirius is finished. He is that important to radio.
My belief is Mel will never compete against Howard.
I agree with you on that.