February 2011 auto sales have come in substantially higher than analysts had anticipated and the number bodes well for Sirius XM Satellite Radio. Auto sales were just shy of 1 million on positive year over year results for most auto makers and an impressive boost of over 40% for GM. The Seasonally Adjusted Annualized Rate (SAAR) for February was 13.44 million, the highest level in well over a year, and the first time a SAAR has at least matched analysts projections of 13 million in auto sales for 2011.
Sirius XM Satellite Radio is installed in 60% to 65% of all cars manufactured. It is through car sales that the company derives most of there subscribers. consumers typically get promotional subscriptions ranging from 3 months to a year when purchasing a satellite radio equipped car.
Here at SiriusBuzz we have a unique method of tracking auto sales that is specific to satellite radio. The attached chart (click to enlarge) illustrates sales figures and whether the auto manufacturer provides "Leading", "point of Sale", or "Trailing" subscriptions.
This category delivers promotional subscribers to the Sirius XM metrics at the time of manufacture. Thus, in Q1 of 2011 it is not monthly sales that matter as much as monthly production. Partners in this category are outlined in green in the charts associated with this article. With the average inventory being at 50 days from manufacture to sale, Sirius XM gets the benefit of counting subscriber 50 days earlier than the “POINT OF SALE” category. Sirius XM receives payment for the subscription from the OEM at the point of manufacture. That payment is booked as deferred revenue (a liability) on the balance sheet. The deferred revenue starts to become revenue when a consumer buys the automobile. These types of promotional subscriptions also impact metrics such as Average Revenue Per User (ARPU) as well. During that 50 day period between manufacture and sale the monthly revenue from these radios is $0. This is a negative impact on the ARPU metric. The positives of these types of promotional subscriptions is that they are counted as subscribers longer than the consumers trial period. Additionally the company gets back some of their cash investment into the radio (Subscriber Acquisition Costs – SAC) more quickly than with the other promotional categories. This makes the “LEADING” category cash flow friendly. Essentially Sirius XM invests into a radio installation and a mere couple of weeks later gets a paid subscription. They pay money, get it back, then can invest that same money into yet another radio.
POINT OF SALE
“POINT OF SALE” promotional subscriptions are exactly what they sound like. The promotional subscription is activated when the car is sold to the consumer. This category does not impact the deferred revenue line as the consumer is actually receiving the service when the promotional subscription starts. These promotional subscriptions are not as cash flow friendly as the company must wait that 50 days for the car to get from manufacture to the dealer lot and sold. With “POINT OF SALE” the monthly sales figures are quite meaningful. This is because this is when the promotional subscription actually happens. Most satellite radio equipped cars in this category come with a three month subscription. This category is represented by yellow in the charts associated with this article.
“TRAILING” promotional subscriptions are perhaps the most tricky for investors. Essentially cars sold in this category get promotional subscriptions, but are not counted as subscribers unless they become self paying subscribers at the end of the promotional period. The company receives no money for the promotional subscription and thus can not count it in the subscriber totals. Most cars in this category offer a three month promotional subscription. If at the end of three months the consumer elects to keep the service they are then counted as a subscriber. If they elect to decline they are not counted as a deactivation because they were never counted as an activation in the first place. A Toyota sold today can not possibly become a counted subscriber until May 1st 2010. Thus sales in this category will not impact the subscriber metrics until three months later.
With a strong February in auto sales Sirius XM should be on a good pace to meet or exceed subscriber guidance for 2011. Unless the wheels somehow fall off of the economy, it would appear that auto sales for 2011 should be among several positives Sirius XM is able to report this year.
Position - Long Sirius XM Radio