If you are invested in Sirius XM (NASDAQ:SIRI) you always want to keep tabs on the auto industry and how sales and production are going. The reason is that auto sales carry a strong impact on how Sirius XM performs, as well as the metrics that investors tend to watch. For July the auto industry sold 1,058,770 vehicles. This is above the 1 million number that SiriusBuzz readers know to watch for, thus good news.
Investors should note that a new dynamic is developing in the auto channel that could impact Q3 metrics. As SiriusBuzz readers are aware, the auto channel is divided into three distinct categories called "LEADING", "POINT-OF-SALE", and "TRAILING". In a perfect world we would see a healthy balance between these categories. Due to the disaster in Japan earlier this year that balance was interrupted. Soon after the disaster I wrote about how the impacts of the disaster would take a few quarters to play out, and that it would be more of a ripple effect on Sirius XM.
In Q2 the auto sales balance shifted strongly in favor of the "LEADING" category. This boosted gross subscriber numbers as production in this category was higher to meet demand. The category that suffered in Q2 was the trailing category, which will carry a negative impact in Q3 and Q4.
In July of 2011 the auto sector saw a new shift in the balance. The "LEADING" category has ticked down below 40%, as did the "POINT-OF-SALE" category. The "TRAILING" category saw a rise by almost two points. What does this mean? It translates to the "TRAILING" category setting up for a recovery that we will see the impacts of in and Q4, while taking share away from the categories that would provide more subscribers in Q3.
Earlier this year I wrote about how the lapse in sales in the "TRAILING" category would impact Q3 in a negative manner in terms of subscribers. One factor that helps this category is the new General Motors used car deal that activates any satellite radio equipped used car. These cars will be in the "TRAILING" category along with cars from the Certified Pre-Owned (CPO) programs.
While it is too early to assess what the subscriber numbers will be in Q3, there are certain factors that we can already consider. The impact from the disaster will not be huge this quarter, but could impact the subscriber line in a way that has Sirius XM reporting fewer subscribers in Q3 than in Q2. These are factors that investors will want to begin to consider as the balance of Q3 plays out.
The company will likely have a similar number of gross additions in Q3 even though auto sales will likely be higher. A savvy investor will consider this. Subscriber Acquisition Costs (SAC) will likely rise due to the fact that the company is investing in the "TRAILING" category. The big question is whether there will be enough gross subscriber additions to make the SAC per gross addition hold the line. That answer will come as we see the auto sales numbers over the next two months.
Position - Long Sirius XM Radio