Okay, I can already see that some readers will be confused because of the news that October of 2011 brought the highest Seasonally Adjusted Annualized Sales (SAAR) that has been reported in quite some time. How could the highest SAAR in months mean that auto sales were a mixed bag for Sirius XM (NASDAQ:SIRI)? The answer is that while the SAAR looked good it only represented slightly over 1,020,000 in actual cars sold.
Now I can see people being confused by the fact that it has long been my mantra that Sirius XM needs 1,000,000 cars to sell per month to deliver decent news on a quarterly report. The first thing to understand is that the auto sector is finally getting to a point of full recovery after the March Earthquake and Tsunami disaster in Japan, but, despite that, the tenor of the auto sales market is not quite what analysts had hoped for. Simply stated, auto sales are not climbing at a pace that gives Sirius XM the opportunity to deliver growth numbers that impress the street.
As each quarter goes by, the number of subscribers that churn out of the company increases. Last quarter that number was over 1.8 million This puts pressure on the company to have more gross additions in order to offset that churn and show positive growth. Current new car auto sales are simply not providing a number that is allowing the company to impress to a level that the street is already anticipating. While the October SAAR was at 13.26 million and higher than anything we have seen this year, October sales on an absolute basis were actually the worst we have seen in the last seven months.
In the latest quarter, Sirius XM reported their second consecutive quarter of negative promotional subscribers in the OEM channel, and the take rate dropped to 44.7%. The company cites the mix of vehicles as a driver for the lower take rate, but in many ways the recent auto sales trend has gone to OEM partners that are long time contributors to the service. The trend of fewer promotional subscribers and a lower take rate is challenging. Certainly the mix of vehicles has some impact, but it is that mix that we have to deal with in the longer term. Perhaps it is time for investors to get used to the idea that economic factors are playing a bigger role than many think. Consider that the paid promotional subscriptions needs to trend up if the company wants to offset the deactivating subscribers. We are now approaching a point where the company needs to ramp up their used car program to offset the churn, or we need to see an average of 1.1 million cars sold each month to ensure positive metrics.
As of right now Q4 has started off weaker than Q2 and Q3. This will apply more pressure on the company to meet their 2011 subscriber guidance of 1.6 million. Below is a chart of auto sales.