It is no secret that the OEM channel is where Sirius XM Radio garners most of their subscribers. Given that fact, it becomes important to understand how the OEM channel works as well as how the metrics are counted. While most already know it, different companies have different deals, and the determination of whether a radio is considered a subscriber is tied to a payment on a subscription. Thus, some manufacturers, such as GM, are not counted until the end user buys the car. This happens because there is no subscription payment until the car is sold. On the other side of the equation, we have Chrysler. Chrysler pays for a subscription at manufacture, and in doing so, the subscription is counted as soon as the car rolls off of the assembly line. In terms of subscriber numbers, it is not only car sales that matter, but OEM production as well.
One oft discussed metric in the OEM channel is the penetration rate. This metric is measured by the percentage of vehicles that come with SDARS installed. Typically, when the OEM world is running like clockwork, this metric has true meaning. There are enough constants out there that you can measure the penetration rates of various OEM against their sales or production. In times like these, the penetration rate as a measure gets quite skewed.
HERE IS WHY... if we assume that an OEM is going to manufacture 1,000,000 vehicles, and has a 50% penetration rate, then we can expect 500,000 satellite radio subscriptions in the pipe-line. Sirius XM contracts the production of the radios, and supplies them to the OEM partner. Now assume that auto sales are down drastically, and that OEM slows production to 750,000. The 500,000 radios are on the shelf and awaiting installation. In this situation, the penetration rate increased to 66%, but the number of radios remained the same. Is the new 66% penetration rate good news? For someone that does not think deeply enough it would appear to be. The real question that is not quantifiable when looking at the OEM channel is whether or not the supply of radio's has changed. Investors need to consider this.
In addition, the mix of radios is not a constant in geographical regions. Satellite radio has the highest concentration of subscribers in the northeast. It would only make sense that more satellite equipped cars would find there way to that region. A dealer lot in New York with 85% of the cars equipped is great, but what about the dealer in Georgia with only 40% of the cars equipped. A national random sample is the only method by which you can understand what dealer inventories are relative to satellite radio. Even then, the issue boils down to the supply of SDARS receivers to any given manufacturer.
The bottom line on penetration is that investors need to remember that we are not supplied with the key component that is radios supplied by SDARS.
Another metric that is important to investors is "Days Of Inventory". This is not a SDARS metric, but rather an OEM metric. It represents the inventory of unsold cars of each OEM. Chrysler went from 115 days of inventory at the beginning of the year to 151 days of inventory at the end of February. As of April 1st, the days of inventory for Chrysler went down to 87. What does this say, and what does it mean? Knowing that Chrysler's sales have been horrible, it can mean only one thing. Production was slowed substantially. What about other OEM's? GM went from 167 days of inventory in January to 122 days in April, and their car sales were also bad. Ford, which is perhaps the domestic auto maker that is in the best shape, went from 101 days of inventory to 80.
All of this becomes important when you consider the OEM subscriber picture. Ford and Chrysler become subscribers at production. Lower production means fewer subscribers. Combined that with poor sales, and you can quickly see that there will be an impact on the subscriber numbers. GM's vehicles become subscribers when a customer buys the car. Poor auto sales mean fewer cars produced with SDARS on an absolute basis.
The bottom line is that both production and sales need to be considered, but in the end, there are simply fewer cars being made and sold. Other OEM partners outside the Detroit three all have their respective deals as well, and the impacts translate through.
What people need to remember is that the fall off in the OEM channel likely did not only impact the OEM's themselves. Sirius XM Radio also needs to adjust. Don't forget that the company subsidizes each chipset. IF OEM partners are not producing vehicles, Sirius XM needs to slow down their own production as well. Radios cost money, and to have that money sitting on a shelf does not help the bottom line. Last year, Mel Karmazin gave what was at the time conservative guidance based on annualized auto sales of 12,000,000. With annualized auto sales still below 10,000,000 it is common sense that the company not only pulled that guidance, but adjust their chipset orders accordingly.
There is another item that seems to have been lost in the shuffle of all of the OEM discussion. OEM partners like Toyota, Nissan, and Hyundai all install satellite radios. All of these cars come with promotional periods. With these companies, the subscription is not counted AT ALL in the promotional period. The only way a subscriber is counted with these brands is if the consumer elects to keep the service after the promotional period ends. Thus, all of the cars from these brands that sold in Q1 don't matter at all to the Q1 subscriber numbers. It is the Q4 purchases that will count in Q1, but only if they became self paying. Considering when the self pay option became available to the consumer (in the worst of the recession), the take rate likely suffered.
Thus, the important things to remember are:
1. Penetration rates as a percentage currently mean little unless you know the number of radios available for installation.
2. It is important to understand that production is important with OEM's such as Chrysler, Ford, Mercedes, BMW, Volkswagen, Mitsbishi, and Kia.
3. It is important to understand that sales are important with OEM's such as GM, and Honda.
4. It is important to understand that OEM partners such as Toyota, Nissan, and Hyuandi are not counted as subscribers until AFTER the promotional period ends and IF the customer becomes a self paying subscriber.
5. It is important to understand how these issues relate to ARPU (average revenue per user). All of the "production" subscription cars carry a negative impact on ARPU until such time that a consumer buys them. They help fully loaded churn, but impact ARPU.
6. Auto sales are still below 10,000,000 in sales annualized, off from a high of about 16,000,000 only a couple of years ago.
On the positive side, when auto sales begin to see improvements to above 12,000,000 annualized (do not use year over year comparisons here, because last years sales were bad as well), we will see a quick response by SDARS, and a positive impact on the subscriber numbers.
Position - Long Sirius XM Radio, No Position OEM's