With the announcement that Sirius XM added over 171,000 subscribers in the first quarter comes the realization that the company is well ahead of the guidance offered by CEO Mel Karmazin of 500,000 NET subscriber additions only a couple of months ago.
Typically the first quarter is always among the hardest in terms of subscriber numbers for Sirius XM. Last year the company lost over 400,000 subscribers. This year is a STARK difference. The fact that the company added 171,000 subscribers in Q1 of 2010 should not go unnoticed, and further, should propel investors to take a serious look at the guidance of 500,000 for the year.
In 2009 the Sirius XM subscriber picture offered little hope for thinking positive. In Q1 of 2009 the company lost over 400,000 subscribers. The second quarter offered improvement, but the number was still in the negative territory with a loss almost 186,000 subs. Sirius XM's Q3 saw the first positive number of the year with the company gaining over 100,000 subs. The fourth quarter, on the heals of Cash For Clunkers, saw the company add a quarter million. Overall 2009 saw the company report a subscriber decline.
It is little wonder that when Mel Karmazin guided to over 500,000 NET additions in 2010 that some took the guidance with a large grain of salt. Now, that the company has announced a positive number in Q1 2010, people should be taking a look at guidance, and coming to the conclusion that perhaps Mel was being conservative with his subscriber guidance. Those that have followed Mel for some time already knew this because Mel is notorious for being conservative with guidance and beating it.
So how does the company proceed on this news? Do they raise subscriber guidance in the Q1 conference call? How will analysts react to this news? These are all questions that will be answered in time, but we can already see that some adjustments in guidance may well be necessary.
Given the trend of past years, the company will likely show growth as the year progresses. The major component that is helping the company report subscriber growth is happening in the OEM channel. The penetration rate is now in the neighborhood of 60%. This means that 6 out of every 10 cars made for the U.S. market are equipped with satellite radio. On top of that, the company is seeing more success in converting trial subscribers to self paying subscribers.
As long as car sales remain stable and demonstrate slight growth, Sirius XM will be able to show decent numbers of subscribers adding to the rolls each quarter of 2010. To be fair, the company is being more aggressive with their marketing efforts, and many subscriptions are coming at discounted rates, but some money is better than none at all. That is a sign of the overall economy rather than a knock on the product being offered by Sirius XM Radio. The good news is that these practices are bearing fruit, and will allow consumers to realize that satellite radio offers great entertainment value.
The news is good, but not without hurdles. We need to remember that 2009 saw the introduction of Cash For Clunkers. This boosted car sales in a an abnormal fashion that the market will need to consider as car sale numbers for this year are reported. Potentially, Sirius XM could have to face news that car sales decline year over year as the anniversary of Cash For Clunkers arrives. What investors need to understand is that the penetration rate should more than make up for what will be perceived as a negative in car sales. Look for Mel Karmazin to cover this point in the quarterly report as well as the annual meeting.
Another potential hurdle is the typical weakness of subscriber growth in the summer months. In an ideal world the company would be able to report stable subscriber growth each consecutive quarter of 2010. The second quarter may offer some challenges to that happening. I am not saying that the number will be lower than Q1. It is far to early to produce meaningful estimates. What I am saying is that the number may show what appears to be a slowing to the growth. Either way, the second quarter number should demonstrate clearly that the existing guidance of NET subscriber additions of 500,000 will be quite safe, and indeed conservative.
Sirius XM is reporting growth across many metrics, and needs that stability to reflect in the stock price. For this reason, the company needs to reassure analysts as well as investors that items such as car sales are already considered and covered in the growth. This can't be just a mention, it is a point that needs to be hammered home.
Couple this data with the fact that Sirius XM may well eclipse the $1.00 mark, and Sirius XM could be the recipient of some investor confidence that the equity has not seen in quite some time.
Position - Long Sirius XM Radio