SiriusXM Already Above 2013 Subscriber Guidance?
SiriusXM raised the bar on net subscriber guidance today from 1.5 million to 1.6 million. That would appear to be a great thing. However, if you follow the company closely you would have noticed that SiriusXM, just three quarters into 2013 already has 1,681,730 subscribers. Are they really projecting a net subscriber loss in Q4 of this year? The simple answer is yes. The big question is why.
Losing subscribers is bad, so what is happening that would cause a company that has added almost 1.7 million subscribers in the last 9 months to lose 81,730 in the next three?
The answer is General Motors. No, GM is not ceasing with satellite radio installations. In fact, the auto giant is probably installing more satellite radios than it ever has. What has changed is the deal between SiriusXM and GM.
The Past Deal
In the past every GM car equipped with a satellite radio came with a three month trial when that car was sold to a consumer. At the time the car was sold, the radio was counted as a subscription. More specifically, it was counted as a paid promotional subscription. A paid promotional subscription is on in which the auto maker (in this case GM) pays SiriusXM for a trial subscription.
At the end of the three month trial, the consumer would be asked by SiriusXM if they wanted to keep the service. If the consumer keeps the service, they continue to be counted as a subscriber. More specifically, they are now counted as a self-paying subscriber. If the consumer does not keep the service, they are dropped from the subscriber roles and become a part of the deactivation statistic (not the churn statistic, as churn is only the self-paying subscribers that cease service).
The example is as follows:
- GM sells 750,000 cars in a quarter
- Of that 750,000 cars, 525,000 are satellite radio equipped.
- The net subscriber additions would appreciate by 525,000 during the quarter
- At the end of 3 months 44% will keep the service.
- In this case 231,000 would shift to the self-pay category after the trial, and 294,000 would become deactivations. However, the subsequent quarter would deliver another 525,000, and the cycle would continue.
The New GM Deal
In the new GM deal, the satellite radio equipped cars are NOT counted as subscribers when a customer buys the car despite the fact that the consumer gets an unpaid 3 month trial subscription. The key term here is unpaid. GM is no longer paying SiriusXM for the trial subscription. That would seem bad, but it is not. The exchange for that concession is that SiriusXM does not have to pay as much to GM on the back end.
GM, Ford, Chrysler, and a few other manufacturers get a share of the revenue derived from subscribers for the life of the car. Essentially, for every dollar SiriusXM collected on that subscription, $0.40 would go back to GM. The new deal has a substantially lower revenue share. While the exact number is not disclosed, it could now be as low as $0.25. In the longer term, and from a financial perspective, the new deal is a very good thing. From the perspective of counting subscribers it is not good.
This quarter GM will go from supplying several hundred thousand subscribers on cars sold to ZERO. That is correct, the GM deal (relative to new cars) will not deliver a single subscriber this quarter. The double whammy is that the GM deal will also see the deactivations form Q3. Thus, the impact in Q4 is the lack of 525,000 in the supply chain, but also the impact of about 300,000 subscribers deactivating from the previous quarter. That is an 800,000 subscriber swing relating to the shift in the GM deal.
The good news is that the major impact will be absorbed in Q4. We should get used to some lower sub numbers moving forward as well. There you have it. The reason we may well have no net subscriber additions in Q4 is that it makes financial sense for the long term goals of the company.
For SiriusBuzz Premium members, the technical update and valuation models will be published in the morning.
If the company announces negative subs numbers, the stock will take a big hit during Q4 results. Street will punish all longs..It will be the best time to buy and load it up. guaranteed!!!
Spencer,
I an aware of the GM change. Still, are you confident that sirius will lose customers? Is the weight of GM so huge that it will draw the compnay into the negative? I am not convinced.
sirifair….
The negative impact could be as much substantial. We will be missing 550,000 gross additions. It may not go negative, but it certainly will not be very positive.
Spencer,
Thank you for your response. Your answer is reassuring. Still, if the get a positive number, what do you think it might be? Also, any idea of annual savings on the new GM deal? Is it going to be $10M or $30M or even more?
One more hypothetical. If we assume that liberty knew all these details about the Q3 results and “rough” guidance for 2014 and potential stock slip, they must be so hard pressed for money that they agreed to sell potentially 10-15%% cheaper than they could do in six or nine months. Or do you see a trend down?
Us longs have already been punished. This drop from $4.18 to $3.66 was ridiculous. Enough BS already. SIRI is a strong buy right now, cause the buybacks continue.
Anyone find it interesting that the day before earnings some brokerage houses upgraded to outperform? Wall Street.at its finest…squash the little guy so they hold and you go short.
Spencer, I believe that the growing trend to auto leasing is creating much more and quicker turnover and in the short run hurts self pays. For example, I recently leased a Chrysler for two years that came with a free 12 month subscription to SXM. I had a SXM subscription with my leased Ford…an “all access” one. Now when I turned in my Ford, I canceled my paid subscription and won’t start paying on my new cars account for 12 months. So, SXM is losing my self pay for a year and an “all access” one at that, but at least there will be a 2 year old car on the market with a sat radio.
We hasn’t Sirius discussed this at great length so the markets don’t overreact when they see these terrible numbers at next years cc–Its an accounting change basically that has good LONG term implication but terrible short term. Taking a step back to take 2 forward so to speak. Plus, isn’t there some new debt paydowns that will also impact this quarters numbers? Yet im not hearing anything in relation to communication
I’m shocked to learn that Sirius has been paying a 40% commission or revenue share to the auto manufacturers. I don’t see how Sirius can generate so much free cash flow when they’re paying $5 or $6 per month per subscriber to GM, Ford and the like.
Perry….
To answer this we need to go back in time. The GM deal was the first OEM deal and was struck by XM. At the time, XM had advertising and was counting on ad revenue to make up dollars. GM was the most expensive deal, and was essentially a wash when it came to cash flow. Ford and Chrysler were more along the lines of 25%. It is generally assumed that the new GM deal will be closer to the Ford and Chrysler deal in terms of revenue share.
I didn’t notice anyone mention that the earnings came in light at 1 cent as opposed to the expected 2 cents. when was the last time that SIRI missed expectations?