While the headlines read about a small recovery in the OEM channel, the reality is that the news is still not good. Year over year comparisons are still down, and that is dismal considering that last years sales were already down. Thus, the 2008 numbers should be easy to beat, and yet nearly the entire channel is still seeing decline. For satellite radio this is not good news, and there is nothing that will improve it any time soon.
Sirius XM Radio relies heavily on the OEM channel for exposing consumers to satellite radio, and hopefully converting those that are exposed into full time subscribers. As penetration rates increase, many naturally think that the number of subscribers will follow suit. This however is not the case. Differing OEM deals count subscribers in different ways. The big contributors to subscriber rolls have been on the sidelines for much of the second quarter, and this will once again Sirius XM will deliver a negative subscriber number for Q2. I have some additional data to collect, and more calculations to run bad the subscriber number will be for Q2.
Overall, sales are off from 2008 totals by over 35%, and the annualized realistically looks to be below 10 million cars sold for 2009. So how does the continued bad news in the auto channel translate into good news for SDARS? The answer is that it is not the number of subscribers that really matter as much as the average revenue derived from each subscriber, and that costs are under control. The auto sector brings in the bulk of subscribers, but it is also responsible for the bulk of costs.
A slower OEM channel means fewer costs. Combine that with additional revenue due to the price increase, and from Internet subscriptions, and you will see the bottom line of Sirius XM Radio have continued improvement.
Sirius XM will for the first time in a long time be able to offset some royalty costs above and beyond what they have been able to do in the past. The company will also enjoy the fruits of the iPhone app because it requires an Internet subscription, thereby adding $3 per month to the subscription price. A consumer like me gets the standard Sirius package, plus the Best of XM, plus the Internet feed. Instead of being a $13 per month sub, I am now a $19 per month sub for the balance of my current subscription, then a $21 per month sub going forward. This additional revenue will begin to show up beginning this quarter, and will continue to grow for the next year.
In the end, the company will have yet another good news vs. bad news situation on their hands. The good news will be in the cost cutting and revenue line. The bad news will be the subscriber number. Overall, the quarter should be decent, but as usual, it depends on what the mainstream media focuses on as to how the perception of the quarter is received. Investors who know now how some of these numbers will shake out have the advantage of being able to determine an investment strategy before the company announces. Look for great cost cutting, revenues that beat expectations, and bad subscriber numbers, and pay close attention to how the mainstream media reacts to the news.
Position - Long Sirius XM