Vehicle Production could propel Sirius to a record in GROSS OEM additions. Because Sirius’ deals with most OEM’s hinge on the production of a vehicle rather than the sale of a vehicle, the OEM numbers have potential to add subscribers that many analysts may have failed to consider.
A case in point is can be seen with Ford. Ford Motor Company produced 84,000 more vehicles in North America in the second quarter vs. the first. If we back out roughly 10% of that production to account for Canada, we arrive at about 76,000 additional vehicles in Q2 for the U.S. market. At a 30% Sirius install rate, this would equate to roughly 23,000 more Sirius equipped vehicles from Ford that we saw in Q1. Ford had already announced intentions of more Sirius installations. The wild card here comes in the production numbers.
The OEM channel is ramping substantially, and many analysts and sector followers had been assuming a 40% to 50% installation rate from another Sirius partner Chrysler. As we know, Chrysler has announced that they will be carrying Sirius in 70% of production. Thus, even if DCX production remained level, the increased penetration, albeit not at 70% yet, would add more Sirius units.
We have a potential (slight) of seeing for the first time a non-Q4 GROSS addition number of greater than 1,000,000 subscribers. The street is anticipating GROSS additions in the low to mid 900,000’s. Sirius has had a gross subscriber number above 1,000,000 twice (Q4-2005 and Q4 2006).
As we saw with XM’s quarterly filing, they established a new high in the GROSS OEM subscribers at 618,000. It is possible that Sirius nears or even surpasses that number. The OEM channel is perceived to be the growth channel in the satellite radio sector, but investors need to be cognoscente of the value/cost of an OEM subscriber. Clearly, not all OEM subscribers are created equal with some having higher revenue shares, or getting larger subsidies. This is illustrated in the “revenue share” line item of the financials, as well as SAC, CPGA, and deferred revenue. Some deals are cash flow friendly, some are volume friendly, and this can make comparisons difficult at best.
The bottom line is that there may exist an upside in the subscriber number for Sirius that was not anticipated or considered by many analysts that follow the sector. Sirius had indicated that the blended average of OEM penetration would be at about 34%. The Chrysler announcement, and increased vehicle production should be enough cause for analysts to revisit their blended percentage of installs, as well as their anticipated OEM contribution for Q2 estimates. Currently the consensus NET subscribers for Sirius is at about 470,000.
Position - Long Sirius, Long XM, No Position Ford, No Position DCX