October 2011 Auto Sales – Mixed Bag For Sirius XM
Okay, I can already see that some readers will be confused because of the news that October of 2011 brought the highest Seasonally Adjusted Annualized Sales (SAAR) that has been reported in quite some time. How could the highest SAAR in months mean that auto sales were a mixed bag for Sirius XM (NASDAQ:SIRI)? The answer is that while the SAAR looked good it only represented slightly over 1,020,000 in actual cars sold.
Now I can see people being confused by the fact that it has long been my mantra that Sirius XM needs 1,000,000 cars to sell per month to deliver decent news on a quarterly report. The first thing to understand is that the auto sector is finally getting to a point of full recovery after the March Earthquake and Tsunami disaster in Japan, but, despite that, the tenor of the auto sales market is not quite what analysts had hoped for. Simply stated, auto sales are not climbing at a pace that gives Sirius XM the opportunity to deliver growth numbers that impress the street.
As each quarter goes by, the number of subscribers that churn out of the company increases. Last quarter that number was over 1.8 million This puts pressure on the company to have more gross additions in order to offset that churn and show positive growth. Current new car auto sales are simply not providing a number that is allowing the company to impress to a level that the street is already anticipating. While the October SAAR was at 13.26 million and higher than anything we have seen this year, October sales on an absolute basis were actually the worst we have seen in the last seven months.
In the latest quarter, Sirius XM reported their second consecutive quarter of negative promotional subscribers in the OEM channel, and the take rate dropped to 44.7%. The company cites the mix of vehicles as a driver for the lower take rate, but in many ways the recent auto sales trend has gone to OEM partners that are long time contributors to the service. The trend of fewer promotional subscribers and a lower take rate is challenging. Certainly the mix of vehicles has some impact, but it is that mix that we have to deal with in the longer term. Perhaps it is time for investors to get used to the idea that economic factors are playing a bigger role than many think. Consider that the paid promotional subscriptions needs to trend up if the company wants to offset the deactivating subscribers. We are now approaching a point where the company needs to ramp up their used car program to offset the churn, or we need to see an average of 1.1 million cars sold each month to ensure positive metrics.
As of right now Q4 has started off weaker than Q2 and Q3. This will apply more pressure on the company to meet their 2011 subscriber guidance of 1.6 million. Below is a chart of auto sales.
The business model is unsustainable imho. the only way siri will grow is to have a paid sub base with no adds and an option for an add base for free, either way the excitement for siriusxm is clearly past there prime. Unfortunatly Karmazin cannot see thru the trees and hire some young visionaries to move the product forward he’s still stuck in his 60’s and 70’s beliefs, which may have more impact but when John Malone recieves %40 while the rest of the invstors are doing all the heavy lifting, there seems to be very little margin for error, or risk taking
spencer, thank you , you are the man . i sold on the fact the the subs would be light , like you said … and i will buy back in soon . nobody calls it better than you ………johnny
The CC stated that the used car activations are really starting to have an impact and its a low cost activation–I think that will help much in the 4thQ plus Mel already stated in CC they expect 440k in net subs which makes them reach their goal for the year of 1.6(?) He has a track record of underpromising and i hope the same happens–One thing i have to say as a financial planner working with business/personal clients is that this economy is getting worse–We havent hit bottom–Stores closing, expansion being cancelled, credit still low cost but still hard to get so it defeats the purpose and people losing jobs–I think 2012 election will be turning point in people mind at least–Perception is important
Spencer, i submit that your article’s a tad misleading.
You wrote: “As each quarter goes by, the number of subscribers that churn out of the company increases. Last quarter that number was over 1.8 million.”
Yes, the NUMBER of subscribers that churn has increased, BECAUSE THE COMPANY HAS MORE SUBSCRIBERS EACH QUARTER.
But the churn RATE has remained stable.
Sirius XM had a churn rate of 1.7% in 2007 and 1.8% in 2008. However, due to difficult market conditions, churn rate increased to 2% in 2009. The churn rate for 2010 declined to 1.9%, driven by an improving economy, the success of retention and win-back programs as well as reductions in non-pay cancellation rates. (Source: Trefis)
Average self-pay monthly churn was 1.9% in the third quarter of 2011, in-line with 1.9% in the second quarter of 2011 and the third quarter of 2010. (Source: Investor.SiriusRelations.com)
Conclusion: THE NUMBER OF SUBS, AS A PERCENTAGE OF TOTAL SUBS, IS NOT DROPPING. IT’S THE SAME AS IT’S BEEN SINCE THE 3RD QUARTER OF 2010. 1.9%
You also stated that the take rate dropped to 44.7%. Even so, by ANY standards of selling, for over 40% of free subscriptions to convert to paying subscribers, is nothing short of extraordinary.
Birdhouse….
Okay,. I stole away a few minutes to give you a proper response.
This article was not misleading at all. In fact, it gets to the heart of the matter with acual numbers.
You see, while the churn rate may remain the same, the absolute numer is rising. It is the absolute numbers we need to deal with. I can make percentages say anything I want.
Q2 2011
Gross additions 2,179,348
Churn – 1,727,201
Q3 2011
Gross additions 2,138,131
Churn – 1,804,448
You see what is happening here? Gross additions went down while churn went up. If you simply follow percentages you would would be missing that picture.
next quarter churn will approach 1,900,000. With auto sales being weaker, and gross additions not growing as fast, it becomes very imp[ortant for Sirius XM to garner more gross subscribers. This can be accomplished by:
1. More car sales – not likely
2. Higher penetration rate – not likely
3. A ramped up used car program – in the works
4. Better retail – in the works
Trefis is simply quoting Sirius XM and ignoring the fact that “retention” and “win-back” programs are code words for SELLING OUR PRODUCT CHEAPER. You will see that if you look at the ARPU line. Winning back subs is fine, but there is a cost to doing it.
A take rate of 44.7% may seem impressive, but you need to remember that KEEPING subscribers is how the company makes money. 24% churn out each year. Winning 100 subs, but losing 85 is the reality. The sub growth is much more modest than people realize, and a dipping conversion rate makes that qynamic change greatly.
In Q2 the situation was win 100 subs lose 80. Do you see the difference.
What happens if we lose another half point on take rate combined with lower OEM sales and churn remaining stabnle at 1.9%? Think about that
“We are not seeing any change in conversion that concerns us about how customers feel about our product. Conversion of the same vehicle models are basically the same. What changes every quarter is the mix of OEMs and the mix within OEMs, as all models convert at different levels.”
Mel Karmazin
November 1, 2011
You missed the entire point of the article. You need to look at the absolute numbers
” — on our second quarter earnings call, we raised our subscriber guidance for the year to 1.6 million net adds, which we expect to meet. This means, we anticipate adding about 440,000 net subscribers in the fourth quarter, up about 34% from subscriber growth in the fourth quarter of 2010.
Self-pay subscriber performance in the third quarter was excellent. We grew our self-pay subscriber base by 364,000 subs to an all-time new third quarter record. These third quarter self-pay net adds were up 41% from third quarter of last year, and represented the best single quarter since we completed the merger of SiriusXM in the summer of 2008.”
Mel Karmazin
November 1, 2011