Sirius XM and OEM Metrics
It is no secret that the OEM channel is where Sirius XM Radio garners most of their subscribers. Given that fact, it becomes important to understand how the OEM channel works as well as how the metrics are counted. While most already know it, different companies have different deals, and the determination of whether a radio is considered a subscriber is tied to a payment on a subscription. Thus, some manufacturers, such as GM, are not counted until the end user buys the car. This happens because there is no subscription payment until the car is sold. On the other side of the equation, we have Chrysler. Chrysler pays for a subscription at manufacture, and in doing so, the subscription is counted as soon as the car rolls off of the assembly line. In terms of subscriber numbers, it is not only car sales that matter, but OEM production as well.
One oft discussed metric in the OEM channel is the penetration rate. This metric is measured by the percentage of vehicles that come with SDARS installed. Typically, when the OEM world is running like clockwork, this metric has true meaning. There are enough constants out there that you can measure the penetration rates of various OEM against their sales or production. In times like these, the penetration rate as a measure gets quite skewed.
HERE IS WHY… if we assume that an OEM is going to manufacture 1,000,000 vehicles, and has a 50% penetration rate, then we can expect 500,000 satellite radio subscriptions in the pipe-line. Sirius XM contracts the production of the radios, and supplies them to the OEM partner. Now assume that auto sales are down drastically, and that OEM slows production to 750,000. The 500,000 radios are on the shelf and awaiting installation. In this situation, the penetration rate increased to 66%, but the number of radios remained the same. Is the new 66% penetration rate good news? For someone that does not think deeply enough it would appear to be. The real question that is not quantifiable when looking at the OEM channel is whether or not the supply of radio’s has changed. Investors need to consider this.
In addition, the mix of radios is not a constant in geographical regions. Satellite radio has the highest concentration of subscribers in the northeast. It would only make sense that more satellite equipped cars would find there way to that region. A dealer lot in New York with 85% of the cars equipped is great, but what about the dealer in Georgia with only 40% of the cars equipped. A national random sample is the only method by which you can understand what dealer inventories are relative to satellite radio. Even then, the issue boils down to the supply of SDARS receivers to any given manufacturer.
The bottom line on penetration is that investors need to remember that we are not supplied with the key component that is radios supplied by SDARS.
Another metric that is important to investors is “Days Of Inventory”. This is not a SDARS metric, but rather an OEM metric. It represents the inventory of unsold cars of each OEM. Chrysler went from 115 days of inventory at the beginning of the year to 151 days of inventory at the end of February. As of April 1st, the days of inventory for Chrysler went down to 87. What does this say, and what does it mean? Knowing that Chrysler’s sales have been horrible, it can mean only one thing. Production was slowed substantially. What about other OEM’s? GM went from 167 days of inventory in January to 122 days in April, and their car sales were also bad. Ford, which is perhaps the domestic auto maker that is in the best shape, went from 101 days of inventory to 80.
All of this becomes important when you consider the OEM subscriber picture. Ford and Chrysler become subscribers at production. Lower production means fewer subscribers. Combined that with poor sales, and you can quickly see that there will be an impact on the subscriber numbers. GM’s vehicles become subscribers when a customer buys the car. Poor auto sales mean fewer cars produced with SDARS on an absolute basis.
The bottom line is that both production and sales need to be considered, but in the end, there are simply fewer cars being made and sold. Other OEM partners outside the Detroit three all have their respective deals as well, and the impacts translate through.
What people need to remember is that the fall off in the OEM channel likely did not only impact the OEM’s themselves. Sirius XM Radio also needs to adjust. Don’t forget that the company subsidizes each chipset. IF OEM partners are not producing vehicles, Sirius XM needs to slow down their own production as well. Radios cost money, and to have that money sitting on a shelf does not help the bottom line. Last year, Mel Karmazin gave what was at the time conservative guidance based on annualized auto sales of 12,000,000. With annualized auto sales still below 10,000,000 it is common sense that the company not only pulled that guidance, but adjust their chipset orders accordingly.
There is another item that seems to have been lost in the shuffle of all of the OEM discussion. OEM partners like Toyota, Nissan, and Hyundai all install satellite radios. All of these cars come with promotional periods. With these companies, the subscription is not counted AT ALL in the promotional period. The only way a subscriber is counted with these brands is if the consumer elects to keep the service after the promotional period ends. Thus, all of the cars from these brands that sold in Q1 don’t matter at all to the Q1 subscriber numbers. It is the Q4 purchases that will count in Q1, but only if they became self paying. Considering when the self pay option became available to the consumer (in the worst of the recession), the take rate likely suffered.
Thus, the important things to remember are:
1. Penetration rates as a percentage currently mean little unless you know the number of radios available for installation.
2. It is important to understand that production is important with OEM’s such as Chrysler, Ford, Mercedes, BMW, Volkswagen, Mitsbishi, and Kia.
3. It is important to understand that sales are important with OEM’s such as GM, and Honda.
4. It is important to understand that OEM partners such as Toyota, Nissan, and Hyuandi are not counted as subscribers until AFTER the promotional period ends and IF the customer becomes a self paying subscriber.
5. It is important to understand how these issues relate to ARPU (average revenue per user). All of the “production” subscription cars carry a negative impact on ARPU until such time that a consumer buys them. They help fully loaded churn, but impact ARPU.
6. Auto sales are still below 10,000,000 in sales annualized, off from a high of about 16,000,000 only a couple of years ago.
On the positive side, when auto sales begin to see improvements to above 12,000,000 annualized (do not use year over year comparisons here, because last years sales were bad as well), we will see a quick response by SDARS, and a positive impact on the subscriber numbers.
Position – Long Sirius XM Radio, No Position OEM’s
Tyler, now that is a nice piece of work…. great job and thanks for providing the general details that impact the specific numbers that will be reported on Thursday…. Looking at the reductions in overall sales and OEM production, and with Chrysler and GM woes, the sub numbers will be negative as you have previously said…. Just common sense, backed up by facts presented. When you see the impact the economy has had on the auto industry that Sat Rad is so dependent on, what other conclusion is there? All that is left to see is if cost cutting with the current to slightly down sub base, will show improved cash flow….
Tyler-
I knew alot about the OEM channel, but learned a few more things from you on this article, especially in the detail of how each different OEM partner works in counting subs. I was not aware how Toyota, Nissan and Hyandai worked. I hope they had a better 4th quarter in sales so that we will see many of those in 1st Q #’s.
I think I am going to print this out for future ref.
Thanks !
Excellent piece Tyler,first time i have seen it laid out like this,think i’ll print it out also for further refernce..
It will be neg subs,hope not worse than 300k to 400k expecting,but FCF and further guidance on EBITDA for 09 is what i’m looking for in CC.Wasn’t expecting auto subs to materialize until late 2Q and beyond anyway.But this news makes it look like not until 4Q will we see OEM positive number.Still hoping for Retail and used car plus I-Phone and on-line to help with rest of sub adds tho.
is chryslers back seat tv contract voided now that its bankrupt,cause this whole direct tv infusion could be the video feed needed for the backseat tv.I know at&t is pushing tv at the car show and the dish is huge on the roof.I feel thursday they announce a sirius radio and direct tv car package
I would bet my house on it. DIRECT TV AND SIRIUS PACKAGE FOR CAR 29.95
Tyler.
You have been on fire since your return from vacation.
Kudos.
Socal
Interesting piece. Thanks. Are used car sales included in the OEM numbers? If not, you may be underestimating the market
Nice article Tyler. You did a really good job explaining how it works, and even broke it down. Thanks for taking the time for us investors.
Thanks Tyler, you rock (not sure which channel).
Also of note from the WSJ article, OEM’s have increased the percentage of installed with SIRI.
A challenge for Sirius XM is the slump in car sales, since many listeners first encounter the radio service while driving. But many car companies say a growing share of their new vehicles are being equipped with satellite radios. For instance, Jon Bucci, vice president of Toyota Motor Sales USA, says satellite radio was factory installed in four times as many cars in the year ended March 31 as in the year-earlier period. Growth rates should be similar this year, he says.
Read my post in the sub loss/net gain etc.. thread..
I have some numbers on that accessment.
Finally an article with some useful information. You stated that “Most already know it…”, but that is false. There is a lot of mis-information and speculation surrounding this company. It is hard to find out what is really going on. When there are huge spikes up or down, I usually am not able to find out the reason for the move in stock price until it is too late. I am encouraged with the recent move up, and hope it keeps going. In the end, it is still a great product.
Tyler,
Excellent article. It made me much more informed and I now have a better understanding of the possibilities….thanks.
Sirius XM needs to allow a home unit additional subscription (i.e., entertainment sized and can’t be used in the car) for very low or free. A lot of people will not foot the bill if they can only listen in their cars and that’s what is going to happen as more and more cars have it built in. I have a 1.25 hour commute one way and would cancel if I could not bring my unit into the home. $2.99 for stream is nice but most people can’t handle that nicely in their homes ( now and for years to come). they have the VCR blinking on 12:00 for years mentality. Sirius has got to give it up to them in the house to keep these people. XM used to have XM ready entertainment size units. If you have a built-in car unit (main subscription) Sirius should give you 1 home sub for free. THAT WILL LOCK PEOPLE INTO BECOMING SAT RADIO “ONLY” PEOPLE! People are home more than in the car. Reel them in to a subscription with “new car sales” and lock them in by allowing free in the house – again entertainment size units only so they can’t be moved from car to car.