Sirius XM Holdings Inc (SIRI)

[LonJandis]

Slowing Auto Sales No Worry For Sirius XM

by Spencer Osborne

http://seekingalpha.com/article/637251-slowing-auto-sales-no-worry-for-sirius-xm?source=email_rt_article_readmore&ifp=0

Despite the fact that May 2012 auto sales came in below expectations and delivered the lowest Seasonally Adjusted Annualized rate (SAAR) of the year, Sirius XM has little to worry about. While the headlines will deliver mixed reviews of auto sales, it is the numbers that dictate whether Sirius XM is ahead of or behind the curve.

Throughout 2012 the auto sector has been above an annualized rate of 14 million. The pace was moving so well in the first quarter that many analysts began to up the expectations for the year to 14.3 million from 14 million. This has been a stellar year in auto sales and Sirius XM has benefited in a big way.

April of 2012 delivered the first hints that the auto channel was cooling off slightly and now May has confirmed it. Analysts were expecting auto sales to come in at an impressive 1.4 million for May. The actual number was 1.33 million. The mixed bag of how this news is digested comes from the overhang from the disaster in Japan last year. The year over year comparisons look great, but the month over month are less impressive. Looking at SAAR, the 13.8 million demonstrates the fact that the pace has slowed a bit.



Now, with all of that considered, what does all of this mean for Sirius XM (NASDAQ:SIRI)? The simple answer is that things are fine this quarter and there is little danger of the subscriber guidance being in jeopardy.

As many regular readers know, I divide the auto sector into three distinct categories based on how each category delivers subscribers to Sirius XM. The "Leading" category (depicted in green) delivers subscribers at the time of production. The "Point-of-Sale" category (depicted in yellow) delivers subscribers when a vehicle is sold. Lastly, the "Trailing" category (depicted in blue) delivers subscribers only if the consumer elects to become self-paying.

What we can see trending is that the "Trailing category is slowly taking share away from the "Leading" and "Point-of-Sale" categories. In a perfect world we would like to see a balance between these categories. Having a balance provides a smooth flow of subscribers and deactivated subscribers.

From a Sirius XM investors standpoint the key issue here is expectations vs. what is delivered. Last year I wrote a few articles indicating that the ability for Sirius XM to meet their overall guidance of 1.6 million would be a challenge. Ultimately the company delivered 1.7 million subscribers and naive investors were quick to say that I was flawed in my assessment of the situation. Savvy investors looked deeper into what I actually stated and saw the issues right away when the company reported numbers. Deactivated subscribers were lower than they should have been and the company went negative in Average Revenue per user (ARPU). Those that read my thoughts more carefully saw that this was exactly what I was warning about. I never called for a miss, but did say that if the company hit the guidance it would come at the expense of other metrics. That is EXACTLY what happened. For those that doubt this, I challenge you to go back and read what I wrote:

In Sirius XM Will Find Adding Subscribers More of A Challenge I noted:

"While churn remained stable at 1.9%, the deactivations were 187,000 more this year than last. The lesson is that flat churn on a percentage basis sounds good, but because the base grows, the real number increases. It is important that the company deliver a higher gross number to offset the deactivations."

In my article November Auto Sales Make It A Challenge For Sirius XM To Meet Subscriber Guidance, I spelled out why challenges existed and how the company might overcome them. In that piece I actually warned of some of the dynamics that would be negative should the company meet guidance stating:

"So what does Sirius XM need to do to pull off 442,000 subscribers in Q4?

1. Bring churn down to about 1.75%

2. Be aggressive on conversion and get that number up to 45.5% or better.

3. Push the retail channel - They need to get the Lynx on the market ASAP.

4. Offer up some great consumer deals.

5. Get the used car market ramped up ASAP."

The November auto sales article was not popular with many long term Sirius XM investors. I followed it up with more detail as the month of December progressed. In Finalized Novemeber Auto SalesFigures Confirm Sirius XM Concern, I reiterated:

As stated before, the company is very capable of hitting their subscriber guidance. They simply need to hit on all cylinders, including:

Stronger December sales that hit at least 1.15 million
Reduce churn to a level near 1.75%
Increase take rate to at least 45.5%
Get the Lynx unit out in retail or at least promote the Edge unit
Work on retention stronger than usual (could impact ARPU)
The point was not a prediction that the company would miss, but rather a concern over what the company would need to do to get to the number they needed. When Sirius XM announced that they beat 2011 subscriber guidance by 100,000 units people celebrated that fact. A few weeks later we were able to see how it happened. Retention efforts were substantial and actually drove the ARPU metric down by 5 cents instead of seeing it rise.

This is why managed expectations and even a negative opinion of May auto sales may be very important for Sirius XM. Sirius XM investors were over-excited about getting to 1.7 million subscribers in 2011. A few short weeks later investors saw the COST of getting to 1.7 million, and then the company issued 2012 guidance of only 1.3 million subscribers. This is the roller coaster that long term investors want to avoid.

When Sirius XM revised subscriber guidance for 2012 to 1.5 million from the low-ball 1.3 million it was very warranted. If May 2012 sales had come in at 1.4 million, there could be an impression that Sirius XM would need to raise guidance again. That would have been bad. Now that sales are lower the company finally has a chance to manage the expectation level. Sirius XM will leave guidance alone and has every reason to because of the perceived slower pace. This is very good for this equity.

The most difficult thing Sirius XM faces in 2012 is expectations that are too lofty. The stock has typically been trading at a premium, and more recently has been punished for trading at that premium. The May auto sales reality check is just what Sirius XM needed.

The key point to understand is that sales were high enough for the company to deliver good numbers, but low enough to keep expectations in check. Savvy investors will know how to play this and seek out buying opportunities.

Disclosure: I am long SIRI.