Sirius XM Sees Something Blue in Something Borrowed

Shares of Sirius XM Radio (NASDAQ: SIRI  ) finally inched higher yesterday. It had closed lower in four consecutive trading sessions, shedding nearly 5% along the way. A poorly received earnings report on Tuesday morning didn't help the situation. 

One of the more disappointing things about the report was the disintegration of engagement metrics. Monthly churn rate inched up to 1.9% and the conversion rate fell to 42%. In other words, nearly 2% of Sirius XM's subscribers are bowing out in any given month and just 42% of the drivers taking Sirius or XM up on free trials are sticking around as paying subscribers. 

Sirius XM's conversion rate has historically been between 44% and 46%, so what's the problem? Well, there may actually be an explanation that isn't as dire as the market may think. The satellite radio provider has put a lot of effort into getting buyers of used cars with existing satellite receivers on board. It has deals in place with more than 11,000 dealers to report sales of pre-owned cars with Sirius or XM receivers, promoting 90-day free trials as they drive off the lot. Sirius XM also introduced its Service Lane program last summer with 2,500 service centers offering trial subscriptions to folks with dormant receivers when they come in for service. 

The two programs will result in incremental revenue. The receivers were already paid for the first time around, so it's basically found money when anyone activates an old receiver. 

But as you can probably imagine, folks buy used cars instead of new ones because they're watching their money. They may not have a lot of cash to spring for entertainment subscriptions, and it doesn't help that Sirius XM has increased its monthly rate twice since the start of 2012. Sirius XM provided some color on that during Tuesday's earnings call. 

Folks buying new cars are still converting at 44%. That's at the low end of its historical range, but it's not as alarming as the 42% metric we heard. What's weighing down the conversion rate is that just 34% of used-car drivers are sticking around as self-pay subscribers after their three months of access dry up. It's a safe bet that used car buyers will continue to grow as a percentage of total accounts at Sirius XM, and that will likely result in conversion rates continuing to decline. In the bigger picture, that's not so bad. It translates into more subscribers for a model with low variable costs. This is why earnings and free cash flow have been growing a lot faster than Sirius XM's revenue growth through the past couple of years.

That 42% conversion rate may not be so problematic after all.

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  • Report this Comment On February 07, 2014, at 3:08 PM, sirifair6 wrote:

    Rick,

    The 42% conversion rate is something to be expected and should not be scary because, and I agree with your vision that siri will make up for the OEM greater conversion by lower OEM conversions in the used car market.

    One detail is often overlooked here - these used car subscribers are probably 50% cheaper than the OEM subs and eventually the used car subscriber numbers will be going up much faster than OEM subscriber number going down. As the result, with 50% lower used car sub SAC the bottom line will be getting much fatter than some think. On top of that, security and other services to be provided via newly acquired Agero team will beef up both the OEM sub and the used car sub via appealing and super profitable bundling.

    The strategy of the company is obvious finally that will help accelerate the revenue growth much faster than we expect while the economy of scale both in the radio and telematics arenas will become even more prominent.

    The company is entering a span of extremely productive and profitable business that many are still failing to recognize. Liberty is the one who clearly sees this. If they do acquire siri, since the great results are literally around the corner beginning Q1 or the latest Q2, liberty will take credit for the great management whereas is essence such results were meant to be with or without liberty anyway.

  • Report this Comment On February 07, 2014, at 6:29 PM, Guggerpaul wrote:

    I get so tired of repeating myself on this but you want to talk churn? A seriousxm subscriber buys a new car (and a lot of them do) and we just lost a sub for 3 months to 1 year, there is a lag. sure it looks like churn but most of these will return in the next few quarters and when they do it will look like Siri is adding subs like never before when the fact is its just subs that are returning after the free trials. It is my belief that this whole thing was orchestrated by Malones henchmen over at Siri to assist Liberty in the attempted theft from Siriousxm shareholders. I hope the SEC forces Liberty to sell all of their shares in Siriousxm for $3.68 a piece.

  • Report this Comment On February 08, 2014, at 10:07 AM, dannysboy wrote:

    Rick, even with SiriusXM's price increase a prepaid 1 year sub. works out to 45 cents/day for a sub. To call this pricey, or expensive, is literally ludicrous! But many are ludicrously doing it.

    Regarding the 44% conversion rate, do you realize the a baseball player who could hit every third ball would make more money than we could imagine!

    I have been a successful salesman and business owner all of my business life and lord knows how much money I would have made if I sold 44% of the potential customers I came in contact with.

    Furthermore, I delighted to hear that there is a 34% conversion rate on used cars.

    Keep it up!

  • Report this Comment On February 08, 2014, at 1:44 PM, Guggerpaul wrote:

    Every time a subscriber buys a new car we lose a subscriber for 3 months to 1 year, effecting the churn numbers, don't fall for it! buy more vote no Those subs will start to reappear over the next few quarters. This is a scam to scare investors out of their shares, I for one am adding shares.

  • Report this Comment On February 08, 2014, at 3:29 PM, sirifair6 wrote:

    The fact and the matter is that the focus should be on one number - self-pay subs. These are the customers who pay on a regular basis. Another importnat metric is the ARPU -how much money the compnay can generate off each subscriber through various services it offers.

    I predict that at some point the used car market will catch up with or may be even will take over the OEM subs. Another strong incentive to subscribe would be the bundling of security and other services with radio. They will make the package so appealing that it will be hard to resist such an offer.

    To conclude, I will not be surprised if siri's revenue get to $7B+ in the next five years due to the above factors I described. A good validator of my prediction will be 2014. If they add 500M to revenue this year I may be right.

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