Image source: Sirius XM.
There weren't a lot of surprises when Sirius XM Radio (SIRI -0.94%) reported quarterly results on Tuesday morning. After all, the satellite radio provider had already pre-announced its year-end subscriber count and bumped some elements of its guidance higher just a few weeks ago.
However, one glaring nugget in its earnings release is that Sirius XM's conversion rate -- the percentage of new car buyers that stay on as paying subscribers at the end of their free trials -- dipped below 40% for the first time in the media giant's history.
Satellite receivers aren't cheap, and knowing that three out of every five factory-installed units go dormant -- and now slightly more than three out of every five -- after months of free usage may seem disconcerting.
It's not as problematic as it may seem. There are a few reasons why this is happening. Sirius XM pointed out how a change in telemarketing laws -- making outbound sales calls jump through more hoops -- makes it harder to reach and retain those enjoying free trials.
However, the bigger culprit is that as automakers expand availability of Sirius or XM radios in vehicles we're hitting more economical cars where drivers are less likely to have the disposable income to subscribe to a premium radio service.
It's not the growing popularity of the connected car, as worrywarts would have you believe, that's making it easier for folks to "cut the cord" if you will with satellite radio. The problem is actually at the other end of the value spectrum.
This isn't a new trend. We've seen conversion rates go from 45% for all of 2012 to 44% in 2013, followed by 41% in 2014 and now 40% for all of last year. Why wouldn't it fall below that 40% Mendoza line sooner rather than later?
This is the new normal. Sirius XM announced during its call that it expects to stay in the 38% to 40% rate in the near future, and it doesn't have a problem with that.
"We are less concerned with the conversion rate than how many users we can get into the top part of that funnel," CEO Jim Meyer said during this morning's conference call.
The "make it up in volume" rationale is legit. Sirius XM still closed out the fourth quarter at a record 29.6 million subscribers. It gained 0.6 million net new accounts during the period despite conversion rates slipping to a historic low. It also closed out the year with 2.3 million net additions, the highest tally on that front since Sirius and XM merged in 2008.
The model works. Subscriber acquisition costs are low -- down to $33 per installation -- and average revenue per user keeps inching to new highs. Meyer said during the call that the business would make sense even if conversion rates dropped into the single digits.
Don't worry. They won't.
Sirius XM keeps growing. It also keeps eating its own cooking, having repurchased 1.8 billion shares -- shelling out $6.5 billion in the process -- since initiating its share buyback efforts three years ago.
The market wasn't blown away by the report with the stock opening slightly lower on Tuesday, but every quarter can't be a party. Sirius XM is doing just fine, and as long as folks keep buying new and now used cars it will remain that way.
