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.