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Are Expanding Auto Sales Really Going To Help Sirius XM (NASDAQ: SIRI)?

 May 17, 2011 10:30 AM

Sirius XM (NASDAQ: SIRI) recently announced strong growth in its subscriber base that it attributes to a rebound in the auto industry. The company currently boasts a wide selection of auto manufacturers as OEM partners, and Sirius offers a free trial to their service on new car purchases. In addition, the company also offers an introductory trial period on certain certified used cars fitted with a satellite radio. It seems logical that with an increase in car sales, Sirius XM's subscriber base would grow accordingly.

However, free users while accounted for in subscriber additions, do not contribute to revenue growth. A more meaningful figure to look at would be its conversion rate. This is the percentage of free users that go on to purchase Sirius XM subscription after the trial period has ended. For the quarter ended March 31, 2011, the company reported gross subscriber additions of over 2 million – an increase of over 19 percent year-over-year, but a decrease of 1 percent sequentially. Net subscriber additions came in at 373,064 for the quarter, an increase of 117.6 percent year-over-year. Although the growth may seem healthy, the percentage of free subscribers that make up the mix of net additions this quarter is 67.6 percent – over 2 out of 3 additions were trial users. In the comparable quarter of 2010, free subscriptions made up 59.3 percent of net additions.

[Related -Sirius XM Holdings Inc. (SIRI): Turning The Dial To $4.20 Per Share?]

Now it is a fair assumption to make that an increased number of free users would translate to increased exposure to the company's product, in turn leading to a higher number of paid users. But the conversion rate for Sirius XM actually declined from 45.2 percent in Q12010 to 44.7 percent this quarter. The rise in free subscribers could mean more conversions going forward; however, if conversion rates slide further, it doesn't do much for top-line growth. Sirius XM as a product can be considered more of a luxury than a necessity, and has many cheaper (and free) alternatives. This makes it possible increasing numbers of free users will decide to become ex-users when the trial period expires.

[Related -Sirius XM Radio Inc (SIRI) Q3 Earnings Preview: Turning Down The Dial]

Another stat to look at would be churn. Sirius XM reports churn on a monthly basis and only counts paid subscription cancellations in that figure. Churn has been fairly steady at around 2 percent of paid subscriptions over the last few quarters which is fairly low thanks to a core group of loyal subscribers who continue to renew the services. However, with more people trading in their cars, an unfortunate situation could arise where subscribers cancel their paid subscriptions because of the now free subscriptions which range from 3 months to 12 months available in new cars. This scenario could increase churn rates going forward.

 Revenues came in lower than analyst expectations this quarter. Revenue growth this quarter was 8.5 percent year-over-year which pales in comparison with subscriber growth. The company has admitted it will have to raise subscription rates going forward, which could further affect the company if customers find better-value alternatives to its service.

Sirius XM has built a true multi-platform service that not only caters to listeners in cars, but home and mobile listeners too. If the company is to continue its growth story, it will have to widen its perspective rather than seek it out from the auto-industry alone.



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