Despite another dramatic decline in automobile sales last month, analysts say Sirius XM ( SIRI) should easily outlast the storm. Thanks to increasing car models that are coming off the assembly line with Sirius or XM receivers installed in their dashboards, Sirius XM should see rising penetration rates offset the rapid slide in new vehicle sales. In September, Ford ( F) said vehicle sales tumbled 34%, General Motors ( GM) saw a 16% decline, and Toyota ( TM) reported a 30% drop in sales. "We are experiencing sales levels that were last seen in the early 1990s," says Jesse Toprak, executive director of industry analysis for Edmunds.com. "Total industry sales this year will probably not be above the 1995 levels. Overall, sales are down and there is really no hope in the immediate future for a full recovery." It would seem that this news would hit shares of Sirius XM particularly hard. After all, the vehicle installation side of Sirius XM's business, referred to as original equipment manufacturer or OEM, is key to the company's success as a merged unit. The satellite radio company has shifted dramatically from the weakening retail channel to installing receivers in automobiles. "The retail channel continues to be a small contributor to net
revenue-generating unit additions," says David Joyce, media analyst with Miller Tabak. "Going forward, the big growth is going to be from the automotive channel." The data certainly back up Joyce's claim. More than 87% of Sirius' net subscriber additions in the company's last quarter as a standalone company came from automotive subsidies that converted into paying customers. In XM's final quarter as a solo business, it had 360,000 net additions from its OEM business, while the retail side saw a net loss of 38,000 users.
For shareholders who have seen their investment in Sirius XM drop more than 60% since the merger was completed in late July -- and nearly 80% in 2008 - there may be hope yet. Despite the softness in the U.S. auto market, both Sirius and XM should see increased subscriber additions from the OEM channel as higher penetration offsets lower car sales, says Kit Spring, analyst with Stifel Nicolaus. "Some might argue weak retail is an indication that consumers aren't interested in satellite radio," Spring writes in a research note. "However, we would counter that a major reason that retail is weak is that satellite radio is increasingly becoming available in cars. Both
Sirius and XM have seen major ramp-ups in subscriber additions coming from the OEM channel in 2007/2008." Miller Tabak's Joyce adds that while auto sales will be soft going forward, they will be offset by the increasing number of models with Sirius or XM radios. "There is a lower volume of sales but there are more vehicles coming off the assembly line that have them installed," he says, That means that the conversion rate of those OEM installations, which has always been a key metric for analysts in observing the health of both Sirius and XM, will become even more important with automobile sales in a nosedive. In its premerger second-quarter earnings report, Sirius said its conversion rate of subscribers with an auto installation was approximately 48%. XM, meanwhile, said its conversion rate was 53.4%.
During a tech conference last month, Sirius XM said it hopes to further improve the conversion rate of OEM installations with its new "Best of Sirius/XM" upgrade, set to launch Monday. The $4 premium upgrade will be marketed to Sirius XM's combined 18 million existing subscribers, the company said, and will bring the best of Sirius' programming to XM subscribers and vice versa. Sirius XM will also launch a la carte radios in retail stores Monday, offering lower price options to retain more price sensitive subscribers by allowing customers to pick and choose different packages of channels. "You could get barebones service for $7 a month instead of paying the $13 Sirius charges right now. That could certainly lead to more subscriber growth," Joyce says. It also bodes well for Sirius XM that auto sales could improve slightly in 2009, provided the $700 billion bailout package gets approved and consumer confidence improves. A real recovery, Edmunds.com's Toprak says, could come in 2010 as new auto sales are artificially deflated, meaning people are willing to buy but the credit market is so bad that they are postponing purchasing decisions. "Those purchases could eventually become a reality in a year or two when conditions improve," Toprak says. "In fact, if a bailout package comes that involves provisions for the automotive businesses, including loans and securities, then the incremental benefit for the industry may be as many as 500,000 units next year." Of course, Sirius XM would have to reevaluate its OEM model if a recovery in auto sales is not realized in 2009, but with the stock trading near 60 cents a share, "that fear is pretty much baked in there," Joyce says.
There's also that pesky problem of Sirius having to refinance a large chunk of debt that will come due next year. In February, $300 million of Sirius convertible notes will come due, another $350 million in XM bank debt is due in May and $400 million in XM convertible notes are set to expire in December. "One concern that is knocking the stock down is the condition of the credit markets because they have some maturities due next year, with some convertibles coming in February that they need to refinance," Joyce adds. "But that's a very near-term financing issue people are paying attention to." Spring acknowledges that Sirius shares may be of little or no value if the company cannot attract refinancing. "Alternatively, shares could go back to $3 to $4 should Sirius obtain reasonable financing, auto sales improve in 2009 and 2010, and Sirius executes on merger synergies," he adds.