Why Sirius XM Is Making a Bigger Push in Used Cars

By Markets Fool.com

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IMAGE SOURCE: SIRIUSXM.COM

Sirius XM Holdings' (NASDAQ: SIRI) growth over the past several years has come largely on the back of new car sales. It's managed to get its technology into about three of every four vehicles that roll off the assembly line, and agreements with the automakers have been effective in turning new owners into subscribers.

But Sirius XM executives have been devoting an increasingly larger share of their attention on used cars. And if there's any doubt as to why, there are two numbers from the second quarter that should make it abundantly clear.

  • Free trials activated by new-car buyers: down 3%.
  • Free trials activated by used-car buyers: up 18%.

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There are two distinct markets

Somewhere around 17 million new vehicles should be sold this year.So Sirius XM technology should make its way into somewhere around 13 million new cars that hit the road. The problem for Sirius is that many of those new-car buyers may have already tried the satellite-radio service and either subscribed or decided it wasn't for them.

And Sirius has essentially hit its saturation point with new vehicles. The cars that its technology is not in are cheaper models, for which buyers are less likely to pay for audio content. That limits the growth potential on the new-car front.

The used side is a much different picture. More than twice as many used cars are likely to change hands,and many of those buyers will be seeing Sirius XM technology for the first time.

So as the company looks to ramp up in the used market, it sees big growth ahead there.

In just one year's time, the number of Sirius XM-equipped used cars that were sold grew by 12%, according to the company. They made up close to three of every 10 used cars that changed hands over the first six months of 2016, Sirius says.

As time passes, that number will rise, and Sirius sees the number of cars on the road with its technology rising to some 180 million -- more than double what it is today.

Sirius has had to get creative

Sirius XM's approach in used cars is multi-pronged. It has more than 16,000 franchise auto dealers signed up to report used at sales to the company, as well as another 6,000 independent car dealerships.

Its Service Lane program, which works with companies such as Jiffy Lube and other chains that change your oil and rotate your tires, now has some 11,000 locations providing it with information on the vehicles that come through their maintenance bays. It's continuing to add service and repair shops to its rolls.

"Behind the scenes at our company, there is truly a frenzy of activity as week seek to capitalize on this huge and growing opportunity," CEO Jim Meyer told analysts last month.

Sirius has agreements with two large Insurance companies already and is trying to add more. And it's begun working with banks and credit unions to offer free trials to used-car buyers who borrow money through them.

"We're investing heavily in this, and we're getting better at it all the time," Meyer said.

With all its combined efforts, the company says it can market to eight of every 10 buyers of Sirius XM-equipped used cars.

"Investing heavily" comes at a cost, but how much?

Another promising sign for investors is that Sirius appears to be ramping up its efforts in used cars without incurring costs that outpace its growth in revenue.

Sales and marketing costs -- the line item under which most of those expenses would be recorded -- were up by less than 6% over last year. At the same time, subscriber acquisition costs, which mostly include costs related to getting technology into new vehicles and getting those owners signed up, were down over the year-ago period.

Used cars offer Sirius a potentially long runway for continued subscriber growth. The challenge has been figuring out effective -- and cost-effective -- ways to track down used-car buyers and sign them up for trial subscriptions.

Sirius XM has made significant progress on that front, and it's now starting to show in the quarterly results. Its long-term growth depends on that continued success. Investors should be pleased with the progress it's made.

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John-Erik Koslosky has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.