[11-08-07 – Satellite News] DirecTV, the U.S. satellite pay-TV operator, issued a strong set of third quarter results, which largely were ahead of analyst forecasts. Spencer Wang, a satellite equity analyst at Bear Stearns commented in a research note, “Direct TV reported third quarter operational metrics that were generally stronger than expected (including net adds of 240,000 vs. our estimates of 169,000 and consensus of 183,000; better than expected churn and gross adds). As a result, DirecTV U.S. revenue reached $3.885 billion, +14.2 percent year over year, and ahead of our $3.794 billion forecast. Revenue growth was driven by stronger than expected ARPU growth of 8.3 percent (vs. our estimates. of 6.0 percent) and higher net adds.”

ARPU Figure Strong

    Wang highlighted the importance of DirecTV growing the Average Revenue Per User (ARPU) figure in the United States. He said, “DirecTV U.S ARPU was also robust, with growth of 8.3 percent year over year to $78.79, above our $77.10 forecast, and helping revenues grow by just over 14 percent. Excluding the effect of the extra NFL game on the platform’s NFL Sunday Ticket package, ARPU growth would have been closer to seven percent. Having said this, DirecTV has rarely seen ARPU growth that is this high. The company has only had three other quarters of 6.8 percent growth or better since the beginning of 2004. ARPU growth was driven by a combination of price increases, higher fees from multiple boxes, and HD-DVR fees.”
    April Horace, a satellite equity analyst at Janco Partners was equally bullish about DirecTV’s performance in the United States. She said in a research note, “DirecTV U.S. added 240,000 net subscribers, handily beating our estimates. ARPU was $78.84, which is anticipated to continue to increase as penetration of advanced services increases. For the quarter just over 60 percent of the gross additions took the advanced services, well above cable advanced services take rates. We believe that DTV will continue to increase penetration of advanced services when the full HD offering is available.”
    DirecTV now has more than 16.5 million subscribers in the United States, having added around 900,000 subscribers in the last year. In the third quarter, DirecTV added 240,000 net subscribers, which beat Janco Partners, Inc. estimates of 153,000 by almost 57 percent.
    Bryan Kraft, a satellite equity analyst at Credit Suisse was also positive about the operator’s results, despite higher than expected subscriber acquisition costs (SACs). He said in a research note, “DirecTV reported a strong quarter, particularly with respect to churn and ARPU. Strength in these metrics drove better net adds and revenue growth than we had expected. This was somewhat dampened by higher SAC, retention marketing, and programming costs. We continue to believe that DirecTV has upside in the short term and are raising our target price to $30. Catalysts include strong net adds, driven by churn reduction and HD, as well as a relevering of the balance sheet following the close of the Liberty-News swap. Longer term, we believe that DirecTV is secularly challenged due to its single product, inability to narrowcast, that it is seeing increased competition from telco entry, and that it will likely lose AT&T as a distribution partner within the former BellSouth territories.”
    In terms of its performance in Latin America, Wang added, “Revenue for DirecTV Latin America (DTVLA) reached $442 million, above our $433 million estimate and grew by 67 percent versus the prior year quarter. EBITDA grew to $105 million and was up 24 percent versus the prior year quarter. The growth in these financial metrics are primarily the result of the consolidation of the Sky Brasil platform which occurred during the third quarter of 2006. DTVLA subscribers, with the inclusion of the Brasil platform, are now just under 3.1 million and grew by a strong 161,000 (driven by sub net adds in Brazil especially, but also in Venezuela, Argentina & Colombia,) during the third quarter.”

Investment Risks

    While generally positive about the DirecTV story, Wang did highlight a number of investment risks related to the operator. He said, “We believe that the rollout of RBOC video is worse for DBS operators than it is for cable operators as the RBOCs will be offering a bundled service offering that will be harder for DBS to defend against than it will be for cable operators to defend against. Increased competition will likely put pressure on subscriber growth, upgrade and retention costs, ARPU growth, subscriber acquisition costs and churn. Secondly, without a bundled offering of communication services, we view DirecTV as structurally challenged versus its competitors. Consumers appear to be increasingly interested in purchasing bundles of services. Without such an integrated offering, we believe that it will be harder for DBS operators to grow their businesses. Thirdly, we believe that it will be hard for DBS to differentiate its products in the future as it has in the past and we are not yet convinced that the company’s aggressive HD strategy can provide a lasting advantage vs. cable/telcos. Finally, we remain concerned that DirecTV could invest in a broadband business to round its product portfolio. Such an investment could be costly both financially and operationally, and possibly value destructive.”