DIRECTV Misses but Users Grow (DISH) (DTV) (T) (VZ)

Zacks

DIRECTV (DTV), the largest satellite TV operator of the U.S., delivered excellent third quarter 2011 financial results today before the opening bell. The solid result was primarily attributed to the combined effect of double-digit revenue growth, significant margin expansion, and record net customer additions. Management’s aggressive promotional plan of offering popular NFL SUNDAY TICKET coupled with upgrading customers with premium plans worked wonders for the company.

During the reported quarter, DIRECTV spend $1.45 billion in share repurchases.

Total revenue in the reported quarter came in at $6,844 million, up 13.6% year over year, and ahead of the Zacks Consensus Estimate of $6,737 million. This was primarily attributable to massive subscriber growth in the U.S. and Latin American regions, solid average monthly revenue per subscriber growth, and increasing contribution from the domestic market.

Quarterly GAAP net income was $521 million or 70 cents per share compared with $479 million or 55 cents per share in the year-ago quarter. Quarterly EPS of 70 cents was below the Zacks Consensus Estimate of 73 cents.

Quarterly operating profit before depreciation & amortization (OPBDA) was $1,584 million, up 6.7% year over year. Operating profit in the third quarter of 2011 stood at $1,030 million, up 18.7% year over year, primarily due to gross profit associated with higher revenues, partially offset by an increase in subscriber acquisition costs.

At the end of third quarter 2011, DIRECTV generated $3,611 million of cash from operations compared with $3,825 million in the prior-year period. Free cash flow (cash flow from operations less capital expenditures) in the reported period was $1,451 million compared with $2,178 million in the year-ago quarter.

At the end of the third quarter of 2011, DIRECTV had $1,297 million in cash & cash equivalents and $13,463 million of outstanding debt on its balance sheet compared with $1,502 million in cash & cash equivalents and $10,472 million of outstanding debt at the end of fiscal 2010.

DIRECTV U.S. Segment

Revenue from this segment was $5,421 million, up 7.8% year over year, primarily due to strong subscriber base and significant ARPU growth. Quarterly ARPU was $92.21 versus $88.98 in the prior-year quarter. Quarterly operating profit before depreciation & amortization was $1,153 million, down 3.3% while adjusted operating profit climbed 11.1% to $800 million.

Average monthly subscriber churn rate in the reported quarter was 1.62% compared with 1.70% in the prior-year quarter. Quarterly net subscriber addition was 327,000 compared with 174,000 in the year-ago quarter. As of September 30, 2011, DIRECTV U.S. had 19.76 million subscribers, up 4% year over year. Such record addition of subscribers was mainly fueled by their popular NFL SUNDAY TICKET promotional campaign.

DIRECTV Latin America Segment

Segment revenue was $1,356 million, up 45.8% year over year,mainly due to strong subscriber growth, particularly in Brazil and higher ARPU including a massive increase of 178.6% in third quarter net subscriber additions of 574,000.

Quarterly ARPU was $64.63 versus $58.20 in the prior-year quarter, primarily driven by price increases and higher sales of HD and DVR services. Quarterly operating profit before depreciation & amortization increased 38.7% to $434 million and operating profit jumped 37.2% to $236 million.

Average monthly subscriber churn rate in the reported quarter was 1.83% compared with 2% in the prior-year quarter. As of September 30, 2011, DIRECTV Latin America had approximately 11.1 million subscribers, up 28.4% year over year.

Recommendation

Strong fundamentals along with huge subscriber growth across all its segments make the company quite popular within the pay-TV industry.

However, within the satellite TV industry, DIRECTV is facing intense competition from its nearest rival DISH Network (DISH). Furthermore, U.S. telecom giants, AT&T (T) and Verizon Wireless (VZ) are increasingly rolling out their fiber-based network in order to provide video services. Additionally, the newly developed Internet video streaming companies like Netflix, Hulu, YouTube have become major threats to the overall pay-TV industry.

We, thus, maintain our long-term Neutral recommendation for DIRECTV. Currently, DIRECTV has a Zacks #3 Rank, implying a short-term Hold rating on the stock

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