We reaffirm our long-term Neutral recommendation on DIRECTV (DTV). The company declared excellent financial results for the first quarter of 2011. These solid results were the combined effect of a double-digit growth of the top line, significant margin and ARPU expansion, and better-than-expected net customer addition. Management’s strategy to target high-end customers paid-off nicely as the demand for the company’s HD channels and digital-video recording services sky rocketed in the reported quarter. DIRECTV remains one of the few pay-TV service providers that are still generating commendable video subscriber growth.
DIRECTV is reaping the benefit of affluent quality subscribers, who are willing to pay for the company’s costly premium services and programs with low churn rate.In the first quarter of 2011, DIRECTV added 184,000 net subscribers in the U.S. and 427,000 in Latin America. ARPU (average revenue per user) in the U.S. and Latin America increased by 3.9% and 11.7%, respectively.
The most surprising fact is that DIRECTV is generating net subscriber addition sequentially, when other large pay-TV operators like cable TV giant Comcast Corp. (CMCSA), Time Warner Cable Inc. (TWC), and Cablevision Systems Corp. (CVC) are sequentially loosing basic video customers. We believe this fabulous performance was the combined result of effective customer screening, target marketing, avoiding disputes with content manufacturers and media companies.
Nevertheless, within the satellite TV industry, DIRECTV is facing competition from its nearest rival DISH Network Corp. (DISH), which recently acquired Blockbuster Inc. The 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. Furthermore, the newly developed Internet video streaming companies like Netflix Inc. (NFLX), Hulu, YouTube have become major threats to the overall pay-TV industry.
During the first quarter of 2011, DIRECTV’s churn rate in the U.S. region was 1.5% compared with 1.48% in the prior-year quarter. Management is expecting increasing competition as both cable and telecom operators offering new customer promotions use aggressive pricing strategy. Continuation of this trend will adversely impact DIRECTV’s churn rate and net customer addition.
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