DirecTV Churn Dismays Wall St.

Nov 8, 2004  •  Post A Comment

Is DirecTV Group’s white-hot streak starting to cool?

Though the satellite operator last week continued the performance it has reported the past several quarters, reporting robust subscriber growth in subscribers in its third-quarter results, Wall Street’s enthusiasm for the company flagged upon learning the company’s churn rate.

Churn rose to nearly 1.7 percent in the third quarter from a year-earlier rate of 1.6 percent. The increase caught many analysts off guard and raises questions about the quality of new customers signing up for DirecTV service and whether investors ought to brace themselves for higher churn rates in the future.

DirecTV has been on a subscriber-growth tear for most of the year, an effort that accelerated once Rupert Murdoch’s News Corp. took control of the satellite company late last year.

In the third quarter alone DirecTV added more than 1 million new subscribers as a result of its own efforts as well as its partnerships with telephone companies BellSouth and Verizon Communications. A lot of the growth has come at the expense of cable operators, which in recent months have stepped up their own efforts to beat back the satellite tide.

But with the latest churn numbers, analysts are starting to quietly wonder whether DirecTV’s growth has come at the expense of consumer quality.

Bernstein Research analyst Craig Moffett described the churn number as a “key concern” because it wasn’t a result of recently acquired customers from DirecTV reseller Pegasus Communications, whose churn rates were historically higher than DirecTV’s, but rather a function of a highly competitive marketplace and, perhaps more worrisome, a higher number of disconnects for nonpayment.

“The latter could cast a question about the quality of the gross additions in recent quarters,” Mr. Moffett warned.

For their part, DirecTV officials admitted the churn number was higher than they wanted it to be and have begun several initiatives designed to better identify customers with riskier credit profiles. They blamed the increase on subscriber growth rates that proved more difficult to manage than initially expected.

DirecTV President Mitch Stern added: “Voluntary churn was still too high.”

Despite raising the churn number, the growth helped DirecTV report a double-digit increase in revenue. It wasn’t enough to offset a one-time charge or increased marketing costs booked in the quarter.

The company, which is 34 percent controlled by News Corp., fell deeper into the red, reporting a third-quarter loss of $1.01 billion versus year-earlier red ink of $23 million. Revenue surged 20 percent to $2.9 billion.

Driving much of the red ink in the 2004 quarter was an adjustment DirecTV made to the fair value of two satellites the company expects to launch next year. Originally planned for use as part of the company’s satellite-based high-speed data service, DirecTV scrapped the broadband plans and decided to use the satellites to deliver video. However, because video wasn’t the main purpose of the satellites, DirecTV had to adjust downward the value of the satellites from an original worth of $1.9 billion to $390 million. That led the company to book a charge in the 2004 third quarter of $903 million.

The quarter also reflected $260 million in marketing and customer-retention costs spent in the quarter.

Despite the questions about churn, many analysts still forecast significant growth for DirecTV, particularly as the company continues its relationships with the telephone companies, which accounted for more than half of DirecTV’s subscriber growth in the quarter.