DirecTV Results Raise Concerns

Jan 31, 2005  •  Post A Comment

Has satellite TV growth leveled off?

That appeared to be the question on Wall Street’s mind last Thursday after satellite operator DirecTV Group released its fourth-quarter and full-year 2004 results. Even though DirecTV reported a narrowed 2004 fourth-quarter loss, investors appeared more worried about the rising costs of subscriber acquisition and lower-than-expected subscriber growth.

Though the company netted 444,000 new subs in the quarter, it missed some analysts’ projections, which went as high as a net of 560,000 new subs. At the same time, subscriber acquisition costs jumped to $669 per customer from $638 a year ago. Churn, or the rate of customers leaving the service, rose to 1.6 percent from a year-earlier 1.5 percent.

Those results sent DirecTV shares falling 52 cents, or more than 3 percent, to close Thursday at $15.28 a share.

To be sure, the net new subs in the fourth quarter surpassed the 361,000 net new adds that DirecTV posted a year earlier. However, the 2004 results come as evidence mounts suggesting that satellite’s growth trajectory might be flattening a bit-in particular growth generated by a series of high-profile partnerships inked last year with large telephone companies such as SBC Communications and Verizon Communications.

But Mitch Stern, president and CEO of DirecTV’s U.S. operations, said DirecTV’s partnership with Verizon generated 50 percent more subscribers in the 2004 fourth quarter than it did in the third quarter.

DirecTV Group CEO Chase Carey said during the company’s earning call last Thursday that the satellite operator will work toward reducing customer turnover, improving margins and introducing a new set-top box this year as the company continues on its track to becoming a 20 million-subscriber platform.

“As a whole, [2004] was both a successful and in many ways [a] very important year for positioning DirecTV for the future,” Mr. Carey told analysts and investors.

Mr. Carey said that while subscriber growth would remain strong in 2005, the company’s decision to tighten customer screening processes meant it is not likely the company will repeat the robust growth seen in 2004, when DirecTV added a record 1.7 million net new subscribers. Mr. Carey predicted the company would add nearly 1.5 million net new subscribers in 2005 and would add “well over 1 million” net new subs in 2006.

DirecTV currently has more than 13.9 million subscribers.

Figuring prominently in DirecTV’s growth plans is the introduction of what the company is calling its home media center, a set-top box offering more advanced digital video recording features, high-definition television programming and the ability to connect multimedia devices in a home. The company believes the introduction of the set-top box will help lower churn.

For the quarter, the El Segundo, Calif.-based company reported a net loss of $283 million, or 20 cents a share, compared with year-earlier red ink of $310 million, or 22 cents a share. The 2004 quarter included a $217 million pre-tax charge for DirecTV’s expected sale of its Hughes Network Systems unit and a $45 million pre-tax charge related to the closure of DirecTV Latin America’s Mexico operations.

Revenue jumped 22 percent to $3.4 billion, driven largely by 444,000 net subscriber additions.

For the year, DirecTV reported a widened loss of $1.9 billion, or $1.40 a share, compared with a year-earlier loss of $362 million. The 2004 figure includes a series of charges related to subscriber acquisition and retention, a change in the primary use of two satellites and the sale of DirecTV’s PanAmSat unit.