DirecTV Sacrifices Short-term Profits For Growth

By | February 16, 2004 | Feature

The peculiar part about satellite TV subscriber growth is that the cost of boosting revenues typically batters a service provider’s bottom-line. The phenomenon repeated itself last week when Hughes Electronics [NYSE: HS], the parent company of U.S. satellite TV provider DirecTV, reported its fourth quarter 2003 results.

Revenues at El Segundo, Calif.-based Hughes rose more than 20 percent to $2.95 billion during the fourth quarter on the strength of robust gains in subscriber numbers and average revenue per user (ARPU) at DirecTV. Increased sales from DirecTV’s set-top boxes and satellite broadband services at Germantown, Md.-based Hughes Network Systems (HNS) also fueled revenue gains. However, the bottom-line results at Hughes dipped partly due to a one-time pre-tax charge of $132 million caused by its December sale to News Corp [NYSE: NWS] and increased marketing costs at DirecTV to acquire new subscribers.

That latter issue helps to account for the yo-yo effect that occurs when rising revenues from subscriber sales are accompanied by subscriber acquisition costs (SAC) that hurt profitability. Hughes suffered a net loss of $310 million during the fourth quarter, compared to net income of $113 million for the same period of 2002. The difference certainly was exacerbated by a 2002 pre-tax gain of $600 million, stemming from a payment from EchoStar Communications [Nasdaq: DISH] to terminate its proposed merger with Hughes. And, a further financial hit to Hughes during the fourth quarter included a reorganization expense of $193 million from agreements with creditors in the bankruptcy proceedings of its DirecTV Latin America business unit.

Despite the bottom-line decline, Hughes’ DirecTV business unit achieved significant subscriber growth. DirecTV’s 405,000 net new subscribers during the fourth quarter were 39 percent above the 292,000 subscribers that the company attained during the same quarter in 2002. DirecTV’s subscriber churn during the fourth quarter also fell to 1.45 percent, compared to 1.49 percent during the same quarter a year ago.

DirecTV’s deteriorating bottom-line masked the progress it achieved by signing up 861,000 new subscribers during the fourth quarter before factoring in churn. That level of new subscriber growth compares favorably with the same quarter of 2002 when 711,000 new subscribers joined the fold.

Also on the plus side, DirecTV’s average revenue per user (ARPU) jumped to $71.70 during the fourth quarter compared to $64.69 in the fourth quarter of 2002, $63.70 in the third quarter of 2003, and a pre-earnings release estimate from Lehman Brothers of $70.08. ARPU rose due to increased revenues from DirecTV’s NFL Sunday Ticket package, a higher number of receivers per customer, and an increase in the number of markets that had access to local signals, company officials said.

Steve Blum, who heads the Marina, Calif.-based satellite consulting firm Tellus Venture Associates, said DirecTV has spent additional marketing dollars to pursue more upscale subscribers who tend not to drop the service. Increased spending on subscriber acquisitions also is cutting churn by luring less price sensitive subscribers who generally are loyal and rack up higher monthly programming charges.

It costs money to build a customer base and the short-term effect is to reduce earnings, Blum said.

News Corp, which gained control of Hughes on Dec. 22, is unlikely to abandon the trade off of near-term profitability for robust revenue growth. “When you are News Corp and you are in the business of selling eyeballs to advertisers, you will recoup those costs in another part of the company,” Blum said.

Last Dec. 22, General Motors [NYSE: GM], Hughes, and News Corp successfully completed the sale of Hughes to GM. As part of the deal, News Corp acquired 34 percent of the outstanding common stock of Hughes and then transferred its entire stake to its U.S. subsidiary, Fox Entertainment Group [NYSE: FOX].

Since Fox owns programming that the rising number of DirecTV subscribers will watch, do not expect DirecTV to put the brakes on its growth drive. To the contrary, Fox may press down on the accelerator to increase its revenue flow. –Paul Dykewicz

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