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DirecTV Builds Momentum

By | May 10, 2004

      DirecTV, the satellite TV services unit of The DirecTV Group [DTV], appears to be regaining the momentum it lost a few years when EchoStar Communications [DISH] became the fastest-growing satellite TV service in the United States.

      Now, the El Segundo, Calif.-based carrier increasingly is scooping up more U.S. satellite TV subscribers than EchoStar as well as significantly boosting its average revenue per subscriber. The rebound has not gone unnoticed by satellite analysts who have begun scaling back their expectations for rival Littleton, Colo.-based EchoStar compared with DirecTV since the role reversal began last year.

      The sale of DirecTV to News Corp [NWS] last December by Hughes Electronics [GMH] not only gave the satellite TV operator a powerful media company as a parent but it also bought renewed commitment to the sector.

      DirecTV could gain further progress later this year as it begins to reap the benefit of last week’s launch of a new satellite, DirecTV 7S. That spacecraft is intended to help the company significantly expand it delivery of local signals throughout the United States. The new spot beam satellite, launched successfully May 4 from the ocean-based platform aboard a Sea Launch Zenit-3SL rocket, will deliver local channels to DirecTV customers in more than 60 U.S. markets.

      The DirecTV 7S, a Space Systems/Loral-built 1300 model spacecraft and the second spot beam satellite in the DirecTV fleet, would let the company expand its local channel programming to an additional 42 markets and to transmit local channels in 19 existing local-into-local markets. The launch of the new satellite also will enable existing satellites in the DirecTV fleet to use part of their capacity to deliver more local channels and new services.

      Launched from an equatorial launch site at 154 degrees west longitude, DirecTV 7S would help DirecTV enlarge its local channel capabilities by year-end to a minimum of 130 U.S. markets – roughly 92 percent of the country’s U.S. TV households.

      Clobbering Cable?

      Mitchell Stern, president and CEO of DirecTV, said, “There is no understating the importance of the role DirecTV 7S plays in our plans to turn up the heat on cable in more local channel markets and our ability to continue to roll out other new services for our customers.”

      Bob Peck, a satellite analyst with Bear Stearns, says the launch of the new satellite is “a key component of the company’s growth prospects and competitive capabilities, with competitor EchoStar already available in 119 local markets.”

      The launch of the DirecTV 7S satellite adds impetus to already strong sales gains in DirecTV that the company has been showing in recent quarters. That strength was reflected last week when the company announced improved results for first quarter 2004, compared with the same quarter of 2003.

      DirecTV played a key role in helping its parent company boost its revenues 22 percent to $2.51 billion during first quarter 2004, compared to the same quarter a year ago.

      The DirecTV Group’s revenues rose primarily due to a rise in the number of subscribers and ARPU (average revenue per user) at the U.S. satellite TV subsidiary, as well as from higher sales of DirecTV set-top boxes and DirecWay satellite broadband services at Germantown, Md.-based Hughes Network Systems (HNS).

      The parent company’s operating profit before depreciation and amortization of $96 million and an overall operating loss of $91 million both marked gains from the same quarter the year.

      Television’s Traction

      Arguably the top highlight of first quarter 2004 was the accelerating subscriber growth at the DirecTV satellite television unit, which added a record 912,000 subscribers, said Chase Carey, the parent company’s chairman and CEO. In addition, combining a 30-percent increase in gross subscribers, coupled with a four-year-low average monthly churn rate of 1.4 percent, resulted in an all-time high of 460,000 net new subscribers in first quarter 2004, he added.

      Those net new subscriber gains at DirecTV marked a 67 percent jump from the same period last year, company officials said.

      Bouncing Back

      “The impressive achievement shows that DBS remains a very price elastic business that still has a bit of bounce in its step,” explained William Kidd, a satellite analyst with Vintage Research, a New York-based media research firm.

      Another positive sign from first quarter 2004 is an 8 percent increase in average monthly subscriber revenue (ARPU). DirecTV’s ARPU now has reached $63.60.

      Fundamentals at DirecTV are “exceptionally strong,” Peck said. In particular, the company’s 460,000 net new subscribers during the quarter, excluding those obtained by the company’s marketing partner, the National Rural Telecommunications Cooperative (NRTC), topped the Bear Stearns estimate of 255,000, as well as the Wall Street consensus estimate of 300,000.

      Morgan Stanley’s Benjamin Swinburne, another Wall Street satellite analyst, also wrote a positive research note last week about DirecTV’s financial performance.

      Despite raising prices approximately 4 percent March 1, both gross new subscriber additions and churn at the satellite TV unit were “well ahead” of Morgan Stanley’s estimates, Swinburne wrote to his clients. ARPU growth of 8 percent and SAC of roughly $645 per gross subscriber addition — lower than Swinburne’s estimate of $683 — helped DirecTV to outperform his forecast for both measures.

      Upscale-Led Uptick

      The company’s results were aided by consumer demand for using multiple set-top boxes to serve different rooms in the same household, local-into-local services and Personal Video Recorders (PVRs), Swinburne said.

      DirecTV also announced that it began accounting for SAC during the quarter that it is incurred rather than amortized over four consecutive quarters. The accounting change follows the practice used by rival EchoStar in reporting its results, Swinburne noted.

      Overall, several one time charges led the DirecTV parent company to post a first quarter 2004 earnings per share (EPS) loss of 46 cents. When those one-time charges are factored out, the company’s EPS was 3 cents a share.

      In the coming months, DirecTV may opt to use cash it recently gained from the sale of its controlling interest in PanAmSat and minority stake in XM Satellite Radio to provide the needed funds for the purchase of News Corp’s Sky Latin America, Peck wrote. Other near-term restructuring moves also are possible, he added.

      Specifically, DirecTV will receive about $2.8 billion in the second half of 2004 when its sale of PanAmSat is expected to close, Peck estimated.

      –Paul Dykewicz

      (Bob Marsocci, DirecTV, 310/964-4656; Bob Peck, Bear Stearns, 212/272-6665; William Kidd, Vintage Research, 646/472-5228; Benjamin Swinburne, Morgan Stanley, 212/761-7527)

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