By Jimmy Schaeffler

Hughes Electronics Corp. [NYSE: GMH] offered surprisingly good news when it held its first quarter conference call with financial analysts last Monday. Wall Street satellite analysts were congratulatory and hopeful about similar news in the quarters ahead.

Amid a weak economy and fierce competition from hundreds of rival cable operators nationwide, a positive growth trend would do wonders for the sector and for the stock prices of Hughes and EchoStar Communications [Nasdaq: DISH]. The most encouraging news may have come from Hughes’ cash cow DirecTV. The largest U.S. satellite TV service exceeded Wall Street expectations for almost every benchmark. Perhaps most importantly, DirecTV’s results suggested momentum and future optimism for the sector. It is important for any multi-channel video provider these days to show long-term growth, as well as prospects for improved profitability. Those are the factors that will sustain stock valuations.

DirecTV’s Financial Metrics

For the first quarter of 2003, DirecTV added 275,000 net new subscribers, boosting its numbers by 80 percent compared to forecasts. With DirecTV reporting that it activated 701,000 new subscribers during the first quarter, it appears that DirecTV turned off about a half million subscribers during the same time frame.

DirecTV President Roxanne Austin readjusted the company’s year-end gross subscriber projections to 2.8 million – or 800,000 to 850,000 net new subscribers for the year — based upon first quarter trends. Overall, DirecTV subscriber growth is expected to dip in the second and third quarters, compared to the just-finished first quarter. However, DirecTV is offering guidance that this year’s second and third quarter results will top the same quarters of 2002.

Favorable first quarter financial metrics achieved by DirecTV include a subscriber acquisition cost (SAC) of $540, an average revenue per unit (ARPU) of $59.10, and monthly churn measuring a respectable 1.5 percent. Additionally, overall quarterly revenue for its parent company Hughes climbed 10 percent to $2.23 billion, up from the $2.02 billion amassed last year. Since becoming DirecTV’s president in July 2001, Austin made a clear strategic decision to focus the company’s growth on “valuable” subscribers that pay the most money per month for programming. DirecTV defines “valuable” subscribers as those that sign-up for at least a year’s service and have good credit. Those positive factors help to offset the up-front cost of acquiring new subscribers.

During an April 14 conference call, executives from Hughes and DirecTV attributed their growth to three factors: 1) stronger than expected revenue gains, 2) low churn, and 3) cost cutting. Executives from News Corp [NYSE: NWS], the Rupert-Murdoch-led company that recently arranged for its Fox Entertainment [NYSE: FOX] unit to buy a controlling interest in Hughes, said in a recent analysts’ call that it intended to cut both costs and churn once DirecTV joined its fold.

U.S. government approval of News Corp’s purchase of DirecTV is expected by year-end. For the first time ever, Hughes reported a separate net income for DirecTV – $47.3 million for the first quarter.

Austin was not shy about identifying cable TV as the “key rival” facing her company. Cable also is a competitor to DirecTV’s sister company, Germantown, Md.-based Hughes Network Systems (HNS). HNS competes with cable in the delivery of broadband and data delivery to enterprise subscribers. Cable traditionally has been weak in those areas. HNS Chairman and CEO Pradman Kaul reported that 20 percent fewer employees worked for HNS this year than a year ago as part of his company’s thrust to achieve financial improvement that would involve reaching EBITDA (earnings before interest, taxation, depreciation and amortization) break-even by year-end. HNS’ value as a provider of DirecTV receivers was demonstrated when the company shipped its 11 millionth set-top box (STB) during the first quarter.

Austin said that her strategy to grow DirecTV’s subscriber base is to launch another high-power satellite, 7S. That spacecraft would add local channels in 50 additional markets. DirecTV currently offers local channels to 52 markets. Once the satellite is operational, DirecTV will be able to offer local channels in 102 U.S. TV markets covering 84 percent of the U.S. population. The introduction of local channels into more cities served by DirecTV should play a key role in satellite TV’s subscriber growth. Many consumers feel that because of DirecTV’s movie listings and exclusive sports packages, such as NFL Sunday Ticket, it is a superior service to EchoStar’s DISH Network. A sampling of those consumers in areas where DirecTV currently does not offer local channels found that the people either plan to retain their subscriptions or subscribe to its programming when local channels become available.

EchoStar’s Accent

Littleton, Calif.-based EchoStar, the other major U.S. satellite TV provider, recently announced plans to add as many as 100 foreign-language, ethnic channels to its program offerings. Those new channels would be available on a single platform to supplement the company’s existing line-up of around 42 foreign-language channels accessible by customers who currently use two dishes to receive them. The additional foreign-language programming is important because it allows EchoStar to differentiate its service and tap into the potential to serve the foreign-language market in the United States from one source. Since cable systems serve disparate U.S. markets, they are unlikely to offer comparable programming to a national audience.

Like DirecTV, EchoStar is concentrating much of its new business on digital video recorders (DVRs). DISH Network STBs with DVRs are selling at a pace that have made EchoStar the world’s largest provider of DVRs. EchoStar is committed to a strategy involving multiple STBs deployed in a single household at affordable monthly rates.

The Numbers Please…

The Carmel Group estimates that DirecTV added 82,000 net new subscribers in January, 93,000 in February and 100,000 in March. And EchoStar added an estimated 93,000 net new subscribers in January, 102,000 in February and 108,000 in March. This brings EchoStar’s first quarter estimated numbers to 303,000 net new subscribers. That total is about 10 percent more than DirecTV’s first quarter results. Both providers together added an estimated 200,000 net new subscribers in March alone.

According to Carmel Group estimates, EchoStar amassed almost 8.5 million DISH Network subscribers by the end of the first quarter. DirecTV’s subscriber total is almost 11.5 million. The two U.S. high-power satellite TV providers combine to serve an estimated 19.9 million subscribers. EchoStar’s actual subscriber count will not be available until it publicly announces its financial results sometime in late April or early May. The Carmel Group estimates the market split between the two companies at the end of March 2003 is 43 percent for EchoStar and 57 percent for DirecTV.

Jimmy Schaeffler researches, analyzes and writes this monthly report. He is a subscription TV analyst at The Carmel Group, a publisher of industry data books and the monthly newsletters DBS Investor and Satellite Radio Investor. The Carmel Group is a consultancy based in Carmel-by-the-Sea, Calif., that specializes in telecommunications (e.g., cable, satellite, broadcast and wireless), as well as computers and the media. He can be reached by e-mail, jimmy@carmelgroup.com, or by telephone, 831/643 2222.