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February 08, 2007

Good Quarter For DirecTV -- Upside Remains

Technical difficulties prevented me from listening to the DirecTV (DTV) 4Q06 conference call. The following comments are based upon the press release and initial analyst comments made before the call started.

I expected a strong quarter from DTV but the numbers at the subscriber level, where it really matters for the stock price, were much better than expected. DTV added 275,000 subscribers vs. expectations of 200,000. Gross additions of 1 million exceeded estimates as did a churn level of just 1.57%. These two measures combined to produce the better than expected subscriber additions.....

ARPU was also better than expected at $80.70 vs. expectations for the mid $79 area. The combination of higher than expected ARPU and lower than expected churn indicates that DTV's strategy of focusing on high end customers is working. This is a good strategy that has helped drive the stock price up sharply in the last year. There is still a concern of how defensible DTV's subscriber base is vs. the onslaught of cable's triple play. This quarter suggests that DTV will be able to continue growing for the time being and that accounts for the sharp increase in the stock price today.

EPS of 29 cents fell just shot of the 30 cent consensus while EBITDA of $915 million matched or slightly exceeded estimates. Subscriber acquisition costs look t be inline to slightly higher than expected as do programming costs.

Overall, this was an excellent quarter for DTV which justifies the 7% gain in the stock so far today. Since I was unable to listen to the call I can't comment on whether DTV addressed its severely under leveraged balance sheet ($950 million in net debt at year end) or its plans to enter the broadband market. I'll try to follow-up with a comment tomorrow addressing these issues.

In the meantime, if you are long DTV, I'd hold on. As an aside, DTV's strategy is good for the entire multichannel TV industry as they are not competing on price. This is favorable for cable.

Posted by Steve Birenberg at February 8, 2007 01:16 PM in DTV