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November 02, 2009

DirecTV 3Q Earnings Preview

Northlake clients own DirecTV (DTV) through their position in Liberty Media Entertainment (LMDIA). LMDIA owns 54% of DTV. DTV will acquire LMDIA prior to year end in a transaction that has already received all necessary government approvals. LMDIA shares will convert into DTV shares. LMDIA shareholders will also receive shares in a new company called Starz Entertainment. I am bullish on both DTV and Starz.

DirecTV (DTV) is expected to report 3Q09 EPS of 39 cents on revenues of $5.42 billion. EBITDA is projected at $1.39 billion. One of the most impressive things about DTV is that the company is continuing to grow right through the recession. On a year-over-year basis, revenue is projected to be up 8.7%, EBITDA up 11.2%, and EPS up 21.2%. EPS gets an extra boost form very aggressive share buybacks that have been in place for several years.

Growth remains because DTV remains a share gainer in multichannel TV. Gross adds this quarter should again be over 1 million subscribers. Churn may tick up a few basis points but net subscriber additions will still be up by 140,000. This compares to flat to lower net adds for cable and is not far off the gains already reported by AT&T (T) and Verizon (VZ). Keep in mind that Telco TV subs number in the millions while DTV has over 18 million subscribers.

Besides the headline financial and subscriber numbers, I think the focus of the call will be on ARPU. Last quarter, DTV guided 2009 ARPU growth lower by 100 basis points (note that ARPU in 2009 is still projected to be up about 2%) and the stock traded poorly despite an otherwise good quarter. The culprit was cautious spending on extras like pay per view and premium tiers. Analysts indicate that ARPU trends have stabilized.

There will also likely be some discussion of use of free cash flow once the Liberty Media Entertainment (LMDIA) merger closes later this year. Presently, DTV is unable to buyback shares. I have every expectation that share repurchases will resume at their prior level.

A final topic that could come up on the call is DirecTV Latin America. There is speculation that the company may spin-off the fast growing division. Analysts may also question the intensifying competitive environment in Mexican multichannel TV with cable companies and Telmex battling for market share.

Disclosure: T and LMDIA are widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts.

Posted by Steve Birenberg at November 2, 2009 02:14 PM in DTV