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November 04, 2005

DirecTV: Not Interested In Getting Long

DirecTV (DTV) reported slightly disappointing 3Q05 results primarily due to higher than expected churn and retention marketing. Revenue of $3.2 billion was a little shy of estimates while EBITDA of $365 million was a more significant shortfall. Gross and net adds don’t appear too far off estimates which is confusing since higher churn should have led to a shortfall in net adds. One positive in the quarter is that subscriber acquisition costs, which include equipment subsidies, were well below expectations. This has been an area of concern....

DTV shares traded down a little over 1% against a strong market following the report. Not much new came out on the conference call and analysts didn’t seem agitated by the mixed results so I think the decline in the stock is attributable to the bad tone set by Comcast. Fears about competition have been ratcheted up and DTV remains a single product supplier getting squeezed by the behemoth cable companies and RBOCs.

On the call, management was asked about any broadband plans in lieu of sister company, British Sky Broadcasting's recent acquisition of a terrestrial broadband company in the UK. DTV said broadband is an important issue but investors shouldn’t draw any parallel from SKY to DTV beyond the 30,000 feet view that broadband is a factor in the competitive marketplace. In response to a question about uses of free cash flow and the underleveraged balance sheet, management noted that they see no areas to invest except broadband but are approaching it cautiously. This leaves an important strategic and financial question open and will serve to depress valuation.

DTV has been restricted in its ability to buy back stocks but that will change near year end. Management was non-committal about its plans but acknowledged that something needs to be done.

I did not pick up a lot of insights on guidance beyond the press release statement that churn would be lower in the fourth quarter and into 2006.

I don’t think investors are likely to bid up DTV shares until they get satisfactory answers to the broadband questions and competitive fears recede. Aggressive shareholder value enhancement via the balance sheet and free cash flow could do the trick but this hasn’t really worked for other media companies so far and is widely anticipated. I am not interested in getting long DTV at this time.

Posted by Steve Birenberg at November 4, 2005 09:06 AM