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February 18, 2010

DirecTV: Solid Results and Guidance Reduces Worries on US Competition

DirecTV (DTV) reported solid 4Q09 financial results and mixed subscriber metrics. The company also announced a $3.5 billion share repurchases which exceeded the high end of estimates calling for $2-3 billion. Ahead of the conference call, on which, the company should provide some 2010 guidance commentary, the news is on balance positive and justifies the bounce in the shares, especially considering the stock had been weak in fear of a tough quarter due to competitive conditions.

EPS of 48 cents beat the consensus of 39 cents. Revenues of $5.98 billion exceeded consensus of $5.92 billion. EBITDA of $1.49 billion beat estimates of $1.44 billion. Free cash flow of over $700 million also surprised to the upside thanks to the earnings upside and benefits from lower than expected subscriber additions that helped to limit capital spending. EBITDA margins grew 190 basis points, better than expected.

In the US, revenues closely matched estimates, rising 8.1%, while EBITDA grew 20.7%, ahead of expectations of 15-16% growth. Gross and net subscriber additions missed estimates which helped margins --- it cost money to add and activate new subscribers. Gross sub adds of 964,000 were about 70,000 short leading to a similar shortfall of 70,000 in net subs which were just 119,000. Churn was in line at 1.52%, up 10 basis points from a year ago.

In Latin America, all financial and subscriber figures exceeded estimates. Revenues grew 46.6% vs. expectations of 39%. EBITDA rose 19.6% vs. expectations for 12% growth. Gross subscribers rose 839,000 about 250,000 ahead of estimates. In turn, net sub growth of 214,000 exceeded estimates by about 45,000.

Management commentary on the 2010 outlook seems a bit cautious toward the US business as I listen to the call. The CEO is discussing a comprehensive strategy review of US businesses in response to an "increasingly competitive" environment and called the US business "mature.". The focus seems to be on client retention more than subscriber growth. The implication is that expenses could rise for marketing and customer service. Official guidance for mid to high single digit revenue growth and low teens EBITDA growth is at the low end of estimates but acceptable

At the same time, the comments on Latin America are quite bullish and specific guidance for 2010 is good for subscribers and 20% EBITDA growth. On a possible Latin American spinoff, the CEO is talking down the idea due to the high growth potential, further value creation potential for DTV shareholders, and synergies of being under the larger DTV umbrella. I think some analysts will find this commentary to be bearish and issue cautious comments and slightly lower estimates.

Putting the two pieces together, guidance appears quite close to current estimates calling for 9% revenue growth and 16% EBITDA growth. Guidance seems very slightly below consensus but management is usually conservative and has a history of surprising to the upside.

Overall, despite the cautious outlook commentary for the US, I see the day's news as biased to the upside. That said, I see further upside in the stock as somewhat limited in the near-term. In the long term, DTV remains a powerful company with a great balance sheet (even after the full share buyback is completed).

Disclosure: DTV is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. DTV is a collared long position in the Entermedia Funds. Steve Birenberg is co-manager and co-owner of the Entermedia Funds and has personal investments in the Funds.

Posted by Steve Birenberg at February 18, 2010 01:47 PM in DTV