Selling DirecTV With Rising Fears of Price Competition in Mature Video Cable/Satellite Business

All Northlake client positions in DirecTV (DTV), including those in my personal accounts, were sold this morning. DTV proved to be a very successful investment having been sold for a gain of 84% and held for just short of 14 months. The original purchase was Liberty Media Entertainment, which restructured, merged with DTV, and ultimately DTV shares were spun off.

The reasoning behind the sale of DTV is twofold. First, I am nervous about the increasingly mature cable and satellite TV business. The last several quarters have seen sharp slowing in subscriber additions for all providers and I am fearful that DTV may miss on its subscriber numbers when it reports earnings next week. I also worry that price competition among providers will pick up offsetting gains from selling higher value added services like high definition and video on demand.

Second, I have been looking for sale candidates in order to build cash reserves given my more cautious view on the stock market upside in the second half of 2010. I am not outright bearish but I feel the risk-reward trade-off is only neutral and shocks to the market remain possible as long as the economic data continues to be sluggish. A larger cash reserve provides clients with downside protection and greater opportunity to take advantage of sharp market declines with new ideas.

There are several risks in selling DTV. The company is very strong financially and likely to buy back about 30% of its shares in the next 18 months. DTV is also a long rumored takeover candidate for AT&T or Verizon. On the fundamental side, I could be wrong about DTV's subscriber growth as satellite companies may be gaining share at the expense of cable and telco.

Disclosures: DirecTV is a hedged, net long position in the Entermedia Funds. Steve Birenberg is co-portfolio manager, partial owner the Funds' investment management company, and has personal monies invested in the Entermedia Funds.

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.

Liberty Media Entertainment Merger with DirecTV Closes

Last Thursday, shareholders of Liberty Media Entertainment (LMDIA) and DirecTV (DTV) formally approved the merger between the two companies. The merger closed Thursday night. Many Northlake clients owned shares in LMDIA. Each share of LMDIA is now one share of DTV. In addition, for every ten shares of LMDIA, shareholders received one share of Liberty Starz (LSTZA).

For example, if a Northlake client owned 500 shares of LMDIA they would now own 500 shares of DTV and 50 shares of LSTZA. Any fractional shares of LSTZA will be paid in cash.

As of early Monday morning, Schwab Institutional shows the new holding of LSTZA but has not yet converted the LMDIA to DTV. This means that account values are understated by the value of client DTV holdings. Schwab has assured me the DTV shares will be credited to accounts very soon.

I plan to hold both DTV and LSTZA for the time being. DTV is growing around 10% a year and producing lots of free cash flow which is being used to aggressively repurchase shares. In my opinion, the growth profile of the company, cash flow, and balance sheet strength are about 20% undervalued at the current DTV price of $31. DTV has further upside in the event that the long rumored takeover of the company by a major telecom company comes to fruition. Just last week, John Malone, the controlling shareholder of LMDIA and now the largest shareholder of DTV, indicated that he is willing to sell the company. In a takeover, DTV could be sold for a price of $40-50. I am less optimistic about a takeover but the ongoing speculation provides excellent support for the stock as do the aggressive share repurchases.

LSTZA operates the Starz and Encore movie channels that are available on a subscription basis via cable and satellite services. The company’s revenues come from splitting the subscription fee with the cable and satellite companies. Expenses are dominated by the fees paid to the movie studios for the rights to show the movies exclusively on Starz and Encore for a period of time. Revenue growth has been slow but the movie rights expenses have been falling driving good growth in profits the last few years. The outlook for growth is more mixed as online video rights complicate negotiations between the studios and LSTZA. Fortunately, the company’s current rights deals are good through 2012 and 2015. In the meantime, LSTZA produces significant free cash flow which I expect to be used to aggressively buyback shares. Current Northlake client holdings of LSTZA are small due to the 1:10 ratio. I suspect that will eventually lead me to sell the shares but for now I think they could rise another 20% to around $60.

If Media Talk readers have any questions about the LMDIA-DTV-LSTZA transaction, please do not hesitate to contact me or just leave your thoughts in the comments section below.

Disclosure: LMDIA and now DTV are widely held by clients of Northlake Capital Managemet, LLC including in Steve Birenberg's personal accounts.

DirecTV Comes Through with Free Cash Flow as Prior Worries Recede

When I first read the DirecTV press release I was worried the stock would trade down. I saw the results as mixed with a few negatives offsetting plenty of positives. I sure was wrong. As the conference call concludes, the stock is up 6.1%.

I think part of the gains relate to ongoing takeover speculation as DTV approaches the closing of its merger with Liberty Media Entertainment (LMDIA). LMDIA owns 54% of DTV. The deal dramatically reduces LMDIA's John Malone's influence and simplifies the corporate structure. It also sets up a spin-off of the rapidly growing DirecTV Latin America unit. That step is widely expected and makes DTV an easier and more attractive merger candidate for AT&T. AT&T exclusively sells DirecTV service in the telco channel and is already accounting for the bulk of DTV's new subscribers. With telco TV subscriber additions slowing but telcos still needing TV as part of the bundle in the battle with cable, DTV looks like a better and better acquisition candidate.

Getting back to the earnings report, the negatives were a slight miss in net subscribers on higher monthly churn, and modest shortfall in EPS and EBITDA. Upside came from a rebound in ARPU growth and higher than expected share buybacks and free cash flow. EPS of 37% were two cents short of estimates. The ARPU improvement was important as a weak 2Q09 ARPU had made investors skittish.

The misses were minor and besides takeover speculation, it seems that investors are taking away the fact the DTV still grew revenues and EBITDA by 10% and 8%, respectively. The EBITDA number is depressed by charges from repatriating money from Venezuela and foreign exchange. In the US, revenues grew 9% and EBITDA was up 11%. Compare that to flat to low single growth at cable and telco competitors and you have to be impressed.

Even better, DTV is providing the street with the capital allocation strategy it desires: heavy share repurchase. Share buybacks are now suspended until the closing of the LMDIA merger (shortly after 11/19). But expect a big announcement by the end of the month on a repurchase for 2010 likely to be 10% or more of the shares outstanding.

Net debt stands at $3.9 billion against EBITDA of over $5 billion in 2009 and estimates for greater than $6 billion in 2010. Even with new debt coming on board when the merger closes, the balance sheet is in superb shape and free cash flow continues to grow as subscriber growth moderates.

I still like the DTV story but prefer to play it through LMDIA which will create a stub of Starz Entertainment that I Think remains undervalued by about 30%. Via LMDIA I get that upside plus the good DTV story.

Disclosure: LMDIA is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts.

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.

Liberty Media Entertainment: New Long Position Provides Cheap Play on DirecTV and Other Goodies

I took a new position in Liberty Media Entertainment Group (LMDIA) today. LMDIA is being acquired by DirecTV (DTV). LMDIA owns 54% of DTV along with several billion dollars in other assets composed primarily of the Starz movie channels, three regional sports networks, and cash. When the deal closes near year end, each LMDIA will have turned into 1 share of DTV and a stub containing the majority of LMDIA's non-DTV assets. I think the stub is worth at least $4 per LMDIA share, so buying one share of LMDIA today at $23.65 nets you $26 (one share of DTV at $22.10 plus the $4 stub).

That is a pretty nice discount on its own but I think there is more upside as both DTV and the stub could have upside. DTV could rise to the upper $20s if my current expectations for earnings and cash flow growth in 2009 and 2010 are met. In addition, although I do not anticipate it will happen there are persistent rumors that DTV will be sold to AT&T or Verizon. The stub, which will consist primarily of Starz and cash, could be undervalued by a few dollars depending on valuation assumptions for the movie channels. I believe my $4 assumption is conservative, representing just 6 times operating cash flow for an asset forecast to have double digit growth for the next five years.

The bottom line is that purchasing LMDIA today provides a nice combination of offense and defense. Offense comes from the fact that LMDIA's primary assets (DTV and Starz) are undervalued. Defense is in the form of the 10% discount at which LMDIA can be purchased compared to today's price for DTV and a conservative assessment of the value of Starz.

I'll post a more complete analysis next week. In the meantime, here is an analysis of the merger I wrote in February when it was just a rumor. Click on the "download file" link to see a full listing of LMDIA's assets.

The Backdoor Way to Play DirecTV

In February, following release of DirecTV's (DTV) 4Q08 results, I wrote several favorable comments about DTV on RealMoney.com. I followed up by publishing the following commentary which discusses Liberty Media Entertainment (LMDIA) as an attractive backdoor play to purchase DTV at a substantial discount. With SeekingAlpha.com publishing an article from Bullish Bankers discussing Liberty Media and LMDIA, I decided to republish my article which first appeared on February 13th....

John Malone's Liberty Media owns 54% of DTV via the Liberty Entertainment tracking stock (LMDIA). LMDIA owns other assets but the DTV shares represent over 85% of the total asset value.

If you apply values to LMDIA's non-DTV assets, you can isolate the embedded value of the DTV shares. Based on yesterday afternoon's trading, the implied value of LMDIA's DTV shares is 34% below the current trading value of DTV. As a result, a plausible long idea is to own LMDIA and hope that the valuation gap closes and DTV shares appreciate.

As I will outline, there are some risks to being long LMDIA, so another option is to go long LMDIA and short DTV. In this case you are playing solely to close the 34% valuation gap and leave aside any upside in DTV shares. That might not be a bad way to go in this market environment. If you were long/short on less than a 1:1 basis you could still maintain some extra upside exposure to DTV.

Fortunately, there is a catalyst on the horizon that could cause the gap to close which makes the naked long LMDIA option a good one. Liberty has announced its intent to split its DTV shares and a few other related assets into a new, asset based stock. On its own, the split further isolates the DTV shares and makes it easier to identify the value. However, Liberty has made it pretty clear and DTV agrees that the real purpose of the split is to make it easier for DTV and LMDIA to combine. That combination would close the valuation gap enabling LMDIA shareholders to capture most if not all of the upside depending on the combination terms. The fact that DTV has good fundamentals and just issued surprisingly strong 2009 guidance calling for double digit growth makes the LMDIA option even more attractive.

Obviously, there are some risks or the LMDIA's discount valuation would not exist. Before we get to that, let's look at the numbers beginning with LMDIA's asset value and isolating the value of the DTV shares so we can see the discount.

Download file

The $3.714 billion in non-DTV assets is merely the total of the other assets listed in the first table.

As mentioned before a valuation gap this simple and this large would not exist without a reason. Here's a rundown.

The non-DTV asset values could be too high. This may very well be true given that realizing value form an illiquid asset is virtually impossible in today's environment. However, if yu haircut the non-DTV assets by 50%, LMDIA would still be trading at a 20% discount to NAV.

LMDIA's plan to split in two and create an asset-based stock owning the DTV shares may not go through. This is a legitimate concern because Liberty first proposed this plan with a different asset split in September and then pulled it in October. I think it will go through this time as several of the troublesome issues were resolved in the new plan (mainly excluding Starz! from the stock with the DTV shares). A proxy has been filed, credit markets are more stable, and reputations are on the line.

John Malone has voting control of LMDIA and potentially a merged LMDIA/DTV. Malone has a bad reputation as a financial engineer who looks out for himself at the expense of minority shareholders when the going gets tough. Regardless of whether this is fair, it is the perception and it will keep some investors from investing in LMDIA.

The deal is complicated and includes a third entity. This is true. If you buy LMDIA today, you will soon own stocks, the DTV stock and another stock whose primary asset is Starz!. The Starz! stock could collapse as it is sold. Or investors might just be thinking it is not worth the trouble.

The deal may be blocked by Liberty bondholders. There is a clause in Liberty's bond covenants that gives bondholders the rights to "all or substantially all" of Liberty asset value. Since the DTV shares do not produce cash flow, the cash flow from Starz! will remain at Liberty, and $1.9 billion of debt is going with the DTV shares, analysts think bondholders will not block the deal.

The merger terms between DTV and the new Liberty stock may be unfavorable to LMDIA shareholders. This is possible though rumored exchange rations suggest that the risk is no more than a 10% discount. I think comments coming from Liberty and DTV, while lacking detail, suggest that neither side is looking to rip off the other side. And of course, Liberty's 54% ownership and necessary approvals from DTV's independent directors make a neutral deal most likely.

DirecTV Still Rolling And I Missed It

DirecTV reported another strong quarter. Overcoming potential headwinds from the economy, the housing recession, and the loss of AT&T marketing in former BellSouth territories, DTV produced an across the board beat in its 1Q08.

EPS of 32 cents and revenues of $4.59 billion beat consensus estimates of 31 cents and $4.47 billion, respectively. EPS grew 18% and revenues grew 17%. EBITDA also came in ahead of expectations.

Both U.S. and Latin America contributed to the upside. US only revenues grew 14% with EBITDA up 22%. Latin America is definitely turning into a significant value generator for DTV shareholders. Revenues rose 47%, EBITDA rose 73%, and 200,000 new subscribers were added. Latin America accounts for over 10% of total DTV EBITDA.

The good financial results were matched by even better subscriber metrics....

....Net subscriber additions of 275,000 easily beat analyst estimates for around 200,000. The upside was driven by greater than expected gross additions and lower than expected churn. Flow through to financial results was boosted by higher than expected ARPU growth. ARPU is getting a boost from DVRs and HD. DTV also did a good job keeping a lid on its retention and subscriber acquisition marketing expenses. SAC was in line with estimates at $712.

On the ownership/capital structure front, DTV announced another $3 billion share repurchase to be financed mostly by debt. Liberty Media has agreed to keep its voting stake at 48% even though its economic ownership will rise above 50% if the buyback is completed. Eventually a merger with Liberty Entertainment and broadening of DTV's business to programming seems in the cards.

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.

I Liked DirecTV's Quarter But Market Did Not

I think the numbers from DirecTV (DTV) look pretty good. The results support the company's new strategy to focus on profitable growth even if it means slightly slower subscriber growth. Gross adds did come in a little light at 919,000 vs. estimates of around 1 million. However, the focus on retaining and attracting better quality subs is evident in lower than expected churn of 1.45% (vs. 1.6% estimated) that led to net sub adds growing as expected at 255,000. Also, supporting the new strategy was better than expected ARPU of $69.75, up 6% year over year and ahead of estimates. Subscriber acquisition costs and retention marketing were prettu much as expected so the better quality subscriber base produced EBITDA of $545 million, ahead of expectations.

Given the signs of success in DTV's new strategy I would have expected the shares to trade up today. I think a couple of things may be at work causing the 1% drop in the shares. First, the stock rose 27% since the company reported 4Q05 earnings in early February. Maybe investors had already responded to the apparently successful strategy shift. Second, investors may still be concerned about long-term growth with gross adds softening at the same time that cable companies seem to have reignited basic subscriber growth. DTV management readily admits that competition is tougher than ever. With cable rolling out the full triple play bundle across virtually the entire country this year and maintaining a short-term edge in HDTV, investors may already be looking past DTV's improving performance toward a period when satellite TV only providers begin to lose market share...

On other subjects, management responded to a question by noting that consolidation among cable companies and RBOCs and the fact that cable offers telephony and RBOCs are offering TV means that a merger between DTV and Echostar (DISH) might get approved. On the AT&T-BellSouth (T/BLS) merger, DTV said it was too soon to tell how that would impact the company's distribution deal with BLS (T has a deal with DISH). There was limited commentary about implementing a broadband strategy. I think it is too late for satellite companies to enter high speed internet so I'd just assume DTV did nothing on this front as anything meaningful would be expensive and dilutive.

I think DTV shares can work higher from here but I think more upside exists in Comcast (CMCSA/K) if you are looking for exposure in multichannel TV.

DirecTV: Controlled Growth Strategy Might Work

DirecTV (DTV) shares are up about 3% in response to a solid quarterly earnings report. My key takeaway is that the street is beginning to respond favorably to the company's transition to a controlled growth strategy where EBITDA and free cash flow growth is paramount and subscriber growth is secondary. The street is also pleased to see the announcement of a $3 billion share buyback. None of the buyback will come from the GM pension plan which is not a seller at this time.

The strategy transition is evident in the 4Q05 numbers. EBITDA was a big positive surprise while gross and new subscriber additions fell well short of estimates. The subscriber shortfall was mostly a self-inflicted wound as DTV has been trying to upgrade the quality of its subscribers. Thus far, that has been accomplished by an increase in involuntary churn as tighter credit policies have been maintained. This quarter the strategy was extend to include termination of certain distributors and a change in incentives for distributors. Churn came down a bit last quarter to 1.70% but that is still high. On a base of 15 million subs, that means each month 255,000 subs are lost, 765,000 a quarter, or over 3 million a year. DTV has said it wants to add 1 million subs a year and grow to 20 million subs. A strategy that deemphasizes sub growth and leads to greater EBITDA and free cash growth seems appropriate given the churn obstacle and the high cost of that churn....

During the quarter, management claimed that subscribers with high credit scores actually grew by 14%. Given the mediocre net adds of 200,000 that implies that they must not have tha many really high credit scores in the customer base. However, it is a sign of where th company is headed. If they can pull it off and sustain solid EBITDA and free cash flow growth, the street might respond.

EBITDA benefited from a combination of factors, some of which might flow from the controlled growth strategy. ARPU rose more than expected to $75.53 per month, up 5% over a year ago. The absolute ARPU figure is high in the fourth quarter due to the NFL Sunday Ticket, but the theory that higher quality customers are more willing to take bigger programming packages, premium services, HD and DVR packages is plausible. Those add-ons can be high margin.

EBITDA also benefited from "improved scale and operating efficiencies." Management noted that upgrade and retention marketing was stabilizing and G&A leverage was appearing. The quarter also benefited form lower than expected subscriber acquisition costs directly related to lower gross subscriber additions, declining prices for set-top boxes, and lower installation and commission charges.

DTV is hosting an analyst meeting in a couple of weeks but did provide some broad 2006 guidance. Questions about the assumptions behind the guidance were generally deferred to the analyst meeting. Overall, DTV expects EBITDA growth of greater than 20% in 2006 driven by continued solid ARPU growth, and "reasonably flat" subscriber acquisition costs. Continued gains in operating leverage against G&A and upgrade and retention marketing are also anticipated. Besides continuing to upgrade the quality of the subscriber base, key strategic initiatives for 2006 include rolling out local high definition channels to 2/3rds of the country, jump starting the company's COD initiatives, and making further investments in original content.

Finally, DTV provided no additional color on its potential broadband wireless initiatives. In the long run, Rupert Murdoch, whose News Corporation owns 34% of DTV, is on record as saying a broadband data product is necessary for DTV to grow subscribers. This is a major wildcard for DTV shares as investors will be rightfully about the size and financial drain of any investment.

Overall, this was a good quarter from the perspective of near-term DTV stock performance.

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.