DIRECTV Remains Neutral

Zacks

We reiterate our long-term Neutral recommendation on DIRECTV (DTV). The company reported weak financial results for the second quarter of 2013. While total revenue marginally beat the Zacks Consensus Estimate, net earnings significantly fell below the same. DIRECTV currently has a Zacks Rank #3 (Hold).

Why Kept at Neutral?

DIRECTV has improved its subscriber quality – i.e. shrank the proportion of subscribers with low credit ratings – by restructuring dealer incentives (changed the commission and penalty structure), cutting the proportion of third-party dealer sales, and implementing a credit card policy for new subscribers. With a higher-quality subscriber base, the company has implemented programming package price increases, and higher HD and DVR equipment service and lease fees in the U.S., driving ARPU, which resulted in margin expansion.

In the second quarter of 2013, ARPU (average revenue per user) in the U.S. was $98.73 compared with $94.40 in the prior-year quarter. Average monthly churn rate remained flat at 1.53%. We attribute this growth primarily to the popularity of its NFL Sunday Ticket promotion. Moreover, other factors like customer screening, target marketing, innovative product developments, and avoiding disputes with content manufacturers and media companies also resulted in the improved performance.

Meanwhile, increased net subscriber loss in the U.S. and a huge fall in the growth rate of net subscriber addition in Latin America are major concerns for the company. In the last quarter, DIRECTV lost 84,000 pay-TV customers in the U.S. compared with 52,000 in the year-ago quarter. Telecom giants Verizon Communications Inc. (VZ) and AT&T Inc. (T) jointly gained 373,000 subscribers in the same quarter by offering fiber-based TV services. Cable MSO Comcast Corp. (CMCSA) was able to reduce the rate of net subscriber loss year over year. In the Latin American region, DIRECTV added just 165,000 subscribers compared with 645,000 in the year-ago quarter.

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