Mixed 2Q at DIRECTV

Zacks

The largest U.S satellite TV operator, DIRECTV (DTV), has posted mixed second-quarter 2012 results, with the bottom line missing the Zacks Consensus Estimate but the top line surpassing it. Moreover, record customer addition in the Latin American region was partially offset by customer loss in the U.S. region.

Total revenue in the reported quarter came in at $7,224 million, up 9.5% year over year, and slightly ahead of the Zacks Consensus Estimate of $7,203 million. Such impressive growth in revenue was mainly attributable to huge subscriber growth in Latin American region.

Quarterly GAAP net income was $711 million or $1.09 per share compared with $701 million or 91 cents per share in the year-ago quarter. Quarterly earnings per share of $1.09 per share fell short of the Zacks Consensus Estimate of $1.14.

Quarterly operating profit before depreciation & amortization (:OPBDA) was $2,009 million, up 8.8% year over year. Moreover, operating profit in the reported quarter stood at $1,411 million, up 14.7% year over year.

At the end of the second quarter of 2012, DIRECTV generated $3,024 million of cash from operations compared with $2,404 million in the prior-year quarter. Free cash flow (cash flow from operations less capital expenditures) was $471 million in the quarter compared with $395 million in the year-ago quarter.

At the end of the second quarter of 2012, DIRECTV had $2,132 million in cash & cash equivalents and $15,962 million of outstanding debt on its balance sheet compared with $873 million in cash & cash equivalents and $13,464 million of outstanding debt at the end of 2011.

DIRECTV U.S. Segment

Revenue from this segment was $5,647 million, up 7% year over year on the back of strong subscriber base and significant ARPU growth. Quarterly ARPU was $94.4 against $90.58 in the prior-year quarter. Growth in ARPU was mainly fueled by price increases on programming packages and leased boxes, higher advanced service fees and higher penetration of premium channels.

Quarterly operating profit before depreciation & amortization upped 9.6% to $1,585 million primarily buoyed by reduced subscriber acquisition cost.  Quarterly operating profit climbed 19.7% to $1,216 million.

Average monthly subscriber churn rate in the reported quarter was 1.53% compared with 1.59% in the prior-year quarter. Quarterly net subscriber losses were 52,000 compared with 26,000 subscriber additions in the year-ago quarter. As of June 30, 2012, DIRECTV U.S. had 19.914 million subscribers, up 2.5% on an annualized basis.

DIRECTV Latin America Segment

Segment revenue was $1,508 million, up 20.3% year over year, on account of record subscriber growth. Quarterly ARPU was $57.2 versus $64.56 in the prior-year quarter, primarily driven by foreign currency fluctuation. Quarterly operating profit before depreciation & amortization increased 5.2% to $445 million and operating profit fell 7.1% to $224 million.

Average monthly subscriber churn rate in the reported quarter was 1.80% compared with 1.81% in the prior-year quarter. Quarterly net subscriber addition was 645,000 compared with 472,000 in the year-ago quarter. As of June 30, 2012, DIRECTV Latin America had approximately 9.116 million subscribers, up 35.9% year over year.

Recommendation

Strong fundamentals along with huge subscriber growth across all its segments make it quite popular within the pay-TV industry. Moreover, moving ahead settlement of service renewal fees with Viacom, Inc. (VIAB) may act as a tailwind for the company.

Nevertheless, stiff competition from other pay-TV providers, coupled with sluggish economic growth, may act as headwinds for the company in the future. Accordingly, we maintain our long-term Neutral recommendation on DIRECTV.

Currently, DIRECTV has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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