To DirecTV, lean means more green

Satcaster ups cash flow, seeks 'Quality' subs

NEW YORK — DirecTV intends to make some money — even if that means slower subscriber growth.

The quarterly financials of parent Hughes Electronics, released Monday, showed fewer new subscribers to the satcasting service than expected, but higher cash flows and narrower losses.

The company said that was no accident — it has made a deliberate decision to maximize financial performance by various means, including pushing higher-priced sub packages.

In the U.S., DirecTV netted 206,000 new subs in the last quarter, far fewer than its original expectation of 250,000-300,000 new customers. Service’s total U.S. sub count now stands at 9.2 million.

Company insists the slowdown in sub growth is part of a calculated campaign of attracting “higher-quality customers.” It touted the fact that profitability was up thanks to reduced subscriber acquisition costs.

“We have implemented several changes … specifically designed to maximize subscriber returns and cash flow, including reduced distribution costs, higher average programming packages and tougher treatment of pirates.”

Cash flow higher

Hughes boasted that DirecTV’s third-quarter EBITDA (cash flow, or earnings, before interest, tax, depreciation and amortization) of $196 million was more than 30% higher than its original projections.

DirecTV’s marketing expenditure diet and new value approach helped lead to a tenfold increase in EBITDA compared with the same period last year.

According to DirecTV CEO Roxanne Austin, the satcaster will continue to focus on shrinking its cost structure and optimizing subscriber cash flow.

She said the U.S. unit’s 19% year-on-year revenue growth was due in large part to higher monthly revenue per sub, increasing numbers of multibox homes and the elimination of its low-priced, entry-level subscription package.

Pushing multiple receivers enables DirecTV to position itself as a “whole house” cable TV replacement, said Austin, who further noted that these subscribers have lower churn rates than those with only one box.

The net sub gain fell short of DirecTV’s original projections mainly because of higher-than-expected monthly churn (1.7%) related to its efforts to fight piracy by replacing “smart cards” in set-top boxes. Austin blamed the rest of the sub shortfall on a sluggish economy and wavering consumer confidence.

Holiday help

For the fourth quarter, DirecTV says it’s counting on the usual holiday season boomlet to add an additional 250,000-300,000 new subs while bringing its churn rate back down below 1.6%.

Hughes reported overall quarterly revenues up 5.3% over the year-earlier period to $2.21 billion, while EBITDA increased to $243.5 million, up from the third-quarter 2001 figure of $76.5 million.

Net loss for the quarter was $13.6 million compared with a loss of $227.2 million in the year-ago quarter.

Though the market was widely expecting Hughes’ numbers, the company’s less sanguine outlook for the end of the year sent its shares down 2.74% to $8.52 in an otherwise good day for the market.

Hughes cut its full year sales forecast to a range of $8.9 billion to $9 billion, down from its previous guidance of $9 billion to $9.2 billion.

Hearing no Echo

In its earnings conference call with analysts Monday, execs chose not to dwell on last week’s FCC rejection of its merger with rival EchoStar and instead touted the progress it’s made in boosting overall profitability in a difficult economy.

With its future still in limbo for at least another four months, Hughes is sticking by its primary goal to be lean, mean and profitable. Gone, it seems, are the days of sub growth at all costs. Now DirecTV is looking for “quality subs” that generate more cash and are less likely to churn out. Such bottom-line focus would certainly improve the company’s attractiveness to a potential buyer or even a management buyout.

Despite the participants’ tight lips on the matter, speculation is stirring on Wall Street over possible alternative scenarios for Hughes and DirecTV should its deal with EchoStar collapse, as is widely expected.

The most likely scenario would have News Corp. buying out General Motors’ 30% in Hughes for cash or shares. The “magic number seems to be $4 billion,” said one analyst, speculating on the pricetag GM hopes to get.

According to Lehman Brothers analyst William Kidd, DirecTV should be generating positive free cash flow by the end of 2003. Such a development would make it easier for the company to support additional debt if a buyer (management or otherwise) attempted a leveraged deal.

Duo haven’t given up

Hughes prexy-CEO Jack Shaw said he was not in a position to divulge more detail about the company’s floundering merger with EchoStar, beyond confirming that the two companies intended to file the necessary petitions with outlined amendments to both the Justice Dept. and FCC.

Company said it was “disappointed that the Federal Communications Commission has designated the matter for administrative hearing.

“We will continue to work aggressively within the context of the FCC and Dept. of Justice to achieve approval of the merger,” the company said in a statement.

Latin American woes

Though a small part of its overall business, DirecTV Latin America continues to suffer amid a debilitating economic and political crisis in three of its four key territories. Kevin McGrath, president of DLA, said the unit had adopted “risk mitigation strategies” including raising prices in the midst of serious currency devaluations. Financial turmoil in Argentina, Brazil and Venezuela led to a loss of 65,000 subs.

“Cash conservation and growth in Mexico are our core focus,” said McGrath, who has slashed expenses by 25%, largely thanks to a 35% workforce reduction. McGrath also is working to reduce programming costs significantly.

Third-quarter sales at the Latin unit clocked in at $146 million, compared with $201 million at the same point last year, primarily due to currency devaluation and subscriber losses.

Filed Under:

Want to read more articles like this one? SUBSCRIBE TO VARIETY TODAY.
Post A Comment 0

Leave a Reply

No Comments

Comments are moderated. They may be edited for clarity and reprinting in whole or in part in Variety publications.

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

More TV News from Variety