DirecTV dishes out a strong Q4

'Impressive' sub additions contribute to profit, revenue gains

Shares of satellite TV provider DirecTV Group rose 5.8% on Wednesday after the company reported stronger-than-expected fourth-quarter subscriber gains and other key figures and sounded bullish on its 2007 outlook.

The stock closed at $25.35 after hitting a 52-week high of $26.09 in intraday trading. It was the third-biggest gainer Wednesday on The Hollywood Reporter's Showbiz 50 stock index.

Fellow satellite firm EchoStar Communications also set 52-week highs Wednesday, going as high as $42.51 before ending the day up 1.9% at $42.07.

El Segundo, Calif.-based DirecTV is controlled by News Corp., which has agreed to a sale of its controlling stake to John Malone's Liberty Media.

The company's fourth-quarter profit nearly tripled, from $121 million a year ago to $356 million, with revenue up 16% to $4.2 billion.

DirecTV added 275,000 net subscribers in the U.S. during the latest quarter, up from 200,000 a year ago. This marked the first year-over-year increase in user gains in several quarters, its strongest quarter of net adds since first-quarter 2005 and brought DirecTV's total customer base to 16 million.

Merrill Lynch analyst Jessica Reif Cohen called the subscriber gains "impressive" but suggested that "a significant amount of turmoil" in the cable sector might have contributed to them. She cited the weakness in Los Angeles and Dallas cable systems previously owned by Adelphia Communications as well as the dispute between Mediacom Communications and Sinclair Broadcast Group, which the firms ended last week.

Churn, or subscriber losses, declined from 1.7% a year ago to 1.57%, lower than analysts expected. Wall Street observers said that DirecTV's recent focus on higher-quality subscribers by way of tougher credit checks was a key driver of its improvement.

DirecTV also said its average subscriber-acquisition cost fell from $639 to $626, and its average revenue per user rose 6.8% — its highest growth rate in more than two years — from $75.53 to $80.70.

"Fourth-quarter results point to the continuing progress and operating strength at DirecTV U.S." and also reflects "the competitive strength of our business," DirecTV president and CEO Chase Carey said.

Factors dragging down the bottom line in the fourth quarter were higher upgrade and retention costs, but Carey highlighted that this mainly was because of more users signing up for HDTV and DVR services. "These high-value subscribers generate the highest ARPU, lowest churn and greatest cash flow for DirecTV over the long term," he said.

With 2007 still in its early stages, Carey said, "we have many reasons to be excited." He cited the launch of up to 100 national HD channels in the second half and new programming offers, including NASCAR HotPass, the Championship Gaming Series and DirecTV On Demand.

Overall, he predicted "even better results" from DirecTV's U.S. operation in 2007 than 2006 and "a big year" for the company.

Carey added that the company expects to add about the same number of subscribers this year as it did in 2006 — about 820,000. Revenue should rise more than 10%, according to the guidance. Churn should decline from 1.6% to 1.5%, and average revenue per user should climb more than 5%, Carey also predicted.

Analysts cheered the latest quarterly earnings but remained cautious on satellite TV firms' longer-term competitive outlook amid the current strength of cable operators' bundled service offerings.

"DirecTV operating results were fairly strong across the board," Goldman Sachs analyst Anthony Noto said in a report Wednesday. "We are encouraged by these strong operating results and healthy subscriber additions in the face of cable's triple-play gains and the (telecom companies') video rollout."

However, he added that "we still believe that satellite in general is at a long-term competitive disadvantage to cable and will need either stronger partnerships with the (telecom firms) or significant investment soon in broadband to remain competitive."