DirecTV quarter profit triples


NEW YORK -- Satellite TV giant DirecTV Group Inc. on Wednesday reported third-quarter earnings that tripled, but net subscriber gains of 165,000 were weaker than expected because of tightened credit checks and what Wall Street observers said is increased competition from cable operators.

Nonetheless, investors bid up the stock 5.2% to a closing price of $22.97 after it hit a new 52-week high of $23.04 intraday, with analysts citing excitement about the increased profitability and free cash flow as well as hope for a much-discussed deal that would transfer control of DirecTV from News Corp. to Liberty Media. The stock was the leading gainer Wednesday on The Hollywood Reporter's Showbiz 50 stock index.

In the earnings call Wednesday afternoon, News Corp. president and chief operating officer Peter Chernin said the conglomerate and Liberty have had "very constructive talks," with chief financial officer David DeVoe calling them "advanced." While both again cautioned that News Corp. is in no rush to close a deal, which would also see Liberty get DirecTV and likely a TV station in return for its stake in News Corp., Chernin said "it is not out of the question" that it could be announced before the end of the year.

Chernin also emphasized that DirecTV's stock run-up this year "doesn't prohibit" a deal with Liberty. He also reiterated that a sale of DirecTV wouldn't hurt News Corp.'s strategic position in the industry and particularly its ability to get its content distributed broadly.

Meanwhile, DirecTV president and CEO Chase Carey declined comment on the Liberty situation beyond saying that he felt his team has done "a pretty good job staying focused on the business" rather than being distracted.

While he admitted that third-quarter subscriber gains and churn were disappointing, he shrugged off analysts' worries about the impact of cable companies' bundled service offerings on DirecTV. "We are very bullish on our ability to compete long-term in this business," he said, adding that cable competition has played a role but not more than his team had expected.

Still, Street observers predicted that DirecTV's user growth will remain more restricted than in the past. "DirecTV posted the sixth consecutive quarter of double digit decline in subscriber net additions, down 37% year-over-year," said Merrill Lynch analyst Jessica Reif Cohen.

"Financial results were generally in line or better than our expectations," argued Bear Stearns analyst Spencer Wang. "However, subscriber results were somewhat disappointing." He had predicted 238,000 user adds, and the consensus estimate had stood at about 212,000. In the year-ago period, DirecTV had added 263,000 net users. As a result, Wang lowered his 2006 net user add estimate from 803,000 to 753,000.

Thomas Rutledge, chief operating officer of cable operator Cablevision Systems, in his firm's earnings call Wednesday also suggested that Cablevision's basic subscriber growth of nearly 10,000 in the latest quarter indeed mainly came from the satellite competition. "There's a share shift going on," he said before adding it was a "small" shift.

DirecTV posted a profit of $370.2 million, compared with a year-ago profit of $94.6 million. The latest figure was boosted by about $325 million thanks to a change in the way the company accounts for its U.S. set-top boxes under a lease program introduced on March 1. Revenue rose 13% to $3.67 billion. Both figures slightly exceeded average Wall Street expectations.

Average revenue per user rose to $72.74 from $68.65 a year earlier, exceeding street expectations.

Customer turnover, or churn, fell from 1.89% to 1.80%, but was higher than management's target of around 1.75%.

Carey cited execution issues for this and promised an improved churn figure for the current fourth quarter.
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