DirecTV Posts 2nd-Quarter Profit, Tightens Credit Terms
DirecTV swung to a $162 million 2nd-quarter profit from a $13 million net loss despite “unacceptably high” churn caused by addition of high credit risk customers the past year, CEO Chase Carey told analysts in an earnings conference call Thurs. Revenue increased 21% to $3.19 billion.
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DirecTV added 225,000 net subscribers in the quarter, well below even the most bearish Wall St. expectations of about 300,000, due to higher churn. Churn rose to 1.69% from 1.49% as a result of more stringent credit checks of the company’s subscribers. About 42% of the churn was “involuntary,” up from 38% in the first quarter, CFO Michael Palkavich said. Churn is forecast at 1.79% 3rd quarter, he said.
DirecTV also tightened credit terms at the start of the 2nd quarter, requiring new customers deemed credit risks to pay a $150-$200 upfront fee. Carey conceded in the conference call that DirecTV will likely fall short of its forecast for 16% annual churn this year, but maintained that it could achieved within 12 months. DirecTV ended the quarter with 14.7 million subscribers, up from 13 million a year ago. Average revenue per subscriber rose 4% during the quarter.
Churn will stabilize as the company launches its DirecTV Plus receiver in Oct. It will use NDS software as part of a video-on-demand (VoD) and add MPEG-4-equipped HD receivers in Nov. The HD receivers will be key to DirecTV’s plans for transmitting local HD programming in an initial 12 markets, a target the company had expected to reach in Sept. DirecTV has 500,000-600,000 subscribers to its HD service and expects to switch their MPEG-2 receivers to MPEG-4 in 2006, Carey said.
Marketing costs are expected to rise in the 2nd half as a result of the new product introductions, company officials said, due to new digital video recorder launches in Oct. and high-definition TV plans. “We'd hoped to be further along” with offering advanced services and some of that resulted in higher churn, Carey said. “By not having a competitive offer yet we have lost some subscribers.” DirecTV has “extremely high” subscriber acquisition costs for HD subscribers, but that’s expected to drop with MPEG- 4, Carey said.
Unclear are DirecTV’s plans for offering high-speed Internet and wireless services and when it will commit on a technology. DirecTV sold its DirecWay satellite-based Internet access service last year and made an unsuccessful run with DSL several years ago. DirecTV will like rely on partnership or alliance to introduce a service, Carey said. “It’s clearly going to be part of the world we're involved in,” Chase Carey, CEO of DirecTV, said, regarding plans for offering high-speed Internet services. “Direction, size, timetable are all questions we have to evaluate.”
DirecTV will focus on the satellite business in the short term before deciding how to compete with current partners in the phone industry, which also plans to launch video services this year. It has agreements with Bells that contributed “north of” 150,000 new customers during the quarter, company officials said. DirecTV’s Spanish language Para Todos service added another 100,000 subscribers and ended the quarter with 800,000, company officials said.