Investors bid the shares higher Wednesday after the satellite broadcaster announced a jump in quarterly profit
DirecTV Group (DTV) has had trouble with subscribers who kept canceling, switching to other services, or not paying. But during the three months ended Dec. 31, the satellite television operator more than doubled its profit, as it changed accounting methods and added new subscribers at lower expense.
The El Segundo (Calif.)-based company said Feb. 7 that its net income rose to $356 million during the quarter, up 194% compared to the same period of 2005. DirecTV's profits came even as the whole satellite TV industry has dashed headlong into a future where cable companies offer phone, TV and broadband service combinations (see BusinessWeek.com, 9/21/06, "Why Malone Desires DirecTV").
It costs serious bucks to provide customers with equipment like satellite dishes - DirecTV paid an average $626 on each new subscriber during the fourth quarter. In an effort to improve profitability, the company introduced a program on March 1, 2006 that enables DirecTV to retrieve and reuse set-top receiver equipment that customers lease. This affects the way the company accounts for expenses; the set-top receivers are capitalized and depreciated over their estimated useful lives of three years.
DirecTV had made missteps in recent years like going after customers with poor credit, Morningstar analyst Michael Hodel pointed out in a research note Dec. 22. While that helped the company add new subscribers in 2005, DirectTV has also suffered from high churn (the percentage of customers disconnecting or being disconnected from service.) "Spending heavily to win new customers ... who can't or won't pay is clearly a poor investment," Hodel said.
CEO Chase Carey has recently been gunning for subscribers who buy more advanced products and services. The company had 275,000 net subscriber additions during the quarter, up 37.5% year over year. As DirecTV customer spending increased, the company's fourth quarter revenues improved by 16% year over year to $4.18 billion.
With help from what CEO Carey calls "higher-quality subscribers", DirecTV's monthly churn rate fell to 1.57% in the fourth quarter, down from 1.7% in 2005. That's the largest reduction in customer turnover DirecTV has managed in the past three years.
And Carey is expecting to have better financial results in 2007. After launching a new satellite, Carey plans to provide up to 100 national high definition channels, which show clearer pictures and use more sophisticated technology, in the second half of 2007. "We also expect stronger operational performance in 2007 now that we have launched our new set-top boxes, strengthened our sales channels and implemented several key changes to our installation and customer service infrastructure that will drive improved efficiencies and quality," Carey said in the press release Feb. 7.
After the news investors bid up the stock 7.1% to $25.68 per share in midday trading Feb. 7 on the New York Stock Exchange.
Even though DirecTV will undergo a major ownership change, Carey will have time to continue his his strategic push. Liberty Media, which will acquire News Corp.'s (NWS) 38.4% controlling stake in DirecTV in an $11 billion asset swap in a deal expected to close in the second half of 2007, plans to retain the CEO after it takes control of the satellite broadcaster.