DirecTV's Profit Falls, But Subscriber Adds Exceed Expectations

BY REINHARDT KRAUSE

Satellite broadcaster DirecTV Group (DTV) beat analysts' forecasts by adding more than 460,000 U.S. customers last quarter, becoming the latest pay TV company to report strong numbers amid the recession.

But the company reported on Wednesday that first-quarter earnings fell 38% to 20 cents per share, far short of views. Analysts polled by Thomson Reuters had expected 33 cents per share.

DirecTV Group shares fell 1% Thursday but are up 5% in 2009.

The No. 1 satellite TV provider said it offered promotions, such as steep discounts in the first year of service, to attract customers. DirecTV said the quarter was a four-year record for customer adds. DirecTV added 275,000 subscribers in the first quarter of 2008.

On Monday, DirecTV agreed to merge with John Malone's Liberty Entertainment (LMDIA), already one of its large shareholders. Liberty Entertainment is a unit of Malone's Liberty Media (LINTA).

That sparked speculation the simplified ownership structure better positions DirecTV to be sold — perhaps to AT&T (T) or Verizon Communications (VZ) — or to go on a shopping spree itself.

Chase Carey, DirecTV's chief executive, said nothing about the combined company's strategy on the earnings conference call with analysts, but he raised subscriber guidance. DirecTV now expects to add more than 1 million subscribers this year, up from 880,000 last year. It earlier forecast 850,000 adds.

"Based on our first-quarter results some of our expectations have changed," Carey said. "Broader economic challenges make it difficult to project the future, but we feel good about the momentum of our business."

A stabilizing economy might help, he added. "It doesn't seem to be getting worse right now," he said. "I wouldn't say it's getting better, so maybe that's bottoming."

First-quarter subscriber numbers at cable TV firms Comcast (CMCSA) and Time Warner Cable (TWC) also beat analyst forecasts. Comcast lost 78,000, fewer than expected. Time Warner Cable added 36,000. The cable firms were aided by consumers that switched to pay-TV service because of the conversion of over-the-air analog signals to digital.

AT&T and Verizon each added nearly 300,000 TV customers in the first quarter, as competition in the pay TV field accelerates.

The other large satellite TV company, Dish Network (DISH), has been losing market share. It's set to report its results on Monday. Dish shares fell 3.6% on Thursday.

"Dish Network is again likely to be odd man out," said Craig Moffett, an analyst at Bernstein Research. "All in all, (first-quarter) results suggest a much healthier pay TV market than anyone anticipated."

Analysts said DirecTV's results were aided by its distribution agreement with AT&T. AT&T resells DirecTV's service in areas where it doesn't offer its own video service. AT&T no longer sells Dish Network's service.

Analysts estimated that DirecTV would add 275,000 customers, despite the recession. DirecTV now has 18.1 million U.S. subscribers.

DirecTV said first-quarter sales rose 7% to $4.9 billion, just shy of analyst estimates of $4.96 billion. DirectTV blamed lower ad sales and fewer pay-per-view movie orders.

Average monthly revenue per subscriber rose 1% to $80.35.

The companies expect the tax-free deal with Liberty, which requires shareholder and regulatory approval, to close in six months.

Media baron Malone will own 24% of the voting shares of the combined company, which will keep the DirecTV name. Malone also owns a stake in satellite radio company Sirius XM (SIRI).

DirecTV will take on $2 billion in debt but still has a strong balance sheet to pursue acquisitions, analysts say. DirecTV churned out $457 million in free cash flow last quarter, down 16%

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