DirecTV Sees Slow Growth in the Stars

Satellite Provider Will Shift Its Focus Growth, CEO Says

By Mike Farrell -- Multichannel News, 2/20/2012 12:01:00 AM

Perhaps DirecTV has seen its future in the stars, because the nation’s No. 1 satellite-TV service provider is now preparing for slower growth.

The satellite giant — it has 19 million customers, making it the second largest multichannelvideo provider in the country behind Comcast — said last week it will dial back its customer acquisition efforts in favor of driving more profitable growth, a move that acknowledges the maturing of the pay TV market and ever rising programming costs.

The moves, said CEO Mike White on a conference call with analysts Feb. 16, will help drive mid-single digit or better revenue and cash flow growth over the next three years.

White outlined a three-pronged approach — shifting the business focus from top-line to bottom-line growth, controlling costs on the operations and programming side and heightening its efforts to improve customer service.

DirecTV plans to provide more detail on those plans at its upcoming Investor Day, March 29, at the Roosevelt Hotel in New York.

Analysts have been bracing for a slowdown in subscriber growth at DirecTV, and improved losses at both Comcast and Time Warner Cable in the fourth quarter have only accelerated that talk. While DirecTV reported strong customer additions in the fourth quarter — it added 125,000 net new subscribers — it was below some analysts’ expectations and fell short of its 289,000 net new additions in the prior year.

On the conference call, White said the satellite giant expected to report positive net new customer growth in the first quarter and for full-year 2012, but conceded that DirecTV is focusing more on retention and upgrading existing customers than on new customer acquisition.

“We’re not planning subscriber losses,” White said on the call.

Chief financial officer Patrick Doyle said DirecTV took a long, hard look at its business and determined that it would get a greater return by upgrading existing customers.

“It made a lot more sense for us to go spend money over into the upgrade budget than to bring on a low-value customer with the pressure on programming costs,” Doyle said.

The prospect of declining customer growth hit DirecTV stock — it was down 2% (92 cents each) to $47.30 on Feb. 16, but most analysts said any concerns are overblown.

Collins Stewart media analyst Tom Eagan still expects DirecTV to add about 153,000 net new customers in the fourth quarter; he said the focus on retention will likely increase customer valuations. And though focusing on more profitable customers is nothing new in pay TV — cable companies have been doing it for years with the triple-play bundle — several analysts believe DirecTV can do that effectively.

“The difference between DirecTV and everyone else, in my estimation, is that they have the brand power and the demographics to pull it off a lot better,” said Wunderlich Securities analyst Matt Harrigan. He added that he wouldn’t be surprised if the favorable customer trends during the first six weeks of the first quarter lasted longer than the Street expects.

“At the worst, I think the domestic business could degenerate into more of a blocking and tackling slog but will maintain growth even then in the top quartile,” Harrigan said.

On the programming side, White said DirecTV can get more creative with entertainment and sports packaging, while at the same time balancing promotional offers with annual rate increases. DirecTV raised rates by about 4% early last year.

He added that pushing through ever larger rate increases only increases the level of discounting needed to attract new customers. By focusing on selling more services to existing customers — a strategy that has done well for the cable industry — DirecTV can drive profit ability and keep its subscriberacquisition costs down.

“This is the right moment in time for us to slightly rebalance, to ensure that as we grow the business, we don’t just grow the top line, but that we equally grow the bottom line, and the cash flow that goes with it, in a sustainable way,” White said.