News

DirecTV Will Spend to Cut Churn: Carey

2/15/2004 7:00 PM Eastern

In his first quarterly conference call with analysts since News Corp. took control of DirecTV Inc. parent Hughes Electronics Corp., Hughes CEO Chase Carey said 2004 would be characterized by some big changes.

"I expect 2004 to be a bigger year with much bigger changes," Carey said on the conference call discussing fourth-quarter results. "It will really be a year of transformation where we implement a plan that sets DirecTV on a course to maximize its long-term value and potential."

DirecTV reported strong fourth-quarter results, driven by the addition of 405,000 net new subscribers in the period and 1.19 million over the full year, both records for the DBS operator.

Revenue rose 24% to $2.26 billion and operating profit before depreciation and amortization declined 17% in the quarter to $166 million from $200 million a year earlier.

Carey's priorities include trimming Hughes corporate staff by about half and consolidating the Hughes and DirecTV support functions.

Hughes is made up primarily of three businesses — DirecTV, satellite manufacturer PanAmSat Corp. and technology company Hughes Network Systems.

Carey said the focus will now be on DirecTV and that the company has "begun to evaluate how PanAmSat and HNS fit within a DirecTV-driven strategic vision."

Carey also said that in 2004, DirecTV will add about 1 million net new subscribers — he predicted that total customers would be more than 15 million in the next three years, up from the current 12 million.

He said thinks digital video recorders and interactive features will help cut churn and raise average revenue per unit to north of $70, from its current $63.90.

Carey also said DirecTV will also attack niche areas underplayed by its previous management, such as ethnic programming, attacking multiple-dwelling units and the development specialized sales channels and partnerships with telephone companies, local broadcasters, wireless telephony players and security companies.

There's a price tag. DirecTV's capital expenditures will rise from $389 million in 2003 to between $500 million and $600 million in 2004, Carey said.

That will help launch new satellites and roll out more DVR and interactive services.

Carey did not say how many more birds the DBS giant would launch. But sending new birds into orbit will be an important part of the growth strategy.

According to DirecTV, 80% of new customer growth came from the 64 markets where the DBS giant provides local-to-local service.

While DirecTV has plans to extend local-to-local to 130 total markets by the end of the year, those launches depend heavily on its ability to obtain more satellite spectrum.

DirecTV had planned to launch a new satellite, DirecTV 7S, by the end of the first quarter. But problems with the solar array of a similar satellite — built by Loral Space & Communications, the maker of DirecTV 7S — have delayed that launch. A faulty solar array could reduce the power and the long-term life of a satellite.

DirecTV's 7S spot-beam satellite would have expanded that reach to about 106 markets across the country.

Mercer said that the 7S bird would bring 40 new markets — including Tulsa, Okla.; Spokane, Wash.; and Lexington, Ky. — into the fold and provide additional spectrum for about 20 existing markets.

The 7S satellite — scheduled to occupy the 119-degree West Longitude orbital spot — is crucial for DirecTV in that it would expand its local-to-local service by 64 markets covering an additional 14.1 million households. It also would allow DirecTV to move the satellite currently in that orbital slot to 72.5 degrees West Longitude (pending Federal Communications Commission approval), opening up another 18 markets for local-to-local service.

Vice chairman Eddy Hartenstein said Hughes expects to hear from Loral concerning the status of the satellite before the end of the month. With a favorable bill of health, Hartenstein said that DirecTV could launch it by the end of April.

September