Satellite

Sub Growth Costly for DirecTV

11/02/2004 4:41 AM Eastern

DirecTV Group Inc. reported mixed third-quarter results, adding 484,000 new subscribers but paying for that growth with increased churn and a growing number of bad-debt customers.

DirecTV’s 484,000 net new-subscriber additions were its strongest in history, but churn inched up to 1.67% in the period from 1.6% in the previous year.

The direct-broadcast satellite giant also reported an increase in involuntary churn (customers removed from the service for failure to pay their bills) to 45% of total customer losses from 40% in the second quarter.

“We didn’t get to the churn numbers we wanted,” DirecTV CEO Chase Carey said in a conference call with analysts. However, he added that subscriber numbers were above expectations, fueled in part by stronger-than-expected additions from its relationships with regional Bell operating companies Verizon Communications and BellSouth Corp. DirecTV said about 100,000 subscribers were added in the quarter through its RBOC relationships.

The company said it is working on methods to reduce its bad-debt exposure -- including changes to its risk-reducing practices and credit scoring and slimming down marketing offers to high-risk customers -- which should take hold in 2005.

DirecTV U.S. president Mitchell Stern said churn numbers should peak at 1.67% and will decline in the fourth quarter as new products like digital-video recorders and HDTV continue to be rolled out.

Stern added that programming-cost increases are expected to be in the mid-single-digit range for the year. He said that while DirecTV has signed deals with networks that represent about one-half of its programming, other contracts expected to expire this year -- including with The Walt Disney Co.’s ESPN and Fox Cable Networks Group -- should be done soon.

“We are very close to finishing Disney and very close to finishing with Fox,” Stern said.

When asked if estimates for programming-cost increase included cash payments for retransmission consent, Stern replied: “No, for good reason.” He declined to elaborate.

Marketing and subscriber-retention costs led DirecTV to a net loss of $1 billion, or 73 cents per share, versus a third-quarter-2003 net loss of $23 million (2 cents).

The current-year period included a $903 million after-tax impairment charge related to the company’s decision to pull the plug on Spaceway, its failed high-speed Internet venture; a $204 million loss from an adjustment to the final selling price of a satellite operation; and a $624.3 million income-tax benefit.

Revenue rose 20% to $2.86 billion from $2.57 billion in the prior-year quarter.

Monthly average revenue per user rose to $66.46 from $63.49 in the third quarter of 2003.

The company said subscriber-acquisition costs jumped almost 50% to $723.1 million during the quarter, and the cost to upgrade and retain customers more than doubled to $261.3 million.

March