Hughes Electronics Corp. reported one of its strongest quarters in years, driven mainly by better-than-expected subscriber growth at DirecTV Inc.
For the second quarter, Hughes reported revenue of $2.4 billion (an 8.1% increase over the prior year) and its first net profit in four years — $21.6 million, reversing a net loss of $155.1 million in the previous year.
Most of that growth was driven by increases at DirecTV, Hughes's direct-broadcast satellite subsidiary, where net subscriber additions for the second quarter were 181,000, slightly above analysts' expectations, but below the 275,000 net additions in the first quarter. Total subscribers were 11.4 million, an 8.6% increase over last year.
The subscriber additions did not include National Rural Telecommunications Cooperative franchise customers, which fell by about 45,000 in the period.
DirecTV "continues to bring in quality subscribers at a good clip," said Hughes CEO Jack Shaw in a conference call with analysts.
As a result of the strong quarter, DirecTV increased its full-year guidance for subscriber additions, revenue and operating profit before depreciation and amortization (Hughes's new term for earnings before interest, taxes, depreciation and amortization).
In a conference call with analysts, DirecTV president Roxanne Austin said she was disappointed in subscriber declines at the National Rural Telecommunication Cooperative franchises, mainly served by DirecTV reseller Pegasus Communications Corp.
"I wish our partner at the NRTC in Pegasus would improve their performance. They're obviously not performing well and they continue to deteriorate," Austin said. "That's disappointing to all of us. I wish we could do something about that."
Austin added that DirecTV continues to make strides against its cable competitors, claiming that about 40% of gross subscriber additions came directly from digital cable. That is up from about 38% in the first quarter of the year.
Monthly churn also came in below expectations during the quarter, at 1.5%. Austin said that third-quarter churn is expected to be slightly higher, with the fourth quarter being slightly lower. She added that full-year churn should come in at 1.5%.
DirecTV more than doubled its EBITDA in the second quarter to $324.8 million.
Austin said that the growth in the DBS business was due to the company's strategy of concentrating on high quality customers and in cutting costs.
Austin added that DirecTV's robust subscriber growth came despite a $2 per month rate increase implemented during the quarter. She added that DirecTV would raise its guidance for subscriber additions for the year to 900,000 from between 800,000 and 850,000.
SAC rose by $30
Subscriber-acquisition costs rose in the period (to $595 per subscriber from $565) and are likely to continue to grow because of additional expenditures for additional advertising, the introduction of digital video recorders into more homes and DirecTV's focus on driving multiple set-top boxes into new customers' homes.
SAC is expected to rise by about $20 for the full year to $590 per subscriber, she added.
DirecTV fell short of its earlier goals of having at least 10% of new subscribers purchase DVR set-tops — DirecTV said new-customer DVR penetration in the second quarter was in the single-digits.
By year-end, Austin said, DirecTV should reach its goal of 10% penetration.
Austin said that about 100,000 subscribers have DVRs, but added that a marketing push for the new boxes targeting existing customers had only started on July 1. As that campaign gains steam, the number of DVR customers should grow rapidly, she said.
"We started in July running on-air ads directly to existing customers," Austin said. "We've seen a significant pickup relative to those ads, which we expect to continue throughout the quarter and into the fourth quarter.
"We decided we needed to spend quite a bit of attention on existing customers because they are so passionate, first of all, about DirecTV and we think that once they have a DirecTV DVR with TiVo, they'll be very passionate about that and their word of mouth will actually help grow the product."