DirecTV said in a Securities and Exchange Commission filing Thursday that its Brazilian division inflated subscribers to its satellite service by 200,000 customers, a mistake that will cost the satellite TV giant about $25 million.
DirecTV said in the filing that it determined as part of a company investigation that beginning in 2012; certain employees of its Sky Brasil unit improperly credited various subscribers who had cancelled service, which artificially reduced churn. Those practices resulted in the company counting 100,000 customers in 2012 who weren’t paying for service and another 200,000 in the first quarter of this year. The company said in the filing that those improper practices have been terminated and the non-paying subscribers have been removed from the customer rolls.
As a result of the increased churn at Sky Brasil, DirecTV said it would recognize a $25 million pre-tax charge in the second quarter to reflect the write-off of capitalized installation costs and subscriber related equipment held by the terminated subscribers. In addition, DirecTV said due to economic and competitive factors, it expects churn at Sky Brasil to be higher than previously expected. The company said it would offer other operating and financial data, including updated 2013 guidance, on its Aug. 1 second quarter conference call.
In a research note, Credit Suisse media analyst Michael Senno said the Sky Brasil revelation brings into question other DirecTV Latin American operations and whether these findings could change the satellite giant’s near-term outlook.
“We expect to hear more color on the issue from the company at some point,” Senno wrote.
DirecTV said in the filing that its investigation is continuing.
Much of DirecTV’s future growth has been tied to the Latin American market, especially since the U.S. pay television market has matured. In 2012, DirecTV U.S. added about 199,000 net new customers for the full year, while Latin America reported 2.1 million net new subscribers. For the first quarter, U.S. net new subscriber additions numbereed just 21,000, while its Latin American divsion netted 583,000 new customers. Any sign that growth may not be as once anticipated could affect analysts’ ratings on the company. Earlier Thursday, ISI Group media analysts Vijay Jayant and David Joyce lowered their forecasts for the company, reducing their estimates for full-year 2013 revenue to $7.73billion from $7.87 billion; operating profit before depreciation and amortization (OPBDA) to $2.065 billion from $2.112 billion, free cash flow to $136 million from $142 million, and earnings per share to $1.26 from $1.31.
Jayant and Joyce maintained their “neutral” rating on the stock and their $60 price target.
Shares of the satellite giant were down as much as 4.3% ($2.62) in early trading Thursday to $58.46 each, but rebounded to $61.01 per share (down 0.1% or 7 cents) by the afternoon.