DIRECTV Remains Neutral

We reaffirm our long-term Neutral recommendation on DIRECTV Inc. (DTV - Analyst Report). In the previous quarter, the company generated a record high net customer addition in Latin America, increased ARPU in the U.S., and accounted for a higher operating profit margin.

Despite these positives, we are very much concerned about the slowing growth of the company’s core U.S. market, especially when the U.S. pay-TV industry as a whole performed much better in the previous quarter. Management cited a volatile U.S. economy, intensified competition, and heightened costs of TV programs as the reasons for weak performance.

Nevertheless, management remains confident that it will be able to achieve its long-term financial goals in 2013 without any hiccup. DIRECTV has improved its subscriber quality – i.e. shrank the proportion of subscribers with low credit ratings – by restructuring dealer incentives (changed the commission and penalty structure), cutting the proportion of third-party dealer sales, and implementing a credit card policy for new subscribers.

With a higher-quality subscriber base, DIRECTV has implemented programming package price increases, and higher HD and DVR equipment service and lease fees in the U.S., driving increases in ARPU, which resulted in margin expansion. The top line witnessed double-digit growth for the eleventh consecutive quarter.

DIRECTV recently entered into an agreement with ViaSat Inc. (VSAT - Snapshot Report) and Huges Network Systems Inc. to install a nationwide satellite broadband network. The proposed network will enable DIRECTV to deliver data transmission speed of more than 10 Mbps, thereby supporting the company’s video-on-demand offerings.

With this network, DIRECTV will be able to provide satellite broadband services in the rural U.S. while also establishing a strong national foothold. The pricing and packaging (bundled service) of this new satellite broadband service is scheduled to be announced in late 2012.