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The largest U.S satellite TV operator DIRECTV ( has posted mixed second-quarter 2012 results, where the bottom line missed the Zacks Consensus Estimate but the top line surpassed the same.

Total revenue in the reported quarter came in at $7,416 million, up 8.4% year over year, and slightly ahead of the Zacks Consensus Estimate of $7,407 million. Such impressive growth in revenue was mainly attributable to huge subscriber growth in Latin American region. Quarterly GAAP net income was $565 million or 90 cents per share compared with $516 million or 70 cents per share in the year-ago quarter. Quarterly earnings per share of 90 cents fell short of the Zacks Consensus Estimate of 92 cents. Quarterly operating profit before depreciation & amortization (OPBDA) was $1,686 million, up 6.4% year over year. Moreover, operating profit in the reported quarter stood at $1,068 million, up 3.7% year over year.

At the end of the first nine months of 2012, DIRECTV generated $4,133 million of cash from operations compared with $3,611 million in the prior-year quarter. Free cash flow (cash flow from operations less capital expenditures) was $319 million in the reported quarter compared with $235 million in the year-ago quarter. At the end of the third quarter of 2012, DIRECTV had $2,421 million in cash & cash equivalents and $17,162 million of outstanding debt on its balance sheet compared with $873 million in cash & cash equivalents and $13,464 million of outstanding debt at the end of 2011.

DIRECTV U.S. Segment

Revenue from this segment was $5,769 million, up 6.4% year over year on the back of strong subscriber base and significant ARPU growth. Quarterly ARPU was $96.4 against $92.2 in the year-ago quarter. Growth in ARPU was mainly fueled by price increases on programming packages and leased boxes and higher advanced service fees. Quarterly operating profit before depreciation & amortization rose 8.5% to $1,251 million primarily buoyed by reduced subscriber acquisition cost.  Quarterly operating profit climbed 9.5% to $876 million.

Average monthly subscriber churn rate in the reported quarter was 1.74% compared with 1.62% in the prior-year quarter. Quarterly net subscriber growth was 67,000 compared with 327,000 subscriber additions in the year-ago quarter. As of September 30, 2012, DIRECTV U.S. had 19.981 million subscribers, up 1.1% on an annualized basis.

DIRECTV Latin America Segment

This egment generated revenue of $1,577 million, up 16.3% year over year, on account of massive subscriber growth, which was on the flip side  dampened by reduced ARPU growth. Quarterly ARPU was $55.9 against $64.6 in the prior-year quarter, primarily driven by foreign currency fluctuation. Quarterly operating profit before depreciation & amortization increased 4.8% to $455 million and operating profit fell 6.4% to $221 million.

Average monthly subscriber churn rate in the reported quarter was 1.91% compared with 1.83% in the prior-year quarter. Quarterly net subscriber addition was 543,000 compared with 574,000 in the year-ago quarter. As of September 30, 2012, DIRECTV Latin America had approximately 9.666 million subscribers, showing an annualized surge of 32.8%.

Recommendation

Strong fundamentals along with huge subscriber growth across all its segments make it quite popular within the pay-TV industry. Moreover, moving ahead settlement of service renewal fees with Viacom, Inc. may act as a tailwind for the company.

Nevertheless, stiff competition from other pay TV providers coupled with sluggish economic growth are envisioned to act as headwinds for the company in future. Accordingly, we maintain our long-term Neutral recommendation on DIRECTV.

Currently, DIRECTV has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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