DirecTV CEO Downplays Scope of AT&T Talks

DirecTV Group is continuing to talk to AT&T about the future of their “bundling relationship,” but there’s “not a whole lot more than that,” the satellite provider’s chief said Wednesday.

DirecTV president and CEO Chase Carey made the remarks during a third-quarter conference call. He also said that while the acquisition has turned out to be “frustratingly slow” to close, he expects Liberty Media’s deal to acquire News Corp.’s 38.5% stake in DirecTV to be completed before the end of the year.

In October, The Wall Street Journal reported that AT&T’s lawyers had been knocking on doors in Washington, seeking feedback on how long it would take the telco to secure government approval to buy either DirecTV or EchoStar Communications.

AT&T has partnerships with both the satellite companies to offer their video service, along with phone service, as part of a bundle to compete against cable.

Carey was asked if there were any negotiations taking place with AT&T related to either the distribution relationship or something more strategic in nature.

“On AT&T, we certainly are talking to AT&T about the bundling relationship,” Carey told analysts. “My recollection is they sort of said they were trying to, somewhere around year-end, try to make decisions about where they were going. We’re talking to them. I’m sure they’re talking to EchoStar.”

He added, “I think those are the substantive conversations, really around where they’re going to go in terms of the bundling relationship going forward. Not a whole lot more than that to add.”

DirecTV reported that it added 240,000 subscribers in the third quarter, a 45% increase from 165,000 this time last year, and is on target to have 100 HDTV services by the end of the year. It now has 74 HDTV national services.

The nation’s largest satellite TV provider reported that as of the Sept. 30, the end of the third quarter, it had 16.56 million total subscribers, a 6% increase over its 15.68 million subscribers in the year-ago period.

The satellite provider’s monthly churn rate in the quarter dropped to 1.61%, compared with 1.80% last year.

“The increase in gross additions to 1,032,000 was fueled by dramatic growth in the demand for advanced services — over 50% of new subscribers in the quarter signed up for HD and/or DVR services compared to only 28% a year ago,” Carey said in a prepared statement.

Sanford C. Bernstein analyst Craig Moffett issued a report Wednesday that described DirecTV’s gain of 240,000 subscribers as “a clear win,” but noted that they had come at a high price.

“Retention-marketing costs – largely concentrated today in the capital spending associated with upgrading existing customers to HDTV – soared,” Moffett wrote.

“On a per-subscriber basis, retention marketing was $9.45 per subscriber per month, up 28% sequentially, and up 34% year on year, and the highest level ever,” he wrote. “Capital spending jumped 19.3%, with capital intensity soaring to 16% of revenues. Programming costs also rose sharply, as the company added channels to its HD suite, and took on sports-related programming (including the Big Ten Network) when others balked at their high prices.” 

According to Moffett, “With higher costs, and higher capital spending, free cash flow plunged to just $34 million in the U.S., and to just $82 million at the consolidated level, far below expectations.”

On the call, Carey vowed that DirecTV would be making a concerted effort to be more efficient and trim its costs to upgrade customers to HDTV.

“We’re rolling too many trucks to replace boxes or fix boxes in a home,” he said.

One of the issues was that the demand for advanced services such as HDTV was beyond DirecTV’s expectations, but Carey said the company was “not going to turn away those customers” in order to hit one of is financial numbers.

In the third quarter, DirecTV’s revenue increased 18% to $4.33 billion and operating profit before depreciation and amortization increased 12% to $1.00 billion compared to last year’s third quarter.

Third-quarter operating profit of $566 million and net income of $319 million declined 10% and 14%, respectively, compared with last year’s third quarter. Earnings per share were $0.27 compared with $0.30 in the same period last year.