DirecTV Sub Gains Marred by Defections

After two strong periods in a row, DirecTV Group Inc. continued on the path of robust subscriber growth, but added two less attractive metrics to the mix in the third quarter — increased churn and a higher percentage of bad-debt customers.

DirecTV’s 484,000 net new subscriber additions in the third quarter were its strongest in history, but churn inched up to 1.67% in the period, from 1.6% in the previous year.

The No. 1 direct-broadcast satellite provider also reported an increase in involuntary churn (customers removed from the service for failure to pay their bills) to 45% of total customer losses from 40% in the second quarter.

“We didn’t get to the churn numbers we wanted,” DirecTV president and CEO Chase Carey said in a conference call with analysts last Tuesday. However, Carey said that subscriber numbers were above expectations, fueled in part by stronger than expected additions from its relationships with regional Bell operating companies Verizon Communications Inc. and BellSouth Corp.

DirecTV said that about 100,000 subscribers were added in the quarter through its RBOC relationships.

While the net subscriber additions fell short of some analysts’ expectations — most predicted upward of 495,000 would sign on — many considered the quarter to be a strong one.

In a research note, Banc of America Securities analyst Doug Shapiro noted that the subscriber additions were 50% above last year, average revenue per unit was at $66.46 per month (up $2.77 from last year) was solid, and DirecTV showed good control of subscriber-acquisition costs, which at $617 per customer were below his estimates.

“In general, we continue to believe that the DBS investment case is one of the most compelling secular investment cases in the media sector today, because it has a visible unit growth, pricing and margin story,” Shapiro wrote.

DirecTV was working on methods to reduce its bad-debt exposure, Carey said.

“We need to work better to refine our credit checks and other checks to identify the high-risk customers that we can do a better job weeding out,” Carey said.

For the most part, the increase in bad debt was a result of the strong growth — DirecTV didn’t have the management controls in place to handle such strong additions. But those controls are now in place, including conducting credit checks at the retail level instead of during activation, and that should keep bad debt in check.

DirecTV U.S. president Mitchell Stern said that churn numbers should peak at 1.67% and will decline in the fourth quarter, as new products like digital video recorders and HDTV continue to be rolled out.

Programming-cost increases are expected to be in the 5% range for the year, Stern also said. While DirecTV has signed deals with networks that represent about half of its programming, he said, other contracts expected to expire this year — including with The Walt Disney Co.’s ESPN and Fox Cable Networks Group — should be done shortly.

“We are very close to finishing Disney and very close to finishing with Fox,” Stern said.