Despite Miss, DirecTV Tells Bullish Story

For Dvorchak's preview heading into the DirecTV conference call, please click here.

DirecTV (DTV - commentary - Cramer's Take) proved that the quarter can matter even in the midst of a large merger by reporting a big miss in quarterly results.

DirecTV on Thursday reported quarterly earnings of 20 cents a share, well below the consensus of 33 cents, on revenue that was in line with the Street at $4.9 billion. Results were pinched by lower operating margins and higher debt interest expense. Subscriber growth was very good, growing 67% with 460,000 new adds, well above the Street's 265,000 expectation, but this simply highlights the aggressive promotions necessary to even get close to the revenue estimate.

If sub adds had met their internal budget, profit and cash flow would have been up year over year. Rare is the company that can attribute failure to success. Having said that, management fully expects that these subs will be valuable over time; the long-term view is that they are worth the short-term cost.

Management commented at length on its conference call of the miscalculation that caused the sub add/margin imbalance. Management overestimated the negative impact of the economy, and ran promotions more aggressively than usual. People took them up on the offers, causing massive sub growth but at subpar average revenue per user.

ARPU was further pinched by credits to certain existing customers, essentially loyalty rewards to their best customers. The economy's impact was evident in another ARPU detractor -- premium channel penetration and pay-per-view usage. Management is increasing promotions of premium channels as an offset, but they note that premium channels are low margin, so loss of that revenue doesn't have a huge impact on profit.

Pay-per-view changes were amusingly attributed to a fall off in adult material. Competition from the Internet is finally impacting in that area. High definition to the rescue?

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At the time of publication, Dvorchak had no positions in any stocks mentioned, although positions can change at any time.

Gary Dvorchak is a managing partner of Aviance Capital Management, a Sarasota, Fla.-based institutional asset manager that manages $200 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.