DirecTV Adds Users but Posts Loss

The company's marketing push results in a subscriber-count jump -- and a sharp rise in costs.
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Updated from 12:53 p.m.

DirecTV

(DTV)

showed surprisingly strong growth at its U.S. satellite TV operation in the first quarter.

But spending on subscriber acquisition, along with one-time charges and an accounting change, translated into a big loss on the bottom line.

The company's results, reported Tuesday, reflect the first full quarter of operation under the aegis of Rupert Murdoch, whose

News Corp.

(NWS) - Get Report

gained control of the satellite TV operator, then known as Hughes Electronics, late last year.

"All in all, we feel we've got things ... pretty well in hand," DTV Chairman Chase Carey said on a conference call with analysts.

For the first quarter ended March 31, DirecTV reported a loss of $639 million, or 46 cents per common share, compared with a year-earlier loss of $51 million, or 4 cents per share.

The March quarter's loss included such factors as a $479 million noncash charge related to the pending sale of DirecTV's PanAmSat unit, and a $311 million charge related to a change in accounting regarding subscriber acquisition -- charges offset by a $387 million pretax gain from the sale of

XM Satellite Radio

(XMSR)

stock.

Excluding PanAmSat and the accounting charge -- but including the XMSR sale -- DirecTV would have reported a 13-cent-per-share profit, ahead of the Thomson First Call consensus of a 1-cent profit.

At DirecTV's U.S. satellite operations -- the focus of Wall Street's attention -- DirecTV reported net subscriber additions of 460,000, well ahead of analysts' expectations of about 300,000 subscribers. DirecTV added 275,000 subscribers in the first quarter of 2003. DirecTV now has 11.1 million owned and operated subscribers.

DirecTV U.S. revenue amounted to $2.08 billion in the quarter, up from $1.71 billion one year earlier and ahead of the $2.04 billion analysts' consensus compiled by SG Cowen.

Average monthly revenue per subscriber in the quarter, abbreviated as ARPU, amounted to $63.60, up from the year-ago $59.10 and above the $62.94 consensus.

Gross additions amounted to 912,000 in the quarter, up from 701,000 one year earlier. Average monthly churn -- the percentage of subscribers who give up the service -- dropped from 1.5% to 1.4%.

Operating profit before depreciation and amortization at DirecTV U.S. dropped significantly, from $230 million one year ago to $145 million. That $145 million reflects such factors as higher subscriber acquisition costs related to the number of gross subscriber acquisitions, higher SAC costs related to the increased in the average number of set-top boxes and digital video recorders purchased by new subscribers, and higher retention costs for older subscribers. The average subscriber acquisition cost rose from $545 in the first quarter of 2003 to $645 in the current quarter.

DirecTV's change in how it accounts for subscriber acquisition, retention and upgrade costs -- expensing them as incurred, rather than amortizing a portion over the 12-month customer contract period -- cut an additional $60 million from the DirecTV U.S. operating cash flow figure. Were that number added back to the reported cash flow figure for the quarter, the cash flow number would have been $205 million, well below the $300 million consensus figure.

Driving up subscriber acquisition costs, said DTV President and CEO Mitch Stern, is the amount of new equipment that new subscribers are taking. New households took an average of 2.4 set-top boxes apiece in the latest quarter, up from 1.85 in the first quarter of 2003, Stern said. This increase, indicated Stern, is linked to greater customer loyalty; households taking at least three set-top boxes have a monthly churn rate of 1%, Stern said.

Schwab Soundview analyst John Hill wrote Tuesday that the subscriber gains came in a quarter in which DirecTV spent an unprecedented amount on TV advertising. "These results call into question the idea that seasonality affects gross adds more than marketing spend, an idea to which we previously had subscribed," Hill wrote. Hill has an outperform rating on DirecTV and a price target of $22.

DirecTV's stock rose 21 cents at midafternoon to $18.31.