While cable companies scramble to retain existing customers, DIRECTV (DTV.DL) continues to tack on new ones here and abroad. The leading satellite television provider reported earnings on Tuesday that came in ahead of analyst expectations on both the top and bottom lines. Over the past couple of years, the story hasn't changed much for DIRECTV, and that's a great thing for investors. The company is raising prices in its domestic market, while going for raw subscriber growth in Latin America. This combo of top and bottom market is a strategy that has led to fantastic cash flows and earnings, along with a stock price that has appreciated roughly 40% in two years. Looking forward, is DIRECTV set to continue delivering alpha to investors?
Earnings recap
In most quarters, DIRECTV has impressed investors and analysts with its emerging-market domination, mainly in Latin America. As one of the few multinationals vying for the pay-TV market in these fresh markets, DIRECTV has booked hundreds upon thousands of new subscribers every year -- a much different story from the one heard at cable companies across the U.S., and even competitor DISH Network (DISH).
This quarter, however, it was the domestic business that far outshone the emerging-markets one, as the company posted its lowest quarterly churn rate (subscriber loss) in six years and booked a net addition of 139,000 subscribers. To add a thick layer of icing to the cake, it wasn't promotions that drove the user gains, as ARPU (average revenue per user) rose an impressive 6.2% from the year-ago quarter.
In DIRECTV Latin America's Sky Brasil and Pan Americana ventures, the company tacked on 260,000 net new subscribers, bringing the total LatAm count to more than 17 million. Wall Street analysts were actually expecting an even richer number, and the stock was down roughly 1% on the day due to the missed estimate.
Overall, DIRECTV saw sales of $7.88 billion -- a 6% rise over the prior year's number -- along with adjusted bottom-line earnings of $3.89 per share. In 2012's third quarter, the company earned $3.08 per share. Analysts had been expecting more than $0.20 per share less.
The free cash flow at DIRECTV is phenomenal -- up 17% this quarter to $372 million.
Though the stock movement didn't reflect it, things looked pretty impressive for DIRECTV's third quarter. The short-term weakness in Latin American growth need not worry investors as the long term remains very appealing.
The future
DIRECTV may be the only traditional television provider not bleeding users. Time Warner Cable lost 300,000 subscribers this fall based on a one-month blackout of CBS. Comcast lost 117,000 subscribers, mainly attributed to cord-cutting. We haven't heard yet from DISH Network, but the company has not been nearly as successful at keeping subscriber growth healthy as its larger competitor.
There are certainly some overarching themes in the pay-TV business, and every single company will have to adapt at a faster rate than it is now. One commonly raised idea for DIRECTV is a merger with DISH Network. While consolidation isn't always the best idea for the end user, it would give the giant company greater leverage in negotiating fees paid to broadcasters and keep prices in check. Both DISH's and DIRECTV's executives have acknowledged the option, though there is no current evidence to suggest it may happen anytime soon.
The bottom line, while impressive, is somewhat less relevant to investors as it relates to the company's aggressive stock buybacks. The more important figures are operating level results and cash flow. Still, for the time being, DIRECTV is doing a marvelous job at not only boosting its subscriber counts here and in the LatAm division, but creating extremely attractive growth in operating income and free cash flow. It's not too late to consider jumping on board with this consistent winner.
