Here at The Motley Fool, we believe individual investors should have the same access to information that Wall Street has. In that spirit, we've listened in on some investment-bank conferences with major companies and are giving you the rundown. We call this feature "Fool on the Street."
Not too much has changed at DirecTV
DirecTV's future: Reply hazy, try again
The Bank of America moderator started with a big-picture question, which I would say Palkovic pretty deftly avoided throughout the course of the talk: Can DirecTV compete with cable providers such as Comcast
As we are constantly reminded in the financial world, past performance is no guarantee of future success. In that light, I was somewhat disappointed by the CFO's focus on the rearview mirror instead of the road ahead. I wouldn't say I'm surprised, though. Anyone monitoring this battle over consumer eyeballs knows that the video space is hypercompetitive. It's only natural that the combatants play their cards close to the chest. It just would have been nice to hear the company better articulate why it is bullish on its own future.
The importance of being broadband
Another question, firmly related to the first, was posed with regard to DirecTV's broadband plans. I was interested to hear Palkovic state that "anybody with a national [next-generation] broadband offering is going to be a great partner for us, and we will be a great partner for them." He made it clear that the company will not rush into a deal -- that is, overpay -- merely to have the technology. Such a partnership would be game-changing for the company, however.
Satellite broadcasting solves the so-called "last mile" problem with its wide coverage area -- it can reach viewers in areas where it isn't economical for a cable company to build out its network. But DirecTV is a heavyweight because of its premium content, such as its NFL Sunday Ticket and its preponderance of HD channels, rather than because of its delivery mechanism. It's widely expected that sometime in the not-too-distant future, DirecTV will move to a next-generation technology such as WiMax, a mobile broadband standard that provides enough bandwidth for more than 100 HD channels. The company is naturally coy about its plans in this area.
A next-gen broadband solution would offer not just a new platform for delivering DirecTV content, but also an additional, complementary revenue stream. In other words, DirecTV would be able to partner with the broadband provider, whether it's Clearwire
Churn, baby, churn
Throughout 2006, many analysts expressed concerns about churn, or customer turnover, of both the voluntary and involuntary sort. Voluntary churn represents customers who can pay for the service but decide to cancel, and involuntary churn refers to those who can no longer afford it. In the fourth-quarter report, churn was lower than anticipated, and it was guided lower for 2007. How'd the Street get this one wrong?
With regard to involuntary churn, the company has tightened its credit standards, admittedly at the risk of losing some quality subscribers. In that area, Palkovic says the company is now "at a level of fine tuning that's pretty tight." The real upside in 2007 and beyond actually stems from reduced voluntary churn, which would seem to be both a larger issue, given the cost-competitive environment, and one that is much more expensive to control.
This is where DirecTV's leadership in premium content comes into play. The company finds that customers of the advanced products, HD and DVR, have significantly lower churn profiles -- by more than 50%, judging from the figures Palkovic threw out -- because of higher satisfaction and contract lock-ups. With the continued migration of customers to these advanced offerings, the future churn profile looks extremely attractive.
Foolish bottom line
While I didn't get all the answers I was looking for, I did gain a better sense of where DirecTV stands today, as well as how it looks over the next 12 to 18 months. It seems as though the company is doing a good job acquiring quality customers while keeping subscriber-acquisition costs under control, driving customers to high-end offerings and thus earning a higher return on invested capital, and maintaining brand leadership with its premium content.
The Latin America picture is still fuzzy for DirecTV, but Palkovic noted that there is a planned "Investor Day" targeted for May that will provide us a clearer signal on operations in Mexico, Brazil, and elsewhere. You can bet that Fool on the Street will be on that beat.
For more boob-tube Foolishness:
Fool contributor Toby Shute doesn't even have cable, let alone shares in any of the companies mentioned. Bank of America is an Income Investor selection. The Fool's disclosure policy has no last-mile problem -- it covers everybody.
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