The world's largest pay-TV company, DIRECTV (DTV +0.00%), hit a few snags between its last impressive quarter and this one, but it doesn't mean the company is no longer an attractive investment. While revenue came in short of expectations, along with net income, DIRECTV is still seeing impressive growth in its Latin American operations -- even after accounting for the company's misstep in reporting subscriber churn. Moreover, DIRECTV may soon be following the trend of its cable brethren -- consolidation. Here's what you need to know about the company's second quarter and going forward.
Earnings review
For the second quarter, faced with multiple challenges, DIRECTV grew revenue by 7%, to $7.7 billion. The reasons for the bump were the usual suspects -- increasing average revenue per user (ARPU) in North America, and subscriber volume growth in Latin America. It's been roughly the same story for several quarters now, yet not one that gets old.
Operating profit fell 4%, but on the bottom line, diluted EPS rose 8%, to $1.18 per share.
The company has now completed a $2-billion share buyback through the first half of the year.
ARPU in Latin America fell, due to ongoing currency exchange issues, but the subscriber growth was still able to drive, in local currency, a 20% increase in top-line sales -- impressive given the softness in nations such as Brazil.
The numbers are not as glowing as in previous quarters, but investors should not think that the DIRECTV growth engine is over -- there are multiple avenues of growth ahead.
Where it's headed
While exchange rates have been, and will continue to be, a plague for the company, its Latin American operations still hold a long, long runway for growth, with pay-TV penetration far below North America's average. Investors will continue to see sustained growth in the region, even if the bottom-line growth does not match the more impressive top line.
For North America, the company is pushing the market higher and higher, getting more out of each user with premium service packages. While it may alienate some low-level subscribers, the pay-TV penetration rate (basically market saturation) is so high in the U.S. that the focus needs to be on ARPU over raw subscriber count.
These factors, even with rising content costs, will keep DIRECTV growing, and investors satisfied. But there is another option, as well, and one that I believe is equally-- if not more -- appealing.
DIRECTV CEO Mike White has, for some time now, been amenable to the idea of merging with competitor DISH Network (DISH +0.00%). While the merger has never approached any degree of formality, it may be an increasingly attractive option for both companies. DISH, as many know, is in the midst of an uphill battle to launch its wireless network. It has tried to acquire many companies, and still has bids out for spectrum-laden telecoms. Though DIRECTV does not have the spectrum that DISH needs, it does have the best satellite TV business, and would create one behemoth of a service provider.
In the recent conference call, Mike White noted that a merger between the two would ensure that viewers' subscription fees were kept at a reasonable level. As separate entities, it will become increasingly difficult to pay for the content that viewers want without raising the price of the service.
Either way, DIRECTV remains a very well-managed company with strong growth prospects going forward.
