DirecTV (NYSE:DTV.DL) reported its third-quarter earnings Thursday mornings, beating analyst estimates on both the top and bottom lines. The company reported revenue of $8.37 billion and EPS of $1.33 when analysts were expecting just $8.3 billion in revenue and $1.30 per share.
Like many other U.S. pay-TV operators, DirecTV lost U.S. subscribers, seeing net subscriber losses of 28,000. Somewhat surprising is the large subscriber decline in its Latin America unit. The company lost 119,000 throughout Latin America.
Here's what investors need to know about DirecTV's third-quarter earnings.
Phone companies continue to steal subscribers in the U.S.
The third quarter has been pretty dreadful for cable and satellite TV operators. While phone companies like AT&T (NYSE:T) continue to expand and grow their subscriber base for IPTV, they're taking customers away from established providers like DirecTV.
While DirecTV lost 28,000 net U.S. subscribers in the third quarter, AT&T added 216,000 net new U-Verse television subscribers. Still, DirecTV is doing a much better job at keeping its customers than Comcast -- 81,000 net subscriber losses -- and Time Warner Cable -- 184,000.
DirecTV's net subscriber loss stems from a simple fact: It's not adding new customers as fast as its losing existing ones. It ended the quarter with 20.2 million subscribers in the U.S.
Gross additions declined 8% last quarter as DirecTV is becoming more stringent with its credit policies. Management expected this. CFO Patrick Doyle explained last quarter, "Based on our most recent lifetime value calculations, we refined our credit policies, which also could have an impact on new subscribers coming on to the platform."
More surprising was the churn rate of existing U.S. customers. 1.73% of DirecTV's subscribers left the service last quarter. That's an increase from 1.61% the year before and 1.55% in the previous quarter. Many people sign up for DirecTV right before the football season to get its Sunday Ticket package, so churn from expiring promo contracts hits in the third quarter. With a lack of gross additions, churn weighed heavily on net subscriber losses.
Subscribers are paying more
DirecTV's focus on higher-end customers this year is literally paying off. Its average revenue per subscriber increased to $107.27. As a result, revenue from DirecTV's U.S. operations increased 3.7% sequentially despite losing 28,000 subscribers. What's more, the new subscribers DirecTV is bringing on under its more stringent credit policies are more likely to stay with DirecTV, reducing involuntary churn, so investors can expect the higher ARPU to become permanent.
The other factor driving revenue higher is an increase in ad sales. When it comes to advertising, DirecTV just locked down one of the most valuable pieces of programming in the U.S. -- NFL Sunday Ticket. The company agreed to spend an average of $1.5 billion per year on the package, and will look to recoup its cost in subscriber fees and advertising.
The Sunday Ticket package also ensures that AT&T won't back out of its buyout offer. Earlier this year, AT&T agreed to purchase DirecTV for approximately $48.5 billion in cash and stock. The deal must be approved by regulators first.
Latin America is suffering a hangover
DirecTV's Latin America segment also saw a decline in subscribers. In fact, 119,000 more subscribers disconnected their service than DirecTV connected.
Again, this wasn't completely unexpected. Last quarter, CEO of DirecTV Latin America Bruce Churchill refused to update his full-year guidance of 1 million net new subscribers for DirecTV Latin America despite topping 900,000 in the first half of the year. He noted, "Given the huge run-up in prepaid subscribers in this past quarter, I expect that the trend will reverse post World Cup, which could result in negative net adds in the third quarter."
The company now stands at 12.35 million subscribers in Latin America compared to 11.35 million a year ago. The effects of foreign currency exchange rates continue to weigh on results, however, and ARPU fell slightly to $48.88 from $49.42 a year ago. In local currency, ARPU increased 5% in Brazil and 28% in the PanAmericana region.
Operations are in order
The most surprising thing about DirecTV's earnings report was the higher than expected churn rate in the U.S. The company is already addressing that issue by screening it clients more stringently, and going after clients less likely to be swayed by promotional offers from competitors.
Meanwhile, AT&T's buyout offer looks to be in order, and now that DirecTV renewed its deal with the NFL, the only thing that stands in the way of it going through is the regulatory board. Until the buyout is approved, investors should expect DirecTV's stock price to remain tied to AT&T's and remain relatively stable.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.