DirecTV (NYSE:DTV.DL) reported first-quarter earnings on May 5 and delivered results that fell short of expectations. The average analyst estimate, as derived from a Zacks poll, called for revenue of $8.16 billion and earnings per share of $1.52, while actual revenues came in at $8.14 billion and earnings per share came in at $1.44.
After the earnings release, CEO Michael White, CFO Patrick Doyle, and other executives participated in a conference call to discuss the results for the period and the future of DirecTV. Here are five key takeaways from the call.
The AT&T merger is expected to close in the second quarter
CEO Michael White kicked off his introduction to the call saying he expected the conference call would be DirecTV's last as a separate public company. AT&T's $48.5 billion purchase of the satellite TV provider has been a big priority for both companies, and both expect that the deal will be approved in the current fiscal quarter. In the company's previous earnings call, White had indicated that the company anticipated that the FCC would give its stance on the merger around March 23, however discussions have lasted longer than expected. Netflix recently issued a statement urging the FCC to reject the AT&T-DirecTV merger as currently proposed.
Despite objections to the merger and a somewhat delayed timeline, White said he was very confident in the arrangement being finalized quickly: "In reiterating what AT&T said to the Street a couple of weeks ago, I am very confident that we will be able to close our transaction in the second quarter."
White went on to say that he believes the eventual merger of the two companies will be a boon for shareholders as new bundle and service options drive revenue growth.
Currency headwinds and tech problems in Brazil
As anticipated in the company's guidance for the current fiscal year, DirecTV got off to a bit of a rough start due to unfavorable foreign exchange. First-quarter revenue in the company's Latin America segment fell 5% year over year, with turbulence from the Sky Brasil component accounting for most of the drop-off. First-quarter revenue for Sky Brasil fell 15% year over year to $795 million, with unfavorable movement on Brazil's currency, the real, accounting for some of the decline. Here's Michael White giving color on the Sky Brasil situation and discussing other elements of the business's underperformance in the quarter:
Obviously, the main headwind in the quarter was Sky Brasil, where a 22% depreciation in the real put incredible pressure on our dollar-based results. That pressure was compounded by issues surrounding the implementation of a new billing system ... So whereas the real depreciation certainly pressured our dollar-based results, it was billing system issues that caused most of the revenue and margin shortfall in the quarter.
Later in the call, Bruce Barrett Churchill, CEO of DIRECTV Latin America LLC,expanded on the billing problems: "During the quarter, we discovered a number of bugs, which resulted in the billing system not communicating properly with the customer care and conditional access systems. ... it took our team and our outside vendors over 3 weeks to fully stabilize the system. A combination of our inability to properly process payments, handle collections and reactivate customer signals in a timely manner led to a onetime loss of revenue of over BRL 100 million in the quarter. In addition, the need to handle significantly higher call volumes resulted in higher churn, higher bad debt and higher subscriber service expenses."
White said he believed the billing issues would be resolved by the end of the quarter and that the business anticipated making up for the lost margins by the end of the fiscal year.
Macro conditions present obstacles to large subscriber growth, but DirecTV is doing well
Responding to a question about U.S. subscriber adds for the remainder of the year, White stated that he believes the TV provider market is mature and that there's not a lot of room for large subscriber growth. Prior to this statement, he indicated that subscription numbers would see a net decline, as the second quarter is traditionally a weaker one across the industry.
With limited room for subscriber growth, particularly in the U.S. segment, DirecTV has been concentrated on securing and retaining high-value customers. Here's White on potential threats to the company's subscriber base and the outlook for the remainder of the year:
I think we all have to be careful about the low-end customers that are struggling to pay the bill. So, you know, I think that's a watch-out. But, I can't say that I've seen a huge increase in cord cutting. And, I think we are seeing maybe some improvement in housing. I don't think it's huge, but some. So I'm still very -- feeling pretty good about the full year being a touch positive.
DirecTV anticipates a roughly 10% rise in average cost per user this year, and rising rates have been cited as a potential catalyst for subscriber declines.
Latin America represents an opportunity for DirecTV and AT&T
While Latin America is currently presenting some turbulence as a result of volatility in currency markets, DirecTV sees the segment as a potential growth driver. Here's Churchill on the opportunities of the segment:
I mean, overall pay-TV penetration is still well below 50% across the region. And as you mentioned, there's still very strong demand for our product. And I think one of the successes we've had over the years that has enabled us to grow the company is our ability to serve multiple segments, which is what it takes to grow.
Churchill continued on the topic of scale, stating that the company's operations in some of the region's smaller countries are getting to the point where the benefits of scale are more apparent. He also stated that future strategies in the area will be largely dependent on AT&T's chosen direction. Following up on Churchill's comments, White added that the company views over-the-top options as a way to reach a wider audience, and also sees significant long-term potential as middle-class demographics continue to emerge in the region.
DirecTV's expectations for the rest of the fiscal year
Following the first-quarter results, the company mostly confirmed that it was on track to meet the yearly guidance it had laid out in February. The company expects modest free cash flow growth in the fiscal year, having delivered roughly 5% year-over-year growth in the first quarterly period.
CFO Patrick Doyle indicated that the U.S. segment was on track to deliver mid-single-digit revenue growth, low-single-digit OPBDA growth, and cash flow before interest and taxes in the high single digits. Currency fluctuations in the Latin America segment remain somewhat unpredictable, but Doyle indicated that the company's EPS target should be accurate barring big foreign exchange swings.
Here's the CFO on the annual earnings outlook: "In addition, as of today, our outlook for about $6 of full year EPS would only be affected by differences in actual foreign exchange rates with those that we laid out for you in February." Hitting the $6-per-share target would represent roughly 11% growth over fiscal 2014's EPS of $5.40.