DirecTV's Mixed Bag

Even as DirecTV reported weaker than expected 3Q sub growth, Wall St embraced the DBS op’s 13% increase in rev growth to $3.67bln and pushed DirecTV’s stock to a 52-wk high of $22.93 (+5%). Gross sub adds in the Q were 1mln and net adds were 165K, numbers that bested 2Q’s 6-yr lows in each metric, yet are still noticeably lower than ’05 stats. Sanford Bernstein’s Craig Moffett was disturbed that the 227K net sub additions posted by DirecTV’s telco partners (BellSouth, Verizon, Qwest) exceeded the satcaster’s net adds. "It is clear that the telcos continue to be a crucial distribution channel for DirecTV. Their moves to build video distribution networks of their own are therefore particularly troubling," Moffett wrote in an analysis. During a Wed conference call, CFO Mike Palkovic cited churn as a key reason for the disappointing sub numbers. 3Q churn was a higher- than-expected 1.8%, although Palkovic said the steady drop in involuntary churn (46% to 38% of overall churn) continues to satisfy. But "we still have much work to do in the area of voluntary churn," he said. "Increased demand is causing a strain on our service infrastructure." Positive 3Q metrics include 6% ARPU growth to $72.74 and a 51% increase in subs with HD, DVR or HD DVR services to 4.3mln. The penetration rate of subs with advanced services nearly doubled in the Q, said Palkovic. UBS maintained its ‘reduce 2’ rating on DirecTV shares with an $18 price target. "We continue to believe satellite is fundamentally challenged over the next several years in an increasingly competitive pay-TV environment," the company wrote.