(DTV) DIRECTV Continues Upward Movement

DIRECTV (DTV), the largest satellite TV operator of the U.S., declared excellent second quarter 2011 financial results before the opening bell today. The solid result was the combined effect of a double-digit revenue growth, significant margin expansion, and better-than-expected net customer addition.

Management’s strategy to target high-end customers paid-off well as the demand for the company’s HD channels and digital-video recording services sky rocketed in the reported quarter.

During the reported quarter, DIRECTV spend $1.51 billion to repurchase its own shares. Management is also confident that the company’s full-year EPS will jump to $5.0 in 2013 from $2.3 in 2010.

Second-quarter 2011 total revenue came in at $6,600 million, an improvement of 13% year over year, surpassing the Zacks Consensus Estimate of $6,539 million. This was primarily attributable to massive subscriber growth in Latin American regions, solid average monthly revenue per subscriber growth, and increasing contribution from the U.S.

Quarterly GAAP net income was $701 million or 91 cents per share compared with a net income of $543 million or 42 cents per share in the year-ago quarter. Second-quarter 2011 adjusted (excluding one-time gains) EPS of 88 cents easily surpassed the Zacks Consensus Estimate of 85 cents.

Quarterly operating profit before depreciation & amortization (OPBDA) was $1,846 million, up 12.9% year over year. Operating profit in the second quarter of 2011 came in at $1,230 million, up 21.8% year over year, primarily due to gross profit associated with higher revenues, partially offset by an increase in subscriber acquisition costs.

During the first half of 2011, DIRECTV generated $2,404 million of cash from operations compared with $2,494 million in the prior-year period. Free cash flow (cash flow from operations less capital expenditures) in the reported period was $1,108 million compared with $1,483 million in the year-ago quarter.

At the end of the second quarter of 2011, DIRECTV had $2,528 million of cash & cash equivalents and $13,462 million of outstanding debt on its balance sheet compared with $1,502 million of cash & cash equivalents and $10,510 million of outstanding debt at the end of fiscal 2010.

DIRECTV U.S. Segment

Quarterly total revenue was $5,277 million, up 7% year over year, primarily due to strong ARPU growth and larger subscriber base. Quarterly ARPU increased 3% to $90.58. Quarterly operating profit before depreciation & amortization inched up 4% to $1,446 million and operating profit climbed 13% to $1,016 million.

Average monthly subscriber churn rate in the reported quarter was 1.59% compared with 1.51% in the prior-year quarter. Quarterly net subscriber addition was 26,000 compared with 100,000 in the year-ago quarter. As of June 30, 2011, DIRECTV U.S. had 19.433 million subscribers, up 4% year over year.

DIRECTV Latin America Segment

Quarterly total revenue was $1,254 million, up 46% year over year,resulting from continued strong subscriber growth including a significant increase of 14% in second- quarter net subscriber additions of 472,000. Quarterly ARPU increased 13.3% to $64.56due to price increase and higher sales of HD and DVR services. Quarterly operating profit before depreciation & amortization increased 60% to $423 million and operating profit jumped 72% to $241 million.

Average monthly subscriber churn rate in the reported quarter was 1.81% compared with 1.63% in the prior-year quarter. As of June 30, 2011, DIRECTV Latin America had approximately 6.707 million subscribers, up 28.4% year over year.

Recommendation

We maintain our long-term Neutral recommendation on DIRECTV. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.Within the satellite TV industry, DIRECTV is facing competition from its nearest rival DISH Network Corp. (DISH). Moreover, the U.S. telecom giants, AT&T (T) and Verizon Wireless (VZ) are increasingly rolling out their fiber-based network in order to provide video services.

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