DIRECTV (NASDAQ: DTV ) recently reported its fourth-quarter numbers, and the results came in ahead of expectations. Revenue for the quarter was $8.53 billion, which narrowly surpassed the average analyst estimate of $8.52 billion. Earnings per share came in at $1.53, surpassing expectations for earnings of $1.40 per share by roughly 9.2%. Despite the solid EPS beat, the company’s share price experienced very little movement in the days of trading following the announcement of the company’s results.
Following the release of the company’s fourth-quarter earnings, DIRECTV’s vice president of investor relations, Martin Sheehan, CEO and President Michael White, Executive Vice President and CEO of DIRECTV Latin America Bruce Churchill, and CFO and Executive Vice President Patrick Doyle participated in a conference call to give some analysis of the recently concluded quarter, fiscal year, and what the future holds for the company. Here are five key takeaways from the call.
The AT&T merger is DIRECTV’s top 2015 priority
Whether or not DIRECTV’s proposed merger with AT&T (NYSE: T ) goes through is of big importance for both companies. For DIRECTV, the merger with AT&T provides a way to improve its reach as an Internet provider and safeguard its relevance by diversifying for a future that looks to have an increasing number of cord-cutters. CEO and President Michael White stated that the successful completion of the merger was DIRECTV’s top priority in 2015. Here’s White on the timeline and prospects for closing the deal:
So we remain confident that we’ll close our transaction some time before the end of the first half of the year, although understandably, there’s still some uncertainty as to the exact date. In the meantime, we all here at DIRECTV continue to focus on running our business as well on a stand-alone basis.
DIRECTV and AT&T have secured the state and international approvals needed to go forward with the deal and are now waiting on approval from the FCC and Department of Justice. The FCC is expected to give its stance on AT&T’s proposed $48.5 billion buyout of DIRECTV around March 23, though that deadline is informal.
DIRECTV Latin America had a solid 2014, but 2015 may have stronger headwinds
DIRECTV’s Latin America segment saw shrinking margins in 2014, but it was still a solid year for new customer additions. The company fell short of its goal of adding 1 million new subscribers in Latin America, instead adding 903,000 subscribers, but the miss was attributed to a deliberate focus on securing high-value customers in a challenging business climate. Here’s White on the outlook for DIRECTV Latin America in 2015:
The current macroeconomic outlook for 2015, I do think, will likely be even more challenging than 2014. So, given that we don’t have any events like World Cup in 2015 to boost demand, we expect significantly less subscriber growth in the region than 2014. And, although we plan on solid performance on a local currency basis, the current outlook for foreign exchange will certainly weigh significantly on dollar-denominated revenue and OPBDA results.
The company is making strides to improve customer experience
With strong competition from Time Warner Cable and Comcast and the ongoing rise of Internet content distribution, DIRECTV’s ability to improve customer service and overall customer experience will be a key factor in delivering ongoing subscriber growth. During the conference call, Michael White outlined key improvements in the company’s customer service and operations, such as a 98% improvement in on-time arrival of technicians. He also cited improvements to the company’s content offerings:
Finally, with regards to advancing the customer experience, we also made significant improvements in the amount of content available to our subscribers as well as how our customers can access that content as well as introducing new services and capabilities. To name just a few, we recently signed new contracts with both Fox and Disney that will dramatically increase the amount of on-demand content we’ll be able to offer in the coming months, both on the television and on devices and online.
Increased content costs are driving up DIRECTV subscription prices
DIRECTV’s content costs have increased more than the company initially anticipated because of an increasingly competitive entertainment landscape and restructured deals with Disney and the NFL. In the company’s last quarter, average cost per user, or ACPU, for content increased 7.3% year over year. Here’s Bruce Churchill on the ACPU outlook for this year:
And as we also said at recent conferences, ACPU will likely increase about 10%, driven by new content deals such as Disney and the NFL, additional content renegotiations during the year as well as the usual annual cost increases on existing contracts. This is higher than our usual 7% to 9% projection, in large part due to our strong performance in 2014, when ACPU only grew 6%, resulting in a more challenging comparison for 2015.
The resulting price increases for subscribers will be some of the biggest in company history, and Churchill indicated that the hike could potentially result in a small decline in the company’s customer base.
DIRECTV is considering new service packages in relation to the AT&T merger
With rising subscription costs and competition from Internet content companies like Netflix, DIRECTV is facing some pressure to offer low-price, low-margin packages in order to preserve market share. The results of the AT&T merger look to be a big factor in what types of new packages eventually come to market. Here’s Michael White on the possibilities:
I think we’re looking at the question of whether to do a slimmed down over-the-top package. But keep in mind, the margins are pretty thin on that package, and barriers to entry are almost none. So it’s not clear to me it’s a particularly profitable idea, but it’s certainly something that we’re considering. But I would also tell you it’s — an important consideration is would I do a broadband-plus idea if we were merged with AT&T ahead of a pure-play, over-the-top kind of idea like DISH has done. And I don’t think we’ve yet kind of finalized our thinking in that regard, but we certainly recognize the challenge of serving those customers.