DirecTV’s Stock Rises from Higher Subscriber Revenues and Lower Costs

DirecTV (NASDAQ:DTV) is one of the leading pay TV providers in the US along with Dish Networks (NASDAQ:DISH), Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC).  The company reported a significant improvement in its free cash flows during for the first quarter of 2010.  We have updated our price estimate for DirecTV’s stock from $32 to $36 based on trends evident in the earnings release.

DirecTV’s US business reported lower subscriber gains during the first quarter of 2010 compared to the first quarter of 2009.  Despite this, DirecTV’s US business doubled its free cash flows compared to first quarter of 2009.

We believe that higher revenue per subscriber and better cost containment will continue to drive DirecTV’s cash flows.

Higher Revenue per Subscriber

Average Revenue per User (ARPU) for DirecTV US grew 6.4% during the past quarter.  The ARPU increase primarily drove revenue growth for the company.  Below are the factors that resulted in significant ARPU growth:

1. The company saw positive trends in premium movie channels that tend to have higher subscription fee
2. Increased penetration of HD/DVR services was incremental to pay TV ARPU
3. DirecTV’s annual price rise on its programming packages aided ARPU growth

We believe that as the economy improves, more subscribers will move to premium channels and advanced services.

With the company planning to introduce newer features like 3-D programming and multi-room viewing, ARPU growth looks sustainable.  We estimate that DirecTV’s average pay TV subscription fee will increase by 1.5% in 2010 while its averge HD/DVR fee will witness an increment of 5%.

Below you can see how change in fee per subscriber for DirecTV’s satellite TV services can impact its stock

Reduction in subscriber upgrade and retention costs

Subscriber upgrade and retention costs for DirecTV US declined by about 9% in the first quarter of 2010, despite a close to 11% increase in revenue.  These lower costs can be attributed to following factors

1. DirecTV’s HD/DVR penetration within its subscriber base has increased from about 29% in 2006 to about 60% at the end of 2009.  As the majority of the subscriber have already upgraded their equipment to HD/DVR receivers, future upgrade and retention costs are bound to decrease.
2. DirecTV states that about 70% of the new subscribers are signing up for its HD/DVR services, up from 60% a year ago.  As more subscribers directly go for advanced services, upgrade requirements are coming down.

You can see our complete analysis for DirecTV’s stock here