Analyst: Victor Sula, Ph.D. Initial Report January 6th, 2008
DTV daily
01/6/09 25 24 23 22 21 20 19 18 17 Š BigCharts.com
30 20 10
Millions
volume
0
Nov
Dec
09
MARKET DATA
Share Statistics
NASDAQ
2006 2007 %Chg
(12/23/08)
9m
9m %Chg
2007 2008
Symbol Current Price Low/ High 52 weeks Average Volume (3m) Market Capitalization Shares Outstanding
DTV
Revenues, $ Mn. 14,755 17,246 16.9% 12,370 14,379 16.2%
$23.17
Gross margin
50.4% 50.2% -0.2 b.p. 50.8% 49.5% -1.3 b.p.
$17.70 - 29.10 Operating margin 16.0% 14.4% -1.6 b.p. 15.1% 14.7% -0.4 b.p. 12,466,000
Net margin
9.6%
8.4% -1.2 b.p. 8.9%
8.3% -0.6 b.p.
EPS, $
1.06
1.19
1.05
$24.34 Bn 1,050 Mn
12.3%
0.91
15.4%
Source: Yahoo Finance, Analyst Estimates
Background The DIRECTV Group Inc. (DTV) is one of the leading American providers of digital television entertainment, broadband satellite networks and services, global video and data broadcasting to customers in the United States and Latin America. The Company also offers mobile service (DirecTV Mobile) for cars, RVs and boats, as well as aircraft (DirecTV Airborne) in cooperation with Boeing. Additionally, regional U.S. local phone companies Verizon and BellSouth bundle DTV video services along with their voice and Internet communications packages. The DIRECTV Group is composed of two main operating units: DIRECTV U.S. and DIRECTV Latin America. DIRECTV U.S. is the largest provider of direct-to-home digital television services and the second largest provider in the multi-channel video programming distribution industry in the United States. The segment covers about 94% of the United States television households and distributes to its subscribThe DIRECTV Group Inc. (NASDAQ: DTV)
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Analyst: Victor Sula, Ph.D. Initial Report January 6th, 2008
ers about 1,800 digital video and audio channels, including about 190 basic entertainment channels, more than 70 XM Satellite Radio music channels, 33 premium movie channels, more than 36 regional and specialty sports networks, an aggregate of more than 1,400 local channels, more than 101 Spanish and other foreign language special interest channels, and more than 31 pay-per-view movie and event choices. DIRECTV U.S. also offers local channels (CBS, ABC, NBC, Fox, PBS, The CW, MyNetworkTV and ION Television) in 72% of U.S. markets, as well as more than 130 national HD television channels. As of September 30, 2008, DTV provides digital television service to more than 17.3 million customers in the United States. The DIRECTV Latin America (DTVLA) provides digital DTH digital television services throughout Latin America, which includes South America, Central America, Mexico and the Caribbean. DTVLA is comprised of PanAmericana which provides services in Venezuela, Argentina, Chile, Colombia, Puerto Rico and certain other countries; Sky Brasil Servicos Ltda (or Sky Brazil); and Innova, S. de R.L. de C.V. (or Sky Mexico). As of September 30, 2008, PanAmericana and Sky Brazil had approximately 3.7 million subscribers; Sky Mexico had about 1.7 million subscribers.
Highlights Solid growth despite the challenging economic environment DTV has reported strong growth over the last years, mainly due to subscriber growth at DIRECTV U.S. and DIRECTV Latin America, as well as a higher average monthly revenue per subscriber (ARPU), resulted primarily from annual price increases on programming packages and an increase in HD and DVR service fees. The analyst consensus forecast expects DTV’s revenues to maintain the upward trend as new product offerings, including more HD product bundles, targeted promotions by geographic area and economy tiers to meet the changing marketplace. Revenue, $ Bn
Source: SEC filings; Yahoo Finance!
The DIRECTV Group Inc. (NASDAQ: DTV)
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Analyst: Victor Sula, Ph.D. Initial Report January 6th, 2008
Strong gross margins due to the leverage of a higher subscriber base The Company continues to benefit from the high gross margin generated by its operations. The increase in margins was due to higher gross profit from the increase in revenues, partially offset by higher subscriber acquisition, upgrade, retention, and general and administrative costs at both DIRECTV U.S. and DIRECTV Latin America. DTV’s gross margin tends to remain stable over time. Gross Margin, %
Source: SEC filings;
Significant subscriber base positions DTV as a leader in digital television entertainment in the U.S. and Latin America The Company has the largest subscriber base for DTH digital television services and the second largest subscriber base for multi-channel video programming distribution (MVPD) in the United States, totaling approximately 17.3 million subscribers. In addition, DTV has more than 5.5 million subscribers in Latin America. This large subscriber base contributes to achieving economies of scale in areas such as DIRECTV System equipment purchasing, customer service, broadcast operations and general and administrative services. Gross subscriber additions in 2008 were up compared to 2007 due to higher demand for HD and DVR services and increased sales in the Company’s direct sales and retail channels. Further expansion of subscriber base due to migration to HD channels The Company continues to dominate the HD landscape by delivering considerably more national HD channels than any other television provider in the nation, distributing more than 130 national HD television channels. At 2009 the end of 2008, the Company was providing local HD broadcast channels in 120+ cities, representing more than 88% of U.S. TV households. DTV intends to continue the rollout of the new HD local markets as its fleet of 11 satellites has the capacity to deliver 200 national HD channels and 1,500 local HD and digital channels in addition to new advanced programming services for customers nationwide. DTV expects its subscriber base to continue to increase, as about 40 million U.S. households are expected to sign-up for HD service over the next three years. The DIRECTV Group Inc. (NASDAQ: DTV)
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Analyst: Victor Sula, Ph.D. Initial Report January 6th, 2008
At the heart of DirecTV’s HDTV service is a software-based production and transmission solution - the Omnibus iTX, shifting away from dedicated hardware to perform specific functions and saving from major investments. DTV also transmits all of its HD programming in the MPEG-4 Advanced Video Coding standard - the first to do so in the industry. All HD programming are available in the Dolby Digital audio format and, moreover, in 2008 the Company began offering movies in 1080p, the highest resolution format available for HD video and the same format used by Blu-Ray HD DVDs. Roll-out of video-on-demand services In July 2008, DTV launched its highly anticipated DIRECTV on Demand service to customers across the country. The platform is available at no additional charge to customers and offers more than 4,500 standard-definition and HD titles, including movies, shows, sports, independent films, family and kids programming, television series on demand and exclusive content. The Company’s video-on-demand (VOD) library features a variety of free and rental new releases in HD, and this initial offering will be expanded over the coming months and on an ongoing basis. DTV still cannot compete with the triple play (the ability to provide Internet access and telephone and cable services in one package), where cable industry giants such as Comcast Corp., Cox Communications and Time Warner have a solid head start with on-demand technology. Moreover, customers will need broadband high-speed Internet access in order to receive the content, something satellite TV does not offer. The Company estimates that about half of its 17 million subscribers have high-speed Internet connections. Partnership with AT&T AT&T selected DTV as its partner to offer television service nationwide after its contract with Dish expires in early 2009. DTV’s agreement with AT&T will provide endless opportunities to thrill consumers with a suite of bundled entertainment and communications services. New AT&T / DIRECTV customers will be able to enjoy DTV programming packages, with the added benefit of a discount for bundling their wireless, home phone and broadband services with AT&T. Meanwhile, AT&T expects to be able to offer the Internet-based service to 31 million residential customers in the next few years.
Investment sentiment DTV is a world-leading provider of digital television entertainment services. Through its subsidiaries and affiliated companies in the United States, Brazil, Mexico and other countries in Latin America, DTV provides digital television service to more than 22 million customers in the United States and Latin America. DTV’s subscribers enjoy access to more than 265 channels of 100% digital picture and sound, exclusive programming and superior technologies that include advanced DVR and HD-DVR services, as well as the most state-of-the-art interactive sports packages available anywhere. DTV’s revenue increased by 15.1% in the third quarter of 2008 due to solid subscriber growth and a 6.1% increase in average revenue per user. EPS improved 22.2% during the same period due to slight improvement in gross margins and the leverage of operating expenses over a greater subscriber base. Going forward, the Company is developing additional revenue streams by launching new HD product bundles, expanding video-on-demand offerings; and implementing cost control programs and operating efficiencies.
The DIRECTV Group Inc. (NASDAQ: DTV)
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Analyst: Victor Sula, Ph.D. Initial Report January 6th, 2008
Comparative analysis Company Name 5-Jan-09 Time Warner Inc. Dish Network Corp. Comcast Corp. Verizon Communications AT&T Inc. Median DIRECTV Group Inc.
Price Mrkt. Ticker per Cap. P/E P/S EPS, $ symbol Share,$ $ Mn 2008 2009 2008 2009 2008 2009 %Chg TWX DISH CMCSA VZ T DTV
10.5 37,670 11.49 5,140 17.03 49,040 32.48 92,260 28.43 167,540 23.17
24,340
Revenue, $ mn 2008 2009 %Chg
9.72 5.77 18.92 12.69 10.01 10.01
9.91 4.93 16.38 12.12 9.98 9.98
0.79 0.44 1.44 0.95 1.35 0.95
0.84 0.43 1.36 0.89 1.32 0.89
1.08 1.99 0.9 2.56 2.84
1.06 2.33 1.04 2.68 2.85
-1.9% 17.1% 15.6% 4.7% 0.4% 4.7%
47,620 11,650 34,150 97,250 124,350
44,930 11,960 36,050 103,340 126,660
-5.6% 2.7% 5.6% 6.3% 1.9% 2.7%
14.7
11.44
1.12
1.03
1.4
1.75
25.0%
19,710
21,440
8.8%
Source: Yahoo Finance!
Moreover, DTV is by far the most dynamic in terms of revenue and EPS growth among its direct competitors and deserves better valuations. Moreover, DTV’s management announced that it continued to see strong consumer demand for its services and content despite the challenging economic climate. Given the Company’s strong competitive position, as well as strong subscriber additions and the continued growth of the average monthly revenue per subscriber we rate the Company as a Buy.
The DIRECTV Group Inc. (NASDAQ: DTV)
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Analyst: Victor Sula, Ph.D. Initial Report January 6th, 2008
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We encourage you to invest carefully and read investment information available at the websites of the SEC at http://www.sec.gov and FINRA at http://www. finra.org. All decisions are made solely by the analyst and independent of outside parties or influence. I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report. Victor Sula, Ph.D. - Senior Analyst Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant positions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.
The DIRECTV Group Inc. (NASDAQ: DTV)
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