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DirecTV beats analyst expectations ahead of potential AT&T merger

DirecTV posted better-than-expected earnings for the fourth quarter — a welcome sign for AT&T’s investors ahead of a potential megamerger between the two. But the results engender the question of what AT&T could itself bring to DirecTV at this point.

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DirecTV beats analyst expectations ahead of potential AT&T merger

Michelle Clancy

DirecTV posted better-than-expected earnings for the fourth quarter — a welcome sign for AT&T’s investors ahead of a potential megamerger between the two. But the results engender the question of what AT&T could itself bring to DirecTV at this point.

The satellite TV provider posted revenues of $8.92 billion, rising 4% year on year from $8.59 billion. Adjusted (EPS) came in at $1.57, up 3% year-on-year and beating the Wall Street consensus estimate of $1.41 by 11.25%.

The satcaster saw an improvement in average revenue per user (ARPU) of 5%, up from $111.74 last year to $117.3. And despite the price hikes, and competition from online video streaming services, the company added 149,000 net subscribers domestically during 4Q, a significant improvement from the comparable period last year, when it added 93,000 net users.

Subscriber churn also improved on a year-on-year basis, from 1.41% in 4QFY13 to 1.37% in the most recent quarter.

AT&T in contrast has seen its profit margins decline in the past few quarters, falling 60% in FY13 to 54.2% in FY14. Revenue rose to $34.4 billion in the quarter from $33.16 billion a year ago, but the telco posted a net loss of $4 billion, or 77 cents per share, in the fourth quarter, compared with net income of $6.9 billion, or $1.31 per share, in the year-ago quarter.

“Much has been written about AT&T's relatively desperate need to change its own narrative. The company needs DirecTV to fix the profitability of its U-Verse TV business,” said Craig Moffett, senior analyst, in an investor note. “They need DirecTV to jumpstart their ambitions in Latin America. They need DirecTV to compete with Cable's vaunted bundles.  And mostly, they need DirecTV to fund their wobbly dividend.”

What's less clear is what DirecTV will get out of AT&T.

“DirecTV has consistently been the best-run operator in pay-TV, sustaining growth and a sterling brand image long past the time that most investors (including yours truly) had predicted that satellite TV would have been relegated to the discount bin,” he said.

He added that DirecTV’s strong fourth quarter results are a reminder that management and execution still matter.

“Even (or perhaps all the more) when the deck is seemingly stacked against them,” he added.

Moffett did caveat his remarks with a reminder that despite the additions, it’s clear that DirecTV’s US subscriber growth phase is all but over. Plus, programming costs are expected to continue to escalate, eating into margins over time.

“And, its margins in both the US and Latin America are going to face continued pressure,” he said. “Programming cost inflation continues to outpace ARPU growth. Margins will be increasingly hard to sustain.”

The scale and diversity offered by the merger could be a net positive for both firms, given DirecTV’s core TV business and AT&T’s position as the No. 2 wireless company.