DTV - Directv

[enoch01]

They have advantages from content delivery, and they also have first mover advantages in Latin America.  That's probably it.  But if they get big enough, fast enough in Latin America, then they may also enjoy switching cost advantages too.  Thats what makes me curious about how much it would cost to build a network that could compete with hem.  I wouldn't want to rely on that in an investment thesis, though.

 

The sharp allocation skills should not be discounted either.

[Yours Truly]

I think once Latin America growth slows down then they will begin reducing leverage.  Of course if they still don't need to retain earnings at that point (strong enough moat), then that changes and they may still keep debt ratios high.

 

What moat do you think they have?

 

The way I see this company is as a content provider (people are paying for the content, not the service).  Does DTV have the right to distribute exclusive content?  If the answer is no, the moat would be lowest cost and/or switching costs.  I'll have to look into those.  I think this thesis needs to consider the competitive landscape of the LatAm assets because I think that they are expecting to grow share.  The growing overall market is more obvious to me.

 

I also have some questions on CapEx, but am just getting started researching.  Will post some thoughts later.

 

I don't see a huge moat as essentially, DTV is a wholesaler of content... their niche lies in the fact that they can penetrate areas where fiber cable is non-existant and in their sports packaging... they are essentially targetting the middle-upper demographic households in excess of $75k, 35+ y/o with college degrees and stable jobs who want stable and HD service

 

Within the next 2-3 years, their high yielding debt will expire which is a bonus and 2013 is considered a capex year with the purchase of 2 satellites (one for backup and the other for HD output to LA) and investment into the Genie boxes.. the 2014 World Cup and 2016 Olympics, both in Brazil, will serve as nice catalysts in the near future

 

It's great that the GVT issue is gone with which allows for the continuation of the much accretive share buyback.. BUT the looming issue still remains with the re-signing and current negotiation with the NFL on obtaining an agreement on rights for the next 4 years.. Perhaps a non-exclusive agreement may satisfy all parties at this juncture

[Yours Truly]

Good thread

http://caps.fool.com/Blogs/holy-buybacks-batman-/798531

[enoch01]

Includes a discussion of the apparent "get big quick" strategy in Latin America:

 

http://seekingalpha.com/article/1286811

[Yours Truly]

Another fantastic investment write up on DTV, read the comments as well

 

http://m.seekingalpha.com/article/1290441

[Phaceliacapital]

DirecTV's DTV fourth quarter-results were largely in line with our expectations. In the U.S., solid customer growth and shifting NFL programming expenses largely offset a jump in customer acquisition costs, producing flat margins versus a year ago. We expect that the firm will increasingly struggle to balance growth and profitability as it battles the cable and phone companies for customers from a relatively weak competitive position. In Latin America, revenue growth accelerated to 22%, despite continued currency pressure, on another record quarter of customer growth. Margins in the region were below our expectations as a result of nonrecurring litigation expenses. Management's U.S. outlook for 2013 is largely in keeping with our view of the firm's competitive position. The outlook for Latin America was on the weak side, even excluding currency pressure. We don't expect to change our fair value estimate and we continue to view DirecTV shares as overvalued.

 

DirecTV added 103,000 U.S. customers during the fourth quarter, down 18% versus a year ago, but its best showing of 2012. The customer growth figures, which the firm had telegraphed at an investor conference last month, were stronger than management had expected heading into the quarter. About 130,000 customers lost access to certain Chinese and Vietnamese programming last November and DirecTV had expected a large number of these customers to churn. The use of substitute programming and promotional efforts enabled the firm to hold on to a chunk of these customers. Management now expects that a large number of these customers will leave in early 2013 as promotions expire. DirecTV expects to lose net customers during the first half of 2013 as a result of these customer losses and seasonality, with stronger results in the second half producing modest customer growth for the year. With customer growth limited, we expect U.S. revenue growth will dip to about 5% in 2013 versus 6% in 2012. The 2012 NFL schedule muddies U.S. margin comparisons versus prior periods, as one game shifted from the fourth quarter to the third relative to 2011. As a result, less cost from the NFL contract hit during the fourth than the year before. Despite this dynamic, programming costs increased to 50.5% of revenue from 49.4% a year ago, reflecting the continued pressure on programming margins. In addition, DirecTV spent considerably more to acquire each new customer than a year ago because of increasing equipment costs. Slower customer growth still allowed total customer acquisition spending to decline versus a year ago, largely offsetting the increase in programming costs during the quarter. As customer growth flattens and programming costs continue to rise, we expect year-over-year margin comparisons will become more difficult. In Latin America, DirecTV added 662,000 customers during the fourth quarter, another record total. While less severe relative to the second and third quarters, currency pressure continues to weigh on reported revenue growth. In local currencies, revenue grew 34% year over year, including 30% in Brazil. Management expects growth in Brazil will slow to 20%, in local currency, during 2013, which implies another step down in average revenue per customer and slowing customer growth (management expects 20% customer growth in 2013 versus 33% in 2012). DirecTV will also see major revenue pressure in Venezuela as a result of currency devaluation--currency problems in that country aren't new and will likely continue for some time. Taken as a whole, DirecTV expects mid-teens revenue growth in Latin America during 2013, lower than our prior 20% expectation. Consolidated free cash flow totaled $543 million during the quarter, bringing the total for 2012 to $2.3 billion, up 13% versus a year ago. Changes in working capital provided a tailwind for cash flow in 2012, as higher capital spending, interest costs, and cash taxes otherwise weighed on cash flow. Management expects that cash flow will decline in 2013 as cash taxes, capital spending, and cash interest costs continue to increase. The firm authorized another $4 billion of share repurchases. If completed during 2013, we would expect repurchases to add another $2 billion to net debt on top of the $3 billion increase in 2012. Share repurchases could be put on hold if the firm moves forward with the acquisition of GVT in Brazil. Management expects to complete its review of a potential GVT deal by the end of the first quarter.

 

[MrB]

http://transition.fcc.gov/Daily_Releases/Daily_Business/2012/db0723/FCC-12-81A1.pdf

[enoch01]

http://transition.fcc.gov/Daily_Releases/Daily_Business/2012/db0723/FCC-12-81A1.pdf

 

This is great, thanks MrB!

[Yours Truly]

Interesting

 

123. DIRECTV notes that its advertising revenue per subscriber trails many of its competitors because it does not have the ability to target advertising at the local level due to its national satellite infrastructure.376 Using new technology, DIRECTV anticipates being able to insert advertisements into individual DVR set-top receivers. This will enable advertisers to target subscribers in local regions and eventually in the individual home. With this new technology, DIRECTV expects to increase its advertising revenues significantl

[LC]

Interesting

 

123. DIRECTV notes that its advertising revenue per subscriber trails many of its competitors because it does not have the ability to target advertising at the local level due to its national satellite infrastructure.376 Using new technology, DIRECTV anticipates being able to insert advertisements into individual DVR set-top receivers. This will enable advertisers to target subscribers in local regions and eventually in the individual home. With this new technology, DIRECTV expects to increase its advertising revenues significantl

 

That is very interesting...might be interesting to find an average advertising rate per user of cable providers and then apply a high/mid/low range of those multiples to DTV and see what ad revenue looks like...

[enoch01]

Interesting

 

123. DIRECTV notes that its advertising revenue per subscriber trails many of its competitors because it does not have the ability to target advertising at the local level due to its national satellite infrastructure.376 Using new technology, DIRECTV anticipates being able to insert advertisements into individual DVR set-top receivers. This will enable advertisers to target subscribers in local regions and eventually in the individual home. With this new technology, DIRECTV expects to increase its advertising revenues significantl

 

That is very interesting...might be interesting to find an average advertising rate per user of cable providers and then apply a high/mid/low range of those multiples to DTV and see what ad revenue looks like...

 

This is mentioned in the 10-K for 2011.  The local advertising initiative is underway.

 

I also thought paragraph 150 was insightful.  $67 billion spent by the cables from 2006 to 2010.  Verizon and AT&T spent billions as well.  I'm not sure what this was all spent on.

 

DirecTV's 12 satellites are carried on their books a $2.3 billion total (I don't know what the cost was), and other property at $5.7 billion.  DISH also spent money putting up satellites during this time.

 

I realize this is not an apples to apples comparison.  The cables can offer bundled services - so that is worth something.  I can see why DirecTV would like to offer exclusive content.  With how little they have to spend on capex they can afford to pay for this exclusivity.

 

In Latin America the other providers have to play catch-up to DirecTV, versus the head start the cables had in the U.S years ago.  I'm guessing the cost to get to DirecTV's coverage in Latin America would be in the tens of billions.

[Sportgamma]

Annual report:

 

http://files.shareholder.com/downloads/DTV/2320010540x0x648743/0F45CAF5-EF90-4087-8A27-21F6C30A9611/DirecTV_2012_AR.PDF

 

furthermore, our track record of generating the industry’s highest return on invested capital—23 percent in 2012—demonstrates we are adept at effectively allocating capital to ensure value creation for our shareholders.

 

[boilermaker75]

Earning out,

 

http://finance.yahoo.com/news/directv-profit-blows-past-estimates-123643618.html

[Yours Truly]

- Nice subscriber growth in LA

- Minor subscriber additions in the US

- Utilized $1.2 billion of its $4 billion share buyback capacity

- Crushes analysts "estimates" as 2013 is supposed to a slow year where lots of money is being reinvested for future growth

[UK]

this is interesting: "DirecTV also has a big supporter in Warren Buffett’s Berkshire Hathaway Inc. The holding company, which held its annual meeting over the weekend, is the fourth-biggest investor in DirecTV, according to data compiled by Bloomberg. White says that Berkshire has endorsed his strategy of sticking with a television focus." and “Berkshire feels that the U.S. business is undervalued because concerns about technology obsolescence are overblown,” said White, who said he’s in regular contact with the company. “They are long-term investors.”

 

http://www.bloomberg.com/news/2013-05-06/directv-spurns-dish-s-view-that-wireless-is-satellite-tv-savior.html

 

also: "Billionaire John Malone is DirecTV’s fifth-largest investor, holding 27.7 million shares."

 

http://www.bloomberg.com/news/2013-05-07/directv-tops-profit-estimates-after-attracting-more-subscribers.html

 

there is also interview from 2010 in which Malone states, that DTV is his largest personal position: http://www.youtube.com/watch?v=QUbQRwKXeCU

 

and the question is how up to date is this bloomberg information? all i am able to find is this 2010 filling: http://www.sec.gov/Archives/edgar/data/937797/000125201710000060/xslF345X03/edgar.xml

 

do I understand correctly that Malone no longer has an obligation to report any changes in his stake and Bloomberg in its article refers to old information or are there any way to get up to date information on his holdings?

[Yours Truly]

this is interesting: "DirecTV also has a big supporter in Warren Buffett’s Berkshire Hathaway Inc. The holding company, which held its annual meeting over the weekend, is the fourth-biggest investor in DirecTV, according to data compiled by Bloomberg. White says that Berkshire has endorsed his strategy of sticking with a television focus." and “Berkshire feels that the U.S. business is undervalued because concerns about technology obsolescence are overblown,” said White, who said he’s in regular contact with the company. “They are long-term investors.”

 

http://www.bloomberg.com/news/2013-05-06/directv-spurns-dish-s-view-that-wireless-is-satellite-tv-savior.html

 

also: "Billionaire John Malone is DirecTV’s fifth-largest investor, holding 27.7 million shares."

 

http://www.bloomberg.com/news/2013-05-07/directv-tops-profit-estimates-after-attracting-more-subscribers.html

 

there is also interview from 2010 in which Malone states, that DTV is his largest personal position: http://www.youtube.com/watch?v=QUbQRwKXeCU

 

and the question is how up to date is this bloomberg information? all i am able to find is this 2010 filling: http://www.sec.gov/Archives/edgar/data/937797/000125201710000060/xslF345X03/edgar.xml

 

do I understand correctly that Malone no longer has an obligation to report any changes in his stake and Bloomberg in its article refers to old information or are there any way to get up to date information on his holdings?

 

Good find!

 

I'm using S&P CapitalIQ and there are no traces of John Malone nor his Liberty companies with any holdings in DTV

 

It's nice that Ted Weschler is constantly in contact with Mike White... i'm betting that his holdings have increased significantly in the last quarter along with DVA.. we'll see next week :)

[compoundinglife]

this is interesting: "DirecTV also has a big supporter in Warren Buffett’s Berkshire Hathaway Inc. The holding company, which held its annual meeting over the weekend, is the fourth-biggest investor in DirecTV, according to data compiled by Bloomberg. White says that Berkshire has endorsed his strategy of sticking with a television focus." and “Berkshire feels that the U.S. business is undervalued because concerns about technology obsolescence are overblown,” said White, who said he’s in regular contact with the company. “They are long-term investors.”

 

http://www.bloomberg.com/news/2013-05-06/directv-spurns-dish-s-view-that-wireless-is-satellite-tv-savior.html

 

also: "Billionaire John Malone is DirecTV’s fifth-largest investor, holding 27.7 million shares."

 

http://www.bloomberg.com/news/2013-05-07/directv-tops-profit-estimates-after-attracting-more-subscribers.html

 

there is also interview from 2010 in which Malone states, that DTV is his largest personal position: http://www.youtube.com/watch?v=QUbQRwKXeCU

 

and the question is how up to date is this bloomberg information? all i am able to find is this 2010 filling: http://www.sec.gov/Archives/edgar/data/937797/000125201710000060/xslF345X03/edgar.xml

 

do I understand correctly that Malone no longer has an obligation to report any changes in his stake and Bloomberg in its article refers to old information or are there any way to get up to date information on his holdings?

 

Good find!

 

I'm using S&P CapitalIQ and there are no traces of John Malone nor his Liberty companies with any holdings in DTV

 

It's nice that Ted Weschler is constantly in contact with Mike White... i'm betting that his holdings have increased significantly in the last quarter along with DVA.. we'll see next week :)

 

I seem to remember reading at some point in the past (might of been on this board) that Malone has collared his personal DTV stake so the net effect was that he would not be impacted by price changes in the stock. Can anyone confirm or deny that?

[Guest wellmont]

 

I seem to remember reading at some point in the past (might of been on this board) that Malone has collared his personal DTV stake so the net effect was that he would not be impacted by price changes in the stock. Can anyone confirm or deny that?

 

I think he had a protective insurance put on after the financial crisis, while things were uncertain. but you may be right. I know he did something to protect his DTV stake. But that was a couple years ago I think.

[ItsAValueTrap]

I think that Liberty Entertainment collared its shades so that it could borrow against them to buy more shares of DTV.  I believe Malone wanted to buy more of DTV to gain control of it (and also presumably because the valuation was reasonable).  The end game would be to get AT&T or somebody else to take DTV over at a premium because he doesn't like DTV's prospects over the long run.

 

Malone is probably concerned about DTV's future.  Obviously other technologies will improve their bandwidth at about 2X every 2 years.  This allows for more channels, etc. etc.  DTV's technology won't improve at that rate.  So in the long run, satellite TV will fall behind in the technology race.  And Malone is one of the few long-term investors out there.  Some management teams (I believe) don't like him because he is always trying to take control and telling them what to do.  Malone probably tells the management teams what to do because he is really smart, is an excellent capital allocator, and knows what he is talking about (he used to run a cable company).

 

Liberty and DTV struck a deal where it seems like DTV paid Malone to go away.  Malone gave up control of DTV, which is pretty unusual.  He learned the value of control the hard way when he lost a lot of money in AT&T stock. 

In Thursday's interview, Mr. Malone displayed his frustration with Mr. Karmazin's attitude. "What gives Mel the right to say, hey, John, you've got to go away? ....This is a John-Mel thing. Control is control is control is control. And my whole life has been about control."

http://webcache.googleusercontent.com/search?q=cache:7ohMYBY8_hQJ:online.wsj.com/article/SB10001424052702303644004577523262536360858.html+&cd=1&hl=en&ct=clnk&gl=ca

 

I am guessing that Malone is personally still holding onto his DTV shares.  Because implied volatility on DTV is really low, I think that he is privately buying put options to hedge his DTV stake.  (He might be doing a derivatives contract with an investment bank that makes his options more tax-efficient, e.g. settlement in cash.)  So he may be betting on DTV going up but he's bought insurance to protect himself.

 

Later on he might switch to using a collar (it's like using derivatives/options to sell a company without triggering capital gains) if volatility goes up.  His net exposure to DTV would be low.

 

I could be wrong.

 

2- If a management team doesn't like John Malone, I see it as a bad thing.  Malone wants superstar CEOs running his companies.  If he thinks that you're a really good CEO, he just probably isn't going to bother you.  But if you are an average CEO who is doing some things that are stupid, he will probably try to tell you what to do.  And you'd have to worry about him trying to replace you with somebody else.

 

If a CEO is fighting Malone, he/she is probably mediocre.

[Yours Truly]

I think that Liberty Entertainment collared its shades so that it could borrow against them to buy more shares of DTV.  I believe Malone wanted to buy more of DTV to gain control of it (and also presumably because the valuation was reasonable).  The end game would be to get AT&T or somebody else to take DTV over at a premium because he doesn't like DTV's prospects over the long run.

 

Malone is probably concerned about DTV's future.  Obviously other technologies will improve their bandwidth at about 2X every 2 years.  This allows for more channels, etc. etc.  DTV's technology won't improve at that rate.  So in the long run, satellite TV will fall behind in the technology race.  And Malone is one of the few long-term investors out there.  Some management teams (I believe) don't like him because he is always trying to take control and telling them what to do.  Malone probably tells the management teams what to do because he is really smart, is an excellent capital allocator, and knows what he is talking about (he used to run a cable company).

 

Liberty and DTV struck a deal where it seems like DTV paid Malone to go away.  Malone gave up control of DTV, which is pretty unusual.  He learned the value of control the hard way when he lost a lot of money in AT&T stock. 

In Thursday's interview, Mr. Malone displayed his frustration with Mr. Karmazin's attitude. "What gives Mel the right to say, hey, John, you've got to go away? ....This is a John-Mel thing. Control is control is control is control. And my whole life has been about control."

http://webcache.googleusercontent.com/search?q=cache:7ohMYBY8_hQJ:online.wsj.com/article/SB10001424052702303644004577523262536360858.html+&cd=1&hl=en&ct=clnk&gl=ca

 

I am guessing that Malone is personally still holding onto his DTV shares.  Because implied volatility on DTV is really low, I think that he is privately buying put options to hedge his DTV stake.  (He might be doing a derivatives contract with an investment bank that makes his options more tax-efficient, e.g. settlement in cash.)  So he may be betting on DTV going up but he's bought insurance to protect himself.

 

Later on he might switch to using a collar (it's like using derivatives/options to sell a company without triggering capital gains) if volatility goes up.  His net exposure to DTV would be low.

 

I could be wrong.

 

2- If a management team doesn't like John Malone, I see it as a bad thing.  Malone wants superstar CEOs running his companies.  If he thinks that you're a really good CEO, he just probably isn't going to bother you.  But if you are an average CEO who is doing some things that are stupid, he will probably try to tell you what to do.  And you'd have to worry about him trying to replace you with somebody else.

 

If a CEO is fighting Malone, he/she is probably mediocre.

 

It's okay, the CEO has found a new friend in Berkshire Hathaway

[constructive]

Man, that's a boatload of assumptions.

[Yours Truly]

New article out: more of the same

http://sumzero.com/headlines/telecom/DTV/172-a-spin-off-of-directvs-lat-am-segment-should-unlock-big-value

 

I forsee an eventual spin-off of its LA operations and the US operations will merge with Dish once share buyback plans is slowed/stopped due to going over its leverage limit of 2.5 and/or interest rise significantly

[constructive]

New article out: more of the same

http://sumzero.com/headlines/telecom/DTV/172-a-spin-off-of-directvs-lat-am-segment-should-unlock-big-value

 

I forsee an eventual spin-off of its LA operations and the US operations will merge with Dish once share buyback plans is slowed/stopped due to going over its leverage limit of 2.5 and/or interest rise significantly

 

I still don't see DirecTV and Dish successfully merging.

 

Despite fiber and VOD emergence, their market share has actually gone up since their last attempt was blocked.

 

<img src=http://farm4.static.flickr.com/3097/2298269943_f51e110180.jpg></img>

[MrB]

This might be a silly question, but if I can watch Directv on my iPad, what is the difference between it and Netflix? What advantage does Netflix have over Directv?

[finetrader]

This might be a silly question, but if I can watch Directv on my iPad, what is the difference between it and Netflix? What advantage does Netflix have over Directv?

 

I'm not an expert, but I would think that this is due to the fact that Nexflix's signal is using IP(Internet Protocol)  because it is streamed over the internet while Directv is using an another protocol for delivery (from the satellite to your receiver). To watch it on an Ipad you would have to convert Directv's signal format to IP.