DirecTV's Call: Real-Time Diary
"I'm going to need you to flesh out these 'churn' figures for me, kay? Suuuuper."
8:10 After just 10 minutes or so of boilerplate, DirecTV (DTV) surprises to my entertainment upside by cutting to Chase Cary (CEO) to discuss the quarter in an apparently more or less conversational way (what wrestlers call a "shoot interview").
Chase likes the quarter, except for the churn number. Blames the "weaker customers we signed up last year" getting cut-off for most of the issue.
In the kind of statement that has made being a TiVO (TIVO) shareholder such a special brand of torture over the years, Mr. Carey is tickled with the customer additions "in light of the fact that we didn't have price-competitive offerings in DVRs or HD DVRs."
Why didn't they have those offerings? Because they were (and are) waiting for NDS Group (NNDS) to finish their product. For a TIVO shareholder, this is admittedly a larger point than it is to DTV shareholders but, still, it's the kind of idiocy that got me out of DTV stock (higher, as fate would have it).
DTV shareholders want the company to retain their perceived competitive advantage and capture shares. When DTV doesn't do this, ostensibly because a Murdoch family division is lagging, it's simply bad corporate governance.
8:19 While I was ranting in type, the CFO got on the horn to discuss churn. He's fired up about the cost reductions and decent ARPU (average revenue per user) seen in the quarter. Thinks that the customer culling for weak credit scores will pay off in the long run.
8:21 Chase going through initiatives over the next 6 months.
"Early October" is now the date for the roll-out of the NDS box. Pushed back from "August 1st."
Chase thinks churn, SAC and customer retention marketing will be higher in the second half (though only churn is higher than analysts expected).
CC is comfortable with the estimates for customer adds and the other estimates for the balance of '05. Sees '06 as a the beginning of a growth year.
Overall... we're on track to roll-out our initiatives (no, Chase, you aren't... you're late on the DVRs... and I bet, in Chase's no-Murdoch-blood-containing heart, the lateness of the NDS boxes really gripes your arse).
8:25 On to the Q&A:
Q. Will you have to recover the old DVR boxes (Mpeg2) when you roll-out the new (Mpeg4) DVRs? Isn't this going to CRUSH SAC?
A: "Ummmm.... well, SAC is going higher but, huh, it's pretty much under control and heading towards our objective of flattening SAC. We hope to move towards being 'flatter' on customer retention marketing in Q4." (Frankly, he seems horrified).
Customers will be rotated out of the TiVO boxes but he sees that as being something that happens "more in 06 and maybe 07, than 05"... if you're short TIVO on the notion that DTV is dumping them immediately... right about now would seem a decent time to cover, in my opinion.
They hit "the box rotation will be '06 and '07, more than '05" again at the end of the answer. NDS is late and these guys don't seem all that confident about the revised October roll-out date.
Q: Ok, seriously, what's the deal with retention marketing going higher?
A: The delay in the roll-out of new boxes did effect retention marketing (read: We aren't going to market TiVO boxes, no matter how late NDS is... we're on this path and we're sticking to it, regardless of near-term competitive problems this obstinance creates.)
Regarding bundlings... "we got two parties, the rbocs and cables, fighting it out and we're the beneficiary of that fight, for now." True, that. Bundling DSL with DTV was shockingly effective at virtually no cost to DTV.
Q: What percentage of customers take local programming and how many DVRs did you add during the Q?
A: 98% of the customers take local programming.
7-8% of new subs are taking DVRs, a number that has been static for the last year.
Churn for DVRs remains well below 1%, though it upticked slightly (when surly TIVO/ DTV users bailed).
Again... I know I'm biased as a TiVO long but what, on earth, are these guys thinking putting this customer base "in play" from a retention perspective?
Q: Will you stop selling TIVO entirely? Are you going to promote them the same way you will the NDS boxes?
A: We will be selling both TiVO and the DVR-plus boxes (from NDS) at roughly the same prices, starting sometime next year. (Meaning they'll push the NDS boxes like crazy at first and hope that a non-meaningful % of customers will be demanding TiVO after seeing DVR-Pluses).
DTV doesn't have any test market data for the NDS boxes (holy cow... this implies that NDS hasn't been able to mass produce and install even to a test-market degree).
DTV plans to have both DVR-Plus and TiVO for sale for the forseeeable future (though it's clear they intend to make the DVR-Plus the core... they likely just don't know how hard they'll have to push, financially, to make that happen).
Q: Can we get some idea of the impact to marketing when you give away all these boxes?
A: (Much higher but we're going to hide it with this trick) The boxes will be booked as leased next year, meaning that we will capitalize them rather than calling a product give-away a "Marketing" gimmick.
8:40 Someone whose name was garbled is now talking. Judging by the Aussie accent and the give-me-the-mic deference being shown, this person is The Man.
The Man is discussing the Sunday Ticket Package. Says it's in the early stages but "I've shown it to the announcers... a cynical group... I knew we had a hit when Terry Bradshaw said he could run it!"
[Insert obsequious Please-make-him-stop-talking air laughter here]
8:47 The arrival of The Man has catalyzed an impromptu riff on the topic of "driving customer demand" from Chase Carey. "We need to be leaders in the industry in providing the highest quality content and technology... [provided, of course, that the companies from whom we outsource this technology are owned and/or controlled by the Murdochs... hee... Another cracker, your dictator-ness?]"
Q Back on track with questions... Did you really just say that Q3 churn was going to be 1.79%!!??
A "I don't want too much to be made of that... I said that we'd see Q3 churn higher 'by about one tenth of a percent' which, technically, means 1.79 but I don't want anyone to think that '1.79' is an exact prediction"
I tried very hard to quote that verbatim. That was a horrible answer which translates to (in my opinion): Dude, I'd be psyched if we kept churn for Q3 at 1.79%. Did you happen to hear the whole 'early October' rollout plan for those new DVRs? We can't promote TiVO, at this point, no matter how late NDS is. I've got a baby upgrade to the NFL Sunday Ticket and that's it, in terms of "stuff to pitch to our customers". I'm not married to 'point-one' because I don't want to bet my career on a number I'm never going to hit, for reasons I can't really control.
8:48- 9 A long off-road into the topic of wireless and whether or not DTV is going to buy a broadband provider.
DTV is sort of trail-ballooning the idea of buying someone big. They have questions about the business (chuckling about the price wars), and also think that their relationships with RBOC bundling are solid.
DTV regards it as "too early" in the development of the marketplace (and deals they are looking at) to talk about any details for a potential buy-out or partnership.
Q: Less than half of the increased churn seems to have come from the force-dropped customers. Isn't it increasing, broadly?
A: Ok... after an hour we'll finally just flat-out say that churn is a problem. We are going to miss our churn targets for '05. The delay in the initiatives has hurt us. We wanted to be rolling out DVRs early in the year, not in the fall (*cough... winter... *cough). When we launch those, churn should drop.
We're 6-12 months behind where we were, and where we look to be, on churn.
Q: "Are you losing subs on HDDVRs because of the $1,000 price point (because you aren't promoting it... DTV, not TiVO, prices the boxes) and, if so, what type of SAC are you going to be comfortable with to change that?"
A: "Yes, we are losing customers. Our SAC will be uniquely high over the next few months (because we are jumping from $1000 to "free"). The NDS box will be More Expensive (to DTV... my "wow" caps-added) but we think it will pay off with lower long run churn."
As I noted, they already have sub-1% churn with TiVO boxes that they are selling (at non-competitive prices).
The call is done. These guys sounded much, much more confident about a year ago, when they were crushing the ball on sub-ads, cable wasn't yet promoting DVRs with much pep and Job 1 was simply "cleaning up the messes left behind by GMH."
Now that they are actually having to run the company, they seem to be stumbling just a bit. The delay on the NDS boxes to October shouldn't be that surprising (though I believe there are certain Minyans who have lost certain wagers, tied to the August release). It's a monster screw-up and bespeaks a company that isn't hitting on all cylinders. That said, they were smart enough to try to roll it out in the Spring. If it gets here in October, all will be forgiven by the Street. ("Dumb" plan or not, it's better to able to execute your intentions than not).
If NDS doesn't have the boxes fully in stock by the holidays there may be more than chestnuts burning on open fires in DTV HQ.
DTV is up about 30-cents as I type. If there was a winner in the call, it was probably TiVO though, I'm quick to add, that it was a non-paying, "I told you so" type of victory.
DirecTV has created a lot of problems for itself by bungling (or having bungled for them) the switch to NDS boxes. This prolongs the amount of time DTV can be expected to be paying fees to TiVO (into at least '07, from the sounds of it), but there wasn't really any evidence of DTV rethinking the NDS decision and going back to TiVO anytime soon (read: ever).
I'm still not interested in DTV's stock, long or short, at this level. The call was moderately bullish for TiVO but I don't think it will be enough to get any of the downgraders from last week to change their minds, at least in public.
As far as calls go, this was a fairly good one. They got off the set-script (though stuck to the theme) and actually conversed with analysts on the call, to an extent. We got some decent new information, in terms of timing for DTV and the financial weakness they are dealing with (which they hope is temporary).
Expect some lightly cautious "Facing a Rough Patch" responses from the analyst community on this call. Nothing horrible but, for my money, there wasn't anything to get me excited about DTV's stock in this call.
Which, I hope you agree, didn't make the exercise a waste of bits and time.
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