2nd UPDATE: DirecTV 1Q Net Rises 8.5%, Invests In Latin America

DirecTV Group Inc.'s (DTV) first-quarter earnings rose 8.5% as the satellite TV operator boosted investment spending in its fast-growing Latin America segment and eked more growth out of its business at home.

Faced with a maturing pay-TV market in the U.S., DirecTV is betting on fast-growing Latin America markets like Brazil and Colombia--where pay-TV penetration remains low relative to the U.S.--to gain subscribers and boost profits.

The El Segundo, Calif. company aims to double its Latin America subscribers to more than 16 million and annual revenue to more than $10 billion over the next five years.

DirecTV shares traded up slightly in a broader market selloff; the shares are down around 1.1% over the last year.

The first quarter results "were certainly not of the 'blow out' variety [especially in the U.S.], but were definitely solid and respectable," writes ISI Analyst Vijay Jayant.

Chief Executive Michael White said the company was likely to continue with its share repurchase plan, although it will evaluate the program going forward based on how potential tax policy changes might impact shareholders.

He also offered his take on a new promotional offer for DirecTV's NFL Sunday ticket, which some analysts have received skeptically because of its aggressively slashed price.

"It really is a one-time opportunity for us to step up the renewals," White said during a conference call. But "the key thing for this product is that we've got to grow the base."

DirecTV added 593,000 net subscribers in Latin America for the first quarter, in line with guidance provided by executives in March, and up from 427,000 subscribers tacked on a year earlier. Overall, the company had a total of 8.46 million subscribers in the region by the end of the quarter, a 36% jump from the year earlier.

The subscriber growth in Latin America came at a cost: operating profit margins for the segment decreased as DirecTV increased spending on satellites, equipment and better customer service in the region. Free cash flow, a key metric eyed by cable analysts, swung to a loss of $34 million, compared to $76 million a year earlier. But operating profit increased to $249 million on higher subscriber revenue.

Meanwhile, DirecTV added 81,000 subscribers in its U.S. segment, slowing sharply from a year earlier, but gained during a period when big cable operators like Comcast Corp. (CMCSA, CMCSK) and Time Warner Cable Inc. (TWC) continue to bleed video subscribers.

DirecTV warned that it faced "challenges" in terms of adding subscribers in the second quarter in the U.S., which is traditionally a weak one for the pay-TV industry.

In the U.S., DirecTV has said it is focusing on subscribers that opt for higher-priced services as well as on customer retention in general.

Total subscribers in the U.S. stood at 19.97 million, at the end of the quarter, up slightly from 19.4 million a year earlier. Operating profit from the U.S. business was also up, to $1.31 billion.

DirecTV reported a profit of $731 million, or $1.07 a share, compared with year-earlier profit of $674 million, or 85 cents a share. The earnings per share gain was helped in part by DirecTV's share repurchase program over the past year, which included $1.26 billion in stock repurchased in the first quarter.

Revenue increased 12% to $7.05 billion. Analysts were looking for earnings of $1.06 a share on $7.06 billion in revenue, according to a poll conducted by Thomson Reuters.

-By William Launder, Dow Jones Newswires; 212-416-3412; william.launder@dowjones.com

--Mia Lamar contributed this article.

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