DirecTV (DTV) announced Thursday that it had over-reported Latin American subscribers by approximately 100,000 accounts at the end of 2012. The error came from the 93%-owned Sky Brasil, which continued the practice into 2013, leading to subscribers being over-reported by 200,000 accounts at the end of the first quarter. Unfortunately, it appears these customers also received service without paying after the inflated accounts were improperly terminated.
Needless to say, we're not pleased with the artificial account inflation, which not only boosted raw subscriber numbers but also lowered churn. DirecTV anticipates churn will increase during the second quarter in Brazil, but it will have no impact on the rest of the business.
The 8-K filed by the company in response to the event was brief, and it specifically made no mention of an impact on revenue, profitability, or cash flow. As far as we can discern, the only impact will be a $25 million charge to write-off capitalized installation costs and account for equipment held by terminated customers. Further details may eventually arise, but at this time, we doubt we will see any impact on DirecTV's operating metrics-except ARPU, which may rise (assuming revenue is the same, and total customers fall).
A $25 million charge, while unfortunate, will have little long-term impact on DirecTV. Sky Brasil might not be performing quite as well as previously announced, but we think economic growth will outweigh competitive pressures in the Brazilian market. Our valuation of the firm remains unchanged at this time, and we continue to hold shares in the portfolio of our Best Ideas Newsletter.
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