DirecTV (NASDAQ:DTV), the biggest satellite pay-TV provider in the U.S, and a close competitor of Dish Network (NASDAQ:DISH), released its Q1 2012 earnings recently. Broadly the trend remained as it has been for the past few quarters – growth in ARPU driven by increased adoption of advanced services and net subscriber gains even though cable companies such as Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) continue to lose subscribers. Nevertheless, the net subscriber additions came down indicating that the U.S. pay-TV market is getting saturated and more competitive than ever. Going forward, the company will focus on maintaining high credit quality subscribers and pushing for further adoption of advanced services. Additionally, there is opportunity to introduce paid streaming service to generate incremental profits, something similar to what Comcast has done.
DirecTV’s net U.S. subscriber additions came in at 81,000 for Q1 2012 compared to 184,000 in the same quarter last year.  This was primarily a result of lower gross subscriber additions rather than increase in subscriber disconnects.
This clearly indicates that while DirecTV has maintained its service quality, the market is getting increasingly competitive and saturated, thus making it harder for the pay-TV companies to add subscribers. Cable companies are attempting to improve their service, Comcast being a prime example, which is affecting DirecTV’s growth.
The issue of saturation is not new and DirecTV used to enjoy significant subscriber gains as a result of defections from cable companies. The defections are reducing now – what can DirecTV do?
The right thing to do will be focusing on how the company can retain current subscribers and how it can market additional services to existing subscriber base. DirecTV has mentioned that it is focusing on retaining high quality subscribers to compensate for reduced gross additions by reducing subscriber disconnects. As a result, the retention costs increased this quarter. Given this effort and rising programming costs, we believe that margins can go down slightly in the future.
Nevertheless DirecTV is an attractive investment given its already affluent subscriber base and high growth in Latin America.
Our current price estimate for DirecTV stands at $53.26, implying a premium of more than 10% to the market price. We are in process of reviewing our price estimate in light of recent earnings.Notes:
- DirecTV’s SEC filings [↩]