Strong subscriber growth in Latin America and moderate growth in the U.S. primarily driven by the ARPU (average revenue per user) increase were the highlights of DirecTV’s (NASDAQ:DTV) recently released Q3 2012 earnings. As we previously expected, the company reported low subscriber additions in the U.S. compared to Q3 of last year driven by the pay-TV market saturation and a higher churn due to its dispute with Viacom (NASDAQ:VIA) (see DirecTV’s Latin America Unit Will Spice Up Results As US Business Slows). Growth in Latin America remained healthy as the company continues to see success of its middle market products in Brazil and other countries. However, the risk related to currency fluctuation remains, which reduced a notable portion of DirecTV’s revenue growth in Latin America in the third quarter.
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After Initial Scare From Dish, DirecTV Is Back On Track As Satellite-TV Growth Leader
DirecTV gained 67,000 net U.S. subscribers in the third quarter, marking a decline compared to the same period in 2011.  However, this was expected due to the saturation in the U.S. pay-TV market and a higher churn resulting from programming disputes. The silver lining is that DirecTV’s subscriber performance was substantially better than that of its arch rival Dish Network (NASDAQ:DISH), which lost 19,000 net subscribers during the third quarter.  Back in Q4 2011 and Q1 2012, Dish significantly turned around its subscriber losses and even surpassed DirecTV in terms of net additions in Q1 2012. Had Dish continued on the same track, it would have made things difficult for DirecTV and resulted in a significant slowdown in revenue growth. However, that’s not the case and DirecTV is inching up slowly and steadily.
Growth in ARPU helped the company post 6% revenue growth in the third quarter, which isn’t bad given the competitive environment in the U.S. ARPU growth was a result of a higher number of people signing up for NFL Sunday Ticket, increased penetration of HD/DVR services, and growth in premium channel viewership and pay-per-view services.  About 90% of DirecTV’s new subscribers in Q3 purchased these advanced services. This implies stronger credit quality and relatively stickier base.
DirecTV has been able to achieve this growth with fewer promotional offers and controlled capital expenditures. Such expense control will help the company offset the impact of rising programming costs.
Latin America Is Growing But Some Margin Pressure Is Building
DirecTV added close to 1.08 million gross subscribers and 543,000 net subscribers in Latin America (excluding Sky Mexico) in Q3 2012. While gross subscriber additions were up 13%, net subscriber additions were slightly down due to a higher monthly churn.  The higher churn resulted from increased penetration of middle market products, especially in Brazil.
We have previously voiced that middle market customers in Latin America are value conscious and are likely to be less sticky than those opting for higher priced packages. This is a risk that DirecTV has to face and, in order to mitigate that, the company will look to bundle other services such as broadband and phone. DirecTV has been contemplating acquisitions and expanding its satellite broadband service, which will help strengthen its competitive position. The company has already started its broadband service, but it might be better if it had a cable partner to provide viable bundles to its customers.
In addition, the company saw its costs increase in Latin America due to inflationary and regulatory pressures on labor costs. We believe these pressures cannot be avoided and the company will need to come up with other initiatives to offset these costs and maintain margins. Such initiatives include potential price hikes, increasing operational efficiency of advanced products and controlling programming costs.
Our price estimate for DirecTV stands at $57, implying a premium of more than 10% to the market price.Notes: