DirecTV (NASDAQ:DTV) will report its Q1 2013 earnings on May 7, 2013. While the saturated pay-TV market in the U.S. remains a key challenge, its Latin America business is the dark horse for the company’s growth and contributes around 25% to DirecTV’s value.
The company faces fierce competition from other multi-service operators (MSOs) such as Comcast (NASDAQ:CMCSA) and telecom carriers such as Verizon (NYSE:VZ) that provide fiber based cable and broadband services. For the Q1 earnings, the focus will remain on the company’s pay-TV subscriber gains. While we expect the subscriber additions and average revenue per user (ARPU) to drive growth in the U.S., subscriber growth will be the primary driver for Latin America operations.
What Is DirecTV Betting On?
Opportunity In Latin America
The Latin America business has been doing well for the company, and its revenues jumped 23% in 2012 as compared to the previous year.  We expect a strong growth in Latin American market due to the under-penetration of the pay-TV market in the region.
Exclusivity Of NFL Sunday Ticket
NFL Sunday Ticket is an out-of-market sports package that broadcasts National Football League regular season games unavailable on local affiliates. The exclusivity of NFL Sunday Ticket will continue to attract more customers to DirecTV. Moreover, the company has been focusing on becoming a premium brand in the U.S. by targeting high-end customers. This strategic positioning will help the company boost its subscription fee. We expect ARPU for the company to grow in this quarter and reach $70 by end of the year.
What Is DirecTV Lacking?
DirecTV commands close to 20% of the pay-TV market share in the U.S. In the past couple of years traditional cable based pay-TV operators have been losing their market share to satellite based operators such as DirecTV and Dish Network (NASDAQ:DISH). However, companies like Comcast and Time Warner Cable (NYSE:TWC) have been aggressively attending to this issue and have come up with multiple strategies to retain their customers. Comcast has been successful in reducing its subscriber losses in the past few quarters. In the long run this can impact the growth in market share of DirecTV.
Given the saturation in the pay-TV market, there is not much room left for the company to penetrate in the U.S. and it lacks bundling options as provided by MSOs and other fiber-based operators. DirecTV’s rival Dish Network has been eyeing wireless market and offered $25.5 billion to acquire Sprint last month. However, DirecTV has made it clear that it has no intentions to enter into wireless space, and it will continue to invest in its traditional satellite based model. 
Need for online streaming
Another important feature that the company is lagging in is the online streaming service. Given the increased use of smartphones and tablets and a change in customer’s preference to grab entertainment at home as well as on-the-go, it is important for any pay-TV operator to offer smooth streaming services. DirecTV offers certain shows and videos on demand for multiple devices and certain live networks on its tablet and smartphone apps, but it still has a ways to go in improving these services.
Our price estimate for DirecTV stands at $58, roughly in line with the current market price.Notes:
- DirecTV’s SEC filings [↩]
- DirecTV Spurns Dish’s View That Wireless Is Satellite-TV Savior, Bloomberg, May 6, 2013 [↩]