Satellite TV provider DirecTV (NASDAQ:DTV) said its Sky Brasil unit had over-reported subscriber numbers for the last two quarters owing to improper practices by some employees.  DirecTV owns about 93% of Sky Brasil, which contributes close to 12% to the company’s revenues. In an internal investigation, the company found that some employees had improperly credited subscriber accounts to reduce or eliminate balances owed, artificially reducing attrition. 
Brazilian Numbers Fudged
While Sky Brasil is one of DirecTV’s fastest growing units, there has been an increased subscriber churn due to increased competition and adverse conditions of the economy.  Brazilians have taken to the streets to protest against corruption, a lack of services and the billions of dollars the country has spent building new stadiums for the soccer World Cup and Olympics.  The Brazilian currency has tumbled to four year low against the U.S. dollar. 
The number of Sky Brasil subscribers as of March 31, 2013 was overstated by about 200,000.  After its quarterly results last month, DirecTV shares jumped more than 10% due to better-than-expected growth in Latin America. DirecTV said it expected to take a pre-tax charge of about $25 million in the current quarter to recognize the increased churn.  Latin America is a growing market and contributes approximately 20% to the company’s value.
While the reduction in the number of subscribers will have a slightly negative impact, the company is going to remove all subscribers who were improperly recognized as active from Sky Brasil’s subscriber base. Apart from Brazil, Latin America, other division also includes operations in Argentina, Chile, Colombia, Ecuador, Puerto Rico, Venezuela and certain other countries in the region.
Going forward, we expect Latin American operations to continue to drive growth for the company. In the light of this recent development, we have updated our price estimate for DirecTV.
Our price estimate for DirecTV stands at $59, close to the current market price.Notes: