DirecTV (NASDAQ:DTV) will report its Q2 2013 earnings on August 1. While the slowing growth in its domestic operations remains a key concern, the Latin American business continues to expand and drive growth for the company. The subscriber trends and ARPU will be in focus for the company’s domestic operations. While the subscriber growth will be the primary driver for Latin America operations, the recent macroeconomic volatility especially in Brazil may temper the company’s Q2 earnings.
Focus On Retaining Domestic Subscribers
Even though the U.S. pay-TV market is saturated, the company still continues to add customers to its base while other multi-service operators (MSOs) such as Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) have been losing subscribers.
The company added 21,000 new customers and witnessed a revenue growth of 5% driven by higher ARPU in Q1 2013. The company has the highest ARPU in the industry.  According to a research by Infonetics, cable makes up the largest portion of the pay-TV market, but this will change by 2017 when satellite grows to more than 40% of total pay-TV revenue.  We believe DirecTV will continue to lead the U.S. satellite pay-TV market as the company’s strategy is now focused on retaining the existing customers rather than acquiring new ones. This will not only reduce the subscriber churn, but also aid the ARPU growth.
Growth In Latin America Operations
According to our estimates, Latin America business contributes 25% to DirecTV’s value. The success of its middle-market focused programming packages, and the growing popularity of prepaid products is helping it win market share in Latin America. Earlier in Q1 2013, the company witnessed a 16% growth in its revenues led by subscriber additions from the region. However, ARPU declined by 11% primarily due to currency devaluation in Venezuela, and an unfavorable foreign exchange comparisons in Brazil and Argentina.  Later, the company reported that the Brazil subscriber numbers were overstated and it will take $25 million charge in the second quarter to recognize the increased churn.  The company has removed all subscribers who were improperly recognized as active from Sky Brasil’s subscriber base.
The macroeconomic situation in Brazil has not been challenging recently. 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. 
While the Latin America operations will take a hit from increased customer churn in Brazil due to the increased competition and adverse economic conditions, pay-TV remains largely under-penetrated in the region and DirecTV is poised to benefit from it as the overall demand continues to grow in the Latin American countries. 
Our price estimate for DirecTV stands at $59, implying a discount of over 5% to the market price.Notes:
- DirecTV’s SEC Filings [↩] [↩]
- Pay-TV revenue up 10%, users up 7%, driven by India, China, Brazil, Russia: Infonetics, Telecom Lead, Jul 29, 2013 [↩]
- DirecTV says Latin America unit over-reported subscriber numbers, Reuters, Jun 27, 2013 [↩]
- Bubbling anger about high prices, corruption and poor public services boils over into the biggest demonstrations in two decades, The Economist, Jun 22, 2013 [↩]
- Frustration Mounts as Brazil’s Real Tumbles, The Wall Street Journal, Jun 1, 2013 [↩]
- Non-linear pay-TV services will be the next challenge in Brazil, RCR Wireless, Apr 17, 2013 [↩]