DirecTV (NASDAQ:DTV) recently reported its Q2 2013 earnings. The company not only lost subscribers in the U.S., but it added fewer subscribers in Latin America. While overall revenues for the company grew by 6.5% during the quarter, the macroeconomic volatility in Brazil weighed on earnings. The success of its middle-market focused programming packages, and the growing popularity of prepaid products has helped the company win market share in Latin America. While we believe that in the longer run DirecTV will continue to benefit from the rising pay-TV demand in Latin America, it will be interesting to see how the domestic subscriber trend for rest of the year pans out given the better performance of cable companies.
Latin America Subscriber Trends
DirecTV’s Latin America business in Q2 2013 added 165,000 subscribers as compared to 645,000 a year earlier as the rate of cancellations jumped to 3.1% as compared to 1.8%. While the revenues for the region grew 12% to $1.69 billion, ARPU declined 11% to $51.13.  The decrease in ARPU was primarily due to the devaluation of the bolivar in February 2013, and unfavorable exchange rates in Argentina and Brazil. The performance in Latin America was muted in this quarter primarily due to the macroeconomic situation and increased competition in Brazil. (Read – Growth In Latin America Operations) DirecTV’s management stated that it expects the churn rate in the middle-market of Brazil to improve as the company unveils some new initiatives and the company’s long-term view on the region has not changed. DirecTV so far has witnessed great success from its prepaid and middle-market products in the region. Almost 40% of DirecTV’s Latin American subscribers are middle-market customers and 59% of gross additions in Pan American region (excludes Brazil and Mexico) came from prepaid packages.  The Latin America business is the key growth engine for the company, and we believe that DirecTV will continue to gain subscribers given that pay-TV is largely under-penetrated in the region and its demand is growing at a healthy rate. 
Challenging Domestic Operations
DirecTV lost 84,000 U.S. subscribers in Q2, up from the 52,000 it shed in the same period last year. The revenues grew by 5% to $5.9 billion due to higher ARPU, which increased by 5% to $98.70.  The higher ARPU resulted primarily from higher advanced receiver service fees and price increases on programming packages. The company has highest ARPU in the industry, thanks to its exclusive NFL Sunday Ticket. The contract with NFL expires in 2014, but the company is optimistic about getting a renewal. 
It appears that the better Q2 performance of multi-service operators and cable companies such as Comcast (NASDAQ:CMCSA) has come at the expense of satellite companies. (See – Comcast Posts Solid Results As Broadband And NBCU Lead The Growth) After losing thousands of subscribers to satellite providers and telcos in the recent years, cable companies are fighting back more effectively with the help of their ability to offer wired broadband, which satellite companies don’t offer, and additional pay-TV features are helping them reduce their subscriber churn. The pay-TV market is saturated in the U.S. and the company is now focusing on retaining the existing customers rather than acquiring new ones. This will not only reduce the subscriber churn, but also aid the ARPU growth.
We are currently in the process of updating our model for DirecTV in view of the recent earnings.Notes:
- DirecTV’s SEC Filings [↩] [↩]
- DIRECTV Management Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, Aug 1, 2013 [↩] [↩]
- Non-linear pay-TV services will be the next challenge in Brazil, RCR Wireless, Apr 17, 2013 [↩]