While the pay-TV industry is saturated in the U.S., Latin America market is booming and has been driving the growth for DirecTV (NASDAQ:DTV). The company has more than 10 million subscribers in the region and has been growing at an average rate of 25%. Earlier this week, the company launched its on-demand video services in Latin America, which will help attract more customers. However, the challenging macroeconomic situation in the region remains a concern in the near term.
Strong Growth In Latin America
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DirecTV offers satellite-based digital TV services to Latin American households. According to our estimates, Latin America business contributes more than 20% to the company’s value. The pay-TV revenues from the region have grown at an average rate of 30% in the past six years. According to a report by Digital TV Research, DTH will continue to be the largest pay TV platform in Latin America with revenues reaching US$20.1 billion in 2018, up from US$13.4 billion in 2012.  The growth in Latin America digital TV will reach 84% of households in the next five years. This will translate into 134 million digital television households by the end of 2018. Satellite TV is poised to grow in the region as most of the Latin American markets lacks a developed wireline copper and coaxial-cable infrastructure. The following chart indicates the penetration of different forms of pay-TV services in Latin America.
Outlook For DirecTV
DirecTV will benefit from the pay-TV growth in Latin America. It has been able to grow its subscriber base in the region by offering higher quality video that gives it a competitive edge. Also the success of its middle-market focused programming packages and the growing popularity of prepaid products has helping it win market share. The company has done well in terms of understanding the needs of the market. Moreover, the company recently launched DirecTV Play in Latin America, which is an online content portal with a collection of movies, series, sports and channels on demand, available to subscribers of DirecTV.
We believe that these factors will continue to drive the company’s growth in the region. Long term growth will be broadly driven by the fact that pay-TV is largely under-penetrated in the region. At the same time, the rising competition in this market can moderate the growth rate. The company has seen an annual average subscriber growth of 1.21 million in the region. We estimate average net addition of over 1 million subscribers in the next few years, implying 18 million subscribers by the end of the forecast period. However, there will be an upside of 10% to our price estimate if the subscriber base reaches 24 million.
Macroeconomic Concerns In Near Term
While the long term story remains intact, DirecTV has been facing some headwinds recently due to the currency devaluation and macroeconomic situation in Latin American countries. 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.  As a result, DirecTV’s Latin America business in Q2 2013 added only 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%. Moreover, the ARPU declined by 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. Last month, the Brazilian currency tumbled to four year low against the U.S. dollar. Notes: