DirecTV (NASDAQ:DTV) will report its Q3 2013 earnings on November 5. The satellite company has so far performed better and lost fewer subscribers as compared to its major peers Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC) and Dish Network (NASDAQ:DISH). The slowing growth in the domestic pay-TV industry remains a key concern. The increased competition from telcos such as AT&T (NYSE:T) and Verizon (NYSE:VZ) and the rise of alternate video platforms such as Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) are adding to the woes of traditional pay-TV operators.
While it will be interesting to see how domestic pay-TV subscribers trend for the company, it is the Latin American business that will be the key growth driver. Macroeconomic volatility in Brazil weighed on the company’s earnings last quarter. However, things have now improved in the region. Since August 22, Brazil’s currency, the Real, has risen sharply in a rally sparked by Brazil’s $60 billion intervention plan, which is helping slow an inflation surge that policy makers have been trying to curb.  We expect DirecTV to report gains from the Latin American market primarily driven by subscriber growth.
Concerns Weigh Over Domestic Operations
The U.S. pay-TV business contributes more than 50% to DirecTV’s value, according to our estimates. The pay-TV industry has been losing video subscribers for quite some time now. According to a report by Moffett, video subscriptions in the U.S. dropped by about 316,000 compared with growth of 330,000 the year before.  On the other hand, alternative video platforms such as Netflix have seen strong subscriber growth. Netflix gained 1.3 million subscribers in the U.S. in the third quarter alone (Read More - Netflix Demonstrates Strong Performance; Stock Remains Richly Valued). However, there is room for satellite growth in the U.S. and according to research by Infonetics, satellite will account for 40% of total pay-TV revenue by 2017.  We believe DirecTV will lead that growth primarily on its strong brand, customer service and unique programming such as NFL Sunday Ticket. The company’s focus on retaining existing subscribers will aid growth in its average revenue per subscriber.
Latin America Operations Will Drive DirecTV’s Growth
DirecTV has been able to gain market share in Latin America due to the success of its middle-market focused programming packages and the growing popularity of prepaid products. Most of the region lacks a developed wireline copper and coaxial-cable infrastructure, and this is helping the satellite operators to grow. While there is increased competition in the region, DirecTV has a competitive edge due to its high quality video and DirecTV Play – an online content portal with a collection of movies, series, sports and channels on demand available to its subscribers. The company recently introduced DirecTV Play in Latin America. We believe these factors will continue to drive near-term growth for DirecTV. The fact that pay-TV, although growing at a fast pace, is still largely underpenetrated in the region offers strong growth potential for the company in the long term.Notes:
- Real Rises as Fed Outlook Bolsters Brazil Currency Intervention, Bloomberg, Oct 10, 2013 [↩]
- Cord-Cutting No Longer an ‘Urban Myth’: Pay TV Operators Drop 316,000 Subs in Past Year, Variety, Aug 6, 2013 [↩]
- Pay-TV revenue up 10%, users up 7%, driven by India, China, Brazil, Russia: Infonetics, Telecom Lead, Jul 29, 2013 [↩]