DirecTV (NASDAQ:DTV) reported solid subscriber growth in the U.S. during Q3 2013. The subscriber gains were far better than anticipated, partly due to the impact of the feud between Time Warner Cable (NYSE:TWC) and CBS (NYSE:CBS) .  The company added fewer subscribers in Latin America primarily due to restrictions on its ability to import equipment in Venezuela.  Also, the decrease in value, relative to the U.S. dollar, of Latin American currencies year to year continued to weigh on DirecTV’s reported operations in the region. Overall, revenues for the quarter grew by 6% to $7.88 billion and operating profit increased 7% to $1.22 billion (for an operating margin of 15.5%), excluding the ECAD gain. 
While we believe that in the longer run DirecTV will continue to benefit from the rising pay-TV demand in Latin America, we are closely watching domestic subscriber trends in the near term . We currently have a $60 price estimate for DirecTV, which we will soon update based on the third quarter filings. It currently trades just above this level.
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Latin America Performance Weaker For the Second Straight Quarter
DirecTV’s Latin America business added 260,000 subscribers in the third quarter, well below the prior year level of 543,000. The fewer additions can be attributed, at least in part, to a jump in the average churn rate to 2.27% from 1.91% a year earlier. While the revenues for the region grew 6% to $1.69 billion, ARPU (average revenue per user) declined 12% to $49.42.  The decrease in ARPU was primarily due to the unfavorable exchange rates in Latin America. Excluding foreign exchange, ARPU increased about 4%. 
Performance in Latin America was weaker than expected for the second straight quarter. One of the key issues was the importation of subscriber equipment into Venezuela. The company is awaiting approval of the third tranche of planned imports, which has been delayed. As a result, for almost the full third quarter, the company had very little equipment on hand to sell to customers. Company performance in Brazil, in turn, was impaired by efforts to tighten credit filters and stem delinquencies, but sales declined as a result.  Altogether, these issues, combined with the aforementioned currency effects, continue to weigh on the company’s performance over the near term. However, we continue to believe that DirecTV will grow more strongly in Latin America over the longer term, primarily due to the fact that pay-TV is largely under-penetrated in the region.
DirecTV Gains Subscribers In The Domestic Market
After losing 84,000 subscribers in the second quarter, DirecTV provided a positive surprised with sudden addition of 139,000 subscribers in the U.S. The gain in subscribers was due in part to lower churn rate of 1.61% compared to 1.74% the previous year. The conflict between Time Warner and CBS (see above) generated additional demand as well. The domestic revenues grew by 7% to $6.17 billion due to higher ARPU, which increased by 6% to $102.37. The higher ARPU resulted primarily from: 1) higher advanced receiver service fees; 2) price increases on programming packages; 3) higher fees for a new enhanced warranty program; and 4) higher pay-per-view revenues. 
The pay-TV industry is witnessing fierce competition between cable companies, satellite operators and telcos (most notably Verizon). Moreover, the surge in demand for alternative video services such as Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) are adding to the pressures that face pay-TV operators. Cable companies in particular have been losing video subscribers for quite some time now and a similar trend was visible in the third quarter when TWC lost 306,000 and Comcast (NASDAQ:CMCSA) lost 129,000 subscribers. It will be interesting to see the subscriber trends for the satellite company Dish Network (NASDAQ:DISH), which will report its third-quarter earnings on November 12. Worldwide, the satellite market is expected to grow rapidly with increased penetration in emerging economies, supplanting Cable as the dominant medium to claim as much as 40% of the 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 ARPU. All in all, prospects seem brightNotes:
- DIRECTV Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, Nov 5, 2013 [↩] [↩]
- DirecTV’s SEC Filings [↩] [↩] [↩] [↩] [↩]
- BRIC countries keep pay-TV market growing despite cable subscriber losses, Infonetics Research, Jul 3, 2013 [↩]