DirecTV (NASDAQ:DTV) has been benefiting from its presence in Latin America. The company has more than 11.57 million subscribers in the region and they have been growing at an average annual rate of 24%. The challenging macroeconomic situation and currency devaluation in 2013 weighed over DirecTV’s recent performance in the region. However, given that pay-TV is largely under-penetrated and the region lacks a developed wireline copper and coaxial-cable infrastructure, satellite TV has enough room to grow. We believe that DirecTV with its middle market focused programming packages will continue to see strong growth in the coming years and continue to add subscribers.
Latin America Satellite TV Outlook
The Latin American market is dominated by Brazil, Mexico and Argentina. Brazil’s pay-TV subscriber base ended December 2013 at 18.02 million, an increase of more than 1.8 million subscribers (11%) over the preceding twelve months.  Satellite accounted for 72% of net additions, reflecting strong growth and demand for satellite TV in the region. According to a 2013 report by Digital TV Research, satellite will continue to be the largest pay-TV platform in the region with revenues reaching $20.1 billion in 2018 and digital TV will reach 84% of households in the next five years.  DirecTV said that pay-TV continues to gain acceptance in Latin America as an increasingly must-have consumer staple with growth in the middle-class segment.  The company’s pay-TV revenues from the region have grown at an average annual rate of more than 25% in the past six years, amounting to $7 billion in 2013. We estimate the total subscribers will reach 20 million by the end of our forecast period and fee per subscriber will grow at an average annual rate of 3% over the same time frame. This will translate into revenues of over $15 billion.
What Is DirecTV’s Edge?
DirecTV offers satellite-based digital TV services to Latin American households. According to our estimates, Latin America business contributes more than 24% to the company’s value. DirecTV has been able to grow its subscriber base in the region by offering higher quality video and its middle-market focused programming packages. Moreover, the growing popularity of prepaid products is helping it win market share. DirecTV has done well in terms of understanding the needs of the market and is targeting the right mix of households.
While we believe that these factors will continue to drive the company’s growth in the region, rising competition in the market can moderate the growth rate. The company faced the heat of currency devaluation in 2013 and average monthly rate per subscriber (ARPU) for Latin America declined by 8% to $51.47. However, ARPU actually increased by 8% in local currency and the decline in dollar terms was the impact of unfavorable currency exchange.  We will be closely watching the macroeconomic situation in the region. In the near term, the outlook looks negative, especially for Brazil. In December 2013, economic activity and industrial production both hit a five-year low. In January 2014, consumer confidence dropped to the lowest level since June 2009. On the external front, the current account gap widened in December 2013 and Brazil’s GDP growth forecast for 2014 is currently at 2.1%.  However, while there may be some headwinds in the near term, the long-term outlook looks strong for the satellite company.Notes:
- Brazil adds 1.8 million pay TV subscribers in 2013, Digital TV News, Feb 7, 2014 [↩]
- Digital TV Latin America 2013, Digital TV Research, Apr, 2013 [↩]
- DIRECTV Management Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, Feb 20, 2014 [↩]
- DirecTV’s SEC Filings [↩]
- Latin America – Economic Outlook, Focus Economics, Feb 18, 2014 [↩]