DirecTV (NASDAQ:DTV) recently reported its Q1 2014 earnings per share, which grew 14% to $1.63. The company continued to add pay-TV subscribers in Latin America (LatAm) as well as in the U.S. In LatAm, the company added 361,000 video subscribers while it added 12,000 in the U.S.  Pay-TV continues to gain acceptance in the LatAm region as an increasingly must-have consumer staple with the growth in middle-class segment. It turned out to be a good quarter for the pay-TV operators in the U.S. Comcast (NASDAQ:CMCSA) and DirecTV added video subscribers while Time Warner Cable (NYSE:TWC) lost fewer subscribers as compared to the recent past quarters (See – Comcast Adds Pay-TV Subscribers For The Second Consecutive Quarter; Q1 Results Impressive With Strong Growth Across The Segments).
Overall, DirecTV posted good set of numbers for the first quarter with 6% growth in revenues. However, the adjusted operating profits (before depreciation and amortization) declined 1% to $540 million due to a slight decline in margins. Given the currency devaluation in Venezuela, the company took a one-time charge of $281 million on its P&L.  We continue to believe that the macroeconomic situation in the LatAm countries will weigh over the company’s performance in the near term. However, the U.S. operations will remain stable in the near term. Looking at the second quarter, the company stated that second quarter is always a seasonally low quarter for the industry, and this quarter will be no exception. However, the gross subscriber additions in Q2 are off to a good start, according to DirecTV’s management. 
We currently have $79 price estimate for DirecTV which we will soon update based on the recent quarterly earnings.
How Did The U.S. Operations Pan Out?
DirecTV’s U.S. operations contribute close to 60% to its value, according to our estimates. The U.S. operations continued their steady growth in the first quarter. The revenues and operating profits grew by 5% to $6.09 billion and 11.48% to $1.24 billion respectively. The churn rate was unchanged at 1.45% while the ARPU (average monthly rate per user) increased by 4.28% to $100.16, reflecting higher advanced receiver service fees and price increases on programming packages. 
While the satellite industry posted solid growth over the past few years, the growing availability of online content as an alternative video platform, along with an expanding market for connected devices, poses a competitive challenge to the entire pay-TV industry in the U.S. It is noteworthy that DirecTV has been able to add subscribers in such an environment. This can be attributed to the company’s exclusive programming of NFL Sunday Ticket, its superior customer service, and the ongoing migration of subscribers from cable to satellite. We believe DirecTV’s U.S. operations will remain stable in the near term. However, a lot will depend on the renewal of its exclusive programming of NFL Sunday Ticket, which will expire by the end of 2014 season.
How Did Latin America Operations Pan Out?
The LatAm operations contribute around 25% to DirecTV’s value, according to our estimates. The segment revenues for the first quarter remained at $1.72 billion while the adjusted operating profits declined by 10% to $255 million.  The pay-TV revenues are driven by two factors, i.e., the number of subscribers and ARPU. While the company managed to add more subscribers during the quarter, currency fluctuation weighed over the ARPU growth. DirecTV saw growth in local currency ARPU but that was offset by foreign exchange headwinds. This led to a 10% decline in ARPU in terms of U.S. Dollars. While we believe that macroeconomic volatility will continue to weigh over the company’s performance in the near term, in the long run, DirecTV will benefit from the rising pay-TV demand in LatAm region, due to its middle-market focused programming packages and the popularity of its prepaid products. Moreover, despite rapid growth in the pay-TV market, the industry largely remains under-penetrated and offers enough room for growth.