Earnings Preview: DirecTV Likely To Add More Pay-TV Subscribers In The U.S. And Latin America

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DirecTV (NASDAQ:DTV) will report its Q2 2014 earnings on July 31. The satellite company has so far performed better than the other pay-TV operators, reporting solid subscriber growth over the past few years. The company added 12,000 subscribers during the first quarter of 2014 in the U.S. We expect this trend to continue in the near term, driven by the company’s focus on retaining existing subscribers by changing credit policies and sales filters, which should help lower the churn rate.

DirecTV’s Latin American (LatAm) operations have played an important role in driving growth for quite some time now. However, currency devaluation weighed over the company’s performance in the recent past. Currency depreciation led to a 10% drop in ARPU (average revenue per user) in the previous quarter. [1] While we believe that ARPU will grow in local currency, the exchange rate fluctuations will weigh over ARPU in dollar terms.

Last month, DirecTV and AT&T testified about the merger plans to Congress. We’ll be closely watching for any updates from the management on this front.

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See our complete analysis for DirecTV

Continued Growth In U.S. Subscribers Likely

The U.S. satellite TV operations contribute over 65% to DirecTV’s value, according to our estimates. The first quarter of 2014 turned out to be one of the best quarters for the pay-TV industry, as subscriber losses stemmed and the overall market grew by 202,670 subscribers. [2]

DirecTV has managed to add subscribers over the past few years even when the industry at large saw declines. In 2013, while the overall industry lost 105,000 net video customers, DirecTV added 169,000 subscribers. [1] The company’s competitive advantage stems from exclusive programming of the NFL Sunday Ticket, which has also helped it attract more customers and command higher monthly subscription fees. Moreover, it has formed distribution partnerships with telcos to provide bundled offerings to stay competitive. We believe these factors will continue to drive growth for DirecTV in the near term. We estimate 2014 U.S. satellite revenues to be north of $21 billion.

Watchout For ARPU Trends In Latin America

We estimate that Latin America operations contribute over 18% to DirecTV’s value. The company witnessed a 10% decline in operating profits due to the impact of currency fluctuation. However, it continued to gain subscribers and added 361,000 video customers in the previous quarter. [1] DirecTV’s middle-market focused programming packages and the growing popularity of prepaid products have boosted its market share in the region. While we believe DirecTV will continue to add more subscribers in the Latin American market, the currency impact from the macroeconomic volatility in the region will weigh over its earnings in the near term. We estimate 2014 Latin America pay-TV revenues to be north of $7.5 billion, primarily due to the continued growth in subscribers.

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Notes:
  1. DirecTV’s SEC Filings [] [] []
  2. US Pay TV Subscriptions Rise in Q1 as Cable Achieves Best Quarter in Years, IHS, May 15, 2014 []