DirecTV’s Latin America Operations See Continued Subscriber Growth But Declining Currencies Stall ARPU Growth

DirecTV (NASDAQ:DTV) is one of the largest pay-TV operators in Latin America with more than 12 million subscribers and it has been growing at an average rate of 25% annually over the past few years. The pay-TV business in Latin America, accounts for 20% of DirecTV’s stock price, according to our estimates. While the pay-TV industry is saturated in the U.S., Latin America has been the driving force for DirecTV. While the company has been consistently growing its subscriber base in the region, depreciating regional currencies has stalled ARPU growth over the past few quarters. In this article, we talk about the company’s subscriber growth and the ARPU trends in the region and our estimates for these drivers.

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DirecTV Has Seen Rapid Subscriber Growth In The Region

DirecTV has seen phenomenal subscriber growth in the region over the past few years. The subscriber base has surged from 3 million in 2007 to close to 12.5 million by the end of second quarter of 2014. ^[1] The company has gained popularity and market share in the region driven by its prepaid and middle market focused packages. Moreover, the region lacks a developed wireline copper and cable infrastructure and this has aided the penetration of satellite operators. The pay-TV still remains under-penetrated in the region. The growth in Latin America digital TV is expected to reach 84% of households over the next six years, translating into 157 million digital television households by end of the decade. ^[2] Brazil’s pay-TV market alone is expected to grow by more than 13% over the next four years as compared to a global average of 3.8%. ^[3] Satellite operators such as DirecTV will benefit from this growth given the limited cable infrastructure in the region. We estimate the subscriber base to be north of 20 million by end of the decade. It must be noted that there is a potential 10% upside to our price estimate of $95 if the company manages to add subscribers at a higher pace and take the subscriber base north of 25 million by end of the decade. On the other hand, there is a risk of 5% downside to our price estimate, if the growth rate remains subdued and the subscriber base is around 15 million by 2020.

Weaker Currencies Stall ARPU Growth

While the subscriber growth remains intact, DirecTV has been facing some headwinds over the past few quarters due to the currency devaluation and macroeconomic conditions in the Latin American countries. Venezuelan Bolivar has dropped significantly over the past few years. The official exchange rate was 2 Bolivar to 1 USD between 2005 and 2009, which dropped to 6.3 Bolivar for 1 USD in 2013. A couple of weeks back, there were reports of black market trading in the currency at the rates as high as 89 Bolivars for 1 USD as opposed to official rate of 6.3. ^[4] DirecTV recorded $166 million devaluation charge for Venezuelan currency in the first quarter of 2013 and $281 million charge in the first quarter of 2014. ^[1] Brazilian Real also declined to its four year low in 2013. The currency depreciated to 2.3060 per USD on August 9, 2013, the weakest closing level since March 2009. ^[5] Declining currencies in the region weighed over the company’s ARPU in terms of U.S. Dollars. However, ARPU continued to grow in the local currencies in the region.

ARPU moved from $47.80 in 2007 to an estimated $62.10 in 2011. It has been declining since then and stood at $52.10 in 2013. Given the currency trends in the region, we expect the ARPU to continue to decline in the near term and stabilize in the medium to long run. We estimate ARPU to be around $53 by the end of our forecast period. However, there could be a potential upside of more than 10% to our price estimate, if the currencies appreciate at a faster pace taking ARPU north of $70 by the end of our forecast period. On the other hand, there is a downside risk of over 5%, if ARPU continues to decline and be in the mid 40s by end of the decade.

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1. DirecTV’s SEC Filings [↩] [↩]
2. Digital TV Latin America 2014, Digital TV Research [↩]
3. Brazil Pay TV and Internet Are Booming, Per Report, Variety, Sep 6, 2014 [↩]
4. Venezuelan Bolivar Plunges to Record Low on Black Market; Bond Default Coming Up in October?, HoweStreet, Aug 28, 2014 [↩]
5. Brazilian Real Declines to Lowest Level in Four Years, Bloomberg, Aug 9, 2014 [↩]