DirecTV’s Q3 Earnings Likely Driven By Latin America Subscriber Growth And Lower U.S. Subscriber Churn

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DirecTV (NASDAQ:DTV) will report its Q3 2014 earnings on November 6th. The satellite company has so far performed better than the other pay-TV operators, reporting solid subscriber growth over the past few years. Looking at the first six months of 2014, the company lost only 22,000 video subscribers in the U.S. [1] This is remarkable as the pay-TV industry is facing the headwinds from an increased competition in a saturated market and cable companies, including Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC), are the worst hit. Time Warner Cable alone has lost more than 500,000 pay-TV subscribers since the third quarter of 2013. [2] However, DirecTV has managed to retain its subscribers, driven by better customer services and its exclusive NFL Sunday Ticket programming. We expect this trend to continue in the near term, driven by the company’s focus on retaining existing subscribers. They are changing credit policies and sales filters, which should help lower the churn rate. Accordingly, we estimate fewer subscriber losses in the third quarter.

DirecTV’s Latin American (LatAm) operations have been  the key growth driver for the company over the past few years. However, currency devaluation weighed over the company’s performance in the recent past. Currency depreciation led to a 4.40% drop in ARPU (average revenue per user) in the previous quarter. However, the ARPU has been growing in local currencies. We expect to learn that the company continued to add more subscribers in the third quarter, leveraging the appeal of its prepaid packages. We’ll look for confirmation with the earnings release.

See our complete analysis for DirecTV

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Expect Lower Subscriber Churn In The U.S.

We estimate that the U.S. satellite TV operations contribute close to 65% to DirecTV’s stock value. The company has seen continued subscriber growth over the past few years growing from around 17.5 million subscribers in 2008 to over 20 million subscribers in 2013. In 2013 alone, the pay-TV industry lost 105,000 customers while DirecTV managed to gain 169,000 subscribers. [1] This can be attributed to the company’s competitive advantage, which stems from exclusive programming of the NFL Sunday Ticket, and it has also helped the satellite company attract more customers and command higher monthly subscription fees.

Recently, the company extended its deal with NFL for another 8 years. However, this time around, the price is increased by 50% to around $1.5 billion a year. This is very expensive and far more than $1 billion what CBS, NBC and Fox pay for their respective NFL coverage (Read More – DirecTV Extends Its Deal With NFL For $12 Billion). One of the important aspects of DirecTV’s relationship with NFL was the merger with AT&T (NYSE:T). Earlier this year, when AT&T agreed to buy DirecTV in a $48 billion deal, a regulatory filing revealed that if DirecTV didn’t renew the deal with NFL, the mobile carrier could walk away from the deal with no penalty. This could be one of the reasons why DirecTV agreed to pay a 50% premium to the previous contract rates. Now that the deal is renewed, we believe DirecTV will not only continue to retain its existing subscribers, it should be able to gain more customers in the near term. We currently estimate 2014 U.S. satellite revenues to be north of $20 billion and an estimated EBITDA margin of 46% will translate into EBITDA of close to $9.5 billion for the year.

Continued Subscriber Growth In Latin America

We estimate that Latin America operations contribute close to 20% to DirecTV’s stock value. Looking at the previous quarter, LatAm revenues grew 6% to $1.79 billion and operating profits increased by 2% to $142 million. If we exclude the foreign exchange impact, the revenues grew by 27% driven by higher subscriber addition of 543,000 during the quarter. [1] The company has been able to establish a strong foothold in the LatAm market primarily due to its middle-market focused programming packages. We believe DirecTV will continue to add more subscribers in the LatAm market in the near term primarily due to the popularity of its prepaid products. Accordingly, we estimate subscriber base to grow to close to 13 million in 2014, reflecting subscriber growth of over 10% as compared to 2013.

We estimate revenues of around $33 billion for DirecTV in 2014, with EPS of $5.75, which is in line with the market consensus of $5.73-$6.17, compiled by Thomson Reuters. We currently have a $95 price estimate for DirecTV, which is more than 5% ahead of the current market price.

 

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Notes:
  1. DirecTV’s SEC Filings [] [] []
  2. Time Warner Cable’s SEC Filings []