DirecTV Loses 28,000 Pay-TV Subscribers In The U.S. But Benefits From Higher ARPU

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DirecTV (NASDAQ:DTV) recently reported its Q3 2014 earnings, which grew 4% to $1.33 (after adjustments) during the third quarter. [1] The satellite operator saw a steady revenue growth, both in the U.S. and Latin America (LatAm). However, the company lost 28,000 video customers in the U.S. and 119,000 subscribers in LatAm. Despite the subscriber losses, DirecTV managed to post revenue growth due to higher ARPU in the U.S. While ARPU was also up for LatAm market in the local currency, unfavorable foreign currency exchange resulted in lower ARPU in U.S. Dollars.

We estimate revenues of $33.38 billion for DirecTV in 2014, with EPS of $5.81, which is in line with the market consensus of $5.73-$6.10, compiled by Thomson Reuters. We have revised our price target for DirecTV from $95 to $99, reflecting the impact of recent quarterly earnings.

See our complete analysis for DirecTV

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U.S. Satellite Operations Benefit From Higher ARPU

We estimate that the U.S. satellite TV operations account for around 65% of DirecTV’s stock value. The company saw a 5% revenue growth in the U.S. while operating profit was up 13% to $1.11 billion. This can be attributed to a 5% growth in DirecTV’s reported ARPU to $107.27. [1] We believe that APRU will grow steadily in the coming years driven by periodic price increases. Programming costs rise each year due to periodic increase in the carriage fee for various channels, which is a critical part of the multi-year agreements between media companies and pay-TV service providers. To protect margins, pay-TV companies typically increase prices periodically and pass on the burden of increased programming costs to subscribers. We expect this trend to continue in the coming years.

The subscriber churn rate was at 1.73% during the third quarter, as compared to 1.61% witnessed in the prior year period. The reason for subscriber decline was a combination of tightening credit scores, promotional offers amid fierce competition and the option of bundling broadband with cable operators. [2] However, we continue to believe that DirecTV will add more subscribers in the coming years driven by its unique NFL Sunday Ticket programming and better customer service among pay-TV providers. [3] Recently, the company extended its deal with NFL for another 8 years and this will help it reduce the churn rate. We currently estimate 2014 U.S. satellite revenues to be around $20.75 billion and an estimated gross profit margin of 46% will translate into gross profit of around $9.5 billion for the year.

 

Unfavorable Foreign Currency Exchange Drags ARPU Lower In Latin America Market

The Latin America operations contribute close to 20% to DirecTV’s value, according to our estimates. The segment revenues for the third quarter grew 10% to $1.82 billion while the operating profits plunged 48% to $137 million. The subscriber churn rate increased 2.99% as compared to 2.27% seen in the prior year period. As a result, the company lost 119,000 subscribers. [1] The company saw strong subscriber addition in the previous quarter due to the FIFA World Cup and this resulted in larger decline in reconnects in the third quarter post the football event. If we exclude the foreign exchange impact, the revenues grew by 28% in the quarter led by a 15% growth in ARPU. [2] However, ARPU dropped a little over 1% to $48.88 in U.S. Dollar terms, as growth in local currency was offset by continued foreign exchange headwinds.

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 the region. The company’s popular prepaid packages and advanced HD/DVR services will help it gain market share. It must be noted that despite rapid growth in the pay-TV market, the region largely remains under-penetrated and offers enough room for growth. Accordingly, we estimate that DirecTV’s Latin America revenues will double to $14 billion by the end of our forecast period.

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Notes:
  1. DirecTV’s SEC Filings [] [] []
  2. DIRECTV’s (DTV) CEO Bruce Churchill on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Nov 6. 2014 [] []
  3. AT&T, DirecTV Customer-Satisfaction Ratings Fall But Comcast and TW Cable Fare Far Worse, Variety, May 19, 2014 []