DirecTV Q4 Earnings Preview: Watch Out For ARPU Trends In Latin America And Subscriber Growth In The U.S.

DirecTV (NASDAQ:DTV) will report its Q4 2013 earnings on February 20. The satellite company has so far performed better among the pay-TV operators and lost fewer subscribers in 2013. The company in the previous quarter benefited from the Time Warner Cable’s (NYSE:TWC) dispute with CBS (NYSE:CBS) over distribution fees and added 139,000 subscribers during the quarter. ^[1].

The pay-TV industry is witnessing fierce competition between cable companies, satellite operators and telcos. Moreover, the surge in demand for alternative video services such as Netflix (NASDAQ:NFLX) is adding to the woes of pay-TV operators. While slowing growth in the domestic pay-TV industry remains a key concern, satellite companies may benefit from the cord-switching from cable operators.  We believe that DirecTV will see continued growth primarily on its strong brand, customer service and unique programming such as NFL Sunday Ticket. The company’s focus on retaining existing subscribers will aid growth in its domestic average monthly revenue per subscriber (ARPU).

In its recent dispute over fees with The Weather Channel, DirecTV has replaced the network with WeatherNation TV. Many such incidents come up every now and then, where TV content producers demand higher fees from the cable and satellite companies that carry their programming. The higher fees translate into ballooning bills for consumers and provide an incentive to switch services or even move to alternative video platforms such as Netflix. We look forward to learning more from management with earnings on the dispute with The Weather Channel.

The company’s Latin American (LatAm) operations on the other hand have been driving the growth for the company for quite some time now. However, there has been a slowdown in the recent past primarily due to the depreciation of LatAm currencies against the U.S. Dollar. As a result, the ARPU has dropped by double digits to $49 in the September ending quarter as compared to $56 in the prior year period. ^[1]

We currently have $64 price estimate for DirecTV, which we will soon update based on the fourth quarter earnings announcement.

See our complete analysis for DirecTV

Latin America Growth And Concerns In The Near Term

DirecTV has been able to gain market share in Latin America due to the success of its middle-market focused programming packages and the growing popularity of prepaid products. Most of the region lacks a developed wireline copper and coaxial-cable infrastructure, and this is helping the satellite operators to grow. Digital TV penetration in Latin America is expected to surge from less than a third of homes at the end of 2012 to nearly 45% by end of 2013, and reach 84% by 2018, according to a report from Digital TV Research. ^[2]

While there is an increased competition in the region, DirecTV has a competitive edge due to its high quality video and DirecTV Play – an online content portal with a collection of movies, TV shows, sports and channels on demand available to its subscribers. The fact is that pay-TV, although growing at a fast pace, is still largely under-penetrated in the region and offers strong growth potential for the company in the long term.

However, in the recent past things haven’t been great on LatAm front. Macroeconomic volatility in Brazil weighed on the company’s earnings in the previous two quarters. The situation still looks gloomy with Brazil’s currency recently falling to a 5-month low over widening of the trade deficit. ^[3] While we believe DirecTV will continue to add more subscribers in the LatAm markets, we are still wary of ARPU trends given the currency impact.

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1. DirecTV’s SEC Filings [↩] [↩]
2. Digital TV Latin America, Digital TV Research, April 2013 [↩]
3. Brazilian Real Drops to Five-Month Low as Trade Deficit Widens, Bloomberg Businessweek, Feb 3, 2014 [↩]