DirecTV (NASDAQ:DTV) reported its first quarter earnings on May 5th. The company continued to add pay-TV subscribers in Latin America (LatAm) as well as in the U.S. In LatAm, the company added 219,000 subscribers while it added 60,000 in the U.S.  Pay-TV continues to gain acceptance in the LatAm region as an increasingly must-have consumer staple with the growth in middle-class segment. However, a stronger dollar is hurting revenue growth in the region in the near term. Here are the key takeaways from the earnings report.
We currently have a price estimate of $95 for DirecTV, which implies a premium of around 7% to the market price.
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Aided By Subscriber Growth, U.S. Operations Deliver
The revenues from the U.S. segment jumped 6% to $6.46 billion.  The churn rate declined to 1.37% from 1.45% in the prior year period, while the ARPU (average monthly rate per user) jumped 5.5% to $105.60, reflecting higher advanced receiver service fees and price increases on programming packages. DirecTV reported solid subscriber growth in the U.S., adding 60,000 video subscribers during the quarter and taking its subscriber tally to 20.41 million. By comparison, the company had added 12,000 subscribers in the same period a year ago.
While the cable operators continue to lose video subscribers, satellite operators have been able to expand their customer base. DirecTV in particular has been on the uptrend for quite some time now, primarily due to its better customer service and the exclusivity of its NFL Sunday Ticket package. DirecTV’s service is generally very good and it received an American Customer Satisfaction Index (ACSI) score of 69, reflecting customers’ overall satisfaction with the service in 2014.  By comparison, the industry wide average was 65. DirecTV performed well on several parameters such as perceived quality, picture quality, HD picture quality, channel range, and website satisfaction. We believe that DirecTV will continue reaping the rewards of its excellent service and its subscriber base will continue growing in the near term.
Currency Headwinds Hurt Latin American Operations
The LatAm operations contribute around 14% to DirecTV’s value, according to our estimates. The revenues in the region declined by around 5% to $1.64 billion.  Excluding changes in foreign exchange rates, the revenues jumped by 19% primarily due to the addition of 219,000 new subscribers. The churn rate was also higher at 2.34% as compared to 2.13% in the prior year period and ARPU declined by 11% to $43.32. However, ARPU actually increased in local currency and the decline in dollar terms was the impact of unfavorable currency exchange rates. We continue to believe that in the longer run DirecTV will benefit from the rising pay-TV demand in LatAm, due to its middle-market focused programming packages and the growing popularity of prepaid products. Moreover, despite rapid growth in Pay-TV, the industry largely remains under-penetrated and offers significant room for growth.
Management Expects To Close AT&T-DirecTV Merger In Current Quarter
Even though DirecTV has posted solid subscriber growth over the past few years, the traditional pay-TV industry in the U.S. is in the midst of a decline and has lost thousands of subscribers over the past few years. The growing availability of online content on alternative video platforms such as Netflix (NASDAQ:NFLX), Hulu, Sling TV, HBO Go etc. also poses a competitive threat to traditional pay-TV. Cable operators such as Comcast (NASDAQ:CMCSA) and Charter Communications (NASDAQ:CHTR) continue to lose video subscribers but are compensating this decline by achieving growth in their respective high speed internet businesses. This makes DirecTV’s proposed merger with AT&T (NYSE:T) extremely crucial as the deal will lead to DirecTV finally entering the high speed internet services market. The merger is currently under regulatory review and the Federal Communications Commission (FCC) will be taking its final decision soon. DirecTV’s management is confident that the deal will be closed by June end.  The merged entity will crucially be able to bundle AT&T’s high speed internet services and DirecTV’s pay-TV services in the U.S. The practice of bundling has been very successful for service providers such as Comcast, Charter and Time Warner Cable (NYSE:TWC) and we believe it will be the same for the AT&T-DirecTV combo.
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