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DirecTV Shows Controlled Growth In The U.S. & Aggressive Expansion In Latin America
2/15/2013 3:53:00 PM
Some of the key takeaways from DirecTV's ( DTV ) Q4 2012 earnings include a focus on improving financials and controlling costs in the U.S., continued aggressive expansion in Latin America and plans to increase investments in upgrading programs. In the U.S., DirecTV is still gaining subscribers, but the growth is slowing down as the market gets saturated and competition intensifies. As a result, the company is looking at ways to improve its ARPU (average revenue per user) and maintain its margins against rising programming costs. In Latin America, the aggressive expansion continued and the company ended the year with 10.3 million subscribers (excluding Sky Mexico). We expect this growth to continue in 2013 as well as the market is still under-penetrated and there is opportunity to expand to more countries.
U.S. Business Will Focus On Balanced Growth In Financials
DirecTV added 103,000 net subscribers in the U.S. in the fourth quarter of 2012. This brings the company's total net adds for 2012 to close to 196,000, which we expect to be significantly higher than the expected net adds for its competitor Dish Network ( DISH ). Even though the net subscriber additions came down compared to the fourth quarter of 2011, DirecTV's performance is commendable in the context of the U.S. pay-TV industry. The U.S. pay-TV market is getting saturated and there is not much room left to grow, except for relying on the growth in total number of households or poaching subscribers from competitors. Comcast ( CMCSA ), which has been losing subscribers for the past few years, has improved significantly recently. The company lost just 7,000 net pay-TV subscribers in Q4 fiscal 2012 and the year 2013 may see a turnaround. In addition to this, Dish Network is also making efforts to improve its competitive position.
For 2013, DirecTV will focus on offsetting the expected increase in programming costs with price increase, promotion of HD/DVR services, pushing pay-per-view and DirecTV Cinema and improving customer experience to reduce churn. We note that DirecTV resorted to 4% price increases in 2011 and 2012, and starting from February 2013, the prices have gone up again by 4.5%. The company seems poised to continue its revenue growth while minimizing impact on margins.
Latin America - Subscriber Growth Will Continue
In Q4 2012, DirecTV's gross additions in Latin America stood at close to 1.18 million, while net subscriber additions amounted to 658,000. The revenues grew by 22% despite higher growth in subscribers due to negative exchange rate effects. The year 2012 has been a stellar one for DirecTV in terms of Latin American expansion and the key question that emerges is - will this expansion continue in 2013? The company expects so. The Latin American market is still under-penetrated and DirecTV is witnessing great success from its prepaid and middle market products. Almost 37% of DirecTV's Latin American subscribers are middle market customers and 54% of gross additions in Pan American region (excludes Brazil and Mexico) came from prepaid packages. The Latin American customers are more value conscious and therefore, these packages have been successful. The company expects its revenues from the region to grow by roughly 20% in 2013. Although ARPU may come down due to increasing penetration of middle market packages, which are priced lower.
We currently forecast DirecTV's Latin American subscriber base to reach close to 20 million by the end of our forecast period. This is based on our expectation that DirecTV will maintain its lead and continue to grow its base at a high rate. However, if churn becomes higher and other competitors start offering competitive pay-TV packages or landline bundles, this growth could taper down. In an event where DirecTV can reach only 15 million subscribers instead of 20 million by the end of our forecast period, there can be a downside of about 10% to our price estimate.
We are in the process of updating our pricing model in the light of recent earnings, and will have an update ready soon.
Our price estimate for DirecTV stands at $59 , implying a premium of more than 15% to the market price.