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Latin America Is Driving DirecTV's Growth

Posted
5/13/2013 9:32:00 AM
By: Trefis
Referenced Stocks:CMCSA;DISH;DTV;TWC

DirecTV ( DTV ) recently reported its Q1 2013 earnings. While the slowing growth in its domestic operations remains a key concern, the Latin American business continues to expand. Overall revenues for the company grew by 8% during the quarter, but the currency impacts from Venezuela's devaluation and Brazil's weaker real weighed on earnings. While DirecTV's rival Dish Network ( DISH ) has been aggressively eyeing the wireless market in order to remain competitive, DirecTV is betting on its traditional satellite based model. The success of its middle-market focused programming packages, and the growing popularity of prepaid products is helping it win market share in Latin America.

See our complete analysis for DirecTV

Latin America Drives The Growth

Latin America has been the dark horse for DirecTV and has helped the company register healthy growth overall despite the saturated U.S. pay-TV market. (See: Latin America Is DirecTV's Dark Horse And Chips In 25% Of Its Value , Trefis, March 27, 2013) The company added 583,000 net subscribers this quarter in Latin America, which led to 16% growth in its revenues from the region. However, ARPU (average revenue per user) for Latin American operations declined by 11% mainly due to the currency devaluation in Venezuela and unfavorable foreign exchange comparisons in Brazil and Argentina.  If we exclude the impact of exchange rates, ARPU increased 1.5% in the quarter primarily due to the increase in prices. Going forward, the Latin American business will continue to fuel DirecTV's growth as the region's pay-TV market remains under-penetrated. DirecTV is well positioned to expand its operations in the region with continued focus on prepaid and middle-market packages.

Domestic Operations Growth Remains A Concern

For its domestic business, DirecTV added 21,000 new customers in the quarter compared to 81,000 during the same period last year. Revenues grew by 5% primarily due to 4.4% growth in ARPU. Customers paid more for advanced services such as DirecTV's Genie entertainment experience.

Even though the growth is slowing down, the company still continues to add customers to its base while other MSOs (multi-service operators) and fiber based operators such as Comcast ( CMCSA ) and Time Warner Cable ( TWC ) have been losing pay-TV subscribers. However, DirecTV's competitors have been aggressively addressing the issue of customer churn and promoting premium services which has been helping in recent quarters.

The demand for broadband has been rising in the country, and these companies have the added advantage of providing broadband and pay-TV in a bundled package, which is not available with satellite providers such as DirecTV. With added features like online streaming and X1 services, we expect Comcast to turn around its pay-TV subscriber losses, which may impact DirecTV's market share in the U.S.

We are currently in the process of updating our model for DirecTV in the light of recent earnings.

Our price estimate for DirecTV stands at $58 , implying a discount of over 5% to the market price.

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