DirecTV Q4 Earnings Preview: A steady but unspectacular quarter expected

DirecTV (NASDAQ:DTV) will report its Q4 2014 earnings on February 19th. The satellite TV company has so far performed better than the other Pay-TV operators, reporting solid subscriber growth over the past few years. Looking at the first nine months of 2014, the company lost only 50,000 video subscribers in the U.S. ^[1] This is remarkable as the Pay-TV industry is facing the headwinds from an increased competition in a saturated market and cable companies such as Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) are the worst hit. Time Warner Cable alone has lost around 408,000 Pay-TV subscribers in the year 2014. ^[2]

DirecTV’s Latin American (LatAm) operations have played an important role in driving growth for quite some time now. However, devaluation of local currency has weighed over the company’s performance in the recent past. While we believe that ARPU (average revenue per user) will grow in local currency, the exchange rate fluctuations will weigh over ARPU in dollar terms.  We continue to believe that Latin America will drive growth for DirecTV in the coming years. However, the impact of foreign exchange will hurt earnings in the near term. The U.S. operations will remain stable in the coming years driven by growth in monthly subscription fees.

See our complete analysis for DirecTV

Exclusive Packages Will Help DirecTV Maintain Its U.S. Subscriber Base

We estimate that the U.S. satellite TV operations contribute close to 65% to DirecTV’s stock value. The company has seen continued subscriber growth over the past few years growing from around 17.5 million subscribers in 2008 to over 20 million subscribers in 2013. In 2013 alone, the Pay-TV industry lost 105,000 customers while DirecTV managed to gain 169,000 subscribers. ^[1] This can be attributed to the company’s competitive advantage, which stems from its  exclusive programming of the NFL Sunday Ticket. This has also helped the satellite company attract more customers and command higher monthly subscription fees.

The company extended its deal with NFL for another 8 years last year. However, in this latest deal, the price increased by 50% to around $1.5 billion a year. This is very expensive and far more than the $1 billion that CBS, NBC and Fox pay for their respective NFL coverage (Read More –DirecTV Extends Its Deal With NFL For $12 Billion). One of the important aspects of DirecTV’s relationship with NFL was the merger with AT&T (NYSE:T). Earlier last year, when AT&T agreed to buy DirecTV in a $48 billion deal, a regulatory filing revealed that if DirecTV didn’t renew the deal with NFL, the mobile carrier could walk away from the deal with no penalty. This is presumed to be one of the reasons why DirecTV paid a 50% premium on the previous contract rates. As the deal has been renewed, we believe DirecTV will not only continue to retain its existing subscribers, it should be able to gain more customers in the near term. We currently estimate 2014 U.S. satellite revenues to be north of $20 billion and an estimated EBITDA margin of 46% will translate into EBITDA of close to $9.5 billion for the year.

Currency Headwinds Will Continue To Affect LatAm Operations In The Short Run

LatAm operations contribute around 19% to DirecTV’s value, according to our estimates. The segment revenues grew 10% to $1.82 billion in the third quarter of 2014 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] However, this was largely because the increased demand seen in Q2 due to the FIFA World Cup tapered off in Q3. If we exclude the foreign exchange impact, the revenues grew by 28% in the quarter led by a 15% growth in ARPU. ^[3] 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. In 2013, the company’s LatAm revenues increased 10% to $6.84 billion primarily due to the rise in subscribers. DirecTV’s LatAm Pay-TV subscriber base grew 12% to 11.57 million in 2013. The company 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.

While we believe that macroeconomic volatility and currency headwinds 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 increase to just under $14 billion by the end of our forecast period.

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1. DirecTV’s SEC Filings [↩] [↩] [↩]
2. Time Warner Cable’s SEC Filings [↩]
3. DIRECTV’s (DTV) CEO Bruce Churchill on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Nov 6. 2014 [↩]