Subscriber Additions Help DirecTV Deliver A solid Quarter Of Growth

DirecTV (NASDAQ:DTV) reported its Q4 2014 earnings recently. The company continued to add Pay-TV subscribers in Latin America as well as in the U.S. In Latin America, the company added 118,000 subscribers while it added 149,000 in the U.S. ^[1] Pay-TV continues to gain acceptance in the Latin American 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.

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Aided By Subscriber Growth, U.S. Operations Deliver

The revenues from the U.S. segment jumped over 5% to $7.14 billion. The churn rate declined to 1.37% from 1.41% in the prior year period, while the ARPU (average monthly rate per user) jumped 5% to $117, reflecting higher advanced receiver service fees and price increases on programming packages. DirecTV reported solid subscriber growth in the U.S., adding 149,000 video subscribers during Q4 2014 and taking its subscriber tally to 20.35 million. ^[1] 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.

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. ^[2] 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.

While DirecTV has posted solid growth over the past few years, the growing availability of online content on alternative video platforms such as Netflix (NASDAQ:NFLX), along with an expanding market for connected devices, poses a competitive challenge to the entire Pay-TV industry in the U.S. Netflix alone added around 6 million subscribers in the U.S. last year and the company’s U.S. subscriber base is expected to cross 40 million in the first quarter of 2015.

Latin American Operations Hit By Strong Dollar

The Latin American operations contribute around 19% to DirecTV’s value, according to our estimates. The revenues in the region declined by around 2% to $1.73 billion. Excluding changes in foreign exchange rates, the revenues jumped by 20% primarily due to the addition of 118,000 new subscribers. The churn rate was also higher at 2.31% as compared to 2.21% in the prior year period and ARPU declined by 10% to $46.48. ^[1] 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 Latin America, 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.

Looking Ahead

Growing content costs are a big concern for DirecTV going into 2015. The company expects its programming cost per subscriber to increase by about 10% this year as compared to 6% in 2014. ^[3] This rise in content cost is being driven by new content deals such as those with Disney and the NFL.  Additional content renegotiations loom in 2015 and annual cost increases on existing contracts already negotiated. The NFL deal is a prime example of rising content costs. DirecTV 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).

The company also stated that one of its top priorities in 2015 is to successfully close the merger with AT&T (NYSE:T). ^[3] The merger is on track and is expected to be completed by the end of the first half of 2015. The Federal Communications Commission (FCC) will be taking its final decision on the deal in March. The deal will lead to DirecTV finally entering the broadband services market, which is something it has been eyeing for long. The merged entity will crucially be able to bundle AT&T’s broadband 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 (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC).

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1. DirecTV’s SEC Filings [↩] [↩] [↩]
2. DIRECTV Profile, ASCI [↩]
3. DIRECTV (DTV) Q4 2014 Results – Earnings Call Transcript, February 19, 2015, Seeking Alpha [↩] [↩]