DirecTV Q1 Preview: Currency Headwinds Could Play Spoilsport In Otherwise Solid Quarter

DirecTV (NASDAQ:DTV) will report its quarterly earnings on May 5th. The pay-TV industry is the midst of a decline and has lost thousands of subscribers over the past few years. However, DirecTV has so far performed better than other pay-TV operators, reporting solid subscriber growth over the past few years. The company gained 99,000 video subscribers in the U.S. during the year 2014. ^[1] In comparison, cable companies Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) lost around 200,000 ^[2] and 400,000 ^[3] subscribers, respectively during the same period. DirecTV has managed to retain its subscribers primarily due to its better customer services and its exclusive NFL Sunday Ticket programming. We expect this trend to continue in the near term, driven by the company’s focus on retaining existing subscribers.

DirecTV’s Latin American (LatAm) operations have played an important role in driving growth for quite some time now. However, the devaluation of local currencies has weighed over the company’s performance in the recent months. 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 LatAm division will drive growth for DirecTV in the coming years. However, the impact of foreign exchange will hurt earnings in the near term.

DirecTV has also stated that one of its top priorities in 2015 is to successfully close the merger with AT&T (NYSE:T). ^[4] The merger is currently under review by the Federal Communications Commission (FCC) and a decision is expected soon.

We currently have a price estimate of $95 for DirecTV, which implies a premium of around 5% to the market price.

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 68% 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 20.4 million subscribers in 2014. In 2014 alone, top cable companies lost a combined 1.2 million customers ^[5] while DirecTV managed to gain close to 100,000 subscribers. ^[1] This can be attributed to the company’s competitive advantage, which stems from its exclusive programming of the NFL Sunday Ticket. Keeping this in mind, the company extended its deal with NFL for another 8 years last year. (Related – DirecTV Extends Its Deal With NFL For $12 Billion) 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. The exclusivity of its programming should also help the satellite company command higher monthly subscription fees from its customers.

LatAm Operations Will Experience Short Term Volatility Due To Currency Headwinds

LatAm operations contribute around 14% to DirecTV’s value, according to our estimates. In 2014, the company’s LatAm revenues increased 3% to $7.1 billion primarily due to the rise in subscribers. ^[1] DirecTV’s LatAm pay-TV subscriber base grew 8% to 12.5 million last year. The company has been able to gain market share in LatAm due to the success of its middle-market focused programming packages and the growing popularity of prepaid products. Full year average revenue per user (ARPU) declined by 6% to $48.39. However, ARPU actually increased in local currency and the decline in dollar terms was the impact of unfavorable currency exchange rates.

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 LatAm revenues will increase to just over $11 billion by the end of our forecast period.

Growing Content Costs Raise Some Concerns

Growing content costs are a potential 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. ^[4] 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 costs also tend to go up 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. (Related – DirecTV Extends Its Deal With NFL For $12 Billion)

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1. DirecTV’s SEC Filings [↩] [↩] [↩]
2. Comcast’s SEC Filings [↩]
3. Time Warner Cable’s SEC Filings [↩]
4. DIRECTV (DTV) Q4 2014 Results – Earnings Call Transcript, February 19, 2015, Seeking Alpha [↩] [↩]
5. MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 3, 2015, Leichtman Research Group [↩]