DirecTV (DTV) will report its Q4 2012 and full-year results on Feb. 14, and besides strong subscriber additions in the U.S., Latin American growth will be in focus. The company's revenues in the U.S. will be aided by subscriber growth and higher ARPU (average revenue per user) due to a price increase. As far as Latin America is concerned, subscriber growth is the primary growth driver as the pay-TV market in this region remains under-penetrated. As far as levying extra sports fee is concerned, the effect won't be visible as it was introduced toward year-end, and the fee applies to only new customers (for details see "The Impact Of DirecTV's Extra Sports Fee"). In addition to this, we'll keep an eye out for the trend in programming costs, which are resulting in margin pressure across the pay-TV industry.
Pay-TV Business in the U.S. -- What to Expect?
DirecTV already disclosed that it added 100,000 net subscribers in the U.S. in the fourth quarter of 2012. This brings the company's total net adds for 2012 to 196,000, which we expect to be significantly higher than the expected net adds for its competitor Dish Network (NASDAQ:DISH). Compared to the cable companies, which are losing subscribers, DirecTV's performance is stellar. Furthermore, the performance is commendable given that the U.S. pay-TV market is highly saturated. However, if we compare DirecTV's subscriber performance in 2012 against 2011, we note that there was a substantial decline.
However, the company has an opportunity to continue its gains as the telcos have slowed down their pace of expansion. As far as revenue growth is concerned, subscribers are not the only way to go. DirecTV continues to expand the penetration of advanced services such as DVR, HD, and on-demand video. In addition, the company periodically raises prices. We note that DirecTV resorted to 4% price increases in 2011 and 2012, and starting in February 2013 the prices will go up again by 4.5%. The impact of the price increase will be visible in this quarter's revenue growth.
DirecTV's Programming and Distribution Advantage Is Helping it Outperform Dish
There is a reason why DirecTV is expected to perform better than Dish and has been doing so for the past few years. DirecTV has a greater number of HD channels with more emphasis on sports compared to Dish Network. HD and sports channels cost more and attract subscribers who have a better spending capacity. This, in turn, lowers the churn as DirecTV can market additional services such as whole-home-DVR to these customers, and they tend to be stickier.
Until last year, DirecTV spent about $1 billion a year on NFL programming, making its flagship NFL Sunday Ticket out-of-market sports programming package available to its subscribers. This has been a unique selling point for the company. Out-of-market sports programming enables viewers to watch games of teams that are not local to their area of residence. In addition to programming advantage, DirecTV also has a distribution advantage. Dish Network lost its key distribution partners such AT&T (NYSE:T) and CenturyLink to DirecTV in the past.
Latin America -- Subscriber Growth Will Continue but Watch Out for Churn
DirecTV added close to 1.08 million gross subscribers and 543,000 net subscribers in Latin America (excluding Sky Mexico) in Q3 2012. While gross subscriber additions were up 13%, net subscriber additions were slightly down due to a higher monthly churn. This higher churn resulted from increased penetration of middle-market products, especially in Brazil.
We expect the growth to continue this quarter, but some of it might be hampered by increased churn. The middle-market customers in Latin America are value conscious and are likely to be less sticky than those opting for higher priced packages. This means that cost savings, in tandem with high quality service, is likely to be the primary growth driver for pay-TV services in this region. Such cost savings can be achieved through bundled offerings where DirecTV is lagging currently. The company has been contemplating acquisitions and expanding its satellite broadband service, which would help strengthen its competitive position. It has already started its broadband service, but having a cable partner will help in providing viable bundles to its customers.
Our price estimate for DirecTV stands at $59, implying a premium of about 15% to the market price.
Disclosure: No positions.