DirecTV (DTV) reports its Q3 2012 earnings on November 6, and we expect it to report soft subscriber additions in the U.S. driven by the pay-TV market saturation and the dispute with Viacom (VIA). In addition, we expect growth in Latin America to remain healthy, a trend seen over the past few quarters. We’ll look for any color on DirecTV’s streaming and pricing strategy in the U.S., which will be critical to its future revenue growth. We’ll also look for color on DirecTV’s acquisition and broadband strategy in Latin America, which might be important for bracing itself against future competition.
Slow U.S. Subscriber Growth Due To Market Saturation And Dispute With Viacom
The U.S. pay-TV industry is becoming saturated, and subscriber growth is slowing down. Consequently, pay-TV companies are looking to poach subscribers from each other, and are resorting to price increases as well as marketing advanced services to ensure revenue growth. This, along with the fact that cable companies are doing better and reducing subscriber losses, could affect DirecTV’s subscriber gains.
Additionally, the company was involved in a dispute with Viacom over the latter’s demand for carriage fee increases. As a result, DirecTV’s subscribers had no access to Viacom channels Nickelodeon and MTV for several days in July. While this appeared to be a small disturbance, it could have had a slight impact on the company’s subscriber churn. Some avid Viacom viewers could have dropped out under the uncertainty about the timeline of the channel blackout.
Continued Growth In Latin America
DirecTV has been witnessing fast growth in Latin America for awhile, and we expect this to continue in Q3 as well. The company expects to grow its Latin American subscriber base by 25% to 30% for the full year 2012, compared to its earlier guidance of 20%. This implies that it may surpass 10 million subscribers in Latin America (excluding Sky Mexico, which is equity accounted) by the end of the year. The bulk of this growth will come from the middle-market segment and growing popularity of prepaid programming packages. Additionally, although Brazil is currently DirecTV’s biggest market in Latin America, other regions are witnessing higher growth rates, which bodes well for the company.
DirecTV has been contemplating acquisitions and expanding its satellite broadband service, which will help strengthen its competitive position. The company has already started its broadband service, but it might be better if it had a cable partner to provide viable bundles to its customers.
Risk To Investors
Due to the growing popularity of prepaid packages, there is a risk as competition grows in Latin America. Prepaid subscribers are not likely to be as sticky as postpaid subscribers, and that makes one wonder if DirecTV is experiencing a phase similar to that seen by Netflix (NFLX). Netflix demonstrated explosive growth until competition started to develop and the loyalty of its customers was exposed due to management’s missteps. DirecTV will need to market multiple services and promote bundles overtime to establish more subscriber stability.
There is also the risk of currency fluctuation, which impacted revenues in Q2 2012, especially from Brazil. Additionally, capital expenditure remains high. As a result, cash flows are negligible or negative. This is likely to continue as long as subscriber additions remain high. Currently, Latin America is more about future prospects for DirecTV than profits.
Our price estimate for DirecTV stands at $57, implying a premium of more than 10% to the market price.
Disclosure: No positions