While cable companies have been struggling to maintain subscriber numbers in the face of an "unplugging" trend to streaming services, the two major satellite television providers have been successfully increasing subscriptions. However, while Dish Network (NASDAQ: DISH ) continues its foray into building a nationwide 4G network, DIRECTV (NASDAQ: DTV ) is gaining hundreds of thousands of subscribers in Latin America -- per quarter. The latter released an impressive quarterly earnings report on Thursday, but the stock didn't react accordingly. Let's take a look at DIRECTV's estimate-crushing fourth-quarter earnings and find out why the stock isn't through the roof.
Staying on course
Not much has changed at DIRECTV over the past year -- it is still the No. 1 provider of pay TV in the world. The company has been resolute in sticking to its strategy of customer acquisition in Latin America and higher revenues per user in North America. This simple yet effective strategy has yet again brought the company to beat analyst estimates on both the top and bottom lines. It also resulted in record subscriber growth.
Total revenues for the fourth quarter hit $8.05 billion, up nearly 8% from the year-ago quarter. Analysts expected around $8.02 billion. GAAP net income skyrocketed to $942 million from $718 million the year before. This translates to earnings per share of $1.55 vs. $1.02. The Street expected, on average, $1.15 per share. For all of 2012, free cash flow (one of the main priorities for management) was up to $2.29 billion from $2.02 billion in 2011.
The source of the growth, as mentioned, comes from subscriber additions and higher average revenue per user (ARPU). Let's take a closer look at these factors.
At this point, it should come as no surprise that DIRECTV is absolutely banking off of its tremendous growth in Latin America. The company faces little competition in the region and was able to grow its net subscribers by 658,000, compared with a still-incredible 590,000 in the year-ago quarter. Overall, the Latin American segment grew by 22% in the quarter and closed out fiscal 2012 with 10.33 million subscribers -- a 31% premium to 2011's number.
While the company piles on thousands upon thousands of new users, it is invariably sacrificing some profit potential per user, which is to be expected. ARPU did fall in the quarter from $60.40 per customer in the fourth quarter of 2011 to $55.80. However, this loss wasn't due to cheap prices or incentives; instead, it was an issue of currency fluctuation. The company had to take a $160 million charge due to the wild volatility of the Venezuelan currency.
Luckily, the raw growth of Latin America offset the currency issues and still contributed a major portion of DIRECTV's quarterly and annual growth. And don't forget about the company's business in North America, which also happens to be thriving.
Rockin' in the free world
Revenue from DIRECTV's U.S. segment was up nearly 5%, to $6.32 billion, for the quarter. The company was able to add subscribers in the quarter, though that's only a fraction of the growth taking place in Latin America. The main source of revenue growth for DIRECTV's U.S. business was its continued effort in increasing ARPU in the mature market. For the quarter, ARPU rose from$101.40 in 2011's quarter to $105.20. ARPU was up due to advanced service fees, box lease revenue, and premium packaging.
Average monthly churn (subscribers leaving the service) fell to 1.43% compared to 1.52%. This is in direct conflict with the trend among cable service providers, which are seeing their TV customers flee services in favor of streaming options.
DIRECTV U.S. ended 2012 with a 1% net increase in subscribers.
Though programming fees will rise approximately 8% going forward (part of the reason the stock fell on the day) and currency threats remain substantial in Latin America, DIRECTV will continue to grow based on the same fundamentals: subscriber growth and ARPU enhancements. I find the stock's near three-point drop on Thursday to be completely unwarranted and see it as buying opportunity for a stock otherwise destined for greater things.
DIRECTV has a sound management team, both in the U.S. and Latin America. It is navigating the new content distribution environment much better than its cable counterparts. I also believe that DIRECTV is a more transparent business compared to its rival Dish Network because it is sticking to its core business -- and doing it very well. Dish has a risky, risky investment on its hands with a more than $4 billion venture into spectrum acquisition and the wireless network world. Dish will face continued pressure from telecom giants and possible government intervention -- two factors that would keep me away from the stock for the time being.
I have covered DIRECTV a number of times now and I have no new opinion on the company other than that it will continue to outperform. Last year, the stock rose nearly 20%, yet it remains fairly valued to undervalued at less than 10 times next year's forecasted earnings. DIRECTV has been and will be a great long-term hold for the risk-averse investor.
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