The cable and satellite business is fiercely competitive in the United States. Customers want the most content at the lowest price, and that has clashed hard with content producers who are consistently increasing their fees. Of course, the increasing popularity of Internet-streaming television has created an "unplugging" phenomenon among subscribers, who find that they can pay less and watch on their own schedule. All in all, it makes for a difficult business to be in. For DIRECTV (DTV +0.00%), one of two major satellite providers, salvation lies in the south. No, not the U.S. South, but in Latin and South America. As the U.S. business continues to mature and opportunities dwindle, DIRECTV has found a high-growth business with little competition in a vastly under-penetrated area. This quarter's earnings may have underwhelmed investors, but is there more to the DIRECTV story?
Nice -- not thrilling, but nice
As you well know by now, quarterly earnings statements are a mixed blessing. We love to see updates from the companies we invest in, but the market tends to blow these short-term trends way out of proportion. DIRECTV, a leading satellite television provider, missed third-quarter EPS estimates by $0.03, coming in at $0.90 per share. This doesn't really matter, as the company still managed to grow its diluted EPS by 29% over the year-ago quarter. Certainly not a bad gain in a tepid economic environment. Revenue actually came in at $7.42 billion, beating estimates by $280 million. The revenue growth was more modest than the bottom line on a year-over-year basis, growing only 8% from 2011. All in all, the report seemed impressive to me, but investors had the stock down around 2% at market opening on Tuesday. So what was the problem?
Beyond the $0.03 EPS miss, which should not factor into the analysis, the company is facing increasing pressure in the United States. Growth was minimal, with a 4% gain in U.S. operating profits over the last year. The U.S. market faces near complete saturation, which forces cable and satellite providers to focus on increasing average revenue per unit, or ARPU, over subscriber acquisitions. For DIRECTV, this materialized in a 4.6% gain in U.S. ARPU and only 67,000 net new subscribers. It is easy to see that the growth and investor interest in this company comes from Latin America.
DTVLA
DIRECTV Latin America, which controls the vast majority of the pay-TV market in the region with very little competition from DISH Network (NASDAQ: DISH), continues to grow strong and fast. Revenues were up 16% year over year for the segment, bringing in $1.58 billion. Couple that with the overall revenue figure mentioned earlier, and we see that Latin America now accounts for more than 21% of the company's top-line earnings. That changes a bit on the bottom line, as the segment is currently sacrificing some potential gains in ARPU in favor of raw subscriber additions. This makes sense, as first you hook the customer and then later squeeze more out of each one.
ARPU was down nearly 15% for the quarter, but that was almost exclusively due to exchange-rate issues in Brazil and Argentina. With the currency loss removed, ARPU actually ticked up slightly over the last year.
Remember that 67,000 net subscriber addition in the U.S.? Well, Latin American operations brought in 543 000 net new customers, which is actually a little below last year's number. According to company management, this is due to a higher monthly churn rate -- the rate at which customers leave the service.
On the bottom line, operating profit shrank around 6% for the company's Latin American group. This should be viewed as a temporary trend. As the company continues to aggressively court new customers, it incurs higher-than-normal service expenses in addition to promotions offered to new and existing subscribers.
Looking forward
As is evidenced by my previous articles regarding the company, I am a big fan of DIRECTV. While Dish Network has focused on its 4G network and buying up spectrum, DIRECTV has successfully grown its core business at an impressive rate and will continue to do so in the still young Latin and South American markets.
With a forward P/E of 9.56, which comes in a good bit lower than Dish's 14.60 and Time Warner Cable's (NYSE: TWC) 13.48, DIRECTV appears to be a good value considering its growth potential moving forward. One should also note that famed investor Warren Buffett owns around 4.5% of the company.
I am a perennial bull for DIRECTV and will continue to be as the long as the company continues to grow in developing regions.
