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Executives

Jon Rubin - SVP of IR and Financial Planning

Chase Carey - President and CEO

Pat Doyle - CFO

Bruce Churchill - President of DIRECTV Latin America

Analysts

Benjamin Swinburne - Morgan Stanley

Spencer Wang - Credit Suisse

Bryan Kraft - Banc of America

Jason Bazinet - Citi

Douglas Mitchelson - Deutsche Bank

Matthew Harrigan - Wunderlich Securities

Craig Moffett - Sanford Bernstein

Ingrid Chung - Goldman Sachs

April Horace - Janco Partners

John Hodulik - UBS

Tuna Amobi - Standard & Poor's Equity

Kit Spring - Stifel Nicolaus

DIRECTV Group Inc (DTV) Q3 2008 Earnings Call November 6, 2008 2:00 PM ET

Operator

Good day, ladies and gentlemen. My name is Tom, and I will be your conference operator today. At this time, I would like to welcome everyone to The DIRECTV Group's third quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

It is now my pleasure to turn the call over to your host, Mr. Jon Rubin, Senior Vice President of Investor Relations and Financial Planning. Please go ahead, sir.

Jon Rubin

Thank you, operator, and thanks, everyone, for joining us for the third quarter 2008 financial results and outlook conference call. With me on the call today are Chase Carey, our President and CEO; Pat Doyle our CFO; Bruce Churchill, President of DIRECTV, Latin America; and Larry Hunter, our General Counsel.

In a moment, I'll hand the call over to Chase and Pat for some introductory remarks. But first, I'm obligated to read to you the following. On this call, we make statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that could cause actual results to be materially different from those expressed or implied by the relevant forward-looking statements.

Factors that could cause actual results to differ materially are described in each of the DIRECTV Groups and DIRECTV US's annual reports on Form 10-K, quarterly reports on 10-Q, and our other filings with the SEC, which are available at www.sec.gov.

Additionally, in accordance with SEC's Regulation G that requires companies reporting non-GAAP financial measures to reconcile these measures to the most directly comparable GAAP measure, we provide reconciliation schedules for the non-GAAP measures. These are attached to our earnings release and are posted on our website at directv.com.

With that, I am pleased to introduce Chase.

Chase Carey

Thanks, John. The third quarter was a solid one for DIRECTV. The highlights in the quarter were our solid top-line revenue growth, and our bottom-line cash flow growth. These results were led by our ability to continue to attract quality customers to drive HD and DVR penetration, continued progress in management key cost, and disciplined control of capital expenditures.

We are in a tough economy, and a competitive environment, and that is putting more pressure in a few areas like churn out and retention spending. Overall, I would say the impact is marginal. The strength of our business is really continuing to enable us to reach our key targets.

Pat will take you through our results in detail, but I want to briefly comment on a couple of US metrics. Most, like our [affiliate] SAC were pretty much in line with our expectations. A couple of metrics that were a bit off our expectations were net subgrowth in churn. The net sub shortfall was really due to the BellSouth region. It's taken us longer than we expected to mitigate the end of our AT&T bundling relationship in that area.

Excluding the BellSouth region, our net subgrowth was actually up a touch year-on-year. We are making progress in the BellSouth region, but it's taking us longer than planed. Churn is also impacted by the BellSouth transition, although the challenging environment added a bit of pressure too.

Beyond these areas, we were impacted by a few issues like the hurricanes, and legal settlements that impacted G&A, but overall we feel pretty good about the results. Our Latin American business continues to show strong results. Revenues, profits, and cash all beat our targets. Churn continued to track above a year ago due to both to our prepaid program and the overall expansion of the business.

The one metric I want to comment on in this area is Brazil. Subscribers were recorded a one-time 57,000 subscriber reduction. With Brazil merger being completed in the last year, we've had a lot going on in that area. As we stabilize that business this year, we discovered in Q3 a block of subscribers that should have been churned out in prior quarters, but we'll not remove from this subcount.

There is no financial impact from this adjustment. We're obviously not happy that we had to make this adjustment after making an adjustment in Q2 in Brazil. We are confident that we take the necessary steps to ensure all our metrics are accurate going forward. We've also reviewed our other Latin businesses to ensure they are not lingering elsewhere.

At this point, I'll turn it over to Pat.

Pat Doyle

Thanks, Chase. I thought we had a solid quarter, as we continue to achieve solid subscriber and ARPU growth, improve operating efficiency and margin expansion, as well as reduce CapEx and significant cash flow.

Starting at the top-line, revenues were up 11% at DIRECTV US, to $4.3 billion. Net additions of 156,000 were lower than last year, but consistent with the targets we provided at the beginning of the year and on our last earnings call.

Last quarter, we said that second half net subscriber additions would be similar to the first half, assuming that gross ads would be flat to down versus the prior year, combined with a flat to slightly higher churn rate, and that's basically what we are seeing.

Gross additions of about a 1 million subscribers were down about 3% from last year. Although we fell a bit short of our target in the former BellSouth territories, we more than made up for that shortfall with strong results in the rest of the country.

All of our key channels had year-over-year growth except those with our Telco partnerships. In particular our direct sales, independent dealers, and commercial business had solid year-over-year growth. The quality of our growth additions continues to improve, as the percentage of high quality or lower risk subscribers increased over both the prior year and last quarter.

We prioritize quality over quantity. This focus on quality continues to drive down involuntary churn. We saw an increase in voluntary churn in the quarter, primarily due to increased competition in this slowing economy.

We're being much more selective in our upgrade and retention efforts to ensure that the best offers are given to our best customers. We're continuing to see aggressive promotions in some of the FiOS areas, as well as in the former BellSouth territories where AT&T is offering bundles with DISH Network.

In a slowing economy, some of our more price-sensitive customers might be more interested in saving money by taking a less expensive offer from a competitor. In these cases, we'll typically have less aggressive save offers, particularly if the customer is identified as a lower value subscriber.

So, churn maybe a touch higher, but as you can see so far this year, we're on a page to reduce our full year cash, upgrade our retention costs by about $200 million, compared to 2007. A trade-off we feel makes sense in this type of macro environment.

ARPU growth of 6.1%, to $83.59, was driven mostly by price increases and strong growth in HD and DVR service revenues. Despite some of the market issues I mentioned earlier, we continue to see extremely strong demand for advanced services.

We added nearly twice as many HD and DVR customers in the third quarter, as Comcast reported last week. As a result, over 8 million of our customers, or a third more than a year ago, have advanced services, and pay us, on average, about $100 a month.

As we talked about on our last earnings call, we were expecting ARPU growth in the second half of the year to be lower than the first half due to such trends as lower upfront HD and DVR equipment fees, slower ad revenue growth, as well as more offers for new and existing customers. We expect these trends to continue into Q4 and into next year.

I thought we had another solid quarter in terms of managing costs and improving operating margins. As you saw in the earnings release, our operating profit before D&A margins increased almost a full percentage point to 24.5%, despite some one-time unfavorable items. This margin expansion is consistent with what we have seen all year and what we expect for the full year.

Most of the margin improvement is coming from better cost containment in areas such as subscriber services and upgrade and retention marketing while we continue to hold the line on our programming margins. Partially offsetting these improvements were higher subscriber acquisition costs, mostly due to increased sales, and marketing expenses related to the acquisition of higher quality and advanced product subscribers.

Our G&A costs were also a bit higher than the prior year, primarily due to a legal settlement, higher bad debt expense, and costs associated with the acquisition of the Installer Networks, the legal settlement related to a patent infringement case originally filed over eight years ago. Bad debt expense is a bit higher in the quarter, however, we are still targeting our full year bad debt expense as a percentage of revenue to be at or below last year's level.

As we have discussed in our last earnings call, we've either acquired or gained control over several DIRECTV installers, which we call home-service providers. We now own and operate an HSP, servicing approximately one-third of the country. As the result, we are reporting G&A costs for these businesses that were previously incurred by a third party.

We expect these transactions to result in net cost savings. I remind you that we are taking control of these installers primarily to improve the overall customer experience. Excluding these three items, our G&A costs are up year-to-date about 5% which is consistent with our target and full year outlook.

In addition to improving margins, we are continuing to drive down our capital expenditures. DIRECTV US CapEx was down over 30% in the third quarter. Year-to-date, we reduced our CapEx by over $0.5 billion, mostly due to rapidly declining set-top box costs combined with increased usage of refurbished boxes, a leveling off in demand for advance services from our existing customers, and the completion of our HD and satellite expansion plan that began about three years ago.

The reduced CapEx combined with our higher OPBDA drove more than 50% increase in cash flow before interest and taxes for DIRECTV US to about 500 million. On a year-to-date basis, cash flow before interest and taxes is up 845 million, or 87% over last year.

At the consolidated level for the first nine months of this year, our total free cash flow, which includes the Latin American taxes and interest, is about 1.25 billion, or more than double last year's free cash flow. Also in the quarter, but not included in our free cash flow number, was over $1 billion of stock repurchases.

Cumulatively we have now purchased about 340 million shares for nearly $7 billion over the last two-plus years, while reducing our outstanding share count by roughly 25%.

Before turning the call back to Chase, I'd like to briefly comment on exchange rates in Latin America and our liquidity. As you may know, the Brazilian real has weakened by about 30% in the fourth quarter compared to the third quarter. The impact on revenues in Brazil due to the exchange rate change is about $70 million to $80 million.

However, we are still expecting strong Q4 revenue and OPBDA growth in the region when compared to prior year.

Looking at our consolidated balance sheet as of the end of the third quarter, we had a net debt position of about $2.9 billion, comprised of $5.9 million of debt and $3 billion of cash and equivalents. We do not have any significant debt maturing until 2013 and we currently hold an undrawn credit facility of $50 million, [$500 million]. In addition about 90% of our cash is held in the US in extremely conservative investment vehicles. It's safe to say that we feel good about our liquidity at this time.

With that I'd like to turn the call back to Chase for some closing comments.

Chase Carey

Thanks, Pat. The rest of 2008 will be one of progress as we move forward with our HD leadership, adding both more local markets as well as national channels. We will look to reinforce our content leadership with unique programming like Friday Night Lights which we launched in early October. We’ll move forward with our whole home solution, absorb our field services operation that Pat touched on, as well as myriad other initiatives.

The economy and competitive pressures have increased. We feel good about the momentum of our business. The demand for DIRECTV in the fourth quarter is extremely strong, and we are looking at fourth quarter net sub adds in the low to mid 200,000’s. Seasonal initiatives like NFL Sunday Ticket sales are also strong.

In the fourth quarter, we'll continue to see a bit of pressure in some metrics like ARPU churns, SAC, and retention spending, but these pressures are really at the margin, not that that was in the third quarter. We continue to find ways to mitigate these pressures while making ongoing improvements in other key areas that enable us to continue to improve margins.

Overall the demand, the strength, and our growth of our business will enable us to continue to drive double-digit revenue growth while adding over $1 billion in cash flow this year. We also continue to move forward with our buyback plans, given our undervalued stocks and strong balance sheet, and expect to continue the increases in operating cash flow going into 2009 and beyond. We have no intent to change our plans, although we will continue to monitor the broader economy and make adjustments if appropriate.

With that I’ll turn it back to John.

Jon Rubin

Before moving on to Q&A, investors should note that we have members of the media on this call in a listen-only mode. I’d like to remind the media that they are not authorized to quote any participants on this call either directly or in substance, other than the representatives of the DIRECTV group. In addition, we are webcasting this call live on the Internet and an archive copy will be kept on our website.

Finally, I’d like to ask callers to look at your questions until we’ve had a chance to get to all people who are asking. Operator, at this time we’re ready for the first question.

Question-and-Answer-Session

Operator

(Operator Instructions) We'll go first to Benjamin Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley

Thanks. Good morning to you. First question: is it possible to spend a little more time on BellSouth region and whether or not that was a gross ads or a churn issue in the quarter? Perhaps I am reading too much into this. It looks like you addressed this successfully in 4Q. I'm little surprised that AT&T is being aggressive with Dish bundle, given that they are migrating over to DIRECTV next year. As a corollary to that, any early thoughts on what that means for you in 2009 on a gross ads basis bringing that channel on board?

Chase Carey

Okay. On the BellSouth side, it is both gross and churns. We are affected. I'd say more on the gross side than the churns side . It is improving in the fourth quarter. As I said it's taking us longer. We know we can compete. Obviously we're going into 2009 and this will all change, but we know we can compete effectively. We know we've competed for years, in the AT&T region itself whether there is bundle with Dish what we found here is, that it is taking us longer put in place the right sales initiatives to replace it.

So the second and third quarter, we clearly did not get to where we plan to. We are making headway in the fourth quarter, but even in the fourth quarter we won't be where we were. To some degree, we are not looking forward to the transition in the first quarter where BellSouth comes back in. So, we have to plan the fourth quarter taking that into account. It doesn't make a lot of sense to really gear up a whole bunch of initiatives to mitigate the BellSouth only to find two months later, you've got BellSouth back in as a partner.

In terms of BellSouth being aggressive with Dish, I would expect them to be. They were aggressive with us right up to our benefit up to March 31, when they went to Dish and I think to be in the market you fight with what you've got, and that's sort of what they got to fight with now. I would expect them to use that competitiveness until they switch to us.

In 2009, it will clearly be a positive and I probably wouldn't want to get too far into it. It will be a building process in 2009 and probably dealing with BellSouth we are benefited by having some history with them working there and the rest of the region where we don't. So, there clearly will be a ramp-up as we go through it. Our goal will be to hit the ground running as strong as we can, but there clearly will be a ramp-up to the BellSouth relationship, as we go through 2009.

Benjamin Swinburne - Morgan Stanley

Thank you very much.

Operator

We'll take our next question from Spencer Wang with Credit Suisse.

Spencer Wang - Credit Suisse

Thanks. Good morning. Chase, you talked earlier about the competitive landscape, it seems like over the last six months, both cable and Dish have beefed up the HD offering. So I was wondering if you could speak to that and talk about if you're seeing that impact in your business at this point, or is the competitive pressure more from the Telco side and more price related and promotional driven? Thank you.

Chase Carey

Spencer, I'd say the cable guys and DISH have feeds up their HD, although I think sometimes what they market and say they are doing is way ahead of what they are really doing. But in terms of impact on us, we feel great about our position in HD. I think one of the great things about establishing a position of leadership that really associates your brand with that leadership position is that those are strengths you can drive for a while, particularly if you keep finding ways to energize that position. I've said before and continue to believe, I think our position in HD leadership is one that can benefit us not for months or quarters but for years. It is incumbent on us to continue to freshen it and we do, adding dimensions in terms of sports packages.

We'll finish the year with 120 local markets. We'll be up to about 88% of the country and continue to look for new and interesting ways to add NFL SUNDAY TICKET metric channel, now in HD. As we continue to do things, we continue to reinforce our leadership position and reinforce our brand and I think that brand differentiates us from our competitors' particularly in cable and in HD.

I think we've built a real position of leadership that will continue to benefit us for a long time to come and certainly that's what we've been seeing. We feel very good about our position, the ability to drive our strengths forward. But I think you are seeing more competition, whether it' s the cable bounties, switching or just the pricing on offers. It's a more aggressive competitive marketplace on the offer side.

When I talk about increased competitive pressures, they will be there. I'm really talking about that, not as much in terms of HD leadership and the like.

Spencer Wang - Credit Suisse

Great, thank you very much.

Chase Carey

Yes.

Operator

We'll take our next question from Bryan Kraft with Bank of America.

Bryan Kraft - Bank of America.

Yes, thank you. One, have you seen any pickup in the Verizon channel in terms of gross ads? And second, a question on advertising; I think a couple of years ago, advertising was about a $1.5 per sub. Just wanted to find out where that figure is now, and also do you think there's enough growth in advertising from share take over the next year to offset the cyclical headwinds? Thanks.

Chase Carey

In terms of Verizon, it is not yet a meaningful tickup . In the summer we had very good discussions with Verizon about trying to reenergize. I do think Verizon sort of has had FiOS and understandably at the forefront of what they are trying to do, and have probably made the non-FiOS aspects of the business a little bit more of an afterthought that we would have liked. I think they understand that; they even referred to it on a call, last quarter.

And there is a renewed energy on that side of our relationship, and I think we look at that as an opportunity that we can put some fresh energy into, but then actual results today, it wouldn't be up. I think we've done a bit better, but I wouldn't say the results would be materially impacted but I think we believe we have some nice momentum to that that we can build on it and Verizon is more focused and committed to that side of the business versus they might have been six months ago.

In terms of advertising, I thought it would be small, it's a tiny part of our business, 2% or 3% of our revenue. If you want to say where did the economy hit us; that would probably be the area. That area clearly was hit by the economy. There's no question.

We are probably, a bit in the third quarter and clearly in the fourth, advertising is an area that's been growing really well for us. It looks like the fourth quarter will be down year-on-year on advertising, not up. And so certainly and that probably in a unique way is a place the economy does hit us, but again it's a pretty small part of our business.

It's an area, we still really believe there's real upside to us. In many ways we just scratch the surface, we don't compete on any of the levels that really that came in. We get spots. We sell them nationally. What we really are looking to do is move in to and take advantage of the technologies we got for the next few years, it started before our ability to target the localized too. We are adding some interactivity to it, to add a lot of the things that, they really are advanced set-top boxes will give us capabilities to do. Whether that mitigates in '09, probably we will not get into that specific and comparison.

But we think this is an area, certainly as you look at it over a couple of years, that we are a small fraction per sub of what certainly are, the cable competitors are and we think as you get, particularly DVR and the capability with that. DVR's connectivity in the home and that is some of those capabilities in terms of interactivity and targeting and insertion and the like, that this is the area that is one of real opportunity for us as you look out over a couple of years.

Bryan Kraft - Bank of America

Great. Thanks so much.

Operator

We'll take our next question from Jason Bazinet with Citi.

Jason Bazinet - Citi

I'm going to ask a longer term question here.

Chase Carey

Okay.

Jason Bazinet - Citi

If I go back, I don't know maybe eight or nine years, there was a time when people thought your growth would slow and you got this fairly significant boost in terms of your gross ads as you expanded local channel availability. And then everyone got very nervous about video-on-demand and you guys got another leg of growth from DVR and more recently your growth has been spread on by your differentiation on HD? And my question is as we look out over the next say two to four years.

Is there another sort of rabbit that you guys can pull out of your hat to sort of differentiate yourself and keep your growth aloft or do you think it's more about the blocking and tackling just to maintain high customer loyalty and drive revenue and cash flow sort of off the businesses, the street is thinking about it today? Thanks.

Chase Carey

Well, you always wish you had the crystal ball. I wish, I was here eight years ago, but I guess, my doubt they had the crystal ball that says, let me see, three years from now we do the DVRs and then six years from now we do the HD. So in hindsight these things probably always have a much greater degree of visibility than they do as foresight.

So, I think a lot of our focus is on blocking and tackling, but I honestly believe in the industry we are in that moves and changes as much as it does, there will be a transforming opportunity. So mobility is one example of a place that will become a more meaningful part of this and that's your one-check formula.

I think people are going to watch episodes of Lost on a cell phone, but I think it will continue to be I think just by definition. There will continue to be events that energize and expand the arena we are part of. But we aren’t obviously all of it, but we're part of and I think, what's really incumbent on the players who succeed there are ones who can be opportunistic and smart about seeing where the opportunities are, when it's right to jump on them and trying to figure out how to exploit them.

And obviously, we made a bet on HD at a point in time where we thought it was there and I think there will be places and opportunities to bets that open up new arenas and new opportunities for us. I think, we have great strengths in our business versus we obviously have differences between us if you want to get too philosophical here, but between wired players and on ourselves. I think we have true speed-to-market, a national footprint, an international brand, that's a tremendous strength and the wireless nature of our business and tremendous strength.

I think we have natural partners out there that we bring unique strengths to that are dependent on us, whether it's emerging broadband or TELCO as they develop their businesses and I think for the other technological forces that came into play and again I think for us the key is to be as strong as you can on the one hand. So you have unique strengths like our subscriber base, quality subscriber base, our distribution strengths, our speed-to-market, our brand and develop and content leadership.

Develop those strengths and then figure out how to use those strengths to move forward to take advantage of opportunities that emerge in the market as you can get a sense of them and again I wouldn’t have been probably sitting here. Right now, I'm not sure I would say if I believe it.

I publicly say where I thought that opportunity is even if I knew, but I think it is ultimately something you have to continue to push and prod and try to make the best when you think its right.

Jason Bazinet - Citi

Let me sharpen it a little bit. I mean how do you believe that your potential push in to MDUs is a material driver of growth, two to four years out?

Chase Carey

Yes, in that probably a more mechanical of networks, we are doing that. Clearly two years ago or a year ago, we did not have the technological solution that really worked and we didn't have the sales infrastructure to develop it. Yes we have both those foundations today.

If you look at our penetration in that area, it is woeful, it is just of close to embarrassing to me. And to some degree, it is probably understandable. We didn't have the right solution for those marketplaces. There was lower-hanging fruit elsewhere and it made more sense for us to go chase it. Today, with the solutions in place and the capabilities in place that we do, it's normative for us even to take market share, let alone getting to the type of market share we have overall.

Just we are a tiny fraction of what we are in the mainstream market. So and as you go out there, you find that we are far enough out into the MDU market. You clearly have incredible pent-up demands from the MDU players that are really looking for choice and looking for alternatives.

They just really haven't had that opportunity that a residential consumer has. So, it's not going to drive the '09 results. It will be a solid contributor, but it really is a multi-year plan to really capture some of the MDU share we should have.

Jason Bazinet - Citi

Okay. Thank you.

Operator

And we'll take our next question from Doug Mitchelson with Deutsche Bank.

Douglas Mitchelson - Deutsche Bank

Thanks. Let’s shift from operational opportunities to balance sheet opportunities. You are obviously in an enviable position with a 3-plus billion in cash, more coming in each quarter, and assets have gotten cheaper, whether it’s your own stock through DIRECTV shares or all media shares or potential acquisition targets. I know you don't want to disclose specific plans. The question is, how aggressive are you willing to be with your cash position in this marketplace to the extent you see something that’s just too cheap to resist? Thanks.

Chase Carey

You mean in an acquisition sense?

Douglas Mitchelson - Deutsche Bank

Whether its acquisition, look you bought back 5% of your shares that was great. But do you decide your stock is too cheap and do you tender off or do you buy out media because the spread blew out? There’s a lot you can do with your cash and its enviable capital right now.

Chase Carey

We are pursuing, we have continued to be diligent and aggressive about pursuing the buyback. I probably wouldn't say at this point, that we have probably a different view, but we certainly continue to be in the market, continue to be active with the buyback.

I think liberty, there are lot of dynamics around that. So I think just looking around a cash perspective, I think it is probably a bit tail wagging the dog. I think you've probably got it. If there's something to do, time will tell. We talk to Liberty Investor Day in September. Both John and I talked about it a bit, and right now there doesn't seem to be anything. I think we will continue to look at it, if there's something to makes sense, but as we said and I don't see anything even at there. Probably there's a factor of cash, then the values and other issues.

I think on acquisitions, we have a lot more to say than what we said before. I think we are strategically held. We don't need to do anything. I think, we always wanted to be opportunistic and although, my guess would be anything that's interesting, there's probably, the public values beat up the private values, probably still going to be a whole different animal and certainly would not think anything is eminent there. Again, we want to be smart about it and if there's something smart to do, we'll definitely look at it.

Douglas Mitchelson - Deutsche Bank

Chase, have you considered buying back L Media shares are the cheaper way to buy your own stock and increase your leverage and negotiation with?

Chase Carey

I think that's really complicated. You are buying a minority position and attracting stock from a shareholder on the flipside owns 48% percent of you. I mean, it's not living like a game of chicken with your larger shareholder. I think that's a pretty complicated dynamic to get in. We are going to look at everything. We'll look at it from a DIRECTV perspective, but I do think we believe having a constructive relationship with Liberty is in our interest. And that is certainly been the mindset we brought to it and trying to play that against private equity guys may play as probably a little different than sort of how I think we look at what's right and smart for us to do.

Douglas Mitchelson - Deutsche Bank

All right. That's helpful. Thank you.

Operator

And we'll take our next question from Matthew Harrigan, Wunderlich Securities.

Matthew Harrigan - Wunderlich Securities

Hi. A couple of questions on Latin America: you talk about the real declining 30%, I think the functional currency for Pan Americana apart from Venezuela. In Venezuela, we have a fixed peg are also off in the low 20s to mid 20s. That business I think is about 70% or so the size of Brazil, but if you can give us more guidance on that. And also, I suspect some of the CapEx done there is effectively US dollar denominated, but is there anything on the actual operating cost side that implies less than just the proportionate move to the currency movement? Do you have any programming that would have the US dollar element?

Chase Carey

No. Let me answer the latter part. I'll let Pat touch on the currency, we think it's mostly Brazil. We worked very hard in the last few years to really get the business largely aligned in local currency, so whether it's programming contracts, operating contracts even debt that maybe we have resolved, local currency, denominated. I think the only material cost we have that is a US dollar denominated one of the satellite, at least satellite transponder leases. I think the rest of it is really aligned with the local currency there, which wasn't true I think three or four years ago, but really we have successfully moved it all to be in that case and probably Pat is closer to the currency and we do think Brazil the primary issue. But, Pat maybe you or Bruce can add on it, one of you can touch on the currency issue.

Pat Doyle

Bruce, do you want to--?

Bruce Churchill

Go ahead. That's fine.

Pat Doyle

Okay. I think if you look at it, like we said, we pick the Brazil just because the magnitude of the dollars there. When you look across the region again, we still feel like if you look at kind of where we were in the third quarter versus the fourth quarter, we are still going to see some very good year-over-year growth for the whole region, but it won't be the kind of growth that we saw in the first three quarters. So it will still be up 20% something like that overall for the region even with the rates the way they are. I would say that most of our revenues are local and the vast majority of our expense are all in local currencies.

Matthew Harrigan - Wunderlich Securities

You probably need a better crystal ball for currencies even then you do for your business in the US, but are you still looking for decent US dollar growth in Latin America next year or would you expect it to more or less a flat year as the currency relationships hold where they are right now?

Pat Doyle

Well, I mean right now we are not looking out to 2009, but certainly we've got some good organic growth that's there as well. I mean obviously we'll have to kind of see how the economy is down there, say over the next few months and as we begin to look into 2009. But we are in a good position as far as our subscriber base down there and the growth and the type of services they are tacking which is helping on our ARPU growth.

Chase Carey

Yeah I mean I don't think we are really currency speculative. Again our primary way dealing with the currency was to try and get our costs and revenues aligned and I guess probably most of you just follow with the third-party consensuses, I don't think we have the unique insights, so I think we are trying to deal with currency by getting cost of revenues aligned and I think then our focus is making sure we are operationally on top of it, so that if you do have probably less currency gain in economic issue in particular country or region, we can take appropriate steps to deal with it.

Matthew Harrigan - Wunderlich Securities

Thanks. Good quarter.

Chase Carey

Thank you.

Operator

And we'll take our next question from Craig Moffett with Sanford Bernstein.

Craig Moffett - Sanford Bernstein

Hi guys. Let me just drill down a little bit on what you are seeing in terms of the high-end and the low-end of your business. We heard from Time Warner Cable yesterday that things have slowed down dramatically. And it sounds like you are describing a real strength in the fourth quarter. Are you seeing real differences between your higher end customers? Customers for example, they take the NFL SUNDAY TICKET and are still feeling relatively secure versus the lower end customer base that you've got, or some of the ethnic segments that may be feeling more macroeconomic pressure?

Chase Carey

I really wouldn't say so. We look at all those things, and I think it isn't accurate information. I think we feel very good about the demand and strength of the business. And as I said, certainly HD DVR, SUNDAY TICKET, those sort of products continue to be pretty much in line with what we are seeing.

Again, as we said on churn and a bit more on the credit side, there is a segment of our customers out there, who probably feel a bit more squeezed and are more open to going after a deal, but it's not a big segment; it's probably more than it was, but it's a part of the business and the dynamic we are dealing with here, but I wouldn't say you'd pitch it whole or sort of really put it in one particular area. Actually the ethnic side of our business continues to be pretty good as well.

So I wouldn't say it's being driven by one segment versus the other, or one is weak versus the other. I think overall it's probably largely what we've seen is continuing to be what we've been seeing in the recent quarters and what we are seeing going forward and there will be probably some added strength in the fourth quarter. But again, acknowledging within that, across the bar, there are a few more customers in every place that are searching for a deal to try and switch and take advantage of, switch deal or a new customer offer to shave a few bucks off their bill, when they bill and nobody help them.

Craig Moffett - Sanford Bernstein

If I could ask a follow-up question about your Telco relationships? Can you describe happens when AT&T rolls out U-verse in a given market?

Do you see a complete fall off in your bundled relationships with them or do some customers still opt for the satellite bundle and AT&T for example is still willing to market that?

And sort of how does the dynamic work with existing subscribers? Are you seeing churn out from your bundled subscribers as they have the option of moving to the Telco delivered video?

Chase Carey

Well, it's tougher for me to comment on AT&T because I'd probably be commenting on a stuff removed, since we don't bundle with them. Certainly the conversation and my expectation is AT&T is probably approaching it different than Verizon. I think AT&T will with us bundled offers that are pretty universal across the footprints and really offer it to everybody.

And I think they are clearly not investing anything close to what Verizon's investing FiOS. So I think in the FiOS side, probably is that differentiation is clearer and I think where FiOS is launched, that is clearly they're much more their lead product.

And we are the lead product where FiOS isn’t. So we are competing with them. There are still customers who take DSL we have and there still customers that want us and will take DSL with it for the spot leadership are the reasons of just content leadership. But I think in the AT&T, my expectation is AT&T will be pretty widely distributed itself.

U-verse would be more of an option for a customer that they are not trying to differentiate or sort of provide an edge, a extra weight to one side of the other is more a consumer proposition. There are two consumer propositions. The consumer chooses, I think with FiOS Verizon, clearly put more weight, unique offers in the FiOS area, free TVs in New York and things like that wouldn’t exist on the DSL bundle.

Craig Moffett - Sanford Bernstein

All right. Thanks, Chase.

Operator

(Operator Instruction) We'll go next to Ingrid Chung with Goldman Sachs.

Ingrid Chung - Goldman Sachs

Good morning. Thank you. So my question is about the geographic strength in terms of gross ads. You already mentioned that you had a negative impact still from the former BellSouth territories. But I was just wondering, were there any geographic regions that you did better in year-over-year that was making up for that?

Chase Carey

Not different, not meaningfully different than historical. I mean we do have historical geographic differences that the Northeast would be tougher than some Southern of that. Some things that are just the nature of the business. But I wouldn't say that in the quarterly trend, there was a dramatic difference in that regard.

Ingrid Chung - Goldman Sachs

Okay. Thanks.

Chase Carey

And certainly, again and probably the economic areas likewise that we've always kind of look at certain places people talk about, the Las Vegas, the Phoenixes, the Floridas, the Southern Californias, is there a geographic issue coming from some of them, the troubles and again would not say, there is anything material from those dynamics geographically either.

Ingrid Chung - Goldman Sachs

And what about competitively? Were there certain geographic areas that you saw were a little more vulnerable competitively?

Chase Carey

Sure. But, I mean, that's probably in the ebb and flow. I mean, I think, if you ask me in any quarter, it's probably true and in other places cable guys come out with a unique offer and in a city or the like and we deal with it.

But I wouldn't say anything different than the ebb and flow, that is again been the course of our business. So then from an overall perspective, we have this probably for all of them to be more competitive.

Ingrid Chung - Goldman Sachs

All right. Thank you.

Operator

And we'll take our next question from April Horace with Janco Partners.

April Horace - Janco Partners

Hi. Good afternoon. A quick question on the housekeeping, what percentage of subscribers are taking advanced services today and then also DISH came out with their box with the SlingBox capability. Is that a type of technology that you guys would consider or find interesting at all?

Chase Carey

I guess on the first, I think what we've said and probably not that different. I think we sort of said at the end of this year will be close to 50% and that's probably and we've given a lot more visibility in that, so I probably say sort of close to half our customers by the end of the year and it will have an advanced product.

And I think the SlingBox is an example, mobility I think will be a bigger part of our business. So I think it will be over the next set of years, not quarters and I think the Sling products, they are pretty niche products for a handful of customers that want it today. I think the real issue is how scalable the Sling technology is and anything, but a niche basis because of bandwidth issues and the like about it.

And so I think it's a nice product for niche customers that want that. But I think the whole mobility thing will probably emerge in more mainstream ways and it's probably a few years from now as it becomes more front center. I think we actually think things we've done in probably a much broader application and appeal like that, ability to remotely use it yourself or interact with your set-top box which has actually been a real popular product for us we launched this year and will probably look for ways to continue to deal with more the mainstream, the adding features and dynamics to the mainstream cellular and PC business for a large majority of our customers, not a small niche.

Operator

We will take our next question from John Hodulik with UBS.

John Hodulik - UBS

Great, thanks. First of all, on the AT&T relationship, Chase, is there any spending that you need to do upfront to get ready for AT&T as a distribution partner in terms of like, priming the channel?

Secondly, as it relates to the fourth quarter guidance, sort of a nice healthy uptick from the third quarter.

Verizon recently announced the new, some fairly aggressive bundles that included DIRECTV or $80 triple play type numbers. Does that factor into that strength that you are seeing or that you expect or could that possibly lead to some upside? And then if you probably don't want to answer it, is that the kind of pricing you expect from AT&T when things heat up going into next year?

Chase Carey

Yes, I think in terms of AT&T, since it was AT&T?

Right. There will be some, it will be more operational. We have, dealing with call centers, getting call centers prepared, systems in place to able to handle the customer between the two of us. So it's not enormous, but yeah there is clearly expense, but overhead, we will setting and coordinating, really the operational aspects of the business. Call centers, field service systems, bills and the like.

John Hodulik - UBS

Is that we are going to see in the margins in the fourth quarter or is it quicker?

Chase Carey

I think we are sure we can handle it. We are continuing to add features and dynamics to our business and I think again we view it as our job to try to find ways to be able to continue to provide these enhancements for whatever real enhancements for the consumer or enhancements in this case for the sale of channels and to manage it in the context of our overall goals.

So I think it will some and then clearly there will be some marketing, as you get to the more of the launch product to market. I think we would look for some ways to add, some marketing to it, which is probably work in progress, so its too early to say what that becomes. We would not be at this point banking on or projecting a sort of a significant jump from Verizon. I do think we feel we've put some positive momentum to that relationship, but it wouldn't be in the fourth quarter. I would not say it’s a material part of what I would be, projecting in the fourth quarter.

And I think AT&T I mean everything, every conversation I have had with AT&T as well as the rest of the people here, I think, there is quite enthusiasm on both sides and I think great excitement about what we're doing with the product, again it will be a building profits, as any relationship with the size of scale is through '09. But we think there will be great energy and great excitement about on both sides, the trial is really something that is building part of both our businesses.

John Hodulik - UBS

Great, thanks.

Operator

We will take our next question from Tuna Amobi with Standard & Poor's Equity

Tuna Amobi - Standard & Poor's Equity

Alright. Thank you. My question is on the digital transfusion. I know you haven't talked much about it because it's probably a non-event for you, but as you think about that transition, are there any initiatives that you are currently putting in place to try to capitalize on some of the confusion maybe out there for analog cable customers that maybe cut off , or even over the air who maybe willing to switch to some kind of a low cost pay-TV service. What exactly are you doing right now and how do you see that opportunity in your area?

Chase Carey

We are clearly are doing or addressing it. I mean there are two aspects to it. First, there are customers we have today that can be impacted, you know have TV in the kitchen with rabbit ears, something like that. So, we have initiatives and plans in place, so we obviously have to roll our customers that may not have local and they have gotten it that way. So, we are working with those customers that we have today to help them through this.

I think in the new customer place, we will have initiatives out there. Again I don't view this is a sort of major event for us. I think its positive opportunity. There's no down side to it. I think We will look to it, we're in the in the new task, we got some customers out of it, but we don't think is defining event and I guess , generally you're talking about customer who historically have not cared enough about TV to get pay-TV. So you will probably end up saying they are not going to uniquely profitable, or some may grow overtime, but by definition its probably not going to be customers that you build your business around. We would have offers and compete and I think if there's an opportunity, I think it will be positive for us, I just don't think it would be a sort of a major positive that we'd be looking at in '09.

Tuna Amobi - Standard & Poor's Equity

All right. Just one more question on the whole home solution, I think that's been something that’s been on your radar for couple years now and I am not quite sure. Can you be a little bit more specific, Chase in terms of the traction you might be seeing there? I know its still probably early this specific initiatives or marketing offers that you have gear around those kinds of things and how you intend to monetize that as you look out to next year?

Chase Carey

Yeah. I mean, I think at this point, the focus is really more from an engineering and customer experience perspective as opposed to first and foremost and that's really where the focus is today and we are going to move forward with phases that sort of move from being able to tire out supplies in the phase we are in now of really having the tying the PC screens at home to the TV screens in the home. You go watch DIRECTV on your PC as well as your TVs or access your DVR and your PC as well as your TV.

And you are going to move from that being able to up the time, boxes in the home, so if you got an HD box in one room and HD DVR in the other room, the HD box can access the HD DVR and then probably more towards the end of '09, '10 move to really a next generation box. It is one box feeding multiple sets, so it’s a process of moving through time. Our goal is really tie the devices in our home and no matter out of the home as we said with remote looking on the PCs and [Shaltons] but to tie the devices in our home from PCs to the boxes, you have to two ways, get a box from the ground up that will be able to really provide a fully, a whole what I guess would be the ultimate, that really what would have tied wholesome, the final product of home experience.

We are also, and if to restart in the fourth quarter sort of installation technology, single wire technology that makes sounds much more upgradeable, add flexibility, add interconnectivity. So all those things are things that we are deploying now. We actually have customer who are not marketing, but we actually have customers that are using, are tying their PCs and experiencing it.

We always call it beta sort of customers that we tell how do to it. We're not marketing to them but I think it's actually 10,000 plus customers that are experiencing it today. So we are starting to really move and I think our goal really is to refine the experience and get it out, get some of bugs worked out and really sort of move forward with that. So I don’t think it’s a revenue events in, it's not a revenue event in '09. It’s really a sort of getting that experience to a place where it can become probably a driving a centerpiece in that regard beyond '09.

Tuna Amobi - Standard & Poor's Equity

Okay. Thank you very much.

Operator

And ladies and gentlemen, we have time for one final question today. It does come from Kit Spring with Stifel Nicolaus.

Kit Spring - Stifel Nicolaus

Can you talk about any major content re-negotiations you have over the next year too? And how do you see your leverage against the major content companies, maybe both on the broadcasting and on the cable network programming side? Thanks.

Chase Carey

Probably I won’t get too far in to specific negotiations and I think most of the big players, we actually have dealt with over the last couple of years, it's always something coming up. And we have pretty good record. There's always a tension to a buyer-seller relationship that we have. That being said I think we have tried to approach things in a fair way and I think part of that ends up being, we expect to be respected for the size we have in the business, and to have values, that adapt pricing that is commensurate, can fit in with our competitors for the size we have in the marketplace.

And I think that’s been the goal and that’s what we’ve driven the business to. Not to think there again won’t always be frictions in it. We obviously moved quite successfully forward in adding HD for really everybody to it. So, I think we have been able to move forward and we’ve made progress certainly on program costs.

And there are always areas that one kind of talked about probably that are continuing to be there that probably have as you sort of say what are the bright light issues today, it’d probably be re-transfers and then sort of some of the local sports issues, not as much national but local.

Most of the big guys in re-trans we have for quite a while. So we don’t those sort of -- the real high-profiled big guys, but lot of stations out there.

So that’s a part of the business that we deal with day in, day out and continue to fight. But I think, we feel we made real headway on the program cost side and again. I think, our side is clearly an asset in doing, sell and we are going to make a sort of foundation on how we move forward. We expect to be treated fairly for the size we have in marketplace.

Kit Spring - Stifel Nicolaus

Thanks.

Operator

And ladies and gentlemen that does conclude today's conference call. We appreciate your participation. You may disconnect at this time.

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Source: DIRECTV Group Inc. Q3 2008 Earnings Call Transcript
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