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Q4 2008 Earnings Call

February 10, 2009; 2:00 pm ET


Chase Carey - President & Chief Executive Officer

Pat Doyle - Chief Financial Officer

Bruce Churchill - President of DIRECTV Latin America

Larry Hunter - General Counsel

Jonathan Rubin - Senior Vice President of Investor Relations & Financial Planning


Jessica Reif-Cohen - Banc of America Securities

Ingrid Chung - Goldman Sachs

Vijay Jayant - Barclays Capital

Doug Mitchelson - Deutsche Bank

Benjamin Swinburne - Morgan Stanley

Tom Eagan - Collins Stewart

Spencer Wang - Credit Suisse

Matthew Harrigan - Wunderlich Securities


Good day ladies and gentlemen. My name is Tom and I will be your conference operator today. At this time I’d like to welcome everyone to The DIRECTV Group’s fourth quarter 2008 earnings conference call. All lines have been placed in a listen-only mode to prevent background noise. After the speakers’ remarks, there will be a question-and-answer period.

It’s now my pleasure to turn the conference over to your host, Mr. Jonathan Rubin, Senior Vice President of Investor Relations and Financial Planning. Please go ahead, sir.

Jonathan Rubin

Thank you operator and thanks everyone for joining us for the fourth 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’ll 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 Group’s and DIRECTV U.S. annual reports on Form 10-K, quarterly reports on Form 10-Q and our other filings with the SEC, which are available at

Additionally, in accordance with the 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 schedules are attached to our earnings release and are posted on our web site at

With that, I’m pleased to introduce Chase.

Chase Carey

Thanks, John and good day to everybody. We feel good about our fourth quarter results and the minimum of our business today overall. Let me talk first about the U.S. I believe our brand content and overall customer experience has never been stronger. At a time when many of our competitors or feeling pressure from the broader economy and facing challenges in multiple fronts, we believe our focus on delivering a great television experience to quality customers through increasingly strong and after- sales marketing initiatives is enabling us to further differentiate us from our competitors.

These strengths have been enhanced recently by more aggressive offers to new and existing customers. Our offers became somewhat more aggressive in the middle of 2008 in response to both competitive and market pressure and we continue that strategy through Q4.

It’s important to note that our goal has been neutralized rather than what our competitor offers, as it is our object to differentiate ourselves on the quality of our experience not on price. We do believe these were intelligent investments capitalizing on our strength in the market.

Taking a minute to look at the fourth quarter in a bit more detail, clearly one of the highlights was subscriber growth. We achieved multi-year highs in both gross and net subscriber growth, more importantly this growth continue to come from quality subscribers with strong advance product takeaways. Obviously, the aforementioned offers also helped.

Churn was also a highlight. The driving forces behind churn reduction were the quality of our experience and the quality of our subscriber base. We continue to target our sales initiatives to quality subscribers and tightened up credit terms to limit involuntary churn. About half our customers now have an advanced product. Churn was also aided by more attractive upgrade offers and offers targeted our good customers to mitigate broader economic and competitor pressures.

SAC was up a bit year-on-year, but pretty close to our expectations. A richer mix of advanced products as well as higher sales costs were the primary drivers. In the fourth quarter we also begin to deploy an HD DVR box in place of a standard DVR, because an HD upgrade to be made without a box replacement or truck roll. Without this change, our SAC would actually have been down from Q4 ’07.

Turning to ARPU, lower growth is something we talked about earlier. ARPU growth has actually touched lower than expected. The primary factors lowering Q4 growth were increased new customer offers, credits to existing customers, lower hardware revenue and lower add sales. We already touched on the offers and credits. Hardware revenue has been dropping as box cost drop and add sale clearly were a victim of the economy.

The other Q4 metric that was a bit higher than expected was upgraded retention spending. Upgraded retention was actually about flat year-on-year, but we had expected it to be down. Again the largest factor driving upgrade spending was demand for advanced products from our existing customers. We also increased spending on our movers program and launched a loyalty program for our good long-term customers and Pat will describe these in more detail in a minute.

In terms of bottom line results, I believe the number that best signifies our progress is cash flow. In the fourth quarter our cash flow before interest and taxes increased about 45% year-on-year, even with 60,000 more gross adds in Q4. Our Q4 OPBDA grew a more modest 5% year-on-year as factors like higher sub add and advanced product upgrade demand put pressure on profits.

Our OPBDA growth was also impacted by an ongoing shift in the split of SAC and upgrade spending that gets capitalized versus expense. Our aggregate Q4 cash, SAC and upgrade spending was up about $50 million year-on-year; the amount of that that was expensed was up about $100 million.

Turning more briefly to Latin America, much of the strength I noted in our U.S. business was true here as well. Most of our key metrics continued to be strong. Churn is the one metric that continue to run higher year-on-year with Q4, ’08 churn at 1.59%. While always looking to lower churn, we are comfortable at this level given the lower SAC and expanding prepaid business in the region.

Q4 revenue was up about 15% year-on-year in spite of currency issues. In fact ARPU was down 11% in Brazil in Q4, leading to zero growth there. OPBDA was even strong with about 60% growth and a nine percentage point improvement in OPBDA margin. Our Q4 cash before interest and taxes grew about 50%. Overall we feel 2008 as a whole has been a really good year for the DIRECTV Group. We grew revenues about 15% and OPBDA about 20%. Cash flow before interest and taxes increased over $1 billion.

I’ll now turn it over Pat for few more detailed comments on the quarter and I’ll come back and touch on 2009 expectations.

Pat Doyle

Thanks Chase. All-in-all, I though we had a solid quarter, particularly in terms of subscriber growth, churn management and cash flow. The one metric that was not as strong as Chase mentioned was ARPU, which we’ll talk about a bit later.

Starting first with subscribers, we were pleased with a strong demand for DIRECTV, particularly inline of the more challenging economic and competitive landscape. The strength of our brand along with more competitive offers contributed to a 6% increase in gross additions to over $1 million subscribers in the quarter.

Despite the continued rollout of FiOS and U-Verse, this was our best number in 15 quarters. It’s interesting to point out that the last time we had more gross additions, was before we started implementing the tighter credit policies. Much of this growth can be attributed to the strong results from our direct sales channel, which had its best quarter ever by growing 20% over the prior year, while contributing over 50% of our total gross ads.

Our other strong contributors to this growth included our local dealers and commercial account, but more important than the increase in growth additions was that the overall quality of these subscribers was at or above the levels we’ve seen in recent quarters.

Another indicator of the quality of new subs is that 55% to 60% are signing up for HD and/or DVR services, bringing our overall penetration of advanced services to about half of our subscriber base. We also did a good job managing churn in the quarter, monthly churn of 1.42% was flat with last years level and I’ll remind you that last years fourth quarter churn rate was 15 basis points better than in 2006.

The story has been fairly consistent at recent quarters, namely our higher quality subscriber base, combined with increased penetration of HD and DVR services, continue to drive strong churn rates; specifically tighter credit screening policies and improved fraud management have been driving down involuntary and first year churn.

It’s also worth highlighting that our full year churn dropped four basis points to 1.47% representing the best level in about nine years; adding the strong gross ads and churn together drove about a 10% increase in net ads to 301,000 subscribers in the quarter. As you probably saw on the earnings release, this was the best number in almost four years, but the number was even better from a market share perspective as our sequential growth and net subscriber ads was about 50% greater than the combined increase reported by both FiOS and U-verse.

In other words we added about a 150,000 more subs in Q4 than Q3, while the telco’s combined increase was only about 100,000 subscribers. This continues the trend we’ve seen in recent quarters, where the telco market share gains appear to be coming at the expense of cable companies and DISH Network.

Moving onto the financial results, revenues were up about 8% at DIRECTV U.S. to $4.7 billion. Although the 8% revenue growth is still among the highest in our industry, it’s clearly a number below our recent performance due to slower ARPU growth of 3.5%. We’ve been flagging this slower ARPU growth for several months now, so we’re not surprised by it. In fact our full year ARPU growth of 6.1% was a bit higher than our internal target set at the beginning of the year.

You may recall that ARPU has been trending down for many reasons including lower upfront HD and DVR equipment fees, more attractive offers for new and existing customers and slower add revenue growth. The decline in up front equipment fees had coincided with lower set-top box cost. So, although offering free hardware hurts ARPU, from an economic perspective this has been mostly offset by the 25% decline or about $400 million savings in CapEx this year, resulting from the lower set-top box cost and similar to industry trend, the ad sales decline was probably a bit deeper than we had originally expected.

Regarding our increased promotional activity, the telco look at it in terms of offers provided for new versus existing customers. On the front end our offers for new customers were a bit richer starting in the second quarter of last year. Later in the year we decided to opportunistically capture market share at a time when our competitors were struggling. We believe the unfavorable ARPU impact from these strategies is a short term issue, because as I mentioned earlier we’ve been adding high quality customers who are signing up for HD and DVR services.

So, although we’lllikely to see an ARPU impact related to these richer promotions, over the next couple of quarters, we expect this impact to diminish as we go though the year when subscribers start coming off their one year introductory offers and revert to a more normalized ARPU.

Regarding promotional activity for exiting customers, we implemented a more attractive loyalty program for our best subscribers during the second half of last year. This program provides our highest value customers with offers such as a free upgrade to HD or DVR services and anniversary gifts. So, here again from an ARPU growth perspective, we are anticipating the impact from this program to lessen in the second half of this year.

Another reason for the slower ARPU growth in 2009 relates to the completion of a satellite lease, which generated about $75 million of revenue last year. With the contract ending we will see an unfavorable impact to ARPU growth of between 60 and 80 basis points each quarter of this year. In summary, the net impact from all of these changes as well our ARPU growth in 2009, as well as stronger ARPU growth in the second half of this year compared to the first half.

Turning now to profitability, our OPBDA margin of about 22.2% was down from 22.9% the prior year, primarily due to higher acquisition and marketing costs, related to the increase in gross additions, as well as the flow through from some of the ARPU trends I just talked about.

From a cash standpoint, our upgrade retention and subscriber acquisition costs, excluding the impact from the higher gross ads we’re relatively flat compared with the prior year. However, from a P&L perspective, these costs were higher than last year due to a few items including the higher installation costs associated with an increase in customers acquiring HD and DVR services. The increase in existing customers upgrading to advanced service was in part due to our new loyalty program which I talked about early.

We also have implemented a most aggressive movers program, because the cost of saving a customer who is moving is far less than the cost of acquiring a new customer. So, we’re retaining a higher percentage of our customers who are moving, which results in lower churn, but an increase in our upgrade and retention expenses.

Finally as Chase mentioned, there has been shift in the split of SAC and upgrade spending that gets capitalized versus expense. This is mostly due to the fact that our set-top box costs are capitalized and they have trending lower, while our dish and instillation costs are expensed and they have been trending slightly higher because of the incremental cost associated with an HD or DVR upgrade.

With these fourth quarter results, we ended 2008 with a full year OPBDA growth rate of about 14%, while increasing OPBDA margin from 24.8% to 25.3%. More importantly, we hit our target of adding at least $1 billion of incremental cash flow before interest and taxes compared to 2007. As a result DIRECTV U.S. generated about $2.5 billion or 73% more cash flow before interest and taxes than the prior year.

In addition to the increase in OPBDA, the cash flow growth was driven by a 24% decline in CapEx, mostly due to lower set-top box costs and increased usage of refurbished boxes from our lease program. At a consolidated level, DIRECTV grew free cash flow, which includes Latin America taxes and interest, finished the year up 76% to $1.7 billion. With this growth we ended the year with a very strong balance sheet, including a cash balance of about $2 billion and a net debt balance of $3.8 billion. Also in the quarter were share repurchases of about $1.4 billion, bringing the total for the year to $3.2 billion.

Cumulatively, over the last two and a half years, we have repurchased more than 400 million shares for over $8 billion, while reducing our outstanding share count by almost 30%. So, in summary I thought we had a good quarter, capping a very solid year, in which we met or exceeded all of our key targets we shared with you at our Investor Day a year ago.

With that, I’d like to turn the call back to Chase, for some closing remarks.

Chase Carey

Thanks Pat. Let me turn a couple of minutes to 2009. While we have many plans for this year, I want to start by touching briefly on three priorities. First, we’ll continue to drive our brand and content leadership. We’ll launch a satellite latter this year that will enable us to continue to add to our HD experience or continuing to build on our leadership in sports and add to the richness of our content with events like Friday Night Lights. Our VOD offering will improve in both richness to the offering and functionality in terms of things like faster access and a more integrated experience.

We’ll also continue to use technology and software to enrich the content experience with features like the DVR schedule or quick tune. Another key initiative in 2009 will be our whole home experience, which will start to rollout in the second half of the year.

Second priority will be continued strengthening and focusing of our sales and marketing efforts in a complicated and competitive market. High quality subs will be a greater propriety than ever. Building our AT&T relationship to its full potential is a key objective. We also think there are real opportunities for us to put a cable on it’s heal by developing relationships with the cellular industry as mobility becomes an increasingly central themed in peoples lives.

The third priority is to improve our customer services. This is one initiative where we came up short of our targets last year in both quality and efficiency. Ownership of a large part of our installed network is giving us much better insight into many aspects of services. We’ve developed tools and technologies like wireless handheld dish pointing verification, diagnostics and a vastly improved web experience to improve in performance at many levels. The key here remains execution and we have a tremendous amount of focus on this priority.

Turning to the financial story for 2009, we recognize that this is the time of unique uncertainty. We’ve weathered economic storms pretty well so far, but are fully aware of the risks. Fortunately, we face these issues from a position of strength and you look at our balance sheet, our cash flow, our competitive position and quality subscriber base.

These times may well provide opportunities to capitalize and other’s react to the challenges. At the same time we’re not immune, so we’re doubling our efforts to be lean and disciplined in every area for capital expenditures to headcount to operating costs. We believe we should plan for things to be bad and have any surprises to be on the upside or the positive.

With this environment in mind, we expect the U.S. business in 2009 to look a lot like 2008 with solid sub growth, improved margins and significant cash flow growth. Starting with subscribers, we expect net subscribers’ growth around the 2008 level with a little higher gross ads and turnaround of 1.5%.

AT&T will be positive although, that will rollout throughout the year, but the AT&T affect will be somewhat offset by plans to moderate our offers as such. ARPU growth is expected to be in the 4% plus range. We expect 2009 SAC to be around the level we saw in Q4,’08 while we expect to see increased demand for advanced products, we look to find savings to offset that pressure.

Pre SAC margin will improve in 2009 though not as much as it did in 2008. Programming costs per sub should increase 5% to 6%; upgrade and retention spending should be around the 2008 level on an absolute basis, maybe a tough higher. We expect margin improvement from areas like service and G&A.

Capital expenditures, excluding set-top boxes will be $500 million plus, but down from 2008. From our top and bottom line perspective, we expect high single-digit revenue growth with double-digit OPBDA growth, what was down a bit from the 2008 growth rate. We expect cash flow before interest and taxes to be north of $3 billion.

Looking a little more closely at the first quarter of 2009, we expect strong subscriber growth with gross ads at or above our Q1 ’08 level and churn around the Q1 ’08 level leading to another strong quarter of net sub growth. The year-on-year ARPU growth will be below our expected 4% plus year ARPU growth, probably in the 2% to 3% range.

As I noted earlier, we began to enhance our offers for new and existing customers in Q2 ’08, therefore these items are larger in Q1 ’09 than Q1 ’08. This impact will diminish as we go through 2009. Q1 ’09 also had some unfavorable timing on paper due events, which are later in the year in 2009. The high sub growth in ARPU variants will put some pressure on Q1 OPBDA, but we have factored that into our full year expectations.

Turning to Latin America, we obviously face the same economic risks with the addition of currency challenges so we will be equally disciplined in this region. That being said, we believe 2009 should be a year of real growth in Latin America. From an operating perspective, one of our priorities will be follow the U.S. blueprint in maximizing our advantage in HD and DVR services. In fact our advantage is even greater than the U.S., because our comparative position is stronger and we can piggyback on the U.S. infrastructure for cost and functionality advantages.

Another key objective will be to expand into the middle of the market. We clearly established ourselves as the premium segment leader, there is a great opportunity to use our leverage to create profitable packages for the mid market. Our prepaid business is one such effort that will do more in 2009. On an individual country basis there are clearly other priorities and opportunities that we’re focused on.

From a financial perspective, 2009 should be another strong year for subscriber growth, with net sub ads around the 2008 level. ARPU is a bit tougher to project due to the currency issues. We expect ARPU to decline modestly, due to unfavorable currency fluctuations, particularly in Brazil, although we do our best to offset currency impacts.

In an overall basis, we’ve done a pretty good job protecting ourselves from currency fluctuations, as most of our costs, evidenced in satellite leases and set-top box are in local currencies. These efforts should enable us to generate OPBDA growth in the low double-digit range. Cash flow before interest and taxes will be relatively flat with 2008. It’s higher box cost for advanced products and satellite CapEx offset the higher of them.

In conclusion, despite the economic turmoil and increasing competition, we’re very positive in our expectations for 2009 for the DIRECTV Group. We’re looking to revenue growth just under 10%, OPBDA growth in the low to mid teens, cash flow before interest and taxes growth of about 30% and EPS growth of 15% plus.

With that, thank you for your time. I’ll now turn it back to John before I return to questions.

John Malone

Thanks Chase and before moving onto 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 representatives of the DIRECTV Group. In addition, we’re webcasting this call live on the internet and an archived copy will be kept on our website. Finally I’d like to ask all callers to limit your questions till everyone’s had a chance to get their questions through.

So, operator we’re ready for the first question.

Question-and-Answer Session


Thank you, sir. (Operator Instructions) We’ll take our first question from Jessica Reif-Cohen with Banc of America Securities.

Jessica Reif-Cohen - Banc of America Securities

Thank you; Banc of America and Merrill Lynch. Chase, I’m just curious if you could comment on Liberty with the preliminary proxy out. Can we try to get out our arms around some kind of deal structures, what the timing might be and any comments you can give on the thinking of what an exchange ratio might look like if you go ahead with the reverse Morris Trust?

Chase Carey

You’re a couple of steps down the road, but I’m not going to get sort of putting I guess the cart in front of horse; I mean in terms of Liberty, unless you have a whole lot new and they’re going forward with their spin, but that doesn’t really directly effect us and I think that situation is probably pretty similar to what we’ve said in what we described before.

I think both of us would agree that structure that exists today between DIRECTV and another public company in which DIRECTV is the majority of the value, probably will not be optimum from most peoples perspectives and if there is a way for both of us to address that in a manner that makes sense, then I think we would do it, we’d look to do it.

That being said, we’re not going to do something, that doesn’t make sense for us. It’s not effecting our operations; it’s not effecting what we’re doing with the business as I think our result show. So, I think we continue to talk with Liberty and see what we can do, to the degree their spin helps narrow or address some of the issues, mainly issues obviously kind of revolve and things like value and governance to the degree we can address those. I think it will be a positive.

I think discussions between us and Liberty are constructive and I think we both see it pretty much the same and continue to try to have positive discussions and continue to see if there is a way to reach an agreement that would be good for all parties.

Jessica Reif-Cohen - Banc of America Securities

And can I just switch gears; you made a comment about potential wireless deals, could you talk about what you envisioned and do you need one wireless carrier or are you thinking about multiple and this is the last question, you said that advertising sales were down steeply in ’08, can you say what advertising sales actually were in 2008 and how much have they declined?

Chase Carey

To comment it’s not that specific. I mean do think that clearly the wireless business has sort of operated, independent of the other sort of aspects to what become a bundle, broadband telephony, wire telephony and video and I think there will be more of a interest on both sides for wireless to become a more interrelated part of the other aspects of this business. I think that’s good wireless space and good for us.

It can evolve in a lot of ways. I mean we’ve obviously developed functionalities to deal with wireless phones from the DVR schedule or in the like and contents are going to get richer. From that perspective obviously the customer basis that one can create things around, but its early days. I think it’s a positive opportunity for us and I think it’s an opportunity for us to create a dimension through our relationship.

That is we don’t have a wireless, we don’t have a cellular business ourselves, but we obviously have relationship with big wireless players, Verizon and AT&T and I think the real opportunities for us to create win-win, expand our relationships in a win-win way to do things and I think mobility is going to become in multiple ways a more and more valued attribute and a more and more important one.

I think you already see we can see how many households are cutting up phone wire and going for wireless telephony and that experience is getting richer and broadband on a wireless basis gets richer, I think those are all opportunities. What’s the shape and form of that as we go forward? I think we’ll have to see it as we discussed those things, but it’s certainly I think prmature to be try to pick one path over another in what is the right opportunity from what I was really addressing it from a broad basis I think it’s a real opportunity for us.

In terms of ad sales, it’s clearly down and we expect it to continue to be certainly down going forward in the short term. We’ll see where it goes again. I think, we want to plan, we’ve got plans for things to be tough and not going to put a percentage to it or perceiving to it, but it is clearly a place that we have felt and we’ve been immune to a lot of the economic pressures; it is certainly one place we’ve not been immune and we felt the economic pressures with a lot of other players in the advertising arena field.

Jessica Reif-Cohen - Banc of America Securities

Thank you.


We will take our next question from Ingrid Chung with Goldman Sachs.

Ingrid Chung - Goldman Sachs

Thank you, good afternoon. So, I think it’s pretty clear that you are taking share from dish and from cable. I was wondering if you could characterize more of that share coming from dish or whether more of its coming from cable and then secondly, we are wondering if you would consider increasing your leverage in the near term to take advantage of the window of opportunity for high quality issuers today.

Chase Carey

In terms of share, we obviously do try and we track and look at where both our subs are coming from and who they are going to, so it is certainly important to us. I guess what I’d probably say in that and I’m probably again not going to get too specific in it. It is both, it’s not largely skewed one way or the other, it may not be fully balanced, but it is a relatively general sort of share that went out again.

It’s largely coming from one of those buckets or the other; it may not be exactly proportional, but I think you’d probably see; if I was describing it generally you’d say it’s sort of generally across the breadth of the market and I guess in terms of leverage, I guess everything is relative. You may see it’s a little better today than it was a couple of months ago.

I certainly would not describe this as a good market. Now, I guess who knows what it is and it could be, it could get worse and I don’t know who’s going into it if it gets worse, but I think we’ll continue monitor it. I think we are quality issuer, I would not describe the credit markets as favorable and therefore I don’t think we probably would be rushing into these credit markets and unless we really had a reason to do so.

I think we’d obviously wrestle harder with what are the terms in which we can get, but as Pat touched on we sit on real cash today. We’re generating real cash going forward in the year and so I don’t think we’d go into these types of credit markets unless again we had a place to have a clear cut reason to do it, because I think in some timeframe these credit markets are going to get better than they are today, I mean better than they where a few months ago, but I am not trying to be naive about how quickly the market comes back or the breadth and depth of the credit market problems, but I think somewhat a reasonable time. I would hope you are going to get a better credit market, than you got today’s still.

Ingrid Chung - Goldman Sachs

If you don’t mind, if I follow-up on the first question; I was just wondering were there certain geographies that were stronger for you in the quarter than others?

Chase Carey

There always are. I mean again I wouldn’t say something that was sort of a shift. So, clearly there are places we do better and there are places that we struggle more, but I would was upset and it’s sometimes we have particular efforts to take advantage of something going on in a market.

So, some of it will always vary based on our own target and in actions we’re taking out targeted stuff that is really trying to be opportunistic. I wouldn’t say its been a real shift? I mean certainly there are differences between regions and segments, but again I wouldn't say you’ve gotten a sort of shift in the last quarter in that regard.

Ingrid Chung - Goldman Sachs

Okay, thank you.


We’ll take a next question from Vijay Jayant - Barclays Capital.

Vijay Jayant - Barclays Capital

Thanks. Chase are you going to have a single-tiered structure, if you wanted to introduce those second class of the stock, assuming its super voting. Would that require a shareholder vote or the board approvement?

Chase Carey

I’m sorry, I didn’t. I heard…

Pat Doyle

To put in the second class of stock, do we need stockholder approval or can the broad approve it? The only way the board could approve it would be using preferred stock. We don’t have two classes of common stock.

Chase Carey

I guess a simple answer would be, if you wanted it, it would require a shareholder approval.

Vijay Jayant - Barclays Capital

Okay, thanks and a question for Bruce, can you sort of talk about what’s Latin American growth on revenues and OPBDA was on local currency?


Mr. Churchill was disconnected.

Pat Doyle

I mean I think Vijay, a couple of things. If you look at the fourth quarter, our revenues for the segment were up like 15%. They probably would have been up probably 40% more or something like that, with kind of flat exchange rates on OPBDA, where we’re up by 60% and that would probably be like 15% to 20% access, absent exchange rates. So, it kind of shows also the natural hedge we have and that what most of our expenses are in, local currencies as well, so we get kind of a nice hedge on the exchange rate.

Vijay Jayant - Barclays Capital

If I could, one final one; since you’ve launched your VOD proposition in the market place, can you give any color on the take up usage of it? Thanks.

Chase Carey

Yes, (Inaudible) we have launched, its early days. I mean the take up is increasing. I still think VOD just for all players as the content offering has to improve in terms of windows and the like. Probably our greater focus right now is really in improving the experience and really making it easier to use, making some of the functionality more attractive, but I wouldn’t say right now. I’d say it’s big enough to be driving anything in a material way.

Financially I think we’re quite happy with the growth, rate of it, our take-up of it is improving, but again I think for us VOD is something that I think we look at as a financial or something that over a couple of years as the whole proposition improves, it becomes a more meaningful part of the story, sort of not a few quarters.

Vijay Jayant - Barclays Capital

Thank you.


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

Doug Mitchelson – Deutsche Bank

Thanks. Chase, because you said mobility was important, do you need to license Sling technology to sort of pursue your long term goal there; and then separately when you look forward with charter two and the bankruptcy as soon as maybe next week and Comcast going all digital over the next couple of years, what’s been your experience with those type of events in terms of helping drive sub growth? Thanks.

Chase Carey

I mean I think Sling as a technology, it maybe something very popular with a niche of a customer in technology sort has issues in terms of it being scalable. The major question is what do people want from a mobility perspective. I think they want a richer experience. If there’s a question of do they really want to watch two hour movies on cell phones; they want be able to interact with their devices at home to record it and watch it on the large screen TV, is it really geared more towards short viewing of live events that you don’t want to miss, the sports news and the like stuff.

I think there it becomes an important part, but I don’t necessarily think it’s just another screen that looks like your other screen. I think it becomes an intergraded part of an experience from a functionality in the context perspective, but I think in a way that makes sense for it. I think there are some aspects of it that just simply are customers based and sales channel based that we can take advantage of. On some sales level you just go out and look at the thousands of retail outlets and the like and it’s to the degree you can start to create some connections past it; maybe some offers with it and again some more integration between the content and video aspects of it. I think those are all opportunities.

I think the way Sling works and piggybacks on the back of the spectrum, probably in a scale start step, I’m not a technology guy, but I spend enough time with it that I think has some challenges. So, I think the early phases of it are going to be geared more towards sales marketing and functionality thats a logical step forward with the big players in the cellular business.

Doug Mitchelson – Deutsche Bank

And then on Charter and Comcast going all digital?

Chase Carey

What’s was the question on that?

Doug Mitchelson – Deutsche Bank

Your Charter potentially could be fileing from bankruptcy next week. I think in the past when cable companies have gone bankrupt, you might have had some opportunities to sort of steal share and then you made comments on Comcast went all digital in Chicago a while back, and if could just remind us of that experience and do you think Comcast going all digital and Charter potentially having some financial issues and a lot of public press surrounding that, are those opportunities for you or is that just sort of normal course of business?

Chase Carey

No, there’s certainly opportunities for us. Again as you said, we publicly said it, (Inaudible) we clearly targeted an array of markets and kind of did very well with that. I think we found the digital transitions from creating both the turmoil in the market, as well as it creates a different proposition for those customers. I think they have to deal with cost to digital boxes that sort of open opportunities for us to be those customers.

There’s certainly things we’ll be looking at. I touched on a sort of sales and marketing focus and I think it has become a real strength for our business and any one of the core themes is in all levels to be nimble, agile and opportunistic in whatever shape and form those things present themselves.

Certainly those two larger examples, and they can be any retrans-fights or sports channel fights and any other noise in the market that I think. If this market gets more competitive, I think you have to be able to take advantage of every one of those opportunities and certainly those would probably be larger ones in the scope of things.

Doug Mitchelson - Deutsche Bank

All right. Thank you.


We’ll take the next question from Benjamin Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley

Hi, good afternoon guys. A couple of questions, Chase on the channel contribution in the quarter, you said direct sales were up quite a bit over half the channels. Was telco down in the quarter, which I guess would make sense given the BellSouth comps and I know we’re only a few weeks in or less than two weeks into the AT&T distribution relationship, but any qualitative or quantitative points you’d want to make on and what that means for the year beyond, sort of the guidance you laid out.

Then one other piece just for Pat on more of an accounting question, but I think your earnings guidance suggest a pretty healthy growth in deprecation in 2009, which doesn’t make sense given the set-top payments. I don’t know if you could quantify that for us and what your expectation is for that growth rate over a longer period of time?

Chase Carey

In terms of sales, I think probably what you said is reasonably accurate. Direct sales was strong and up, but telco’s in the fourth quarter were down. And I think we’ve take some steps to strengthen and obviously that was just instead of AT&T and we think it affects the strength and I think we believe we we’re talking this morning about some of things with Verizon that are having some positive impacts going forward, but I think that generally would have been directionally correct.

AT&T, probably kind of more qualitatively and quantitatively; I think we are not going to try and extrapolate a whole lot in terms of quantitative comments. Qualitatively, we feel right. I mean initially we weren’t sure if we’d launch in all 22 states, but we did launch in all 22 states. It was a massive undertaking and I think that’s folks at AT&T as well as our folks here worked together fabulously from an IT perspective, from a telephony, from an install, from a sales perspective.

I always say the execution of the launch in a one to ten, ten being best, is certainly a nine if not nine plus. I mean I think they did a really good job of both sides and I think we feel very good about getting out of the blocks with this, but probably want a bit more in terms of results before we try and make any judgmenst in a quantitative sense.

Pat Doyle

And then on the depreciation, I think when you look at ‘08 where depreciation went up like $600 million because of the continuing effect primarily of the lease boxes and ’09 it should be something like a third of that $600 million as far as the increase. I mean we kind of hit our peak in ’09, but the year-over-year growth flows and then when you get ’10 we go the other way which we start to see the depreciation actually decline and some of the amortization on some of our prior acquisitions of like Pegasus, start to falloff. So you should actually see a meaningful drop in D&A when we get to 2010.

Benjamin Swinburne - Morgan Stanley

It’s very helpful. Thanks.


We’ll take our next question from Tom Eagan with Collins Stewart.

Tom Eagan - Collins Stewart

Great, thank you very much. Just two questions, Chase. First, what you think as a bigger market for you in 2009 and which will you focus on, the NDU market or the non-premium market and then secondly on churn, just to drilled down a little bit; you mentioned that some of the promotions are going to be rolling off in 2009 and on top of that you also recently increased rates. So, you might still feel comfortable about churn, I guess if you could just talk a little bit about that, it will be great.

Chase Carey

Sure. I didn’t get the NDU versus what; I didn’t get the other one.

Tom Eagan - Collins Stewart

You mentioned kind of attacking or rolling out into the non-premium market, so the market that isn’t so quite so high-end?

Chase Carey

You mean the Latin America, because that was the Latin America.

Tom Eagan - Collins Stewart

That was Latin America, okay. So, I guess if could just talk about your thoughts about then NDU market and any attempts you’re going to take?

Chase Carey

I mean the NDU market I would end up saying is actually a big priority operationally in ’09, but I don’t think it will actually be something that has an impact, if you know like a positive, but I think the benefits from a financial or sort of metric perspective will really be more over sort of 2010, 2011. I mean it’s a business that takes its build.

We’ve got our organization in place; we’ve got the technological solution in place. We’ve actually started to make some headway in terms of moving it. I think we’ve been upfront about saying its business, realistically we’re not player in and it’s an important big market for us, but I think a lot of ’09 will be really getting some momentum into that business really in some way.

I think we started that in the commercial business and started off late ’07 and sort of did it through ’07 and sort of through ’08. We started to get some real benefits that flow through, as we went to ’08 and go into ’09. So, I think there will be some positives; there won’t be driving positives for our metrics or results in ’09. I think they’ll become meaningful to us from a results perspective as we go into ’10 and ’11, but I don’t want to be saying that it’s not a big operational priority in ’09.

It is an important area we already were spending real time and attention to build strength there and make some investments. We have some investments we’re making in the first quarter to upgrade some properties as part of that strengthening, so it is an area we are moving on in.

In terms of churn, I guess what I should be clear is we’re not talking about sort of shipping from or taking a right turn. I think what we are trying to do when I talked about sort of again as moderating or tempering is try and tighten up in a few places. So, I think we will clearly continue to quickly in this economy have reasonably aggressive offers. I think what we try to do when we get into these things is try to say, can be find pockets or places where we think we can tighten this up.

So, it’s not sort to saying, “we’re going to go, we’re going to reverse course back to what we were spending our credits and offers at the end of ’07,” I think it will clearly be in this marketplace, an important part of our strategy to manage churn, but I think as we can do in a lot of places, I think we can tighten up and find some places where we can refine it.

I think our goal really ends up being which is sort of where we’ve got this. What really started in the second quarter of ’08, a ramp up in terms of offers and credits and therefore as we work through that I think in’09, we’d look to be much more in a stable place where we’re not sort of adding to those and we’re finding places we can squeeze it down a little bit. But again I don’t want to create impressions of some how we’re sort of going to be. It’s going to be a full circle back to where we are in ’08.

I think given the competitive, proper place which I expect to continue to be challenging and I do think the economy put some pressure on us. I mean there is no question if we ended up saying, what is the economy? The economy impacted us in some places. So, yes and certainly we’re spending.

Some other credits are results of the economy and I think that’s appropriate for us to do so and I think what we try to do is make sure we target those credits to our best customers and our most valued customers. I think we believe we can do up a good job of sort of tightening that up a bit. I think that’s more of our goal as we go through ’09.

Tom Eagan - Collins Stewart

And Chase, on the investments you made for the NDU market, is that more of an OpEx or in CapEx?

Chase Carey

I think they are actually OpEx.

Pat Doyle

For the most part we’ve upgraded building where…

Chase Carey

It maybe the ARPU Cap.

Pat Doyle

It’s kind of a mix, because some of the upgrades that we’ve done, the equipment remain with a kind of our sales agent there, but we are upgrading some properties that we’ll actually manage and those will be capitalized.

Tom Eagan - Collins Stewart

Right. Thank you.


And we’ll take our next question comes from Spencer Wang with Credit Suisse.

Spencer Wang - Credit Suisse

Thanks for taking my question. The first question, Chase you mentioned the whole-home DVR was a priority or one of the priorities in 2009. I was wondering if you give us a rough cost there and should we expect that to put some upward pressure on upgrading retention costs? Then the second question is, just on programming cost growth I think you said 5% to 6% per sub. It seems like you’re managing that line item better than some of your competitors. I was wondering if you could just talk to us about, the long run outlook on programming cost growth. Thank you.

Chase Carey

Sure. For the first, I mean really the initially phase, there’s sort of phases to this. The initial phase really doesn’t change SAC at all, because really what it is, it’s more soft where that is going to enable boxes, certain boxes to speak with each other and I guess the specific example would be if you had an HD DVR, if you have three sets, two HD boxes and an HD DVR it will be software where that it enables those two HD boxes to access what you’ve stored on your HD DVR.

So, really the generation that we sort of roll, that really is the second half of ’09, is really a software capability to have that boxes share something, certainly but not all boxes, basic box; that boxes share that type of content. I think our ’09 focus is we’re really going to do that and then refine that experience. Then if you go into ’10 which will really be the place where you probably move forward to sort of a generation of equipment that really is an equipment set up that is geared to do that, but which is essentially more of a home server with slaves or some sort of different type of device, so it’s really is a different set up in the home, but that was going to be the next phase.

The phase in’09 is really one that is software driven, generates the boxes to speak to each other and share that experience and I think what we’ll do is put that out there. Our initially focus will be to push in the volume to focus on the experience in really improving that experience to be really what it can and a great experience for those customers.

Spencer Wang - Credit Suisse

Programming cost growth?

Chase Carey

I don’t have insights to the others. I mean it is an area and I think publicly is a concern. We better spend a lot of time with it or you can look at a financials to know what’s our biggest cost. There is not a whole lot there. I mean I’d say the category pressures that the whole industry shares and probably lead by retrans and sports. I mean particulary local sports; if you look at the proliferation of these team deals and the like and obviously we have some that are out there already, publicly on some of the local sports.

So, we have a couple this year; we did it last year in terms of places where we’d expect some jumps on the MLP network launched in the beginning of the year and the innovations deal that thing. I think the whole industry came up because it’s conversion from sort of must carry to which they’ve doing previously to obviously a different approach.

I think probably we may benefit a bit from the fact that we’re sort of obviously capturing the benefits of our growth and size overtime and getting our contracts down to where they should be, particularly given the size we have in the business. I think we also probably have some of the more challenging and we have a pretty stable place. If you want me to say some of this, last couple of weeks ago I guess I saw a dish launched Fox News and some of them probably are more challenging contracts, agreements and the like that we’ve mostly fought and dealt with and have digested.

So, I think there are probably others that have more issues coming. Most of our big group re-trends, the L&L Group re-trends, we still have a lot of time in and so I think we’re sort of from a renewal perspective in a pretty good place vis-à-vis a lot of the things coming and I think appropriately it should be capturing some of the benefits that come with our size and scale, but we certainly are not immune to some levels of the programming cost issues that everybody has out there.

Spencer Wang - Credit Suisse

Great thank you.


Ladies and gentlemen, we have time for one final question today. It comes from Matthew Harrigan with Wunderlich Securities.

Matthew Harrigan - Wunderlich Securities

Thank you. Two questions, can you give us a little more impression on how the prepaid program is going down in Latin America given all the pressures, particularly outside Brazil and also when you talk about the whole network solution, are you principally looking at swim A on your 2009, 2010 initiatives or do you have some other things in your pocket as well?

Chase Carey

I guess in terms of prepaid, in the country beyond, I mean it’s been as well as the one were its the most mature and it clearly is a significant part of the Venezuelan business and it needs to be healthy. I think Brazil is probably the one that is new, but far enough along. I mean you’re looking on Brazil, but they’re still probably all in a building process.

So, Brazil has actually gotten more scale to it and I think Brazil is still in a process where it’s shaking it out. I mean I think it’s been okay, but it can be improved. So, I think we’ve had in the market, we’re making some refinements to the prepaid and it recently improve a bit, but I think that’s still a launch that we have some work to do to get it where it should be and I think the other countries are probably a little early. I mean like they are okay, but I guess they are not far enough along to probably make too many real judgments about it.

On the whole home, certainly swim becomes an interval part. Swim is an installation technology that’s certainly enhancing the whole communication within the home and it is an installation technology we are using for most of our more advanced setup these days. More than half of our HD DVR customers are getting swim. Again I think with new technologies we want to be prudent in how fast we deploy it and so I think that the swim installation will clearly continue to expand.

As a percentage of our installs, I think swim will be a central part of sort of the whole home experience. It clearly enhances the ability to move content around in the home and so yes the two do come together, but swim has a lot of others, I mean it just has efficiency and effectiveness and flexibility and it really gives the ability to sort of getting into drop shipping boxes and the like.

So, let as we make sure we’ve got a new technology. I think before we deploy it too broadly we want to make sure we take some of the bucks out of it and get some experience and learn from it and obviously test something in a lab. When you put something in half a million homes you learn some things you didn’t learn, no matter how hard you tested it, with a 1000 boxes in a controlled environment.

So, we are sort of in that place of deploying it reasonably broadly with the higher end or the HD DVR, U-Verse or our new subs and as we forward I think we’ll clearly widen that out, but it marries up pretty well with the whole home as we launch it out and plus those customers that has the set-ups that will be relevant to the software upgrade, will be ones getting swim.

Matthew Harrigan - Wunderlich Securities

Great quarter for this environment.

Chase Carey

Appreciate it.


And thank you ladies and gentlemen. This does conclude today’s DIRECTV fourth quarter 2008 earnings conference call. You may now disconnect you lines and have a pleasant afternoon.

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