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Executives

Patrick T. Doyle - Chief Financial Officer, Executive Vice President and Member of Proxy Committee

Analysts

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

DIRECTV (DTV) Deutsche Bank's DbAccess 21st Annual Media and Telecom Conference March 6, 2013 8:40 AM ET

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Good morning. We're going to start with the next presentation. Very pleased to have with us Pat Doyle, Executive Vice President, Chief Financial Officer of DIRECTV. Pat, thanks very much for coming.

Patrick T. Doyle

Oh, great to be here.

Question-and-Answer Session

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So look, I think what we're starting off with this conference, we've got 2013 in front of us. Everyone reported their quarters within the last 2 to 4 to 6 weeks and gave a bit of an outlook. And so we wanted to start with just thoughts around how is management at DIRECTV trying to drive value?

Patrick T. Doyle

Well, yes, that's a good question. I mean, I think, if I take first Latin America, I think you're going to see a lot of the strategy there that you've seen in the past. Our goal is to take as much advantage of the strong economies down there, the movement of the -- of customers into the middle market, into the higher income levels. So it's certainly our goal to take advantage of that, but also take advantage of that profitably. I mean, we have specifically designed our programs there to make sure that we're going to get the kind of return out of kind of the lower-end packages that we need. At the same time, we want to be the leader on the A and B markets. We want to continue to -- as those markets are attracted to stuff like DVRs and HD, we want to make sure that we're advancing those products along to that marketplace. And then, as we said, I mean, I think we've got some infrastructure things to do in Latin America, both from kind of broadcast centers from field service and call centers to deal with our growth, along with moving forward on the satellites there that we need to expand our product and services down there. So it's going to look a lot like what we've done before because it's been very successful. We continue to take share down there, and that's our goal, is to continue to take market share in Latin America, across the region. In the U.S., it's obviously a little bit different story. I think we've got a good plan there, which we've talked about, of trying to mix top line growth with profitability. We feel very comfortable that we've got a plan that really kind of deals with the rising programming costs, of trying to really push through the revenue enhancements we need. We want to get through price increases to the consumer that meet the market. And on top of that, push things, like commercial and ad sales and movies, VOD, to try to enhance the revenue stream. And then, we're keenly focused on margin and making sure that we're diligent, which is critical to us, as all of our other cost categories, we've got to be right on. And we're keenly focused on that. On top of that, we've -- we are spending a tremendous amount of time on customer service and the customer experience. We're committed to that. We're committed to continue to try to become the best in the industry at that and then also, just the whole customer entertainment. I mean, just trying to make the product better, whether it's a user interface or the services. So I think on both of those, we feel like we've got a great plan, and certainly, the management team is committed to achieve, both in Latin America and U.S., what we need. And then I think on top of that, there's obviously the return of capital strategy that layers on at the top level, where we're -- to the extent, we don't return capital or we don't have capital redeployed for higher-value projects, it would be our intention to continue to return capital to our shareholders.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So you sound busy?

Patrick T. Doyle

Yes.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Okay. So I think we'll talk through a lot of those. And you ended on the operational side with improving the product, and that's where I wanted to start. And Bruce Churchill talked last week, spent a lot of time on Lat Am, and we'll touch on that. But I think we'll spend a little bit more time on the U.S. today. But product differentiation cuts across both, so it's a good place to start. What's the innovation path for DIRECTV?

Patrick T. Doyle

Well, probably it starts in 2013, with the launch of our Genie product. And we're early on in that product, but it's been well received, not only by new customers, but the demand that we're getting from our existing customers. We're seeing a lot of interest and people upgrading, obviously, much larger storage capacity than you'd see in cable, being able to record 5 shows, multiroom viewing. It's a great product. We're also still on our path of getting as much of our customers connected to broadband. We finished 2012 with over 3 million customers connected to broadband. Our goal is to get another 1 million-plus connected to broadband. I think that's important. We're moving forward on things like voice search. I mean, we're spending a lot of time on Discovery and how we can make it easier for our customers to find the right products that they want. And so on Discovery, we think the next move that we'll be testing this year is voice search because we think that's a lot more intuitive than trying to kind of type numbers. There's a lot of things that's going on. I think you'll see also a lot of -- the more we connect, the more interactivity we can get with the customer so that they can be watching a show and doing other things, whether it's weather or interacting with the show. But we've -- I think the Genie product, we're -- we really like. And I think the customer is resonating with it. Probably the next evolution of that, which is coming pretty soon, would be then wireless throughout the home for distribution, and that's not far off in our plans, either.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

When you think about the Genie, what do you see from those customers? Does it drive higher ARPU? Does it drive lower churn? And is there any segmentation that you can offer? Is this really sort of the higher-end customers reaching out for this? Or do you see it broadly across your entire customer base?

Patrick T. Doyle

Yes. I mean, it's early on so it's kind of hard to tell exactly what the impact is on Genie. I mean, our experience tells us whenever we come out with a new innovative product like this that, that's a step up. Yes, we do get more on the way of ARPU. It does make for a stickier customer. Probably, a little early on that one. But again, I do think that this is the kind of the product that the customer really resonates with. It really does make a difference in how they watch TV throughout the house. So I do think that this will be a good product going forward.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

When you try to extend the time frame out, I know it's always difficult because the marketplace is evolving. I think one of the things the cable guys are excited about is they try to keep people with satellite, the fact that they have this 2-way interactive network. You talked about trying to connect more homes. How do you feel about where -- what do you think the home is going to look like in 5 years? And how do you think about competing against the cloud-based user interfaces that the cable guys are introducing?

Patrick T. Doyle

Yes, it's a good question. I mean, I think -- look, we've, by necessity, have gotten very comfortable with our customers connecting our boxes to somebody else's broadband service. I mean, it's just part of the environment we're in because we don't have our own broadband service. And experience is telling us that, as we've seen before, is people will discriminate when it comes to the video product. It's usually kind of video, broadband is the next most important and then telephony. So we're -- I mean, we're comfortable with dealing in that environment. And so going forward, we look at being able to offer the consumer everything that a triple-play supplier can do. Because like I said, we're going to connect as many boxes to broadband as we can. We want to get them all of the services, whether it's VoD or apps or any type of interactivity. So we see that. I mean, we definitely see wireless in the home being important. We see streaming inside the home and outside the home. We see people are definitely focused on multiple devices, and we want to make sure that user experience is as good on your best HDTV as it is on your tablet or on a laptop or on a mobile device. And that's our goal is to really make sure, when you're in the home, it's a seamless experience. You're going to get the same quality if you're looking at a tablet as your best TV in your house, and that there's no distinguishing between that experience.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Your a close #2 in terms of scale in the U.S., and again, you also have Latin America. I think you've highlighted before that you guys are sort of #1 worldwide, right? And when you think about the fact that Comcast, AT&T and Verizon are offering SVOD services, does it make any sense to partner with Netflix? Is there industrial logic between acquiring something like a Netflix and offering it like an HBO GO service or a network just like HBO?

Patrick T. Doyle

I mean, I think we're always interested in looking at opportunities that are out there. I mean, I think if you talk about SVOD, in particular, we've been pretty cautious. Obviously, as we connect more of our boxes to broadband, we'll be able to invest more, but we try to be fairly prudent and logical. As we move forward and build scale on broadband connectivity, we'll be willing to invest more in content, right, for a library. But we're always interested in -- and we continue to try to make sure we have a dialogue with everybody out there just to kind of get the lay of the land. But yes, sure, I mean, for us, I think there would be some value there. That's not top on our priority list right now. Our focus is mainly building on our own SVOD product. But again, I think you'll see us pace that as we get more and more of our customers that can access the VOD product.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So the natural progression, when you talk about things like the Genie and it being a better box, is for us to think about the cost of that better box. Can you walk through what do you think the SAC cost is going to look like for the future home and sort of what the puts and takes are from where we are today?

Patrick T. Doyle

Yes. I mean, sure. If you break down SAC, some of the easy stuff is on like on the install cost, we continue to try to drive efficiency there. You have a natural tendency for that to go up just because of cost of living and wages. But those are pretty modest. If you look at our kind of commissions and direct sales cost, again, our focus is to be as efficient in that segment of SAC as we can. So it generally gets back to hardware and the technology and the home. And that's probably a 2-pronged thing. I mean, we want people to put technology in the home. We want them to have the best experience. As you said before, we're -- generally, we find those are higher revenue producing and customers that stay with us for a long time. So on one hand, we're happy to see people that want the Genie. They want the whole home experience. They want HD throughout the home. So to combat that, again, we're always focused on driving down the cost of hardware, not just the set-top boxes but everything from cabling to the dish. And also, how efficiently we can install when you get a much more complicated home. So I would say -- it's hard to tell, but I would say, look, I think SAC is going to probably stay pretty flat in a range. As you get more technology in the home, our goal would be to continue to drive down the cost of the product, the hardware product, commensurate with the higher demand for advanced products in the home.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

The -- obviously this is a new generation of box that does more. On the marketing side, fourth quarter call, Mike mentioned the challenging competitive environment. What are you seeing so far in the first quarter? Are you seeing any change in the competitive landscape?

Patrick T. Doyle

Yes, I think the competitive landscape continues to be intense. You get -- I mean, I always find that there's an ebb and flow. I mean some of our competitors may move back a little bit, while some get more aggressive. Probably, the one thing that we continue to see, which is probably my least favorite in the promotional side, is cash-backs. Most of our competitors now are offering a cash back, and for us, that's kind of the worst promotional offer because you're just paying customers that come onto your platform. And I -- honestly, from our view, it's just -- it's not sustainable to continue to offer cash back to customers. But on the flip side, again, I think we've been -- we continue to compete in that environment month in and quarter in, and we feel comfortable that we've got the right strategy and the right product to continue to compete, even as our competitors may up the amount of cash back that they give to their customers. But that's probably the biggest change we see of moving up and down is just how much the competitors are giving in cash back to consumers.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

And have you found equilibrium with your sort of marketing strategies, the segmentation, the fact that you've been tightening credit policies? You've made a lot of changes over the last couple of years.

Patrick T. Doyle

Yes, I think we have. I mean, as we looked at the numbers in 2012, what we were very pleased with is the actions that we took in '11 and into '12. When we looked at the lifetime value of the customers that we brought in, in 2012, and we're constantly going back and looking at those, both on -- after like 3 months, 6 months, a year, how are they performing. And we're seeing lifetime values of customers that are increasing by double digits from '11 to '12. And a lot of that is -- it's a combination of selling more advanced products and getting more revenue out of those people. And then also, kind of making sure, on the lower-value customers that we do a better job of screening or making them pay a little bit more. So very pleased with the transition we saw when we tried to focus on higher quality and creating more value. So as I look at '13, I mean, I can tell you that it's a constant exercise within DIRECTV where a month doesn't go by, where we're continuing to evaluate the profitability of the customers we brought on, their behaviors and is it consistent with the behavior that we thought. So I would say more tweaking. We always do that. It's like, "Okay, this group, either return is doing better than we thought and maybe we can get more aggressive in that group or we've got a segment over here that really didn't produce the kind of values that we thought," and then, you start to dial back. But I think, I don't foresee big changes in '13 like we might have had in kind of '11 going into '12 of really kind of trying to focus more on profitability of new customers coming into the platform.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

The lifetime value comments are encouraging. And I think the other side of that is you talked about investing $200 million more in 2013 retention, $100 million in CapEx, $100 million [ph] of OpEx. And so when we think about it from a number standpoint, of course, that's $200 million in 1 year that's come out of what we might have thought lifetime value was for the customers you previously acquired, right? So how do you juxtapose those 2?

Patrick T. Doyle

Yes. No, it's -- that particular decision, I mean, we spent a lot of time going in and analyzing the behavior of our current customers, their upgrade tendencies, what happens when they call and they don't like the upgrade offer. And then what do they do after that and what are their churn propensities. Or even on a move, you have certain layers of offers we have when people move. And I think we came up with kind of a plan that we're confident that, that's going to return. It's going to give us a return that's better than a lot of, let's say, some of our lower-value, lifetime-value customers coming on as new customers. So it's very targeted. I mean, it's very specific. When we talk about the additional $200 million, we're going to invest in new customers. It's going to get us a return on top of what our expectations were just from that transaction, that's very attractive. So it's not something where we're just going to kind of, "Hey, go out and spend more on upgrading people." It's very targeted on certain types of customers and certain type of activities because we're always looking at the activity that gets more revenue or gets a stickier customer because they'll sign up for another 2-year commitment. And it's a certain quality of customer that's proved to us that we're willing to reinvest in them. So we're really confident in -- like I said, we've done enough work that we're very confident on the return that we would get on that $200 million.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So I shouldn't think about this as a statistic of, "We've upgraded this percentage of our existing base to Genies" or other metric because it's more situational specific?

Patrick T. Doyle

Yes, it is. Like I said, it goes everywhere from "Hey, here is a good customer that's been on the platform for 5 years. They're not getting the kind of experience of like a Genie or a multiroom viewing. They've been a great customer." We're going to be much more proactive and much more lenient as to kind of the cost of doing that versus a customer that's maybe been on the platform for 1.5 years and now sees a new product coming out and says, "Hey, that's great. I'd love to have it." And then, like I said, everything from movers to customers that are very long-term customers that may have very old technology in the home. Those are the ones we target. It's not kind a -- it's not a shotgun blast of just upgrade everybody.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

I'm finally going to get my Genie box, it sounds like. So mid-single digit U.S. revenue growth, something you've been targeting. You certainly hit last year, so it sort of seems like the plane landed safely. But what investors wonder is how long can you continue to push price in a tougher economy. So now growth is being driven more by price than subscribers. Can you talk about the sort of the concern that the pay-TV package is getting too expensive and how you continue to drive revenue?

Patrick T. Doyle

Yes, I think that if you look at what we did in our most recent price increase -- I mean, again, I think the whole industry -- I mean we always try to be fairly prudent, not -- I mean, we're not trying to pass through the programming cost increases to consumers. So all of our -- kind of our multiyear plan of looking at revenue is really kind of assuming a status quo on 3% to 4% annual rate increases, not the 7% or 8% you'll see in programming cost increases. And then as, I think, we've talked about before, I mean, we are really focused on all of these other ancillary revenue streams. I mean, we push at commercial. We push at ad sales. We push at getting a better share of wallet on movies, and so those are all critical. Again, on top of that is making sure we get more and more people to sign up for advanced products and that revenue. So again, we'll see how the market reacts. I mean, I think we were pleased to see that, in addition to us, there were -- most of our competitors put together fairly aggressive price increases in this year. And I think that's -- I think it's going to be the new norm. With programming costs doing what they're doing, I mean, I think the industry is -- has been pretty prudent in the price increases they've put through. But when you go year-on-year, it's -- I mean, I think, it behooves the industry to try to match up a little bit better with the cost increases.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

And you're putting an RSN surcharge in place, and some of your competitors also decided to do that as well. Has there been any reaction to that? Has that sort of hit yet?

Patrick T. Doyle

I mean, we've been surprised that the reaction has been pretty mild. We started in the fourth quarter with new customers in those territories, didn't really see any reaction there. We also tested before we launched it, putting in an RSN for existing customers in those territories and then, last month, rolled out in those -- for existing customers, the RSN fee. And honestly, we have seen very little reaction from those price increases. And like you said, it helps that now I think we're starting to see some of our competitors go down that same route. So it's not just DIRECTV out there on its own, with -- the only one that's differentiating on sports cost.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Can you talk a little bit about the commercial and the advertising and the movie opportunity? Is there any sort of meat on the bone you can put on there for us?

Patrick T. Doyle

Yes, I think if you look at 2012, we had a really good year, in that both commercial and movies gave us double-digit growth year-over-year. Ad sales was a little bit different in that we had some -- kind of rolling out that product more nationwide took us a while. But the second half of the year, we saw double-digit growth on ad sales as well. Looking forward to 2013, we certainly think we can grow commercial at double digits. Movies, again, kind of depends a little bit. We're probably not as optimistic there of double-digit, but still good growth there. And I mean, I think ad sales we're really kind of putting ourselves in a position where maybe not significant growth in '13, but as we roll this out and get better at it and selling at it, we do think it can provide really good growth going forward in '14 and beyond. So we're definitely focused on it, and it's important to us because, like I said, anything that we can that takes the pressure off of those annual programming price increases, where you can get these revenues in other sources, I think is -- it's critical for us to continue to push that as hard as we can.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

And on the past, you've sort of talked about the movie spend per customer and the advertising sort of spend relative to cable levels. Is there a relationship there that you can share with us?

Patrick T. Doyle

Yes, I mean, I think that -- I mean, it's not surprising that if you look at -- like our total advertising dollars that we get, if you compare it to a Comcast, we're probably at half of or less of what they bring in. Now again, different model with local versus us now moving to local but being dependent on the DVR. So I don't know that we'll ever kind of totally bridge that gap. But it's certainly our goal to kind of squeeze the difference between the amount that, like, somebody like a Comcast can get from local advertising and what we can get. So I do think there's a lot of room there just because, today, we've never been able to really sell anything other than national, and then we went to regional. Now we're bringing advertising to a local level.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So of course, we always talk about programming cost. I think the big topic for you is the NFL. A couple of years left on the current contract. Have formal talks with the NFL begun? Usually they renew early.

Patrick T. Doyle

Yes, I wouldn't call them formal talks. I mean, we continue to have a dialogue with the NFL. I think now kind of once you get past post Super Bowl, they're really kind of focused. When they're leading up to the Super Bowl and don't -- aren't really kind of interested in getting much in the number. But this is probably -- yes, there's a time. We're kind of halfway through our 4-year deal. I mean, usually, historically, we found that's kind of when the NFL wants to start thinking about what happens beyond the next 2 years. So I think again, our relationship's great. We continue to talk and share information on how did this last season go, what were the take rates, how did our strategies work. So we talk a lot about kind of how we're different, right? And a broadcaster who pays for rights and then passes it on to the advertisers versus us, so we're really depending on our customers taking the product and being willing to pay for it. So I think there is a difference there, and I think they recognize it. And I think it's good to have that dialogue. We share with them kind of how we think about it internally and how we try to drive that, but nothing formal. But again, I think, this is probably the period between this season and next season where I would think there would be more dialogue than we've had in the last couple of years.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

And I think you sort of are implying that perhaps they'll be reasonable. Obviously, one thing investors will be concerned about is that sports inflation everywhere, why wouldn't this contract become more expensive when it's already pretty healthy marketing expense, as it currently sits. Any thoughts on that, sort of competitive positioning versus cost?

Patrick T. Doyle

Yes. No, I mean, I think, internally, we've spent a fair amount of time of kind of looking at, "Okay, what our economics? How do we value the product, not just in the direct revenues, but the type of customers it attracts?" And an NFL customer tends to buy Major League Baseball and NBA and other products, and we've had that dialogue with the NFL. They're aware of that. So for us, again, there's a point where we're certainly willing to renew and at some increase that's reasonable, that we can absorb and continue to pass on to the customer. I think, obviously, if it goes above that, we would certainly either think about not carrying it or go nonexclusive. I mean, I don't -- we're not necessarily concerned about going to nonexclusive, I mean, if it's structured properly. Our goal would always be to keep it exclusive, if we can. But there's -- obviously, there's a paying point that I think we would reach where we wouldn't do that to our shareholders.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So why don't we finish off the U.S. with CapEx. So what is the -- why don't we just start with the satellite suite and build back from there. What does the satellite suite look like? Is there a refresh cycle coming any time soon?

Patrick T. Doyle

We've got the 2 satellites on order. And I think those 2 satellites, once completed -- one was to deal with the DIRECTV 10 satellite that was having some anomalies, which have now settled down, fortunately. Something that we were concerned about has now kind of dissipated. So I think that once 14 and -- DIRECTV 14 and 15 are completed and launched, I puts us in a pretty good position. I mean, I think after that, anything that we would decide would be more discretionary on, "Does it add value or services?" We're probably still a few years away from starting to think about just retirement of -- end of life on satellite. So our expectation would be after 14 and 15, at least you'd see a dropoff for a while until we had to start thinking about a DIRECTV 16.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Maybe sort of end of decade, sort of thing?

Patrick T. Doyle

Yes. No, I mean, I think -- I mean, the fact, like I said, that DIRECTV 10 had some issues but then is now working very well and the fact that we have 2 satellites on order puts us on a really, really good position once those 2 satellites are up and running.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So maybe a little bit -- this is repetitive to the call, but you talked about some headquarters CapEx, the satellite CapEx. How does U.S. CapEx sort of flow when you think about '13, going to '14, '15, '16?

Patrick T. Doyle

Yes, I mean, I think we've said that. i mean, we really view '13 as a high water mark. Yes, the things -- I mean, there's the couple of things -- we talked a little bit about spending more on upgrading our customers. So of the $200 million we talked about of additional spend in '13, about half of that is CapEx. We are going through a kind of a consolidation of bringing all of our -- kind of the spare office space in El Segundo together and trying to build more of a campus atmosphere. That will be essentially complete in '13. The satellite spend starts to drop off in '14. And then, we have -- Mike, who's pretty -- he's pretty passionate about our investment in the customer experience and technologies. And so I think, there's a little bit more spend in '13. But we -- I kind of expect '14 CapEx to look more like '12. So I think, again, this is -- '13 is kind of a high water mark, with the campus build. We don't see, like on the upgrade and retention of -- again upping that $200 million additional spend and going higher in '14. So there's kind of a natural kind of peak, and then I would say, like I said, '14 will look a lot more like '12, I think, when we get there.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Okay. So why don't we shift over to Latin America. I wanted to start with the guidance you gave for flat profitability for 2013 versus a core of 20% -- or almost 20%, I think, was the number thrown out in the conference call. And I'm having trouble connecting the dots between the 20% core and 0% guide. I can get a good part of the way there, but it still seems like the guidance feels a little bit conservative. Is that right?

Patrick T. Doyle

Yes, I mean, I think the -- I mean, I think from a starting point, absent the devaluation, I mean, I think our guidance would have been -- you're going to see about a 20% growth in revenue and a 20% growth in EBITDA. I think the devaluation effect on the ongoing business, I think as we said, kind of would drop the revenue more into the mid-teens. I think probably where the disconnect was, because the Venezuela is so profitable, it's one of our best businesses, it's got -- it's self-contained. We don't put any more money into it. So it's -- it uses a lot of recovered boxes. It's very efficient. It has a very low cost of programming. So its margins are higher than you might see in Argentina. So when you looked at that, the revenue would have gone from 20 to 15. The EBITDA, just because of that, would have gone from 20 to more like 10. And then, you layer on the onetime charge of basically writing down the cash to the current rate, we've got the 10% to 0%. So again, I think there is -- my view is I'm optimistic that we can do better in Latin America than a 0% growth. But again, I think some work to do there to kind of make sure we drive the right decisions down there. But kind of mechanically, that's kind of how it worked off of our original plan.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So essentially, the company reaffirmed the long-term guidance for Latin America despite devaluation in 2013 and the flat EBITDA. And I think -- so sort of an open target -- topic, but I'm interested in what drives the confidence in still hitting the guidance target relative to the investor concern that there might be more devaluations or competition might increase over time?

Patrick T. Doyle

Yes. No, I mean, I think if you look at the core business, I mean, I think we're -- I mean, we have a lot of confidence in not only kind of the markets there and that they will continue to be a little stronger than you would see in, let's say, the U.S. market and our positioning of our product down there to take advantage of that growth. So when you kind of -- just take the devaluation and the effect of that into our outlook, we think we can still kind of meet all of the kind of the pretty aggressive targets. Now, again, if there was a deval and it went from 6.3 to 10 or 12, that's not in those numbers. It's too hard for us to kind of predict what's going to happen in Venezuela. And particularly, now with the death of Chavez, we'll see kind of how that market turns out. But yes, that's kind of, really, kind of assuming status quo in Venezuela, which, again, may not be the case, but it's the only way for us to kind of -- to move ahead. And I guess, I would like to add is that, and we have said before, when it comes to Venezuela, we always kind of knew that the exchange rate -- the official exchange rate wasn't a reality. But we go in and we manage that business. We don't put any more U.S. dollars in there. The only way we put boxes in -- import boxes into that country is if the government allows us to use the local currency to pay for those boxes. So we look at it as really kind of a self-contained business. And our view is, "Hey, let's run it the best we can and create the most value." It's -- and fortunately, it's a great pay-TV market, and the people in Venezuela love pay-TV, and they love our product. I mean, we're -- we have great market share down there. So our view is, on the long term, is, "Look, let's just keep managing this. Let's be smart. Let's not put more U.S. dollars in there that we can't get out. But let's manage this thing intelligently and then let's see kind of where the future of that country goes. It may get better." And that's how we look at it as an opportunity for sure.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Venezuela's topical, Brazil's a lot bigger and more important. Anything interesting or new in Brazil for the growth trajectory there?

Patrick T. Doyle

No, I mean, I think that -- I mean I think we're really pleased. If you look at our numbers for 2012, I think we had a really good year. And even what I liked is -- particularly, we got to the second half of the year, some of our competitors, particularly on the lower-end packages, got really aggressive in certain markets, and we decided not to follow suit there. I mean, we just didn't think it was prudent on some of those lower end. We want to keep our returns on kind of the lower-end packages up there where we want it. And I mean, I think, we've talked about like a 40% IRR on some of the middle market packages, and we think we're still right in that range. But we continue to monitor that one closely just because it's such a new market. So again, I think there's still good growth. We still see really good growth in 2013. And again, our focus, like I said earlier, would be, "Let's continue to dominate on the A and B market on the higher-valued customer that wants advance products, and then just make sure we monitor the middle market very closely for any type of trends that would tell us that things are moving better or worse and that we need to adjust to that." But we're -- we feel very good about the Brazilian market.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

And we talked about this a little bit in the call, but again, a very important topic because capital intensity in Latin America was also increasing in 2013. And you talked about the 40% IRRs. Have the return profiles for the high-end or the middle market been improving, deteriorating at all? And again, we're just trying to juxtapose that against there is more CapEx than expected.

Patrick T. Doyle

No, I think the returns have stayed pretty steady. I mean, I think we've found some things that tend to put pressure on returns. I mean, the lower-end customer tends to demand more of services. They call more often into the call center than we had anticipated. But then again, you kind of tweak the economics upfront to try to make sure you're compensating if they're drawing more on your -- on kind of the overhead cost. The upper end, we -- again, we have seen a very high desire for those customers to move into advanced products. I mean, if you kind of look at our upgrade and retention costs in Latin America, and this is true in Brazil and in PanAmericana, there's a fairly strong demand on the A and B market. They want the HD product. They want the DVR product. They're becoming interested in the multiroom viewing product. So I think that, that's -- we kind of find that kind of net-net, the returns are staying very steady in both the upper end and in the middle market.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Why don't we do this? I know it's breakfast so we rarely have any questions. But I've got a couple more obvious ones. But if someone on the audience has a question, we have enough time to take it. One on the back. Please wait for the microphone.

Unknown Analyst

This might be an obvious question. Just do you have any idea when you might make a decision on this GVT SA in Venezuela and what you're going to do?

Patrick T. Doyle

Yes, I think that the comment that we made on the earnings call, I think, are pretty consistent. I would say that we would finish our evaluation probably within the next 2 weeks. And that, at that point, we would decide whether to -- that we would move further or pass on the opportunity. I can tell you because I just spent a fair amount of time this week looking at it. It's -- from our standpoint, because, I mean, we don't see it as a "have to do" in Brazil, that to the extent we move forward, I guess I can ensure the investors, that it's -- the economics are going to be compelling. I think we're not going to go into a transaction where we don't feel like it clearly creates additional value for the company that we couldn't get otherwise, with the capital that would be expended on that transaction. So I think we're approaching it kind of very, I would say, cautiously, very diligently. And I know Mike White, in particular, wants to make sure if we do this, like I said, that the economics are compelling.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Any more questions? Again, wait for the microphone.

Unknown Analyst

Just keeping it on the M&A theme. Apart from GVT, what other types of M&A activity would you guys be looking at?

Patrick T. Doyle

Sure. I mean, part of the reason why I think you've seen that we've returned so much cash over the years is we have -- I mean, we're constantly looking into the market and seeing opportunities that are out there. I think as you probably heard us speak publicly, we're not particularly keen on getting into content. I mean, we just don't feel like that is our core competency. And generally, those assets come at a very high multiple, and then you have to kind of turn around and figure out how to make money on it. I think to Doug's question before, I mean, we continue to look at what people are doing and kind of over the top in those areas, and I think to the extent that there were an interest there, I mean, something along those lines. But in all honesty, we really don't see anything out there that's critical that we need to do to continue to deliver the returns that we have. We're very comfortable. Like I said, internally, we're geared up to be a single-play video provider, but to be the best one out there and to drive what we think will be top quartile returns over the next several years.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

We have 2 more. Why don't we go -- either one, whoever is closer. And we'll get -- Danny, you'll be last.

Unknown Analyst

Early in the discussion this morning, there was talk that you had 3 million broadband subscribers. You'd add 1 million more. But then later on, you said that you're comfortable with your subscribers connecting to other providers' broadband, since you don't offer it. So by the 3 million, do you mean that there's 3 million of your TV households that are connecting their boxes to some third party's broadband?

Patrick T. Doyle

Yes. So we went -- with a new box that we brought out a couple of years ago, it became very proficient for us to connect our boxes to the customers' broadband devices. So we went out on a very proactive process of every time we get a new customer and if they have broadband, we connect their boxes to the broadband for free. There's no additional charge. And then, we moved from that to every time we go to a customer's home, whether to upgrade or if it's a service call, and again, if they have a broadband service in the home, the technician won't leave that home before he's connected that. And so now, it's part of the normal process of both the sale process where, I mean, that's a key question to a customer, "Do you have a broadband service?" And we basically tell them, we will connect it. I mean, it's almost the customer has to say, "I don't want you to do that," which we're not sure why they would do that. So we're -- yes, we are very focused on making sure we get as many of our set-top boxes, over time, connected to broadband because, like I said, it just enhances the experience for that customer.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

And then, last question in the middle. Danny?

Unknown Analyst

Could you talk about where you are in terms of the cycle of both affiliate and retransmission fee increases? And at what point program expense increases would at least level out, if not go down?

Patrick T. Doyle

Yes. I think in affiliate, I mean, there's a lot of the smaller regional ones that we're constantly dealing with. Obviously, we had with Sinclair recently, which, I think, we've moved on and reach an agreement on that one. I think we're very comfortable now. And that -- I mean, the market is kind of been established on retrans. It's a ton of work because you get a lot of affiliates that are 1, 2, 3 stations, and so our teams are constantly going through that. But the good news is, like I said, I think the market has been established, and I think we are kind of getting to a cycle here where you'll see, in the next year or 2, you start to get, I think, a flattening of the RSN, as more of these deals come up and everybody kind of gets to market. So all of that -- I mean, all of those costs are really built into the strategy I mentioned before. We're assuming that programming costs are going to continue to rise at these kind of rates for the foreseeable future, and we're building our business and our cost structure and our revenue enhancements to make sure that we can continue to drive mid-single digit revenue and EBITDA growth for the foreseeable future as well.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Pat, thank you very much.

Patrick T. Doyle

Thank you

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