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The DIRECTV Group, Inc. (NASDAQ:DTV)

Q1 2009 Earnings Call

May 7, 2009 2:00 pm ET

Executives

Jonathan Rubin - SVP of IR & Financial Planning

Chase Carey - President & CEO

Pat Doyle - CFO

Bruce Churchill - President of DIRECTV, Latin America

Analysts

Benjamin Swinburne - Morgan Stanley

Jessica Reif-Cohen - Merrill Lynch

Tom Eagan - Collins Stewart

Vijay Jayant - Barclays Capital

Jeff Wlodarcza - Hudson Square

Doug Mitchelson - Deutsche Bank

Marci Ryvicker - Wachovia Wells Fargo

Craig Moffett - Sanford Bernstein

Tuna Amobi - Standard & Poor's Equity

Ingrid Chung - Goldman Sachs

Bryan Kraft - Cross Research

Spencer Wang - Credit Suisse

Jason Bazinet - Citi

Operator

At this time, I'd like to welcome everyone to The DIRECTV Group's first quarter 2009 Earnings Call. (Operator Instructions).

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

Jonathan Rubin

Thanks, operator, and thanks to everyone for joining us for our first quarter 2009 financial results and outlook conference call. With me today on the call are Chase Carey, our President and CEO; Pat Doyle, 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 US's annual reports on Form 10-K, quarterly reports on Form 10-Q and our other filings with the SEC, which are available at www.sec.gov.

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 are available on our website and attached to our earnings release and posted at www.directv.com.

With that, I'm pleased to introduce Chase.

Chase Carey

The highlights from the first quarter are clearly the multiyear highs and growth in net subscriber growth and low in churn. These results were largely driven by the competitive strength of DIRECTV. There were also a few factors that enhanced the results.

First, our AT&T arrangement got off to a solid start in February. Second, the digital transition had a bit more of a positive impact than we expected. It's tough to estimate the actual incremental subs, but we believe it was a plus. Finally, the sub [insurer] results were helped by reasonably aggressive offers in place, both to attract new customers and retain existing ones.

Importantly, we achieved this growth while we continue to strengthen credit controls and terms to protect us from higher risk customers. In addition, it's worth noting that the first quarter was the first one where the percent of new customers taking advanced products, HD or DVR, ticked above 60%.

First quarter was also one in which we did a good job managing our largest costs. SAC, upgrade spending and programming costs all came in at or below our targets. Our expansion of HD locals added expected costs to our broadcast operations, while G&A would have been on target but for some timing issues and a couple of modest one-time legal expenses. Overall, we feel got about all these costs.

The one cost that is not where it should be is service, which, although we made improvements, is still a work-in-process. We've made quality the first priority ahead of cost in the service area. Quality has improved and we expect cost improvement to follow later in the year.

One metric where we struggled in the first quarter was ARPU. There were four issues that caused the ARPU shortfall. First, our use of offers for new customers and credits to existing ones was significantly greater than a year ago. In hindsight, we overestimated the impact of the economy a bit and were more aggressive than we needed to be. These offers did directly contribute to our 460,000 sub adds. So this investment clearly generated a solid return.

However, our goal is to pursue a better balance between top and bottom-line growth. I'll also remind you, as we noted on the last call, that Q1 would be our most difficult quarter for year-on-year ARPU comparisons, and the impact will be much more modest going forward.

Second factor impacting ARPU was a drop in penetration of premium channels like HBO, Showtime and Stars. Clearly, the broader economic woes led some customers to cutback on these services, but we also did not do a good enough job to mitigate this pressure. We made some changes in the management of this area and established new initiatives to improve execution here.

It's also important to note that while we look to maximize the value of these services, they are also some of our lowest margin channels. So a drop in ARPU may be matched with a disproportionately large drop in ARPU or cost per unit. At the end of the day, we're ultimately focused on bottom-line profit per unit, not top-line results did not drop to the bottom-line.

Pay-per-view was the third area to decline. This was partially due to the timing of events, partially due to the economy and somewhat attributable to competition from other mediums in areas like adult. Fourth, the final area to contribute materially to the drop in ARPU was ad sales. This drop really was truly due to the economy. The other key areas of ARPU, like our base packages, advanced products and others were all in line with our expectations.

Our bottom-line operating profit and cash flow were significantly impacted by our subscriber growth, first and foremost. The year-on-year comparisons were exacerbated by trends in SAC and upgrade costing expenses that have capitalized. Quite simply, if our sub growth had been more in line with expectations, then we would have been up year-on-year in both profits and cash. Instead, we invested in our business, ended up taking advantage of an opportunity to add a unique number of valuable subscribers.

We generated 460,000 subs. Those subscribers are a great investment for DIRECTV and will add to our long-term value, even if they come at a short-term cost. While we will pursue a bit more balanced approach going forward, growth is still a short term priority. Given our financial strength, we can think of no better place to invest our capital than in new subscribers.

Turning quickly to Latin America, the first quarter was a really solid one in almost every level if you exclude currency issues. Almost all our metrics and sub growth, the SAC, the ARPU were at or above expectations if you exclude currency impacts. Churn was higher than expected, but again the largest reason was the growth of our prepaid business where churn is really not a viable measure of success. Equally, our top and bottom-line results beat expectations if you exclude currency factors.

Currency issues were the problem in Q1. It hit us in two ways. First, currency devaluation adversely affected most of our results. Second, we incurred a $72 million charge to G&A and currency-related charges when we repatriated a large cash balance that had accumulated in Venezuela. We remain bullish about the competitive position of our Latin business and its prospects going forward.

Overall our goal in managing DIRECTV is to build value for our shareholders. We try to provide an appropriate level of visibility to our plans and expectations, but our competitive environment is one changing opportunity. In making decisions our priority has been and will continue to be maximizing the value as opportunities.

I'll now turn it over to Pat.

Pat Doyle

Thanks Chase. I'd like to start with a clear highlight in the quarter. Net additions were up 67% to a four year high of 460,000 subscribers, driven by a 22% increase in gross adds and a 10 year low monthly churn rates.

Looking first at growth subscribers, the nearly 1.2 million additions represented the largest number since Q3 of 2004. Several factors contributed to these strong results. First, our brand identity remained extremely strong and we continue to promote a very competitive offer in the first quarter. As a result, every sales channel had higher gross adds than a year ago, with particularly strong results from our direct sales and Telco channels.

We also benefited from the launch of our partnership with AT&T at the beginning of February. Although we do not disclose specific Telco numbers, about 20% of our total gross additions came through the Telco channels. This is roughly comparable to the level from a year ago, but the percentage dropped to the low-teens after losing BellSouth in Q2.

Our Latino service, DIRECTV, [Mass] is also gaining momentum and contributing to our topline growth. Similar to our competitor's comments, we benefited from the digital transition process, although as Chase said, it's very difficult to quantify the actual number. Importantly, the overall credit quality of the new subscribers remained about the same high levels seen in recent quarters, as did the advanced product take rate of about 60%.

Turning to churn, the 1.33% in the quarter was 3 basis points lower than the prior year. And we've talked about in recent quarters our high quality subscriber base combined with increased penetration of HD and DVR services, continued to drive down churn. Specifically, tighter credit screening policies, longer commitment periods, and improved fraud management have all had favorable impacts on both involuntary and first year churn. We have also seen significant improvements in our DIRECTV [Mass] and Telco churn.

On the other hand, ARPU growth of 0.8% fell short of our expectations in the quarter. This was primarily due to more credits given to existing customers, lower premium, pay-per-view and advertising revenues, as well as the overachievement in gross adds. Although, we've talked about all these trends on recent calls, I would like to add a bit of more color for each.

Regarding offers for existing customers, most of the year-over-year increases related to hardware credits to customers upgrading to HD or DVR services. You may recall that we implemented a loyalty program in the third quarter of last year, to reward our best customers, those who have been with us for more than three years, with the best offers and despite the slowing economy, more customers upgraded in Q1 than we had anticipated.

Upgrading our customers is important from both a financial and churn management perspective. However, we will manage these costs more stringently going forward particularly in light of our ARPU shortfall. The other revenue misses were in areas more related to the economy or timing.

Premium and ad sales have been weak for the past few quarters, but we saw greater declines than expected in Q1. Pay-per-view was also lower than expected due to weakness in adult movies and events. Additional pressure on ARPU came from the overachievement in gross additions because we were adding more subscribers at the lower promotional price points.

Needless to say, ARPU is an area that we are extremely focused on. On the bright side, we believe that Q1 ARPU growth represents a low mark of the year and we expect that full year of 2009 will be the trough year in terms of ARPU growth. Chase, will have a few comments later on the ARPU outlook.

Looking now at our profitability. Overall I thought we did a pretty good job managing costs in the quarter, particularly in the areas of programming, cash SAC and upgrade and retention. However, our OPBDA margin of 23% was about 3 percentage points down from last year. About two third of this decline was related to the higher acquisition costs resulting mostly from the increase in gross additions. We were pleased that our cash SAC of $708 was lower than both the prior year and prior quarter.

Equipment costs and SAC were relatively flat, even though we had a record number of new subs taking advanced services in the quarter. We are also seeing a richer mix towards the more expensive and higher revenue generating advanced boxes. For example, the percentage of new subs taking the HD and DVR box more than doubled from a year ago. In addition, we're gaining efficiencies in our sales and marketing efforts as both, our average and incremental marketing costs, to acquire subscribers were lower than last year and last quarter.

The remaining decline in margin came mostly out of G&A and subscriber services. G&A costs were higher than a year ago, mainly due to timing and a few one-time items. We are still targeting for our G&A cost in 2009 to increase at a slower rate than our revenue growth.

Subscriber services were a bit higher than the prior year, mostly because our average call handle times are running a little longer than planned. As you've heard us say in recent quarters, improving service levels is one of our top priorities. As such, we're spending a little more than planned to ensure that we provide our customers with a level of service they deserve.

We view this as a short-term trend because we still believe that over the long-term, a higher quality experience drives lower cost. To maintain or improve our pre-SAC margin we must continue to find cost savings to offset the slower revenue growth. One good example of this came in programming where we saw a significantly lower increase in programming cost.

Some of this improvement was associated with a lower revenue growth in areas such as premiums and pay-per-view, but we also captured cost savings by negotiating better terms on many of our contracts. Our goal is to continue managing our programming costs so that we can hold our programming margin relatively flat in 2009 compared to 2008.

Cash flow before interest and taxes of $558 million followed the OPBDA trends and was down mostly due to SAC associated with a 22% increase in gross additions. Excluding the acquisition cost for the higher gross adds cash flow was up about 15% over last year. To state the obvious, we believe that in aggregate these new subscribers are highly accretive and will significantly increase cash flow over the long-term.

I'd like to now spend a few minutes providing some additional color on DIRECTV Latin America. Starting with subscribers, DLA had a very solid quarter with higher gross adds than a year ago despite some economic and competitive challenges. The higher gross additions in churn came mostly out of Brazil where we recently launched a very popular pre-paid service.

As a reminder, the financial returns and payback for a prepaid subscriber are significantly better than for post-paid subscribers because the higher churn is more than offset by a net SAC of less than $100, plus other cost savings in bad debt, billing and customer service.

In terms of revenue, as you saw in the press release, DLA's revenues were up about 10% despite the fact that Sky Brazil's ARPU was down 16% compared to last year. In local currency, Sky Brazil's ARPU was actually up roughly 13%, but we saw about a 26% decline in the real compared to the prior year.

At the consolidated DLA level, the weak Brazilian currency was more than offset by a 30% increase in revenue at PanAmericana due to strong subscriber and ARPU growth. The higher revenues combined with strong cost management drove significant OPBDA and cash flow growth in the quarter, when excluding a $72 million charge in Venezuela.

This charge is related to our ongoing effort to repatriate cash from Venezuela where we are exchanging Bolivar's for US dollars at a parallel exchange rate that has recently traded between 4 and 6 bolivars to the dollar compared to the country's official exchange rate of only 2.15 bolivars to the dollar.

Excluding these fees, DLA's OPBDA and free cash flow increased 38% and 66% respectively in the quarter compared to last year. For the balance of the year, we intend to continue repatriating excess cash from Venezuela at the parallel rates. Assuming there is enough liquidity in the parallel market every quarter to accomplish that, we would report quarterly losses of about $20 million per quarter.

So in summary, I thought we had a solid quarter further demonstrating the strength of DIRECTV's brand and competitive advantages. Due to the timing of our ARPU growth and expenses, our 2009 plan always anticipated greater OPBDA and cash flows in the second half of the year, and our Q1 results are consistent with this outlook.

There is no question that we have room for improvement in the areas of ARPU and cost management. However, I believe it's much easier to address these when dealing from a position of strength.

So with that, I'll turn the call back to Chase.

Chase Carey

Thanks, Pat. Looking forward, we feel very good about the momentum of our business. Our brand and constant leadership is stronger than ever with some of the ticket renewed through 2014.

We solidified our long-term position as the leader in sports. Events like the Friday Night Lights renewal will continue to add unique event content to our experience, enhancements like the DVR scheduler ap and the iPhone are our new score guide or examples of new features that will continue to excite our customers.

With the new satellite being launched in the second half of '09 and the largest library of 10 ADP movies, in the industry, we continue to strengthen our HD leadership.

A lot of our focus over the next few quarters will be on execution and efficiency. We need to continue to maximize opportunities like our AT&T partnership or making sure we execute attacking costs from programming to sales service to G&A.

We need to do a better job in mitigating the challenges in areas like premium channels and find the right balance between top and bottom-line growth.

Turning to the financial outlook for 2009, obviously some of our expectations have changed based on our first quarter results. The broader economic challenges continue to make it difficult to project the future and the economy has had some impact when we look at areas like credits, premium channels or ad sales. Nonetheless we believe, we can continue to grow our business on a healthy basis amidst these challenges.

First, 2009 subscriber growth which we previously expected to be around the 2008 levels, of the mid-800,000 will now be significantly higher. We expect upside in our sub growth for the rest of 2009, but not like the upside we saw in Q1.

We've already taken steps, like reducing the discount new customer offers, and further toughening up other terms for new customers that will reduce sub growth. Nonetheless, we expect 2009 net subscriber growth to exceed 1 million subscribers. Full year churn is expected to be around the 1.5% we previously discussed.

As Pat said, ARPU growth will improve in Q2 over Q1 and second half ARPU will exceed the first half. However, we would not expect full year ARPU to be in the 2% to 3% range versus 4% plus we previously expected. Overall, we feel the fundamental driving forces in ARPU are largely unchanged and still look to a 4% plus ARPU growth, as we go beyond 2009.

Most of our costs are inline with previous expectations and we still expect pre-SAC margin improvement. Our higher sub growth will reduce our ops on cash flow growth a bit, but we believe, we remain on track to generate $3 billion in cash flow before taxes and interest.

Finally, a comment on our buybacks. As of the end of the day yesterday, we have bought about 20.2 million shares for about $438 million under the buyback we announced earlier this year. We will be allowed to continue to buy a limited number of shares daily, between now and when we mail our proxy in the Liberty agreement. We are also allowed to do a tender offer during this period.

Once we mail the proxy, we will not be allowed to buy shares until our shareholder vote. We are then again, allowed to buy shares after the vote until we close the Liberty deal. For the one-year period following the close, we are allowed to buy shares, but it is unclear how a purchase would impact our tax structure. So, we're planning to get clarification from the IRS. Until, we receive this clarification, it is not clear that we'll be able to buyback shares in this period.

With that, let me turn it back to Jon.

Jonathan Rubin

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

With that, operator, we're ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions). We'll take our first question from Benjamin Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley

Wanted to ask about subscriber trends and ARPU, as you moved into the second quarter I realize we're getting sort of from a timing perspective, getting now into weekly pacing's. But you've made some changes I think to your offers in the marketplace. I think you sound like you've intentionally dialed back some of the subscriber growth.

Any sense after a month of the quarter where you think ARPU may shake out in Q2? Maybe your gross adds strength, and if you want to comment on that front as well? Then I wanted to ask Pat, if you strip the ad sales declines out of the first quarter, maybe give us a sense of what maybe true video ARPU was? How material that might have been as a piece of the pie? Thanks.

Pat Doyle

Yeah, I guess really not going to get too granular on sort of second quarter numbers, I'll probably comment more sort of directionally. We did in March reduce the discount, also toughen up some other term increase that's commitment period and as we continue to do. I think as we said, I think we are by design, and you're right, probably while we still need the growth opportunity, I think opportunity to take share, I think we do want a bit more balance and we'll look to that.

I think we still look for subscriber growth going forward to be positive. Again, not like it was in the first quarter. The first quarter from an ARPU perspective, the first quarter was always our toughest quarter and it got better as you went to the second and the second half and that certainly is still true.

Clearly to the degree we've made some moves that particularly on I guess the two areas that I think we control more directly is certainly the credits and offers which we've tightened up a bit on and probably a bit more focused on the premium sales. That will take a little time to get some traction because it doesn't kick in right away. I think those things will help in ARPU. I think ARPU always had a trend to it that was weighted towards the back-end.

Again, you go back to what we had said early on, I think said last call that really with the second quarter of '08 that we increased due to competitive and economic issues, our offers and credits and therefore you sort of had this tune as you went through the year into the first quarter. You look at the amount, obviously credits and offers are hit on ARPU.

If you look at the difference between first quarter of '08 first quarter of '09, it's at a high point. If you look at the difference between fourth quarter '08 and first quarter '09, it's a small fraction of what it was on a year-to-year basis. So, I think you certainly can see as you sort of get through that period of those credits, particularly 12 month credits building as you went through second quarter, third quarter, fourth quarter, hitting a point of stability which will benefit ARPU as we go forward.

Chase Carey

Yeah, and then on the ad sales, kind of the year-over-year ad sales were down about $10 million. Which, again, last year it was in the first quarter it was growing year-over-year and so now we've had a decline. So, you kind of get a little bit of a doubling up of effect on ARPU in this first quarter.

Benjamin Swinburne - Morgan Stanley

If I could just ask one follow-up, Chase, on the tender point you made earlier. Are there any limitation to the size of that beyond, obviously your balance sheet and sort of financial flexibility, any legal constraints? Any comment on timing as to when you guys might make a decision as to whether you'd put a tender in place? Thanks.

Chase Carey

There are no limitations on size, and probably we wouldn't comment on the timing. It's not that bigger window. Probably starting to mailing the proxy on July or August something like that. So this isn't that bigger window to start.

Operator

We'll take our next question from Jessica Reif-Cohen with Merrill Lynch.

Jessica Reif-Cohen - Merrill Lynch

Actually I wanted to follow up on that last question. I guess how much would you be willing to lever up? You've given different numbers in the past. Is there anything that could be done from Liberty's end to facilitate a share repurchase after the close of the merger?

Chase Carey

On the lever up question, again, I can't give it probably said earlier in the week. The credit markets have obviously been pretty choppy to try to make judgments about where and what level of leverage was appropriate, feasible and the like. We've obviously been in the middle of a transaction that has an impact on our future.

So, clearly with the Liberty transaction behind us, I think we'll make judgments. We have to make judgments and deal with the debt we're assuming as part of that, which obviously we're comfortable with and other dynamics, try to go out and look at the credit market, look at the realities of what we're able to do in the market around the legal structures that exist and with the Board make those judgments.

I think there are a variety of things we have to factor in and again try and make some judgments on. I wouldn't say today we would have a target leverage that we could put out there in light of today's credit markets versus what would have been. I think a level of leverage we would have said a year and-a-half ago, before the economy changed.

Jessica Reif-Cohen - Merrill Lynch

Is there anything that Liberty can do to post the merger to facilitate a share repurchase?

Jonathan Rubin

To facilitate a share buyback, we're not aware of anything.

Chase Carey

I don't think there's.

Jonathan Rubin

We've explored a lot of different alternatives. We haven't found anything up to this point.

Jessica Reif-Cohen - Merrill Lynch

I guess last question on this topic is how common is the IRS ruling that you're seeking? Is there any precedence in the market for this?

Chase Carey

The IRS just issued a revenue procedure Monday, which kind of gives us an opening to consider that, so.

Jessica Reif-Cohen - Merrill Lynch

Then just one last question on the subscriber growth. How much of an impact was Univision's flair up with EchoStar I mean in the end they resolved it, but it real really came close?

Chase Carey

No, I don't think it was a big event. I think those sorts of things until they become reality, I don't think the noise creates a lot but integrates a little bit. Customers are not that savvy, all of us in the business are a lot savvier to these events. I think people know when they are not getting something. I'm not saying there wasn't some noise around it but I think that was a [deminimis] issue.

Operator

And we'll take our next question from Tom Eagan with Collins Stewart.

Tom Eagan - Collins Stewart

Chase, I'm sure maybe you're a little bit surprised to get some of the over-the-air viewers this quarter. Could you give us a little bit of detail as to maybe what markets those came in across the country? And then do you think that the second quarter impact of those OTA viewers would be less or more than the first quarter? Thanks.

Chase Carey

We don't really have a great handle. We believe it was positive, it's really tough to track. We do sort of every month look at where our subscriber is coming from and it's never the same month in, month out. There was clearly a bit more from over the air which you would end up saying, it looked at from a lot of directions, our sort of gut is we got bit more of a benefit from the digital transition than we expected. I don't think it was a defining event for the quarter but I think it was positive for the quarter.

You really don't have visibility to the geography of where they are from, I don't think anybody has had. I think it's one of the struggles for this whole transition is. It's been tougher for all parties that really have a visibility and clarity on where these customers are. I'm not sure I'd say we have a real great feel for what happens in July as it winds down. I think we were a little positively surprised to date whether that continues, I wouldn't bank on it just because I don't have enough visibility to really rely on it.

We'll be opportunistic and that's what we said we were going to be, and we clearly are trying to take advantage of it to the degree there is something there. And I think by being focused on it, making sure we could prudently take advantage of it, we got to benefit. And if that opportunity is there in July, as it sort of winds down or whatever the end date is, I think it's June or July, we'll try to do so again. But we don't really have the visibility to it.

Tom Eagan - Collins Stewart

You mentioned in terms of the gross additions that came from Telco that they were about 235,000. You had two months of the AT&T venture, so is it fair to think that the impact would be a greater one in the second quarter?

Chase Carey

I don't think it's going to be a big variance as a percent, first to second. I think we had a lot of pent-up energy packed into the launch and so I think we launched really well, to our credit. I think AT&T, it was the best product launch they'd ever had. I think we really sort of sprinted out of the box. Our focus is to continue to improve this for the year, I think it's a great relationship. We feel very good about it continuing to build it, but I would not say AT&T. And there will certainly be a defining difference between second quarter and first quarter.

Operator

We'll take our next question from Vijay Jayant with Barclays Capital.

Vijay Jayant - Barclays Capital

I just want to drill down on programming cost increase, plus the [satellite] based on the numbers I see. It looks like 2% was up, and I think your guidance was 5% to 6% for the year. Just want to compare that to cable guys, were talking about double-digit on that metric. Can you help us understand why such a big differential between big players in the same business? And second, do you think that 5% to 6% is still reachable or are we going to be below that?

Chase Carey

I think we feel good about programming costs. First, there are differences. I mean, take an example, there are at least a couple of our large competitors launched the FOX News channel, had a very significant increase in the first quarter.

Our deal had dropped the FOX News channel a year or so ago. So, we didn't have an increase, we didn't have a change on FOX News in the first quarter. I think there are barriers for us. I can't speak to others but assets and the premiums to the degree, some of the premium services we have are our highest cost per unit product. So to the degree we got hurt on ARPU by having fewer premium sets than we planned, we got benefited disproportionately on ARPU for having under the services that had a disproportionately high cost.

I think somehow it's the timing of where these things flow. And again, we're not all channels come up at the same time and the same place and different companies get different players, I assume. I don't have visibility of their full percent. Get impacted in different way.

I think the other thing, if you look at what percentage of the programming content is variable versus fixed, obviously our growth has helped that where maybe it hasn't helped some of our competitors as much? But overall, I think we do feel comfortable that, Chase, kind of the things that are pushing programming down, that our ARPU growth this year will be below 5% that we mentioned before.

Operator

We'll take our next question from Jeff Wlodarcza with Hudson Square.

Jeff Wlodarcza - Hudson Square

At the end of March you ended a promotion where consumers were getting about $20 discount. When did many of these subscribers start coming off promotions? And can you talk about what you're doing to mitigate churn as consumers come off these packages?

Chase Carey

Most of the new customer offers are 12 months. And again, if you look at what I've been saying, we probably stepped up the offers back in the second quarter of '08. As you went through in the second quarter of '08, you had one quarter. In the third quarter you had obviously two quarters teaming up and by the time you get the best quarter you've got sort of a running rate that goes forward and the end of March we actually scaled it back a bit. But they are generally 12 months.

Certainly one of the things we do is to have a commitment that extends past it, so we get people through. Right now, our commitment is upto 24 months. So you're still under a commitment as you come out of the offer and we probably get people in place on the sort of more list retail basis. And then from there we have an array of initiatives. Pat touched through the loyalty program we launched, and I think obviously at the core we want to keep customers to mitigate churn, to have a great service, great programming, and people really love and feel and love DIRECTV.

We launched the loyalty program to give them some benefits, start making them really feel like we care about them. And then clearly, we have money we use selectively, to try to save customers. And I guess talked about sort of the costs and credits which is the costs we're talking on ARPU credits and offers, and it's really two pronged. Part of it's offers to new customers and part of it's credit to existing ones.

So for the right customer offering, some sort of deal to keep them if we make that judgment and obviously, we don't treat all customers the same. A uniquely valuable, long-term customer that we feel it's the right thing to go an extra mile to keep them happy and it can be one-time. Sometimes it can end up being sort of foregoing hardware revenue upfront, and sometimes it can be something more in a three or six month timeframe. But the existing one has probably more variability to it between one-time and monthly. If it's one-time, probably the biggest chunk of that being things like hardware revenue where if somebody wants to upgrade, obviously we're getting a benefit if somebody is upgrading to HD and DVR, trying to sent that and make somebody feel like they got a deal if they stay on.

I think that fighting churn is putting terms in place, delivering a great service and then using tools, targeted tools selectively towards the right customers to try and keep them.

Pat Doyle

I think the other thing Jeff we did is promotional offers as kind of increased overtime, we've built in some technology into our system. So now an agent, when they get an inbound call from somebody that's approaching the end of their promotional period or has just ended it, that agent will get a flag that lets her know that this may be somebody that's calling about the sensitivity of price.

Jeff Wlodarcza - Hudson Square

How much of a driver this quarter was the charter bankruptcy? And then Chase, do you see signs at DIRECTV that the US economy is starting to bottom out?

Chase Carey

I think the charter bankruptcy I would not have said was a material change. I mean, we have certainly targeted some of the charter markets for a while, that gave us a new dimension to it but I wouldn't have said. It's not like charter all of a sudden jumped on the radar screen. We're going to be opportunistic about it, but I wouldn't, again, said it was a major change. I guess I'd end up saying probably, I mean, certainly, clearly I wouldn't say we have great visibility to it. I don't think we feel it's getting worse right now.

I wouldn't say it's getting better, but so if that's bottoming. Again I think we feel okay. The other thing I said you could even end up saying we marginally overcompensated a little bit. I think in hindsight, I'm not that sorry about saying. We wanted to make sure we were prepared and in place in case customers were more sensitive than we thought they would be.

But, I guess generally, the honest answer is we don't really know. I think if I was trying to say a feel for it, I'd say it feels relatively stable. You look at something like ad sales, it's not getting worse. It's not getting better. It's probably about what it's been, which is probably certain a window into one aspect of what we deal with. From our customer perspective I wouldn't say.

We certainly sill have customers with price sensitivities which leads to the premium thing. Wanted still a bit more shopping for deals, but I wouldn't say that's sort of meaningfully escalating or changing in one direction or the other at this point in a meaningful way.

Operator

We'll take our next question from Doug Mitchelson from Deutsche Bank.

Doug Mitchelson - Deutsche Bank

Chase, sort of a strange question, but do you have any explanation as to why the credit agencies don't have you as an investment grade company today, even knowing you might lever up to two to two and a half times to do a tender offer?

Chase Carey

We've been in a state of flux for an array of reasons and I think it's probably more up to us to define those parameters and where we want to be with credit markets in place where clearly you have a different credit market than you did before. Credit ratings I think seem to have more of an impact on your rates than they would have a couple years ago.

I think probably the biggest reason is really on us to push and get a better definition. I mean our rating clearly makes no sense, given our balance sheet and cash flow today. The reality is, given the things we've had rolling around to anchor and really with the Liberty one I think being the final one that anchors it. I think we now are in a place where we can appropriately get some definition, make some appropriate decisions.

Doug Mitchelson - Deutsche Bank

Do you think you have to pursue ratings increases before you can get a fair shake from the bond market or do you think the bond market will value appropriately even if you don't get upgrades?

Chase Carey

I would probably want to get probably advice and insights from others, but we haven't talked about it. I probably would be winging that more than I would like to without appropriate feedback. My guess would be, it's not the extreme of either. We're not just blindly rated on. We're not just blindly dealt with on the credit rating, but conversely I don't think it's ignored completely either. I think we're respected for what we generate to do. I think we probably should deal where there was more clarity.

Pat Doyle

We clearly get the benefit of kind of being one of the well-known and more premier of the high grade issuers. I mean, whenever we've done something it's been very well received and the pricing has been appropriate. As Chase said, I mean it's kind of a whole different world, if you go into investment grade.

Operator

We'll take our next question from Marci Ryvicker with Wachovia Wells Fargo.

Marci Ryvicker - Wachovia Wells Fargo

I know it's early in your AT&T partnership, but Dish had mentioned that churn was higher with their AT&T customers than with their non-AT&T customers. So what can you do to keep churn down? Then I guess as a colliery to do that who essentially owns the customer relationships in your Telco partnership?

Pat Doyle

I guess in the latter, I mean, it's our customer. I mean, I never quite know what owns means to our customer. We get paid for it. Essentially most of the relationship is around creating a price points and [weeks] maybe discounts and put the services together.

Marci Ryvicker - Wachovia Wells Fargo

Well I guess when they call in do they call in to you or do they call in to AT&T if they have a problem with their video portion?

Chase Carey

I think right now there is some aspects of the calls we handle, some aspects we'd like that. I think right now I think we handle most of it. In all honesty that wouldn't be my definition of ownership. I think I would probably do that on what's the best customer experience. We've had this intellectual debate overtime here as what does ownership mean (inaudible) you answer the phone, I think it's our customers and I think those things we get to decide on the basis of what creates the best customer experience.

We know who the customers are. They're our customers. We have all the information we have about them. We would have about any customer. We can offer things to them and provide things to them and do what we want. Today we answer most of the phone calls. I think to the degree we feel it made more sense to have a single phone contact so you don't have to go to one place for one aspect of it and another.

I don't think that's ownership. I think that's just creating a better customer experience. I think in terms of churn, I mean, clearly AT&T, is probably not got a lot of churn sort of this far into it. Obviously, we have other Telco relationships that are much longer terms. First a lot of the tools are the same tools we talked about and I think our view is the bundling helps, provide a deeper relationship with the customer and we'll use those tools. I think we found effective ways to try to improve churn.

As we've gotten more experienced, initially with Verizon, with Quest, with BellSouth when we had them and actually continued to focus on those subs from a quality perspective, credit perspective, churn perspective, just like we would with other subs. Actually sort of preliminarily, we feel pretty good about the AT&T subs in all those regards. They've done a pretty good job right out of the box.

Operator

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

Craig Moffett - Sanford Bernstein

Chase, I've seen at least here in the New York market, we've seen you go back to some of your older TV messaging and some of your older ads and things. You've got a lot of productivity from your HD messaging for a long time. The cable operators have been saying of late that they think they will have fully closed that HD sort of tonnage gap, if you will, by the end of this year or so.

So, what do you think is the next source of messaging and competitive advantage that sells DIRECTV to your customer base? Is it still HD advantage and programming advantage or something a little more subtle than that?

Chase Carey

Our view would certainly be we've got real legs left in HD and as I said, we've got additional capacity and flexibility to do more things and add more dimension to HD with the satellite that goes up later this year. So certainly HD is a place that we feel very good about the results we're getting today in HD and the response and certainly will continue to be a part of the message.

I think one of the messages beyond that, I think in some ways we'll deal with, I'm not sure, I'm going to announce them too far in front of doing them. In some ways, you're getting into what our competitive aspect. We obviously bought the DVR scheduler and the iPhone aspect of it was something we made a little noise about beginning of the year and actually felt good about that.

When we have something in content that we can tie together, like the masters and some of the golf and tennis stuff, we make a little noise about that in the content. I think there's some stuff coming from a technology and in-home functionality that, again, we can really take advantage of. I think how we do that, probably I guess I'd say I'm going to leave more to, when you see it.

Craig Moffett - Sanford Bernstein

If I could just have one more competitive question. Dish was in the market with offers like a turbo offer that was sort of HD only and then a 999 offer. Did you see any impact of those or did those sort of miss your core customer base, sort of fly under your core customer base?

Chase Carey

I guess the best way I would respond, I don't think you saw anything from us that responded to those. If we thought it was impacting us, we probably would have.

Operator

We'll take our next question from with Standard & Poor's Equity.

Tuna Amobi - Standard & Poor's Equity

I'm just looking at the guidance here. I think Chase, you said on track for about $3 billion in total cash flow for this year. So I'm just kind of looking at your Q1 and it seems to me any way I look at it based on the guidance and all the other factors you commented, it seems like, you're actually on track to shatter that guidance. I think that based on your commentary, this seems like you've become more optimistic on overall business trends and I'm just trying to reconcile.

Chase Carey

I think you may be looking at OPBDA versus cash before interest and taxes, OPBDA would clearly be much higher than that. I'm talking probably a different definition of cash flow. OPBDA which I guess some people look at as operating cash flow will clearly be higher. The $3 billion I was talking about was cash flow before interest and taxes.

Tuna Amobi - Standard & Poor's Equity

The other question was on the HD advantage, I think a question was asked on that. I'm just trying to get a sense, do you still feel that when you look at some of the cable companies now approaching 100 channels and it seems like by the end of this year most of the cable industry is going to be north of 100. So at that point, what's the next card that you have that you can really play out there to position your offering as a superior technology offering? And I know you haven't talked much about HD choices as opposed to the channels, if you can also comment on that because that seems to be one of the weapons that cable guys have been touting as helping them to contain churn as well. Can you comment on that as well?

Chase Carey

I disagree with the view that HD is simply about sort of getting to 100 channels and saying you're done. I think it is finding ways to continue to energize that as we've done in pay-per-view, with things like [1080P] in mix channels, and layering a brand on top of it. And I think a large part of some of our inherent strengths of being able to talk about cable doing things, you go back to saying cable has a different thing in every market and it's a different message.

We have a singular, uniform, consistent offering of a quality in breadth, choice, dimensions, and that have continued to sort of add, strengthen dimensions in these areas that I've just touched on that will distinguish us. We have capacity to add more channels which we will as this satellite lights up in the second half of the year. And I think the combination of that brand strength with a consistency of the delivery of the quality, with the ability to continue to energize it not just through adding channels but adding other dynamics and features around those channels, I think all combine to create a real position of leadership that truly will continue to have legs with us for quite a while.

I think we've always viewed content as a place we can lead and to the degree we can et on, best part of what we're going to do is continue to find ways we can add dimensions to content as a whole, and certainly HD related content is a part of it. I think any research we do clearly continues to speak to the perception of us as the consumer perception of us is the leader in HD and a strong leader in HD, and it really is the combination of marketing, brand, content, and creativity, and unique new exciting features to it. And I think we'll continue to be able to deliver on that.

Operator

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

Ingrid Chung - Goldman Sachs

Just a quick one in regards to the Telco Channel. It seems that even if after taking out AT&T out of that 235K or so, it looks like the Verizon channel also accelerated. I was wondering if that was the case and if it was the case, why you think there was that acceleration?

Chase Carey

I think Verizon did put a little renewed energy but I think they even actually, I'll get back in memory which is never a good thing. I think even last summer, Verizon at one point said they were going to put a little more energy towards the DSO side of the business, and I think we did some things with them towards the end of the year that we thought were positive. And I think we did have a sort of renewed and positive energy to the Verizon side of the relationship.

Ingrid Chung - Goldman Sachs

And have you seen that continue into this quarter also?

Chase Carey

I wouldn't have called today, a dramatic impact on the quarter. I think there is a [rename], I think there is a greater commitment that there was a year ago but I guess I wouldn't view. The shift in Verizon was not sort of a meaningful event, just not a defining event in sort of the first quarter results. It's in the credit, I think they've had good positive renewed energy that has helped it but again, it would be modest in the context of our aggregate numbers.

Operator

We'll take our next question from Bryan Kraft with Cross Research.

Bryan Kraft - Cross Research

First, SAC was relatively low for the quarter. I just want to understand, is this a function of just better leveraging some of the fixed portion of the marketing cost because gross adds were so high? And then secondly, can you talk a little bit about the outlook for Latin America and the key metrics, specifically ARPU. And do you think the net add rate continuous at the first quarter rate for the rest of the year?

Chase Carey

I don't know if Bruce is on, I'll let Bruce speak to Latin America. I'd say if you're talking after currency, I'm not sure we're going to claim and (inaudible) expertise on trying to tell what you the currency is going to do to the results. So they probably realistically weaken, probably the Latin America side, we can comment on them. The operating aspects of it will be more than we more control, which I think we feel good about. But I think the currency, whatever judgment exists on a macro level.

SAC clearly benefited a bit from the volume against fixed marketing or the portion of marketing that was fixed. So it was a modest positive. I think beyond that it was a place where hardware cost helped us, then I think that even though we're significantly greater number of advanced products, the high-end of the advanced in terms of HD and DVRs not just DVRs went up. I think the hardware savings were still clearly, a real positive inside that.

And I think just in the areas of sales and installation, those are areas of good discipline and I think generated results, generated results in a disciplined way.

Bryan Kraft - Cross Research

Do you think you saw command around that 725 level for the year or do you think given the first quarter you might actually come in a little bit better?

Pat Doyle

Or do you think given the first quarter I might actually come in a little bit better.

Bryan Kraft - Cross Research

Probably not going to change that, sort of my expectations for the year at this point but obviously we'll make sure we maximize opportunities for efficiency as it goes forward.

Chase Carey

Do you want me to comment on Latin America? Yeah Bruce, you can add.

Bruce Churchill

In general, I guess we would feel to continue to or have pretty good confidence in the business. And historically, the first quarter is in fact our weakest in many cases. So I would look to sort of at least continue what we did in the next quarters and I think for the launch of [Hi-Def] which we have done now throughout the entire South American continent, the launch of pre-paid, particularly in Brazil. And then just I think a general overall probably improving mood down there, certainly vis-à-vis the fourth quarter that we're pretty comfortable with what the rest of the year looks like.

Operator

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

Spencer Wang - Credit Suisse

I wanted to just go back to the programming cost growth. I think you guys mentioned that you've gone back and renegotiated some of your affiliate deals and I was wondering if you guys were in these renegotiations able to actually lower the dollar amount you're paying or is it just a slower rate of growth? And then secondly, just can you give us a sense of if the percent of gross ads that you've been getting from Dish has changed materially, either year-over-year or sequentially?

Chase Carey

I guess on the programming cost, first, I know that renegotiating is the right phrase. Deals come up and we negotiate a new deal at the end of a deal. Those negotiations obviously are tough negotiations. I'm probably not going to get too far into what our goal is to drive the cost as far down as we can. Those come in all size and shapes and every negotiation is different. But I think we probably will leave those negotiations and results to the private discussions with those parties.

The percentage of customers from Dish, again, I probably would have to say I think we feel we're competing pretty effectively with Dish. Within this quarter, with the AT&T swing happening, probably need a little more visibility to try to factor out how's that from January, where it was on one side, versus February and March on the other side, something that we're still sort of probably trying to get a bit better visibility to. I simply say I think we are competing. I think we're competing pretty effectively on most levels for subscribers.

Operator

Ladies and gentlemen, we have time for one final question today. It does come from Jason Bazinet with Citi.

Jason Bazinet - Citi

I guess sort of coming off of Craig's question regarding sort of what comes after HD I just had two questions on that front. For any of the AT&T and Verizon marketing…

Chase Carey

Can you speak up a little bit?

Jason Bazinet - Citi

Sorry, my mistake. For any of the AT&T or Verizon marketing that's going out, is any of that happening out of the Telco's local footprint, in other words, AT&T outside their local footprint? Then second can you just give us an update on the Whole-Home Experience sort of slated for 2010, is that still Phase II I think you called it last time, is that still on track? Thanks.

Chase Carey

Perhaps, you're really talking about marketing wireless essentially which would be outside their local footprint is what you mean?

Jason Bazinet - Citi

Correct.

Chase Carey

It's an active place with both, that we are actively engaged, both Verizon Wireless and AT&T Wireless. As I said before I think we view that as a real opportunity for us. We've done some. We obviously have the iPhone app that is not just in the wired footprint. So there are clearly components of this that are going beyond. I'd say that probably is really still more to come. Again, it's really I think an opportunity as we look forward, not something that we're out in any meaningful way today on. I think we think it's a major opportunity for us to add a real dimension to the business.

The Whole-Home Solution, yeah, we're actually moving forward. We are going to move forward in the second half of the year. The first generation, again, it's sort of to have boxes speak to each other. I was just looking at the demo yesterday that moves sort of a HD DVR and HD Boxes to be access content from each other so that you could have an HD DVR and HD Box in another room in the house, could access that disc and tie into the PC.

It's all part, which is really the first generation of it before we move to really, which is really more a 2010 move to a generation of the box that is really built specifically as more of a media center, tying two devices. The first generation that we will be moving forward in the second half of this year is the one that has the boxes ability to speak to each other, as well as tying to PC. So that is on track for the second half.

Operator

Thank you, ladies and gentlemen. This concludes today's DIRECTV Group first quarter 2009 earnings conference call. You may now disconnect your lines and have a pleasant afternoon.

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