Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

DirecTV Group Inc. (NASDAQ:DTV)

Q3 2009 Earnings Call

November 5, 2009 14:00 p.m. ET

Executives

Jonathan Rubin - SVP of IR and Financial Planning

Larry Hunter - Interim CEO

Pat Doyle - EVP and CFO

Bruce Churchill - EVP & President, DIRECTV Latin America

Analysts

Rick Greenfield - Pali Capital

Jeff Wlodarcza - Hudson Square

Marci Ryvicker - Wells Fargo Securities

Spencer Wang - Credit Suisse

John Hodulik - UBS

Doug Mitchelson - Deutsche Bank

Jason Bazinet - Citi

Matthew Harrigan - Wunderlich Securities

Bryan Kraft - Cross Research

Vijay Jayant - Barclays Capital

Tom Eagan - Collins Stewart

Tuna Amobi - Standard & Poor's Equity

Ben Swinburne - Morgan Stanley

Presentation

Operator

Good day ladies and gentlemen. My name is Clayton and I will be your conference operator today. At this time, I’d like to welcome everyone to The DIRECTV Group’s third quarter 2009 earnings conference call. All lines have been placed on mute to prevent background noise. After the speakers’ remarks, there will be a question-answer-session.

It’s now my pleasure to turn the call over to your host, Mr. Jonathan Rubin, Senior Vice President of Investor Relations and Financial Planning. Sir, you may begin.

Jonathan Rubin

Thank you, operator, and thanks to everyone for joining us for our third quarter 2009 financial results and outlook conference call. With me today on the call are Larry Hunter, our Interim CEO; Pat Doyle, our CFO; and Bruce Churchill, President of DIRECTV Latin America.

In a moment, I'll hand the call over to Larry, Pat and Bruce 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 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 the relevant forward-looking statements. Factors that could cause actual results to differ materially are described in each of the DIRECTV Group's and DIRECTV U.S.'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 on our website for the non-GAAP measures.

So with that, I'm pleased to introduce Larry.

Larry Hunter

Thanks, John, and thanks to everyone for joining us today. I'll briefly review our third quarter results and then turn the call over to Pat for more detailed discussion of DIRECTV U.S. operations. After Pat, Bruce Churchill will provide a summary of our results in Latin America and then I'll conclude with our operational priorities and a quick update on the Liberty transactions.

All around, I thought DIRECTV both in the U.S. and the Latin America had really solid numbers in the third quarter. Both of our companies have generated strong top-line and bottom-line results reflecting strength of our brands and services, which in turn drove substantial cash-flow growth. In fact, our consolidating free cash flow was our record high in the quarter.

On our last earnings call, we talked about our goal to strike a better balance in the U.S. between subscriber growth, margin expansion and cash flow growth in the second half of the year. Our third quarter results reflect the successful execution in these strategies and goals.

Revenue growth of 9% was solid and points to the strength of our industry leading content HD, DVR and interactive services. These, along with the benefits from marketing to DIRECTV AT&T bundle, contributed to the increase in gross ads to 1.1 million subs. We achieved record high penetration level for HD and DVR services which points to our strength at the high end of the market. About two thirds of our new sub signed up for advance services this past quarter, compared to just under 60% a year ago.

More importantly, penetration of subscribers getting both HD and DVR services, which are our most valuable subs, was up 50% from a year ago. Net additions of 136,000 were lower than last year primarily due to a modestly higher monthly churn rate. We’ve talked about spending our upgrade in retention dollars more efficiently and as a result, during this quarter we tightened up many of our offers to existing customers.

As a result of these stricter policies, our upgrade and retention cash expenses declined by about 7% compared to the prior year, which contributed to the small increase in turn. Clearly, a highlight in the quarter was our strong cost controls which drove higher year-over-year pre SAC and [uptown] margins for the first time this year. Lower upgrade and retention costs were just one of the many areas where I thought we did an excellent job managing costs.

For example, we drove SAC below $700 for the second consecutive quarter despite the record high HD and DVR levels. And in industry where our competitors are talking about double digit increases in subscriber programming costs, we had an increase of only 1.2% on a per subscriber basis in the quarter. The one area where our costs were higher than planned was in the subscriber services. However, we feel this is money well spent as our service levels are dramatically improved over the last year.

In addition, according to recent JD power results, DIRECTV service quality remains significantly better than most of our competitors. The strong top line growth and cost controls contributed to our best ever quarter in terms of cash flow. At the DIRECTV group level, free cash flow which also includes DIRECTV Latin America’s results as well as interests and taxes, nearly doubled in the quarter and that’s up more than 30% over $1.6 billion for the first nine months of the year. And this cash flow has been put to good use as we bought back almost $1 billion of stock in the quarter representing the largest dollar amount of the year.

So at this time, I'd like to turn the call over to Pat and Bruce and then come back with a few concluding remarks.

Pat Doyle

Thanks and Mike and Larry, I thought we had a very strong quarter. Clearly the highlights in the quarter point to our competitive and operating strengths, which demonstrate the very substantial cash flow capabilities that our businesses are in line to deliver.

Looking first at revenues, the 9% increase over the prior year was consistent with our expectations as the larger subscriber base contributed about 6.5% growth while ARPU was up 2.1% in the quarter. Those additions were particularly strong growing 8% over the prior year as we continue to benefit from the strength of our brand and industry leading advance services as well as from the increased sales from the DIRECTV/AT&T bundle.

Our direct sales channel once again had a year-over-year increase in gross adds despite the increase in subscribers coming from the AT&T sales channel. This reflects not only the strength of our direct sales channel, but also the fact that the majority of subscribers coming through the Telco channels are not cannibalizing sales from our other channels. In other words, subscribers attained through the Telco channels are generally incremental and represent customers that we would not have otherwise attained. This is because the sales are usually connected with a specific transaction, such as when a customer moves or calls the Telco to change a service plan.

Although still relatively small, we're also starting to see some nice growth coming out of both our commercial and MDU our multi-dwelling unit channels. The commercial and MDU markets are very large, yet our market share is extremely low which translates into significant growth opportunities for us in the coming years.

In addition, the overall quality of new subscribers remains very high both in terms of credit scores and advance services sales. As Larry mentioned, a record two thirds of our gross adds signed up for HD and/or DVR services and for the first time ever, we saw more new customers sign up for both HD and DVR services than either HD or DVR standalone services.

Turning to our monthly churn rate of 1.72% in the quarter. The modest increase over last is consistent with our goal to strike a better economic balance between churn and the amount of money we spent to upgrade and retain existing customers.

As we talked about on our last earnings call, we tightened up many of our offers to existing customers. We do this regularly to adjust to changing economics and competitive conditions. As a result, few of our customers are receiving free upgrades and more of our customers are paying high fees for equipment and truck rolls. In some cases, the stricter policies will result in slightly higher churns, particularly as some of our lower quality customers shop around for better offers.

But this is the trade-off we're willing to make as we strive to minimize the offers given to customers who have a track record of calling us on a regular basis seeking discounts or free services.

In terms of ARPU, growth in the quarter of 2.1% was largely inline with expectations and upper touch from the growth we saw in the first half. As usual, there were many offsetting trends but in a nutshell, the modestly higher ARPU growth compared to a level seen in the first half or mostly due to higher pay-per-view revenues primarily due to the [May weather fight] as well as the lower credits relating to the tighter retention offers I just talked about.

Somewhat offsetting these favorable results was the impact from one last week of NFL Sunday Ticket revenues in this year's third quarter compared to the prior year. In addition, we're continuing to see weakness in sales of premium movie channels. However, we're executing better and have slightly slowed the year-over-year rate of decline.

Looking now at the bottom-line, I thought we did an excellent job, managing cost in the quarter particularly in the area of the SAC retention and programming. The cash SAC of $697 was particularly impressive when considering the record demand we've seen for our most expensive HD and DVR boxes. The main reason for the lower year-over-year SAC is that the significantly higher savings attained from using refurbished boxes and the continued cost reductions, on new set-top boxes are more than offsetting the higher cost associated with the increased sales of advanced boxes.

Also strong in the quarter was our pre SAC margin, which increased to 170 basis points to over 36%. The largest contributor to the higher margin was lower upgrade in retention costs as we talked about earlier. In addition, we did a good job managing our programming cost in the quarter. When looked at from a cost per subscriber perspective, our increase of just over 1% compares very favorably with the 5.3% seen in the year ago period.

Subscriber services on the other hand continue to run a bit higher than the prior year in our target. But as Larry said, we feel that this is money well spent, achieving the gold standard in customer service remains one of our highest priorities. And we feel that we are making steady progress toward that goal.

So when you combine our solid top line growth with higher margins and lower CapEx, you get a 41% growth in cash flow before interest in taxes at DIRECTV, US in the third quarter. And at the DIRECTV Group level, free cash flow, which includes DIRECTV Latin America results as well as taxes and interest, grew even faster at 94% to a record $643 million. Included in these numbers are lower Q3 tax payments due to a variety of items including the timing of payments, lower EBT and credits from prior years.

Based on these favorable trends, we are now expecting a full year cash tax rate in the low 20% range, compared to last year’s rate, which was almost 29%. In terms of our stock repurchase program, we repurchased $943 million in the third quarter, bringing our total share repurchases over the past three years to almost 500 million shares, while reducing by one third our shares outstanding.

As you may know, we halted our buyback program a couple of weeks ago, when we started mailing the proxy. At that time we had approximately $300 million remaining on the original $2 billion share repurchase program approved at the beginning of the year. We look forward to resuming our buyback program after completing the liberty transactions later this month.

So in summary, I thought we had another very strong quarter further demonstrating the strength of DIRECTV’s brands and operations, our unique competitive advantages as well as the tremendous and sustaining cash flow generating capability of our company.

So with that, I’ll turn the call over to Bruce.

Bruce Churchill

Thanks Doug. Let me spend a few minutes talking about Latin America and as a reminder all of the figures that I am about to discuss exclude the results for Sky Mexico, which we account for on an equity basis.

Overall, I think DIRECTV Latin America, which I'll refer to as DTVLA, had a very strong quarter both in terms of top line growth and bottom line cash flow. Looking first at subscriber growth, we set an all time record for gross additions with 385,000 in the quarter, up 22% from last year's third quarter.

Although, we saw solid growth in many countries including Puerto Rico and Columbia. Brazil was the primary driver where there is 38% increase in gross adds. Much of the growth in Brazil is due to increased demand for our HD service as always a new package that we recently launched called Sky Digital Lite which is targeted into middle market or what we call the C class market, which is somewhat lower yet still attractive demographic than our traditional A and B classes.

In addition our prepaid product is also designed to surface market. Also contributing to the strong results is the fact that Brazil's economy, financial markets and currency have continued to strengthen, resulting in a very positive business environment. Average monthly churn in the quarter of 1.75% for DTVLA, was 16 basis point higher than last year, if you exclude 57,000 subscriber adjustments that we took last year. This increase was almost entirely due to the rapid growth of our prepaid subscribers in the region.

Excluding churn related to prepaid subscribers, and the subscriber adjustment last year, postpaid churn was about 1.53% in the quarter, versus 1.51% in the third quarter of last year. This is at or near what I consider to be our sweet spot of 1.5% for postpaid churn.

The combination of higher growth adds and lower churn resulted in net adds of 162,000 in the quarter, bringing our total of DTVLA subscribers to 4.3 million, representing growth of 16% over a year ago. Including Sky Mexico, we now have over 6.1 million subscribers in the region. As I mentioned, both our prepaid and advance services have been fueling our growth, so I thought it'd be helpful to provide a little more color on these trends.

Total DTVLA prepaid growth adds, comprised about 20% of total gross adds in the third quarter, compared to about 14% a year ago. Most of our prepaid subscribers are coming from Brazil and Venezuela, however we have also recently launched a very popular service in Puerto Rico that has exceeded our expectations and is helping to drive growth there.

In addition, sales of advanced products continue to contribute to our strong top line growth. At the DTVLA level, we are announcing about 20% of new subscribers, sign up for HD or DVR services, which is over twice the rate of the year ago.

Most of the DVR growth is in PanAmericana, where we have been selling the service for the better part of two years, where most of the HD growth is coming out of Brazil where the service was introduced in the second quarter of this year. We recently enhanced the HD service in Brazil with the addition of several new channels including HD programming from Global. We expect to further extend our competitive advantage by adding significantly more HD channels in the coming months.

Turning now to the financials, DTVLA's revenue earnings and cash flow, were all quite strong in the quarter, particularly considering some of the weakened currencies in the region, and cash repatriation charges in Venezuela.

Revenues of 761 million were up 16%, driven by our strong subscriber growth and a small increase in ARPU. Excluding the unfavorable FX impact revenues would have increased by over 25% reflecting price increases, increased penetration of advanced products, and a larger subscriber base.

ARPU of roughly $60 was negatively impacted by about $5 in the quarter due to the unfavorable exchange rates mostly in Brazil and Argentina. Excluding the impact of FX, DTVLA’s ARPU would have increased about 9% in the quarter.

Operating profits before depreciation and amortization declined $9 million in the quarter, to $199 million, but that includes a $48 million charge related to the exchange of Venezuelan currency into US dollars, as we continue to repatriate cash from Venezuela.

In last year’s third quarter that charge was only $17 million. Excluding, these charges, the after margin would have been over 30% in the quarter, which reflects the underlying strength of our business. Year-to-date we have incurred $168 million in charges from repatriating cash from Venezuela, compared with only $26 million through the first nine months of 2008.

Cash flow before interest and taxes including these charges in Venezuela, grew over 60% in the quarter to $81 million as strong operating results more than offset an increase in CapEx, mostly related to higher growth adds, and the sales of advanced services.

So all in all, I am very pleased with the results in the quarter, as I believe they demonstrate DTVLA’s competitive and operating strengths. We are also very pleased with the overall macro economic conditions throughout the regions, which are generally stable if not even favorable. With these strong internal and external trends, our outlook remains extremely bullish as we expect even stronger results in the quarters ahead.

With that, I’ll turn the call back to Larry for some concluding remarks.

Larry Hunter

Thanks Bruce. I’d like to wrap up with a summary of our key near term operational priorities followed by a quick update on the liberty transactions. Top on our priority list is to continue delivering strong bottom line results, while introducing new products and services that will further expend our video leadership position. Some of our recent launches have done just that.

Streaming NFL games to cell phones for a NFL Sunday Ticket subscribers has proven to be even more popular than we expected. On a typical Sunday, we now have twice as many customers watching games on their cell phones and in particular iPhones, as we have last year watching on their PCs. Also getting good reviews has been the launch of TV Apps a few weeks ago. Similarly, App Store concept with the iPhone customers can download apps providing a welcome information to their big screen TV.

And a couple of weeks ago we exclusively launched the fourth season of Friday Night Lights, but perhaps more exciting are some of the new services we’ll be launching over the coming months.

In a few months, we’ll start shipping the receivers that will provide customers with Whole-Home functionality including multi-room viewing, broadband connectivity for services such as VOD and TV Apps as well as access to connected PCs to view pictures, music and other media.

Also in a few months, we’ll be greatly enhancing our user experience by introducing an industry leading search engine that in many ways will look and feel like a PC search. The advanced search experience will not only make it significantly easier to find exactly what you are looking, but will also include photos, DVD cover art as well as recommendations for similar shows based on your preferences.

We are also planning to launch a new movie service next year, where customers will be able to access more than thousands of movie from either their PC or TV to view on their big screen TV. This service will be greatly expanded upon the successful launch of our next satellite D12, which becomes operational in the first half of next year. This new satellite will also increase DIRECTV's HD capacity by 50% over 200 national channels.

Moving on to the liberty transactions as you probably know we had received all necessary governmental approvals and have schedule a special shareholder meeting in two weeks on November 19. We expect to complete the merger between DIRECTV and Liberty entertainment right after receiving shareholder approval. Regarding our search for new CEO, the process is going well. Our goal is to have an announcement in the near future.

Finally, I know many of you have asked about our balance sheet and capital allocation strategy. We recognized the importance of providing clarity on these topics and intend to do so shortly after the newly merged company holds its first board meeting later this month.

So, in summary I got both our US and Latin America businesses had very strong quarters, demonstrating our competitive strengths, favorable operating trends and most importantly our commitment to deliver significant cash flow growth and to use that cash in a prudent manner to increase shareholder value.

So, with that I'll turn the call over to John, so we can begin the Q&A session.

Jonathan Rubin

Thanks, Larry. And before moving on to Q&A, investor should know that we have members of the media on this call in a listen only mode. I'd like to remind the media that they are not authorized to quote any participants on this call either directly or in substance other than representative 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.

Operator, we're ready for the first question.

Question-and-Answer Session

Operator

Thank you. The question-and-session will be conducted electronically. (Operator Instructions). Our first question will come from Rick Greenfield with Pali Capital

Rick Greenfield – Pali Capital

Couple of questions here you mentioned all of these new initiatives for next year in terms of more advanced set top boxes, the surprise that is how you have been able to keep SAC as low as you have what is all these new boxes mean for and functionality mean for SAC next year, how should we think about that? And then just a financial question. In terms of cash taxes you certainly mentioned some benefits this year. What do we think about the overall rate of cash taxes since you are in the low 20s this year. What’s the right way to think about it as we head into 2010 just broad brush. Thanks.

Pat Doyle

Sure. Talking about SAC for next year obviously I guess on both as in on the tax question or right in the middle of our 2010 planning process. But I think we do feel like that we will be making probably a little bit more commitment into the home of products like the broadband connectivity and multi-revenue and we should have a slight upward pressure on SAC but also what help us on the revenue side as we mainly charge for the installation of those services. On taxes again that one is probably too early we’ve certainly benefited from the two stimulus bills that have given us the accelerated depreciation on equipment purchases over the last two years which we’ll pay back next year.

So it’ll be certainly higher than the low 20s, but it’s probably too early for us to really have a good range for you there.

Rick Greenfield – Pali Capital

And then on the ARPU side of the advanced set-tops, do you think you’ll be getting further the types of features you are adding. Do you think you’ve got a significant kind of ongoing ARPU bump in these boxes?

Pat Doyle

Yeah I think that there is a couple of things that happened there will probably add a monthly charge for kind of a whole home solution that would include multi-room viewing and broadband kind of activity so you will get a regular one and then we have seen on just kind of a limited basis that we have now and people that are connected to the broadband that they tend to apply more services and produce more revenue. And then again on the SACs I guess one thing to remember is we continue to bring down the cost of set top boxes and then we have also had just a great year on recovering and redeploying set top boxes and we expect that to continue to grow next year or so. We are certainly countervailing things that help us with keeping the kind of SAC where we have seen it lately.

Operator

Next question comes from Jeff Wlodarcza with Hudson Square.

Jeff Wlodarcza - Hudson Square

Two questions do you still feel comfortable you could hit the one across million in that new sub level ad level for full year 2009 given you increased your upfront credit standards and pull back in retention that’s the first one?

Pat Doyle

We still think that that is an achievable goal I mean obviously we set that target before we tightened up our credit policies which will have a little bit of a damp run on process in the fourth quarter which, but its obviously its in the best interest of the company and the return that we get that I mean again we are still obviously early into the fourth quarter but its potentially still achievable that we have made a little bit tougher with some of our credit policy changes.

Jeff Wlodarcza - Hudson Square

And then can you provide more color on the 2010 limitations on how many shares you can repurchase? As I understand that you can repurchase about 20% of the flow, is that limitation for one year?

Pat Doyle

The tax consideration associated with repurchase, we'll be making an announcement after the completion of the merger but I guess in a nutshell, the 20% limitation is a limitation implicit in the representations that we had to make in connection with the revenue ruling and that would apply with respect to whatever plan we adopt with respect to share repurchases after completion of the merger. So I would look at that 20% limit as being something that we would necessarily strive to achieve in the first year.

Operator

Next question comes from Marci Ryvicker with Wells Fargo Securities.

Marci Ryvicker - Wells Fargo Securities

Thanks. ARPU seems to have been a little bit stronger than expected. Any thoughts on longer-term trends and on your guidance for 2009?

Pat Doyle

Yeah, I think that in looking at 2010, I think we've said before that we certainly have some things that are working in our favor, we lost a week of the NFL this year that we wont have next year. Add sales, certainly looks like its kind of comeback and rebounded where we are seeing year-over-year improvement and then we don’t have kind of the year-over-year impact of the telesat lease revenue that we had last year and not this year. So, we clearly see ARPU post better in 2010 and 2009 but again we are right in the middle of looking at a lot of things for 2010 and making decisions on pricing and packaging and other things that will influence it. But we definitely see kind of a more bullish outlook going into 2010 on ARPUs.

Marci Ryvicker - Wells Fargo Securities

And in terms of your 09 guidance, any change to your ARPU growth of 1% to 2%?

Pat Doyle

No, no change there.

Marci Ryvicker - Wells Fargo Securities

Okay and then just a question on programming expenses, how are you able to buck the trend in terms of programming expenses, what do you do differently than some of your peers?

Pat Doyle

Well, I mean again some of it we can access a lot I mean I guess the partly it’s the low, programming costs in the quarter I mean a lot of it honestly is driven by the premiums which have been kind of a bad news on the revenue because their cost is fairly high. It helps us there. We lost the game on the NFL, which had a meaningful impact, but we’ve also done some other things than just the negotiations. So really tried to slow down the rate of growth. But I think part of it too is you know we are still growing and I think some of our competitors are either flat or losing some some so to the extent they have a percentage of fixed costs in their programming it’s, going to hurt them and for us while we are growing we received the benefit of that and I think it could be if some of the costs that others are putting on to their programming now. We’ve already been through in the last few years.

Marci Ryvicker - Wells Fargo Securities

I know there is a bunch of retransmission consent agreements coming up at the end of this year and into next year, do you think that that will impact programming expenses going forward for you?

Pat Doyle

No, I mean if you look at where we are in the life cycle of our programming agreement you know all of the pick broadcasters we had you know we entered into multi-year agreement so we don’t have any kind of big re-trend agreements coming up until clearly after 2010 on many of the kind of the big networks guys.

Operator

Next question comes from Spencer Wang with Credit Suisse.

Spencer Wang - Credit Suisse

Just two quick questions the first is just a follow-up on programming cost, could you give us a sense of what programming cost percept was excluding premiums and the NFL impact then secondly was hoping you could give us a little bit more detail on the subscriber service spending and exactly what built that increase was at more cost vendors more people on phones, more training any more color would be great.

Pat Doyle

On the programming I think if you back out some of those its still if you were to look at 5 plus percent that we were last year. We were still doing better than that 5.3% even without these couple of items that had probably the biggest impact. On subscriber services I mean part of it is you know again like I said we are really focused on the quality metrics and kind of speed to answer and first call resolutions and things like that so we are kind of, our tendency is to kind of make sure that its quality first and then kind of try to the efficiencies out of that out of the call centers as much as we can also we have seen some kind of rise and just a service call and we were attacking all of the root causes of things that would cause us to roll a truck and we have had some great success and things like we've mentioned before like install verification, now we are all of the boxes going into the home, have to go through a test to make sure that their quality of signal is where it should be. So, we are fighting it kind of all angles to try to bring down the volume of service calls and kind of manage the growth in that cost category.

Again quality is that kind of our number one focus and I guess our view is that the cost will follow as we get better at the quality at all aspects of that area.

Operator

Next question comes from John Hodulik with UBS.

John Hodulik - UBS

Okay, thanks. Two quick ones, first on share and listing terms obviously a little bit at elevated this quarter. Is this a good run rate going forward into 2010 or is it just a situation where you got to turn through this sort of group of customers out there looking for the better deal. And then just to clarify on the board meeting you referenced earlier in your prepared remarks. Does that mean we could get some more clarifications about sort of potentially reloading the buyback going forward and looks like you are down you should be only about $300 million after big buyback in the third quarter obviously, that’s you are going to eat through that pretty quickly.

Pat Doyle

Yeah, I guess on the insurance side of it, we do like looking into the fourth quarter we think again the return in the fourth quarter will be modestly higher than the fourth quarter of 2009. A lot of the things that we are doing, I think they kind of control quality also on the front and like this credit screening changes that we talked about we are making in the fourth quarter and there is a bunch of other kind of smaller things behind the scenes that we are doing to make sure that we have bring on quality, customers are going to stay. I think they will have an ongoing benefit but it takes a lot to see the impact of those changes of not bringing those customers on. So we are not ready to kind of talk about 2010 turn but fourth quarter will be like I said modestly up over the fourth quarter of the last year.

Larry Hunter

And with regard to stock buyback, to be consistent with the revenue ruling and other guidance we have the new board will adopt, stock buyback plan post transaction we would expect that to happen you know on the same day or the next day after the merger closes and again since the board is the same as our existing board I will just reaffirm we continue to believe that our stock is under priced and that’s a very good use for our cash.

Operator

Next question comes from Doug Mitchelson with Deutsche Bank

Doug Mitchelson - Deutsche Bank

A few quick ones, what have you seen so far in 4Q regarding competitive behavior relative to what you saw in 3Q, that’s the first.

Pat Doyle

Yeah, I mean again I think we have seen I would say it’s been, some of our competitors have backed off slightly in the fourth quarter but there’s still some very strong competitive offers this network has a strong offer that they saw in the third quarter that they’ve continued into the fourth and we’ve seen some pretty strong video only offers out there as well, but if I were to gauge it between third and fourth I would say slightly less on the kind of the promotional offers in fourth quarter versus third.

Doug Mitchelson - Deutsche Bank

Next question is you are pretty well into the football seasonal and based on what you’ve seen so far you are still on track do you think for the revised NFL Sunday Ticket Contract to remain break-even or profitable over employees? I think that you indicated at the time of the renewal, right?

Pat Doyle

Yeah I think that you know we are had a very good NFL season this year it exceed our expectations on the motive just over all subscribers taking Sunday ticket and those people also signing up for super fan so we obviously got a lot of years left with the four years that we extended the contract but we are certainly seeing good strong demand for that product.

Doug Mitchelson - Deutsche Bank

And then last, what's left for charges in 4Q for Venezuela is there a way for you tell us of the full year 2009 charges how much of that was sort of normal ongoing related to 2009 cash flow and how much was pointing cash out for prior years that you have been holding back on?

Pat Doyle

I think for the year we have talked about a number that’s around $200 million total. I think we about 170, 175 through this year so might be a little north of that. I think probably if you look at the run-rate in the last couple or so that’s in Q3 is in Q4 even is probably a good proxy for what the run-rate might be going forward because we are pretty much at the point now where the amount of cash left in Venezuela is really there for working capital purposes so anything that comes out over the course of the quarter is what's just been generated and needs to be pulled out in order to pay suppliers for boxes, Satellite payments and that kind of thing.

Larry Hunter

And results in Venezuela continue to be strong and improving in good operations.

Doug Mitchelson - Deutsche Bank

But if I am hearing that right the charges in 2010 should be about the same level of 2009 right?

Pat Doyle

They should be less. It's little hard to say I guess depends on how well the business grows but I suppose there was certainly an element in 2009 of repay training cash that had that built up. So I guess, but as the business continues to operate at the level it has been going then I suppose you are right, its going to be and grows, it could well very be at that same level.

Larry Hunter

Its nothing else that wont hurt us next year.

Operator

Next question comes from Jason Bazinet with Citi.

Jason Bazinet - Citi

I just have two quick questions. Can you just provide a bit more detail in sort of the tactical mechanics that happened between now and hopefully deal close, in other words you alluded to the shareholder in meeting. How long did I have to vote on that? And then are there any other dating factors after that? And then second, just want to clarify your point regarding the 20% limitation. Was the point you were trying to convey that your intent isn’t really to bump up against that ceiling within the first year and so it’s not really material, was that the right take away?

Larry Hunter

Yes, on the second question. On the first question the profits from this point is really just getting shareholder vote in, I don’t know if you noticed risk metrics came out with a recommendation of four on all the vote on the DIRECTV side which we expected and so far at least the voters overwhelmingly if favor of the transaction. So, we don’t see an impediment there. And then the last of it just process. Just getting paper done and I guess I would be reasonably confident that our lawyers will get that paper done so it would close on the 19.

Jason Bazinet - Citi

Okay. Thank you.

Larry Hunter

And then the new board would convene either that day or early the next day.

Operator

Next question comes from Matthew Harrigan with Wunderlich Securities.

Matthew Harrigan - Wunderlich Securities

Couple of questions, I guess basically in Venezuela that this will rate 2.15 in the parallel rate and I think is over five. So basically I would assume you are just watching that through on a normalized basis going forward and its going to go up just as much as your business grows. And then secondly if you could update us on the CapEx requirement in Latin America your median term I mean you really hit an inflexion point are you perhaps implying investing more capital there and then thirdly just domestically if you could update us on Swim A and what’s going on there as the popularity of that product.

Bruce Churchill

Okay, let me I think your point is correct on the Venezuela cash I am not sure exactly what the question was, but you are right that the official rate is 2 but the parallel rate is between running help and running sort of between 5 and 6. So assuming that there is no change from the SEC in terms of how we have to do our accounting yes you will continue to see that we will just pull that cash out sort of at the run rate that we’ve been going next year as we have this year.

And then on CapEx obviously the biggest trends that drive our CapEx is the number of gross SACs and I think that combined with the fact that we are having more success in selling advanced products will also tend to drive the CapEx up a bit as well. There’s no huge or significantly enlarged non-SAC related CapEx expense in the years ahead during that next year that would materially change the non-SAC CapEx. We do have a new satellite coming in I think there’s a modest payment next year and a payment a year after that but again these are not, they are not big numbers.

Matthew Harrigan - Wunderlich Securities

But with regard to the set top box costs I mean you are now getting pricing that’s about very close to U.S. pricing because we get the benefit of having moved to technology so its comparable across.

Bruce Churchill

Just as Pat spoke earlier about our billing to cost down over time with a lot of these products we benefit from all of that in Latin America as well.

Pat Doyle

And then on the swim, we are using the swim on all of our HD instead installed starting here in the fourth quarter, then again we think that they are even though it’s a has a little bit of cost to the installation that’s a benefits far outlay the cost as far as ease of installation and back channel phone-line and ability also next year to help us with broadband connection and multi room viewing so its going very well and then we also think, it helps on reliability as well. One other thing that Venezuela Bruce kind of hinted at a bit the accounting bodies are again looking at this issue in Venezuela about whether company should report their financial result at the parallel rate or the official rate. I think our preference would be to just report our P&L at the parallel rate which is more reflective of that’s how running the business anyway but not sure how they will conclude on that discussion but there certainly is a possibility that we may change next year and start reporting at the parallel rate.

Bruce Churchill

But that wouldn’t affect our bottom line.

Pat Doyle

Instead of being on one line and what we do now when we bring the cash out it kind of flow through the each line item on the income statement.

Matthew Harrigan - Wunderlich Securities

Yeah that’s what I was trying to ask in a very inarticulate way but you didn’t spit it out right. Thanks a lot, congratulations on the quarter.

Operator

Next question comes from Bryan Kraft with Cross Research.

Bryan Kraft - Cross Research

Hi, thanks. Few quick things; one, can you talk about where you are with the evolution of your VOD product and how that’s could be expanding as we head into next year and can you share an usage logistics associated with VOD as well. Then also can you just comment on your confidence and your ability to drive margin expansion next year? Thanks.

Pat Doyle

On VOD we have at any given time around 500,000 to 600,000 customers that are connected to broadband we have a much larger population as more in the 3 to 4 million range of those people that would be able to connect the VOD. We do see a lot more usage and I guess interaction with those that are hooked up to VOD and they too tend to buy more paper view services than those who are not. Again we continue to work on making that product robust and also to make the user experience, the best that we can, that part of what we are talking about its kind of the DIRECTV movies that will get more robust next year. The fact that people are hooked up to broadband that will certainly help to complement that whole process.

Bryan Kraft - Cross Research

Okay. Thanks. Second question was margin expansion.

Pat Doyle

Oh, margin expansion. Yeah, now again I think we feel very confident about our ability with ARPU is like we said, we do feel like it will be up year-over-year and we are clearly focused on all of our cost categories. Programming obviously is a tough one but it’s like with our stamps with versus I mean I think we are going to certainly have to take some tougher stands to slow down the growth of that category. We’ve done a really good job on as we mentioned on keeping SAC and ROM and kind of all of our other G&A and broadcast ops costs and growing at a slower rate than revenue. And then the one category of subscriber services that’s been growing faster than revenue and again as we mentioned before we think there is a very good opportunity to slow the growth of that category while still maintaining the quality. So I feel very good about our ability to continue to expand margins.

Bryan Kraft - Cross Research

Thanks and just a follow up on the VOD question, can you comment on how large the library for the content piece of VOD content that’s online, how broad that library is at this time?

Pat Doyle

Yeah, it’s in the 1000s of titles but again there’s no lack of content there for people to.

Bruce Churchill

And we will be expanding it next year further and also of course with D12 we will have much stronger push capability coming out of our satellite.

Operator

Next question comes from Vijay Jayant with Barclays Capital.

Vijay Jayant - Barclays Capital

I’ve got a couple, could you talk about the Telco mix and gross ads I think you mentioned earlier that AT&T had got it scaled and so what’s sort of running and has that sort of improved or decline and second if we can talk about TV everywhere concept I know you guys are working on it, I haven’t heard you guys talk about when you sort of plan to roll it out, thanks.

Pat Doyle

On the Telco mix I think we have said before once kind of AT&T launched and kind of got into the main stream and that Telcos as a percentage of gross ads are usually in kind of the 20% to 25% range and that’s where they were in the third quarter and TV everywhere I guess we don’t talk about it publicly that much but we are very active and talking to the content providers and talking about ways to authenticate so I think we feel that we are in a very good position along with the other distributors to be ready to start to kind of control the access of programming to people that are pay TV providers next year.

Larry Hunter

But also make it available everywhere.

Pat Doyle

Yeah I mean again part of their authenticated price.

Larry Hunter

We are really excited about that.

Vijay Jayant - Barclays Capital

If I can add one quick question in terms of your buyback capacity or capability post-delivery transaction are you able to do a tender the year following delivery transaction?

Larry Hunter

No not much we want back to IRS and got specific approval for that. The authorization, the clarification that we got was customary open market stock repurchases and again we've got to go back and get additional.

Pat Doyle

I think Vijay in all honesty kind of since this was the first time they really addressed us in a ruling. I think we are probably more conservative in their view on this but we though like open market purchases gave us ample of opportunity to continue to return cash to the shareholders.

Operator

Next question comes from Tom Eagan with Collins Stewart.

Tom Eagan - Collins Stewart

Thank you. Wondering if you could talk a little bit more about the market place. For example, Comcast said, on this quarter's call that about 50% of the impacts markets place was the economy and of about 50% was competition. Time Warner Cable said it was more than a more impacted by competition. Just wondering if you could talk a little about your sense of how those factors impacted subscriber growth in the quarter and then I have a follow up. Thanks.

Pat Doyle

Sure, I mean, again I think if you look at the quarter from the gross ad perspective obviously we are up 8% year-over-year, some of that was AT&T being added. But I think from our standpoint again we continue to see strong demand for our product. I think that we have said before, I think when you look at the economy and it’s effect on our business, we see it more on just the what people buy and particularly add on services like paper view movies or the premium channels. So, we do find people that are definitely looking at their monthly bill and trying to make sure that its right size for affordability but on the demand side we have again continue to see a strong demand for our products, its hard for us to kind of look at the economy and says its effecting on the top-line.

Tom Eagan - Collins Stewart

I guess looking at it in a different way, you saw an increase in churn. Would do you choose to more of an increased in voluntary churn or an involuntary churn?

Pat Doyle

We saw a little bit of delta our involuntary churns being pretty good, it was up to that, very small amount in the quarter and voluntary was up I think we mentioned partly because we reined in a little bit of just how much where we were willing to spend to keep certain segments of customers but I think we’ve said before that probably the economy when you look at voluntary churn what we are finding is that people are probably more sensitive and more willing to change service providers and be lured away by promotional offers where they can reduce their monthly bill. So I think we’ve said for a while if there is anything it, the economy hasn’t really heard of that much and involuntary people are not being able to pay their bill. Probably more in their willingness to change providers to bring down their monthly bill.

Larry Hunter

But again its not all segments. Definitely we see the customers who want to get the best video experience are staying with DIRECTV.

Tom Eagan - Collins Stewart

The cable operators talked about improving their two play offers and potential to target satellite customers who say don’t take broadband. Any thought on how you may either try to compete with that or work with that?

Pat Doyle

Well, no I think that we’ve seen kind of the two play non video offers before and again I think we feel like that’s potentially a good opportunity for us. It’s a comment that we saw which we would agree with if there’s a lot of our customers as Larry said are certainly very happy with our product and don’t have a desire to leave us and so if our competitors want to try to provide the other services into the home as a complimentary.

Operator

Our next question comes from Tuna Amobi with Standard & Poor's Equity group

Tuna Amobi - Standard & Poor's Equity

I do have a couple of questions, first one is on the I think you in the prepared remarks I heard some comment about the potential upside on the commercial and MDU market. So can you perhaps help us to size up opportunities as you see it and what specifically that you are doing right now to tap into that?

Pat Doyle

Yeah sure one the commercial between kind of the commercial on the MDU is probably somewhere around 10% of our gross ads so its not a big number for the size of that market so couple of things on the commercial side I mean we have seen good growth in that market. We had some pricing and packaging that we changed about a year ago that really was making this hard to compete against our competitors in that area and that’s what were again we haven’t put a probably the amount of focus on attention and money behind that segment as we should and so we do think that that’s one we are particularly with our kind of domination of sports but that’s an area that we should do very well and we are confident that we can grow that segment faster than some of the other kind of more mature segments for us. On MDU we have talked about before, I mean we are moving more to a model where we own where we kind of build out the buildings or this is having an agent kind of have control over the building. We have started to do that in that kind of the late summer and they are continuing it through the fall and I think we will step back and kind of look at kind of how we can do, I mean it all gets down to kind of penetration level that you can get into the MDUs but we are definitely on to a process where we are identifying kind of an ideal units and then negotiating to build those out and then test our theories on our ability to really drive much better penetration by controlling the interface with the tenants in those buildings.

Tuna Amobi - Standard & Poor's Equity

It sounds like those were in the relatively early stages. If I can switch gears to a financial question on CapEx, I think in the past that you had said that your expectations was around $500 million excluding set-top boxes for 2009. Can you update us on that outlook where you stand currently and seems like that’s looking somewhat conservative, am I correct?

Pat Doyle

No, I mean again I think we are still kind of putting on set-top box where you still kind of have a target of kind of in the 500 million range and that’s kind of a number, I think that we've thrown out kind of sustaining, if you take satellites out of the equation that we think around 500 million is where we land on that.

Tuna Amobi - Standard & Poor's Equity

Okay. And lastly, in Latin America, seem like, how would you assess the opportunities for the consolidation particularly given the recent trends in the currency movement etcetera? Do you feel like you might be in this switch part to kind of make some moves over there in the year ahead?

Pat Doyle

Actually I'm not sure what you are getting at consolidation of what?

Tuna Amobi - Standard & Poor's Equity

Of certain kind of assets or any opportunities to add some scale over there, not necessarily on the satellite side but maybe on some complimentary services related to your core business I mean how would you assess the overall market right now in Latin America as to the M&A opportunities that might seep your core business.

Pat Doyle

I think that kind of thing is always very speculative but I think that if you are talking about the opportunity to work with Telco is looking to do for example, broadband bundles we do some of that, honestly we’ve had more success in some places versus others. For example we are very successful in Columbia at the moment with our local partner (inaudible). But I think the first step in the lot of these areas will probably be more in the line of commercial arrangements and commercial partnerships as we have done in the United States but it would be M&A.

Operator

We have time for just one more question. We will go with Ben Swinburne from Morgan Stanley.

Ben Swinburne - Morgan Stanley

Thanks for squeezing me and I would just ask a question on how you are thinking about ARPU in terms of costs over the next couple of years. Pat do you think that the competitive environment and what’s happening on these trends and you have touched on some of those stuff on the call but do you think your margin just sort of, gross margin after program income would be flat over time or is there going to be pressure on that line and you sort of have to find the leverage in your more fixed operating costs.

Pat Doyle

No I mean I think that we do have some good opportunity there like I said we haven’t kind of settled in on where we think ARPU growth can be in 2010 and beyond. A lot of the things that people seem to be concerned about on programming cost growth because of the fact that we entered into some, most of our really big contracts into multi year agreements that go on for a few more years and we are not going to have to address stuff like rising retrend scars. So we are probably more than ever are really looking at any of our programming contracts that come up and really looking at it more from a financial prospective of are we getting the value out of that channel that the content owner is asking for and I guess I have certainly been an advocate that programming they are I think there should be some rationalization there and I don’t know that there will be but at some point obviously it seems like the value of all of these pieces is adding up to more value of the whole of these packages so I think that there does need to be some better rationalization in there and I think I hope that other distributors do it as well but I think we need to be very conscious of what it is so that the customer is willing to pay for and what they are not willing to pay for.

Operator

This does conclude today's DIRECTV Group's third quarter 2009 earnings conference call you may now disconnect your lines and have a pleasant afternoon.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: DirecTV Group Inc. Q3 2009 Earnings Conference Call
This Transcript
All Transcripts