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DIRECTV (NASDAQ:DTV)

Q4 2013 Earnings Call

February 20, 2014 2:00 pm ET

Executives

Martin Sheehan - Senior Director of Investor Relations

Michael D. White - Chairman, Chief Executive Officer and President

Bruce B. Churchill - Executive Vice President, Chief Executive Officer of DIRECTV Latin America LLC, President of DIRECTV Latin America LLC and President of New Ventures

Patrick T. Doyle - Chief Financial Officer and Executive Vice President

Fazal Merchant - Senior Vice President of Treasury & Corporate Development

Analysts

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

Bryan D. Kraft - Evercore Partners Inc., Research Division

Kannan Venkateshwar - Barclays Capital, Research Division

Amy Yong - Macquarie Research

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Michael McCormack - Jefferies LLC, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

Craig Moffett - MoffettNathanson LLC

Thomas W. Eagan - Northland Capital Markets, Research Division

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

James M. Ratcliffe - The Buckingham Research Group Incorporated

Vijay A. Jayant - ISI Group Inc., Research Division

Jason B. Bazinet - Citigroup Inc, Research Division

Operator

Good day, ladies and gentlemen. My name is Justin, and I will be your conference operator today. At this time, I'd like to welcome you to DIRECTV's Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to turn the call over to your host, Martin Sheehan, Vice President of Investor Relations. Sir, you may begin.

Martin Sheehan

Thank you, Justin, and thank you, everyone, for joining us for our fourth quarter 2013 financial results and outlook conference call. With me today on the call are Mike White, our President and CEO; Pat Doyle, our CFO; Bruce Churchill, President of DIRECTV Latin America; Fazal Merchant, CFO of DIRECTV Latin America; and Larry Hunter, our General Counsel.

In a moment, I'll hand the over -- hand the call over to Mike, Bruce and Pat for some introductory remarks, but first, I need to read 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 cause actual results to differ materially are described in the Risk Factors section and elsewhere in each of DIRECTV'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.

Examples of forward-looking statements include, but are not limited to, statements we make related to our business strategy and regarding our outlook for financial results, liquidity and capital resources. Additionally, in accordance with the SEC's Regulation G that requires companies reporting non-GAAP financial measures to reconcile these measures to their most directly comparable GAAP measure, we provide reconciliation schedules for the non-GAAP measures, which are attached to our earnings release and posted on our website at directv.com.

With that, I'm pleased to introduce Mike.

Michael D. White

Thanks, Martin, and thanks, everybody, for joining us today. I'm pleased to report that we had a great fourth quarter, which capped off yet another strong year. In particular, I'm particularly proud of our total shareholder return of 38%, which was our sixth consecutive year beating the S&P 500.

I believe our results were entirely consistent with the long-term strategy that we talked about at our Investor Day in December, which is essentially to continue creating significant shareholder value by delivering first quartile growth while also returning cash to shareholders.

In particular, there are 3 areas I'd like to highlight from our consolidated results. First, we're generating solid top line growth, driven by strong consumer demand for our best-in-class video service all across the Americas. DIRECTV's industry-leading revenue growth of 7% continues to confirm our competitive advantages in the marketplace in the growing Latin America business, as well as our ability to profitably grow ARPU amidst a challenging U.S. operating environment.

Second, strong full year OPBDA and double-digit cash flow growth demonstrate our commitment to profitably grow our businesses while keeping a sharp eye on disciplined expense management and productivity improvements. And third, we continue to return significant capital to our shareholders. As you saw in our earnings release, we repurchased $4 billion of DIRECTV stock last year, helping to fuel an 18% increase in adjusted diluted earnings per share to $5.42, which exceeded the 2013 EPS target that we set for ourselves way back in 2010. In addition, free cash flow per share increased 33% to $4.76. Finally, I'm pleased to announce that our Board of Directors authorized a $3.5 billion share repurchase program.

Now before I turn the call over to Bruce and Pat for a more detailed review of our fourth quarter results, as well as an update on our long-term strategies and outlook, let me just offer a few observations, starting with Latin America. Look, on balance, even with the macroeconomic, political and operational challenges that we talked about on December and we encountered last year, I thought DIRECTV Latin America's quarter and full year results were quite solid and reflected our strategy to heighten our focus on profitably expanding DIRECTV and Sky's share of the growing pay-TV marketplace throughout the region.

Subscriber growth in the quarter, although below expectations, certainly was consistent with our initiatives to consciously try to improve the quality and profitability of new subscribers and drive lower postpaid churn. Stricter credit standards, reduced promotional discounts and sales filters all contributed to a decline in gross additions. However, I'm confident these actions will improve the value of our subscriber base and are the right thing to do for the long term.

Turning now to the top line. Full year revenue growth in DTVLA was 10%, in line with the guidance we provided. But perhaps a better indicator of our achievement, factoring out the impact of foreign exchange rate fluctuations, both revenue and OPBDA grew approximately 26% and 40%, respectively, for the full year. And in terms of margins, Bruce will cover it in a bit more detail, but importantly, Latin America delivered its adjusted OPBDA margin target of 30% in 2013, further demonstrating our ability to adapt and execute in an agile way in a challenging market environment.

Turning briefly to the U.S. I believe our fourth quarter and full year results were very strong and reflect our overarching goal to balance top line sales and bottom line profitability. Specifically, our enhanced focus on the quality, loyalty and profitability of our subscribers continues to increase the long-term value of the subscriber base and yield strong financial returns. These benefits are particularly clear when looking at our full year ARPU growth of 5.4%, which represents the greatest year-over-year increase in 5 years, while, at the same time, our industry-leading churn rate of 1.5% marks our lowest level in half a decade.

In addition, our heightened focus on cost-containment initiatives all across our enterprise, along with a disciplined customer acquisition strategy, drove operating profit before depreciation and amortization growth to nearly 8% in 2013, exceeding our full year guidance and expectations. Overall, DIRECTV U.S. met or exceeded all the key goals that we established at the beginning of last year.

Now before I turn the call over to Bruce, let me just take a couple of minutes to talk about our 2014 outlook and our key strategic priorities. The operating environment for our U.S. business in 2014 should be pretty similar to 2013. Macroeconomic conditions we expect to modestly improve while, in a maturing, highly competitive pay-TV marketplace, competition will continue to be challenging and programming costs continue to rise in an unsustainable rate. We continue to demonstrate DIRECTV's ability to perform amidst this backdrop. And as we've shared with you at Investor Day a couple of months ago, we're executing on the strong comprehensive strategy we established to deliver profitable growth over the long term.

And I thought it might be helpful to just provide you a brief recap so you have a better appreciation of our top U.S. priorities for the coming months. First and foremost, we'll continue to strengthen our competitiveness in the marketplace as the premier provider of video services by building and improving our customer franchise. We believe we must keep the DIRECTV brand synonymous with being the highest-quality television experience and accelerate our innovation to fulfill our mission of providing the best video experience in the world anytime and anywhere our customers want it.

To achieve this, we need to continue to significantly improve our customer service experience as well, driving loyalty, reducing churn and meaningfully differentiating DIRECTV from our competitors.

Additionally, our team has collaborated on a robust product roadmap that embraces new technologies, like the cloud and mobility, to advance the entertainment experience across multiple platforms and drive deeper customer engagement while also continuing to leverage our traditional strengths with satellite.

For example, in 2014, we plan to expand our DIRECTV Everywhere content offerings, enable our subscribers to restart a show from the beginning if they tuned in late and allow subscribers to catch up on shows they missed the day after they air. And we're also continuing to enhance our world-class user interface across all devices, with a particular emphasis on greater personalization, deeper social integration and even better search and discovery.

With the future in mind, we're investing in satellites and related broadcast infrastructure this year to ensure we can continue delivering the best high-quality video experience possible, including with Ultra HD or 4K. With successful execution in these areas, I'm looking for the DIRECTV U.S. business to, at a minimum, maintain its market share.

Now second, due to the rising cost of program we've talked about before, driving top line sales and remaining disciplined in the management of credits and promotions has become increasingly critical to us. Therefore, it's important that we put through responsible price increases as we have as we expand our value proposition and pursue incremental revenue streams, such as commercial, addressable and local advertising; video home security; potentially, subscription video-on-demand; and even over-the-top services. As we mentioned at Investor Day, over the next 3 to 5 years, we plan on generating an additional $1 billion from these ancillary revenue streams.

And finally, we're enhancing our focus on preserving a sustainable cost structure through investments that will deliver future benefits and drive efficiency. In particular, we're looking to capture additional productivity improvements, which will not only reduce costs, but also improve call center performance, field operations, retention and customer satisfaction.

In addition, we're tightly managing costs across the organization to help neutralize some of the impact of higher programming expenses on our U.S. margins. And with regards to programming costs, we'll continue to remain disciplined and look for greater package flexibility, ensure we negotiate fair terms that reflect the value of the programming and the scale of our subscriber base and pursue digital rights to create more value for our customers.

So in wrapping up the U.S. business, I'm confident that the successful execution of these key strategies will position our U.S. business for continued operational and financial success while also positioning us, as we said in December, to continue delivering mid-single-digit revenue and OPBDA growth over the next 3 years.

Turning now to Latin America. While clearly the macroeconomic forecast across the region is less favorable than the U.S. broadly, terrific individual long-term opportunities for growth remain in each country. Our optimism stems from both our video leadership and the strategic strength of our business with all of its competitive advantages, as well as the fact that, today, only 38% of the 140 million TV households in Latin America pay for television services.

Household formation continues to grow and as millions of people across the region continue to migrate into the mass market and the middle class, pay-TV continues to gain acceptance as an increasingly must-have consumer staple.

But continuing to penetrate Latin America's emerging markets, as I've seen in my career, also means managing certain risks, whether it's the impact of inflation on labor costs, foreign exchange fluctuations, foreign currency restrictions or regulatory activity. And with that in mind, while our long-term outlook continues to be strong, as we articulated at our Investor Day just 2 months ago, there's no question, 2014 will be a bit more challenging year for our business as we expect the increased volatility, particularly in the global currency markets, tied to the Fed's tapering, to present significant foreign exchange headwinds.

And as Bruce will explain further, fluctuations in foreign exchange, when you add that to some higher programming costs, given the World Cup, and some difficult comparisons related to some onetime benefits in 2013, will put pressure on both our top and bottom line dollar-based growth in 2014.

That said, we remain committed to the strategy that we outlined at our Investor Day, which was to balance our focus on Latin America's terrific growth opportunities with an emphasis on long-term profitability and prudent capital and cost management. As such, a top priority in 2014 will be to continue to profitably extend DIRECTV and Sky's leadership position in both the high end and the mass market segments. This will be facilitated by continuing to offer unique and distinctive content, such as the most extensive coverage of the 2014 FIFA World Cup of anyone in our industry, as well as leveraging the synergies gained from DIRECTV U.S. to gain competitive advantages in terms of equipment features, the cost of our equipment and time to market.

We also plan to further leverage our competitive advantages in serving the mass market with an enhanced focus on optimizing our programming and packaging strategies so we can better align our differentiated officers -- offers with consumer income levels, behavioral patterns as they may shift given the macroeconomics and of course, the overall macroeconomic and political environment.

Additionally, it's critical that we remain agile and continue to modify our tactics and strategies, ensuring smart pricing across each market segment while we heighten our focus on cost management and capital discipline to ensure we deliver strong margins and cash returns over the long term.

It's also critical that we plan -- that we continue to manage our investment in the build-out of a world-class infrastructure that effectively supports the growth of our subscriber base while ensuring consistent world-class service levels and continue to improve our operating performance, particularly in areas such as our call centers and IT systems. As part of our infrastructure upgrade, we're also investing in satellites this year, as well as related broadcast infrastructure to continue our DIRECTV and Sky service offering to remain at the forefront of the industry for years to come with significantly greater HD capacity in particular.

Finally and ultimately, the most important goal is to generate significant accessible free cash flow by 2016 and beyond. We'll accomplish this by capitalizing on increasing margins mostly related to the operating leverage and scale of our platform, along with declining capital expenditures as we complete the construction of our world-class infrastructure over the next couple of years and launch 3 state-of-the-art satellites that will increase our HD capacity tenfold, as we talked about in December.

And finally, to provide us with a solid foundation to achieve our 2016 free cash flow growth, we've internally set a target to ensure DTVLA is self-funded by year-end 2014.

So in summary, I believe all of our businesses remain extremely strong from an operational, competitive and financial perspective. And importantly, while our long-term growth trajectory, particularly in Latin America, won't necessarily always be linear or without geopolitical bumps and bruises, our long-term vision has not changed. With the strategies we shared with you -- that I shared with you today for both our U.S. and Latin America businesses, I'm confident we'll continue to drive first quartile top line and bottom line growth while, at the same time, creating significant value for our shareholders in the years to come.

So with that, Bruce, let me turn it over to you.

Bruce B. Churchill

Great. Thanks, Mike. So we shared a great deal of information with you at the December Investor Day, which included expectations for our full year results. Since we held the Investor Day so close to year-end, it probably won't surprise you that our results came in with, in most cases, maybe even slightly better than what we expected. I'll add some color, but I won't spend too much time repeating what we shared in December. Just as a reminder, unless otherwise noted, our results exclude those of Sky Mexico, which we do not consolidate.

Overall, I think DIRECTV Latin America delivered solid fourth quarter and full year results, highlighted by strong revenue and earnings growth, as well as solid new subscriber sales. These results are particularly pleasing, given the macro challenges we encountered during the year.

Starting with the top line, DIRECTV Latin America reported fourth quarter revenue of $1.8 billion, representing a 6% year-over-year growth, reflecting our ability to offset the pressures of foreign exchange with subscriber growth and prudent pricing actions. Excluding the impact of currency, fourth quarter revenue grew 24% while ARPU grew 8%, demonstrating our balanced approach to both growth, retention and pricing.

Turning now to the bottom line. Fourth quarter OPBDA growth of more than 11% was strong, and OPBDA margin expanded 160 basis points to approximately 31%. Margin growth in the quarter was driven by a more selective acquisition strategy, which helped grow local-currency ARPU, as well as a more disciplined approach to cost control. The improvement was also aided by a lower performance rights rate associated with the ECAD settlement in the third quarter, together with certain nonrecurring litigation charges included in the prior year.

Cash flow before interest and taxes in the quarter of $164 million increased from $82 million a year ago, driven by the stronger OPBDA growth and improvements in working capital, partially offset by greater infrastructure investment and timing of set-top box purchases.

Our fourth quarter gross additions of 989,000 were solid, given the macro and market challenges we've faced, coupled with the implementation of stricter credit standards and reduced promotional discounting. Net additions of 231,000 were consistent with our goal to improve the overall quality of the subscriber base by maintaining our momentum in the higher-end A and B households while generating profitable subscriber growth from our mass market segment.

In Brazil, fourth quarter gross additions of 510,000 were slightly higher than last year.

Starting with the mass market. A good start to our newly launched Livre prepaid product, coupled with strong sales from our Light and FIT packages, speak to the strength of our brands in the marketplace. Together, these packages, targeting the mass market, now comprise over 50% of Sky's base. Also in Brazil, fourth quarter sales of HD to new subscribers grew 50% year-over-year. When combined with upgrades to our existing customers, total HD subscribers grew more than 30% versus the prior year to 1.8 million and now represent more than 1/3 of our Sky subscriber -- excuse me, Sky Brasil subscriber base.

Changes to our credit policies, sales filters and retention programs for the mass market enabled us to make progress towards our goal of attracting and retaining the most profitable subscribers onto our platform. Delicate management of this balance resulted in fewer credits and lower retention and upgrade expense, which, when coupled with improvements in G&A expense, contributed to the year-over-year margin improvement. With respect to churn, we made progress, and we're seeing good results as evidenced by the 15-basis-point sequential improvement in postpaid churn, but there's still work to do.

In PanAmericana, fourth quarter gross additions of 479,000 were 29% lower than last year as a result of both the regional macroeconomic challenges and limitations on our ability to acquire subscriber-related equipment in Venezuela, which, alone, accounted for about half the decline in gross adds.

As we discussed at the Investor Day, given the economic uncertainty, we continue to take a more disciplined approach to acquiring subscribers, balancing sales growth with maintaining long-term financial returns. To that end, the fourth quarter postpaid churn in PanAmericana improved 11 basis points to 1.16%, which, in my view, is an impressive achievement and a testament to our team in the region.

Our limited ability to import HD boxes in Venezuela was the primary driver for our lower year-over-year advanced product sales growth. Excluding Venezuela, advanced product sales were relatively flat year-over-year. And today, we have over 1 million advanced product subscribers in PanAmericana receiving our HD service.

In terms of mix, prepaid customers now represent 33% of PanAmericana's base, as we exit the year with more than 2 million on prepaid subscribers. As a reminder, when we refer to our on subscribers, we are only referring to those subscribers that have paid for and are receiving our signal on the last day of the quarter.

In summary, for the full year and excluding the impact of ECAD and the Venezuela devaluation, DTVLA delivered 10% revenue and OPBDA growth, a 30% OPBDA margin and added more than 1.2 million net subscribers to finish the year with nearly 11.6 million subscribers while maintaining or increasing our share in every major country except Venezuela.

Again, just to be clear, these figures exclude Sky Mexico. However, what I can say is, having just returned from the Sky Mexico board meeting held in Mexico City the day before yesterday, our enthusiasm and positive outlook for that business continues. A more complete picture of the Sky Mexico story will be available to you after Televisa releases its full 2013 results today after the market close.

So let me turn to 2014. At our Investor Day, we spoke at length about the challenging foreign exchange headwinds, and nothing has changed in that regard. If anything, the subsequent tapering announcement by the Fed in December has only heightened the macro challenges. No one is expecting a smooth ride, and we have to remain nimble as conditions develop.

That said, we remain committed to the long-term strategy we outlined at our Investor Day, which was to extend our leadership across the region by strengthening our penetration of advanced services for premium customers and leveraging our scale to further penetrate and profitably serve the mass market while keeping a sharp eye on cost management, productivity improvements and capital investments.

It would be a mistake to paint the entire picture with the same brush. So it's best if I deal with DTV outlook in its parts. Let me begin with Brazil. Although GDP forecast for Brazil has moderated, we're still expecting a fairly strong year for the pay-TV market. Even with all the growth the market has experienced in recent years, pay-TV penetration ended the year at less than 30%. So in our view, there's still a large opportunity for growth.

For 2014, we expect gross additions at Sky to remain healthy, but modestly lower than 2013 as we continue to balance the trade-offs in growth and profitability with stricter credit and sales filters, as well as a reduction in promotional discounts. At the same time, our mass market products, including our new prepaid offering, will continue to drive sales while we also continue upgrading quality customers where possible and of course, driving sales of our advanced products where appropriate. We expect the actions we've taken to better segment and align our offers in the marketplace will result in lower year-over-year churn and an associated improvement in net additions.

In local currency terms, we expect Brazil's revenue to grow approximately 10%, driven by a combination of subscriber and ARPU growth. Excluding the ECAD benefit in 2013, we expect local currency OPBDA in Brazil to grow in the mid- to high-single-digits percentage range, with OPBDA margin of approximately 30%, reflecting a modest decline due to higher programming costs, the launch of prepaid services and greater broadcast center costs related to capacity expansion. Additionally, we expect cash flow before interest and taxes in local currency to grow in the mid- to high-teens percentage range, given -- driven by OPBDA growth and relatively flat CapEx spending. We would expect depreciation of the real to shave about 10 percentage points off these growth rates when translated into U.S. dollars.

Turning to PanAmericana. Each country has its unique challenges and opportunities that we manage with unique strategies in terms of products, packaging, pricing, competitive positioning and selling approaches. However, across the board, we've heightened our focus on taking a more disciplined approach to acquiring subscribers to ensure we maintain attractive financial returns over the long term.

As we discussed in our Investor Day, we expect some of the markets less talked about, such as Colombia, Chile, Ecuador and Peru, to grow more quickly than the larger markets of Argentina and Venezuela. In total then, we expect gross additions in 2014 to be relatively flat with 2013. We also anticipate that churn will be higher year-over-year, primarily driven by a greater mix of prepaid subscribers on the platform and aggressive pricing actions in the face of inflation. Therefore, 2014 net additions in PanAmericana will be lower.

The financial outlook for PanAmericana is more challenging to project, given the complexity and breadth of its portfolio. But let me start by reminding you of a few things we shared at the Investor Day. Venezuela still makes up a meaningful component of the PanAmericana segment, with 2013 revenues and OPBDA in the range of $900 million and $500 million, respectively, at the official exchange rate. For planning purposes, based on recent comments made by the Venezuelan government as to their intent to maintain the existing exchange rate, we have not attempted to speculate on the timing or magnitude of any devaluation of the bolivar.

As for the other currencies, our assumptions are more punitive than those we shared with you at Investor Day, given the Fed's tapering announcement that followed and the subsequent impact on global currencies. With all that in mind, in 2014, we expect PanAmericana revenues in dollar terms to increase about 10%, primarily as a result of pricing increases to combat inflation. We expect adjusted OPBDA to increase over 20%, aided by the continued focus on growing our smaller markets and helping margins improve from increased scale and operating efficiencies to help offset higher programming costs related to the 2014 FIFA World Cup.

Additionally, excluding Venezuela, we expect cash flow before interest and taxes in PanAmericana to improve in U.S. dollars by approximately $100 million.

So summarizing our consolidated DTVLA outlook for 2014. In dollar terms and excluding the impact of ECAD and the Venezuela devaluation in 2013, we expect DTVLA to deliver mid-single-digit U.S. dollar revenue and OPBDA growth and to hold OPBDA margins in the 30% range. Additionally, in keeping with our DTVLA goal of being self-funding in 2014, we expect CapEx to remain relatively flat in the $1.6 billion to $1.7 billion range, leading to a significant improvement in cash flow before interest and taxes.

Finally, we expect DTVLA on a consolidated basis to achieve over 4 million gross additions and about 1 million net additions for the year.

In light of the current environment, I believe we're taking the appropriate actions and putting the right business practices in place in both Brazil and PanAmericana to ensure we achieve our revenue, OPBDA and cash flow targets for 2014 and over the long term.

So with that, I'll hand it over to Pat. Pat?

Patrick T. Doyle

Thanks, Bruce. DIRECTV U.S. delivered yet another quarter of impressive results as our financial and operating performance exceeded both internal and external expectations. And as you've heard from Mike earlier, these results are entirely consistent with our strategy to rebalance our top and bottom lines so that we can achieve sustainable and profitable growth over the long term.

Looking first at the top line, our industry-leading revenue growth of 7.2% continues to demonstrate the strength of the DIRECTV brand in the marketplace and was driven by ARPU growth of 6.3% in the quarter, as well as by net subscriber gains over the last year.

As we've seen throughout 2013, the key driver of this growth, other than price increases, was increased penetration of both new and existing customers paying for advanced service -- advanced services and particularly, our whole-home DIRECTV Genie, as well as our new enhanced warranty program. ARPU also continued to benefit from strong pay-per-view sales as buy rates reached an all-time high this quarter, driven mostly by record movie buys, as well as the December UFC event.

These strong results continue to highlight the success of our improved HD user interface, DIRECTV CINEMA and Connected Home strategy. In addition, commercial and advertising sales contributed favorably this quarter, as both grew revenues at a double-digit clip year-over-year.

Turning now to subscribers. DIRECTV U.S. net additions of 93,000 came in better than we forecast, driven by lower churn. In fact, churn in the quarter of 1.41% represents the lowest fourth quarter churn rate in 15 years. This improvement demonstrates the benefits of our more selective acquisition policy, our efforts to drive higher loyalty through segmented offers and increased upgrade spending, as well as growing the percentage of subscribers on commitment.

In addition, we've been successful in significantly increasing the percentage of customers on auto-bill pay compared with last year.

Moving now to the bottom line, where strong cost management was clearly a highlight. Operating profit before depreciation and amortization margin improved in the quarter, driving nearly 8% OPBDA growth. Much of this performance came from our ability to drive strong top line growth as we just discussed. In addition, nearly every line on our income statement came in better than our internal forecast due to disciplined expense management and improved productivity from prior year capital investments.

As a result, many of our key cost areas, including subscriber services, broadcast operations and subscriber acquisition expenses grew slower than revenues.

Partially offsetting these improvements were increased content costs primarily related to annual programmer rate increases, as average programming cost per subscriber, or ACPU, grew at roughly 7.7%. That said, full year ACPU growth of 7.3% came in better than we had expected as we remained extremely disciplined in our negotiations and with our approach towards launching new networks. And consistent with our full year guidance, cash upgrade and retention costs, which includes capitalized set-top boxes, were also higher in the quarter as we continue to execute on our strategy to reward our most loyal subscribers and manage churn with upgrade offers for our DIRECTV Genie entertainment experience.

Lastly, the cash SAC rate of $8.58 -- $858 in the quarter was a touch below our expectations due principally to lower hardware costs, along with better-than-expected gross additions coming from our direct sales channel, which has a lower than SAC relative to our other channels.

Looking quickly at our full year consolidated results. Adjusted diluted earnings per share, excluding the Venezuelan devaluation charge, grew 18% to $5.42, and free cash flow increased 14% to $2.6 billion, representing the highest level in 3 years.

Moving on to the balance sheet. In the quarter, we repurchased 11.5 billion (sic) (million) shares of DIRECTV stock for $772 million, bringing cumulative repurchases since we began the program in 2006 to nearly 30 billion [ph] or 65% of shares outstanding. Also in the quarter, we issued GBP 350 million of 20-year sterling notes, furthering our cost-effective funding diversification strategy. With this transaction, we ended the year with about $19.5 billion in total debt, bringing our total debt to trailing consolidated OPBDA leverage ratio to about 2.4x.

Finally, I'd like to make a few comments about our 2014 outlook for DIRECTV U.S., as well as our expectations for performance at the consolidated level. Looking first at DIRECTV U.S. As we talked about at our Investor Day in December, our 2014 revenue growth will be in the mid-single-digit range, driven mostly by ARPU growth and modest subscriber growth.

Similarly, we continue to expect OPBDA growth in the mid-single-digit range as we remain confident that we can effectively manage all of the costs on our P&L to achieve relatively flat margins with 2013.

As we said in our Investor Day in December, we're expecting programming cost per subscriber growth in the 7% to 9% range over each of the next 3 years. With regards to 2014, we expect ACPU will come in at the lower part of that range. We also expect to spend less in 2014 on total SAC spending than we did in 2013 due to reduction in box hardware cost, an increase in the use of less expensive refurbished boxes, as well as slightly lower gross additions. As a result, we anticipate an increase in SAC expense relative to 2013, which will be more than offset by a decline in SAC CapEx spend.

In addition, we're expecting our upgrade and retention spending to decline by approximately $150 million in 2014, primarily due to savings in hardware costs, along with lower upgrades relative to the initial demand volumes for the DIRECTV Genie in 2013. We anticipate that the reduction will be split fairly evenly between expense and CapEx. As a result, we expect a reduction in total capital spending at DIRECTV U.S. of approximately $300 million or roughly $1.75 billion in 2014.

Next, I would like to make a few comments about our consolidated outlook. Let me begin by providing some additional color on our EPS outlook for 2014. Depreciation expense at both DIRECTV Latin America and DIRECTV U.S. will increase by roughly 5% compared with 2013. And similar to 2013, we're expecting our effective tax rate this year to be into the -- in the mid- to high-30% range. Having said that, absent any major devaluation charges in Venezuela, we're forecasting reported earnings per share will increase in the mid-teen range from the $5.22 reported in 2013. We also expect free cash flow to increase approximately 10% over 2013 levels.

Finally, in terms of DIRECTV's strategy for returning capital, I'd like to first point out that our top priority for creating shareholder value remains to reinvest in our businesses. That said, if opportunities do not arise that meet our rigorous strategic and financial hurdles, we will continue our capital allocation strategy for share repurchases as we believe DIRECTV's stock price remains significantly undervalued. As such, we expect to repurchase approximately $3.5 billion of DIRECTV stock in 2014, which is in line with the authorization our Board of Directors approved last week.

All in all, we entered 2014 from a position of strength, thanks to our strong balance sheet, cash flow, competitive position and quality subscriber base across the Americas. And if we accomplish all of our targets and deliver the expected financial results, I believe we will continue leading the industry in revenue and earnings growth, as well as creating substantial shareholder value.

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

Martin Sheehan

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

[Operator Instructions] Operator, at this time, we're ready for the first question.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take the first question from Doug Mitchelson with Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

One for Mike, one for Bruce. Mike, I know it's early. Any thoughts around cable consolidation in terms of potential for tougher cable competition? And also, whether there's any opportunity in D.C. for DIRECTV to shape the regulatory process in a way that's favorable for DIRECTV? And for Bruce, I'm just wondering if you can give us any help with cadence for 2014 because you obviously did -- had the marketing changes rolling through and then the World Cup in the summer. You said over 1 million net adds. Is it start slow and then finish big, or is there a bubble in the summer? How does that work?

Michael D. White

Gee, Doug, I'm shocked that you asked that question. First question out of the box, though, I was kind of expecting it. Look, I think it's very early in the process, and we're still assessing some of the competitive implications. But certainly, if the deal is approved as proposed, it clearly represents an unprecedented media concentration in 1 company. I guess, I think the challenge in terms of what posture we take in Washington, D.C. we haven't decided yet. But I think one of the challenges is to try and ensure that it is appropriately scrutinized in some kind of unique ways than you might traditionally look at. And I think it's particularly around the effective [ph] broadband monopoly they might have in as much as 2/3 of the country and the implications of that, as well as I would argue the nexus or the interaction between the horizontal power and the vertical power that they would have with content costs. Clearly, it's something we need to think about. Obviously, we're always evolving our strategy, and rest assured, we will continue to look at options for how we can strengthen our company for the long term regardless of what competitors do. But I would say from my perspective, Doug, I think it certainly creates some significant changes in the competitive landscape that we need to think hard about. Bruce, did you want to...

Bruce B. Churchill

Yes. I think you're right, the World Cup will definitely have an impact on the way that we add subscribers over the year. I would expect that the first half is going to be much stronger than the second half. We would be well past the halfway mark by the time we get to the end of the second quarter and then have a weaker second half. And I think for us, the real challenge comes probably mostly in the third quarter. But as you have a much larger base of prepaid subscribers, it's just going to be a natural tendency for many of them to temporarily, probably, disconnect and not be on at the end of the third quarter, even though some of them will have been on for part of the quarter and many of them will be on again by the fourth quarter. But certainly, you would expect to see a bit of a bubble in the middle of the year.

Operator

And the next question comes from Ben Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

Mike, I think it was about a year ago, you laid out a plan or an ambition to drive churn down in the U.S. over time, and it was a very strong fourth quarter on that front. I wonder if you could just revisit that outlook, how you're feeling about churn management and as you think about the next couple of years, how that target looks to you today. And just a quick kind of housekeeping. Bruce, you gave us a lot of numbers there on the guidance, and appreciate the transparency, but what's the base dollar number you're using in '13 that we should be thinking about the mid-single-digit growth off of on OPBDA for the consolidated LATAM?

Michael D. White

Okay. I'll start, Ben. Absolutely, I think that focusing on churn, and I'm not going to get to the specific metric, but for us, when you have put an enormous amount of work over the last year into overhauling our entire operations group with retraining, virtually, every technician and call agent in a whole new approach to thinking about customer service and building customer loyalty. We also implemented, I think, a world-class upgrade program. I think we upgraded more than 1 million customers last year with a better experience around Genie. And I think that has been a huge home run for us. And by the way, the enhanced protection plan, which also contributed to ARPU in the fourth quarter, has been a huge success for us, and I expect will continue to enable us to have even more of our customers able to get a free upgrade every 2 years. So we're working hard in a multidimensional way on how we can continue to improve our performance with our customers and lower churn. I still think that as the market gets competitive, it's really important that we hang on to our customers. I think you see a little bit of that, shall we say, a down payment in the fourth quarter, Ben. I would have to say I haven't changed my views on the magnitude of the opportunity. But certainly, I'm probably a little more sober about the challenges of raising prices and the impact that, that has on the total churn metric in any given year. But look, with that said, we're focused on continuing to manage churn and try and continue to bring it down by building loyalty with our customers. Bruce, did you want to...

Bruce B. Churchill

Yes. And I apologize, Ben, we did give out a lot of terms and a lot of adjusted [ph] in that. But -- so again, it's excluding the write-down on the Venezuela devaluation and excluding the benefit of the ECAD settlement. So the base number for 2013 would be $2,048,000,000.

Operator

And the next question comes from Bryan Kraft with Evercore.

Bryan D. Kraft - Evercore Partners Inc., Research Division

I had a couple questions on programming. You dropped the Weather Channel. I was wondering if you've seen any kind of impact with that. And then also if you've entered into negotiations yet for the Dodgers RSN and how you're thinking about carriage of that network given the price that's being asked.

Michael D. White

Sure. Look, Bryan, I've said before I think our biggest -- my biggest concern is our customers, and I think we all forget that not all of our customers have an income like those of us on the call here. And that's my overriding concern, is what's in the best interest of our customers when we negotiate these agreements on any of the channels. Now as it relates to your second question, I'm not going to get into any comment on state of discussions with any programming partners. I just don't think that's a good practice. But let me make a couple of comments briefly about each of them. Fundamentally, I continue to believe if your viewership goes down materially or customers are finding other ways to access their content, like online, that, that should be reflected in the price that one pays for a service. I can certainly say that as we look at it, the impact on our U.S. business, it's a little early to say in the sense that we've also got price increase that we announced at the same time. So trying to parse that isn't that easy. But I would say probably, the -- we may have lost a few thousand customers in the first quarter related to the Weather Channel dispute. As it relates to the Dodgers, look, I'd like to carry the Dodgers. But unfortunately, Time Warner Cable has done an unprecedented deal for local sports rights. I mean, the Dodgers channel is over double what the average Regional Sports Network charges per customer per day. And by the way, all the others have at least one other pro team. So it's a staggering increase relative to any other benchmark in Major League Baseball. Now with that said, we haven't made any final decisions. I would say I continue to believe that this kind of increases are what drive people to want to see à la carte. But we'll keep an open mind. I hope we can come to some acceptable terms for broad carriage. But as I said, we'll have to take a look, and we'll see how the negotiations progress.

Bryan D. Kraft - Evercore Partners Inc., Research Division

Do you think that à la carte RSNs are something -- I know you said you haven't completely formulated the strategy on the regulatory side of the proposed deal yet, but is that something that you might focus on?

Michael D. White

I would say all things are on the table. The -- when you're talking about RSNs, though, Bryan, and the Dodgers in particular, I think the Dodgers own most of it, and Time Warner Cable just negotiated agreement to go get it distributed. So that might or might not even be feasible, and the whole subject of a la carte has more to do with rights fees -- sorry, with contracts than anything else. So who knows, I think it's early days. I certainly think that when you see these kinds of increases in a given market, like the Los Angeles market has experienced with both the Lakers and the Dodgers, it's, frankly, what has driven us to have to do a surcharge. And so I think you can expect us to see probably more than an average increase in that surcharge as we pick up these kinds of situations.

Operator

And the next question will come from Kannan Venkateshwar with Barclays.

Kannan Venkateshwar - Barclays Capital, Research Division

A couple of questions, Mike. One of things that you mentioned now a few times is this opportunity to go over the top. You mentioned it during the Investor Day, and you mentioned it again during the call. So just wanted to see if you could flesh us -- flesh out what the opportunity in your mind really is. And then secondly, from -- one of the comments you made is on the surcharge. Just wanted to understand, I mean, since you've started putting that on the bill, has that changed consumer behavior? What's the kind of feedback that you're getting on that?

Michael D. White

Let me take them in reverse order, Kannan. In terms of the surcharge, along with everything else, I'd say the reason that we are having tough discussions with content providers is because we're the only representative of our customers that can push back and say, "Drive some productivity in your business." And so I would say the customers probably don't like the surcharge any more than they like other increases in what they pay for television. And as I said, in particular, for the bottom quintiles of American consumers, it's a real burden on them trying to meet that bill each and every month. With that said, we've seen some competitors follow us, and we have to do what we think is right to recover these unsustainable increases in costs. And that's what we're looking at. By the way, our surcharge that we've got is only $2 or $3, so it hardly covers even a fraction of what the total cost of sports is in markets like New York and L.A. In terms of the over the top, I have -- and I'm sure, over the next 6 months or so, we'll have more to say about it. But let me be clear, first of all. I'm not talking about taking the DIRECTV 200-channel service and trying to do that over the Internet. I continue to believe that our highway in the sky with 12 satellites, on a marginal basis, is a low-cost highway to provide a high -- the highest quality signal out there. But with that said, we are embracing a hybrid satellite cloud infrastructure for our core business, which will give us greater variety and greater ability to move content through the cloud seamlessly for consumers' own devices in the home. What we are thinking about is a couple of, I'd call, more niche offerings, which, for competitive reasons, I really would rather not get into right on this particular call. But I'd say stay tuned. I think you'll hear more from us this year. But again, our focus in that area is more -- probably, this year's probably more niche related and let's get some learning.

Operator

And the next question will come from Amy Yong with Macquarie.

Amy Yong - Macquarie Research

I just have 2 quick questions. In December, you laid out a vision of positive net adds. And I was just wondering. It's obviously still early in the process, but given Comcast, Time Warner Cable, does this at all change the outlook around that? Then my second question is on the NFL SUNDAY TICKET. Any updates there? And just discussions around pricing and perhaps some streaming rights.

Michael D. White

Thanks, Amy. Look, I think our ambition hasn't changed at all. Obviously, as I said, when you have a megadeal such as what was announced, it does change the competitive landscape. And it's something we need to take into consideration in thinking about what else we can do to further strengthen our competitive position. And we're certainly looking at all options in that regard. Second quarter is always a tough quarter just because of moving and stuff like that from a churn standpoint for the industry, but I'm still optimistic that we'll be positive net adds for the year this year. But the numbers are relatively small even if you look at what we added last year. So we'll see. But we're off to a good start, and I'm optimistic in that regard. I think as it relates to NFL SUNDAY TICKET, I really don't have a lot new news to report other than I continue to be very optimistic that we'll retain DIRECTV NFL SUNDAY TICKET on an exclusive basis. Our conversations with the NFL are progressing in a very positive and constructive manner. Obviously, things kind of tend to get pushed to the side as you get through Super Bowl. But now that we're through Super Bowl, we both agreed to extend our exclusive negotiating period, and more to come, but I'm very optimistic. And in every discussion that we have on any content, digital rights are an important part of those discussions, and frankly, that's often partly why things take a little longer these days to get done because it's an awfully complex digital landscape in deciding exactly what rights a content provider will or won't provide you. But from our perspective, we're optimistic. We very much value the relationship with the NFL. We think it's important to our brand, and -- but we're also looking for opportunities, as we did last year, to strengthen what we were doing in a smaller way with our DIRECTV app and the SUNDAY TICKET experience, which I think is terrific. But we'll have more to say on that, again, probably as we get into the year.

Operator

And the next question come from Frank Louthan with Raymond James.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Can you talk to us a little bit about the national advertising platform? You had the announcement a few weeks ago about political advertising with DISH. Why not go beyond that? And then you mentioned in the text about improving customer service. Where do you see -- is that -- what specifically do you think the industry's lacking there that you can improve your customer service and capitalize on?

Michael D. White

So Frank, on the first question, we're very excited. It's a particularly unique space, the political space, that, historically, the satellite companies have been less effective at tackling. We think this gives great scale, having the 2 of us together. We're off to a -- we're getting a great reception in Washington, where we've opened up a dialogue with both parties. And between that and our addressable ad capability in our collective platforms, we think this is going to be a nice add and -- to us building on, frankly, the success we've had in advertising sales last year. As Pat said, by the way, our addressable and targeted advertising platforms, combined with real strength on the core side, we grew ad sales over double digits last year. And I'm optimistic we'll do that again this year. So I think it's going to be a nice, nice addition to us. Frankly, let's get a little learning on how we work together, and then we'll see whether there are opportunities to do something more broadly down the road. But right now, we're excited about taking advantage of the political space, which has been kind of untapped from us in the past. And I think you're going to see that continue to help us as we try to leverage up our ARPU by growing kind of these incremental revenue streams like commercial and ad sales. On the customer service side, Frank, look, we think of it much more broadly than just purely service although service is an element. We think of the whole customer experience. We've got a simplified bill that we're planning to launch later this year that we think will be more transparent and easier for customers to understand. We've added chat capability and self-care. We've got further enhancements in our self-care capability, we've benchmarked Zappos and Amazon, and I think that's an area that we can do better with our customers. We continue to strive to even be better in terms of on-time performance, on-time arrival in the way we service our customers.

Adding the upgrade program last year, I think, is a big plus in showing our customers that we do value their loyalty, and that it isn't just the new guy that gets the deal. So I continue to be very excited about what we're trying to do on this whole customer experience side. Our entire team is charged up. I'm not sure we've communicated how tremendous a transformation effort it is because you're really trying to touch probably 40,000 people between technicians and call agents in changing the way we do business. And we're measuring different things, like Net Promoter Scores instead of just customer satisfaction. And I'm really excited and I know our Board of Directors is, too about what further we can do to enhance the customer experience and make us a easier and simpler company to do business with in the future.

Operator

And the next question will come from Mike McCormack with Jefferies.

Michael McCormack - Jefferies LLC, Research Division

Maybe just a couple for Bruce. On the Brazilian side, when you're looking at the churn there and the improvement on a going-forward basis, have you seen sort of more involuntary versus voluntary, and how do you address that issue as you go and progress through '14? And then, I guess thinking about cash flow generation in Latin America, you guys are showing some confidence in being self-supportive in '14. Is that predicated just on lower capital intensity or slower sub growth and the associated lower SAC?

Bruce B. Churchill

So on the Brazil churn, a lot of it is in -- this year has really been more on the involuntary side because we've, just frankly, been tougher about our willingness to issue credits. And as we worked our way through that base of subscribers, over time, a few of them are still on the platform. That is made doubly true when given that at the same time, we tightened our credit filters and tightened up our standards at the point-of-sale, so that we're hoping that all the new customers we put on will also get higher quality and therefore, will exhibit better churn characteristics. So it's probably the increase in churn this year was very much a decision that we made. But frankly, it was reflected in the higher ARPU that I talked about. On the cash generation point, I think really what -- when we talk about going forward where we look for a lot of the growth is in some of those countries that we don't often talk about, which is Colombias and Ecuadors and Uruguays and Chiles and Perus of the world, where they have historically been very small businesses, have eaten up relatively large amounts of capital relative to their size. But now that we're starting to have a bit of a critical base there, you're going to see a lot more cash generation coming. Their ability to be more or closer to self-supporting has a larger impact on the broader picture. So I think that's what sort of drives that big part of the cash growth. I don't know if you, Fazal, you may have some additional comments.

Fazal Merchant

Yes, sure. The -- if you think back to some of the things we talked about at Investor Day, one of the things we mentioned was that we were in the middle of an investment cycle. There is an expansion in the infrastructure spend as we get prepared to get the additional satellites up to expand our HD capacity to attract and retain the subscribers that we're seeking out. As the scale of the business grows and that infrastructure is put in place, we should see the benefits of that scale and the moderation of the growth that's not declined in the CapEx going forward to help generate that cash.

Operator

And the next question comes from Marci Ryvicker with Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

It's Marci. I know programming costs remain a headwind for everyone, but you've done a really good job managing this, at least relative to expectations. Do you think that a Comcast-Time Warner Cable combination would help this even further, at least in terms of growth or lack of acceleration? And then my second question is Google Fiber announced a pretty big intended launch, and I know the focus usually is more on high-speed data with the Google than on video. But have you felt incremental competition from Google Fiber in the markets where they're currently in, and is there any thought that they might increase the competition for you going forward?

Michael D. White

So Marci, thanks for the compliment on managing programming costs. It really goes to Dan York and his entire team. Look, I said before, I have to kind of go back and look at my own quotes sometimes, but consolidation in the industry is the only way I know, from a marketplace standpoint, to put some further break on growth rates above and beyond normal inflation. So on the one hand, I could certainly say if you're negotiating with 30 million subscribers, you probably have more leverage. On the other hand, it's a very complicated dynamic because that leverage might not flow through to the rest of the competitors. And second, they happen to own a substantial amount of program -- of content themselves and kind of so what their motivations would be between content price increases and the cable side, we'd still -- we'd have to see. As it relates to Google Fiber, at least what I've read about it, I mean it hasn't been a material impact on us one way or the other. Although we're happy to see naked broadband opportunities for our customers, we think it's good for our company. And where we can figure out a way to do bundles, we will. But it's only got like 2,000 customers, I guess, I saw on one report in Kansas City. So it's not material enough to see anything anyway. And no, we haven't seen any impact on our business, and I think what they announced is more they're kind of exploring with other cities whether those cities might have dark capacity that they could use. But frankly, from our perspective, the more competition in the broadband space, the better. We're happy with that.

Operator

And the next question comes from Matthew Harrigan with Wunderlich Securities.

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

I think the NFL is about the most fanatically image-conscious organization out there. They certainly want to provide best quality product to their customers. I think for 4K, I mean, if that becomes significant in 2015, 2016 on the games, I mean do you still feel like you'll probably be advantaged there? And then moving from the tall to the small side, I think on the streaming side, you more or less said at the -- at your investor conference that you were perfectly, Fazal, on the engineering side, you didn't have any issues there as opposed to having a streaming partner for the NFL. And I guess the second question, when you look at the Wireless business down in Latin America, how does the macro situation down there affect the business plan for that longer term? And could it even perversely help you that some of your competitors probably wouldn't be quite as aggressive on the broadband upgrades when they see that Brazil's kind of the country of the future again in a certain sense?

Michael D. White

I'll take the U.S. ones, and I'll let Bruce comment on the Latin America stuff, Matthew. In terms of 4K, we're launching a satellite, I think, late this year or this fall for the U.S. business. That's a key enabler for us to get our 4K business going. I'm not one who's yet ready to say everything is going 4K, to be honest with you, but we will be prepared. And if it does, we'll be ready to go there. I think my bet is more likely what you'll see is individual, let's say, events whether it is a football game or a playoff game or a Major League All-Star game in baseball or whatever, you may see some content there. But it's not yet clear to me how fast the content companies are going to come along. They've got a huge investment in HD trucks that they're not going to walk away from. But with that said, look, we're going to be prepared. And as I said, you'll hear more about how we're going to start on 4K a little bit later this year when we're ready to announce the specifics. In terms of the NFL, keep in mind all of the, if you will, kind of what you call it, the shooting of -- the camera shooting and all that stuff is done by the broadcasters. And they're the ones that have the massive investment in HD infrastructure. So I wouldn't be surprised if some of them tried some things. But I don't yet get a sense in my discussions that there's some wholesale move to throw out all their HD equipment and get ready to start investing in 4K equipment. I think they're all kind of looking at it, going to try some things and test and learn and we'll see how differentiated the consumer experience is and how fast 4K TV takes off. But we'll be prepared to kind of take a lead role as we always have, regardless. Bruce?

Bruce B. Churchill

Yes. On the wireless broadband, I would say that our plans have not changed materially since we spoke about it in December. As we spoke about at that time, it's very much a very targeted effort and we're able to call it, I think, success-based investment to the point where we're not even necessarily when we enter into a city saying to ourselves we intend to bid out the whole city. We'll go neighborhood by neighborhood where we can identify attractive competitive dynamics in places where we have a lot of subscribers. So I think in today's environment, that strategy works very well. Whether the macro conditions cause others to possibly cut back on some of their more aggressive investments with things like fiber, tough for me to say. But to the extent that it's less competitive then yes, I suppose it presents more opportunities for us. But at the moment, I would say we're sticking with the plan we shared in December.

Patrick T. Doyle

Yes. I think it's more a question of how fast we go, Matthew. I mean we're going to invest more within the guidance we gave you in broadband in 2014. But we'll stay agile, and it's really almost a country-by-country discussion to see where the opportunity is and whether you go faster or you go slower, and then we'll make prudent decisions based on how we see the macros evolving.

Operator

And the next question comes from Craig Moffett with MoffettNathanson.

Craig Moffett - MoffettNathanson LLC

Yes. A question for Bruce. If I -- you were talking about the expectation that Brazil reaccelerates. I think, Mike, you were talking about the still low penetration. But it looks like your market share has hung in very well, and yet the real issue is just the growth rate in the market has slowed down so much that the Anatel data would suggest that the growth rate's now about half of what it was a year ago, down about 11% versus 22%. Is that simply a temporary headwind due to macroeconomics or -- and then it should reaccelerate, or are we looking at maybe a lower ceiling in Brazil than we would have expected?

Bruce B. Churchill

Look, I think that's very difficult to say. But I wouldn't say that my view about the long-term potential of the market has changed. Again still with sub-30% pay-TV penetration, no matter how you slice it, there's a big opportunity there. But I think it's probably also fair to say that when you go from an economy that a few years ago was at 7% to an economy that's going at some people are saying 1.5% to 2%, you're going to see that reflected in consumer behavior. And it probably is most reflected in the consumers that have the smallest pocketbook to spend on these kinds of things. I think you'll -- that's an experience as you'll probably see in lots of different market, not just pay television, all kinds of consumer products. So I think it probably is linked to some extent then. And to the extent that Brazil gets back on track to a healthier growth rate down the path, then I would expect you would see it reaccelerate. But certainly, in the meantime, the more stressed consumer who has a smaller pocketbook is going to be making some choices. And some of them will continue to buy pay TV and some of them will have to do other things just to get along fundamentally.

Michael D. White

Yes. I would agree to that and I...

Bruce B. Churchill

Fundamentally, the 30% data point is a pretty good one.

Michael D. White

I would say, Craig, from my own experience and kind of networking with peers and other businesses, look, first of all, Brazil, it has a very healthy balance of payments, a very -- sorry, very healthy deficit situation, debt situation. That's not a big issue. It's got plenty of foreign currency reserves. It's got tremendous natural resources and scale. So to me, the political environment has been a bit choppy, no question, and no question the economy has had some bumps in the road in terms of its growth rate. In my own experiences, when you've got a whole new segment of people moving into this middle class, as Bruce said, I think it's got less to do with our business per se and more to do with -- they're going to make choices on a month-to-month basis. And sometimes, I think we find, gosh, our customers make smarter decisions faster because they're kind of making the choice on the margin. And by the way, that's why we've started this shift to a prepaid model as a segment for us in Brazil so that we can serve those customers profitably, as well as serving the A and B traditional strengths that we've had down there. So I think you probably have seen a slowdown. I think it's true, by the way, in every category probably you could find in the economy down there. But the opportunity is still enormous, and Brazil is not -- I mean, it's unique. Brazil has still got tremendous size and scale, tremendous potential, tremendous natural resources.

Operator

And the next question comes from Tom Eagan with Northland.

Thomas W. Eagan - Northland Capital Markets, Research Division

One for Pat, one for Bruce. Pat, in terms of looking at ARPU, what is the percentage of customers now that are on auto-bill pay? And how many of them are taking the warranty? And then for Bruce, regarding your LATAM goal of seeing significant free cash flow in '16 in terms of how that's different from the free cash flow in 2014, is that more driven by reduced CapEx or by higher cash flow?

Patrick T. Doyle

Yes. So, Tom, on the -- on your questions on the auto-bill pay, we're approaching 40% of our customers that are on auto-bill pay. So that number would have been more like 30% a year ago, so we've done a really good job of getting more people on that. And then on the protection plan, we've got over half of our customers now that are on the protection plan. And as Mike said, even though we raised the price in May, it really resonated with this kind of free technology upgrade every 2 years. So we actually got a higher take rate on new customers taking the protection plan than we had when it was $2 cheaper, so we're really pleased with how that has been attractive to our customer base.

Thomas W. Eagan - Northland Capital Markets, Research Division

And then how much deeper do you think you can go?

Patrick T. Doyle

I mean, even the trends we're seeing early in '14 are a little bit better than that take rate. So it's kind of hard to tell it's -- because it's attractive then, obviously, but it also -- when you get tough times, that's kind of an easy thing for customers to drop. But we're not quite sure where the top is there, but it's still trending slightly upward into 2014.

Bruce B. Churchill

And with respect to your question about is cash flow generation coming from growth and lower CapEx, the answer is yes. So what I mean -- so obviously, in the next 2 years, we continue to expect to grow the business, which should result in more OPBDA. At the same time, I think as Fazal mentioned just a few minutes ago, we are in a bit of a peak of an investment cycle with the Latin America business, particularly with the satellites and related broadcast infrastructure that goes along with that. But that will start to taper off from '16 and on. So clearly, the combination of those factors contribute to that.

Thomas W. Eagan - Northland Capital Markets, Research Division

Is the CapEx peak really in '14 or '15, do you think?

Bruce B. Churchill

I think it's '15, yes, '15.

Operator

And our next question comes from Jessica Reif Cohen with Bank of America Merrill Lynch.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

I guess 2 questions. If Aéreo wins in the Supreme Court, can you just talk about what your strategy would be in regards to the broadcasters?

Michael D. White

A, I'm not convinced they're going to win, Jessica, but we'll see. I mean I've been a little surprised that they haven't successfully explained how that technology works. It doesn't work as an individual antenna. It works as a field. But we'll see. It's -- from our standpoint, look, I think if you can sign more workarounds, we know a lot about antennas. We've actually studied Aéreo's technology. We continue to kind of think about stuff from an engineering standpoint. But I think it's premature to say what we would do. I think let's wait and see. I mean they just lost a case yesterday, so I wouldn't sit here and say, well, let's -- hypothetical, assuming they win, when I'm not convinced they're going to win, I think there are other ways in terms of retrans reform that we'd like -- things we'd like to see in Washington that could at least to ensure a marketplace that works better than the current one works.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Okay. And then the second question, one of the Ancillary business as you mentioned, was home monitoring. Are you out of the testing phase? Have you started rolling that out yet? And if yes, what have you seen so far?

Michael D. White

Yes. It's very early days, Jessica. We probably, I don't know, made 300 or 400 sales, I would guess. So really early days. We are not national yet. We're trying to make sure -- one of the things we've learned about it already is there's certainly different licenses, and sometimes you need electrician. So as we kind of train our field organization, we're trying to take a very prudent approach and make sure it's a great customer experience. I talked to Mike Hagan, the President of LifeShield last night, and he's very enthusiastic. He said that the NPS scores, Net Promoter Scores are off the charts. So, so far, the customers seem to be really happy with it. We've also learned that the installs are going seamlessly. In fact, if anything, they're taking less time than we had kind of done on our time and motion studies. And that's more money in the pockets of our techs, which is a good thing. So from that standpoint, so far, so good. But look, it's -- we're going to kind of roll this when we're capable. We want to make sure that we can deliver and execute flawlessly before we roll anything out fully. But we do plan to roll out fully by the end of the year.

Operator

And our next question comes from James Ratcliffe with Buckingham Research Group.

James M. Ratcliffe - The Buckingham Research Group Incorporated

One for Bruce and one for Pat, if I could. Bruce, there are a lot of moving parts in ARPU in LATAM. Currency plus, of course, the mix shift toward more prepaid and the like. Can you help us understand what you're expecting for, call it, U.S. dollar pricing rather than ARPU in LATAM going forward? In other words, does the inflationary environment allow you to raise pricing enough to offset the expected currency devaluation? And second, Pat, can you give us some color on what's driving the higher expense side in acquisition spending? I thought you said that expense is up but CapEx down, just installation costs or commissions or something else going on?

Bruce B. Churchill

Yes. So I would say that we do our best to try and raise prices where we can. Obviously, it's a bit of a balance because obviously, consumers are never that excited when you raise prices, and they tend to have a knock-on effect in your churn. But I would say in general, we do the best we can. But as a general rule, we're not quite able to keep up with the devaluations in the currencies, so that on a U.S. dollar basis, it would depreciate slightly.

Michael D. White

And I would add, James, we're going to price the local inflation, not the currency devaluations. Now...

Bruce B. Churchill

Yes.

Michael D. White

Purchasing power parity would say over time, those things should sort themselves out. But in any given quarter or in any given moment in time, that's not necessarily the case. And I think as Bruce said, we do the best we can. I think he's exactly right. Look, we -- our team tries to make a smart decision in the market without crashing the business and the gross add. It's a balancing exercise. Clearly, as inflation takes off in certain markets like Argentina, we've been more aggressive with multiple price increases. But it's a judgment call by our local general managers, and they're best equipped to do it. They know they need to try and recapture as much of local inflation as they can, and they do a great job of that. Pat, do you want to...?

Patrick T. Doyle

Yes. And then James, on the SAC. So if you look at 2013, because '14 I'll talk about in a minute, it's a little bit different. With the Genie product, we saw a lot of new boxes going out there. So a lot more stuff was capitalized. And as you mentioned, on top of that, we spent more money in kind of commissions and in-store labor and the consumer electronics channel, which has turned out to be a great channel for us as it brings a really high customer but obviously, with a little bit higher expense and that we're actually putting DIRECTV labor in the stores. If you reel forward to 2014, you're going to see a little bit different because I think as we've mentioned, we see -- using a lot more refurbed product in 2014 as we start to settle down with the Genie. Also we're driving the hardware cost down. So you're going to see a little bit of a switch in that you'll see a lot more refurbed product, with chips and SAC as an expense versus a capital item.

Operator

And the next question comes from Vijay Jayant with ISI Group.

Vijay A. Jayant - ISI Group Inc., Research Division

I just wondered, earlier you talked about launching TV Everywhere across footprint. Can you talk about where you are on digital ad insertion technology? I think the content guys are pretty optimistic on that opportunity, and there could be an incremental revenue share potentially for you guys. And second on for Bruce, given some of the new broad regulations coming through in Mexico, is there opportunities there to buy some assets, maybe consolidate all of Sky Mexico?

Michael D. White

So, Vijay, I'll take the first one. Obviously, we've been investing as well. In fact, we've had equity stake in Freewill [ph] , I believe, as an important strategic partner for us in doing addressable advertising. And there are some broadcasters doing some things slightly different, so we're tailoring our stuff to each of them. We're in very good shape on that front. We've got more to do this year. But by the end of this year, I think our platform will be fine as it relates to kind of the capabilities we need. And by the way, in the meantime,, as I said, addressable advertising more than doubled in fourth quarter for us. And frankly, as we said at Investor Day, I think there's a huge opportunity for us to grow our ad sales business, which is very profitable for us, double digits. So we're counting on it, but I think what we've learned is it isn't just the technology. As -- it becomes a consultative sell. So when you're trying to sell addressable advertising to Lexus or someone else, you really have to help them understand how to use the tool. And so it takes a little more work and a different kind of a sales team, which we've been building, and have a terrific group that I think will yield huge dividends in that area. So we don't feel like we're going to be lacking anything in that area relative to anybody else in terms of ad insertion. Bruce?

Bruce B. Churchill

On Mexico, I think I've been -- I've said before, I think that's a great business. I've always would have liked to own more of it. Unfortunately for me, I think Emilio Azcárraga feels the same way. So I don't see them as sellers. With respect to the reforms that are going on down in Mexico and the potential changes that might come out of that, I think it's really premature to say. We just have to see how that plays out. It clearly has a ways to go. It's obviously going slower than they had anticipated, I believe, you can tell [ph] it's their first 180-day deadline. So we just have to sit tight, see how it goes and continue to just manage the business, which, as I said, is doing very well.

Operator

And that question comes from Jason Bazinet with Citi.

Jason B. Bazinet - Citigroup Inc, Research Division

I just want to build on Ben's question on churn. I think, Mr. White, it was about a year ago, maybe a little over to where you talked about a stretch goal of lowering churn by 10 basis points. I just had 2 questions on that. Did you ever specify a timing if you hit that goal of how long it would take? And then second, was there anything in the quarter, I mean adverse weather or anything, that caused the churn to be lower than normal, or do you think we are in fact seeing signs that you're moving in the right direction on a sustained basis?

Michael D. White

Yes. No, Jason, I learned a long time ago when I was a CFO, give them a number or a date but never both in the same sentence. And I take full control of [indiscernible] . But anyway, no, I think I said over the next 3 or 4 years. I didn't specify whether it was 3 or 4, as I recall, and I think we've got a nice down payment on that last year of a couple of basis points, as I recall, Pat?

Patrick T. Doyle

Yes.

Michael D. White

But look, it -- there's no question, Jason, that the entire industry having to raise prices at the rates we're raising prices at makes that more of a challenge if you overlay that on it. It's -- the external environment is a little bit more challenging in that regard. But no, it wasn't weather or anything like that. I mean, I honestly I think the -- I'm trying to remember -- just to give you one metric, I think the number of calls last year that we took was like 10 million lower. Okay, that didn't just happen. It happened because we are reengineering what we do, fixing things right the first time, got the rebates. It was a much simpler process and didn't require 4 steps. And all of that I think, coupled with the upgrade program, is helping us. But look, it's an incredibly competitive industry so we take nothing for granted. And -- but I am really proud of our team and what we're doing in [ph] really aggressively going after this customer experience work to make it a real hallmark in advantage, not just relative to our peers in the industry, but frankly, our ambitions are to be a great company to do business with relative to any industry, not just the pay TV industry.

Operator

And thank you. This concludes today's DIRECTV fourth quarter 2013 earnings conference call. You may now disconnect your lines, and have a pleasant afternoon.

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