DIRECTV's (DTV) CEO Bruce Churchill on Q1 2014 Results - Earnings Call Transcript

May. 6.14 | About: AT&T Inc. (T)

DIRECTV (DTV) Q1 2014 Earnings Call May 6, 2014 2:00 PM ET

Executives

Martin Sheehan - Vice President of Investor Relations

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

Bruce Barrett Churchill - Executive Vice President, Chief Executive Officer of DIRECTV Latin America LLC, President of DIRECTV Latin America LLC and President of New Enterprises

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

Fazal Merchant - Senior Vice President

Analysts

Jason B. Bazinet - Citigroup Inc, Research Division

John C. Hodulik - UBS Investment Bank, Research Division

James M. Ratcliffe - The Buckingham Research Group Incorporated

Thomas William Eagan - Telsey Advisory Group LLC

Tuna N. Amobi - S&P Capital IQ Equity Research

Benjamin Swinburne - Morgan Stanley, Research Division

Adam Ilkowitz - Nomura Securities Co. Ltd., Research Division

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

Craig Moffett - MoffettNathanson LLC

Amy Yong - Macquarie Research

Operator

Good day, ladies and gentlemen. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to DIRECTV's First Quarter 2014 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, Melissa, and thank you, everyone, for joining us for our first quarter 2014 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 call over to Mike, Bruce and Pat for some introductory remarks. But first, I need to read to you the following. On this call, we make statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause actual results to be materially different from those expressed or implied by the relevant forward-looking statements. Factors that could cause actual results to differ materially are described in 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 those measures to the 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. Before I review our first quarter results, let me just start by saying that as you're well aware, over the last couple of months, there have been an increase in the number of media rumors and speculation on lots of proposed mergers and industry consolidation moves. The most recent media reports have included speculation about possible transactions that might involve DIRECTV.

These reports are not based on official sources of information, and we don't view it as productive to speculate about alternative business combinations, which may or may not occur. As such, and I'm sorry to disappoint you, but I'm not going to be commenting further or taking questions on those reports.

But I do think it's important to note that we continue to be focused on the strategies we outlined to you during our December Investor Day meeting. That is, driving product innovation, in particular leveraging the cloud and mobility and, in addition to our traditional advantage satellite platform, improving the customer service experience, finding new sources of incremental revenues and tackling productivity initiatives enterprise-wide.

We continue to feel we're very much in a position of strength, and I'm confident in our future. And we're fully committed to delivering our long-term growth profitability and cash generation goals for our shareholders.

So with that, let me turn to the first quarter. I think, as you saw in our earnings release this morning, DIRECTV's off to a strong start in 2014 as both our U.S. and Latin American businesses delivered another excellent quarter of operating and financial results that were entirely consistent with the long-term strategic imperatives I mentioned earlier.

In particular, there are 3 areas that I think are worth highlighting. First, the strength of DIRECTV and Sky's premium brands, along with our differentiated suite of products and services, continues to drive robust consumer demand, share gains and top line growth across the Americas.

Second, our commitment to strike an optimal balance between growth and profitability is clearly represented by the margin increase in our adjusted operating profit before depreciation and amortization. Now as we explained in our earnings release, the adjusted results exclude the impact of the pretax charge of $281 million in this quarter and $166 million in the prior year period related to the devaluations of the Venezuelan bolivar.

And third, we continue to execute on our strategy of aggressively returning capital to our shareholders, which helped fuel a 14% increase in adjusted diluted earnings per share in the quarter.

Now before I turn the call over to Bruce and Pat, let me just offer a few observations on Latin America and the U.S. Starting with Latin America, where, during the first quarter, we achieved a major milestone. I'm especially proud of Bruce and the team surpassing 18 million total customers in Brazil, PanAmericana and Mexico.

I think this is an accomplishment that's a true testament to our Latin America employees' amazing ability to adapt and execute amidst a challenging market environment. It's a testament to the strength, the continued strength of our DIRECTV and Sky brands and also our best-in-class video and service experience.

Subscriber growth in the quarter in Latin America was very consistent with our internal expectations and the long-term growth strategies we discussed during the last earnings call. As you'll recall, attaining strong financial returns in both the high end and mass market segments continues to be our top priority.

As such, stricter credit standards, reduced promotional discounts and sales filters all contributed to the declining gross additions. However, I'm confident these actions will improve the value of our subscriber base and drive lower postpaid churn over the longer term.

Importantly, we're continuing to ensure our customers receive a best-in-class service experience as we upgrade our infrastructure with new integrated IT systems as we refine our segmented offers and monitor our service levels against clearly articulated performance metrics. And to that point, Bruce will be providing you some good news on the Sky Brasil customer service front in just a minute.

Also over the last couple of months, we've seen increased volatility in the global currency markets, which certainly presented foreign exchange headwinds, particularly in Argentina and Venezuela. However, in local currency, DIRECTV Latin America's top line growth of more than 20% in the first quarter remains rock solid and continues to reflect the strength of our leading brands and advantaged competitive position. And adjusted operating profit before depreciation and amortization margin was also strong and right in line with our guidance over 30%.

So overall, I believe we're doing a terrific job navigating through this operating environment as DIRECTV Latin America is on track to have a solid year in terms of net subscriber additions and local currency revenue and adjusted OPBDA growth.

Moving on to the U.S. business. Our first quarter results were strong and reflect our overarching goal to rebalance the top and bottom lines so we continue to achieve long-term sustainable and profitable growth. Specifically, we believe our enhanced focus on the quality, loyalty and profitability of our subscribers is increasing the long-term value of our subscriber base in yielding stronger financial returns. These benefits are particularly evident when you look at our more than 5% revenue growth that was generated mostly by our ability to grow ARPU and attain high-quality subscribers in a challenging U.S. operating environment.

In addition, our sharper focus on expense management, combined with our disciplined customer acquisition strategy, was a clear highlight as our operating profit before depreciation and amortization margin expanded for the third consecutive quarter. This margin improvement is important because it demonstrates the strength of our U.S. business from an operational, competitive and financial perspective while also providing us even more confidence that we can continue to achieve first quartile growth for the next several years.

So in conclusion, overall, I think a very solid quarter for DIRECTV to start the new year. In Latin America, we're delivering on key strategies to profitably extend our leadership position in both the high-end and mass market segments while heightening our focus on cost management to ensure we continue to deliver strong margins.

In addition, we continue to prudently manage our investment in the build-out of a world-class infrastructure in Latin America to ensure consistent service levels, the industry's best content offerings and greatly improve our operating performance over the long term. In the U.S., we continue to focus on achieving our plans for profitable growth by maintaining a strong financial foundation through initiatives that drive top line sales, maximize subscriber returns, heighten our focus on the overall customer experience and effectively manage costs across our enterprise. And at the same time, we're returning cash through stock repurchases at an industry-leading clip. With these strengths, I'm confident that we'll continue to deliver superior financial returns to our shareholders for years to come.

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

Bruce Barrett Churchill

Great. Thanks, Mike, DIRECTV Latin America got off to a strong start in 2014 with solid results, particularly with regards to subscriber growth and adjusted OPBDA margin despite the foreign exchange headwinds and tougher economic conditions we faced in several markets. Before discussing our first quarter results in more detail, I'd just like to remind everyone that unless otherwise noted, our results exclude those of Sky Mexico, which we do not consolidate.

Touching on the consolidated results of DTVLA. Gross additions of 1.1 million were solid given market conditions and in light of our implementation of stricter credit standards and reduced promotional discounting for new customers. Total monthly average churn of 2.13% declined sequentially for the third consecutive quarter as we continue to make progress in improving the economics of our subscriber base, particularly in Brazil. The resulting net additions of 360,000 were ahead of consensus and give us a good base on which to start the year.

Before discussing the financials, I'd like to touch briefly on the Venezuela devaluation and provide some context for what it means for the full year outlook. I'm going to assume that everyone has read the extensive disclosure on Venezuela contained in the press release.

So suffice it to say that we, like several other companies, will be moving from a rate of VEF 6.3 per dollar to the SICAD 1 rate of VEF 10.7 at the end of Q1. The resulting impact was a onetime charge of $281 million to our P&L as we use the new rate to revalue our net monetary assets on the balance sheet, which consist primarily of cash. As a result, our cash balance in Venezuela at the end of the quarter translated to 453 million at the new SICAD 1 rates.

As we move forward using the SICAD 1 rate to translate the results in the coming quarters, it's important to note the SICAD 1 is an auction-based rate. So we expect that it will fluctuate in the future. So what does this mean for our full year outlook?

First, let me be clear. We have nothing new to say as it relates to our business x Venezuela. Our outlook remains on track.

Second, you will recall when we provided our 2014 full year outlook in our previous earnings call, we stated that rather than speculate on the timing or magnitude of a potential devaluation, we assume the rate of VEF 6.3 for planning purposes, and we also provided Venezuela's 2013 revenue and OPBDA as a baseline.

Therefore, as an update to the full year outlook, assuming the SICAD 1 rate remains at about VEF 10.7 for the remainder of the year and taking a more conservative view on our ability to raise prices in Venezuela, the full year impact to revenue and adjusted OPBDA is around $400 million and $200 million, respectively. As a result, dollar-denominated PanAmericana full year revenue will be roughly flat with last year, and adjusted OPBDA will decline in the mid to high single-digit percentage range.

For consolidated DTVLA, that means flat revenues and a low single-digit percentage decline in adjusted OPBDA compared to last year, excluding the $70 million ECAD [ph] gain in 2013. Again, these changes to our full year outlook are entirely due to our updated functions in Venezuela.

And finally, while the margin pressure will be particularly pronounced in the second quarter, we are, of course, not taking the devaluation lying down. We're working harder than ever to use whatever levers we have to drive top and bottom line growth across the entire DIRECTV Latin America footprint to see how much of these reductions we can call back.

So with that, let me move on to the quarter's consolidated results. In the quarter, DTVLA revenues were roughly flat to last year at $1.7 billion as growth in local currency ARPU and total subscribers was offset by foreign exchange headwinds. Similarly, adjusted OPBDA, which excludes the $166 million devaluation charge in Q1 of last year and the $281 million charge in Q1 of this year, declined 1% to $540 million as adjusted OPBDA margin declined just slightly to 31.4 from 31.6 a year earlier.

Now looking at the segments a little more closely. In Brazil, first quarter gross additions climbed 2% to 537,000 compared to a year ago, demonstrating the continued strong demand for Sky service. Advanced product sales were up 56% compared to a year ago, driven by our new low-cost HD basic box that allows us to provide more competitively priced HD offers while still maintaining strong returns.

Advanced product penetration of our total subscriber base has increased over 700 basis points compared to a year ago as we have seen a 33% increase in the number of these subscribers.

Moving on to the mass market. Demand remains strong in this segment with gross adds increasing over 4% compared with the prior year. Importantly, we continue to make progress in reducing the mix of cash-paying postpaid subscribers, which we believe will improve churn in the long term. Regarding our prepaid offering, it is still early days, but demand has been steady coming out of Q4.

In addition, we're starting to expand the number of recharge points while also gaining experience managing the reconnection process. The Sky Brasil team has done an excellent job in rapidly responding to the changing market conditions in Brazil by getting to market quickly with a prepaid offering while continuing to drive growth in our postpaid mass market offerings. It's difficult to appreciate the amount of effort, coordination and teamwork it takes to make such a significant changes to our sales, dealer, IT and financial systems, but the team has made rate progress.

Meanwhile, postpaid churn in the quarter was up 28 basis points versus a year ago, but you will recall last year, we had some issues with retention credits, which resulted in reducing churn in the period. Importantly, the postpaid churn trend is improving on a sequential basis, and we continue to expect postpaid churn to be down for the full year, and net additions to be ahead of last year.

I should also mention that the quarter was capped off with the announcement that Sky Brasil won the equivalent of the J.D. Power award in 2013 for best customer service in the industry for the 12th consecutive year. In addition, Sky Brasil was nominated for the Customer Service Company of the Year, an award that spans multiple consumer-facing industries. The results for that will come out later this month.

Moving on to the financials. Sky Brasil revenues increased in local currency by 15%, driven by a 6% increase in the average number of subs and a 9% increase in local currency ARPU compared to Q1 2013. The ARPU increase was driven primarily by reduced levels of retention credits and the higher penetration of advanced products.

Revenues in U.S. dollars declined 2.7% as the average value of the real [ph] declined about 18% compared to it last year, more than offsetting the improvements in local currency terms. The higher ARPU was also the major driver in improving margins 90 basis points to over 33% in the quarter.

Wrapping up on Brazil, we're very pleased with our Q1 results, which leave us on track to hit our full year local currency financial outlook of approximately 10% revenue growth and mid- to high single-digit OPBDA growth when excluding last year's $70 million ECAD [ph] gain.

Turning now to PanAmericana. The first quarter gross additions declined by about 13% or about 80,000 subscribers versus Q1 of last year as a result of both the regional macroeconomic conditions and limitations on our ability to acquire subscriber-related equipment in Venezuela, which alone accounted for nearly 40% of the decline in gross adds.

Despite this, in PanAmericana, we were able to nearly double the number of gross additions who signed up for HD. In addition, the total number of PanAmericana subscribers with HD service increased 43% over the last year and again an important part of our strategy going forward.

In terms of prepaid customers, over the last year, we've seen a 27% increase in the number of subscribers based on our traditional on-off metric, bringing the total to over 2.2 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. I think it's important to note that the number of prepaid subscribers who had the service at some point during the first quarter was actually over 3.1 million or roughly 950,000 higher than the reported on subscribers. Given the nature of the prepaid offering, we view this 90-day metric as a better measure of the performance of the platform and the underlying trends. It eliminates some of the event-, day of the week, and/or holiday-driven volatility that can come with the month-end on-off metric. Furthermore, it's one of the key metrics we use to manage the business.

The difference between the on-off metric and the 90-day metric will be important to keep in mind in the months ahead as the 2014 World Cup, which runs from mid-June to mid-July, bridges the end of Q2 and the beginning of Q3. It's possible that the number of reported prepaid customers on June 30 would look unusually high based on the on-off metric but then be followed by a drop in Q3. The difference using the 90-day metric will probably be much less pronounced.

Moving on to postpaid churn. As we stated on our last earnings call, we continue to make an even more disciplined approach to acquiring subscribers, balancing sales growth with maintaining long-term financial returns. To that end, first quarter postpaid churn in PanAmericana improved 7 basis points to 1.24%, continuing the trend of year-over-year declines in postpaid churn. This figure's quite impressive, given the level of competition in the market.

PanAmericana revenues increased in local currency by 28%, driven by a 15% increase in the average number of subscribers over the last year and an 11% increase in local ARPU. The ARPU increase was driven primarily by price increases and a higher penetration of HD subscribers.

Revenues in U.S. dollars increased 2.5% as the higher local currency performance was mostly offset by depreciation and foreign exchange rates compared to the prior year period. Adjusted OPBDA margin declined 150 basis points to 29.3% versus Q1 of 2013, mainly due to inflationary pressure and the timing of price increases in Venezuela, as well as the settlement of a performance rights fee dispute in Argentina.

Wrapping up on PanAmericana, we're pleased with the overall results in Q1. And excluding Venezuela, PanAmericana is on track to deliver solid top and bottom line growth, both in local currency and U.S. dollars.

And finally, I would like to mention Sky Mexico whose results were released by Televisa a little over a week ago. Sky Mexico delivered another strong quarter, adding 139,000 net subscribers in the quarter, bringing their cumulative subscriber count to nearly 6.2 million. And financial results at Sky Mexico were also strong with roughly 10% growth in local currency revenue and OPBDA.

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

Patrick T. Doyle

Thanks, Bruce, DIRECTV U.S. delivered yet another quarter of strong results as our financial and operating performance exceeded our internal expectations, particularly with regards to OPBDA margins and growth.

Beginning with subscribers, DIRECTV U.S. net additions of 12,000 were driven by continued strong gross additions and low churn of 1.45%. Gross additions were aided by strong performance in our LSP or local service provider distribution chain, our Commercial business, as well as continued strong demand for our Genie HD DVR, which accounted for roughly 2/3 of our gross additions.

And churn was unchanged from a year ago as higher disconnects related to the challenging competitive environment were offset by a 9-basis point improvement in churn from our HD DVR customers, as well as our lowest involuntary churn rate in over 9 years.

Revenue growth was also right in line with our internal plan at 5.1%, demonstrating the continued strength of the DIRECTV brand in the marketplace. Revenue growth was driven by a 4.3% increase in ARPU, as well as by net subscriber gains over the last year. Consistent with recent trends, the key driver of our ARPU growth, other than price increases, was increased penetration of both new and existing customers paying for advanced services, in particular our Whole-Home DVR Genie, as well as our new enhanced warranty plan.

ARPU also benefited from a 27% increase in ad sales, our highest quarterly growth rate in over 5 years. This was driven by a more than doubling of our addressable advertising sales and a 64% increase in our national ad sales.

In addition, commercial revenues continue to grow nicely, attaining year-over-year double-digit growth for the 17th consecutive quarter.

Moving now to the bottom line, where strong cost management was clearly a highlight, operating profit before depreciation and amortization margin improved for the seventh time in the last 8 quarters, driving OPBDA growth of nearly 10%. Margin improvement was seen across virtually the entire P&L, but in particular on the upgraded retention line where lower equipment costs drove the improvement.

In addition, disciplined expense management and improved productivity from prior year capital investments resulted in our subscriber services, broadcast operations, G&A and subscriber acquisition expenses growing slower than revenues. Partially offsetting these improvements were increased content costs, primarily related to annual programmer rate increases as average programmer cost per subscriber or ACPU grew at 5.7% in the quarter, which was right in line with our plan.

Lastly, the cash stack rate of $859 in Q1 was nearly $40 lower than Q1 of 2013, principally due to lower set-top box costs, as well as an increase in the use of refurbished boxes. With regards to our full year U.S. outlook, obviously with regards to revenue growth, we are right on track. And from an OPBDA perspective, our Q1 results give us additional confidence in achieving our full year OPBDA target growth rate of mid-single digits. It's important to point out that despite our solid performance and ACPU growth in Q1, we continue to expect ACPU growth at the low end of our 7% to 9% target for the full year.

Looking quickly at our Q1 consolidated results. Adjusted diluted earnings per share, excluding the Venezuela devaluation charge, grew 14% to $1.63 in the quarter, driven by a modest increase in adjusted net income, as well as our share repurchases over the last year.

In addition, we got off to a good start on free cash flow as it increased 25% to $886 million driven by higher OPBDA and the timing of capital expenditures, which should pick up starting in Q2.

Moving on to the balance sheet. In the quarter, we repurchased just under 13 million shares of DIRECTV stock for $895 million, bringing cumulative repurchases since we began the program in 2006 to over 30 billion or 66% of shares outstanding. Also in the quarter, we issued 1.25 billion of 10-year notes, most of which was used in April to redeem 1 billion of senior notes that were due later this year.

At the end of the quarter an adjusted -- and adjusting for the April redemption, we had approximately $19.8 billion in total debt, bringing our debt to trailing reported OPBDA leverage ratio to our target of about 2.5x.

Turning to our consolidated outlook for 2014. In addition to the Venezuela devaluation impact on consolidated revenue and OPBDA that Bruce just mentioned, adjusted EPS, which would exclude the devaluation charges, will likely increase mid- to high single digits from $542 a year ago or about a 5% reduction to our original plan before the devaluation.

In addition, our expectations for free cash flow growth of about 10% are, at this point, unchanged as the negative impact from the Venezuela devaluation is anticipated to be offset by slightly lower full year CapEx spending in both the U.S. and Latin America.

Finally, in terms of DIRECTV strategy for returning capital, we are right on track to hit our full year target of $3.5 billion of share repurchases in 2014.

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're 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 an archived copy will be kept on our website. [Operator Instructions] Operator, at this time, we're ready for the first question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jason Bazinet with Citi.

Jason B. Bazinet - Citigroup Inc, Research Division

A question for Mr. White. I appreciate your -- and respect your decision not to comment on M&A, but I just had one question as it relates to your '16 outlook. Is there any chance as you sort of work through the numbers that if the market begins to price in more M&A in your equity that it sort of diminishes the efficacy of your buyback and therefore, jeopardizes sort of a dollar number you've outlined for 2016?

Michael D. White

Thanks, Jason. I'm going to ask Pat to tackle that first.

Patrick T. Doyle

Yes. I mean, I think look, we -- when we review the -- our share repurchase strategy, I mean, we're always looking at other sources to validate what we think is the internal or private valuation of our business. I think we still remain confident when we look at our outlook and what would be what we think are appropriate multiples for our stock. That is still the right do in that it's value creative for the shareholders. Certainly, if the stock moved away into a territory that we felt like was overheated, then we have the option of pulling back. But I don't see that as necessarily a problem over a longer period of time.

Michael D. White

Yes. I would say clearly, Jason, that the last 4 years I've been here, I think I've always felt strongly that our stock was structurally kind of stuck in a place that didn't represent the fair value of the company, and it was driven by a lot of things, questions about the long-term viability of satellites, so on and so forth, which is kind of in effect what made the stock buyback program such an attractive thing for us to do for our shareholders. I think you could probably say today the discount, if you will, that we were getting seems to have moved out of our stock for the moment. We'll see how that goes over the long term, but I think to Pat's point, even if we were fairly valued, I still think the share buyback program makes sense provided, and I've always said this, provided we don't find better alternatives and we'd always put as our first preference would be to reinvest in the business or to find accretive acquisitions. So from that standpoint, I don't see any change.

Operator

And next we'll go to John Hodulik with UBS.

John C. Hodulik - UBS Investment Bank, Research Division

Okay. Pat, it looks like you guys are seeing some slowdown in the ARPU from 6% to 4.3% growth. Can you talk about how you see that trending throughout the year? And then maybe put some more details on the pretty dramatic improvement you're seeing in the addressable and national ad sales.

Patrick T. Doyle

Sure. You got to remember when you go from the fourth quarter to the first quarter, the fourth quarter, we had a very strong NFL SUNDAY TICKET program and with a number of takers and a number of paid takers. So in the fourth quarter, we definitely saw a nice tailwind there. We also saw kind of the beginnings of the protection plan that we adjusted in May that helped us a lot. So that's probably the main reason. Our revenue and ARPU in the first quarter was right on our expectations. We do see that, as we look through the year, that there's -- that the trend is probably slightly up on revenue growth and ARPU, more leaning toward the back half of the year. But the relationship between fourth quarter and first quarter was right on what we expected. Yes, on ad sales, we're really pleased there. Obviously, that's an area that we haven't been able to really take advantage of. The team's done a great job of working the technology. And more importantly, I guess demonstrating to the advertisers that we can really return their investment, we can give them empirical evidence that the addressable advertising that we can do for them is more effective than kind of your national advertising. We're in the beginning stages of that. I mean, still the numbers relative to total advertising are not big percentages, but it's growing rapidly, and that's kind of where the industry is moving. So we're really encouraged by the reception that we've gotten from advertisers as we move into this new phase.

Michael D. White

As someone who used to work in a consumer goods company, I can tell you that I always felt it was going to take a little while with a different selling skill set to sell addressable ads because it's more of a consultative sell, but we've really ramped up our capabilities in the ad sales department over the last 2 years to do that. And we're now selling to 4 out of the 5 largest advertisers in America on addressable. So I think they're seeing, to Pat's point, the ROI out of that, but it is more of a complex sell. Are you doing interactive? Are you not? Are you targeting households that have dogs, as opposed to cats, for dog food? Things like that. It takes some learning as to how you manipulate the databases, but's we're very pleased with the progress the ad sales team is making.

Operator

Our next question will come from James Ratcliffe with Buckingham Research.

James M. Ratcliffe - The Buckingham Research Group Incorporated

A couple of questions if I could. First of all, can you talk about what sort of impact you've been seeing in Los Angeles, given the launch of SportsNet LA, if you have seen any subscriber drag on that? And if it turns out you don't see much subscriber drag on that, what that kind of means for hours [ph] and programming costs going forward? And secondly, for Venezuela, with the new currency regime, are you able to actually get capital out of the country? And can you help us quantify if there is still sort of a gross add constraint in Venezuela?

Patrick T. Doyle

Sure, James. I'll take the first one and then turn the second one over to Fazal or Bruce. Look, if you look at the Dodgers situation, it's very disappointing. Frankly, that Time Warner Cable did an unprecedented deal far above any rational view of the market for a premier baseball team and created another channel that only has content 6 months out of the year. Frankly, I don't think it's been good for consumers or for the pay-TV industry. We'd still like to carry the Dodgers. We're still having discussions with Time Warner Cable about it. But let's be clear. I mean, they're looking to double what the average RSN charges DIRECTV customers per pro game. And we recognize that we would have to step up and pay more for the Dodgers this year. They're a premier franchise, and we'd love to find a way to carry them. We'll continue discussions and hope we can get to a sensible place. But I do think this kind of pay-whatever price and then dump it on every pay-TV provider in the market to pay for the decision that was made by Time Warner Cable management is just -- it's not right. And so we're -- so far, churn has been immaterial in Los Angeles. In terms of whether it has some bigger effect on RSN costs longer-term, look, we recognize sports as a valuable asset. We're in the RSN business. So I don't know that I could go that far. I think what we're all just trying to say is, look, it seems to be the only industry I know of where in some ways, the more competition, the higher the price is. And in this case, it's a tax on most customers who wouldn't pay it if they had a choice. So we're hopeful that in the end, we can kind of strike some reasonable compromise. But frankly, the prices that we've been quoted so far are so far beyond what a rational view of the market is that we don't think that it's appropriate to put that on our pay-TV customers. On Venezuela?

Fazal Merchant

Yes. This is Fazal. As it relates to Venezuela, the gross adds were constrained as we mentioned at the back end of last year as a result of availability of boxes. And I think with churn in Venezuela at already unbelievably low levels, the availability of boxes was even more pronounced. Now we fortunately have -- do have availability of boxes now for the time being. So the constraint on gross adds should, at least for the near future, not be something that inhibits us. In terms of being able to get capital out, obviously, everyone's keenly aware of the constraint. So we certainly aren't able to get capital out as freely as we would like, but we have had some success both last year and are optimistic for select approved expenses. We work in discussion with the government and get, occasionally, approvals to selectively get capital out.

Operator

And next, we'll take a question from Tom Eagan with Telsey Advisory.

Thomas William Eagan - Telsey Advisory Group LLC

I guess, first, for Mike, if you could share some of your thoughts on the dynamics of the U.S. video sector. For example, at telco, they added 150,000 fewer video subs, and last year, cable had lost 170,000 viewer subs. So did you guys take share from telco? Or was it growth from the occupied homes?

Michael D. White

Thanks, Tom. Look, I think first of all, Tom, keep in mind, the weather was a significant factor for, frankly, every CEO I talked to in the first quarter. Fortunately, the economy seems to be coming back strong in the second quarter. And I think particularly when you think about installs and moves, which tend to drive gross add, new gross adds, as opposed to share shifts, there's no question in my mind that put a damper somewhat on the first quarter results. I think the second thing I would say is I'm acutely aware, as I sit on the Whirlpool Board of Directors, that the housing market is still not great. In fact, I think I heard this morning, we're back to homeownership levels of 1995. And it's a combination of challenges between student debt, the price of getting a new house. On the other hand, all of the projections I've seen with household formation and population growth, there is no question, you're going to see eventually a significant increase in new homes. The issue is, when? Is it 2015? Is it 2016? I don't think it will be in 2014. But certainly, I strongly believe you're going to see a significant increase somewhere over the next 3 or 4 years that will be new demand for our industry. But with that said, it's still a pretty mature business. And mostly, you've got a lot of dynamics going on of who's promoting hard in a given quarter. Clearly, Time Warner Cable got far more promotional in both fourth quarter of last year and first quarter of this year. So you've seen a bit of a shift there, I think, the telcos, they continue to be very aggressive. So it's a very competitive space, and I really don't think that's changed, to be honest with you. It's a -- an extremely competitive space, and I would say the easy wins for telco that they had a couple of years ago are probably behind them. All the cable guys have gotten very aggressive in telco geographies in being as promotional as the telcos. So I think for us as a national player, it continues to be a national game for us, and we have certain geographies that we're stronger in than others. But I would say on balance, frankly, I was pleased with the first quarter. Keep all in mind though, second quarter is always a seasonally low quarter for the industry, and I don't think this quarter will be any exception as people move out. And then you get the bounce back in Q3. But with that said, our gross adds are off to good start in Q2.

Thomas William Eagan - Telsey Advisory Group LLC

Great. And then for Pat. The upgrade and retention cost was about 4.6% of revenue. That's the lowest I've seen it, I think, ever. Is it a new rate?

Patrick T. Doyle

Yes -- no. I think what -- there are a couple of things going on there, Tom. One, as you know, we made a conscious effort to upgrade our best customers last year. We ended up spending about $300 million more on top of our normal upgrade volume. So I think we've got -- we clearly satisfied a lot of the initial demand on the Genie product. The other thing that I mentioned in my notes is the team has done a great job of driving down the hardware costs.

Michael D. White

Right.

Patrick T. Doyle

And we're not done there. The team is clearly focused on looking at all aspects of hardware and continuing to drive that down. The third thing I would say is we've really done a great effort of driving calls out of the system, focused on quality and reliability, and in some respects, we're finding a correlative effect there in that if people don't call in, a lot of times, that doesn't give them an opportunity to talk about upgrades or other things they might do. So there's kind of a little bit of a nuance there in that the more we drive calls out of the system, the kind of a less conversation you have with your customers. So it's kind of a three-pronged result.

Michael D. White

Yes, I just put in a plug for the work that we've been doing on the customer service experience that we've talked about in the past, and I think it's both been a win for customers, and it's also a productivity win. So our on-time arrivals are up 5% this year. Our service truck rolls are down 7%. Equipment replacements are down 20%. We had a lot of initiatives on equipment reliability. Customer escalations are down 12%, and call volume's down 8%. That stuff just doesn't happen by itself. It's happened because of a lot of work that we've been doing cross functionally in our operations and sales and marketing teams to improve the customer experience to streamline and simplify how they do business with us and to reward our most loyal customers.

Operator

And next, we'll take a question from Tuna Amobi with S&P Capital IQ.

Tuna N. Amobi - S&P Capital IQ Equity Research

Mike, those are pretty impressive numbers you were spitting out there on customer service. I could hardly keep up. My question is for Bruce actually on the World Cup, right? So if I remember 4 years ago, this event, you guys were literally 15 on the World Cup. And if I remember correctly, a number of -- a fair amount of subscribers dropped off the platform right after the event concluded. So based on the guidance that you provided, it doesn't sound like, and correct me if I'm wrong, that you're quite as enthusiastic on this World Cup and yet it seems to me that you've adopted a deliberate strategy to use this as a loss leader. So given the macroeconomic changes that have happened in Latin America in the last few years, dramatically different than 4 years ago I would imagine, can you kind of maybe give us your philosophy on how the World Cup kind of fits into your broader term strategy in Latin America, and how you kind of see this particular year's event shaping up relative to the current environment versus 4 years ago, if that makes sense?

Bruce Barrett Churchill

Sure. Look, I would say, in general, the FIFA World Cup is the marquee event in Latin America. That's why we have bought rights, some of them exclusive in some territories, not only for this World Cup but in '18 and '22. So it's important that we have this product for the long haul. Having said that, you're right. When you take a product over a long period of time, sometimes it hits you at a time when things are on the upswing, and sometimes it hits you or comes in a period when things aren't as robust. So I think it is probably fair to say that while in the last cycle, we did look to the World Cup to really drive more gross adds and drive growth, I think in light of the macroeconomic conditions that we're looking at today, we see it more as a way to sustain the demand and sustain the growth rates that we've had. We've also taken some conscious steps to try and avoid what you described early in your question, which was the potential on the back side for a lot of people to disconnect. We've actually, in many of the markets, particularly in the prepaid arena, we've increased the hook-up fee so that there are people -- in the sense that the customers who've come on are not customers that are just going to buy it for the month or 2 months and then never reconnect, trying to encourage people that do come on to have some skin in the game. And we're also looking to do a number -- a couple -- one particular event in the third quarter to help continue the support and interest in the platform. So I would say you're probably right. We have -- the environment is a little different. We've taken some steps to probably tone down to make sure we don't have just 2 -- a churn problem in the third quarter. But in general, look the World Cup is still the most important product in the market, and I continue to be very happy that we have it in this cycle and for the next 2 cycles.

Tuna N. Amobi - S&P Capital IQ Equity Research

Okay. Great. Just a separate follow-up question for Mike. So Mike, when you think about DISH's strategy in going into some of these negotiations with their AutoHop, it seems like something that they've been able to use successfully to begin to extract some leverage in these carriage negotiations. Does that kind of make you think about your own strategy as to -- if you might be potentially leaving money on the table, and that kind of also may be a good segue into your broader online video strategy? What -- how does this kind of play to your overall strategy in some of these negotiations in terms of traditional versus online?

Michael D. White

Yes. I don't -- I, frankly, think it's more of a liability in their negotiations to leverage, at least based on what I've seen with the Disney deal. Look, I think trying to eliminate adds from our perspective that undermines the ecosystem, only means they will ask for more money on the affiliate revenue side. So it's a delicate balance in this ecosystem. We're happy with our DVR approach. We, frankly, haven't seen consumer pull for the AutoHop in any huge dimension. We actually own the rights to the technology, but we have no plans to use that right now. I think our approach to programming costs has always been to try and fight on behalf of our customers to keep their bills from skyrocketing out of sight. And we do that with a lot of data analysis and looking at the market, looking at ratings and looking at churn projections and things like that in any given negotiation. But -- and make sure that we're treated fairly, given the scale and size of 20 million subscribers. And at the end of the day, that's the most important thing for us is making sure we're treated fairly relative to our competitors. So I don't think that changes our thinking though, Tuna, in terms of what I would be doing on the programming side.

Operator

And next, we'll take a question from Ben Swinburne from Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

Pat, just to clarify. You may have said in this in your prepared remarks, I apologize, but did you reconfirm your buyback plan for this year, which I believe is $3.5 billion?

Patrick T. Doyle

Yes -- no. I said the first quarter was consistent with our target of $3.5 billion for the full year.

Benjamin Swinburne - Morgan Stanley, Research Division

Got you. Okay. And then, Mike, maybe take a little bit of a different approach to the streaming video or online video question. Hybrid cloud satellite you mentioned in your prepared remarks, it's in your 10-K as a strategic imperative. There was some press commentary last week on some of the deal spec that you're behind DISH on development of online video, and I know it's early days on sort of where you go there. But I'd love to hear your thoughts on where your infrastructure is today in the U.S. and what your strategy is if you look out over multiple years to try to incorporate cloud delivery of video into the DIRECTV product offerings. It seems like something, given your brand, could be a pretty big opportunity when you think about the sustainability of your U.S. business.

Michael D. White

Yes. I appreciate the opportunity to comment, Ben. As you can imagine, I didn't agree with many of the assertions that were in the article that you're referring to. Look, I think first of all, if you talk about -- if you're going to talk about this broad area of technology change, I think you have to separate the subjects from, let's call it, either an over-the-top or personalized service, what they're calling subscription service PSS, from how consumers want to consume their content anywhere and everywhere they get it. And I want to comment on each of them. And so in terms of the -- how consumers want to consume their content, look, CableFAX show -- the CableFAX award for best TV Everywhere App and Portal was given to DIRECTV. Last I checked, we're not a cable company. I thought was pretty good. We have been working hard on addressable ads, ad insertion. We were the first company to be able to do Android in terms of our -- last year, last fall in terms of our TV Everywhere screen. And we continue to add to our TV Everywhere capability, but I continue to say that TV Everywhere is as much or more driven by rights availabilities and the timing of negotiations. DISH's Disney deal was up last year. Ours is up later this year. So it's just a matter of where you are kind of in the sequencing on that. But I fully expect we'll continue to aggressively build out our TV Everywhere capability. We've got the capability to do start over and look back, which I was told was impossible when I took this job by a consultant. And so in terms of our infrastructure, I think we're making good progress. I think when I talk about hybrid satellite cloud, Ben, I think the questions that are still out there in my mind are how far do you go on electronic sell-through? I think it's starting, but it's still in its infancy. Where might you go with ultraviolet kind of capability to store stuff in the cloud and seamlessly move your content through the cloud, but again, a lot of that has to do more with rights than building the cloud itself. Frankly, the technology is kind of a commodity, to be honest with you, on this stuff. If you get to the over-the-top or personalized subscription service, again, I would say you can get Newline or mlb.com to build you a website in a matter of months. It's not a -- it's, frankly, not a very complex technology challenge. I think the question will be as the rights evolve, how big is the opportunity and how attractive is it. If you -- by my math, if I sell something for $30 a month or $29 and the estimates on how many households that are out there that are broadband-only or whatever is probably somewhere between 5 million and 7 million, and you picked up even 2 million of those, it's less than $100 million OPBDA opportunity and it's less than $1 billion revenue opportunity, but it's an opportunity. If you can find a way to get the best channels more à la carte, frankly, because it's content cost again that will drive the pricing on that bundle and if you can avoid cannibalizing your core business because if I just look at the Netflix business model and I figure 70%-odd programming cost or something in that neighborhood and a 10% margin, your monthly margin on a personalized subscription service is like $3, which compares to something like 7 to 10x that for the core business. So I think we're all concerned about the millenials, and we're all concerned about folks that can't afford pay-TV, the cord-cutters, if you will, and finding creative ways to service them. And I think I have no doubt you'll see some launches this year where, I've said before, we're working on more niche ideas around content, but we are looking at this area, as well. And if we think it's a good enough opportunity, it won't be that difficult to take the infrastructure that we're already building for Hispanic or other products and extend it over. It's just -- it's not that difficult. I mean, frankly, we're already working on a building module and other things to kind of be able to do this stuff. So it doesn't concern me. I just think it's a question of you have to pay for retrans and then how many other things you're going to add into that thing and then at what point does the price point become $34.99, $39.99 or $44.99 before you get beyond what consumers will bear. When we have done over-the-top research in the past, it has shown a sharp falloff at $12. But who knows? We'll see.

Benjamin Swinburne - Morgan Stanley, Research Division

Yes. But I guess what I'm hearing you say is just putting the business model rights issues to the side from a technology perspective. So from the Genie, all the way up through the network to the cloud and server capacity, and giving the customer a great experience, you feel like you're as good or better than anybody else in the marketplace?

Michael D. White

Absolutely. In fact, we had a science fair downstairs about 3 weeks ago where we let a bunch of our engineers do some skunk-work stuff. And they showed me an HTML5 UI based in the cloud. So look, if it makes sense to do a cloud-based UI, we will. The box is primarily for the storage not for the -- not necessarily for the UI. So I mean, if that makes sense, we'll be able to do it.

Operator

Our next question will come from Adam Ilkowitz with Nomura.

Adam Ilkowitz - Nomura Securities Co. Ltd., Research Division

Two, if I could. One, to Pat. Thinking about the devaluation loss of EBITDA and the cash from Venezuela, can you update us on how you think about leverage and what your leverage target would be as a maximum? You mentioned 2.5 now, but obviously that moves around a little bit with the devaluations. And then you've chosen the SICAD 1 rate, the VEF 10.7 to the dollar. I was wondering about your ability to access that over time. Do you think you'd actually be able to get that, or is the SICAD 2 rate, which is obviously materially higher, would be more appropriate for a company in the services industry like you are?

Patrick T. Doyle

Yes. Let me hit the first one, Adam, and then I'll let Fazal respond to the second one. Yes, I think as we've said in the past, we're very comfortable where we are with the 2.5x consolidated EBITDA. And also, whenever we talk to the rating agencies we always talk about what does that mean as far as DIRECTV U.S. and as standalone leverage there. And I can tell you in all of the recent discussions we've had with the rating agencies, they're very comfortable that we kind of look at it from 2 perspectives, not just consolidated, but what is that leverage when you just look at it from a U.S. perspective. So I feel like we're in a very comfortable spot. So even with some of these devaluations in Venezuela, it doesn't impact our thinking on our leverage.

Fazal Merchant

Yes, I'd just say on SICAD 1, we are optimistic we'll be able to access funds at the SICAD 1 rate. And SICAD 2 is actually available for anybody to participate in as far as we know. However, the volume, the availability of the funds under that program aren't clear because they're not disclosed. So it's not clear to what extent folks are able to get funds out of the SICAD 2 rate. You mentioned services industry, which is true. We are actually categorized under the telco industry in Venezuela, which, again, as far as we're aware, is entirely eligible to participate if invited into the SICAD 1 auctions. So like I said, we're optimistic, and we'll see as the year progresses. I think the auction process seems to be going reasonably well, and there is a level of liquidity that's stabilizing at least in SICAD 1. So we're optimistic.

Michael D. White

I'd just add to that, Adam, a couple of comments about it. When I look at Venezuela, first of all, I think you have to think about 3 different buckets. There's the operating performance of the business and its economics. There is the $450 million now in cash sitting on the balance sheet that is all cash that's been generated internally in Venezuela. And then there's the ability to import boxes. I think in terms of the operating kind of economics of the business, what I look at is ARPU relative to peer countries. And I think with the deval, this takes us from probably $50 ARPU, which would have been on the high end for Latin America to mid-30s, which is roughly in line with Colombia and Argentina. So it feels right to me when I look at it using the SICAD 1 rate, as opposed to the SICAD 2 rate, that that's truly representative of the economics of the business. In terms of our ability to import boxes, I think we continue to feel we can do that. Sometimes we have a delay and you see it, and kind of then we don't have boxes and so we wait a quarter or 2, but that works. And I have no reason to believe it won't continue to work, as Fazal said. I think the question of what about the $450 million in cash flow, if you guys decide what to do with that. It's cash that's been internally generated in Venezuela. We'd love to repatriate it, but I don't have any expectation that, that will be happening anytime soon, and we don't put fresh cash into Venezuela from outside the country. It generates its own cash, it's self-sufficient. And that's been the case, by the way, for several years. That's the way Bruce has always managed it.

Operator

And next, we'll go to the Vijay Jayant with ISI Group.

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

Both for Bruce. Can you just talk about rate increases in Latin America? Is the strategy basically just sort of match inflation? And can you talk about, is it done in the beginning of the year, or across different countries at different times? And really, also, the second question really is on the World Cup soccer. Is there any sort of start-up costs associated with it that we need to think about in the 2Q results?

Bruce Barrett Churchill

With respect to price increases, it depends. It's done differently in each market. The timing is different. It's not necessarily at the beginning of the year. And in some cases, it's more than once. And in general, yes, we try and get as much of a price increase as we can to track inflation. I think fundamentally, what we're doing there is to try and preserve our margin. And maybe even to add a bit onto what Mike said to the last question is in pretty much every market now, pretty much all of our economics are local currency denominated. So even if you take -- you may take the ARPU down, but then there's a similar reduction in our ACPU. So it generates then just more local currency cash. So it doesn't affect our fundamental economics that way. With respect -- on the World Cup, yes. There's going to be some margin pressure in this quarter because we just will expense the World Cup the actual rights and production cost through -- in that quarter. So as -- I think I mentioned in my opening comments, there is going to be some margin pressure in the second quarter. It's a combination of a reduction in Venezuela that has historically had a higher margin, but also the fact we're putting through the World Cup a big portion of it in the second quarter. But I think when we gave our full year guidance, obviously, we had that built into it. So the sort of 30% OPBDA margin that we keep talking about is for the year and that -- our view on that hasn't changed.

Operator

Our next question will come from Craig Moffett with MoffettNathanson.

Craig Moffett - MoffettNathanson LLC

A quick question, Mike. I want to go back to the conversation you had about cloud-based guidance for a second. Comcast talked about a significant uplift that they've had in markets where they've launched their new X2 interface and their X1 box platform. Have you seen the same thing? And how well does DIRECTV compete or how differentially does it compete in markets where the new guys have already been rolled out versus the markets where they haven't? And then while we're on the topic of Comcast, I wonder if you can just update your thoughts on the conditions that you would like to see applied to the Comcast transaction in the SEC if, in fact, it is approved.

Michael D. White

A lot of the markets they've picked, Craig, aren't strong satellite markets, geographies. Boston. I don't know where their second market was. I forgot. I know they started in Boston. So it will be hard for me to find, one way or the other in our metrics, kind of any impact from it. I'm sure they've improved their UI. I have no doubt about it. We're working to improve our UI. I don't think consumers -- they also play a slightly different game than we do. They push VOD, whereas we've historically had much, much bigger presence in DVRs for recorded programming. So they're slightly different strategies, but ours -- I'm still confident in the way we've approached it. We've added a lot of VOD content as well over the last year, but we also have a much bigger kind of footprint in our customer base around DVRs and Genie, which has kind of been the focus of us. So I'm sure it's improved their business. They're a -- look, competing with them now, DIRECTV's competed with them for many years. They are a tough, capable competitor, but I'm equally confident in our own ability to innovate and compete successfully, whether it's our technology. our brands or our people. So I don't think it's anything in my mind that's so transformational in the marketplace that it would drive us to do anything different. As I said, if it makes sense for us to do our UI in the cloud, we can do it in the cloud. It's -- frankly, the box in the home is valuable for us for storage and enables us to do a lot of things uniquely in improving video-on-Demand, pay-per-view movies and so on and so forth that we've talked about in the last couple of years, and storage just keeps getting cheaper and cheaper. So we still see a box in the home, but look, our longer-term vision is 1 box for the whole home and wireless everything else would be where we'd like to get over the next 3 or 4 years. In terms of your second question, look, I'm not going to speak on behalf of regulators and I probably don't have anything to add that I didn't comment on, on the last call.

Operator

And our last question today will come from Amy Yong with Macquarie.

Amy Yong - Macquarie Research

I was just wondering if you could comment around your relationship with Netflix and how has that evolved over time? It looks like more cable companies are viewing Netflix as more of a friend than a foe and they've struck a few deals, including incorporating apps into the set-top box. I was just wondering if DIRECTV has an appetite to do something similar, and if you could just comment on the broader -- your broader relationship with Netflix.

Michael D. White

I would say, Amy, I don't see them as a friend or a foe. I think they're an extended competitor playing a unique game of no-ads and more library content supplemented now by some original content, and Reed runs a terrific business. And I have a lot of respect for the model that he's built and the culture that he's built there. From our standpoint, if you have a Smart TV like I do at home, a Samsung Smart TV, it's not that complicated to click on the Netflix app, if that's what you want versus building it into the box. I suppose it if there's big consumer demand at some point, would we consider it? Sure. But frankly, we make a lot of money selling premiums and pay-per-view movies. And from that standpoint, I would say I don't see a compelling reason to build it into the box. But just remember and also remember, cable' -- most of what you've been reading about is cable is also selling broadband. So there's been a lot of discussion about whether it's kind of the peering or whether it's the speeds within it and, also, would point out that the premium business is a lot bigger. I think we're twice the penetration of premiums of cable. So they may have a slightly different view because they're selling broadband and making 80%-plus margins on broadband than us. But look, I don't -- I respect the business that Reed has built.

Operator

Thank you. This does conclude today's DIRECTV Group's First Quarter 2014 Earnings Conference Call. You may now disconnect your lines, and have a pleasant afternoon.

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