DIRECTV's (DTV) CEO Bruce Churchill on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: AT&T Inc. (T)

DIRECTV (DTV) Q2 2014 Earnings Call July 31, 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

Analysts

Benjamin Swinburne - Morgan Stanley, Research Division

David Carl Joyce - ISI Group Inc., Research Division

Amy Yong - Macquarie Research

Craig Moffett - MoffettNathanson LLC

Michael McCormack - Jefferies LLC, Research Division

James M. Ratcliffe - The Buckingham Research Group Incorporated

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

Thomas William Eagan - Telsey Advisory Group LLC

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Richard Greenfield - BTIG, LLC, Research Division

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

Jason B. Bazinet - Citigroup Inc, Research Division

Operator

Good day, ladies and gentlemen. My name is Aaron, and I will be your conference operator today. At this time, I would like to welcome everyone to the DIRECTV Second 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, Aaron, and thank you, everyone, for joining us for our second 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 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 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. Let me start out by saying I'm extremely pleased with our second quarter results, and I couldn't be more proud of the passion for leadership and continued executional excellence that has been exhibited by my entire DIRECTV team since the announcement of our merger with AT&T.

We continue to focus on delivering the goods. As we work to secure government approvals and plan for a successful integration of DIRECTV with AT&T, we continue to deliver on the strategic imperatives we established of maintaining first quartile growth in our industry.

In the U.S., our results were entirely consistent with our goal of balancing top line sales and bottom line profitability through the strategic initiatives we discussed last December that heighten our focus on the quality and profitability of subscribers, the overall customer experience, product innovation and cost management across the enterprise.

In Latin America, our second quarter performance continued to highlight strong consumer demand, driven by the strength of the DIRECTV and Sky brands, bolstered by an unrivaled suite of differentiated products and services. With these achievements, I'm pleased to report that DIRECTV delivered mid-single digit revenue and double-digit earnings and cash flow growth in the quarter.

Now before I turn the call over to Bruce and Pat for a more detailed review of our Latin America and U.S. businesses, let me just offer a few observations. In terms of Latin America, on balance, I thought DIRECTV Latin America's second quarter results were very solid and consistent with the key financial and strategic priorities we shared with you at our Investor Day in December.

Net additions of 543,000 new subs in the quarter were driven by a 10% increase in gross additions to 1.3 million, a new record high. Clearly, the FIFA World Cup propelled much of this growth, but we're also continuing to see solid demand across the entire region, driven by our industry-leading HD and DVR services, as well as popular postpaid and prepaid packages. And with this strong subscriber growth, DIRECTV Latin America's revenues grew in the mid-single digits, but perhaps more importantly, if you exclude the impact of foreign exchange, revenues grew around 27% for the quarter.

Shifting to margins. DIRECTV Latin America's OPBDA margin, although below last year, primarily I would point out due to the increased cost associated with the FIFA World Cup and the acquisition costs related to the record gross additions, those margins were right in line with our expectations. As such, we still intend on delivering the strong subscriber returns we shared with you at our Investor Day, as well as full year adjusted OPBDA results in line with Bruce's previous guidance.

Turning to DIRECTV U.S. I believe our second quarter results continue to demonstrate the strong execution of the strategies we've established of delivering mid-single-digit top and bottom line growth. As we've seen in recent quarters, benefits from our initiatives to focus on quality, loyalty and profitability of subscribers are represented in our more than 5% revenue growth, which was generated mostly through strong ARPU growth.

In terms of margins, Pat will go into a bit more detail, but the benefits we're generated from our cost-containment and productivity improvements are notable, resulting in many of our key cost areas growing slower than revenues in the quarter. Having said that, rising programming cost, particularly related to the large resets of excessive increases in retrans and sports fees, remains our greatest cost challenge. We remain committed to fighting on behalf of our customers to do everything we can to slow down these unsustainable cost increases.

I'd also like to highlight that our focus on the overall customer experience and product innovation continue to strengthen our competitiveness in the marketplace. Case in point, the 2014 Satmetrix net promoter industry report revealed that DIRECTV's Net Promoter Score more than doubled from the 2011 survey, improving 18 percentage points over the last 3 years to make DIRECTV the top-ranked distributor in our industry measured NPS as we have been in the ACSI scores for many years relative to cable.

Also in the coming months, we'll be launching some exciting new products from the road map we shared with you at Investor Day, including the ability to watch shows that aired within the last 72 hours, as well as significant enhancements to our popular NFL SUNDAY TICKET offering, such as our new exclusive NFL FANTASY ZONE channel and the expansion of our NFL SUNDAY TICKET over-the-top service for those customers who are ineligible to receive traditional DIRECTV service via a satellite dish.

Although we're in the early innings of making the DIRECTV customer experience a true competitive differentiator, I'm particularly pleased with our progress. Having said that, we must continue to take our game to an even higher level as I'm confident that financial returns over the long term will be fully realized through happier and more loyal customers in an intensely competitive industry.

Overall, our second quarter results in total for DIRECTV continue to demonstrate the strength of our businesses, and the more planning we do for our proposed merger with AT&T, the more excited I am about the opportunities for the combined company.

As for the transaction itself, as you may have heard from AT&T last week, we have filed all of the initial documents required by the FCC, DOJ and key countries in Latin America. In addition to that, the SEC provided comments on the S-4 that AT&T had filed on July 1. We're currently in the process of responding to them, and we fully expect to hold our shareholder vote in the September time frame.

Regarding our SUNDAY TICKET contract negotiations, I don't have anything new to report, but I remain very confident that we will have an exclusive deal completed for the service by the end of this year. That's about all I have relating to the transaction. So I'd appreciate everyone focusing their questions on our core businesses.

Finally, before turning the call over to Bruce and Pat, let me highlight 2 important milestones that we recently achieved. First, it was announced that DIRECTV, the largest pay-TV company in the world, secured its place as a Fortune 100 company in 2013. And second, in addition, last month, DIRECTV celebrated its 20th anniversary of delivering the industry's leading video service. These are terrific accomplishments that have been realized through the efforts of many of our colleagues and employees at DIRECTV today and in the past. And I couldn't be more grateful for all of our DIRECTV employees, for our founders, for those that were innovative enough to think about putting these satellites into commercial use 20 years ago. I think our employees should be extremely proud. DIRECTV's objective has always been to deliver the best video experience and service experience. And I'm confident, together with AT&T, we will continue to raise the bar, drive innovation and offer superior service to our customers.

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

Bruce Barrett Churchill

Great. Thanks, Mike. As you can see from our earnings release this morning, our results in Latin America continue to be strong as the tremendous excitement surrounding the FIFA World Cup drove subscriber performance across the region above our expectations. Local currency revenue growth was another highlight as we continued to balance the economic tradeoff between retention spend, customer credits and managing churn.

In addition, we're making a solid effort to put through price increases in high inflation environments. As we mentioned last quarter, our coverage of the FIFA World Cup did impact our margins as we incurred greater fees in the quarter for World Cup rights, as well as for production costs associated with the tournament. OPBDA margin was also lower than last year as a result of costs associated with the record gross additions in the quarter.

Let me start with Brazil, looking first at the Brazil subscriber metrics. The second quarter gross additions reached a new all-time high of 599,000, representing an improvement of nearly 9% over the prior year period, driven by the impact of the World Cup on our advanced product sales, as well as our recently launched prepaid offering.

Postpaid churn in the quarter was 2.56%. And while significantly better than the prior year, the comparison is not meaningful, given the significant churn issue we experienced last year at this time. As we've discussed on prior earnings calls, economic conditions for the cash-paying segment of the mass market remain challenging, which results in higher churn from these customers that they have difficulty affording the full 12 months of programming that our postpaid model requires. Therefore, as we continue to try to migrate this group of customers to our prepaid model, churn over the next several quarters will continue to be higher than we would like.

Net additions in the quarter totaled 137,000, lifting the SKY Brazil cumulative customer base to just north of 5.6 million, a 9% increase from a year ago.

Turning now to the financial results at Sky Brasil. In local currency, revenues grew 15% versus the prior year period, driven about equally by subscriber and local currency ARPU growth. Reduced levels of retention credits and a 29% increase in total subscribers paying for advanced services drove the strong local currency ARPU performance. As a result, the higher ARPU, in combination with our heightened focus on cost management, drove an 18% improvement in OPBDA versus the prior year period, with margins expanding by 80 basis points.

In dollar terms, revenue and OPBDA grew 7% and 10%, respectively, as local currency performance more than offset a 7% decline in the average value of the real versus Q2 of last year. Overall, Brazil clearly had a solid quarter, and we remain on track with regard to our local currency financial outlook of approximately 10% revenue growth and mid- to high-single digit OPBDA growth for the year, when excluding last year's $70 million ECAD gains.

Turning now to PanAmericana. In respect to subscriber metrics, subscriber demand also reached record highs with 713,000 gross additions in the quarter, reflecting an 11% increase over the prior period's performance, driven by our delivery of the most extensive coverage of the 2014 FIFA World Cup, including more than 1,000 hours of our own related original programming.

Advanced product and prepaid sales grew 42% and 15%, respectively, while monthly postpaid churn fell 24 basis points to under 1.1%, the lowest rate in over 4 years. Adding it all up, PanAmericana posted an all-time record of 406,000 net additions in the quarter. Roughly 2/3 of those net additions came from our prepaid product, driven by both the strong lift in gross additions, as well as a high level of reconnects. In fact, we had such a high level of reconnects that we experienced negative prepaid churn in PanAmericana for the month of June.

Using the on-off metric, PanAmericana had just under 2.5 million prepaid customers at quarter end. I think it's important to note that the number of prepaid customers who had service at some point during the quarter was actually over 3.4 million or over 900,000 higher than the reported on subscriber number.

Turning now to PanAmericana's financial results. Revenues in the quarter increased 42% in local currency terms, generated by a 15% increase in the average number of subscribers on the platform and a 23% increase in ARPU, resulting from price increases, along with an 18% lift in customers paying for advanced services. In dollar terms, revenues increased 5% compared to last year, as the strong local currency growth was mostly offset by significant foreign exchange headwinds, particularly in Argentina and Venezuela.

In dollar terms, OPBDA in the quarter declined to $149 million, and the OPBDA margin fell to 19% due to several factors, including unfavorable FX comparisons, the production and rights cost associated with the World Cup, higher subscriber acquisitions costs associated with the record gross additions, as well as a delay of a price increase in Venezuela.

So in summary, PanAmericana delivered a solid quarter very much in line with our expectations, leaving us on track to hit the full year guidance we gave you last quarter for roughly unchanged revenues compared with last year and a modest decline in OPBDA. I would also like to point out that excluding Venezuela, PanAmericana remains on pace to grow revenue, OPBDA and cash flow before interest and taxes in dollar terms.

Additionally, I would like to mention Sky Mexico whose results were released by Televisa a few weeks ago. Sky Mexico added 203,000 net additions in the quarter, bringing their cumulative total of subscribers to just under 6.4 million. In addition, Sky generated mid-single digit growth in revenues and OPBDA in the quarter.

One final point before turning the call over to Pat. It probably has not escaped anyone's attention that year-to-date, DTVLA has added over 900,000 subscribers, which in the context of our full year guidance of 1.0 million net additions, begs the question, will I be changing our full year guidance? The short answer is no. Given the huge run-up in prepaid subscribers in this past quarter, I expect that the trend will reverse post World Cup, which could result in negative net adds in the third quarter. Therefore, we still expect to end the year in line with our full year number, based on a return to more normal sales and churn patterns in Q4.

Overall, I continue to be pleased with Latin America's results. Our team continues to demonstrate its ability to adapt and navigate through the turbulence and challenges that come with operating in the region. Visibility underscores my bullish stance on the long-term prospects for our business.

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 across the board.

Looking first at subscribers. Although DIRECTV U.S. experienced a net loss of 34,000 customers in the quarter, this performance reflects a 50,000 subscriber improvement over the second quarter of last year. Gross additions were up 8% on a year-over-year basis, demonstrating that the DIRECTV brand and service continues to resonate strongly in the marketplace.

Specifically, we saw strong results this quarter in our consumer electronics, direct sales and local service provider channels, partially offset by continued declines from our telco partners. Churn in the quarter of 1.55% was up 2 basis points over the last year due to an increase in voluntary churn. I'd like to point out that as we exited the second quarter, we did see an uptick in the competitive landscape as new customer promotions, offered by both cable and the telcos, were more aggressive.

To the extent these trends continue, we may see an impact on gross additions and churn going forward. Additionally, based on our most recent lifetime value calculations, we refined our credit policies, which also could have an impact on new subscribers coming on to the platform in the back half of the year. That said, increased competitive activity was contemplated in our 2014 guidance, and we are still on track to deliver positive net additions for the full year.

Looking next at the top line. Revenue growth of 5.5% was solid and slightly ahead of our growth rate in Q2 of last year. This performance continues to highlight the strength of the DIRECTV brand in the marketplace and was driven by ARPU growth of 4.6%, demonstrating our pricing power amidst a challenging U.S. operating environment.

Consistent with recent trends, the key drivers of our ARPU growth, other than price increases, were increased penetration of both new and existing customers paying for advanced services, in particular, our Whole-Home DIRECTV Genie, as well as our enhanced warranty program.

60% of our residential subscribers now have an HD DVR, up from 55% a year ago, adding about 1 percentage point to our revenue growth in the quarter. In addition, our enhanced warranty program just surpassed the 50% penetration mark, and we're on track to generate $1 billion of revenue from this very successful offering, which represents a 20% increase over 2013.

ARPU also benefited from a 17% increase in ad sales, driven by addressable advertising, which nearly doubled in the quarter. This continues to be a great success story for DIRECTV, and we now expect revenues from the high-margin addressable segment to increase over 70% this year. In addition, commercial revenues continued to grow nicely with another double-digit increase in the quarter. This is another area that we expect to generate $1 billion of revenue in 2014.

Moving now to the bottom line. Operating profit before depreciation and amortization margin improved for the eighth time in the last 9 quarters, driving OPBDA growth to nearly 6%. Margin improvement was seen across most of the P&L, led by upgrade and retention costs as lower equipment costs continue to drive the majority of the margin increase. In addition, disciplined expense management and improved productivity from prior year investments resulted in our subscriber services, broadcast operations and G&A, all growing in line with or slower than revenues.

Mostly offsetting these improvements were higher total SAC cost, driven by the increase in gross additions. That said, our cash SAC rate per subscriber decreased $33 compared with the prior year period, marking the third consecutive quarter of year-over-year declines. This improvement was driven by lower box and equipment costs, higher usage of refurbished boxes, efficiencies in our direct marketing channel and the impact of higher gross additions on our relatively fixed marketing spend.

Content cost also increased in the quarter, primarily related to annual programmer rate increases as average programming costs per subscriber or ACPU grew at 5.5%. Our commitment to hold out against exorbitant price increases demanded by certain programmers helped us perform ahead of our plan in the quarter.

That said, I would like to reiterate that we continue to expect 2014 ACPU to increase at the low end of the 7% to 9% growth rate target we gave for the 20 to 2016 time frame. This is driven primarily by contract renewals that will take effect in the third and, in particularly, the fourth quarter.

Looking quickly at our Q2 consolidated results. Diluted earnings per share grew 35% to $1.59 in the quarter, driven by a 22% increase in net income, as well as our share repurchase program. Net income growth was primarily driven by a 5% growth in consolidated operating profit, as well as pretax charges in the prior period of $39 million related to foreign exchange translation adjustments at Sky Brasil, as well as $59 million associated with the deconsolidation charge for ROOT SPORTS Northwest.

In addition, we continue to generate strong free cash flow as it increased 24% to $652 million in the quarter, driven by higher OPBDA, lower set-top box costs at DIRECTV U.S. and the timing of set-top box purchases at Latin America.

And wrapping up with the balance sheet. We repurchased just under 6 million shares of DIRECTV stock for $491 million in the quarter. Keep in mind that we halted our buyback program in May per our merger agreement with AT&T.

Before wrapping up, I would like to make a few comments about our outlook, which, as you've heard, both DIRECTV U.S. and DIRECTV Latin America are on track to meet guidance for all of their key metrics.

In addition, we continue to target adjusted EPS growth in the mid- to high-single digits from $542 a year ago. This excludes the Venezuela devaluation charges in Q1 of 2013 and 2014. We also continue to expect free cash flow growth to increase approximately 10% over 2013 levels as the negative impact from the Venezuela devaluation is anticipated to be offset by lower full year CapEx spending at both the U.S. and Latin America.

In summary, 2014 is shaping up to be a solid year. 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 an archived copy will be available on our website starting tomorrow, August 1. [Operator Instructions] Operator, at this time, we're ready for the first question.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Ben Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

Mike, a couple of questions on the programming side. I don't know if you can comment yet, I know you're in the process of negotiating with Disney, but can you give us an updated thoughts you have on what the PSS idea might mean for DIRECTV? Is it something you think could be helpful in addressing the lower end of the market around affordability? I know it's an issue you care quite a bit about. And then somewhat related but different part of the programming story. On the Dodgers network, we saw Time Warner Cable today reduced their guidance, now factoring in no additional distribution, so I guess we know how they feel about the rest of the year, but the FCC has gotten involved. I don't know if you would comment on what your outlook is there and whether you think the FCC's role has an impact on DIRECTV beyond just this specific situation?

Michael D. White

Sure. Happy to. Look, we continue to discuss with Disney, our overall deal. We have agreed on rates for the SEC Network, but we don't yet have a launch date, but we're hopeful and optimistic that we will be launching that network. On the PSS concept, we've looked at it, we're continuing to look at it. It's a bit of a challenging concept, to be honest with you, given the bundling when you look across the entire ecosystem, to be able to get the right number of best channel offerings that folks would want to see at a price point sub $30. And so I think it's certainly an interesting idea. I think it's certainly in the industry's interest if we could find a way to better service many of the -- both millennials, apartment dwellers and low-income Americans that want pay-TV, but it's so overpriced today that they're missing out on that opportunity. So we certainly see the strategic opportunity to service that segment, but it's a very tough challenge when you talk to other -- beyond Disney, when you talk to other media companies about rights and what you might do and the bundling that would end up getting jammed into it, it gets really hard to get to a price point that makes any sense without having a massive trade down risk on both revenues and profits for both distributors and the media companies. So it's certainly an idea that we're exploring. I think, frankly, we're more excited about some of the other things that we talked about in December, which is using an over-the-top approach to look at niche markets like ethnic markets, as well as what we're looking to do with our NFL SUNDAY TICKET this year, where we'll be offering it on 10 university campuses, and we're targeting 3 cities to test a more aggressive approach to servicing customers who can't get DIRECTV. With regards to the Dodgers, let me just make a couple of comments, Ben. First of all, I appreciate the concern of the congressional delegation and Chairman Wheeler about this unfortunate commercial dispute, and certainly, we're frustrated with the process as it has evolved. My overriding concern has always been to do what's right for our million-plus subscribers in the L.A. area. And in that regard, the challenge with this thing is that it's -- this and the Lakers deal that Time Warner Cable did, creates stratospheric pricing in the Los Angeles market, that if you did it for all of the sports teams that L.A. subscribers have to pay for, you would be at $26 per subscriber per month in the bill, and that's a huge tax, particularly on the many households that don't watch sports. I might note that last year, the Dodgers viewership was on average, 128,000 for any given game out of a total pay-TV marketplace in the L.A. area of 4.4 million. I'm pleased with our performance in L.A. Our gross adds were up strongly, and we're actually positive net adds in the L.A. area in the quarter. With that said, we're always open to discussion. In June, we put forward a proposal that would have compensated the Dodgers equivalent or more than the entire rights fees they got from all distributors combined in 2013, and it was rejected out of hand by Time Warner Cable. We will always negotiate in good faith. We're always open to meet and discuss. Quite honestly, I'm willing to consider some kind of mediation, but I don't yet know what Time Warner Cable has in mind in that regard. And, frankly, without the active and constructive participation of the ownership of the Dodgers, it's hard to see how you'd get any resolution to this dispute. But look, we like the Dodgers as a team, and we'd love to carry them on DIRECTV. But right now, I'd say we are where we are.

Operator

And we'll go next to Vijay Jayant with International Strategy & Investment Group.

David Carl Joyce - ISI Group Inc., Research Division

This is David Joyce. You talked about your addressable advertising growth. I was wondering if there are any technologies you have in place where it could be underway, where you could help monetize some time shifted viewing along with the help of the content companies.

Michael D. White

David, we look at all of that. By the way, we're probably also excited about the new political effort we're doing in partnership with DISH and expect that to also leverage our ad sales results this fall. We have the capability to insert ads into on demand in a kind of a real-time way. We frankly don't think that's going to improve the customer experience to get in the way of the way customers watch their DVR-recorded content. I mean, our customers love the Genie product. We think it's a best-in-class DVR. And frankly, I think the industry, probably if you put too much of an ad load on the on-demand stuff, you're just going to chase the viewers to want to watch it on the DVR. So we see the DVR as an integral and important part of our future. As Pat pointed out, it's now 60% of our customers that have it, but we're not expecting to try and drive ad sales onto the DVR experience at this time.

Operator

And we'll go next to Amy Yong with Macquarie.

Amy Yong - Macquarie Research

Two questions for me. Can you talk a little bit about some of the points of negotiation between you and the league? Do you still plan on offering the NFL SUNDAY TICKET for free? Any other points that are kind of keeping you from announcing something in the interim? And then my second question is just can you elaborate about the competitive landscape in the space? Do you anticipate any integration noise from cable as they kind of swap between Comcast and Charter? And can you comment on any kind of promotional activity from DISH in the quarter?

Michael D. White

Thanks, Amy. Appreciate it. Look, every deal we do these days is incredibly complex because you get digital rights involved, you've got rates, you've got packaging, you got a lot of nonfinancial things that have to get sorted. We continue to make very good progress in our discussions with the league. I think the league is very committed to trying to get this deal done based on comments that I think Commissioner Goodell made recently, and certainly, that's been my experience personally. And so I'm very excited about it. Clearly, I think one of the areas that we're both trying to sort through are the digital rights and how those might evolve. And more than the rights, what the right -- what the smart way is for us to continue to monetize the NFL SUNDAY TICKET package. And I think that's why you see us expanding this year with the approval of the league, to go look at college campuses, to look at apartments and to look at some inner-city areas that maybe DIRECTV satellite doesn't as effectively serve, and see if we can find some new openings there. And obviously, I think some of the learnings from that experience over the next 45, 60 days will also help both the league and us in assessing kind of the digital aspect of this going forward. But I think I'd have to leave it at that. But I'm still feeling very optimistic about our ability to get that deal done. In terms of the competitiveness, I think Pat pointed it out. Look, it's always been a very competitive industry, but I think with the revitalization of Charter, with the kind of revitalization of Time Warner Cable and the continued aggressiveness of the telcos, as well as the normal competitiveness from ourselves, DISH and Comcast, Cox and others, it is certainly a very competitive space right now. I would say we've seen an uptick in competitiveness, as Pat said, coming towards the end of the second quarter. I frankly don't think integration noise is the way I would look at it. I'm not expecting that to play much of a factor if DISH continues to be very aggressive in their promotions, but so is everybody. So I don't -- I wouldn't kind of highlight one competitor or another. I think just the entire industry has probably gotten somewhat more competitive with upfront discounts and gift cards and so on and so forth, and I don't expect that to continue in the quarter. So I think we could see some impact in our net adds in Q3. But, as Pat said, we still expect to be positive for the full year.

Operator

And we'll go next to Craig Moffett with MoffettNathanson.

Craig Moffett - MoffettNathanson LLC

Mike, there were some reports over the last couple of weeks about making the NFL SUNDAY TICKET much more available to nonsubscribers -- that you had, in some way, relaxed your restrictions. Is that the case? And have you seen a big uptick in the availability or in the subscribership to the NFL SUNDAY TICKET for online only?

Michael D. White

It's too soon for me to say what the uptick would be since we just started to sell it, but actually, there is no change in my mind. I think what we did do, Craig, is we've got a package that we're going to market to 10 college campuses, to try and get some experience there and see how that market looks and whether there's kind of a pure play that you could offer on college campuses more broadly, perhaps, in the future, but we're launching in 10 campuses there. But in that sense, no, we did add Xbox. So last year, we only had PlayStation, I think, 3 or 4. Now you've got the Xbox platform that will be available this fall. So we've made some changes in terms of providing other avenues of distribution, and we certainly hope to get learnings this year out of that experience. And always, I think it's a trade-off of when I look at mlb.com, it's not clear to me that the digital pennies problem makes that a huge opportunity. But certainly, both the league and we have had discussions and are both interested in ways to expand the subscribership of NFL SUNDAY TICKET if we can do it in a smart way, recognizing that it's an important promotional tool for our satellite sales.

Operator

And we'll go next to the Mike McCormack with Jefferies.

Michael McCormack - Jefferies LLC, Research Division

Mike, you're talking about the competition in the U.S. Are you seeing -- is this really just a triple-play offer that's driving the higher competitive threat or is it a pricing action? And then I guess, thinking about the U.S. market and the move towards Bring Your Own Devices, do you anticipate more of a movement away from Genie-type boxes -- obviously, they're quite expensive -- and into a BYOD with an IP gateway type system in the home?

Michael D. White

Thanks, Mike. Actually, it's an interesting question on the competitors, Mike. I think it's -- I mean, you see a little bit more on gift cards, but I would say I almost think of it more in terms of the GRP [ph] noise. Everyone is advertising aggressively and you probably didn't have all competitors that were as aggressive a year ago in advertising and aggressively pushing their promotions. So in some ways, I think it's more the noise level on the airwaves. And I think if you'll look at the triple-plays, it's mostly triple-plays that the cable companies are focused on. They tend to be a little bit sometimes, a little deeper discount or supplemented with a gift card, but I don't think there's anything beyond that. But I certainly think you'd see a lot more GRPs [ph] out there in terms of noise around advertising. In terms of the BYOD, actually, we see it a little bit differently, Mike. We see both BYOD as an integral part of our in-home strategy going forward, but we're still very committed to having -- and I think I said this in December, our ideal vision is one box, one wire and everything else wireless and boxless in the home, because the cost of storage is declining so fast, and the cost of processing power is declining so fast that we see it as a competitive advantage to continue with our hybrid Connected Home satellite cloud kind of connected experience is the best way for us to go, to give the consumer the best experience, we think, in the industry.

Michael McCormack - Jefferies LLC, Research Division

I'm just wondering if that younger demographic isn't more moving to an asset-light type model as a pay-TV subscriber?

Michael D. White

I think there's a lot of questions about the younger consumers that are way beyond just that. I mean, I think -- I mean, they'd love to see everything for free and they'd love to see a la carte, which I don't think the media companies are likely to participate in. And some of what they'd like to see, we'd like to see, but I would say no. I don't think it's likely to be driven by that, frankly. And as I said, we're committed in our TV Everywhere platform, to making a seamless experience broadly available across whatever device you want, wherever you want to watch it, but it's primarily restricted by the rights landscape, Mike.

Operator

We'll go to James Ratcliffe with Buckingham Research.

James M. Ratcliffe - The Buckingham Research Group Incorporated

Two if I could, one for Pat and one for Bruce. Bruce, looking at LatAm ARPU, and particularly in Brazil, it was basically the same growth trend as in 1Q, and it was a little surprising given the surge in prepaids for probably, I guess, the World Cup. Can you help us think about what we should expect in terms of ARPU trends there in 3Q and later as you see some of those World Cup-driven prepaids drop off? And second, Pat, you mentioned that you've done some refining in your credit policies in the U.S. and some changes to your customer lifetime model. Any color you can share with us on that on what levers are getting pulled or what is getting more or less important?

Bruce Barrett Churchill

So I'll start on the Brazil ARPU question. It's actually -- you're correct in pointing out that we've had quite a bit of growth in the prepaids, so you would think that would drive the average ARPU down. But, frankly, offsetting that is a conscious decision on our part to reduce the number of discounts that we have been giving, particularly to cash-paying fit and light customers, which are the 2 smallest packages or the more mass-market packages. And there's obviously a bit of a trade-off there, which is why you see the churn a bit elevated, but that's a decision that we've consciously made. We just think we're better off trying to migrate the subscriber that really cannot afford to pay on a postpaid basis 12 months out of the year, to migrate them more to a prepaid model in lieu of giving them discounts every other month, for example, which is -- we used to be -- kind of the historical practice. So that's what's really been, I think, much more a factor in terms of driving up the local currency ARPU in Brazil, and I don't foresee us changing that position for the rest of the year. So I think the ARPU trends will remain where they are in the local currency.

Patrick T. Doyle

James, and on our lifetime value accounts and credit models, I think what we saw in some of the recent trends and also, kind of refining it down to even smaller and smaller segments is, are there some segments, particularly the high-end segments where there's probably even more value creation in those customers than we've seen in the past. And on the flip side, particularly with the rising programming cost and pressure on pricing on the lower-income households, we're probably seeing less of a return on those. So we made a decision to reallocate more of our investment to the high-end customer. As you can appreciate, they are less attracted to offers. They're harder to get versus the lower-income households. So we feel like doing that trade-off is a good value creation. It's the right thing for us to do for the company. But by doing that, we're going to give up some gross adds, but they're going to be kind of the lower value in exchange for the higher value customers we're looking for.

Operator

And we'll go next to Matthew Harrigan with Wunderlich Harrigan (sic) [Wunderlich Securities].

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

First question, can you update us on mobile broadband in LatAm and whether there's a desire to get more aggressive in more markets? And then secondly, my somewhat embarrassing default question. Mike, you talked a lot about 4K in the past and the advantages you have on distribution and the nuances of the quality of the signal relative to what the cable guys can offer. Can you just -- I'm sort of asking this almost as a consumer as well. Can you update us where you are in that process? I mean, I know you don't think it's a complete game changer, but it still seems like an area where you could be advantaged for a bit.

Michael D. White

Sure. Bruce, want to go first?

Bruce Barrett Churchill

Starting with our fixed wireless broadband, we are continuing with the plan that we laid out in the Investor Day. We now operate in 40 cities in Brazil. We have also launched in Colombia. We started sales for the first time in June. So there's obviously virtually no effect so far in terms of actual sales or impact on the P&L. And we expect to launch in Peru in the fourth quarter, as indicated last December. I would say the one area that we are lagging in is Argentina, and that is kind of a combination of some political and sort of governmental bureaucracy in terms of our ability to get permissions and things like that to move forward, as well as some of the issues our country is facing in terms of being able to exchange foreign currency to purchase equipment for import in order to build out networks. So I would say in the end, I think we guided that we mentioned something in the range of 200,000 subs for this year. We will be a little short of that, but that entire shortage will be in Argentina.

Michael D. White

And on 4K, Matthew, I'm certainly excited about it. We expect to be able to do 4K VOD before the end of the year. We're working to secure some content because that's one of the challenges is getting content that's shot in 4K. And we expect certainly in 2015 or early '16, to be able to stream live content. That'll somewhat depend on the scheduled launches we have of 2 new satellites for the U.S. business that will be going up over the next 18 months. So as we get those satellites up in the air, certainly, that's going to unlock a tremendous amount of incremental capacity for our system. And we fully expect some of that capacity to be used to be able to stream 4K content.

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

And would you expect the QoS to be discernible from the 4K on cable as it is with HD right now? Because I've seen some of the prototypes and some of the satellite-delivered stuff that does look a lot better.

Michael D. White

I don't -- I haven't seen -- I know Comcast is working on it, Matthew, and I haven't seen their execution. I'm sure they'll do a great job, but we certainly expect fully, with the 2 new satellites going up, it's going to give us a unique advantage of capacity to be able to provide a great customer experience. And as I said, we actually hope, even before we get those satellites up, to do VOD before the end of the year.

Operator

And we'll go next to Tom Eagan with Telsey Advisors.

Thomas William Eagan - Telsey Advisory Group LLC

First, a question for Bruce. The release mentions OPBDA margins were negatively impacted by inflation and price increases timing in Venezuela. So do you expect that to continue into July or did it continue into July? And then for Mike, I was wondering if you have the contractual ability to expedite any of your cable or broadcast network renewals ahead of time, so before any potential consolidation among the other players?

Bruce Barrett Churchill

Look, I hope in the second half, we're going to be able to keep a better match between our price increases and inflation costs. We actually did put through a price increase in Venezuela, but it didn't -- it was in July -- rather, in June, so it didn't really have as much of an impact in the quarter as we had originally hoped. I expect we may put another one through before the end of the year. So we're hoping that with that pattern, we'll be able to stay ahead and, in other words, maintain the margins for the second half in Venezuela.

Michael D. White

Tom, I wouldn't want to get into the details on our specific programming contracts. I think suffice it to say also, we haven't even had our shareholder vote yet. So we continue to run our company in the best interest of our shareholders without consulting with AT&T, and we're going to do the right thing for the business. My whole team is doing that, I think, to continue to drive the strategies we laid out in December. So I think we wouldn't want to kind of get out in front of this thing too much. Certainly, we've done some preplanning with outside counsel present on begin -- and on the very, very early stages of it, of beginning to think about integration planning. But in the meantime, all of the decisions that we're making on programming, carriage and otherwise, we're doing the right thing for DIRECTV regardless of what happens with the merger.

Thomas William Eagan - Telsey Advisory Group LLC

Right. And so I guess what I was thinking was with the prospect of, say, whether it's a CBS Viacom or a Time Warner Fox, before we see any of that really happen, do you guys have the rights to actually renew ahead of time?

Michael D. White

I'm not sure, but we don't have any plans to try and do that.

Operator

And we'll go next to Marci Ryvicker with Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

I guess, just along the lines of consolidation and content, do you feel like there's going to be any impact on pay-TV just going forward, for example, if Time Warner and Fox get together? That's the first question. And then we've spent so much time on the competitive environment in the U.S. I don't know if there's been any change in Latin America or if perhaps, it's just being colored by the World Cup or any comments you can say there.

Michael D. White

I'll be brief, and then I'll turn it over to Bruce, Marci. Look, our and my primary focus has been on successfully running our business as I just said and planning for a successful integration between us and DIRECTV and answering all of the questions from the regulators. I just don't think it's appropriate for me to comment on hypothetical media mergers that may or may not occur. Bruce, on Latin America?

Bruce Barrett Churchill

Look, I would say there wasn't anything dramatically different about the competitive scenario in Latin America other than the fact like us, everybody tried to take advantage of the World Cup. I think particularly in our PanAmericana platform, we demonstrated that we were, in many ways, more successful than most, and that we actually had a lot of exclusive games in some territories, we had a lot of exclusive content that we put on that most pay-TV distributors did not. We were the #1 media brand that was recognized coming out of the World Cup, #4 overall in Latin America, so even ahead of some of the big sponsors. So it was a huge uplift for us, and I think we took advantage of it as -- in many ways as best as we can. We were also very successful with an app that we had. We had over, I think, 1.6 million downloads and millions of streams of some of our subscribers watching games online. So it was a big event for us, a big success, but it was clearly the dominating event for everybody.

Operator

We'll go next to Richard Greenfield with BTIG.

Richard Greenfield - BTIG, LLC, Research Division

Mike, I know that you're very confident on renewing your NFL deal. I was just curious though, I believe the NFL has talked about you currently being in an exclusive negotiating period. Just wondering if you could give any timeframe on when your current deal does go nonexclusive, which would allow other people to bid if you haven't yet finalized and announced your deal that you hope to announce.

Michael D. White

Yes, I'm not going to comment on that but other than to confirm that we are in an exclusive negotiating period, and I am optimistic that we will complete our negotiations before it expires.

Operator

And it looks like we have Tuna Amobi back on the line from S&P Capital IQ.

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

So my question was actually on -- or one of my questions is on LifeShield. I think now that you're nearing your first year anniversary of that purchase, can you share with us any kind of impact it's having on the business? Any kind of metrics that you're kind of tracking? And anything else that you can tell us about potentially scaling up that business if it's kind of in the radar? And then separate -- okay, my other question was on the telco channel, the comments that were made on the prepared remarks, I think it was by Pat. Have you seen anything in the telco channel, specifically with regard to Verizon since the deal announcement? I mean, what kind of trends are happening there? Are they pretty consistent with what you've been seeing there? Or has there been a shift since the AT&T deal announcement? Any color on that would be helpful.

Michael D. White

Sure. So on the first question, Tuna, look, we're very pleased with the progress we're making with LifeShield, but frankly, this is a very -- I mean, we're piloting it in a small percentage of the U.S., mostly to make sure that we can install it well. There's a licensing, a separate kind of set of licenses you have to get that are local specific. The good news is, so far, the experience that the customers have had on the -- I did do a recent review of it and the time it takes to make the sale, the install is consistent with all of the engineering we did on compensation for our techs, and the product works quite well. So we're very pleased with that. I think we'd probably will roll it national, probably by the end of the year, maybe early next year. So I think it's too soon. I mean, the numbers are immaterial from a sub standpoint, but we're certainly excited about it and think it's a great opportunity for us as we look at kind of where the home automation is going longer term. On the telco channel, I'll let Pat talk on the metrics, but just to reiterate, after the announcement of our merger, I personally spoke with the CEOs of all of our telco partners and reiterated our commitment, and I think Randall has, by the way, as well, to continue the relationship that we have with them. And so I can't say we've seen any different. I mean, Verizon's a small percentage of our telco channel now because they sold off most of their wireline business, but I can't say that I've seen a big change. Pat?

Patrick T. Doyle

Yes, yes, Tuna. I think that as Mike said, we get about 10% of our gross adds through our telco relationships. But Verizon and partly because of some of the other directions they've taken, they've run about 1% of our gross adds. So they've been very small for a while. So there's not much that can change there just based on their size today.

Operator

And we will go to Jason Bazinet with Citi.

Jason B. Bazinet - Citigroup Inc, Research Division

I just had a slightly longer-term question for Mr. White, one that maybe is a bit backward looking. When I look at just the supply of SVOD content that's out there and stagnant wage growth and stagnant or declining cable ratings and food inflation, and then I look at the pay-TV subs across the sector including yours, and they look relatively benign, and it's hard for me to sort of square all that. And so my question is this, do you -- is DIRECTV pursuing more initiatives in the U.S. to try and retain subs in a different way than they have in the past? Or do you think we're really just anyone that's concerned about the pay-TV market contracting is just of misdiagnosing sort of the broader threat?

Michael D. White

Look, you're asking kind of one of the questions for the ages that I think about a lot at night. First of all, in terms of what we're doing, I mean, actually our spending on upgrade and retention, as you saw in the quarter, is down this year. So we're not doing something dramatically different. On the other hand, it was up quite a bit last year as we were investing in Genie boxes. I would say though more importantly, Jason, what we've been focused on is improving the customer experience, to try and get customers to be more excited about staying with DIRECTV over the long haul, and it's paying big dividends. I mean, our call volume is down double digits. As I recall, our on-time arrivals were up 4%. Our service truck rolls were down 8%. Equipment replacements were down 14%. Customer escalations are flat. So, I mean, I think all of the work that we've been doing on the customer experience is an integral part of trying to make us the best service that customers want to stay loyal to. In addition to that, it's obviously all about innovating with the product. As it relates to SVOD, we too see that as an opportunity, and we'll have more to say about that, probably in the next couple of months since we've got some stuff we're working on for later this year, as I said earlier in my remarks. And you'll see the SUNDAY TICKET stuff even sooner than that. Look, I've been pretty vocal, I suppose, in the industry that I think we have a collective responsibility between both the media companies and all of us distributors, to realize that the bottom 1/3 or bottom half of America is still struggling. I see it in the complaints I get that most of them can probably afford $50 a month, and our average ARPU is $100. And whether it's the PSS concept or something else, the only way we're going to get there is with more flexibility around packaging from the media companies that will enable us to better serve those customers, but we all want to do it in a way that doesn't cannibalize the collective ecosystem. It's a tough challenge. We continue to look for other ways to find a lower cost to serve. We try and take learnings from Latin America. We've got some new ideas on how we might do kind of a slimmed-down box and then have kind of a Lego model where you can kind of buy your DVR extra and kind of click it on top. So we're looking for lots of ways to try and make sure we continue to service that segment. And no doubt, it is a concern that as the pay-TV bill continues to rise, there's more and more frustration on the part of our customers about that. And we're doing the best we can to try and respond to those concerns. Having said that, heck, I mean, our results speak for themselves. I think our performance was better than last year. We still expect to be positive in net adds for the full year. We were positive last year, recognizing that the housing market is still terrible. And I think you've got millennials that are increasingly delaying moving out of their parents' home by a decade. So you've got a lot of things that suggest to me that over the next 3 or 4 years, you're going to have to, at some point, have an explosion in household occupation, and I think that would certainly help the industry. But no easy answer. It's one of the tough issues we wrestle with.

Operator

Thank you, everyone. And this does conclude today's DIRECTV Second Quarter 2014 Earnings Conference Call. You may now disconnect your lines, and have a pleasant afternoon.

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DIRECTV (NASDAQ:DTV): Q2 EPS of $1.59 beats by $0.06. Revenue of $8.1B (+5.2% Y/Y) beats by $90M.