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Executives

Michael White - Chairman, Chief Executive Officer and President

Jonathan Rubin - Investor Relations

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

Patrick Doyle - Chief Financial Officer and Executive Vice President

Analysts

Jeffrey Wlodarczak - Pivotal Research Group LLC

John Hodulik - UBS Investment Bank

Benjamin Swinburne - Morgan Stanley

Richard Greenfield - BTIG, LLC

James Ratcliffe - Barclays Capital

Stefan Anninger - Crédit Suisse AG

Jason Bazinet - Citigroup Inc

Marci Ryvicker - Wells Fargo Securities, LLC

Douglas Mitchelson - Deutsche Bank AG

Tuna Amobi - S&P Equity Research

Thomas Eagan - Collins Stewart LLC

DIRECTV (DTV) Q2 2011 Earnings Call August 4, 2011 2:00 PM ET

Operator

Good day, ladies and gentlemen. My name is Leah, and I will be your conference operator today. At this time, I would like to welcome everyone to the DIRECTV's Second Quarter 2011 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to your host, Mr. Jonathan Rubin, Senior Vice President of Investor Relations and Financial Planning. Sir, you may begin.

Jonathan Rubin

Thank you, operator, and thank you, everyone for joining us for our second quarter 2011 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 of Latin America; and Larry Hunter, General Counsel. In a moment, I'll hand the call over to Mike, Bruce and Pat for some introductory remarks. But first, I'll read to you the following. On this call, we'll 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 and 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 be materially different and are described in the Risk Factors section and elsewhere in each of DIRECTV's and DIRECTV U.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 2011 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. So with that, I'm pleased to introduce Mike.

Michael White

Thanks, Jon, and thank you, everyone, for joining us today. From my perspective, DIRECTV's diversified portfolio of businesses across all of the Americas delivered another strong quarter of industry-leading growth. And parenthetically, I might add that our momentum continues as we just recently achieved another impressive milestone, which we'll be announcing later on today after the call, reaching 30 million customers, including Sky Mexico across the DTV platform. And for those of you who don't have the numbers right in front of you, by the way, that works out to about 300,000 net adds for the month for DIRECTV across all of the Americas.

We continue to extend our position as the world's largest pay television service by leveraging the strength of our brand, as well as our best-in-class video experience with continued operating discipline across all of our disparate geographies, demographics, and I might add, macroeconomic conditions.

As you saw in our release, the consolidated revenue and operating profit before depreciation and amortization both grew double digits at 13%, representing an even faster growth rate from last quarter's performance. This accelerating growth was driven by another quarter of exceptional performance of DIRECTV Latin America, as well as by solid financial returns from DIRECTV U.S. that were entirely consistent with our expectations. Consolidated net income increased 29% in the second quarter and we repurchased over $1.5 billion of DIRECTV stock, fueling a 52% lift in earnings per share to $0.91.

Now before I turn the call over to Bruce and Pat for a more detailed review of our Latin American financials, I'd like to offer just a few observations.

Let me begin with DIRECTV U.S., where industry-leading revenue growth of 7% and an OPBDA improvement of 4% are right in line with our guidance for the quarter and the full year. On the top line, we're continuing to see solid growth from Advanced Services in premium channels, as well as double-digit growth in our commercial sales, although pay-per-view revenues were a little soft in the quarter, mostly due to the timing of events. In terms of our net additions, the lackluster economy and a tough competitive landscape drove our churn slightly higher than we initially forecast. The pickup in competitive intensity that we saw coming out of the first quarter is yet to abate, I would say, when I look at the marketplace in general. Triple play offers, without contractual commitments, and higher cashback incentives by both the cable operators and telco providers, along with the consumers who are increasingly under stress from an ongoing weak economy have resulted in more price-conscious consumers shopping for better deals.

In response, we've significantly stepped up our efforts to closely manage churn in a more targeted fashion. For instance, we further refined our segmentation analysis to identify those customers that are most likely to churn as they get close to the end of their 2-year contract, and matched them up with our best agents and best offers.

We also increased our upgrade and retention spending for higher quality subscribers and raised credit score requirements for new customers in many of our sales distribution channels. Also enhancing our churn mitigation efforts are ongoing initiatives aimed at improving overall customer service levels. Recently, our hard work in that area was recognized when DIRECTV was noted as the only company in the pay television industry to have a better American customer satisfaction index survey score compared with prior year. I'd also note that Consumer Reports rated DIRECTV best among TV providers for both phone and online help last quarter.

All in all, I think we've made excellent progress in addressing our churn issues and consciously optimistic that the worst is behind us. In fact, based in the favorable subscriber trends we've seen so far in the third quarter, I think we've also regained some of our lost momentum. We're seeing a terrific response to our popular NFL SUNDAY TICKET offer, and as I mentioned, we're also seeing favorable voluntary churn trends.

More importantly, we remain on track to meet all of our DIRECTV U.S. full year guidance for revenues, OPBDA and cash flow.

Turning now to Latin America where, as you may have seen, we recently achieved a major milestone surpassing 10 million total customers in Brazil, PanAmericana and Mexico. This accomplishment is a true testament to all of our employees' strong commitment to success, the strength of the DIRECTV and Sky brands and our best-in-class video experience. Just one bit of evidence, last quarter, the Brazilian Direct Marketing Association awarded Sky best of the best in the customer service category for our Sky HDTV product. In addition, Telecenter, which is our regional customer service operation in Colombia, received 2 first-place awards for the best customer service strategy and best in-house.

Latin America, by any measure, continues to demonstrate tremendous momentum. DIRECTV Latin America surpassed last quarter's historic customer growth to set yet another all-time high for net additions as we're continuing to see strong consumer demand for our products and services all across the continent, along with the underlying favorable demographic and macroeconomic trends.

And once again, the significant subscriber growth, which was primarily driven by Brazil as the net adds in that country were more than double last year's level. Equally notable, our postpaid churn improved to 1.44% from 1.45% last year and remains lower than levels that we've seen in the U.S. business.

Furthermore, DIRECTV Latin America exceeded all of our key financial metrics recorded during the second quarter of 2010, which as you all recall, benefited from the run-up to the FIFA World Cup. Not only were revenues north of our expectations because of subscriber performance and robust ARPU growth, but the significant gain in market share and related acquisition costs did not come at the expense of our profitability, as I'm sure you noted our margins continued to expand and OPBDA growth accelerated to 60%.

This growth rates, coupled with favorable macroeconomic conditions in the region, continued to give evidence that the DIRECTV Latin America business offers a terrific long-term growth opportunity.

And as you'll hear from Bruce in a few minutes, we're on pace to do even better than the increased guidance we'd provided for DTVLA on our last earnings call.

In summary, our second quarter results reflect continued successful operational execution against all of the growth strategies we outlined at our Investor Day with you last December. In the U.S., we continued to navigate through tough market conditions by adhering to strict economic principles with regards to the credit quality of our subscriber base, as we demonstrate our unique ability to match the increasing value of our differentiated products and service enhancements to consumers expanding needs.

And in Latin America, we continue to benefit from favorable market conditions by profitably increasing market share to a segmented approach but not only extends our leadership in the higher end markets with the focus on HD and DVR superiority, but also penetrates the rapidly growing middle-market segment with attractive lower price packages.

And the combination of both our U.S. and Latin American businesses provide our shareholders with I think a unique investment opportunity that benefits from solid and steady returns in a more mature U.S. marketplace, as well as from tremendous growth potential in the still under penetrated emerging Latin America marketplace.

So with that, I'll turn it over to Bruce Churchill to review our Latin America results and outlook in more detail. Bruce?

Bruce Churchill

Okay. Thanks, Mike. As Mike mentioned in his opening statement, our results in Latin America continue to exceed our expectations. With yet another record quarter of both growth in net additions and all of our key metrics showing strong year-over-year improvement. This is a reminder, unless otherwise noted, our results exclude those of Sky Mexico, which we do not consolidate.

For the quarter, gross additions of 823,000 were 25% higher than last year. In Brazil, gross additions increased approximately 85% compared to Q2 of 2010 to approximately 435,000. Sky Brazil continued to have great success with its middle market products, which grew 147% compared to Q2 of 2010, mostly reflecting the launch of the SKY FIT product late last year. For the quarter, our middle market products represented 65% of Brazil's growth -- gross additions.

In PanAmericana, growth additions declined approximately 10% compared to the same period last year, reflecting our controlled growth strategy in Venezuela and the beneficial effect that the 2010 FIFA World Cup had on last year's results. Excluding Venezuela, PanAmericana growth additions were almost equal to last year, the strong year-over-year growth in Argentina offset declines in Colombia and Chile.

Prepaid gross additions represented 17% of our total gross additions in the quarter. Cumulatively, prepaid subscribers make up approximately 10% of our 6.7 million subscribers and are predominantly in our PanAmericana region.

Advanced products represented about 16% of new customers, down significantly from 30% last year. There are 2 factors driving this. First, the increase of advanced products in PanAmericana decreased approximately 50% year-over-year, which reflects the fact that in the run-up to the 2010 World Cup, we ran aggressive advanced product promotions throughout PanAmericana, achieving take rates exceeding 50% in some countries. Second, as we continue to see sales growth in lower-priced packages, by definition, advanced products become a smaller part of the mix. For example, in Brazil, the number of advanced product sales more than doubled compared to last year, but as a percent of total sales, they're roughly flat because of the tremendous growth in other products.

As I've mentioned in the past, although we're pleased with the success of our middle market products across the region, we have not lost sight of the fact that our traditional A and B households are our most profitable customers and the ones that we work hard to get and keep. Advanced products represented approximately 25% of our 6.7 million subscribers and are an important part of our product mix. As a result, we remain very focused on selling advanced products to both new customers, as well as upgrading existing ones. In fact, in Brazil, where we now have more than 600,000 high definition subscribers, approximately 60% of our new HD customers in the quarter came from our existing subscriber base.

With respect to churn, our postpaid churn for the quarter of 1.44% is mostly unchanged from the same period last year, reflecting slightly lower churn in Brazil offset by slightly higher churn in PanAmericana. Postpaid churn in the PanAmericana region benefited from our controlled growth in Venezuela, as slower sales typically result a lower churn. But was negatively impacted due to last year's benefit from the 2010 World Cup.

In summary, we ended the quarter with 472,000 net additions that were relatively balanced both from a regional and product mix perspective.

Turning now to our financial results. Driven by strong subscriber growth, our revenues increased 46% compared to last year, or approximately 40% if you exclude the impact of foreign exchange. In particular, excluding foreign exchange, more than 80% of our growth came from the increase in the subscriber base. The remaining growth came from higher ARPU by merely reflecting higher pricing and increased penetration in advanced products and premium packages. Excluding the impact of Foreign Exchange, ARPU increased around 8%, this is a testament to our success in attracting and retaining high-value premium customers.

In addition, the subscriber base in Brazil is a larger piece of the total pie today than it was a year ago. And in general, ARPUs are higher across the board in Brazil. This does have the effect of driving up the overall average for DTVLA. OPBDA and cash flow before interest and taxes for the quarter were also stronger compared to last year's results. OPBDA increased $158 million or 60% over last year, mostly due to the gross profit on the incremental revenues, partially offset by higher subscriber acquisition costs related to the increase in gross ads and the increased retention and upgrade spending particularly in Brazil.

The higher OPBDA flow through and cash flow before interest and taxes, which was $141 million versus $69 million a year ago. Regarding Venezuela, the government continued to tightly regulate the repatriation of local products out of the country -- profits, excuse me, out of the country. This situation restricts our ability to repatriate dollars, which explains the lower foreign currency exchange losses this year compared to last. In fact, we incurred no repatriation charges from Venezuela this quarter. The modest ones that did come out of Venezuela this quarter came out of the official rates through the official central bank process. As of June 30, we had approximately $264 million of cash on hand in Venezuela, expressed using the official rates of 4.3 bolivars per U.S. dollar.

I would also like to mention results of Sky Mexico, which were released by Televisa a few weeks ago. Sky Mexico delivered another strong quarter, adding 274,000 net subscribers compared to 251,000 a year ago. The financial results of Sky Mexico were equally strong, as revenue and OPBDA grew 19% and 26%, respectively. In total, DTVLA's platforms combined, including Sky Mexico, now serve more than 10.3 million subscribers in the region.

Then finally, with more than half of 2011 behind us, I thought I'd provide you with some thoughts on how I see the rest of 2011 playing out. During our Q1 earnings call back in May, I mentioned that barring any unforeseen change in the general macroeconomic environment in Latin America, particularly in Brazil, and barring any large swings in foreign exchange rates, again, particularly in Brazil, we expected both full year revenue and OPBDA to grow closer to 30% year-on-year, the total net additions in the 1.25 million to 1.5 million range, and a modest increase in subscriber-related capital expenditures. Based on the continued momentum we are seeing in sales and our continued low postpaid churn, I feel confident that we will meet or exceed the high end of these estimates for the full year. In short, we look forward to another exceptional year in Latin America. Let me now turn it over to Pat to discuss the U.S. Pat?

Patrick Doyle

Thanks, Bruce. Overall, DIRECTV U.S. had a good second quarter, highlighted by solid revenue, earnings and cash flow growth. As you heard from Mike earlier, we had some challenges with churn in the quarter, but I believe we made excellent progress towards addressing that. Looking first at subscribers, as you saw, DIRECTV U.S. gained 26,000 net new customers in the quarter. Gross additions were up a touch on a year-over-year basis, demonstrating that DIRECTV brand and service continues to resonate strongly in the marketplace. The increase in demand is notable particularly considering the current economic and competitive conditions within the pay-TV industry. Specifically, we saw a strong result this quarter on our consumer electronics and commercial channels, which more than offset continued declines from our telco partners.

Second quarter churn of 1.59% was slightly higher than we initially forecast, due mostly to an increase in voluntary churn. We attribute this increase primarily to more aggressive competitive offers we're seeing in the pay TV space, especially in the telco territories. Another contributing factor was the price increases we implemented earlier this year for the first time on both programming packages and lease fees. And to a smaller degree, we saw a slight uptick in involuntary churn, mostly related to the continued lackluster economy and its impact on higher risk customers rolling off their promotional offer periods.

To address these challenges, we place a tremendous focus on implementing strategy that would enhance our ability to actively manage the increases in churn, and so far, I'm pleased with the progress we've made. As you have heard us say before, the balance between our upgrade or retention spending and churn rate is heavily dependent on both macro economic and competitive conditions. As such, we spent modestly more this quarter than a year ago and prudently managed the economic trade-off towards our higher quality subscribers.

In addition, we continue to step up the utilization of our targeted segmentation analysis to better identify a higher risk customers and match them with our best agents and offers. We also continue to refine and tighten up our credit policies to mitigate the impact of involuntary churn.

Combining our subscriber growth with the higher ARPU yield and industry leading revenue growth of 7%, the ARPU growth was driven by an increased penetration by both new and existing customers aimed for advanced services, as well as from strong commercial and paid premium channel sales. Approximately 70% of our customers now have advanced products and we're continuing to see about 1/3 of new customers sign up for our Whole-Home DVR. Commercial revenues grew again by almost 20%, while the pay premium movie channel category posted the highest buy rates per subscriber in over 2 years. Partially offsetting these benefits were softer pay-per-view revenues related to weaker movie titles, lower adult buys and weaker event revenues compared to the prior period.

In addition, higher acquisition and retention credit had an unfavorable impact on ARPU. Turning now to the bottom line. Second quarter OPBDA growth of 4% was in line with our quarter and full year expectations. OPBDA margins declined year-over-year to 27.4%, as increases in programming expenses continue to place downward pressure on margins and this trend will continue for the remainder of the year. Also contributing to the decline and tying back to our earlier discussion about churn, was our decision to increase upgrade and retention spending. The majority of the increase was targeted toward upgrading higher valued subscribers with HD DVRs, as well as our popular newer services such as Whole-Home DVR and broadband connectivity.

Also in the quarter were higher costs associated with converting customers who were previously receiving programming from a third-party satellite whose lease has expired. Looking quickly at our quarterly consolidated results. Net income grew 29% to $701 million and diluted earnings per share accelerated 52%, to $0.91, a solid operating profit growth and our share repurchase strategy provided a generous lift.

Consolidated cash flow before interest and taxes also remained strong with double-digit growth to $1 billion this quarter. Free cash flow also improved, albeit at a slower rate as growth was impacted by an increase in cash tax payments, greater capital expenditure and higher working capital requirements. Please note this increase in tax payments is expected to continue throughout the year as earnings before taxes and our cash tax rate are both expected to be higher than the prior year periods.

Moving onto the balance sheet. This quarter, we repurchased 31 million shares of DIRECTV stock for $1.5 billion, bringing accumulative repurchases to approximately $18 billion or nearly 50% of shares outstanding. Additionally, we redeemed the remaining 66% of the $1 billion high yield note that were issued in 2005. With these transactions, we ended the quarter with about $13.5 billion in total debt, while bringing our total debt to trailing U.S. OPBDA leverage ratio target to 2.5x.

Before wrapping up, I would like to make a few comments about our outlook, which you've heard. DIRECTV U.S. is on track to meet guidance for all of its key metrics, and as Bruce described a few minutes ago, we are optimistic that DIRECTV Latin America is on a pace to exceed the increased guidance provided on our last earnings call. In addition, our plan is to continue to return the capital to shareholders through our share repurchase program. We expect to continue repurchasing shares in the same 100 million per week range that you've seen in recent quarters, while maintaining our leverage target at current level. During the second half of this year, we expect to include our work related to bringing DIRECTV Latin America into the credit, which will provide additional capacity for 2012. In the meantime, we have plenty of liquidity and free cash flow generation to continue to fund our current share repurchase program.

Summing it all up, we remain on target at the consolidated level to continue leading the industry in double-digit revenue and OPBDA growth as well as returning capital to shareholders. So with that, I'll turn the call back over to Jon.

Jonathan Rubin

Thanks, Pat. Before moving on to Q&A, investors should note that we have members of the media on this call and 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 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, we're ready -- I might add that we are having some technical problems on our webcast, but hopefully we'll get those fixed shortly. Operator, we're ready for the first question.

Question-and-Answer Session

Operator

[Operator Instructions] And we will hear first from John Hodulik with UBS.

John Hodulik - UBS Investment Bank

Maybe just some comments on both the churn and the ARPU outlook. You churned was a little bit higher than we thought in the U.S. and you mentioned some efforts to lower churn. You were seeing some positive response, how do you expect that to trend in the second half? And also we thought the ARPU in the U.S. looks like it's been decelerating. Do you expect that trend to continue?

Patrick Doyle

Yes. I mean, I think the tactic that we talked about in our speech now is, I think, we're seeing really good traction. June was a good month on churn and particularly on voluntary churn. July's result have also been very good. So we're not claiming victory yet, but we're optimistic that we've got the right formula and the voluntary churn should be a much better in the third quarter, probably ought to look a lot like last year's churn. On ARPU, yes, I think the second quarter in particular, we had a few headwinds. The pay-per-view was down, ad sales wasn't -- year-over-year, it wasn't as good as we would like it to be. And then we've got the impact onto the Free HD, which came in last June so we're kind of comparing now a full year of FREE HD for those customers that qualify versus last year. Again, we do think we're meeting our internal expectations. This is right on line with what we expected and it's consistent with our full year guidance that we gave on revenue growth of mid to high single-digit growth.

Michael White

Yes, I think, John, on the churn thing, is we kind of dove into it and kind of parsed it, analyzed it. We found that there were a number customers going shopping at like plus or minus 3 months of the end of their 2-year contract. We've been able to pretty surgically target those that are prone to do that, and as Pat said, I feel pretty good, we've had an excellent month of July on churn. But get a little bit of a tick up on involuntary churn, which I think is more the economy, but our improvements in voluntary have overwhelmed that so our total churn number looks good for July. So I'm optimistic we'll be fine for the rest of the year and we're kind of fine-tuning some things out of that as well. On ARPU, I can't quite comment. Everybody's movies business seems to be down, the pay per view, even of our competitors, I noticed a number of them highlighted and I don't know whether that's just kind of weak titles from the box office or what. But we've got a lot of good things going on a premium side. We've had tremendous strength, and frankly, our ARPU growth, as I looked at it for third and fourth quarter, I expected to be better than what you saw in Q3. So I mean, we're pretty much right in line with how we be for the full year as I look at -- it's kind of my outlook for Q3 and Q4.

Operator

Our next question comes from Jason Bazinet with Citi.

Jason Bazinet - Citigroup Inc

I just have a long-term question for Mr. White. If I look at sort of all of the capital that's been used by the industry for the last 3 years, it seems as though you have your dishes out there, sort of trying to get wireless spectrum, you've got the cable guys investing in more Internet capacity. Some companies buying content. And I look at the down VOD or the numbers for you guys and the others in the industry, do you think that's a harbinger of sort of things to come and do you feel comfortable sort of with where the firm is sort of looking out 5 years?

Michael White

Yes. No, I think we're very confident as we look out 5 years. We did a comprehensive strategy project last year. We just updated it for our Board of Directors. Frankly, as we look at the VOD opportunity, I think we're just scratching the surface on the potential. We're going to add more titles next year. I mean, honestly, I think if I look at kind of what happened in VOD in the quarter, given it was kind of systemic across a lot of our competitors as well, I think it's got more than to it, which is kind of lousy titles that came out of Hollywood before the quarter. It just didn't really work with consumers. But, frankly, I still think that's a tremendous opportunity for us as we look going forward. But we're still bullish on kind of the VOD and the TV Everywhere parts of our strategy and what we think those opportunities are. And I think you'll see that back in nicely in Q3, Q4. Keep in mind, to size up the stuff, I mean, the premiums category, which had a fantastic quarter, is almost 10x, I think, the size of pay per view. So it's a relatively small piece of the total -- today, we still think it's got a big growth opportunity, and even with that, we weren't down versus a year ago. We just went up kind of 20% that we were in the first quarter.

Operator

We'll take our next question from Jeff Wlodarczak with Pivotal Research Group.

Jeffrey Wlodarczak - Pivotal Research Group LLC

It's Jeff Wlodarczak. Pat, can you confirm, is 1.5% churn for the full year still a reasonable target? And then the level of retention and upgrade in the second quarter, is that a good level to think about for the back half of the year, quarterly?

Patrick Doyle

Yes. No, we haven't come off of our kind of 1.5 plus range as being our goal. And we certainly think that's achievable. On upgrade and retention, as Mike said, I think we boosted up a little bit as we tried to deal with customer that may be leaving us because of upgrade issues. But again, our higher quality customers. Suddenly in there, there was about a 15 million or 16 million year-over-year increase on upgrade and retention related to this satellite lease that we're coming to the end of which will drop off as the year goes on. So I think in the back half of the year, you'll see upgrade and retention probably be again slightly higher than prior years, but probably not at the level we saw in the second quarter.

Jeffrey Wlodarczak - Pivotal Research Group LLC

And then one for Bruce. DIRECTV Latin America, another great result, you raised your guidance at high end of your previous guidance, which implies a bit of a slur in the second half. Is that something we should be thinking about? Not that [indiscernible] it was obviously a fantastic number for us.

Bruce Churchill

Yes. Exactly. You guys are never satisfied, honestly. I think we're very comfortable with how the business continues to go. I just don't want to get too far ahead of myself in any of these areas. Operating in emerging markets, it can be very volatile, a lot of it depends a bit on where our control growth strategy in Venezuela goes, if we're actually able to get more -- able the pay for boxes out of funds coming out of Venezuela, we'll take advantage of those opportunities. But it's all a bit uncertain at that stage, so -- at this stage, sorry, so I don't want to get too far over my skis, as they say on that. But I'm not looking particularly for a big slow down in the second half. No.

Michael White

Yes. I think, Jeff, look, we're trying to manage guidance sort of a consolidated corporate level, as we release the guidance. So I think when you're dealing with 50% growth rates in any business, I think, predictions are always difficult. But frankly, as I announced, we just crossed 30 million subscribers, so you can do the math on that. We're continuing to have a very strong performance out of both Latin America and we had a nice performance in the U.S. in the month in July. So I think we'll continue to see good performance out of Latin America balance of the year. But I wouldn't read into it anything other than what Bruce just said.

Operator

Our next question comes from Stefan Anninger with Crédit Suisse.

Stefan Anninger - Crédit Suisse AG

Just two briefly, could you provide a bit more color on the leveraging of the Latin American business, perhaps both in terms of timing and maybe you could quantify a bit for us the size of the debt issuance so that you're thinking of? And then also, if you could provide perhaps a bit of color on the connected box strategy and where you are in terms of reaching some of the targets you laid out at your Investor Day in the fall?

Michael White

Pat, why don't you take the DTVLA thing and I'll come back in the connected box.

Patrick Doyle

Yes, sure. On the leveraging, I think we have now designed a plan of how to incorporate it. We are working with the lawyers, tax people, financial reporting, so I feel very comfortable that we've got a design of how to bring it into the credit that we're not ready to talk about today, but that's all been worked out. I think what our planning is to do is to get that done before year-end with our discussions with the rating agencies, we'll kind of see how their view is of the leverage opportunity that Latin America brings into the credit. And then we'll go from there. I think it's kind of too early to get specific on those numbers.

Michael White

On the connected box strategy, in fact, we just did a deep dive review on it. I think, first, the good news is, of the customers who get connected, we are seeing increase in ARPU that we expected. In fact, we're beating it. We're seeing probably a $2.50 increase per subscriber once they get connected in terms of, I think, being able to access the video on demand content, which goes to the comment I made about VOD earlier. So we are seeing a nice lift in the ARPU. What we have seen is, that we've run a little bit short of our goal in terms of the number of homes that we're going to connect this year. We've had some operational complexities, we've been working our way through. We think we kind of solve most of those. In some cases, a consumer says they have Internet and maybe they only have a modem and not a router or they kind of go for the DIRECTV install, but the Internet is not installed for 2 weeks later. So there are a few kind of operational glitches that we're working our way through. But the connected home experience is a fantastic experience. It's going to get even better this fall with our new high-definition user interface and I think as we add more VOD titles, it's just going to be more and more kind of pull from consumers I think for that experience and as I said, the good news is, we know it pays. It pays out because of the increased $2.50 in ARPU we get from it. But we've been just kind of working our way through some of the operational complexities of these, I think we've got a wireless capability that we'll be launching this fall, as well as I think we'll make it available to even more homes. So it's absolutely continues to be a top strategic priority for us and we're still very bullish on its potential for DIRECTV in longer-term.

Operator

Your next question comes from James Ratcliffe with Barclays Capital.

James Ratcliffe - Barclays Capital

Two, if I could. On the U.S., you've gotten more aggressive in the NFL SUNDAY TICKET promotion strategy. Can you talk about the trade-off between potentially cannibalizing existing customers -- excuse me, cannibalizing new costumers versus potentially getting people who otherwise wouldn't pay for it upfront hook on it? And secondly, if you're looking at Latin America, how much of the increasing gross adds you see in the first half of the year in Brazil to attribute just the fact that you have these new mass market products out there and how much you think is sustainable going forward?

Michael White

James, I'll take the U.S. one. Bruce, then you can kind of answer the question on gross adds in Latin America. I think it's important on the NFL SUNDAY TICKET. Let me rewind a bit, because I think we actually gave you a sense in December that we were going to think differently about NFL SUNDAY TICKET this year. We were doing that for a couple of reasons. One, we had to have a promotion that if the strike was continuing, we actually had an attractive enough promotion without NFL that would work in third quarter. So we had to design the promotion not knowing whether they were going to settle or not. That's point one. I think the second and more important strategic point was, we've come to the conclusion that it was critically important for us given the long-term contract we have with the NFL at higher cost and given that it's a fixed cost, that we find a way to get more subscribers the sample or try NFL SUNDAY TICKET, to try and get them to renew next year so this will be in 2012, to build that franchise and that's really the reason that we went with this particular offer. I think we'll read it as it goes, we're quite pleased with its results so far through the month of July. But the real test would be when we do renewals next year. But it was kind of driven by a strategy of trying to change the economics of our NFL SUNDAY TICKET business and it's a bet on that. And I still think it's going to be a good bet because the number of folks that come on, we then have an opportunity to roll them to pay next year, 100% of our universe rather than the typical 20%, 25% of our quarterly gross adds. So that's kind of the background on it. Bruce, you want to talk about the second one?

Bruce Churchill

Yes, I think the question was sort of what percent of the total gross adds -- the increase in the gross adds came from middle market products? Is that right?

James Ratcliffe - Barclays Capital

Yes.

Bruce Churchill

Well, because actually we were down year-on-year with advanced products because of what I mentioned about PanAmericana, obviously, a very high percent of the growth came from the middle market products. I guess when we think about it is, if you looked at Brazil, it's as I mentioned is the middle market products were about 65% of the total gross adds. And that was a very large increase compared to last year about 1.5x. So I think they're very important part of the overall story. Having said that, we still sell a lot of standard packages in all of the traditional basic and extended basic and those remain equally important as to advanced products. So certainly, it's a very important part of the story now. I think it will remain an important part of the story for the foreseeable future, because certainly, I would say that the A and B classes are very largely penetrated in many countries. But most of the growth is going to come from these middle market products.

Michael White

The other thing I'd add though, Bruce, you guys have really got a very disciplined strategy to manage the mix and ensure that the profit mix ends up fine. And in fact, I mean, even to the point of having lower commissions for instance, if you sell the middle market products, so actually Bruce's team has really thought this through. It did a great amount of details as to how to ensure that we get the right balance as we grow the business and that the margins are not impacted. True, it may affect ARPU but it won't affect profitability.

Operator

Our next question comes from Marci Ryvicker with Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC

I have 2 questions. Mike, you mentioned that you spent some time on DIRECTV's long-term strategy. So does entering into content via Hulu coming into these conversations at all? That's the first question. And then secondly, Charter mentioned on their call that they have some sort of relationship with Dish and that they're now offering a synthetic bundle. So are you having similar discussions with any of the cable operators?

Michael White

Marci, first, on the long-term, look, I don't want to get into specific comments on an acquisition process. But I think suffice it to say, we have consistently said that we want to make sure that we can make DIRECTV available anytime and anywhere our customers want it. The Hulu software has some nice aspects to it, but you also have to kind of form a judgment about its business model and what you think that business model can generate. So we look at a lot of things here and we'll see as we go through that process where we come out. But I think what we we're looking for is, is there something there that would enable us to accelerate our TV Everywhere? But obviously, I'd say it's critically dependent on the distribution relationships that it has and the contracts that underpin that. So I think there's still more for us to learn and we really haven't made a final judgment on it. I don't think it's kind of something we have to have, frankly. I think it's an interesting idea and we're looking at it. But I mean, we are doing IP -- I mean, our NFL SUNDAY TICKET to go product is an IP protocol product and we know how to do the hybrid kind of, if you think of it, using the satellite, I mean, using the Internet, kind of cloud, the Internet and then IP. So I mean, our technical guys are quite comfortable with that world and so I'm sure one way or the other, we'd be able to do what we need to do with TV Everywhere. But it's an interesting opportunities so we're taking a look at it. In terms of the comment on Charter, look, I've said consistently, I think, we're open to discussions with any cable company that wants to talk to us about bundles. Having said that, remember, I think we've got 97% of the U.S. covered with relationships with telcos that Dish does not have, so perhaps, they're looking at a different angle than we are in that regard. Our focus right now is to try and operationalize the 2 fiber bundles that we've got access to, to sell with both FiOS and U-verse in the second half of this year, and really make it a good customer experience and we'll be kind of working more against that, I would say, in the second half of the year. But we're always open to a good offer if anybody has an idea on a wholesale bundle, a wholesale broadband offering.

Operator

We'll take our next question from Richard Greenfield with BTIG.

Richard Greenfield - BTIG, LLC

Question related to your key satellite peer in Dish and Charter, again, I think, is -- had some pretty interesting maneuvers over the last 6 to 9 months and beyond the big picture comment of kind of not believing in the long-term future, having questions of the long-term future of linear programming between wireless and swim and a host of things like Blockbuster, just curious kind of how you think about some of the competitive things he's doing vis-à-vis your business? Any that were you -- or how you think there might be applications of what he's doing to how you're thinking about your business?

Michael White

Look, Rich, I worry about all of our competitors and same competitor including Google, Apple, Amazon, you name it, everybody kind of -- is in the competitive spectrum, and I don't think it'd be productive for me to comment one way or the other. Charlie knows this strategy a lot better than I do. But suffice it to say, we're comfortable with our strategy. So as I said, I think, you have to recognize, we have some things that they don't have and they have some things we don't have. So our strategies are designed for DIRECTV and I think we're quite comfortable with the direction that we're going. Now we're always open to ideas. As I said, whether it's a wholesale bundle from a cable company that includes broadband or another way to get to a broadband service that has the price performance that's required to compete with DOCSIS. It's just up to this point, our focus has been on, number 1, the relationships we have with the telcos and trying to take that to another level with the fiber bundles that we've got access to. But we're continuing to look for other ways to do bundles or other ways to provide a fixed broadband to the consumer. But it has to have a price performance that I think it will be competitive for us to pursue it.

Richard Greenfield - BTIG, LLC

Mike, let me ask the question another way then. How do you think there -- do you think there's an opportunity for DIRECTV to provide an IP-based satellite service to consumers nationwide over the course of the night next 4 to 5 years?

Michael White

Well, again, our TV Everywhere strategy, I mean Rich, by definition is going to be, we're strengthening our whole portal, our DIRECTV portal right now, which you'd be able to access content there. We signed up HBO GO, we've got NFL SUNDAY TICKET To-Go, so by definition, we're going to have some kind of a hybrid satellite, say, a cloud or Internet-based kind of connection, and that's really what the connect-the-home strategy is all about as well. How far you go, whether you kind of offer a kind of a flow TV idea, let's call it, but that's kind of through the Internet, what pricing -- what content rights you get from the distributors, I think it's not about the technology, frankly. Technology is not the challenge there. I'd say it's more about the content rights and how the owners of the programming decide to use those content rights. And if you look at our cost of programming, all of us as a distributor's these days, it's kind of hard to get to a meaningful group of channels. Any price that's, I would say, less than even $30 at the rate we're going. So I mean, it's kind of an interesting idea, but I think it's a function of what kind of content rights you've got more than the technology. Technology is pretty easy. We're doing that already with NFL SUNDAY TICKET To-Go.

Operator

Our next question comes from Tom Eagan with Collins Stewart.

Thomas Eagan - Collins Stewart LLC

I guess, Mike, I wondered if you could give us a little sense of granularity. In terms of second half of this year, with the call center being able to sell the fiber-based telco bundle and the new free NFL offer, any sense of what kind of lift we might expect in the second half on gross adds?

Michael White

Gosh, I got one month of data. On one month, we're quite pleased with the performance of our offers. We've also got have -- we've got this fantastic new high-definition user interface that we'll be launching in the fall, I think probably October or November. But how will that impact this year versus next year, I'm not sure, but again, we're tracking pretty much in line with our gross add expectation for the full year in the U.S. business and I don't know, Pat, I don't...

Patrick Doyle

Yes, like you said, I think we were...

Michael White

Gross adds were fine I mean our gross adds in the quarter were above last year modestly as I recall.

Patrick Doyle

Yes. No, I think the second quarter was right on in our expectations or a little bit better we're starting out July with a very good month. But it certainly makes us more optimistic. Like Mike said, one month, not overall trend for us. So we'll stay cautiously optimistic. But right now, the early signs are good.

Operator

Our next question comes from Doug Mitchelson with Deutsche Bank.

Douglas Mitchelson - Deutsche Bank AG

I know, Mike, you're trying not to get pinned down too much here, but I think at the Analyst Day emphasize that U.S. growth should slow pretty dramatically this year and flat year-over-year now you're talking about churn back to improving a little bit in the second half. It seems like you're headed towards 500,000 or more net adds in the U.S. this year which isn't much of a slowdown. Am I thinking about that right? Given the visibility you have now with would you take a look at more aggressive stance than you took of Analyst Day?

Michael White

Why don't you ask me after third quarter call, Doug? Look, we had a tough quarter for churn and the good news is, as Pat said, we kind of sought, came back under control in June and July. Our gross adds are off to a terrific start. I'd rather not speculate other than I feel good about our expectations for both gross and net adds for the full year, but we are going to be fine. Kind of -- the year isn't going to be a perfect each quarter at the same ratable number, probably first quarter was also stronger than we thought, second quarter a little softer. I'm optimistic, third quarter is going to be a little stronger and we'll see about fourth quarter. But I don't see any trends in the business other than the macro economy, which is of concern. And you do see, as I said, our involuntary churn, albeit it's a small part of the total churn calculation, but it is credit problems, that's what it is. People can pay their bill when we contact them, that is up a couple of basis points. But so you do see some of the challenges that the consumer is facing. But other than that, I don't see anything competitively or otherwise. As I look at our quarter, second quarter, we had some challenges, as Pat said, in the telco geographies and we had some challenges in rural areas where consumers were going to go TV and I think that the economy.

Douglas Mitchelson - Deutsche Bank AG

I wanted to squeeze one in for Bruce. You talked about drivers of LATAM ARPU which is a positive surprise for us. I believe at Analyst Day you indicated ARPU would be flattish the next 5 years or so and again you talked about in this call as the middle market being the driver a lot of sub growth. Is that still the direct trajectory for ARPU flattish the next 5 years or so the potential for some ARPU improvement we saw in the second quarter?

Bruce Churchill

No, I think we would stick with our overall projection. As I mentioned before, the middle market expand, it becomes a bigger part of the total base, it will create some downward pressure on ARPU. We expect that will be offset by our continued ability, the upgrade existing customers, as well as continuing to serve A and B segments with more advanced products, more HD. So my sense is, over the long haul, that's still the right way to look at it.

Michael White

Be careful with the ForEx, Doug. I mean you got the Brazilian real has been so strong, that's also running through the numbers, but at some point, that kind of comes to a lapping probably in the fourth quarter of this year the total different, so you got to look at it x ForEx.

Douglas Mitchelson - Deutsche Bank AG

How much of the Sky Mexico contributed in July of that 300,000?

Bruce Churchill

No, it wasn't huge.

Michael White

More importantly, the U.S. did contribute.

Operator

Our next question comes from Ben Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley

I want to ask you about the SAC for add number and what you're thinking there as you move for the back end of this year into next? I know the connected box units or probably below what you thought, but it seems like those numbers are coming in a little lighter and maybe just because you're using more credit for the ARPU line so we sort of need to put those 2 together, analyze it property. How are you think about SAC per add and the typical sort of box savings on an apples-to-apples basis, DIRECTV typically realizes as they move through a production cycle?

Patrick Doyle

Then, I think I see SAC kind of staying in the kind of range that we saw in the second quarter. Obviously, like you said, there's countervailing things as we try to connect more people to broadband. There is some pressure there, but we continue to try to work down not only the rocks costs, but he outvote outdoor unit which gets to be a pretty extensive unit when you're dealing with HD and the SWiM. So I ought to say it ought to say plus or minus in the same range you saw the second quarter as we've got upward pressure on more technology in the home and as we try to get obviously more efficient and more productive on boxes and dishes in other things like that.

Benjamin Swinburne - Morgan Stanley

And one follow-up for Mike. You mentioned a number of product initiatives later this year, the guide and also connected box strategy. The TV Everywhere product, the nomad product, the tablet product, can you just update us there on your plans and when you think that's going to become fully deployed what it looks like when it is?

Michael White

I think the nomad product, which is the ability to port your content from your DVR onto your iPad, I expect you'll see that in some geographies before the end of the year, we're probably going to do with in a fewer geographies to make sure that that's working flawlessly before we roll it out so rollout might be in 2012. But you'll see that before the end of the year, the high-definition user interface comes in the fourth quarter. We'll also, I would expect to be streaming pay-per-view and premium channels on my DIRECTV.com probably in the fourth quarter. I think we're expecting, we're going to launch the Home Media Center, which will have a kind of high and DVR or new subs in the fourth quarter as well space we got a lot of things with I feel pretty good about that will roll into the fourth quarter, albeit will see more of the benefits of that probably in 2012 than in 2011 in terms of the acceleration and momentum.

Benjamin Swinburne - Morgan Stanley

When do these include sort of a robust on demand and maybe even live linear streaming products to the tablet?

Michael White

Well, the light linear stuff is all driven by content rights and most our breakfast candidly. Every program has a different point of view. So I mean, that's not been our focus. Our focus is more things we think we can monetize like VOD, pay-per-view, premium channels like HBO Go and NFL SUNDAY TICKET To-Go, kind of that and then porting your DVR content is kind of our focus. Now we're also working on the ability to stream your iPad in the home and you may see something on that by the end of the year. But the actual kind of live streaming of content is still kind of a work in process. But as I said it's really not and my Chief Technology Officer showed he stream to the NFL Super Bowl -- at the Super Bowl on his iPhone from our broadcast hit here in Marina del Rey. So it's not a technology challenge. It's a rights issue.

Operator

We have time for one more question. That will come from Tuna Amobi with Standard & Poor's Equity Group.

Tuna Amobi - S&P Equity Research

So I guess it's good to hear that on the connected box that you saw an uplift in ARPU us a result. But I wasn't sure if that was the same effect as far as churn is concerned. I'm trying to basically isolate the economics of that set of customers, to figure it if you're getting the kind of overall upside that you expected. I know it's still early, but any clarification there will be helpful. And separately, as a philosophical question, Mike, so on the NFL ticket, right, there seems to be some concern and I know that contract has still got another 3 or 4 years to run, but as you think about this contract been a lost leader, there's questions about whether as the market becomes more competitive for these kinds of sports rights, when a contract is up for renewal, there's almost an expectation for the costs are going to go up astronomically. And I know that you're trying to monetize that in various ways, the VIP offering, whatnot. So the question is, do you still feel that having that contract of the lost leader over the long-term is the right way to go?

Michael White

Well, thanks, Tuna. First, the connected box, you're right, it is a little premature to reach churn because usually the churn problem, even in Q2 when we went and kind of dissected it, it was in certain geographies and it was plus or minus 3 months, either before or after the 2-year contract that folks are going shopping. And I think that's, again, function of the economy and the competitiveness that's out there. So it's a bit premature. I certainly believe it will have a positive impact on churn. We certainly know from history that advanced products in general, we do see lower churn rate in our advanced products that we do on basic or standard DEF customers. So if history is kind of any guide, I'm pretty confident -- and I also think that the quality of the experience and I think that's where we've got probably still some more work to do to fill in some more VOD content and really, with the HD user interface, really make that experience pop for the consumer. I think we're bringing Pandora, Andorra, bringing in a bunch of things making it absolutely not just socks off experience with the customer. And as I said, were already getting more than we had planned in ARPU lift out of those customers. So I feel great about the connected box strategy. I think we're just working through some of the operational things.

Tuna Amobi - S&P Equity Research

On the pay-per-view buys on that just to get connected element of it?

Michael White

Obviously, that's where the $2.50 is coming from. It's pay-per-view buys. It's VOD. And then on the NFL SUNDAY TICKET, look, it's way premature and I might say that the last contract cost more astronomically, I suppose. But we think NFL SUNDAY TICKET is a terrific product. We have an excellent partnership with the NFL. We're delighted to see football is back. Our customers are very interested in the product right now. We're trying to make sure we can grow that franchise to support it but it's a very important part of our brand, but how would we look at it 3 years down the road, I think it all depends. Sports costs are clearly a problem for the entire industry and not just football, all sports costs. And as an industry, we're all going to have work hard on it because the consumers -- I just don't see the consumer being willing to pay. For everyone one of these new RSMs are 6 RSMs and or one league, or whatever. One college league at once. Six different channels. There are just some things that as a practical matter we're going to have to pretty disciplined and what we're doing and what we don't do.

Operator

And ladies and gentlemen, that will conclude today's presentation. Thank you for your time. Have a good day.

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