DIRECTV's CEO Discusses Q3 2011 Results - Earnings Call Transcript

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by: SA Transcripts

DIRECTV (DTV) Q3 2011 Earnings Call November 3, 2011 1:00 PM ET


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

Jonathan Rubin

Thank you, operator, and thanks to everyone for joining us for our Third Quarter 2011 Financial Results and Outlook Conference Call. With me today on the call are Mike White, President and CEO; Pat Doyle, our CFO; Bruce Churchill, President of DIRECTV 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, 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 and DIRECTV U.S.'s annual reports on Form 10-K, quarterly reports on Form 10-Q and our other filings with the SEC, which are available at

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

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

Michael White

Thanks, Jon. Good afternoon, everybody, and thanks for joining us today. Now overall, from my perspective, I think that DIRECTV delivered another very strong quarter of industry-leading growth, further extending our position as the world's largest provider of pay-TV video services and with now well over 31 million subscribers across the Americas. Clearly, I think the highlight of the quarter was that both DIRECTV and Sky's premium brands and best-in-class video experience drove tremendous subscriber growth and market share gains across the Americas.

In terms of gross additions, both in the U.S. and Latin America, we soared to all-time highs, fueling the largest net subscriber gain in our history, recording over 1.1 million net new subscribers, including Mexico, in the quarter. This considerable achievement, along with increases in ARPU, drove our ninth consecutive quarter of double-digit top line growth for our company and the highest quarterly growth rate since Q1 of 2010.

Now as is typical in our business, the large increase in gross additions did unfavorably impact OPBDA and cash flow growth in the quarter as did higher programming costs. However, the larger subscriber base positions us very well for greater cash flows over the longer term.

Also, we continue to execute on our strategy of aggressively returning capital to our shareholders, repurchasing nearly $1.5 billion of stock in the quarter, bringing our year-to-date shares repurchased to about $4.4 billion.

Before I turn the call over to Pat and Bruce for a more detailed review of our U.S. and Latin American businesses, let me offer just a few observations. Starting first with DIRECTV U.S. Although the economy and competitive environment remained challenging during the third quarter, our brand leadership, differentiated products and popular NFL SUNDAY TICKET offer strengthened DIRECTV's competitiveness in the marketplace, driving gross additions to a new record high.

Perhaps from my perspective, more important than that, this record level of gross adds also incorporated the fact that the overall quality of those new subscribers continue to meet our high industry standards. For the first time, the percentage of gross adds in the quarter taking advanced products, for instance, surpassed 80%. In addition, we saw a significant increase in take rates for Whole-Home DVR, Auto Bill Pay and Connected Home. And our data and analysis suggest that all of these drive both better ARPU and lower churn over the longer haul. Combine this with significant reduction in churn, and you get the highest third quarter subscriber gain in 7 years of 327,000 in net additions.

The successful execution of our churn management initiatives outlined on our last earnings call primarily reflect a more proactive and segmented approach to churn management. Also enhancing our churn-mitigation efforts were some ongoing initiatives aimed at improving our overall customer service experience.

Recently, that hard work has been recognized by J.D. Powers and Associates in ranking DIRECTV significantly ahead of our major cable providers and considerably narrowing the satisfaction gap between us and the telco providers. I think this distinction shows that we've made excellent progress, but it also shows that we need to continue to take our game to an even higher level in this incredibly competitive environment.

Nothing is more important, from my perspective, than delighting our most important asset, the nearly 20 million loyal customers that pay us an average of $92 a month. And I believe managing churn is quickly becoming one of our greatest value drivers and is a very important priority for our company as this industry matures.

In terms of margins and the bottom line, Pat will touch on that in a bit more detail, but overall, our results, excluding the impact from the significantly higher gross additions, were right in line with our expectations and the full year guidance we provided at our Investor Day last December.

Finally, before I turn to Latin America, I'd like to also highlight several very important innovations that will further extend our video leadership, while also providing a tremendous boost to our brand in the fourth quarter. Just last month, we launched the first phase of our nomad product to existing customers, which allows them to port content from their HD DVR to computers, laptops and tablets, enabling them to watch their favorite video content remotely. And just last week, we introduced live in-home streaming on the iPad.

Starting in December, the new graphically rich HD user interface that supports the multiscreen social and interactive experience will be available to our HD customers. And before year end, we'll introduce the highly anticipated Home Media Center, which not only has twice the storage capacity of our traditional HD DVR but also allows customers to record up to 5 shows at once in any room. Another promising future benefit of that product is the ability for customers to access full HD and DVR functionality through the DIRECTV user interface on RVU-compatible televisions, eliminating the need for additional set-top boxes in secondary rooms.

In addition to our current SUNDAY TICKET To-Go product, HBO GO and MAX GO offerings as part of our overall DIRECTV Anywhere initiative, subscribers will soon be able to stream VoD and pay-per-view movies inside and outside their homes on PCs and mobile devices as well. All in all, I think our fourth quarter is shaping up to perhaps be the busiest quarter in our history for innovation and new product launches.

Turning now to Latin America, which has rapidly become the biggest growth engine for our company. Strong consumer demand for our products and services all across the continent, along with favorable macroeconomic trends, continue to drive exceptional results as DIRECTV Latin America delivered yet another quarter of record gross additions. Combining this with an equally notable 14-basis-point reduction in postpaid churn culminated in a historic gain of 574,000 net subscriber additions. This accomplishment exceeded both internal and external expectations, as well as surpassing the best-ever quarterly subscriber gain recorded in our U.S. business as Bruce Churchill likes to remind me.

Consistent with recent quarters, our subscriber growth was led by Brazil, as net additions more than doubled last year's level. But in addition to Brazil, we also saw solid growth in several other countries, including Argentina and Venezuela. The strong subscriber performance coupled with another quarter of solid ARPU growth drove an acceleration of revenues. And similar to DIRECTV U.S., our higher acquisition costs associated with the record gross adds did somewhat impact OPBDA growth.

Also, over the last few weeks, I know you've all seen some fluctuations in the foreign exchange rates, particularly in Brazil, which is roughly 10% of our overall DIRECTV consolidated revenues. We believe the recent changes in FX are frankly more a response to volatility in the global markets as opposed to a reflection of fundamental weakness in Brazil's economic outlook, which we believe still remains solid. Bruce will provide more color in his remarks, but suffice it to say, this volatility was contemplated in our prior guidance, and we remain right on track to meet or exceed all of our targets.

In summary, third quarter results for DIRECTV reflect continued successful execution of our operating and strategic initiatives. Going forward, in the U.S., we'll continue to navigate through tough market conditions, while focusing on our top priority of driving profitable growth through brand leadership, innovative excellence, world-class customer service and financial discipline. In Latin America, you can expect us to continue executing on our key strategies to maintain subscriber momentum by leading both the higher end markets with the best advanced services, while also further penetrating the rapidly growing middle market via attractive lower price packages across the region. Both our U.S. and Latin American businesses have unique and sustainable competitive advantages that I believe will continue to deliver superior financial returns to our shareholders in the years ahead.

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

Bruce Churchill

Thanks, Mike. Well, as you can see from our earnings release this morning, our results in Latin America continue to be strong in yet another record quarter of both growth and net subscriber additions, as well as strong year-over-year growth in our key operating metrics. Just a reminder, unless otherwise noted, our results exclude those of Sky Mexico, which we do not consolidate.

For the quarter, gross additions of 957,000 were 82% higher than last year. In Brazil, gross additions increased more than 110% compared to Q3 of 2010 to approximately 540,000. Sky Brazil continues to have great success with its middle market products, in particular our SKY FIT product that we launched in September of last year. For the quarter, our middle market products represented just over 60% of Brazil's gross additions.

In Panamericana, gross additions increased 54% compared to the same period last year on strong demand for our prepaid product and entry-level packages across the region. Argentina was particularly strong. It accounted for approximately 2/3 of Panamericana's year-over-year growth in gross additions.

Prepaid gross additions represented 17% of our 957,000 gross additions in the quarter. Cumulatively, prepaid subscribers make up approximately 10% of our 7.3 million subscribers and are predominantly in our Panamericana region.

Advanced products represented about 15% of new customers, down from 20% last year, reflecting the effect of the explosive growth in our middle market packages. Specifically, take rates of advanced products in Panamericana increased approximately 10% year-over-year, split more or less evenly between our SD DVR and HD products.

In Brazil, advanced product sales more than doubled compared to last year, as our industry-leading HD product continues to enjoy strong demand. I should note that unlike in our Panamericana region, we do not offer a standard-def DVR in Brazil, so advanced products are only HD. But even with this year-over-year growth, advanced products, as a percent of total sales, in Panamericana and Brazil combined are down because of the tremendous growth in other products.

As I've mentioned to you in the past, we believe that our advanced products and middle market offers are equally important components of our long-term strategy across the region. Subscribers with advanced products represent almost 2 million of our more than 7 million subscribers. And we will continue to focus on selling advanced products to both new customers as well as upgrading existing ones. In fact, in Brazil, where we have approximately 750,000 HD subscribers, approximately 60% of our new HD customers in the quarter came from upgrading our existing subscribers.

With respect to churn, our postpaid churn for the quarter of 1.39% is down from 1.54% last year, reflecting slightly lower churn in Brazil, complemented by an improvement in Panamericana. In Brazil, we've been pleasantly surprised that the churn behavior of the new middle market customers has not been materially different than that of our traditional base of standard definition customers. The improvement in Panamericana was driven primarily by better results in Venezuela, where our controlled growth strategy has meant fewer sales, which tends to reduce churn, and more focus on operational improvement.

In summary, we ended the quarter with 574,000 net additions that were relatively balanced from both a regional and product mix perspective.

Turning now to financial results. Driven by strong subscriber growth, revenues increased 46% compared to last year or approximately 41% if you exclude the impact of foreign exchange. In particular, excluding foreign exchange, more than 85% of our growth came from the increase in our subscriber base. The remaining growth came from higher ARPU, reflecting higher pricing and increased penetration in advanced products and premium packages, partially offset by lower local currency ARPU in Brazil. However, ARPUs are generally higher in Brazil than elsewhere in the region. Therefore, with the subscriber base in Brazil now making up a larger percentage of our total subscriber base than a year ago, there is a slight uplift in the ARPU for DTVLA overall. Excluding the impact of foreign exchange, ARPU increased about 8%.

OPBDA increased $121 million or 39% over last year, mainly due to the gross profit on the incremental revenues, partially offset by higher subscription acquisition costs related to the increase in gross additions and increased retention and upgrade spending, particularly in Brazil. Cash flow before interest and taxes declined to $32 million from $151 million a year ago. In addition to advanced payments of approximately $75 million for 2 future satellites, higher subscription acquisition costs associated with the record gross additions, as well as increased upgrade and retention spending more than offset the higher OPBDA.

Of course, I never like to forget Sky Mexico whose results were results were released by Televisa a couple of weeks ago. Sky Mexico delivered another strong quarter, adding 238,000 net subscribers. And financial results at Sky Mexico were equally strong, as revenue and OPBDA grew 13% and 10% respectively. In addition, we received a dividend from Sky Mexico this quarter of $20 million, bringing the total to $63 million for the year. In total, DTVLA's platforms combined, including Sky Mexico, now serve more than 11.1 million subscribers in the region.

As Mike alluded to, there has been significant volatility in the global currency markets in the most recent quarter, particularly between the U.S. dollar and Brazilian reais. I'd like to give you some feel for how this impacts our results. Given that Sky Brazil represents a little more than half of our Latin American revenues and OPBDA and the fact that its revenues and expenses are predominantly in local currency, changes in the U.S. dollar-Brazilian reais exchange rate are generally half of the overall foreign exchange impact on revenues and OPBDA in any given quarter. To put it another way, a 10% devaluation in the U.S. dollar-Brazil rate would reduce DTVLA's revenue and OPBDA by approximately 5%.

Also in the quarter, we announced that we had contracted for 2 new satellites for our Panamericana businesses. These satellites are expected to be launched in late 2014 and 2015 and are designed to provide primary and redundant capacity for Panamericana for the foreseeable future. These contracts call for annual prepayments of approximately $100 million from now through 2014, followed by lower monthly fees over the life of the satellites. While I cannot disclose the details of our agreements, I can say that the economics of these deals start to look a lot more like we own these satellites as opposed to leasing them, which we believe is a much more attractive option for DIRECTV.

Regarding Venezuela, the government continues to tightly regulate the repatriation of local profits 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 funds that did come out of Venezuela this quarter came out of the official rate through the official Central Bank process. As of September 30, we had approximately $328 million of cash on hand in Venezuela, expressed using the official rate of VEB 4.3 per U.S. dollar.

And finally, with 3 quarters of 2011 behind us, I thought I'd provide you some thoughts on the balance of the year. Even with the recent volatility in the global markets, we have not seen any meaningful change in the favorable macroeconomic environment in Latin America, particularly in Brazil. In addition, I gathered with our top 100 executives in Caracas about a month ago at our annual DTVLA Management Conference, and the mood remained upbeat.

So in the absence of any unforeseen major global crisis or any large swing in foreign exchange rates, we expect our Latin American markets to remain robust in the near to midterm. Therefore, we expect both full year revenue and OPBDA to grow about 40% year-on-year with total net additions nearing 2 million. These figures are well ahead of the guidance we provided one year ago. One knock-on effect of these improved results is that we do expect capital expenditures to exceed the $1 billion guidance we had previously provided. The higher sales, combined with the satellite commitment I discussed earlier, will push total capital expenditures closer to the $1.4 billion mark for the year. However, we believe all of these investments are helping us deliver a superior product to a profitable customer base that delivers attractive returns for DIRECTV shareholders.

So with that, I'd like to turn it over to Pat for further comment on the U.S. Pat?

Patrick T. Doyle

Thanks, Bruce. Overall, I thought that our third quarter results for the U.S. business were solid, as we continued to demonstrate our competitive advantages and operating strengths. The clear highlight in the quarter was that DIRECTV U.S. net additions nearly doubled the prior year's level to 327,000 subscribers, driven by a 13% increase in gross adds and the lowest third quarter monthly churn rate in 4 years. Considering the current economic and competitive conditions within the pay-TV industry, this increase in demand is particularly notable, and there were several factors contributing to it.

First, the DIRECTV brand and service continues to remain strong in the marketplace, and it's clear that some of our new products are resonating very well with customers. For example, the new subscriber take rate for our Whole-Home DVR service reached 40% in the quarter compared to the 30% we saw last year. In addition, our NFL SUNDAY TICKET offer was even more popular than we had anticipated. As a result, nearly every major sales channel had a greater contribution than the prior year, providing us with the opportunity to upsell the NFL SUNDAY TICKET to an additional 1 million subscribers next year.

We saw particularly strong results in our direct sales, consumer electronics and commercial channels, which more than offset continued declines from our telco partners. Equally important, we tightened up our offer with stricter credit policies in many of our sales channels, so the overall quality of these new subscribers remains consistent with our high standards. For example, advanced product take rates of gross additions were well over 80% in the quarter with the biggest driver coming from nearly 65% of new customers signing up for both HD and DVR services compared to only about 50% a year ago.

Turning to churn. We attribute the 8-basis-point reduction to 1.62% primarily to our more proactive churn management efforts and the increased use of selective segmented offers targeted at those customers most likely to churn. In addition, all parts of our operation, from the initial installation to equipment reliability to our loyalty program and overall customer service, are all performing at improved levels and contributing to lower churn.

In terms of our expectations for the fourth quarter, we do not foresee the same year-over-year improvements in gross adds and churn that we saw in the third quarter, primarily due to the absence of the NFL offer and less retention spending. In other words, net additions are not expected to be as high as the third quarter but also not as low as the second quarter, so probably something in between those levels.

Turning to the top line. Our revenue growth of 8% was solid and driven mostly by the substantial subscriber additions and the ARPU growth of 3.6%. In addition to the strong HD and DVR trends I mentioned earlier, ARPU growth also benefited from higher overall take rates in both premium and pay-per-view movies, as well as an increase due to the Mayweather/Ortiz fight in the quarter. We also had strong results in commercial sales, as revenues were up 15% year-over-year. Partially offsetting these benefits were higher acquisition and retention credits and lower contribution from ad sales.

Looking now at the bottom line. I thought we did a pretty good job managing our costs this quarter as OPBDA remains in line with our full year expectations of low to mid-single-digit growth. In the quarter, OPBDA margin declined 240 basis points year-over-year to 21.3%. Subscriber services and G&A hit our targets, as they were relatively flat to down as a percentage of revenues compared with the prior year. However, as we've discussed all year long, programming expenses, mainly related to annual programmer rate increases and a step up in our new NFL contract, continue to place downward pressure on programming margins.

I was pleased with our cash SAC rate of $793, which came in below the prior quarter and prior year's number. We're continuing to drive down the cost of our set-top boxes. And our sales and marketing team attained new subscribers in a more efficient manner. However, we are anticipating an increase in our cash SAC rate in the fourth quarter due to a new Whole-Home DVR promotion, which includes all HD boxes in the home; the unfavorable impact that lower gross additions will have on our fixed marketing and advertising costs; as well as from the higher sales related to our connected home strategy.

Looking quickly at our quarterly consolidated results, diluted earnings per share increased 27% to $0.70, as solid operating profit growth at DIRECTV Latin America and our share repurchase program continues to drive substantial EPS growth. This quarter, we repurchased 32 million shares of DIRECTV stock for nearly $1.5 billion, bringing cumulative repurchases to almost 20 billion or over 50% of shares outstanding.

As of yesterday, we had approximately $1.5 billion left on our $6 billion share repurchase authorization announced in February 2001 (sic) [2011]. At this time, we intend to continue repurchasing shares in roughly the same $100 million per week range.

Before wrapping up, I would like to discuss a few items that will also be outlined in more detail within DIRECTV'S Form 10-Q, which is scheduled to be filed within the next few days. First, some background on a significant component of the lower depreciation expense recorded at DIRECTV U.S. in the quarter. Over the last few quarters, we saw indications that the useful lives of our leased HD set-top boxes were increasing, so we performed an extensive evaluation of the underlying factors impacting the useful life of these boxes. We found that improved efficiencies and our ability to recover and refurbish boxes and significant lower box failure rates required us to change the estimated useful life of HD set-top receivers used in our U.S. business from 3 years to 4 years beginning July 1, 2001 (sic) [2011]. This change resulted in a $76 million reduction and depreciation expense during the third quarter of 2001 (sic) [2011], and you'll see similar reductions over the next 3 quarters. It's also worth noting that we did not change the useful life estimate for standard-definition boxes.

Next, we are accelerating the launch of DIRECTV 14 and the recently approved DIRECTV 15 satellite into 2014 because our DIRECTV 10 satellite has had technical issues and is now operating on its backup propulsion system. Currently, DIRECTV 10 is operating normally, and we expect that it will continue to do so. However, in case the propulsion system fails, we have developed a backup plan to minimize any potential disruption.

I'd also like to briefly discuss the functional currency loss booked in Brazil during the third quarter. Every quarter, we record the impact that changes in the Brazilian reais has in our U.S. dollar-denominated net liabilities in Brazil, which currently include a intercompany loan, as well as satellite lease obligations.

In the quarter, the reais depreciated against the dollar by roughly 20% resulting in a pretax noncash charge of $72 million. It should be noted that as the reais strengthened over the prior 4 quarters, we recorded pretax gains totaling $49 million over that period.

In addition, we expect to announce, in the next few days, our plan to unify DIRECTV's borrowing base by including both DIRECTV Latin America and DIRECTV Sports Networks into the DIRECTV credit story, which had previously been limited to just our U.S. operations. This very positive step will provide all of our existing bondholders with substantial additional collateral in support of their commitments to us. And importantly, going forward, all of our future bondholders will benefit from and be aligned with all of DIRECTV's combined operations.

To implement this new structure, a guarantee from DIRECTV, our parent company, will be provided to DIRECTV Holdings, the issuer of our existing bonds. This structure will ensure parity among all current and future bondholders with support from all of DIRECTV's cash flow, whether in the U.S. or in Latin America.

Over time, we anticipate raising additional capital in an opportunistic fashion as market conditions permit, in line with our prior history, while maintaining our consolidated leverage target of 2.5x. This structure has been reviewed by both Moody’s and Standard & Poor's, and while we won't speak on their behalf, we do not anticipate any change in our current ratings.

So in summary, I thought we had a really strong quarter, as we continue to generate industry-leading top line and bottom line growth and remain on track to meet or exceed our full year guidance for DIRECTV U.S. And, as Bruce explained a few minutes ago, we are even more bullish on DIRECTV Latin America's 2011 results, as we have increased their full year guidance for most of their key metrics.

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

Jonathan Rubin

Thanks, Pat. And before moving on to Q&A, investors should note that we have members of the media on this call in 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 representatives of DIRECTV. In addition, we're webcasting this call live on the Internet, and an archived copy will be kept on our website.

So with that, I would like to turn it over to the operator to begin our Q&A.

Question-and-Answer Session


[Operator Instructions] We will go first to James Ratcliffe of Barclays Capital.

James M. Ratcliffe - Barclays Capital, Research Division

One for Bruce and one for Pat, if I could. Bruce, if you could just give us an idea for the new customers you're adding in Brazil, in particular, how their ARPU stacks up versus the existing base and just also where margins for those customers stack up? And Pat, regarding the AT&T deal, release just came out. Anything substantively different in the deal, either in terms of U-verse access or anything like that? Or is it basically just an extension of the existing one?

Michael White

James, I'll just take that second one. It's Mike, because it’s kind of a quick answer, and then let Bruce talk to the Latin America question. No, it's not very -- there's similar terms and conditions to the relationship we've had with AT&T. We're delighted that they continue to put their trust in us, and we're excited about continuing to build on that partnership. But there's no material change in the terms and conditions. Bruce?

Bruce Churchill

So as you can imagine, as we sell much -- many more of our middle market products, the average sales ARPU, if you will, in other words the ARPU -- the average ARPU of the incoming customer is going to be lower than that of the total base. Just as a point of reference, our entry-level products are priced at roughly BRL 49.90 and BRL 69.90 per month. The total ARPU for the company is more like above BRL 130, something like that. So the entry-level is lower. Having said that, we have been able to largely offset an overall decline in local currency ARPU through upgrades and continued sales of advanced products. So in average, at Sky Brazil, in particular, the ARPUs have not really deteriorated that much. But as we have said, I think starting over a year ago at the Investor Day, we expected ARPUs to be, over time, sort of flat to modestly down. And I would say they've -- they're not -- we thought it might start sooner. We've been able to offset the decline in sales ARPU with more upgrades in advanced products. So we hope we can continue to do that for as long as possible. On the margins side, to be honest, it doesn't really matter to us. We reconstructed our packages in such a way that we could afford to offer the lower-priced packages but maintain the margins. We didn't just lower the price. So we actually restructured the packages, did renegotiations with programmers. In some cases, we actually pay less on lower-priced packages for the same product than we do for higher-priced products. So it's all set up in such a way that we are a relatively indifferent from a margin perspective as to whether I sell a SKY FIT or SKY Light product versus a standard-def extended combo, whatever you want to call it. So the margins from that perspective are, on a percentage basis, quite similar.


And we will go next to Vijay Jayant of ISI Group.

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

First question really on the NFL SUNDAY TICKET. It looks like the upfront [ph] economics is sort of a wash based on ARPU and SAC and the way you said it would change the marketing method. Can you sort of tell us, given the big success, how do you really evaluate -- because there may be some dilution to the NFL brand in the process, because you’re having sort of a mass market product. But how do you sort of value the economics of this whole new strategy? And why hadn't we done this earlier, given how successful it's been?

Michael White

Sure, Vijay. It's Mike. First of all, I was delighted with the success we had with the NFL offer, obviously, in the quarter. Keep in mind though, our thinking had started with the change in the contract and the fact that I think I've said before, if you looked over the last several years, the product was maturing with about 2 million customers a year kind of flattish, and yet our contracted costs were going to go up over the next 3 years with the new contract we have with the NFL. Hence, we spent some time brainstorming this, and I think we actually signaled this actually at the December Investor Day that we were going to rethink how we did the NFL SUNDAY TICKET and promotion, also given the costs are what they are. We don't pay more if we have more customers. If I look at the actual results and we strengthened our brand, I would argue. I don't think we diluted the brand. I think it generated a lot of excitement in the marketplace, which drove our gross adds in the quarter. I think it's very important to keep in mind that we kept a very strict look at the quality of the gross adds. We measured that in umpteen number of ways from average income, do they own a house, as well as do they take kind of credit score, Auto Bill Pay, so on and so forth, take rates on advanced services. And all of those metrics were positive in the quarter. So the quality of the gross adds continued to be very high. I think in terms of the core question you're asking about the economics, Vijay, think of it this way. In prior years, we probably brought in about on average, 300,000 takers in our third quarter promotion that would take the NFL SUNDAY TICKET that we would then try and market to them next year to get them to renew. And those renewal rates might have been about 30% probably. This time around, we now have 1.1 million customers. That's triple the number of kind of opportunities to market their renewal to when it comes time next year. Now, obviously, I think the test of the success of our promotion will be next year when we get the renewal rates and see what those are. But I have to say, I mean, we've got a much bigger pool of customers that have had kind of a free trial, if you will, of the product. By the way, our viewership is way up. It's up over 75%, even on the linear, not counting the mobile, which is up about 40% viewing. So the consumers are using the product. That's great news. And as I said, we've got a much bigger pool to go market against next year to get renewals. So we're very, very pleased with the results of the promotion. I might also add, and I think another important thing is that paying renewals, in existing customer sign-ups, were also up modestly in the quarter, which I think is another positive when you think of the economic environment. So net-net, I think it's been a success for us this year where obviously, it's premature to talk about what we will do next year. But I mean, I think the real test would be the renewals next year when we see that from an economic standpoint. But I'm pleased with the results so far.


We will go next to Jessica Reif-Cohen with Bank of America Merrill Lynch.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

I have 2 cost-related questions. I was wondering if you could comment on expectations for fourth quarter marketing costs given all the consumer initiatives that you're offering to customers. And I mean, obviously, the market's more competitive in any case, but just if you could comment on just kind of all those new offers? And then the second question relates to programming costs. I don't know how comfortable you are, but if you could comment on when kind of the new Fox deal hits and is that all-inclusive of all of their channels? Anything you can give us in terms of expectations on programming cost growth in the coming year.

Michael White

Happy to, Jessica. And Pat, maybe you can help me out. On the fourth quarter marketing cost, I don't think they're up significantly. There's nothing kind of -- we got a lot of stuff that we're launching, Jessica, but some of that is kind of a sequential rollout, to be honest with you, and our normal advertising rates, I mean, we just shift kind of what we spend the GRPs on. So we're not really substantially increasing that. I mean, we did make a change. We've been offering the Whole-Home DVR service to customers, some of whom had SD boxes in the home, and it doesn't work on SD boxes, and we felt that was a poor-quality customer experience. So somebody who wants Whole-Home DVR now, they're going to get all HD boxes to make sure they get the right customer experience. But I don't expect, frankly, in the fourth quarter, anything out of the ordinary in terms of our marketing spend. On the programming cost, look, clearly, overall, when you look at programming cost for the industry, and by the way, we're no different than the rest of the industry in that regard. I think it's fair to say that ACPU growth on a per-subscriber basis continues to grow high single-digits this year and probably will again next year. Our new Fox deal kicks in, in January, so we'll have that impact next year. It is for -- by the way, the deal is for all of the services from News Corp. So it includes everything from Fox News to the broadcast channel, to all their cable channels. But I think certainly, as an industry -- I've said this before. I think it's one of our single biggest challenges as an industry that the costs of retrans, the costs of sports, all of these things are putting tremendous pressure on distributors. We're doing everything we can to mitigate it, but it's certainly higher than I would say we originally anticipated.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

And then just one last follow-up. You mentioned that advertising on the call, you guys mentioned that advertising was a little bit weaker. Was that because of political? Or it was just the overall macro environment?

Michael White

Ad sales, Jessica, was a little below our expectations for the year. Part of that, though, was we had built our expectations around fully rolling out the targeted advertising product, and we were late with that. It's out there now, where we would be doing 25 channels in 25 cities. But it was delayed as we kind of worked out some of the technical bugs in it. But as I think about 2012, between both political advertising and our targeted ad products, which now is ready to go, I'm very bullish on 2012 for ad sales. But our ad sales this year has been a bit soft. And I would say also, you're right. I mean, we have probably more direct-response-type stuff that is more in our mix that is more sensitive to the macroeconomic environment. I guess we just didn't have enough shamus being sold. But it has been a little bit weaker than what we would have expected.


And we will go next to Jason Armstrong of Goldman Sachs.

Jason Armstrong - Goldman Sachs Group Inc., Research Division

Maybe first question, just with record gross adds in the quarter, which was sort of a different look on the promotional activity. I'm wondering, did this change the patterns of where your subscribers are coming from, whether it's coming from telco, coming from cable or coming from your bigger competitor and satellite? And then second, just quick a question, Pat, you talked about LatAm leverage and introducing that into the mix. Just to clarify, that's all of LatAm EBITDA gets included in sort of the 2.5 turns leverage discussion right now or are there certain markets you have to carve out because cash tends to get trapped there or you have other issues?

Michael White

Hey, Jason, it's Mike. I'll do the first one, and I'll let Pat talk about the credit thing. So there really wasn't, I mean, if you looked at kind of where our churn went and where our gross adds came, it was pretty consistent with what it's been in the past, which is a little over half was cable, and there was some from satellite. But I would say the bulk of it was still other cable providers, to be honest with you. It's not that much, I mean telcos, I would say, we didn't pick up a lot of gross adds from telcos. We haven't historically either, from that standpoint. So I'm just kind of looking at the metrics, and I don’t know. I mean, I think we're pretty much in line as I look at the percentages by kind of analog cable, digital cable, whatever. I mean, they are all -- again, it's still -- over half is from cable, and I wouldn't say there was any other material shift in that regard.

Patrick T. Doyle

Yes, and then I think on the leverage question, it's certainly our expectation that it would be 2.5x the consolidated EBITDA of the enterprise. Ultimately, the rating agencies, to the extent there's a nuance, it will be up to them. But it is our expectation that it would be 2.5x of that consolidated EBITDA as far as our leverage opportunity.

Michael White

I mean, you're right. Venezuela is a bit of a unique situation, Jason, but we're quite comfortable that even counting that EBITDA we don't have any kind of credit risk.


And we will go next to Stefan Anninger of Crédit Suisse.

Stefan Anninger - Crédit Suisse AG, Research Division

Can you talk a bit more about some of your churn-reducing strategies, including the better segmentation of your retention offers, things like Auto Pay and some of the other strategies you're pursuing? And perhaps the relative importance of each of those? In other words, which ones are having the greatest impact? And then which ones do you think have the most room to grow with respect to further reducing churn?

Michael White

I mean, obviously, Stefan, it's Mike. I mean, you're getting into kind of proprietary strategy stuff that I'd prefer not to get into any kind of detail. I would say, certainly, what we've gotten a lot smarter, we spent a lot of time after the second quarter doing a review of all of our databases to try and understand targeted bases, where was the churn coming from, by geography, and also by time in kind of the in the relationships. So in other words, first year, second year, end of second year, third year. And I think by doing that enabled us to get pretty laser-focused on both geography and on the time, kind of where they would be in the relationship where we saw the uptick. And also, by the way, we look by channel because we have kind of some channels that it was a little bit elevated. So we were very targeted in looking at what kind of incentives we had to provide to customers and to try and be a bit more proactive rather than waiting for the phone to ring to say, "I'm disconnecting." We felt if we could be that laser-like, we could kind of target those customers when they call within 6 months of a contract kind of expiring, that we could begin to think about what happens at the end of the contract in other ways. So we're using a variety of things, a variety of tools, equipment, advanced equipment, frankly, when -- we know, if we give them a better customer experience and think about this as a long-term relationship, their churn is going to be lower. And so we're kind of looking at that as well. I think as it relates to the future, look, I think we're just at the beginning of doing a better job, I mean, a significantly better job in thinking about retention and thinking about it holistically, which is everything. I think Pat mentioned this in his remarks, we've got initiatives with our call centers and our field technicians to improve the customer service. I think, also, as we think about how we use upgrade and retention spending in the future, we're going to be a bit smarter about that as well. I mean, we already spent a lot on upgrade and retention. I think it’s, I don’t know, $1.5 billion or something a year. So anytime you spend that amount of money on anything, you get a lot smarter and more productive if you kind of start kind of going through the weeds and assume not every one of those dollars is well-spent as you might like. So mostly, we've been smarter about redeploying the dollars in ways that we think has a higher payback.


We will go next to Phil Cusick of JPMorgan.

Philip Cusick - JP Morgan Chase & Co, Research Division

First, I wonder if you could talk a little bit about the buyback pace you were thinking about. You said about $100 million a week in the fourth quarter as well. With the leverage now down pretty far below your target, is there any thought of accelerating that next year?

Patrick T. Doyle

I think where we sit now, we're comfortable with this pace. We've been at this pace for a while. We think it's a good balance between leverage and giving us a lot of flexibility and our ability to continuing to bring return on capital. So I would say, look, like I said, we've been doing at this pace for a while, we're very comfortable with it and I would foresee that we would continue to do that for the foreseeable future.

Michael White

Having said that, Phil, look, we haven't discussed this with our board yet. When we do our normal kind of discussion about 2012, we'll have more to say about it at that time. But I think it's important that we kind of discuss this with our board. Again, other than what we have always said, which is we are going to bring DIRECTV Latin America under the credit, as Pat noted in his remarks, we now know how we want to do that from a structuring standpoint that is kind of positive, I think, from a tax standpoint, and we'll be doing that in the coming days, and we're still committed to the same EBITDA target that we said. How do we go about getting there? I think we'll have more to say about that probably in February on the call.


We will go next to Bryan Kraft of Evercore Partners.

Bryan Kraft - Evercore Partners Inc., Research Division

Just 2 quick questions. One, can you update us on your wireless plans in Latin America, including how much capital have you spent on the trial in Brasilia? And can you talk about the results of that? And also the potential for expanding that into other areas? And then just on the U.S., can you talk a little bit about how the U-verse and FiOS bundling efforts are progressing? And I think Verizon has been talking about a DirecTV LTE offering being launched by the end of the year. Just wanted to get your perspective on that.

Michael White

Sure, Bryan. Hey, Bruce, why don't you take the first one?

Bruce Churchill

With respect to the wireless effort in Brazil, we actually have not launched yet. Honestly, we got a bit of a delay because no one had actually ever used LTE equipment yet in Brazil. So it required sort of -- I guess you call it regulatory certification. That certification has now been obtained, but that led to a delay in the importation of the equipment to build the base stations, et cetera. So the actual -- the launch has not occurred, so therefore the amount that we spent is de minimis.

Michael White

And I think, going forward, I'd say, Bryan, look, the economics down there are quite different than the U.S. So we're not talking multibillion dollars worth of investments, I think. So it’s actually quite efficient in an area like Brasilia as dense as the population is. In terms of the question you had on U-verse and FiOS, I would say, again, I think we're getting earning -- I think it's too soon to say. And again, I guess part of my feeling has been until we kind of have all the kinks worked out of the customer experience piece, the call transferring and stuff like that. And I would argue a, I don’t know, $99 bundle or something, something that marketing could do something with. It's more opportunistic. So it's not been a big driver this year. I assume you're talking about the High Speed Internet bundles. But we continue to look at that and with the new relationship with AT&T, that may offer some opportunities to be more aggressive on that as we go forward. But we haven't made any decisions on that at this time. So I would say, so far, it's probably premature in its rather modest amount of our gross adds. In terms of FiOS, look, we're continuing in our relationship with Verizon as well, and in certain geographies, we feel like the cantenna approach is a very interesting approach. I think the key for its success, however, will be how things shake out in terms of its price performance relative to, let's say, DSL or DSL plus. And I think there, the speeds looked pretty good in terms of megabits per second. The question will be how the caps work out and how customer-friendly, I would say, the caps are. I mean, right now, the caps are pretty low if you want to download 3 or 4 movies a month. So that's one of the things we're still looking at and trying to fine tune together with Verizon. But I think we'll continue to get earnings on that. It's not going to impact our fourth quarter, I can tell you that.

Bryan Kraft - Evercore Partners Inc., Research Division

I was -- actually, a bit more on a go-forward basis for next year. But if I could just ask a follow-up on Latin America and the wireless, is there a scenario in which you would do that on your own, Mike and Bruce, or is that something that you would only do with a partner? Just trying to get a sense as to how you might think about that.

Bruce Churchill

Look, I think, certainly, initially, we would do it on our own. And to sort of underscore the point that Mike made. I mean, one of the advantages of this -- the wireless strategy that we're approaching is that we really only intend to enter into cities where we already have the existing subscribers, meaningful number of existing subscribers to whom we can sell. And then depending on how it goes, we will either roll it out more quickly or more slowly than planned. Whether that ultimately leads to potential partnership with other spectrum holdings, for example, I certainly, I think we would be very open to that and recognize that other partners could play a meaningful role in it. But for the moment, I think there is a strategy at least in the outset where we can go alone at very modest investment levels and offer a very competitive product that also frankly improves the performance of our video products. So we remain pretty hopeful about that potential.

Michael White

Now I think we're open, Bryan, I think, in some geographies, like Brasilia where we have the spectrum on our own, we're comfortable going by ourselves. Other geographies, you get to São Paulo, be more likely to probably look at a partnership. But everything's on the table from our standpoint. We're excited about the strategy. We'll probably talk more about it next year when we do our Investor Day in March, I guess. And in terms of the FiOS things for next year, Bryan, again, I think it's too soon to say. We're just in the middle of putting our plans together for next year, and we haven't even locked and loaded internally on what we're targeting for next year. But look, I think, this is a journey, and we're excited about all of our partnerships with our telco providers. CenturyLink does a great job, Verizon and AT&T, they're all important to us.


And we will go next to Craig Moffett of Bernstein.

Craig Moffett - Sanford C. Bernstein & Co., LLC., Research Division

Mike, earlier I think you said that about half of your churn still goes to cable operators. Presumably, that means about half of it is back and forth between you and DISH. And I wonder, if DISH proceeds with somewhere down the line a wireless broadband strategy, would you potentially be a partner for that strategy? Or does the churn and the competition back and forth make it difficult for you to collaborate on something in broadband? And then just a second and unrelated question, if I could, and that's the public perception, even on your own website, in talking about your Fox deal was sort of, I think, to me, surprisingly, anti-distributor, pro-content. Did that have any influence on your decision to settle? And were you disappointed in how much education it's going to take for -- even on your own customer base to sort of understand the dynamics of these kind of programming relationships?

Michael White

Two great questions, Craig. So first, on your first question, let me first clarify, what I had said was that of gross adds, more than half have always and still come from cable, okay? In terms of churn, the percentages are a little bit different because some of the churn goes to at least what we think of as no-antenna-no-TV. And that's also been about kind of running about the same, I would say. But in terms of broadband, look, if there's a smart strategy, we're open-minded just as in Latin America. I think I've said this before at several different investors meaning, we talk with everybody, and I mean, everybody, about other ways that we might provide broadband to the home. But it's very clear to me that there's an awful lot of confusion going on in the whole world with spectrum and is T-Mobile going to go through, what's going to happen to Clearwire, is the LightSquared spectrum going to work? I mean, the way I look at it, Craig, I mean, the mobile wireless businesses is a really tough business. Just look at Sprint. Fixed broadband to the home is something no one's done in scale up to this point. But it's certainly something that we continue to think about and have done a lot of technical analysis on. And we'll continue to keep an open mind and, heck, I've said before, on almost every subject, I’m willing to partner with anyone if it makes good sense for our shareholders and for our customers. Second, in terms of the News Corp. thing, I don't want to get into the specifics but absolutely not. I mean, when we kind of did what we did, we felt we had to do what we thought was right for our shareholders and our customers, frankly. Our customers don't fully understand how this game works, unfortunately. And you're right, it's -- you work hard to try and educate them, but it's probably still there's a lot of educating to do. But I still strongly believe in the long run that the content providers can't be successful by making the distributors unsuccessful and vice versa. I mean, we're going to win in this thing together or not. Now clearly, there are some changes with retrans. I've always said we understand that. But I've got to say, when you look at the pressure this puts on the P&Ls, and you've seen it in the last week, it's a significant industry challenge. But we're pleased with the deal we got in the end. I mean, like all deals, there is some compromise on both sides that has to happen, and there was compromise in this case. But it's a challenge to educate the consumer. And unfortunately, we’re distributors, so our costs ultimately have to be borne by our customers.


We will go next to Ben Swinburne of Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

Just a couple of quick for Pat and then a bigger question for Mike. Pat, on the depreciation and amortization, something ran off this quarter. I don’t know if it was NRTC or USSV [ph], is that one of those running off amort?

Patrick T. Doyle

I mean, there was something really immaterial, Ben. I mean, the biggest one was just the change in the set-top box live [ph].

Benjamin Swinburne - Morgan Stanley, Research Division

And you would talk -- I think, I don't know, sometime in last year about D&A declining for the business over time. I know it's at 3 quarters now, the lower number, but does that trend continue when you look out beyond that?

Patrick T. Doyle

No, it's -- I mean, other than this change here, I think you start to see more of a leveling. I mean, we saw as boxes came down and more refurb, there was a trend. I would expect it to more flatten out as we look forward.

Benjamin Swinburne - Morgan Stanley, Research Division

Okay. And Mike, you talked a lot about new products, a lot of them leverage the IP infrastructure out there. And I think the view in the marketplace that DirecTV has got a disadvantage just not owning IP infrastructure. But I think Rômulo and the team have spent a lot of time on sort of looking at ways to be creative and innovative and you do have some assets yourself. Can you just talk about how you guys think about moving content over an IP infrastructure over time, both for the television or other devices and how that might benefit your market share in the growth of the business?

Michael White

Well, I think all of the providers, Ben, are all committed to trying to provide a seamless anytime-anywhere experience for our customers. And I see -- I mean, I think everybody's working on it. We’re all working in different ways. I mean, to your point, our technologies are a little different so we have to kind of -- we're going to do in home streaming a little different way than others are doing it. But in my mind, I think, first of all, I guess I would say, the interesting thing about most of this stuff is that actually it has a lot less to do with technology than most people think. I mean, we can stream today from our head-end, our broadcast center and have a terrific product, just taking our in-home streaming product and turning on a switch. It's actually -- on my iPad, I can do it. But we can't market it because we don't have the rights. And so most of this is back to rights with the content owners. And I think we're seeing some progress there. It's a topic of every one of our discussions, but each one has still got a slightly different strategy and policy as it relates to it. And I think, we'll all continue to make progress in that regard. But I think I'm really pleased with our iPad streaming product and our iPad in-home product in terms of the quality of the user, kind of the use the user would get out of it and the ease of that use. I think you'll see a little bit of the future in our HD user interface because although that's for the linear product, it will give you a sense of how we're looking at kind of speed of response, search engines, recommendations, shows you might like, poster art for movies, a much more, I would say, Apple-like, to be honest, experience from an interface standpoint. And I think you'll see that as well as we continue to evolve. In terms of owning the pipe, as I said, we look at -- we continue to look at those, but these are -- if you're really serious about building a national network, you're talking multibillions of dollars. And therefore, you got to make sure you got a better price performance than what's out there. I've also said we'll continue to have conversations with other cable companies about wholesale deals. So we're mindful that, that creates a little bit of a challenge. But then again, Latin America is going to be 1/3 of our business, and that's a big growth engine for us. So we get there in a different way, but I'm quite comfortable that Rômulo's team is thinking out of the box. We're thinking about the cloud. We're thinking about where you use IP and where you use the satellite with a hybrid model as we talked about a year ago. And if anything, I'm even more convinced than ever that we are not technology-constrained in our ability to adapt to a new world and to millennial desires.


We will go next to Doug Mitchelson with Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

A couple of questions. On the easy side, Pat, any chance that you can give us the ARPU impact in 4Q from having less paid NFL SUNDAY TICKET subs this year? You have a lot more free promotional subs but probably fewer paid. And then Mike, similarly on these lines because we were talking about programming costs a lot in this call, I'm just wondering if you could consider that you might be an advantage-competitive position on this issue as a high-end provider of pay-TV. I mean, you should have a greater ability to pass on price to customers, given your customers are already willing to pay a premium for a quality product. So you're obviously pretty well-established but still consider you a fresh set of eyes on some of these long-term secular issues. So I'm sort of curious if you think you could pass on these programming price increases through successfully, and I'll leave it at that.

Michael White

Hey, Doug, on the 2 questions. I think Pat, correct me if I'm wrong, on NFL, actually because we've been so successful, including selling existing customers, our NFL revenues are going to exceed our plan.

Patrick T. Doyle

Yes, I think, Doug, it gets into a little bit of a complicated accounting that we're required to go through. But the fact of the matter is because we have more NFL subs than we’re required to allocate revenue to that higher group, there won't be a negative impact on revenue or ARPU in the fourth quarter. If anything, they'll be a modest benefit. And again, it gets back into the accounting rules, looking at the customer as kind of a 2-year economic proposition and then allocating the revenue amongst programming packages, the discounting and NFL. So there won't be a negative impact on revenue in the fourth quarter.

Michael White

Again, in fact, I mean, NFL revenue's going to be way up in the fourth quarter over fourth quarter last year. So on the question of programming cost, Doug, I suppose certainly having a higher-end customer in certain geographies is helpful for DirecTV. I think that's -- particularly also customers that are passionate about our product, our brand and our technology. On the other hand, I have to say, look, we're a national footprint, and I'm as concerned about how we service the price-sensitive half of America as I am how we service Beverly Hills or Brentwood, California. So I think -- I feel like we are well positioned, if not better positioned than others, to weather the storm. But I still think it’s an industry problem, and it's something that, at some point, is going to put pressure on consumers' bills. And in a world where incomes aren't growing significantly, if at all, I still believe the consumer is king in this world, and it's going to be an issue for us collectively if we don't figure it out going forward.


We will go next to Matthew Harrigan of Wunderlich Securities.

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

With so many of your new products, DirecTV Anywhere increasingly attractive with your 4G LTE and all that, and the new deal you just did with AT&T, does it ever make sense -- I mean, obviously implicit in that deal is that a lot of people are going to take DirecTV rather than U-verse TV. But could you get to a point where you are better off just going with Verizon, say, on an exclusive basis? I mean, you've got your 19 million eventually passed FiOS homes and a lot of those are not in satellite markets. What's sort of the game theory on you having all of these telco deals versus really bonding yourself with one carrier, at least on the wireless side, particularly as the cantenna thing develops? I know that’s sort of a nebulous question but I thought it could give you an opportunity to kind of hop around on the answer.

Michael White

Yes, Matthew, look, we're pleased with the partnership we have with all of our telcos, including CenturyLink, I might add. That's an important partner to us. Glen Post does a great job down there. I think, look, we have consistently explored all kinds of ideas with our telco partners, and we'll continue to do so. I personally believe that DirecTV is the best video provider out there and that there might be other ways that we could partner with them going forward. But that's a decision for them to make, to be honest with you. We continue to explore all ideas and throw out-of-the-box ideas on the table with them, and we'll continue to do that. I just -- I think this is a complex business from negotiating deals with content providers, having scale number of subscribers that ensure your content costs are competitive when it's getting close to half your P&L. That's a critical piece of it, as well as the scale leverage that the technology that we have had. So I still believe, look, I'm passionate about DirecTV. I think we've got the best product out there, bar none, and we’d be more than delighted if one or all of the telco providers wanted to think differently about what they're doing in video. But that's really a question for them, not for us.


And we have time for one more question. That will come from John Hodulik of UBS.

John C. Hodulik - UBS Investment Bank, Research Division

First, a quick follow-up to Ben's question. Mike, in the past, you guys would talk about the initiative to try to connect the boxes -- the customers' boxes to the Internet. Where are you with that process? Is that still a priority? And is that required to roll out the new sort of IP front end? And then switching gears on -- going ahead into Brazil. Obviously, the Latin American guidance suggests another strong quarter for net adds in Latin America. I mean, I guess, is it safe to assume that the progress you've made in gross adds sequentially over the past 1.5 years has been as a result of the middle markets product? Maybe if you could talk a little bit about how you size that market? And then given the discrepancy in the ARPU, do you think as that sort of works its way through that we see an impact on the sort of regional ARPU on a constant-currency basis?

Michael White

Bruce, why don't you go first on the Latin America question?

Bruce Churchill

Well, I guess we do continue to see strength in as you said in the fourth quarter, and the middle market, I think I had mentioned earlier, is a big part of the gross adds. It was up 110% in Brazil year-over-year. I'm not sure, with discrepancy on ARPU, I'm not quite sure I understand what you mean by that.

John C. Hodulik - UBS Investment Bank, Research Division

I think, in the first question, you referenced the $59 and the $69 ARPU price point versus the $130 in force rate.

Bruce Churchill

Sorry, 49 and 69, those are reals, so that's local currency. Those are the price points for the low-price packages. The 130 still north of there is the average ARPU for the Brazil business, so…

John C. Hodulik - UBS Investment Bank, Research Division

Is your adding 60% of the base coming on those low packages? I know you talked about upselling, but I was sort of trying to cut to the chase and say did you expect that overall number to come down over time?

Bruce Churchill

Yes. Yes, modestly. As I think we've said it, it's sort of flat to down. As you sell more of the low-priced packages, it's just the mathematics of the mix are going to force the average down. We've been able, to date, to offset that largely by upgrades and continued sale of advanced products, and we've probably been able to stem the tide, if you will, longer than we had originally anticipated, which has led to the results we’ve had. But over time, yes, I do see local currency or real-based ARPUs to drift downward, but not, I think, by any measure.

Michael White

So John, to your question on broadband and the Connected Home. Look, the Connected Home is a very important strategy for us because if I go back to some of the other points that were made earlier, there's no question that over time for us to optimize VoD, pay-per-view variety that having 2 pipes to the home, kind of one that connects to a cloud or a digital locker in the sky, if you will, and another one that's coming from the satellite, is of vital importance to our strategy. And in particular, almost all of the TV Everywhere stuff, you're right, is kind of linked to that. Now I would say I'm pleased with our performance so far. We’ve probably got 1.6 million customers at the end of the third quarter that have Connected Homes, and that's up significantly over prior years, probably double where we were a year ago, but it's probably still not anywhere near enough. I would say a couple things: One, as we got into it, we found there were some executional challenges, training our field force, timing of when they would arrive and when the Internet was connected. Sometimes the customer said they had a router and it turned out they had a modem. So we've had to get some kinks out of the execution. I feel quite confident our teams have kind of worked that through. I think the key next thing for us, though, will be as all of these things come together, then there's a time when you turn on the marketing jets. And we have resisted doing that to make sure that we knew, coming from an executional standpoint, all of the ins and outs of this thing and how it was going to work. But I think, it's fair to say, you’ll undoubtedly see, over time, more and more marketing talking about the value from a consumer standpoint of a Connected Home, which I think will create pull. Right now, we're running about, I think it's about 40% of our HD DVR gross adds are taking the Connected Home. We're just launching a wireless DECA, which will enable us to do it wireless. I mean, there's so much stuff coming. I think we're just at the beginning of that journey. But it is an integral part of our longer-term strategy that enables consumers to seamlessly port content through a cloud in the sky, to have it on a device in a device-agnostic way. I think the technology has not really got me that concerned. I think it's more how the content rights evolve.


Thank you. This concludes today's DirecTV Group's earnings conference call. You may now disconnect your lines and have a pleasant afternoon.

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