DIRECTV Q1 2007 Earnings Call Transcript

May. 9.07 | About: AT&T Inc. (T)
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DIRECTV Group, Inc. (DTV)

Q1 2007 Earnings Call

May 9, 2007 2:00 pm ET

Executives

John Rubin - Vice President, Investor Relations

Chase Carey - President, Chief Executive Officer, Director

Michael Palkovic - Chief Financial Officer, Executive Vice President

Analysts

Anthony Noto - Goldman Sachs

Vijay Jayant – Lehman Brothers

Tom Egan – Oppenheimer

Ben Swinburne - Morgan Stanley

Kathy Styponias – Prudential

Tuna Amobi - Standard & Poor’s

Jason Bazinet - Citigroup

Tom Watts - Cowen & Company

Presentation

Operator

I would like to welcome everyone to the DirecTV 's first quarter 2007 earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Mr. John Rubin, Vice President of Investor Relations. Sir, you may begin your conference.

John Rubin

Thank you, operator and thank you, everyone for joining us for our first quarter 2007 financial results and outlook conference call. With me on the call today are Chase Carey, our President and CEO; Mike Palkovic, CFO; Larry Hunter, General Counsel; Bruce Churchill, President of DirecTV Latin America; and Pat Doyle, our Controller.

In a moment I'll hand the call over to Chase and Mike for some introductory remarks, but first I'm obligated to read to you the following: on this call we make statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause actual results to be materially different from those expressed or implied by the relevant forward-looking statements.

Factors that could cause actual results to differ materially are described in each of the DirecTV Group’s and DirecTV U.S. 's annual reports on Form 10K, quarterly report on Form 10-Q , and our other filings with the SEC which are available at www.sec.gov.

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. These schedules are attached to our earnings release and are posted on our website at DirectTV.com.

With that, I'm pleased to introduce Chase.

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Chase Carey

Thanks, John. I'm going to start with a quick overview of the quarter and then ask Mike to provide a more detailed look at the first quarter results and then I'll conclude the comment part by touching on the rest of 2007 before turning it over to questions.

The first quarter overall was a solid quarter for DirecTV and I thought the most positive aspect of the quarter was really our ability to compete effectively and successfully in the marketplace. Our issues really and our shortcomings in the quarter were really due to internal issues, essentially we did not execute effectively enough in a few key areas; but our success in competing in the market overall really could be seen in the first quarter, in the subs we added and our ability to effectively add more quality subscribers and expand our advanced product penetration, grow top line revenues. I think a number of these metrics really show the strength of the DirecTV platform being in the marketplace.

I think the gross adds were good, particularly given that the subscribers continued to skew toward higher quality subscribers and we had significant increases in the advancement product take rates. Churn also continued to improve, although actually we would have liked the churn, would have hoped the churn number would have been a touch lower than it was; but again, did make progress in churn.

ARPU was up over 5%. It would have actually been up about 6% if not for some timing issues related on revenues in 2006. SAC also continued to be an area of strength as increased advanced product take rates were largely offset by savings and efficiencies and we again, managed to drive more advanced product by maintaining SAC well within the range we're shooting for.

The two areas I'd like to spend a minute on where spending exceeded our expectations were first upgrade and retention; and second, customer service. Upgrade and retention costs were clearly higher than last year and our expectations. The increase was really primarily due to greater than planned demand for advanced products, particularly the HD DVRs. We do view this spending -- and I think it's important and I do want to keep reiterating -- we view this spending as an investment in our business and it creates value, it generates higher revenues, generates lower churn. It is a value enhancing investment in the business.

Now that being said, we do obviously look to manage it and I guess there are a couple other points I'd want to make on the upgrade spending. First, the investments we made were heavily skewed toward our best customers; which really, we're looking to ensure we're targeting those customers where the costs bring us the greatest value.

Also, I do want to point out the first quarter upgrades were particularly high because we were working off the large year end backlog that resulted from the strong fourth quarter sales, and we had some equipment shortages that we were bringing new boxes into the marketplace so the seasonality of that demand as well all worked together to have a backlog we went into the year with. The majority of these upgrade costs are for hardware, essentially; leased equipment that we will recapture if the customer churns. So again, it really is an investment on that level as well.

I guess the final point I do want to highlight in the upgrade spending was the first quarter results included about $45 million of costs related to MPEG-4 swaps and that compares to about $10 million a year ago. As we move forward that MPEG-4 swap, you see that becomes a part of the variance.

The second area of cost growth was in customer service, where we quite frankly are not meeting our targets. In the service area, we've been focused on improving both quality and efficiency. Our first priority has been quality and we feel we've made some real gains there, but we're not where we need to be in terms of efficiency.

We've had some issues related to advanced boxes that have probably exacerbated some of the things in service. We're really on top of those and we've talked about it on prior calls, but we have to and will do a better job in terms of managing service costs. We expect nothing short of being the gold standard in customer service. We've made investments in both people and call centers to reach this goal. We've made some senior management changes to help us continue to make sure we are delivering the quality and moving towards the efficiency we need in this area of tremendous focus for us; you will see real improvements on the financial end of this. In that area, again I think we have made real strides on the quality side, real improvements in the financial side of it over the next couple of quarters.

With that, I'll turn it over to Mike for some more details on the DirecTV business.

Michael Palkovic

Thanks, Chase. Starting with revenues for DirecTV US, they were up 11% to over $3.5 billion. Similar to recent quarters, the revenue growth was driven by our largest subscriber base along with strong ARPU growth of 5.2% to $73.40. The ARPU growth was actually closer to 6% if you remove the extra week of NFL Sunday Ticket revenues in 2006 for a game that was played in January that did not happen this year.

Much of the ARPU growth, as it always does, comes from the effect of annual price increases; however, strong growth in HD and DVR services is also contributing to our ARPU growth.

In terms of subscribers, the improvements in both gross subscriber adds and churn, as well as the 235,000 net adds in the quarter, reflect favorably on our competitive strengthen the marketplace. We've also kept our focus on quality and in fact, the percentage of higher quality gross adds in the quarter was actually up a touch over last year.

Another positive turn in the quarter was that our direct sales channel continued to grow at a rapid pace and for the first time contributed more than 40% of our total gross adds in the quarter. As we've talked about on prior calls, this has been an important channel for us in terms of reducing churn, increasing ARPU and most importantly, improving the entire customer experience from the initial sale through the installation.

Another factor contributing to the growth was the accelerating demand for advanced services. In the quarter, over one-third of new customers signed up for HD and/or DVR services. The improved credit quality of new subscribers, coupled with the higher HD and DVR penetration are the main factors driving our monthly churn rate from 1.45% last year to 1.44% in the current quarter; the lowest rate in three years.

I might also add that if you break down the churn by the quality or value of the subscriber, voluntary churn for our lowest quality subscribers actually increased on a year-over-year basis, while voluntary churn for the higher quality subscribers saw a larger decline. This is consistent with our segmentation strategy that optimizes returns on our upgrade and retention marketing costs.

In terms of our operating profit for depreciation and amortization, we had a 59% increase to $869 million, mostly due to higher capitalized equipment costs related to our lease program. As a reminder, we began the lease program in March 2006, so last year’s results included only one month of capitalized set-top box costs.

Looked at from a cash perspective, or adding back the capitalized costs, operating profit for depreciation and amortization margin declined slightly this year, primarily due to upgrade retention and subscriber services cost. Upgrade and retention costs were higher than last year and last quarter due to existing customers upgrading to high definition services and in particular, upgrading to our HD-DVR receiver.

Existing customers upgrading to HD-DVRs increased to nearly four times the prior year. For each of these upgrades, we continue to charge an upfront fee of $299 and require a two-year commitment. The cost of the HD-DVR box is still a bit over $400; however, later this year we'll drive the cost of that box down by over $100.

Adding customers with HD and DVR services is a top priority for us because they generate superior financial returns. For example, incremental after-tax returns for customers who purchase HD or DVR services remain two to three times higher than returns for subscribers who only have standard boxes in their home.

Furthermore, the returns for subscribers who have an HD-DVR are even more attractive. As long as these types of results continue, adding subscribers with HD and DVR services will remain a top priority for us.

Adding to Chase's earlier comments, a big part of the upgrade cost resulted in the large backlog that we had at the end of last year. The backlog build up was due to both strong demand for advanced products in general and specifically, our new HD-DVR. At this time, we have essentially worked through the backlog and do not anticipate another spike of this size in upgrade costs like we saw in the first quarter.

The other main area of cost growth was in subscriber services. Both our call volumes and length of calls are greater than planned, in large part due to the increased sales of advanced services. Part of this is related to the set-top box issues we've talked about on previous calls and some of it is simply due to the fact that customers generally have more questions when they activate a box with new and advanced features.

As a result, we've added more customer service reps and we are not running currently as efficiently as we should and more importantly as we will be. The additional service reps will improve the overall quality of the service and over the coming weeks we'll start seeing significant improvements in our cost efficiencies.

Turning to our businesses in Latin America, we saw strong results across the board. Net subscribers increased 42% to 88,000 due to growth primarily in Brazil and Columbia; importantly, aggregate churn declined significantly from 1.56% last year to 1.40% this year. In total, we now have about 2.8 million subscribers in Latin America, or 4.2 million if you include our subscribers in Mexico.

Revenue and operating profit for depreciation and amortization also increased, in part due to the consolidation of Sky Brazil after its merger in the third quarter of last year. You may have seen our announcement last week that we'll be hosting an Investor Day on May 24, at which time we'll be going into much greater detail on each of the three main businesses in Latin America. We hope that many of you will be able to listen to the webcast or join us for this event to see for yourselves why we're so excited about these businesses.

Looking quickly at our cash and balance sheet, DirecTV US generated $340 million in cash before interest and taxes in the quarter, a significant increase over prior year. On a consolidated basis, the main uses of cash in the quarter were $325 million to purchase Darlene's interest in DirecTV Latin America; $210 million for the assumption of the outstanding debt at Sky Brazil; and $101 million for the repurchase of shares. As a result, net debt at the corporate level increased slightly to a little over $1 billion.

With that, I'd like to turn the call back to Chase.

Chase Carey

Thanks, Mike. In the coming months, we have a number of major initiatives as we look out over 2007. At the top of the list is clearly our planned launch of a new satellite, a satellite we are calling DirecTV-10 in late June. This satellite will greatly increase our HD capacity beginning in September; that's about the target when we hope the satellite should be operational if everything stays on target. With that satellite, we'll move forward to later this year, towards the end of the year bringing 100 channels of HD to the marketplace.

This satellite will also provide us with capacity to continue to deliver local HD channels, looking to target about 75 markets that we would be at towards the end of the year, that would represent about 75% of US households to be up from 59 -60 markets we're in today. The second satellite, DirecTV-11, is scheduled to be in service the first half of next year. That satellite is delayed a bit as we said before due to the C launch problems. That delay really only has an impact on probably pushback some of our local HD launches but it's not material because we're really, at this point, moving down to smaller markets that on an individual basis are not as big a part of our plans.

But once we get that satellite up, DirecTV-11 with DirecTV-10 we will have the capacity for over 150 national channels and 1,500 plus local channels. Really again, I think a position that is going to put us in a unique position competitively for a real period of time.

Another important initiative we'll launch is our now VOD service which is named DirecTV On Demand. We're currently in the beta test phase and we'll launch this service nationwide in the summer. We are going to have thousands of titles available, some through customers DVR hard drive; most of them are broadband connections so we'll have both push and broadband connectivity to deliver this. It's a feature that a customer will be able to browse and schedule recordings when away from home through DirecTV.com and a lot of features that I think will distinguish ourselves by providing a service that is user friendly and really differentiates itself from competitors in that regard.

Finally, we'll continue to launch compelling, unique programming that distinguishes DirecTV from the competition. Most recently, we've taken racing and baseball to new heights by adding interactive features to our NASCAR Hot Pass and MLB Extra Innings packages. We recently announced beginning in September, DirecTV will exclusively air Passions, a popular daytime drama with 2 million viewers and an intensely dedicated fan base. We also announced later this year we'll launch the most advanced comprehensive programming ever offered to tennis fans through agreements with the Tennis Channel and focusing on some of the majors there. So we think we have a lot of stuff operationally going on, but certainly a number of signature events we'll bring to the marketplace over the coming months.

Financially as we look at 2007, there really are no major changes to our full year expectations. Revenue, ARPU and operating profit before depreciation and amortization are tracking a bit better than our expectations due primarily to the increased demand for advanced products; for the same reason CapEx and upgrade and retention costs are tracking a bit higher than expectations. At this time it's probably difficult to gauge with precision the demand for advanced products for the balance of the year, particularly as we move into the more expanded HD offering and push.

All in all again, I sum it up to say we had a really solid quarter; a solid quarter that really reflects our strong competitive positioning, and in particular our ability to compete effectively with the bundle and we do continue to feel good about our ability to drive DirecTV's unique strengths in this marketplace.

Before turning the call back to John, I'd like to remind you that as Mike said, we have announced the DirecTV Latin America Investor Day in New York on the 24. We are also planning on having an Investor Day for the DirecTV US business probably later in the fall. We would really like to get closer to the close of the Liberty deal, but I think it would be a more productive session and informative session, but we are targeting to do that as well.

So with that I thank you for your time and I'll turn it back to John.

John Rubin

Thanks, Chase. Before moving on to Q&A, investors should note that we have members of the media on this call in a listen-only mode. I'd like to remind the media that they are not authorized to quote any participants on this call either directly or in substance other than representatives of the DirecTV Group. 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 for the first question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Anthony Noto - Goldman Sachs.

Anthony Noto - Goldman Sachs

Thank you. I am sure you’ve noticed, but there was a marked acceleration in telco satellite adds from the fourth quarter to the first calendar quarter, and that is even with Verizon aggressively marketing its FIOS product. Do you think this is due to seasonality, some other factor? Are there RBOX finding satellite to be a more useful tool, the cable triple-bundle, and do you think that trend will continue? Thanks.

Chase Carey

You are saying, that we have from telco first quarter versus fourth quarter?

Anthony Noto - Goldman Sachs

Telco net adds with a partnership with a satellite company, correct.

Chase Carey

First, I would end up saying it wasn’t that dramatic for us. I think the telco channel continues to be important. I think the first quarter on fourth quarter it may have been up a percent or two; it was up a bit. I do think – I don’t want to overstate it – but I guess what I’d say is I think they continue – I mean they are all a little different, but I think they continue to gain steam.

The telcos were late to get into responding to the bundle. They are obviously further into it. Some of them I probably would say, I think Quest in particular has really hit its stride and I think the most committed to this as a short and long-term strategy, and therefore really has, I think, been uniquely effective in being able to work with us to maximize the benefits for our mutual benefits.

I think there was some renewed energy on Verizon, and Bellsouth has been pretty healthy. So I think in general, they continue in varying ways, they each have their own issues. I mean, I think Bellsouth to some degree, was probably getting through the AT&T merger and probably had a little bit of a distraction, just naturally when people are, are we going to have a job? Obviously in the first quarter you have people who have jobs and are out trying to prove they can do a good job.

So for different reasons, and those were the major three. Quest really continuing to build momentum with a commitment; I think Verizon with a bit of renewed focus, though I think has always been okay; and I think Bellsouth probably coming a little bit out of what is a merger process that probably has a little bit of a distraction to it.

Overall, I would have said it was up modestly but not significantly on our end.

Operator

Your next question comes from Vijay Jayant – Lehman Brothers.

Vijay Jayant – Lehman Brothers

On your requirement to deliver signals in Alaska and Hawaii, given the delay in the launch, how are you thinking of delivering that capacity?

Second, are you contemplating developing an integrated box like [inaudible] has with their home zone box, integrating DSL with the satellite box top into one unit, at least for your RBOC partner? Thanks.

Chase Carey

On Alaska and Hawaii, it is affected by the delay in the D-11 satellite. It is, in some ways, still a work in process. We are talking to the parties involved and still hope to find a solution to that that is productive for all as we work towards it, but the timing of that was affected by the C launch issue and the delay in that C-11 satellite, which is really the satellite that is going to give us that expanded level of local HD coverage.

In terms of Home Zone, we have a box today that can do that and we are looking to continue to develop it. Our box, again, in summer we will have boxes that will have broadband integrated capability that will be able to deliver video from websites onto your TV or your PC. It really becomes the cornerstone to that Home Zone box, but we actually do have that box. We are talking with our telco partners, they are obviously in different places. We do think clearly, as we go forward in many ways, we are going to be moving continuously to set-top boxes that are more and more a whole home solution, whether it is set-top boxes that feeds multiple TVs or a set-top box that integrates multiple devices in the home. That will all be part of what we will be launching, as well as services like being able to program a DVR from your office on the web or from a cell phone.

Those experiences are all part of what we are developing. Our version of a Home Zone type box is very much a part of our road map, and we are specifically talking to some of our partners about it.

Operator

Your next question comes from Tom Egan – Oppenheimer.

Tom Egan – Oppenheimer

Chase, I was wondering if you saw a particular opportunity in the first quarter to gain subs? Say, for example, in Los Angeles where Time Warner notably has had some real difficulty transitioning the Adelphia system over into their system; or if you saw this also in other markets as well?

Secondly, when we may see or hear about Bellsouth’s partnership with DirecTV maybe changing over to a dish? Thanks.

Chase Carey

We certainly are targeting opportunities like LA. There were other markets too. I think it is very much a part of our strategy going forward. I think we have talked about it from a broad level for a while; I think our business will get more targeted in an array of ways, and we will more and more target opportunities that we think we can particularly equate value. Certainly these cable transition markets are ones where we see opportunities. There were multiple markets affected and we are going to target those just as we are going sports bands or we are going to target the type of customers that are particularly interested in HD in various ways.

But it certainly is an ongoing part of our business to take advantage of opportunities, be they geographic niches, demographic niches, what have you. I wouldn’t say it drove the numbers in the first quarter, but it is certainly a part of our strategy and will be an ongoing part of our strategy, whether as a part of that is just taking advantage of a weak cable market.

There are certainly markets where cable operators, including the biggest ones, have struggled and we will take advantage of those to the degree we can. So it is a part of the road map.

I think in terms of Bellsouth, our Bellsouth relationship is today, great. The conversations, certainly in the short term with the AT&T folks as well as the Bellsouth folks are really focused solely on maximizing the opportunity for both of us in that territory.

I think probably the reality will be AT&T will go along, it is just my speculation, through this year and somewhere towards the end of the year, beginning of next year, I think also their deal with Echostar… I think, I don’t know officially, but I think it is up some time in the next couple of years that they have to decide what they do there, but I think they will probably continue to drive each for what it is worth and make decisions as they go along, but I don’t think for the next few months, that they could set a further timeframe on whether they continue to approach the market with different players. I think it is important for them to combine under one. We will have to see.

What I think you do have to recognize is we have had a very good relationship, and again, in the Bellsouth footprint, which is a still a fraction of the rest of the AT&T footprint, we continue to outsell what Echostar does with AT&T. I think that speaks to our success and the health of it.

I think that will be, certainly for the short term, it is just going to continue to drive it. I think as you go out, sell more towards the end of the year or the like, those conversations which we will continue to have, we will see where they go.

Operator

Your next question comes from Ben Swinburne - Morgan Stanley.

Ben Swinburne - Morgan Stanley

I wanted to go back to two cost items: retention marketing and customer service, or service expenses. I am just trying to understand in the framework of the guidance or the three-year outlook that you presented last year where you talked about pre-marketing margins picking up modestly over time, how much of the retention marketing spend in the quarter, which is on a run rate basis, is tracking ahead of where you guys had guided, how much of that increase was pure volume related in terms of high end set-tops? In relation to how much you may have changed the pricing offer to customers in the installed base? In other words, are you getting less cash back from that sub, and so it also negatively impacted the spending?

Mike, you may have mentioned this upfront – did you say you expected customer service expenses to trend better over the next couple of quarters? Maybe you can quantify: is that dollar terms or percent of revenue, how we should think about that?

Michael Palkovic

Let me answer the second one first. Absolutely we expect the cost, on a year-over-year basis and from the margin to improve as we get a handle on the efficiency side of the call centers. We’ve already seen some indication of that, but we expect it to continue. It may not come all the way back to where we want it to be in the next quarter, but throughout the year it will get better.

On your first question on the retention side, it is almost entirely… it is really two things. It is volume is up significantly year-over-year, to the order of close to 150,000 more upgrades into advanced products from the installed base, and the mix of people choosing the HD DVR is up significantly.

The primary thing causing that is our comment on backlog where we introduced our new HD DVR in the third quarter, got it out in the supply chain and people were waiting for that product. So we’ve kind of worked our way through that, but those are the things driving the spike in this quarter and a little bit in the fourth quarter.

Chase Carey

I’d say our run rate today in retention is probably more in line with our expectations. The other piece from service I’d just add, on top of what Mike said on the call centers, I think there was also we have had, as we went through these new boxes in multiple places, some issues in the boxes so it included box replacement issues that again, as we’ve really gotten those boxes stabilized, we can already see today things coming; a significant improvement as those boxes have really been debunked and gotten to a place where we want them to be. So there is both the call center side and the truck roll/equipment side that was dealing with those boxes, that we will be a part of it as well.

Operator

Your next question comes from Kathy Styponias – Prudential.

Kathy Styponias – Prudential

Thank you. My question relates to your HD roll out, especially when you get to the point where you have 100 channels, not 150. How should we think about the margins on that business? Both in terms of what kind of incremental pricing that is going to be on that package as well as the cost associated with it from an operational standpoint? Programming costs and what it costs for back haul, et cetera -- the margin would be better or worse than the existing base video business? Thanks.

Chase Carey

I think in terms of pricing, it is probably -- essentially, we’ve got a $10 price to the package and we don’t have plans to change that. So from a pricing perspective, the addition of the channels is not going to change what we do today with the product.

The cost is really -- I mean, the program cost side of it is minimal, so this is a very high margin product for us. We do have back haul costs -- the reality, we’re bearing a fair amount of it today, so we should get scale. That’s a fixed cost. It obviously is not a volume-sensitive cost. We are back-hauling the 60 locals as we speak. We were back-hauling them in the first quarter, so to some degree, there are some costs against it but those sort of costs are really fixed costs. We had 15 more markets, we’ll have some back haul costs against them but the majority of those costs are in our costs today.

So you have two types of costs, one which is infrastructure costs, which are really fixed against volume and therefore and we are already incurring a fair amount of them, and then variable costs, which are really programming that’s available inside the HD package, so it is a very profitable package for us.

Operator

Thank you. Your next question is coming from Tuna Amobi with Standard & Poor’s.

Tuna Amobi - Standard & Poor’s

Thank you very much. My first question is on the satellite expansion program. Chase, as you -- I recall you laid out a three-year satellite expansion plan which is now coming to an end. I was wondering if you can comment on what might be your run-rate CapEx now that you are nearing the end of this program.

The other question is on DirecTV Latin America. If my math is correct, it seems like the deal that you did with Darlene values DirecTV Latin America approximately $400 per subscriber. Given that premise, can you perhaps explain the dynamics of that business compared to the U.S. business? It seems like this value is approximately a quarter or a fifth of the U.S. business. What are the dynamics in Latin America that accounts for such a discrepancy? How do you see this value converging over time as you continue to build that business?

Chase Carey

On the first part, the satellite expansion, we are not -- obviously we have the two satellites to get up, the second of them may not actually launch until the end of the year, I guess it could even be ’08. It got dealt out -- as I think is probably not uncommon with long-term CapEx plans, it’s obviously gotten stretched over -- I don’t think the amount is actually that different than we planned. It’s gotten stretched over a longer time period, so it probably does stretch a bit into ’08. We obviously also have, for clarity, we have set-top boxes showing up in the capital.

To that point of when it ends, probably again it will stretch a bit into ’08. I think as you get to a run-rate, I think the run-rate we’ve looked to, which is that $300 to $400 run-rate is probably still a run-rate we would look to as we get through that, but it will take -- again, it has sort of gotten stretched out a bit. If you look at our CapEx, like in ’06, it was lower than we would have planned, which is really timing issues, not as much as anything. But I think as a run-rate, that’s where we would still be looking for it to go.

In terms of Latin America, certainly not a $400 business. I don’t think you can look at Darlene. I think you can look at -- Darlene, there was a contract. There were a lot of issues around that Darlene agreement, so it was not just a -- an agreement, a purchase based simply on open market negotiation as much as it was based on an agreement in place that had an array of conditions in it that had to be taken into account.

We think it’s a great business. When you look at that business, it’s got -- competitively, we feel great about it. It is a -- really, you obviously have a cable business that exists in some places and clearly has had some issues. We are the leader in the marketplace. You look at the ARPU, the churn, the SAC of that business. It is a business that I think has tremendous value. I’m probably -- since we are going to have a full, sort of a half-day, or a portion of a day dedicated to it to provide a picture, probably rather than trying to not do it justice in a couple of minutes here on the phone, I probably would let the presentation we’ll make in the next two weeks from now give you a better picture of how we speak to, how we look at it.

But it is a very valuable business that I think if you again work through some of those, look at some of those key metrics that are there, it speaks to the tremendous value on a per sub basis and overall of the Latin American business.

Tuna Amobi - Standard & Poor’s

Fair enough, and if I could just sneak in one quick one on SATGO. You are offering that at $1,499 one-time. I’m assuming that that’s a promotional product, or is there any add-on features there in terms of subscriber acquisition? Can you speak to briefly any economics of that product?

Chase Carey

It probably has a price as is not uncommon for a -- that is, an introductory price for a new product into the marketplace. We will see where we go. We will see where we take it as we go forward but it is a product that is priced as a lot of new technologies would be for those most anxious buyers of an attractive new technology.

Tuna Amobi - Standard & Poor’s

Are you subsidizing that at all?

Chase Carey

No.

Tuna Amobi - Standard & Poor’s

Thank you.

Operator

Thank you. Your next question is coming from Jason Bazinet with Citigroup.

Jason Bazinet - Citigroup

Thanks so much for the question. I just have one question regarding your cap structure. Is it a fair hypothesis that we won’t see any material change to your cash balance, or any sort of change in your cap structure until the transaction closes with Liberty? Thanks.

Chase Carey

This is -- you’re talking about balance sheet issues?

Jason Bazinet - Citigroup

Yes.

Chase Carey

I don’t -- I think we obviously did announce the buy-back, so although I mean I certainly would be the first to say a $1 billion buy-back is really not -- it is not addressing how do we rationalize our cash generating and balance sheet questions. I think the larger is sort of truly addressing what is the appropriate construct for us and how do we deal with the balance sheet are questions that you want to have -- you do want to make those decisions with a voice from a 38% shareholder.

I think we will continue to do things that make sense for us, be opportunistic -- that’s sort of what the buy-back is -- in the short term. I think the larger issues are probably more likely tied to having liberty to be part of the decision-making process.

Jason Bazinet - Citigroup

Thank you.

Operator

Thank you. Your next question is coming from Tom Watts with Cowen & Company.

Tom Watts - Cowen & Company

A couple of quick questions. First, can you update us on any plans with Wild Blue? My understanding is you are planning on stepping up the marketing of that once they have all beams on in June, but any updates there are appreciated.

Secondly, can you give us any plans about your 700-mega, whether you plan to participate in the 700-megahertz auction, and would the strategy be any different than it was in the AWF auction?

Chase Carey

In terms of Wild Blue, yes, I think we are trying to move forward. Really, this is probably a general statement, not a specific -- we are going to look to be even more proactive in offering a bundle with partners, whether it’s realistically telcos or Wild Blue, than we have been in the past. In most of the offers that have existed between us and our RBOC partners have really been offers from the RBOC side. We are going to move to be a larger part of that, providing that solution, and as part of that certainly would move in the same way with Wild Blue for those customers to whom Wild Blue is a relevant player that we would look to make that offer, to have that offer be pushed in a more attractive way to customers to whom we think it’s relevant.

In terms of the 700-megahertz, they haven’t really fully laid out what the rules or how they are laying it out. We will certainly evaluate it. I think it’s better spectrum for WiMAX than the other spectrum. Clearly there will be parties involved. I think it’s probably early at this point to determine in what ways might we approach it. There are certainly obviously been things written already about a number of the parties who are engaged on it, but we think we should certainly evaluate it and see if there is something that makes sense for us there, but we will see if that goes and if some of it gets clarified.

Tom Watts - Cowen & Company

Thanks very much.

Operator

Thank you. We have no further questions at this time. I’d like to say thank you and this concludes today’s first quarter 2007 earnings conference call with the DirecTV Group. You may now disconnect your lines and have a pleasant day.

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