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Executives

Jonathan Rubin -

Michael White - Chairman, Chief Executive Officer and President

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

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

Analysts

Philip Cusick - JP Morgan Chase & Co, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Jason B. Bazinet - Citigroup Inc, Research Division

Stefan Anninger - Crédit Suisse AG, Research Division

Nicholas Del Deo

James M. Ratcliffe - Barclays Capital, Research Division

Tuna N. Amobi - S&P Equity Research

Michael McCormack - Nomura Securities Co. Ltd., Research Division

Thomas W. Eagan - Collins Stewart LLC, Research Division

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

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

Amy Yong - Macquarie Research

Bryan D. Kraft - Evercore Partners Inc., Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

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

DIRECTV (DTV) Q4 2011 Earnings Call February 16, 2012 1:00 PM ET

Operator

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

Jonathan Rubin

Thank you, operator, and thank you, everyone, for joining us for our fourth quarter 2011 financial results and outlook conference call. With me today on the call are Mike White, our President and CEO; Pat Doyle, 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 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 and implied by the relevant forward-looking statements. Factors that could cause actual results to differ materially are described in the Risk Factors section and elsewhere in each of DIRECTV's annual reports on Form 10-K, quarterly reports on Form 10-Q, and our other filings with the SEC, which are available at www.sec.gov. Examples of forward-looking statements include, but are not limited to, statements we make related to our business strategy and regarding our outlook for financial results, liquidity and capital resources. Additionally, in accordance with SEC's Regulation G that requires companies reporting non-GAAP financial measures to reconcile these measures to the most directly comparable GAAP measure, we provide reconciliation schedules for the non-GAAP measures, which are attached to our earnings release and posted on our website at directv.com.

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

Michael White

Thanks, Jon, and thanks, everybody, for joining us today. On today's call, we're going to talk briefly about our fourth quarter and full year 2011 results, so we can spend more time discussing both our longer-term strategies and our 2012 outlook.

Now, looking first at our 2011 results, I have to say I think DIRECTV had another year of industry-leading growth, further extending our position as the world's largest provider of pay-TV video services, now with over 32 million subscribers across the Americas. Clearly, one of the highlights of 2011 was the tremendous consumer demand for DIRECTV and Sky's premium brands, which drove record subscriber growth and market share gains across the Americas. Propelled by strong fourth quarter results in both the U.S. and Latin America, our full year gross additions soared to all-time highs, up over 20% from 2010 levels, culminating in the largest annual net subscriber gain in DIRECTV's history. In fact, including Sky Mexico, we added a record 3.7 million net new subscribers in 2011. In addition to these subscriber achievements, we generated industry-leading top and bottom line growth, while also returning cash to our shareholders through stock repurchases at an industry-leading clip.

Turning to DIRECTV U.S. DIRECTV U.S. had a solid year and in spite of a lackluster economy, competitive intensity and heightened programming costs, which challenged us throughout the year, DIRECTV's brand leadership, differentiated products and popular NFL Sunday Ticket offer, strongly resonated with consumers and strengthened our competitiveness in the marketplace. Consumer demand for our service exceeded our own internal expectations, as solid fourth quarter gross adds capped off a record year, in which we added over 4.3 million gross additions, while also achieving nearly 700,000 net additions in the United States. In terms of our top line, full year 2011 revenue growth of 8% met the higher end of our guidance that we provided at Investor Day, which was driven by both solid subscriber and solid ARPU growth. In terms of margins and the bottom line, our overall U.S. results, excluding the impact from the incremental record gross additions, were pretty much right in line with our full year guidance.

Turning to Latin America, we saw a tremendous operating and financial success across 2011. Strong consumer demand for our products and services across the continent, along with favorable macroeconomic trends, drove accelerating subscriber growth throughout the year. Bruce Churchill's team set new records every quarter, culminating with a 70% increase in full year net additions over 2010, as we exceeded the 2 million mark for the first time ever, bringing our base at the end of 2011 to nearly 8 million customers. And in fact, adding in Sky Mexico, we now have more than 12 million customers throughout the region. From my perspective, equally impressive was that this exceptional subscriber growth was accompanied by equally outstanding growth in both revenue and profit. Full year revenue accelerated 42% to over $5 billion, while OPBDA full year grew 43%, in spite of the higher acquisition costs associated with those record gross additions. Overall, it's clear that DIRECTV Latin America's performance in 2011 exceeded all of our expectations across the board.

So in summary, our strong results from both our U.S. and Latin America businesses provide us with solid momentum as we head into 2012.

Now, before discussing our long-term outlook, I thought it might be helpful to first review the key financial objectives we outlined for our consolidated business at Investor Day in December 2010. As I'm sure you'll recall, we set targets for the end of 2013 of 30 million consolidated subscribers, $30 billion in consolidated revenues and earnings per share of at least $5. I'm confident we're poised to meet or exceed all of those targets. Now, it is clear also that our current outlook for free cash flow is about perhaps a year behind our target due to both additional satellites in the U.S. and Latin America, as well as the higher DIRECTV U.S. costs, including increased investment for advanced equipment in the home. With that said, I continue to believe our 3-year strategy as we presented it in December of 2010, remains largely on track, albeit as you'd expect, we've had to modify certain initiatives and update our priorities to reflect the ever-changing operating and macroeconomic environment that we face.

Let me turn to the DIRECTV U.S. outlook. As we've said before, the key challenges facing DIRECTV U.S. continue to pressure our core business and in some cases, are even more pronounced today than they were at Investor Day. Macroeconomic weakness continues to pressure the U.S. consumer, driving them to be decidedly more cautious and focused on getting good value for every dollar they spend, even as the economy has marginally improved. The pace of advancement in the world of technology is providing consumers with more choices and options, both in and out of the home, to get content, while continuing to raise expectations around the quality of service. And in the maturing pay-TV marketplace, the competitive environment continues to intensify. Finally, and perhaps most critically, our programming providers seek even higher rates for their content. Frankly, even higher than the higher rates we anticipated at Investor Day, I might say, as well as our compensation for digital rights.

So with these challenges in mind, we've established 3 strategic priorities for our U.S. business this year, with the goal of continuing to deliver first quartile revenue and OPBDA growth over the next 3 years. First and foremost, we need to continue our traditional excellence when it comes to delivering our financial and operating plans. Frankly, DIRECTV has always had a world-class capability to execute flawlessly and we certainly intend to continue that in 2012. Having said that, the cost of doing business in our industry has changed significantly as a result of higher programming costs. While we still expect to grow our base, albeit not at historical rates, we are shifting the balance somewhat between the top and bottom line. In that regard, you've already seen our announced price increase and earning promotional approach. I'm equally excited that we can continue to offer something for each and every customer segment, from those high-end customers who love technology, sports content and our high definition channels, to more typical families who are perhaps a bit more cost conscious with our new entertainment package. Certainly, attaining strong financial returns on new subscribers is a bit more difficult as the risk-reward equation is more challenged now with the result of these higher programming costs. Having said that, let me emphasize, we still believe attaining new subscribers is highly accretive. However, we just plan on being a bit more disciplined to ensure that we generate acceptable long-term financial returns.

Now, clearly in light of that, we also need to do an even better job managing all of our costs. In the case of programming costs, we'll continue to be disciplined, as I'm sure you saw we were last fall with some of our disputes, while looking for greater packaging flexibility, ensuring that DIRECTV is treated fairly relative to our competition in every respect and pursuing digital rights to create more value for our customers, who want to watch what they want to watch when they want to watch on multiple screens.

In addition to that, we've heightened our focus on cost management all across our enterprise. We concluded a rigorous 2012 planning process late last year that did include headcount reductions in some areas, combined with challenging cost-containment objectives in others. I think our leadership team has stepped up with the right mindset and is committed to controlling costs in an extremely disciplined manner. And we will make whatever midcourse corrections or tradeoffs are necessary to deliver our plans in a balanced way.

Second, we fully intend to continue to invest in the strategies we outlined for you at Investor Day, from Connected Home, to better bundles, to TV Everywhere. In fact, we'll be significantly expanding our multiscreen streaming capability with in-home viewing on mobile devices, as well as an expanded entertainment portal this year. And we'll also continue aggressively growing our 3 key incremental revenue sources, namely DIRECTV CINEMA, local advertising and commercial. Although we did have some delays in the rollout of local advertising and our Connected Home strategies in 2011, we're well on track to deliver double-digit revenue growth in those areas this year.

Third and finally, we've begun a new initiative here at DIRECTV to heighten our focus on the overall customer experience. We know, our most important job is to continue to delight our most valuable asset, our nearly 20 million subscribers, in every respect, to not only increase loyalty, but also driving better ARPU and lower churn. In that regard, we're developing plans to launch several new initiatives to improve both the service experience and the entertainment experience for each of our segments. Our service priorities will undoubtedly focus primarily on improving loyalty of existing customers, with an ultimate goal of winning customers' hearts for life, starting them out right and supporting them through the full lifecycle. Our entertainment priorities will evolve around driving our industry-leading technology to continue offering the best sound, picture and user interface, while also making significant strides in TV Everywhere, including a very important link to social media that we're developing.

So wrapping up DIRECTV U.S., we believe that successful execution of these 3 key priorities will position DIRECTV U.S. for continued operational and financial success, while also positioning us to deliver mid-single digit or better revenue and OPBDA growth over the next 3 years.

Turning briefly to Latin America. As you know, low-pay television penetration and favorable macroeconomic and demographic trends continue to represent a substantial growth opportunity for DIRECTV. Unlike the U.S., where we've modified our strategy to reflect the changing operating environment, I frankly don't expect significant changes to our DTV Latin America strategy. We remain committed to the strategy previously shared with you to profitably increase market share across the demographic segments in the region. In 2012, we'll continue to strengthen our leadership position in the higher-end markets with a continued focus on HD and DVR excellence, and we plan to continue to further penetrate the rapidly growing middle markets by offering the most attractive lower-priced, postpaid and prepaid packages throughout the region. Finally, we're also pursuing several wireless broadband and over-the-top moves in Latin America.

In summary, I clearly believe that DIRECTV Latin America's best days are still yet to come. Bruce will give you a bit more color on our outlook. However, we look forward to offering you a deeper dive on our strategic initiatives and financial priorities for Latin America on March 29, when we host our DIRECTV Latin America Investor Day in New York City.

So in conclusion, with these winning long-term strategies in place for both our U.S. and Latin America businesses, the final piece of the puzzle for us to continue delivering superior financial returns is our return of capital policy. I'm sure you've seen in our press release today that our Board of Directors authorized another $6 billion share repurchase program. This is entirely consistent with our long-term strategy, which I might add is now -- will be substantially completed by the end of this year, of re-leveraging our balance sheet to improve our capital structure. We continue to believe our stock remains significantly undervalued and therefore intend to continue buying back our shares this year at a pace of about $100 million a week.

So in summary, while we recognize the strength of our brand and leadership in content, technology and service are the foundation of our strategic plan, our success ultimately depends on our ability to consistently execute with the discipline and focus that enables us to continue to take advantage of our opportunities, manage risks and achieve our targeted results. DIRECTV has consistently delivered on this formula for success, bolstered by our employees' unparalleled passion and commitment to excellence, the guidance and leadership of our Board of Directors, along with the support of you, our shareholders. With these strengths, I'm confident we'll continue generating substantial value for our shareholders for many years to come.

So with that, let me turn the call over to Bruce.

Bruce Churchill

Great. Thanks, Mike. Well, it was not only another great quarter for us in Latin America but it was a strong finish to a fantastic 2011. Just as a reminder, unless otherwise noted, our results exclude those of Sky Mexico, which we do not consolidate for financial reporting purposes. I would make a few comments on their 2011 results towards the end of my remarks.

For the quarter, gross additions increased 51% compared to last year to a new all-time record of 965,000. In Brazil, gross additions increased 56% compared to Q4 of 2010, with more than 500,000 new sales. Sky Brazil continues to have great success with its middle-market products, in particular, our SKY FIT product that was launched in September of 2010. For the quarter, our middle-market products represented approximately 65% of Brazil's total gross additions.

In PanAmericana, gross additions increased 46% compared to the same period last year, on continued strong demand for our prepaid products and entry-level packages across the region, particularly in Argentina and Venezuela. Prepaid products made up nearly half of PanAmericana's gross additions in the quarter, and now represent a touch over 850,000 in total.

Advanced products represented about 14% of new customers, down from 19% last year, mostly reflecting the effect of the growth in our middle-market packages. Specifically, in Brazil, advanced product sales increased more than 70% when compared to last year, due to our industry-leading HD offer. I should note that unlike in our PanAmericana region, we do not offer an SD DVR in Brazil. So advanced products in Brazil are synonymous with HD. Take rates of advanced products in PanAmericana decreased approximately 7% year-over-year, on lower sales of our standard definition DVR in Colombia. On a cumulative basis, subscribers with advanced products represent approximately 27% of our 7.9 million subscribers, which includes 1.3 million HD subscribers throughout the region. At the same time, our middle-market customers now represent more than 25% of total subscribers. So as you can see, there's a nice balance within the overall subscriber base. With respect to churn, our postpaid churn for the quarter of 1.42% is up from 1.37% last year, reflecting a more normalized level of churn in Brazil in 2011. In Brazil, we have been pleasantly surprised by the churn behavior of our new middle-market customers, which has been broadly in line with our traditional base of standard definition customers. Churn in PanAmericana was mostly flat versus the prior year. As I've said in the past, I believe the sweet spot for churn in Latin America for our postpaid subscribers is around 1.5%, a level we are still comfortably below. In summary, we ended the year with a record 590,000 net additions, which was a remarkable end to a terrific year.

Now, turning to our financial results. Driven by strong subscriber growth, Q4 revenues increased 33% compared to last year. In particular, higher subscriber volume led to a 40% increase in revenue year-over-year, which was partially offset by lower ARPU in Brazil and slightly unfavorable FX impacts throughout the region. Price increases and higher penetration rates of advanced products over the past year were mostly offset by the effect of our growth in the middle market segment, which has a significantly lower ARPU. OPBDA increased $79 million or 23% over last year, mainly due to the gross profit on incremental revenue, partially offset by higher subscription acquisition costs related to the increase in gross addition, as well as increased upgrade spending, particularly in Brazil. Cash flow before interest and taxes declined $9 million to $101 million from the same period a year ago. In addition to an advanced payment of approximately $30 million for 2 future satellites, higher subscription acquisition costs associated with the record gross additions, as well as increased upgrade spending, more than offset the higher OPBDA.

So all in all, 2011 was a great year for DTVLA. We had 2 million net additions. Churn remained in control. Revenue increased over 40% to break through the $5 billion mark and profit margins remained largely intact. I believe this performance positions us well for another strong year in 2012. But before I provide you with a view on how we see 2012 playing out, I would like to make a few comments regarding Sky Mexico, whose results will be released in more detail by Televisa later today.

Sky Mexico delivered another strong quarter, adding 184,000 net subscribers, and Sky ended the year with over 4 million subscribers. Revenue and OPBDA at Sky Mexico were mostly flat as the Mexican peso declined approximately 10% in value versus the U.S. dollar. Excluding foreign exchange, revenue and OPBDA would've each increased 11% year-over-year. I would also like to remind everyone that we received more than $60 million in dividends from Sky Mexico in 2011. So it is an important contributor to the DTVLA business, even though we do not consolidate it for financial reporting purposes. As of today, as Mike mentioned, DTVLA's combined platforms, including Sky Mexico, now serves more than 12 million subscribers across the region.

Regarding Venezuela, the government continues to tightly regulate the repatriation of local profits out of the country. The modest funds that did come out of Venezuela this quarter came out at official rates through the official Central Bank process and therefore, we did not incur any foreign exchange losses this most recent quarter. In total, we repatriated approximately $40 million as the official rate in 2011. As of December 31, we had approximately $400 million of cash on hand in Venezuela, expressed using the official rates of VEF 4.3 per U.S. dollar. As many of you are aware, we will be hosting an Investor Day on March 29 in New York, during which we will provide you with more details and insights for not only 2012, but also for the longer term. However, in the interim, I would like to provide you with some top-level direction on our outlook for 2012.

We remain optimistic about the market for pay-TV in Latin America in that it will remain robust in the near term. The same trends that we have discussed before, namely relatively strong economic growth and favorable demographics, remain in place and bode well for the demand for pay-TV in the region. Having said that, we will face some headwinds when it comes to making year-on-year comparisons. First, we expect that foreign exchange rates will make year-on-year comparisons challenging in U.S. dollar terms. For example, we believe that Brazilian real will on average be worth 5% to 10% less vis-à-vis the U.S. dollar in 2012 than it was in 2011. In addition, inflation remains an issue in some markets, especially Argentina and Venezuela. We assume that we will be able to raise prices to address inflation as we have in previous years. This is not a certainty. Nevertheless, our scale in the market, our world-class products and our superior service will enable us to weather these storms better than anyone else.

Therefore, we expect year-over-year revenue and subscriber growth to be about 20%, with OPBDA and cash flow before interest and taxes to grow in the mid-teens. Growth in OPBDA and cash flow before interest and taxes will be somewhat compressed next year due to higher growth additions and higher investments in infrastructures to support the tremendous growth we've been experiencing. Having said that, if you think about the pre-SAC margin as a metric, it remains largely unchanged in the 36% to 37% range. ARPU will decline in U.S. dollar terms by approximately 5%, reflecting changes in foreign currency exchange rates and a higher mix of middle-market products. We expect CapEx to increase about 10%, as we continue to add subscribers, make the infrastructure investments I just mentioned and pursue strategic opportunities, such as wireless broadband. There is much more to talk about with respect to the future of our business in Latin America, including the rollout of new pay-TV products, the expansion of wireless broadband and the launch of over-the-top services. We will go into more detail on these points on our Investor Day, and I encourage all of you to attend, if possible.

So in summary, the entire management team at DIRECTV Latin America remains energized about the opportunity ahead of us. And even though we are all proud of what we accomplished in 2011, no one is resting on its laurels.

So with that, I'll turn the call over to Pat for further comment on the U.S. Pat?

Patrick T. Doyle

Thanks, Bruce. Overall, I thought DIRECTV U.S. had a good fourth quarter, highlighted by solid revenue, earnings and cash flow growth. Looking first at the top line, our industry-leading revenue growth of 9% was solid, driven mostly by ARPU growth of 4.9% and net subscriber gains, demonstrating the continued strength of the DIRECTV brand. ARPU growth benefited from increased penetration of NFL Sunday Ticket subscribers and advanced services. In fact, the number of subscribers on the DIRECTV platform taking advanced services, grew by more than 10% year-over-year and includes nearly 3x as many Whole-Home DVR customers than a year ago. Additionally, penetration of new HD DVR customers signing up for our Connected Home service doubled from a year ago, bringing our total number to just under 2 million connected subscribers. Premiums and Pay Per View sales were also particularly strong in the quarter, bolstered by our graphically-rich new HD user interface and the continued success of our Connected Home strategy and DIRECTV CINEMA. Eight premium movie channels posted the highest buy rates per subscriber in over 3 years, as premium revenues grew at a double-digit clip year-over-year. And we saw even higher revenue growth in Pay Per View, driven by strong buy rates for movies and events. Partially offsetting these favorable trends were higher credits and lower contributions from ad sales.

Turning now to subscribers. The modestly lower fourth quarter gross additions were consistent with our internal expectations. Most of the year-over-year change was related to less discounting and stricter credit standards. Churn of 1.52% in the quarter came in slightly higher than we forecast on the last earnings call, resulting in net subscriber additions of 125,000. Our internal projections for churn did not include the impact of our public dispute with Fox, which drove a small variance in voluntary churn. Also impacting the year-over-year comparison was a churn benefit received in the prior year period as DISH and Cablevision were in the middle of a prolonged programming dispute with Fox.

Turning now to the bottom line. Overall, I thought we did a good job managing costs in the quarter. Specifically, subscriber services, broadcast operations, G&A and cash and upgrade retention expenses were relatively flat to down as a percentage of revenue compared to the prior year. However, OPBDA margin in the quarter declined by 190 basis points from the prior year period to 22%, as the significant year-over-year increase in programming expenses placed pressure on margins. As we've guided all year, the increased content costs were primarily related to the step-up in our new NFL contract and annual programmer rate increases. Higher Pay Per View buys and increased premium penetration also had a modest unfavorable impact. In addition, as previously discussed, we increased our investment in the Home during the fourth quarter, particularly related to the Whole-Home DVR and Connected Home services, which contributed to the higher cash SAC rate of $835. These investments continue to yield significant benefits as we are seeing higher ARPU, driven mostly by greater VoD buys, as well as lower churn rates among subscribers taking these new services. Also impacting SAC were the lower gross additions relative to our fixed marketing and advertising costs.

Looking quickly at our full year consolidated results. Diluted earnings per share increased by more than 50% to $3.47, as solid operating profit growth at DIRECTV Latin America and share repurchases continued to drive substantial EPS growth. Cash flow before interest and taxes for the full year declined by 5% to $3.7 billion, as the increases in OPBDA at both DIRECTV U.S. and DIRECTV Latin America were more than offset by the higher capital expenditures associated with record gross additions and increased demand for advanced services, along with higher satellite payments.

In the fourth quarter, we repurchased 24 million shares of DIRECTV stock for approximately $1.1 billion, bringing cumulative repurchases since 2006 to nearly $21 billion, reducing shares outstanding by more than 52% over that period. Although the dollar amount of fourth quarter share repurchases was modestly lower than prior quarters, we returned to the $100 million per week pace in January. In addition, as you may already know, in the fourth quarter, we unified DIRECTV's borrowing base by providing a parent guarantee to the DIRECTV U.S. borrowers, effectively including both DIRECTV Latin America and DIRECTV Sports Network into the DIRECTV credit. We ended the year with about $12.6 billion in net debt, including a cash balance of $873 million, and total debt to consolidated OPBDA ratio of about 1.9x.

Finally, I would like to make a few comments about our 2012 outlook. First and foremost, as you heard from Mike a few minutes ago, most of the key metrics for the 3-year financial outlook that we provided at our Investor Day in December 2010 remains intact. I would, however, like to provide some additional color on our outlook for the U.S. and consolidated businesses. Looking first at DIRECTV U.S. Our 3-year revenue outlook of mid-single-digit growth is expected to be generated more from ARPU growth than from subscriber growth. This first quartile growth will be driven by a combination of price increases and even greater emphasis on new and advanced services, continued strength in premium and Pay Per View, commercial sales and local advertising initiatives.

In addition, we plan to reduce the level of discounting provided to new customers and prudently manage retention credits, while improving loyalty and churn. Regarding our subscriber growth, as you've heard earlier, we'll be even more disciplined in our pursuit of higher-value subscribers to ensure a strong financial return. Our 3-year OPBDA outlook of mid-single-digit growth will be challenged by the rapid rise in programming costs. However, we remain confident that we can manage all costs on our P&L to achieve those growth targets. I would like to reiterate the guidance we've provided on the last earnings call for high single-digit programming costs per subscriber growth this year, which we've commonly referred to as ACPU. The increase is mainly due to higher costs associated with the step-up in our new Fox contract and extra NFL game in the 2012 calendar year, higher retransmissions fees on the 70-plus local channel deals we negotiated in 2010, and also Regional Sports Networks. To help neutralize the impacts of higher programming expenses on our margins, we will tightly manage our other costs across the organization and strive to capture productivity improvement, which will not only reduce costs but improve call center performance, field operations, retention and customer satisfaction. Specifically, we expect subscriber services, broadcast operations, G&A and cash upgrade and retention spending to be relatively flat, and in some cases, down in 2012 as a percentage of revenue. We also expect to spend less in 2012 on total acquisition spending than we did in 2011 due to lower gross additions. However, higher sales of advanced services related to our Whole-Home DVR, Home Media Center and Connected Home strategy, combined with the unfavorable impact from lower gross additions, is expected to result in a modestly higher cash SAC rate in 2012. In addition, we expect total capital spending in the U.S. to be relatively flat with 2011 at approximately $1.7 billion. The lower capital expenditures associated with the reduction in gross additions are expected to be offset by the accelerated launch of DirecTV 14 and payments for the new DIRECTV 15 satellite, which was approved in October for launch in 2014.

Next, I would like to make a few comments on our consolidated outlook. We expect to grow earnings per share to well over $4 this year, on pace to achieve our EPS target of at least $5 in 2013. Before interest and taxes, cash flow is expected to grow in the low double-digit range. However, free cash flow is likely to come in relatively flat compared with 2011, due mostly to our cash taxes, which will be higher in 2012, due to greater earnings and higher cash tax rate of 30% range, primarily related to the reversal of accelerated depreciation and benefits associated with prior year economic stimulus programs.

Finally, regarding our balance sheet, at this time, we still believe there is significant value in DIRECTV's stock price, which merits our capital allocation strategy for share repurchases. Therefore, as Mike stated earlier, we expect to continue repurchasing shares at the pace of about $100 million per week. We also expect to opportunistically exit the debt markets in the near future. Once we get beyond 2012 with our balance sheet re-leveraging substantially completed, the level of buybacks will be based on a number of considerations, including strategic opportunities, our share price, leverage capacity and further investments in Latin America. If we accomplish all of these targets and deliver the expected financial results, I believe we will continue generating substantial shareholder value by leading the industry in revenue and earnings growth, as well as returning cash to shareholders.

So with that, I'll turn it back to Jon.

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 a listen-only mode. I'd like to remind the media that they are not authorized to quote any participants on this call, either directly or in substance, other than the representatives of DIRECTV. In addition, we are webcasting this call live on the Internet and an archive copy will be kept on our website. [Operator Instructions] Operator, at this time, we are ready for the first question.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Phil Cusick with JPMorgan.

Philip Cusick - JP Morgan Chase & Co, Research Division

Thanks for the granularity on the revenue growth and ARPU growth. If I can clarify a little bit, if I think about 4Q, 1Q drop, can you talk about what happens in ARPU with some of the promotional revenue coming out of the NFL? Should we look for a bigger-than-typical sequential drop in revenue? And then second, it sounded like on the -- more the sort of the dialogue earlier, the programming costs in the U.S. could be up a little more than you expected. But we still shouldn't look for those up more than 10% this year?

Michael White

Phil, on the second one, yes, I don't expect it to be -- the ACPU to grow. I think we've said high-single digits. And since most of our contracts, for the most part we know what they are, I'd say we're pretty confident in that. Pat, do you want to talk just briefly about the revenue? I don't think it changes that much, but why don't you touch on it?

Patrick T. Doyle

No, I mean, we're not expecting anything unusual in kind of our normal historical trends going from Q4 to Q1. We still have one NFL game in January, regular season, which we had last year, so that's comparable. And so going into Q1, I mean, some of the things that we talked about in our prepared remarks on stuff like premiums, Pay Per View and other things are doing very well. So no, we don't expect anything unusual in that transition from Q4 to Q1.

Michael White

We're off to a good start this year and I'm pleased with the net adds and churn is well under control. So we're -- I'm expecting a good quarter.

Operator

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

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

With competition being relatively aggressive and the economy being somewhat static, it's clear that your longer-term strategy in the U.S. is one of retention versus acquisition. Is there a point in time when you would consider other companies, acquiring other companies as a potential path for growth in the United States? That's the first question. And then just related to competition, do you see competition increasing most among the cable companies, the telcos or DISH?

Michael White

Marci, it's Mike. I mean, I think, first -- look, we're always looking opportunistically for acquisitions that would generate sufficient synergies and strategic benefits that would offset whatever premium one might pay. Clearly, in our industry, being a regulated industry, probably the number 1, 2 and 3 consideration is always regulatory in that regard. And we'll continue to kind of look in -- because I honestly believe our industry is changing from whatever it may have been 10 years ago. But frankly, you have to look at the current landscape post the T-Mobile deal and at least be reasonably careful in making assessments about what regulatory situation there might be. So we'll continue to look at that opportunity. I think in terms of the question of competitiveness, look, this is a highly and intensely competitive industry, I've found. And I always hesitate to say, it's more competitive today than it was yesterday because it's always been competitive, to be honest with you. If you look at our trends in the fourth quarter, it was highly competitive and yet we still got substantial net adds from cable companies. In fact, a slightly higher percentage of our gross adds came from cable companies, and we didn't lose more to cable companies than we've been losing. So the telcos are aggressive. Everyone is aggressive. I fully expect this to be an interesting transition year. We're trying to manage our business in a disciplined way. We look at the rising cost of content and the impact it has on our LTVs and those long-term value calculations are critical for how we run our business. And in that regard, we've had to tweak some of our thinking around that. And you're right, certainly, my own belief is that job one for any service business is loyalty and retention. But I think you'll still see us gain some new subscribers this year. As I said, we're well ahead of our plan actually in first quarter. So our churn looks great and then we're continuing to add gross adds, albeit not at the rates that we would have a year ago.

Operator

And we'll go next to Jason Bazinet with Citi.

Jason B. Bazinet - Citigroup Inc, Research Division

I just had a question regarding your buyback pace and sort of that buyback in the context of the environment we're in. It seems to me that the industry is in maybe more flux than it's ever been in, whether it's declining cable ratings or core shaving or core cutting or new players entering the market. Why is the right answer to sort of aggressively shrink your equity now as opposed to -- as capital inefficient as it might be, sort of sit on your cash and just see how the world evolves. I mean, are you very confident in terms of how the world's going to sort of play out over the next 3 or 4 years? Because it seems like a lot of these unknowns are sort of outside your control.

Michael White

I think that's true in any business, Jason, in today's crazy macroeconomic environment, globalization, et cetera. But we're very confident as we look at our business. And I think there are a number reasons for that. First of all, we're quite confident that the levels that we've set and have discussed with our board, including this year's buyback, which really is bringing the DTVLA business underneath the rubric of our credit rating is eminently reasonable. Our cash flow outlook for the year, as Pat said, we're looking to grow our cash flow before interest and taxes significantly this year. And third, our stock price continues to be low. And fourth, interest rates are at a ridiculously low level. I mean, Pat could comment on what we're expecting for rates. But the rates looked very, very favorable out there. So we're quite comfortable that this year -- I mean, I think when I came on board 2 years ago, I felt that the company could stand to be re-leveraged in a significant way. We've been on, I think, a consistent path to do that in a disciplined way, and I think all we're kind of saying is the bulk of that re-leveraging is completed at the end of this year. I think what -- however, we're still generating $2 billion roughly free cash flow a year. So what we choose to do with that, we'll continue to look, as Pat said, is our stock price still undervalued as we think it is? What investment opportunities do we see to grow our core business in the U.S. or Latin America or other acquisition opportunities? But frankly, we're quite comfortable that this is the right decision for our shareholders to continue to generate good value and a good use of our cash.

Operator

And we'll go next to Stefan Anninger with Crédit Suisse.

Stefan Anninger - Crédit Suisse AG, Research Division

Just 2 brief ones. As you shift to a somewhat more retention-focused subscriber management strategy, can you talk about how you go about doing that while at the same time reducing the retention credits, which you mentioned in your opening remarks? I mean, how do you balance your goal in reducing or maintaining churn, while at the same time reducing those credits? And the second question would be, could you provide a bit more detail with respect to your cost savings initiatives in the U.S.? I think one area where you may have made some investments is the customer service area. Are there some costs there that are behind you? And is perhaps that one of the areas where you might actually see a decline in terms of absolute spending?

Michael White

Sure, Stefan. First, on the retention. I mean, again, we take a very granular look. I think the key thing is also retaining your higher quality subs and making sure that they're profitable for you as you go forward. Frankly, I'm trying to remember, Pat, I think our entire upgrade and retention pool is $1 billion and any time you spend $1 billion on anything, there are plenty of opportunities to rethink, relook and find those pockets that are perhaps not as productive in the way they're being used and redeploy them. So our own feeling is there are a number of initiatives. For instance, one of the things we learned last year is that if we screw up the first 90-day experience with a new customer, the churn impact is dramatic. And so we've got a whole initiative that we've kicked off and piloted in the field last year that we'll be expanding this year. It's kind of what we call the perfect 90-day install. How do we ensure that it's a perfect experience for a new customer? That has significant churn reduction benefits longer term. Second, we are looking at kind of how we deal with customers that are rolling off contract in a smarter way. We have a significant movers program. Some of it is very attractive, some of it's probably not the most productive spend, particularly for those that are in apartments. So there are a number of things that we're trying to do right now to kind of think differently about loyalty and retention. And frankly, I think the other thing that we've learned is that we have to think differently between what I'll call price value customers and our advanced services customers. Kind of the promise and what drives loyalty with one is slightly different than what drives loyalty in the other. And so there are a number of things that we're doing there. So far, I mean, our strategies around retention look very good this year. I mean, our churn is well, well under control year-to-date so far thru 6 weeks. Pat, you might touch on the cost savings, particularly in the field. I mean, because we have actually, to your point, made a number of systems investments over the last year.

Patrick T. Doyle

Yes. I mean, I think there's probably 3 that I would highlight where we've invested quite a bit of capital. One is on the technician side and putting in technology that will allow us to more efficiently dispatch trucks and then, more importantly, adapt to it during the day as jobs take longer or shorter. And so we're just starting to pilot that in a few cities. We're pretty confident based on other companies that have used it, that it will create quite a bit of efficiency in the field service side. At the call centers, again, we're investing quite a bit there. The idea there is to do a better job of putting appropriate information and the right information in front of an agent when she's dealing with somebody. So not only will it reduce the handle time that the agent has, but obviously for the customers, a better experience because you're getting to the right answer, what their offers might be quicker, so that the customers are not spending any more time with the agents than they need to. And the last one is, we've gone on a campaign over the last few years to convert all of our local collection facilities, our backhaul units, to upgrade them to HD. We were going to finish that process this year and when we do, we're going to see a substantial reduction in backhaul costs by moving up to a more current technology that will reduce the costs significantly starting in 2013. So we've got a lot of other smaller ones but those are 3, that kind of rise to the top of my list.

Operator

And we'll go next to Craig Moffett with Sanford Bernstein.

Nicholas Del Deo

This is Nick Del Deo pinch hitting for Craig. Two questions, if I can. First, can you help us understand what portion of the decline in your gross margins in the U.S. was attributable to the Sunday Ticket, and how you account for it? And second, can you share what sort of pay-TV penetration rates your market research suggests you can -- or ultimately be realized in some of your bigger Latin American markets like Brazil and Mexico?

Michael White

Sure. Bruce, let's take the pay-TV penetration rates and then Pat can comment on the U.S. gross margin and the impact of NFL SUNDAY TICKET.

Bruce Churchill

Look, it's suppose it's very difficult to predict. And, of course, is a big question is over what time period are you talking about? Certainly, I think we've said that we don't expect pay-TV penetration rates in Latin America to get anywhere near where they are in just, say, the United States, which is in the high sort of 80 percentile range. But I do think it's reasonable to think that in the big territories like the ones that have relatively low penetration today such as Mexico or Brazil, as you mentioned, that you can get to 50% to 60%, assuming that we're continuing to be able to offer packages at the kinds of prices that we offer them today, and that's something that we emphasize over and over again with our programmers is, it's not about increasing prices, it's about increasing volumes. So that, I think, is the opportunity there. And the reason I'd say that, is you probably have well over 60% -- I don't remember the number off the top of my head today. But in Argentina, for example, where pay-TV has been around for longer and for a long time, the local football was only on pay-TV. The penetration rate is well above 60%. So I think in a kind of time horizon where you might reasonably be planning, those are the sort of penetration rates that you would sort of expect to get to. And mind you, there have been some big increases in the last couple of years.

Michael White

Pat, you want to take the gross margin question?

Patrick T. Doyle

Yes. So on the NFL, if you look at the impact on the fourth quarter in particular, so I think as we had mentioned to you, both with the new contract and the fact that we recorded a margin in 2010 that didn't repeat itself, a significant increase. So if you look at our programming cost increase, more than half of the increase, whether you're looking at it just in the gross programming cost or in our ACPU increase year-over-year, more than half of that...

[Audio Gap]

James M. Ratcliffe - Barclays Capital, Research Division

Probably lower revenue -- probably lower margin than the rest of your revenue. And secondly, as you start to move through this year now that you've incorporated the NFL -- excuse me, Latin America, can you talk about thought process around potentially a dividend at some point?

Michael White

Sure. I'll take the second one, James. And, Pat, you can kind of comment on the ARPU impact from premiums. I mean, our premiums business, James, had a terrific year. I think our best year ever by the way was up high-single digits for the year, and was up double digits in the quarter. So we're delighted with the performance on premiums and equally, our movie business was up 20% for the year and more than that in the quarter. So those were 2 really attractive parts of our business. In the grand scheme of our total ARPU, they're not that big a number, so they don't move the needle totally. But on the second question, on dividend, so our board asks us to present to them on a regular basis, our thinking on capital structure. Again, tell me what the tax rates are going to be and who's going to get elected and what the landscape's going to look like next year. I continue to look at it and find it far more attractive for us to buy back shares from a shareholder standpoint, particularly when I look at the tax impact than the double taxation that you get on dividends. But we're not -- we don't have a religious aversion to it. It's just, right now, for this year, our focus is on buyback. Clearly, as we get into some kind of slightly shift in our thinking on capital past this year, I suppose, it will be on the table as well as share buyback and our board will make that decision when we get there. But I have to say, it's always kind of -- it's a tough one because the economics, the tax economics of dividends isn't particularly attractive to shareholders. Pat, you want touch on the ARPU thing?

Patrick T. Doyle

Yes, James, on the paid premium side. Again, this has been a great story for us because I think some of our competitors have actually shown this as an area of risk as far as growth. But in the fourth quarter, our premium revenue grew by almost 12% year-over-year. When you look at the effect it had on ARPU, it helped it by over 0.5 percentage point in ARPU growth from last year's fourth quarter to this year's fourth quarter. But before, we were looking at it as maybe flat to even down on the growth side. It's really turned around and been a nice avenue for us to grow revenues.

Operator

And we'll go next to Tuna Amobi with Standard & Poor's Equity Group.

Tuna N. Amobi - S&P Equity Research

So my first question is on the Connected Home. From the numbers that, I think, you said 2 million, based on the target that you set out to connect by 2013, I believe, you had put out somewhere close to 8 million. Is that still the case? Or is that looking aggressive at this point? And then I have a follow-up.

Michael White

Yes, Tuna. I mean, it's Mike. Look, what we learned last year as we started on the Connected Home initiative is there are a lot of moving parts to make that work flawlessly. And as we've started in the year, while the technology works, it's actually around the execution in the home. So sometimes you'd show up and the homeowner would say -- you'd say, "Do they have a router?" And they'd say, "Yes," and you'd show up and they have a modem, they don't have a router. Or sometimes, you'd show up and they'd say they have Internet but they didn't have Internet or the Internet connection was coming a week later. There were a number of things that we wanted to kind of iron out the kinks in the initiative before we just blindly kind of said push the Connected Home strategy. So we actually took a conscious decision in the summer to pause. Not to stop it, but to kind of slow it down until we kind of worked out all of the executional aspects, particularly through our technicians in the field services organization to ensure that it was working flawlessly. Now, our team did a deep dive on it. I think they did a fantastic job of looking at root cause issues. As a result of that, we've made some tweaks to how we were doing it. In the fourth quarter, we got back on track. And in terms of pushing the Connected Home, but we did lose probably 6 to 12 months. So I would expect that we'll grow that substantially this year, but I don't think we'll be at 8 million by next year. I mean, I think, we've got 2 million now. I would hope we'll add 1 million to 2 million this year and probably at least a similar amount next year. So we maybe a couple million lower than 8 million by then. I don't know, we'll see. But I think what's hard to know is that, while we've worked out the kinks in the thing, we really haven't turned the marketing approach on to say, now you get 6,000 free shows and movies. Frankly, that's a conscious choice, guys, and I think you know how powerful our marketing can be. So we're just trying to make sure we've got it fully buttoned up and I'm sure you'll see probably later this year as we start to turn the marketing on, we're going to create more pull for that product, and I fully expect that we'll then be able to accelerate. But we'll accelerate, when we've got all of the moving parts in our organization executionally completely flawless.

Operator

We'll go next to Mike McCormack with Nomura Securities.

Michael McCormack - Nomura Securities Co. Ltd., Research Division

Just looking at a couple of companies reporting on the cable side with better sub numbers. Just trying to get a sense for your tolerance in the U.S. business for sub loss as you go through 2012. And also, on the EBITDA guide, you mentioned the idea that we could see some price increases and obviously, you've also said it's a very competitive marketplace. Did the EBITDA guide anticipate an increase in prices here in the U.S.? And then also, for Latin America, on the EBITDA growth, does that anticipate price increases as well?

Michael White

First, let me be clear, we're not planning sub losses. I thought I was clear in the remarks. I certainly expect that we will have positive net adds this year. We're doing very well year-to-date. In fact, we're well ahead of our plan for net adds through 6 weeks. It's only 6 weeks but we're pleased with that. We feel like we've got an excellent Q3 promotion around NFL Sunday Ticket lined up again this year that I feel great about. So we're -- I'm not expecting any sub losses in our business this year. We may have a quarter, the second quarter is always a tough quarter for the industry seasonally. But gosh, I mean so far, all I can tell you is our trends on churn are very, very favorable to our plan and our gross adds are running just slightly better than our plan. So we're feeling good about that. Our EBITDA guidance did include taking into consideration the price increases that we announced and went into effect on the 9th of February. We will not -- we have specific plans around another price increase during the year for the U.S. business, but we're constantly managing our promotional and our -- you make the normal tradeoffs. But in terms of our price increase for the U.S., that's in place. Bruce, you want to comment on the DTVLA?

Bruce Churchill

Yes. We do -- we have historically raised prices and we typically do that every year. In some cases, it's been more than once a year depending upon what territory you're talking about, what kind of inflation they're experiencing. We're assuming that we won't be able to continue to do that. But I'll tell you that, honestly, where we get, I think, more bang for our buck, if you will, it's more in upgrading customers. We have a fairly aggressive and systematic process for doing that, particularly in Brazil. And the reason is, when you have a base of people that come in at low prices, you take every opportunity you can to try and get them to upgrade to a slightly higher package if they're able to do so. So on the anniversary of their joining the company or what have you, when you might ordinarily flip through a price increase, you can usually give them a call and convince them to take a slightly better package for an even slightly higher price and everyone's much happier. So that's a process we'll continue to do and price increases are definitely part of our program.

Operator

We'll go next to Tom Eagan with Collins Stewart.

Thomas W. Eagan - Collins Stewart LLC, Research Division

I guess, 2 follow-ups. First, on churn. If you could give us a little bit more detail on why the change in the churn direction from Q3? And if more of your subs aren't going to cable, does that mean more of them are going to DISH or to telco or to all over the air? I have a follow-up.

Michael White

Okay. On the churn, if you look between third quarter -- well, so I look at it, kind of I look at Q4 of 2010 and Q4 of 2011. If you go back to Q4 of 2010, we were running on voluntary churn over 1% pretty consistently during the year. We dropped down to like 0.93% in the fourth quarter. And you've got to remember, there were some disputes going on at the time. We certainly don't try and take advantage of those because it's an industry challenge but our churn did drop in the fourth quarter of 2010 by 6 -- voluntary churn by 6 or 7 basis points. And in fact, if you look at our kind of increase in the fourth quarter of 2011, I mean, our churn was up a lot more than that. So I think -- I don't know, Pat, I guess I'd say half and half or something. Half of it was extraordinarily low churn in fourth quarter of the prior year and half of it was driven by our own disputes that we had this year. But frankly, right now, through 6 weeks, our churn is doing very, very well this year and I'm -- I mean, I'm not alarmed or concerned at all. I mean actually, we're well better than planned through 6 weeks in terms of our plans on churn.

Thomas W. Eagan - Collins Stewart LLC, Research Division

Are you -- when you say better than planned, Mike, do you mean lower in terms of directionally, where was it versus the first quarter of last year?

Michael White

Yes. I don't -- I mean, we typically plan our churn probably around flat to prior year as a percent. So we're not looking for a big reduction one way or the other. I think kind of flat to prior year's a little bit of kind of where we try and keep it. I think it's not that different than what Bruce said, we try and manage it around 1.5%.

Thomas W. Eagan - Collins Stewart LLC, Research Division

Right, okay. And then in terms of where they're going, if they're not going to cable, are they going to -- are more of them going to DISH or to telco or all over the air?

Michael White

I can't say that there was all that big a change in the fourth quarter in terms of where they're going. Some of them just dropped off pay television in general because of pricing issues, particularly the more lower-priced subs is what you see, not that different from the cable guys. But I don't think we saw -- I'd have to look at it, I don't think we saw in terms of -- you are talking about now -- you're talking about where the churn is going?

Thomas W. Eagan - Collins Stewart LLC, Research Division

Yes.

Michael White

Yes. I don't -- I mean, actually, I mean, it's pretty consistent. DISH, telcos were actually between Q3 and Q4 as a percent. There really wasn't that much change between the third and the fourth quarter. If anything, there was a little less churn to cable. That's it.

Operator

We'll go next to Doug Mitchelson with Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

I guess, 2 questions. Mike, it's hard for us to gauge the risk with the new acquisition strategy, right? The initial results sound encouraging, it's still early days. So I'm wondering, was this sparked by some market research that you conducted that showed your brand was strong enough, it didn't require discounting? Or what you saw that pushed you in this direction versus others? I mean, for example, you could have, of course, gone for bigger price increases but more credits for those that complain. I mean, there was multiple strategies you could choose. So why this route?

Michael White

I think it's a combination of several things, Doug. Certainly, I believe that our brand is very, very strong. But I don't think in today's economy, anybody can be pushing price increases much beyond what we're all, as an industry, trying to do. I mean, it just -- and I think we're looking kind of low to mid-single-digit price increases are relatively high relative to most other industries. So I start with kind of a premise that, while you can't not increase prices when your content costs are growing high-single to low-double digits, I mean double digits last year on total, but high single on both last year and this year. Your cost of doing business is going up and you have to factor that into your thinking on LTVs. And once you do that, you absolutely have to start thinking differently. The other thing, Doug, you find in any business, and I saw this in my prior life, is that the depth of discounting only goes up when you raise price. So you'd also get to a certain point where you're losing your price points and your depth of discounting becomes problematic. So you don't have a choice. You have to take a step back and take a fresh look and think about it. And certainly, as I kind of look at our business, both kind of the LTVs of new gross adds, as well as kind of the value of our existing customers, it seemed to me that this was the right moment in time for us to slightly rebalance, and that's what we're doing, to ensure that as we grow the business, we don't just grow the top line but that we equally grow both the bottom line and the cash flow that goes with it in a sustainable way. The other thing that we did, Doug, is we had a fairly significant piece of consulting work done with our team, looking at the whole issue of retention versus acquisition with a deep dive, analyzing it. And all of the strategies that we came up with for this year, by the way, are part of a 3-year plan. So I mean, when we look at our pricing decisions and our promotional decisions, we started looking through a 3-year lens to make sure that we could kind of try and sustain this approach and navigate through 3 years. Frankly, when I look at rising content costs, which is an industry-wide phenomenon, I don't see how any responsible business can't take that into consideration in thinking about their cost of doing business and the implications that has on pricing and discounting.

Patrick T. Doyle

I think, Doug, just to add to that, and kind of when we use the word retention, as Mike said, we spent a lot of time, and went back and looked at historical data, looked at our customer base, looked at our upgrade policy, how much do we charge for certain activity. And it was clear that, I think, we could get some really good return on our current base by being more liberal with some customers, obviously, less liberal with other customers on how much we charge or how we approach upgrading the home. So as Mike said, as you got the squeeze on some of the values of lower-end customers with higher programming costs and margin compression, it made a lot more sense for us to go spend money over and into maybe the upgrade bucket than to bring on a low-value customer with the pressure on programming cost.

Michael White

I think the other thing we found, Doug, too, is part of that work was that -- I suppose you can always get by with one more year and kick the can down the road. They seem to do that in Washington all the time. But frankly, it only makes your -- kind of the growth in credits and discounts gets worse and worse because as I said, you lose your price points. As you raise price, then by definition, if you're still trying to hit an entry price point of x, the gap gets bigger and bigger and sooner or later, it's unsustainable. And so we felt this was the right time, but that we were going to do it in a very strategic way. I think what you saw us do with the entertainment package and pulling sports out of that was certainly to try and make sure we can still compete, and compete well with the price-sensitive consumer. So we're trying to make sure that we do this in a very smart way but in a way that's very mindful, not just to 2012 but at getting us on track to be able to have a sustainably growing top and bottom line in both 2012, '13 and '14.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

That's really helpful. It would also be interesting to see if other companies sort of follow suit and improve pricing sort of across the board, offer a free commercial for you. I bought a nomad, it's terrific. When do you start marketing that?

Michael White

Thanks. We appreciate that. We need to get some more content rights for it.

Operator

We'll go next to Matthew Harrigan with Wunderlich Securities.

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

It's possible to pretty much back into your programming costs for Latin America, given that you provide it on a consolidated basis and for the U.S. subject only to the small number on the sports side. And it looks like you're about 15% below on a percentage of revenues in the non-Sunday Ticket in the quarter. I know Bruce said that you did some long-term deals down there. You got -- you're starting an over-the-top initiative and all that. Are we going to see a step function deterioration at some point in the programming cost down there because it's just so benign? And then secondly, I know you commented already on the implications of the Verizon cable deal and you've announced some information on that. Do you have anything to add to what you've already said in conferences and some other public forums?

Michael White

Take that, Bruce. You should go first.

Bruce Churchill

Look, I have no expectations if there's any kind of step functions in increasing programming costs coming or anything like that you might have seen in the U.S. For example, we don't have anything like retrans facing us, for example. Certainly all the programmers always want price increases every year, when there's a renewal. But as I mentioned earlier, I think so far at least, we've been very successful in convincing them that their real opportunity for overall revenue growth is not necessarily just in raising prices but actually in getting to price points where we can serve more consumers. And so in fact, because we have that tariff to offer programmers, I think, we have been able to be more successful in Latin America than certainly anyone in the U.S. has been in terms of being able to have differentiated prices for different price points, not being forced to take huge packages of channels in every single package tier, et cetera, et cetera. So it's an ongoing process but there's nothing looming that I'm aware of that is going to create any kind of a step function. And to the extent that maybe -- you've mentioned some flat rate deals, et cetera, that you might have read about. Maybe you're alluding to sports, I don't know. And certainly sports rights have increased in the region. But when you look at the growth in subscribers in the region, the actual increases on a per sub basis have not been that dramatic. So again, the growth in the market is covering a lot of that increased costs.

Michael White

And I think the sports dynamic in Latin America, although again, sports is a rising -- is kind of rising cost across the broad but not anywhere near the dynamic as the U.S. It's mostly soccer and even on soccer, the government is -- in most of those countries is fairly committed to ensuring free to air is available on a broad basis and exclusives are not. So it's quite a different dynamic between no retrans and a different sports dynamic. Look, on the Verizon cable deal, we're watching to see whether these quad plays take off. We've had quad plays with some of our telco providers that we've been testing. So far, it doesn't seem to be a huge win for the consumer or it doesn't seem to be resonating that much with the consumer. But we'll keep an eye on it and see where the quad play goes beyond that. We're committed to ensuring that our product, to the extent the consumer wants to access it on the go, is available on Verizon, AT&T or any other wireless network that's out there. I think we want to make sure that our consumers can access their content on anybody's network, and we continue to try and have a good relationship with all of our telco partners.

Operator

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

Amy Yong - Macquarie Research

Can you talk about pre-SAC margins for 2012? And also, I think in your prepared remarks, you mentioned commercial, advertising and DTV CINEMA. Can you talk about, if it's on track to getting to $750 million incremental revenue for 2013?

Michael White

Sure. Pat, you want to take the first one on pre-SAC margins?

Patrick T. Doyle

Yes. I mean, I think on pre-SAC margins, we definitely in 2012 see that those margins will contract a little bit just with the higher programming costs. Obviously, our goal is, as Mike said, is managing the costs and pushing all these revenue streams and probably try to minimize that compression as much as possible. And then our hope is, after 2012, with some moderation in the programming costs area that we can get back to more stabilizing those margins going forward.

Michael White

On the incremental revenues, Amy, I think there's kind of 3 different things going on there. So in the commercial business, we had a terrific year last year. We're actually ahead of what our expectations were for 2013 and we're planning continued growth in that business in 2012. So I feel good about that. In the case of the Pay Per View movies, we actually had a terrific year, as I said. We grew our Pay Per View movies, I think, over 20% for the full year. But we had planned slightly higher than that. So we're just a tad behind on movies. But part of that was because we slowed down on Connected Home, and the Connected Home, we do know, increases the buy rates on movies. As we now reaccelerate Connected Home, I frankly think we'll get our pay-per-view movie goals right back in line for 2013. And again, we're planning healthy growth in that again this year. The one area that kind of did fall a bit short last year was ad sales. That was driven specifically by our targeted ad sales as you may recall. Historically, we've been disadvantaged in the ability to offer local advertising. So if the Boston Red Sox were playing targeted Boston ads, you're going to get a higher rate card on that stock. We had a new technology, that technology got delayed a bit. But we now have it fully operating. We've actually already generating some revenues this year for HD DVR boxes. We are working on SD DVR boxes, but I don't expect that probably until the second half of this year. So we're probably, I would say, a good 6 to 9 months delayed on that piece of the total for 2013. We're going to try and see if we can make it up. We're going to have, I think, a good year. We're planning a significant amount of ad revenues from the targeted advertising initiative this year. We expect with the political environment, we'll have good ad sales in general this year. So I think we'll get that one back on track but we might have lost 6 months or something in trying to get to the total numbers. So I would say directionally, I however, feel very good about it. And all 3 of the initiatives in terms of today are kind of clicking and doing what we would've hoped. We just kind of had a little bit of a delay because of the Connected Home and the delivery of the HD DVR capability on targeted ads. But we're back on track now.

Operator

We'll go next to Bryan Kraft with Evercore Partners.

Bryan D. Kraft - Evercore Partners Inc., Research Division

A couple of questions for Bruce. I guess, Bruce, what are you seeing in terms of increased promotional activity or change in the level of marketing from, say, Embratel, Net or the other competitors down there? And longer term, what do you see happening to -- if you look at Telefonica, Oi, some of the other subscale platforms in Brazil, they don't really seem to be growing. Do you think they stick with the market. Do you think that they are kind of regrouping and going to come back at the market anytime soon? And then if you could also comment just on the wireless investments that you're making in Brazil, and how much CapEx and operating expense is reflected in the 2012 guidance and when you kind of see those investments beginning to turn positive?

Bruce Churchill

Okay. As far as increased marketing activity, I don't think there's been any noticeable change in the last few months. You're probably alluding to the fact that, now that, effectively, Movistar owns all those companies and wants to consolidate them and run them as one company, one might expect for the promotional and marketing activity to increase. We have been expecting it. We've been expecting it for a while but we actually haven't seen it yet. And for example, we had a very strong January in Brazil. So it doesn't seem like there's any impact on us, at least, at this stage. With respect to what Telefonica and Oi end up doing, very difficult for me to say. I agree with you. They're clearly at subscale. It's difficult for me to understand even why someone like Oi that competes so fiercely with Telefonica would really want to partner with them in something like DTH. But in any event, they just sort of seem to be limping along and I probably -- I do not anticipate that they'll come back with some hugely reinvigorated effort, particularly now that, that business has been separated from the actual country businesses in the latest Telefonica reorganization. That's now part of a corporate group called Telefonica Digital. On the wireless side, I think I'm just going to take a pass on that until the March Investor Day because I am very excited about that opportunity. I think there's a lot that we can talk about it. But I will just say that in the overall CapEx guidance that I gave you, there is a number buried in there for wireless broadband. So it's not like it's a big blowout number for 2012. But we'll talk more about that in late March.

Bryan D. Kraft - Evercore Partners Inc., Research Division

Is the investment commitment that's in there, without getting into the numbers, is it something that you would expect to kind of grow, say, in 2013 and '14? Or is it something that we can assume is going to be constant for the next couple of years? Can you talk about that at all?

Bruce Churchill

Look, I actually hope it grows. It's a function of how much spectrum we get. And I would say that there's sort of 2 factors, it's how much spectrum we're getting, and therefore, the investments that we made and then -- so that we can make and the geographic expansion that we can build out. On the other hand, the nice thing about it is that it's somewhat marginal in the sense that we'll only build it out to the extent that we continue to have success and we start to generate revenues. So as far as sucking up or using up a lot of net cash, that the numbers will, and could well remain quite modest over the long haul, but it's just in aggregate, it may add to a lot but they'll also be generating revenues and profits. But again, it's not something -- in all the spectrum deals that we've done so far, which have still been pretty modest, there are no buildout requirements. We're not obligated to go and spend a lot of money to get a network up and running over a broad geographic area. And furthermore, our approach can be very much city by city, depending on where we have subs and where we think we can generate returns. So we're not -- again, not having to build out even a whole country or even a whole city if we don't feel that we can compete there. So I think it will be a quite measured approach but one I'm actually very excited about.

Operator

And we'll go next to Ben Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

Maybe following up on Bryan's good questions. Bruce, I wanted to ask about your outlook for 2012. I think heading into '11, your guidance was around 20% or more OPBDA growth in Latin America. You came in north of 40%. And you also had some modest margin expansion despite the significant gross adds growth in 2011. Can you just talk about the level of conservatism in your '12 guidance and also, do you expect to see -- can you walk us through why margins are going to be compressed in '12? Is it anything beyond the wireless investments? Just some help on why we're not seeing more operating leverage there? And sort of what the timing of that might look like over time? And then, Mike, I wanted to ask you, there's clearly a message to the market and to investors and competitors, I guess, about a change in your strategy in the U.S. What's that like internally? Are you trying to change behaviors inside the company? And specifically, have the compensation metrics that management are paid on changed in the U.S. business to help drive this new strategy?

Michael White

Bruce, do you want to go first?

Bruce Churchill

Yes. I don't want to make too much of my point about the margin compression. I think as I said in my comments, overall, when you look at-- when you normalize out the impact of SAC, the margins aren't changing that much. And I think -- to be honest, I thought when we gave our guidance a year ago, last December, it was sort of the growth was going to be consistent both in OPBDA and revenues. So I don't think we really did project margin expansion going forward. We were able to achieve that this year. I think there's always going to be a little bit of noise in these numbers. I wouldn't, again, make too much of the fourth quarter. You're talking about a business that covers, what, 10 to 11 countries, which are very different markets, different currencies. Frankly, different seasonalities depending on whether you're in the north or the south. So when you look at numbers on a quarter-by-quarter basis, I try, at least, not to get too exercised about small changes in margins one way or the other. And I tend to look at it more over probably a rolling 12-month average. So in general, I guess, my message would be that I don't think our margins are going to change dramatically one way or the other. We just talk about preserving them. And there may be some things -- we are making some investments, frankly, in broadcast operations, IT, customer care systems, et cetera, that are depressing our margins a little bit, particularly in 2012. But I don't think they'll be that material in the end and they're certainly not going to be lasting.

Michael White

I think on the second question, if we kind of go back, I mean, it just seems to me when clearly, you have a certain set of tactics. I would say they're more tactical than strategies. But the more tactical approach is that kind of slight emphasis differences when half your P&L has grown at comparable rates to what you can price at versus a world where at least for now, those rates are double what you could price at. Then you have to take a step back and think about kind of some tactical shifts. Certainly, we have spent a lot of time internally talking as a team about how we do it in a smart way and how we do it in a way that, as I said earlier, anticipates a 3-year approach that's thoughtful and disciplined and not, frankly, not kind of going from guardrail to guardrail. I think we do live in a world of both/and, not either/or, so it's not a matter of either acquisitions or retention. We have to do both. I think you'll see a slight shift in the emphasis towards more focus on our existing customer. But that's a journey. And we've spent a lot of time thinking about it internally. Look, I mean, people do what they're incented to do. That lesson was not lost on us. And there have been some shifts in our incentive compensation approach for 2012, modest shifts, I would say. Historically, we've probably had our annual compensation more 50-50 between top line and bottom line, and we've now shifted that to more 40% top line, 60% bottom line. So you still can't get a great number if you don't do well on 40% of your targets, which has to do with the top line. But on the other hand, it was an attempt to kind of meaningfully signal to the organization we need to do just a slightly better job, with a little bit more focus on both profits and cash flow.

Operator

And we will take our last question from Vijay Jayant with ISI Group.

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

Just wanted to talk, given this new 3-year strategy, I'm assuming your highest programming rate increases are in 2012 and hopefully moderates beyond that. Will the strategy change if programming rate increases moderate in '13 and '14? And will you have more of an acquisition focus? Is that part of the longer-term plan?

Michael White

I think, Vijay, look, as we look at -- first of all, as we look at the content landscape right now, we certainly expect to see some moderation in the growth rates when you get to '13 and '14 from what we know today. But I would hardly see, at the moment, it going back to those days of 3% or 4%. And so when I look at it, it's still going to be elevated relative to historical levels. But, of course, I mean if your cost of doing business goes down dramatically, you think differently about the LTVs on an incremental gross add than you would if your cost of doing business is going up, high-single digits. So to me, this is a subtle shift in what we're trying to do. And as always, this is a world that changes constantly. You have to be prepared to make the right tradeoffs if something changes. So if we see something dramatically different or if we saw an opportunity in a segment or whatever, we won't be shy about going after it. And let me just repeat, I do expect healthy net adds this year. You'll probably see, hopefully, a little more from better managing churn but you're still going to see healthy gross adds. I mean, we had over 4 million gross adds last year. We'll have plenty of gross adds this year. But we are kind of, as you've seen with our price increases in our announced new entertainment package, we're trying to find a way to kind of do this in a smart way and do it in a way that we're thinking not just about one quarter or one year. But that we're looking at sustainable growth in the top and the bottom line over the long haul for our investors.

Operator

Thank you. And this does conclude today's DIRECTV Group's Fourth Quarter 2011 Earnings Conference Call. You may now disconnect your lines, and have a pleasant afternoon.

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