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DIRECTV (NASDAQ:DTV)

Q1 2012 Earnings Call

May 08, 2012 2:00 pm ET

Executives

Jonathan Rubin -

Michael D. 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, Executive Vice President, Treasurer and Member of Proxy Committee

Alex Penna - Director

Analysts

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

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

Stefan Anninger - Crédit Suisse AG, Research Division

James M. Ratcliffe - Barclays Capital, Research Division

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

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

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

Tuna N. Amobi - S&P Equity Research

Jason B. Bazinet - Citigroup Inc, Research Division

Operator

Good day, ladies and gentlemen. My name is Keith, and I'll be your conference operator today. At this time, I'd like to welcome everyone to DIRECTV's First Quarter 2012 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to your host, Jonathan Rubin, Senior Vice President of Investor Relations and Financial Planning. Sir, you may begin.

Jonathan Rubin

Thank you, operator, and thank you, everyone, for joining us for our first quarter 2012 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, our 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 or implied by their 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 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 do 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 D. White

Thanks, Jon, and thanks, all, for joining us today. DIRECTV is off to a strong start in 2012, as our first quarter results for both Latin America and the U.S. business reflect solid execution of the long-term strategies we put in place last fall, designed to maintain our long-term growth momentum and profitability.

In particular, as I look at the quarter, I'd make 3 points worth highlighting. First, the strength of both the DIRECTV and the SKY brands, along with our differentiated suite of products and services, drove strong double-digit top line growth for the 11th consecutive quarter. I might add that DIRECTV's consolidated revenue growth of 12% leads our industry and is due in large part to the diverse geographies, macroeconomic conditions and the diversity of growth opportunities in our portfolio of businesses across the Americas.

Second, strong OPBDA and cash flow growth in the quarter demonstrates our commitment to striking an optimal balance between growth and profitability through effective cost management and a highly disciplined approach to improving the efficiency and productivity of our operations on every line item. And third, we continue to execute on our strategy of aggressively returning capital to our shareholders. As you saw on our earnings release, we repurchased nearly $1.3 billion of DIRECTV stock in the quarter, bringing a 26% increase in earnings per share to $1.07.

Now before I turn the call over to Bruce and Pat for a more detailed review of our Latin America and U.S. businesses, let me give you just a few observations on each of those 2 businesses, starting with Latin America. As we hopefully demonstrated at our investor day in March, our Latin America business has quickly become our biggest growth engine and continues to demonstrate outstanding growth momentum. For the first time ever, gross additions not only exceeded those posted by our U.S. business in the quarter, but they also surpassed the 1 million-subscriber mark, achieving yet another major milestone.

In addition, our net additions of nearly 600,000 reached another all-time high. This significant subscriber growth continues to be driven by the strength of our premier brands and our segmentation strategy of offering the rapidly growing middle market segment attractive, lower-priced postpaid products and prepaid services. At the same time, we continued to strengthen our leadership position in the higher-end A and B markets with our differentiated products and services.

The majority of our year-over-year subscriber growth came from PanAmericana this quarter, where our net additions nearly doubled. This tremendous performance was driven by strong contributions from our prepaid offerings, along with the healthy postpaid gains in Colombia, Argentina and Venezuela. I might point out the Colombia market is a key part of our growth strategy in PanAmericana and although it's early days in this opportunity, I'm delighted to see the results are running even better than Bruce's very aggressive plan for that country.

SKY Brasil also had a great quarter, as they delivered one of their best quarters ever in terms of both gross and net additions. As we've seen in recent quarters, SKY Brasil's growth just continues to be driven by the popularity of our lower-priced SKY FIT and SKY Light packages among the middle market segments, as well as our differentiated products for the A and B segment.

Now as expected, unfavorable exchange rates and the increasing middle market sales have resulted in a modest decline in ARPU. But our overall OPBDA margin remained strong at over 30% even as we grew market share. Finally, we're also seeing success in several of our new products, including Sky Online and the newly launched DIRECTV CINEMA service in PanAmericana, which drove pay-per-view sales to more than double last quarter's performance in just 3 months' time.

Turning now to DIRECTV U.S. Our revenue and OPBDA growth were generally right in line with our expectations, and were achieved during a quarter in which we had one of the largest recalibrations of our promotional offers in DIRECTV's history. Now as we've indicated, rebalancing our top and bottom lines is the core of this strategic initiatives we outlined on the last earnings call to achieve mid-single-digit revenue and OPBDA growth over the next 3 years.

During first quarter, you saw us begin to implement this shift as we transitioned to a new promotional strategy. We introduced our entertainment package, a lower cost-programming offer that tailors our best-in-class entertainment experience to better fit the needs and affordability of our more value-conscious consumers, and it's off to a great start.

We also reduced our promotional discounts for new customers by about $5 a month in February and instituted a new advanced receiver service fee on our customers' bills. These 2 initiatives alone are expected to significantly reduce customer credits and increase ARPU over the balance of this year and in particular, over the next several years. In addition, we eliminated a few of our over-distributed channels from some of our packages and placed a few sports channels and RSNs on different tiers. At the same time, we successfully implemented our annual price increase on programming packages.

In spite of all of these changes, churn in the quarter of 1.44% represents the lowest first quarter rate in 3 years. This outstanding performance reflects the collective efforts that we've made over the past few years in 3 key areas. First, we've increased our upgrade efforts for higher-quality customers to grow the percentage of subscribers who are on commitments. Next, we're getting more customers to agree to sign up for Auto Bill Pay, which we found correlates directly with lower churn. And finally, we're continuing to refine and tighten up our credit policies wherever that makes sense.

With all that said, I thought if there was one area that we could improve on, we did spend a touch too much in the quarter on upgrade and retention. As I mentioned on our last call, we're going to be more focused this year toward achieving a better balance between our top line and bottom line growth. We've already made some adjustments and so for the balance of the year, I expect upgrade and retention spending will moderate relative to prior year. I also expect you'll see better OPBDA growth going forward, although we achieved our full year guidance of mid-single-digit growth for OPBDA.

But even with the lower churn, I think we still have some tremendous opportunities to enhance our overall customer experience at DIRECTV. And in that regard, I recently made 2 important organizational changes in our company to support 2 key strategic initiatives that I believe will put us in a much better position to capture the opportunity of creating passionate loyal customers for life. First, I named Rasesh Patel, who's a high potential Senior Vice President in our company, to head up a new organization that's taking a fresh look at every customer touch point, with the ultimate goal of improving loyalty and creating passionate loyal customers.

Now let's be clear, it's going to take a lot more than the efforts of one person or one organization. We're going to do a better job of collaborating with every DIRECTV employment across all of our functions in order to reach our successful conclusion in this project. As such, we've also instituted a company-wide incentive plan, with specific performance goals that are structured around delivering an unparalleled customer experience to every customer.

Second, I also recently named Senior Vice President, Tony Goncalves, to lead our new digital entertainment products team that will focus on ensuring our product and service innovation remains at the forefront of our industry in the digital arena. Tony's team will take a more integrated approach to product innovation, including everything from strategy, ideation and product definition across all of our set-top box, but with a specific focus on digital and mobile platforms. Tony played a key role in the recent expansion of our TV Everywhere service for a couple of months ago when we started offering pay-per-view of premium network content on mobile devices and personal computers outside the home.

The digital entertainment products team will also play a critical role as we extend our TV Everywhere experience later this year when we begin streaming linear content outside the home and launch our next-generation Home Media Center nationwide. All of these efforts to dramatically improve the customer experience are part of a multiyear journey, and I look forward to updating you with our progress and our performance as we go through that journey.

In summary, DIRECTV is right on track in delivering on our long-term strategies for both our Latin America and U.S. businesses. In Latin America, as we've said, our goal is to continue to capitalize on the tremendous growth opportunity we see there by maintaining leadership in our A, B markets, while further penetrating the rapidly growing middle class throughout the region. In addition, we will selectively continue to pursue emerging growth opportunities, such as wireless broadband and Sky Online.

And in the U.S., we remain firmly focused on delivering mid-single-digit revenue and OPBDA growth sustainably over the next 3 years by rebalancing our top and bottom lines while significantly enhancing our focus on improving the entire customer experience. At the same time, we'll continue to return cash through stock repurchases at an industry-leading clip. I believe this is the right formula for DIRECTV to continue delivering the superior returns to our shareholders that they've become accustomed to expect.

So with that, I'll ask Bruce to talk about DIRECTV Latin America's results in a little bit more detail. Bruce?

Bruce Churchill

Thanks, Mike. As I commented during our 2012 Investor Day just over a month ago, our momentum continues on all fronts, with DIRECTV Latin America having yet another record quarter for both gross and net additions while also delivering solid financial results. As a reminder here, unless otherwise noted, our results exclude those of SKY Mexico, which we do not consolidate.

For the quarter, our record gross additions of 1,034,000 are 35% higher than last year. SKY Brasil continues to experience strong sales, with gross additions growing 26% compared to Q1 2011. Approximately 65% of our gross additions in Brazil came from the middle market segment. In PanAmericana, gross additions grew 45% compared to last year, with sales in Argentina and Colombia leading the way. Prepaid sales represented approximately 45% of our gross additions in PanAmericana compared with 35% a year ago. Middle market subscribers now make up approximately 30% of our 8.5 million subscribers compared with 23% a year ago.

Advanced products represented approximately 14% of our new customers in the quarter, with almost 70% of those taking our HD product. In Brazil, we continue to see strong demand for our industry-leading HD offer, with HD gross additions increasing almost 40% compared to Q1 of 2011. In fact, as of today, we now have over 1 million HD subscribers in Brazil. Compared to last year, HD DVR sales in PanAmericana increased 50%. Approximately 13% of our subscribers in PanAmericana have our HD product.

Overall, approximately 27% of our 8.5 million consolidated subscribers now have advanced products, 2/3 of whom subscribe to our HD service. This is a testament to what I've said many times in the past. While we are working very hard to take advantage of the strong growth in the middle market segment, we have not lost sight of our traditional bread-and-butter A and B households. These households are still a very important part of our success.

Turning to churn. Our postpaid churn for the quarter was 1.47%, up from 1.43% a year ago but still within our expectations. Much of this increase in churn came from Brazil, reflecting the fact that the middle market subscribers make up a larger part of our subscriber base. That said, I am pleased our churn rates are below 1.5% given the growth rates we have experienced over the past several years.

With regard to our prepaid services, our recharge rates are generally ahead of last year and were particularly strong at the end of the quarter, as we've seen positive results from initiatives aimed at increasing our recharge rates. We ended the quarter with 593,000 net additions, an increase of 39% compared to the same period last year. It's another record quarter for DTVLA.

Turning now to our financial results. Revenues increased 33% compared to last year or approximately 38% if you exclude the impact of foreign exchange. If you recall, the Brazilian reais was very strong versus the dollar through Q3 of last year. Our expected year-over-year comparisons will continue to be negatively impacted by FX over the next several quarters.

ARPU declined almost 2% reflecting the negative impact of foreign exchange in Brazil and Argentina. Excluding FX, ARPU was slightly higher, reflecting price increases, increased penetration of advanced products and the fact that the country mix continues to shift towards Brazil where ARPUs are generally higher. These factors were mostly offset by the impact of more lower ARPU middle market subscribers in the overall mix.

Consolidated DTVLA OPBDA increased $84 million or 22% over last year, mostly due to the gross profit on the incremental revenues, partially offset by higher subscriber service-related costs, as well as higher subscriber acquisition costs related to the increasing gross additions. Subscriber service-related expenses, which mostly relates to our call centers and technical service calls, were higher across the region, reflecting inflationary pressures on labor and increased spending necessary to maintain service levels on a significantly larger customer base.

Cash flow before interest and taxes decreased $88 million, with higher OPBDA and favorable working capital being more than offset by $100 million of increased subscriber-related CapEx and $55 million more of nonsubscriber and satellite related CapEx versus last year. It's also worth noting that last year, we received a $43 million dividend from SKY Mexico in the first quarter, which we did not receive this year.

Regarding Venezuela, there's no new news on regulations regarding the repatriation of local profits. We have been able to repatriate modest amounts to cover certain U.S. dollar costs at official rates through the approved exchange control process. As of March 31, we had approximately $400 million of cash on hand in Venezuela, expressed using the official rate of the VEF 4.3 per U.S. dollar.

I'd also like to spend just a couple of seconds on SKY Mexico, whose results were released by Televisa a few weeks ago. SKY Mexico delivered another strong quarter, adding 275,000 net subscribers in the quarter compared to 268,000 a year ago. Like DTVLA, SKY Mexico results reflected very strong performance in the middle market segment, but also good growth from the traditional A and B segments as well. The financial results of SKY Mexico were also strong, with double-digit growth in local currency revenue and OPBDA.

In total then, the DTVLA platforms combined, including SKY Mexico, now serve more than 13 million subscribers in the region. As I look out over the remainder of the year, I remain very confident about meeting the full year objectives we set out for ourselves and that I discussed with all of you at our investor day. We'd like to note that from a financial results perspective, the comparables in the remainder of the year will get more challenging than the strong Brazilian reais 1 year ago.

On the other hand, through assumed current sales levels, year-over-year comparisons on margin will level out in the second half of the year as we get past some higher-than-normal upgrade spending on some box swap-outs in PanAmericana and benefit from price increases later in the year. All in all, I remain very upbeat about the prospects for DTVLA.

With that, I'll hand it over to Pat. Pat?

Patrick T. Doyle

Thanks, Bruce. Overall, I thought that DIRECTV U.S. had a good quarter, highlighted by solid revenue and cash flow growth, along with an impressive reduction in subscriber churn. And as you heard from Mike earlier, the first quarter results are particularly pleasing because the many changes we initiated in our offers and prices collectively represent the largest transition we have made in a single quarter.

Looking first at the top line. Our industry-leading revenue growth of 7% continues to demonstrate the strength of the DIRECTV brand in the marketplace and was driven by ARPU growth of 3.6% and net subscriber gains. In addition to growth related to price increases, we saw a strong premium channel and pay-per-view movie sales this quarter, bolstered by our improved HD user interface and the continued success of DIRECTV CINEMA and our Connected Home strategy.

The premium channels generated the highest buy rates per subscriber since early 2008, while pay-per-view movie buys per subscriber represented the best quarterly performance in over 4 years. In both premium and pay-per-view, movie revenues grew at a double-digit clip year-over-year. However, total pay-per-view revenues declined in the quarter as reduced contributions related to the absence of a boxing event and a lower number of the UFC events in the quarter more than offset the pay-per-view movie gains.

ARPU growth also benefited from the increased penetration of both new and existing customers paying for advanced services. Compared to last year, penetration of Whole-Home DVR and Connected Home service more than doubled. And as you know, we've had some operational challenges that have had -- that we've had to work through in Connected Home, so this quarter's performance was particularly encouraging. Not only was it the best quarter we've had yet in terms of total new homes connected, but we exceeded our internal projection for the quarter.

Turning now to subscribers. The modestly lower first quarter gross additions were consistent with our internal expectations and long-term growth strategies discussed at our last earnings call. You may recall, we noted that attaining strong financial returns on new subscribers is more difficult as the risk-reward equation continues to be challenged by the maturing industry, competitive intensity and most importantly, rapidly rising programming costs. Therefore, we have continued to refine and tighten up our credit policies to ensure that we attain new subscribers who are highly profitable.

Over the past several quarters, we've also increased upgrade and retention spending of higher-quality subscribers to improve loyalty. In addition, we placed a higher percentage of people on commitments, as well as Auto Bill Pay.

Our first quarter churn rate of 1.44% reflects the success of these efforts and represents the lowest first quarter churn level in 3 years. Continuing to drive churn lower is a key component of our long-term growth strategy, particularly because we're now more selective in our acquisition of new subscribers.

Turning now to the bottom line. The first quarter OPBDA growth of 3.4% was in line with our expectations and full year guidance of mid-single-digit growth. In the quarter, OPBDA margin declined primarily due to higher programming, upgrade and retention and G&A expenses compared to the prior year period. As we've mentioned previously, rising programming costs continue to place downward pressure on margins. Year-over-year increase in content costs were primarily related to our annual programmer rate increases, higher payments to Regional Sports Networks and higher fees related to retrans and our new Fox and NFL contracts.

Cash upgrade and retention costs of $390 million were also up as we expanded upgrade offers for higher-value subscribers of HD DVRs, as well as our popular newer services, such as Whole-Home DVR and the Connected Home to improve loyalty and manage churn. As Mike mentioned, our upgrade and retention spending was a bit higher in the quarter than we had originally planned. We have addressed this by refining our segmented offers even further, and I'm confident that our cash upgrade and retention spending will be flat to down relative to the prior year as a percentage of revenues for the balance of the year.

With regards to G&A, as a reminder, last year's first quarter benefited from a $25 million onetime adjustment for our property tax accrual. G&A often includes these types of nonrecurring items, making it difficult to predict cost trends. However, from a budgeting perspective, we are targeting G&A expenses to be relatively flat to down as a percentage of revenues for the full year.

Subscriber service cost performance was solid this quarter and exceeded our targets as we are driving higher overall service levels at a relatively lower cost. For example, service call volumes were down 9%, and call volumes were down 6%. It's worth noting that some of the decline was due to our particularly mild winter. However, we are also seeing improvements in 3 key areas.

First, we are benefiting from several initiatives in place at both our call centers and installation network over the past couple of years to increase productivity. Next, the improved reliability of our set-top boxes, along with more effective self-care options for our customers, has reduced call volume and truck rolls. And finally, we're doing a better job of getting it right the first time, especially during the critical first 90 days of the customers' life cycle, with improved work order accuracy and installation.

Lastly, before moving on to our consolidated results, although it did not impact the income statement, the higher cash tax rate of $857 was mostly due to higher equipment and installation costs related to more sales of advanced services and Connected Home, along with an unfavorable impact from lower gross additions relative to our fixed marketing and advertising costs. It's worth repeating that 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 services.

Looking quickly at our consolidated results this quarter, DIRECTV continues to generate solid bottom line growth, as diluted earnings per share increased 26% to $1.07 in the quarter. Consolidated cash flow before interest and taxes in the quarter was strong, increasing by 45% to $1.3 billion as higher OPBDA and favorable DIRECTV U.S. working capital more than offset the higher capital expenditures associated with the record gross additions in Latin America, increased demand for advanced services and higher satellite payments.

Working capital benefited from the timing of payments received from customers, as well as those paid to vendors, and we expect it to be positive for the full year. Free cash flow also improved over 40%, but was impacted by higher interest payments related to the increase in debt, as well as greater cash tax payments. Please note that this increase in tax payments is expected to continue throughout the year due to the greater earnings before taxes and a higher cash tax rate in the 30% range, primarily related to the reversal of accelerated depreciation benefits associated with prior year economic stimulus programs.

Moving on to the balance sheet. This quarter we repurchased 28.5 million shares of DIRECTV stock for $1.26 billion, bringing cumulative repurchases to approximately $22 billion or nearly 54% of our shares outstanding since we began the program in 2006. Looking ahead, we expect to continue repurchasing shares in the same $100 million per week range for the remainder of the year.

Additionally, during the first quarter we made some significant improvements to our capital structure which, along with DIRECTV's strong free cash flow generation, ensures that we will continue executing on our strategy of aggressively return capital to shareholders. As you may have seen in March, we had an extremely successful debt offering, where the demand for our issuance exceeded our offer in the marketplace and enabled us to attain very attractive rates on $4 billion of investment grade notes. As a result, we've achieved our total debt to consolidated OPBDA leverage target of 2.5x. We also announced that we will be redeeming $1.5 billion of outstanding high-yield notes later this month.

So in summary, I thought we had a solid quarter. DIRECTV U.S. is on track to meet guidance for all of its key metrics, and we are confident that DIRECTV Latin America is on pace to meet or exceed the guidance provided at our Latin America Investor Day in March. As we accomplish all of these targets, I believe we will continue generating substantial shareholder value by leading the pay-TV industry in revenue and OPBDA growth, as well as returning capital to shareholders.

So with that, I'll turn the call back over to Jon.

Jonathan Rubin

Thanks, Pat. Before moving on to Q&A, investors should note that we have members of the media on this call in a listen-only mode. I'd like to remind the media that they are not authorized to quote any participants on this call, either directly or in substance, other than the representatives of DIRECTV. In addition, we are webcasting this call live on the Internet, and an archived copy will be kept on the website. [Operator Instructions].

So with that, operator, we're ready for the first question.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Doug Mitchelson with Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Mike and Pat, can you talk a bit about the change in the SUNDAY TICKET pricing this year with regards, I guess, to 3 areas? What did you see in the marketplace that drove the decision to lower the pricing? What level of conversions of prior year promotional subs is necessary or should we be looking for, for you to consider the change to be successful? And lastly, does this shift in pricing at all change the value of the service for DIRECTV as we all think about the renewal process for the NFL?

Michael D. White

Doug, we've talked about this before. We talked about it a bit last summer and obviously, we're now coming up on the renewal period where we're going to get a chance to see how well our new strategy around SUNDAY TICKET is working. When we looked at this thing, Doug, we were particularly focused on how do we get to a long-term pricing strategy for this business that's sustainable with consumers. And at the same time, we have a onetime opportunity to take advantage of kind of a, if you will, 1 million free trials we gave out last summer. So we don't need very many of those 1 million free trials. I think if you look at the history, with the old approach, you might have gotten, I don't know, 100,000 at most that would've kind of re-upped. Honestly, I think by doing this segmented offer where there's a basic package and there's an enhanced package, we both try to make the product more appropriate both for existing customers, but there's something in it for existing customers while we continue our promotional strategy of free SUNDAY TICKET with the purchase of DIRECTV in Q3. So I expect we'll have another strong promotion in third quarter around new customers, but we think we've got a terrific platform that is now -- gives us a 3-year runway. And I want to be clear, as we looked at the pricing decision, we were looking at a 1-year thing, we were trying to figure out what gives us confidence that we can kind of build a value offer for customers over the next 3 years and maximize the number of existing customers that will renew and keep the product. So it really is kind of a onetime opportunity for us to step up the renewals. And we've always said, I think going back, Doug, to the use of it in the promotion last year, that the key thing for this product is we've got to grow the base. We've got to grow the base number of customers that will pay for the product. Given that the cost of the product are increasing, our view is use it as a loss leader and we'll go from there. So I think it's too soon to say, but I'm very excited about our third quarter promotion. It gives me a lot of confidence that we should have a good take on that in the third quarter, but I'm equally excited about our opportunity for renewals and we'll see how that goes. We're kind of coming up on it, but it's a little early to kind of give you any report on that.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

What I was trying to get to you with the last part of the question is should investors worry at all that the value of the NFL service to the company is different from what the NFL might think the value of the service is?

Michael D. White

I don't think so. I mean, I think the NFL believes the value of its product is very strong across the board. I think in terms of the role it plays at DIRECTV, it's both driving gross adds for us, but it's also a -- it's a unique differentiator at DIRECTV, so I don't see anything -- I mean, I've talked recently with Roger Goodell. I think we have a good partnership with the NFL, and we both feel good about the role that, that product plays with the current approach that we're taking.

Patrick T. Doyle

Yes, I think, Doug, as Mike said, I think if you go back a year, the subscribers that took the NFL offer was a little bit over the 300,000 in total. We ended up this year with, and some people that didn't get the whole season, but about 1.5 million customers experienced the NFL SUNDAY TICKET as part of our offer. And so again, as Mike said, we're looking for ways. I think we feel like we've got the passion of NFL customers that are on our platform. We're trying to find a way to kind of appeal to those people that are interested, maybe not as passionate, and that's why we've kind of also came up with this kind of 2-tier package to try to maybe encourage that customer to take it now that they've experienced it for a season.

Michael D. White

I mean, look, if you look out there with any programming that we're looking at, as things are available through more channels, games move to Thursday night, whatever, I think we'd love to keep it exclusive and very, very narrow. But the fact of the matter is, and I'm sure Roger would be the first to point this out to me, we had record gross adds in the third quarter of last year, so we still have tremendous demand for that product. All of our consumer research says our customers still love the product, and it's a great part of our DIRECTV brand.

Operator

We'll take our next question from Ben Swinburne, Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

I wanted to ask about the entertainment package. Mike, for you guys to move a bit away from sports is a little bit of a departure from the historical kind of DIRECTV positioning, and I think we all understand why. Could you guys shed a little bit of light on the impact it might have had in the quarter on either ARPU or programming costs because actually ARPU growth was a little bit below what we had feared for Q1? And I don't know if that's going to ramp through the rest of the year. But more broadly how you're thinking about tiering, you can be at the lower end of the market from a price point perspective then -- as you move through the rest of this year.

Michael D. White

Ben, appreciate the question. First of all, in terms of its impact on any of our metrics, it's immaterial. I mean, we just started in February selling the product. It really is tiny in the grand scheme of kind of our total metrics today. Having said that, the take rates are pretty much right in line with what we expected, Ben. I mean, they're probably high teens, I would say. Maybe a touch more, but not much. I mean, right in that line. And we're seeing a number of customer -- existing customers, that have an interest in the product. So I think, look, this is a tough economy for the bottom half of America, and I think we're all going to have to continue to think about ways to make the pay television business more affordable for the average American household. It's something I'm very concerned about. So I'm pleased with the product's take so far. It's one of those you don't want it to be too small or too big. Just about right, just like Goldilocks. And it's just about right, right now in terms of where it's landed. I think it's an important addition to our portfolio. To your point, look, we're a national service. We aren't some niche service that only serves kind of high-end homes and sports only. So while sports is an integral part of our brand for sure, there are a lot of consumers out there who would rather not be paying for those expensive RSNs, and I think it's up to us to serve those customers. So we see it as an important offering going forward, and we're pleased with it so far. But gosh, in terms of the size, it's just immaterial in terms of any of the metrics. They had nothing to do with our programming cost performance in the quarter.

Benjamin Swinburne - Morgan Stanley, Research Division

Okay. Any comment on programming cost for the rest of the year? Do you expect the rate to go up from here as you move through? I think you guys said you guided to high singles this year.

Michael D. White

We came in at about 8%, and I would expect we're going to be in about that ballpark for the full year. We do have one extra game in Q3, so that may impact Q3. But net-net, I would say we're tracking right in line with our programming cost kind of expectations. It's very difficult. It's forcing all of -- all distributors to have to take a very hard look at low-rated channels no matter who offers those channels and look for ways to economize for our customers who are having trouble affording all this content. But I don't -- we're right in line with expectations on programming costs, I would say.

Patrick T. Doyle

To make sure everybody understood that, I mean, the NFL, when their schedule came out, usually they have a regular-season game that falls over into January this year. With the calendar the way it is, they'll have an additional game in September, so we'll report both additional programming costs and additional revenue related to an extra game in the calendar year.

Operator

We'll take our next question from Marci Ryvicker with Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Two questions. First on the U.S. I'm getting a little confused on the comments around promotions. So I hear you when you say you're less promotional, but reading the press release, it says ARPU is impacted by new promotions and then there are additional promotions around the NFL. So can you reconcile this and maybe explain where you're being more promotional and where you're being less promotional? And then turning to Latin America, just looking over the past 2 years at ARPU growth organic, it tends to decelerate throughout the year, so I don't know if this is seasonal. And if it is, would it be safe to assume that the 1.5% organic growth we saw in the first quarter is likely to be the peak growth rate for ARPU in 2012?

Michael D. White

Bruce, I'll let you take the Latin America question. In terms of the promotional question, Marci, look, there's a lot of moving parts. Fundamentally, I keep looking at ARPU. I mean that, to me, net ARPU growth, is the key focus. And I think what we're trying to do is very carefully balance, kind of reducing discounts and credits with kind of the consumers' reaction to that. So we've taken a very careful and deliberate approach that I look at full year and what we're trying to do full year, and we're right in line with that. I think, frankly, just the way the math works that the rate of growth, first of all, for credits is slowing significantly. Second of all, when you look at ARPU in the second half, you'll see an improvement. So I mean this is part of a full year plan. You can't just look at 1 quarter and try -- and remember, the new stuff didn't come into play until, I don't know, the 10th or 15th of February, and the quarter was over the end of March. So there was only 1/2 quarter's impact in there, but we're right in line with what we had expected to do. But again, my key focus is looking on that net ARPU growth, and I do expect you'll see an improvement in that growth rate as we go through the year. Bruce, you want to talk about DTVLA?

Bruce Churchill

Yes. I don't really want to get into a discussion about trying to predict ARPUs on a quarter-by-quarter basis. I think what we have broadly said is that ARPU will be flat to down for the year, mostly driven by really 2 factors, which is the tough comparisons with the Brazilian reais. That is going to be particularly tough in the second part of the year, as well as just the fact that as we sell more middle market products, which have lower ARPUs and they become a bigger part of the mix, it tends to drag the average down. The 2 countervailing forces against that are the efforts we always make to continue to upgrade customers, as well as selling into the A and B, so that has a mitigating effect. And the fact that as Brazil becomes a bigger part of the total pie, ARPUs, in general, are higher in Brazil. So a low-priced consumer in -- a low-priced package in Brazil, just in dollar terms, is higher than a similar package in Argentina, for example. So I think I'd prefer to just stick with my overall guidance and not try and get making projections on a quarter-by-quarter basis. It's hard to predict.

Michael D. White

Yes, I'd just reiterate, though. One, I think it's important when you talk something like ARPU, you've got to look at it local currency. I mean, we have to report in dollars, so you're going to get -- you get a number in dollars. But frankly, I look at it not through that lens in terms of a traditional management look. I look at it, adjust it for ForEx and say what's happening and we're fine in that regard.

Operator

We'll take our next question from Michael McCormack with Nomura Securities.

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

Can you just maybe make a quick comment on your domestic sub philosophy? I mean obviously, you've talked about some price increases, but also managed your attention spend. Is it a stalwart goal to be sort of neutral for year? And then secondly, can you give us any color on the percentage of gross adds in Latin America that are coming into the middle market?

Michael D. White

Bruce, you want to go with the middle market one first?

Bruce Churchill

What was the question? What percent of gross adds were middle market? Gross adds?

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

Right.

Bruce Churchill

Let me see. Again, Brazil it will take 65% and roughly 45% in PanAmericana. They are -- those 2 are roughly each 50% of the business, so take the average.

Michael D. White

I think in terms of the U.S. business, Mike, look, we start with the reality, as an industry, that the cost of the product has increased substantially on a long-term basis. We're on a long-term growth in programming costs and as we look at our pricing and our discounting, we're looking it through what's a responsible position for us to take as a company to best manage our margins for the long haul. We've got a very complete and comprehensive approach to that, that includes looking for $400 million in improved programming margin enhancements are ample, if you want, each year, and we've got very clear kind of line items in terms of reducing credits, selling more addressable advertising, aggressively growing commercial and DIRECTV CINEMA to improve our ARPU and reducing programming by re-tiering or cutting out small channels wherever possible. We've got a very aggressive $100 million goal for reducing cost and operating productivity initiatives across the board from subscriber services to broadcast ops to G&A. When you kind of start from how do you balance an algorithm over the long haul, it is sustainable. We, frankly, look at it through that lens. And then to be honest with you, we will sell as many quality customers that are profitable as we can sell. But we're constantly adjusting the lenses here as we look at customers to see which ones are profitable and which ones are not. And frankly, if they're not going to be a profitable customer, I'm not going to chase bad business. So we've been -- I think we've been very deliberate in saying I still expect to gain share this year. I think our strongest promotional quarters are Q3 and Q4. I'm pleased with Q1. We're ahead of expectation. Q2 is always a seasonally low quarter for the industry, and so I think we'll see some challenges in Q2, along with the industry. We hardly had any net adds in Q2 last year. So I feel that we're right on track. Our business is performing well and I think we'll have a good year overall for the year.

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

Bruce, just a quick follow-up for me the Latin American comments. Can you just give us a sense for whether SAC is tracking the way you thought it would as you outlined at the analyst day for those middle market subs?

Alex Penna

It is, and just for those of you that weren't there, we were -- I think we said it was either flat to modestly down, and that is in fact where we are.

Operator

We'll take our next question from Stefan Anninger with Credit Suisse.

Stefan Anninger - Crédit Suisse AG, Research Division

I have 2 questions. For Mr. White, I was hoping to get a bit more color on your TV Everywhere plan that you mentioned in your opening remarks. I believe I heard you mention that you would be launching an out-of-home linear video product later in the year. Maybe you could describe what that would be just in general terms, if possible. That would sound like a sling-like product, and then if I could ask a follow-up question for Pat.

Michael D. White

Stefan, it's probably premature for me to get too much into it for competitive reasons. But certainly I can tell you that more broadly, let's talk about TV Everywhere. I think it's very much in the nascent stage in our industry. You've got different programmers with different rules of the road that we all have to work with. So it's not that simple and clean from a programmer right standpoint. There's a lot -- we could do way more than we're doing today from a technology standpoint, but we're not able to because we don't have the rights. We've got challenges with some of the other portals like Apple in terms of what their ecosystems rules are going to be and how they're going to evolve as well that we need to be responsive to. So I would say you'll see us continuing to build, but this is a long-term journey over multiple years. So I would be clear that while we'll look to be doing more streaming of products, we're going to be doing more on-demand products outside the home. This is a long-term journey, and I don't think you'll see some big transformational thing out of any of the distributors because frankly, the rights aren't there, and the rights are very much in the stage of evolution. So I'm excited, we launched our dot-com with Pay Per View and premiums. We're working on kind of Androids and making our stuff work on Android. We're pleased with our iPad app and how it works and our iPhone apps. But you're going to see a kind of multiyear journey here as we expand TV Everywhere. It'll go as fast as we can get the rights to evolve, to be honest with you. The technology, I can already stream all of our channels of my iPad if I want. I just don't have the rights to do it, so the technology is not the issue.

Stefan Anninger - Crédit Suisse AG, Research Division

Got it. And if I could just ask a quick follow-up for Pat. Could you provide us with a brief update on your commercial and advertising revenues and their potential for a positive impact on ARPU growth in 2012? You may have mentioned them in your opening remarks, but I didn't hear anything about them.

Patrick T. Doyle

Yes, I think we're moving along. I think we have talked about the fourth quarter, we had a little bit of delay of getting the product in the position where we're comfortable launching it. We did get it out in the fourth quarter. Clearly, it didn't start to become revenue generating on the local ad sales until the first quarter. So we saw some nice year-over-year increase in revenue from ad sales in the first quarter, not great, but we see that getting better as each quarter goes by and we begin to roll out more cities, more stations. So yes, we're definitely looking for kind of double-digit growth for the full year and or better on ad sales. On commercial, we're doing very well there like along the original plan. Some issues there, but if you go back to kind of our 3-year outlook there, we're still -- we still feel good about that business. Maybe it's not quite at the revenue growth levels that we had expected over a 3-year period, but both of those are now on track and again, we're looking for that to really kind of help us on ARPU because we're looking at kind of double-digit growth for those -- both of those opportunities over the next few years.

Michael D. White

Keep in mind, Stefan, the actual addressable ads, which is the thing that enables you to do local ads, which is where the big driver of difference between us and cable guys, they've always been able to do local ads and you can charge a lot more money for a local ad than you can for some of the stuff we do nationally. That really kicks in full bore in fourth quarter. We get some of the benefit in third quarter, so you'll see that start to ramp up in third and fourth quarter, and that will help our ARPU as we go through the year. But we're pretty much right in line with our plan on ad sales so far this year. But the real kick, where it's coming, I think as you get into Q3 and Q4 on ad sales. In commercial, we're a little shy of our plan, but we're well ahead of a year ago in commercial, so we're doing fine there.

Operator

And we'll take our next question from James Ratcliffe.

James M. Ratcliffe - Barclays Capital, Research Division

First of all, how important is it going forward to actually own the user interface and customer experience? I mean, you have precedence with the TiVo relationship and having a non-DIRECTV branded user interface on your CPE. Is that something that you would be willing to explore with other potential CPE providers, given discussion of an Apple TV or a Google TV? And secondly, with RSN costs rising and highly varied across markets, would it ever make sense to have packages that were non-nationals or regionally standardized, for example, a New York-specific package, would that be RSN, given the sports costs in that market.

Michael D. White

So James, on the -- I don't think of it as needing to own the user experience. I think of it that our ability to deliver a differentiated outstanding user experience is the reason we do it because we think we can do it the best of anybody. I mean, we are 100% focused on our customers and their customer experience. So I don't really see -- we continue to believe that if you look at any of the consumer ratings of DIRECTV, we've got the best sports, most HD channels, the best sound, the best picture and the best user interface. So that's our core strategic advantage, in my mind, and therefore, we're going to continue to capitalize on that advantage and continue to evolve and enhance that user experience as consumers evolve. So that's our primary focus in terms of what we offer the user. Now we've added services. We added Pandora to our DIRECTV services for connected boxes, and it's a terrific addition that consumers love. So not to say we'd never kind of look for other partners in certain areas but in terms of the core user interface, we frankly think we do the best of that and plan to continue to do so. Now sports is a challenge in terms of its rising costs across the board. We've looked at any number of options as it relates to Regional Sports Networks. That's partly why our first choice was to launch the entertainment package. We stripped it out to make it more affordable for customers. Clearly, one has to look at areas like the New York City area where RSNs are pretty expensive and ask some of those kinds of questions. And we continue to ask those kinds of questions as to whether you would do a surcharge or whether you would go ala carte. I mean, my own personal belief is it ought to be ala carte in the long haul, but in the short run, I'm not likely to get there. So we'll continue to look at that. And as we try things and think we've got a plan that we could roll out, we'll communicate when the time is right.

Operator

We'll take our next question from Craig Moffett with Sanford Bernstein.

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

I'm not sure whether this is a question for Bruce or Pat. But I know you guys track very carefully the lifetime value of subscribers. We only get to see the blended averages, but I wonder if you could comment at all about the trajectory you're seeing in the lifetime value of customers in Latin America. It looks like churn is coming down, but there's a lot of puts and takes obviously, especially for customers on the margin.

Patrick T. Doyle

It's pretty fairly competitively sensitive. I guess what I would refer you to is the IRRs that we presented to everybody at our investor day a month ago. There's no reason -- there's certainly no change in any of that information and the way -- you're right, with the way we do look at, you can call it LTV, you can call it IRR, but we do take a very close look at how much we have to put in upfront, which is the fact, and then what's the return. The reason I believe IRR is important is because it's a return calculation. The actual, of course, dollar LTV of a lower ARPU sub in absolute dollar terms is going to be lower, even though the IRR might be as good, if not better. So I think that's why you need to look at both, and I would say that there's nothing material that has changed since we presented those to you a month ago.

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

Are there any interesting trends on the margins? For example, are incremental subscribers coming in showing lower or higher churn rates or lower or higher ARPUs that are going to be masked in any way by the blended averages?

Patrick T. Doyle

No, nothing material.

Operator

We'll take our next question from Matthew Harrigan with Wunderlich Securities.

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

Firstly, can you update us on your thinking on the Verizon -- Mike, your situation with the cable companies and whether there are parallel opportunities of you and AT&T Wireless, particularly since AT&T needs you more in the U-verse markets and Verizon needs -- would have needed you in the FiOS markets? And then secondly, I know this is a little ways out there, but when you look at Ultra HD with Ka-band, I mean, you have some advantages relative to the cable companies, even with the CCAP implementation. Do you have any -- you must be looking at that on a preliminary basis in terms of jazzing your brand on the video side and even inevitably moving to that 5 or 10 years out.

Michael D. White

So Matthew, so the first question on the Verizon and the Comcast thing, look, so far, we track pretty carefully geography by geography. The $200 credit card thing hasn't really impacted our gross adds or our churn in those geographies in any material way. We have a good relationship with AT&T, Verizon and CenturyLink, all 3. They're important partners of ours. We now have the ability to spell high -- to sell high-speed bundles, high-speed fiber bundles, as well as the DSL bundle. We're always in conversations with all of those partners about ways to strengthen our relationship with their wireless division. And when we have something to say about that, I'll let you guys know. Rest assured, we're always looking at opportunities. I think we still think that the consumer -- all of the research that we've done, the consumers still have a little bit of difficulty trying to see what a quad play is and why they should pay 2 companies for that thing, and then it all gets blended into one and they lose transparency. And I think from the consumer trust standpoint, I'm not sure it's a huge idea. But we'll keep an eye on it, and we're in constant conversations with the telcos about ways we could strengthen our relationship with their wireless divisions. In terms of the 4K or Ultra HD. There was some 4K TV sets at CES that I saw in Las Vegas, very interesting, beautiful picture. It think it will be a really interesting technology for DIRECTV. We've got it along with a long list of items that are out there in terms of where we think the business will evolve over the next 3 or 4 years, and that's a certainly one of them that we've got on our technology roadmap. Frankly, I think you'll start to see those TVs next year, but you're not going to see the large screen ones. For whatever reason, the television manufacturers are focused on, I think, 50- or 55-inch screens for the 4k. And keep in mind you've got to shoot in 4K to really get the benefits. So you've got to also ask how long it'll take the television producers to adopt that technology. So as we've seen with 3D, that could be a long journey. But certainly, it's an exciting opportunity for us longer term to continue to differentiate our sound and picture. And as always, we'll be looking at it.

Bruce Churchill

Might I just chime in, Mike, that this quarter we've -- for the first time in Latin America, we broadcast the first live 3D soccer match, which was Real Madrid versus Barcelona. So we also take advantage of these technologies in Latin America when it makes sense.

Operator

We'll take our next question from Bryan Kraft with Evercore Partners.

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

I just had one question on the U.S., and then one on Latin America. Have you seen any change in subscriber trends since DISH launched its Hopper and Joey product in early March and the associated ad campaign? And then, Bruce, actually 2 little ones. Have you heard anything about Embratel raising DTH pricing? We had heard some rumblings about that didn't know if you -- if that was anything that was real? And then also, can you talk about your marketing partnership with TIM [ph] on fiber to the node broadband? Is that something that's meaningful? Or is it just a small initiative?

Michael D. White

Well, Bryan, it's Mike. I'll take the first one. Look, I think you've seen DISH's sub trends in the first quarter. We're a little bit above expectation. Hard to parse how much of that is Hopper and Joey and how much of it is no pricing. But I would dare to say, from my perspective, it's probably mostly not taking a price increase. That hard to sustain with content cost growing high-single digits for any of us. So in terms of our own business, I would say yes, I mean, I think DISH is working hard to revitalize their business, and they're a very formidable competitor as they always are. And we're going to compete every day. Bruce, you want to about Latin America?

Bruce Churchill

Yes. On Embratel, I actually haven't heard definitively whether they've raised their prices or not. I will say that we have done some analysis to suggest that even if they had our costs and the advantage of our scale that they would struggle to make money, so it wouldn't be a huge shock if they did their raise prices. And with respect to the marketing agreement with TIM [ph], it actually isn't finalized, so it's not at all in these results.

Operator

We'll take our next question from Tuna Amobi with S&P Capital IQ.

Tuna N. Amobi - S&P Equity Research

So another angle on the lifetime value question that was asked earlier. As I look at your -- the SAC trend in the U.S. versus Latin America, it's my -- I understand you're kind of close to maybe about 45% in dollar terms of SAC Latin America versus U.S., if my estimate are correct. So I'm just trying get a sense of in terms of the return that you get per subscriber, how much of that -- how much are you willing to push SAC higher in Latin America in terms of the eventual return? I know you spoke about IRR. So if you can kind of help us out with that because clearly, we're looking at local currency versus U.S. and we're just getting the U.S. translated numbers. That would be helpful. And separately, Mike, I was wondering if you had any comment on the hearing on the FCC rule-making process, one way or the other. It was something I'm sure you're watching closely kind of you've come down on either side in terms of the comment period, if you can share that with us. And lastly, Bruce, on Netflix in Latin America, we're hearing that trends there are getting tougher for online players, which seems somewhat kind of intuitive given the low broadband penetration there. And I know you spoke in your investor day about not seeing Netflix as a major competitor. If you can update us there's on what the trends there are doing, that would be helpful.

Bruce Churchill

Okay, with respect to the LTV issue and the trade-off between SAC, I guess, and LTV, obviously, the SAC is very different for a high-end customer than for a low-end customer, and it's a relationship that we try to manage. Certainly, I'm not incented to increase my SAC cost. Probably the only thing that forces you to do that is if you're responding to the competition in the market. So it's a balance we try and strike. It's why we look at the IRR because it is very much an idea of how much we invest upfront to get a return over time and factoring in the churn of the profile of those customers. So all of those factors are factored in, and it's the relationship that we watch very closely. With respect to Netflix, I think you have to ask them how they're going there. I will say that -- I will repeat what I said at investor day which is that delivering video over the Internet in Latin America is considerably more challenging than it is in the United States. Not only because fewer people have broadband connections, but the quality of the broadband is much lower. And when people say they have broadband, they really often are talking about speeds well below 1 meg. So there's a number of challenges that we think are structural that will remain in place for quite some time and therefore, that's why we have a very modest view of what the near-term potential of video over the Internet is in Latin America.

Michael D. White

Tuna, it's Mike. When you say the hearing on the FCC, since there are a number of topics in front of the FCC, which one were you specifically talking about?

Tuna N. Amobi - S&P Equity Research

I was talking about the rule making process on the 2-gigahertz S-band spectrum that DISH asked for a waiver and they got declined. And that's ongoing right now, the comment period.

Michael D. White

Yes. Yes, I'm not sure we've made a final decision whether to comment or not. It's really not -- I mean, that's kind of up to the commission to look at. My sense is that the commission's public policy interest is to ensure that spectrum is used and used effectively for America. So I mean in general, my guess is they will be focused on how do they ensure that, that spectrum is going to be used. And if it's going to be used, I'm sure they'll be fine with whatever they have to look at but I...

Operator

And we'll take our last question from Jason Bazinet with Citi.

Jason B. Bazinet - Citigroup Inc, Research Division

I just have a question for Mr. White. I think in the past, you guys have sort of kicked around the notion of being a bit more balanced in terms of your capital returns to include both dividends and buybacks, and I was just wondering if you can share with us what sort of feedback you've received from the buy side as you sort of chatted with the owners of DIRECTV in terms of their predisposition, any early thoughts?

Michael D. White

Jason, every time -- I mean I do, as you do probably know, ask the question every time I meet with the buy side, just out of my own curiosity, how they look at it. I have to say, while there are some that have dividend funds and non-dividend funds, I still look at it kind of through the efficiency lens and say to myself, particularly with what is at least speculated to be the tax rates next year on dividends, it's kind of hard to justify doing dividends with that kind of tax policy. So I think we have to see what the tax policy is next year. Our board, just from a process standpoint in the second half of the year, as a regular matter, we do review our capital structure. I'm sure we'll have a conversation as we get towards 2013 and '14 about what approach we should do, whether it is share buyback or dividend or some of both. But I think it's premature for me to speculate where we come out, other than to say I keep looking at it and say, with an 8% free cash flow yield, with borrowing costs that you just saw at amazingly all-time low interest rates I think net of inflation are probably negative. And even without inflation, they are like 2% after-tax. That it's pretty attractive, frankly. If the market can't properly value our business from a multiple standpoint for us to keep buying back stock, I mean, that, I think, is the smartest thing for us to do for our shareholders. So that's the approach that we're taking right at the moment. We're always keeping an eye on what's happening in Washington, D.C. and see if anything affects our thinking one way or the other. But I would say for right now, that's our focus. We'll see what evolves with the tax policy as we get to the end of the year.

Operator

Ladies and gentlemen, that does conclude the Q&A session in our conference for today. Thank you for the DIRECTV's First Quarter 2012 Earnings Conference Call. You may now disconnect your lines, and have a pleasant afternoon.

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