DIRECTV Q1 2008 Earnings Call Transcript

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The DIRECTV Group, Inc. (DTV) Q1 2008 Earnings Call May 7, 2008 2:00 PM ET

Executives

Jonathan Rubin - Investor Relations

Chase Carey - President, Chief Executive Officer, Director

Patrick T. Doyle - Chief Financial Officer

Bruce B. Churchill - Executive Vice President; President, DIRECTV Latin America

Analysts

Ingrid Chung - Goldman Sachs

John Hodulik - UBS

Doug Mitchelson - Deutsche Bank

Kit Spring - Stifel Nicolaus

Jeff Wlodarczak - Wachovia

Jason Bazinet - Citigroup

Vijay Jayant - Lehman Brothers

Ben Swinburne - Morgan Stanley

Jonathan Chaplan - JP Morgan

April Horace - Janco Partners

Craig Moffett - Sanford C. Bernstein

Thomas Eagan - Collins Stewart

Operator

Good day, ladies and gentlemen. My name is Stacy and I will be your conference operator today. At this time, I would like to welcome everyone to the DIRECTV Group’s first quarter 2008 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, please begin.

Jonathan Rubin

Thank you and thanks for everyone for joining us today. With me on the conference call today are Chase Carey, our President and CEO; Pat Doyle, CFO; Bruce Churchill, President of DIRECTV Latin America; and Larry Hunter, our General Counsel.

On this call, we will make statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that could cause actual results to be materially different from those expressed or implied by the relevant forward-looking statements.

Factors that could cause actual results to differ materially are described in each of the DIRECTV Group’s and DIRECTV U.S.’ 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.

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

With that, I am pleased to introduce Chase.

Chase Carey

Thanks, John. I am going to just start with a few comments but I am going to keep them reasonably brief, because I think the first quarter numbers really speak for themselves. Pat will provide probably some more color on the results.

In a nutshell, we had a very strong quarter in the first quarter. There’s not a lot to be critical of in our results and I do believe they reflect the overall strength of our business. Almost all our metrics in the U.S. were pretty strong in the first quarter, certainly gross adds, net adds, churn, ARPU growth were all good. We continue to attract quality subscribers and install advanced products in well over half our new customers.

Top line revenue growth was certainly solid but the highlight in the quarter was our improvements in margins and cash flow. I think we really began to marry our top line growth with success in getting on top of key costs like retention spending, service, and G&A, to really drive the bottom line.

However, there are still areas we can do better, that’s for sure. For example, SAC could be tightened up. Most of the increase was planned -- planned for spending on advanced products or more targeted sales tools, but there are clearly things we can do there. There are also costs like service where we made progress but still have a ways to go to get to where we should be.

In many ways, our Latin American business was even stronger than the U.S. Net subscriber growth more than doubled to about 200,000. ARPU grew about 20%. Overall revenue grew almost 50% and OPBDA grew about 70%. Clearly those numbers were helped by foreign exchange but overall it was a really good quarter.

Sky Mexico, which is not reflected in these numbers, also had a strong quarter with a doubling of net sub adds and double-digit percent increases in revenue and OPBDA. The one metric in Latin America that was up more than plan was churn, which was at 1.57% per month for Q1. This increase was primarily due to higher than expected sub growth because first-year churn exceeds longer tenure customer churn.

Again, strong results for both the U.S. and Latin America. I guess with that, I’m going to turn it over to Pat and I’ll come back and make a few comments about the rest of the year.

Patrick T. Doyle

Thanks, Chase. In many ways, our first quarter results were very similar to the trends we’ve seen in recent quarters where the rapid growth in demand for HD and DVR services had a material impact on both our top line and bottom line results. We also saw in the quarter some very favorable cost trends that are consistent with the outlook we provided at our investor day to increase operating margins.

Starting first with revenues, DIRECTV U.S. was up 14% to $4 billion in the quarter. Much of this increase was due to our third consecutive quarter of ARPU growth over 8%, bringing ARPU to 79.70.

In addition to annual price increases, we are continue to see strong growth in HD and DVR services. We now have more than 7 million subscribers with advanced services, or over 40% more than a year ago and paying us nearly $100 per month. That ARPU is over 50% greater than a subscriber without advanced services.

We also saw strong revenue growth in areas such as pay-per-view, ad sales, and in our commercial business. The increase in commercial revenues is related to increased competitiveness resulting from our new pricing and packaging strategy that we talked about briefly at our investor day. At that time we had estimated that the change in our commercial equivalent subscribers would result in a downward adjustment to our cumulative subscriber count of about 65,000 subscribers.

As we reported in our earnings release this morning, the actual adjustment came in at 71,000 subscribers. More importantly though, we are already seeing higher gross adds in the commercial market segment, particularly in small bars and restaurants.

Moving on to churn, on the last earnings call we talked about achieving an eight-year low monthly churn rate of 1.42% in the fourth quarter. We raised the bar a little bit in this first quarter by hitting a 10-year low rate for the first quarter of 1.36%. Consistent with recent quarters, most of our churn improvement came from lower involuntary churn due to our focus on higher quality subscriber growth and ongoing efforts to tighten our credit policies.

We also had a slight reduction in voluntary churn in the quarter, which speaks to the strength of our service in an increasingly competitive industry.

It was good to see that the tighter credit policies implemented over recent quarters did not negatively impact gross subscriber additions, which were up 4% to 964,000. In fact, higher quality gross additions, which we define based on minimum credit scores, were better than a year ago, both on an absolute and relative basis.

Many of the favorable trends we are seeing both in terms of gross subscribers and churn can be attributed to strong performance from our direct sales channel. Our direct sales team has done a good job capitalizing on our strengths, exploiting competitors’ weaknesses, and targeting higher quality customers who are more likely to purchase advanced services. This helps explain why new customers purchase HD or DVR services jump from the mid 30% range of gross additions last year to the mid 50% range this year.

In total, the direct sales channel brought in 14% more gross adds than a year ago, which more than offset a decline in the telco channel. With the loss of BellSouth as a partner on April 1st, direct sales will become an increasingly important sales channel.

Operating profit before depreciation and amortization was up 22% but importantly, OPBDA margin was up 155 basis points to 26.1%. From a margin perspective the largest improvements were in subscriber services and G&A. These are consistent with the outlook we provided at our investor day and are driven by greater financial discipline as well as improved quality and operating efficiencies. We look to see these favorable trends continue throughout 2008.

In addition, our programming margin stabilized in Q1, which is also consistent with our outlook. Partially offsetting these were higher subscriber acquisition costs. Cash SAC of $712 was actually down a touch from the fourth quarter but was up 7% over last year. The primary reasons for year-over-year SAC increase were higher new subscribers purchasing advanced services, increased dealer payments, and more national advertising.

Regarding the higher dealer payments, we recently change the compensation structure for many dealers to better align their commissions with the acquisition of higher quality subscribers. In other words, the increase in dealer payments and the higher quality subscriber growth we saw in Q1 are highly correlated.

Also putting upward pressure on SAC is a shift in sales from the telco channel to direct sales in other dealers. Telco SAC is typically below our average due to some of our costs and revenue sharing arrangements. However, it is important to note that a shift away from the telco channel will not impact our margins because we will not be sharing revenues or contributing towards their bundled discount offers.

There was, however, one large silver lining in our cash SAC, namely our capitalized hardware costs were 17% lower than a year ago, despite the fact that we had 60% more new customers purchasing HD and/or DVR boxes. This reflects the aggressive set-top box cost reductions that we’ve talked about in the past, as well as the increased usage of refurbished boxes through our lease program.

These same hardware reductions were evident in our capitalized upgraded and retention costs, which were also lower than the prior year. Also contributing to the lower capitalized upgrade cost was a decline in upgrade orders by existing customers, something we haven’t seen in about five years.

These strong top line and bottom line results combined with lower capital expenditures drove a 76% increase in cash flow before interest and taxes for DIRECTV U.S. to more than $600 million.

At the consolidated DIRECTV group level, which includes cash from DIRECTV Latin America, free cash flow was also up 76% to $544 million. I might add that for the first time, we received a cash dividend of $32 million from Sky Mexico last month that will be reported in our Q2 results

Also in the first quarter but not included in free cash flow was $160 million capital contribution received from News Corporation at the close of the Liberty transaction, and share repurchase of $160 million.

The Liberty agreement announced this morning to cap their DIRECTV voting stake at around 48% will allow us to start buying shares again under our new $3 billion share repurchase program. To help fund this program, we will issue additional debt of about $2 billion. We anticipate raising this money through both bank debt and bonds, and expect to complete these transactions shortly.

We feel this is an important first step towards improving our capital structure and we will continue to evaluate our balance sheet as the credit market and other conditions change.

So all in all, we are very excited about the momentum that is building at DIRECTV, both in the U.S. and Latin America. As we’ve talked about in February, we expect to take this company to a whole new level in terms of profitability and cash flow growth in 2008 and we think the first quarter results are entirely consistent with this bullish outlook.

And with that, I’ll turn it back to Chase for some closing remarks.

Chase Carey

Thanks, Pat. Looking over the rest of 2008, I think we are on track with most of our plans. We recently launched our newest satellite, which is expected to deploy in the third quarter for customers and will enable us to continue to drive forward and HD leadership. We currently have about 95 national channels and local HD in 77 markets, or about 76% of the U.S., so we will build on both of those once the satellite becomes active for customers.

We also took a significant step forward in improving customer care with our acquisition of 180 Connect, which is one of our major third-party installation companies, which will really give us unique insights into and ability to really maximize the efficiency and quality of the installation process.

We will also roll out our VOD product by the end of the second quarter, which we are excited about. We think a product that really will distinguish us first and foremost in easy use [to assume] customer attractiveness.

And we continue to distinguish ourselves in the content area with our -- the most recent deal is our exclusive deal for Friday Night Lights we announced with NBC, and that show will start broadcasting in about October 1st, or the beginning of October.

Obviously there is a lot happening, a lot more happening across almost every area of DIRECTV so it is both a busy and exciting time for us.

From a financial perspective, we are on course with the outlook for 2008 that we provided at our investor day a couple of months ago. As Pat touched on, during the last months, we worked -- last month we worked through the transition of BellSouth bundling from DIRECTV to Dish, which as most you know was effective April 1st. I guess it’s as expected. We had some short-term transition issues in the first few weeks but we are pretty well on track with implementing our plans to mitigate this transition, although I do want to remind you that our second quarter sub growth is always down significantly in a seasonal basis but we really do feel we are on track with our plans and expectations there.

Overall, our business remains as competitive as ever and I certainly don’t want to use our results to gloss over a competitive market. However, the fact of the matter is that we have unique strengths which we feel in many ways are getting stronger and we are competing very effectively against the bundle and other market forces out there.

Finally, before turning to Q&A, I want to touch on the $3 billion share buy-back we announced this morning. We are not going to set a deadline of the completion of the buy-back but we do plan to pursue it aggressively yet opportunistically. As Pat said, we will be in the credit markets in the next few days to borrow $2 billion plus to fund it. We recognize this level of debt will not optimize our balance sheet but we think it is a prudent step in today’s challenged credit markets.

We also want to highlight that this buy-back is accompanied by an agreement with Liberty to exclude the impact of the buy-back on Liberty’s vote in DIRECTV. We are only a couple of months into our new ownership with Liberty and just actually had our first board meeting less than two weeks ago. But I think these steps should be a clear indication that Liberty and DIRECTV are working well together and working well to move DIRECTV forward.

Clearly we and Liberty believe there are other steps that make sense for us together and expect to continue to move forward expeditiously as we work through short-term items. It’s a great start under our new ownership structure and we look forward to the future.

And with that, I’ll turn it back to John.

Jonathan Rubin

Thanks, Chase and quickly, 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 would like to remind the media they are not authorized to quote any participants on this call, either directly or in substance, other than the representatives of the DIRECTV Group. In addition, we are webcasting this call live on the Internet and an archived copy will be kept on our website.

With that, Operator, we are ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Ingrid Chung with Goldman Sachs.

Ingrid Chung - Goldman Sachs

Thank you. Congratulations on a great quarter. I think all of us are a little surprised by the general out performance in net adds across pay TV. I was wondering if you could characterize what is driving the out performance in context of a slowing housing market. I was wondering if you were maybe getting some benefit from the analog homes that are out there that need to transition to digital.

And then my second question is on the Sprint Clearwire announcement today. I was wondering if that impacts your partnership with Clearwire in any way.

Chase Carey

I guess in terms of the subs, I wouldn’t attribute much to the economy one way or the other. I mean, I think we’ve said pretty consistently in the past and I think I’d just continue to say it’s true for us. I don’t think -- I guess I’d never say none but the economy has not had a material impact on the results you are seeing from us and I think that continues to be true.

I don’t think the digital -- I think it is pretty early for the digital transition to be having much of an impact. I think changes like that usually end up being driven more around the actual date and time, which is early ’09. I’m not saying there isn’t some there.

I think for us, it is mostly continuing strength. I think for all the -- doing things like in HD where they say they are going to do more, I think we still have a unique position of leadership and a real window to continue to drive it. I think we’ve got momentum to a lot of aspects of our business and I think continue to execute reasonably well. I’m not saying we can’t do better but to take advantage of the strengths we’ve got in the business.

I don’t think it is probably anything that different than what we’d been -- what we had experienced but I wouldn’t cite the economy.

I think in terms of the announcement today, I don’t -- Clearwire really hasn’t had any meaningful -- and I don’t mean this in any derogatory way, they may have been focused on other things but Clearwire has not been a meaningful part of anything we’ve been doing. So we have an agreement but we are not doing a whole lot with it and they haven’t been doing a whole lot with their business and I think we’ll see where this goes. I think in general, the whole announcement is probably -- I view as positive. I think anything that happens that sort of creates energy in alternatives in the broadband space is a good thing. And I think more action and more energy are there. I think clearly there are issues about six-party partnerships and other things that time will tell but I think energy and action and alternative and broadband and anything that helps push it forward is a positive.

But for us, I don’t think we’ve gotten far enough with Clearwire to really end up saying it has any impact. And I think the relevant factors, where do they go and what do they become down the road, which will take time.

Ingrid Chung - Goldman Sachs

Great. Thanks.

Operator

We’ll go next to John Hodulik with UBS.

John Hodulik - UBS

Thanks. A quick follow-up to that -- you had real strength in the gross adds in Latin America. If you could talk a little bit about what’s driving that.

And then ARPU is another thing that really surprised us. You’ll seeing continued acceleration there. Is it just the increasing mix of the advanced services subscriber base that is driving that or are there other things at work? Thanks.

Chase Carey

I’ll answer the second part and maybe let Bruce Churchill answer the first part in a second. But I think in terms of ARPU, it really is essentially the mix. As Pat said, we had this type of growth really the last couple of quarters as well and it is the mix of certainly advanced products, certainly quality subscribers behind that that lead to strength in terms of overall package buying. We did have the price increase go through pretty well.

I think it is the mix of elements that have really been there the last couple of quarters. I really wouldn’t say it’s that -- the growth in this quarter is meaningfully different in terms of what drove it than the past few quarters.

I’m going to let Bruce Churchill touch on the growth in Latin America.

Bruce B. Churchill

I guess obviously Latin America is not one place. There are reasons for the growth across the board and it has pretty much been experienced across the board. In general, I guess I would say the economies are doing well, so we benefit from that and that’s particularly true of a country like -- let’s say Brazil. And then on top of that, there are other factors in some big territories, such as Venezuela, where our prepaid product continues to be a very big success for us, and in territories such as Argentina where there’s been a bit of a change in the competitive scenario and some of the cable systems going digital. It has made us frankly more competitive than we have historically been when they were just analog.

So it’s a mix of factors but it’s been pretty much across the board.

John Hodulik - UBS

Great, thanks.

Operator

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

Doug Mitchelson - Deutsche Bank

Great. Thanks very much. A clarification and a question; the clarification, I just wanted to make sure your comments on BellSouth regarding 2Q where you said you feel like you are ramping back up to plan. Does that mean you are making up for the first few weeks starting out a little bit soft, or does that just mean your first few weeks were soft but you feel good about the trend going forward?

And then the question is, wireless is kind of the topic of the day, I think. I mean, it looks pretty clear that DIRECTV's been able to compete with cable bundles and adding a wireless phone to that bundle might not change the market for you but what the cable operators are doing is building out mobility not just for their telecom services but for their video services as well. And you also have Dish making tech bets on Fling and Archos and 700-megahertz.

I guess my question for you is how important do you see video mobility as you look out, rather than just focusing on that date or phone aspect of wireless? Thanks.

Chase Carey

In terms of BellSouth, what I am really talking to is our plans. I mean again, I think we’ve talked about sort of overall for the year what we expect we were looking to in sub growth a couple of months ago. And you get all those things factored in, that we knew the BellSouth transition was coming. We had, as we said, actions and things we’d be taking that we expected to both directly and indirectly mitigate some of those shifts.

And I’m not going to get into specific numbers sort of month by month, region by region, that I think are too competitive, but an overall comment to say things are going about as we planned and I think we feel okay about it. And again, I think it’s tough to plan for some aspect of it, so is there in the first part of that, in the first few weeks of that transition until you get -- until it occurs, there are things you can mitigate but you sort of work through it and probably be nimble and try and make the appropriate adjustments. And I think we feel we’ve done that reasonably well and I think we feel we are on track to the types of results we planned for the year.

I think in terms of wireless, I think wireless video is part of the long-term proposition but I guess -- I do emphasize the phrase long-term, particularly if you are talking in bundling. I think it is going to take a while. I mean, how long, I don’t know. They don’t even have in many ways the WiMAX technology deployed yet and you’ve got to build it out.

I think wireless, even the wireless core services are really not part of the bundle today. So I think if you are sort of saying as you think in three and five-year timeframes through some of these -- does some of this start to emerge? I think it does start to emerge but I think it is a longer term proposition. I think it is a place we plan to sort of be at but I think you’ve got a lot of forces in there. You’ve got the big cellular guys, Verizon and AT&T as they move from 3G to 4G and what are the propositions they push into the market.

And I think you’ve still got to define the consumer appetite -- what type of content, what type of video do they want to watch and in many ways, is it how complementary to the home experience?

But I think bottom line, this is a -- it’s not a one or -- this is not something that is going to be impacting the business a whole lot in the next couple of years. It is probably more I think in a five-year time context, not a one and two-year time context that is a meaningful event. So I think there is a lot to be played out and certainly we intend to play in it and I think some of the newer plays, I mean, whether it’s Sprint Clearwire or EchoStar, again -- I think you’ve got to see what happens. I mean, building out wireless infrastructures to compete with guys like AT&T and Verizon with 4G is clearly going to have -- going to be a fairly challenging proposition, not that there aren’t real opportunities in mobility and video as part of mobility are important parts of the business but I think there’s a lot of ground between here and there as it shakes out. And I think we want to be smart about how do we play in it, but I think it is an area over time we do intend to play in it. But I think in what shape and form is something that we’re going to continue to be thoughtful.

Doug Mitchelson - Deutsche Bank

Thank you.

Operator

We’ll go next to Kit Spring with Stifel Nicolaus.

Kit Spring - Stifel Nicolaus

Can you talk about how you are doing in areas where FiOS or U-Verse have rolled out? And maybe a little bit about your decision to buy 180 Connect and whether bringing in more of your installation in-house is an initiative you plan to continue on? Thanks.

Chase Carey

I guess in terms of FiOS and U-Verse, I probably wouldn’t put them in the same bucket. I think where FiOS is launched, they are probably more of a competitive factor. I mean, first they are spending a lot more and anybody who lives in FiOS market, all you have to do is look at the marketing and the offers and the stuff they are throwing at it, which I think is why in many ways the questions around FiOS are probably more economic than anything.

But I think where FiOS exists, it is a competitive force in the market. Not that we can’t compete against it and I think we compete pretty well against it. But where they exist in a market it certainly adds to their competitor and I think has an impact on the market.

Again, I think as we’ve said with FiOS, they’ve talked about building out this 15 million plus households and if they do, I think that’s -- I don’t know what they get, 5 million plus subs and some chunk of that would come from us. But in the overall context of our business, it’s one of the things you deal with but I think it is manageable and I think it is sort of a competitive factor we can address.

I do still think there are questions they’ve got to address over time as to is what their -- not just on CapEx but what they are spending on programming and marketing and installation and services, is it sustainable and where do they really settle out?

And I think with U-Verse, it’s a different problem with them and I think U-Verse is probably not a competitive impact. I think there are still fundamental questions whether -- you know, what’s the timeframe before it’s really -- particularly for someone who cares about a quality television experience, I think there’s a ways before it’s really a viable mainstream television option for American households, so I certainly don’t think you see the same impact and I don’t think they -- they’re not spending the money FiOS is spending to get homes.

What was the other -- 180 Connect. We don’t have plans to do right now -- we’re to doing anything else. I mean, I think we felt this was an attractive opportunity for us in an upper level and I think in many ways first and foremost to really get a first-hand understanding of what we really think are the right levels of quality and efficiency that first-hand in our installation operation should operate by. You know, how often should we have to roll a truck to fix something, what is the right target? I’ve always said I don’t understand why 100% of dishes aren’t pointed right and therefore it’s a very -- more than 1.1% aren’t. I guess we want to understand why not and it may give us more insights and better insights to how do we really make sure we are hitting the right targets in efficiency and quality.

And I think it probably gives us deeper insight to look at other ways that we can do some things that may improve the business for us and our partners. I think in many ways we think this is an opportunity for us to be up, play a leading role in setting the right targets, the right goals, the right efficiencies, the right business practices for all our installers, not necessarily ours. But I think we will -- and it certainly gives us the foundation to go forward and address all this and understand it better and determine where we go from here.

But I think for now our plans are really going to be focused -- we’ve got our focus on really getting the 180 Connect to be that operation and owned by us to really operate and deliver the results we expect it to.

And it will be a nice financial opportunity -- I mean, we expect it should be a real value-wise -- I would not say -- but it’s not that big of a -- but actually it is certainly something that if we do our job well, it is sort of going to be a lucrative, a good investment for us.

And I think it gives us an opportunity to grow. I’ve always thought television is the leading force in a household and as people go forward and put more in the home and more inter-connected things in the home, can you play -- what roles and what opportunities are there for us to really broaden and obviously we are going to be more in a home as we start connecting broadband to our boxes and the like, so it I think equally gives the foundation to try and explore growth opportunities, again both for us and the HSBs.

Kit Spring - Stifel Nicolaus

Thank you.

Operator

We’ll go next to Jeff Wlodarczak with Wachovia.

Jeff Wlodarczak - Wachovia

I wanted to focus on the former BellSouth/AT&T relationship again. Did your AT&T/BellSouth subscriber additions ramp down materially in Q1 in anticipation of the end of the deal April 1st? And then your latest thoughts on the potential I guess to win back AT&T in the fall, especially given your very strong relative subscriber results and sort of unarguably much stronger HD programming lineup? Thanks.

Chase Carey

I’d say in the first quarter, BellSouth remained pretty focused on working with us to pretty close to the end of the quarter. I’d say through most of the first quarter they remained, and I think were true to working and making our deal work for our mutual benefit.

In terms of later in the year, probably not a lot. Again, I really don’t have anything to new to say than what I said before. I mean, I know EchoStar is talking to them. I think we are talking to them and again, if we can structure the right relationship, it can be attractive. Obviously there are arrangements that would not make sense for us but we certainly engaged and I think as with any sort of ongoing negotiation, probably time will tell and there are probably limits to how much we can provide, in terms of insight stuff to where it works out.

Jeff Wlodarczak - Wachovia

And if I could ask one follow-up -- can you provide more color on how material the sub growth to you all when Comcast sort of force converted Chicago at all digital? And given the fact that Comcast anticipates force converting about 20% of their markets this year to all digital, how big of a subscriber driver do you anticipate that’s going to be for DIRECTV? Thanks.

Chase Carey

I’m probably not going to -- I mean, I think you are getting into competitive dynamics and I’m probably not going to provide a whole lot of real color on. I think any time we are -- I think we’ve gotten very good at sort of trying to track whatever goes on with any of our competitors in any market and making sure to the degree any changes are ones where we think there’s an opportunity to take advantage of, we try and do so.

But I don’t think it probably benefits us to sort of be telling the world which ones are good and which ones are bad.

Jeff Wlodarczak - Wachovia

Fair enough. Thanks.

Operator

We’ll go next to Jason Bazinet with Citigroup.

Jason Bazinet - Citigroup

Thanks so much. I have a question regarding the new buy-back, or the new debt offering in the intended buy-back program. My question is, is there a new standstill agreement as part of this with Liberty? And as you answer the question, I guess the most salient aspect of it that I would love to get your answer to -- does this give Liberty the flexibility to buy back DIRECTV shares crossing the 50.1 threshold without tendering for the balance of DTV? Thanks.

Chase Carey

The agreement with Liberty was filed this morning with an 8-K and the answer to your second question is no.

Patrick T. Doyle

It is a new agreement but --

Chase Carey

It is a new agreement. It was just entered into last night but --

(Multiple Speakers)

-- it doesn’t give them -- neither the buy-back nor independent action of Liberty would give them the right to buy additional shares and avoid the requirements of the certificate of incorporation.

Jason Bazinet - Citigroup

Okay, and --

Chase Carey

This agreement preserves the status quo.

Jason Bazinet - Citigroup

Okay, perfect and can I ask one more? I think it was last year that the FCC opened up the exclusive arrangements with MDUs, which my guess is around 5 million households or something across the U.S. And I was just wondering if you could elaborate on any sort of R&D improvements you made to address that MDU market. And then second, when if at all you expect that to begin to impact gross adds. Thank you.

Chase Carey

I think actually the size is a bit bigger than you cited but I would actually say we’ve made very good progress in the R&D front and the technology engineering front and we have not made the progress we should on the execution front. So it falls in one of those categories where I guess I can call it a glass half full. That it’s an area of opportunity where we are not where we should be and it’s because we haven’t done a good enough job there, and actually have had two meetings in the last month to -- we’ve made some progress but we’re not anywhere close but the issues are -- a year ago we had some issues in terms of having the right technological solution and the like. Right now actually we have a great solution that is a competitive advantage for us and we’ve got to do a better job executing it in a marketing, sales and service context.

Jason Bazinet - Citigroup

Could it be an ’08 event?

Chase Carey

It should be a benefit in ’08. I think this -- probably realistically it’s positive in ’08. I don’t think it’s a transforming ’08 event. I think it’s positive in ’08 but I think it’s a longer term proposition than that. The end user, somewhat tricky to reach. I mean, there are some that are in large groups but a lot of them require dealing with an array of building owners and the like.

So I probably would end up saying this is probably more of a -- we should be making steady progress. This should start in ’08 but I think it is more of a multi-year than a multi-quarter initiative.

Jason Bazinet - Citigroup

Thank you. Very helpful.

Operator

We’ll go next to Vijay Jayant with Lehman Brothers.

Vijay Jayant - Lehman Brothers

Thanks. Chase, the cable industry has started to offer the Vista Voice and Data bundle. Is that something that your marketing department has been able to sort of monetize at all so far?

And a follow-up for Pat -- is there any benefit to your free cash flow profile from the economic stimulus on accelerating set-top box depreciation that we are seeing from some other companies? Thanks.

Chase Carey

On the 2-play, I don’t say we’re specifically targeting -- I mean, what we are trying to do is really get ourselves to be better -- to really be capable of being an overall guide and aid to the customer in understanding their options, and have spent a fair amount of time putting in place the capabilities, so what are your options from a -- particularly for broadband telephony that are compatible with us. To the [inaudible] cable is one of them -- it’s one of them. I wouldn’t say it’s a focused one but I think we want to -- we want to be able to -- if our goal, as we’ve said, is really to make sure customers have options that are compatible with DIRECTV we feel we should be proactive in trying to play a role in helping to inform, educate, and identify. And obviously they vary by region and place and therefore there’s been a fair amount of system and data support required to put it in place. So it’s a part of the mix but I wouldn’t necessarily say it’s a targeted aspect of the mix.

Patrick T. Doyle

On the stimulus package, we do believe that it is going to help us with our free cash flow in 2008. Probably the number -- if I had to pick a number, it would be over $100 million of benefit we think in allowing us to defer taxes into future periods.

Vijay Jayant - Lehman Brothers

Thanks.

Operator

We’ll go next to Ben Swinburne with Morgan Stanley.

Ben Swinburne - Morgan Stanley

I think in your opening remarks, Pat, you talked about broadly the first quarter being on track with your full year plan. And I wanted to go back to ARPU and also programming costs per sub, because I think both -- are both trending a little bit above from a growth rate perspective what you guys talked about at the investor day?

And maybe on the ARPU front, if you could eliminate the telesat and maybe the activation ARPU flowing through there, if there was maybe a more organic number that we should think about for the remainder of the year.

And then on the programming costs front, is there seasonality to the year-over-year growth rate that suggests the rest of the year will be a lower number in terms of year-over-year growth on a per sub basis than 1Q?

Patrick T. Doyle

Again, we do have -- the telesat lease revenue, which is in the first quarter but not in the prior quarter, probably affected the ARPU growth by three to five basis points, something in there. But again, as we look through the year, I mean, the first quarter was a great quarter and a strong quarter. It is not necessarily that we will keep that pace through the whole year, so we are still comfortable with the guidance that we’ve given on our full-year ARPU.

On programming, yeah, the first quarter is a little higher. We do see some things down the line, some stuff with mix and some of the contractual rates that helped us in the later part of the year that will bring that programming cost back kind of in the line of the guidance that we’ve given you.

Chase Carey

I think we still feel comfortable with where we are. Again, I’m not going to -- I think when we try to paint a picture, we’re not painting it quarter to quarter. In some ways, we’ve tried to give directional, so I think as you talk 5%, it doesn’t mean 5.0 versus 5.1 for your -- there are areas and you get down to small enough timeframes like quarters and fairly small amounts can move the percentages. So I think as a picture for the year, we still feel comfortable with the picture we painted.

Ben Swinburne - Morgan Stanley

Okay, and if I could just ask one quick follow-up; did you guys talk about the MPEG-4 upgrade spend in the quarter, if that was something that -- and sort of where you are at the end of the quarter and what’s left to do and your timeframe there?

Chase Carey

I think it’s sort of a -- I guess it’s a -- I think we’ve continued to try to -- we certainly don’t -- we actually did get through a part on the west coast. I think the rest of it, we’re not, as we’ve said in the last I think number of quarters, we’re not looking to accelerate. We are certainly on the back half I think of what we’d do, but it continues to benefit us as we stretch it out. I mean, probably the easiest example would be a fair number of these people actually now would be taking HD DVRs. An HD DVR first half of ’07 was costing us well over $400. By the middle of this year, it’s costing us in the low 200s. So clearly the benefit of being able to stretch that out obviously there’s just a natural level of churn and other things that help mitigate it. But that number is actually one that I think we are sort of on the -- we still have a material level to go but I think we are on the downside of it.

Ben Swinburne - Morgan Stanley

Thank you.

Operator

We’ll go next to Jonathan Chaplan with JP Morgan.

Jonathan Chaplan - JP Morgan

Thanks. A couple of quick follow-on questions, if I may. So firstly, on the -- just a follow-up to Ingrid’s first question; in terms of the macro trend for the pay TV space overall, I understand what is driving growth in your business specifically and I understand that you don’t have a tremendous amount of visibility into your competitors’ businesses, but I’m wondering if you have an opinion on -- when we look at your ads plus the telco ads plus the cable TV ads, the MSO ads so far this quarter, it looks like there is an anomaly going on in the trend and that the overall market seems to be growing at a faster rate. And I’m wondering if -- you know, there’s still three providers that haven’t reported results so far but from everyone that has reported results, they’ve been better than expected. I’m wondering if you’ve got an opinion on what might be driving that.

And then on BellSouth, it seems like -- you were saying earlier that the direct sales channel is at a point now where it would make up for the down draft from BellSouth, setting aside the seasonal pressures in 2Q, that the direct channel would [light a growth] through that. I just wanted to clarify that.

And then finally on the shift in mix away from telco, what was the magnitude of the avoided revenue share in those deals? If you could give us some color on that. Thanks.

Chase Carey

I guess the growth of subs, I mean, I’ll probably -- you guys track the market more than I do. I worry about our business so I’ll probably leave it to you. I mean, again as you say, some people aren’t there. I know what we’ve done and we’ve done it, we’re getting the type of stuff we want to get but not everybody obviously was up. I think some of them were down but probably leave it to you guys who track the market. I’m more focused on us.

BellSouth, again I want to clarify -- we’re not trying to mitigate sub for sub. I think as I said, there was an aspect of -- what I’m saying is we’re able, we’re on track with achieving what we look to achieve in the year. There are benefits that come out of BellSouth. We take actions in an array of places to be able to continue to drive to get the type of results we want. I guess what I’ve been saying is we are on track to achieve the results we talked about at the investor day and the type of sub growth we talked about there.

So I think we’ve been achieving our plans. Our goal is not to say how do we go mitigate sub for sub every sub that related to BellSouth. I mean, it’s sort of how do we use channels to sort of replace some of the BellSouth subs and go use various strengths we have to compete in the marketplace in an intelligent way.

But clearly there were some incremental subs that come through a telco and we can -- we’re saving money that we can deploy in other ways to effectively capture subs. But we’re not going to -- our goal is not how do we sub for sub replace BellSouth. Our goal is how do we effectively go get some subscribers, and clearly we have some resources that we are not deploying, that we were deploying with BellSouth and some of that we are redeploying in the BellSouth regions and we redeploy elsewhere.

But I think what we’ve been saying is we are on track for what we planned for the year in terms of sub growth. I think you are probably trying to get down to the dollars and that again I would end up saying you are getting into competitive data that we wouldn’t really be publicly sharing at that sort of level.

Jonathan Chaplan - JP Morgan

Thanks, Chase.

Operator

We’ll go next to April Horace with Janco Partners.

April Horace - Janco Partners

Thanks for taking my question. I think you said that 55% of the gross additions were taking advanced services this quarter. Is that more of a seasonal effect because of the Super Bowl and Christmas, or is that something we can expect throughout the year? And then I have a follow-up.

Patrick T. Doyle

I don’t know that we gave that at mid 50.

Chase Carey

I don’t think it was that precise. I think it’s sort of -- I don’t think it’s a -- I think you have a general trend to, as I think I said at the investor day, I think you’ll find in a couple of years, 2010 70% of our customers will have advanced products. I think things like a DVR will become just like a VCR or a DVD player was in a home and become a mainstream part of an experience, as will HD. I think they both continue to move. I mean, we saw certainly in excess of 50% in the fourth quarter, so it’s not like this was an anomaly or sort of a quarter that went to a whole different level. We’ve been seeing steady growth in that really throughout the last number of quarters.

April Horace - Janco Partners

And then I was wondering if you could give us an update on the VOD rollout and what kind of effects the pay-per-view, if it will affect ARPU anytime in the near-term or over the long-term?

Chase Carey

I think VOD continues to be probably a longer term proposition. I think as I’ve said before, I think DVRs and HD I think are much more powerful forces in the marketplace today. I think VOD -- that’s not diminishing -- I think VOD will continue to grow but I think it will grow over a longer timeframe.

I mean, some of the content issues in terms of windows and the like are starting to be addressed but again, I think it takes time, habits take time. Customers need to understand and start to use it. So I don’t think VOD -- I mean, we do plan to launch our VOD product by the end of the second quarter. I don’t think it’s a -- I think it really is against something that will be -- to affect something like ARPU over, it’s something that is years, not quarters.

April Horace - Janco Partners

Okay, great. That’s all I got. Thank you.

Operator

We’ll go next to Craig Moffett with Sanford Bernstein.

Craig Moffett - Sanford C. Bernstein

You are facing a digital TV transition in January of next year that at least some of the studies that we’ve seen suggest that signal propagation and the like may force an awful lot of those 14 million over the air households into the pay TV market, and a lot of them are Hispanic and sort of right in your wheelhouse. Is that an opportunity that you think is something that you are able to get at or is it -- are those customers too low value to be interesting, given the equipment requirement? I wonder if you could just comment on that as an opportunity for you and how you think you might go after it.

Chase Carey

We’ll certainly go after it. I think it’s tough to get a real handle on how big. I don’t think we -- I think we view it as an opportunity. I think it’s a positive. I would not end up saying at this point we are planning for it to be a huge positive. And I think certainly if it is more than we think it is, we think we should be able to get more than our fair share of it. I do think our national reach and I think we’ve gotten pretty good capability to target customers in the right segments, whether it’s ethnic or elderly or some of the segments people have talked about, that we will go after.

But I think we will have to see how big it is. Again, I would not say -- you know, we are certainly spending money and we are certainly pursuing it. I think we will pursue it competitively as much as anybody.

Probably not as worried -- I mean, I think we’ve gotten pretty good at building protections in and disciplines in to get the right customers and I think we will rely on those to deal with the quality issue and to the degree they are customers that we would be concerned with -- I mean, between the credit card check, social security checks, and other protections, I think there’s some good quality customers there that just probably have a different appetite for television yet still want to some degree a reliable quality television experience. And certainly we’d like to be there if we can but again, we will be.

But again, I would not end up saying we’ve planned on it. We’ve talked about numbers or expectations for ’08. There’s not a big factor in there coming from this.

Craig Moffett - Sanford C. Bernstein

Okay. Thank you.

Operator

Ladies and gentlemen, we have time for one final question. That will come from Thomas Eagan with Collins Stewart.

Thomas Eagan - Collins Stewart

Thank you very much. I was wondering if you could talk a little bit about SAC costs or more accurately box cost reductions for ’08 and ’09. How much do you expect to continue to pull down your box costs?

And also, if you could reiterate your relationship with TiVo now and in the future. Thanks.

Chase Carey

Sure. It will be a little -- I think box costs continue to get -- or something like the basic box, now that it’s into the 40s, and I think there are clearly probably limits to where that goes. We are actually going to have -- I mean, to some degree over the next couple of years, we’ll actually have some more substantial levels. It won’t be enormous volume, a little bit of migration going on. I mean, one of the things we will actually add a bit of cost directly to SAC starting in the second half of the year, which I touched on at the investor day, is our standard def DVR we are going to deploy. It is actually going to cost about $30 more. We think we can bring that down as it goes.

And then the current standard def, because what it is going to be is a DVR that is upgradeable with a set-up or download to HD, so that a customer that goes from a standard def DVR wants to upgrade to an HD DVR, we can do it simply by flicking a switch, like turning HBO on as opposed to rolling a truck and replacing equipment in the home. We think it’s an overall savings but obviously it’s a shift from one place to another. And as you go into ’09, we start to move to a whole home solution.

So I do think hardware keeps going down, though there are aspects of it technology wise that keep going in, which I think is why we continue to sort of look at a stabilizing of SAC and managing these array of intelligent investments with economies and efficiencies.

Thomas Eagan - Collins Stewart

And I actually have a follow-up; we’re seeing a lot these days in the industry on M&A on cable networks. I was wondering if you could reiterate a little bit on your content strategy and would you be willing to buy any cable networks? Thanks.

Chase Carey

You mean buy like a small rural --I guess that’s what I’ve heard -- you mean like a small rural cable?

Thomas Eagan - Collins Stewart

No, I actually mean --

Chase Carey

Oh, cable networks, I’m sorry. I thought you meant cable services. Because I don’t think we’re buying cable networks. Cable channel -- look, I think my general view is the ones when you hear about all seem to be pretty premium priced. I do think content, and I’ve said it before, I think content and distribution, there are values, there are synergies and values you can create. So I think if we are going to pursue something, I think it’s something we want to really feel there’s real upside in and you go out and pay -- I don’t really see the benefit of sort of going out and paying retail for something that you’ve got to do a whole lot of work just to make it pay for itself.

So I think it there are opportunities, it probably makes them more modest because there’s got to be more upside. We’d like to be smart about sort of, if there’s something there that makes sense but it probably, to really have the type of returns we’d need out of it, it probably needs to be something that we can bring a lot of value to, something that is sort of more fully developed, my guess is gets more competition around it and more premium priced and probably tougher to make it make sense.

I think we’ll be opportunistic but I think we’d be selective and opportunistic, and I think those are probably more modest best but I think there are places we think we could, DIRECTV could bring value to that.

Thomas Eagan - Collins Stewart

Great. Thank you.

Chase Carey

Oh, and TiVo. I think we continue to try to -- I’m sorry, I forgot about TiVo. I think we continue to see a few things -- I think we have a constructive relationship. We are not doing a lot in all honesty but I think we have an honest dialog that I think is sincere about seeing if there are things that make sense for us. I mean, at our core, the heart of our business is going to continue to get driven by set-top box technologies we’ve developed that are at the core of the -- as we launch VOD and whole home solutions and broadband connectivity and all these things, they are all tied into set-top box software that is deployed and operated by us. That doesn’t mean there aren’t things we can do with TiVo and if we can find a way to crack it, I think we’ve always been open to an intelligent relationship if there was one.

Operator

Thank you. Ladies and gentlemen, that will conclude today’s question-and-answer session and conclude today’s DIRECTV Group’s first quarter 2008 earnings conference call. You may now disconnect your lines and have a pleasant afternoon.

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