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DIRECTV (NASDAQ:DTV)

Q2 2012 Earnings Call

August 02, 2012 2:00 pm ET

Executives

Jonathan M. Rubin

Michael D. White - Chairman, Chief Executive Officer and President

Bruce B. 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 and Member of Proxy Committee

Analysts

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

Benjamin Swinburne - Morgan Stanley, Research Division

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

Jason Armstrong - Goldman Sachs Group Inc., Research Division

James M. Ratcliffe - Barclays Capital, Research Division

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

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

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

Stefan Anninger - Crédit Suisse AG, Research Division

Amy Yong - Macquarie Research

Thomas W. Eagan - Canaccord Genuity, Research Division

Operator

Good day, ladies and gentlemen. My name is Nancy, and I will be your conference operator today. At this time, I would like to welcome everyone to DIRECTV's Second 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 M. Rubin

Thank you, operator, and thanks to everyone for joining us for our second quarter 2012 financial results and outlook conference call. With me today on the call are: Mike White, President and CEO; Pat Doyle, our CFO; Bruce Churchill, President of DIRECTV Latin America; and Larry Hunter, 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 and Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause actual results to be materially different from those expressed or implied by the relevant forward-looking statements. Factors that could cause actual results to differ materially are described in the Risk Factors section and elsewhere in each of DIRECTV's annual report 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 most directly comparable GAAP measure, we provide reconciliation schedules for the non-GAAP measures, which are attached to our earnings release and posted on our website at directv.com.

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

Michael D. White

Thanks, Jon, and thanks to everyone for joining us today. Overall, I thought our consolidated second quarter results were strong and reflect the unique benefits from both our diversified portfolio of businesses and our focus strategies, which continue to drive industry-leading revenue growth of 9%, OPBDA growth of 9% and earnings per share growth of 20%.

In particular, I'd highlight 3 areas. First, the growth opportunity of our Latin America business continues to exceed both our internal and external expectations. Tremendous consumer demand for DIRECTV and SKY's premium brands across the region drove another quarter of record subscriber growth while driving a 20% lift in revenues, even with the significant currency headwind. Second, DIRECTV U.S. delivered the highest operating profit before depreciation and amortization growth in 2 years, accelerating at 10%. I personally think this is an early payback from successfully executing our long-term strategy of striking a more optimal and disciplined balance between growth and profitability as we've been talking about over the last year. And third, by leveraging the achievements of both the Latin America and U.S. businesses with the continuation of our share repurchase program, earnings per share increased 20% to $1.09.

Now before I turn the call over to Bruce and Pat, let me just offer a couple of other observations about both Latin America and the U.S., starting with Latin America. On balance, I thought DIRECTV Latin America's second quarter results were very strong, consistent with the key financial and strategic priorities we shared with you at our Investor Day in March. As a reminder, those priorities were to rapidly grow our subscriber base while maintaining strong margins and also aggressively pursue noncore initiatives, such as wireless, broadband and over-the-top video.

Talking about those strategies, I'd first point out that DIRECTV and SKY's leading brands, differentiated products and segmented offers drove another record quarter of subscriber growth and market share gain. Net adds of 645,000 reached an all-time high as we expanded our share of the growing pay-TV household market across the region.

Now although we've become accustomed to SKY Brasil's subscriber outperformance, PanAmericana's net additions increased 83% in the quarter to nearly match SKY Brasil's net subscriber gains for the first time. Now with this tremendous subscriber growth, DIRECTV Latin America's revenues grew 20%. But perhaps more importantly, if you exclude the impact of foreign exchange, revenues grew around 30% in the quarter.

3 key strategies are driving that growth: continuing to lead with HD and advanced services; expanding into the middle market via prepaid in PanAmericana and SKY Light and FIT packages in Brazil; and jump-shifting our market share and scale in Colombia. All 3 of those strategies are either on track or, in most key cases, exceeding expectation.

Shifting to margins. As you saw in the earnings release, DTVLA's OPBDA margin was below last year but for a variety of reasons, including the higher gross additions, some one-time items and what I would refer to perhaps as a bit of growing pains related to our tremendous subscriber growth over the last 2 years. In fact, the nearly 300,000 increase in gross additions was a major reason for the margin decline.

Just to put that growth in perspective, over the last year and a half, our subscriber base has grown nearly 60% by adding more than 3.3 million net additions. To service that kind of a rapidly expanding subscriber base, we've had to open up new call centers and upgrade our IT systems. And as you might expect, there are sometimes temporary inefficiencies associated with those processes.

Most importantly, we continue to learn a lot and are quickly implementing solutions to address those issues as they arise, while ensuring our customers continue to receive best-in-class service experience. Case in point, the Brazilian equivalent of the J.D. Power award honored SKY Brasil for the best customer service in pay TV for the 10th consecutive year this spring.

And I think it's also worth repeating the key messages from our Investor Day in March, which we remain committed to. DIRECTV Latin America is our company's greatest growth opportunity, and we believe we continue to have an opportunity to create significant value for our shareholders. As such, Bruce has the green light with his team to rapidly grow the business with one key condition, which is maintaining strong margins. I might say Bruce and his team continued in this quarter to successfully execute on this goal. Even though our Latin America business is growing a lot faster than expected, which, as you know, has an unfavorable impact on margins in the short term, we still intend on delivering OPBDA margin in the 30% range this year, which is consistent with both our guidance and the exceptional subscriber returns we shared with you in March. Lastly, we made substantial progress on our wireless broadband opportunity, including successfully bidding on some additional spectrum, which Bruce will talk about in a minute.

Turning now to DIRECTV U.S. I believe that second quarter results reflect early returns from our long-term strategy to deliver first quartile growth through initiatives that heighten our focus on the quality and profitability of subscribers, improving the overall customer experience and driving enterprise-wide cost management.

First, our very disciplined approach to attaining higher-quality subscribers is perhaps best exemplified by our second quarter results on gross adds. Stricter credit standards, reduced promotional discounts and lower telco sales all contributed to the decline. However, we estimate that the long-term value of our new subscribers this year is 25% higher than a year ago because of those changes we implemented.

The year-over-year decline in gross additions that we saw in the first half of the year will likely continue in the second half as we continue to place a greater focus on the quality and profitability of new subscribers. We also continue to invest in the customer experience to gain higher loyalty and profitability through more segmented upgrade programs, which are designed to drive greater penetration of our advanced services like Whole-Home DVR and Connected Home. The benefits from these initiatives and several others were clearly represented in the second quarter improvements reported in both churn and in ARPU. And also in the quarter, with benefits from our enterprise-wide cost containment and productivity improvements as we're now starting to see many important cost areas grow slower than revenues.

Now with that said, rising programming costs can remain our greatest cost challenge at DIRECTV and as an industry. And as you saw with the Viacom dispute, we continue to be committed to doing whatever it takes to mitigate the growth of those programming costs on behalf of our customers. With these successes, operating profit before depreciation and amortization margin for DIRECTV U.S. increased for the first time in 2 years. This margin improvement is particularly pleasing to me because it not only positions us to meet, in some cases, exceed our full year 2012 guidance for U.S. revenue, OPBDA and cash flow, but it also provides us with even more confidence that we can continue to achieve first quartile growth over the longer-term as well.

In summary, second quarter results for both Latin America and the U.S. business demonstrate solid execution of a disciplined set of strategies for creating shareholder value. In Latin America, we continue to deliver on key strategies to maintain our subscriber momentum by leading the higher-end markets with the best advanced services while also further penetrating the rapidly-growing middle markets. And in addition, we remain committed to the profitable increase of market share across those demographic segments. In the U.S., we continue to navigate through tough market conditions while focusing on our top priority of achieving sustainable long-term profitability while delivering mid-single-digit revenue and OPBDA growth.

With these winning strategies in place, I'm confident that we'll continue to deliver superior financial returns for our shareholders for many years to come.

So with that, let me turn it over to Bruce Churchill. Bruce?

Bruce B. Churchill

Thanks, Mike. As Mike mentioned, DIRECTV Latin America continues to demonstrate its competitive advantages in a rapidly-growing marketplace by achieving another record quarter in terms of both gross and net additions. The significant subscriber momentum that we are seeing throughout the region continues to exceed our expectations. Before discussing our second quarter results in more detail, I'd just like to remind everyone that unless otherwise noted, our results exclude those of SKY Mexico, which we do not consolidate.

For the quarter, our record gross additions of 1,119,000 were 36% higher than last year. In Brazil, gross additions grew 24% compared to Q2 of 2011, of which approximately 70% came from the middle market segment. In PanAmericana, gross additions grew 50% compared to last year with sales in Argentina and Colombia leading the way. For those of you who joined us for our Investor Day last March, you may recall that we had identified Colombia as a market with great potential. Therefore, it's gratifying to see Colombia become such a big contributor.

It's also worth noting that prepaid sales represented approximately 49% of our gross additions in PanAmericana compared with 36% a year ago since the potential prepaid was another item we highlighted in our presentation last March. In total then, for both Brazil and PanAmericana, middle-market subscribers now make up slightly more than 30% of our 9.1 million subscribers compared to about 25% a year ago.

Consistent with recent trends, nearly 14% of new customers in the quarter took an advanced product and almost 75% of these customers took HD. In Brazil, our HD subscriber base has grown by more than 85% compared with last year, with more than 2/3 of the growth coming from upgrades of our existing customers. SKY Brasil now serves over 1 million HD households or roughly 25% of the base. In PanAmericana, total HD subscribers increased more than 50% from the prior year. And when combined with our standard definition DVR, approximately 30% of our subscribers in PanAmericana have advanced products. Overall, approximately 28% of our 9.1 million consolidated subscribers now have advanced products, 2/3 of which subscribed to our HD service. When you consider this in the context of the fantastic growth that we've experienced over the past year or so in the middle market, I believe this is quite an achievement and consistent with our balanced growth approach.

Turning to churn. Our postpaid churn in the quarter of 1.51% increased versus the prior year. As we mentioned at our Investor Day, middle-market subscribers in Brazil have a monthly churn rate of just below 2%. And as these subscribers comprise a considerably larger part of our postpaid subscriber base, it does place some pressure on this metric. In addition, we experienced some IT-related systems issues in Brazil in the quarter, but has since then mostly resolved. That said, I remain comfortable where our churn rates are given the growth rates we've experienced over the past several years.

With regard to our prepaid services, our recharge rates in the quarter were particularly strong, which we attribute at least in part to the timing of the Eurocup soccer championship that ran into the first days of July. When compared to the same time last year, our active prepaid customers increased over 70%. In summary, we achieved 645,000 net additions in the quarter, significantly more than any previous quarter, while maintaining balanced growth across our customer demographics, product lines and geography.

Turning now to our financial results. Revenues increased 20% compared to last year, around 30% excluding the impact of foreign exchange, mostly reflecting a 36% increase in our subscriber base. Most of the negative FX impact is a result of the average Brazilian real exchange rate in the quarter, declining more than 20% versus the U.S. dollar compared to the same time last year. Excluding the effects of foreign exchange, ARPU declined approximately 2.3% due principally to the impact of the higher penetration of middle-market subscribers in Brazil, partially offset by price increases in PanAmericana and a greater penetration of advanced products across the region.

Consolidated DTVLA operating profit before depreciation and amortization increased 5% over last year, mostly due to the higher revenues, offset in part by a combination of higher subscriber acquisition costs, reflecting the increase in gross additions, as well as higher subscriber service expenses. In addition, in PanAmericana, we had higher programming costs associated with certain soccer events in the quarter, including the Eurocup, as well as the cost associated with the replacement of first-generation set-top boxes, which is now largely complete.

As Mike alluded to in his opening remarks, we saw subscriber service expenses increase more than we had previously expected. More specifically, we saw some localized inflationary pressures on labor and some higher-than-normal incremental spending that we felt necessary to maintain service levels during these periods of rapid growth. These growing pains are symptomatic of a business like ours that has grown so rapidly over the last several years. While managing growth is a nice problem to have, particularly in today's world, everyone should know that we are very focused on maintaining our operating margins and we remain focused on addressing these issues.

Cash flow before interest and taxes of $89 million was down from $141 million a year ago as higher OPBDA and favorable working capital were more than offset by approximately $110 million more in nonsubscriber-related CapEx. This increase includes payments on the new satellites for PanAmericana that we ordered last year, a down payment of approximately $50 million for a future office space in Caracas, Venezuela and some investments in infrastructure necessary to support current and future growth. It's also worth noting that we received a $15 million dividend from SKY Mexico in the quarter.

Regarding Venezuela, there's nothing new to report 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 June 30, we had approximately $455 million of cash on hand in Venezuela, expressed using the official rate of VEF 4.30 to the U.S. dollar.

As always, I don't want to forget SKY Mexico, whose results released were by Televisa a few weeks ago. SKY Mexico delivered another strong quarter, adding 267,000 net subscribers. Like DTVLA, SKY Mexico results reflected strong performance with its middle-market product, as well as sales from the traditional A and B segments. And 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 nearly 14 million subscribers in the region.

I would also like to mention we made significant headway on our wireless broadband initiative in Brazil this quarter. As many of you are aware, we recently participated in a spectrum auction in Brazil and announced agreements on several smaller acquisitions that are consistent with the strategy that we laid out for you in our Investor Day. When completed, the combination of these actions will result in SKY Brasil owning 2.5 spectrum that covers approximately 16 million households, which represent more than 30% of the GDP in Brazil.

Finally, I would like to share with you my views on the rest of the year. At the beginning of the year, we expected both our subscriber base and revenues to grow in the range of 20%. Given our strong results in the first half, we now expect subscribers to grow more in the range of 25% to 30%. This growth should mitigate the impact of the currency headwinds we face, which we did not anticipate to this degree. But we should, therefore, be able to achieve the original 20% revenue growth target for the full year.

As for 2012 OPBDA growth, I think we will be more realistically in the mid- to low-teens, given our sales levels. And some of the issues we faced this quarter in subscriber service expense will bleed into the third quarter as well and will affect the overall margin for the year. Having said that, I still expect to report an OPBDA margin in the 30% range, which is the figure we guided you to at our Investor Day.

With regard to our core pay-TV business CapEx, I expect the increase year-on-year to be closer to 25% due to higher gross adds, the investments in growth that I discussed earlier, including the building in Venezuela and payments on the PanAmericana satellites that only began in the Q3 of last year. In addition, we're contemplating an investment in additional satellite capacity for SKY Brasil that could require some capital expenditures this year. I expect our investments in the wireless broadband business to be in line with the annual $50 million figure that we gave you at our Investor Day.

I would like to remind everyone that the 2 events that are somewhat beyond our control that could affect these figures are foreign exchange rates and the rate of market growth. With regard to the latter, I would like to reiterate that we remain very bullish about the long-term value creation opportunity in Latin America. And therefore, to the extent we see more growth, we will continue to invest to build our share and secure our market position.

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

Patrick T. Doyle

Thanks, Bruce. Overall, I thought that DIRECTV U.S. had a strong second quarter, highlighted by industry-leading revenue growth, margin improvement for the first time in 2 years and solid cash flow growth. As you heard from Mike earlier, these results are consistent with our strategy to generate a more optimal balance between our long-term growth and profitability.

Looking first at the top line. DIRECTV U.S. revenues increased by 7% to surpass $5.6 billion and were primarily driven by a solid ARPU growth rate of 4.2% in the quarter. In addition to the usual ARPU growth we receive from annual price increases, ARPU benefited from strong pay-per-view, premium channel and advanced services sales.

Total pay-per-view revenues reached an all-time high in the second quarter, driven mostly by 2 premier boxing events, as well as by strong revenue contributions from movie sales, led by VoD movies increasing 59% over the prior year period. In addition, both total pay-per-view and paid premium channels in the quarter generated the highest buy rates per subscriber we have seen in 4 years. These strong results highlight the success of our improved HD user interface, DIRECTV CINEMA and Connected Home strategy. ARPU growth also benefited from increased penetration of both new and existing customers paying for advanced services, as well as our policies to reduce credits and discounting.

Turning now to subscribers. Consistent with recent trends, the lower second quarter gross additions were in line with our internal expectations and long-term growth strategies. The stricter credit policies we've implemented are yielding positive results as the percentage of higher-quality new customers increased over both the prior year and prior quarter, and nearly 90% of these customers signed up for advanced products. In addition, we estimate that these initiatives have increased the lifetime value of new subscribers by some 20% compared with last year. Another trend worth noting is the lower contribution from our telco partners. This decline is related to several factors, including the continued migration of legacy DSL subscribers to U-verse and FiOS, as well as the rapid decline in their landlines, which results in fewer incoming calls and sales opportunities at their call centers.

Churn in the quarter of 1.53% was 6 basis points lower than the prior year as both voluntary and involuntary churn were favorable. These improvements reflect our efforts to drive higher loyalty through segmented upgrade offers to grow the percentage of subscribers on commitment. We've also been successful increasing the percentage of customers on auto-bill pay compared with last year, which, coupled with our more selected acquisition policy, has helped lower involuntary churn. That said, we expect third quarter churn to be higher than last year, primarily due to the Viacom dispute, as well as for more aggressive promotional activity from the cable companies and AT&T. However, we're still targeting churn to be flat to down for the full year relative to 2001.

Turning now to the bottom line, where strong cost management was clearly a highlight as operating profit before depreciation and amortization margin expanded for the first time in 2 years. Nearly every line on our income statement came in better than our internal forecast due to solid execution of cost containment and productivity initiatives. Lower spending related to more selective acquisition of new subscribers also helped margin growth in the quarter.

The reduced cash upgrade and retention spending in the quarter was consistent with comments we made on the last earnings call when we mentioned that first quarter spending levels were elevated and we were targeting to reduce spending in subsequent quarters. Looking at the back half of the year, we will continue to invest in our upgrade programs targeted at higher-quality subscribers, but we still expect to manage our cash upgrade and retention spending to be relatively flat in absolute terms versus last year.

We're also continuing to see solid results in subscriber services as we are driving higher overall service levels at a relatively lower cost. These efficiencies are being driven mostly by prior year capital investments aimed at improving productivity and also by greater reliability of our set-top boxes. We've also improved processes in key areas of our installation network and in our call centers. As a result of these achievements, service call volumes in the second quarter were down about 12% and call volumes were down roughly 4% compared with 2011.

With regards to G&A, excluding the impact of the $22 million write-off of equipment mostly related to an MDU dealer, G&A expenses in the quarter were flat as a percentage of revenues and remain on track to hit our guidance for the full year of approximately 5% of revenues. Higher programming costs were the only expenses that pressured margins in the quarter as ARPU increased nearly 8%. It's interesting to note that nearly 25% of this growth was attributable to the higher pay-per-view and premium channel buy rates. Excluding these, ARPU growth would've been roughly 6%.

Moving on to our consolidated second quarter results. DIRECTV continues to generate solid bottom line growth as diluted earnings per share increased 20% to $1.09 in the quarter. Free cash flow also improved over 19% in the quarter, driven primarily by higher OPBDA and lower cash tax payments that have been deferred until later this year. Please note that we still expect higher cash tax payments this year due to our higher earnings and a higher cash tax rate in the 30% range, primarily related to the reversal of accelerated depreciation of benefits associated with prior year economic stimulus programs.

In addition, but not included in free cash flow, this quarter, we repurchased 28.6 million shares of DIRECTV stock for $1.35 billion, bringing cumulative repurchases to approximately $23 billion or nearly 50% of the shares outstanding since we began the program in 2006. Also in the quarter, we redeemed $1.5 billion of outstanding high-yield notes due in 2016. There was a $64 million pretax charge associated with the early retirement of these notes. However, the net present value of this event was significantly positive. With these transactions, we ended the quarter with about $16 billion in total debt while bringing our total debt to trailing consolidated OPBDA leverage ratio target to 2.2x.

Before wrapping up, I thought it would be helpful to review a couple of items which we noticed were not accurately reflected in our second quarter consensus estimates for EPS. First, there's a functional currency loss booked on Brazil's P&L during the second quarter, which was recorded in other net in our consolidated P&L. Every quarter, we record the impact that changes in the Brazilian real has on our U.S. dollar-denominated liabilities in Brazil, which currently includes an intercompany loan of approximately $200 million and a $200 million satellite lease obligation. In the quarter, the real depreciated against the dollar by roughly 10%, resulting in a pretax noncash charge of $43 million. It should be noted that this charge compares to an $18 million pretax gain recorded in the prior year period during which the real strengthened.

Next, I'd like to remind everybody of the change we made last year to reflect the longer useful life of HD set-top receivers, which resulted in lower depreciation expense at DIRECTV U.S. over the last 4 quarters. In the third quarter, we will lap the change and depreciation expense will gradually increase going forward.

Lastly, I would like to remind everyone that the useful life estimate for standard definition boxes in Latin America is 7 years, which differs from the U.S. as we see less obsolescence. That said, Latin America's depreciation expense will increase at a slower pace when compared with the U.S. business.

In summary, I thought we had a really strong quarter as we continue to deliver on the strategies we outlined for our business in February on our earnings call and remain on track to meet or exceed our full year guidance at DIRECTV U.S. And as Bruce mentioned a few minutes ago, we are even more bullish about DIRECTV Latin America's full year growth prospects. If we continue to execute on 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 M. Rubin

Thanks, Pat. [Operator Instructions ] 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 are ready for the first question.

Question-and-Answer Session

Operator

[Operator Instructions] We're going to go to the first question from Bryan Kraft with Evercore Partners.

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

I'm just going to ask a question on Latin America -- or 2 questions. Brazil net adds seemed to have peaked at about 340,000 a quarter. I just want to see, Bruce, if you agree with that. Or do you think this is more of a pause before we see some reacceleration? And how is the macro playing into that? And then on ARPU, Brazil ARPU, it looks like has declined about BRL 3 per quarter for the last 2 quarters. Should it continue to erode at that pace sequentially? Or should we look at it more on the 3% year-over-year decline basis? And how are price increases playing into that?

Bruce B. Churchill

With respect to the net adds for Brazil, I'd probably prefer not to get into trying to give guidance on it by platform basis on a quarter-by-quarter basis. But look, I think it was a very strong quarter for Brazil, and that number you have is pretty close to what it is for this past quarter. Where it goes in the future will obviously depend a lot on how the overall market grows and which probably leads a bit into your second question, which is how do the macros affect that as well as ARPU. With respect to ARPU, I think what we generally said is we expect ARPU to continue to be flat to down. I think again in Brazil what will drive that more than anything else is going to be product mix. And it's something we try and mitigate through our fairly aggressive upgrade program, particularly getting more and more subscribers into HD, which I mentioned in my opening comments. So again, without wanting to be too granular about where ARPU might be headed specifically for Brazil, I think that the historic trends are probably somewhat indicative.

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

Can you comment on whether there are price increases that are being implemented now or during the back half of the year that would change that trend?

Bruce B. Churchill

Yes. We do implement price increases. I believe the way it works in Brazil is that you're allowed to increase prices for the same product. It's linked to effectively what is kind of a CPI, it's a different index, they call it the IGP-M. And our strategy has been more, not so much just to increase prices on the packages, but actually to try and upgrade people to a higher package that includes more programming but then is at a price that is higher than just the difference between their current package and the IGP-M price increase. So yes, we do increase prices, but I would say we get a bigger bang by upgrading customers.

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

And any thoughts on the macro environment in Brazil and how that's impacting the business?

Bruce B. Churchill

We haven't -- honestly, we haven't seen it yet. Obviously, it's been a lot in the news lately. It's something that we look at. And I think there's been a lot of talk about, for example, some of the banks struggling with some loan paybacks and that kind of thing now. I will say one thing, we haven't seen it and I think part of the reason is that even in all of this growth that we've had, we've always had credit filters on our sales process. And there are a number of, I mean, in the -- a meaningful number of sales that we turned down because people don't qualify for our -- under our criteria. So my guess is to the extent that there are problems in the middle market, those people aren't, for the most part, SKY customers.

Operator

The next question comes from Ben Swinburne from Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

One on Latin America. Bruce, if you could just comment on the drivers of growth in Colombia. I think part of the improvement in the market came around, there were some regulatory changes that have cleaned up some piracy, so just wanted to get a sense for how much that might be. Just sort of a one-time benefit or what the drivers of growth in that market are? And then Pat, in the U.S., you mentioned gross adds will be down in the back half. You also mentioned that churn will be up in Q3. I don't know if you'd be willing to give us any kind of sense for what your outlook is for net adds in the back half. And if not, any comment on how SUNDAY TICKET is shaping up? It's a big quarter, given what you guys did last year. It's a huge opportunity to sort of upgrade people, so I'd love to hear on that as well.

Bruce B. Churchill

Okay. Why don't I start with Colombia? The regulatory change that you alluded to is a change in the tax regimes that I think will be very important for the industry going forward. But it actually only takes effect in October, so it had no impact whatsoever in this quarter. In general, I think the big drivers of growth in Colombia are, a, very good favorable macroeconomics. I think it's a country that's gotten its house in order in the last several years and it's now reflecting in the general economy. And really, in our case, better execution on a number of fronts, particularly in the arena of prepaid. We've put a lot of emphasis in terms of relaunching and really focusing on what we call the efficiency of our prepaid product, which is the culmination of how quickly -- how often people reup and at what levels. And I think a number of those factors have kind of all come together to create the opportunity and also create the results that we've seen in Colombia. So it's a pretty broad brush of things or broad stroke of things that have driven the growth, it's not any one thing in particular.

Patrick T. Doyle

And then Ben, on the net adds -- and I'll let Mike address the NFL. But I think we were very pleased with the churn trends that we saw in the first half of the year. Like we said, I think in the third quarter, there will be a little bit of aberration with some of the stuff we faced with Viacom. I don't really want to get into quarter-by-quarter net add projections. But let it be said that we certainly expect to overall in the second half of the year is to have net adds. And I think as we've communicated before, for the full year, we clearly expect to add to our base for the full year.

Michael D. White

I think on the NFL SUNDAY TICKET question, Ben, it's a little early. And the renewal notices are just going -- just went out in June. I think actually 1/2 of the renewals have yet to even kind of see their full bill and pay, so it's a little premature. Having said that, we're very excited about the promotion you saw just in the last 2 days because usually the gun goes off 1st of August. So you've seen on some of the Olympics ads that we've our NFL ads out there now, so it's just it's really -- I mean, until they get into training camp and you hit the 1st of August, we've got some early renewals, and those were going well. And yes, we are expecting a significant bump in renewals this year. But it's just a little early to say. We're excited about it and feel good about it. But I mean, literally, the NFL ads with Eli Manning just literally just started on air, I think, yesterday or a day before, so a little early.

Operator

The next question comes from Craig Moffett from Sanford Bernstein.

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

Another question about the U.S., if I could. Programming cost per subscriber looks like it came down significantly, down to about 6.9% or so. And in your commentary, you were talking about how pay-per-view was up dramatically with 59% increase in movie sales, which would suggest that programming cost per subscriber underlying that was up even less. Help me understand that going forward because you've been guiding to high single-digits on that dimension. Should we expect that actually programming costs at this point are starting to moderate a bit from the kind of level we were seeing before? Or is there something one-time going on?

Patrick T. Doyle

Yes, Craig, I think, if -- I mean, from our P&L, it's not always easy because we combine a couple of cost categories. But in the second quarter, our programming cost per subscriber were up closer to 8%. And I think in my comments, I mentioned a lot of that. I mean, a piece of that is driven by our success on pay-per-view and premiums, which has a much higher cost. As we look forward, as we – as you get into the third quarter and fourth quarter, it should be relatively stable, except for -- in the third quarter, you have the NFL has an extra game in the month of September. So there's probably a couple of percentage points of growth that we expect in the third quarter that's related singly to reporting another game in the third quarter that we didn't last year. So again, it's more stable, but it's still kind of up in that 7% to 8% for subcategory.

Michael D. White

Yes. I don't think you'll see anything --- Craig, this is Mike. I don't think I've seen anything materially change. We've got the odd kind of third quarter thing, where we'll have an extra NFL game, but therefore ARPU will be higher, too, keep in mind. So that kind of goes hand-in-hand, but you get a little bit of an anomaly there. But I would say our outlook for this year is very consistent with what we told you in February on the call. And as we've said, we certainly are expecting next year to be a tad less. But it's still, I think, higher than the average customer could afford if you priced it all the way through their bill.

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

And if I could ask a follow-up, do you think you gained anything specifically on that dimension from the Viacom dispute, either in signaling to other programmers or with Viacom specifically?

Michael D. White

I don't know. I mean, we've had issues with several, as you know. It seems like perhaps because of our size, we get picked on to try and reset the market more often than I think is appropriate. But look, we felt it was very important to stand up for the customer. I mean, if you look at it, I continue to believe that all of us in this industry, both on the media side and on the distributor side, need to spend a little more time in the customers' homes and understanding what's happening with their incomes in this economy. Because the customer at the end of the day is the one getting squeezed and bearing the brunt of these exorbitant price increase demands that are just not sustainable. And we're going to continue to stand up and put the customer first. That's -- every time I go into one of those, I feel like I'm sitting there representing 20 million households, many of whom have had a real tough challenge in the last several years with this economy. So hopefully, we continue to make it clear to the industry, we're willing to make fair deals and we believe we've got a fair deal in the end in the case of Viacom. But we are standing up and representing the customer, first and foremost. And I think it would help everybody for our counterparts on the media side to spend a little more time in the customers' homes understanding what's happening to their incomes.

Operator

And we'll move to the next question from Jason Armstrong with Goldman Sachs.

Jason Armstrong - Goldman Sachs Group Inc., Research Division

A couple of questions, maybe first on Clearwire. I think you proposed recently that the FCC maybe force cable companies to divest their stakes in Clearwire. Just maybe you can help us think through what you're intending to accomplish here and whether that spectrum you might be interested in or spectrum that you might consider some sort of partnership. And then second question, just on U.S. ARPU. You talked to the benefits from pay-per-view, a couple of fights. How should we think through the trajectory from here? You pushed about 4% this quarter. Is that sustainable in terms of the growth rate going forward?

Michael D. White

Okay, Jason. Pat, why don't you take the ARPU one? That's kind of straightforward, and then I'll comment on the Clearwire thing.

Patrick T. Doyle

Yes. I mean, I think we're really pleased with the ARPU growth in the second quarter. In the third quarter, I mean, we would expect something similar. And as Mike and I have mentioned that it will probably be a little higher than normal just because we will report an extra game. But we're at least right now we're comfortable in that kind of 4% range for the rest of the year. Like I said, the third quarter will be a little higher, but mainly just because of the comparison of games year-over-year.

Michael D. White

Well, I think on the Clearwire thing, clearly, I'm not going to kind of outline whatever internal things we look at. And as I've said on many other calls, we look at lots of ideas and continue to look at lots of ideas. But I think, certainly, in terms of the SpectrumCo deal, look, I think it's as simple as our concerns about the influence that cable has on limited broadband alternatives that consumers have access to and ensuring that there's free and fair competition so that customers that choose satellite have -- aren't discriminated against in terms of their access to or the pricing they pay for broadband services. And so we simply weighed in on that front. But now that you have some kind of a joint venture between the dominant wireless broadband provider in Verizon and a 50-plus share dominant wireline broadband provider, actually, it's probably close to a monopoly in 85% of the company on the cable side, that it's important that the government look at all those considerations and ensure that there's free and fair competition.

Operator

We'll move to James Ratcliffe with Barclays.

James M. Ratcliffe - Barclays Capital, Research Division

One on U.S. and one on LatAm, if I could. On the U.S. side, could you talk a little bit about the telco impact in the quarter and what you saw both in terms of the impact on churn and gross adds year-on-year from staff migration and also sounds like increased impacts on landline? And secondly, on the LatAm side, can you help us understand some of the inefficiencies you mentioned, Bruce, in the quarter and what the order of magnitude of those was and how those sort of -- to what degree they persist for the rest of the year?

Michael D. White

James, the telco channel is certainly this year, and not just in the quarter, this year, has been weaker versus prior years. I think, I don't know, in total, probably the telco channel won't contribute much more than around 10% of our gross adds for the year, which is down quite a bit from several years ago. But to be honest with you, when we did our analysis last call, as we were looking at this whole reset of our approach to profitability versus subscriber gross adds in a world of increased programming costs, we frankly found that a disproportionate share of, I would say, more price-sensitive customers and the ones that are higher churn rates -- I mean, we've got churn rates north of 2% were in the telco channels. So I would say probably the telco channel has been more impacted by our quality initiatives than perhaps some of the other channels. Our direct sales channels held up quite well. But we've always had very -- we've always had lower churn and better screens on our own direct sales when we market directly to the customer. So my own sense is it is what it is and the telco channel in total is probably going to settle out, but it's not going to go back to where it used to be. And we're not going to chase water uphill for poor-quality subscribers, to be honest with you. So I think we expect in the third -- that's why I think that the direction that I gave you in my opening remarks is -- and even, by the way, in the month of July, in spite of the Viacom thing, our gross add performance was pretty consistent with our year-to-date performance versus year ago, so in fact, almost identical. So I mean, I think you can expect that for the full year that, that kind of lower gross add relative to prior year is probably going to continue. Bruce, do you want to take the Latin America question?

Bruce B. Churchill

Yes. I guess, the inefficiencies would probably fall into 2 categories. One category is probably what I would call kind of the need to make front-loaded investments as we begin to serve a larger subscriber base. In other words, we're trying to -- we're putting a new CRM systems, new billing systems, that kind of thing. Naturally, that investment tends to come up -- a lot of that comes upfront and the expense of doing that comes upfront, gives you greater scale over time. But it's more like a step function. It doesn't just track the revenue, so it's a bit of a-- it hits us harder now, and it's something that we'll work our way through. And it's not something that we're going to work our way through in 1 quarter. Other inefficiencies were more unique to this quarter, which is the result of the rapid growth in some of the systems, frankly, having similar troubles. We needed to staff up and advance some of the hiring that we've done, particularly in Brazil. Those kinds of things will go away more quickly. Whether we'll get through them all in the third quarter, I don't know. But I think that the overall comments I made about where we'll end up overall for the year with OPBDA margin is the way to think about it. And one of these is sort of material long-term changes to our business.

Operator

We'll move next to Doug Mitchelson from Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So 2 questions. Mike, you talked about the challenge of competing as customers move off DSL and onto cable high-speed data or files for U-verse. Other than regulatory protection or enforcement, other options might be buying DISH or building out wireless broadband. Are those options something that have to be taken seriously? Or are there other options I haven't thought of? And I'll throw the second question in there if you want a moment for you or for Pat. Can you just walk us through the math around the 20% to 25% higher lifetime value for U.S. gross additions this year versus last year? What are the inputs that give you that kind of extra return would be great?

Michael D. White

Sure. Happy to because it's a bunch of things that are contributing to the LTV improvement. And again, it's a lot of the strategies that we've put in place last year. I'll let Pat take that one. In terms of the DSL, as you know, I mean, DSL continues to decline from what I have seen. The good news is actually you're seeing an awful lot more naked broadband at fair prices. I'm optimistic that there'll be a competitive broadband market for Americans and that they'll be able to access a fair price for high-speed broadband from cable companies. So and as I said, I think over the last year, if you look at it, you'll see a lot more options to get naked broadband to $40 a month, which is a pretty competitive price. So I think the other stuff, I would say, is pretty speculative and not particularly helpful for me to comment on it and not something that I would expect to see some big initiative we'd launched this year on the other 2 things that you mentioned. So I mean, I think I talked about both of those before. We continue to have discussions with lots of folks in the industry about ways to partner together and continue to be open for different ways to partner. But I don't have anything imminent that I would foresee on the radar screen right this year.

Patrick T. Doyle

And then Doug, I guess, on lifetime value, as Mike said, there's a bunch of different drivers that we look at when we see how we're trending there. I mentioned auto-bill pay, which we think really helps on involuntary churn. That's up year-over-year about – from about 25% of our customers to about 1/3 of our customers. We've got more customers year-over-year on commitment. About 55% of our customers are on commitment, where a year ago it was 52%. That's part of our -- also of our upgrade strategy of getting people back onto a commitment through upgrade offers. And then the kind of the factors that we've been talking about, we've got almost 20% of our customers now that have Multi-Room Viewing in the home. We're at about 3/4 of our customers now that have advanced products in the home. So there’s -- it's kind of not one thing or another. And the discounting on our new promotional offers and the elimination of lifetime HD helps as well. So it's a whole combination of things that we continue to focus on to make sure that the investment that we're making in the SAC upfront makes sense and also, at the same time, eliminating the lower quality and pockets of customers where we lose money.

Michael D. White

Yes. If you look at it, I mean, we track LTVs very carefully and do regular monthly reviews on our LTVs and how we're performing by segment of customer base. So a piece of it was new pricing, including the ARS fee that is getting rid of the Free HD for Life. A piece of it has to do with tightening of our credit scores and a piece of it is kind of mix around more advanced products. But I think the other comment I wanted to add in, Doug, is just to give you an example. In the month of July, clearly, we had some elevated churn from the Viacom dispute. Interestingly enough, though, we looked at the LTVs of the customers we lost and they were 40% below our average for the company, which says to me what really was going on was people that were looking for a better deal, a discount, a credit or whatever on the lower end, it had less to do with, "Hey, where's my MTV?" It had more to do with these were poor-quality customers to begin with that wanted to use the dispute to try and go get a better offer somewhere else. So we manage through our call centers in a very rigorous way. When we look at churn and retaining a sub, we have kind of pretty careful screens as to who are the real high-value subs that we want to retain and that we will provide credits for versus lower-quality customers that we might not provide as much in the way of credits for.

Operator

The next question comes from Marci Ryvicker from Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

I have 2 quick ones. The first, you mentioned more aggressive promotions from both cable and AT&T. You didn't mention DISH, which is interesting, given their preannounced sub numbers. So were you seeing anything incremental in terms of promotions or advertising from DISH? And then secondly, I think you said that U.S. revenue, OPBDA and cash flow could now exceed guidance. So what factors could drive you to actually exceed guidance? Would it be the economy, a better competitive environment or something company-specific that you can do to drive that?

Michael D. White

So on the first question, Marci, it's all a bit like playing Willard the weatherman, I suppose. I mean, this is a very competitive industry, always has been and I think always will be. So trying to look for subtle shifts in kind of the promotional nature, I mean, I would say we've seen a little bit more cashback offers more broadly. But look, DISH is working hard to revitalize their business and we're working hard to compete. So I think -- I don't think I could characterize it as materially different one way or the other. We feel good about -- we've got a very clear game plan. We're executing to our game plan. And we try to be very smart. As I said, I've had a bit of experience watching things like Marlboro Friday. When you try and get the consumer off of the discount drug, you need to do it in a very thoughtful, deliberate and disciplined way. And I think that's exactly what you saw in the second quarter numbers, frankly, playing out. And I expect you'll continue to see that as we go balance of year. I think the comment I was making on guidance, I think, was frankly -- specifically if you looked at some of the components, we feel good relative to our internal plans that we're in good shape on cash flow, on revenue and on profit for the year. But I probably was referring to a discussion we've had on other occasions where people ask us about, "How are you going to navigate? How you stabilize OPBDA margins overall?" And I think it's the same things we've talked about before. We think we can get $400 million from a combination of reducing credits, selling local and addressable ads and executing on our commercial and cinema and pay-per-view business, which you saw a bit of and also get a little smarter on programming costs. So that's $400 million or $500 million, and we're looking for $100 million in productivity. And I think again you see that in the quarter. So I guess, what I was simply trying to say is that as I look at our ability to navigate smartly through these headwinds and deliver revenues and profit and cash flow -- and ultimately, it's cash flow that pays the bills. I mean, our free cash flow per share this year is over 20%. I think -- I feel very good about how we're doing that. And I think the second quarter, more than anything, illustrates a little bit about how the strategies actually get reflected in the financial statements.

Operator

And the next question comes from Mike McCormack from Nomura.

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

Bruce, maybe just a quick thought on Latin America. Can you go through maybe proportion of SAC that's been capitalized versus expensed? And then thinking going forward, you mentioned the fact that we should see churn probably ticking up on the sort of lower-end customers coming in. As we have a potential for higher churn and the new EBITDA guidance, can you just give us your thoughts maybe just holistically this year and then looking forward to the point where we can see some free cash generation from that business?

Bruce B. Churchill

Well, okay, that's a loaded question. We actually do capitalize more of our SAC. I think it's about 50% of the total SAC costs in the U.S. -- I mean, sorry, in Latin America versus close to 20% or so in the U.S. That has something to do with the nature of our agreements with the consumers. We actually retain title to more of the equipment, not just the boxes, but also the dishes, antennas and everything. The sort of offset to that is that with respect to prepaid, we actually do not capitalize that expense, we expense it. So the answer to your question lies a little bit in the mix between prepaid and postpaid. So that can be difficult from quarter-to-quarter to project. But with respect to churn -- and I guess, your question is do I expect churn to go up as we go more into the middle market? Is that the question?

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

Well, I think you mentioned that those customers tend to have a bit higher churn. Just trying to think about as we model forward going to 1.5%, is 1.5% going to become [indiscernible] in the near-term or longer-term trajectory?

Bruce B. Churchill

Look, I think when I’ve talked before about 1.5% kind of being the sweet spot for us in terms of the postpaid churn, and that's a target, I think, we'll try to keep in line with. I don't foresee it going up that much more again as we continue to penetrate the A and B houses with more HD and other advanced products, that tends to have an offsetting affect. So I think the 1.5% is a pretty good number to use. And so overall, I think the basic economic models that we present in terms of IRRs and the investment returns, et cetera, that we gave to you in March have not changed since then, certainly. And as we demonstrated, the returns on those middle-market customers are at least as attractive as they are in the higher-end customers just because of the lower investment.

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

Right. And then when you put it all together and you have the churn going a little bit higher, ARPU under a little bit of pressure and subs, I guess, increasing obviously [ph], how should we be thinking about [indiscernible] of the free cash picture in Latin America? Are we thinking about a negative number in 2012?

Michael D. White

It's Mike. I'm not managing Latin America for cash flow, okay? I think we were very clear on that in March. I am looking at return on invested capital. And as long as we have an attractive return on invested capital, which we showed you guys in March, I don't know how else to look at the business, to be honest with you. So I mean, it's frankly more a function of the boxes that you place and the growth rate that the business is experiencing. And I can assure you that if we see something in either the price value customer in Brazil or the prepaid customer that suggests we should tweak our pricing a little bit, we do that. In fact, we've done some of that already this year. So we kind of manage both of those businesses, PanAmericana and Brazil, in a pretty rigorous way. And I'm not managing it for cash flow, I mean, so if we need another satellite for Brazil, albeit it's a little different because it probably wouldn't be purchased so it won't be as much as the PanAmericana one, we're going to do it. I mean, this is DIRECTV's best growth opportunity. And as long as I see returns on invested capital as attractive as Bruce shows me, we're going to continue to push aggressively for growth.

Operator

We'll move next to Vijay Jayant from ISI Group.

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

I have 2 questions. First, on the U.S. Could you talk about what big deals you have left with the programmers in the next sort of 12 to 18 months, apart of Discovery and CBS? And are you concerning considering carrying the L.A. RSN that Time Warner Cable is launching in 4Q? And then for Bruce, I sort of read somewhere that EchoStar is probably partnering with Telefónica in Brazil and potentially launching a service. Can you talk about -- they were sort of trying to be a spoiler in Mexico, if you remember. And just sort of talk about what are the opportunities of that sort of having an impact on the business?

Michael D. White

So Vijay, we don't get into kind of going through every contract with you guys. And I'm not going to do that here. We've got one other large one. I think it's pretty public, and that is our CBS deal, which we're in the middle of renegotiating. But I'm very optimistic. We've had very good conversations. And I think all we're trying to do is get a very fair deal for our customers. And I'm very optimistic that, that will be wrapped up and we won't have any significant issue on that one. I think, we have retrans deals up all the time. And retrans continues to be a challenge for the industry. We're all trying to ensure that we'll pay market that, but if the market doesn't continue to grow at rates that are unaffordable to the customer. But I think you'll continue to see those in the industry. You've seen quite an increase in the number of those disputes in the industry this year. But -- and as it relates to some of the sports networks that are being launched -- look, we have conversations with everyone out there. Sports is an important part of DIRECTV. But frankly, we have to be disciplined in that area, too, just like we are on the entertainment side. So I think we'll have to see. We've had some conversations. We've got a couple of those decisions to make. We probably can't afford to do everything that everybody would like us to do in sports, so we will be disciplined. And I think we'll just have to see. It's a little early for me to comment, though. Bruce, you want to comment on Telefónica?

Bruce B. Churchill

Obviously, it's no secret that EchoStar has wanted to get into Brazil, which is evidenced by the fact that they spent $100 million on a slot for a satellite about a year ago. Certainly, there has been a lot of speculation in the market about them possibly partnering with Telefónica, Pandora, Oi. I think in the absence of specifics, it's very difficult to comment intelligently about how that would affect our business. But I guess, the only comment I would add is that to the extent that people are trying to draw an analogy with the Mexico situation, I would say that it's a little different in Brazil because, one, there is no telco that's as dominant in Brazil as Telmex is in Mexico. So having Telmex as your partner in Mexico is a lot different than having some other telco as your partner in Brazil. And secondly, they were the ones that initially went into the middle-market and lower-priced segments. And I think those segments are already very well served by a number of competitors, including us. So it won't be quite the open road that it might have been in Mexico. But again, until we know specifically what they're doing, it's hard to have a really well-informed response.

Operator

The next question comes from Stefan Anninger from Credit Suisse.

Stefan Anninger - Crédit Suisse AG, Research Division

This is a follow-up to...

Operator

I apologize. We'll move to Amy Yong from Macquarie.

Michael D. White

Yes. We lost you, Stefan. Dial back in, and we'll take your question. Go ahead, Amy.

Amy Yong - Macquarie Research

It looks like your leverage is right under target right now. How do we think about your buyback? And is there the potential that you could introduce a dividend next year?

Patrick T. Doyle

Yes. I mean, I think as we've said, we’ve effectively been on our planned target of about $100 million a week in share repurchases. So our intent is, absent something that we don't foresee, that we would stay on that pace for the rest of the calendar year. Obviously, we may go back -- if you just kind of look at the math, we may go back to the market for some debt issuances later in the year to accommodate that flow. We haven't made any decisions beyond 2012. We're in the middle of kind of reevaluating all of our capital structure decisions and having a dialogue with our board. We'll continue those discussions into the fall and have more to say about that probably late in the fall.

Michael D. White

Amy, within the constraints of regulatory, I mean, we have a pretty robust process internally. So when the stock dropped in the early part of June, I think it was, I had Pat ramp up our purchases. Unfortunately, it only stayed down for about 10 days or something. So we did increase our share repurchase for that time. But I think it just more illustrates we keep an eye on what we think a fair value is. And if we see an opportunity for our shareholders that we think is well-below fair value, we're going to be aggressive and we're not afraid to change on the fly. It just didn't stayed down that long. But I think you've just got a little -- we've got some cash on the balance sheet, it's just the timing of when you raise money, and then when you do the buybacks or whatever. We haven't changed our view on our kind of optimal leverage target. And at least as it relates -- as I look at it, as long as you've got a stock trading at 5.5x EBITDA, we can borrow at 2% and we've got a 7% free cash flow yield, gosh, and tax rates are what they are, it's awfully hard to convince oneself that the smartest thing you can't do for your shareholders is to continue to buy back stock. But we take a fresh look. That will be a board decision. Our board always asks us to look at all alternatives, and we will do that, of course, in due course this fall.

Operator

And we'll go back to Stefan Anninger.

Stefan Anninger - Crédit Suisse AG, Research Division

Just for Bruce, I wanted to follow up on Vijay's question about Brazil. With respect to the pricing environment that you're seeing down there, it looks like Oi had a pretty strong quarter from what I can tell. I think they added about 90,000 subs, which is the most they've added in a while. Are you seeing anything different within the C class pricing environment than, say, you saw a quarter or 2 or 3 ago? Has it gotten more competitive? And did Oi perhaps run a promotion this quarter that boosted their growth? And how do you think about that pricing competition in the C class going forward?

Bruce B. Churchill

I don't think it's any more competitive. I don't know off the top of my head whether Oi had a specific promotion or not. I mean, of all of the segments actually, probably the C class is the most well-served. Pretty much every competitor has a package at the entry-level pricing, which is not the case on the HD side. So I don't think that, to be honest, anything has dramatically changed in the last quarter or 2. But it's something we obviously always monitor carefully. And so I guess, to the extent that there's any changes in that, we would respond. But we have a very compelling offer, our entry price is BRL 49.90. It's a very good package, and it's clearly selling well.

Operator

And we have time for one more question, and that will come from Tom Eagan with Canaccord.

Thomas W. Eagan - Canaccord Genuity, Research Division

I just have a follow-up on a previous discussion about your negotiation with Viacom. I guess, in assessing the ratings of the Viacom networks, did you guys look at ratings from any of the other sources, except from Nielsen? And if so, what you got from that?

Michael D. White

Look, again, I don't want to kind of go into all of our internal workings here, Tom. But what I can tell you is that I think our view here, I think it's an important point, is that we're talking about billion-plus dollar contracts over mega years. So I mean, if you kind of -- it's several billion dollars. This is not something that you just kind of go in and stick your finger in the wind and see what you think the price is. I think you're absolutely right. We, at DIRECTV, have an outstanding programming team, and we take a very rigorous approach when we kind of begin to prepare for these negotiations to benchmark what we think the current market is. We have enough deals of our own, first of all, so we take our own database. We take our intelligence for the rest of the industry. Obviously, we have, we think, pretty good intelligence. Yes, we also look at our set-top box rating data internally. So we, in fact, do take a very careful look of what we know our customers are watching from our set-top box data and we look at Nielsen data. And we try and look at what we believe to be what is pay for performance. Just like all of us in business that are subject to pay for performance, I mean, we look at these content companies and their channels and we look at it channel-by-channel. We don't kind of glob everything together. I mean, we take a very rigorous, fact-based look at what we think the market is. Now it's never a pinpoint number, but there's a range. And then of course, there are discussions around digital rights that we believe our consumers should be able to access on an authenticated basis in today's world. And I mean, that frames the negotiation, coupled with assurances that we are being treated fairly, consistent with our size and scale. So I mean, that's kind of how we approach it. But I mean, I can assure you, we take this -- there's more science than art than there might have been 20 years ago in this industry and there needs to be. I mean, given the size of these deals, we take it very seriously and we have an outstanding programming team that looks very, very carefully at what we believe the right market data is and is fact-based in our decision-making.

Operator

And that does conclude the question-and-answer session for today and it also concludes today's DIRECTV Second Quarter 2012 Earnings Conference Call. You may now disconnect your lines, and have a pleasant afternoon.

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