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The DIRECTV Group, Inc. (NASDAQ:DTV)

Q2 2008 Earnings Call Transcript

August 7, 2008 2:00 pm ET

Executives

Jonathan Rubin – SVP of IR and Financial Planning

Chase Carey – President and CEO

Pat Doyle – CFO

Analysts

Ben Swinburne – Morgan Stanley

Jason Bazinet – Citigroup

Craig Moffett – Sanford C. Bernstein

Ingrid Chung – Goldman Sachs

John Hodulik – UBS

Doug Mitchelson – Deutsche Bank

James Radcliff – Lehman Brothers

Tom Eagan – Collins Stewart

Tuna Amobi – Standard & Poor's

April Horace – Janco Partners

Operator

Good day, ladies and gentlemen. My name is Tom and I will be your conference operator today. At this time, I would like to welcome everyone to The DIRECTV Group’s second quarter 2008 earnings conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer period. It is now my pleasure to turn the call over to your host, Mr. Jonathan Rubin, Senior Vice President of Investor Relations and Financial Planning. Please go ahead, sir.

Jonathan Rubin

Thank you, operator, and thanks everyone for joining us for our second quarter 2008 financial results and outlook conference call. With me on the call today are Chase Carey, our 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 Chase 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 statement 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 annual reports on Form 10-K and 10-Q and 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 web site at directv.com.

With that, I am pleased to introduce Chase.

Chase Carey

Thanks, John, and thanks everybody for being with us today. The second quarter for us was another solid one. The headline results in the quarter was probably a doubling of cash flow before interest and taxes from a year ago which reflects our progress in driving our cash flow to a level that really begins to reflect the true value of DIRECTV. Our revenue and profit growth also continued to meet or exceed our targets. In fact most of our key performance measures were in line or ahead of our targets. And if you look at the U.S. first, our gross adds were strong as we largely mitigated the ending of our BellSouth bundling agreement on April 1st,, equally importantly we continued to attract quality subscribers with our brand and content leadership.

Churn continues to approve from a year, although we are seeing increased competitive pressure in the market as our competitors spend more on marketing and offers. ARPU growth was also strong driven first and foremost by ongoing strong demand for advanced products for new customers as well as the existing ones.

Most of our costs are either in line or at least trending in the right direction. Upgrade spending was one area in particular where we really began to get on top of that investment. SAC was also one target, although we are incurring higher sales cost as we target the right customers in increasingly competitive markets. However, we’ve been successful in finding savings in other areas of SAC to keep the overall cost in line.

One expense that appears out of line on a year-to-year basis is the G&A. That variance is skewed by one-time $25 million positive last year related to Hurricane Katrina insurance settlement and a one time expense of about $15 million this year related taking control of one of our major field service companies, one called Premier [ph]. Excluding these items, G&A was in line.

Again, overall a good quarter in the U.S., that’s not to say we don't have plenty of areas needing improvements. Service levels are still not where they need to be. Our dollars being spent on acquiring and saving customers can be targeted more efficiently and we’re certainly working on that. There are market segments like MDU where we’re still under performing, but we are at least making headway in all these areas.

Study the Latin America for a minute, the quarter could be summarized probably in one word – growth. Every key financial measure from revenue to profit to cash displayed excellent growth. Key metrics like subscribers and ARPU also had outstanding growth.

Our costs were well managed too which contributed to our bottom line success. The one Q2 metric that looks problematic was churn. There were two items that skewed the year-on-year comparison. First, we had a one-time event related to completion of the merger of Sky and DIRECTV in Brazil that led to the elimination of about 20,000 subs.

Second, our prepaid business expanded in the region. The prepaid business which we described to the depth at the Investor Day operates on different principles from the core business. The net SAC is under $100. Consumer proposition is geared to allow the customer to go in and out of service on a regular basis, leading to a high churn based on our accounting rules. Since our SAC is low and there’s no cost reactivating the customers, this is a very good business for us even if the customer churns in and out regularly.

Excluding the one-time event in Brazil in the prepaid business, churn in the region was actually down a touch from the first quarter. Now, that being said, Latin American churn is running above expectations for the year. Market disruptions like strikes in Argentina in the last quarter weren't a factor of higher churn.

Increased competition in certain areas from Telmex, Telefonica are also a market reality; we deal with it. We do feel we’re dealing with all those factors. The political situation in Venezuela relating to getting cash out or boxes in continues to be an issue, it ebbs and flows. Nonetheless, all these things considered, we feel great about the momentum of our Latin American business and its future.

Latin America business, we don’t consolidate Mexico, but just quick comments on Mexico. It really continues to be juggernaut and certainly growth in subs, revenue, profit really across the board, continues to be essentially the story about our Mexican business.

In sum a solid quarter. With that, I will ask Pat to make a few more in-depth comments about Q2, then I’ll come back to make a couple closing comments on the rest of the year before closing.

Pat Doyle

Thanks, Chase. Like Chase, I also believe we had a very good quarter both in the U.S. and Latin America. Particularly considering the numbers we’ve seen from some of our competitors and the slower economy, we thought DIRECTV's numbers were solid.

Similar to the first quarter, the highlights from Q2 were at the strong churn and ARPU results combined with disciplined cost control drove significant cash flow growth. But at the same time, we still have areas of our business that need improvement and I’ll touch on those in a moment.

Starting with DIRECTV U.S. subscriber growth, our net additions of 129,000 were consistent with prior year results and our expectations. We were pleased that our gross additions were essentially flat with last year, particularly considering that we lost 70,000 to 90,000 subscribers that came through the BellSouth distribution channel each quarter. Although we fell just a bit short of our target in former BellSouth territories, we more than made up for that shortfall with strong results in the rest of the country.

In fact, all of our key channels had year-over-year growth except those through our telco partnerships. Our direct sales channel was particularly strong as it contributed almost half of our gross adds and we also saw a solid growth of our independent and national dealers as well as from our commercial business. Some of this growth was related to the increase in direct sales and marketing expenses and dealer incentives in the quarter which helps explain why our cash SAC of $707 was a bit higher than the prior year. We feel comfortable making these investments because these marketing and dealer expenses are directly linked to the acquisition for customers with higher credit scores and advanced products.

Regarding churn, a majority of the improvement came from lower and voluntary churn. As we’ve talked about on previous earnings calls, our ongoing efforts to tighten credit policies have resulted in a higher quality subscriber base, which in turn drives lower churn.

The primary driver of the improvement is a lower first year churn, which is a particularly important metric to focus on in a slowing economy where a company may be more vulnerable to unfavorable trends.

Although we are pleased with the progress made in reducing churn for shorter tenure customers, we think we can do a better job in reducing churn for longer tenure customers. This will be a focus for our company in the second half of the year as we introduce new loyalty programs for our most valued subscribers. Investors often ask how much more can we lower DIRECTV’s churn rate or what is the optimal level of churn. This is a difficult question to answer in isolation because the answer depends on many variables including ones beyond our control such as the competition and the economy.

Having said that, we are comfortable with monthly churn on an annual basis in the 1.5% range. As we’ve showed them at first half, were constantly analyzing opportunities to improve both voluntary and involuntary churn.

Clearly, we are on track to meet that goal in 2008. However, as Chase mentioned, churn will be seasonably higher in the second half and will probably look a lot like the absolute levels we saw in the second half of 2007. The solid subscriber growth combined with a 7% increase in ARPU drove revenues up 13% to $4.2 billion.

Consistent with recent quarters, the ARPU growth was driven by price increases and strong growth in HD and DVR services. We now have more than 7.5 million subscribers with advanced services or 40% more than we had a year ago, and they are paying us about $100 per month. And I also point out that we added three to four times as many HD and DVR subscribers as Comcast added in the quarter.

Although we recently had quarters with 8% ARPU growth, we’re happy with 7% growth because if you recall at our Investor Day, we’ve mentioned that our longer-term ARPU target was more on a 5-plus range. Similar to our competitors, we booked less pay-per-view and event revenue in the quarter. We’re also starting to see some trends that will continue in the second half and into next year.

For example, we are collecting less upfront equipment fees from our customers. Our practice has been to pass along the set-top box cost savings to our customers via lower upfront equipment fees.

As a result, any ARPU decline related to lower upfront fees is essentially cash neutral because it will be mostly offset by lower CapEx for set-top boxes. Another trend we’re starting to see relates to the smaller favorable impact resulting from our HD and DVR growth as our base gets larger and larger. In other words, assuming that we don’t increase our pricing or penetration rates, each incremental point of HD and DVR penetration has a smaller impact on our ARPU growth. All of these trends were predictable and consistent with the longer-term ARPU outlet provided earlier this year.

Turning to profitability and cash flow, I felt we had another solid quarter in terms of managing cost and generating cash flow. We mentioned in the earnings release that excluding a couple of one-time items, OPBDA margin increased 153 basis points to over 29%. This margin expansion is consistent with what we saw on the first quarter and what we expect for the full year. And like the first quarter, most of the benefit came from lower subscriber services cost while we continue to hold the line on our programming margin. Unlike the first quarter, however, our G&A costs were higher than the prior year due to the $25 million benefit that Chase mentioned last year, along with the $15 million charge related to the shutdown of one of our larger home service providers.

You may recall that last month, we completed the acquisition of 180 Connect which serviced approximately 15% to 20% of our orders. We now have integrated their more than 3,000 employees into DIRECTV. In that same time frame, we terminated an agreement with another HSP due to performance issues.

The $15 million charge reported in the quarter covered the cost incurred to ensure an orderly transition of the work performed by the terminated HSP, including the write off of receivables and other miscellaneous expenses. Excluding this charge, our G&A costs as a percent of revenue were relatively flat year-over-year at around 5%, which is consistent with our full-year target.

But perhaps the most notable trend in the quarter was the 35% decline in DIRECTV U.S. CapEx, reflecting almost a $200 million reduction in cost from a year ago. This decline in CapEx can be explained by three main trends. First, the rapid decline in set-top box cost combined with increased usage of refurbished boxes. Second, a leveling off in demand for advanced services from our existing customers. And finally, the winding down and nearing completion of our HD and satellite expansion plan that we began about three years ago.

The reduced CapEx combined with our higher OPBDA drove a more than doubling of cash flow before interest and taxes for DIRECTV U.S. to over $600 million. At the consolidated level for the first six months of this year, our total free cash flow which includes Latin America, taxes and interest, is $729 million or three times last year’s free cash flow. This number includes our first-ever dividend from Sky Mexico of $32 million and a roughly $65 million tax benefit related to the economic stimulus package.

We didn’t recognize a benefit in the first quarter, so this amount represents about a half of what we intend to realize for the full year. Also in the quarter, but not included in our free cash flow number, was over $0.5 billion of stock repurchases. Through today, we have repurchased over 6 billion in stock in the past two and a half years. So, all in all we’re very excited about the financial results of DIRECTV both in the U.S. and Latin America.

We expect to take this company to a whole new level in terms of profitability and cash flow growth and we think the first half results are entirely consistent with this bullish outlook. And with that, I’d like to turn the call back to Chase for some closing remarks.

Chase Carey

Thanks, Pat. Looking for a minute beyond the numbers, we continue to make progress on an array of key operating initiatives. We launched our on-demand product at the end of last quarter, at the end of Q2, and that will be an expanding part of our story going forward. Our newest satellite went into operation last week, giving us significantly more capacity and before year-end, we will move to over 130 HD channels. That should be well before that and about 120 local HD markets representing well over 85% of the United States.

We continue to bring new and exciting content to our customers like expanded Olympic or PGA U.S. Open Tennis Coverage all in the next month or exclusive premier of the TV series Friday Night Lights in about two months. As Pat touched on, we’ve taken ownership now of actually about a third of our field service organization in the last couple of months and that will enable us to more efficiently and effectively really build that service as unique strength.

Turning to the financial outlook for the second half of the year, we’re comfortably on track with the outlook that we provided at the beginning of the year. The problem with the general economy continued to have a limited impact on us. I would not say no impact but it’s certainly limited.

More significant, our competitors have really stepped up their spending. We’re competing quite successfully in this more competitive environment, but it does mean we will spend a bit more in areas like offers and sales to do so.

We expect revenue, OPBDA and cash to continue to be strong. Subscriber growth should continue to be solid and we expect second half sub growth to be around the first half level. As Pat touched on, second half churn should be sustained at about the level it was a year ago. We should continue to make progress in improving efficiency and effectiveness and managing key costs like upgrade, service and programming. ARPU will be impacted a bit by increased spending on offers but we will still be lower to 5%.

Really overall, we feel very good about our business and the momentum we have in the marketplace. We feel good about our competitive position and we’re really on pace to hit our targets.

Quick comments on two additional topics before turning it back to Jon, regarding our buyback, as of today we purchased about $1 billion of our stock. And finally on Liberty, there’s really nothing new to say about our relationship, essentially the status quo. With that, I will turn it back to Jon.

Jonathan Rubin

Thanks. 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’d like to remind the media they are not authorized to quote any participants on this call either directly or in substance other than representatives of The DIRECTV Group. In addition, we’re webcasting this call live on the Internet and an archived copy will be kept on our web site. With that, I’d like to turn over to the operator to begin the Q&A session.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We’ll take our first question from Ben Swinburne with Morgan Stanley.

Ben Swinburne – Morgan Stanley

Thanks. Good morning I guess to you. Chase, if I could ask two questions on some of your prepared remarks. One on the retention spend which you are, as you pointed out, really seeing now come down on a year-on-year basis. How much of that is cost savings on the box side, efficiencies you’ve captured in the labor involved in sending (inaudible) trucks or is the unit deployment declining a bit on the events service side into the base? Just trying to get sense of both levers. And then second, you talked about competitors stepping up spending. Is that just across the board, telco, cable, dish? Any more color there would be helpful.

Chase Carey

Sure. On retention, it’s probably all of that, so it is both – clearly we are benefiting from harbor costs. We are benefiting from the leasing plan. It’s become a more meaningful part as it rolled out. I think our efficiencies, we’ve got more effective because some of that – we’ve made headway. We are not where need to be on some of the service costs under the reach rep [ph] things like that. We’re making headway on all that, but there certainly is a part of it that’s also really getting on top of it, I think we talked about it, that we had a pent-up demand. We obviously have the impact too and we – I think it started ’06 and ’07. We were – we maintained higher box prices than others did. We were rolling out boxes and probably a point in time, we had to block the customers that we had to upgrade and work through, and I do think we got on top of that demands and that demand obviously continues. I mean realistically, these are products that I think as far as I’ve been looking out have more growth, penetration stuff got in front of it than behind it in both the HD and DVRs. But that thing said, I think we have really caught up on what was the pending demand and it has helped us stabilize this. So, but it is both sides of it.

And on the competition, it’s pretty general. I mean, I guess you’d say – I’d certainly say it’s general. There are probably exceptions to that, I think actually Verizon spent a little on (inaudible) in Q2 and then they come back, they’re giving away free TVs in the first quarter and during the second quarter. I'm sure they will come back with them again in the third quarter, but certainly cable and EchoStar (inaudible) pretty much cross the board whether it is just discounting to new customers, saving customers, balance these vis-à-vis satellite that – they’re being more aggressive and I think we have a lot of strengths to compete with it, but it is more of a competitive market and it is a part of what we deal with.

Ben Swinburne – Morgan Stanley

Thank you.

Operator

Now we’ll take our next question from Jason Bazinet with Citi.

Jason Bazinet – Citigroup

Excuse the long preamble here, but –

Chase Carey

It’s all right.

Jason Bazinet – Citigroup

But if you sort of look at the model that I’m sure everyone’s running in the gross adds, sort of stay in the range they’ve been after the last few years and churn comes in around the 1.5 range. Just mathematically, the net adds just continue to sort of tick down and looking at your valuation, it seems like the street is sort of grappling with sort of long-term durability in this business. And so, my question is this, if I had to sort of simplify the segmentation in the space right now, sort of bundle customer goes to cable and the value customer goes to Dish and you guys go after the high-end customers. I was just wondering, is there any thought internally of sort of launching another brand or doing something to compete for the value segment, to try and get the gross add number up more materially, is that not in the sort of the thought process at all in senior management team?

Chase Carey

We’re certainly not asserting something we‘re launching in the next six months or two. I made it all in a date, we‘re not doing our job if we’re not thinking about everything. Yes, I do – yes, probably a little bit of your perspective, I would probably differ with because I think you seem to be certainly imply probably more of a slowing than I think is appropriate. We did think (inaudible) net subs to be down a touch but basically we got great momentum in the market.

Right now, I very much like our competitive position. I think we got a lot of wins at our back on a lot of fronts for all that things about HD. We got – that demand continues to be great. We've got more stuff coming. We are not realistically – we’re certainly not in the place where we’re struggling to find – to hit growth targets. Again, that being said, we’re not just sort of blindly pursuing growth. Realistically our ultimate goal is to build long-term cash flow in the business and as I said before, I think that’s how you build value. But we’re quite comfortable with sort of the growth side of the business today and the competitive things we have fuel that growth.

I think we’d probably be more opportunistic as opposed to we wanted to look at something, is there something opportunistic to do as opposed to sort of trying to – need to offset some maturing that is evident. I think that side of it, it’s a tough place to be to not just sort – as you really saw down there, competing on price and that’s a challenge I think broadband and other telephony have today and there are a lot of dynamics. It doesn’t mean again we don’t continue to study the value of the low end, look at all segments of the market, but I think we like what is the sweet spot for us. I think there’s a lot of things raised up [ph]. The real opportunities for us are to continue to take advantage of the strengths we got, to do a better job in some of the areas we’re not doing a good enough job today and there’s a lot we can do now there, so that’s certainly – a long-winded back answer, answer back – (inaudible) focus is.

Jason Bazinet – Citigroup

All right. Thank you very much.

Operator

Now we’ll take our next question from Craig Moffett with Sanford C. Bernstein.

Craig Moffett – Sanford C. Bernstein

Hi. Hey, Chase, last I heard, I think the penetration of broadband, wired broadband among your subscribers was not that different than the national average at around 60 some odd percent, about 60%. But as I recall, it was overwhelmingly skewed toward DSL. Is that still the case? And given the very big share shift that we’ve seen in the broadband market from DSL to cable, how is that impacting your business? Are you successfully coexisting in those cable homes? Has it turned into a tailwind for you to have more cable availability that's sort of separate from cable video and how do you see that playing out?

Chase Carey

I think your basic proposition is our broadband penetration of our customers, it’s generally true as far as numbers, but I think that’s a generally clear one and I probably would also say that I guess the subject, the DSL would certainly be – gives you sort of segmented where they get that broadband DSL would be the largest single segment. That actually cable is a decent segment, and the one that probably has grown the most recently is cable. So I was going to say we’re the largest growth come in sort of where our customers are getting broadband, it’s cable.

I do think DSL is meaningful to us and in some ways, I’d like – and certainly saw the same second quarter numbers you (inaudible). The competition those guys had is close and I do think the phone guys was not – we’d like to see them focus a bit better on their DSL initiatives. I think Verizon has been a little sort of overly focused and I even acknowledged it – sort of singularly focused on wires [ph] and had said they've got up and I think did well, and I think we have a good relationship and talk about it. I think AT&T, likewise. They sort of – (inaudible) back in ’04 and ’05, but cable came back and competed effectively. I think now they’ve got up. We’d like to see them come back again. That doesn’t mean we can’t compete in the marketplace but I think it would be positive for us if they sort of stepped up their game on the DSL side and I think that’s a matter of focus, discipline and energy. It’s not my job to tell them what to do.

But we actually are getting it – getting broadband. It is a mix and as I said, we’re getting it from an array of places and I think core for us continues to be we have a great video product and people will find – there are enough customers who want that video products, original product, they care about it and they’ll find the broadband solutions in other places. So, that’s probably the news that we continue to go out with. I think the strength of it is probably reinforced by the fact that we have grown as much as we have in terms of our customers having cable broadband yet or video.

Craig Moffett – Sanford C. Bernstein

Thanks, Chase.

Operator

We’ll take our next question from Ingrid Chung with Goldman Sachs.

Ingrid Chung – Goldman Sachs

Good morning. Thank you. So, first question on the VOD service, I know it’s early days still, but I was just wondering if there is anything you could tell us about how many customers are using it and what their usage patterns look like. And then separately, I know you’ve spoken in the past about how you’ve been doing some things together with Dish. I was just wondering if there are incremental ways that you can work together with Dish and what those things are.

Chase Carey

Okay. On VOD, it’s really early days and probably we would not be coming out with specifics out there. We just launched in the last month and about the customers, it’s so small at this point. We got to get the customers hooked up to the broadband and we’re doing. As customers have it, results would be great and also the use of it, but it is small. (inaudible) VOD. I mean VOD sales, as a portion of the market is nowhere near. It’s sort of not something that is high in the list of, sort of what is driving in the marketplace today. HD, DVRs, those really continue to be the things that drive it. VOD matters to a segment but it’s still a pretty modest segment. And I think we’ll grow to meet that demand as it evolves, helps you get better product, but it is really something that will grow over a period of next couple of years, not next couple weeks or months.

As far as the DISH, there’s really new. I probably talked about this a lot and I think we will continue to look at things but – from top to bottom. I said there is not a whole lot new to say about what we can do or would do with Dish. We do things that make sense. If we can find them today, they’ve been recently modest and that probably stills continue to be the perspective. I mean there are really larger things you could deal with satellite, and lots of them get to pretty complicated and has a fair number of issues around them. But we want to make sure we’re opportunistic and I'm continuing to sort of at least trying to aggressively find areas that we could together create value for both of us.

Ingrid Chung – Goldman Sachs

Okay, great. Thank you.

Operator

We’ll take your next question from John Hodulik with UBS.

John Hodulik – UBS

You had some commentary about your competitors being more intense in promoting happily, but it seems like Dish was relatively conservative in the second quarter and seems to be ramping up now, maybe heading into the third and fourth, and we’re certainly seeing more advertising from Dish's stand point. Is there any sense that their posture helped you guys in the second quarter and are you seeing any sort of increased competition directly from them – hey head into the third quarter that they may give some headwinds.

Chase Carey

I guess first, I would – and I try and I try more. I mean, we do get (inaudible) coming, so this might end all the reaction that's up. The customer wants to pick – watches TV and reads newspapers. I certainly would have said Dish in the first half, we are spending some foundation marketing and offers significantly more than they had. I mean they're on TV with ads. The thing that hasn't really done never before and never done. Pick up USA Today, I don't know what the volume is there, but they got a page in the USA Today. And it suffices that they certainly going in the past would have not been things they had, so I do think they've actually been spending more. Certainly had offers in – the market there offers a free program. And I was told a comment was made by (inaudible) that the free programming they had may not been the best offer, but they had an offer there in the first half that was months of free programming.

So, I think they had offers. They may have more aggressive offers. Look and I think my assumption is, our industry is going to continue to get more competitive and I guess the reality is we've said it all along, and I think whether it is cable or dish, I think our assumption is, it will continue to be more competitive and I think it's incumbent on us to continue to raise our game. Continue to build competitive ranks and continue to operate as efficiently as we can.

So I think Dish will step and I expect Dish and expect Cable to continue to be more aggressive. I don't think there's going to be, but I think there's some sort of step function that's changing from one of these guys I think they included in the mix and have been more aggressive. And I think everybody else will continue to get more aggressive in terms of competition, but I think we like our competitive position against all of them and we will certainly – it is incumbent on us to make sure we take advantage of it.

John Hodulik – UBS

Okay and one quick follow-up. You said in your prepared remarks, you could do a little bit better in the MDU space. I mean, can you elaborate on that a little bit more, how big an opportunity is that and what do you need to do to capture that?

Chase Carey

I mean, it's big opportunity, when you hear numbers – people will talk 20% in sort of multi dwelling units. And clearly it's an area we have way underpenetrated and there's some like Manhattan high rises that are probably uniquely challenging and want our contracts, and an awful lot of MDUs (inaudible) you are out of county and they are an entire mix.

We clearly are not where we should be. We probably didn't have the focus in the organization in place to go after it. It is different so you can't go after it in the way you go after a single family home. We built that organization over the last 12 months. We also didn't have a technological solution that really worked in terms of putting the right cost efficient hardware in place to delivery the right mix of content, including HD and if that customer is in the building one, we now have had that for the last six months.

So, it is a combination of having the right proposition, the right hardware and technology for it and then an organization that can execute. Really all of that has been – is in place now. We're not going to – we have new business, by definition, it's not something you tackle in a quarter or two but it is an area we are really looking out over the next couple of years that clearly there's an enormous opportunity because we are so under-represented against our market share in any shape or form.

John Hodulik – UBS

Okay. Thanks.

Operator

And we'll take your next question from Doug Mitchelson with Deutsche Bank.

Doug Mitchelson – Deutsche Bank

Thanks. Chase, the Latin American results are just terrific. And so yes, I think any metric you look at there is pretty exceptional. I have to believe it's pretty wildly undervalued within your public evaluation. Do you have any ideas as to how to unlock the value at Latin America? And then secondly, you mentioned that you're up to now $1 billion through the share purchase plan. So, I think that implies an acceleration of pace as this quarter started. Should we be looking for a more aggressive share of purchase pace in 3Q and beyond? Thanks.

Chase Carey

Yes, I'm probably not going to make more – I probably don't want to make comments on that share repurchase. I mean, we believe our shares are more than we have. I mean, we believe our shares were undervalued. We are certainly – we have the share repurchase in place to take advantage of that. We're going to continue to do so and I guess all I can say is we don't really have – and haven't change our approach or philosophy about that. We do want to be optimistic and smart about it but we do think that our share are undervalued and it's an opportunity for us given the liquidity that we have.

In terms of Latin America, I mean don't really have a sort of – certainly don't have a specific plan. I mean, I guess realistically what we're trying to do is tell the story better and create more visibility around it, which I think we acknowledged as we were going through the mergers and the like. Up to '07, we had the Investor Day – in some degree by intent because we know it's tough to do with the mergers going on. We had not really created the appropriate visibility and understanding around Latin America and I think we are doing a better job. I still think obviously we can do – we can continue to do more, to continue to provide better visibility to it, but I think that's the primary focus. I'm not a big fun of sort – people ask about sort of spending it all, I mean, sort of financial engineering that create values, I'm not a big fan unless you have a better reason than that. I think (inaudible) sort of tried to do that financial engineering to clarify values and more often it seemed to have a reverse effect than the positive effect. So, I think our focus will continue to be to try to create the visibility and greater understanding of what is the real value and opportunity there.

Doug Mitchelson – Deutsche Bank

Great, thanks.

Operator

And we'll take our next question from Vijay Jayant with Lehman Brothers.

James Radcliff – Lehman Brothers

Hi, guys. It's James Radcliff for Vijay. Couple of questions, first of all it appears that Dish is pretty close to close the gap in the volume of HD channel. So, how does that affect your HD marketing going forward, if the release for some time you may not be able to claim a clear absolute channel count advantage? And do you think that 10 ADP channel that their offering is the differentiator and something you're going to need to match? And secondly how important is the debate going on about network neutrality to your on-demand platform and do you foresee any risk of that being dependent on third parties or the broadband access could end up constraining that product? Thanks.

Chase Carey

In HD, and I don't know (inaudible) because all I get is – all I see is some press releases from Dish, so I don't want to get too far into what they have asked other than, I think an awful a lot of people have been making every since we sort of established its leadership position claims about what they've got in HD and how they define channels. I mean some of that has defined a gamble week at the channel, some have defined a pay-per-view event as a channel, there are an awful lot of sort press releases to muddy the water.

So, I'm probably more a believer when we see it in ways that are clear. I think we got a great position in HD. I think we continue to add dimensions when we do things like our sport packages all on HD, when we have HD – when we have regional sports network, but yes – we have 24 hours ones, not just a few games a week. I think we've got great strength in that and I think strength we can continue to drive including brand strength. And we obviously have more local and we'll be going to– we're going to be in the high 80% penetration. And so I think we've got, I think we do still have a position of real leadership both in terms of having been there first, having created that leadership position and created that brand position around and continuing to add dimensions to it. We do have – we announced we're doing 1080. I think we are very comfortable with sort of the leadership position. We have and will continue to be able to drive in this space. (inaudible), you have to see where that ebbs and flows. (inaudible) in some manner though I don't think you get to up.

Yes, and I think if I put a guidance on the cable and phone guys push back in that neutrality, I think which is true thinking it – I think there's a limit to what you can manipulate to frustrate customers. I mean that neutrality is relevant and there is sort going to I think a lot of discussions and a lot of issues around it. I think customers clearly are going to demand a level of service. So, I think if broadband shakes out, I think we do believe that it will be a good viable part of sort of our ability to deliver full service to a customer. But we'll have to see where these – where all these things shake out in the coming year or years.

James Radcliff – Lehman Brothers

All right. Thank you.

Operator

And we'll take our next question from Tom Eagan with Collins Stewart.

Tom Eagan – Collins Stewart

Great, thank you. First question is on the former BellSouth territories, Chase, I was wondering how many formerly BellSouth DTV subscribers have turned? What have you seen there with those subscribers? And when at all do you expect AT&T may get back to you as to when they are going to make a decision about their partnership in '09? And then following, Pat, I think you said about churn – second half '08 churn that would be at the total absolute level of second half of '07. Did you mean the 1.5 million subscribers that churned off in second half of '07? Thanks.

Chase Carey

On BellSouth, probably – I mean I think the question you had probably gets into what I consider probably more specific data than we publicly would put out there. It is – within BellSouth, on this churn, like there is elsewhere, BellSouth does not allow to target our old customers for it. And so, as with all these places, the level of churn we compete it back, but they have to be generally the market again [ph] that are allowed to target things there.

Pat Doyle

It's a partnership with AT&T [ph].

Chase Carey

It's a question they have to answer on what there timeframe is. I mean their timeframe seem to be at this point the end of the year, that's – I mean, most of this is public. I mean that's seem to be a termination notice they gave to Dish on the existing agreement. So, that's come through timely and I assume there's some lead time into that what they have to deal with. But really that question they got, I answer on sort of what's the lead time for their comfort to address it.

Pat Doyle.

The last question was just the churn and we were talking about a rate, not an (inaudible). The rate has been in the second half or looked like the second half of '07?

Tom Eagan – Collins Stewart

Okay. Thank you.

Operator

And we'll take our next question from Tuna Amobi with Standard & Poor's.

Tuna Amobi – Standard & Poor's

Great, thank you very much. So, now that the telco channel is going away and as you look the mix of all the other channels, clearly you are getting a lot more tax in the direct sales channel. So, the question there is how do you see that mix evolving over time and what's your preferred mix over time in terms of the other channels, the independent dealers and the commercial business? And separately I was also looking to get some thoughts, Chase, now that, I'm sure this question has been asked over and over, but it seems to be an opportune time to get an update on your thoughts about possible satellite television merger between you guys and Dish given the satellite radio closing. So now it seems like the environment has changed substantially it would appear since 2002. How do you see that possibility evolve and do you – would be constructive on such an idea? And lastly any quick thoughts on the possible spinoff of Liberty Entertainment to merge with DIRECTV? I know that idea has been out there, so I'd love to get your thoughts on that as well.

Chase Carey

On the channels, I think as we said, direct sales has clearly become our largest channel by a large margin that does not [ph] happen in our business. Unless we had some nice help in terms of the dealer side of it and we're supporting it. Actually that has increased a bit. Part of it at the telco side has moderated a bit. We like every channel would be as healthy as we can and will be opportunistic. The commercial channel is one that actually we think has growth opportunity for us. I think we – if not this year, but we still actually – I think it's a segment that really with our sports leadership, we should be (inaudible) and there's clearly upside for us in sort of driving that. We're going to make every channel what it can be. I mean, that direct sales is going to be and it is the largest. But we are certainly working hard with things like inside [ph] in the dealer side to create a very healthy relationship with them and I think we've made nice strides in that regard. In terms of the merger with EchoStar, it really has nothing to do. (inaudible) page or what, but I have nothing – there's really nothing.

Tuna Amobi – Standard & Poor's

I mean, don't you feel that the scenario is more, I mean, the environment given the satellite radio is now more at least on the cable channels?

Chase Carey

I think that satellite radio is probably – it's not (inaudible) and say probably in the theory of it, it's probably a minor positive, not a major positive. There are a lot of differences between the businesses, but I don't think it certainly doesn't change the world from black to white. So, I don't – I think you're all implying what that – the meaning of that decision is – and then the third the merger, not a lot. In Liberty, which I think have said it, they have about until the end of August to pay – their current status is present with News Corp. First, the tax structures and so there's really nothing – as I said, I think in the opening comments.

Tuna Amobi – Standard & Poor's

Would you be receptive to that idea, Chase? I mean if it is going to be, would you view that as constructive in terms of a new structure for DIRECTV?

Chase Carey

I mean, anything has got a specific detach [ph]. Look, I think at this point to say you've got a Liberty entity that is worth, I don't know, 80% something of the value of (inaudible), it's probably not anybody's ideal scenario of that two public entities that are by and large were 100% of warranty and something percent of the others, probably not what you logically grant there. That's a great construct but (inaudible) is where we are. But I think, clearly there'd be opportunities to create a more rational one. But you got to deal with the issues that come out of it and we can't deal with them now because we're in a tax situation, so we'll deal with them as we can get there.

Tuna Amobi – Standard & Poor's

Thanks a lot.

Chase Carey

Sure.

Operator

And ladies and gentlemen, we have time for one final question today. And that question comes from April Horace with Janco Partners.

April Horace – Janco Partners

Hi. Thanks for taking the question. Congratulations on a good solid quarter with respect to subscriber gains. Would you say – could you give us some color as to how many subs are coming from Cable, how many are coming from Dish? And then can you also kind of give an outline as to the VOD offering, how many hours do you have in total, how much of the HD?

Chase Carey

Yes, I would – we haven't done it, so I probably give a sort of specific breakdown. They do really come from more on mix – more come from Cable because it's more ad Cables than – and that's what we certainly take, certainly a meaningful number comes from Dish. Probably allow me – I mean the telcos are so new and they are probably less coming in at this point going – they're just launching. But probably Cable and it's a mix of digital and analog. And so the biggest segment would be there, but certainly it really is spread across.

In terms of the VOD, well, I'd have to take – I mean, it's a lot of hours that sort of – I think it a 1000, 3000 or 4000 on the titles or hours, it's a combination of movies in eBay [ph]. We are pushing selected events to the DVR so there's a push to firm up a full component through (inaudible) broadband, really pushing event movies to the customer and then letting them pull the long sale. But it's a large volume. I think the HD piece of that still is probably, we certainly have it but it's probably small and the HD will – it's very early, the numbers in the VOD side of it from us today are not large because we just launched it. We got customers calling and asking and we're putting the appropriate equipment in a home to hook up your box to a broadband connection. And so it is really something that we'll probably – there'd be more meaningful shape and structure in that as we go forward over the next year.

April Horace – Janco Partners

Thanks, that's all I got.

Chase Carey

Thank you everybody for staying on the call and we will catch up with all of you a quarter from now, if not before. Take care.

Operator

Thank you, ladies and gentlemen. This does conclude today's conference call, this DIRECTV Group second quarter 2008 earnings call. You may now disconnect your lines and have a pleasant afternoon.

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