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DIRECTV (DTV)

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DIRECTV (DTV)

Q2 2013 Earnings Call

August 01, 2013 2:00 pm ET

Executives

Jonathan M. Rubin - Senior Vice President of Investor Relations and Financial Planning

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 Ventures

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

Analysts

Benjamin Swinburne - Morgan Stanley, Research Division

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

John C. Hodulik - UBS Investment Bank, Research Division

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

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

Jason B. Bazinet - Citigroup Inc, Research Division

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

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

Philip Cusick - JP Morgan Chase & Co, Research Division

Craig Moffett - Moffett Research, LLC

Jason Armstrong - Goldman Sachs Group Inc., Research Division

Tuna N. Amobi - S&P Capital IQ Equity Research

Richard Greenfield - BTIG, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to DIRECTV's Second Quarter 2013 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 thank you, everyone, for joining us for our second quarter 2013 financial results and outlook conference call. With me today on the call are Mike White, our President and CEO; Pat Doyle, CFO; Bruce Churchill, President of DIRECTV Latin America; and Larry Hunter, General Counsel. In a moment, I'll hand the call over to Mike, Bruce and Pat for some introductory remarks. But first, I'll read to you the following:

On this call, we make statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause actual results to be materially different from those expressed 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 reports on Form 10-K, quarterly reports on Form 10-Q and our other filings with the SEC, which are available at www.sec.gov.

Examples of forward-looking statements include, but are not limited to, statements we make related to our business strategy and regarding our outlook for financial results, liquidity and capital resources. Additionally, in accordance with the SEC's Regulation G that requires companies reporting non-GAAP financial measures to reconcile these measures to the most directly comparable GAAP measure, we provide reconciliation schedules for the non-GAAP measures, which are attached to our earnings release and are posted on our website at directv.com.

So with that, I am pleased to introduce Mike.

Michael D. White

Thanks, John. And you get to read that faster every time I hear it. And thanks, everyone, for joining us today.

Look, on balance, I think DIRECTV's second quarter consolidated results were solid. In the U.S. business, our results continue to reflect our goal to smartly balance top line sales and bottom line profitability through various strategic initiatives that heighten our focus on quality and the profitability of our subscribers, the overall customer experience and, of course, cost management all across the enterprise.

In Latin America, even with the macroeconomic and operational challenges, which I'll touch on briefly more in a moment, we're continuing to see robust demand for DIRECTV and Sky's differentiated products and services. And these results across both the U.S. and Latin America, coupled with our share repurchase program, drove mid- to high single-digit revenue and earnings per share growth along with solid free cash flow growth in the quarter.

Now before I turn the call over to Bruce and Pat for a more detailed review of Latin America and the U.S. businesses, let me offer just a few observations. Let me begin with Latin America, where, as I said, strong consumer demand for DIRECTV and Sky's leading brands, attractive products and segmented offers drove gross additions in the quarter to a DIRECTV all-time high. Consistent with recent trends, this record performance was driven by strong growth from our middle market segments as well as continued momentum in the higher-end -- what we call A and B households.

However, as we previously disclosed in our 8-K filing in June, higher churn in the quarter did drive net additions below expectations in Brazil. We attribute this increase in churn to several factors. First, there was a churn of something on the order of 200,000 subscribers related to the termination of Sky Brazil customers who got retention credits during late 2012 and early 2013 that were inconsistent with authorized policies. Second, a combination of a slowing economy overall in Brazil and continued competition is placing upward pressure on churn, most especially among the middle market subscribers. To address the improper credits issued in Brazil, we've already taken appropriate disciplinary action for the management that was involved and put new rigorous control procedures in place. In addition, we are, of course, tightening our credit screens and reviewing our programming and packaging strategies to better align our offers with consumer income levels and behavior patterns.

Now I should point out, we also took the opportunity to review our practices in PanAmericana, and we're confident that all of our subscriber retention and churn policies continue to be property followed throughout the region. Although unfortunate, I'm confident that Sky Brazil will come out of this process as a stronger company with a smarter management team with a higher-quality and more profitable subscriber base.

Now also, over the last few months, we have seen increased volatility in the global currency markets, which present foreign exchange headwinds, particularly in Venezuela, Brazil and Argentina. However, keep in mind, in local currency, DIRECTV Latin America's top line growth of more than 20% in the second quarter remains very strong and continues to reflect the strength of our leading brands and advantaged competitive position.

As Bruce will cover a bit further, the fluctuations in foreign exchange, coupled with some onetime and ongoing operating cost issues, as well as the subscriber challenges that we spoke about earlier, did unfavorably impact our dollar-reported profit results for the quarter. That said, I believe we're doing a good job navigating through this operating environment, and DIRECTV Latin America is still on track to have a very solid year in terms of net subscriber additions in local currency, revenue and OPBDA growth.

Read the rest of this transcript for free on seekingalpha.com