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DIRECTV (DTV)

2013 Investor Day Conference

December 12, 2013 8:30 am ET

Executives

Martin Sheehan - Senior Director of Investor Relations

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

Jacopo Bracco - Director and President of Directv Panamericana

Luiz E. Baptista da Rocha

Evan R. Grayer - Vice President of Broadband

Fazal Merchant - Senior Vice President of Treasury & Corporate Development

Romulo C. Pontual - Chief Technology Officer and Executive Vice President

Michael W. Palkovic - Executive Vice President of Operations

Paul Guyardo - Chief Revenue & Marketing Officer and Executive Vice President

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

Analysts

Benjamin Swinburne - Morgan Stanley, Research Division

Craig Moffett - MoffettNathanson LLC

Richard Greenfield - BTIG, LLC, Research Division

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

Presentation

Martin Sheehan

Good morning, and welcome, everyone, to the 2013 DIRECTV Investor Day. For those of you who don't know me, or only spoken with me on the phone, I'm Martin Sheehan, Vice President of Investor Relations.

We have an exciting day planned for you, including some great product demonstrations out in the lobby, which I highly recommend you spend some time perusing, either at the break or when we adjourn for lunch. In particular, I'd like to point out, we have an ultra HD experience demo out in the last room on the right, just past the registration desk. In addition, we're highlighting our new sports portal, second screen apps, as well as many of the features, content and services that set DIRECTV Latin America apart from the competition.

As for today's agenda, Mike will come up in a minute to give you -- to kick off the day and make some opening remarks. And then we'll spend about 90 minutes going through the Latin America business, followed by a short Q&A. Then we'll take a 10-minute break, followed by 90 minutes of presentations on the U.S. business. We will close the session with a more extended Q&A. And of course, we want to make sure that you get all your questions answered, so Mike and his executive team invite everyone to join us for a buffet lunch in the breakout rooms back again down towards the registration desk, following the formal Q&A session.

I would also like to note that hard copies of the presentation will be available after the formal remarks are complete at about 1:00. You may also pick up a flash drive at the registration desk that will have a PDF of the slides saved on the drive. And of course, at that time, we will post the slides on our website, directv.com.

Finally, I would be remiss if I didn't point out that Jon Rubin is making his final appearance today, representing DIRECTV. I've had the pleasure of working for Jon for over 15 years, and I want to personally thank him for all he's done in helping me in my career, as well as his efforts in making DIRECTV and the IR function best-in-class. So if you haven't had a chance to wish Jon well, please make sure you track him down before you leave today.

With that, I will try to perform one of the duties which he's done so well over the last 18 years and read our legal disclaimers. In the materials, we have provided a cautionary statement regarding the use of forward-looking statements in these presentations and the associated risk factors, and urge you carefully to read that statement. In addition, 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 non-GAAP measures, which are included in the back of the hard copies of the presentation and will be posted on our website at directv.com/investor.

With that, I'm pleased to introduce Mike White, Chairman, President and CEO of DIRECTV. Mike?

Michael D. White

Thanks, Martin. Good morning, everyone, and welcome to our 2013 Investor Day, otherwise known as Martin Sheehan's coming-out party.

Look, we've got a lot of DIRECTV staff here. I'm not going to introduce them all. A number of the presenters -- we'll introduce the presenters as we go. Most of them, you're familiar with, but there are a number of others that are out in the audience. I'm going to just ask all of the other DIRECTV executives after I kind of introduce a couple to stand up. But our General Counsel, Larry Hunter, is here; our Chief Content Officer, Dan York, is here, in charge of programming. Anybody got any questions about programming? I do. A guy you may not have met before, Rasesh Patel, Senior Vice President of our Customer Experience Group; Tony Goncalves, Senior Vice President of our Digital Entertainment group. And if I just ask all the other DIRECTV resources that are here, they'll be out manning the booths so that if you have questions or whatever, by all means, seek them out. So all the rest of the DIRECTV folks, just raise your hands, that are out in the audience. We've got a pile here.

Okay. With that, let me get started. It was December 2, 2010, and a number of you didn't have much to do to prepare for Christmas that year, so you came up to -- uptown to our big Investor Day meeting. And as I think back on it, I mean, this was one of the slides, we talked about building a diversified growth story. At the time our stock was $40 a share. We had about -- we closed that year with 28 million subscribers, and we had about $24 billion in revenue. We told you, for the U.S., that we were going to build on our leading brand and technological innovation to take U.S. video to the digital world, and we talked about pillars of strength like strengthening the core -- pillars of success, being: strengthening the core through segmentation, delivering a best anytime, anywhere experience, creating new revenue streams and enhancing productivity. And in terms of Latin America, we talked about doubling down on Latin America to capture the tremendous growth opportunity we saw, to profitably increase market share with the segment and strategy, extending our leadership in higher end markets through HD and DVR leadership with the best programming, and penetrating deeper into the middle market, with prepaid services and lower priced postpaid offerings.

Well, here we are 3 years later, and we've added nearly 10 million more households across the Americas that are DIRECTV customers. We are the world's largest pay-TV provider, and I know you're all pretty familiar with our different portfolio parts. 3/4 of our portfolio is in the highly profitable U.S. business that continues to generate strong cash growth. About 1/4 of our business is in Latin America, and growing fast, with big business that's highly profitable in Brazil. A PanAmericana business that's got some dramatic growth opportunities you'll hear about from Jacopo later today. And our all-important investment in Sky Mexico, as well, which is also highly profitable. And we have a small sports network team, but I would argue, they may be small, but they are by far, the best Regional Sports Network in the industry and a hugely strategic asset for us.

Now when I think back on the last 3 years, we've accomplished a lot. But I would say, if I were to pick out a few things that I'm most proud of, and I kind of picked 4 buckets here, product innovation because innovating on our product and the entertainment experience is the lifeblood of DIRECTV; advancing the customer experience; developing our talent and expanding our corporate social responsibility and delivering our financial and operating goals.

In terms of product innovation. We launched the best-in-class set-top box called Genie. We've rolled out an industry-leading, high-def user interface across multiple screens. And there's a tremendous story that Tony Goncalves, coupled in partnership with our engineering group led by Romulo Pontual that are building around digital entertainment. There's a lot of stuff in the back in the demos that you'll see in that area. But that team, in partnership with both Mike Benson in IT and Romulo, has helped lead us build the foundation for a robust TV Everywhere platform that we're very excited about. And after beating cable for 13 consecutive years on the customer experience with -- the ACSI customer service scores, as is typical of DIRECTV, we felt it was time to raise the bar on ourselves and not necessarily just look through our own industry, but look beyond our industry, to become best-in-class in terms of the customer experience, believing that improving our customer experience will both improve customer loyalty, as well as drive productivity.

We created a group under Senior Vice President Rasesh Patel, who's here with us this morning, that has helped focus us working in partnership with both Paul Guyardo on our policies and practices on the sales side, as well as with Mike Palkovic on the operations side. And it's really doing a terrific job making a real difference in how we service our customers.

In 2013 alone, we'll have eliminated 5 million phone calls out of some of the policies and practices that we've been following. We've reduced our service calls by 25%, and our equipment failures by 40%. And Latin America continues to win award after award around our customer experience and is investing in new software that will give us an even more sophisticated way to manage our customers going forward. Third, I'm incredibly proud of our team and our focus on corporate responsibility. We've been recognized just last week as one of Bloomberg's Civic 50 list of America's most community-minded companies. Our DIRECTV employees have contributed more than 32,000 hours across the Americas, in both Latin America and the U.S., in their community over the past year. We've got a robust sustainability agenda, receiving the 2013 Department of Energy, ENERGY STAR Partner of the Year Award, in reducing our carbon footprint by more than 10% since 2011. And we know that's not only good for the planet, it's also saving us real money. And you'll find out, to the right, a booth where we've got copies of our new Corporate Social Responsibility report, which we just issued about a week ago.

And lastly, but not least, certainly, we continue to deliver year in and year out on our commitments. We delivered on our consolidated revenue goal that we set 3 years ago of $30 billion. In fact, when we closed the year out, we'll exceed that goal. We far exceeded the 30 million subscriber goal that I set 3 years ago. And we will have delivered on our $5 earnings per share goal that I outlined 3 years ago. We continue to have the highest capital return policy in the industry. And as I looked at it, 45% of our float has been retired since I became CEO.

Now all of that has created a lot of shareholder value and we're really, really proud of the improvement that we've seen in our stock price and the recognition in delivering those numbers. And we continue today to be confident in our future based on the same competitive advantages that we talked about 3 years ago. Our advanced technology, from our best sound and picture to our industry-best user interface to the best HD DVR in Genie. Our incredible brand, that Paul Guyardo will talk to you about a little later on this morning, that continues to win award after award for our world-class advertising. Our customer experience that continues to beat cable year in and year out. Our low-cost delivery and service platform all across the Americas. Distinctive content from NFL SUNDAY TICKET to our World Cup offerings that we'll have in 2014 in Latin America, and perhaps, most importantly, an experience-savvy management team that has a track record of strong execution.

But certainly, I know, no one can rely on historical advantages in today's fast-changing world. Each of us in business has to constantly adapt, reinvent, revitalize, and everyday, look to improve our business. And I might say for DIRECTV as like -- I like to say, the original over-the-top disruptor in our industry, we don't ever take anything for granted, and are constantly looking for ways to get better day in and day out.

Now with that said, I'm well aware of the unique challenges that we face in our 2 key geographies. And the U.S. is a mature, hypercompetitive marketplace. We've got an accelerating pace of technological change from 4G networks to a proliferation of mobile devices, over-the-top services, even new video ecosystems like YouTube to our content cost challenge. And in Latin America, it's also a competitive marketplace, but I would say one thing that has changed is it clearly is a much more volatile and challenging macro political -- macroeconomic and political environment, requiring greater agility and streetsmarts in how we manage through that. All of that being delivered, at the same time, we've still got to complete the modernization of our Latin America infrastructure, launching 3 new satellites, excluding Mexico, over the next couple of years and completing 2 broadcast centers, as well as a broadband build-out. And ensuring that while we do that, we generate an attractive return on investment and cash flow in 2016.

So with that said, let me just tell you quickly the themes you're going to hear today. First, in terms of Latin America, Bruce Churchill and his team will be up right after me, to talk to you about how we're going to grow our Latin America business. First and foremost, continuing to extend our leadership position in the high-end markets. You're going to hear about the launch of our new satellites over the next couple of years that will, over time, give us a tenfold increase in high-definition channel capacity, and you know how important that was to accelerating our growth in the U.S. business. You'll hear them talk about lower-cost boxes, like a lower-cost HD box or something called Lego [ph] that we've got. And you'll see that outside, by the way, demonstrated in the back, where we can kind of take a low-cost HD box and literally just drop-ship to the customer, something that you could just hook onto it and create a DVR out of it. Self-service, in effect, which saves truck rolls. Incredibly efficient opportunity for us going forward. Clearly, we need to continue to profitably increase our penetration in the mass market segment.

And you'll hear how we're going to continue, especially in Brazil, to better optimize our programming and packaging strategies, leverage prepaid, which has been so successful in PanAmericana, and continue to build a profitable middle -- mass market business.

You'll also hear from our new CFO of Latin America, Fazal Merchant, who'll talk to you a little about how we're going about protecting, in some cases, or improving margins in other cases, depending on the country, through smart pricing and rigorous cost management and tough-minded control of our capital spending.

Evan Grayer will talk to us a little bit with an update on how we're going about driving fixed wireless broadband growth with a success-based initiative that also we're demoing in the back. In fact, we expect to reach, or pass, somewhere between 5 million and 8 million households by the end of 2014 across Brazil, Argentina, Colombia and Peru.

And finally, you'll hear Fazal talk about how we're working to ensure that Brazil is largely self-funded in 2014. And when I say self-funded, what I mean is if I pull Venezuela out, we've been investing in Latin America. We expect, in 2014, to get pretty close to self-funding, excluding Venezuela. And we certainly expect to generate significant accessible free cash by 2016.

Now with all that said, I think I could argue that a lot of what's on that slide is similar to what you've heard before at our recent Latin America Investor Day. Certainly, it's true that we're committed to continuing to modernize our infrastructure, which, by the way, when we get done with 3 or 4 satellites across both Mexico and South America, we'll have fewer satellites to service an entire half continent than the United States does with its satellites. So it's an incredibly efficient approach that we're taking. But it does take money and it does play out in our capital spending over the next 3 years.

Second, we have to win in the middle market. It's not a choice. Those statistics, if we just stick with the A and B consumer in Brazil, you're going to service 20% of the population. The C-class customer is more than 1/2 of the population and we can't win and build a scale business without being successful with that population. But finally, we're well aware that the macros are changing, are more challenging between devaluation, elections and other disruptions across Latin America. So we are taking steps to fine-tune our spending, be smart about our pricing and be quick to adapt our capital spending as things change.

After that, you'll hear from the U.S. team. Romulo Pontual, our Chief Technology Officer, is going to tell you about our product innovation plans and how we intend to continue to advance our best-in-class entertainment experience. He has a terrific demo, as Martin said, of the ultra HD, which will be enabled by the launch of 2 new satellites over the next 2 years. You'll see in the back, a whole pile of demos around the whole digital DIRECTV Everywhere platform and what we're doing with satellite cloud hybrid technology. You'll see how we're going to continue to enhance our HD user interface. I think we're demoing voice in the back.

Second, after Romulo gets done, Mike Palkovic, our EVP of Operations, will talk to us about how we're going about going from best in the industry to best in the world to make customer service a true competitive differentiator for DIRECTV, how we've spent a tremendous amount of effort over the last year between Rasesh Patel and his team working in partnership with Mike on empowering our frontline employees to completely retrain our technicians and our call agents on how we're going to do business going forward. You're going to see how we're working to streamline and simplify policies, practices and processes. And the 5 million call reduction in 2013 is just a down payment on the opportunities that we see to further reduce calls in 2014 and beyond. And we're investing in our directv.com capability to enable chat, which we did this year, but also, to enable greater self-care over the next couple of years.

After that, our EVP of Sales and Marketing, our Chief Revenue Officer, Paul Guyardo, will talk to us about how we continue, year in and year out, to attract and retain profitable subscribers through what I would argue is world-class direct marketing capabilities, the best-in-class branding and sophisticated retention tools. In addition, Paul is going to talk to you a little bit about some of the nonresidential kind of more new ancillary revenue streams that we're focusing on. Home security, through our LifeShield acquisition, which is also being demoed in the back and kind of one of the founders, Mike Hagan, is here in the back, demoing the LifeShield opportunity, which you'll see more of as we expand that in 2014. And dynamic ad insertion and ad sales is a tremendous opportunity that we've got a great start on in 2013, and you'll hear more from Paul about that. Growing our commercial business, which also has had a terrific year, as well as looking at opportunities in subscription VOD, over-the-top and electronic sell-through. Finally, Pat Doyle will wrap up with an explanation of our productivity initiatives that we've undertaken across our enterprise over the past year.

Now again, a lot of that hasn't changed. Most of it's pretty consistent with what we've talked about before. But make no mistake about it, I would argue, we are far more in-depth in our strategies. We know a lot more about streaming, we know a lot more about our TV Everywhere platform, we know a lot more about the cloud, we know a lot more about ultra HD. In terms of the customer experience, we've had about 18 months of experience, realizing that it is not only a huge advantage in terms of customer loyalty, but it also drives real productivity. And we've had now 3 years, by my count, of managing elevated content cost, managing our net adds and our churn with elevated pricing. All of that has taught us a lot in how to work in these times. And we've got a lot of new things going on in terms of our enterprise-wide focus on productivity, including a whole initiative around leveraging global procurement across the Americas and the U.S. So don't all rush out to your Bloomberg terminals. This is why Martin didn't want to give you the slides ahead. But if I think about the next 3 years, the story is -- continues to be that DIRECTV is an attractive, diversified growth story for our investors. We've got solid strategies. We're embracing new technologies, looking for the best of the best, ensuring that we get the low-cost, high-quality, high-reliability advantages of a scale satellite platform, coupled with the mobility and the interactivity and the breadth of content that the cloud can offer and ensuring that we make that together a seamless experience that leverages the best of both. And we're adapting to changes, whether they're in the U.S. or Latin America, through agility and continued innovation.

Now I have confidence in our business and its prospects. Our U.S. algorithm really isn't that different than what we've talked about before. Clearly, Latin America's gotten a little more complex. So in my mind, what I look to, and Bruce and the team come in and talk to me about their performance quarter in and quarter out, is first and foremost, our GMs manage their business in local currency. So I want to know how they're performing on the top line in local currency, and we certainly expect to see continued growth in 2014. Second, I want to make sure that we're thinking hard about how we either sustain in some cases, because we've got several countries that already have 30% up to margins, or in other cases, where we've been investing for growth, that we have a track -- kind of a path forward that over the next several years, gets us close to 30% margins. And finally, that we're managing our capital spending in a disciplined way, recognizing the changes that are going on in the external environment.

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