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DIRECTV (DTV)

Q4 2013 Earnings Call

February 20, 2014 2:00 pm 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

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

Fazal Merchant - Senior Vice President of Treasury & Corporate Development

Analysts

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

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

Kannan Venkateshwar - Barclays Capital, Research Division

Amy Yong - Macquarie Research

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Michael McCormack - Jefferies LLC, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

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

Craig Moffett - MoffettNathanson LLC

Thomas W. Eagan - Northland Capital Markets, Research Division

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

James M. Ratcliffe - The Buckingham Research Group Incorporated

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

Jason B. Bazinet - Citigroup Inc, Research Division

Presentation

Operator

Good day, ladies and gentlemen. My name is Justin, and I will be your conference operator today. At this time, I'd like to welcome you to DIRECTV's Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to turn the call over to your host, Martin Sheehan, Vice President of Investor Relations. Sir, you may begin.

Martin Sheehan

Thank you, Justin, and thank you, everyone, for joining us for our fourth quarter 2013 financial results and outlook conference call. With me today on the call are Mike White, our President and CEO; Pat Doyle, our CFO; Bruce Churchill, President of DIRECTV Latin America; Fazal Merchant, CFO of DIRECTV Latin America; and Larry Hunter, our General Counsel.

In a moment, I'll hand the over -- hand the call over to Mike, Bruce and Pat for some introductory remarks, but first, I need to read 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 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 their 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.

With that, I'm pleased to introduce Mike.

Michael D. White

Thanks, Martin, and thanks, everybody, for joining us today. I'm pleased to report that we had a great fourth quarter, which capped off yet another strong year. In particular, I'm particularly proud of our total shareholder return of 38%, which was our sixth consecutive year beating the S&P 500.

I believe our results were entirely consistent with the long-term strategy that we talked about at our Investor Day in December, which is essentially to continue creating significant shareholder value by delivering first quartile growth while also returning cash to shareholders.

In particular, there are 3 areas I'd like to highlight from our consolidated results. First, we're generating solid top line growth, driven by strong consumer demand for our best-in-class video service all across the Americas. DIRECTV's industry-leading revenue growth of 7% continues to confirm our competitive advantages in the marketplace in the growing Latin America business, as well as our ability to profitably grow ARPU amidst a challenging U.S. operating environment.

Second, strong full year OPBDA and double-digit cash flow growth demonstrate our commitment to profitably grow our businesses while keeping a sharp eye on disciplined expense management and productivity improvements. And third, we continue to return significant capital to our shareholders. As you saw in our earnings release, we repurchased $4 billion of DIRECTV stock last year, helping to fuel an 18% increase in adjusted diluted earnings per share to $5.42, which exceeded the 2013 EPS target that we set for ourselves way back in 2010. In addition, free cash flow per share increased 33% to $4.76. Finally, I'm pleased to announce that our Board of Directors authorized a $3.5 billion share repurchase program.

Now before I turn the call over to Bruce and Pat for a more detailed review of our fourth quarter results, as well as an update on our long-term strategies and outlook, let me just offer a few observations, starting with Latin America. Look, on balance, even with the macroeconomic, political and operational challenges that we talked about on December and we encountered last year, I thought DIRECTV Latin America's quarter and full year results were quite solid and reflected our strategy to heighten our focus on profitably expanding DIRECTV and Sky's share of the growing pay-TV marketplace throughout the region.

Subscriber growth in the quarter, although below expectations, certainly was consistent with our initiatives to consciously try to improve the quality and profitability of new subscribers and drive lower postpaid churn. Stricter credit standards, reduced promotional discounts and sales filters all contributed to a decline in gross additions. However, I'm confident these actions will improve the value of our subscriber base and are the right thing to do for the long term.

Turning now to the top line. Full year revenue growth in DTVLA was 10%, in line with the guidance we provided. But perhaps a better indicator of our achievement, factoring out the impact of foreign exchange rate fluctuations, both revenue and OPBDA grew approximately 26% and 40%, respectively, for the full year. And in terms of margins, Bruce will cover it in a bit more detail, but importantly, Latin America delivered its adjusted OPBDA margin target of 30% in 2013, further demonstrating our ability to adapt and execute in an agile way in a challenging market environment.

Turning briefly to the U.S. I believe our fourth quarter and full year results were very strong and reflect our overarching goal to balance top line sales and bottom line profitability. Specifically, our enhanced focus on the quality, loyalty and profitability of our subscribers continues to increase the long-term value of the subscriber base and yield strong financial returns. These benefits are particularly clear when looking at our full year ARPU growth of 5.4%, which represents the greatest year-over-year increase in 5 years, while, at the same time, our industry-leading churn rate of 1.5% marks our lowest level in half a decade.

In addition, our heightened focus on cost-containment initiatives all across our enterprise, along with a disciplined customer acquisition strategy, drove operating profit before depreciation and amortization growth to nearly 8% in 2013, exceeding our full year guidance and expectations. Overall, DIRECTV U.S. met or exceeded all the key goals that we established at the beginning of last year.

Now before I turn the call over to Bruce, let me just take a couple of minutes to talk about our 2014 outlook and our key strategic priorities. The operating environment for our U.S. business in 2014 should be pretty similar to 2013. Macroeconomic conditions we expect to modestly improve while, in a maturing, highly competitive pay-TV marketplace, competition will continue to be challenging and programming costs continue to rise in an unsustainable rate. We continue to demonstrate DIRECTV's ability to perform amidst this backdrop. And as we've shared with you at Investor Day a couple of months ago, we're executing on the strong comprehensive strategy we established to deliver profitable growth over the long term.

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