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DIRECTV (DTV)

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DIRECTV (DTV)

Q4 2010 Earnings Call

February 23, 2011 9:00 am ET

Executives

Michael White - Chairman, Chief Executive Officer and President

Jonathan Rubin - Investor Relations

Bruce Churchill - Executive Vice President, Chief Executive Officer of Directv Latin America LLC, President of Directv Latin America LLC and President of New Enterprises

Patrick Doyle - Chief Financial Officer and Executive Vice President of Finance

Analysts

Craig Moffett - Sanford C. Bernstein & Co., Inc.

Jessica Cohen - BofA Merrill Lynch

Bryan Kraft - Evercore Partners Inc.

Thomas Ernst - Deutsche Bank AG

Stefan Anninger - Crédit Suisse AG

James Ratcliffe - Barclays Capital

Marci Ryvicker - Wells Fargo Securities, LLC

Kunal Madhukar - Bear Stearns

Jason Armstrong - Goldman Sachs Group Inc.

Thomas Eagan - Collins Stewart LLC

Tuna Amobi - S&P Equity Research

Presentation

Operator

Good day, ladies and gentlemen. My name is Clayton, and I'll be your conference operator today. At this time, I'd like to welcome everyone to DIRECTV's Fourth Quarter 2010 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 Rubin

Thank you, operator, and thanks, everyone, for joining us for our Fourth Quarter 2010 Financial Results and Outlook Conference Call. And 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, 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 Risks Factors section and elsewhere in each of DIRECTV's and DIRECTV U.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 2011 financial results, liquidity and capital resources.

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, 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 White

Thanks, John. Good morning, everyone. I thought we had a terrific fourth quarter as you saw in the press release to cap off one of DIRECTV's strongest years ever. Both our quarter and, I would say, our full-year results were entirely driven by the strategy that we talked about at our Investor Day in December, which is essentially to continue creating significant shareholder value by leading our industry and top-line and bottom-line growth while also returning excess cash to our shareholders.

I think we also accomplished something pretty rare in our industry last year, which is to say we both increased market share and profitability in our U.S. business, and we also did both of those things with our Latin American businesses.

In terms of market share, our consolidated subscriber growth accelerated throughout the year, culminating with our best quarter in a decade with 667,000 net additions. For the full year, we added 1.9 million net additions or 3 million new customers if you include Sky Mexico, which easily qualifies as our best year ever. And while we captured market share throughout the Americas, we also generated the industry's best top and bottom line results in 2010. In fact, our full year 2010 growth and revenues and operating profit before depreciation and amortization of 11% and 13%, respectively, were somewhere around twice that of our key competitors. And equally important, free cash flow grew even faster at 18% to a record $2.8 billion.

Let me look first at our DIRECTV U.S. business. Our best ever fourth quarter for gross additions capped off a strong year in which we added over 4.1 million gross additions, nearly matching the levels attained in 2009 which, as I'm sure you’ll all recall, was somewhat inflated by the analog-to-digital transition of over-the-air signals. Equally importantly, the quality of new subscribers remained high. We ended last year with several favorable trends, providing us with excellent momentum as we start 2011. For instance, nearly 80% of gross additions signed up for HD and/or DVR services in the fourth quarter. This was the highest percentage we've seen in our history.

Increased penetration of advanced services, along with stringent upfront credit filters, also contributed to an eight-basis point reduction in our fourth quarter churn rate of 1.44%. The strong gross additions and healthy churn management drove a more than doubling of net additions in the quarter to 289,000. Our top line results were also boosted by strong ARPU growth of 4.6% for the quarter, and almost 5% for the year, which compares very favorably to the 2% growth we saw in 2009.

Pat's going to give you a bit more detail behind our fourth quarter numbers, but it's worth mentioning that we launched our enhanced DIRECTV CINEMA service in December and immediately generated our best month ever in terms of revenues and movie buys.

DIRECTV U.S. profitability was also solid last year as the strong revenue growth, coupled with higher margins, drove double-digit growth and operating profit before depreciation and amortization. Overall, I thought we did an excellent job managing costs, but I was particularly pleased with our programming upgrade, retention and subscriber services costs, which all increased at a slower rate than revenues. As I'm sure you know, however, that was not the case with subscriber acquisition costs where our strategy continues to be providing advanced products in broadband-connected services to our higher qualities customers. We continue to believe that these investments are not only strategic, but will generate attractive financial returns through higher ARPU and lower churn.

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