DTV

DIRECTV (DTV)

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DIRECTV (DTV)

Q3 2012 Earnings Call

November 06, 2012 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 Enterprises

Patrick T. Doyle - Chief Financial Officer, Executive Vice President and Member of Proxy Committee

Analysts

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

Craig Moffett - Sanford C. Bernstein & Co., LLC., Research Division

Stefan Anninger - Crédit Suisse AG, Research Division

John C. Hodulik - UBS Investment Bank, Research Division

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

James M. Ratcliffe - Barclays Capital, Research Division

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

Thomas W. Eagan - Canaccord Genuity, Research Division

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Jason B. Bazinet - Citigroup Inc, Research Division

Presentation

Operator

Good day, ladies and gentlemen. My name is Bryan, and I will be your conference operator today. Today's conference is being recorded. At this time, I would like to welcome everyone to DIRECTV's Third Quarter 2012 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to your host, Jon Rubin, Senior Vice President of Investor Relations and Financial Planning. Sir, you may go ahead.

Jonathan M. Rubin

Thank you, operator, and thank you, everyone, for joining us for our third quarter 2012 financial results and outlook conference call. And 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'll 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 our 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 D. White

Thanks, Jon. Thanks, everyone, for joining us today. The strength of DIRECTV and SKY's premium brands, combined with early success from executing our long-term strategic initiatives that we established earlier this year, maintained first quartile growth, delivering healthy third quarter results. I think there are probably 3 main takeaways from my perspective for our quarter as you look at it.

First, we're generating solid top line growth, driven by strong consumer demand for our best-in-class video service across the Americas. Our industry-leading revenue growth of 8% continues to demonstrate our competitive advantages in the rapidly growing Latin America marketplace, as well as our ability to grow ARPU in a challenging U.S. operating environment.

Second, we continued to enhance our focus on achieving operational excellence through disciplined expense management and productivity initiatives. The benefits from these initiatives were clearly represented in the financial results of DIRECTV U.S., with our margins improving due in part through effective cost containment all up and down the P&L. We're also making good progress addressing some of the cost challenges in Latin America that we talked about on our last earnings call.

And third, the strength and stability of our cash flow continues to create significant value for shareholders. Share repurchases of $1.2 billion in the quarter fueled a 29% lift in diluted earnings per share to $0.90, and our year-to-date free cash flow is up 35% to $1.7 billion.

Now before I turn the call over to Bruce and Pat for more detailed comments on both our Latin America and U.S. business, let me share a couple of observations. First, starting with Latin America.

DIRECTV Latin America's third quarter results were in line with our expectations and the guidance that we provided you on our last earnings call. Our competitive advantages and operating strengths continue to drive healthy market share gains throughout the region.

Consistent with recent results, we're maintaining momentum in the higher end A and B households, and we continue to see strong subscriber growth from the middle market segments. This subscriber performance drove DTVLA's revenue growth of 16% even in spite of currency headwinds, primarily from the Brazilian reais.

And on a local basis, excluding the impact of foreign exchange, ARPU was up slightly, which I think is quite notable, given that our growth remains very strong in the lower-ARPU middle-market segment. I think this speaks to the continued strength of our brand as we continue to offer popular value added services across Latin America.

Turning to the bottom line, DIRECTV Latin America's OPBDA margin was consistent with our overall expectations. As we discussed on our last earnings call, short-term profitability continues to be impacted by both higher gross additions, as well as some of the increased expenses associated with digesting the tremendous growth that we've seen in our subscriber base over the last couple of years.

Importantly, we're making really good progress working through these, with ongoing initiatives aimed at improving overall customer service levels. For instance, we're in the process of upgrading our IT systems and centralizing our network management structure to ensure consistent service levels and greater productivity.

We've implemented a series of tactical changes to reduce billing cycle costs, and we're opening new call centers outside of greater São Paulo, with a focus on delivering superior customer service at a more affordable cost across the diverse market segments in our subscriber base. With these achievements, we continue to expect to see margins improve. You'll see it in the next quarter, and I remain confident that we'll deliver our OPBDA margin target of about 30% this year. But more importantly, our 5-year vision to profitably double our subscriber base from 8 million to 16 million, as we shared with you in March, while delivering significant cash flow growth, remains right on track as we continue to see exceptional subscriber returns.

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