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DIRECTV Q2 2010 Earnings Call Transcript

DIRECTV Q2 2010 Earnings Call Transcript


Q2 2010 Earnings Call

August 05, 2010 11:00 am ET


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

Michael White - Chairman, Chief Executive Officer and President

Jonathan Rubin - Investor Relations

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


John Hodulik - UBS Investment Bank

Spencer Wang - Crédit Suisse AG

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Jason Bazinet - Citigroup Inc

Timothy Schlock - Wells Fargo Securities, LLC

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Good day, ladies and gentlemen. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the DIRECT Group's (sic) [DIRECTV's] Second Quarter 2010 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to your host, Mr. Jonathan Rubin, Senior Vice President of Investor Relations and Financial Planning. Sir, you may begin.

Jonathan Rubin

Thanks, operator, and thanks, everyone, for joining us for our Second Quarter 2010 Financial Results and Outlook Conference Call. With me today on the call are Mike White, our President and CEO; Larry Hunter, General Counsel; Pat Doyle, CFO; and Bruce Churchill, President of DIRECTV Latin America. 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 each of DIRECTV's and DIRECTV U.S.'s annual reports on Form 10-K, quarterly reports on Form 10-Q and our other filings with the SEC, which are available at

Additionally, in accordance with SEC's Regulation G that requires companies reporting non-GAAP financial measures to reconcile those 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

With that, I'm pleased to introduce Mike.

Michael White

Thanks, Jon, and thanks, everyone, for joining us on the call this morning. Overall, I thought our second quarter results in both the United States and Latin America were very strong and reflects solid execution of our key three core strategies for creating shareholder value.

First, we're generating very solid topline growth, driven by the strength of our brand, as well as an unrivaled suite of compelling products and services. In that regard, DIRECTV's consolidated revenue growth of 12% leads the industry and is due in large part to our company's portfolio of businesses all across the Americas, reflecting diverse geographies, demographics and growth profiles.

Second, of course, our traditional focus on operating excellence, which is driving strong margins and cash flow growth. There, both of our U.S. and Latin American businesses grew their margins in the second quarter. Our earnings per share increased 50% excluding the impact from the Malone transaction, and our year-to-date free cash flow was up 40% to $1.4 billion.

And third, as we spoke to you on our last call, we're continuing to execute our strategy of aggressively returning capital to shareholders. As you saw in the earnings release, we repurchased over $1.7 billion of stock in the second quarter, representing one of the largest quarterly share buybacks in our history.

Now before turning the call over to Pat and Bruce for a more detailed review of our U.S. and Latin America businesses, let me just offer a few observations. First, starting with Latin America. While, clearly, we expected a strong quarter, I think it's fair to say that net additions of 415,000 exceeded all of our expectations. And to put that number into perspective, it was more than 3x the net additions of a year ago and over 60% higher than our previous record set just two quarters ago. The FIFA World Cup, coupled with a relatively strong macroeconomic landscape, propelled a lot of that growth. But we're also continuing to see very solid momentum across the entire region driven by our industry-leading HD and DVR services, as well as popular postpaid and prepaid packages.

I was also extremely pleased to see that even with that rapid subscriber growth, Bruce and his team were able to significantly increase their operating profit before depreciation and amortization, and the margins by over seven percentage points to almost 31%.

Now I think we also had a very solid results with our U.S. business. Furthermore, we saw some key trends develop in the quarter, particularly in the areas of both subscriber and ARPU growth that, I believe, position us well for the second half of the year.

Our net additions of 100,000 were a touch better than our expectations. But importantly, gross adds and churns strengthened throughout the quarter. We're becoming much more targeted in our marketing strategies as well as our new promotions, which is enabling us to drive higher gross additions with much greater penetration of both HD and DVR services. Due in part to our free HD offer, which was introduced at the end of the quarter, we reached a record high penetration level of over 70% in the quarter for new subscribers activating with advanced services. So they're very high-quality subscribers.

We're also very excited about the additional demand that will be generated through our new partnership with CenturyLink, which was officially launched just this past Sunday, and we're off to a terrific start already taking orders. I might also add that we have exclusive distribution in 12 out of the 13 states that Frontier operates in, and we have an excellent partnership with them as well.

In addition to growing demand for new subscribers, I think we're also doing a better job of retaining existing subscribers. Our monthly churn rate of 1.51% was equal to prior-year's second quarter, breaking a five-quarter trend of higher year-over-year churn rates.

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