Q2 2011 Earnings Call Transcript
Transcript Call Date 08/04/2011

Operator: Good day, ladies and gentlemen. My name is Liya, and I'll be your conference operator today. At this time, I would like to welcome everyone to the DIRECTV's Second Quarter 2011 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

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 - SVP, Financial Planning and IR: Thank you, operator, and thank you everyone for joining us for our second quarter 2011 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; and Larry Hunter, General Counsel. In a moment, I'll hand the call over to Bruce, Mike 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 and are described in risk factor sections and elsewhere 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 Examples of forward-looking statements include but are not limited to statements we make relating to our business strategy and regarding our outlook for 2011 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 the most directly comparable GAAP measures, 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 - Chairman, President and CEO: Thanks John and thank you everyone for joining us today. From my perspective DIRECTV's diversified portfolio of businesses across all of the Americas delivered another strong quarter of industry leading growth. Parenthetically I might add that our momentum continues as we just recently achieved another impressive milestone, which we'll be announcing later on today after the call.

Reaching 30 million customers including Sky Mexico across the DTV platform, and for those of you who don’t have the numbers right in front of you by the way that works to about 300,000 net adds for the month, for DIRECTV across all of the Americas.

We continue to extend our position as the world's largest pay television service by leveraging the strength of our brand as well as our best-in-class video experience with continued operating discipline across all of our (disputed) geographies demographics and I might add macroeconomic conditions. As you saw in our release, the consolidated revenue and operating profit before depreciation and amortization both grew double-digits at 13%, representing an even faster growth rate than last quarter's performance. This accelerating growth was driven by another quarter of exceptional performance of DIRECTV Latin America, as well as by solid financial returns from DIRECTV U.S. that were entirely consistent with our expectations.

Consolidated net income increased 29% in the second quarter and we repurchased over $1.5 billion of DIRECTV stock, fueling a 52% lift in earnings per share to $0.91. Now, before I turn the call over to Bruce and Pat, for a more detailed review of our Latin America and financials, I'd like to offer just a few observations.

Let me begin with DIRECTV U.S. where industry-leading revenue growth of 7% and an OPBDA improvement of 4% are right in line with our guidance in the quarter and the full year. Now at the top line, we are continuing to solid growth from advanced services and premium channels, as well as double-digit growth in our commercial sales, although Pay Per View revenues were a little soft in the quarter mostly due to the timing of events. In terms of our net additions for lackluster economy and a tough competitive landscape drove our churn slightly higher than we initially forecast. The pickup and competitive intensity that we saw coming out of the first quarter is yet to abate I would say when I look at the marketplace in general.

Triple play offers without contractual commitments and higher cash-back incentives by both the cable operators and telco providers, along with consumers who are increasingly under stress from an ongoing weak economy have resulted in more price conscious consumers shopping for better deals. In response, we've significantly stepped-up our efforts to closely manage churn in a more targeted fashion. For instance, we further refined our segmentation analysis to identify those customers that are most likely to churn as they get close to the end of their two-year contract, and match them up with our best agents and best offers.

We also increased our upgrade and retention spending for higher quality subscribers and raised credit score requirements for new customers in many of our sales distribution channels. Also enhancing our churn mitigation efforts are ongoing initiatives aimed at improving overall customer service levels. Recently our hard work in that area was recognized when DIRECTV was noted as the only company in the pay television industry to have a better American Customer Satisfaction Index survey score compared with prior year. I might also note that consume reports rated DIRECTV best among TV providers for both phone and online help last quarter.

All in all, I think we've made excellent progress in addressing our churn issues, and I am consciously optimistic that the worse is behind us. In fact based on the favorable subscriber trends, we've seen so far in the third quarter, I think we've also regained some of our lost momentum. We're seeing a terrific response to our popular NFL SUNDAY TICKET offer and as I mentioned, we're also seeing favorable voluntary churn trends. More importantly, we remain on track to meet all of our DIRECTV U.S. full year guidance for revenues, OPBDA and cash flow.

Turning now to Latin America where as you may have seen, we recently achieved a major milestone surpassing 10 million total customers in Brazil, PanAmericana and Mexico. This accomplishment is a true testament to all of our employees strong commitment to success, the strength of the DIRECTV and Sky brands and our best-in-class video experience. Just one bit of evidence, last quarter the Brazilian Direct Marketing Association awarded Sky, best of the best in the customer service category for our Sky HDTV product. In addition, Telecenter, which is our regional customer service operation in Colombia, received two first place awards for the best customer service strategy and best in-house.

Latin America by any measure continues to demonstrate tremendous momentum. DIRECTV Latin America surpassed last quarter’s historic customer growth to set yet another all-time high for net additions as we're continuing to see strong consumer demand for our product and services all across the continent, along with the underlying favorable demographic and macroeconomic trends. Once again, the significant subscriber growth was primarily driven by Brazil, as the net ads in that country were more than double last year's level.

Equally notable, our post-paid churn, improved 1.44% from 1.45% last year and remains lower than levels that we've seen in the U.S. business. Furthermore, DIRECTV Latin America exceeded all of our key financial metrics recorded during the second quarter of 2010, which as you'll all recall benefitted from the run up to the FIFA World Cup. Not only were revenues north of our expectations because of subscriber performance and robust ARPU growth, but the significant gain in market share and related acquisition costs did not come at the expense of our profitability. As I'm sure, you noted our margins continue to expand and OPBDA growth accelerated to 60%. These growth rates coupled with favorable macroeconomic conditions in the region continue to give evidence, that the DIRECTV Latin America business offers a terrific long-term growth opportunity. You'll hear from Bruce in a few minutes, we're on pace to do even better than the increased guidance we've provided for DTVLA on our last earnings call.

In summary, our second quarter results reflect continued successful operational execution against all of the growth strategies we outlined at our Investor Day with you last December. In U.S., we continue to navigate through tough market conditions by adhering to strict economic principles, with regards to the credit quality of our subscriber base, as we demonstrate our unique ability to match the increasing value of our differentiated products and service enhancements to consumer's expanding needs.

In Latin America, we continue to benefit from favorable market conditions by profitably increasing market share through a segmented approach, that not only extends our leadership in the higher end markets with a focus on HD and DVR superiority, but also penetrates the rapidly growing middle-market segment with attractive lower price packages. The combination of both our U.S. and Latin American businesses provide our shareholders with I think a unique investment opportunity that benefits from solid and steady returns in the more mature U.S. marketplace, as well as from tremendous growth potential in the still underpenetrated and emerging Latin American marketplace.

So, with that, I'll turn it over to Bruce Churchill to review our Latin America results and outlook in more detail. Bruce?

Bruce B. Churchill - EVP and President, DIRECTV Latin America: Thanks, Mike. As Mike mentioned in his opening statement, our results in Latin America continue to exceed our expectations, with yet another record quarter for both growth and net additions and all of our key metric showing strong year-over-year improvement. Just as a reminder unless otherwise noted, our results exclude those of Sky Mexico, which we do not consolidate. For the quarter, gross additions of 823,000 were 25% higher than last year. In Brazil gross additions increased approximately 85% compared to Q2 of 2010 to approximately 435,000. Sky Brazil continued to have great success with its middle-market products which grew 147% compared to Q2 of 2010 mostly reflecting the launch of the (Sky Flip) product late last year. For the quarter, our middle-market products represented 65% of Brazil's gross additions.

In PanAmericana, gross additions declined approximately 10% compared to same period last year reflecting our controlled growth strategy in Venezuela and the beneficial effect of the 2010 FIFA World Cup add on last year's results. Excluding Venezuela PanAmericana gross additions were almost equal to last year as strong year-over-year growth in Argentina offset the declines in Colombia and Chile. Prepaid gross additions represented 17% of our total gross additions in the quarter. Cumulatively, prepaid subscribers make up approximately 10% of our 6.7 million subscribers and are predominately in our PanAmericana region.

Advanced products represented about 16% of new customers down significantly from 30% last year. There are really two factors driving this. First, take rates of advanced products in PanAmericana decreased approximately 50% year-over-year which reflects the fact that in the run up to the 2010 World Cup we ran aggressive advanced product promotions throughout PanAmericana achieving take rates exceeding 50% in some countries. Second, as we continue to see sales growth and lower priced packages, by definition advanced products become a smaller part of the mix. For example in Brazil, the number of advanced product sales more than doubled compared to last year, but as a percent of total sales they are roughly flat because of the tremendous growth in other products.

As I've mentioned in the past although we are pleased with the success of middle market products across the region we have not lost sight of the fact that our traditional A and B households are our most profitable customers and the ones that we work hard to get and keep. Advanced products represented approximately 25% of our 6.7 million subscribers and are an important part of our product mix. As a result we remain very focused on selling advanced products to both new customers as well as upgrading existing ones. In fact in Brazil where we now have more than 600,000 high definition subscribers, approximately 60% of our new HD customers in the quarter came from our existing subscriber base.

With respect to churn post-paid churn for the quarter of 1.44% is mostly unchanged from the same period last year, reflecting slightly lower churn in Brazil offset by slightly higher churn in PanAmericana. Post-paid churn in the PanAmericana region benefitted from our controlled growth in Venezuela as lower sales typically result in lower churn, but was negatively impacted due to last year's benefit from the 2010 World Cup. In summary we ended the quarter with 472,000 net additions that were relatively balanced both from a regional and product mix perspective.

Turning now to your financial results. Driven by strong subscriber growth revenues increased 46% compared to last year or approximately 40% if you exclude the impact of foreign exchange. In particular excluding foreign exchange more than 80% of our growth came from the increase in the subscriber base. The remaining growth came from higher ARPU primarily reflecting higher pricing and increased penetration as advanced products and premium packages. Excluding the impact of foreign exchange, ARPU increased around 8%. This is a testament to our success in attracting and retaining high value premium customers.

In addition, the subscriber base in Brazil is a larger piece of the total pie today than it was a year ago and in general, ARPUs are higher across the board in Brazil. This does have the effect of driving up the overall average for DTV LA. Over time cash flow before interest and taxes for the quarter were also stronger compared to last year’s results. OPBDA increased $158 million or 60% over last year, mostly due to the gross profit on the incremental revenues, partially offset by higher subscriber acquisition costs related to the increase gross adds and increased retention and upgrade spending particularly in Brazil. The higher OPBDA flow through the cash flow before interest in taxes which was $141 million versus $69 million a year ago.

Regarding Venezuela, the government continued to tightly regulate the repatriation of local profits out of the country. This situation, restricts our ability to repatriate dollars which explains the lower foreign currency exchange losses this year compared to last. In fact we encourage no repatriation charges from Venezuela this quarter. The modest funds that did come out of Venezuela this quarter came out at official rates through the official central bank process. As of June 30, we had approximately $264 million of cash on hand in Venezuela, expressed using the official rate of 4.3 bolivars per $1.

I would also like to mention the results of Sky Mexico which were released by Televisa few weeks ago. Sky Mexico delivered another strong quarter adding 274,000 net subscribers compared to 251,000 a year ago. The financial results of Sky Mexico were equally strong as revenue and OPBDA grew 19% and 26% respectively. In total DTV LA's platforms combined, including Sky Mexico, now serve more than 10.3 million subscribers in the region.

Finally, with more than half of 2011 behind us, I thought I'll provide you with some thoughts on how I see the rest of 2011 playing out. During our Q1 earnings call back in May, I mentioned that barring any unforeseen change in the general macroeconomic environment in Latin America, particularly in Brazil, and barring any large swings in foreign exchange rates, again, particularly in Brazil, we expected both full year revenue and OPBDA to grow closer to 30% year-on-year, with total net additions in the $1.25 million to $1.5 million range, and a modest increase in subscriber related capital expenditures. Based on the continued momentum, we are seeing in sales and our continued low post-paid churn, I feel confident that we will meet or exceed the high-end of these estimates for the full year. In short, we look forward to another exceptional year in Latin America.

I'll now turn over to Pat to discuss the U.S. Pat?

Patrick T. Doyle - EVP and CFO: Thanks, Bruce. Overall, our DIRECTV U.S. had a good second quarter highlighted by solid revenue, earnings and cash flow growth. As you heard from Mike earlier, we had some challenges with churn in the quarter, but I believe we made excellent progress towards addressing that. Looking first at subscribers, as you saw DIRECTV U.S. gained 26,000 net news customers in the quarter. Gross additions were up a touch on a year-over-year basis, demonstrating the DIRECTV brand and service continues to resonate strongly in the marketplace. The increase in demand is notable, particularly considering the current economic and competitive conditions within the pay-TV industry. Specifically, we saw strong results this quarter in our consumer electronics and commercial channels, which more than offset continued decline from our telco partners.

Second quarter churn at 1.59% was slightly higher than we initially forecast, due mostly to an increase in voluntary churn. We attribute those increases primarily to more aggressive competitive offers we're seeing in the pay-TV space, especially in the telco territories. Another contributing factor was the price increases we implemented earlier this year. For the first time on both programming packages and lease fees and to a smaller degree we saw a slight uptick at involuntary churn, mostly related to the continued lackluster economy and its impact on higher risk customers rolling off their promotional offer periods.

To address these challenges, we placed a tremendous focus on implementing strategies that would enhance our ability to actively manage the increases in churn, and so far I'm pleased with the progress we've made. As you have heard us say before, the balance between our upgrade and retention spending and churn rate is heavily dependent on both macroeconomic and competitive conditions. As such, we spent modestly more this quarter than a year ago and prudently managed the economic trade-off towards our higher quality subscribers.

In addition, we continue to step-up the utilization on our targeted segmentation analysis to better identify higher risk customers and match them with our best agents and offers. We also continued to refine and tighten up our credit policy to mitigate the impact of involuntary churn. Combining our subscriber growth with the higher ARPU yields and industry-leading revenue growth of 7%. The ARPU growth was driven by increased penetration by both new and existing customers paying for advanced services, as well as from strong commercial and paid premium channel sales.

Approximately 70% of our customers now have advanced products and we're continuing to see about one-third of new customers sign up for our Whole-Home DVR. Commercial revenues grew again by almost 20%, while Pay Per View movie channel category posted the highest buy rates per subscriber in over two years, partially offsetting these benefits were softer Pay Per View revenues related to weaker movie titles, lower adult buys and weaker event revenues compared to the prior period. In addition, higher acquisition and retention credits had an unfavorable impact on our ARPU.

Turning now to the bottom line. Second quarter OPBDA growth of 4% was in line with our quarter and full year expectations. OPBDA margin declined year-over-year to 27.4% as increases in programming expenses continue to place downward pressure on margins and this trend will continue for the remainder of the year. Also contributing to the decline and tying back to our earlier discussion about churn, it was our decision to increase upgrade and retention spending.

The majority of the increase was targeted toward upgrading higher value subscribers with HD DVRs as well as our popular newer services such as, Whole-Home DVR and broadband connectivity. Also in the quarter, where higher cost associated in converting customers or previously receiving programming from a third-party satellite whose lease has expired.

Looking quickly at our quarterly consolidated results, net income grew 29% to $701 million and diluted earnings per share accelerated 52% to $0.91, a solid operating profit growth and our share repurchase strategy provided a generous lift. Consolidated cash flow before interest and taxes also remain strong with double-digit growth to $1 billion this quarter. Free cash flow also improved albeit at a slower rate as growth was impacted by an increase in cash tax payments, greater capital expenditure and higher working capital requirements. Please note, this increase in tax payments is expected to continue throughout the year as earnings before taxes and our cash tax rate are both expected to be higher than the prior year periods.

Moving on to the balance sheet, this quarter we repurchased 31 million shares of DIRECTV stock for $1.5 billion bringing cumulative repurchases to approximately $18 billion or nearly 50% of shares outstanding. Additionally, we redeemed the remaining 66% of the $1 billion high yield notes that were issued in 2005. With these transactions, we ended the quarter with about $13.5 billion in total debt while bringing our total debt to trailing U.S. OPBDA leverage ratio target to 2.5 times.

Before wrapping up, I would like to make a few comments about our outlook which you heard, DIRECTV U.S. is on track to meet guidance for all of it’s key metrics and as Bruce described a few minutes ago, we are optimistic that DIRECTV Latin America is on a pace to exceed the increased guidance provided on our last earnings call. In addition, our plan is to continue to return capital to shareholders through our share repurchase program. We expect to continue repurchasing shares in the same $100 million per week range that you’ve seen in recent quarters, while maintaining our leveraged target at current level.

During the second half of this year, we expect to include our work related to bringing DIRECTV Latin America into the credit which will provide additional capacity for 2012. In the meantime, we have plenty of liquidity and free cash flow generation, to continue to fund our current share repurchase program. Summing it all up, we remain on target at the consolidated level to continue leading the industry in double-digit revenue and OPBDA growth, as well as returning capital to shareholders. So, with that, I'll turn the call back over to Jon.

Jonathan Rubin - SVP, Financial Planning and IR: Thanks, Pat. Before moving onto Q&A, investors should note that we have members of the media on this call in a listen-only mode. I'd like to remind the media that they are not authorized to quote any participants on this call either directly or in substance other than representatives of DIRECTV. In addition, we're webcasting this call live on the Internet and an archived copy will be kept on our website. I might add that we are having some technical problems on our webcast, but hopefully, we'll get those fixed shortly.

Operator, we're ready for the first question.

Transcript Call Date 08/04/2011

Operator: John Hodulik, UBS

John Hodulik - UBS: Maybe some comments on both the churn and the ARPU outlook, your churns a little bit higher than we thought in the U.S. You mentioned some efforts to lower churn, you're seeing some positive response. How do you expect it to trend in the second half and also we thought the ARPU in the U.S. it looks like it's be decelerating. Do you expect that trend to continue?

Patrick T. Doyle - EVP and CFO: The tactics that we talked about in our speech notes, I think, we were seeing really good traction. June was a good month on churn and particularly, on voluntary churn. July's result have also been very good. So, we are not claiming victory yet, but we're optimistic that we've got the right formula and that voluntary churn should be much better in the third quarter, we probably ought to look a lot like last year's churn. On ARPU, yeah I think the second quarter, in particular, we had a few headwinds with the Pay Per View is down, ad sales year-over-year wasn't as good as we would like it to be and then we've got the impact of the free HD which came in last June. So, we are kind of comparing now a full year of free HD for those customers that qualify versus last year. We do again – we do think we're meeting our internal expectations as we're right on line with what we expected and its consistent with our full year guidance that we gave on revenue growth of mid to high single digit growth.

Bruce B. Churchill - EVP and President, DIRECTV Latin America: Yeah. I think John on the churn thing as we kind of doled into it and kind of parsed it, analyzed it, we found that there were a number of customers going shopping at say plus or minus three months of the end of their two year contract. We've been able to pretty surgically target those that are prone to do that and as Pat said I feel pretty good. We've had an excellent month of July on churn. We still got a little bit of tick up on the involuntary churn which I think is more of the economy, but it's our improvements in voluntary have overwhelmed that. So our total churn number looks good for July. So, I'm optimistic we'll be fine for the rest of the year and we're kind of fine tuning some things out of that as well. On ARPU, I can quite comment everybody's movies business seems to be down. The Pay Per View even of our competitors I noticed a number of them highlighted I don't know whether that's just kind of weak titles from the box office or what, but we're got a lot of good things going on the premium side. We've had tremendous strength, and frankly our ARPU growth as I look at it for third and fourth quarter I expect it to be better than what you saw in Q3. So, I mean, we're pretty much right in line with where we thought we'd be for the full year, as I look at, it's my outlook for Q3 and Q4.

Operator: Jason Bazinet, Citi.

Jason Bazinet - Citi: Just have a long-term question for Mr. White. If I look at sort of all the capital that's been used by the industry over the three years, it seems as though, DISH is out sort of trying to get wireless spectrum, you've got the cable guys investing in more internet capacity, some companies buying content. I look at the down VOD numbers for you guys and the others in the industry. Do you think that's a harbinger of sort of things to come and do you feel comfortable sort of with where the firm is sort of looking out five years?

Michael White - Chairman, President and CEO: I think, we're very confident as we look out five years. We did a comprehensive strategy project last year. We just updated it for our Board of Directors. Frankly, as we look at the VOD opportunity, I think we're just scratching the surface on the potential, we're going to add more titles next year. Honestly, I think, if I look at what happened in VOD in the quarter given that it was systemic across a lot of our competitors as well, I think, it's got more do with just kind of lousy titles that came out of Hollywood for the quarter that just didn't really work with consumers. But frankly, I still think that's a tremendous opportunity for us as we look going forward. But we're bullish on kind of the VOD and the TV everywhere, parts of our strategy and what we think those opportunities are and I think you'll see that come back here nicely in Q3, Q4. I mean keep in mind, just to size up this stuff, I mean the premiums category which had a fantastic quarter, is almost 10 times I think the size of Pay Per View. So, it's a relatively small piece of the total today, we still thing it's got big growth opportunity and even with that we weren't down versus year ago. We just weren't up to20% that we were in first quarter.

Operator: Jeff Wlodarczak, Pivotal Research Group.

Jeffrey Wlodarczak - Pivotal Research Group: Pat, can you confirm, is 1.5% churn for the full year still a reasonable target? Then the level of retention in upgrade in the second quarter, is that a good level if you think about back half of the year, quarterly?

Patrick T. Doyle - EVP and CFO: No, we haven't come off of our kind of 1.5% plus range as being our goal and we certainly think it's achievable. On upgrade, retention as Mike said, I think we (boosted) up a little bit as we tried to deal with customers that maybe leaving us because of upgrade issues, but again our higher quality customers – suddenly and there was about ($15 million or $16) million year-over-year increase, an upgrade retention related to this satellite lease that we’re coming to the end, which will drop off as the year goes on. So I think in the back half of the year, you'll see upgrade and retention probably be again slightly higher than prior years, but probably not at the level we saw in the second quarter.

Jeffrey Wlodarczak - Pivotal Research Group: One for Bruce, DIRECTV Latin America another great result, you raised your guidance with high-end of your previous guidance, which implies a bit of a slowdown in the second half. Is that something we should be thinking about – was obviously a fantastic number.

Bruce B. Churchill - EVP and President, DIRECTV Latin America: Yeah, exactly. You guys are never satisfied honestly. We're very comfortable with how the business continues to go, I just don't want to get too far ahead of myself in any of these areas, Operating in emerging markets it can be very volatile. Lot of it depends a bit on where our control growth strategy in Venezuela goes if we're actually able to pay for boxes out of funds coming out of Venezuela. We'll take advantage of those opportunities, but its all a bit uncertain at this stage, so I don't want to get too far over my (skies) as they say on that, but I'm not looking particularly for a big slowdown in the second half now.

Patrick T. Doyle - EVP and CFO: Jeff, we're trying to manage guidance on the consolidated corporate level as it relates to guidance, so I think when you're dealing with 50% growth rates in any business I think predictions are always difficult, but frankly as I announced we just crossed 30 million subscribers so you can do the math on that, we're continuing to have a very strong performance out of both Latin America and we had nice performance in the U.S. in the month of July. I think we'll continue to see good performance out of Latin America balance of the year, but I wouldn't read into it anything other than what Bruce just said.

Operator: (Stefan Anninger, Credit Suisse.)

Stefan Anninger - Credit Suisse: Just too briefly, could you provide a bit more color on the leveraging of the Latin American business perhaps both in terms of timing and maybe you could quantify a bit for us the size of the debt issuance that you're thinking of? Then also if you could provide perhaps a bit color on the connected box strategy and where you are in terms of reaching some of the targets you laid out at your Investor Day in the fall?

Michael White - Chairman, President and CEO: Pat I want you to take to the DTVLA things and I'll come back on the connected box?

Patrick T. Doyle - EVP and CFO: Yeah. Sure on the leveraging I think we have now designed a plan of how do we incorporate and we are working with a number of lawyers, tax people, financial reporting. So, I feel very comfortable that we've got a design of how to bring it into the credit that we're not ready to talk about today, but that's albeit more doubt. I think what we're planning is to do is that is to get that done before year-end, with our discussions with the rating agencies, we just will kind of see how their view is of the leverage opportunity that Latin America brings into the credit and then we'll go from there. I think it's kind of too early to get specific on those numbers.

Michael White - Chairman, President and CEO: On the connected box strategy, in fact, we just did a deep dive review on it, I think first the good news is of the customers that get connected, we are seeing the increase in ARPU that we expected in fact we are beating it. We're seeing probably a $2.50 increase per subscriber once they get connected in terms of I think again being able to access the video-on-demand content which goes to comment I made about VOD earlier. So, we are seeing a nice lift in the ARPU. What we have seen is that we have run a little bit short of our goal in terms of the number of forms that we were going to connect this year. We've had some operational complexities. We've been working our way through. We think, we've kind of solved most of those. In some cases, the consumer says, they have internet and maybe they only have a modem and not a router or they go for the DIRECTV install, but the Internet is not installed for two weeks later. So, there are few operational glitches that we are working our way through, but the Connected Home experience is fantastic experience. It's going to get even better this fall with our new high definition user interface and I think, as we add more VOD titles, it's just going to be more and more pull from consumers, I think, for that experience. I said, the good news as we know (it pays, it pays) out because of the increased $2.50 in ARPU we get from it, but we've been just working our way through some of the operational complexities of this plus, I think, we've got a wireless capability that we'll be launching this fall as well and I think, we'll make it available to even more homes. So, it absolutely continues to be a top strategic priority for us and we're still very bullish on this potential for DIRECTV longer term.

Operator: James Ratcliffe, Barclays Capital.

James Ratcliffe - Barclays Capital: Two, if I could. On the U.S., you've gotten more aggressive in the NFL SUNDAY TICKET promotion strategy. Can you talk about the tradeoff between potentially cannibalizing new customers versus potentially getting people who otherwise wouldn't pay for it upfront are hooked on it? Secondly, if you're looking in Latin America, how much of the increase in gross adds we see in the first half of the year in Brazil, do you tribute to just the fact if you have these new mass market products out there and how much you think it's sustainable going forward?

Michael White - Chairman, President and CEO: I'll take the U.S. one, Bruce then you can answer the question on the gross adds in Latin America. I think it's important on the NFL SUNDAY TICKET. Let me rewind a bit, because I think we actually gave you a sense in December that we were going to see differently about NFL SUNDAY TICKET this year and we were doing that for a couple of reasons. One, we had to have a promotion that if the strike was continuing that we actually had an attractive enough promotion without NFL that would work in third quarter. So, we had to design the promotion not knowing whether they were going to settle or not. That's point one. I think the second and more important strategic point was, we had come to a conclusion, that it was critically important for us given the long-term contract we had with the NFL at a higher cost and given that it's a fixed cost that we find a way to get more subscribers to sample or try NFL SUNDAY TICKET to try and to get them to renew next year, so this would be in 2012, to build that franchise. That's really the reason that we went with this particular offer. I think we'll read it as it goes. We're quite pleased with it’s results so for through the month of July. But the real test will be when we do renewals next year, but it was kind of driven by a strategy of trying to change the economics of our NFL SUNDAY TICKET business and it's a bet on that. I still think it’s going to be a good bet because the number of folks that come on, we then have an opportunity to roll them to pay next year, a 100% of our universe rather than the typical 20%, 25% of our quarterly gross adds. So that's kind of the background on it. Bruce you want to talk on the second one?

Bruce B. Churchill - EVP and President, DIRECTV Latin America: I think the question was sort of what percent of the increase in the gross add came from middle-market products because actually we're down year-on-year with advanced products because of what I mentioned about PanAmericana obviously the 5% growth came from the middle-market product. I guess when you think about it is you looked at Brazil. As I mentioned the middle-market products were about 65% of the total gross ads and that was a very large increase compared to last year about 1.5 time. So I think they are very important part of the overall story. Having said that, we still sell a lot of standard def packages with traditional basic and extended basic and those remain equally important as to it advanced products. So, certainly it’s a very important part of the story now. I think it will remain an important part of the story for the foreseeable future, because certainly as I would say the A&B classes are very largely penetrated in many countries. So, most of the growth is going to come from these middle-market products.

Michael White - Chairman, President and CEO: The other thing I'd add though, Bruce, you guys have really got a very disciplined strategy to manage the mix and ensure that the profit mix ends up fine and in fact even to the point of having lower commissions for instance, if you sell the middle-market product. So actually Bruce's team is really thought this through in a great amount of detail as to how to ensure that we get the right balance as we grow the business and that the margins are not impacted.

Bruce B. Churchill - EVP and President, DIRECTV Latin America: So in other words, it may affect ARPU, but it won't affect profitability.

Operator: Marci Ryvicker, Wells Fargo

Marci Ryvicker - Wells Fargo: I have few questions, Mike you mentioned that you spend some time on DIRECTV's long-term strategy. Is it entering into content via Hulu come in to these conversations at all? That's the first question and then secondly, Charter mentioned on their call that they have some sort of relationship with DISH and that they are now offering a synthetic bundle. So, you've had any similar discussions with any of the cable operators?

Michael White - Chairman, President and CEO: Marci. First on the long-term look I don't want to get into specific comments on an acquisition process, but I think suffice it to say, we have consistently said that we want to make sure that we can make DIRECTV available anytime and anywhere our customers want it. The Hulu software has some nice aspects to it, but you also have to kind of form a judgment about its business model and what you think that business model can generate. So, we look at a lot of things here and we'll see as we go through that process where we come out. But I think what we're looking for is there are something there that would enable us to accelerate our TV everywhere, but obviously I'd say it's critically dependent on the distribution relationships that it has in the contracts that underpin that. So, I think there is still more for us to learn. We really haven't made a final judgment on it. I don't think it's kind of something we have to have frankly. I think it's an interesting idea and we're looking at it, but I mean we are doing IP, I mean our NFL SUNDAY TICKET to-go product is an IP protocol product. I mean we know how to do the hybrid kind of if you think of using the satellite and then using the Internet kind of cloud, the Internet and then IP. So, I mean we're our technical guys are quite comfortable with that, world. So, I'm sure one way or the other, we'll be to do what we need to do for TV everywhere. But it's an interesting opportunity. So, we're taking a look at it. In terms of the comment on Charter, look I have said consistently I think we're open to discussion with any cable company that wants to talk to us about bundles. Having said that, remember, I think we've got 97% of the U.S. covered with relationships with telco's that Dish does not have. So, perhaps they are looking at a different angle then we are in that regard. Our focus right now is to try and operationalize the two fiber bundles that we've got access to sell with both FIOS and UVerse in the second half of this year and really make it a good customer experience and we'll be working more against that, I would say, in the second half of the year, but we're always open to a good offer, if anybody has an idea on a wholesale bundle, a wholesale broadband offering.

Operator: Richard Greenfield, BTIG.

Richard Greenfield - BTIG: Question related to your key satellite peer in Dish and Charlie Ergen I think has had some pretty interesting maneuvers over the last six to nine months. Beyond the big picture comment of, not believing in the long term future, having questions about the long term future of linear programming between wireless and sling and a host of things like Blockbuster. Just curious, kind of how you think about some of the competitive things he is just doing vis-a-vis your business any that were you or how you think there might be applications of what he is doing to how you're thinking about your business?

Michael White - Chairman, President and CEO: Rich, I worry about all of our competitors and distant competitors including, Google, Apple, Amazon you name it everybody is in the competitive spectrum and I don't think it'd be productive for me to comment one way or the other. Charlie knows his strategies a lot better than I do, but suffice to say we're comfortable with our strategy, as I said I think you have to recognize, we have some things that they don't have and they have some things we don't have. Our strategies are designed for DIRECTV and I think we're quite comfortable with the direction that we're going. Now we're always to open to ideas as they said whether it's a wholesale bundle from a cable company that includes broadband or another way to get to a broadband service that has the price performance that's required to compete with DOCSIS. It's just up to this point, our focus has been on number one the relationships we have with the telco's and trying to take that to another level with the fiber bundles that we've got access to. But we're continuing to look for other ways to do bundles or other ways to provide a fixed broadband of the consumer. But it has to have a price performance, but I think will be competitive for us to pursue it.

Michael White - Chairman, President and CEO: Mike, let me ask the question other way the. How do you think there – do you think there's an opportunity for DIRECTV to provide an IP-based satellite service to consumers nationwide over the course of the next four to five years?

Michael White - Chairman, President and CEO: Again, our TV Everywhere strategy, Rich by definition is going to be – we're strengthening our whole portal, our DIRECTV portal right now, so that you should be able to access content there. We signed up HBO Go, with that NFL SUNDAY TICKET to-go. So by definition we are going to have some kind of a hybrid satellite, say cloud or Internet-based kind of connection and that's really what the Connected Home Strategy is all about as well. How far you go, whether you kind of offer a flow TV idea, let's call it, but it's through the Internet, what pricing, what content rights you would get from the distributors? I think it's not about the technology. Frankly, technology is not the challenge there. I'd say its more about the content rights and how the owners of the programming decide to use those content rights. If you look at kind of cost of programming, all of us as distributors these days, its kind of hard to get to a meaningful group of channels for any price that's I would say less than even $30, at the rate we're going. It's an interesting idea, but I think it’s a function of what kind of content rights, you get more than the technology. Technology is pretty easy and we're doing it already with NFL SUNDAY TICKET to-go.

Operator: Tom Eagan, Collins Stewart

Tom Eagan - Collins Stewart: Mike, I wondered if you could give us a little sense of granularity, in terms of second half of this year, with the – other call center being able to sell the fiber-based local bundle and the new few NFL offer. Any sense of what kind of lift we might expect in the second half on gross ads?

Michael White - Chairman, President and CEO: I've got one month of data. On one month, we're quite pleased with the performance of our offers. We've also got this fantastic new high-definition user interface that that we'll be launching in the fall, I think probably October or November, but how much that will impact this year versus next year, I am not sure. But again we're tracking pretty much in line with our gross add expectation for the full year in the U.S. business and I don't Pat…

Patrick T. Doyle - EVP and CFO: Like you said, I think we were…

Michael White - Chairman, President and CEO: Gross ads were fine. Our gross in the quarter were above last year modestly as I recall.

Patrick T. Doyle - EVP and CFO: No, I mean I think the second quarter was right on our expectations or a little bit better we're starting out July with very good month that certainly makes us more optimistic like Mike said one month is not an overall trend for us. So, we'll stay cautiously optimistic, but right now the early signs are good.

Operator: Doug Mitchelson, Deutsche Bank.

Doug Mitchelson - Deutsche Bank: I know Mike you'll try not to get pinned down too much here, but I think at the Analyst Day, you emphasized that U.S. sub-growth should slow pretty dramatically this year and the first half has been flat year-over-year and now you are talking about churn back to improving a little bit in the second half. It seems like you're headed toward 500,000 or more net adds in the U.S. this year which isn't a much of a slowdown, am I thinking about that right or given the visibility you have now would you take a little bit more aggressive stance than you took at the Analyst Day?

Michael White - Chairman, President and CEO: Why don’t you ask me of the third quarter call. Look, we had a tough quarter for churn and the good news is as Pat said we kind of saw it come back under control in June and July. Our gross adds were off to a terrific start. I'd rather not speculate other than I feel good about our expectations for both gross and net adds for the full year that we're going to be fine. I mean it kind of (the year isn’t) going to be a perfect kind of each quarter at the same ratable number probably first quarter was a little stronger than we thought, second quarter, a little softer, I'm optimistic third quarter is going to be a little stronger and we'll see about fourth quarter, but I don't see any trends in the business other than the macro economy which is of concern. I mean you do see as I said our involuntary churn albeit it's a small part of the total churn calculation, but it is credit problem, so that's what it is people can't pay their bill when we contact them, that is up a couple of basis points. So, you do see some of the challenges that the consumer is facing, but other than that I don't see anything competitively or otherwise. As I look at our second quarter, we had some challenges as Pat said in the telco geographies and then we had some challenges in rural areas where consumers were going to (no-TV) and I think that's the economy.

Doug Mitchelson - Deutsche Bank: I wanted to squeeze one in for Bruce. You talked a little bit about drivers of Latam ARPU which was a positive surprise for us I believe at the Analyst Day, you indicated ARPU will be flattish in the next five years or so and again you talked about in this call as the middle-market being the driver of a lot of sub-growth. Is that also the trajectory for ARPU flattish for the next five years or is there potential for some ARPU improvements like we saw in the second quarter?

Bruce B. Churchill - EVP and President, DIRECTV Latin America: I think, we would stick with our overall projection, as I mentioned there and said before, as the middle-market expands it becomes a bigger part of the total base it will create some downward pressure on ARPU. We expect that we'll be offset by our continued ability to upgrade existing customers as well as continuing to serve A and B segments with more advanced products and more HDs. So, my sense is over the long haul that’s still the right way to look at it.

Patrick T. Doyle - EVP and CFO: Be careful of the Forex Doug, I mean you got Brazilian reais has been so strong, that's also running through the numbers, but at some point that comes to a lapping probably in the fourth quarter of this year that's a little difference, you got to look at it ex-Forex.

Doug Mitchelson - Deutsche Bank: Just as well you might give us, how much Sky Mexico contributed in July of that 300,000 of?

Bruce B. Churchill - EVP and President, DIRECTV Latin America: No, it wasn't huge. More importantly the U.S. did contribute, so.

Operator: Ben Swinburne, Morgan Stanley.

Ben Swinburne - Morgan Stanley: I wanted to ask you about the SAC per ad number and what are you thinking there as you move through the back end of this year into next. I know that connected box units are probably below where you saw it, but it seems like those numbers are coming in a little lighter and maybe it's just because your using more credits on the ARPU line. So we sort of need to put those two together to analyze it appropriately. But how are thinking about SAC per ad and the typical sort of box savings on an apples-to-apples basis, DIRECTV typically it realizes as they move through a production cycle.

Patrick T. Doyle - EVP and CFO: Ben, I think we see SAC kind of staying in the kind of range that we saw in the second quarter. Obviously like you said there's counter availing things as we try to connect more people to broadband, there is some pressure there. But we continue to try to work down not only the box cost, but the outdoor unit which I guess to be a pretty expensive unit when you're dealing with HD and the (swim). So, it ought to stay plus or minus in the same range you saw in the second quarter as we got upward pressure on more technology in the Home and then as we try to get obviously more efficient and more productive on boxes and dishes and other things like that.

Ben Swinburne - Morgan Stanley: Maybe just one follow-up for Mike. You mentioned a number of product initiative later this year to guide and also your affected box strategy. The TV Everywhere product, the Nomad product and tablet product, can you just update us there on you your plan and when you think that's going to become fully deployed and what it looks like when it is?

Michael White - Chairman, President and CEO: I think the Nomad product which is the ability to port your content from your DVR onto you iPad, I expect you'll see that in some geographies before the end of the year. We're probably going to do it in a fewer geographies to make sure that its working flawlessly, before we'd roll it out fully, so roll out might be in 2012. But you'll see that before the end of the year. The high-definition user interface comes in the fourth quarter. We'll also I would expect to be streaming Pay Per View and premium channels on My probably in the fourth quarter, I think we're expecting or going to launch the whole media center which will have a kind of high-end DVR or new subs in the fourth quarter as well. So, we've got a lot of things that I feel pretty good about that will roll into the fourth quarter, albeit and I think you'll see more of the benefits of that probably in 2012 than in 2011 in terms of the acceleration of momentum.

Ben Swinburne - Morgan Stanley: Do any of these include sort of robust On Demand and maybe even Live when you're streaming product to the tablet?

Michael White - Chairman, President and CEO: Well a Live linear stuff is all driven by content rights and those are dog's breakfast candidly. Every programmer has got a different point of view, so that's not been our focus. Our focus is more on things that we think we can monetize like VOD, Pay Per View, premium channels HBO Go, NFL SUNDAY TICKET to-go kind of that and then porting your DVR content is kind of our focus. We're also working on the ability to stream to your iPad in the home and you may something on that by the end of the year, but the actual kind of wide streaming of content is still kind of a work in process, but as I said it's really not the technology I mean my Chief Technology Officer showed me he streamed the NFL Super Bowl at the Super Bowl on his iPhone from our broadcast here in the Marina del Rey. So, it's not a technology challenge, it's a rights issue.

Operator: Tuna Amobi, Standard & Poor's Equity Group.

Tuna Amobi - Standard & Poor's Equity Group: So, I guess it's good to hear that the on the connected box, you saw an uplift in ARPU as a result, but I wasn't sure if that was a same effect as far as churn is concerned I'm trying to basically isolate the economics of that set of customers to figure out, if you'll get into kind of overall upside that you expected. I know it's still early, but any clarification there would be helpful and separately a philosophical question Mike. So on the NFL Ticket right, so there seems to be some concern and I know that contract is still got another three, four years to run, but as you think about these contract being a loss leader, right. There is question about whether as a market becomes more competitive for these kinds of sports right when a contract is up for renewal there is almost an expectation that the cost are going to up astronomically and I know that you are trying to monetize that in various ways the IP offering what not. So, the question is do you see still feel that having that contract as a loss leader over a long-term is the right way to go.

Michael White - Chairman, President and CEO: Firstly, on the connected box, you are right. It is a little premature to read churn because usually the churn problem even in the Q2, when we went and dissected it, it was in certain geographies and it was plus or minus three months, either before or after the end of their two-year contract, if folks were going shopping and I think that's again a function of the economy and the competitiveness that's out there. So, it's a bit premature. I certainly believe it will have a positive impact on churn. We certainly know from history that advanced products in general, we do see a lower churn rate on our advanced products when we go on basic or standard (desk) customers. So, if history is any guide then, I'm pretty confident and I also think that the quality of the experience and I think that's where we've got probably still some more work to do to fill in some more VOD content and really with the HD user interface really make that experience pop for the consumer. I think, we're bringing Pandora into it. We're doing a bunch of things to make it just an absolutely knock your socks off experience for customer. As I said, we're already getting more than we had planned in ARPU lift out of those customers. So, I feel great about the connected box strategy, I think we're just working through some of the operational things.

Ben Swinburne - Morgan Stanley: Any thoughts on the Pay Per View buys on that connected, just to get the other element of it that you produce?

Michael White - Chairman, President and CEO: Obviously, that's yeah, that's where the $2.50 is coming from, it's Pay Per View buys to VOD. On the NFL SUNDAY TICKET, look it's way premature and I might say that the last contract, the cost went up astronomically I suppose, but we think NFL SUNDAY TICKET is a terrific product. We have an excellent partnership with the NFL, we’re delighted to see footballers back. Our customers are very interested in the product right now. We’re trying to make sure we can grow that franchise to support it. It’s a very important part of our brand. But how would we look at it three years down the road, I think it all depends. Sports costs are clearly a problem for the entire industry and not just football, all sports costs. As an industry, we’re all going to have to work hard on it because, the consumers – I just don’t see the consumer being willing to pay for every one of these new RSMs or six RSMs for one league or whatever – one college league that wants six different channels. They are just some things that as a practical we’re going to have to be pretty disciplined in what we do and what we don’t do.

Operator: Ladies and gentlemen that will conclude today’s presentation. Thank you for your time and have a good day.