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| DTV > SEC Filings for DTV > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
The following management's discussion and analysis should be read in conjunction with our management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC on February 25, 2008, our Quarterly Reports on Form 10-Q for the quarter ended March 31, 2008 filed with the SEC on May 7, 2008, and for the quarter ended June 30, 2008 filed with the SEC on August 7, 2008, and all of our other filings, including Current Reports on Form 8-K, filed with the SEC after such date and through the date of this report.
This Quarterly Report on Form 10-Q may contain certain statements that we believe are, or may be considered to be, "forward-looking statements" within the meaning of various provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as we "believe," "expect," "estimate," "anticipate," "intend," "plan," "foresee," "project" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from historical results or from those expressed or implied by the relevant forward-looking statement. We discuss these risks and uncertainties in detail in Part I, Item 1A of our 2007 Form 10-K.
THE DIRECTV GROUP, INC.
SUMMARY DATA
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(Dollars in Millions, Except Per Share Amounts)
Consolidated Statements of
Operations Data:
Revenues $ 4,981 $ 4,327 $ 14,379 $ 12,370
Total operating costs and
expenses 4,323 3,761 12,263 10,501
Operating profit 658 566 2,116 1,869
Other expenses (65 ) (26 ) (155 ) (53 )
Income from continuing operations
before income taxes and minority
interests 593 540 1,961 1,816
Income tax expense (195 ) (220 ) (712 ) (723 )
Minority interests in net
earnings of subsidiaries (35 ) (1 ) (60 ) (7 )
Income from continuing operations 363 319 1,189 1,086
Income from discontinued
operations, net of taxes - - - 17
Net income $ 363 $ 319 $ 1,189 $ 1,103
Basic and diluted earnings per
common share:
Income from continuing operations $ 0.33 $ 0.27 $ 1.05 $ 0.90
Income from discontinued
operations, net of taxes - - - 0.01
Basic and diluted earnings per
common share $ 0.33 $ 0.27 $ 1.05 $ 0.91
Weighted average number of common
shares outstanding (in millions)
Basic 1,106 1,182 1,131 1,209
Diluted 1,111 1,190 1,136 1,217
September 30, December 31,
2008 2007
(Dollars in Millions)
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 2,988 $ 1,083
Total current assets 5,022 3,146
Total assets 17,515 15,063
Total current liabilities 3,387 3,434
Long-term debt 5,755 3,347
Minority interest 71 11
Total stockholders' equity 5,925 6,302
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THE DIRECTV GROUP, INC.
SUMMARY DATA-(continued)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(Dollars in Millions, Except Per Share Amounts)
Other Data:
Operating profit before
depreciation and
amortization(1)
Operating profit $ 658 $ 566 $ 2,116 $ 1,869
Add: Depreciation and
amortization expense 594 438 1,675 1,198
Operating profit before
depreciation and amortization $ 1,252 $ 1,004 $ 3,791 $ 3,067
Operating profit before
depreciation and amortization
margin(1) 25.1 % 23.2 % 26.4 % 24.8 %
Cash flow information
Net cash provided by operating
activities $ 868 $ 788 $ 2,821 $ 2,644
Net cash used in investing
activities (634 ) (661 ) (1,738 ) (2,183 )
Net cash provided by (used in)
financing activities (1,083 ) (874 ) 822 (1,769 )
Free cash flow(2)
Net cash provided by operating
activities $ 868 $ 788 $ 2,821 $ 2,644
Less: Cash paid for property
and equipment (521 ) (669 ) (1,480 ) (1,903 )
Less: Cash paid for satellites (15 ) (37 ) (92 ) (149 )
Free cash flow $ 332 $ 82 $ 1,249 $ 592
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We believe this measure is useful to investors, along with GAAP measures (such as revenues, operating profit and net income), to compare our operating performance to other communications, entertainment and media service providers. We believe that investors use current and projected operating profit before depreciation and amortization and similar measures to estimate our current or prospective enterprise value and make investment decisions. This metric provides investors with a means to compare operating results exclusive of depreciation and amortization expense. Our management believes this is useful given the significant variation in depreciation and amortization
expense that can result from the timing of capital expenditures, the capitalization of intangible assets, potential variations in expected useful lives when compared to other companies and periodic changes to estimated useful lives.
Operating profit before depreciation and amortization margin is calculated by dividing operating profit before depreciation and amortization by revenues.
º (2)
º Free cash flow, which is a financial measure that is not determined in
accordance with GAAP, can be calculated by deducting amounts under the
captions "Cash paid for property and equipment" and "Cash paid for
satellites" from "Net cash provided by operating activities" from the
Consolidated Statements of Cash Flows. This financial measure should be
used in conjunction with other GAAP financial measures and is not presented
as an alternative measure of cash flows from operating activities, as
determined in accordance with GAAP. Our management and our Board of
Directors use free cash flow to evaluate the cash generated by our current
subscriber base, net of capital expenditures, for the purpose of allocating
resources to activities such as adding new subscribers, retaining and
upgrading existing subscribers, for additional capital expenditures and
other capital investments or transactions and as a measure of performance
for incentive compensation purposes. We believe this measure is useful to
investors, along with other GAAP measures (such as cash flows from
operating and investing activities), to compare our operating performance
to other communications, entertainment and media companies. We believe that
investors also use current and projected free cash flow to determine the
ability of revenues from our current and projected subscriber base to fund
required and discretionary spending and to help determine our financial
value.
THE DIRECTV GROUP, INC.
SUMMARY DATA-(concluded)
(Unaudited)
Selected Segment Data
Corporate
DIRECTV DIRECTV and
U.S. Latin America Other Total
(Dollars in Millions)
Three Months Ended:
September 30, 2008
Revenues $ 4,324 $ 658 $ (1 ) $ 4,981
% of total revenue 86.8 % 13.2 % - 100.0 %
Operating profit (loss) $ 532 $ 142 $ (16 ) $ 658
Add: Depreciation and
amortization expense 528 66 - 594
Operating profit (loss) before
depreciation and amortization $ 1,060 $ 208 $ (16 ) $ 1,252
Operating profit before
depreciation and amortization
margin 24.5 % 31.6 % N/A 25.1 %
Capital expenditures $ 418 $ 110 $ 8 $ 536
September 30, 2007
Revenues $ 3,885 $ 442 $ - $ 4,327
% of total revenue 89.8 % 10.2 % - 100.0 %
Operating profit (loss) $ 538 $ 46 $ (18 ) $ 566
Add: Depreciation and
amortization expense 378 59 1 438
Operating profit (loss) before
depreciation and amortization $ 916 $ 105 $ (17 ) $ 1,004
Operating profit before
depreciation and amortization
margin 23.6 % 23.8 % N/A 23.2 %
Capital expenditures $ 608 $ 96 $ 2 $ 706
Corporate
DIRECTV DIRECTV and
U.S. Latin America Other Total
(Dollars in Millions)
Nine Months Ended: September 30,
2008
Revenues $ 12,569 $ 1,811 $ (1 ) $ 14,379
% of total revenue 87.4 % 12.6 % - 100.0 %
Operating profit (loss) $ 1,842 $ 322 $ (48 ) $ 2,116
Add: Depreciation and
amortization expense 1,493 185 (3 ) 1,675
Operating profit (loss) before
depreciation and amortization $ 3,335 $ 507 $ (51 ) $ 3,791
Operating profit before
depreciation and amortization
margin 26.5 % 28.0 % N/A 26.4 %
Capital expenditures $ 1,240 $ 322 $ 10 $ 1,572
September 30, 2007
Revenues $ 11,150 $ 1,220 $ - $ 12,370
% of total revenue 90.1 % 9.9 % - 100.0 %
Operating profit (loss) $ 1,826 $ 103 $ (60 ) $ 1,869
Add: Depreciation and
amortization expense 1,021 177 - 1,198
Operating profit (loss) before
depreciation and amortization $ 2,847 $ 280 $ (60 ) $ 3,067
Operating profit before
depreciation and amortization
margin 25.5 % 23.0 % N/A 24.8 %
Capital expenditures $ 1,784 $ 237 $ 31 $ 2,052
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BUSINESS OVERVIEW
The DIRECTV Group, Inc. is a leading provider of digital television entertainment in the United States and Latin America. Our two business segments, DIRECTV U.S. and DIRECTV Latin America, which are differentiated by their geographic location, acquire, promote, sell and distribute digital entertainment programming via satellite to residential and commercial subscribers.
DIRECTV U.S. DIRECTV Holdings LLC and its subsidiaries, or DIRECTV U.S., is the largest provider of direct-to-home digital television services and the second largest provider in the multi-channel video programming distribution industry in the United States. As of September 30, 2008, DIRECTV U.S. had approximately 17.3 million subscribers.
DIRECTV U.S. currently broadcasts from a fleet of eleven geosynchronous satellites, including ten owned satellites and one leased satellite. DIRECTV 12 is under construction and is expected to be ready for launch in the second half of 2009.
DIRECTV Latin America. DIRECTV Latin America is a leading provider of DTH digital television services throughout Latin America. DTVLA is comprised of PanAmericana, which provides services in Venezuela, Argentina, Chile, Colombia, Puerto Rico and certain other countries in the region through our wholly-owned subsidiary, DIRECTV Latin America, LLC, or DLA LLC, our 74% owned subsidiary Sky Brasil Servicos Ltda., which we refer to as Sky Brazil, and our 41% equity method investment in Innova, S. de R.L. de C.V., or Sky Mexico. As of September 30, 2008, PanAmericana had approximately 2.1 million subscribers, Sky Brazil had approximately 1.6 million subscribers and Sky Mexico had approximately 1.7 million subscribers.
SIGNIFICANT TRANSACTIONS
Financing Transactions
In May 2008, DIRECTV U.S. issued $1.5 billion in senior notes and amended its senior secured credit facility to include a new $1.0 billion Term Loan C. The senior notes bear interest at a rate of 7.625% and the principal balance is due in May 2016. The Term Loan C currently bears interest at a weighted average rate of 5.60% and was issued at a 1% discount. Principal payments on the Term Loan C began on September 30, 2008. The principal is payable in installments with the final installment due in April 2013.
Acquisitions
180 Connect
On July 8, 2008, we acquired 100% of 180 Connect's outstanding common stock and exchangeable shares. Simultaneously, in a separate transaction, UniTek USA, LLC acquired 100% of 180 Connect's cable service operating unit and operations in certain of our installation services markets in exchange for satellite installation operations in certain markets and $7 million in cash. These transactions provide us with control over a significant portion of DIRECTV U.S.' home service provider network. We paid $91 million in cash, net of the $7 million we received from UniTek USA, for the acquisition, including the equity purchase price, repayment of assumed debt and related transaction costs.
Investments
During the nine months ended September 30, 2008, we paid $99 million in cash to acquire equity method investments and $7 million in cash for other investments.
On January 30, 2007, we acquired Darlene's 14% equity interest in DLA LLC for $325 million in cash and resolved all outstanding disputes with Darlene. We accounted for this acquisition using the purchase method of accounting.
LEASE PROGRAM
The following table sets forth the amount of DIRECTV U.S. set-top receivers
we capitalized, and depreciation expense we recorded, under the lease program
implemented in 2006 for each of the periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
Capitalized subscriber leased equipment: 2008 2007 2008 2007
(Dollars in Millions)
Subscriber leased equipment-subscriber $ 151 $ 220 $ 432 $ 580
acquisitions
Subscriber leased equipment-upgrade and 128 197 373 579
retention
Total subscriber leased equipment $ 279 $ 417 $ 805 $ 1,159
capitalized
Depreciation expense-subscriber leased $ 287 $ 177 $ 789 $ 434
equipment
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KEY TERMINOLOGY
The following key terminology is used in management's discussion and analysis of financial condition and results of operations:
Revenues. We earn revenues mostly from monthly fees we charge subscribers for subscriptions to basic and premium channel programming, HD programming and access fees, pay-per-view programming, and seasonal and live sporting events. We also earn revenues from monthly fees that we charge subscribers with multiple non-leased set-top receivers (which we refer to as mirroring fees), monthly fees we charge subscribers for leased set-top receivers, monthly fees we charge subscribers for digital video recorder, or DVR, service, hardware revenues from subscribers who lease or purchase set-top receivers from us, our published programming guide, warranty service fees and advertising services.
Broadcast Programming and Other. These costs primarily include license fees for subscription service programming, pay-per-view programming, live sports and other events. Other costs include expenses associated with the publication and distribution of our programming guide, continuing service fees paid to third parties for active subscribers, warranty service costs and production costs for on-air advertisements we sell to third parties.
Subscriber Service Expenses. Subscriber service expenses include the costs of customer call centers, billing, remittance processing and certain home services expenses, such as in-home repair costs.
Broadcast Operations Expenses. These expenses include broadcast center operating costs, signal transmission expenses (including costs of collecting signals for our local channel offerings), and costs of monitoring, maintaining and insuring our satellites. Also included are engineering expenses associated with deterring theft of our signal.
Subscriber Acquisition Costs. These costs include the cost of set-top receivers and other equipment, commissions we pay to national retailers, independent satellite television retailers, dealers, regional Bell operating companies, and the cost of installation, advertising, marketing and customer call center expenses associated with the acquisition of new subscribers. Set-top receivers leased to new
subscribers are capitalized in "Property and equipment, net" in the Consolidated Balance Sheets and depreciated over their useful lives. The amount of set-top receivers capitalized each period for subscriber acquisitions is included in "Cash paid for property and equipment" in the Consolidated Statements of Cash Flows.
Upgrade and Retention Costs. The majority of upgrade and retention costs are associated with upgrade efforts for existing subscribers that we believe will result in higher average monthly revenue per subscriber, or ARPU, and lower churn. Our upgrade efforts include subscriber equipment upgrade programs for DVR, HD and HD DVR receivers and local channels, our multiple set-top receiver offer and similar initiatives. Retention costs also include the costs of installing and providing hardware under our movers program for subscribers relocating to a new residence. Set-top receivers leased to existing subscribers under upgrade and retention programs are capitalized in "Property and equipment, net" in the Consolidated Balance Sheets and depreciated over their useful lives. The amount of set-top receivers capitalized each period for upgrade and retention programs is included in "Cash paid for property and equipment" in the Consolidated Statements of Cash Flows.
General and Administrative Expenses. General and administrative expenses include departmental costs for legal, administrative services, finance, marketing and information technology. These costs also include expenses for bad debt and other operating expenses, such as legal settlements, and gains or losses from the sale or disposal of fixed assets.
Average Monthly Revenue Per Subscriber. We calculate ARPU by dividing average monthly revenues for the period (total revenues during the period divided by the number of months in the period) by average subscribers for the period. We calculate average subscribers for the period by adding the number of subscribers as of the beginning of the period and for each quarter end in the current year or period and dividing by the sum of the number of quarters in the period plus one.
Average Monthly Subscriber Churn. Average monthly subscriber churn represents the number of subscribers whose service is disconnected, expressed as a percentage of the average total number of subscribers. We calculate average monthly subscriber churn by dividing the average monthly number of disconnected subscribers for the period (total subscribers disconnected, net of reconnects, during the period divided by the number of months in the period) by average subscribers for the period.
Subscriber Count. The total number of subscribers represents the total number of subscribers actively subscribing to our service, including seasonal subscribers, subscribers who are in the process of relocating and commercial equivalent viewing units. In March 2008, we implemented a change in DIRECTV U.S.' commercial pricing and packaging to increase our competitiveness. As a result, during the first quarter of 2008, DIRECTV U.S. made a one-time downward adjustment to the subscriber count of approximately 71,000 subscribers related to commercial equivalent viewing units.
SAC. We calculate SAC, which represents total subscriber acquisition costs stated on a per subscriber basis, by dividing total subscriber acquisition costs for the period by the number of gross new subscribers acquired during the period. We calculate total subscriber acquisition costs for the period by adding together "Subscriber acquisition costs" expensed during the period and the amount of cash paid for equipment leased to new subscribers during the period.
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