Add
DTV to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| DTV > SEC Filings for DTV > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
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, 2008 filed with the SEC on February 27, 2009, 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 2008 Form 10-K.
THE DIRECTV GROUP, INC.
SUMMARY DATA
(Unaudited)
Three Months Ended
March 31,
2009 2008
(Dollars in Millions,
Except Per Share Amounts)
Consolidated Statements of Operations Data:
Revenues $ 4,901 $ 4,591
Total operating costs and expenses 4,477 3,934
Operating profit 424 657
Interest income 10 16
Interest expense (101 ) (63 )
Other, net 3 3
Income before income taxes 336 613
Income tax expense (124 ) (230 )
Net income 212 383
Less: Net income attributable to noncontrolling (11 ) (12 )
interest
Net income attributable to The DIRECTV $ 201 $ 371
Group, Inc.
Basic and diluted earnings per common share $ 0.20 $ 0.32
Weighted average number of common shares
outstanding (in millions)
Basic 1,018 1,148
Diluted 1,021 1,152
March 31, December 31,
2009 2008
(Dollars in Millions)
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 2,105 $ 2,005
Total current assets 4,035 4,044
Total assets 16,406 16,539
Total current liabilities 3,562 3,585
Long-term debt 5,696 5,725
Redeemable noncontrolling interest 325 325
Total stockholders' equity 4,518 4,631
|
THE DIRECTV GROUP, INC.
SUMMARY DATA-(continued)
(Unaudited)
Three Months Ended
March 31,
2009 2008
(Dollars in Millions)
Other Data:
Operating profit before depreciation and
amortization(1)
Operating profit $ 424 $ 657
Add: Depreciation and amortization expense 666 524
Operating profit before depreciation and $ 1,090 $ 1,181
amortization(1)
Operating profit before depreciation and 22.2 % 25.7 %
amortization margin(1)
Cash flow information
Net cash provided by operating activities $ 996 $ 1,110
Net cash used in investing activities (542 ) (565 )
Net cash used in financing activities (354 ) (2 )
Free cash flow(2)
Net cash provided by operating activities $ 996 $ 1,110
Less: Cash paid for property and equipment (522 ) (520 )
Less: Cash paid for satellites (17 ) (46 )
Free cash flow(2) $ 457 $ 544
|
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, for
share repurchase programs 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:
March 31, 2009
Revenues $ 4,303 $ 598 $ - $ 4,901
% of total revenue 87.8 % 12.2 % - 100.0 %
Operating profit (loss) $ 397 $ 41 $ (14 ) $ 424
Add: Depreciation and
amortization expense 589 78 (1 ) 666
Operating profit (loss) before
depreciation and amortization $ 986 $ 119 $ (15 ) $ 1,090
Operating profit before
depreciation and amortization
margin 22.9 % 19.9 % N/A 22.2 %
Capital expenditures $ 435 $ 103 $ 1 $ 539
March 31, 2008
Revenues $ 4,049 $ 542 $ - $ 4,591
% of total revenue 88.2 % 11.8 % - 100.0 %
Operating profit (loss) $ 593 $ 78 $ (14 ) $ 657
Add: Depreciation and
amortization expense 464 60 - 524
Operating profit (loss) before
depreciation and amortization $ 1,057 $ 138 $ (14 ) $ 1,181
Operating profit before
depreciation and amortization
margin 26.1 % 25.5 % N/A 25.7 %
Capital expenditures $ 469 $ 97 $ - $ 566
|
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, or DTH, digital television services and the second largest provider in the multi-channel video programming distribution industry in the United States. As of March 31, 2009, DIRECTV U.S. had approximately 18.1 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 March 31, 2009, PanAmericana had approximately 2.3 million subscribers, Sky Brazil had approximately 1.7 million subscribers and Sky Mexico had approximately 1.8 million subscribers.
SIGNIFICANT TRANSACTIONS
Venezuela Exchange Controls
We are required to obtain Venezuelan government approval to exchange Venezuelan bolivars into U.S. dollars at the official rate of 2.15 Venezuelan bolivars per U.S. dollar. Alternatively, a legal parallel exchange process exists, however the rates implied by transactions in the parallel market are significantly higher than the official rate (recently 4 to 6 bolivars per U.S. dollar). The official approval process has been delayed in recent periods and our Venezuelan subsidiary relied on the parallel exchange process to settle U.S. dollar obligations and to repatriate accumulated cash balances during the first quarter of 2009. As a result, during the first quarter of 2009, we recognized a charge to "General and administrative expense" in the Consolidated Statements of Operations of approximately $72 million in connection with the exchange of accumulated Venezuelan cash balances to U.S. dollars in the parallel exchange process. See "Liquidity and Capital Resources" below for additional information.
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 5.25% and was issued at a 1% discount.
Transactions with Liberty Media
In April 2009, Liberty Media filed with the SEC an amended preliminary proxy statement requesting shareholder approval for a redemption proposal which would allow Liberty Media to redeem a portion of the outstanding shares of Liberty Media Entertainment common stock, a tracking stock,
using shares of a newly formed wholly owned subsidiary of Liberty Media, Liberty Entertainment, Inc., or LEI. LEI will be comprised of: (i) approximately 54% of the common stock of The DIRECTV Group, (ii) Liberty Sports Holdings, which owns three regional sports networks (RSNs), (iii) a 65% interest in Game Show Network (GSN) which in turn owns 100% of FUN Technologies, ULC, (iv) approximately $30 million in cash, and (v) approximately $2 billion in debt. The redemption proposal is subject to the satisfaction of various conditions including, but not limited to, an effective registration statement, the receipt of a tax ruling and applicable shareholder approvals. Successful implementation of the redemption proposal will result in the split-off of LEI as a separately publicly traded company.
On May 3, 2009, The DIRECTV Group and Liberty Media and certain subsidiaries of The DIRECTV Group and certain subsidiaries and affiliates of Liberty Media entered into definitive agreements for and related to the combination of The DIRECTV Group and LEI following its split-off from Liberty Media. For more information regarding this transaction please refer to The DIRECTV Group Form 8-K filed with the SEC on May 4, 2009.
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 March 2006 for each of the periods presented:
Three Months Ended
March 31,
Capitalized subscriber leased equipment: 2009 2008
(Dollars in Millions)
Subscriber leased equipment-subscriber acquisitions $ 179 $ 156
Subscriber leased equipment-upgrade and retention costs 136 161
Total subscriber leased equipment capitalized $ 315 $ 317
Depreciation expense-subscriber leased equipment $ 337 $ 241
|
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. Revenues are reported net of customer credits and discounted promotions.
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 estimated 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 estimated 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.
EXECUTIVE OUTLOOK UPDATE
DIRECTV U.S. experienced a significant increase in subscriber additions during the 2009 first quarter, well exceeding our previous outlook. Based on this performance and our outlook for the remainder of the year, DIRECTV U.S. now expects net new subscriber additions to be over one million for 2009. We previously reported in our 2008 Form 10-K that we expected 2009 net new subscriber additions to approximate the 861,000 net new subscriber additions reported for 2008.
During the first quarter of 2009, DIRECTV U.S. experienced continuing competitive and economic pressures, which led to an increase in the use of discounted offers for new and existing subscribers, as well as decreased demand for premium movie services and pay-per-view, and lower advertising revenues. These changes resulted in lower than expected ARPU during the first quarter of 2009. Due to these factors, we now expect ARPU growth to be 2% to 3% for the year, with higher ARPU growth expected in 2010. We previously reported in our 2008 Form 10-K that we expected ARPU growth of about 4% for 2009.
The costs of acquiring the higher than anticipated number of new subscribers coupled with lower than expected ARPU growth have decreased our expected basic and diluted earnings per common share for 2009. We now expect basic and diluted earnings per common share to increase by less than 15% during 2009, instead of our previous outlook of at least 15% reported in our 2008 Form 10-K. Basic and diluted earnings per common share will continue to be influenced by the degree to which we experience increased subscriber additions and slower ARPU growth.
|
|