direc tv group The DIRECTV Group, Inc. at Merrill Lynch Media Fall Preview
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  • 1. Merrill Lynch Media & Entertainment Conference September 17th 2007 Mike Palkovic CFO, DIRECTV 1
  • 2. Cautionary Statement This presentation may include or incorporate by reference 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 “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 actual results to differ materially from historical results or from those expressed or implied by the relevant forward-looking statement. Such risks and uncertainties include, but are not limited to: economic conditions; product demand and market acceptance; ability to simplify aspects of our business model; improve customer service; create new and desirable programming content and interactive features; achieve anticipated economies of scale; government action; local political or economic developments in or affecting countries where we have operations, including political, economic and social uncertainties in many Latin American countries in which DTVLA operates; foreign currency exchange rates; competition; the outcome of legal proceedings; ability to achieve cost reductions; ability to renew programming contracts under favorable terms; technological risk; limitations on access to distribution channels; the success and timeliness of satellite launches; in-orbit performance of satellites, including technical anomalies; loss of uninsured satellites; theft of satellite programming signals; and our ability to access capital to maintain our financial flexibility; and we may face other risks described from time to time in periodic reports filed by us with the SEC. 2
  • 3. Non-GAAP Financials This presentation includes financial measures that are not determined in accordance with accounting principles generally accepted in the United States of America, or GAAP, such as Operating Profit before Depreciation and Amortization, Free Cash Flow, Pre-SAC margin and Cash Flow before Interest and Taxes. These financial measures should be used in conjunction with other GAAP financial measures and are not presented as an alternative measure of operating results, as determined in accordance with GAAP. DIRECTV management uses these measures to evaluate the profitability of DIRECTV U.S.’ subscriber base for the purpose of allocating resources to discretionary activities such as adding new subscribers, upgrading and retaining existing subscribers and for capital expenditures. A reconciliation of these measures to the nearest GAAP measure is posted on our website. 3
  • 4. Solid Year-to-Date Results YTD YTD DIRECTV U.S. June June Change 2006 2007 Revenue $6.51B $7.27B +12% Operating Profit Before $1.52B $1.93B +27% Depreciation & Amortization Cash Flow Before Interest $661M $651M (2)% and Taxes ARPU $70.73 $74.96 +6% SAC $656 $677 +3% Monthly Churn 1.52% 1.51% (1) basis pt. 4
  • 5. Strong Subscriber Growth DIRECTV Share of U.S Industry Net Subscriber Growth 20% Gross Adds FY YTD 2007 2006 DIRECTV 820K 363K Cable ramps- up VoIP 15% Comcast 80 (20) Cable ramps-up Time Warner 50 (10) High Definition Cable ramps-up Cox 40 20 Video-on-Demand 10% Charter (70) (10) Cable ramps-up Cablevision 100 10 Broadband Mediacom (40) (40) Cable 160K (50)K 5% 2001 2002 2003 2004 2005 2006 5
  • 6. Increasing Sales of HD and DVR Services Year End 2006 Year End 2005 DIRECTV U.S. Subscriber Penetration Advanced Services Basic Services Year End 2007E Year End 2008E 6
  • 7. Reducing Monthly Churn Key Factors 1.70% • Higher HD/DVR Sales • Tighter Credit Policies 1.60% • Improved Customer Service & Set-Top Box Performance • New Programming/Services 2005 2006 2007E 7
  • 8. Continued Strong ARPU Growth 6.0% YTD ARPU Increase HD/DVR Fees (~1%) Price Increase (~4%) Lease Fees Ad Sales 8
  • 9. Stabilizing SAC $642 $642 Marketing Commission/ Other Installation Hardware 2005 2006 2007E Increasing HD/DVR Sales Are Mostly Offset By Significant Box Cost Reductions $500 Box Costs 27% 14% HD/DVR Sales (% of Gross Adds) $0 Q1 '06 Q1 '07 Q1 '08E 2005 2006 2007E HD-DVR HD 9 Note: Subscriber Acquisition Costs (SAC) Include Capitalized Set-Top Box Costs
  • 10. Managing Upgrade/Retention Costs Upgrade/Retention Costs as a % of Revenue* 9% 9% 9% MPEG-4 $1.3B Swaps $1.1B Other HD/DVRs 2005 2006 2007E Annual Cost/Sub* HD/DVRs $23 $37 $48 All Other $52 $44 $38 Total $75 $81 $86 10 * Excludes MPEG-4 HD swap costs of $75M in 2006 and approximately $200M in 2007 Note: All Upgrade/Retention Costs Include Capitalized Set-Top Box Costs
  • 11. DIRECTV U.S. Capital Expenditures Expect Significant Reduction in Satellite/Maintenance CapEx After Launch of D11/D12 Satellites Maintenance $.7B $.7B 2005 2006 2007E Additional CapEx Set-Top Boxes* 0 $1.1B 11 *Lease program began in March 2006
  • 12. U.S. High-Definition TV Forecast Homes with HD Televisions Homes with HD Service 44% 62% % of U.S. TV Homes 57% 37% % of U.S. TV Homes 49% 28% 72M 51M 66M 36% 42M 19% 25% 55M 12% 32M 40M 28M 21M 13M 2006 2007E 2008E 2009E 2010E 2006 2007E 2008E 2009E 2010E 12 Source: Compilation of 3rd party research, company estimates
  • 13. HD Channel Launch 1st Half 2008: Up to 150 Channels Year end 2007: Subscribers Up to 100 Channels can also receive: Today: ~10 Channels More Channel Announcements To Come 13
  • 14. Advanced Services Drive Higher Returns 2006 After-Tax IRRs 2006 After-Tax Relative NPVs 54% 6x 25% 1x Basic Advanced Basic Advanced 14
  • 15. Broadband Partnerships Partner Technology Coverage Today Verizon DSL 44 Markets Mostly in N.E. AT&T/BellSouth DSL 42 Markets Mostly in S.E. Qwest DSL 38 Markets Mostly in Central U.S. Earthlink DSL National Earthlink Wi-Fi Anaheim, Philadelphia, New Orleans WildBlue Satellite Continental U.S. Clearwire Wi-Max 51 Markets Throughout the U.S. Current BPL Dallas/Ft. Worth 15
  • 16. DIRECTV Latin America Overview Region-Wide Revenues of $2.4B and 4.5M Subscribers Sky Mexico (DIRECTV= 41%; Televisa=59%) • 22M TV HHs • 27% Pay TV Penetration • 1.5M Sky Subscribers • $42 ARPU; 1.3% Monthly Churn Sky Brazil (DIRECTV=74%; Globo=26%) • 50M TV HHs PanAmericana • 9% Pay TV Penetration (DIRECTV=100%) • 1.4M Sky Subscribers • 34M TV HHs • $55 ARPU; 1.3% Monthly Churn • 28% Pay TV Penetration • 1.5M DIRECTV Subscribers • $43 ARPU; 1.4% Monthly Churn 16
  • 17. DIRECTV Latin America A Great Opportunity to Unlock Value Sky Brazil 2006 2007E Subscribers (K) 1,332 1,487 Revenue ($M) 417 900 DLA 2006 2007E 2009E Operating Profit Consolidated 153 250 Before D&A ($M) Subscribers (K) 2,711 3,100 4,000 Cash Flow before 62 180 Interest & Taxes ($M) Revenue ($M) 1,013 1,600 2,000 Operating Profit PanAmericana 2006 2007E 244 350 600 Before D&A ($M) Subscribers (K) 1,286 1,560 Cash Flow before 12 165 400 Interest & Taxes ($M) Revenue ($M) 569 720 Operating Profit 101 135 Before D&A ($M) Cash Flow before 47 30 Interest & Taxes ($M) 17 Note: DIRECTV owns 100% of PanAmerica and 74% of Sky Brazil. DIRECTV also owns 41% of Sky Mexico, which is not consolidated.
  • 18. Strong Balance Sheet • $1.4.B net debt position as of 2Q 2007: Total Debt $3.4B Cash and Short Term Inv. $2.0B Net Debt $1.4B • As of August 9, 2007, we repurchased approximately 228M shares for $4.0B – New stock buyback program authorized for an additional $1B in August, 2007 • Current credit rating provides significant borrowing capacity 18
  • 19. Summary DIRECTV is poised for significant cash flow growth • Leading digital multichannel TV service provider – 100% digital platform – Unique and exclusive programming – New products/services expected to further differentiate • Strong revenue, OPBD&A and subscriber growth – Increasing margins due to cost controls and operating leverage • Significant upside potential at DIRECTV Latin America • Strong balance sheet with substantial liquidity 19
  • 20. 20
  • 21. Non-GAAP Financial Reconciliation Schedules DIRECTV Holdings LLC (U.S.) Reconciliation of Operating Profit Before Depreciation and Amortization to Operating Profit S ix Months Ended June 30, 2006 2007 (Dollars in Millions) Operating Profit Before Depreciation and Amortization $ 1,522 $ 1,931 Subtract: Depreciation and amortization expense 385 643 Operating Profit $ 1,137 $ 1,288 DIRECTV Holdings LLC (U.S.) Reconciliation of Cash Flow before Interest and Taxes and Free Cash Flow to Net Cash Provided by Operating Activities S ix Months Ended June 30, 2006 2007 (Dollars in Millions) Cash Flow before Interest and Taxes $ 661 $ 651 Adjustments: Cash paid for interest (108) $ (104) Interest income 32 $ 44 Income taxes refunded (paid) (312) $ (376) Subtotal - Free Cash Flow 273 215 Add Cash Paid For: Property and equipment 219 $ 322 Subscriber leased equipment - subscriber acquisitions 199 $ 359 Subscriber leased equipment - upgrade and retention 140 $ 382 Satellites 105 $ 112 Net Cash Provided by Operating Activities $ 936 $ 1,390 21