The DirecTV Group (DTV)

Third Quarter Review

The DIRECTV Group’s third quarter revenues of $5.47 billion increased 10% over the same period last year principally due to strong subscriber growth at DIRECTV U.S. and DIRECTV Latin America (DTVLA). Operating profit before depreciation and amortization increased 8% to $1.35 billion primarily due to the gross profit associated with the higher revenues, partially offset by higher acquisition costs related to the increase in gross subscriber additions and higher subscriber services costs associated with service quality improvement initiatives at DIRECTV U.S. Also impacting the comparison was an increase in general and administrative expenses primarily due to higher currency-related transaction charges in Venezuela ($48 million in the third quarter of 2009 compared with $17 million in the third quarter of 2008) as a result of DTVLA’s ongoing efforts to repatriate cash from Venezuela. The DIRECTV Group’s operating profit increased 4% to $685 million as the higher OPBDA was partially offset by an increase in depreciation and amortization principally due to capitalization of customer equipment under the DIRECTV U.S. and DIRECTV Latin America lease programs.

Net income attributable to The DIRECTV Group increased 1% compared with the third quarter of last year as the higher operating profit was mostly offset by increased net interest expense due to higher average net debt balances and higher income tax expense principally associated with a tax benefit in the third quarter of 2008 relating to the partial reversal of a valuation allowance on deferred tax assets of Sky Brazil. Diluted earnings per share increased 12% to $0.37 as the higher net income was also favorably impacted by a 12% reduction in average shares outstanding resulting from share repurchases made over the last year.

Cash flow before interest and taxes² grew 39% to $862 million and free cash flow³ increased 94% to $643 million compared to the third quarter 2008 primarily due to the higher OPBDA and cash provided by working capital changes. Free cash flow was also favorably impacted by lower income taxes paid primarily due to the timing of lower pre-tax earnings and prior-year credits. The quarter also included cash paid for share repurchases of $943 million, the issuance of $2 billion of additional debt ($1 billion of 4³/₄% senior notes due 2014 and $1 billion of 5⁷/₈% senior notes due 2019), the repurchase of $583 million of 8³/₈% senior notes and the repayment of $30 million under DIRECTV’s senior secured credit facility. The remaining outstanding $327 million of 8³/₈% senior notes was repurchased in October 2009.

Second Quarter Review

The DIRECTV Group’s second quarter revenues of $5.22 billion increased 9% over the same period last year principally due to strong subscriber growth at DIRECTV U.S. and DIRECTV Latin America. Operating profit before depreciation and amortization increased 2% to $1.38 billion primarily due to the gross profit associated with the higher revenues partially offset by higher acquisition costs related to the increase in gross subscriber additions, higher subscriber services costs associated with service quality improvement initiatives, and increased upgrade and retention costs at DIRECTV U.S. Also impacting the comparison was higher general and administrative expenses primarily due to $48 million in currency-related transaction charges in Venezuela at DIRECTV Latin America, as well as a $14 million charge in 2008 for costs associated with the transition of services from a DIRECTV U.S. home service provider that ceased operations. The DIRECTV Group’s operating profit declined 12% to $702 million as the higher OPBDA was more than offset by an increase in depreciation and amortization principally due to capitalization of customer equipment under the DIRECTV U.S. and DIRECTV Latin America lease programs.

Net income attributable to The DIRECTV Group declined 11% compared with the second quarter of last year primarily due to the lower operating profit and increased net interest expense due to higher average net debt balances, partially offset by a decline in tax expense principally resulting from lower earnings before tax, as well as a $38 million gain associated with the revaluation of U.S. dollar denominated monetary net-liabilities held by Sky Brazil. This revaluation is a result of the second quarter change in the functional currency of Sky Brazil and is reported in “Other, net” on the Consolidated Statements of Operations. Earnings per share were unchanged at $0.40 as the lower net income was offset by a 12% reduction in average shares outstanding resulting from share repurchases made over the last year.

Cash flow before interest and taxes² grew 9% to $785 million and free cash flow³ increased 47% to $550 million compared to the second quarter 2008 primarily due to the higher OPBDA, $69 million in dividend payments received, primarily from Sky Mexico, and lower working capital requirements. Free cash flow was also favorably impacted by lower income taxes paid, primarily due to the timing of lower pre-tax earnings, partially offset by higher net interest payments due to an increase in average net debt balances. The quarter also included cash paid for share repurchases of $324 million.

First Quarter Review

In the first quarter of 2009, DTVLA’s net subscriber additions were 148,000 compared to 200,000 last year as gross additions were 3% higher at 368,000 and churn increased to 1.86% primarily due to the growth in DTVLA’s pre-paid business, increased competition and a more challenging economic environment. The total number of DIRECTV subscribers in Latin America as of March 31, 2009 increased 16% to 4.03 million compared to 3.48 million as of March 31, 2008.

Revenues for DIRECTV Latin America increased 10% to $598 million in the quarter principally due to strong subscriber growth, particularly in Brazil, Venezuela and Argentina. ARPU declined 5.8% to $50.43 primarily due to unfavorable exchange rates in Brazil. DIRECTV Latin America’s first quarter 2009 OPBDA of $119 million was 14% lower than last year’s results and operating profit declined 47% to $41 million primarily due to a $72 million charge in connection with the exchange of Venezuelan currency to U.S. dollars as a result of DTVLA’s ongoing efforts to repatriate cash from Venezuela. Excluding this charge, OPBDA, operating profit and free cash flow would have increased 38%, 45% and 66%, respectively. Also impacting operating profit were higher depreciation expenses mostly due to the increase in set-top boxes deployed related to the higher gross subscriber additions attained over the last year.

Second Quarter Review

The DIRECTV Group’s second quarter revenues of $4.81 billion increased 16% over the same period last year principally due to strong ARPU and subscriber growth at DIRECTV U.S. and DIRECTV Latin America.

Operating profit before depreciation and amortization increased 20% to $1.36 billion primarily due to the gross profit associated with the higher revenues discussed above, partially offset by higher acquisition costs at DIRECTV U.S. mostly due to higher direct sales marketing expenses, dealer incentives and installation costs related to the acquisition of higher quality and advanced product customers. Also impacting the comparison was a $25 million one-time gain booked in 2007 related to hurricane insurance claims and a $14 million charge in 2008 for costs associated with the transition of services from a DIRECTV Home Service Provider that ceased operations. Operating profit increased 8% to $801 million primarily due to the higher OPBDA, partially offset by higher depreciation and amortization associated with the capitalization of customer equipment under the DIRECTV U.S. lease program implemented in March 2006.

Net income increased slightly to $455 million compared with the second quarter of last year as the higher operating profit was mostly offset by higher net interest expense primarily associated with an increase in average net debt. Earnings per share increased 8% to $0.40 driven by the higher net income and a reduction in shares outstanding due to share repurchase programs.

Cash flow before interest and taxes² more than doubled to $718 million and free cash flow³ increased 86% to $373 million compared to the second quarter of 2007 primarily due to the higher OPBDA, lower capital expenditures primarily driven by reduced set-top box costs and an increase in the use of refurbished set-top boxes, as well as a $32 million dividend received from Sky Mexico. These improvements were partially offset by higher use of working capital.

The period also included cash paid for share repurchases of $576 million as well as a $2.50 billion debt financing. The financing consisted of $1.5 billion in 7⁵/₈% senior notes due 2016 and $1.0 billion of incremental floating rate term loans under an existing senior secured credit facility. The net proceeds of these financings are available for general corporate purposes and to fund DIRECTV’s $3 billion share repurchase program announced in May 2008.

First Quarter Review

In the first quarter of 2008, DIRECTV Latin America net subscriber additions more than doubled to 200,000 compared to the same period last year. The increase was due to higher gross additions mainly in Brazil, Venezuela and Argentina, partially offset by higher churn of 1.57% reflecting the significant increase in first-year subscribers who typically have higher churn rates compared to longer tenured subscribers. The total number of DIRECTV subscribers in Latin America as of March 31, 2008 increased 24% to 3.48 million compared to 2.80 million as of March 31, 2007.

Revenues for DIRECTV Latin America increased 47% to $542 million in the quarter principally due to strong subscriber and ARPU growth. ARPU increased 19.9% to $53.52 primarily due to favorable exchange rates in Brazil and the benefits from the merger with Sky Brazil, as well as strong growth in Venezuela and Argentina. DIRECTV Latin America’s first quarter 2008 OPBDA of $138 million was 73% higher than last year’s results and operating profit more than quadrupled to $78 million primarily due to the gross profit generated from the higher revenues. These improvements were partially offset by higher acquisition costs mostly due to the increase in gross additions and increased costs related to the exchange rate appreciation.

Fourth Quarter Review

In the fourth quarter of 2007, The DIRECTV Group’s revenues of $4.88 billion increased 17% over the same period last year principally due to strong ARPU and subscriber growth at DIRECTV U.S. and DIRECTV Latin America.

Operating profit before depreciation and amortization increased 21% to $1.10 billion and operating profit increased 4% to $617 million primarily due to the gross profit associated with the higher revenues discussed above, partially offset by higher acquisition and upgrade costs at DIRECTV U.S. mostly due to the increased number of new and existing customers adding HD and DVR services. Operating profit was also impacted by higher depreciation and amortization principally due to increased capitalization of customer equipment under the DIRECTV U.S. lease program implemented in March 2006. Net income fell 2% to $348 million compared with the fourth quarter of last year as the higher operating profit was more than offset by higher net interest expense.

Cash flow before interest and taxes² of $512 million increased 53% compared to the fourth quarter 2006 primarily due to the higher operating profit before depreciation and amortization and lower capital expenditures, partially offset by lower cash provided by working capital. In addition, free cash flow was impacted by higher tax payments and higher net interest expense in the fourth quarter of 2007. The quarter also included share repurchases of $479 million.

Fourth Quarter Review

In the fourth quarter of 2006, DIRECTV Latin America’s net subscriber additions nearly doubled to 77,000 primarily due to strong growth at PanAmericana, particularly in Venezuela, Colombia, and Peru. Also contributing to the net subscriber increase was a decline in aggregate churn from 1.76% to 1.29% in the current quarter. The total number of DIRECTV subscribers in Latin America as of December 31, 2006 increased 70% to 2.71 million compared to 1.59 million as of December 31, 2005. The increase was due to the 869,000 subscribers added as a result of the merger with Sky Brazil, as well as the new subscribers added throughout the region over the past year.

Revenues for DIRECTV Latin America increased 86% to $354 million in the quarter primarily due to the consolidation of Sky Brazil’s operations and continued subscriber growth. The increase in DIRECTV Latin America’s fourth quarter 2006 operating profit before depreciation and amortization to $55 million was primarily attributable to the consolidation of the Sky Brazil business after its merger and the gross profit generated from the higher revenues at PanAmericana. This improvement was partially offset by a $12 million non-cash gain recorded in 2005 for the sale of DIRECTV Latin America’s subscribers in Mexico. DIRECTV Latin America’s operating loss improved to a loss of $3 million due to the higher operating profit before depreciation and amortization discussed above partially offset by higher amortization expense resulting from the Sky Brazil transaction.

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