The DirecTV Group (DTV)

Year-to-Date Review

The DIRECTV Group’s first nine months of revenues increased 8% to $15.58 billion principally due to strong subscriber growth at DIRECTV U.S. and DIRECTV Latin America. Operating profit before depreciation and amortization increased slightly to $3.82 billion as the gross profit associated with the higher revenue at both DIRECTV U.S. and DTVLA was offset by higher acquisition costs related to the increase in gross subscriber additions, higher subscriber services costs associated with service quality improvement initiatives, as well as increased upgrade and retention expenses at DIRECTV U.S. Also impacting the comparison was higher general and administrative expenses at DIRECTV Latin America primarily due to $168 million in currency-related transaction charges at Venezuela in the first nine months of 2009 compared with $27 million in the same period of 2008. Operating profit declined 14% to $1.81 billion mostly due to higher depreciation and amortization associated with the capitalization of customer equipment under the DIRECTV U.S. and DIRECTV Latin America lease programs.

Net income attributable to The DIRECTV Group and diluted earnings per share declined 18% and 8%, respectively, compared with the first nine months of 2008 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 $57 million gain associated with the revaluation of U.S. dollar denominated monetary net-liabilities held by Sky Brazil. In addition, earnings per share were favorably impacted by a 12% decline in the average shares outstanding resulting from share repurchases over the last year.

Cash flow before interest and taxes increased 13% to $2.21 billion and free cash flow increased 32% to $1.65 billion compared to the first nine months of 2008 primarily due to lower working capital requirements and $69 million in dividend payments received, primarily from Sky Mexico. 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, partially offset by higher net interest paid due to higher average net debt balances. The first nine months of 2009 also included cash paid for share repurchases of $1.61 billion, 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 $78 million under DIRECTV’s senior secured credit facility. The remaining outstanding $327 million of 8³/₈% senior notes was repurchased in October 2009.

Year-to-Date Review

The DIRECTV Group’s first half revenues of $10.12 billion increased 8% over the first six months of 2008 principally due to strong subscriber growth at DIRECTV U.S. and DIRECTV Latin America. Operating profit before depreciation and amortization declined 3% to $2.47 billion primarily due to 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 at DIRECTV Latin America primarily due to $120 million in currency-related transaction charges in Venezuela. Operating profit declined 23% to $1.13 billion due to the lower OPBDA as well as higher depreciation and amortization principally due to capitalization of customer equipment under the DIRECTV U.S. and DIRECTV Latin American lease programs.

Net income attributable to The DIRECTV Group and earnings per share declined 26% and 17%, respectively, compared with the first half of 2008 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. Earnings per share were also impacted by a 12% decline in the average shares outstanding resulting from share repurchases made over the last year.

Cash flow before interest and taxes increased 1% to $1.35 billion and free cash flow increased 10% to $1.01 billion compared to the first six months of 2008 as the decline in OPBDA was more than offset by $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 paid due to higher average net debt balances. The six-month period for 2009 also included cash paid for share repurchases of $670 million.

Year-to-Date Review

The DIRECTV Group’s nine month revenues of $14.38 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 24% to $3.79 billion primarily due to the gross profit associated with the higher revenues discussed above, partially offset by higher subscriber acquisition and upgrade costs at DIRECTV U.S., as well as increased general and administrative expenses at both DIRECTV U.S. and DIRECTV Latin America. The higher subscriber acquisition and upgrade costs were driven by increased sales and marketing expenses related to the acquisition of higher quality and advanced product customers. General and administrative expenses were higher primarily due to currency related transaction fees at DIRECTV Latin America, a $14 million charge for costs associated with the transition of services from a DIRECTV U.S. Home Service Provider that ceased operations, settlement of litigation at DIRECTV U.S. and a $25 million one-time gain booked in 2007 related to hurricane insurance claims at DIRECTV U.S.

Operating profit increased 13% to $2.12 billion primarily due to the higher OPBDA, partially offset by higher depreciation and amortization primarily associated with the capitalization of customer equipment under the DIRECTV U.S. lease program implemented in March 2006.

Net income climbed 8% to $1.19 billion compared with the first nine months of last year as the higher operating profit was partially offset by higher net interest expense primarily associated with an increase in average net debt and a decrease in average cash balances. Earnings per share increased 15% to $1.05 driven by the higher net income and a reduction in shares outstanding due to share repurchases.

Cash flow before interest and taxes and free cash flow more than doubled to $1.95 billion and $1.25 billion, respectively, compared to the first nine months of 2007 primarily due to the higher OPBDA, lower capital expenditures driven by lower set-top box costs, reduced infrastructure costs related to expanding HD channel capacity, an increase in the use of refurbished set-top boxes, and a $32 million dividend received from Sky Mexico. These improvements were partially offset by higher use of cash for working capital. Also impacting free cash flow were higher income tax payments in 2008 primarily due to an increase in earnings before tax and a higher cash tax rate associated with the utilization of net operating losses and tax credit carry forwards in 2007.

The first nine months of 2008 also included cash paid for share repurchases of $1.79 billion, a capital contribution of $160 million received at the close of the Liberty Media and News Corporation transaction, $102 million in payments for transactions related to two DIRECTV U.S. Home Service Providers, as well as a $2.5 billion debt financing comprised 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 the remainder of DIRECTV’s $3 billion share repurchase program announced in May 2008.

Year-to-Date Review

The DIRECTV Group’s six month revenues of $9.40 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 23% to $2.54 billion 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 higher direct sales marketing expenses, dealer incentives and installation costs related to the acquisition of higher quality and advanced product customers. Operating profit increased 12% to $1.46 billion 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 climbed 5% to $826 million compared with the first half of last year as the higher operating profit was partially offset by higher net interest expense primarily associated with an increase in average net debt. Earnings per share increased 13% to $0.72 driven by the higher net income and a reduction in shares outstanding due to share repurchases.

Cash flow before interest and taxes more than doubled to $1.34 billion and free cash flow increased 80% to $917 million compared to the first six months of 2007 primarily due to the higher OPBDA, lower capital expenditures 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 first six months of 2008 also included cash paid for share repurchases of $736 million and a capital contribution of $160 million received at the close of the Liberty Media and News Corporation transaction.