UBS 36 th Annual Global Media and Communications Conference. Jon Rubin Senior VP of Financial Planning and Investor Relations

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1 UBS 36 th Annual Global Media and Communications Conference Jon Rubin Senior VP of Financial Planning and Investor Relations December 8, 2008

2 Cautionary Statement This presentation includes certain statements that may be considered to be, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ( PSLRA ). These forwardlooking statements generally can be identified by words 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 forwardlooking 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 improve customer service or create new and desirable programming content and interactive features; government action; 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 reliance on satellites as a significant part of our infrastructure and we may face other risks described from time to time in periodic reports filed by us with the SEC. Non-GAAP Financials This presentation includes financial measures that are not determined in accordance with GAAP, such as Operating Profit before Depreciation and Amortization, Free Cash Flow 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 and is included at the end of this presentation package. 2

3 DIRECTV s Goal To offer the best TV experience through leadership in: Content Technology Service HD, Exclusive, Sports, Original, Interactivity User Interface, DVR/ Advanced Equipment, Internet, Whole Home Call Centers, Installer Network, Self Care 3

4 Increasing Market Share YTD 9/30/08 Subscribers (K) Net Adds % Net Adds % Net Adds % DIRECTV U.S % % % Dish Network 1,065 47% % 0 0% Cable 163 7% (520) (26)% (540) (43)% Verizon FiOS 205 9% % % AT&T U-Verse 3 0% % % Total Pay TV Market 2, % 2, % 1, % 4

5 And Increasing Subscriber Returns YTD Thru 9/30/08 ARPU $66.95 $69.61 $73.74 $79.05 $81.73 Churn 1.59% 1.70% 1.60% 1.51% 1.50% Variable Margin 39% 41% 40% 37% 42% SAC After-Tax IRRs 23% 25% 29% 27% 33% 5

6 Subscriber Growth Drivers Superior Programming/Services Most comprehensive SD, HD and DVR services Most sports/interactivity Stronger Sales and Marketing Advertising / National Offers Direct Sales Commercial Business Building the Brand The 101 Friday Night Lights, original shows and concerts New Services DVR Scheduler, DIRECTV2PC, 1080P Video-on-Demand 6

7 HD Channel Comparison 130* 102 Local Premiums National HD 75* DIRECTV Verizon DISH AT&T Time Warner Los Angeles Los Angeles Denver Florida Los Angeles Comcast Philadelphia Based on October survey of websites *Excludes Games-only Regional Sports Networks and VOD 7

8 Rapid Growth in HD/DVR Subscribers Penetration of Total Subscribers 41% 30% 6.6M 21% 4.6M 3.0M ~50% Net HD/DVR Subscriber Adds Comcast DIRECTV Q K 600K Q K 550K Q K 400K Q K 450K LTM 1,400K 2,000K Penetration of Sub Base ~30% ~50% E Cumulative HD/DVR Subscribers 8

9 Attracting More Valuable Subscribers DIRECTV U.S. Subscriber Returns 2007 YTD Thru 9/30/08 Basic Sub Advanced Sub Basic Sub Advanced Sub Monthly Churn 1.9% 0.8% 1.9% 1.1% ARPU $62 $100 $62 $106 Variable Margin 33% 44% 34% 47% SAC* $575 $760 $600 $750 IRR 20% 59% 18% 66% * Includes credit for upfront fees 9

10 A Large Opportunity ~40M U.S. Households are Expected to Sign-up for HD Service Over the Next 3 Years TV HHs with HDTVs 54M 39M 34M 23M 65M 46M 83M 76M 72M 59M TV HHs with HD Service Source: Average of Analysts/Research Groups 10

11 Interactive Services NFL Sunday Ticket The Masters Golf Tournament The Weather Channel News Mix 11

12 Advertising / National Offers 40% of customers Index Drive 60% of Profits Demographics Men 35+ Married Homeowner Income >$70K College+ 12

13 Direct Sales Growth Direct Sales as a % of Total Gross Adds 43% ~49% 34% 1.6M 1.3M E Targeted DIRECTV.COM DIRECTV 13

14 Commercial Business Growth Commercial Accounts Gross Additions (Equivalent Units) ~190K DIRECTV Market Share Target Market = 6M+ Locations 130K 140K 4% E Hotels Business/Private Bars/Restaurants 14

15 The 101 Concert Blizzcon 15

16 DIRECTV on Demand 16

17 Enhanced Services NFL Supercast DIRECTV2PC DVR Scheduler 17

18 Strong Financial Results DIRECTV U.S. $M except Margin YTD Thru 9/30/07 YTD Thru 9/30/08 Change Revenue 11,150 12,569 13% Operating Profit Before D&A (OPBDA) 2,847 3,335 17% OPBDA Margin 25.5% 26.5% 100 Bps Capital Expenditures 1,784 1,240 (30)% Cash Flow Before Interest & Taxes 974 1,819 87% 18

19 Strong Gross Additions Key Trends (000) s Change Favorable Q1 Q2 Q , ,002 4% (1)% (3)% AT&T partnership Stronger brand Commercial / MDU / International growth Q4 986 Up over last year Unfavorable Weaker economy Full Year 3,847 Up over last year FiOS / U-Verse expansion Less upfront offer discounting 19

20 Managing Churn Key Trends Q1 Q Change Favorable 1.44% 1.36% (8) bps Higher HD/DVR penetration AT&T partnership 1.58% 1.49% (9) bps Further credit tightening Q3 Q4 1.61% 1.42% 1.64% 3 bps Up slightly from last year Unfavorable FiOS/U-Verse expansion Weaker economy Full Year 1.51% Down slightly from last year More disciplined upgrade/ retention offers 20

21 ARPU Growth Key Trends Q1 Q2 Q3 Q4 Full Year Change Favorable Price increases 5.2% 8.6% 340 bps HD/DVR monthly fees 6.8% 8.3% 8.3% 7.2% 7.0% 6.1% ~4% 6-6.5% 20 bps (220) bps Unfavorable National offers/discounts Lease fees per home Free/lower equipment fees Law of large numbers 21

22 Subscriber Acquisition Costs Key Trends $/Subscriber YTD Thru 9/30/07 9/30/08 Change Favorable Lower box costs Hardware (8)% More refurbished boxes Commissions/ Direct Marketing % Owned & Operated installers Unfavorable Installation National Advertising % 7% Richer mix of HD-DVRs New products/services Broadband connection Whole Home solution Total SAC % Note: Includes expensed and capitalized costs 22

23 Upgrade and Retention Key Trends $M YTD Thru 9/30/07 9/30/08 Change Favorable Decline in box costs Upgrades (29)% Lower pent-up demand Retention % More refurbished boxes Swaps (23)% Unfavorable Slower economy/greater competition Total Upgrade & Retention 1,270 1,097 (14)% Richer mix of HD-DVRs Loyalty program Note: Includes expensed and capitalized costs 23

24 Increasing Margins % of Revenues YTD Thru 9/30/07 9/30/08 Change Key Trends Programming/ Other COS Subscriber Services G&A/Broadcast Operations 41.7% 7.6% 6.6% 41.5% 6.7% 6.8% (0.2)% (0.9)% 0.2% Greater cost controls & operating efficiencies Subscriber Services G&A Upgrade & Retention Expenses Subscriber Acquisition Costs Subtotal 6.2% 12.4% 74.5% 5.8% 12.7% 73.5% (0.4)% 0.3% (1.0)% Stabilize key costs Programming SAC Upgrade & Retention Operating Profit Before D&A Margin 25.5% 26.5% 1.0% 24

25 Declining Capital Expenditures Key Trends $M YTD Thru 9/30/07 9/30/08 Change Favorable Lower box costs Set-Top Boxes 1, (31)% More refurbished boxes Basic/Other (28)% Completion of satellite expansion plan Satellites (38)% Unfavorable Richer mix of HD-DVRs Total CapEx 1,784 1,240 (30)% New projects/new local market launches Owned and Operated installers 25

26 DIRECTV Latin America Overview ~5.5M Subscribers in the Region Sky Mexico 1.73M Subscribers 59% Televisa 41% DIRECTV Sky Brazil 1.61M Subscribers 74% DIRECTV 26% Globo PanAmericana 2.09M Subscribers 100% DIRECTV 26

27 DIRECTV Latin America Rapid Subscriber Growth Subscriber Metrics YTD Thru 9/30/07 YTD Thru 9/30/08 Change Gross Subscriber Additions 753K 1,052K 40% Monthly Churn Rate 1.40% 1.85% 45 bps Excluding Brazil Adjustments 1.40% 1.59% 19 bps Net Subscriber Additions 390K 463K 19% ARPU $46.98 $ % Subscriber Acquisition Cost (SAC) $347 $400 15% 27

28 DIRECTV Latin America Strong Financial Results $M YTD Thru 9/30/07 YTD Thru 9/30/08 Change Revenue 1,220 1,811 48% Operating Profit Before D&A % OPBDA Margin 23.0% 28.0% 500 bps Capital Expenditures % Cash Flow Before Interest & Taxes % Free Cash Flow % 28

29 DIRECTV Latin America Strategy Drive Strong Subscriber Growth Offer the best content, technology and service throughout the region Establish HD leadership position Already launched: Argentina, Colombia, Venezuela, Chile and Puerto Rico Brazil launch: 2Q 2009 Aggressively market superior set-top boxes and DVR service Expand pre-paid service Leverage DIRECTV U.S. Capabilities Speed-to-market Advanced set-top boxes at a lower cost Access to exclusive programming Mitigate Currency Exposure ~80% of costs in local currency 29

30 The DIRECTV Group (Consolidated) Generating Substantial Cash Flow $M except EPS and OPBDA Margin YTD Thru 9/30/07 YTD Thru 9/30/08 Change Revenue 12,370 14,379 16% Operating Profit Before D&A (OPBDA) 3,067 3,791 24% OPBDA Margin 24.8% 26.4% 160 bps EPS $0.91 $ % Capital Expenditures 2,052 1,572 (23)% Cash Flow Before Interest & Taxes 968 1, % Free Cash Flow 592 1, % 30

31 The DIRECTV Group (Consolidated) Strong Balance Sheet Net Debt Share Repurchases $M 12/07 9/ YTD Thru 9/30/08 Cash 1,083 2,988 Shares (M) Short Term Debt Long Term Debt Total Debt 48 3,347 3, ,755 5,850 Cum Shares (M) Total Cost ($M) 184 2, , ,838 Net Debt 2,312 2,862 Cum Cost ($M) 2,977 5,002 6,840 31

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33 Non-GAAP Financial Reconciliations Non-GAAP Financial Measure Reconciliation Schedules DIRECTV HOLDINGS LLC (DIRECTV U.S.) Non-GAAP Financial Measure Reconciliation (Unaudited) Reconciliation of Cash Flow Before Interest and Taxes 2 and Free Cash Flow 3 to Net Cash Provided by Operating Activities Nine Months Ended S eptember 30, (Dollars in Millions) Cash Flow Before Interest and Taxes $1,819 $974 Adjustments: Cash paid for interest (175) (162) Interest income Income taxes paid (585) (624) Subtotal - Free Cash Flow 1, Add Cash Paid For: Property and equipment Subscriber leased equipment - subscriber acquisitions Subscriber leased equipment - upgrade and retention Satellites Net Cash Provided by Operating Activities $2,330 $2,032 (Unaudited) The DIRECTV Group Reconciliation of Operating Profit Before Depreciation and Amortization to Operating Profit* Nine Months Ended S eptember 30, (Dollars in Millions) Operating Profit Before Depreciation and Amortization $3,791 $3,067 Subtract: Depreciation and amortization expense 1,675 1,198 Operating Profit $2,116 $1,869 *For a reconciliation of this non-gaap financial measure for each of our segments, please see the Notes to the Consolidated Financial Statements which will be included in The DIRECTV Group s Quarterly Report on Form 10-Q for the quarter ended Sept 30, 2008, filed with the SEC in November Cash flow before interest and taxes, w hich is a financial measure that is not determined in accordance w ith GAAP, is calculated by deducting amounts under the captions Cash paid for property and equipment, Cash paid for satellites, Cash paid for subscriber leased equipment subscriber acquisitions and Cash paid for subscriber leased equipment upgrade and retention from Net cash provided by operating activities from the Consolidated Statements of Cash Flow s and adding back net interest paid and Cash paid for income taxes. This financial measure should be used in conjunction w ith other GAAP financial measures and is not presented as an alternative measure of cash flow s from operating activities, as determined in accordance w ith GAAP. The DIRECTV Group and DIRECTV U.S. management use cash flow before interest and taxes to evaluate the cash generated by our current subscriber base, net of capital expenditures, and excluding the impact of interest and taxes, for the purpose of allocating resources to activities such as adding new subscribers, retaining and upgrading existing subscribers, for additional capital expenditures and as a measure of performance for incenti The DIRECTV Group and DIRECTV U.S. 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 cash flow before interest and taxes to determine the ability of our current and projected subscriber base to fund required and discretionary spending and to help determine the financial value of the company. Free cash flow, w hich is a financial measure that is not determined in accordance w ith GAAP, is calculated by deducting amounts under the captions Cash paid for property and equipment, Cash paid for satellites, Cash paid for subscriber leased equipment subscriber acquisitions, and Cash paid for subscriber leased equipment upgrade and retention from Net cash provided by operating activities from the Consolidated Statements of Cash Flow s. This financial measure should be used in conjunction w ith other GAAP financial measures and is not presented as an alternative measure of cash flow s from operating activities, as determined in accordance w ith GAAP. The DIRECTV Group and DIRECTV U.S. management 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 as a measure of performance for incentive compensation purposes. The DIRECTV Group and DIRECTV U.S. believe this measure is useful to investors, along with other GAAP measures (such as c 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 our current and projected subscriber base to fund required and discretionary spending and to help determine the financial value of the company. The DIRECTV Group Reconciliation of Cash Flow Before Interest and Taxes and Free Cash Flow to Net Cash Provided by Operating Activities Nine Months Ended S eptember 30, (Dollars in Millions) Cash Flow Before Interest and Taxes $1,954 $968 Adjustments: Cash paid for interest (201) (176) Interest income Income taxes paid (568) (296) Subtotal - Free Cash Flow 1, Add Cash Paid For: Property and equipment 1,480 1,903 Satellites Net Cash Provided by Operating Activities $2,821 $2,644 DIRECTV Latin America Reconciliation of Cash Flow Before Interest and Taxes and Free Cash Flow to Net Cash Provided by Operating Activities Nine Months Ended S eptember 30, (Dollars in Millions) Cash Flow Before Interest and Taxes $218 $105 Adjustments: Cash paid for interest (29) (21) Interest income Income taxes paid (94) (24) Subtotal - Free Cash Flow Add Cash Paid For: Property and equipment Net Cash Provided by Operating Activities $435 $311 33