UBS 36 th Annual Global Media and Communications Conference Jon Rubin Senior VP of Financial Planning and Investor Relations December 8, 2008
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
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
Increasing Market Share 2006 2007 YTD 9/30/08 Subscribers (K) Net Adds % Net Adds % Net Adds % DIRECTV U.S. 820 37% 878 44% 560 45% Dish Network 1,065 47% 675 34% 0 0% Cable 163 7% (520) (26)% (540) (43)% Verizon FiOS 205 9% 742 37% 672 54% AT&T U-Verse 3 0% 228 11% 550 44% Total Pay TV Market 2,256 100% 2,003 100% 1,242 100% 4
And Increasing Subscriber Returns 2004 2005 2006 2007 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 643 642 641 692 711 After-Tax IRRs 23% 25% 29% 27% 33% 5
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
HD Channel Comparison 130* 102 Local Premiums National HD 75* 50 37 35 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
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 Q4 07 500K 600K Q1 08 450K 550K Q2 08 150K 400K Q3 08 300K 450K LTM 1,400K 2,000K Penetration of Sub Base ~30% ~50% 2005 2006 2007 2008E Cumulative HD/DVR Subscribers 8
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
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 2007 2008 2009 2010 2011 Source: Average of Analysts/Research Groups 10
Interactive Services NFL Sunday Ticket The Masters Golf Tournament The Weather Channel News Mix 11
Advertising / National Offers 40% of customers Index 120 125 121 130 145 Drive 60% of Profits Demographics Men 35+ Married Homeowner Income >$70K College+ 12
Direct Sales Growth Direct Sales as a % of Total Gross Adds 43% ~49% 34% 1.6M 1.3M 2006 2007 2008E Targeted DIRECTV.COM 1-800 DIRECTV 13
Commercial Business Growth Commercial Accounts Gross Additions (Equivalent Units) ~190K DIRECTV Market Share Target Market = 6M+ Locations 130K 140K 4% 2006 2007 2008E Hotels Business/Private Bars/Restaurants 14
The 101 Concert Blizzcon 15
DIRECTV on Demand 16
Enhanced Services NFL Supercast DIRECTV2PC DVR Scheduler 17
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
Strong Gross Additions Key Trends (000) s 2007 2008 Change Favorable Q1 Q2 Q3 929 900 1,032 964 894 1,002 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
Managing Churn Key Trends Q1 Q2 2007 2008 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
ARPU Growth Key Trends Q1 Q2 Q3 Q4 Full Year 2007 2008 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
Subscriber Acquisition Costs Key Trends $/Subscriber YTD Thru 9/30/07 9/30/08 Change Favorable Lower box costs Hardware 260 240 (8)% More refurbished boxes Commissions/ Direct Marketing 190 225 18% Owned & Operated installers Unfavorable Installation National Advertising 165 70 170 75 3% 7% Richer mix of HD-DVRs New products/services Broadband connection Whole Home solution Total SAC 684 711 4% Note: Includes expensed and capitalized costs 22
Upgrade and Retention Key Trends $M YTD Thru 9/30/07 9/30/08 Change Favorable Decline in box costs Upgrades 680 480 (29)% Lower pent-up demand Retention 460 520 13% More refurbished boxes Swaps 130 100 (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
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
Declining Capital Expenditures Key Trends $M YTD Thru 9/30/07 9/30/08 Change Favorable Lower box costs Set-Top Boxes 1,159 805 (31)% More refurbished boxes Basic/Other 476 343 (28)% Completion of satellite expansion plan Satellites 149 92 (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
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
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 $56.88 21% Subscriber Acquisition Cost (SAC) $347 $400 15% 27
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 280 507 81% OPBDA Margin 23.0% 28.0% 500 bps Capital Expenditures 237 322 36% Cash Flow Before Interest & Taxes 105 218 108% Free Cash Flow 74 113 53% 28
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
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 $1.05 15% Capital Expenditures 2,052 1,572 (23)% Cash Flow Before Interest & Taxes 968 1,954 102% Free Cash Flow 592 1,249 111% 30
The DIRECTV Group (Consolidated) Strong Balance Sheet Net Debt Share Repurchases $M 12/07 9/08 2006 2007 YTD Thru 9/30/08 Cash 1,083 2,988 Shares (M) 184 86 69 Short Term Debt Long Term Debt Total Debt 48 3,347 3,395 95 5,755 5,850 Cum Shares (M) Total Cost ($M) 184 2,977 270 2,025 339 1,838 Net Debt 2,312 2,862 Cum Cost ($M) 2,977 5,002 6,840 31
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, 2008 2007 (Dollars in Millions) Cash Flow Before Interest and Taxes $1,819 $974 Adjustments: Cash paid for interest (175) (162) Interest income 31 60 Income taxes paid (585) (624) Subtotal - Free Cash Flow 1,090 248 Add Cash Paid For: Property and equipment 343 476 Subscriber leased equipment - subscriber acquisitions 432 580 Subscriber leased equipment - upgrade and retention 373 579 Satellites 92 149 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, 2008 2007 (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 2008. 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, 2008 2007 (Dollars in Millions) Cash Flow Before Interest and Taxes $1,954 $968 Adjustments: Cash paid for interest (201) (176) Interest income 64 96 Income taxes paid (568) (296) Subtotal - Free Cash Flow 1,249 592 Add Cash Paid For: Property and equipment 1,480 1,903 Satellites 92 149 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, 2008 2007 (Dollars in Millions) Cash Flow Before Interest and Taxes $218 $105 Adjustments: Cash paid for interest (29) (21) Interest income 18 14 Income taxes paid (94) (24) Subtotal - Free Cash Flow 113 74 Add Cash Paid For: Property and equipment 322 237 Net Cash Provided by Operating Activities $435 $311 33