DIRECTV Announces Third Quarter 2012 Results

DIRECTV Third Quarter Revenues Grow 8% to $7.42 Billion and Operating Profit before Depreciation and Amortization Increases 6% to $1.69 Billion

  • Revenue increase driven by strong DIRECTV Latin America net subscriber growth of 543,000 in the third quarter coupled with 4.6% higher ARPU at DIRECTV U.S.
  • Operating profit before depreciation and amortization propelled by 8% increase at DIRECTV U.S. to $1.25 billion

DIRECTV Year-to-Date Free Cash Flow Increases 35% to $1.7 Billion


DIRECTV's Diluted Earnings per Share Rise 29% to $0.90 and Stock Repurchases Total $1.22 Billion in the Quarter

EL SEGUNDO, Calif.--(BUSINESS WIRE)-- DIRECTV (NAS: DTV) today reported an increase in third quarter 2012 revenues of 8% to $7.42 billion, operating profit before depreciation and amortization1 (OPBDA) of 6% to $1.69 billion and operating profit of 4% to $1.07 billion compared to last year's third quarter. DIRECTV reported an increase in third quarter net income of 9% to $565 million and diluted earnings per share of 29% to $0.90 compared with the same period last year.

"DIRECTV delivered another strong quarter highlighted by solid revenue, earnings and cash flow growth," said Mike White, president and CEO of DIRECTV. "We continue to extend our position as the world's largest pay TV service with industry leading growth by leveraging the strength of our premier brands and distinctive products and services throughout the Americas." White added, "DIRECTV U.S.' third quarter results reflect successful execution of our long-term strategy to strike a more optimal balance between our top and bottom lines while DIRECTV Latin America continues to profitably increase market share in the rapidly growing Latin America pay-TV market by offering best-in-class service to both the advanced and middle market segments."

DIRECTV's Operational Review

Third Quarter Review

DIRECTV's third quarter revenues of $7.42 billion increased 8% principally due to subscriber growth at DIRECTV Latin America (DTVLA) and DIRECTV U.S., as well as higher ARPU at DIRECTV U.S. Operating profit before depreciation and amortization (OPBDA) increased 6% to $1.69 billion and operating profit increased 4% to $1.07 billion in the quarter compared with the same period last year. OPBDA and operating profit margin declined slightly in the quarter primarily due to higher customer service and general and administrative expenses at DTVLA. Also in the quarter, DIRECTV U.S. OPBDA and operating profit margins were higher as lower subscriber acquisition and general and administrative expenses, as well as relatively unchanged upgrade and retention costs were partially offset by increased programming costs including an extra week of NFL Sunday Ticket expense.

                           
DIRECTV Consolidated Dollars in Millions except Earnings per Common Share

Three Months Ended

September 30,

     

Nine Months Ended

September 30,

      2012       2011       2012       2011
Revenues       $ 7,416         $ 6,844         $ 21,686         $ 19,763  
Operating Profit Before Depreciation and Amortization(1) 1,686       1,584 5,598 5,196
OPBDA Margin (1)       22.7 %       23.1 %       25.8 %       26.3 %
Operating Profit 1,068 1,030 3,787 3,415
Operating Profit Margin       14.4 %       15.0 %       17.5 %       17.3 %
Net Income Attributable to DIRECTV       565         516         2,007         1,891  
Diluted Earnings Per Common Share       0.90         0.70         3.06         2.47  
Capital Expenditures and Cash Flow                                      
Cash paid for property and equipment       178         188         546         464  
Cash paid for subscriber leased equipment - subscriber acquisitions       379         470         1,081         1,155  
Cash paid for subscriber leased equipment - upgrade and retention       186         206         533         541  
Cash paid for satellites       47         108         231         156  
Cash Flow Before Interest and Taxes(2)       957         788         3,293         2,685  
Free Cash Flow(3)       319         235         1,742         1,295  
 

Net income attributable to DIRECTV increased 9% to $565 million and diluted earnings per share improved 29% to $0.90 compared with the third quarter of last year primarily due to the higher operating profit as well as a $72 million pre-tax non-cash loss in the third quarter of 2011 associated with the revaluation of U.S. dollar denominated net liabilities in Brazil. These changes were partially offset by higher income taxes in 2012 driven by higher pre-tax income and a lower effective tax rate in 2011 resulting from foreign tax credits not previously recognized. In addition, diluted earnings per share were favorably impacted by share repurchases made over the last twelve months.

Cash flow before interest and taxes2 increased 21% to $957 million and free cash flow3 increased 36% to $319 million compared to the third quarter of 2011 primarily due to lower capital expenditures and the higher OPBDA, partially offset by lower cash generated from working capital mostly due to the timing of receivables at DIRECTV U.S. Capital expenditures decreased principally due to a reduction in leased equipment and satellite payments at DIRECTV U.S. and DTVLA. Free cash flow was also impacted by higher net interest payments primarily due to an increase in average net debt balances. Also during the quarter but not included in free cash flow was cash paid for share repurchases of $1.22 billion. In September 2012, DIRECTV U.S. issued £750 million (~$1.2 billion) principal amount of 4.375% Senior Notes due 2029 and also entered into two senior unsecured revolving credit agreements - a $1.0 billion 3.5 year credit facility and a $1.5 billion 5 year credit facility - to replace a $2.0 billion credit agreement that was terminated during the month. Both were undrawn as of the end of the quarter.

Year to Date Review

DIRECTV's revenues for the first nine months of 2012 of $21.69 billion increased 10% principally due to subscriber growth over the last year at DTVLA and DIRECTV U.S., as well as higher ARPU at DIRECTV U.S. DIRECTV's year to date OPBDA increased 8% to $5.60 billion and operating profit increased 11% to $3.79 billion compared with the same period of 2011. OPBDA margin declined in the period primarily due to increased customer service, upgrade and retention and subscriber acquisition costs at DTVLA. Also in the period, DIRECTV U.S. OPBDA and operating profit margins were slightly higher as lower subscriber acquisition costs and relatively unchanged customer service spending was mostly offset by higher programming costs. Operating profit margin was also favorably impacted by lower depreciation expense at DIRECTV U.S. primarily driven by an increase in the estimated depreciable life of HD set-top boxes from three years to four years implemented in July 2011.

Net income attributable to DIRECTV increased 6% to $2.01 billion and diluted earnings per share improved 24% to $3.06 compared with the first nine months of 2011 primarily due to the higher operating profit and a $24 million increase in equity earnings, mostly from Sky Mexico. These were partially offset by higher income tax expense principally related to the increased earnings before tax and a lower effective tax rate in 2011 resulting from foreign tax credits not previously recognized, as well as higher interest expense resulting from higher average debt balances. Also negatively impacting the 2012 comparison was a $52 million reduction in pre-tax gains resulting from the sale of investments and a $39 million increase in charges associated with the early retirement of debt. In addition, diluted earnings per share were favorably impacted by share repurchases made over the last twelve months.

Cash flow before interest and taxes increased 23% to $3.29 billion and free cash flow increased 35% to $1.74 billion compared to the first nine months of 2011 primarily due to the higher OPBDA as well as an increase in cash generated from working capital mostly related to the timing of customer receipts at DIRECTV U.S. These increases were partially offset by greater capital expenditures principally driven by increased satellite payments at both DIRECTV U.S. and DTVLA, and higher infrastructure investment at DTVLA (including $51 million towards the purchase of a building in Venezuela) partially offset by lower capital expenditures on leased equipment at DIRECTV U.S. primarily resulting from the lower gross additions. The year over year comparison also reflects decreases of $92 million and $69 million for the sale of investments and dividend receipts, respectively. In addition, free cash flow was impacted by higher interest payments related to an increase in long-term debt. Also during the first nine months of 2012 but not included in free cash flow, was cash paid for share repurchases of $3.83 billion. In addition, in March 2012 DIRECTV U.S. issued $4.0 billion of debt consisting of $1.25 billion in 2.40% Senior Notes due 2017, $1.5 billion in 3.80% Senior Notes due 2022 and $1.25 billion in 5.15% Senior Notes due 2042. In May 2012, DIRECTV redeemed $1.5 billion of its outstanding 7.625% Senior Notes due 2016. In September 2012, DIRECTV U.S. issued £750 million (~$1.2 billion) principal amount of 4.375% Senior Notes due 2029 and also entered into two senior unsecured revolving credit agreements totaling $2.5 billion to replace a $2.0 billion credit agreement that was terminated during the month. Both revolving credit agreements were undrawn as of the end of the period.

SEGMENT FINANCIAL REVIEW

DIRECTV U.S. Segment

Third Quarter Review

In the quarter, DIRECTV U.S. revenues increased 6% to $5.77 billion compared with the third quarter of 2011 primarily due to strong ARPU growth and a larger subscriber base. Net subscriber growth of 67,000 decreased from the prior year period principally due to lower gross subscriber additions as well as an increase in the average monthly churn rate. Gross additions declined mainly due to a greater focus on higher quality subscribers and stricter credit policies, as well as lower contributions from the Telco sales channel. The higher churn rate in the quarter was principally driven by a contract dispute with a large programmer that resulted in the removal of several channels for nine days in the third quarter. ARPU increased 4.6% to $96.41 mostly due to price increases on programming packages, higher advanced service fees and an additional week of NFL Sunday Ticket revenues in the quarter, partially offset by increased promotional offers to new and existing customers. DIRECTV U.S. ended the quarter with 19.98 million subscribers compared with 19.76 million subscribers reported for the quarter ended September 30, 2011.

                     
DIRECTV U.S.

Three Months Ended

September 30,

     

Nine Months Ended

September 30,

Dollars in Millions except ARPU       2012       2011       2012       2011
Revenues       $ 5,769         $ 5,421         $ 16,915         $ 15,843  
Average Monthly Revenue per Subscriber (ARPU) ($)       96.41         92.21         94.27         90.48  
Operating Profit Before Depreciation and Amortization(1) 1,251       1,153 4,246       3,962
OPBDA Margin (1)       21.7 %       21.3 %       25.1 %       25.0 %
Operating Profit 876 800 3,130 2,737
Operating Profit Margin       15.2 %       14.8 %       18.5 %       17.3 %
Capital Expenditures and Cash Flow                                
Cash paid for property and equipment       137         159         377         404  
Cash paid for subscriber leased equipment - subscriber acquisitions       184         222         462         546  
Cash paid for subscriber leased equipment - upgrade and retention       79         91         209         236  
Cash paid for satellites       23         35         139         83  
Cash Flow Before Interest and Taxes(2)       861         744         3,018         2,357  
Free Cash Flow(3)       275         267         1,773         1,155  
Subscriber Data (in 000's except Churn)                                
Gross Subscriber Additions       1,107         1,280         2,911         3,286  
Average Monthly Subscriber Churn       1.74 %       1.62 %       1.57 %       1.57 %
Net Subscriber Additions       67         327         96         537  
Cumulative Subscribers       19,981         19,760         19,981         19,760  
 

Third quarter OPBDA increased 8% to $1.25 billion and OPBDA margin improved to 21.7% principally due to lower subscriber acquisition costs related to the reduction in gross additions, reduced general and administrative expenses primarily due to lower bad debt expense and relatively unchanged retention and upgrade costs. These improvements were partially offset by higher programming costs mostly related


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