DirecTV (DTV)

April 14, 2009 CABLE & SATELLITE Henry Fund Research DIRECTV Group, Inc. (DTV) Iana Stahov iana-stahov@uiowa.edu 1-Year Stock Price Movement (as of 4/14/2009) Investment Recommendation Current Price BUY $23.95 Target Price Range $29.19-30.38 INVESTMENT THESIS (+)Growth in the HD market and associated demand make DIRECTV’s superior offering stand out compared to cable operators’ much weaker HD inventory. With 30% of programming currently in HD, including 640 channels, it is ahead of even the major cable operator – Comcast, with 60 HD channels. (+)The Latin American market represents an untapped opportunity for the satellite industry, and will provide DIRECTV with a revenue cushion given the oversaturated U.S. entertainment TV market and intensifying domestic competition. Key Stock Statistics 52-Week Price Range Market Capitalization (B) Shares Outstanding (B) Institutional Ownership 60-Month Beta Dividend Yield Price/Earnings (ttm) Price/Book Price/Sales ROA (ttm) ROE (ttm) Projected 5-Year Growth $17.7-29.1 $24.36 1.02 46.1% 0.85 N/A 17.6 5.1 1.3 10.8% 27.2% 12.0% (+)DIRECTV holds the highest customer satisfaction rating (68)1 in the industry compared to an average of 62 for cable. This has translated into a much lower churn rate (1.53) compared to DISH’s 1.86 and cable’s 2.00. (+)Strategic partnerships with Verizon and other telecom companies have the potential to access a larger market by bundling satellite TV service in their packages. This offers DIRECTV the vertical bundling scale it needs. (+)DIRECTV has a strong balance sheet (high interest coverage ratio of 14x and net debt to EBITDA of 1.2x only). Further satellites construction, critical for assumed growth rates, should not be hindered by credit limitations. (-)Satellite and cable TV offerings are slowly converging pointing to difficulties in preserving satellite’s competitive advantage. With cable companies adding advanced services (DVRs. VOD, etc) and HD inventory, DIRECTV could find it difficult to differentiate. (-)The company offers a sole video product, whereas both cable and telecom companies attract customers with their discounted bundles. While this might hurt their margins, in the long term, it has the potential to attract a wider customer base allured by the “triple play” option of video, data, and voice. EPS ($) Year EPS 2006 1.12 2007 1.21 2008 1.37 2009E 1.65 2010E 2.04 2011E 2.55 All earnings represent earnings from operations and have been filtered from net nonrecurring gains. Valuation Models Discounted Cash Flow Economic Profit Relative P/E Relative P/S $35.03 $35.03 $23.98 $30.35 Important disclosures appear on the last page of this report. Henry Fund Research EXECUTIVE SUMMARY THE UNIVERSITY OF IOWA Henry B. Tippie School of Management 41% stake in DTV (Feb. 2008) and purchasing 78M extra shares (Apr. 2008), Liberty Media Corp. now The cable and satellite industry’s major players are owns 56.3% of DIRECTV (it has agreed to limit its 2 bound for an intense competition both within the voting rights to 47.9%) . industry and with entrants from related industries, such as telecom companies. The battle between cable The company operates in two major segments: operators (providers of digital cable), satellite TV DIRECTV U.S. (serving the United States) and companies, and telecoms is to be focused on providing DIRECTV Latin America. As the 2008 revenue mix HD programming variety and superior bundling offering. below indicates, each segment generates profits Triad bundles of TV, internet and phone services, and roughly at the same ratio as the segment’s contribution extra features such as HDTV, DVRs, and VOD (video- to revenues, with DIRECTV U.S. at 82% of the total. on-demand) are set to become key differentiation Segments can also be compared based on the three points. Two trends can be observed: telecoms key metrics: churn rate, ARPU, and SAC. (traditional phone companies) entering the residential Key Statistics: DIRECTV U.S. DIRECTV L.A. TV/Internet/phone market and cable operators entering % of Subscribers 81.9% 18.1% the commercial segment market, traditionally served by % of Revenues 87.9% 12.1% 87.6% 12.4% the telecoms. Industry barriers are expected to get % of Operating Profits 1.47% 1.78% increasingly more blurry. With many TV entertainment Churn rate (mo.) $ 561 $ 171 providers, differentiation becomes the key in attracting SAC ARPU (mo.) $ 83.90 $ 55.07 and retaining customers. Metrics such as churn rate, ARPU (average revenue per user), and SAC Note: Churn rate - avg. montly # deactivat ed subscribers (% of total avg.) (subscriber acquisition cost) are closely monitored and SAC - subscriber acquisit ion c osts; SAC excl. s et-top boxes expenses ARPU - average revenue per user balanced to achieve leading market positions Source: Data from DTV 2008 10-k, http://sec.gov We anticipate a highly competitive landscape for DIRECTV going forward. However, its market positioning as a leading HDTV provider and scale obtained from strategic partnerships with telecoms and its Latin American business, are expected to help it weather the storm. Given the duopoly environment in the satellite industry, we do not anticipate DISH to hinder DIRECTV’s market share as the latter displays a better ARPU, SAC, and churn rate – key operational success metrics in the satellite industry. Some downside is anticipated from lack of bundling offering, but we expect DIRECTV to enhance its position by adding more advanced services to meet subscribers’ increasing preference for flexible TV viewing. The company offers one of the most extensive international programming packages, which we assess as a highly value adding item for a consumer seeking to access cross-border TV programming. Some challenges are anticipated on the cost-control side as higher subscriber acquisition and retention costs will reduce margins, but we see that as an industry-wide rather than companyspecific development. Along with currently low market valuations for DIRECTV, it presents an opportunity for the investor seeking a promising growth-company stock. This upholds our “Buy” recommendation. Decreasing the churn rate and increasing ARPU are major priorities for a cable/satellite company’s operational viability. Subscriber acquisition costs are a key costs driver, but in the currently competitive landscape DIRECTV targets an aggressive marketing campaign and extra services to attract subscribers; hence, we project U.S. SAC to grow at low doubledigits in the next couple of years. Given our 2009 estimates for DTV’s U.S. segment of $1,022 ARPU (+4% YoY) and $629 SAC (+12% YoY), subscriber acquisition costs can be recouped in 1.62 years. DIRECTV has one of the most extensive program offerings in the MVPD (Multichannel Video Programming Distributor) industry, with 30% of the offering in HD, as can be observed from the product mix chart below2: COMPANY DESCRIPTION DIRECTV is a market leader in providing digital television entertainment by acquiring, promoting, selling and/or distributing it via satellite to both residential and commercial consumers. After acquiring News Corp.’s Source: Data from DTV 2008 10-k, http://sec.gov 2 Henry Fund Research DTV # of Channel s - by type T OT AL L ocal Local SD Local HD THE UNIVERSITY OF IOWA Henry B. Tippie School of Management channels (including major national ones). The digital format offers hundreds of additional cable channels, where subscribers can add such features as premium channels (HBO, Showtime, etc.), VOD, pay-per-view, DVRs, and HDTV. Cable has been growing its HD offering while still significantly lagging behind satellite in that category. Satellite, however, is only able to offer a sole video product unless partnering with a telecom. Satellite-Telecom partnerships Satellite companies have a similar offering to digital cable (which has been making differentiation more difficult) with signals transported to U.S. households via DBS technology (direct-broadcast-satellite). While their offer is typically only video, some satellite companies have been partnering with telecoms forming bundled services. In 2008 DIRECTV entered such a partnership with AT&T where the latter would market a triple bundle including DIRECTV services starting February 2009. With AT&T covering approx. 44M households this represents a significant penetration opportunity for DTV2. DISH had a contract with AT&T earlier but it was terminated in 2008. We project that to be a strategic move by AT&T that is looking to extract the best possible price from the two satellite companies by having them compete for AT&T’s business. Overall, telecoms are gaining bargaining power over the satellite companies that desperately need to offer more integrated services to include voice and data like cable companies do. A market leader such as DIRECTV is the one best positioned to still extract a good deal from these partnerships. HD/ VOD and International Programming Expansion HDTV offering becomes a key differentiation ground for cable and satellite companies. As of Oct. 2008, both DISH and DIRECTV have offered more than 100 HD channels and availability of such coverage for more than 70% of U.S. households3. Particularly, an enhanced and larger HD channels inventory has been a major focus of DIRECTV’s recent marketing campaign. The company announced plans to expand its HD channels to 150 national and 1500 local from current 140 and 500, respectively2. In essence, this will cover most of the U.S. as local channels in most major markets (90% U.S. households’ penetration) will be offered in HD. DIRECTV has also announced plans to launch a “nontraditional VOD offering that allows viewers to play back content downloaded on their set-top boxes3. This will mark its entry in the video-on-demand services enhancing its competitive position and differentiated profile. The company also announced plans to expand its international programming targeting underserved markets in the U.S. Current inventory includes 55 Spanish channels and 70 international channels in ~2,000 1 ,50 0 1,000 500 Bas ic En te rtai nm en t N ationa l H D Spa nish Spo rts Ne two rks Pre mi um M ovie Pay- per-view Source: Data from DTV 2008 10-k, http://sec.gov 2 00 1 30 1 25 50 40 31 Growing programming costs in the U.S. (a point of concern for the entire industry) and intensifying competition that requires aggressive marketing and other expenses associated with subscriber acquisitions, result in a slightly lower operating margin (excl. depreciation) for the DIRECTV U.S. segment. The chart below presents the FY 2008 cost structure comparison for both segments: Source: Data from DTV 2008 10-k, http://sec.gov RECENT DEVELOPMENTS Cable and satellite companies carry some distinct services with their TV entertainment which they use to differentiate their offers. A few recent developments have shaped this industry making differentiation more challenging. “Triple Play” Cable operators have been offering “triple play” or the bundling of video, data and voice services at discount prices from their stand-alone equivalents. While that has affected their bottom-line, it is seen as a necessary tradeoff for better customer attraction and retention. Video service comes in two forms: basic (analog) and digital; Internet download speeds range from 2-10Mbps. Basic signals include local broadcast as well as educational and governmental channels. Expanded Basic, as we know it, offers dozens of additional 3 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management other languages2 (Cantonese, Filipino, Russian, etc.), cut their cable packages than other discretionary items, such as leisure travel, new clothing, appliances, etc. considered leading packages in the market. DTV’s aggressive subscriber acquisition expenses and With these recent developments and increasing a higher churn in its Latin American market (more demand for HD picture quality, cable companies have volatile in a global downturn than the U.S. one) drove been trying to keep up with satellite and telecom most of the negative surprise. companies. The big five MSOs or Multiple System Extrapolating from the 2008 trend, we estimate a Operators (Comcast, Time Warner Cable, Cablevision, slightly lower 2009 U.S. churn rate due to aggressive Cox and Charter) have been switching to all-digital upgrade and retention efforts (+.2% YoY in spite of a 3formats from analog to free up bandwidth for advanced year downtrend due to economies of scale). th services such as HD and VOD. RCN Corp. (6 largest cable operator) called its project of migrating to alldigital “Analog Crush” and has been expanding it in its major markets since launch3. The comparison below across cable and satellite in terms of HD inventory helps understand cable operators’ urge to enhance their HD position. Meanwhile, this is a key strength for DIRECTV, as it is the provider of the largest HD offering by a considerable margin. 2008 Targets HD Channels HD VOD choices CMCSA 60 1000 TWC 50 300 DTV 640 4500 Source: Data from Yahoo!Finance, Analyst Estimates, http://finance.yahoo.com Source: CMCSA, TWC and DTV Latest 10-k’s, http://sec.gov Note: A sample consisting of the major public cable operators (MSOs), the two satellite companies (DTV-DISH duopoly), and major telecoms that entered the cable/satellite arena (AT&T and Verizon) is used throughout this report to emphasize key operational/ financial metrics across these competitors to capture who has/will have the leading edge. Companies represented are the largest players by market capitalization with business in the U.S., as summarized below: Symbol CMCSA LMDIA TWC CVC MCCC CHTR DTV DISH T VZ Company Comcast Corp. Liberty Media Corp. Time Warner Cable Inc. Cablevision Systems Corp. Mediacom Comm. Corp. Charter Comm. Inc. DISH Network Corp. DIRECTV Group Inc. AT&T Inc. Verizon Comm. Inc. Mkt Cap (B) $ 35.63 $ 9.09 $ 7.54 $ 3.50 $ 0.34 $ 0.01 $ 20.35 $ 4.48 $ 137.61 $ 77.95 Sub-industry CATV Systems CATV Systems CATV Systems CATV Systems CATV Systems CATV Systems Satellite Systems Satellite Systems Telecom Services Telecom Services Revenue trends: DTV positioned higher The pace of revenue growth has either flattened or tilted downward for the major cable and telecom companies, as can be observed in the chart below. DIRECTV is the only company that posted a faster growth in the latest quarter. We interpret this being due to its intensive marketing efforts and emphasis on the rich HDTV offering. When consumers feel they have to cut discretionary spending, they seek inexpensive forms of entertainment as a substitute, such as smallscreen entertainment or TV. DIRECTV has addressed that need in a timely manner. Source: MSN Money Deluxe Screener Data, http://moneycentral.msn.com Latest EPS Results The recent quarterly earnings round offered a few surprises. Except for Charter Communications (CHTR), a much smaller player in the industry, all other cable operators (Comcast, Time Warner Cable, and Cablevision) had a positive EPS surprise in the range 17-32%. Both satellite companies had a mild negative % surprise. Telecom faired similarly. This indicates that the major cable operators are in a stronger position than the markets assessed them and the downturn did not impact them to a significant extent. Overall, this is expected as TV entertainment is a low-budget discretionary expense and consumers are less likely to Source: Data from Companies’ 2008 10-k’s and Latest 10-q’s, http://sec.gov INDUSTRY TRENDS Rivalry: Intra-industry Competition Two major preference trends in customers’ viewing habits: enhanced video quality and ability to control one’s viewing schedules have pushed industry players to race in meeting that demand. Cable companies 4 Henry Fund Research have substantially increased their digital video offering through all-digital cable (besides the traditional basic or expanded), VOD and DVR services, which allowed them to compensate somewhat for a weaker HD offer. The emergence of their new digital platforms and bundled services has been attracting customers seeking digital formats and a one-stop shop for their media services needs. Both cable and satellite are racing to introduce more advanced services such as DVRs that achieved a 40% penetration not only for the two major satellite companies but also for major MSOs such as Comcast, Time Warner Cable, and Cablevision. This implies an even more level playing field for all parties, and satellite companies will have to start looking for ways to retain their customers by offering more perks. Long-term this will lead to a squeezing of margins due to SG&A increase, which we estimate at +500-600bps in 2009-10. Substitutes: Threat of Telecoms Telecoms’ recent strategy has been to offer all video, voice, and data services to a residential unit via a onestop shop. Verizon’s FiOS fiber-optic internet service has been gaining popularity due to high speed beating cable’s regular internet offer. As of Q3 2008 it had a 24% penetration. AT&T has two successful initiatives in the residential domain: AT&T U-verse TV and AT&T Homezone. The former is a video service deployed to 9M households in early 2008 and projected to reach 30M households by 20103. The uniqueness of this offer is that it provides a broad range of entertainment services through only one set-top box: satellite TV, DVR (can be programmed remotely), VOD, caller ID on TV, photo-sharing, etc. Overall, telecom carriers have been bundling their voice and Internet service with satellite TV dwarfing the cable industry’s efforts to consolidate its market share. Their fiber-based video offering and ultra high-speed internet services could increase churn for cable and stand-alone satellite companies (without partnerships with a large telecom). Barriers to entry: Regulation and market saturation While not as regulated as the broadcasting companies, cable and satellite are subject to some restrictions as well. Cable companies are allocated franchise rights over certain territories; hence entry of new operators is more difficult (Competition Act of 1992). They are required to carry the signal of local broadcasting TV stations (the reason these stations are part of cable packages). Broadcasters can elect either mandatory carriage or retransmission consent every three years. Similar to the above, satellite companies are also required to retransmit local TV stations, and they have to carry all broadcasters in an area if they carry any one of them. Unlike cable companies, since they are national TV service providers, satellite companies are not subject to local franchising regulations. THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Overall, the threat of new entrants is moderate4 although higher than for broadcasters: cable companies typically have significant channel capacity while broadcasters have limited frequencies, which also limits the number of players. Market saturation is high and differentiation is challenging. Satellite entry barriers are much higher due high risk and set-up costs associated with the build up of a satellites’ fleet in space. Commercial Segment Entry A few major cable operators have been seeking new ways to capture revenues given the over-saturated residential market they currently serve and share with satellite companies. While the commercial market has been historically underrepresented in cable operators’ revenue mix, an uptick in that segment became prominent since 2007 (chart below3) as Cox Communications, Cablevision, and Time Warner Cable took the lead in developing their commercial segments. Since 2007 and through 2008 they channeled significant financial resources and human capital for that purpose. Their commercial offer focuses on highspeed-data and phone services, with relevant video offering to be included. In essence, this is a response to telecoms’ entry in the residential TV entertainment market traditionally dominated by the cable companies. Now cable companies are targeting the commercial market typically served by the major telecom companies. This could help strike a balance of power between the two categories of players. Source: Industry Surveys: Broadcasting, Cable & Satellite. Standard & Poor’s3. Also, as this trend continued though 2008, we see it as a positive development for the satellite companies: as MSOs focus more of their resources in the commercial market and away from residential one, DIRECTV could use that to gain more ground in the residential TV services by continuing its aggressive marketing campaign encouraging “upgrade to HD”. MARKETS AND COMPETITION Given the above-mentioned trends shaping the cable and satellite industry’s competitive landscape, we 5 Henry Fund Research project both new opportunities and new challenges for the key players. While Comcast and DIRECTV emerge as key leaders in their respective markets (also seen from the higher valuations assigned to them in the chart below8), they will be challenged by shifting technologies that will require increasing flexibility to adapt and take the lead. DISH has come down from its 2006-07 valuation peaks as the markets recognized the prevalence of DIRECTV. We also see this industry considerably dependent on strategic partnerships with the telecoms. While DIRECTV has been more successful in that area, we expect telecom’s bargaining power to challenge it upon contract renewals. THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Cost of revenues as a percent of sales stayed flat for most companies, and we can see a negative correlation between DISH’s and DTV’s levels: while DTV is gaining market share, DISH is losing its buyer power with programming suppliers, which translates into higher costs. The premium programmming and larger scale of HD will eventually translate in higher costs of revenues for both cable and satellite. Source: Morningstar Data. Key Ratios. http://morningstar.com Source: Morningstar Data. Valuation Ratios. http://morningstar.com The battle for higher ARPU and/or a higher share of the subscriber base has stratified the market players in several categories (chart below8). DTV has the lead on growth and DISH is at the bottom of the sample. This shows a strong negative correlation between the satellite companies’ revenue growth and that in this oligopoly one will lead the market by a high margin. The question is whether DTV will be able to translate high revenue growth in operating margin growth – we believe margins will be squeezed over time as satellite companies are forced to discount their prices somewhat to stay competitive with the digital cable offer. This development will hurt short-term margins but give back via a vast and loyal subscriber base, also more willing to upgrade. SG&A reflects subscriber acquisition costs and retention costs - expenses needed to establish and preserve the customer base. Verizon and AT&T are on the higher level of SG&A mostly due to their fierce intraindustry competition and ongoing initiatives in marketing new technologies and solutions for the video/voice/data bundles. DTV outpaces DISH in these expenses, which, most likely, allows it to establish a stronger market presence. Source: Morningstar Data. Key Ratios. http://morningstar.com Operating income margins across major players have been increasing and converging as operating platforms become similar. Unlike the majority, DTV has seen declining margins, due to its growth phase. We expect its operating margins to be pushed lower while it battles cable companies and tries to maintain a balance of power with the telecoms. That effect, however, has likely been priced in already. Source: Morningstar Data. Key Ratios. http://morningstar.com 6 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Cable operators features mostly negative ROA9, while the opposite is true for telecoms and satellite companies. The latter have the best metrics, which we expect going forward, although flatter. Source: Morningstar Data. Key Ratios. http://morningstar.com Debt-to-equity ratios in the cable/ satellite and telecom industry9 hoover around 1.0x or 50% of the balance in debt. DTV has one of the highest ratios but we do not see that as a concern due to its strong operating cash flows. Its Net Debt/ EBITDA was 1.2x (industry recommended: <5), and its EBITDA/ Interest was 13.9 (industry recommended: >3)3. DTV’s debt maturity over the next 5 years requires payments of: $108M, $308M, $108M, $20M, and $2,796M. These would not constrain DTV as its 2008 operating cash flow was $3.8B and forecasted to grow at 5-yr. CAGR of 12.7%. Source: MSN Money Deluxe Screener Data, http://moneycentral.msn.com ECONOMIC OUTLOOK GDP. We expect the current economic downturn to be a longer one, primarily due to the effect of massive layoffs on the largest component of GDP – Consumption. As consumers’ savings deplete during months of unemployment, we expect their purchasing behavior to deteriorate further due to shrinking budgets. We expect a very flat bottom stretching over 2H 2009 and a more notable recovery in 1H 2010 with annualized real GDP growth above 1.5% by Q2 2010. While Exports, another component of GDP, have been fueling it for the last couple of quarters, given the global reach of the recession and its lagging effect abroad, we do not see that component significantly boosting U.S. GDP any time soon. Standard and Poor’s predicts “the U.S. recession is likely to be the deepest – but also probably the shortest – of the three” (reference to Europe and Japan). The recently passed stimulus package would have some beneficial impact over the long-term (except that it could cause hyperinflation), but we see these effects only later in 2009-early 2010. Source: MSN Money Deluxe Screener Data, http://moneycentral.msn.com Liquidity is more of a concern for DISH and some smaller cable operators. Surprisingly, CMCSA has low Given that cable and satellite companies are not highly liquidity as well. dependent on advertising revenues (hence, on overall small business health), we do not see the downturn affecting them significantly. Small screen entertainment is a discretionary item least likely to be affected by budget cuts, since it will serve as a substitute for bigger-ticket entertainment. Source: MSN Money Deluxe Screener Data, http://moneycentral.msn.com 7 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management to increase to 5.8% in 2009 and drop to 3% in 2010125. In retrospective, this is beneficial if it helps boost the longer-term saving rate as the opposite is partly what drove the current crisis. In the short-term however, is generates distress for both the producer and consumer. The recently passed $700B+ stimulus package is expected to boost spending. As consumers are still cautious, we expect somewhat increased spending to benefit smaller-ticket items, such as upgrading on cable/ satellite packages. Source: Historical data: FRED Database. Forecast: Analyst. Interest rates/ Inflation. Fed’s once most relied-on monetary tool – the federal funds rate - has failed to spur more lending. While the fed funds rate is at 00.25%, credit default spreads have widened extensively with even investment-grade bonds at 500 bps above the Treasury yields. Given that satellite companies invest significantly in expensive and risky satellite construction and launches, their need for debt could lock them into higher interest rates for a few years. However, given DTV’s high interest coverage ratios, we do not expect that to endanger its financial health. Source: Historical data: FRED Database. Forecast: Analyst. CATALYSTS FOR GROWTH Given that cable and satellite companies are all subscriber-based businesses, they have a couple of key value drivers: subscriber base growth, churn rate reduction, ARPU growth, and SAC reduction or optimization. The following compares DIRECTV and DISH across the above metrics and across time to project future performance. Source: Historical data: FRED Database. Forecast: Analyst. Unemployment. Standard & Poor’s expects a 9% unemployment rate by early 2010. Consumers keep getting hit by layoffs as businesses shed employees to remain solvent. Given massive anticipated business budget cuts, we expect a weak commercial market segment, one that some cable companies recently entered. Subscriber Base Growth Attraction and retention of subscribers are major value drivers in the cable and satellite business as their primary revenue source are subscription fees, and not advertising revenues as is the case for broadcasters. Given the duopoly in the satellite TV sub-industry, the battle between DISH and DTV is going to shape a leader. DISH has lost the pace of its subscriber base growth, while DTV picked up pace in 2007-08. As of FYE 2008, DTV and DISH had 21.5M2 and 13.7M subscribers, respectively. DISH’s share represents 14% of the pay-TV market6. We anticipate DTV to continue its lead, while growth will slow down as its subscriber base approaches the critical saturation mass. The Latin American market is expected to pick up pace after being hit by the global downturn, adding to growth through recovered purchasing power. Source: Historical data: FRED Database. Forecast: Analyst. Consumer spending. While consumers are staying away from large purchases, the saving rate is expected 8 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Source: DTV and DISH 2005-08 10-k’s, http://sec.gov ARPU (avg. revenue per user) DIRECTV is set on a higher ARPU growth than DISH (gaining ground not just in volume but pricing as well), but both lag behind Time Warner Cable’s ARPU growth that picked up pace in 2008. We project cable ARPU to stay flat to slightly up: a major ARPU driver would be HD and other advanced services penetration, but bundling and associated discounts (a widespread practice in the highly competitive and hard-todifferentiate lanscape) will drive ARPU back down. DTV, DISH and TWC ARPU’s are now at $78.7, $69.36 and $102.57, respectively. Source: DTV and DISH 2005-08 10-k’s, http://sec.gov Churn rate management is another key driver, where DTV is positioned much better that DISH (the spread is 0.33% between the two). DTV’s monthly churn is not only lower than DISH’s (1.53 vs. 1.86) but it is somewhat stabilized compared to DISH’s ever increasing churn (good business would display declining churn over time). The slight uptick in DTV’s avg. churn is due to a 0.4% increase in its Latin American segment churn (1.38 to 1.78%). We expect this metric to improve (decline) as the global recovery offers relief to the consumers in that market. Both companies, however, have churn rates lower than average for satellite (2.5%) and even lower than the avg. for cable companies (2.0%)3. Source: DTV, DISH, and TWC 2005-08 10-k’s, http://sec.gov SAC (subscriber acquisition costs) typically include equipment, installation, marketing and sales and various retail subsidies expenses. Higher SAC and further upgrade and retention costs are both tools to decrease the churn rate. Alarmed by its losses in subscriber base DISH turned around its trend of declining SAC to a much higher SAC growth than DTV. SAC declines after the early growth phase but the reversal can be caused by the emergence of a strong competitor. Eventual market saturation (the reach of critical mass in subscribers and brand-recognition) will drive SAC down. Not capitalizing set-top boxes expenses, DTV SAC is now at $715 vs. DISH’s $7206. We anticipate higher SAC growth in 2009 for both companies, while DTV is sxpected to fare better due to its superior brand positioning. Source: DTV and DISH 2005-08 10-k’s, http://sec.gov INVESTMENT POSITIVES DIRECTV carries a diverse TV programming offering with one of the largest HD inventory in the industry. As consumers’ tastes shift even more toward premium TV viewing, we expect DTV’s market leadership and loyal customer base to consolidate. Cable companies are not expected to catch up in the HD offer any time soon. Although carrying relatively higher debt than other industry players, DTV has maintained its financial flexibility. It has a very strong cash position and is continuing its share repurchase program. It has retired about 29% of its shares over the last 3 years without any strain to its balance sheet. 9 Henry Fund Research DTV has a healthy satellite fleet (12 units), 11 of which are owned, and it plans to launch the 12th satellite in 2H 09. Its operating cash flows are expected to grow at 12.7% 5-yr. CAGR. This indicates strong financing ability to support key investments and growth going forward. DIRECTV has the highest customer satisfaction ratings in the cable and satellite industry. Due to the subscriber-driven feature of its business, we expect this to become a significant competitive advantage as subscribers’ power and their demand for high quality service increase. THE UNIVERSITY OF IOWA Henry B. Tippie School of Management DTV is frequently associated with, we get a Relative P/E value of $23.98. The Relative P/S valuation returns a $30.35 current implied value. Our target average is at $29.79 with a +/- 2% range of $29.19 - $30.38. Revenue assumptions Our revenue forecast is based on revenue decomposition in DIRECTV U.S. and DIRECTV Latin America with further separate forecasts for ARPU and subscriber growth. A slight dip in 2009 is followed by a partial recovery to pre-recession growth. We do not anticipate similar high growth rates going forward due to the intense competition. Key assumptions are based on a terminal 2% growth in ARPU (in line with expected inflation) and 1.2% growth in the subscriber base (est. 1% population growth + some growth from transferring market share form cable companies). DIRECTV’s higher pace of revenue growth relative to its cable peers indicates that DTV is fulfilling an unmet customer demand. Its strong position in the Latin America market will fuel future growth as the Cost structure assumptions purchasing power in that market restores. We anticipate a slight uptick in SG&A costs in the coming years, primarily driven by higher SAC to attract INVESTMENT NEGATIVES subscribers away from cable companies. On the costs of revenue side, we assume steadily increasing DIRECTV’s lack of triple-play bundling options that broadcast programming costs as % of revenue become a standard in the industry could potentially (growing supplier power). This is already a point of prevent it from maintaining its growth pace. Higher concern in cost management for the industry, and we churn rates could emerge as customers discover the anticipate that going forward. Also, we project higher benefits of a one-stop shop for their media needs via upgrade and retention costs for the Latin America telecom or cable companies. segment to tackle the higher churn rate in that market. Terminally, we expect SG&A costs to decline by 2% Telecom companies now present a threat for both from current 24% and Costs of Revenue to stabilize at cable and satellite. Their offer is enhanced by about 2.5% higher, leading to slightly lower operating higher internet speeds and their buyer power in and net margins. acquiring programming. Maintaining competitive advantage could become challenging. Financial profile assumptions We expect DTV to maintain its target leverage at 22%, DIRECTV satellites are mostly uninsured due to very which was fairly constant historically except for the onehigh costs, and if they are, insurance covers only time high level (we assume) in 2008 at 34%. DTV does through launch. Thus, dangers of satellite losses not require a higher leverage as it has strong operating present a substantial downside risk for DIRECTV. cash flow projected to grow at 12.7% 5-year CAGR. A Evidence of increasing debris in space, although certain debt level is required to support its construction with low probability, could damage expensive of satellites. We project a slight uptick in PP&E CapEx 2 equipment (satellite construction can take 1.5 yrs.) . as % of revenue that we see needed as DTV significantly expands it customer base going forward. VALUATION Our estimated DIRECTV share value using the DCF/ EP valuation is $35.03. This represents a 20% premium over its peak price ttm ($29), registered right before it went into a downfall with the rest of the market. Our estimate carries a 46% premium over the current price of $23.95. We see that as a very low valuation for DTV given its market position and recommend a “Buy” on the stock. Other valuation techniques give lower values, which is due to cross-industry lower than usual multiples. Based on a peer group of CATV companies, DISH, and a few Comm. Equipment companies that Our WACC estimate is based on a 36-mo. rolling Beta (0.96) and a 5% market risk premium (based on Henry Fund Analysts’ consensus going forward). The sensitivity analysis reveals even with MRP as high as 5.8% and subscriber growth as low as population growth of 0.95%, the implied price is still at 24% premium over the current price. Also, assumed terminal churn rate in Latin America has minimal impact on the price such that a 0.4% swing barely moves the stock price by $0.50. 10 Henry Fund Research Buy and Sell discipline Our sell discipline would be based on: declining or negative net subscriber additions, increased churn rate in spite of higher SAC and upgrade and retention costs, and trouble/ losses of satellites either upon launches or during the early years of operation. Our buy discipline would be enforced with further decrease of the churn rate, diversification of product offering, and recovery in DTV’s Latin American segment growth that has been hit severely by the global economic downturn. THE UNIVERSITY OF IOWA Henry B. Tippie School of Management REFERENCES 1. DIRECTV Group, Inc.: Company Profile. (Nov. 25, 2008). Business Source Complete database: DATAMONITOR. DIRECTV Group Inc. 2008 10-K Report, http://sec.gov Industry Surveys: Broadcasting, Cable & Satellite. Standard & Poor’s (Feb. 5, 2009). Net Advantage Database. Industry Profile: Broadcasting and Cable TV in the United States. (Sep. 2008). Business Source Complete database: Datamonitor. Economic Insight. Vital Signs: Economic Growth Looks Even Weaker. Standard & Poor’s (Feb. 5, 2009). Net Advantage Database. DISH Network Corp. 2008 10-K Report, http://sec.gov Time Warner Cable 2008 10-K Report, http://sec.gov Morningstar Historical Data: Valuation Ratios. Key Ratios. http://morningstar.com MSN Money Sock Screener. http://moneycentral.msn.com 2. 3. 4. 5. 6. 7. 8. 9. IMPORTANT DISCLAIMER This report was created by a student(s) enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. The intent of these reports is to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report. 11 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management DIRECTV Group, Inc. Key Assumptions of Valuation Model Ticker Symbol Current Stock Price Marginal Tax Rate Normal Cash (% of Revenue) Target Leverage (% of Assets BV) Risk‐Free Rate Inflation Rate Market Risk Premium Beta Cost of Debt Cost of Equity Cost of Preferred WACC Terminal Subscriber Growth Terminal Revenue/ Subscriber growth Implied Terminal Total Rev. Growth Net Subscriber Additions (Terminal) Interest Income ‐ Interest Rate (L‐T) Interest Expense ‐ Interest Rate (L‐T) Non‐numeric assumptions: Intense competition from cable MSOs/ telecom and incr. programming costs will drive up cost of revenues as % of sales. DTV $   23.95 35.5% 5.0% 22.0% 3.64% 2.00% 5.00%        0.96 10.34% 8.45% N/A 8.08% 1.2% 2.0% 3.2% 1.2% 3.0% 6.5% As of 4/14/2009 Derived from the income tax provision and adjusting only for operating recurring items 3‐yr. avg. cash balance is 11% (same as DISH), we assume normal for industry at about half of that 3‐yr. avg. excl. 2008 (assumed to be aberation year); 2005‐07 had a ~const. leverage at 22% 30‐Yr. T‐Bond (as of 4/14/2009) Henry Fund Analysts' consensus (13 analysts) Based on 36‐mo. rolling Beta (more representative: DTV discont. network systems since 2006) Moody's BB rating; est. default spread of 6.5% Represents both Total and U.S. Net Subscribers Growth (Latin America slightly higher at 1.4%) Represents U.S. Revenue/ Subscriber Growth (Latin America assumed lower at 1.5%) Results from applied Terminal subscribers and revenue/ subscriber growth in both segments Approx. at 1% U.S. population growth + some mkt. share growth Currently high interest rates are expected to return to nomal levels of 7% within 2 years Higher subscriber acquisition costs will eventually stabilize as a loyal customer base is established (low churn; mkt. saturation). With market saturation in 5 years, DTV is expected to focus efforts on customer retention, slightly incr. their % of revenues. As a result of the above cost shifts, the operating margin will decline until flattening in about 5 yrs. at 11‐12%. After a slow‐down in DIRECTV Latin America growth in 2008‐09, the segment is expected to partically recover its pace going forward. Treasury stock serves as a plug on the balance sheet ‐ in the event of excess cash it triggers share repurchases. 12 Henry Fund Research DIRECTV Group, Inc. By-Segment Historic and Forecast Data FYE December 31 Revenue ($ Millions) THE UNIVERSITY OF IOWA Henry B. Tippie School of Management 2005 $ 13,165 15.9% $ 2006 14,756 12.1% $ 2007 17,246 16.9% $ 2008 19,693 14.2% $ 2009E 22,103 12.2% $ 2010E 25,048 13.3% $ 2011E 28,508 13.8% $ 2012E 31,908 11.9% $ 2013E 34,546 8.3% 2014E $ 36,333 5.2% $ 28,480 5.1% $ 7,853 5.6% Terminal $ 37,480 3.2% TOTAL % Growth DIRECTV US % Growth DIRECTV Latin America % Growth 12,216 25.1% $ 742 10.1% $ $ 13,744 12.5% $ 1,013 36.5% $ 15,527 13.0% $ 1,719 69.7% $ 17,310 11.5% $ 2,383 38.6% $ 18,813 8.7% $ 3,290 38.1% $ 20,583 9.4% $ 4,465 35.7% $ 22,909 11.3% $ 5,599 25.4% $ 25,257 10.2% $ 6,651 18.8% $ 27,108 7.3% $ 7,438 11.8% $ 29,398 3.2% $ 8,082 2.9% NOTE: Subscriber acquisition costs are signifficantly lower starting in 2006 because set-top boxes leased to new subscribers were now capitalized instead of expensed as part of acquisition costs. Subscribers by Segment (Thous. except per subscriber data) 2005 16,726 1,123 7.2% 15,133 1,180 8.5% $ 807 15.3% 1,593 -57 -3.5% $ 466 14.0% 2006 18,664 1,938 11.6% 15,953 820 5.4% $ 862 6.7% 2,711 1,118 70.2% $ 374 -19.8% 2007 20,110 1,446 7.7% 16,831 878 5.5% $ 923 7.1% 3,279 568 21.0% $ 524 40.3% 2008 21,504 1,394 6.9% 17,621 861 4.7% $ 982 6.5% 3,883 604 18.4% $ 614 17.1% 2009E 22,976 1,472 6.8% 18,414 861 4.5% $ 1,022 4.0% 4,563 680 17.5% $ 721 17.5% 2010E 24,526 1,550 6.7% 19,279 865 4.7% $ 1,068 4.5% 5,247 684 15.0% $ 851 18.0% 2011E 26,015 1,489 6.1% 20,243 964 5.0% $ 1,132 6.0% 5,772 525 10.0% $ 970 14.0% 2012E 27,388 1,373 5.3% 21,154 911 4.5% $ 1,194 5.5% 6,233 462 8.0% $ 1,067 10.0% 2013E 28,471 1,083 4.0% 21,895 740 3.5% $ 1,238 3.7% 6,576 343 5.5% $ 1,131 6.0% 2014E 29,183 712 2.5% 22,442 547 2.5% $ 1,269 2.5% 6,741 164 2.5% $ 1,165 3.0% Terminal 29,546 364 1.2% 22,711 269 1.2% $ 1,294 2.0% 6,835 94 1.4% $ 1,182 1.5% TOTAL Net additions % Growth DIRECTV US Net additions % Growth ARPU (U.S., annual) % Growth DIRECTV Latin America Net additions % Growth ARPU (L.A., annual) % Growth 13 Henry Fund Research DIRECTV Group, Inc. By-Segment Historic and Forecast Data FYE December 31 Operating Costs ($ Millions) TOTAL Cost of Revenues % of Revenue Broadcast programming costs % of Revenue THE UNIVERSITY OF IOWA Henry B. Tippie School of Management 2005 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E Terminal $ $ $ $ 6,721 $ 51.1% 5,485 $ 41.7% 7,598 $ 51.5% 6,201 $ 42.0% 8,909 $ 51.7% 7,346 $ 42.6% 9,948 $ 50.5% 8,298 $ 42.1% 11,249 $ 50.9% 9,344 $ 42.3% 12,859 $ 51.3% 10,648 $ 42.5% 14,677 $ 51.5% 12,162 $ 42.7% 16,543 $ 51.8% 13,711 $ 43.0% 18,037 $ 19,156 $ 52.2% 52.7% 14,988 $ 15,948 $ 43.4% 43.9% 19,770 52.7% 16,462 43.9% Subscriber service expenses % of Revenue 982 7.5% $ $ 1,111 7.5% $ $ 1,240 7.2% $ $ 1,290 6.6% $ $ 1,474 6.7% $ $ 1,678 6.7% $ $ 1,864 6.5% $ $ 2,087 6.5% $ $ 2,233 6.5% $ 2,349 6.5% $ $ 2,423 6.5% Broadcast operations expenses % of Revenue 254 1.9% 286 1.9% 323 1.9% 360 1.8% 430 1.9% 532 2.1% 652 2.3% 745 2.3% 816 2.4% $ 859 2.4% 885 2.4% SG&A (excl. one-time charges) % of Revenue Subscriber acquisition costs % of Revenue $ $ $ $ 5,003 $ 38.0% 2,752 $ 20.9% 3,884 $ 26.3% 1,945 $ 13.2% 4,167 $ 24.2% 2,096 $ 12.2% 4,730 $ 24.0% 2,429 $ 12.3% 5,441 $ 24.6% 2,762 $ 12.5% 6,135 $ 24.5% 3,109 $ 12.4% 6,918 $ 24.3% 3,484 $ 12.2% 7,607 $ 23.8% 3,747 $ 11.7% 7,984 $ 8,182 $ 23.1% 22.5% 3,798 $ 3,779 $ 11.0% 10.4% 8,209 21.9% 3,668 9.8% Upgrade & retention costs % of Revenue 1,117 8.5% $ $ 870 5.9% $ $ 976 5.7% $ $ 1,058 5.4% $ $ 1,247 5.6% $ $ 1,355 5.4% $ $ 1,493 5.2% $ $ 1,659 5.2% $ $ 1,785 5.2% $ 1,876 5.2% $ $ 1,936 5.2% General & admin. expenses % of Revenue 1,134 8.6% 1,069 7.2% 1,095 6.3% 1,243 6.3% 1,433 6.3% 1,671 6.7% 1,941 6.8% 2,201 6.9% 2,401 6.9% $ 2,527 7.0% 2,606 7.0% Operating Costs: DIRECTV U.S. ($ Millions) TOTAL Cost of Revenues % of Revenue Broadcast programming costs % of Revenue 2005 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E Terminal $ $ $ $ 6,131 $ 50.2% 5,050 $ 41.3% 7,067 $ 51.4% 5,830 $ 42.4% 8,034 $ 51.7% 6,681 $ 43.0% 8,828 $ 51.0% 7,424 $ 42.9% 9,670 $ 51.4% 8,127 $ 43.2% 10,662 $ 51.8% 8,974 $ 43.6% 11,867 $ 51.8% 10,034 $ 43.8% 13,184 $ 52.2% 11,163 $ 44.2% 14,259 $ 15,151 $ 52.6% 53.2% 12,117 $ 12,901 $ 44.7% 45.3% 15,552 52.9% 13,229 45.0% Subscriber service expenses % of Revenue 935 7.7% $ $ 1,057 7.7% $ $ 1,137 7.3% $ $ 1,139 6.6% $ $ 1,260 6.7% $ $ 1,379 6.7% $ $ 1,489 6.5% $ $ 1,642 6.5% $ $ 1,735 6.4% $ 1,823 6.4% $ $ 1,881 6.4% Broadcast operations expenses % of Revenue 146 1.2% 179 1.3% 216 1.4% 265 1.5% 282 1.5% 309 1.5% 344 1.5% 379 1.5% 407 1.5% $ 427 1.5% 441 1.5% SG&A (excl. one-time charges) % of Revenue Subscriber acquisition costs % of Revenue $ $ $ $ 4,585 $ 37.5% 2,676 $ 21.9% 3,457 $ 25.1% 1,845 $ 13.4% 3,643 $ 23.5% 1,901 $ 12.2% 4,091 $ 23.6% 2,191 $ 12.7% 4,643 $ 24.7% 2,498 $ 13.3% 5,145 $ 25.0% 2,819 $ 13.7% 5,765 $ 25.2% 3,199 $ 14.0% 6,283 $ 24.9% 3,454 $ 13.7% 6,546 $ 6,698 $ 24.1% 23.5% 3,510 $ 3,508 $ 12.9% 12.3% 6,692 22.8% 3,400 11.6% Upgrade & retention costs % of Revenue 1,107 9.1% $ $ 852 6.2% $ $ 958 6.2% $ $ 1,027 5.9% $ $ 1,204 6.4% $ $ 1,297 6.3% $ $ 1,420 6.2% $ $ 1,566 6.2% $ $ 1,681 6.2% $ 1,766 6.2% $ $ 1,823 6.2% General & admin. expenses % of Revenue 802 6.6% 760 5.5% 784 5.0% 873 5.0% 941 5.0% 1,029 5.0% 1,145 5.0% 1,263 5.0% 1,355 5.0% $ 1,424 5.0% 1,470 5.0% 14 Henry Fund Research DIRECTV Group, Inc. By-Segment Historic and Forecast Data FYE December 31 Operating Costs: DIRECTV L.A. ($ Millions) TOTAL Cost of Revenues % of Revenue Broadcast programming costs % of Revenue THE UNIVERSITY OF IOWA Henry B. Tippie School of Management 2005 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E Terminal $ $ $ $ 392 $ 52.9% 237 $ 32.0% 531 $ 52.4% 371 $ 36.6% 875 $ 50.9% 665 $ 38.7% 1,120 $ 47.0% 874 $ 36.7% 1,579 $ 48.0% 1,217 $ 37.0% 2,197 $ 49.2% 1,674 $ 37.5% 2,810 $ 50.2% 2,127 $ 38.0% 3,359 $ 50.5% 2,547 $ 38.3% 3,778 $ 4,005 $ 50.8% 51.0% 2,871 $ 3,047 $ 38.6% 38.8% 4,219 52.2% 3,233 40.0% Subscriber service expenses % of Revenue 47 6.3% $ $ 54 5.4% $ $ 103 6.0% $ $ 151 6.3% $ $ 214 6.5% $ $ 299 6.7% $ $ 375 6.7% $ $ 446 6.7% $ $ 498 6.7% $ $ 526 6.7% $ $ 541 6.7% Broadcast operations expenses % of Revenue 108 14.6% 106 10.5% 107 6.2% 95 4.0% 148 4.5% 223 5.0% 308 5.5% 366 5.5% 409 5.5% 432 5.5% 445 5.5% SG&A (excl. one-time charges) % of Revenue Subscriber acquisition costs % of Revenue $ $ $ $ 318 $ 42.8% 76 $ 10.2% 353 $ 34.8% 101 $ 10.0% 450 $ 26.2% 195 $ 11.3% 573 $ 24.0% 238 $ 10.0% 724 $ 22.0% 264 $ 8.0% 906 $ 20.3% 290 $ 6.5% 1,057 $ 18.9% 285 $ 5.1% 1,217 $ 18.3% 293 $ 4.4% 1,322 $ 1,362 $ 17.8% 17.3% 289 $ 270 $ 3.9% 3.4% 1,391 17.2% 268 3.3% Upgrade & retention costs % of Revenue 11 1.4% $ $ 18 1.8% $ $ 18 1.0% $ $ 31 1.3% $ $ 43 1.3% $ $ 58 1.3% $ $ 73 1.3% $ $ 93 1.4% $ $ 104 1.4% $ $ 110 1.4% $ $ 113 1.4% General & admin. expenses % of Revenue 231 31.2% 234 23.1% 237 13.8% 304 12.8% 418 12.7% 558 12.5% 700 12.5% 831 12.5% 930 12.5% 982 12.5% 1,010 12.5% Corporate (General & Admin.) % of Revenue Operating Profit (bef. D&A) DIRECTV U.S. % of Revenue (U.S.) $ 100 $ 0.8% 2005 1,500 12.3% 75 $ 0.5% 2006 3,221 23.4% 74 $ 0.4% 2007 3,850 24.8% 66 $ 0.3% 2008 4,391 25.4% 74 $ 0.3% 2009E 4,500 23.9% 84 $ 0.3% 2010E 4,776 23.2% 96 $ 0.3% 2011E 5,277 23.0% 107 $ 0.3% 2012E 5,790 22.9% 116 $ 0.3% 2013E 6,303 23.3% 122 $ 0.3% 126 0.3% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2014E $ 6,631 23.3% Terminal $ 7,154 24.3% DIRECTV L.A. % of Revenue (L.A.) 32 4.3% 129 12.7% 394 22.9% 690 29.0% 986 30.0% 1,362 30.5% 1,731 30.9% 2,075 31.2% 2,337 31.4% $ 2,486 31.7% $ 2,472 30.6% Total Op. Profit % of Revenue (Total) Subscriber Acquisition Costs DIRECTV U.S. Total Subscribers Net additions Gross additions Deactivations Churn rate (mo.) % Change 1,432 $ 11.1% 2005 15,133 1,180 4,170 2,990 1.70% 3,275 $ 22.2% 2006 15,953 820 3,809 2,989 1.60% -0.10% 4,170 $ 24.2% 2007 16,831 878 3,847 2,969 1.51% -0.09% 5,015 $ 25.5% 2008 17,621 861 3,904 3,043 1.47% -0.04% 5,412 $ 24.5% 2009E 18,414 861 3,974 3,113 1.44% -0.03% 6,054 $ 24.2% 2010E 19,279 865 4,077 3,211 1.42% -0.02% 6,913 $ 24.2% 2011E 20,243 964 4,284 3,320 1.40% -0.02% 7,758 $ 24.3% 2012E 21,154 911 4,364 3,453 1.39% -0.01% 8,525 $ 8,995 $ 24.7% 24.8% 2013E 21,895 740 4,305 3,564 1.38% -0.01% 9,500 25.3% 2014E 22,442 547 4,218 3,671 1.38% 0.00% Terminal 22,711 269 4,008 3,739 1.38% 0.00% SAC % Growth $ $ 642 2,676 $ $ 484 1,845 $ $ 494 2.0% $ $ 561 13.6% $ $ 629 12.0% $ $ 691 10.0% $ $ 747 8.0% $ $ 792 6.0% $ $ 815 3.0% $ 832 2.0% $ $ 848 2.0% Subscriber acquisition costs DIRECTV L.A. Total Subscribers Net additions Gross additions Deactivations Churn rate (mo.) % Change 1,901 2,191 2,498 2,819 3,199 3,454 3,510 $ 3,508 3,400 1,593 2,711 1,118 1.38% 1.38% $ $ 3,279 568 1,080 512 1.38% 181 195 $ $ 3,883 604 1,393 789 1.78% 0.40% 4,563 680 1,592 912 1.80% 0.02% 5,247 684 1,750 1,065 1.81% 0.01% 5,772 525 1,701 1,177 1.78% -0.03% 6,233 462 1,715 1,253 1.74% -0.04% 6,576 343 1,657 1,314 1.71% -0.03% 6,741 164 1,523 1,358 1.70% -0.01% 6,835 94 1,479 1,385 1.70% 0.00% SAC % Growth 171 ‐5.4% $ $ 166 ‐3.0% $ 166 0.0% $ $ 167 1.0% $ $ 171 2.0% $ $ 174 2.0% $ $ 178 2.0% $ $ 181 2.0% Subscriber acquisition costs 238 264 15 $ 290 285 293 289 270 268 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management DIRECTV Group, Inc. FYE December 31 ($ Millions) Income Statement Revenue % Growth 2005 15.9% 2006 12.1% 2007 16.9% 2008 14.2% 2009E 12.2% 2010E 13.3% 2011E 13.8% 2012E 11.9% 2013E 8.3% 2014E Terminal 5.2% 3.2% $ 13,165 $ 14,756 $ 17,246 $ 19,693 $  22,103 $ 25,048 $ 28,508 $ 31,908 $ 34,546 $ 36,333 $ 37,480 $   6,721 $   7,598 $   8,909 $   9,948 $  11,249 $ 12,859 $ 14,677 $ 16,543 $ 18,037 $ 19,156 $ 19,770 51.1% 51.5% 51.7% 50.5% 50.9% 51.3% 51.5% 51.8% 52.2% 52.7% 52.7% $     5,485 $     6,201 $     7,346 $     8,298 $      9,344 $   10,648 $   12,162 $   13,711 $   14,988 $   15,948 $   16,462 $          982 $     1,111 $     1,240 $     1,290 $      1,474 $     1,678 $     1,864 $     2,087 $     2,233 $     2,349 $     2,423 $          254 $          286 $          323 $          360 $           430 $          532 $          652 $          745 $          816 $          859 $          885 Costs of revenues % of Revenue Broadcast programming costs Subscriber service expenses Broadcast operations expenses SG&A % of Revenue Subscriber acquisition costs Upgrade & retention costs General & admin. expenses Loss (gain)‐ impair. & dispositions $   4,957 $   3,767 $   4,167 $   4,730 $    5,441 $   6,135 $   6,918 $   7,607 $   7,984 $   8,182 $   8,209 37.7% $     2,752 $     1,117 $     1,134 $         (45) 25.5% 24.2% 24.0% 24.6% 24.5% 24.3% 23.8% 23.1% 22.5% 21.9% $     1,945 $     2,096 $     2,429 $      2,762 $     3,109 $     3,484 $     3,747 $     3,798 $     3,779 $     3,668 $          870 $          976 $     1,058 $      1,247 $     1,355 $     1,493 $     1,659 $     1,785 $     1,876 $     1,936 $     1,069 $     1,095 $     1,243 $      1,433 $     1,671 $     1,941 $     2,201 $     2,401 $     2,527 $     2,606 $       (118) Depreciation & amortization $        853 $   1,034 $   1,684 $   2,320 $    2,419 $   2,583 $   2,949 $   3,440 $   3,990 $   4,586 $   5,184 Total operating costs & expenses $ 12,532 $ 12,399 $ 14,760 $ 16,998 $  19,109 $ 21,576 $ 24,544 $ 27,590 $ 30,011 $ 31,924 $ 33,164 Operating profit (loss) $        633 $   2,357 $   2,486 $   2,695 $    2,993 $   3,471 $   3,964 $   4,318 $   4,535 $   4,409 $   4,316 % of Revenue 4.8% 16.0% 14.4% 13.7% 13.5% 2.0% 7.8% ‐0.5% 7.0% 0.3% 6.7% 0.2% 7.8% 0.3% 7.9% 0.3% 13.9% 2.2% 7.5% 0.3% 13.9% 2.5% 7.0% 0.3% 13.5% 2.7% 7.0% 0.3% 13.1% 2.7% 6.7% 0.3% 12.1% 3.0% 6.7% 0.3% 11.5% 3.0% 6.5% 0.3% Interest income Interest rate $        150 $        146 $        111 $         81 $           32 $         32 $         35 $         42 $         47 $         57 $         60 $        238 $        246 $        235 $        360 $       372 $        329 $        289 $        313 $        322 $        342 $        344 $       (65) $         42 $         26 $         55 $           66 $         75 $         86 $         96 $        104 $        109 $        112 $        480 $   2,299 $   2,388 $   2,471 $    2,719 $   3,250 $   3,795 $   4,143 $   4,364 $   4,233 $   4,145 $        173 $        866 $        943 $        864 $       966 $   1,155 $   1,348 $   1,472 $   1,550 $   1,504 $   1,473 36.1% 37.7% 39.5% 35.0% 35.5% 35.5% 35.5% 35.5% 35.5% 35.5% 35.5% Interest expense Interest rate Other income, net % of Revenue EBT (bef. minority interest) Income tax expense (benefit) Effective Tax Rate Minority interest Income (loss) from cont. oper. Net income (loss) Net Income Margin Earnings Per Share Year‐end shares O/S EPS (basic) % Growth $          (3) $       (13) $       (11) $       (92) $        (72) $       (75) $       (78) $       (81) $       (84) $       (87) $       (91) $        305 $   1,420 $   1,434 $   1,515 $    1,681 $   2,020 $   2,369 $   2,590 $   2,729 $   2,642 $   2,581 $        336 $   1,420 $   1,451 $   1,521 $    1,681 $   2,020 $   2,369 $   2,590 $   2,729 $   2,642 $   2,581 2.6% 9.6% 8.4% 7.7% 7.6% 8.1% 8.3% 8.1% 7.9% 7.3% 6.9% 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E Terminal 1,226 1,148 1,024 1,015 961 897 825 754 684 612 $       1.12 $       1.21 $       1.37 $        1.65 $       2.04 $       2.55 $       3.01 $       3.46 $       3.67 $       3.98 7.9% 13.1% 20.7% 24.0% 24.8% 18.0% 14.9% 6.3% 8.4% Note: DTV does not currently pay dividends and we do not anticipate that in the near future. 16 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management DIRECTV Group, Inc. FYE December 31 ($ Millions) Balance Sheet Cash & cash equivalents Excess cash/ Short‐term investments Accounts receivable, net Inventories Deferred income taxes Prepaid expenses & other Other current assets 2005 $       3,701 $           683 $       1,033 $           283 $           163 $           232 2006 $       2,499 $          170 $       1,345 $          148 $          166 $          227 2007 $       1,083 $             10 $       1,535 $          193 $             90 $          235 2008 $       2,005 $       1,423 $          192 $             68 $          356 2009E $        1,105 $          111  $       1,574  $          243  $            88  $          398  2010E $        1,252 $          125  $       1,784  $          276  $          150  $          401  2011E $       1,425 $          143   $      2,031  $          314  $          171  $          456  2012E $        1,595 $          160  $       2,273  $          351  $          191  $          511  2013E $       1,727 $          173  $      2,461  $          380  $          207  $          553  2014E $        1,817 $          182  $       2,588  $          400  $          218  $          581  Terminal $         1,874 $           187  $       2,670  $           412  $           225  $           600  Total current assets Satellites, net Property & equipment, net Goodwill Intangible assets, net Deferred income taxes Investments & other noncur. assets $    6,096 $    1,876 $    1,199 $    4,555 $    2,008 $    2,445 $    3,146 $    2,026 $    3,807 $    4,044 $    2,476 $    4,171 $    3,519 $    2,603 $    4,655 $    3,988 $    2,757 $    5,321 $    4,539 $    2,797 $    6,011 $    5,081 $    2,853 $    6,632 $    5,501 $    2,915 $    7,245 $    5,785 $    2,975 $    7,548 $     5,968 $     3,023 $     7,456 $       3,045 $       3,515 $       3,669 $       3,753 $       3,753 $       3,753 $      3,753 $       3,753 $      3,753 $       3,753 $         3,753 $       1,878 $       1,811 $       1,577 $       1,172 $       1,103 $       1,183 $      1,324 $       1,482 $      1,619 $       1,721 $         1,791 $           492 $       1,043 $          807 $          838 $          923 $        1,105 $        1,252 $       1,595 $       1,727 $        1,817 $         1,874 1,425 $        Total assets Accounts payable Accrued & other current liabilities Deferred revenues Short‐term debt & current portion $  15,630 $       1,607 $            935 $           277 $             10 $  15,141 $       1,793 $       1,023 $          286 $          220 $  15,063 $       1,953 $       1,079 $          354 $             48 $  16,539 $       2,073 $       1,042 $          362 $          108 $  16,739 $  18,254 $ 19,849 $       2,895 $       1,710 $           513 $           108 $  21,396 $        3,218 $        1,914 $           574 $           108 $ 22,760 $       3,459 $       2,073 $           622 $           108 $  23,598 $  23,864 $        2,311 $        2,572 $        1,216 $        1,503 $           398 $            451 $           108 $            108 $        3,674 $         3,792 $        2,180 $         2,249 654 $            $           675 $           108 $            108 Total current liabilities Long‐term debt Deferred income taxes Capital lease obligations Other accrued taxes Programming costs & NRTC Pension & other benefits Deferred credits (revenue) $    2,828 $    3,323 $    3,434 $       3,347 $          567 $             43 $          343 $          368 $             75 $          573 $    3,585 $       5,725 $          524 $          542 $          428 $          251 $          179 $          349 $    4,033 $        3,683 $          524  $          530  $          442  $          385  $          150  $          455  $    4,633 $        4,016 $          524  $          401  $          451  $          385  $          126  $          455  $    5,227 $       4,367 $          524  $          314  $          513  $          385  $          106  $          455  $    5,815 $        4,707 $          524  $          351  $          574  $          385  $            89  $          455  $    6,262 $       5,007 $          524  $          380  $          622  $          385  $            75  $          455  $    6,616 $        5,192 $          524  $          400  $          654  $          385  $            63  $          455  $     6,823 $         5,250 $           524  $           412  $           675  $           385  $             53  $           455  $       3,405 $       3,395 $          315 $             50 $             47 $           184 $          161 $           680 $          626 $           107 $             90 $           386 $          443 Other liabilities & deferred credits Minority interests $    1,408 $    7,690 $     10,956 $            ‐ $      (3,002) $            (14) $    1,366 $    8,460 $       9,836 $     (1,525) $     (1,582) $           (49) $    1,402 $    8,761 $       9,318 $     (2,864) $         (131) $           (21) $    1,749 $  11,686 $       8,540 $     (4,949) $       1,390 $         (128) $    1,963 $  10,313 $       9,076 $     (5,592) $       3,071 $         (128) $    1,818 $  11,116 $       9,656 $      (7,482) $       5,091 $         (128) $    1,773 $           143 $    1,854 $           160 $    1,917 $           173 $    1,956 $           182 $     1,980 $            187 $             49 $             62 $             11 $          103 $           111 $            125 Total liabilities Common stock & PIC Treasury account Retained earnings (deficit) Accumulated OC income (loss) $ 12,033 $    10,286 $     (9,802) $      7,460 $          (128) $  13,060 $    10,970 $   (12,555) $    10,050 $         (128) $ 13,882 $    11,710 $   (15,484) $    12,779 $          (128) $  14,469 $    12,514 $   (18,678) $    15,421 $         (128) $  14,764 $     13,386 $    (22,160) $     18,002 $          (128) Total stockholders' equity Total liab. & stockholders' equity $    7,940 $  15,630 $    6,680 $  15,141 $    6,302 $  15,063 $    4,853 $  16,539 $    6,426 $  16,739 $    7,138 $  18,254 $    7,816 $ 19,849 $    8,337 $  21,396 $    8,878 $ 22,760 $    9,129 $  23,598 $     9,100 $  23,864 17 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management DIRECTV Group, Inc. FYE December 31 ($ Millions) Cash Flow Statement CASH FLOWS FROM OPERATIONS: Net income Reconcile NI to Cash From Operations: Accum. Other Comprehensive Income Ch. Depreciation and Amortization Minority interest in net losses (earnings) Changes in Assets and Liabilities: Receivables Inventories Prepaid Expenses Accounts Payable Accrued Expenses Deferred Revenue Deferred Taxes Other, net Net Cash From Operations CASH FLOWS FROM INVESTING: Investment in property and equipment Investment in satellites Intangibles acquisition Other investments/ acquisitions, net Net Cash Used in Investing Activities CASH FLOWS FROM FINANCING: Net activity of short-term debt Long-term debt borrowings Common stock repurchase & ESOP Other obligations, net Net Cash Provided by Financing Change in Cash and Equivalents Cash: Beginning of the Year Cash: End of the Year 2005 $ $ $ 336 11 853 $ $ $ 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E Terminal 2,581 5,184 1,420 $ 1,451 $ 1,521 $ 1,681 $ 2,020 $ 2,369 $ 2,590 $ 2,729 $ 2,642 $ (35) $ 28 $ (107) $ $ $ $ $ $ $ 1,034 $ 1,684 $ 2,320 $ 2,419 $ 2,583 $ 2,949 $ 3,440 $ 3,990 $ 4,586 $ $ (115) $ (159) $ 145 $ 316 $ 53 $ 15 $ (656) $ 521 $ 1,321 $ $ $ $ $ $ $ $ $ (312) 135 5 186 88 10 805 3,337 $ (190) $ (45) $ (8) $ 160 $ 56 $ 68 $ 328 $ $ 3,532 $ 112 $ 1 $ (121) $ 120 $ (37) $ 8 $ (21) $ $ 3,796 $ (151) $ (51) $ (42) $ 238 $ 174 $ 36 $ (20) $ $ 4,283 $ (210) $ (32) $ (3) $ 260 $ 287 $ 53 $ (62) $ $ 4,897 $ (246) $ (38) $ (55) $ 324 $ 208 $ 62 $ (21) $ $ 5,550 $ (242) $ (37) $ (54) $ 323 $ 204 $ 61 $ (20) $ $ 6,264 $ (188) $ (29) $ (42) $ 241 $ 158 $ 47 $ (16) $ $ 6,891 12.7% $ (127) $ (20) $ (29) $ 215 $ 107 $ 32 $ (11) $ $ 7,395 $ $ $ $ $ $ $ $ $ (82) (13) (18) 118 69 21 (7) 7,853 $ (371) $ (426) $ (86) $ (141) $ (1,025) $ $ $ $ $ (1,684) (56) (606) 280 (2,066) $ (2,103) $ (1,462) $ (176) $ (611) $ (552) $ (656) $ (25) $ (159) $ (2,855) $ (2,888) $ (1,879) $ (2,254) $ (332) $ (376) $ (751) $ (852) $ (293) $ (162) $ (3,254) $ (3,644) $ (2,566) $ (2,872) $ (3,282) $ (285) $ (319) $ (345) $ (969) $ (1,085) $ (1,175) $ (190) $ (187) $ (145) $ (4,010) $ (4,463) $ (4,947) $ (3,452) $ (3,561) $ (363) $ (375) $ (1,235) $ (1,274) $ (98) $ (63) $ (5,149) $ (5,273) $ $ $ $ $ $ (251) 996 86 (257) 575 871 $ $ $ $ $ 211 (10) (2,645) (29) (2,474) $ (172) $ 60 $ $ (48) $ 2,378 $ (2,042) $ (1,857) $ (2,863) $ (108) $ (15) $ 439 $ 221 $ (2,092) $ 14 $ (1,929) 922 $ $ $ $ 333 $ 351 $ (1,309) $ (1,690) $ (130) $ (28) $ (1,106) $ (1,367) 147 $ 173 $ $ $ 340 $ 300 $ (2,070) $ (2,188) $ 99 $ 75 $ (1,631) $ (1,812) $ 170 $ 132 $ $ $ 184 $ 58 $ (2,391) $ (2,610) $ 49 $ 29 $ (2,158) $ (2,523) $ 89 $ 57 1,817 1,874 $ (1,202.7) $ (1,416) $ (900) $ $ 2,830 $ $ 3,701 $ 3,701 $ 2,499 $ 1,083 $ 2,005 $ 1,105 $ 1,252 $ 1,425 $ 1,595 $ 1,727 $ 2,499 $ 1,083 $ 2,005 $ 1,105 $ 1,252 $ 1,425 $ 1,595 $ 1,727 $ 1,817 $ 18 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management DIRECTV Group, Inc. Common Size Income Statement FYE December 31 2004 100.0% 52.6% 44.0% 6.9% 1.7% 58.7% 23.8% 8.8% 11.2% 14.9% 7.4% 118.7% ‐18.7% 0.4% 1.2% 3.9% ‐15.5% 0.3% ‐6.4% ‐6.1% 0.1% ‐9.3% ‐5.1% ‐2.7% ‐17.2% 2005 100.0% 51.1% 41.7% 7.5% 1.9% 37.7% 20.9% 8.5% 8.6% ‐0.3% 6.5% 95.2% 4.8% 1.1% 1.8% ‐0.5% 3.6% ‐0.1% 1.5% 1.3% 0.0% 2.3% 0.2% 0.0% 2.6% 2006 100.0% 51.5% 42.0% 7.5% 1.9% 25.5% 13.2% 5.9% 7.2% ‐0.8% 7.0% 84.0% 16.0% 1.0% 1.7% 0.3% 15.6% 0.5% 5.4% 5.9% ‐0.1% 9.6% 0.0% 0.0% 9.6% 2007 100.0% 51.7% 42.6% 7.2% 1.9% 24.2% 12.2% 5.7% 6.3% 0.0% 9.8% 85.6% 14.4% 0.6% 1.4% 0.2% 13.8% 3.6% 1.8% 5.5% ‐0.1% 8.3% 0.1% 0.0% 8.4% 2008 100.0% 50.5% 42.1% 6.6% 1.8% 24.0% 12.3% 5.4% 6.3% 0.0% 11.8% 86.3% 13.7% 0.4% 1.8% 0.3% 12.5% 3.8% 0.6% 4.4% ‐0.5% 7.7% 0.0% 0.0% 7.7% 2009E 100.0% 50.9% 42.3% 6.7% 1.9% 24.6% 12.5% 5.6% 6.5% 0.0% 10.9% 86.5% 13.5% 0.1% 1.7% 0.3% 12.3% 0.0% 0.0% 4.4% ‐0.3% 7.6% 0.0% 0.0% 7.6% 2010E 100.0% 51.3% 42.5% 6.7% 2.1% 24.5% 12.4% 5.4% 6.7% 0.0% 10.3% 86.1% 13.9% 0.1% 1.3% 0.3% 13.0% 0.0% 0.0% 4.6% ‐0.3% 8.1% 0.0% 0.0% 8.1% 2011E 100.0% 51.5% 42.7% 6.5% 2.3% 24.3% 12.2% 5.2% 6.8% 0.0% 10.3% 86.1% 13.9% 0.1% 1.0% 0.3% 13.3% 0.0% 0.0% 4.7% ‐0.3% 8.3% 0.0% 0.0% 8.3% 2012E 100.0% 51.8% 43.0% 6.5% 2.3% 23.8% 11.7% 5.2% 6.9% 0.0% 10.8% 86.5% 13.5% 0.1% 1.0% 0.3% 13.0% 0.0% 0.0% 4.6% ‐0.3% 8.1% 0.0% 0.0% 8.1% 2013E 100.0% 52.2% 43.4% 6.5% 2.4% 23.1% 11.0% 5.2% 6.9% 0.0% 11.5% 86.9% 13.1% 0.1% 0.9% 0.3% 12.6% 0.0% 0.0% 4.5% ‐0.2% 7.9% 0.0% 0.0% 7.9% 2014E Terminal 100.0% 100.0% 52.7% 52.7% 43.9% 43.9% 6.5% 6.5% 2.4% 2.4% 22.5% 21.9% 10.4% 9.8% 5.2% 5.2% 7.0% 7.0% 0.0% 0.0% 12.6% 13.8% 87.9% 88.5% 12.1% 11.5% 0.2% 0.2% 0.9% 0.9% 0.3% 0.3% 11.7% 11.1% 0.0% 0.0% 0.0% 0.0% 4.1% 3.9% ‐0.2% ‐0.2% 7.3% 6.9% 0.0% 0.0% 0.0% 0.0% 7.3% 6.9% Revenue Costs of revenues Broadcast programming costs Subscriber service expenses Broadcast operations expenses SG&A Subscriber acquisition costs Upgrade & retention costs General & admin. expenses Loss (gain)‐ impair. & dispositions Depreciation & amortization Total operating costs & expenses Operating profit (loss) Interest income Interest expense Other income, net EBT (bef. minority interest) Total current tax expense (benefit) Total deferred tax expense (benefit) Income tax expense (benefit) Minority interest Income (loss) from cont. oper. Income (loss) from disc. operations, net of taxes Cum. effect of accounting changes, net of taxes Net income (loss) Notes: 1 2  Cost of revenues and SG&A sub‐costs are derived by separately projecting DIRECTV U.S. and DIRECTV Latin America costs plus. Corporate op. expenses (Gen. & Admin.)  Depreciation includes depreciation on satellites and property and equipment; depreciation rate is based on beg. Gross P&E and Gross Satellites  Interest income and expense are based on the rate extrapolated from historical data using avg. cash and debt balances, resepctively  Minority interest grows at 4% annually based on an organic 2008 base (excl. $23M of one‐time items)   Amortization of intangibles is based on the historical rate (% of beg. Net intangibles) 3 4 19 Henry Fund Research DIRECTV Group, Inc. Common Size Balance Sheet FYE December 31 $       11,360 $   13,165 ###### ###### ###### $ 22,103 $ 25,048 THE UNIVERSITY OF IOWA Henry B. Tippie School of Management $ 28,508 $ 31,908 $ 34,546 $ 36,333 $ 37,480 Hist. 3‐yr  Hist. 5‐yr  Average Average 11.1% 17.3% 0.4% 1.3% 8.4% 8.2% 1.0% 1.3% 0.7% 0.6% 1.6% 2.0% 0.0% 0.9% 23.2% 31.6% 12.6% 13.2% 19.9% 15.8% 21.4% 19.1% 9.1% 12.2% 0.0% 0.7% 5.0% 7.4% 91.3% 103.8% 11.3% 11.5% 6.2% 6.7% 1.9% 2.0% 0.8% 0.9% 20.2% 21.2% 22.8% 26.1% 2.7% 1.6% 1.1% 0.7% 1.8% 1.3% 2.5% 2.6% 0.7% 0.6% 2.7% 2.2% 8.8% 10.3% 0.3% 0.4% 55.8% 57.2% 54.7% 68.6% ‐17.4% ‐10.4% ‐1.5% ‐11.3% ‐0.4% ‐0.3% 35.5% 46.6% 91.3% 103.8% Cash & cash equivalents Excess cash/ Short‐term investments Accounts receivable, net Inventories Deferred income taxes Prepaid expenses & other Other current assets Total current assets Satellites, net Property & equipment, net Goodwill Intangible assets, net Deferred income taxes Investments & other noncur. assets Total assets Accounts payable Accrued & other current liabilities Deferred revenues Short‐term debt & current portion Total current liabilities Long‐term debt Deferred income taxes Capital lease obligations Other accrued taxes Programming costs & NRTC Pension & other benefits Deferred credits (revenue) Other liabilities & deferred credits Minority interests Total liabilities Common stock & PIC Treasury account Retained earnings (deficit) Accumulated OC income (loss) Total stockholders' equity Total liab. & stockholders' equity Other B/S Inputs A/R days (DSO) A/P days (DPO) Inventory days 2004 24.9% 0.0% 8.1% 1.1% 0.0% 3.3% 4.6% 42.0% 13.7% 10.0% 26.8% 19.6% 0.0% 14.0% 126.1% 11.4% 7.8% 2.3% 2.3% 23.7% 21.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 14.7% 0.4% 60.0% 95.7% 0.0% ‐29.4% ‐0.2% 66.1% 126.1% 2005 28.1% 5.2% 7.8% 2.2% 1.2% 1.8% 0.0% 46.3% 14.2% 9.1% 23.1% 14.3% 3.7% 7.9% 118.7% 12.2% 7.1% 2.1% 0.1% 21.5% 25.9% 0.0% 0.4% 1.4% 5.2% 0.8% 2.9% 10.7% 0.4% 58.4% 83.2% 0.0% ‐22.8% ‐0.1% 60.3% 118.7% 2006 16.9% 1.2% 9.1% 1.0% 1.1% 1.5% 0.0% 30.9% 13.6% 16.6% 23.8% 12.3% 0.0% 5.5% 102.6% 12.2% 6.9% 1.9% 1.5% 22.5% 23.0% 2.1% 0.3% 1.1% 4.2% 0.6% 3.0% 9.3% 0.4% 57.3% 66.7% ‐10.3% ‐10.7% ‐0.3% 45.3% 102.6% 2007 6.3% 0.1% 8.9% 1.1% 0.5% 1.4% 0.0% 18.2% 11.7% 22.1% 21.3% 9.1% 0.0% 4.9% 87.3% 11.3% 6.3% 2.1% 0.3% 19.9% 19.4% 3.3% 0.2% 2.0% 2.1% 0.4% 3.3% 8.1% 0.1% 50.8% 54.0% ‐16.6% ‐0.8% ‐0.1% 36.5% 87.3% 2008 10.2% 0.0% 7.2% 1.0% 0.3% 1.8% 0.0% 20.5% 12.6% 21.2% 19.1% 6.0% 0.0% 4.7% 84.0% 10.5% 5.3% 1.8% 0.5% 18.2% 29.1% 2.7% 2.8% 2.2% 1.3% 0.9% 1.8% 8.9% 0.5% 59.3% 43.4% ‐25.1% 7.1% ‐0.6% 24.6% 84.0% 2009E 5.0% 0.5% 7.1% 1.1% 0.4% 1.8% 0.0% 15.9% 11.8% 21.1% 17.0% 5.0% 0.0% 5.0% 75.7% 10.5% 5.5% 1.8% 0.5% 18.2% 16.7% 2.4% 2.4% 2.0% 1.7% 0.7% 2.1% 8.9% 0.5% 46.7% 41.1% ‐25.3% 13.9% ‐0.6% 29.1% 75.7% 2010E 5.0% 0.5% 7.1% 1.1% 0.6% 1.6% 0.0% 15.9% 11.0% 21.2% 15.0% 4.7% 0.0% 5.0% 72.9% 10.3% 6.0% 1.8% 0.4% 18.5% 16.0% 2.1% 1.6% 1.8% 1.5% 0.5% 1.8% 7.3% 0.5% 44.4% 38.6% ‐29.9% 20.3% ‐0.5% 28.5% 72.9% 2011E 5.0% 0.5% 7.1% 1.1% 0.6% 1.6% 0.0% 15.9% 9.8% 21.1% 13.2% 4.6% 0.0% 5.0% 69.6% 10.2% 6.0% 1.8% 0.4% 18.3% 15.3% 1.8% 1.1% 1.8% 1.4% 0.4% 1.6% 6.2% 0.5% 42.2% 36.1% ‐34.4% 26.2% ‐0.4% 27.4% 69.6% 2012E 5.0% 0.5% 7.1% 1.1% 0.6% 1.6% 0.0% 15.9% 8.9% 20.8% 11.8% 4.6% 0.0% 5.0% 67.1% 10.1% 6.0% 1.8% 0.3% 18.2% 14.8% 1.6% 1.1% 1.8% 1.2% 0.3% 1.4% 5.8% 0.5% 40.9% 34.4% ‐39.3% 31.5% ‐0.4% 26.1% 67.1% 2013E 5.0% 0.5% 7.1% 1.1% 0.6% 1.6% 0.0% 15.9% 8.4% 21.0% 10.9% 4.7% 0.0% 5.0% 65.9% 10.0% 6.0% 1.8% 0.3% 18.1% 14.5% 1.5% 1.1% 1.8% 1.1% 0.2% 1.3% 5.5% 0.5% 40.2% 33.9% ‐44.8% 37.0% ‐0.4% 25.7% 65.9% 2014E 5.0% 0.5% 7.1% 1.1% 0.6% 1.6% 0.0% 15.9% 8.2% 20.8% 10.3% 4.7% 0.0% 5.0% 65.0% 10.1% 6.0% 1.8% 0.3% 18.2% 14.3% 1.4% 1.1% 1.8% 1.1% 0.2% 1.3% 5.4% 0.5% 39.8% 34.4% ‐51.4% 42.4% ‐0.4% 25.1% 65.0% Terminal 5.0% 0.5% 7.1% 1.1% 0.6% 1.6% 0.0% 15.9% 8.1% 19.9% 10.0% 4.8% 0.0% 5.0% 63.7% 10.1% 6.0% 1.8% 0.3% 18.2% 14.0% 1.4% 1.1% 1.8% 1.0% 0.1% 1.2% 5.3% 0.5% 39.4% 35.7% ‐59.1% 48.0% ‐0.3% 24.3% 63.7% 29.5 78.9 7.6 28.6 87.3 15.4 33.3 86.1 7.1 32.5 80.0 7.9 26.4 76.1 7.0 26.0 75.0 7.5 26.0 73.0 7.5 26.0 72.0 7.5 26.0 71.0 7.5 26.0 70.0 7.5 26.0 70.0 7.5 26.0 70.0 7.5 30.7 80.7 7.4 30.1 81.7 9.0 20 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management DIRECTV Group, Inc. FYE December 31 Value Driver Estimation NOPLAT EBITA Less: Taxes on EBITA Marginal Tax Rate Total Income Tax Provision Plus: Tax Shield on Interest Expense Less: Tax on Interest Income Less/Plus: Tax on Nonop. Income/ Loss Taxes on EBITA Plus: Change in Deferred Taxes NOPLAT INVESTED CAPITAL Operating Working Capital: Plus: Normal Cash (0.5% - 2.0% of Sales) Plus: Receivables Plus: Inventory Plus: Prepaid Expenses & Other Less: Accounts Payable Less: Accrued Expenses: Property Tax Less: Deferred Revenue (current) Net Operating Working Capital (+) Net Satellites, Property and Equipment (+) Net Intangibles (-) Other Long-Term Operating Liabilities NET INVESTED CAPITAL ROIC (NOPLAT/Invested Capital) NOPLAT Invested Capital (Beginning) ROIC (NOPLAT/Invested Capital) FREE CASH FLOW NOPLAT Net Investment (change in invested capital) Free Cash Flow (NOPLAT - Net Investment) 2002 $ (399) 33.1% (94) 111 (8) 9 2003 $ 146 21.4% (72) 67 (9) (14) 164 324 2004 $ (3,813) 39.2% $ (691) $ 52 $ (20) $ (664) $ (1,323) $ (647) $ (3,137) 2005 $ 678 36.1% 173 86 (54) 16 221 (472) (15) 2006 $ 2,475 37.7% $ 866 $ 93 $ (55) $ 44 $ 947 $ 782 $ 2,309 2007 $ 2,486 39.5% $ 943 $ 93 $ (44) $ $ 992 $ 510 $ 2,004 2008 $ 2,695 35.0% $ 864 $ 126 $ (28) $ $ 962 $ 64 $ 1,797 2009E $ 2,993 35.5% $ 966 $ 132 $ (11) $ $ 1,087 $ (6) $ 1,900 2010E $ 3,471 2011E $ 3,964 2012E $ 4,318 2013E $ 4,535 35.5% 1,550 114 (17) 1,648 32 2,918 2014E $ 4,409 Terminal $ 4,316 35.5% 1,473 122 (21) 1,574 14 2,757 $ $ $ $ $ $ $ $ $ $ $ $ (408) $ $ $ $ $ $ $ $ 35.5% 35.5% $ 1,155 $ 1,348 $ 117 $ 103 $ (11) $ (12) $ $ $ 1,260 $ 1,439 $ (53) $ 42 $ 2,158 $ 2,567 35.5% $ 1,472 $ $ 111 $ $ (15) $ $ $ $ 1,568 $ $ 41 $ $ 2,791 $ 35.5% $ 1,504 $ $ 121 $ $ (20) $ $ $ $ 1,605 $ $ 21 $ $ 2,825 $ $ $ $ $ $ $ $ $ $ $ $ $ 447 1,134 230 1,066 (1,039) (1,270) (166) 402 6,940 645 7,986 $ $ $ $ $ $ $ $ $ $ $ $ 506 1,206 271 1,195 (1,401) (1,059) (170) 547 6,612 572 7,730 $ $ $ $ $ $ $ $ $ $ $ $ 568 919 124 898 (1,291) (882) (262) 75 2,696 2,227 4,998 $ $ $ $ $ $ $ $ $ $ $ $ 658 1,033 283 232 (1,607) (935) (277) (612) 3,075 1,878 1,066 3,275 $ $ $ $ $ $ $ $ $ $ $ $ 738 1,345 148 227 (1,793) (1,023) (286) (644) 4,453 1,811 1,068 4,552 $ $ $ $ $ $ $ $ $ $ $ $ 862 1,535 193 235 (1,953) (1,079) (354) (561) 5,833 1,577 941 5,908 $ $ $ $ $ $ $ $ $ $ $ $ 985 1,423 192 356 (2,073) (1,042) (362) (521) 6,647 1,172 600 6,698 $ $ $ $ $ $ $ $ $ $ $ $ 1,105 1,574 243 398 (2,311) (1,216) (398) (604) 7,258 1,103 840 6,917 $ $ $ $ $ $ $ $ $ $ $ $ 1,252 1,784 276 401 (2,572) (1,503) (451) (813) 8,078 1,183 840 7,608 $ $ $ $ $ $ $ $ $ $ $ $ 1,425 2,031 314 456 (2,895) (1,710) (513) (893) 8,807 1,324 840 8,398 $ $ $ $ $ $ $ $ $ $ $ $ 1,595 2,273 351 511 (3,218) (1,914) (574) (977) 9,485 1,482 840 9,150 $ $ $ $ $ $ $ $ $ $ $ $ 1,727 2,461 380 553 (3,459) (2,073) (622) (1,033) 10,160 1,619 840 9,906 $ $ $ $ $ $ $ $ $ $ $ $ 1,817 2,588 400 581 (3,674) (2,180) (654) (1,122) 10,522 1,721 840 10,281 $ 1,874 $ 2,670 $ 412 $ 600 $ (3,792) $ (2,249) $ (675) $ (1,159) $ 10,478 $ 1,791 $ 840 $ 10,270 $ (408) $ 324 $ (3,137) $ (15) $ 2,309 $ 2,004 $ 1,797 $ 1,900 $ 2,158 $ 2,567 $ 2,791 $ $ 7,986 $ 7,730 $ 4,998 $ 3,275 $ 4,552 $ 5,908 $ 6,698 $ 6,917 $ 7,608 $ 8,398 $ 4.1% -40.6% -0.3% 70.5% 44.0% 30.4% 28.4% 31.2% 33.7% 33.2% 2,918 $ 9,150 $ 31.9% 2,825 $ 2,757 9,906 $ 10,281 28.5% 26.8% $ (408) $ $ $ 324 $ (3,137) $ (15) $ 2,309 (256) $ (2,733) $ (1,723) $ 1,277 580 $ (404) $ 1,708 $ 1,032 $ 2,004 $ 1,357 $ 647 $ 1,797 $ 789 $ 1,008 $ 1,900 $ 220 $ 1,680 $ 2,158 $ 690 $ 1,468 $ 2,567 $ 791 $ 1,776 $ 2,791 $ 752 $ 2,039 $ $ $ 2,918 756 2,162 $ $ $ 2,825 375 2,450 $ $ $ 2,757 (11) 2,768 ECONOMIC PROFIT Invested Capital (Beginning) ROIC WACC EP (Invested Capital*(ROIC-WACC)) $ 7,986 $ 7,730 $ 4,998 $ 3,275 $ 4,552 $ 5,908 $ 6,698 $ 6,917 $ 7,608 $ 8,398 $ 9,150 $ 9,906 $ 10,281 4.1% -40.6% -0.3% 70.5% 44.0% 30.4% 28.4% 31.2% 33.7% 33.2% 31.9% 28.5% 26.8% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% $ (321) $ (3,761) $ (419) $ 2,044 $ 1,637 $ 1,320 $ 1,359 $ 1,599 $ 1,952 $ 2,112 $ 2,179 $ 2,025 $ 1,926 NON-OPERATING ASSETS Cash on Hand "Normal" Cash Excess Cash/ Short-Term Investments Long-Term Investments Non-Operating Assets $ 1,129 $ 447 $ 682 $ 869 $ 1,551 $ $ $ $ $ 2,263 506 1,757 1,053 2,810 $ $ $ $ $ 2,830 568 2,262 1,587 3,849 $ $ $ $ $ 4,385 658 3,726 1,043 4,770 $ 2,669 $ 738 $ 1,931 $ 807 $ 2,738 $ 1,093 $ 862 $ 231 $ 838 $ 1,069 $ 2,005 $ 985 $ 1,020 $ 923 $ 1,943 $ $ $ $ $ 1,216 1,105 111 1,105 1,216 $ $ $ $ $ 1,378 1,252 125 1,252 1,378 $ $ $ $ $ 1,568 1,425 143 1,425 1,568 $ $ $ $ $ 1,755 1,595 160 1,595 1,755 $ $ $ $ $ 1,900 1,727 173 1,727 1,900 $ $ $ $ $ 1,998 1,817 182 1,817 1,998 $ $ $ $ $ 2,061 1,874 187 1,874 2,061 21 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management DIRECTV Group, Inc. FYE December 31 AAA (as of 4/14/09) Yield 4.6% 5.0% 6.2% 7.2% 9.5% 13.6% AA A BBB BB BB‐ WACC Calculation Common Shares Outstanding (M) Current Price Market Value of Equity Preferred Shares Outstanding Preferred Price $          1,024 $          23.95 $         24,529 $              ‐ $              ‐ closing price as of 4/14/2009 10‐yr. UST 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% Spread 1.8% 2.2% 3.4% 4.4% 6.7% 10.8% Source: Yield data on 10‐yr. instruments (Dec. 2008; Compustat) Market Value of Preferred Effective Tax Rate $              ‐ 35.5% $          6,583 $        31,112 3.64% 5.00% 0.96 30‐Yr. T‐Bond (as of 4/14/2009) Henry Fund Analysts' consensus 36‐mo. rolling Beta (Mar. 2006 ‐ 2009) adj. tax rate debt, cap. leases & PV op. leases O/S at FYE‐08 Market Value of Debt & Leases (M) Market Value of Capital (E+P+D) Risk‐Free Rate Market Premium Beta Cost of Equity Interest Coverage Ratio S&P Debt Rating Implied Default Spread 8.45% 7.49 BB 6.70% based on FYE 2008 10‐k (EBITDA/Interest) FINRA est. based on Dec. 08 spreads (Compustat) derived from BB rating ‐ Dec. 2008 eff. spreads Marginal Tax Rate Calculation Components U.S. Federal tax U.S. State and local Change in unrecogn. tax benefits Minority interest in partnerships Foreign tax benefit Change in valuation allowance Tax Credits Other Total Tax Rate Effective $          864   $            73 $            18   $           (26) $           (27) $           (12) $           (32) $                5 $          863 34.9% Marginal $      864 $         73 $       (27) $       (32) $      878 35.5% Cost of Debt Equity Weight Debt Weight 10.34% 78.8% 21.2% WACC 8.08% 22 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management DIRECTV Group, Inc. Valuation Calculations FYE December 31 WACC CV Growth Rate CV ROIC Cost of Equity 8.08% 3.16% 26.8% 8.45% DCF Model      FCF      PV(FCF)      PV(FCF)      + PV(Non‐Oper)      ‐  PV(Debt)      ‐  PV(Cap. Leases)      ‐  PV(Op. Leases)      ‐  PV(ESOP)      ‐  PV(Other Liab.)      PV(Equity)      Shares Outst.      Target Price      Target Price 2009E $          1,680 $          1,555 2010E $        1,468 $        1,257 2011E $        1,776 $        1,407 2012E $        2,039 $        1,494 2013E $        2,162 $        1,466 2014E $        2,450 $        1,537 Terminal $         49,460 $         31,038 $            39,754 $              1,943 $              5,833 $                   542 $                   208 $                    65 $                   282 $            35,050 1024 $              34.22     As of last FYE $              35.03     As of 4/14/2009 (growth at cost of capital) EP Model      ROIC      EP      PV(EP)      PV(EP)      Invested Capital      PV(Operations)      + PV(Non‐Oper)      ‐  PV(Debt)      ‐  PV(Cap. Leases)      ‐  PV(Op. Leases)      ‐  PV(ESOP)      ‐  PV(Other Liab.)      PV(Equity)      Shares Outst.      Target Price      Target Price 2009E 28.36% $          1,359 $          1,257 2010E 31.20% $        1,599 $        1,369 2011E 33.74% $        1,952 $        1,546 2012E 33.23% $        2,112 $        1,548 2013E 31.89% $        2,179 $        1,478 2014E 28.52% $        2,025 $        1,271 Terminal 26.81% $         39,179 $         24,586 $            33,057 $              6,698 $            39,754 $              1,943 $              5,833 $                   542 $                   208 $                    65 $                   282 $            35,050 1024 $              34.22     As of last FYE $              35.03     As of 4/14/2009 (growth at cost of capital) 23 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management DIRECTV Group, Inc. Market Data: As of Apr. 14, 2009 Relative Valuation: Peer Group in Cable & Satellite/ Comm. Equipment Sub‐industries Symbol NOK CMCSA ERIC GLW BSY SJR DISH DISCA SNI DTV Company Name Nokia Comcast Corp. LM Ericsson Corning Inc. British Sky Group Shaw Comm. Inc. DISH Ntwk Corp. Discovery Hold. Co. Scripps Nwks Int. Inc. Industry Name Comm. Equipm. CATV Systems Comm. Equipm. Comm. Equipm. CATV Systems CATV Systems Satellite Systems CATV Systems CATV Systems Satellite Systems Mkt Cap (B) $               51.03 $               39.93 $               26.29 $               22.69 $               10.69 $                 6.58 $                 5.74 $                 4.77 $                 4.30 $               24.36 # S/O (B) 3.80 2.88 3.25 1.56 0.44 0.43 0.45 0.28 0.16 1.02 Beta 1.6 0.9 1.4 1.4 0.7 1.0 1.4 0.8 ROA (%) 10 2 4 23 3 8 11 5 6 10 EBT (%) 9.8 11.9 8.2 25.6 7.3 21.9 13.5 21.9 19.5 12.6 D/E 0.3 0.8 0.2 0.1 1.5 0.7 0.1 1.2 DIRECTV Group Inc 0.8 Note: GLW is excluded from relative valuation estimates due to its high ROA and EBT% comparing to the rest of the sample and DTV.           Because DTV is sometimes included in the Communications & Equipment sub‐industry, a few companies from that group are incl. in the sample as well.  Symbol NOK CMCSA ERIC GLW BSY SJR DISH DISCA SNI DTV Price $                          13.80 $                          13.86 $                            8.45 $                          14.59 $                          24.60 $                          15.30 $                          12.82 $                          16.96 $                          26.22 $                          23.95 EPS 09E $                      0.96 $                      0.98 $                      0.50 $                      0.72 $                      1.61 $                      1.01 $                      2.11 $                      1.18 $                      1.54 $                      1.65 EPS 10E Est. 5‐yr Gr. (%) Sales 09E (B) $                 1.20 13.8 $              56.0 $                 1.12 11.2 $              35.4 $                 0.66 9.3 $              26.4 $                 1.08 13.5 $               4.4 $                 1.95 12.2 $              11.7 $                 1.11 14.9 $               3.0 $                 2.12 2.0 $              11.7 $                 1.41 15.1 $               3.4 $                 1.73 8.7 $               1.6 12% Sales/share DTV Implied Price Average $               23.35  $               23.98  $               24.61 $               29.27  $               30.35  $               31.43 $               35.03 $               29.79 $                 2.04 Sales 10E (B) $            58.1 $            36.8 $            26.9 $              4.9 $            12.6 $              3.2 $            11.8 $              3.7 $              1.7 Average $            22.10 $          25.05 $          21.73 $          24.62 P/E 09 14 14 17 20 15 15 6 14 17 14 15 P/E 10 12 12 13 14 13 14 6 12 15 12 12 P/S 09 0.9 1.1 1.0 5.1 0.9 2.2 0.5 1.4 2.8 1.3 1.1 P/S 10 0.9 1.1 1.0 4.6 0.8 2.0 0.5 1.3 2.6 1.3 1.0 Valuation Model Relative P/E (EPS09) Relative P/E (EPS10) P/S Ratio (Sales09) P/S Ratio (Sales10) DCF/ EP Valuation Avg. Target Price: 24 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management DIRECTV Group, Inc. DCF/ EP Valuation: Sensitivity Analysis $ 35.03 5.80% 5.60% 5.40% 5.20% 5.00% 4.80% 4.60% 4.40% 4.20% 0.45% 29.06 29.95 30.88 31.86 32.90 33.99 35.15 36.38 37.69 Terminal Net Subscriber Base Growth 0.70% 0.95% 1.20% 1.45% $ 29.54 $ 30.05 $ 30.60 $ 31.19 $ 30.46 $ 31.02 $ 31.61 $ 32.26 $ 31.44 $ 32.04 $ 32.69 $ 33.38 $ 32.47 $ 33.12 $ 33.82 $ 34.58 $ 33.56 $ 34.26 $ 35.03 $ 35.86 $ 34.71 $ 35.48 $ 36.32 $ 37.22 $ 35.93 $ 36.77 $ 37.68 $ 38.68 $ 37.23 $ 38.14 $ 39.15 $ 40.24 $ 38.61 $ 39.61 $ 40.71 $ 41.92 1.70% 31.83 32.95 34.14 35.41 36.77 38.22 39.77 41.44 43.24 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Market Risk Premium $ 35.03 37.50% 38.00% 38.50% 39.00% 39.50% 40.00% 40.50% 41.00% 41.50% $ $ $ $ $ $ $ $ $ 0.72 46.80 46.37 45.93 45.50 45.07 44.64 44.20 43.77 43.34 $ $ $ $ $ $ $ $ $ 0.80 42.93 42.54 42.15 41.75 41.36 40.96 40.57 40.18 39.78 $ $ $ $ $ $ $ $ $ Beta Estimate 0.88 0.96 39.60 $ 36.69 39.24 $ 36.36 38.88 $ 36.03 38.52 $ 35.70 38.15 $ 35.36 37.79 $ 35.03 37.43 $ 34.70 37.07 $ 34.37 36.71 $ 34.03 $ $ $ $ $ $ $ $ $ 1.04 34.14 33.83 33.52 33.22 32.91 32.60 32.29 31.99 31.68 $ $ $ $ $ $ $ $ $ 1.12 31.87 31.59 31.30 31.02 30.73 30.45 30.16 29.88 29.59 Programming Costs (% of Revenue) 25 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management DIRECTV Group, Inc. Operating Leases ‐ Present Value FYE December 31 ($ Millions) Pre‐tax cost of debt Year 2009 2010 2011 2012 2013 Thereafter Yrs. to  Maturity 1 2 3 4 5 6 10.34% Lease  Commitment  $                    51 $                    50 $                    47 $                    35 $                    36 $                    72 $                 291 PV of Lease  1 Payment  $                 46 $                 41 $                 35 $                 24 $                 22 $                 40 $               208 Note: Represents present value of non‐cancellable operating leases (Source: 2008 10‐k). 26 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management DIRECTV Group, Inc. VALUATION OF OPTIONS GRANTED IN ESOP Ticker Symbol Current Stock Price Risk Free Rate Current Dividend Yield Annualized St. Dev. of Stock Returns DTV $         23.95 3.64% 0.00% 22.50% As of 4/14/2009 30‐Yr. T‐Bond (as of 4/14/2009) None Source: 2008 10‐k Range of Outstanding Options Range 1 Range 2 Range 3 Total Average Number Exercise of Shares Price 36,260,477 $         29.54 Average B‐S Value Remaining Option of Options Life (yrs) Price Granted 2.00 $            1.79 $          64,733,721 36,260,477 $         29.54 2.00 $            1.79 $          64,733,721 27