DIRECTV 2002 Annual Report Download - page 25

HUGHES ELECTRONICS CORPORATION
As a provider of fixed satellite services, PanAmSat operates in the most mature segment of the
satellite communications business, historically characterized by steady and predictable revenue
streams, strong cash flows from operations, significant revenue backlog and high barriers to entry.
PanAmSat derives its revenue primarily from its video and network services. At December 31, 2002,
PanAmSat had contracted backlog of approximately $5.55 billion, which compares to $5.84 billion at
December 31, 2001.
Cost Structure. PanAmSat enters into contracts with satellite manufacturers for the construction
of its satellites. These contracts typically require that PanAmSat make progress payments during the
period of the satellite’s construction and orbital incentive payments over the orbital life of the satellite.
These and other related costs are capitalized and depreciated over the useful life of the satellite, which
is typically 12 to 15 years. Satellite depreciation commences as soon as the satellite is placed into
commercial operation. Satellite depreciation is typically the largest component of PanAmSat’s overall
costs and expenses.
The other major operating expenses for PanAmSat are direct operating costs and selling, general
and administrative (“SG&A”) costs. Direct operating costs are primarily comprised of costs to operate
and maintain the satellites such as engineering and operations costs, in-orbit insurance costs and
third-party charges generally associated with the provision of special events and incidental services.
Direct operating costs totaled approximately 16% of total revenue in 2002. SG&A costs primarily
consist of sales and marketing expenses, salaries and benefits, and corporate and administrative
expenses. SG&A costs totaled approximately 12% of total revenue in 2002. PanAmSat achieved an
EBITDA margin of 72.8% in 2002, which included these direct operating and SG&A costs. PanAmSat
is committed to managing its operating cost structure in order to continue to maximize its operational
efficiency.
Video Services. Through its video services, PanAmSat provides satellite services for the
transmission of entertainment, news, sports and educational programming worldwide. PanAmSat
currently provides video services for over 300 content providers worldwide. The video services are
comprised of four categories:
• video distribution services—the full-time transmission of television programming to cable
systems, network affiliates and other redistribution systems;
• direct-to-home television services—the transmission of multiple television channels for
household reception;
• full-time contribution services—satellite transmission services for the full-time transmission of
news, sports and entertainment segments to network affiliates or broadcast centers around the
world; and
• special events services—short-term satellite services that PanAmSat provides to broadcasters
when they need on-the-scene coverage of sporting events and breaking news.
PanAmSat’s video services have been the most stable component of its business, characterized
by predictable revenues from its media customers under long-term contracts. Part of PanAmSat’s
strategy is to utilize the relationships PanAmSat has built with premier video content providers as a
powerful marketing tool for obtaining new business. Because PanAmSat has premier programmers,
such as AOL Time Warner, Disney and Viacom, under long-term agreements for capacity on particular
satellites, PanAmSat has been able to attract additional programmers onto these satellites and charge
appropriate rates for additional capacity on these premium satellites. Other content providers have
been willing to pay higher rates to leverage the existing ground infrastructure already aimed at
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