DIRECTV 2002 Annual Report Download - page 6

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assessing, analyzing and benchmarking
the DIRECTV cost structure. These
efforts have given us tremendous insight
into both our strengths and weaknesses,
and while we’ve made great strides dur-
ing the last two years, we know what we
have to do to further improve the busi-
ness. During 2002, for example, we
realized approximately $50 million in sav-
ings from the workforce reduction imple-
mented in mid-year 2001 as well as from
on-going efforts to streamline DIRECTV’s
operating budget. Looking forward, we
have identified billing, customer service
and programming costs as major opportu-
nities for improvement. With respect to
billing costs, we recently completed
negotiations with our service provider that
will yield annual cost savings of approxi-
mately $50 million per year beginning in
2004. We also envision significant sav-
ings opportunities in the customer service
area as we renegotiate our existing agree-
ments, without sacrificing the service qual-
ity that customers have come to know
and expect from our DIRECTV service.
And importantly, we are determined to
leverage our large and growing subscriber
base in upcoming negotiations with pro-
gramming providers to garner the most
favorable terms possible.
As a result of these efforts to increase
revenue, lower customer churn and
reduce operating costs, DIRECTV
achieved EBITDA of $564 million in
2002, more than triple 2001’s EBITDA.
Despite the heightened focus on prof-
itability, DIRECTV still added more than
1 million net new subscribers during
2002. In only eight years after its
national launch, DIRECTV is now the
entertainment service of choice for nearly
one in every nine television households
in the United States.
Hughes Network Systems
(HNS). At HNS, we’re also sharply
focused on pursuing strategies that we
believe will help the company achieve
profitable growth. HNS’ core business
is its DIRECWAY®satellite-based
service for enterprise customers. In this
market, HNS is the world leader, with
more than 400,000 very small aperture
terminals (VSATs) shipped or ordered
by customers in 85 countries throughout
the world. Although quite profitable
today, we believe that as our enterprise
customers’ bandwidth requirements
expand going forward, the current
technology will not completely satisfy
our customers’ needs. Our answer for
the evolving marketplace – and to
protect and expand our business – is
our next-generation SPACEWAY®
satellite platform.
Development efforts for the
SPACEWAY service are progressing
and the business remains on-track to
commence commercial operations in
2004 throughout North America. With
SPACEWAY, we’ll be able to provide
faster, more cost-effective bandwidth on
demand, delivering rich multi-media
content to our customers. The
SPACEWAY business model differs
from today’s enterprise VSAT business
in two key respects. First, because of
SPACEWAY’s significantly improved
cost and functionality, HNS will tap into
a market ten times the size of its current
addressable market. Second, primarily
because HNS will own – rather than
lease – the satellite capacity, steady-state
EBITDA margins are expected to
increase by a factor of four compared to
today’s North American enterprise
VSAT margins. So by investing in this
platform, we believe HNS is well
positioned to achieve profitable growth
going forward.
HNS is also very important to HUGHES
as a leading manufacturer of DIRECTV
U.S. receiving equipment. Through year-
end 2002, HNS had manufactured over
10 million units since entering this business
in 1996. In late-2002, HNS began ship-
ping a new low-cost DIRECTV receiver
incorporating digital video recording
(DVR) technology. Increasing the num-
ber of DIRECTV customers with DVR-
equipped receivers is a key strategic thrust
in 2003 because the combination of
DIRECTV programming and the DVR ser-
vice creates a compelling viewing experi-
ence and has proven to increase customer
satisfaction, reduce churn and increase
revenue. And HNS, as a low-cost, high-
quality supplier of these receivers, will be
a key partner in this strategy.
PanAmSat. In 2002, PanAmSat,
which is 81% owned by HUGHES and
trades on the NASDAQ under the ticker
symbol “SPOT”, continued the course it
began in 2001 to strengthen its operating,
marketing and financial performance.
These efforts resulted in a nearly three-fold
increase in earnings per share compared
to the prior year, despite a difficult market
for fixed satellite service operators.
Among PanAmSat’s accomplishments
was the completion of a 30-month,
$2 billion satellite fleet modernization
program giving PanAmSat one of the
youngest, most modern fleets in the
industry. PanAmSat’s focus on its core
video customers resulted in a 2002
year-end backlog of $5.55 billion, with
more than 87% of 2003 projected rev-
enue under contract. PanAmSat also
reduced 2002 operating costs before
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