DIRECTV 2006 Annual Report Download - page 56

THE DIRECTV GROUP, INC.
the number of high risk subscribers added to our platform, an increase in the number of HD and DVR
subscribers, and initiatives to further improve customer service.
Operating Results. In 2006, DIRECTV U.S. operating profit before depreciation and amortization
more than doubled to $3,220.7 million and operating profit before depreciation and amortization
margin improved from 12.3% in 2005 to 23.4%, primarily due to the capitalization of set-top receivers
under the lease program introduced on March 1, 2006, lower subscriber acquisition costs due to fewer
gross subscriber additions, and a reduction in general and administrative expenses mostly related to
lower bad debt expense.
In 2007, we anticipate a 15% to 20% increase in operating profit before depreciation and
amortization primarily due to the expected increase in revenues partially offset by higher operating
costs and expenses principally due to higher programming costs from annual programming rate
increases, the larger subscriber base and the added cost of new programming contracts. Subscriber
services, broadcast operations and general and administrative expenses are also expected to increase in
2007 primarily due to the larger subscriber base and expenses related to the planned rollout of
additional HD channels.
We also expect operating profit before depreciation and amortization margin to increase 1% to 2%
in 2007 compared with 2006. Subscriber acquisition, upgrade and retention, subscriber services, and
general and administrative expenses as a percentage of revenue are expected to decline due primarily
to increased scale and efficiencies. These improvements will be partially offset by lower programming
margin due to the increased programming costs discussed above and higher broadcast operations
expenses relative to revenues due to the rollout of additional HD channels.
Operating profit in 2007 is expected to be relatively consistent with the $2,347.7 million generated
in 2006, as the anticipated higher operating profit before depreciation and amortization is expected to
be offset by the higher depreciation and amortization expense resulting from the set-top receiver lease
program.
Additional Information. We expect upgrade and retention costs incurred, including those
capitalized under the lease program but excluding the cost of replacing MPEG-2 HD subscriber
equipment with our new MPEG-4 HD subscriber equipment, to be relatively unchanged with respect to
the approximately $1,250 million spent in 2006. In addition, we expect subscriber acquisition cost per
gross new subscriber (SAC) during 2007 to be within the range of $650 to $700 compared to $641 in
2006 primarily due to an anticipated increase in the percentage of new subscribers leasing advanced
set-top boxes. The amount of upgrade and retention and subscriber acquisition costs capitalized for new
subscribers under the lease program is also expected to be higher due to the full year effect of the
lease program and an increase in the penetration of advanced set-top boxes.
Free Cash Flow. In 2006, The DIRECTV Group generated $1,185.9 million of free cash flow,
defined as net cash provided by operating activities less cash paid for property and satellites. During
2007, we expect free cash flow to remain relatively consistent with 2006. The anticipated increase in
operating profit before depreciation and amortization is anticipated to be offset by a significant
increase in cash paid for income taxes due mostly to the utilization of our net operating loss
carryforwards in 2006 and an increase in capital expenditures for leased subscriber equipment and
broadcast equipment to support the launch of new local HD channels.
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