DIRECTV 2006 Annual Report Download - page 65

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THE DIRECTV GROUP, INC.
Subscribers. The increase in average monthly subscriber churn to 1.70% was primarily due to
higher involuntary churn from higher risk subscribers acquired in 2004 and early 2005, and a more
competitive marketplace. The 48,000 decrease in gross subscriber additions in 2005 was mainly due to
more stringent credit policies implemented beginning in the second quarter of 2005. The 535,000
reduction in the number of net new subscribers was mainly due to the higher churn on a larger
subscriber base.
Revenues. DIRECTV U.S. revenues increased $2,452.2 million to $12,216.1 million resulting from
higher ARPU on the larger subscriber base and the full year effect of the Pegasus and NRTC
subscribers that we purchased in the second half of 2004. The 4.0% increase in ARPU to $69.61
resulted primarily from price increases on programming packages and higher mirroring fees from an
increase in the average number of set-top receivers per subscriber.
Total Operating Costs and Expenses. DIRECTV U.S. total operating costs and expenses increased
$1,672.1 million to $11,414.1 million resulting primarily from higher costs for programming, subscriber
service expenses, general and administrative expenses, depreciation and amortization expense, and
customer upgrade and retention initiatives. Operating costs and expenses as a percentage of revenues
decreased from 100% in 2004 to 93% in 2005 mostly due to the stabilization of costs in key areas such
as subscriber acquisition, upgrade and retention.
DIRECTV U.S. programming and other costs increased $1,039.6 million primarily as a result of
the increased number of subscribers and annual program supplier rate increases. Subscriber service
expenses increased primarily as a result of the larger subscriber base.
Subscriber acquisition costs were stable in 2005 compared to 2004. However, SAC per subscriber
was slightly lower due to a decrease in the cost of set-top receivers, mostly offset by an increase in the
number of set-top receivers provided to new subscribers, including a greater number of higher cost HD
and DVR products.
Increased volume under our movers and HD upgrade programs drove most of the $113.3 million
increase in upgrade and retention costs. Under these programs, we provide additional equipment, plus
installation, to existing subscribers at significantly reduced prices.
The $140.0 million increase in general and administrative expenses resulted primarily from higher
bad debt expense resulting from the increase in the subscriber base and involuntary churn discussed
above, and an increase in other expenses, such as labor, benefits and consulting, to support the larger
business.
The $137.0 million increase in depreciation and amortization expense resulted primarily from
higher amortization expense of $181.0 million resulting from the intangible assets recorded as part of
the NRTC and Pegasus transactions, partially offset by lower depreciation expense resulting from assets
becoming fully depreciated in 2005.
The improvement of operating profit before depreciation and amortization of $917.1 million was
primarily due to the gross profit generated from the higher revenues partially offset by an increase in
upgrade and retention costs and general and administration expenses. The improvement in operating
profit of $780.1 million was primarily due the increase in operating profit before depreciation and
amortization, partially offset by the increase in depreciation and amortization expense.
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