S-1 1 d495675ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on March 6, 2018.

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Vrio Corp.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   4899   82-3203470

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

208 S. Akard St.

Dallas, Texas 75202

Telephone: (214) 748-8746

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Michael A. Hartman, Esq.

General Counsel and Secretary

One Rockefeller Plaza

New York, New York 10020

Telephone: (212) 205-0700

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Patrick S. Brown, Esq.

Sarah P. Payne, Esq.

Sullivan & Cromwell LLP

1888 Century Park East, Suite 2100

Los Angeles, California 90067

(310) 712-6600

 

S. Todd Crider, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

(212) 455-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     ☐       Accelerated filer     ☐
Non-accelerated filer     ☒       Smaller reporting company     ☐
        Emerging growth company     ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE:

 

 

Title of Each Class of

Securities to be Registered

 

Proposed
Maximum
Aggregate

Offering Price (1)(2)

 

Amount of

Registration Fee

Class A Common Stock, par value $0.01 per share

  $100,000,000.00   $12,450.00

 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes additional shares of Class A common stock issuable upon exercise of the underwriters’ option to purchase additional shares of Class A common stock.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is neither an offer to sell these securities nor a solicitation of an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS, DATED MARCH 6, 2018

             Shares

 

LOGO

Vrio Corp.

Class A Common Stock

 

 

This is an initial public offering of shares of Class A common stock of Vrio Corp. (“Vrio”). We are offering                  shares of our Class A common stock in this offering. We intend to use the proceeds from the sale of the shares of our Class A common stock to repay related-party indebtedness owed to our parent company, AT&T Inc. (“AT&T”), and to distribute the remaining proceeds to AT&T. See “Use of Proceeds”.

Prior to this offering, there has been no public market for our Class A common stock. It is currently estimated that the initial public offering price per share of our Class A common stock will be between $        and $        . We intend to apply to list our Class A common stock on the New York Stock Exchange (the “NYSE”) under the symbol “VRIO”.

Following this offering, we will have two classes of common stock outstanding: Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock will be identical, except with respect to voting rights and conversion rights applicable to Class B common stock. The holders of Class A common stock will be entitled to one vote per share for all matters submitted to a vote of stockholders and the holders of Class B common stock will be entitled to ten votes per share for all matters submitted to a vote of stockholders. Each share of Class B common stock held by AT&T or one of its subsidiaries will be convertible into one share of Class A common stock at any time but will not be convertible if held by any other holder.

Following this offering, AT&T will control a majority of the combined voting power of our Class A and Class B common stock and, accordingly, a majority of the power to elect directors. As a result, we will be deemed a “controlled company” within the meaning of the corporate governance rules of the NYSE. See “Risk Factors—Risks Related to Our Ongoing Relationship with AT&T” and “Management” for additional information.

 

 

Investing in our Class A common stock involves a high degree of risk. See “Risk Factors” beginning on page 22.

 

 

 

     Per
Share
     Total  

Initial public offering price

   $                   $               

Underwriting discounts and commissions (1)

   $      $  

Proceeds, before expenses, to us

   $      $  

 

 

(1) For additional compensation information, see “Underwriting”.

To the extent that the underwriters sell more than             shares of our Class A common stock, the underwriters will have the option, for a period of 30 days from the date of this prospectus, to purchase up to             additional shares of our Class A common stock from us at the initial public offering price, less the underwriting discounts and commissions.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of Vrio’s Class A common stock to investors on or about                     , 2018 through the book-entry facilities of The Depository Trust Company.

 

 

Joint Book-Running Managers

 

Goldman Sachs & Co. LLC   J.P. Morgan   Citigroup   Morgan Stanley

 

 

Prospectus dated                 , 2018


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LOGO

Vrio.


Table of Contents

TABLE OF CONTENTS

 

For Investors Outside the United States

     ii  

Trademarks, Service Marks and Trade Names

     ii  

Market and Industry Data

     ii  

Non-GAAP Financial Measures

     ii  

Industry Terms

     iv  

Prospectus Summary

     1  

The Offering

     14  

Summary Historical and Pro Forma Financial and Operating Data

     16  

Risk Factors

     22  

Cautionary Statement Regarding Forward-Looking Statements

     52  

Use of Proceeds

     54  

Dividend Policy

     55  

Capitalization

     56  

Dilution

     58  

Selected Historical Financial Data

     59  

Unaudited Pro Forma Condensed Combined Financial Information

     62  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     68  

Business

     116  

Regulation

     140  

Management

     149  

Executive Compensation

     153  

Certain Relationships and Related Party Transactions

     188  

Principal Stockholders

     192  

Description of Indebtedness

     194  

Description of Capital Stock

     196  

Shares Eligible for Future Sale

     203  

Material U.S. Federal Income Tax Considerations for Non-U.S. Stockholders

     205  

Certain Benefit Plan Investor Considerations

     208  

Underwriting

     209  

Validity of Securities Offered

     214  

Experts

     214  

Where You Can Find More Information

     214  

Index to Combined Financial Statements

     F-1  

Neither we (or any of our affiliates) nor the underwriters have authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we (or any of our affiliates) nor the underwriters takes any responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. Neither we (or any of our affiliates) nor the underwriters are making an offer to sell shares of Class A common stock in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus and any free writing prospectus is only accurate as of its date. Our business, financial condition, results of operations and prospects may have changed since that date.

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. See “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements”.

 

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FOR INVESTORS OUTSIDE THE UNITED STATES

We and the underwriters are offering to sell, and seeking offers to buy, shares of our Class A common stock only in jurisdictions where offers and sales are permitted. Neither we nor any of the underwriters has done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our Class A common stock and the distribution of this prospectus outside of the United States.

TRADEMARKS, SERVICE MARKS AND TRADE NAMES

We own or have the right to use the trademarks, service marks and trade names that we use in connection with our businesses, such as Vrio, DIRECTV, OnDIRECTV, DIRECTV Sports, Cyclone Design, SKY, SKYPlay and our other registered or common law trademarks, service marks or trade names appearing in this prospectus. Each trademark, service mark and trade name of any other company appearing in this prospectus is, to our knowledge, owned by such other company. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus are listed without the ® and ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of any applicable licensors to these trademarks, service marks and trade names.

MARKET AND INDUSTRY DATA

Market and industry data and forecasts used in this prospectus have been obtained from independent industry sources, including Ampere Analysis, Agência Nacional de Telecomunicações (“Anatel”), Business Bureau, the International Monetary Fund (“IMF”), the Inter-American Development Bank (“IADB”) and S&P Global Market Intelligence (formerly SNL Kagan) (“S&P Global”), unless otherwise specified. Some market data and statistical information contained in this prospectus are also based on management’s estimates and calculations, which are derived from our review and interpretation of the independent sources, our internal market and brand research, our knowledge of the industry and public filings. Although we believe these sources to be reliable, we have not independently verified the data obtained from these sources and we cannot assure you of the accuracy or completeness of the data. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and uncertainties as the other forward-looking statements contained in this prospectus.

NON-GAAP FINANCIAL MEASURES

This prospectus contains “non-GAAP financial measures” that are financial measures that either exclude or include amounts that are not excluded or included in the most directly comparable measures calculated and presented in accordance with U.S. generally accepted accounting principles (“GAAP”). In particular, we make use of certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Free Cash Flow (“FCF”) and constant currency, to evaluate the operating performance of the Company. We define EBITDA as net income (loss) excluding interest income, interest expense, equity in net income (loss) of affiliates, other income (expense)-net, income tax (benefit) expense and depreciation and amortization expense. Our calculation of EBITDA, which may differ from similarly titled measures reported by other companies, excludes other income (expense)-net, and equity in net income (loss) of affiliates, as these do not reflect the operating results of our subscriber base or operations that are not under our control. We define Adjusted EBITDA as EBITDA (as defined above), less charges related to the remeasurement of net monetary assets in Venezuela and the impairments of fixed and intangible assets. We define EBITDA Margin as EBITDA (as defined above) divided by revenues and we define Adjusted EBITDA Margin as Adjusted EBITDA (as defined above) divided by revenues. We define FCF as net cash provided by operating activities less capital expenditures.

 

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We believe EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin and FCF are appropriate measures for evaluating the operating performance of the Company. EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin and FCF and similar measures with similar titles are common performance measures used by investors, analysts and peers to compare performance in our industry. Internally, we use EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin and FCF as important indicators of our business performance and to evaluate management’s effectiveness. We believe EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin and FCF provide management and investors with useful measures for period-to-period comparisons of our core business and operating results by excluding items that are not comparable across reporting periods or that do not otherwise relate to the Company’s ongoing operating results. EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin and FCF should be viewed as a supplement to and not a substitute for operating income (loss), net income (loss), and other measures of performance presented in accordance with GAAP. Since EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin and FCF are not measures of performance calculated in accordance with GAAP, these measures may not be comparable to similar measures with similar titles used by other companies.

We believe that FCF is a useful indicator of liquidity and provides information to management and investors about the amount of cash generated from our core operations that can be used for investing in our business. FCF has certain limitations in that it does not represent the total increase or decrease in cash for the period, nor does it represent the residual cash flows available for discretionary expenditures. Therefore, it is important to evaluate FCF along with our combined statements of cash flows.

Constant currency is a non-GAAP measure which we calculate by using average foreign currency rates from the comparable, prior-year period, and which we use to present revenues or the applicable expense items in a manner that enhances comparison. Constant currency can be presented to supplement various GAAP measures, but is most commonly used by management to analyze revenues and operating expenses without the impact of changes in foreign currency rates. We believe constant currency is useful to investors to evaluate the performance of our business without taking into account the impact of changes to the foreign exchange rates to which our business is subject. In calculating amounts on a constant currency basis as presented in this prospectus, we exclude our Venezuela subsidiary in light of the hyperinflationary conditions in Venezuela that we believe are not representative of the macroeconomics of the rest of the region in which we operate.

The presentations of these measures have limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP.

 

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INDUSTRY TERMS

The following is a glossary of certain industry terms used throughout this prospectus. For a list of key financial metrics utilized throughout this prospectus and their respective definitions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Terminology”.

 

4K

   Refers to the horizontal resolution of 3,840 pixels, forming the total image dimensions of 3840×2160, otherwise known as 2160p.

8K

   Refers to the horizontal resolution of 7,680 pixels, forming the total image dimensions of 7680×4320, otherwise known as 4320p.

Conditional access technology

   A combination of scrambling and encryption technology that protects content by requiring that certain criteria be met before granting access to the content.

DBS

   Direct-broadcast satellite.

DTH

   Direct-to-home, a term commonly used to refer to satellite television.

DVR

   Digital video recorder.

HD

   High-definition.

IPTV

   Internet Protocol television. The delivery of television over IP networks.

Middleware

   Computer software that sits between set-top box operating system software and application software. Middleware allows for easier and faster development of complex software applications without having to be concerned with set-top box specific software and configuration.

OTT

   Over-the-top, a term used to refer to audio, video and other media transmitted via the Internet as a stand-alone product.

SD

   Standard-definition.

Set-top box

   A term used to refer to an information appliance device that generally contains a TV-tuner that receives external source of signal, and converts that source signal into content in a form that can then be displayed on the television screen.

SMS

   Short Message Service, commonly referred to as “text messaging”.

 

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PROSPECTUS SUMMARY

This summary highlights information appearing elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before making a decision to participate in the offering. You should carefully read the entire prospectus, including the information presented under “Risk Factors”, “Cautionary Statement Regarding Forward-Looking Statements”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Selected Historical Financial Data”, “Unaudited Pro Forma Condensed Combined Financial Information” and the historical Combined Financial Statements and related Notes presented elsewhere in this prospectus.

In this prospectus, unless the context otherwise requires, the terms “Vrio Corp.”, “Vrio”, “we”, “us”, “our” and the “Company” refer to Vrio Corp. and its consolidated subsidiaries after giving effect to the transactions described under “Certain Relationships and Related Party Transactions—Separation Transactions”, “AT&T” refers to our parent company, AT&T Inc. and its consolidated subsidiaries (other than Vrio and its consolidated subsidiaries) and “DIRECTV” refers to DIRECTV Group Holdings, LLC and its consolidated subsidiaries (which, unless the context otherwise provides, does not include Vrio or its consolidated subsidiaries). Currency amounts in this prospectus are stated in U.S. dollars, unless otherwise indicated.

References in this prospectus to our historical assets, liabilities, products, operations or activities are to the historical assets, liabilities, products, operations or activities of DIRECTV in eight countries in South America and three countries in the Caribbean (“DIRECTV Latin America”) as they were historically owned, incurred or conducted as part of AT&T prior to the completion of the transactions described under “Certain Relationships and Related Party Transactions—Separation Transactions”. Unless otherwise indicated or the context otherwise requires, the information included in this prospectus assumes the completion of the transactions described under “Certain Relationships and Related Party Transactions—Separation Transactions”.

Company Overview

We are a leading provider of digital entertainment services in South America, with approximately 13.6 million subscribers in the Region as of December 31, 2017. The “Region” in which we operate consists of eight countries in South America and three countries in the Caribbean. We are one of the two largest pay-TV providers in each country in which we operate, with the exception of Chile and Peru.

We began our operations in 1996 and since then have expanded by executing our strategy to provide the best digital entertainment experience anytime, anywhere in the Region. Our offerings and brands are widely recognized as market-leading. Through our scale and purpose-built technology, we offer customers a full range of international, regional and local content, including exclusive programming, tailored to each of the countries and certain sub-markets in the Region and delivered in a wide range of packages and features so that customers can receive our services in a manner best-suited to their needs.

We have a sustained track record of growth achieved through a combination of operational excellence, best-in-class customer service, technological innovation, new product introductions and strong brands. According to S&P Global, we accounted for approximately 35% of the total pay-TV and 50% of satellite TV subscriber growth across the Region from December 31, 2011 to December 31, 2016. Our success can be attributed to several factors that differentiate our company from our competitors. Specifically, we believe we:

 

  Operate with a “think global, act local” philosophy, which leverages the expertise of our local, regional and lean senior management teams to drive best practices across the Region;

 

  Offer best-in-class content, including premier sporting events, international programming and tailored local content;


 

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  Utilize low-cost, scalable technology best-suited to efficiently deliver the highest quality all-digital video experience across the Region;

 

  Provide the best customer experience throughout the entirety of the customer relationship, driving demand, fostering loyalty and reducing churn;

 

  Maintain leading, “top of mind” brands that are well-recognized in the Region; and

 

  Understand how to navigate successfully the varied political and macroeconomic environments in the Region with innovative and flexible service offerings, including postpaid and prepaid entertainment services, as well as our TV Everywhere streaming service.

These differentiating attributes enable us to maintain a leadership position in the Region, while generating superior monthly average revenue per user (“ARPU”) relative to other large pay-TV providers in the Region. For example, in 2016, our ARPU was 30% higher than América Móvil’s pay-TV ARPU in the Region, as reported by Ampere Analysis. In addition, we are the only scaled provider of prepaid pay-TV services in the Region.

We provide digital entertainment services to our customers on a postpaid and prepaid basis across three segments: Brazil, which distributes our offerings in Brazil under the SKY brand; South Region, which distributes our offerings in Argentina, Chile, Peru and Uruguay under the DIRECTV brand; and North Region, which distributes our offerings in Barbados, Colombia, Curaçao, Ecuador, Trinidad and Tobago and Venezuela, also under the DIRECTV brand. We are a holding company, and conduct all of our operations through our subsidiaries and we do not conduct any business operations of our own.

The graphic below highlights the geographic presence of our pay-TV customers as of December 31, 2017.

Geographic Presence of Our Pay-TV Customers as of December 31, 2017

 

LOGO



 

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Following AT&T’s acquisition of DIRECTV in July 2015 (the “Acquisition”), we developed a dynamic operating philosophy that enables us to target and address local markets, while also pursuing a cohesive group strategy. This philosophy empowers our local and regional teams to focus on operational decision-making while providing them with centralized infrastructure, strategy and support from a lean U.S.-based management team. Our “think global, act local” approach drives our superior customer experience and has instilled a culture of cost leadership and a focus on driving profitable growth. In addition, our local management teams’ compensation is determined based on a combination of the financial and operational performance of their local territories and our business as a whole, fostering collaboration across geographies.

Since the Acquisition, and in spite of the challenging economic conditions, we have enhanced our free cash flow across the Region by executing several initiatives, including:

 

  Prioritizing the addition of higher quality subscribers over aggregate subscriber count;

 

  Simplifying our organizational structure and reducing management layers;

 

  Renegotiating supplier contracts to better leverage our pan-Regional scale, driving more of our operating costs into local currency;

 

  Redesigning our set-top boxes, including a reduction in expected development costs, to improve the average cost of our set-top boxes by 34% in 2017 compared to 2016;

 

  Focusing our investments on higher return projects and reducing investments in non-core products;

 

  Standardizing and expanding the availability of our prepaid offerings across the Region; and

 

  Further digitizing the customer experience to focus on self-help and automation, which reduces call volumes to our customer care centers, while simultaneously improving overall customer satisfaction.

Going forward, we expect to continue to drive free cash flow generation through our focus on four broad areas:

 

  Profitably grow our subscriber base. By utilizing our data, insights and experience operating across the Region, and matching different customer segments with the right offerings, we aim to continue to take advantage of the underpenetration of pay-TV across the Region to grow our base of higher quality subscribers. Our scale also allows us to offer a prepaid service with attractive unit economics that further expands our total addressable market.

 

  Increase incremental ARPU. We expect to continue to drive higher customer spend through our various forms of premium content add-ons, pay-per-view content and higher-tiered channel packages.

 

  Drive margin expansion. We will continue to innovate and leverage our pan-Regional scale to improve margins and reduce costs. Our innovation has lowered set-top box, satellite dish and other equipment costs, reducing subscriber acquisition costs substantially since 2014. Our investments to modernize customer service platforms continue to drive efficiencies in our subscriber service expense performance. We focus our sales and distribution strategies on specific market opportunities in a manner that has helped to maximize return on marketing spend.

 

  Improve customer experience. Our digital user interface is easy-to-use and feature-rich, and includes tools for content viewing, service and account management at our customers’ fingertips. As we continue to develop user interface features and functionality, we expect continued improvement in customer retention and reduced costs associated with call volumes to our customer care centers and customer service requests while maintaining our high standards for customer service.


 

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For the year ended December 31, 2017, our revenues were $5,568 million, as compared to revenues of $5,023 million for the year ended December 31, 2016. In addition, our net income was $222 million for the year ended December 31, 2017 as compared to a net loss of $356 million for the year ended December 31, 2016, and our Adjusted EBITDA was $1,245 million for the year ended December 31, 2017 as compared to $1,035 million for the year ended December 31, 2016.

 

    Successor     Unaudited
Pro Forma (1)
    % Change     Constant Currency %
Change excluding
Venezuela
 
    Year ended
December 31,
2017
    Year ended
December 31,
2016
    Year ended
December 31,
2015
    2017 to
2016
    2016 to
Unaudited
Pro Forma
Year ended
December 31,
2015
    2017 to
2016
    2016 to
Unaudited
Pro Forma
Year ended
December 31,
2015
 
    (U.S. dollars in millions, except per subscriber amounts)  

Revenues

  $ 5,568     $ 5,023     $ 5,913       10.9     (15.1 )%      8.5     10.8

Brazil

    2,827       2,661       2,823       6.2     (5.7 )%      (2.3 )%      (0.2 )% 

South Region

    1,951       1,638       1,797       19.1     (8.8 )%      28.7     31.7

North Region

    674       589       1,136       14.4     (48.2 )%      6.3     7.4

EBITDA (2)

  $ 1,205     $ 918     $ 111       31.3     727.0     23.7     36.2

Brazil

    679       593       640       14.5 %      (7.3 )%      4.4     (1.6 )% 

South Region (2)

    506       418       451       21.1 %      (7.3 )%      37.0     69.8

North Region (2)

    (23     (143     (976     83.9     85.3     (12.9 )%      73.1

Adjusted EBITDA (3)

  $ 1,245     $ 1,035     $ 1,163       20.3     (11.0 )%      24.5     36.2

Subscribers (as of the end of the period, in thousands) (4)

    13,834       12,655       12,720       9.3 %      (0.5 )%     

Postpaid

    8,719       9,027       9,530       (3.4 )%      (5.3 )%     

Prepaid

    5,115       3,628       3,190       41.0     13.7    

ARPU

  $ 33.81     $ 33.03     $ 38.80       2.4     (14.9 )%      (0.8 )%      11.8

Postpaid

  $ 45.86     $ 39.78     $ 43.96       15.3     (9.5 )%      12.7     15.4

Prepaid

  $ 11.93     $ 14.55     $ 22.27       (18.0 )%      (34.7 )%      (22.1 )%      4.8

 

* The sum of the segment amounts presented above excludes eliminations, adjustments and other impacts necessary for reconciliation to the total combined Company amounts.
(1) Unaudited pro forma information for the year ended December 31, 2015 gives effect to the Acquisition as if it had occurred on January 1, 2015. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Additional Significant Events Affecting the Comparability of Our Results of Operations—AT&T Acquisition of DIRECTV”.
(2) EBITDA includes Venezuelan currency devaluation charges and fixed and intangible asset impairment charges in Venezuela and Peru. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Additional Significant Events Affecting the Comparability of Our Results of Operations—Devaluation and Foreign Currency Exchange Controls”.
(3) Adjusted EBITDA is equal to EBITDA less charges related to the remeasurement of net monetary assets in Venezuela and the impairments of fixed and intangible assets.
(4) On January 1, 2017, we changed how we calculate prepaid subscribers across the Region and postpaid subscribers in Brazil. With respect to our prepaid subscribers, this change resulted in a one-time upward adjustment of 1,029,000 subscribers as of January 1, 2017, and, with respect to our postpaid subscribers in Brazil, this change resulted in a one-time upward adjustment of 103,000 subscribers as of January 1, 2017. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Overview and General Trends”.


 

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Our Competitive Strengths

We believe our leading pan-Regional market position provides significant competitive advantages, meaningful financial benefits and clear economies of scale.

Focused and optimized business model

Our “pure play” business model enables management to intensely focus on our core competency—providing best-in-class digital entertainment services—as well as nearby adjacencies that enhance our customer experience, such as providing broadband in select markets.

Our “think global, act local” operating philosophy differentiates us from other digital entertainment service providers and is a competitive advantage critical to serving the various demographics within the Region. We derive significant benefits from our approach, including:

 

  Empowering our local and regional management teams to make decisions and in-market customizations to quickly adapt to changing market conditions while upholding our core values and maintaining company objectives and a cohesive corporate strategy;

 

  Fostering the sharing of best practices and ideas to ensure operational consistency, technological innovation and capital efficiency throughout the Region; and

 

  Maximizing the benefits of our pan-Regional scale by utilizing centralized services, infrastructure, procurement and IT systems to minimize cost and maximize profitability.

Our operating philosophy enables each of our country operations to function as an innovation laboratory to test and develop products and best practices. These innovation laboratories were responsible for the successful design, implementation and expanded offering of our prepaid services. The initial product originated in Venezuela in 2006 to help expand our addressable market in a profitable manner that both limited our customer credit risk and provided a high quality, affordable product to our customers. We refined the offering in Argentina by adding self-installation and lowering the cost of our set-top boxes, facilitating the introduction of customized versions of our prepaid offering in other markets. Today, we offer our prepaid service throughout the Region and it is a key element of our growth strategy, enabling us to further penetrate underserved markets.

Differentiated content offerings

We believe our content is favorably differentiated from our competitors’ due to its quality, breadth and, in certain cases, exclusivity. Our diverse portfolio includes a wide array of award-winning international programming, premium movie and sports programming and tailored local content. In addition, in the South and North Regions we operate our own branded channels: DIRECTV Sports and OnDIRECTV.

We are also at the forefront of innovating premium content and content delivery. For example, we have partnerships with Torneos y Competencias S.A. (“Torneos”) and WIN Sports S.A.S. (“WIN Sports”) that enable us to create highly engaging, premier sports experiences that our customers can watch anytime, anywhere. In addition, we enhance certain of our original productions with mobile and online features, which further increase our opportunity to interact with our customers. For example, in 2014, approximately 1.6 million customers across the South and North Regions downloaded our FIFA World Cup mobile app onto their smartphones and tablets.

In addition, our pan-Regional scale and reputation as a trusted distribution partner enhance our position with content providers seeking to maximize their reach in the Region and enable us to efficiently acquire pan-Regional content rights and to negotiate more favorable terms with key suppliers.



 

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Our focus on delivering the best-in-class content portfolio enables us to drive higher revenues from existing customers by encouraging premium content add-ons and prepaid subscriber recharges. As of December 31, 2017, 42% of our postpaid customers subscribed to premium content packages.

Superior customer experience resulting in strong customer satisfaction

We have an unrelenting focus on providing a superior customer experience, which is an important driver of our overall value proposition and creates loyalty, improves retention and increases demand for our services. As a result, we receive top rankings in customer satisfaction surveys and significantly outperform our competitors in customer satisfaction. For example, in our 2016 benchmarking of Net Promoter Score (“NPS”), we scored nearly 30 points better than our closest major competitor:

 

Pay-TV Provider

    NPS 

Vrio

     36

América Móvil

     7

Grupo Clarín

     (5)

Telefónica

     (9)

Source: Year end 2016 NPS phone survey data per Teleperformance Customer Experience Lab for Brazil and CEOP LATAM for the South and North Regions.

Additionally, in Brazil our SKY brand was awarded, for the third consecutive year, the “Premio CONAREC 2017” for Leadership in Customer Experience and Excellence in Customer Service and Relationship. We believe that this award, among others, demonstrates the valuable insight we have gained over our more than 20 years of operating history into how to effectively serve customers in both metropolitan and rural markets by providing an optimal mix of video channel options, postpaid and prepaid offerings and price points, as well as best-in-class customer service.

Purpose-built technology infrastructure with pan-Regional reach

Our technology infrastructure is purpose-built for high quality, high scale content delivery throughout the markets we serve, and we believe that it provides significant advantages as compared to many of our competitors. We believe our signal quality and reliability provide the best experience in the Region. Our programming is 100% digital, whereas, according to Business Bureau, approximately 23% of pay-TV subscribers in the Region still receive analog service. Digital transmission allows us not only to provide HD pictures in 100% of our coverage area, but also provides significantly better SD picture quality than many of our competitors’ SD signals. Digital signals are also significantly more efficient in delivering high resolution video formats like 4K and 8K, without noticeable quality degradation.

Our satellites service the entire Region. This provides a clear competitive advantage over cable-TV operators who use ground-based wired infrastructure to deliver their products and often have limited geographic coverage, given the costly infrastructure build-outs required to expand. In addition, our satellite-based service is highly scalable, allowing us to distribute hundreds of channels to millions of customers pan-Regionally with minimal incremental cost per additional subscriber and to quickly introduce new services and channels to a large number of customers. We utilize spot-beam and conditional access technology, allowing us to customize programming by country and, in certain circumstances, sub-markets, to better cater to market-specific segments and consumer preferences. This technology also facilitates the on-demand service provisioning that is critical to enabling our prepaid service. Our state-of-the-art broadcast centers support our satellites and ensure the quality, consistency and reliability of service that our customers demand.

We recently completed a significant upgrade cycle across our satellites and broadcast centers, allowing us to reach average service availability of 99.98% for our satellite fleet. Our satellite fleet is now fully redundant, as well as more powerful, with a stronger signal and better coverage of the Region. Our satellites are equipped with adequate capacity to carry new 4K and 8K video formats and increased programming to support our growth ambitions while maintaining superior image quality.



 

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Extensive distribution network

We have an unparalleled ability to sell, install and support our services throughout the Region. We rely on a network of approximately 38,700 distribution points to sell our services as well as a supporting network of approximately 14,000 installers and other technicians who further enhance our customer service effort. A scaled distribution network is a critical requirement for successful penetration of new locations across the Region, particularly for a new offering such as prepaid, which requires an extensive network of recharge and distribution points. Our extensive physical presence, which has been developed over our long operating history, is especially important for serving areas outside of major cities, where cash-based transactions are prevalent and many of our competitors do not currently have a significant presence. We believe it would be extremely difficult and costly for another party to replicate the breadth and depth of our distribution and support network, which, for example, we estimate covers more than 85% of the households in Argentina, Brazil and Colombia, in aggregate.

We augment our fixed distribution points with commission-based, traveling salespeople in the South and North Regions. These salespeople allow us to quickly and cost-effectively enter new markets and have been instrumental in driving increased penetration of our prepaid services.

Leading brands

Our SKY and DIRECTV brands are broadly recognized for offering the best content, leveraging the best technology and providing the best customer service. The strength of our brands is an important factor in our ability to attract and retain customers, which in turn enhances the attractiveness of our offerings to content providers. Our brands are aspirational and score highly in customer brand awareness and brand preference surveys, as demonstrated below, well above the actual penetration rate of our services across the Region.

 

Brand Attributes

 
     Vrio   Main
Competitor(1)

Top of Heart

     46     19

HD Leadership

     47     28

Sports Programming Leadership

     48     28

 

Source: Vrio brand study (2016) performed by CEOP LATAM, telephone methodology.

 

(1) Calculated as a weighted average of study results for the largest cable provider and leading competitor in each of the following markets: Argentina, the Caribbean, Chile, Colombia, Ecuador, Peru, Uruguay and Venezuela.

In 2017, we won the Consumidor Moderno award, similar to the JD Power Survey in the United States, for the 13th consecutive year as the best pay-TV company in Brazil. We have won similar accolades across the Region, including Apertura’s Top 100 Companies with the Best Reputation in Argentina and Sello BCX IZO’s Best Customer Experience in Colombia.

Our strong brand reputation also enhances our ability to attract and retain what we believe are the most talented and experienced employees, which in turn fosters a strong corporate culture and furthers our success. In 2017, we were rated among the top 10 places to work in Argentina and Ecuador, and among the top 20 in Chile, according to Great Place to Work. Together, these elements help support our Region-leading customer retention rates.

Our Market Opportunity

The Region supports a population of over 400 million people, with $3.5 trillion in GDP in 2016 according to the IMF. When compared to the United States and most Western European countries, we face circumstances that are unique in the Region. For example, purchasing power is generally lower across socio-economic segments and



 

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national economies in the Region have historically experienced varying political and economic conditions. Over the last three years, some countries in the Region, notably Argentina and Brazil, have experienced challenging economic conditions. This caused consumers to reduce discretionary spending and led to elevated inflation and currency devaluations. Despite these conditions, our revenue and EBITDA grew in 2016 on a constant currency basis, excluding Venezuela. The economic climate in the Region improved in 2017 and is projected to continue improving over the next few years, with real GDP expected to grow across the Region at a 2% compound annual growth rate (“CAGR”) from 2017 to 2022, according to the IMF.

We believe that the Region presents a significant opportunity for growth in pay-TV services as a result of the following key factors:

 

  Large, underpenetrated pay-TV market. Pay-TV is significantly underpenetrated in the Region relative to the United States and Western Europe. In 2016, of the 118 million TV households in the Region (excluding the Caribbean) only 38%, or 45 million TV households, subscribed to pay-TV compared to approximately 81% of the 121 million TV households in the United States and over 62% in other developed countries in Western Europe, such as France, Germany and the United Kingdom.

 

  Increasing purchasing power. Real GDP for the Region is expected to grow at a 2% CAGR from 2017 to 2022 as estimated by the IMF, largely driven by an expanding middle class population. According to the IADB, the middle class in the Region (excluding the Caribbean) grew from approximately 20% of the population in 2003 to approximately 40% in 2015. We believe the Region’s expected economic growth and the corresponding increase in disposable income provides a compelling opportunity to increase our subscriber base, capture additional customer wallet share and drive upsell of premium content add-ons.

 

  Subscriber growth. Total pay-TV subscribers in the Region (excluding the Caribbean) grew at an 8.2% CAGR from 2010 to 2017 compared to a 1.0% average annual decline in subscribers in the United States over the same period. DTH in the Region (excluding the Caribbean) is expected to outpace other technologies, having grown at a 14.3% CAGR from 2010 to 2017, nearly four times faster than cable, and is projected to grow at a 3.4% CAGR from 2018 to 2020, compared with cable which is projected to grow at a 2.1% CAGR over the same period.

 

  Underinvestment in broadband infrastructure. Residential broadband penetration in the Region (excluding the Caribbean), at 36.2% in 2016, remains low relative to the United States and Western Europe. Average broadband speeds in the Region also lag those of more developed economies. We believe this limits exposure to broadband-video bundling threats and reduces the competitive threat from OTT streaming video services.

We operate across the Region in areas that are characterized by significantly underserved markets, favorable competitive dynamics and/or diverse socio-economic characteristics. These markets are often underserved due to the lack of both concentrated purchasing power to support traditional cable infrastructure build-outs as well as product offerings that provide flexibility in service and price. By utilizing our unique pan-Regional satellite infrastructure and other distinct technological advantages, we believe we can reach these customers with more flexible service offerings at varying price points. This allows us to increase our addressable market and successfully grow our customer base without meaningful incremental infrastructure investment and provides us with a distinct competitive advantage.



 

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Our Growth Strategy

We believe we are well-positioned for growth and have a multi-faceted strategy that builds upon our key strengths. Our strategy includes:

Strengthen our leadership position in premium postpaid and drive increased customer lifetime value

We are a leading digital entertainment services provider in the postpaid pay-TV market in the Region due to our differentiated content offerings, the quality of the services we provide and our superior customer experience. We intend to further strengthen our market leadership through the following initiatives:

 

  Strengthen our position in HD and beyond. We will continue to broaden the depth of content available to our customers, such as with HD and 4K programming and local content, including country and city-specific programming.

 

  Continue to focus on sales of premium services. We intend to leverage our best-in-class content and focus our sales and marketing efforts to drive sales of premium content add-ons. We continue to identify markets where we have opportunities to drive increased premium-package penetration, particularly for our sports and movies packages.

 

  Further innovate new features and functionality. We are constantly seeking to enhance the customer experience and reinforce our “top of mind” brands by providing customers with more features and functionality in their TV viewing, particularly in terms of viewing options.

 

  Further optimize subscriber acquisition costs. We plan to drive increased profitability through optimizing distribution channels, further digitizing customer service operations and innovating key elements of our cost structure.

We believe these initiatives will continue to drive ARPU and margin expansion as well as lower subscriber acquisition costs, all of which increase our customer lifetime value and drive incremental free cash flow.

Profitably increase penetration of our prepaid service

As the only pan-Regionally scaled provider of prepaid television services, we leverage our data, know-how and experience from providing postpaid pay-TV services in the Region to grow our prepaid offering. Since our prepaid offering was introduced in 2006, we have refined the underlying technology and operations to adapt to specific consumer preferences and market dynamics across the Region. In recent years we have steadily grown our prepaid customer base while also improving unit economics, and we intend to continue to increase the penetration and profitability of our prepaid services in a number of ways, including:

 

  Further penetrate underserved markets. We believe the underserved markets across the Region represent a compelling opportunity for our prepaid business given the low penetration of pay-TV, growing middle class and very limited cable competition in more rural areas. For example, in 2012 we developed an innovative new prepaid offering to appeal to a segment of the Argentine market we considered to be underserved. We believe that this offering contributed to expanding pay-TV to new households, and that we were able to capture an outsized portion of this market growth. Between December 31, 2012 and December 31, 2017, overall pay-TV penetration in Argentina is estimated to have grown by over 850,000 households and, according to Business Bureau, our market share increased by over 700 basis points. We are leveraging this experience in Argentina to make a similarly structured prepaid offering in our other markets where we think there is a similar potential to reach underserved markets.

 

 

Drive continuous engagement. Given our prepaid customers’ ability to turn service on and off, we are constantly focused on customer engagement to maximize the frequency and length of recharges. We will continue to focus on ongoing touchpoints with customers, including SMS and on-screen messages, while curating premium content offerings that are provided in flexible prepaid packages to drive increased



 

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customer recharges. On average, across the Region (excluding Venezuela), we experience 1.25 recharges per customer per month, with an average recharge transaction value of approximately $10.70. The aggregate value of prepaid recharges increased by 35% and the corresponding recharge volumes increased by 23%, each between December 31, 2015 and December 31, 2017.

 

  Deliver a premium experience. We continue to work with our content providers to increase the number of premium content offerings available to our prepaid customers. This, in combination with our ability to offer HD programming rather than SD, positions us to target underserved markets with a high-quality offering and encourage more frequent and longer recharges from existing customers. We believe we are the only pay-TV provider to offer a fully digital HD programming experience on a prepaid basis throughout the Region. We expect to see an increase in ARPU associated with our prepaid products resulting from the introduction of HD programming. For our postpaid products across the Region (excluding Venezuela), ARPUs for HD subscribers are more than 40% higher than ARPUs for SD subscribers.

 

  Drive increased profitability. We continue to look for ways to lower our subscriber acquisition costs to increase the profitability of our prepaid subscriber base. For example, we are well into the process of migrating to a new prepaid set-top box design that we anticipate will lower the average cost by nearly 30% while also providing the same high-quality viewing experience of the postpaid set-top box. Given our prepaid customers must purchase their own equipment, this innovation will lower the barrier to entry for penetration, while reducing our subscriber acquisition expenses relative to revenue.

Targeted provision of fixed wireless broadband internet services

We provided fixed wireless broadband services to approximately 567,000 customers in Argentina, Brazil and Colombia as of December 31, 2017, and our network covered approximately 7.9 million households across those countries. Our broadband services target underserved markets, mostly in second- and third-tier cities. We are able to provide these services efficiently because our fixed wireless network allows narrowly targeted deployment to specific areas. Our strategy is to invest in fixed wireless broadband services in support of our digital entertainment services and to focus on maximizing usage of existing towers with our existing spectrum holdings. Delivery of these services provides opportunities for bundling, which could attract new pay-TV customers and reduce churn. Our broadband services also provide us with know-how that we will use to evolve our next-generation offerings and determine how to expand our broadband offerings opportunistically.

Continue to modernize the way we provide content and services to our customers

We believe our experience demonstrates innovation, with data and technology providing insights into strategies for marketing, packaging and selling our services in the Region and maintaining high levels of customer engagement and satisfaction. This enables us to strengthen our brand, enhance the customer experience and improve profitability.

Our operating philosophy and pan-Regional scale further enable us to leverage individual markets as laboratories where we can develop and refine new products and services for deployment across the Region. We have regularly scheduled product and service feedback sessions with local market teams across the Region to ensure that we can identify best practices, including, for example, churn reduction strategies; postpaid premium marketing strategies, including inbound and outbound call scripts; prepaid recharge and premium marketing strategies; changes to our TV Everywhere applications to drive higher adoption and deeper engagement; refining content and programming line-ups, including streamlining initiatives to reduce costs; and customer acquisition and self-install equipment strategies to reduce costs. Three of our key initiatives are:

 

 

Anytime, anywhere consumption. We are continuing to develop web and mobile destinations to empower customers to seamlessly stream our content while out of the home, upgrade their package or purchase a



 

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pay-per-view movie. Whether through SMS, web, TV or mobile applications, we continue transitioning more of the customer viewing experience to digital platforms.

 

  Enhanced user interface and customer experience. Our current user interface provides tools for viewing, service and account management at our customers’ fingertips, and lower our costs associated with call volumes to our customer care centers and customer service requests.

 

  Using data to drive decision making. We collect and analyze consumer behavior and service performance data to provide valuable insights into ways we can improve our services and reduce our costs. Our proprietary subscriber data also enables us to hyper-segment the market, tailor our footprint expansion, increase our return on investment in new distribution channels and increase penetration of new locations.

Drive margin expansion and cash flow generation through operational efficiency and productivity

Our Regional leadership and market position allow us to obtain greater scale in the acquisition of high quality content, advanced technology, equipment and other assets on which we rely. In addition, our organizational structure facilitates our ability to drive pan-Regional efficiencies and ensure sharing of best practices across all countries. We believe these factors will allow us to meaningfully expand our margins and cash flows, and we believe we have several additional future opportunities, including improvements in product delivery, streamlining costs, enhancing our digital platform and continuing to seek reductions in our subscriber acquisition costs.

Risks Related to Our Business and this Offering

Investing in our Class A common stock involves substantial risks and uncertainties that may adversely affect our business, financial condition and results of operations and cash flows. Some of the more significant challenges and risks relating to our ability to successfully operate our business and this offering involve, among other things, the following:

 

  We compete with other traditional telecommunications providers, some of whom have greater resources than we do, and levels of competition are increasing. Increased competition could result in higher postpaid subscriber churn, lower recharge rates from our prepaid subscribers and increased subscriber acquisition, upgrade and retention expenses, which could adversely affect our business.

 

  We also face increasing competition from entities that provide or facilitate the delivery of video content via the Internet, and our failure to compete effectively with these new entrants may reduce our gross subscriber additions and cause our existing customers to purchase fewer services from us or to cancel our services altogether, resulting in less revenue to us.

 

  Economic, political and social conditions in the Region could adversely affect our business.

 

  Programming and retransmission costs are increasing and we may not have the ability to pass these increases on to our customers.

 

  Our ability to differentiate our service may be limited if we cease to have exclusive content offerings.

 

  We operate in a highly regulated and complex environment and as a result, our business, financial condition and results of operations could be adversely affected.

 

  Disruption to our satellites or broadcast centers may prevent us from providing services, and could harm our business.

 

  Pay-TV piracy has significantly affected our industry and is expected to continue to do so.

 

  Control by AT&T will severely limit our other stockholders from influencing matters requiring stockholder approval, and could adversely affect our other stockholders.


 

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  Conflicts of interest and other disputes may arise between AT&T and us, and we may not be able to resolve favorably disputes that may arise between AT&T and us with respect to our past and ongoing relationships.

 

  We will be a “controlled company” within the meaning of the NYSE rules, and, as a result, will rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk Factors” in deciding whether to invest in our Class A common stock.

Our History and Corporate Information

We have a long and proud history serving in South America dating back to 1996. In 2004, we combined two competing satellite pay-TV providers, SKY Latin America and DIRECTV Latin America, to form the present day company. In July 2015, our then-parent company, DIRECTV, was acquired by AT&T and we have been operated as part of AT&T since that time. Currently, our Chief Executive Officer and our Chief Financial Officer also serve as officers or directors of certain AT&T subsidiaries; however it is expected that, other than with respect to our CEO’s continued service on the board of SKY Mexico as noted under “Management”, each will cease to serve in such capacities for AT&T upon completion of this offering. Our amended and restated certificate of incorporation will contain provisions regulating and defining the conduct of our (including our consolidated subsidiaries’) affairs as they involve corporate opportunities and conflicts of interest with AT&T (and its consolidated subsidiaries, excluding the Company). See “Description of Capital Stock—Provision Relating to Corporate Opportunities and Interested Directors”.

Our principal executive offices are located at 208 S. Akard St., Dallas, Texas 75202. The telephone number of our principal executive offices is (214) 748-8746. Our internet address is www.vriocorp.com. Information on, or accessible through, our website does not constitute a part of this prospectus.

Prior to this offering, AT&T formed our company as a new wholly-owned subsidiary, “Vrio Corp.”, for the purpose of acquiring, owning and operating the digital entertainment services operations of DIRECTV in the Region. Following this offering, AT&T will own approximately     % of our Class A common stock (or approximately     % if the underwriters exercise their option to purchase additional shares of Class A common stock in full) and 100% of our Class B common stock. In connection with this offering, we and AT&T intend to enter into, or have entered into, agreements and take certain actions to separate our business from AT&T. We refer to these separation transactions collectively as the “Separation”. See “Certain Relationships and Related Party Transactions—Separation Transactions”.



 

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The following diagram depicts our organizational structure, material operating subsidiaries and ownership information after giving effect to this offering.

 

 

LOGO



 

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THE OFFERING

 

Issuer

Vrio.

 

Class A common stock offered by us

            shares (or             shares if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

 

Common stock to be outstanding after this offering

            shares of Class A common stock (or             shares of Class A common stock if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

 

              shares of Class B common stock.

 

Common stock to be held by AT&T after this offering

            shares of Class A common stock.

 

              shares of Class B common stock.

 

Option to purchase additional shares of Class A common stock

The underwriters have an option to purchase a maximum of              additional shares of Class A common stock from us. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Voting rights

Following this offering, we will have two classes of common stock outstanding: Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock will be identical, except with respect to voting rights and conversion rights. The holders of Class A common stock will be entitled to one vote per share for all matters submitted to a vote of stockholders and the holders of Class B common stock will be entitled to ten votes per shall for all matters submitted to a vote of stockholders. Each share of Class B common stock held by AT&T or one of its subsidiaries will be convertible into one share of Class A common stock at any time but will not be convertible if held by any other holder. See “Description of Capital Stock” for more information.

 

Use of proceeds

We estimate that the net proceeds from the sale of our Class A common stock in this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $           million ($           million if the underwriters exercise in full their option to purchase additional shares) based on an assumed initial public offering price of $           per share (the midpoint of the price range set forth on the cover page of this prospectus).

 

  We intend to use the net proceeds from the sale of the shares of our Class A common stock to repay related-party indebtedness owed to AT&T and to distribute the remaining proceeds to AT&T. See “Use of Proceeds”.


 

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Dividend policy

We do not intend to pay regular cash dividends on our Class A common stock. In the event we decide to pay dividends in the future, the declaration and payment of future dividends to holders of our Class A common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, legal requirements, restrictions in our debt agreements and other factors deemed relevant by our board of directors. See “Dividend Policy” for additional information.

 

Controlling Stockholder

We are currently a wholly-owned subsidiary of AT&T. Upon completion of this offering, AT&T will own     % of the outstanding shares of our Class A common stock (or     % if the underwriters’ option to purchase additional shares of Class A common stock is exercised in full) and 100% of the outstanding shares of our Class B common stock, giving AT&T     % of the combined voting power and     % of the economic interest of our outstanding common stock (or     % and     %, respectively, if the underwriters exercise their option to purchase additional shares in full).

 

  For additional information regarding our relationship with AT&T following the completion of the offering, see “Certain Relationships and Related Party Transactions—Separation Transactions—Relationship with AT&T and its Subsidiaries”.

 

Listing

We intend to apply to list our Class A common stock on the NYSE under the symbol “VRIO”.

 

Risk Factors

Investing in our Class A common stock involves significant risks. See “Risk Factors” beginning on page 22 for a discussion of certain risks that you should consider before deciding to invest in our Class A common stock.

Unless otherwise indicated, references to the number and percentage of shares of common stock to be outstanding immediately after this offering are based on              shares of Class A common stock and              shares of Class B common stock outstanding as of                     , and excludes any shares of our Class A common stock to be reserved for issuance under our 2018 Incentive Plan and our 2018 Non-Employee Director Plan that we intend to adopt in connection with this offering.

Unless otherwise indicated, the information presented in this prospectus gives effect to the transactions described under “Certain Relationships and Related Party Transactions—Separation Transactions”.



 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

You should read the summary historical and pro forma financial and operating data set forth below in conjunction with the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Capitalization”, as well as the Combined Financial Statements and the related Notes included elsewhere in this prospectus.

The periods presented below on and prior to July 24, 2015, the date of the Acquisition, are referred to as “Predecessor” periods and the periods presented after and including July 25, 2015 are referred to as “Successor” periods. The financial data, Combined Financial Statements and related Notes for each of the periods reflect the combined financial results of the entities expected to be owned by us at the completion of this offering and their subsidiaries, with the exception of operations in Puerto Rico, which are to be retained by AT&T from and after the Separation (as defined in “Certain Relationships and Related Party Transactions”), and which are reflected as assets held for sale on our Combined Financial Statements. As a result, the financial data, Combined Financial Statements and related Notes are not necessarily indicative of our balance sheets, results of operations and cash flows in the future or what our balance sheets, results of operations and cash flows would have been had we been a stand-alone public company during the periods presented. Accordingly, the historical results should not be relied upon as an indicator of our future performance. See “Risk Factors”, “Selected Historical Financial Data”, “Unaudited Pro Forma Condensed Combined Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

The historical financial information for the period from January 1, 2015 through July 24, 2015 (Predecessor), the period from July 25, 2015 through December 31, 2015 (Successor) and the years ended December 31, 2016 and 2017 (Successor) has been derived from the audited Combined Financial Statements included elsewhere in this prospectus.

The historical financial information includes allocations of costs from certain corporate and shared services functions provided to us by AT&T and DIRECTV, including general corporate and shared services expenses. The costs of such services have been allocated to us based on the most relevant allocation method to the service provided, primarily based on relative percentage of EBITDA or specific identification.



 

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The Combined Financial Statements do not reflect any changes that may occur in our operations and expenses as a result of the Separation or this offering. The historical financial information below also contains six financial measures: EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, FCF and constant currency, that are not presented in accordance with GAAP and which have not been audited. We use EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, FCF and constant currency in our business because we believe such measures are useful to help investors understand our results of operations. In addition, because all companies do not calculate non-GAAP financial measures in the same way, these measures as used by other companies may not be consistent with the way the Company calculates such measures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for a description of the non-GAAP measures used in our business and a reconciliation to the GAAP equivalent measures.

 

    Successor     Predecessor     Unaudited
Pro Forma
    % Change     Constant
Currency %
Change excluding
Venezuela
 

Combined Statements of Operations

  Year ended
December 31,
2017
    Year ended
December 31,
2016
    Period from
July 25
through
December 31,
2015
    Period from
January 1
through
July 24,
2015
    Year ended
December 31,
2015
    2017
to
2016
    2016 to
Unaudited
Pro
Forma
2015
Period
    2017
to
2016
    2016 to
Unaudited
Pro
Forma
2015
Period
 
                (U.S. dollars in millions)                                

Revenues

  $ 5,568     $ 5,023     $ 2,228     $ 3,709     $ 5,913       10.9     (15.1 )%      8.5     10.8

Operating Expenses

                 

Cost of services and sales (exclusive of depreciation and amortization expense shown separately below)

                 

Programming, broadcast operations and other expenses

    2,333       2,208       861       1,503       2,364       5.7     (6.6 )%      4.4     11.3

Subscriber service expenses

    595       561       261       443       704       6.1     (20.3 )%      4.2     0.3

Selling, general and administrative expenses (exclusive of depreciation and amortization expense shown separately below)

                 

Subscriber acquisition, upgrade and retention expenses

    780       685       319       546       865       13.9     (20.8 )%      13.0     (1.1 )% 

General and administrative expenses

    615       534       399       418       817       15.2     (34.6 )%      (6.7 )%      (6.5 )% 

Venezuelan currency devaluation charge (1)

    31       45       —         519       519       (31.1 )%      (91.3 )%      N/A       N/A  

Impairment of fixed and intangible assets (2)

    9       72       —         533       533       (87.5 )%      (86.5 )%      N/A       N/A  

Depreciation and amortization expense

    1,157       1,182       543       613       1,310       (2.1 )%      (9.8 )%      (6.7 )%      1.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

    5,520       5,287       2,383       4,575       7,112       4.4     (25.7 )%      1.9     3.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income (Loss)

    48       (264     (155     (866     (1,199     118.2     78.0     217.5     135.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Income (Expense)

                 

Interest income

    49       14       12       46       58       250.0     (75.9 )%     

Interest expense

    (126     (94     (42     (35     (97     34.0     3.1    

Equity in net income (loss) of affiliates

    20       23       12       (49     (37     N/M       N/M      

Other income (expense)-net

    6       5       (38     (40     (78     N/M       N/M      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total other income (expense)

    (51     (52     (56     (78     (154     1.9     66.2    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Loss Before Income Tax

    (3     (316     (211     (944     (1,353     99.1     76.6    

Income tax (benefit) expense

    (225     40       (20     75       (14     N/M       N/M      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Net Income (Loss)

    222       (356     (191     (1,019     (1,339     162.4     73.4    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

Less: Net (Income) Loss Attributable to Noncontrolling Interest

    (9     8       6       (2     4       N/M       N/M      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Net Income (Loss) Attributable to DIRECTV Latin America

  $ 213     $ (348   $ (185   $ (1,021   $ (1,335     161.2     73.9    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

N/M means not meaningful
(1) During the period from January 1, 2015 through July 24, 2015 and the year ended December 31, 2016, we recorded a charge of $519 and $45, respectively, as a result of the change to the SIMADI exchange rate and subsequent devaluations. During the year ended December 31, 2017, we recorded a charge of $31 as a result of the change to the DICOM exchange rate. See Note 12 of the Notes to the Combined Financial Statements.


 

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(2) During the period from January 1, 2015 through July 24, 2015, we recorded impairment charges of $423 and $110 related to Venezuelan fixed and intangible assets, respectively. In the year ended December 31, 2016, we recorded an impairment charge of $72 related to Venezuelan fixed and intangible assets. In the year ended December 31, 2017, we recorded an impairment charge of $9 related to Peruvian fixed and intangible assets. See Notes 4 and 5 of the Notes to the Combined Financial Statements.

 

    Successor     Predecessor     Unaudited
Pro Forma
    % Change     Constant
Currency %
Change excluding
Venezuela
 

Other Data:

  Year ended
December 31,
2017
    Year ended
December 31,
2016
    Period from
July 25
through
December 31,
2015
    Period from
January 1
through
July 24,
2015
    Year ended
December 31,
2015
    2017 to
2016
    2016 to
Unaudited
Pro
Forma
2015
Period
    2017 to
2016
    2016 to
Unaudited
Pro
Forma
2015
Period
 
    (U.S. dollars in millions)  

EBITDA (1)

  $ 1,205     $ 918     $ 388     $ (253   $ 111       31.3     727.0     23.7     36.2

EBITDA Margin

    21.6     18.3     17.4     N/M       1.9        

Adjusted EBITDA (2)

  $ 1,245     $ 1,035     $ 388     $ 799     $ 1,163       20.3     (11.0 )%      24.5     36.2

Adjusted EBITDA Margin

    22.4     20.6     17.4     21.5     19.7        

Capital expenditures

  $ 725     $ 762     $ 369     $ 776       N/A       (4.9 )%      N/A       —         —    

 

(1) EBITDA includes a Venezuelan currency devaluation charge of $519 in the Unaudited Pro Forma 2015 Period, $45 in the year ended December 31, 2016 and $31 in the year ended December 31, 2017. Also includes an impairment of fixed and intangible assets in Venezuela of $533 in the Unaudited Pro Forma 2015 Period and $72 in the year ended December 31, 2016. In addition, includes an impairment of fixed and intangible assets in Peru of $9 in the year ended December 31, 2017.
(2) Adjusted EBITDA is equal to EBITDA less charges related to the remeasurement of net monetary assets in Venezuela and the impairments of fixed and intangible assets.


 

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We have prepared unaudited pro forma supplemental financial information for the pro forma year ended December 31, 2015, which gives effect to the Acquisition as if it had occurred on January 1, 2015 (the “Unaudited Pro Forma 2015 Period”). The Unaudited Pro Forma 2015 Period discussed herein has been prepared in a manner consistent with the requirements of Article 11 of Regulation S-X, and does not purport to represent what our actual combined results of operations would have been had the Acquisition actually occurred on January 1, 2015, nor is it necessarily indicative of future combined results of operations. The Unaudited Pro Forma 2015 Period is being discussed herein for informational purposes only and does not reflect any operating efficiencies or potential cost savings that may result from the consolidation of operations.

In preparing the Unaudited Pro Forma 2015 Period, we combined the Predecessor 2015 Period and Successor 2015 Period and adjusted the historical results within these periods to give effect to pro forma events that are (i) directly attributable to the Acquisition, (ii) factually supportable and (iii) expected to have a continuing impact on the combined financial results. The pro forma adjustments made to give effect to the Acquisition, as if it had occurred on January 1, 2015, are summarized in the table below:

Pro Forma Statement of Operations

 

    Successor     Predecessor     Unaudited
Pro forma
adjustments
for the
Acquisition
             
    Period from
July 25
through
December 31,
2015
    Period from
January 1
through
July 24,
2015
      Note     Unaudited
Pro Forma
2015
Period
 
    (U.S. dollars in millions)  

Revenues

  $ 2,228     $ 3,709     $ (24     (a   $ 5,913  

Operating Expenses

           

Costs of services and sales (exclusive of depreciation and amortization expense shown separately below)

           

Programming, broadcast operations and other expenses

    861       1,503       —           2,364  

Subscriber service expenses

    261       443       —           704  

Selling, general and administrative expenses (exclusive of depreciation and amortization expense shown separately below)

           

Subscriber acquisition, upgrade and retention expenses

    319       546       —           865  

General and administrative expenses

    399       418       —           817  

Venezuelan currency devaluation charge

    —         519       —           519  

Impairment of fixed and intangible assets

    —         533       —           533  

Depreciation and amortization expense

    543       613       154       (b     1,310  
 

 

 

   

 

 

   

 

 

     

 

 

 

Total Operating Expenses

    2,383       4,575       154         7,112  
 

 

 

   

 

 

   

 

 

     

 

 

 

Operating Loss

    (155     (866     (178       (1,199
 

 

 

   

 

 

   

 

 

     

 

 

 

Other Income (Expense)

           

Interest income

    12       46       —           58  

Interest expense

    (42     (35     (20     (c     (97

Equity in net income (loss) of affiliates

    12       (49     —           (37

Other income (expense)-net

    (38     (40     —           (78
 

 

 

   

 

 

   

 

 

     

 

 

 

Total other income (expense)

    (56     (78     (20       (154
 

 

 

   

 

 

   

 

 

     

 

 

 

Loss Before Income Taxes

    (211     (944     (198       (1,353

Income tax (benefit) expense

    (20     75       (69     (d     (14
 

 

 

   

 

 

   

 

 

     

 

 

 

Net Loss

    (191     (1,019     (129       (1,339
 

 

 

   

 

 

   

 

 

     

 

 

 

Less: Net (Income) Loss Attributable to Noncontrolling Interest

    6       (2     —           4  
 

 

 

   

 

 

   

 

 

     

 

 

 

Net Loss Attributable to DIRECTV Latin America

  $ (185   $ (1,021   $ (129     $ (1,335
 

 

 

   

 

 

   

 

 

     

 

 

 

 

(a) The Pro Forma Statement of Operations has been adjusted to reflect a decrease to revenue due to an adjustment to deferred revenue as a result of fair value accounting associated with the Acquisition. Certain revenues are deferred for accounting purposes but require minimal or no future incremental direct costs in order to be recognized.


 

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(b) The Pro Forma Statement of Operations has been adjusted to reflect an increase to depreciation and amortization expense due to the adjustment of our property and equipment and intangible assets to fair value as part of the pushdown of the purchase price from the Acquisition. See Note 3 of the Notes to the Combined Financial Statements.

 

(c) The Pro Forma Statement of Operations has been adjusted to reflect an increase in interest expense related to the related party payable to parent of $1,129 that was recorded at the Acquisition. Interest was calculated using AT&T’s average intercompany lending rate at the time of the Acquisition of 3.25% per annum. See Note 11 of the Notes to the Combined Financial Statements.

 

(d) The Pro Forma Statement of Operations has been adjusted to reflect the aggregate pro forma income tax effect of notes (a), (b) and (c) above, using a statutory rate of 35%. The aggregate pre-tax effect of these adjustments is reflected as “Loss before income taxes” on the Pro Forma Statement of Operations.

Key Business Metrics

We track our results of operations and manage our business using the following key business measures, which include non-GAAP financial measures:

 

  Revenues

 

  EBITDA

 

  Operating Income (Loss)

 

  Capital Expenditures

 

  FCF
  Subscribers (Postpaid and Prepaid)

 

  ARPU (Postpaid and Prepaid)

 

  Postpaid Subscriber Churn

 

  Net Subscriber Additions (Postpaid and Prepaid)
 

 

For a description of certain of these key business metrics, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Terminology”.



 

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The following tables set forth these key business metrics as well as the corresponding GAAP measures, where applicable, for the period from January 1, 2015 through July 24, 2015 (Predecessor), the period from July 25, 2015 through December 31, 2015 (Successor), the years ended December 31, 2016 and 2017 and the Unaudited Pro Forma 2015 Period.

 

    Successor     Predecessor        
    Year ended
December 31,
2017
    Year ended
December 31,
2016
    Period from
July 25
through
December 31,
2015
    Period from
January 1
through
July 24,
2015
    Unaudited
Pro Forma
2015 Period
 
                (U.S. dollars in millions)        

Revenues

  $ 5,568     $ 5,023     $ 2,228     $ 3,709     $ 5,913  

Brazil

    2,827       2,661       1,065       1,760       2,823  

South Region

    1,951       1,638       776       1,032       1,797  

North Region

    674       589       321       826       1,136  

EBITDA

  $ 1,205     $ 918     $ 388     $ (253   $ 111  

Brazil

    679       593       240       402       640  

South Region

    506       418       185       277       451  

North Region

    (23     (143     (25     (940     (976

Operating Income (Loss)

  $ 48     $ (264   $ (155   $ (866   $ (1,199

Brazil

    (81     (131     (77     79       (165

South Region

    302       185       60       145       160  

North Region

    (138     (283     (93     (1,054     (1,118

Capital Expenditures

  $ 725     $ 762     $ 369     $ 776       N/A  

Brazil

    460       418       219       444       N/A  

South Region

    184       238       79       135       N/A  

North Region

    48       78       66       129       N/A  

Net Cash Provided by Operating Activities

  $ 1,361     $ 1,457     $ 240     $ 827       N/A  

FCF (1)

  $ 636     $ 695     $ (129   $ 51       N/A  

 

* The sum of the segment amounts presented above excludes eliminations, adjustments and other impacts necessary for reconciliation to the total combined Company amounts.

 

(1) The years ended December 31, 2017 and December 31, 2016, include a $414 and $551 tax benefit, respectively, generated by the Company. These benefits were utilized by AT&T in its consolidated returns and such utilization was reflected as cash (used in) provided by financing activities.

 

    Successor     Predecessor        
    Year ended
December 31,
2017
    Year ended
December 31,
2016
    Period from
July 25
through
December 31,
2015
    Period from
January 1
through
July 24,
2015
    Unaudited
Pro Forma
2015 Period
 

Subscribers (as of the end of the period, in thousands)(1)

    13,834       12,655       12,720       12,873       12,720  

Postpaid

    8,719       9,027       9,530       9,782       9,530  

Prepaid

    5,115       3,628       3,190       3,091       3,190  

ARPU

  $ 33.81     $ 33.03     $ 33.33     $ 43.06     $ 38.80  

Postpaid

  $ 45.86     $ 39.78     $ 38.12     $ 48.57     $ 43.96  

Prepaid

  $ 11.93     $ 14.55     $ 18.53     $ 25.02     $ 22.27  

Postpaid Subscriber churn %

    2.2     2.1     2.2     2.3     2.3

Net subscriber additions (in thousands)

    47       (65     (153     401       248  

Postpaid

    (258     (460     (252     106       (146

Prepaid

    305       395       99       295       394  

 

(1) On January 1, 2017, we changed how we calculate prepaid subscribers across the Region and postpaid subscribers in Brazil. With respect to our prepaid subscribers, this change resulted in a one-time upward adjustment of 1,029,000 subscribers as of January 1, 2017, and, with respect to our postpaid subscribers in Brazil, this change resulted in a one-time upward adjustment of 103,000 subscribers as of January 1, 2017. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Overview and General Trends”.


 

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RISK FACTORS

Investing in our Class A common stock involves a significant degree of risk. Before investing in our Class A common stock, you should carefully consider the risks and uncertainties described below, along with the other information contained in this prospectus. The risks described below are those which we believe are currently the material risks we face, but are not the only risks facing us and our business prospects. Any of the risk factors described below and elsewhere in this prospectus could adversely affect our business, financial condition and results of operations. Additional risks and uncertainties not presently known to us or that we currently deem immaterial could adversely affect our business, financial condition and results of operations in the future. As a result, the trading price of our Class A common stock could decline and you may lose part or all of your investment.

Risks Related to Our Business

We compete with other traditional telecommunications providers, some of whom have greater resources than we do, and levels of competition are increasing. Increased competition could result in higher postpaid subscriber churn, lower recharge rates from our prepaid subscribers and increased subscriber acquisition, upgrade and retention expenses, which could adversely affect our business.

We operate in a highly competitive, consumer-driven industry and we compete against traditional telecommunications industry participants such as cable television providers, fixed line telephony service providers, wireless companies and other land-based and satellite-based system providers with service offerings including video, audio and interactive programming, broadband and telephony services. Some of these competitors have greater financial, marketing, technological and other resources than we do.

Most of our competitors offer bundled video, broadband and telecommunications services, which we, for the most part, do not. They are able to offer packaging and pricing options, including discounts, which may negatively affect the competitiveness of our products and services. For example, in some cases we believe that our competitors significantly underprice the video component of their bundled offers, and may, in effect, subsidize those discounts by not discounting their rates charged or charging higher rates for broadband and telecommunications services. This practice of cross-subsidization is sometimes incentivized by higher taxes or regulatory fees (as is the case in Colombia) on pay-TV services, as compared to telephony and broadband services. These pricing practices can influence customers’ willingness to subscribe to our services.

Competition can lead us to increase advertising and promotional spending and to reduce prices for our services. We also may be required to increase our spending on programming or on technological developments to increase and enhance our product and service offerings. These developments may lead to higher subscriber acquisition, upgrade and retention expenses and lower operating margins. If we are not able to retain customers due to increased competition, our postpaid subscriber churn will increase and we may see lower recharge rates from our prepaid subscribers.

Competition could intensify to the extent that there is consolidation in the industry. Competition may also increase due to a change in the regulatory environment in the Region. For example, in Argentina, certain providers of telelphony services were allowed to provide cable television services only as of January 2018 and are not allowed to provide DTH services. A further change in law could remove the prohibition on their ability to provide satellite TV services or bundle broadband and mobile services with satellite TV services. Our success in Argentina could be substantially impacted if fixed line and wireless telephony providers begin offering pay-TV services, particularly satellite TV services, in competition with our own. In 2011, a similar change in law in Brazil led to increased competition.

In addition, currently only a limited number of our competitors offer services on a prepaid basis, and we believe that relative lack of competition allows us to acquire and retain customers, including those who would not otherwise use postpaid services offered by us or our competitors. However, if our competitors, and in particular

 

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any of our larger competitors, also begin to offer prepaid pay-TV services, particularly on a pan-Regional basis, our competitive position could be harmed.

As a result of these and other factors, we may not be able to continue to expand our customer base or compete effectively against cable television, DTH operators or other providers of broadband and telecommunications in the future, or we may have to make changes to our business model—such as price decreases or increased spending to obtain more programming—in order to more effectively compete, any of which could adversely affect our business, financial condition and results of operations.

We also face increasing competition from entities that provide or facilitate the delivery of video content via the Internet, and our failure to compete effectively with these new entrants may reduce our gross subscriber additions and cause our existing customers to purchase fewer services from us or to cancel our services altogether, resulting in less revenue to us.

Increasingly, we face competition not just from other providers of traditional pay-TV services, such as cable and DBS operators, but also from both OTT video streaming providers that deliver movies, television and other video programming over broadband Internet connections and pay-TV providers that have launched digital streaming services. Streaming providers typically offer services across multiple customer devices and often at a lower monthly fee than we charge for most of our services. In addition, streaming providers are often not subject to the same licensing, regulatory and tax regimes that traditional digital entertainment services providers like us are subject to, giving them significant advantages in this regard. Increasingly, certain streaming providers with whom we compete are producing their own exclusive content, which has caused and will continue to cause an increase in the demand for exclusive content.

As broadband Internet networks are developed across the Region, we expect there will be increased demand for Internet-based entertainment delivery services and increased competition from streaming providers. There can be no assurance that our services, either existing or future offerings, will be able to compete with these streaming providers. In addition, many of our existing agreements with content providers do not explicitly allow for content to be delivered on an OTT basis. As a result, we may be unable to deliver the same premium content that we currently provide as a DTH service, and we may not be successful in attracting or retaining customers who seek an OTT offering, which could harm our competitive position and our business.

In addition, if our streaming products do not meet customers’ expectations for quality and reliability, or are not comparable with or superior to those of our competitors’, we may experience increased postpaid subscriber churn, fewer recharges by prepaid subscribers and reduced demand for our products and services. Our brand could also be harmed and our relationships with content providers could be adversely affected.

Our failure to effectively anticipate or adapt to competition or changes in consumer behavior could reduce our gross subscriber additions and could negatively affect our business, results of operations and financial condition.

Economic, political and social conditions in the Region could adversely affect our business.

We derive substantially all of our revenues from, and have the majority of our operations in, the Region. Our business, financial condition and results of operations may be significantly affected by economic, political and social conditions and uncertainty in the markets in the Region. The countries that constitute some of our largest markets, including Argentina, Brazil and Colombia, as well as Venezuela, have experienced or are currently experiencing challenging economic conditions, characterized by one or more of exchange rate instability, currency devaluation, high inflation, high interest rates, economic contraction, a reduction or cessation of international capital flows, a reduction of liquidity in the banking sector and/or high unemployment. These economic conditions have often been related to political instability. If these economic conditions continue, worsen or recur, they could substantially reduce the purchasing power of the population in our markets.

 

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Factors related to economic, political and social conditions that could affect our performance, as well as risks associated with doing business internationally, include, but are not limited to:

 

  rapid changes in currency values;

 

  high levels of inflation;

 

  differing levels of regulatory requirements and unexpected changes in regulations or in interpretation or enforcement of existing regulations, some of which are implemented without notice or ability to comment;

 

  changes, whether planned or unplanned, in political administrations and relationships in the Region or the United States as a result;

 

  governmental influence over local economies, influence over or ownership of broadcasters and programming or takeover or nationalization of businesses;

 

  substantial fluctuations in economic growth;

 

  exchange controls or restrictions on expatriation of earnings;

 

  price controls that limit our ability to raise prices, including to match inflation;

 

  changes in government economic or tax policies;

 

  difficulties in obtaining approval for significant transactions;

 

  imposition of trade barriers;

 

  competitive or regulatory environments that favor local or smaller businesses; and

 

  differing levels of intellectual property protection and in some instances, a lack of intellectual property protection.

In recent periods, some of the countries in the Region have seen an increase in governmental actions, such as seizures of assets against U.S.-based companies or limiting the ability to use local currencies to make purchases from abroad. For example, in Venezuela, where foreign currency exchange controls are currently in effect, we have been significantly limited in our ability to import customer premises equipment. In addition, because of foreign currency exchange controls, we have experienced and could in the future experience delays or restrictions on transferring cash from certain countries into the United States.

Our largest market, Brazil, has been experiencing challenging economic and political conditions that have caused a contraction in the pay-TV market and a reduction in consumer purchasing power, which, in turn, has resulted in a decline in postpaid subscribers.

In many countries in the Region, there can be periods of rapid regulatory change. For example, in Argentina, we have experienced four significant changes in the regulatory framework since 2009.

We expect that these significant fluctuations in political, social and economic conditions may continue throughout the Region. In addition to effects on our customer base and demands for our products and services, these conditions also could result in disruption to our operations, such as our broadcast centers, as described further in “—Disruption to our broadcast centers may prevent us from providing services, and could harm our business”. These types of developments, as well as actions we may have to take in light of these events, could adversely affect our business, financial condition and results of operations.

Because we offer premium pay-TV programming, our business may be particularly vulnerable to economic downturns.

Consumer demand for pay-TV programming has in the past been, and is expected to continue to be, affected by general economic conditions and overall levels of consumer spending. During periods of economic uncertainty or weakness or lower consumer confidence, we expect to experience increased customer cancellations and

postpaid subscriber churn, customers shifting to less expensive programming packages, less frequent or shorter

 

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recharges by prepaid subscribers, and lower subscriber additions, all of which may result in lower revenues. During economic downturns, subscriber acquisition, upgrade and retention expenses also could increase as we undertake more aggressive promotions and incur additional marketing expenses to retain and acquire new

customers. Loss of revenues and increased costs during these periods can have a significant adverse impact on our results of operations and our business.

Our results may be negatively affected by foreign currency exchange rates.

We conduct our business and incur costs in the local currencies in the countries in which we operate and, as a result, are subject to foreign exchange exposure due to changes in exchange rates, both as a result of translation and transaction risks.

We are exposed to foreign currency risk to the extent that we enter into transactions denominated in currencies other than our respective functional currencies (non-functional currency risk), such as equipment purchases, certain programming content costs, satellite lease payments and intercompany notes payable and notes receivable. Although we generally seek to match the currency of our obligations with the functional currency of the operations supporting those obligations, we are not always able to match the currency of our costs and expenses with the currency of our revenues. Changes in exchange rates with respect to amounts recorded in our consolidated balance sheets related to these items will result in unrealized (based upon period-end exchange rates) or realized foreign currency transaction gains and losses upon settlement of the transactions.

Although substantially all of our operations are conducted in the local currency of the countries in which we operate, we also are exposed to unfavorable and potentially volatile fluctuations of the U.S. dollar (our reporting currency) against the currencies of our operating subsidiaries when their respective financial statements are translated into U.S. dollars for inclusion in our consolidated financial statements. Increasing exchange rate risk has been brought on by external factors such as increasing interest rates in the United States amid relatively low commodity prices, as well as internal factors as a consequence of high fiscal and external deficits in many countries in the Region, or low liquidity in exchange markets. Volatility in exchange rates can affect our reported revenue, margins, and stockholders’ equity both positively and negatively and can make our results difficult to predict. Cumulative translation adjustments are recorded in accumulated other comprehensive earnings or loss as a separate component of equity. Any increase (decrease) in the value of the U.S. dollar against any foreign currency that is the functional currency of one of our operating subsidiaries will cause us to experience unrealized foreign currency translation losses (gains) with respect to amounts already invested in such foreign currencies. Accordingly, we may experience a positive or negative impact on our comprehensive earnings or loss and equity solely as a result of foreign currency translation. Our primary exposure to exchange rate risk during the twelve months ended December 31, 2017 was to the Brazilian Real, the Argentine Peso and the Colombian Peso representing 51%, 26% and 6% of our reported revenue during the period, respectively. In addition, our reported operating results are impacted by changes in the exchange rates for the Chilean Peso, the Peruvian Sol, the Uruguayan Peso, the Venezuelan Bolívar Fuertes (“Bolivar”), the Euro and the Trinidad and Tobago Dollar. We generally do not hedge against the risk that we may incur non-cash losses upon the translation of financial statements of our subsidiaries and affiliates into U.S. dollars.

Our business, financial condition and results of operations may be negatively affected by increased rates of inflation in the Region.

In recent years, certain countries in the Region, including Argentina and Venezuela, have confronted inflationary pressure. See “—Economic, political and social conditions in the Region could adversely affect our business”. For example, in Argentina, the Consumer Price Index (“CPI”) grew by 26.9% in 2015, and the monthly inflation rate peaked at 6.5% in April 2016. In Venezuela, the estimated CPI growth in 2017 through the end of the year is estimated to have exceeded 700%. In inflationary environments, we may have to increase the salaries paid to our employees multiple times per year to account for rising inflation, but may be unable to increase the costs of our products and services at rates sufficient to compensate for inflation. In addition, increasing rates of inflation

 

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creates economic pressures on our customers that affects their ability to maintain pay-TV services at their current level or at all.

As a result, increased rates of inflation in these countries have and could continue to increase our costs of operation, and may negatively impact our business, financial condition and results of operations. There can be no assurance that inflation rates will not be higher in the future.

Our ability to keep pace with technological developments in the delivery of digital television services is uncertain.

As new technologies are developed, our services and products could become obsolete or could require substantial investment. We use DBS technology to deliver programming to customers. Many of our competitors use cable technology, and increasingly we face competition from streaming providers who leverage Internet infrastructure to deliver content rather than a separate distribution network. Although DBS technology has certain advantages over competing technologies, it also has certain disadvantages, including a limited ability to offer video on demand and similar services that rely more heavily on two-way communications. In addition, streaming providers can more easily deliver their services to wireless devices than either satellite or cable operators. In order to offer an OTT product, we would need to make certain technological investments, including additional signal processing and delivery in the cloud, in order to deliver our content offerings over broadband. Continued advancements in the technologies relied on by us and our competitors could in the future hinder our ability to meet customer preferences to the same extent as our competitors.

Programming and retransmission costs are increasing and we may not have the ability to pass these increases on to our customers.

Programming costs constitute the largest expenses of our business. In recent years, the cost of programming has increased on a constant currency basis and is expected to continue to increase, particularly with respect to costs for sports programming and broadcast networks. We expect that programming costs will also increase as we continue to acquire new premium content, such as new channels and special events, and as the demand for high quality content, along with the prevalence of streaming providers in the pay-TV market, continues to increase. In addition, as described further under “Regulation”, many countries in the Region, including Brazil and Chile, have begun to implement regulations allowing broadcasters to charge a retransmission fee to pay-TV providers seeking to retransmit the digital signals of their broadcast channels. The inclusion of local broadcast channels is an important part of the packages that we offer in many markets, and the imposition of retransmission fees has increased our programming costs, particularly where we have not been able to pass these costs on to customers.

We may not be able to pass programming cost increases on to our customers due to a variety of factors, including government regulations limiting our ability to increase the costs of our services, inability to offer content through premium packages or through sub-licensing arrangements, the increasingly competitive environment and economic downturns. If we are unable to pass these increased programming costs on to our customers, our business, financial condition and results of operations could be adversely affected.

Our service offerings consist principally of programming that we license from third parties, and we depend on these relationships to provide our customers with the programming that they desire. Any failure to secure such programming on acceptable terms, or at all, could harm our business.

Our success depends on our ability to offer our customers a variety of international, regional and local programming. In order to offer this content, we depend on our relationships and agreements with content providers. There can be no assurance that our existing programming contracts will be renewed on favorable or comparable terms, or at all, or that the rights we negotiate will be adequate for us to execute our business strategy. To the extent we are unable to reach agreement, or renewals of agreements, with content providers on terms we believe are acceptable, we may be forced to, or determine for strategic or business reasons to, remove certain programming channels from our line-up and may decide to replace such programming channels with

 

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other programming channels, which may not be available on acceptable terms or be as attractive to customers. For example, in 2017, the Fox channel was removed from our line-up in Brazil for 10 days as a result of a short-term impasse in negotiating the renewal of our programming contract. In addition, at the end of 2017, the contract under which we and other pay-TV operators licensed the rights to distribute games of the Ecuadorean Soccer Federation (“FEF”) was purportedly licensed to a third party for the distribution of FEF games during the 2018 season. As a result, we and other prior licensors are disputing the validity of such assignment with the new licensor and FEF. We may not be successful in these discussions and, as a result, we may not be able to license FEF games at a reasonable price, or at all, which could adversely affect our business, financial condition and results of operations.

In certain countries, if we remove and do not replace the channels, we may have to reimburse our customers for the value of the removed channels. In addition, disputes with content providers could lead to actual or threatened termination of our agreements or interruptions in programming service. Such disputes, or the removal or replacement of programming, may inconvenience some of our customers and could lead to customer dissatisfaction and, in certain cases, the loss of customers, which could adversely affect our business, financial condition and results of operations.

In addition, to the extent that our competitors are able to secure rights to popular programming that we are not able to, such as exclusive sports rights, we could lose customers or customers could reduce the amount of services they purchase from us, which could adversely affect our business, financial condition and results of operations.

Our ability to differentiate our service may be limited if we cease to have exclusive content offerings.

As described further under “Business”, outside of Brazil, our strategy has included developing exclusive content offerings and sourcing exclusive rights from certain content providers that differentiate our pay-TV services from those of our competitors. If we are unable or choose not to renew licenses for exclusive content or substitute them with others at a reasonable cost, or are unable to develop and source other original productions, it could impact the attractiveness of our pay-TV offerings.

In Brazil, we face restrictions under Brazil’s Audiovisual Services Law on our ability to license Brazilian sports rights or engage in the activities of production and programming. These restrictions limit our ability to differentiate our services in Brazil through exclusive sports and other rights in the same manner as we do outside Brazil. There can be no assurance that other countries in the Region will not implement similar restrictions. In the event that we are unable to offer this content to our customers on an exclusive basis due to regulatory restrictions or otherwise, our ability to differentiate our services from our competitors may be diminished. Any one of these limitations could adversely affect our business, financial condition and results of operations.

We may not be able to effectively achieve our growth strategies, which could adversely affect our business, financial condition and results of operations.

Our growth strategies presume that we will be able to sell to customers that are in lower socio-economic segments and that have generally lower purchasing power than most pay-TV customers in more developed markets, such as the United States and Western Europe. In addition, our growth strategies depend in part on maintaining our competitive advantage with current solutions in new and existing markets, as well as our ability to continue to deliver high quality content, technology and customer service while driving margin expansion and free cash flow generation through operational efficiency and productivity. If we are not able to successfully execute our growth strategies, due to the risks described in this prospectus or otherwise, or our presumptions as to the market opportunity are incorrect, or if our strategies do not produce the results that we expect, we may lose market share and our business, financial condition and results of operations could be adversely affected.

 

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Damage to our brands could adversely affect our business.

Our success and ability to attract and retain customers and to charge premium pricing depends in part on the strength and reputation of the SKY and DIRECTV brands in the Region. We believe the SKY and DIRECTV brands are associated with a premium digital entertainment experience in the Region, and that we enjoy strong brand recognition both with customers and with content providers. Any adverse publicity in relation to other companies using the SKY or DIRECTV brands, or any of their licensees, could adversely affect our reputation. In addition, if we fail to promote, maintain or protect our SKY and DIRECTV brands or if we introduce new content and services or enter into new business ventures that are not favorably perceived by our customers or content providers, or that result in unfavorable publicity, our business, financial condition and results of operations could be adversely affected.

We operate in a highly regulated and complex environment and as a result, our business, financial condition and results of operations could be adversely affected.

We are required to obtain from governments and regulators certain licenses to provide our services, and we are also subject to laws and regulations in each country in the Region that govern many aspects of our operations, including:

 

  programming “must carry” and other requirements with respect to the channels we carry, as described under “—We are subject to programming ‘must carry’ requirements that could cause capacity constraints”;

 

  restrictions on the types of products and services we may provide, the prices thereof and how we market and sell such products and services;

 

  restrictions on our ability to grow our market share or our customer base;

 

  regulations regarding labor and consumer protection, including restrictions on our ability to terminate employees;

 

  requirements for how quickly we must disconnect customers upon request;

 

  restrictions on our ability to repatriate profits back to the United States or use certain currencies to purchase products;

 

  regulatory taxes and fees on our pay-TV business;

 

  multiple tax regimes;

 

  restrictions on the acquisition of additional spectrum;

 

  landing rights for satellites; and

 

  earth station and other licenses.

See “Regulation”. Regulatory regimes in the Region are generally less developed than in the United States, although in certain areas, such as labor and consumer protection, the regulatory regimes are often stricter than in the United States, and the application of existing laws and regulations to pay-TV providers is at times uncertain. In some circumstances, these laws apply differently to satellite providers than to other types of pay-TV providers or to those who provide streaming video, including imposing lower fees and taxes on such providers, which can put us at a competitive disadvantage.

In some countries in the Region, we are limited by law as to the programming we can provide. For example, in Brazil, DTH operators like us are unable to create and offer original content productions to pay-TV customers, or to own and operate Brazilian producers or content providers. In addition, several countries such as Argentina, Brazil and Venezuela have passed or proposed laws imposing certain “national” content requirements, advertising limitations and other requirements on the content we distribute. Such laws can have an adverse impact on our business by requiring us to carry content that uses our transponder capacity or by not allowing us to carry content that our customers have paid for in their programming packages.

 

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In Brazil and Venezuela, we are also limited in our ability to increase prices. In Brazil, prices may only be increased once per year on the customer’s service anniversary. In Venezuela, we are not allowed to increase the prices we charge our postpaid customers without governmental approval. As a result, we are often unable to raise our prices at rates sufficient to compensate for inflation or increasing costs underlying our products. In addition, in various jurisdictions, if channels are removed from the line-up but not replaced, we may have to reimburse customers for the value of the removed channels.

In Peru, our regulator has proposed a new regulation that would prohibit pay-TV providers, such as us, from renting or selling (or, under certain circumstances, financing customers’ purchase of) the main set-top box associated with the customer’s account. If approved, this regulation could limit our ability to offer our prepaid service in its current form, which requires customers to purchase and install a set-top box before activating our service.

We are also subject to the tax laws and regulations of many jurisdictions in the Region as well as the United States. These laws and regulations subject us to certain taxes and regulatory fees as a result of our business. In addition, many of the governments in the countries in the Region do not charge or impose lower fees and taxes on streaming providers and, as a result, we may be disadvantaged in competing with these providers. Other federal and sometimes municipal taxes are also imposed in several jurisdictions on telecommunication providers.

Tax laws and regulations are subject to change. From time to time, various legislative initiatives may be proposed that could adversely affect our tax position. There can be no assurance that our effective tax rate or cash position will not be adversely affected by these initiatives. In addition, international tax laws and regulations are extremely complex and subject to varying interpretations. There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that our tax positions would be successful in any such challenge.

In the United States, changes in policy positions could result in changes to U.S. tax laws that could materially impact our business. Any new policies and any steps we may take to address such new policies could have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to a number of other unique regulatory requirements in each of the countries in the Region, any one of which could adversely affect our business, financial condition and results of operation. See “Regulation”.

Recently enacted U.S. federal income tax reform could adversely affect us.

On December 22, 2017, major tax legislation was enacted (Public Law 115-97) (the “Tax Act”). The Tax Act, known as the Tax Cuts and Jobs Act, reduces the statutory rate of U.S. federal corporate income tax to 21%, provides an exemption for certain dividends from 10%-owned foreign subsidiaries and enacts numerous other changes. The overall impact of the Tax Act is based on the effect of numerous provisions in the Tax Act including the imposition of a “base erosion and anti-abuse tax,” a minimum tax for “global intangible low-taxed income,” limitations on deductibility of interest, limitations on the deduction of certain executive compensation costs and limitations on the use of future net operating losses to 80% of taxable income, among other changes. It is possible that the impact from certain of these or other provisions could reduce the benefit from the reduction in the statutory U.S. federal corporate tax rate. The overall impact of the Tax Act also depends on the future interpretations and regulations that may be issued by U.S. tax authorities, and it is possible that future guidance could adversely impact us.

We may lose or be unable to renew the various licenses and regulatory approvals we need to operate our business.

Our licenses to operate our DTH services across the Region have specified terms, typically ranging from 10 to 20 years, and are generally subject to renewal upon renegotiation and payment of a fee, but we cannot assure you that we will be able to renew our licenses on favorable terms or at all. Our ability to renew our licenses and the

 

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terms of such renewals are subject to a number of factors beyond our control, including the regulatory and political environment at the time of such renewal. The loss of, or failure to renew, any one license could have an adverse effect on our business, financial condition and results of operations.

In addition, we have received certain regulatory approvals to operate our business, such as landing rights for satellite capacity or the approval of the prices or any increases in prices that we charge our customers in Venezuela. There can be no assurance that any current regulatory approvals held by us are, or will remain, sufficient, or that any additional necessary approvals will be granted on a timely basis or at all, or that applicable restrictions will not be unduly burdensome. The failure to obtain and maintain the authorizations necessary to operate satellites or provide satellite service internationally could have a material adverse effect on our ability to generate revenues and on our overall competitive position.

We are subject to programming “must carry” requirements that could cause capacity constraints.

In many of the countries in the Region, including Argentina, Brazil, Chile, Colombia and Venezuela, we are required to retransmit all qualifying broadcast signals in the particular market. These typically include government-owned channels and increasingly may also include smaller and/or regional private broadcast channels. We face increasing pressure to carry additional “must carry” channels and any requirement to carry additional signals in our packages could cause us to experience significant transponder capacity constraints and prevent us from carrying additional popular channels or require us to drop other channels. As a result, we are sometimes less able than cable operators to carry certain regional or local broadcast channels, which could result in a competitive disadvantage.

In addition, in some countries the number of channels we may be required to carry exceeds the technical capacity of our satellites. In such instances, we may request from regulators reasonable limitations on our must carry obligations; however, there is no assurance that such requests will be granted in accordance with our request or at all.

We may be forced to change our billing practices in Brazil, which could have an adverse effect on our business, financial condition and results of operations.

In March 2014, Anatel enacted Resolution No. 632 (Regulamento Geral de Direitos do Consumidor de Serviços de Telecomunicações (the “RGC”)), the Brazilian General Telecommunications Consumers Regulation, which restricts pay-TV providers from billing in advance for postpaid services. The RGC provided a two-year grace period to migrate customers to a “billing in arrears” model. In July 2014, we began billing all new customers in arrears. Currently, however, we continue to have approximately 2 million “bill in advance” customers, all of which became our customers prior to the enactment of the RGC. A final decision on whether the RGC also applies to legacy customers is pending. If we are required to immediately convert all of our existing “bill in advance” customers in Brazil to “bill in arrears” customers, it could have a one-time impact on our cash flows. See “Regulation—Regulatory Regime by Country—Brazil” for more information.

We are dependent upon third-party providers for our products and services, and our business, financial condition and results of operations could be adversely affected if any of these third-party providers fails to adequately deliver the contracted goods or services.

We depend on third-party providers for many aspects of our business. We rely on a limited number of original equipment manufacturers to manufacture our set-top boxes, antennas and satellite dishes, and rely on a limited number of suppliers, and in some cases a single supplier, to provide the key components required to build our set-top boxes. We depend on a single supplier to maintain and operate our satellites and provide us with orbital slots. See “—We currently depend on Intelsat to lease five of our six satellites and all of our orbital slots to us, and our business could be adversely affected if Intelsat ceases to provide such leases on terms favorable to us, or at all”. We also rely on a small group of software engineers and computer programmers to develop, maintain and provide certain software code that is used to deliver our programming content. Once our products are ready for distribution, we rely on independent dealers and third-party retailers to sell our products and services.

 

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If we are required to change any of our third-party providers for any reason, we could experience a delay in manufacturing or distributing our products if another provider is not able to meet our requirements or integrate their systems with our existing technology on a timely basis, or at all, and our costs of providing our products and services could increase. Our reliance on third-party providers involves several risks, including:

 

  a potential inability to obtain an adequate supply of set-top boxes or satellite dishes on a timely basis or at all;

 

  potential for change in ownership of our suppliers that may adversely affect the quality of their services;

 

  inability to obtain component parts on a timely basis or at all;

 

  inability to obtain satellite maintenance and operation services and orbital slots;

 

  inability to integrate technology of new providers into our existing products on a reasonable basis or at all;

 

  reduced control over pricing, quality and timely delivery of products;

 

  increased susceptibility to economic downturns; and

 

  the potential bankruptcy, lack of liquidity or operational failure of our suppliers.

An inability to obtain or deliver our products and services in a timely manner, or at all, as a result of any of these risks or others could damage our relationships with current and prospective customers and harm our business, resulting in a loss of market share, and reduced revenue and income.

Our satellites are subject to significant operational and environmental risks that could limit our ability to utilize them, and that could also require us to construct additional satellites.

Satellites are subject to significant operational risks while in orbit. These risks include malfunctions, commonly referred to as anomalies, which may occur because of satellite design, manufacturing defects, problems with power systems or control systems of the satellites, incorrect orbital placement, improper operation and general failures from operating satellites in the harsh environment of space. For example, as we have begun activating the transponders on SKY B-1, the payload on the satellite suffered three failures of electronic power conditioners (“EPCs”), each of which supports two transponders. Two of these EPCs affected SKY Brasil’s transponders and one impacted transponders utilized by a third party. All failures have been covered by on-board redundancy; however, additional EPC failures could result in permanent loss of or the inability to use some of our 60 transponders on SKY B-1. Other anomalies may occur in the future.

Anomalies may also reduce the expected useful life of a satellite, creating additional expenses due to the need to provide replacement or backup satellites earlier than anticipated and potentially reducing revenues if service is interrupted. In the event one of our satellites were to fail, we would need to construct and launch one or more new satellites. The construction and launch of satellites are costly and may be subject to delays, including construction delays, unavailability of launch opportunities due to competition for launch slots, weather, general delays when a launch provider experiences a launch failure, and delays in obtaining regulatory approvals. A significant delay in the delivery of any satellite could materially adversely affect the use of the satellite and thus could adversely affect our anticipated revenues and earnings. If satellite construction schedules are not met, there can be no assurance that a launch opportunity will be available at the time a satellite is ready to be launched. Certain delays in satellite construction could also jeopardize a satellite authorization to the extent it is conditioned on timely construction and launch of the satellite.

Although we believe we have adequate back-up for our satellites, in the event of an anomaly or loss of a satellite, there can be no assurance that we could recover critical transmission capacity or transfer our transmission to another satellite in the event one or more of our satellites were to fail or malfunction, or that in all cases, our backup satellite capacity would be sufficient. In addition, the transfer of capacity to a backup satellite is not instantaneous, and during the time of an anomaly and prior to the implementation of the backup capacity, those of our customers who are covered by that satellite would experience an interruption in their service.

 

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Any single anomaly or series of anomalies could materially adversely affect our ability to use the satellites, which could lead to a loss of customers and adversely affect our operations, revenues and our ability to attract new customers for our services and the value of our brand.

In addition, we have traditionally purchased insurance covering the launch and the first year of operation when the satellite is most vulnerable, and subsequently rely on the redundancies of our backup satellite capacity in the case of anomalies in lieu of purchasing additional insurance coverage.

Our satellites have minimum design lives of approximately 15 years, but could fail or suffer reduced capacity before then.

Our ability to provide our products and services to our customers and earn revenue also depends on the usefulness of our satellites. Each satellite typically has a limited design life of approximately 15 years. See “Business—Our Content Delivery Infrastructure—Satellites”. We can provide no assurance, however, as to the actual orbital lives of our satellites, which may be shorter or longer than their design lives. A number of factors affect the design life of a satellite, including, among other things:

 

  its design;

 

  the quality of its construction;

 

  the durability of its component parts;

 

  the insertion of the satellite into orbit;

 

  any required movement, temporary or permanent, of the satellite;

 

  the ability to continue to maintain proper orbit and control over the satellite’s functions;

 

  the advancement of technology in the delivery of pay-TV; and

 

  the remaining on-board fuel following orbit insertion.

If any of these or other factors cause a decrease in the useful lives of our satellites, we may need to expend additional amounts to provide replacement or backup satellites earlier than anticipated and service interruptions could adversely impact our business, financial condition and results of operations.

In the event we need to obtain additional transponder capacity to deliver content to our customers, we will need to obtain and launch additional satellites.

A key component of our business strategy is our ability to expand our competitive product offerings with high value features, including the expansion of HD and 4K programming. However, each transponder has a fixed capacity to carry our content offerings and as a result, the content offerings we are able to provide are limited by our transponder capacity. In the event that our transponders reach capacity, because of programming “must carry” requirements, adding channels for special events, new technologies or otherwise, we may not be able to carry programming that our competitors carry or we may need to construct and launch new satellites as additional transponders cannot be added to existing satellites.

We currently depend on Intelsat to lease five of our six satellites and all of our orbital slots to us, and our business could be adversely affected if Intelsat ceases to provide such leases on terms favorable to us, or at all.

Five of our six satellites and all of the orbital slots in which our six satellites reside are leased from Intelsat S.A. (“Intelsat”). Our lease agreements with Intelsat extend for the estimated manufacturing life of the satellite. However, Intelsat may terminate the lease agreements if we commit a material breach of the agreements that is not cured within the allotted time. Intelsat holds a sizeable collection of rights to well-placed orbital slots and our ability to provide content to our customers throughout the Region is subject to our ability to obtain adequate

 

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orbital slots through which our content can be uplinked from our broadcast centers and downloaded to our customers. In the event that we would need to add an additional satellite or change the position of a current satellite, we would need to obtain an additional satellite and the right to use additional orbital slots. We cannot assure you that additional orbital slots will be available on acceptable terms or at all. In addition, if Intelsat fails to adequately protect its rights to continued use of, and other rights related to, those orbital slots, or fails to take appropriate steps to manage potential conflicts with rights holders for adjacent orbital slots, or if Intelsat terminates our lease agreements due to our failure to comply with the terms of the lease, then we could lose rights to operate from those locations. The loss of an orbital slot would require us to obtain rights to a new orbital slot and adjust the positioning of each of our customers’ satellite antennas, which would be extremely costly and would adversely affect our business, financial condition and results of operations.

We rely on network and information systems and other technologies, and a disruption, cyber-attack or failure of such networks, systems or technologies may disrupt or harm our business and could adversely affect our business, financial condition and results of operations.

Because network and information systems and other technologies are critical to our operating activities, network or information system shutdowns caused by events such as computer hacking, cyber-attacks, computer viruses or other destructive or disruptive software, and other malicious activity on our network or our website, pose significant risks. Security breaches, attacks, unauthorized access and other malicious activities targeted at information systems infrastructure at larger corporations have significantly increased in recent years, and some have involved sophisticated and highly targeted attacks on computer networks. Our networks, systems and other technologies and those of our third-party service providers may be vulnerable to such security breaches, attacks, malicious activities and unauthorized access.

Due to the fast-moving pace of technological advancements, it may be difficult to detect, contain and remediate every such event. Such an event could have an adverse impact on our operations, including service disruption, degradation of service, excessive call volume to customer care call centers and damage to our broadcast centers, other properties, equipment and data. In addition, we handle a large amount of personal customer data, which could be stolen in a security breach and could subject us to significant regulatory and other liability under consumer protection laws. Such an event also could result in large expenditures necessary to repair or replace such networks or information systems or to protect them from similar events in the future. Significant incidents could result in a disruption of our operations, customer dissatisfaction, a loss of customers or revenues or damage to our reputation and credibility.

We have experienced and expect to continue experiencing significant costs to protect the security of our systems and our information as well as that of our customers and employees. Because of the potential for misuse of personal information, we are subject to additional legal obligations concerning our treatment of customer and other personal information, which may lead to further increased costs. As more countries adopt privacy laws, we may also experience increased compliance costs and we may not be able to comply in a timely fashion or at all.

Disruption to our broadcast centers may prevent us from providing services, and could harm our business.

Our broadcast centers are located in California, Argentina, Brazil and Venezuela, and are subject to interruption by natural disasters, fire, power shortages, pandemics, and other events beyond our control. In the event of a major earthquake, hurricane or catastrophic event such as fire, flood, power loss, telecommunications failure, cyber-attack, war or terrorist attack, we may be unable to continue to transmit all of our programming and our customers may experience program interruptions. Most of the content uplinked from a particular broadcast center differs from content at our other broadcast centers, as we uplink our content based on a localized approach and we do not have fully redundant broadcast centers. For example, approximately one third of our programming for the South and North Regions is currently supported by our broadcast center in Caracas, Venezuela, an area with significant political unrest. While we believe we have adequate redundancies in our broadcast operations, as discussed under “Business—Our Content Delivery Infrastructure—Broadcast Centers”, if any of our broadcast

 

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centers were to stop functioning because of the political instability in the region or otherwise, we would have to reroute content that is exclusively uplinked from the offline broadcast center to another broadcast center, which could result in delays to our customers in receiving content and increased costs.

Failure to continue to deliver services due to a broadcast failure could harm our reputation and have an adverse effect on our future operating results as a result of lost revenues and increased costs to recover broadcast capabilities.

We currently self-insure the operations of our business.

In many cases, we have determined that it is more effective to self-insure than to maintain third-party insurance, including with respect to our satellites and broadcast centers. We have traditionally maintained self-insurance policies through AT&T that provide limited coverage for some, but not all, of the potential risks and liabilities associated with our business. Following our separation from AT&T, we may not be able to self-insure our operations at the current level and, any losses exceeding our self-insured amount could adversely affect our financial condition. We may also choose to use third-party insurance in the future which could result in an increase in premiums paid by the business. Any reassessment in the amount of our self-insurance liability following the Separation will depend on historical claims experience, demographic factors, severity factors and other actuarial assumptions. However, if future occurrences and claims differ from these assumptions and historical trends, our business, financial results and financial condition could be materially impacted by claims and other expenses.

Pay-TV piracy has significantly affected our industry and is expected to continue to do so.

Theft of cable and satellite programming and other forms of pay-TV piracy are widespread in the Region. Piracy takes different forms, including unauthorized access of pay-TV signals (particularly those of analog cable operators), unauthorized retransmission of satellite signals through cable head-ends, misappropriation and distribution through the Internet of encryption keys (called key sharing), illegal streaming over the Internet and underreporting the number of customers on a network by local competitors.

We believe that many people in the Region who view non-broadcast audiovisual programming do so through means that rely on signal theft. Signal theft affects us adversely even where it is not our signal that is being stolen, because it creates the availability of more affordable alternatives to our services which we and other operators must compete against.

In addition, in some countries, special designations are given to certain of our competitors that afford them reduced operating costs and subject them to lower regulatory taxes and similar obligations. We believe that many of these entities exceed these limitations and underreport their customer base in order to maintain the special designation and take advantage of the reduced operating costs and lower regulatory obligations.

The proliferation of unauthorized signal and encryption key sharing, as well as unauthorized copies of content, underreporting of customers and widespread Internet video piracy will likely continue, and our customers may opt to take advantage of such alternatives rather than our products and services, which may result in a loss of revenues, and, in turn, an adverse effect on our business, financial condition and results of operations. There can be no assurance that we and other pay-TV providers will succeed in effectively restricting or eliminating piracy, and activities that we engage in to reduce these activities, including continued technological improvements as well as litigation and government advocacy, are costly.

Current and future litigation, investigations or other actions against us could be costly and time consuming to defend.

We are from time to time subject to legal proceedings, regulatory matters and claims that arise in the ordinary course of business, such as claims brought by tax and regulatory authorities, performance rights organizations,

 

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customers or groups claiming to represent classes of our customers and current or former employees of us and of our suppliers. Increasingly, we face pressure from performance rights organizations seeking to charge us certain royalties for performance rights fees they believe are owed to composers of musical compositions, actors, directors, musicians and others whose creative works are embedded in the content that we provide to our customers. We have settled with some of these organizations, but cannot assure you that we will achieve resolutions with others on favorable terms or at all. Such performance rights fees are paid as incurred and recognized as a component of Programming, Broadcast Operations and Other Expenses.

Litigation can result in substantial costs and may divert management’s attention and resources, which could adversely affect our business, financial condition and results of operations. The assessment of the outcome of legal proceedings, including our potential liability, if any, is a highly subjective process that requires judgments about future events that are not within our control. The timing of the final resolution of such legal proceedings is typically uncertain. In addition, the amounts ultimately received or paid upon settlement or pursuant to final judgment, order or decree may differ materially from amounts accrued in our financial statements. Such potential outcomes, including judgments, awards, settlements or orders could have an adverse effect on our business, financial condition and results of operations.

Our failure to comply with anti-corruption, anti-bribery or anti-money laundering laws could harm our reputation, subject us to substantial fines and adversely affect our business.

We operate in multiple jurisdictions and are subject to complex regulatory frameworks with increased enforcement activities worldwide. Our governance and compliance processes include the review of internal controls over financial reporting but may not prevent future breaches of legal, accounting or governance standards and regulations. We may be subject to breaches of our code of ethics, anti-corruption policies or business conduct protocols or to instances of fraudulent behavior, corrupt practices or dishonesty by our employees, contractors or other agents. Our failure to comply with applicable laws and other standards could harm our reputation, subject us to substantial fines, sanctions or penalties and adversely affect our business and ability to access financial markets.

We face reputational and other risks associated with the deferred prosecution agreement entered into by Torneos with the U.S. federal government and the conduct described therein.

Torneos, a joint venture in which we currently hold a 61.5% economic interest and a 50% voting interest, entered into a deferred prosecution agreement (“DPA”) in December 2016 with the United States Attorney’s Office for the Eastern District of New York (the “EDNY”) in which Torneos admitted its liability for the acts of the former management of Torneos in a scheme involving payment of bribes and kickbacks to secure support for, among other things, the acquisition of rights to broadcast certain soccer tournaments and matches. At the time of the subject conduct, we held a 40% interest in Torneos. As part of the DPA, Torneos agreed to $113 million in forfeiture and criminal penalties, and further agreed to implement enhanced internal controls and a rigorous corporate compliance program and to cooperate fully with the U.S. government’s ongoing investigation of other entities and individuals involved in the scheme. The EDNY agreed to defer the prosecution for a period of 48 months, extendable to 60 months at its discretion. If Torneos complies with its obligations under the DPA, the EDNY will move to dismiss the criminal charge after the conclusion of the DPA period. If Torneos were to violate the DPA, it could be subject to full criminal prosecution. We believe that to date, Torneos has complied with its obligations under the terms of the DPA.

The DPA does not preclude claims from other governments, entities or individuals, including breach of contract claims, arising from or relating to the conduct that was the subject matter of the DPA, which could result in additional costs, expenses and fines to Torneos. While none of the Company, any of its other subsidiaries, or any current management of Torneos, were involved in the allegedly criminal conduct or named in the DPA, future developments relating to Torneos’ past conduct may have a negative effect on our reputation or on the value of our investment in Torneos.

 

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Assertions by third parties of infringement of their intellectual property rights by us or our suppliers could result in significant costs and substantially harm our business and operating results.

The technologies used in the digital pay-TV business are protected by a wide array of patents and other intellectual property rights. In addition, we may be liable for the content carried on and disseminated through our networks and, as such, could be exposed to legal claims for copyright infringement for use of a performer’s likeness or other audiovisual works without compensation. Many entities, including some of our competitors, have or may obtain patents and other intellectual property rights that cover or affect products, services or content related to those that we currently offer or may offer. As a result, third parties have in the past and may in the future assert infringement and misappropriation claims against us or our manufacturers from time to time. Whether or not an infringement or misappropriation claim is valid or successful, it could adversely affect our business by diverting management’s attention or involving us in costly and time-consuming litigation.

If we are unable to adequately protect our intellectual property rights, we could be forced to engage in costly litigation to protect our rights and our business could be harmed.

Our success depends in part on our intellectual property and other proprietary rights in our brand and technology, including various aspects of our DBS delivery, such as our set-top box and advanced program guide software. We rely on a combination of paid-for-development, derivative work, trademark, copyright and patent laws, as well as confidentiality agreements, all of which offer only limited protection. Some of our technology and other intellectual property may not be adequately protected by intellectual property laws, particularly in jurisdictions outside the United States. The loss of our intellectual property or the inability to secure or enforce our intellectual property rights could adversely affect our business, results of operations and financial condition.

In addition, our business could be harmed if we lose the right to use certain third-party licenses. For example, we license the DIRECTV brand from DIRECTV pursuant to an irrevocable, perpetual and royalty-free license for the use of DIRECTV in the Region. In addition, we license the SKY brand from an unaffiliated third party, Sky International AG. We have an irrevocable, perpetual and royalty-free license to use the SKY marks in connection with our satellite TV services in Brazil. In addition, we have a limited, revocable license to use the SKY marks for non-pay-TV products and services in Brazil, and such license has a remaining term of four years unless we, at our option, extend for an additional five-year period. Both of the licenses to the SKY brand can be terminated in certain circumstances. For example, Sky International AG can terminate the licenses to the SKY brand if we commit a material breach of the agreement that is not cured within the allotted time, and can terminate our license for non-pay TV products and services in the event we undergo a change of control. Any such termination could adversely affect our business, financial condition and results of operations.

Our ability to operate our business may suffer if we are unable to retain our employees or attract other skilled employees or contractors, including as a result of our separation from AT&T.

Our success depends, in large part, on the skills of our management team and our ability to attract, retain, recruit and motivate a sufficient number of qualified employees and contractors. In addition to our employee personnel, we also rely on independent consultants and contractors to perform various non-core services for us. We need to continue to attract and retain key personnel and to recruit qualified individuals to succeed existing key personnel to ensure the continued growth and successful operation of our business. Leadership changes will occur from time to time, and we cannot predict whether significant retirements or resignations will occur or whether we will be able to recruit additional qualified personnel. The loss of the services of any senior executive or other key personnel or contractors, the inability to recruit and retain qualified personnel in the future or the failure to develop and implement a viable succession plan, could have an adverse effect on our business, financial condition and results of operations.

In addition, as a result of our separation from AT&T, some of our employees may elect to remain with AT&T or may terminate their employment with us. A loss of key skilled employees or a loss of a significant percentage of our employees as a result of the Separation could adversely affect our business.

 

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A significant portion of our workforce is represented by labor unions and any labor disruptions or strikes could adversely affect our business, financial condition and results of operations.

In Brazil and Argentina, 100% and 64% of our workforces, respectively, are unionized. In addition, a portion of our workforce is unionized in Chile and Colombia. In Argentina, employees of third parties that we use to sell, install and service our customers, are also part of a union, and under current collective bargaining agreements we guarantee their employment continuity, which increases our labor costs. Every year, the industry group that represents our unionized workforce in Argentina negotiates salary adjustments and such negotiations in the past have led to disturbances and may in the future result in additional disturbances or worker strikes. The collective bargaining agreements with the unions in the various countries may increase our compensation-related expenses and any disruptions to our operations due to labor related problems could have an adverse effect on our business, financial condition and results of operations.

In addition, because of the economic environments in many of the countries in the Region, additional unions have started to gain traction and have approached our employees that are not unionized. In the event that additional workers become unionized, this may lead to increased compensation-related expenses and potential for disruption in our business.

We may pursue acquisitions, investments or merger opportunities, which may subject us to significant risks and could adversely affect our business, financial condition and results of operations and there is no assurance that we will be successful or that we will derive the expected benefits from these transactions.

We may pursue acquisitions of, investments in or mergers with businesses, technologies, services and/or products that complement or expand our business. Some of these potential transactions could be significant relative to the size of our business and operations. Any such transaction would involve a number of risks and could present financial, managerial and operational challenges, including: diverting management attention from running our existing business or from other viable acquisition or investment opportunities; incurring significant transaction expenses; increased costs to integrate financial and operational reporting systems, technology, personnel, customer base and business practices of the businesses involved in any such transaction with our business; not being able to integrate our businesses in a timely fashion or at all; potential exposure to material liabilities not discovered in the due diligence process or as a result of any litigation arising in connection with any such transaction; and failure to retain key management and other critical employees.

For any or all of these reasons, a pursuit of an acquisition, investment in or merger with businesses, technologies, services and/or products could have an adverse effect on our business, financial condition and results of operations.

We expect to have substantial indebtedness.

Prior to this offering, we will incur indebtedness of $            , which could adversely affect our business, financial condition and results of operations. As of             , after giving pro forma effect to the Separation, our total debt would have been approximately $            . See “Unaudited Pro Forma Condensed Combined Financial Information”.

Subject to the limits contained in the instruments governing our indebtedness, we may incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could have important consequences, including:

 

  making it more difficult for us to satisfy our obligations with respect to our debt;

 

  limiting our ability to obtain additional financing to fund future working capital, capital expenditures, business development or other general corporate requirements;

 

  increasing our vulnerability to general adverse economic and industry conditions;

 

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  exposing us to the risk of increased interest rates as certain of our borrowings are and may in the future be at variable rates of interest;

 

  limiting our flexibility in planning for and reacting to changes in our industry;

 

  placing us at a competitive disadvantage to other, less leveraged competitors;

 

  impacting our effective tax rate; and

 

  increasing our cost of borrowing.

In addition, the instruments governing our indebtedness may contain restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with such covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt.

Our reported financial results could be adversely affected as a result of goodwill impairment charges.

Goodwill represents the excess of consideration paid over the fair value of identifiable net assets acquired in business combinations. At December 31, 2017, our goodwill resulting from the Acquisition was $3,444 million. The goodwill is allocated to our Brazil, South Region and North Region operating segments in the amounts of $2,559 million, $587 million and $298 million, respectively.

Goodwill is reviewed at least annually for impairment, which might result from the deterioration in the operating performance of the business, adverse market conditions, adverse changes in the applicable laws or regulations and a variety of other circumstances. Any resulting impairment charge is recognized as an expense in the period in which impairment is identified.

Goodwill is not amortized but is tested at least annually for impairment. The testing is performed on the value as of October 1 each year, and compares the book value of the assets to their fair value. Actual experience may differ from the amounts included in our assessment, which could result in impairment of our goodwill in the future. Impairment adjustments, if any, are required to be recognized as operating expenses. We cannot assure that we will not have future impairment adjustments to our recorded goodwill.

Risks Related to Our Ongoing Relationship with AT&T

We may not realize the potential benefits from our separation from AT&T.

We may not realize the benefits that we anticipate from our separation from AT&T, either in the time that we expect them to be realized or at all. These benefits include the following:

 

  increasing strategic and operational flexibility, including by allowing management decision-making to be focused directly on our business needs and strategic priorities;

 

  enabling us to allocate our capital in a manner that is tailored to our business and financial needs;

 

  providing us with direct access to the debt and equity capital markets;

 

  improving our ability to pursue acquisitions through the use of our common stock;

 

  enhancing our market recognition with investors; and

 

  increasing our ability to attract and retain employees by providing equity compensation tied directly to our business.

We may not achieve the anticipated benefits from our separation in a timely manner or at all for a variety of reasons, including if any of the matters identified in this “Risk Factors” section were to occur. For example, the

 

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process of separating our business from AT&T and operating as an independent public company may distract our management from focusing on our business and strategic priorities. In addition, although we will have direct access to the debt and equity capital markets following the Separation, we may not be able to issue debt or equity on terms acceptable to us, or at all. The availability of shares of our Class A common stock for use as consideration for acquisitions also will not ensure that we will be able to successfully pursue acquisitions or that the acquisitions will be successful. If we do not realize the anticipated benefits from our separation for any reason, our business, financial condition and results of operations could be adversely affected.

Control by AT&T will severely limit our other stockholders from influencing matters requiring stockholder approval, and could adversely affect our other stockholders.

Immediately following the completion of this offering, AT&T will own approximately    % of the outstanding shares of our Class A common stock and 100% of the outstanding shares of our Class B common stock, giving AT&T    % of the combined voting power and    % of the economic interest of our outstanding common stock (or    % and    %, respectively, if the underwriters exercise their option to purchase additional shares in full). AT&T is not subject to any contractual obligation to maintain its share ownership other than the 180-day lock-up period as described under “Underwriting”. For so long as AT&T owns a majority of our voting power, holders of a majority of the voting power will be able to take stockholder action by written consent without calling a stockholder meeting, and will be able to approve amendments to our certificate of incorporation and by-laws without the vote of, or prior notice to, any other stockholder. Investors in this offering will not be able to independently affect the outcome of any stockholder vote during such time. As a result, AT&T will have the ability to control all significant corporate activities involving us, including:

 

  the composition of our board of directors and, through our board of directors, decision-making with respect to our business direction and policies, including the appointment and removal of our officers;

 

  acquisitions or dispositions of businesses or assets, mergers or other business combinations;

 

  our capital structure;

 

  payment of dividends;

 

  the number of shares available for issuance under our equity incentive plans for our prospective and existing employees;

 

  termination of, changes to or determinations under our agreements with AT&T relating to the Separation;

 

  changes to any other agreements that may adversely affect us; and

 

  corporate opportunities that may be suitable for us and AT&T, subject to the corporate opportunity provisions in our certificate of incorporation, as described below.

Persons associated with AT&T currently serve on our board of directors. Because AT&T’s interests may differ from ours or from those of our other stockholders, actions that AT&T takes with respect to us, as our controlling stockholder, may not be favorable to us or our other stockholders. AT&T’s voting control and influence will limit other stockholders’ ability to influence corporate matters, may discourage transactions involving a change of control of our company, including transactions in which you as a holder of our Class A common stock might otherwise receive a premium for your shares and may make some transactions more difficult or impossible without their support, even if such events are in the best interests of our other stockholders. This concentration of ownership could cause the market price of our Class A common stock to decline or prevent our other stockholders from realizing a premium over the market price for their Class A common stock. In addition, AT&T may have an interest in pursuing acquisitions, divestitures, financing or other transactions, including, but not limited to, the issuance of additional debt or equity and the declaration and payment of dividends, that, in its judgment, could enhance their equity investments, even though such transactions may involve risk to us. After the expiration of the 180-day lock-up period, AT&T generally has the right at any time to split off or spin off our common stock that it owns, to transfer its common stock or to sell a controlling interest in us to a third party, in

 

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either case without your approval and without providing for a purchase of your shares. See “Shares Eligible for Future Sale”.

Even if the ownership interest of AT&T is reduced to less than a majority of our outstanding shares of our common stock, so long as AT&T retains a significant portion of our voting power, AT&T will have the ability to substantially influence these significant corporate activities. Any of these actions could adversely affect our business, financial condition and results of operations and cause the value of your investment to decline.

Our Class B common stock may remain as a separate class, and the existence of multiple classes of publicly traded common stock could depress the price of our Class A common stock.

Each share of Class B common stock held by AT&T, its successor or a majority-owned subsidiary, will be convertible at any time into one share of Class A common stock at AT&T’s option but will not be convertible if held by any other holder. As a result, if AT&T were to dispose of its shares of Class B common stock, including pursuant to a tax-free split-off or spin-off, the new holders of such shares would not be able to convert the shares of Class B common stock into Class A common stock. In such event, we may apply to have our Class B common stock listed on a securities exchange. The existence of multiple classes of publicly traded common stock could depress the price of our Class A common stock.

The value of our Class A common stock may be adversely affected by the superior voting rights associated with our Class B common stock.

The holders of our Class A common stock and Class B common stock generally have identical rights, except that holders of our Class A common stock, which is the class of common stock being offered in this offering, are entitled to one vote per share on all matters submitted to a vote of stockholders, and holders of our Class B common stock are entitled to ten votes per share on all matters submitted to a vote of stockholders. The ten-to-one voting ratio between our Class B common stock and our Class A common stock will permit the holders of our Class B common stock collectively to exert significant influence over our management. The difference between the voting rights of our Class A common stock and our Class B common stock could adversely affect the value of our Class A common stock to the extent that investors ascribe value to the superior voting rights of our Class B common stock.

In addition, the holding of lower voting Class A common stock may not be permitted by the investment policies of certain institutional investors or may be less attractive to managers of certain institutional investors, all of which could adversely affect the value of our Class A common stock.

In the event that a spin-off, split-off or other public offering is consummated that results in our Class B common stock becoming publicly traded, the existence of two classes of publicly-traded common stock may result in less liquidity for both classes of our common stock than if we had only one class of common stock, which could adversely affect the value of our Class A common stock and Class B common stock. See “Description of Capital Stock” for a description of our common stock and the rights associated with such stock.

Should AT&T determine to pursue a tax-free split-off or spin-off of its interest in us, it is necessary that it distribute an amount of stock in us that constitutes “control” within the meaning of Section 368(c) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), which is defined as at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of each class of nonvoting stock, if any, outstanding. In addition, AT&T intends to submit a request for a ruling from the Internal Revenue Service (“IRS”) that would permit such a tax-free split-off or spin-off, and in any such ruling request, AT&T may be required to make certain representations consistent with the requirements of such “control”.

In a July 2016 revenue procedure, the IRS announced that it will not assert that the distributing corporation lacked “control” of the corporation whose stock was distributed (the “controlled corporation”) in a tax-free

 

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split-off or spin-off immediately prior to the distribution if certain conditions are met, including that either (i) the controlled corporation and its directors, management and controlling shareholders do not take any action (including to adopt a plan or policy) within the 24-month period following the distribution to effect an unwind transaction or (ii) any unwind transaction effected within such 24-month period is in connection with an “unanticipated third party transaction”. For this purpose, an “unwind transaction” generally refers to a restoration of the relative voting rights before high-vote and low-vote stock were established. Accordingly, in the event that AT&T pursues the tax-free split-off or spin-off and the related transactions described above, we will have no plan or intention to enter into any transaction that would alter the relative voting rights of the Class A common stock and Class B common stock, or to otherwise undertake a transaction that could result in an “unwind”, and we intend to comply with all applicable requirements imposed by the revenue procedure or otherwise by the IRS. Accordingly, holders of Class A common stock should assume that the superior voting rights of our Class B common stock, as well as the existence of two classes of stock, both of which may be publicly traded, will remain indefinitely and should not rely on any future occurrence of an unwind transaction.

The historical and pro forma combined financial information does not reflect the results we would have achieved as a stand-alone public company and may not be a reliable indicator of our future results.

We derived the historical and pro forma financial information included in this prospectus from the historical Combined Financial Statements and the related Notes. The information does not reflect what our business, financial condition and results of operations would have been had we been an independent entity during the periods presented, and may not be a reliable indicator of those that we will achieve in the future. This is primarily because of the following factors:

 

  certain corporate services have historically been provided to us by AT&T and DIRECTV, such as executive management, information technology, legal, finance and accounting, investor relations, human resources, risk management, tax, treasury and other services. Following the Separation, AT&T will provide some of these functions for a limited period of time as described under “Certain Relationships and Related Party Transactions—Transition Services Agreement”. Our historical combined financial data and unaudited pro forma condensed combined financial data reflect adjustments and allocations with respect to corporate and administrative costs relating to these functions which are less than the expenses we expect would have been incurred had we operated as a stand-alone company; and

 

  changes that will occur as a result of our transition to become a stand-alone public company. These changes include (i) changes in our cost and capital structure, (ii) changes in our management and employee base, (iii) potential increased costs associated with reduced economies of scale and (iv) increased costs associated with corporate governance, investor and public relations and public company reporting requirements.

Therefore, the historical and pro forma condensed financial information may not necessarily be indicative of what our business, financial condition and results of operations would have been during the periods presented or will be in the future. For additional information about the historical financial performance of our business and the basis of presentation of our historical Combined Financial Statements and our unaudited pro forma condensed combined financial statements, see “Unaudited Pro Forma Condensed Combined Financial Statements”, “Selected Historical Financial Data”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical Combined Financial Statements and the related Notes.

The assets and resources that we acquire from AT&T (including from DIRECTV) in the Separation may not be sufficient for us to operate as a stand-alone company, and we may experience difficulty in separating our assets and resources from AT&T.

Because we have not operated as a stand-alone company in the past, we may have difficulty doing so. We may need to acquire assets and resources in addition to those provided by AT&T (including through DIRECTV) to us, and in connection with the Separation, may also face difficulty in separating our assets from AT&T’s assets. In addition, we have relied on DIRECTV to provide certain intellectual property, technological capabilities,

 

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software engineers and rocket scientists to our business and it may be difficult to separate our intellectual property, technologies and personnel from that of DIRECTV. Our business, financial condition and results of operations could be harmed if we have difficulty operating as a stand-alone company, fail to acquire assets that prove to be important to our operations or incur unexpected costs in separating our assets from those of AT&T (including DIRECTV).

The transitional services that AT&T will provide to us following the Separation may not be sufficient to meet our needs, and we may have difficulty finding replacement services or be required to pay increased costs to replace these services after our transition services agreement with AT&T expires.

Historically AT&T has provided, and, until the Separation will continue to provide, significant corporate and shared services related to corporate services, such as executive management, information technology, legal, finance and accounting, investor relations, human resources, risk management, tax, treasury and other services. Following our separation from AT&T, we expect AT&T to continue to provide many of these services on a transitional basis for mutually agreed-upon fees, although it is possible that not all services that we currently rely on AT&T or its employees to provide will continue or be sufficient to meet our needs. The terms of these services and amounts to be paid by us to AT&T will be provided in the transition services agreement described under “Certain Relationships and Related Party Transactions”. While these services are being provided to us by AT&T, our operational flexibility to modify or implement changes with respect to such services or the amounts we pay for them could be limited. After the expiration of the transition services agreement, we may not be able to replace these services or enter into third-party agreements or employment arrangements on terms and conditions, including costs, comparable to those that we will receive from AT&T under the transition services agreement. In addition, we have historically received informal support such as contract negotiation support, marketing support and corporate oversight from AT&T, which may not be addressed in the transition services agreement that we will enter into with AT&T. The level of this informal support will diminish following the Separation as we become a stand-alone company.

As a result of the Separation, we will lose AT&T’s capital base and other resources, which could adversely affect our business, financial condition and results of operations.

Since the Acquisition, we have benefited from AT&T’s financial strength and numerous business relationships and have been able to take advantage of AT&T’s size and purchasing power in procuring goods, services and technology.

The loss of our relationship with AT&T or of AT&T’s scale, capital base and financial strength may also prompt suppliers to reprice, modify or terminate their relationships with us, and we may be unable to obtain goods, services, technology and programming at prices and on terms as favorable as those that we obtained prior to our separation from AT&T. We cannot predict with certainty the effect the Separation will have on our business, our customers, business partners, vendors or other persons. Any of these effects could adversely affect our business, financial condition and results of operations.

Conflicts of interest and other disputes may arise between AT&T and us, and we may not be able to resolve favorably disputes that may arise between AT&T and us with respect to our past and ongoing relationships.

We are party to a variety of related party agreements and relationships with AT&T and certain of its subsidiaries. In addition, some of our directors and executive officers own common stock of AT&T. As a result of the foregoing, there may be circumstances where certain of our executive officers and directors may be subject to conflicts of interest with respect to, among other things:

 

  our ongoing relationships with AT&T or its subsidiaries, including related party agreements and other arrangements with respect to intellectual property and technological development, shared broadcast centers, the administration of tax matters, employee benefits and indemnification;

 

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  the quality, pricing and other terms associated with services that we provide to AT&T or its subsidiaries, or that they provide to us, under related party agreements;

 

  business opportunities arising for any of us, AT&T or its subsidiaries; and

 

  conflicts of time with respect to matters potentially or actually involving or affecting us.

Disputes may therefore arise between AT&T and us in a number of areas relating to our past and ongoing relationships, including:

 

  intellectual property, labor, tax, employee benefits, shared contracts, indemnification and other matters arising from our separation from AT&T;

 

  contract entanglements;

 

  employee retention and recruiting;

 

  business combinations involving us;

 

  sales or distributions by AT&T of all or any portion of its ownership interest in us;

 

  the nature, quality and pricing of services AT&T has agreed to provide us;

 

  business opportunities that may be attractive to both AT&T and us; and

 

  product or technology development that may require the consent of AT&T.

Upon the completion of this offering, we will have in place a code of conduct and ethics prescribing procedures for managing conflicts of interest, and our audit committee will be responsible for the review, approval and ratification of any potential conflicts of interest transactions. Additionally, we expect that interested directors will abstain from decisions where there exist conflicts of interest as a matter of practice or pursuant to our code of ethics. In addition, our amended and restated certificate of incorporation will contain provisions regulating and defining the conduct of our affairs as they involve corporate opportunities and interested directors. See “Description of Capital Stock—Provision Relating to Corporate Opportunities and Interested Directors”. However, there can be no assurance that such measures will be effective or that we will be able to resolve all potential disputes, or that the resolution of any such disputes will be no less favorable to us than if we were dealing with an unaffiliated third party, which could adversely affect our business, financial condition and results of operations. The agreements that we will enter into with AT&T may be amended upon agreement between the parties. While we are controlled by AT&T, we may not have the leverage to negotiate amendments to these agreements, if required, on terms as favorable to us as those we would negotiate with an unaffiliated third party.

Our tax matters agreement with AT&T restricts our ability to engage in certain transactions, and we could have an indemnification obligation to AT&T if events or actions subsequent to a split-off or spin-off cause the split-off or spin-off to be taxable.

Subject to the receipt of a favorable ruling from the IRS, AT&T currently plans to pursue a tax-free split-off or spin-off of its remaining interest in us. However, AT&T’s ultimate decision as to whether to consummate a spin-off or split-off depends on a number of considerations, including market conditions and AT&T’s regional strategy.

If a split-off or spin-off intended to qualify for tax-free treatment were determined not to qualify for tax-free treatment under Section 355 of the Code, AT&T generally would recognize gain as if AT&T had sold our common stock in a taxable transaction in an amount up to the fair market value of our common stock that AT&T distributed. In addition, Section 355(e) of the Code generally creates a presumption that a split-off or spin-off would be taxable to AT&T, but not its shareholders, if we or our shareholders were to engage in transactions that result in a 50% or greater change (by vote or value) in the ownership of our stock during the four-year period beginning on the date that begins two years before the date of the split-off or spin-off, unless it were established that such transactions were not part of a plan or series of related transactions. Further, if a split-off or spin-off fails to qualify for tax-free treatment under Section 355 of the Code, certain reorganization transactions in connection with a split-off or spin-off intended to qualify for tax-free treatment could be determined to be taxable, which could result in additional taxable gain.

 

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We intend to enter into a tax matters agreement prior to or concurrently with the completion of this offering. Among other things, the tax matters agreement will provide that we will indemnify AT&T for any taxes (and reasonable expenses) resulting from such a tax-free split-off or spin-off (and certain related reorganization transactions) failing to qualify for its intended tax treatment where such taxes result from (i) breaches of covenants that we will agree to in connection with a split-off or spin-off (including covenants designed to preserve the tax-free nature of the split-off or spin-off), (ii) the application of certain provisions of U.S. federal income tax law to the split-off or spin-off with respect to acquisitions of our common stock or (iii) any other actions that we know or reasonably should expect would give rise to such taxes. Any such indemnification obligation could have a material impact on our operations.

In addition, we intend that the tax matters agreement will contain certain covenants designed to preserve the tax-free nature of a potential split-off or spin-off. In addition to our indemnification obligations under the tax matters agreement, these covenants may limit our ability to pursue strategic transactions or engage in new businesses or other transactions that might be beneficial and could discourage or delay a strategic transaction that our shareholders may consider favorable.

See “Certain Relationships and Related Party Transactions—Separation Transactions—Tax Matters Agreement” for more information.

Although we intend to enter into a tax matters agreement under which the amount of our tax sharing payments to AT&T after this offering will generally be determined as if we filed our own consolidated, combined or separate tax returns, we nevertheless will have joint and several liability with AT&T for the consolidated U.S. federal income taxes of the AT&T consolidated group.

We expect that, immediately following this offering, we will continue to be included in the consolidated group of AT&T for U.S. federal income tax purposes. Under the tax matters agreement, with respect to any tax periods for which we are included in consolidated, combined or similar group tax returns with AT&T (“AT&T Group Returns”), AT&T will make all necessary tax payments to the relevant tax authorities with respect to AT&T Group Returns, and we will make tax sharing payments to AT&T, generally based on the amount of tax (if any) we would have incurred if we filed our own consolidated, combined or separate returns.

Following the offering, we may no longer be included in AT&T Group Returns. For example, if a split-off or spin-off of AT&T’s interest in us is consummated, we will file tax returns that include only us and/or our subsidiaries, as appropriate. In such a case, we will not be required to make tax sharing payments to AT&T for those tax periods. Nevertheless, we will continue to have joint and several liability with AT&T to the IRS for the consolidated U.S. federal income taxes of the AT&T consolidated group for the tax periods in which we were part of the AT&T consolidated group.

See “Certain Relationships and Related Party Transactions—Separation Transactions—Tax Matters Agreement” for more information.

AT&T may compete with us.

AT&T will not be restricted from competing with us in the digital entertainment services industry throughout the Region, including as a result of acquiring a company that operates a South American DTH digital television business. Due to the significant resources of AT&T, including financial resources, name recognition and business know-how resulting from the previous management of our business, AT&T could have a significant competitive advantage over us should it decide to engage in the type of business we conduct, which could adversely affect our business, financial condition and results of operations.

In addition, AT&T and its affiliates have no obligation to offer us an opportunity to participate in business opportunities presented to AT&T or its respective affiliates even if the opportunity is one that we might

 

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reasonably have pursued (and therefore may be free to compete with us in the same business or similar lines of business in which we or our affiliates now engage or propose to engage or otherwise compete with us or our affiliates). As a result of competition, our future competitive position and growth potential could be adversely affected.

We will be a “controlled company” within the meaning of the NYSE rules, and, as a result, will rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

Upon completion of this offering, AT&T will own more than 50% of the total voting power of our shares of common stock and we will be a “controlled company” under the NYSE corporate governance standards. As a controlled company, certain exemptions under the NYSE standards will free us from the obligation to comply with certain NYSE corporate governance requirements, including the requirements:

 

  that a majority of our board of directors consists of “independent directors”, as defined under the rules of the NYSE;

 

  the requirement that our director nominees be selected, or recommended for our board of directors’ selection by a nominating/governance committee comprised solely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

  the requirement that the compensation of our executive officers be determined, or recommended to our board of directors for determination, by a compensation committee comprised solely of independent directors with a written charter addressing the committees’ purpose and responsibilities; and

 

  for an annual performance evaluation of the nominating and governance committee and compensation committee.

Following the completion of this offering and for so long as we are a “controlled company”, we intend to utilize these exceptions. As a result, we may not have a majority of independent directors, our nominating/corporate governance and compensation committee will not consist entirely of independent directors and such committees will not be subject to annual performance evaluations. Accordingly, for so long as we are a “controlled company”, you will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.

Transactions at our parent company could have an impact on our business, financial condition and results of operations.

For so long as we are controlled by AT&T, our business may be impacted by mergers, acquisitions and other transactions that AT&T undertakes. For example, AT&T may agree to certain restrictions as part of a condition to closing a transaction that could require a divestiture of us by AT&T or a change to our business, or could impose limitations on the services that we provide, for as long as we are under control of AT&T. As part of AT&T’s proposed acquisition of Time Warner, Inc. (“Time Warner”), SKY Brasil and DIRECTV Chile have agreed that if AT&T acquires Time Warner, they will not discriminate against unaffiliated content providers in favor of Time Warner-affiliated programmers, and following such acquisition, any breach of this agreement could lead to regulatory action against SKY Brasil or DIRECTV Chile, respectively, which could adversely affect our business, financial condition and results of operations.

Risks Related to This Offering and Ownership of Our Class A Common Stock

Prior to this offering, no market existed for our common stock and we cannot assure you that an active, liquid trading market will develop for our Class A common stock.

Prior to this offering, there has been no public market for shares of our common stock. We cannot predict the extent to which investor interest in our company will lead to the development and sustainment of an active

 

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trading market for the Class A common stock on the NYSE or otherwise, or how liquid that market might become. If an active and liquid trading market does not develop or is not sustained, you may have difficulty selling any shares of our Class A common stock that you purchase in this initial public offering and the value of our Class A common stock may be adversely affected. The initial public offering price for the shares of our Class A common stock will be determined by negotiations between us and the representatives of the underwriters, and may not be indicative of prices that will prevail in the open market following this offering. The market price of our Class A common stock may decline below the initial public offering price, and you may not be able to sell your shares of our Class A common stock at or above the price you paid in this offering, or at all. An inactive and illiquid trading market may also impair our ability to raise capital to continue to fund operations by selling shares of our common stock and may impair our ability to acquire other companies or technologies by using our common stock as consideration.

Our stock price may be volatile and you could lose part or all of your investment as a result.

Stock price volatility may make it more difficult for you to resell your shares of Class A common stock when you want and at prices you find attractive. Our stock price may fluctuate significantly in response to a variety of factors including, among other things:

 

  actual or anticipated variations in our quarterly results of operations and those of our competitors or those in similar industries;

 

  recommendations or research reports about us or the industry in general published by securities or industry analysts;

 

  the failure of securities or industry analysts to cover our Class A common stock after this offering or changes in financial estimates by analysts;

 

  failure to meet external expectations or management guidance;

 

  perceptions in the marketplace regarding us or our competitors;

 

  AT&T’s intentions and efforts to dispose of our common stock and market expectations regarding AT&T’s plans;

 

  strategic actions by us or our competitors;

 

  announcements by us or our competitors regarding new product or services offerings, significant contracts, acquisitions, joint ventures or strategic investments;

 

  quarterly fluctuations in the cost of programming;

 

  changes in postpaid subscriber churn, ARPU or subscriber acquisition, upgrade and retention expenses;

 

  general economic and stock market conditions;

 

  recruitment or departure of key personnel;

 

  developments or disputes concerning our intellectual property or third-party proprietary rights;

 

  litigation or threatened litigation involving us;

 

  risks related to our business and our industry, including those discussed above;

 

  changes in conditions or trends in our industry, markets or customers;

 

  changes in applicable laws, rules or regulations or changes in the regulatory environment in the Region;

 

  other events or factors, including those resulting from war, incidents of terrorism, or responses to these events;

 

  future sales of our Class A common stock or other securities;

 

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  investor perceptions of the investment opportunity associated with our Class A common stock relative to other investment alternatives; and

 

  announcements or actions taken by AT&T as our principal stockholder.

As a result of these and other factors, investors in our Class A common stock may not be able to resell their shares at or above the initial offering price or may not be able to resell them at all. These broad market and industry factors may materially reduce the market price of our Class A common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our Class A common stock is low.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our Class A common stock or if our operating results do not meet their expectations, our stock price could decline.

The trading market for our Class A common stock will be influenced in part by the research and reports that securities or industry analysts publish about us or our business. If no or few securities or industry analysts commence coverage of us, the trading price for our Class A common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who cover our company downgrades our stock or if our operating results do not meet their expectations, our stock price could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our Class A common stock could decrease, which in turn could cause our stock price and trading volume to decline.

You will incur immediate dilution as a result of this offering.

If you purchase Class A common stock in this offering, you will pay more for your shares than the net tangible book value of your shares. As a result, you will incur immediate dilution of $            per share, representing the difference between the assumed initial public offering price of $            per share (the midpoint of the price range on the cover of this prospectus) and our pro forma net tangible book deficit per share as of December 31, 2017 after giving effect to the Separation. Accordingly, should we be liquidated at our book value, you would not receive the full amount of your investment. If the underwriters exercise their option to purchase additional shares, you will experience additional dilution. You also may experience additional dilution upon future equity issuances under any equity compensation plans. For additional information about the dilution that you will experience immediately after this offering, see “Dilution”.

The future sale by AT&T or others of our common stock, or the perception that such sales may occur, could depress our Class A common stock price.

Immediately following the completion of this offering, AT&T will own approximately    % of the outstanding shares of our Class A common stock and 100% of the outstanding shares of our Class B common stock. Subject to the lockup restrictions described under “Shares Eligible for Future Sale”, future sales of these shares in the public market will be subject to the volume and other restrictions of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), for so long as AT&T is deemed to be our affiliate, unless the shares to be sold are registered with the SEC. The sale by AT&T of a substantial number of shares after this offering, or a perception that such sales could occur, could significantly reduce the market price of our Class A common stock. Upon completion of this offering, except as otherwise described herein, all shares that are being offered in this offering will be freely tradable without restriction, assuming they are not held by our affiliates.

                                  may, in their sole discretion and at any time without notice, release all or any portion of the shares of our common stock subject to the lock-up.

Immediately following this offering, we intend to file a registration statement registering under the Securities Act            shares of Class A common stock reserved for issuance under our 2018 Incentive Plan and our 2018

 

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Non-Employee Director Plan that we intend to adopt in connection with this offering. Once we register these shares, upon issuance and once vested they can be freely sold in the public market, subject to any applicable lock-up period and the terms of the applicable plan and/or the agreements for the equity awards entered into with holders of such equity awards. If any equity securities granted under our 2018 Incentive Plan or our 2018 Non-Employee Director Plan are sold, or it is perceived they will be sold, in the public market, the trading price of our Class A common stock could decline.

If AT&T sells a controlling interest in our company to a third party in a private transaction, you may not realize any change-of-control premium on shares of our Class A common stock and we may become subject to the control of a presently unknown third party.

Following the completion of this offering, AT&T will continue to own a significant equity interest in our company. AT&T will have the ability, should it choose to do so, to sell some or all of its shares of our common stock in a privately negotiated transaction, which, if sufficient in size, could result in a change of control of our company.

The ability of AT&T to privately sell its shares of our common stock, with no requirement for a concurrent offer to be made to acquire all of the shares of our Class A common stock, could prevent you from realizing any change-of-control premium on your shares of our Class A common stock that may otherwise accrue to AT&T on its private sale of our common stock. Additionally, if AT&T privately sells its significant equity interest in our company, we may become subject to the control of a presently unknown third party. Such third party may have conflicts of interest with those of other stockholders. In addition, if AT&T sells a controlling interest in our company to a third party, AT&T may terminate the transitional arrangements and our other commercial agreements and relationships could be impacted, all of which may adversely affect our ability to run our business as described herein and could adversely affect our business, financial conditions and results of operations.

Fulfilling our public company financial reporting and other regulatory obligations and transitioning to a stand-alone public company will be expensive and time consuming and may strain our resources.

We have historically operated our business as a part of a public company. As a stand-alone public company, we will incur additional legal, accounting, compliance and other expenses that we have not incurred historically. As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and will be required to implement specific corporate governance practices and adhere to a variety of reporting requirements under Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the related rules and regulations of the SEC, as well as the rules of the NYSE. The Exchange Act will require us to file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act will require, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Compliance with these requirements will place additional demands on our legal, accounting, finance and investor relations staff and on our accounting, financial and information systems and will increase our legal and accounting compliance costs as well as our compensation expense as we may be required to hire additional legal, accounting, tax, finance and investor relations staff. As a public company we may also need to enhance our investor relations and corporate communications functions and attract additional qualified board members. These additional efforts may strain our resources and divert management’s attention from other business concerns, which could have an adverse effect on our business, financial condition and results of operations. We expect to incur additional incremental ongoing and one-time expenses in connection with our transition to a public company and our separation from AT&T. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Additional Significant Events Affecting the Comparability of Our Results of Operations—Corporate Separation Transaction”. The actual amount of the incremental expenses we will incur may be higher, perhaps significantly, from our current estimates for a number of reasons, including, among others, the final terms we are able to negotiate with service providers prior to the termination of the transition services agreement, as well as additional costs we may incur that we have not currently anticipated.

 

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In accordance with Section 404 of the Sarbanes-Oxley Act, our management will be required to conduct an annual assessment of the effectiveness of our internal control over financial reporting and include a report on these internal controls in the annual reports we will file with the SEC on Form 10-K. Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal controls until the year following the first annual report required to be filed with the SEC. When required, this process will require significant documentation of policies, procedures and systems, review of that documentation by our internal auditing and accounting staff and our outside independent registered public accounting firm, and testing of our internal control over financial reporting by our internal auditing and accounting staff and our outside independent registered public accounting firm. This process will involve considerable time and attention, may strain our internal resources, and will increase our operating costs. We may experience higher than anticipated operating expenses and outside auditor fees during the implementation of these changes and thereafter. If management or our independent registered public accounting firm determines that our internal control over financial reporting is not effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the NYSE, the SEC or other regulatory authorities, which could require additional financial and management resources. In addition, if our controls are not effective, our ability to accurately and timely report our financial position could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our Combined Financial Statements, a decline in our stock price, suspension or delisting of our Class A common stock from the NYSE, and could have an adverse effect on our business, financial condition and results of operations.

Because we do not anticipate paying regular cash dividends to holders of our Class A common stock after the completion of this offering in the foreseeable future, capital appreciation, if any, will be your sole source of gain and you may never receive a return on your investment.

You should not rely on an investment in our Class A common stock to provide dividend income. We do not anticipate that we will pay regular cash dividends to holders of our Class A common stock in the foreseeable future after the completion of this offering and investors seeking cash dividends should not purchase our Class A common stock. Therefore, capital appreciation, or an increase in our stock price, which may never occur, may be the only way to realize any return on your investment. The declaration, amount and payment of any future dividends on shares of our Class A common stock will be determined at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as our board of directors may deem relevant.

In the event that we decide to pay cash dividends on our Class A common stock, such dividends will be subject to our compliance with applicable law, and depending on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in our debt agreements, business prospects and other factors that our board of directors may deem relevant. Because we are a holding company with no significant assets other than the shares of our subsidiaries, our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of the laws of their jurisdiction of organization or agreements of our subsidiaries, including agreements governing our indebtedness. Future agreements may also limit our ability to pay dividends. For more information, see “Dividend Policy”. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence paying dividends.

Anti-takeover provisions in our charter documents and provisions of Delaware law could discourage, delay or prevent a change of control of our company and may result in an entrenchment of management and diminish the value of our Class A common stock, even if such a transaction would be beneficial to our stockholders.

Several provisions of our amended and restated certificate of incorporation and amended and restated by-laws and provisions of Delaware law could delay, defer or discourage another party from acquiring control of us.

 

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For example, our charter and by-laws will:

 

  authorize a capital structure with multiple series of common stock: Class B common stock that entitles holders to ten votes per share and Class A common stock that entitles holders to one vote per share;

 

  authorize the issuance of “blank check” preferred stock that could be issued by us upon approval of our board of directors to increase the number of outstanding shares of capital stock, making a takeover more difficult and expensive;

 

  provide for a classified board of directors with staggered three-year terms, which may lengthen the time required to gain control of our board of directors;

 

  provide that following the first date on which AT&T ceases to beneficially own a majority of the total voting power of the outstanding shares of all classes of capital stock, directors may be removed from office by stockholders only for cause and any vacancy may only be filled by the affirmative vote of a majority of our directors then in office, which may make it more difficult for other stockholders to reconstitute our board of directors;

 

  permit stockholders to take action by written consent in lieu of an annual or special meeting while AT&T owns a majority of the total voting power of the outstanding shares of all classes of capital stock entitled to vote and thereafter permit stockholder action when unanimous;

 

  provide that special meetings of the stockholders may be called only upon the request of a majority of our board of directors, by our Chief Executive Officer or by AT&T so long as it owns a majority of the total voting power of the outstanding shares of all classes of capital stock;

 

  require advance notice to be given by stockholders for any stockholder proposals or director nominees;

 

  require a super-majority vote of the stockholders to amend certain provisions of our charter from and after the time at which AT&T ceases to beneficially own a majority of the total voting power of the outstanding shares of all classes of our capital stock entitled to vote; and

 

  allow our board of directors to amend our by-laws by the affirmative vote of a majority of directors but only allow stockholders to amend our by-laws upon the approval of two-thirds or more of the voting power of all of the shares of our capital stock entitled to vote from and after the time at which AT&T ceases to beneficially own a majority of the total voting power of the outstanding shares of all classes of our capital stock entitled to vote.

In addition, if AT&T ceases to own at least 10% of the total voting power of the outstanding shares of all classes of our capital stock entitled to vote, we will be subject to Section 203 of the Delaware General Corporation Law (the “DGCL”). Such a provision may limit, in some cases, our ability to engage in certain business combinations with significant stockholders. See “Description of Capital Stock”.

These anti-takeover provisions could substantially impede the ability of our Class A common stockholders to benefit from a change of control and, as a result, could materially adversely affect the market price of our Class A common stock and your ability to realize any potential change-in-control premium.

Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us and limit the market price of our Class A common stock.

Pursuant to our amended and restated certificate of incorporation, as will be in effect upon the completion of this offering, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State

 

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of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware) shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of a fiduciary duty owed by any or our directors or officers or other employees to us or our stockholders; (iii) any action asserting a claim against us or any director or officer or other employee of ours arising pursuant to any provision of the DGCL or our certificate of incorporation or by-laws; or (iv) any action asserting a claim against us or any director or officer or other employee of ours governed by the internal affairs doctrine. Our amended and restated certificate of incorporation will further provide that any person or entity purchasing or otherwise acquiring any interest in shares of our Class A common stock is deemed to have notice of and consented to the foregoing provision. The forum selection clause in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us and limit the market price of our Class A common stock.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate”, “estimate”, “expect”, “predict”, “project”, “potential”, “aim to”, “plan”, “intend”, “believe”, “continue”, “will”, “may”, “might”, “should”, “could”, “can have”, “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. The forward-looking statements contained in this prospectus are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this prospectus, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control) and assumptions.

We operate in a highly competitive, consumer and technology driven and rapidly changing business and various factors could adversely affect our business, financial condition and results of operations in the future and cause our actual results to differ materially from those contained in the forward-looking statements, including those factors discussed under “Risk Factors” in this prospectus. In addition, important factors that could cause our actual results to differ materially from those in our forward-looking statements include:

 

  an increase in the levels of competition, including from entities that provide or facilitate the delivery of video content via the Internet;

 

  the economic, political and social conditions in the Region;

 

  our results being negatively affected by foreign currency exchange rates and increased rates of inflation;

 

  our ability to keep pace with technological developments in the delivery of digital television services;

 

  our dependence on service offerings consisting principally of programming that we license from third parties, with such programming costs continuing to increase;

 

  our ability to differentiate our services if we cease to have exclusive content offerings;

 

  not being able to effectively achieve our growth strategies;

 

  damage to our brands;

 

  the highly regulated and complex environment in the Region and risks associated with our failure to comply with the various regulatory regimes;

 

  the imposition of programming “must carry” requirements and the resulting capacity constraints;

 

  being forced to change our billing practices;

 

  third-party providers failing to adequately deliver the contracted goods or services;

 

  our satellites being subject to significant operational and environmental risks that could limit our ability to utilize them, and that could also require us to construct additional satellites;

 

  our satellites failing or suffering reduced capacity before their minimum design lives and our ability to obtain additional transponder capacity;

 

  our dependence on Intelsat to lease five of our six satellites and all of our orbital slots to us;

 

  a disruption, cyber-attack or failure of our networks, systems or technologies or a disruption to our broadcast centers;

 

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  our self-insurance of the business;

 

  pay-TV piracy;

 

  current and future litigation, investigations or other actions, including assertions by third parties of infringement of their intellectual property rights and the risks associated with the DPA entered into by Torneos with the EDNY;

 

  failure to comply with anti-corruption, anti-bribery or anti-money laundering laws;

 

  our inability to adequately protect our intellectual property rights;

 

  labor disruptions or strikes from the labor unions representing our workforce;

 

  our substantial indebtedness;

 

  any goodwill impairment charges in our reported financial results; and

 

  other risks and uncertainties inherent in the pay-TV business, including those listed under the caption “Risk Factors” in this prospectus.

Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking statements. We believe these factors include, but are not limited to, those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements.

Any forward-looking statement made by us in this prospectus speaks only as of the date on which we make it. Factors or events that could cause our actual operating and financial performance to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $             million, or approximately $            million if the underwriters exercise their option to purchase additional shares of Class A common stock in full, assuming an initial public offering price of $            per share of Class A common stock (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from the sale of the shares of our Class A common stock to repay related-party indebtedness issued to AT&T prior to the completion of this offering in the aggregate principal amount of $             million and to distribute the remaining proceeds to AT&T. This AT&T related-party indebtedness will bear interest at LIBOR plus     % per year and will be payable upon demand with no stated maturity date. See “Description of Indebtedness—Short Term Related-Party Indebtedness”.

A $1.00 increase/(decrease) in the assumed initial public offering price of $            per share of Class A common stock would cause the net proceeds from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, received by us to increase/(decrease) by approximately $            million, assuming the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same.

 

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DIVIDEND POLICY

We do not intend to pay regular cash dividends on our Class A common stock and therefore you should not rely on an investment in our Class A common stock to provide dividend income. In the event that we decide to pay cash dividends in the future, the declaration and payment of future dividends to holders of our Class A common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, legal and contractual requirements and other factors deemed relevant by our board of directors.

In addition, because a significant portion of our operations is through our subsidiaries, our ability to pay dividends depends in part on our receipt of cash dividends from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of the laws of their jurisdiction of organization, agreements of our subsidiaries or covenants under any existing and future outstanding indebtedness we or our subsidiaries incur.

We also expect our ability to pay dividends to be limited by covenants in agreements that will govern, or that we expect to govern, our proposed indebtedness. See “Description of Indebtedness”.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2017, on:

 

  an actual basis; and

 

  on a pro forma basis to give effect to (i) the proceeds from the sale of             shares of Class A common stock in this offering at an assumed initial public offering price of $        per share of Class A common stock (the midpoint of the price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the use of proceeds of this offering as further described under “Use of Proceeds”, (iii) the Separation as described in “Certain Relationships and Related Party Transactions—Separation Transactions” and (iv) the incurrence of $        million aggregate principal amount of additional debt and the use of proceeds therefrom as described under “Description of Indebtedness”.

The information below is not necessarily indicative of what our cash and cash equivalents and capitalization would have been had we operated as a stand-alone public company as of December 31, 2017, or if the Separation described in “Certain Relationships and Related Party Transactions—Separation Transactions” and the incurrence of indebtedness described in “Description of Indebtedness” had actually occurred as of December 31, 2017. In addition, it is not indicative of our future cash and cash equivalents and capitalization.

This table is derived from, and is qualified in its entirety by reference to, our historical and pro forma financial statements and the notes thereto included elsewhere in this prospectus, and should be read in conjunction with “Use of Proceeds”, “Selected Historical Financial Data”, “Unaudited Pro Forma Condensed Combined Financial Information”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Combined Financial Statements and the related Notes included elsewhere in this prospectus.

 

     December 31, 2017  
     Actual      Pro forma
(Unaudited)
 
     (U.S. dollars in millions,
except per share amounts)
 

Cash and Cash Equivalents

   $ 443      $     
  

 

 

    

 

 

 

Debt:

     

Short-term debt:

     

Debt maturing within one year

     —       

Related party note payable to parent

     526     

Capital lease obligations

     25     

Long-term debt:

     

New long-term debt

     —       

Existing long-term debt

     54     

Capital lease obligations

     240     
  

 

 

    

 

 

 

Total debt

     845     
  

 

 

    

 

 

 

Equity:

     

Parent net investment

     5,554     

Preferred Stock, $0.01 par value;             shares authorized, 0 shares issued and outstanding

     

Class A common stock, $0.01 par value;             shares authorized,             shares issued and outstanding on a pro forma basis

     

Class B common stock, $0.01 par value;             shares authorized,             shares issued and outstanding on a pro forma basis

     

Additional paid-in capital

     

Retained earnings

     

Accumulated other comprehensive loss

     (600   

Noncontrolling interest

     307     
  

 

 

    

 

 

 

Total equity

     5,261     
  

 

 

    

 

 

 

Total Capitalization

   $ 6,106      $         
  

 

 

    

 

 

 

 

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Assuming no change in the number of shares offered by us as set forth on the cover page of this prospectus, a $1.00 increase/(decrease) in the assumed initial public offering price of $        per share of Class A common stock (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) each of cash and cash equivalents, additional paid-in capital, and total equity by $        , would decrease (increase) total debt by $        , and would increase (decrease) total capitalization by $         , after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DILUTION

If you invest in our Class A common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of Class A common stock and the pro forma net tangible book value (deficit) per share of our Class A common stock and Class B common stock after giving effect to the Separation. Our net tangible book value (deficit) represents the amount of our total tangible assets less total liabilities, divided by the total number of shares of common stock then outstanding. As of December 31, 2017, our net tangible book value was approximately $        , or approximately $        per share based on             shares of our common stock outstanding as of such date.

Dilution per share represents the difference between the amount per share paid by purchasers of our Class A common stock in this offering and the pro forma net tangible book value (deficit) per share of common stock after giving effect to the Separation. After giving effect to (i) the sale of shares of Class A common stock in this offering at the assumed initial public offering price of $        per share of Class A common stock (the midpoint of the price range set forth on the cover page of this prospectus) after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and (ii) the application of the net proceeds from this offering as described under “Use of Proceeds”, our pro forma net tangible book value (deficit) would have been $         , or $        per share of common stock. This represents an immediate dilution of $        per share of common stock to investors purchasing shares of our Class A common stock in this offering.

The following table illustrates this per share dilution:

 

Assumed initial public offering price per share of Class A common stock

   $  

Pro forma net tangible book value (deficit) per share of common stock as of December 31, 2017

  
  

 

 

 

Dilution per share of Class A common stock to new investors in this offering

   $               

A $1.00 increase/(decrease) in the assumed initial public offering price of $        per share of Class A common stock (the midpoint of the price range set forth on the cover page of this prospectus) would not impact our pro forma net tangible book value (deficit) or our pro forma net tangible book value (deficit) per share of common stock, but it would increase/(decrease) dilution per share of Class A common stock to new investors in this offering by $    .

If the underwriters exercise in full their option to purchase additional shares of Class A common stock, the pro forma net tangible book value (deficit) per share of common stock after giving effect to this offering and the use of proceeds therefrom would have been $         , or $        per share of Class A common stock. This results in dilution in pro forma net tangible book value (deficit) of $        per share to new investors.

We have reserved             shares of our Class A common stock for future issuance under our 2018 Incentive Plan and our 2018 Non-Employee Director Plan. To the extent that any shares of Class A common stock are issued under these or future plans, or if we otherwise issue additional shares of Class A common stock in the future, there may be dilution to investors participating in this offering.

 

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SELECTED HISTORICAL FINANCIAL DATA

You should read the selected historical financial data set forth below in conjunction with the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Capitalization”, as well as the Combined Financial Statements and the related Notes included elsewhere in this prospectus.

The following tables set forth our selected historical financial data for the periods indicated below. The periods presented below on and prior to July 24, 2015, the date of the Acquisition, are referred to as “Predecessor” periods and the periods presented after and including July 25, 2015 are referred to as “Successor” periods. The financial data, Combined Financial Statements and related Notes for each of the periods reflect the combined financial results of the entities expected to be owned by us at the completion of this offering and their subsidiaries, with the exception of operations in Puerto Rico which are to be retained by AT&T from and after the Separation, and which are reflected as assets held for sale on our Combined Financial Statements. As a result, the financial data, Combined Financial Statements and related Notes are not necessarily indicative of our balance sheets, results of operations and cash flows in the future or what our balance sheets, results of operations and cash flows would have been had we been a stand-alone public company during the periods presented. Accordingly, the historical results should not be relied upon as an indicator of our future performance. See “Risk Factors”, “Unaudited Pro Forma Condensed Combined Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

The selected combined financial data at December 31, 2017 and 2016, and for the period from January 1, 2015 through July 24, 2015 (Predecessor), the period from July 25, 2015 through December 31, 2015 (Successor) and the years ended December 31, 2016 and 2017 (Successor), has been derived from the audited Combined Financial Statements included elsewhere in this prospectus. The selected historical combined balance sheet data at December 31, 2015 has been derived from the Successor’s audited combined financial statements which are not included in this prospectus. The unaudited selected historical financial data at and for the year ended December 31, 2014 has been derived from the Predecessor’s combined financial statements which are not included in this prospectus. We have not included selected combined financial data as of and for the year ended December 31, 2013, as such information is not available on a basis that is consistent with the selected financial information for the years presented below and such information cannot be provided without unreasonable effort or expense.

The historical financial information includes allocations of costs from certain corporate and shared services functions provided to us by AT&T, including general corporate and shared services expenses. The costs of such services have been allocated to us based on the most relevant allocation method to the service provided, primarily based on relative percentage of EBITDA or specific identification.

 

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The Combined Financial Statements do not reflect any changes that may occur in our operations and expenses as a result of the Separation or this offering.

 

     Successor           Predecessor  

Combined Statements of Operations

   Year ended
December 31,
2017
    Year ended
December 31,
2016
    Period from
July 24
through
December 31,
2015
          Period from
January 1
through
July 24,
2015
    Unaudited
Year ended
December 31,
2014
 
     (U.S. dollars in millions)  

Revenues

   $ 5,568     $ 5,023     $ 2,228         $ 3,709     $ 7,055  

Operating Expenses

              

Cost of services and sales (exclusive of depreciation and amortization expense shown separately below)

              

Programming, broadcast operations and other expenses

     2,333       2,208       861           1,503       2,691  

Subscriber service expenses

     595       561       261           443       804  

Selling, general and administrative expenses (exclusive of depreciation and amortization expense shown separately below)

              

Subscriber acquisition, upgrade and retention expenses

     780       685       319           546       961  

General and administrative expenses

     615       534       399           418       652  

Venezuelan currency devaluation charge (1)

     31       45                 519       346  

Impairment of fixed and intangible assets (2)

     9       72                 533        

Depreciation and amortization expense

     1,157       1,182       543           613       1,156  
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Total Operating Expenses

     5,520       5,287       2,383           4,575       6,610  
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Operating Income (Loss)

     48       (264 )      (155 )          (866 )      445  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Income (Expense)

              

Interest income

     49       14       12           46       62  

Interest expense

     (126     (94     (42         (35     (53

Equity in net income (loss) of affiliates

     20       23       12           (49     23  

Other income (expense)-net

     6       5       (38         (40     8  
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Total other income (expense)

     (51     (52     (56         (78     40  
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Income (Loss) Before Income Tax

     (3     (316     (211         (944     485  

Income tax (benefit) expense

     (225     40       (20         75       275  
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Net Income (Loss)

     222       (356     (191         (1,019     210  
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Less: Net (Income) Loss Attributable to Noncontrolling Interest

     (9     8       6           (2     (19
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Net Income (Loss) Attributable to DIRECTV Latin America

   $ 213     $ (348   $ (185       $ (1,021   $ 191  
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

(1) During the period from January 1, 2015 through July 24, 2015 and the year ended December 31, 2016, we recorded a charge of $519 and $45, respectively, as a result of the change to the SIMADI exchange rate and subsequent devaluations. During the year ended December 31, 2017, we recorded a charge of $31 as a result of the change to the DICOM exchange rate. See Note 12 of the Notes to the Combined Financial Statements.

 

(2) During the period from January 1, 2015 through July 24, 2015, we recorded impairment charges of $423 and $110 related to Venezuelan fixed and intangible assets, respectively. In the year ended December 31, 2016, we recorded an impairment charge of $72 related to Venezuelan fixed and intangible assets. In the year ended December 31, 2017, we recorded an impairment charge of $9 related to Peruvian fixed and intangible assets. See Notes 4 and 5 of the Notes to the Combined Financial Statements.

 

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          Successor             Predecessor  

Combined Balance Sheet Data

   December 31,             Unaudited
December 31,
2014
 
     2017      2016      2015            
    

(U.S. dollars in millions)

 

Cash and cash equivalents

   $ 443      $ 340      $ 242           $ 697  

Total assets

     10,289        10,466        9,956             6,397  

Long-term obligations (1)

     294        314        298             416  

Total liabilities

   $ 5,028      $ 4,873      $ 4,167           $ 2,527  

 

(1) Long-term obligations include long-term debt and long-term capital lease obligations.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial statements should be read in conjunction with the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Capitalization”, as well as the Combined Financial Statements and the related Notes included elsewhere in this prospectus.

Our unaudited pro forma condensed combined financial statements consist of an unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 and an unaudited pro forma condensed combined balance sheet at December 31, 2017. The unaudited pro forma condensed combined financial statements are based on and have been derived from our historical Combined Financial Statements, which are included elsewhere in this prospectus.

The unaudited pro forma condensed combined financial statements have been prepared to reflect adjustments to our historical Combined Financial Statements that, in the opinion of management, are necessary to present fairly our unaudited pro forma condensed combined results of operations and our unaudited pro forma condensed combined financial position as of and for the periods indicated. The pro forma adjustments give effect to events that are (i) directly attributable to the transactions described below, (ii) factually supportable and (iii) expected to have a continuing impact on us. The pro forma adjustments are based on the best information currently available; however, such adjustments are subject to change.

The unaudited pro forma condensed combined financial statements are for illustrative and informational purposes only and are not intended to represent what our results of operations or financial position would have been had we operated as a stand-alone public company during the periods presented or if the transactions described below had actually occurred as of the dates indicated. The unaudited pro forma condensed combined financial statements should not be considered indicative of our future results of operations or financial position as a stand-alone public company.

The unaudited pro forma condensed combined financial statements give effect to the following transactions, as if they each had occurred on January 1, 2017 for the unaudited pro forma condensed combined statement of operations and on December 31, 2017 for the unaudited pro forma condensed combined balance sheet:

 

  the issuance of shares of our common stock to AT&T in connection with the transfer of substantially all of the assets and liabilities of AT&T’s DIRECTV business in the Region to us;

 

  the incurrence of $         million aggregate principal amount of debt prior to the completion of this offering and the use of the net proceeds therefrom to, among other things, repay the related party payables to parent and the related party note payable to parent (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”) and make a distribution to AT&T prior to the completion of this offering;

 

  the incurrence of $         aggregate principal amount of related-party indebtedness at a LIBOR plus     % interest rate per year and payable on demand; and

 

  certain transactions contemplated by certain agreements between us and AT&T described in “Certain Relationships and Related Party Transactions—Separation Transactions—Relationship with AT&T and its Subsidiaries”, and the provisions contained therein.

Under GAAP, subsequent to the Separation, our combined financial statements will remain at their historical costs; therefore, no pro forma adjustments are required to reflect our assets and liabilities at their fair values.

AT&T and its affiliates, including DIRECTV, currently provide certain corporate services to us, and costs associated with these functions have been allocated to us. These allocations include costs related to corporate

 

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services, such as executive management, information technology, legal, finance and accounting, investor relations, human resources, risk management, tax, treasury and other services, as well as share-based compensation expense attributable to our employees and an allocation of share-based compensation attributable to employees of AT&T and DIRECTV. The costs of such services have been allocated to us based on the most relevant allocation method to the service provided, primarily based on relative percentage of EBITDA or specific identification. The total amounts of these cost allocations were approximately $2 million in 2017, $20 million in 2016, $21 million in the period from July 25 through December 31, 2015 and $14 million in the period from January 1 through July 24, 2015. See Note 11 of the Notes to the Combined Financial Statements. The cost allocations for these functions are included in “General and administrative expenses” in the condensed combined statement of operations.

We will also incur additional costs as a stand-alone public company. As a stand-alone public company, our total costs related to such support functions may differ from the costs that were historically allocated to us from AT&T. We estimate that our annual general and administrative expense for these costs will be an aggregate of approximately $         million to $         million (representing up to $         million of annual costs incremental to the 2017 allocated costs referred to above). In addition, as we transition away from the corporate services currently provided by AT&T, we believe that we may incur $         million to $         million of non-recurring transitional costs in both 2018 and 2019 to establish our own stand-alone corporate functions. These costs are not reflected in our unaudited pro forma combined financial information.

 

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Unaudited Pro Forma Condensed Combined Balance Sheet

At December 31, 2017

 

    Historical     Separation
Adjustments
    Debt
Refinancing
    Equity
Offering and
Other Pro
Forma
Adjustments
    Pro
Forma
 
    (U.S. dollars in millions, except per share amounts)  

Assets

         

Current Assets

         

Cash and cash equivalents

  $ 443     $               (e)   

Accounts receivable-net

    358              

Related party receivables from parent

    244              

Assets held for sale

    173       (169 ) (a)        (4 )(g)   

Prepaid expenses and other

    246                     (h)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    1,464       (169       (4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Satellites-net

    942              

Property and equipment-net

    1,702              

Goodwill

    3,444              

Intangible assets-net

    2,321              

Investments and other assets

    420              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

  $ 10,289     $ (169       (4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Equity

         

Current Liabilities

             

Debt maturing within one year

  $     $             (b)     

Related party note payable to parent

    526                   (b)     

Accounts payable and accrued liabilities

    1,393              

Liabilities associated with held for sale assets

    72       (72 ) (a)       

Unearned revenues

    122              

Related party payables to parent

    1,441              (b)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    3,554       (72      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncurrent Liabilities

         

Long-term debt

    54              (b)     

Deferred income taxes

    842                     (d)   

Other noncurrent liabilities

    578              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noncurrent liabilities

    1,474              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity

         

Preferred stock, $0.01 par value;              shares authorized, no shares issued and outstanding

                        (e)       

Class A common stock, $0.01 par value;              shares authorized,              shares issued and outstanding

                        (e)       

Class B common stock, $0.01 par value;              shares authorized,              shares issued and outstanding

                        (e)       

Additional paid-in capital

                        (e), (f), (h)       

Parent net investment

    5,554       (97 ) (a)        (4 )(f), (g)   

Accumulated other comprehensive loss

    (600            

Noncontrolling interest

    307              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Equity

    5,261       (97       (4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities and Equity

  $ 10,289     $ (169       (4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2017

 

     Historical     Separation
Adjustments
    Debt
Refinancing
    Equity
Offering and
Other Pro
Forma
Adjustments
    Pro Forma  
     (U.S. dollars in millions, except per share amounts)  

Revenues

   $ 5,568     $ (114 ) (a)       

Operating Expenses

          

Cost of services and sales (exclusive of depreciation and amortization expense shown separately below)

          

Programming, broadcast operations and other expenses

     2,333       (39 ) (a)       

Subscriber service expenses

     595       (7 ) (a)       

Selling, general and administrative expenses (exclusive of depreciation and amortization expense shown separately below)

          

Subscriber acquisition, upgrade and retention expenses

     780       (16 ) (a)       

General and administrative expenses

     615       (42 ) (a)       

Venezuelan currency devaluation charge

     31              

Impairment of fixed and intangible assets

     9       —  (a)       (9 ) (g)   

Depreciation and amortization expense

     1,157                  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

     5,520       (104 )        (9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     48       (10 )        (9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Income (Expense)

          

Interest expense

     (126     1   (a)                (c)         

Other income (expense)-net

     75                  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (51     1            
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss Before Income Taxes

     (3 )      (9 )        (9 )   

Income tax benefit

     (225     (1 ) (a)        (d)     —  (d)   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

     222       (8 )       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net Income Attributable to Noncontrolling Interest

     (9                
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Attributable to DIRECTV Latin America

   $ 213     $ (8 )        (9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

          

Net income per share:

          

Basic

          

Diluted

          

Weighted average shares outstanding:

          

Basic

          

Diluted

          

 

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Notes to Unaudited Pro Forma Condensed Combined Financial Statements

Basis of Presentation

The unaudited pro forma condensed combined balance sheet as of December 31, 2017 and the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 are derived from the historical Combined Financial Statements included elsewhere in this prospectus. U.S. dollar amounts are presented in millions, except per share amounts.

Separation Adjustments

(a) Reflects an adjustment to remove the results of the Puerto Rican operations that will be retained by AT&T subsequent to the Separation and which are reflected as assets held for sale on our Combined Financial Statements.

Debt Transactions

(b) Subsidiaries of ours will incur $         of aggregate principal amount of additional debt in the debt financing. The net proceeds will be used prior to this offering to (i) repay the related party payables to parent and the related party note payable to parent, which had outstanding balances of $1,441 and $526, respectively, as of December 31, 2017, (ii) pay a pro rata distribution to a minority investor in one of our subsidiaries and (iii) make a distribution to AT&T. The net increase to debt in connection with the new borrowings includes $         of additional deferred financing costs, resulting in net proceeds of $        .

(c) The following table reflects the adjustments in our unaudited pro forma condensed combined statement of operations to reflect the impact of adjustments to interest expense:

 

     Year ended
December 31,
2017
 

New debt incurrence transactions:

  

Interest expense

   $           

Amortization expense of loan origination costs

  
  

 

 

 
  
  

 

 

 

Repayment of existing debt:

  

Interest expense

  

Amortization expense of loan origination costs

  
  

 

 

 
  
  

 

 

 

Net adjustment to interest expense

   $  
  

 

 

 

The unaudited pro forma condensed combined statements of operations reflect an adjustment for the expected interest expense and the amortization of deferred financing costs on our new debt. Pro forma interest expense (i) reflects an estimated weighted average annual interest rate of    % on indebtedness to be incurred in conjunction with this offering, and (ii) reflects amortization expense on the approximately $         of deferred financing costs associated with our new borrowings. A 1% increase or decrease in the weighted average annual interest rate on the borrowings would increase or decrease pro forma interest expense by $         annually.

 

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Resulting Tax Effects

(d) Reflects an income tax expense adjustment for the items noted in (b) through (d), calculated at the statutory rate of 35%.

Equity Offering and Other Pro Forma Adjustments

(e) Reflects an adjustment related to the net proceeds we expect to receive from this offering of $         , or approximately $             if the underwriters exercise their option to purchase additional shares of Class A common stock in full, assuming an initial public offering price of $            per share of Class A common stock (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Also reflects an adjustment to use the proceeds from the sale of the shares of our Class A common stock to repay related-party indebtedness owed to AT&T, and to distribute the remaining $         net proceeds to AT&T.

A $1.00 increase/(decrease) in the assumed initial public offering price of $        per share of Class A common stock would cause the net proceeds from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, received by us to increase/(decrease) by approximately $         , assuming the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same.

(f) In addition, the adjustment includes the reclassification of AT&T’s net investment in us, which was recorded in parent net investment and was reclassified into additional paid-in capital as well as the required balancing entry to reflect the par value of our outstanding Class A and Class B common stock. The issuance of common stock was at a par value of $0.01 per share.

(g) Reflects an adjustment to remove certain Peru assets which are reflected as assets held for sale on our Combined Financial Statements and to remove the related impairment of such assets.

(h) Reflects an adjustment to remove the deferred transaction costs related to this offering in our historical condensed combined balance sheet as a reduction of offering proceeds.

Pro Forma Earnings Per Share

The number of shares used to compute pro forma basic earnings per share for the year ended December 31, 2017 is             , which is comprised of             shares of Class A common stock (the number of shares outstanding upon completion of this offering) and             shares of Class B common stock.

The number of shares used to compute pro forma diluted earnings per share for the year ended December 31, 2017 is            , which includes the dilutive impact of             .

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with those statements. You should read the following discussion in conjunction with our Combined Financial Statements and the related Notes and our unaudited pro forma condensed combined financial statements and the related notes included elsewhere in this prospectus. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those in “Risk Factors” and included in other portions of this prospectus.

Unless otherwise specified, U.S. dollar and other currency amounts are presented in millions, except per subscriber amounts.

Overview of Our Business

We are a leading provider of digital entertainment services in South America, with approximately 13.6 million subscribers in the Region as of December 31, 2017. The Region in which we operate consists of eight countries in South America and three countries in the Caribbean. We began our operations in 1996 and since then have expanded by executing our strategy to provide the best digital entertainment experience anytime, anywhere in the Region. Our offerings and brands are widely recognized by customers and independent third parties as market-leading. Through our scale and purpose-built technology, we offer customers a full range of international, regional and local content, including exclusive programming, tailored to each of the countries and certain sub-markets in the Region and delivered in a wide range of packages so that customers can receive our services in a manner best-suited to their needs.

We have a sustained track record of growth achieved through a combination of operational excellence, best-in-class customer service, technological innovation, new product introductions and strong brands.

We service our customers across three segments: Brazil, which distributes our offerings in Brazil under the SKY brand; South Region, which distributes our offerings in Argentina, Chile, Peru and Uruguay under the DIRECTV brand; and North Region, which distributes our offerings in Barbados, Colombia, Curaçao, Ecuador, Trinidad and Tobago and Venezuela, also under the DIRECTV brand.

Executive Overview and General Trends

We derive substantially all of our revenues from the provision of digital entertainment services, which are provided to customers on either a postpaid or prepaid basis. We also derive a portion of our revenues from the provision of broadband services. Revenues from postpaid subscribers consist of monthly fees for basic and premium programming and hardware, as well as from fees for advanced services (which include HD, DVR and multi-room viewing) and subscriptions to seasonal live sporting events and pay-per-view programming. We derive revenues from our prepaid subscribers when they charge or recharge their accounts, as well as from sales of our customer premises equipment, including set-top boxes and antennas. In contrast to our postpaid subscribers, for which we maintain ownership of customer premises equipment while in use by our customers, prepaid subscribers purchase their equipment. Increases in revenues are driven by growth in the number of subscribers (which in turn is tied to our ability to reduce churn and add new customers), increases in the prices we charge for our programming packages, upselling programming packages, expansion of premium content add-ons sold to our existing customers and higher recharge volumes by our prepaid subscribers. Revenues from our postpaid and prepaid pay-TV subscribers represented 85.4% and 12.5%, respectively, of our combined revenues for the year ended December 31, 2017, 86.6% and 11.8%, respectively, of our combined revenues for the year ended December 31, 2016 and 85.6% and 13.6%, respectively, of our combined revenues for the Unaudited Pro Forma 2015 Period. Broadband revenues represented 2.1%, 1.6% and 0.8% of our combined

 

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revenues for the year ended December 31, 2017, the year ended December 31, 2016 and the Unaudited Pro Forma 2015 Period, respectively.

Our results of operations are affected by overall macroeconomic conditions in the countries in which we operate. Venezuela is currently in the midst of a severe economic and political crisis, characterized by exchange rate instability, currency devaluation, inflation, economic contraction and increased unemployment. Brazil and Argentina have also recently experienced periods of challenging economic conditions. A number of our other markets, including Chile, Colombia and Peru, have experienced lesser degrees of exchange rate instability and economic slowdown in recent years. These factors have significantly impacted our operating results and will continue to do so. See “Risk Factors” and “—Qualitative and Quantitative Disclosures About Market Risk” for further information.

We expect that growth in our total subscribers will continue to be driven primarily by an increase in prepaid subscribers due to the significant underpenetration of pay-TV in underserved areas and the growing middle class demographic in the Region. Although we have experienced pressure on postpaid subscriber growth due to recent economic challenges in the Region, which we expect to continue in the short-term, we believe longer term growth opportunities exist in postpaid subscribers due to the general underpenetration of pay-TV in the Region, particularly with respect to that portion of the population currently underserved by our competitors. However, we expect any such growth to be at a slower pace than growth in our prepaid offerings, due to higher competition in urban and densely populated areas which are generally well-serviced by cable providers. In addition, subscriber additions and churn are subject to seasonality, particularly with respect to prepaid customers, who often recharge their accounts around significant events such as the FIFA World Cup and Copa America soccer tournaments. We work to keep subscriber acquisition expenses for prepaid customers low in order that we may recoup these costs with minimal recharge activity.

We operate in an increasingly competitive environment, which may impact our ability to attract and retain customers. We compete against traditional telecommunications industry participants such as cable television operators, other DTH operators and other providers of broadband and telecommunication services with offerings including video, audio and interactive programming. Increasingly, we also face competition from OTT video streaming operators that deliver video programming over broadband Internet connections and pay-TV providers that have launched digital streaming services. See “Risk Factors—Risks Related to Our Business—We compete with other traditional telecommunications providers, some of whom have greater resources than we do, and levels of competition are increasing. Increased competition could result in higher postpaid subscriber churn, lower recharge rates from our prepaid subscribers, and increased subscriber acquisition and upgrade and retention costs, which could adversely affect our business” and “Business—Our Competition”.

On January 1, 2017, we changed how we calculate prepaid subscribers across the region and postpaid subscribers in Brazil. With respect to our prepaid subscribers, this change resulted in a one-time upward adjustment of 1,029,000 subscribers as of January 1, 2017, and, with respect to our postpaid subscribers in Brazil, this change resulted in a one-time upward adjustment of 103,000 subscribers as of January 1, 2017. For our prepaid business, beginning in 2017, we count subscribers as “active” if, at the end of the relevant period, they received our service during any of the trailing 60 days. For the periods prior to January 1, 2017, we counted prepaid subscribers as “active” if they received our service on the last day of the applicable period. In Brazil, this change was a result of our adjusting our disconnection policy for non-paying subscribers from 50 to 90 days to align with industry practices. Without giving effect to the adjustments described above, our underlying total subscribers increased in the Region by 0.3% for the year ended December 31, 2017 compared to the year ended December 31, 2016, including an increase in our underlying prepaid subscriber base of 10.0% partially offset by a 4.7% decline in our underlying postpaid subscribers, primarily attributable to ongoing economic challenges in Brazil.

 

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Our programming costs are the largest component of our operating expenses. These costs have increased, and we expect them to continue to increase as the business continues to grow, including as a result of contractual rate increases, some of which are tied to inflation. We expect that programming costs will also increase as we continue to acquire new premium content, such as new channels and special events, including our acquired rights to the 2018 FIFA World Cup. Subscriber acquisition expenses are also a significant portion of our operating expenses and consist of commissions we pay to retailers and dealers, advertising, marketing and customer care center expenses associated with the acquisition of new customers. With respect to our postpaid subscribers, for which we maintain ownership of the customer premises equipment (including set-top boxes and other equipment), we capitalize the cost of such equipment together with the cost of installation. With respect to our prepaid subscribers, subscriber acquisition expenses also include the cost of set-top boxes and other equipment, which is fully expensed at the time of sale. Accordingly, as the number of prepaid gross additions increases relative to postpaid gross additions, we expect that subscriber acquisition expenses will increase proportionally, which will have a negative effect on our EBITDA margins. However, from a cash flow perspective, we should see an offsetting reduction in capital expenditures.

We seek to offset inflation-based increases in programming and other costs by passing them on to subscribers in the form of rate increases. We expect our EBITDA margins to be negatively impacted to the extent that we are not able to pass on 100% of these increases due to competitive pressures, among other things. In addition, we are required to obtain regulatory approval for price increases for our pay-TV services in certain countries in the Region, and we are not always able to obtain the amount of price change we seek or to obtain approval for rate increases in a timely manner.

Our financial statements are presented in U.S. dollars, but our operations outside of the United States account for substantially all of our revenues. Currency variations between the U.S. dollar and the currencies of our subsidiaries affect our results of operations as reported in U.S. dollars. In managing the business, we measure the performance of our specific country operations in local currency. In order to limit our exposure to foreign currency fluctuations, we generally operate in local currencies and seek to match the currency of our obligations with the functional currency of the operations supporting those obligations. For example, approximately 88% of our programming costs, our largest expense category, and approximately 92% of our total operating costs are denominated in local currencies or have adjustment mechanisms tied to movements in local currency foreign exchange rates versus the U.S. dollar.

We believe EBITDA to be a relevant and useful measurement to our investors as it is part of internal management reporting and planning processes and is an important metric that management uses to evaluate operating performance. We remain focused on EBITDA margin expansion and cash flow generation, which we track through FCF. Since the Acquisition, we have made significant progress in improving our free cash flow by executing several initiatives, including:

 

  Prioritizing the addition of higher quality subscribers over aggregate subscriber count;

 

  Simplifying our organizational structure and reducing management layers;

 

  Renegotiating supplier contracts to better leverage our pan-Regional scale, driving more of our operating costs into local currency;

 

  Redesigning our set-top boxes, including a reduction in expected development costs, to reduce the average cost of our set-top boxes by 34% in 2017 compared to 2016;

 

  Focusing our investments on higher return projects and reducing investments in non-core products;

 

  Standardizing and expanding the availability of our prepaid offerings across the Region; and

 

  Further digitizing the customer experience to focus on self-help and automation, which reduces call volumes to our customer care centers while simultaneously improving overall customer satisfaction.

We also recently completed an investment cycle, investing approximately $1,000 in our infrastructure modernization since 2011, to upgrade our satellite fleet and broadcast centers and create additional backup capabilities. The improved operational capabilities provided by this investment have allowed us to (i) enhance

 

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our competitive position by increasing our channel capacity for HD and future 4K and 8K offerings, (ii) standardize customer premises equipment across the Region and achieve higher volume on a lower number of customer premises equipment models, (iii) lower our per-transponder/per-channel satellite costs and (iv) streamline our over-the-air service provisioning and reduce human intervention and related expenses.

We remain committed to our strategy to profitably grow our business across the Region in spite of challenging macroeconomic conditions. We are focused on delivering market-leading advanced services (which include HD, DVR and multi-room viewing) for a growing premium subscriber base and leveraging our scale to further penetrate and profitably serve the rapidly growing mass market. We also intend to continue to improve our productivity, while further optimizing our cost structure.

Additional Significant Events Affecting the Comparability of Our Results of Operations

The factors that drive our financial performance differ in the various countries in the Region, including the competitive landscape, the regulatory environment and economic factors, among others. Accordingly, our results of operations in each period reflect a combination of these effects on our segments. For more information on factors that affect our business, see “Risk Factors” and “Business”.

Devaluation and Foreign Currency Exchange Controls

In certain countries in the Region, we are currently or have been subject to foreign currency exchange controls or limits on exchangeability of local currency into U.S. dollars that impact our business and our financial results.

Companies operating in Venezuela are required to obtain Venezuelan government approval to exchange Venezuelan Bolivars (“Bolivars”) into U.S. dollars and such approval has for several years been rarely granted to us. Consequently, our ability to pay U.S. dollar-denominated obligations and repatriate cash generated in Venezuela in excess of local operating requirements is limited, which has hindered our ability to import set-top boxes and other equipment, impacting the growth of our business in Venezuela. We have not been able to import any significant number of set-top boxes, antennas, cables, remote controls or other equipment in Venezuela since 2012. In addition, our inability to pay dividends or repatriate cash by other means has resulted in increases in cash balances held in Venezuela, which can be subject to devaluation due to currency fluctuations.

In February 2015, the Venezuelan government created a new open market foreign exchange system, the Marginal Currency System (“SIMADI”), which was the third system in a three-tier exchange control mechanism. SIMADI was a floating market rate for the conversion of Bolivars to U.S. dollars based on supply and demand. The three-tier exchange rate mechanisms included the following: (i) the National Center of Foreign Commerce official rate of 6.3 Bolivars per U.S. dollar, which remained unchanged; (ii) the Sistema Complementario de Administración de Divisas (“SICAD-I”), which continued to hold periodic auctions for specific sectors of the economy; and (iii) the SIMADI, which started operating at an open rate of 170 Bolivars per U.S. dollar.

As a result of the change to the SIMADI exchange rate of 197.7 Bolivars per U.S. dollar at June 30, 2015 from the SICAD-I exchange rate of 12.8 Bolivars per U.S. dollar at June 30, 2015, we recorded a charge of $519 in “Venezuelan currency devaluation charge” in the Combined Statements of Operations during the period from January 1, 2015 through July 24, 2015. The significant change in exchange rates also required us to evaluate the recoverability of our fixed and intangible assets, resulting in an impairment charge of $423 for fixed assets and $110 related to intangible assets during this period.

During 2016, we recorded a pre-tax charge of $45 which was recorded in “Venezuelan currency devaluation charge” in the Combined Statements of Operations as a result of the change to the SIMADI exchange rate of 628 Bolivars per U.S. dollar at June 30, 2016 from the SIMADI exchange rate of approximately 197.7 Bolivars per U.S. dollar at December 31, 2015. We also recorded an asset impairment charge of $72 in the year ended December 31, 2016.

 

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On March 9, 2016, the Central Bank of Venezuela issued Exchange Agreement No. 35, which changed the three-tiered official currency control system to a dual foreign exchange system. The preferential exchange rate, called “DIPRO”, had an official rate of 10 Bolivars to the U.S. dollar and replaced the official rate of 6.3 Bolivars per U.S. dollar. DIPRO was available for essential imports and transactions. All other transactions were subject to the SIMADI rate.

During the second quarter of 2017, the Venezuelan government established a new foreign currency system at the supplementary floating market exchange rate known as DICOM which replaced SIMADI.

The results of the first DICOM currency auction resulted in a devaluation of the Bolivar against the U.S. dollar, from an exchange rate of 728 Bolivars to the U.S. dollar to an exchange rate of 2,010 Bolivars to the U.S. dollar. For the year ended December 31, 2017, the DICOM exchange rate was 3,341 Bolivars per U.S. dollar. The devaluation of the Bolivar against the U.S. dollar resulted in a charge of $31 for the year ended December 31, 2017, which was recorded in “Venezuelan currency devaluation charge” in the Combined Statements of Operations.

At December 31, 2017, our Venezuelan subsidiary had Bolivar denominated net monetary assets of $13, including cash of $19, based on the then-applicable DICOM exchange rate of 3,341 Bolivars per U.S. dollar. For the year ended December 31, 2017, our Venezuelan subsidiary generated revenues of approximately $99. The exchange rate used to report net monetary assets and operating results of our Venezuelan subsidiary is based on the results of periodic DICOM auctions, which is expected to result in fluctuations in reported amounts that could be material to the results of operations in Venezuela in future periods and could materially affect the comparability of results for our Venezuelan subsidiary between periods. The comparability of our results of operations and financial position in Venezuela will also be affected in the event of additional changes to the currency exchange rate system or further devaluations of the Bolivar or if we determine in the future that a rate other than the DICOM rate is appropriate for the remeasurement of our Bolivar denominated net monetary assets.

In February 2018, the Central Bank of Venezuela announced a devaluation of its official exchange rate with the launch of a new foreign exchange platform. The first auction of the central bank’s new DICOM system yielded an exchange rate of approximately 25,000 Bolivars per U.S. dollar, which represents a devaluation of 86.6% from the previous DICOM rate of 3,341 and a devaluation of 99.6% from the subsidized rate of 10 Bolivars per U.S. dollar, which was eliminated in the prior month. The devaluation of the Bolivar against the U.S. dollar resulted in a remeasurement loss of $25 on our Bolivar denominated net monetary assets in 2018.

As a result of the significant devaluation of the Venezuelan currency, revenues associated with Venezuela have declined significantly as a percentage of our total revenues. Revenues associated with Venezuela were approximately $99, $60 and $600 for the year ended December 31, 2017, the year ended December 31, 2016 and the Unaudited Pro Forma 2015 Period, respectively, which represented approximately 1.8%, 1.2% and 10.1% of our total revenues for these periods. For the Successor 2015 Period and the Predecessor 2015 Period, revenues associated with Venezuela were approximately $100 and $507, respectively, which represented approximately 4.5% and 13.7%, respectively, of our total revenues for such periods.

In Argentina, from October 2011 through December 2015, the Central Bank of Argentina imposed a series of foreign exchange and capital controls which effectively limited the convertibility of the Argentine Peso into U.S. dollars and caused the official exchange rate for the Argentine Peso to differ significantly from the parallel foreign exchange market that also operated under very limited circumstances in that country. When Argentina’s government lifted all significant exchange market controls in December 2015, the value of the Argentine Peso decreased from 9.80 Argentine Pesos per U.S. dollar on December 15, 2015 to 12.93 Argentine Pesos per U.S. dollar on December 31, 2015. As of December 31, 2017, the exchange rate was 18.61 Argentine Pesos per U.S. dollar.

 

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AT&T Acquisition of DIRECTV

On July 24, 2015, AT&T acquired 100% of the outstanding shares of capital stock of DIRECTV, which included all of the operations of DIRECTV in the Region. Accordingly, the accompanying Combined Financial Statements presented elsewhere in this prospectus include the period from January 1, 2015 through July 24, 2015 (the “Predecessor 2015 Period”) and the period from July 25, 2015 through December 31, 2015 (the “Successor 2015 Period”), with the periods prior to the Acquisition being labeled as Predecessor and the periods subsequent to the Acquisition labeled as Successor. The Combined Financial Statements of the Successor reflect the application of purchase accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”).

We have prepared unaudited pro forma supplemental financial information for the pro forma year ended December 31, 2015, which gives effect to the Acquisition as if it had occurred on January 1, 2015 (the “Unaudited Pro Forma 2015 Period”). The Unaudited Pro Forma 2015 Period discussed herein has been prepared in a manner consistent with the requirements of Article 11 of Regulation S-X, and does not purport to represent what our actual combined results of operations would have been had the Acquisition actually occurred on January 1, 2015, nor is it necessarily indicative of future combined results of operations. The Unaudited Pro Forma 2015 Period is being discussed herein for informational purposes only and does not reflect any operating efficiencies or potential cost savings that may result from the consolidation of operations.

In preparing the Unaudited Pro Forma 2015 Period, we combined the Predecessor 2015 Period and the Successor 2015 Period and adjusted the historical results within these periods to give effect to pro forma events that are (i) directly attributable to the Acquisition, (ii) factually supportable and (iii) expected to have a continuing impact on the combined financial results. The pro forma adjustments made to give effect to the Acquisition, as if it had occurred on January 1, 2015, are summarized in the table below:

Pro Forma Statement of Operations

 

     (Successor)            (Predecessor)                    
     Period from
July 25
through
December 31,
2015
           Period from
January 1
through
July 24,

2015
    Pro forma
adjustments
for the
Acquisition
    Note     Unaudited
Pro Forma
2015
Period
 
     (U.S. dollars in millions)  

Revenues

   $ 2,228          $ 3,709     $ (24     (a   $ 5,913  

Operating Expenses

               

Costs of services and sales (exclusive of depreciation and amortization expense shown separately below)

               

Programming, broadcast operations and other expenses

     861            1,503       —           2,364  

Subscriber service expenses

     261            443       —           704  

Selling, general and administrative expenses (exclusive of depreciation and amortization expense shown separately below)

               

Subscriber acquisition, upgrade and retention expenses

     319            546       —           865  

General and administrative expenses

     399            418       —           817  

Venezuelan currency devaluation charge

     —              519       —           519  

Impairment of fixed and intangible assets

     —              533       —           533  

Depreciation and amortization expense

     543            613       154       (b     1,310  
  

 

 

        

 

 

   

 

 

     

 

 

 

Total Operating Expenses

     2,383            4,575       154         7,112  
  

 

 

        

 

 

   

 

 

     

 

 

 

Operating Loss

     (155          (866     (178       (1,199
  

 

 

        

 

 

   

 

 

     

 

 

 

 

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     (Successor)            (Predecessor)                    
     Period from
July 25
through
December 31,
2015
           Period from
January 1
through
July 24,

2015
    Pro forma
adjustments
for the
Acquisition
    Note     Unaudited
Pro Forma
2015
Period
 
     (U.S. dollars in millions)  

Other Income (Expense)

               

Interest income

     12            46       —           58  

Interest expense

     (42          (35     (20     (c     (97

Equity in net income (loss) of affiliates

     12            (49     —           (37

Other income (expense)-net

     (38          (40     —           (78
  

 

 

        

 

 

   

 

 

     

 

 

 

Total other income (expense)

     (56          (78     (20       (154
  

 

 

        

 

 

   

 

 

     

 

 

 

Loss Before Income Taxes

     (211          (944     (198       (1,353

Income tax (benefit) expense

     (20          75       (69     (d     (14
  

 

 

        

 

 

   

 

 

     

 

 

 

Net Loss

     (191          (1,019     (129       (1,339
  

 

 

        

 

 

   

 

 

     

 

 

 

Less: Net (Income) Loss Attributable to Noncontrolling Interest

     6            (2     —           4  
  

 

 

        

 

 

   

 

 

     

 

 

 

Net Loss Attributable to DIRECTV Latin America

   $ (185        $ (1,021   $ (129     $ (1,335
  

 

 

        

 

 

   

 

 

     

 

 

 

 

(a) The Pro Forma Statement of Operations has been adjusted to reflect a decrease to revenue due to an adjustment to deferred revenue as a result of fair value accounting associated with the Acquisition. Certain revenues are deferred for accounting purposes but require minimal or no future incremental direct costs in order to be recognized.

 

(b) The Pro Forma Statement of Operations has been adjusted to reflect an increase to depreciation and amortization expense due to the adjustment of our property and equipment and intangible assets to fair value as part of the pushdown of the purchase price from the Acquisition. See Note 3 of the Notes to the Combined Financial Statements.

 

(c) The Pro Forma Statement of Operations has been adjusted to reflect an increase in interest expense related to the related party payable to parent of $1,129 that was recorded at the Acquisition. Interest was calculated using AT&T’s average intercompany lending rate at the time of the Acquisition of 3.25% per annum. See Note 11 of the Notes to the Combined Financial Statements.

 

(d) The Pro Forma Statement of Operations has been adjusted to reflect the aggregate pro forma income tax effect of notes (a), (b) and (c) above, using a statutory rate of 35%. The aggregate pre-tax effect of these adjustments is reflected as “Loss before income taxes” on the Pro Forma Statement of Operations.

Corporate Separation Transaction

We currently operate as a wholly-owned subsidiary of AT&T. Our Combined Financial Statements included elsewhere in this prospectus, which are discussed below, reflect the historical position, results of operations and cash flows of the business that will be transferred to us from AT&T pursuant to the Separation, with the exception of operations in Puerto Rico, which will be retained by AT&T from and after the Separation, and which are reflected as held for sale in our Combined Financial Statements. The financial information, Combined Financial Statements and related Notes included in this prospectus, however, do not reflect what our balance sheet, results of operations and cash flows will be in the future or what our balance sheet, results of operations and cash flows would have been in the past had we been a public, stand-alone company during the periods presented. For a detailed description of the basis of presentation and an understanding of the limitations of the predictive value of the historical combined financial statements, see Note 1 of the Notes to the Combined Financial Statements.

 

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In connection with this offering and the Separation, we and AT&T intend to enter into, or have entered into, certain agreements that will provide a framework for our ongoing relationship with AT&T. See “Certain Relationships and Related Party Transactions—Separation Transactions—Relationship with AT&T and its Subsidiaries”.

AT&T and its affiliates, including DIRECTV, currently provide certain corporate services to us, and costs associated with these functions have been allocated to us. These allocations include costs related to corporate services, such as executive management, information technology, legal, finance and accounting, investor relations, human resources, risk management, tax, treasury, and other services, as well as share-based compensation expense attributable to our employees and an allocation of share-based compensation attributable to employees of AT&T and DIRECTV. The costs of such services have been allocated to us based on the most relevant allocation method to the service provided, primarily based on relative percentage of EBITDA or specific identification. The total amounts of these cost allocations were approximately $2 in 2017, $20 in 2016, $21 in the period from July 25 through December 31, 2015, and $14 in the period from January 1 through July 24, 2015. See Note 11 of the Notes to the Combined Financial Statements. The cost allocations for these functions are included in “General and administrative expenses” in the Combined Statements of Operations. The decrease in corporate cost allocations in the year ended December 31, 2017 compared to the year ended December 31, 2016 was attributable to AT&T cost efficiencies and specifically identified retention payments in prior years.

As a stand-alone public company, our total costs related to such support functions may differ from the costs that were historically allocated to us from AT&T. We will also incur additional costs as a stand-alone public company. We estimate that our annual general and administrative expense for these costs will be an aggregate of approximately $                to $                . In addition, as we transition away from the corporate services currently provided by AT&T, we believe that we may incur $                to $                of non-recurring transitional costs in both 2018 and 2019 to establish our own stand-alone corporate functions.

Key Business Measures

We track our results of operations and manage our business using the following key business measures, which include non-GAAP financial measures:

 

  Revenues

 

  EBITDA

 

  Operating Income (Loss)
  Capital Expenditures

 

  FCF

 

  Subscribers (Postpaid and Prepaid)

 

  ARPU (Postpaid and Prepaid)

 

  Postpaid Subscriber Churn

 

  Net Subscriber Additions (Postpaid and Prepaid)
 

 

For a description of certain of these key business metrics, please see “—Key Terminology”. The non-GAAP financial measures listed above do not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, these measures as used by other companies may not be consistent with the way the Company calculates such measures. See “—Non-GAAP Financial Measures” for a description of the non-GAAP measures used in our business and a reconciliation to the equivalent GAAP measures.

 

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The following tables set forth statistics for these key business metrics as well as the corresponding GAAP measures where applicable for the period from January 1, 2015 through July 24, 2015 (Predecessor), the period from July 25, 2015 through December 31, 2015 (Successor), the year ended December 31, 2016, the year ended December 31, 2017 and the Unaudited Pro Forma 2015 Period.

 

     Successor      Predecessor     Unaudited
Pro Forma

2015 Period
 
     Year Ended
December 31,
2017
    Year Ended
December 31,
2016
    Period from
July 25, 2015
through
December 31,
2015
     Period from
January 1, 2015
through
July 24, 2015
   
    

(U.S. dollars in millions)

 

Revenues

   $ 5,568     $ 5,023     $ 2,228      $ 3,709     $ 5,913  

Brazil

     2,827       2,661       1,065        1,760       2,823  

South Region

     1,951       1,638       776        1,032       1,797  

North Region

     674       589       321        826       1,136  

EBITDA

   $ 1,205     $ 918     $ 388      $ (253   $ 111  

Brazil

     679       593       240        402       640  

South Region

     506       418       185        277       451  

North Region

     (23     (143     (25      (940     (976

Operating Income (Loss)

   $ 48     $ (264   $ (155    $ (866   $ (1,199

Brazil

     (81     (131     (77      79       (165

South Region

     302       185       60        145       160  

North Region

     (138     (283     (93      (1,054     (1,118

Capital Expenditures

   $ 725     $ 762     $ 369      $ 776       N/A  

Brazil

     460       418       219        444       N/A  

South Region

     184       238       79        135       N/A  

North Region

     48       78       66        129       N/A  

Net Cash Provided by Operating Activities

   $ 1,361     $ 1,457     $ 240      $ 827       N/A  

FCF (1)

   $ 636     $ 695     $ (129    $ 51       N/A  

 

* The sum of the segment amounts presented above excludes eliminations, adjustments and other impacts necessary for reconciliation to the total combined Company amounts.

 

(1) The years ended December 31, 2017 and December 31, 2016 include a $414 and $551 tax benefit, respectively, generated by the Company. These benefits were utilized by AT&T in its consolidated returns and such utilization was reflected as cash (used in) provided by financing activities.

 

    Successor     Predecessor     Unaudited
Pro Forma

2015 Period
 
    Year ended
December 31,
2017
    Year ended
December 31,
2016
    Period from
July 25, 2015
through
December 31,
2015
    Period from
January 1, 2015
through
July 24,

2015
   

Subscribers (as of the end of the period, in thousands) (1)

    13,834       12,655       12,720       12,873       12,720  

Postpaid

    8,719       9,027       9,530       9,782       9,530  

Prepaid

    5,115       3,628       3,190       3,091       3,190  

ARPU

  $ 33.81     $ 33.03     $ 33.33     $ 43.06     $ 38.80  

Postpaid

  $ 45.86     $ 39.78     $ 38.12     $ 48.57     $ 43.96  

Prepaid

  $ 11.93     $ 14.55     $ 18.53     $ 25.02     $ 22.27  

Postpaid subscriber churn %

    2.2     2.1     2.2     2.3     2.3

Net subscriber additions (in thousands)

    47       (65     (153     401       248  

Postpaid

    (258     (460     (252     106       (146

Prepaid

    305       395       99       295       394  

 

(1) On January 1, 2017, we changed how we calculate prepaid subscribers across the Region and postpaid subscribers in Brazil. With respect to our prepaid subscribers, this change resulted in a one-time upward adjustment of 1,029,000 subscribers as of January 1, 2017, and, with respect to our postpaid subscribers in Brazil, this change resulted in a one-time upward adjustment of 103,000 subscribers as of January 1, 2017. See “—Executive Overview and General Trends”.

 

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In addition, the number of total subscribers by country is presented in the table below:

 

     December 31,
2017
     December 31,
2016
     December 31,
2015
 
     (as of the end of the period, in thousands)  

Total Subscribers

     13,834        12,655        12,720  

Brazil

     5,359        5,249        5,444  

South Region

     4,244        3,599        3,434  

Argentina

     2,951        2,612        2,519  

Chile

     712        578        529  

Uruguay

     231        188        169  

Peru

     350        221        217  

North Region

     4,026        3,607        3,633  

Colombia

     1,199        1,010        1,051  

Ecuador

     646        461        461  

Venezuela

     2,125        2,078        2,059  

Caribbean

     56        58        62  

Puerto Rico (1)

     205        200        209  

 

(1) Puerto Rico subscribers and operations are to be retained by AT&T from and after the Separation. Net assets of Puerto Rico are reflected as held for sale in our Combined Financial Statements. See Note 3 of the Notes to the Combined Financial Statements.

Key Terminology

Revenues. We earn revenues mostly from fees we charge subscribers for subscriptions to basic and premium channel programming, advanced receiver fees (which include HD, DVR and multi-room viewing), subscriptions to seasonal live sporting events and pay-per-view programming. We also earn revenues from subscribers who purchase set-top boxes from us, monthly fees we charge subscribers for multiple set-top boxes, and broadband and advertising services. Revenues are reported net of customer credits and discounts for promotions and retentions.

Programming, Broadcast Operations and Other Expenses. Programming expenses primarily include license fees for subscription service programming, pay-per-view programming, live sporting and other events. Broadcast operations expenses include broadcast center operating costs, orbital slot rental, conditional access management and costs of monitoring and maintaining our satellites and broadband infrastructure costs. Other expenses include continuing service fees, such as performance rights fees or revenue-based taxes, paid as incurred to third parties for active subscribers.

Subscriber Service Expenses. Subscriber service expenses include the costs of customer care, billing, remittance processing and service calls.

Subscriber Acquisition, Upgrade and Retention Expenses. Subscriber acquisition expenses include the cost of set-top boxes and other equipment sold to the customer, commissions we pay to retailers and dealers, advertising, marketing and customer care center expenses associated with the acquisition of new subscribers and other costs. Upgrade and retention expenses are associated with upgrade efforts for existing subscribers that we believe will result in lower churn. Our upgrade efforts include subscriber equipment upgrade programs for advanced set-top boxes and similar initiatives. Set-top boxes that continue to be owned by us while in use by our customers are capitalized in “Property and equipment-net” in the Combined Balance Sheets and depreciated over their useful lives. In most countries, where our postpaid customer agreements provide for the Company’s continued ownership of the entire DIRECTV or SKY Brasil system, we also capitalize the costs of the other customer premises equipment and related installation costs. The amounts we pay each period for the purchase of customer premises equipment are included in “Cash paid for property and equipment” in the Combined Statements of Cash Flows.

 

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General and Administrative Expenses. General and administrative expenses include executive management and departmental costs for legal, administrative services, finance, marketing and information technology. These costs also include expenses for bad debt and other operating expenses, such as legal settlements, and gains or losses from the sale or disposal of fixed assets and allocated costs from AT&T.

Capital Expenditures. Capital expenditures include expenditures for (i) customer equipment, including set-top boxes and other ancillary equipment in cases where we retain ownership while in use by our customers, (ii) costs associated with our satellite fleet and content delivery infrastructure, (iii) costs associated with our broadband infrastructure and (iv) costs associated with the replacement or enhancement of non-content delivery assets, such as office equipment, buildings and vehicles.

Operating Income (Loss). Operating income (loss) refers to our “Revenues” less “Total operating expenses”.

Other Income (Expense)-Net. The main components of “Other income (expense)-net” are gains and losses realized and unrealized on foreign currency transactions.

EBITDA. EBITDA is defined as net income (loss) excluding interest income, interest expense, equity in net income (loss) of affiliates, other income (expense)-net, income tax (benefit) expense and depreciation and amortization expense. Our calculation of EBITDA, which may differ from similarly titled measures reported by other companies, excludes other income (expense)-net, and equity in net income (loss) of affiliates, as these do not reflect the operating results of our subscriber base or operations that are not under our control. See “—Non-GAAP Financial Measures” for a description of the non-GAAP measures used in our business and a reconciliation to the GAAP equivalent measures.

Adjusted EBITDA. Adjusted EBITDA is equal to EBITDA (as defined above), less charges related to the remeasurement of net monetary assets in Venezuela and the impairments of fixed and intangible assets. See “—Non-GAAP Financial Measures” for a description of the non-GAAP measures used in our business and a reconciliation to the GAAP equivalent measures.

EBITDA Margin. EBITDA margin is calculated as EBITDA divided by Revenues. See “—Non-GAAP Financial Measures” for a description of the non-GAAP measures used in our business and a reconciliation to the GAAP equivalent measures.

Adjusted EBITDA Margin. Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by Revenues. See “—Non-GAAP Financial Measures” for a description of the non-GAAP measures used in our business and a reconciliation to the GAAP equivalent measures.

Free Cash Flow (FCF). FCF is defined as net cash provided by operating activities less capital expenditures. See “—Non-GAAP Financial Measures” for a description of the non-GAAP measures used in our business and a reconciliation to the GAAP equivalent measures.

Postpaid Average Monthly Revenue Per Subscriber (Postpaid ARPU). We calculate Postpaid ARPU by dividing average monthly revenues from our postpaid subscribers, net of customer credits and discounted promotions, for the period (i.e., total postpaid revenues during the period divided by the number of months in the period) by average postpaid subscribers for the period. We calculate average postpaid subscribers for the period by averaging the total postpaid subscribers for each month in the period and dividing the total by the number of months in the period.

Prepaid Average Monthly Revenue Per Subscriber (Prepaid ARPU). We calculate Prepaid ARPU by dividing average monthly revenues from our prepaid subscribers, net of customer credits and discounted promotions, for the period (i.e., total prepaid revenues during the period divided by the number of months in the period) by average prepaid subscribers for the period. We calculate average prepaid subscribers for the period by averaging the total number of prepaid subscribers for each month in the period and dividing the total by the number of months in the period.

 

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Postpaid Subscriber Churn. Postpaid subscriber churn represents the number of postpaid subscribers whose service is disconnected, expressed as a percentage of the average total number of postpaid subscribers. We calculate postpaid subscriber churn by dividing the average monthly number of disconnected postpaid subscribers for the period (i.e., the total postpaid subscribers disconnected, net of reconnects, during the period divided by the number of months in the period) by average postpaid subscribers for the period.

Subscriber Count. The total number of subscribers as of the end of the period represents the sum of the total number of our postpaid and our prepaid subscribers. For our postpaid business, the total number of subscribers represents, as of the end of a relevant period, the total number of subscribers actively subscribing to our service, including subscribers who have suspended their accounts for a particular season of the year because they are temporarily away from their primary residence, subscribers who are in the process of relocating and commercial equivalent viewing units. For our prepaid business, beginning in 2017, we count subscribers as “active” if, at the end of the relevant period, they received our service during any of the trailing 60 days. For the periods prior to January 1, 2017, we counted prepaid subscribers as “active” if they received our service on the last day of the applicable period. In Brazil, we adjusted our disconnection policy for non-paying subscribers from 50 to 90 days, as of January 1, 2017 to align with industry practices, which resulted in a change in how we count postpaid subscribers. Prior periods have not been restated to conform to these changes in methodology.

Postpaid Net Subscriber Additions. Postpaid net subscriber additions refers to the number of new postpaid subscribers in a certain period, less the number of disconnected postpaid subscribers for the period, net of reconnects for the period, excluding subscriber migrations between prepaid and postpaid.

Prepaid Net Subscriber Additions. Prepaid net subscriber additions refers to the number of new prepaid subscribers in a certain period, less the number of existing subscribers who disconnected in the period, net of reconnects for the period, excluding subscriber migrations between prepaid and postpaid.

Constant Currency. Constant currency is calculated by using average foreign currency rates from the comparable, prior-year period, and is used to present revenues or the applicable expense item in a manner that enhances comparison. See “—Non-GAAP Financial Measures” for a description of the non-GAAP measures used in our business.

Basis of Presentation

Our historical combined financial statements, which are discussed below, are prepared on a stand-alone basis in accordance with U.S. GAAP and are derived from DIRECTV’s and AT&T’s financial statements and accounting records using the historical results of operations and assets and liabilities attributed to our operations, and include allocations of expenses from DIRECTV and AT&T. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying Notes to the Combined Financial Statements, including estimates of probable losses and expenses.

All significant intercompany transactions are eliminated in the consolidation process. Investments in less than majority-owned subsidiaries and partnerships where we have significant influence are accounted for under the equity method. Earnings from certain investments accounted for using the equity method are included for periods ended within up to one quarter of our period end. We also record our proportionate share of our equity method investees’ other comprehensive income (“OCI”) items, including cumulative translation adjustments.

The information in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” reflects the combined financial results of the entities expected to be owned by the Company at the completion of this offering and their subsidiaries, with the exception of operations in Puerto Rico which are to be retained by AT&T from and after the Separation, and which are reflected as held for sale in our Combined Financial Statements.

 

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Due to these items and other changes, the historical financial information included in this prospectus is not necessarily indicative of our balance sheet, results of operations and cash flows in the future or what our balance sheet, results of operations and cash flows would have been had we been a stand-alone public company during the periods presented.

Our financial statements are presented in U.S. dollars, but our operations outside of the United States account for substantially all of our revenues. Currency variations between the U.S. dollar and the currencies of our subsidiaries, especially the Brazilian Real, the Argentine Peso, the Colombian Peso and the Bolivar, affect our results of operations as reported in U.S. dollars. In the following discussion regarding our operating results, we discuss certain of the changes in the different components of our revenues and expenses between periods and, in some cases, we include an explanation of those changes assuming constant exchange rates (using the same exchange rates to translate the local-currency results of our non-U.S. operations for both periods). To arrive at constant currency, we applied the average foreign exchange rates for the twelve-month period ended December 31, 2016 to amounts for the twelve-month period ended December 31, 2017, and the average foreign exchange rates for the twelve-month period ended December 31, 2015 to amounts for the twelve-month period ended December 31, 2016. We have excluded the impact of Venezuela from the constant currency presentation as it is considered a hyperinflationary country. We believe that this additional information helps investors better understand the performance of our operations. For a summary of foreign exchange rates associated with our primary operating countries as of December 31, 2015, December 31, 2016 and December 31, 2017, see “—Qualitative and Quantitative Disclosures About Market Risk—Foreign Currency Risk”.

Results of Operations for the Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016

The results of operations discussion below focuses on the comparison of the year ended December 31, 2017 to the year ended December 31, 2016.

 

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The following table provides our combined operating results:

 

     Successor     % Change     Constant
Currency
% Change
excluding
Venezuela
 

Combined Statements of Operation

   Year Ended
December 31,
2017
    Year Ended
December 31,
2016
    2017 to
2016
    2017 to
2016
 
     (U.S. dollars in millions, except per subscriber figures)  

Revenues

   $ 5,568     $ 5,023       10.9     8.5

Operating Expenses

        

Cost of services and sales (exclusive of depreciation and amortization expense shown separately below)

        

Programming, broadcast operations and other expenses

     2,333       2,208       5.7     4.4

Subscriber service expenses

     595       561       6.1     4.2

Selling, general and administrative expenses (exclusive of depreciation and amortization expense shown separately below)

        

Subscriber acquisition, upgrade and retention expenses

     780       685       13.9     13.0

General and administrative expenses

     615       534       15.2     (6.7 %) 

Venezuelan currency devaluation charge (1)

     31       45       (31.1 )%      N/A  

Impairment of fixed and intangible assets (2)

     9       72       (87.5 )%      N/A  

Depreciation and amortization expense

     1,157       1,182       (2.1 )%      (6.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

     5,520       5,287       4.4     1.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income (Loss)

     48       (264     118.2     217.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Income (Expense)

        

Interest income

     49       14       250.0     —    

Interest expense

     (126     (94     34.0     —    

Equity in net income of affiliates

     20       23       (13.0 )%      —    

Other income (expense)-net

     6       5       20.0     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expenses)

     (51     (52     1.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss Before Income Taxes

     (3     (316     99.1     —    

Income tax (benefit) expense

     (225     40       (662.5 )%      —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

     222       (356     162.4     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net (Income) Loss Attributable to Noncontrolling Interest

     (9     8       (212.5 )%      —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss) Attributable to DIRECTV Latin America

   $ 213     $ (348     161.2     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA (3)

   $ 1,205     $ 918       31.3     23.7

EBITDA margin

     21.6     18.3    

Adjusted EBITDA

   $ 1,245     $ 1,035       20.3     24.5

Adjusted EBITDA margin

     22.4     20.6    

Capital expenditures

   $ 725     $ 762       (4.9 )%      —    

 

(1) In the year ended December 31, 2016, we recorded a charge of $45 as a result of the change to the SIMADI exchange rate and subsequent devaluations. During the year ended December 31, 2017, we recorded a charge of $31 as a result of the change to the DICOM exchange rate. See Note 12 of the Notes to the Combined Financial Statements.

 

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(2) In the year ended December 31, 2016, we recorded an impairment charge of $72 related to Venezuelan fixed and intangible assets. In the year ended December 31, 2017, we recorded an impairment charge of $9 related to Peruvian fixed and intangible assets. See Notes 4 and 5 of the Notes to the Combined Financial Statements.

 

(3) EBITDA includes a Venezuelan currency devaluation charge of $31 for the year ended December 31, 2017 and $45 for the year ended December 31, 2016. For the year ended December 31, 2017, an impairment of fixed and intangible assets of $9 was recognized in Peru. For the year ended December 31, 2016, an impairment of fixed and intangible assets of $72 was recognized in Venezuela.

Revenues. Revenues were $5,568 in the year ended December 31, 2017 and $5,023 in the year ended December 31, 2016.

The increase in revenues in the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily due to price increases on our programming packages, a higher subscriber base and the impact of changes in foreign exchange rates. On a constant currency basis, excluding Venezuela, revenue increased by 8.5% from the year ended December 31, 2016 to the year ended December 31, 2017 due to higher revenues in the South Region and North Region which increased 28.7% and 6.3%, respectively. The increase in the South Region’s and North Region’s revenues year-over-year on a constant currency basis, excluding Venezuela, was due to price increases on programming packages and advanced products, such as HD set-top boxes and DVR, and also from a larger subscriber base in the South Region and North Region. Revenue on a constant currency basis declined year-over-year by 2.3% in Brazil in 2017 due to a lower postpaid subscriber base.

Programming, broadcast operations and other expenses. Programming, broadcast operations and other expenses were $2,333 in the year ended December 31, 2017 and $2,208 in the year ended December 31, 2016.

The 5.7% increase in programming, broadcast operations and other expenses in the year ended December 31, 2017 compared to the year ended December 31, 2016 was attributed to rate increases and movements in foreign currency exchange rates. On a constant currency basis, excluding Venezuela, programming, broadcast operations and other expenses increased 4.4% in the year ended December 31, 2017 compared to the year ended December 31, 2016 due to increases in programming expense in the South Region which represents the majority of the total increase in programming, broadcast operations and other expenses on a constant currency basis. In Brazil, programming, broadcast operations and other expenses decreased 2.0% on a constant currency basis driven by a lowering in the base on which revenue taxes are required to be paid in Brazil.

Subscriber service expenses. Subscriber service expenses were $595 in the year ended December 31, 2017 and $561 in the year ended December 31, 2016.

The 6.1% increase in subscriber service expenses in the year ended December 31, 2017 compared to the year ended December 31, 2016 is attributed to movement in foreign currency exchange rates and an increase in labor costs. On a constant currency basis, excluding Venezuela, subscriber service expenses increased by 4.2% from the year ended December 31, 2016 to the year ended December 31, 2017 mainly due to annual wage increases, largely linked to inflation, mainly in the South Region, which increased by approximately 30.0%.

Subscriber acquisition, upgrade and retention expenses. Subscriber acquisition, upgrade and retention expenses were $780 in the year ended December 31, 2017 and $685 in the year ended December 31, 2016.

The 13.9% increase in subscriber acquisition, upgrade and retention expenses in the year ended December 31, 2017 compared to the year ended December 31, 2016 is primarily related to changes in foreign currency together with higher commission costs. On a constant currency basis, excluding Venezuela subscriber acquisition, upgrade and retention expenses increased by 13.0% from the year ended December 31, 2016 to the year ended December 31, 2017 due to higher subscriber acquisition costs in the South Region due to inflationary increases of sales commission and higher subscriber acquisition expenses in Colombia.

 

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General and administrative expenses. General and administrative expenses were $615 in the year ended December 31, 2017 and $534 in the year ended December 31, 2016.

The 15.2% increase in general and administrative expenses in the year ended December 31, 2017 was related to movements in foreign currency exchange rates. On a constant currency basis, excluding Venezuela, general and administrative expenses decreased by 6.7% from the year end ended December 31, 2016 to the year ended December 31, 2017 mainly due to the reversal of a $78 legal contingency related to an ongoing tax litigation matter in Brazil, which contributed to a 15.0% reduction in general and administrative expenses, partially offset by higher general and administrative expenses in the South Region.

Venezuelan currency devaluation charge. Venezuelan currency devaluation charge was $31 in the year ended December 31, 2017 and $45 in the year ended December 31, 2016, which reflects continued weakness in the Bolivar against the U.S. dollar. See “—Additional Significant Events Affecting the Comparability of Our Results of Operations—Devaluation and Foreign Currency Exchange Controls”.

Impairment of fixed and intangible assets. Impairment of fixed and intangible assets was $9 in the year ended December 31, 2017 and $72 in the year ended December 31, 2016.

The 2017 impairment charge pertains to certain fixed and intangible assets in connection with the expected sale of our broadband business in Peru. The 2016 impairment charge related to Venezuelan fixed assets.

Depreciation and amortization expense. Depreciation and amortization expense was $1,157 in the year ended December 31, 2017 and $1,182 in the year ended December 31, 2016.

The decrease of 2.1% in depreciation and amortization expense in the year ended December 31, 2017 compared to the year ended December 31, 2016 was due to lower intangible assets amortization partially offset by changes in exchange rates. On a constant currency basis, excluding Venezuela, depreciation and amortization expense decreased by 6.7% in the year ended December 31, 2016 compared to the year ended December 31, 2017, mainly due to declining amortization expense as a result of the application of the sum-of-the-months-digits method of amortization for certain intangible assets established at the time of the Acquisition.

Operating income (loss). Operating income (loss) was $48 in the year ended December 31, 2017 and $(264) in the year ended December 31, 2016.

The increase in operating income in the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily due to higher revenue, as well as lower fixed and intangible asset impairment charges which decreased 87.5% together with lower remeasurement loss on our Venezuela subsidiary’s net monetary assets. On a constant currency basis, excluding Venezuela, total operating income for the year ended December 31, 2017 improved by 217.5% from the year ended December 31, 2016 due to higher revenue and the reversal of a $78 legal contingency related to an ongoing tax litigation matter in Brazil.

Interest income. Interest income was $49 in the year ended December 31, 2017 and $14 in the year ended December 31, 2016.

The increase in the year ended December 31, 2017 compared to the year ended December 31, 2016 is attributable to $29 of interest income associated with the reversal of a $78 legal contingency related to an ongoing tax litigation matter in Brazil.

Interest expense. Interest expense was $126 in the year ended December 31, 2017 and $94 in the year ended December 31, 2016.

Interest expense increased by 34% in the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to higher interest on related party payables and related party note payable

 

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which increased from $62 in 2016 to $73 in 2017 due to higher payable balances. See Note 7 and Note 11 of the Notes to the Combined Financial Statements. The year over year interest expense also increased by $9 due to interest accrued on a legal contingency reserve related to an ongoing tax litigation matter in Brazil.

Equity in net income of affiliates. Equity in net income of affiliates was $20 in the year ended December 31, 2017 and $23 in the year ended December 31, 2016.

The decrease in equity in net income of affiliates in the year ended December 31, 2017 compared to the year ended December 31, 2016 is due to the lower equity in earnings of WIN Sports which were $1 in the year ended December 31, 2017 compared to $12 in the year ended December 31, 2016 as prior year amounts included nonrecurring tax benefits recorded in the financial statements of WIN Sports. This decrease was partially offset by higher equity earning in Torneos which increased 73% from $11 in 2016 to $19 in 2017 due to improved operating performance.

Other income (expense)-net. Other income (expense)-net was $6 in the year ended December 31, 2017 and $5 in the year ended December 31, 2016. The increase in the year ended December 31, 2017 compared to the year ended December 31, 2016 was mainly comprised of net foreign currency transaction losses.

Income tax (benefit) expense. Income tax (benefit) expense was $(225) in the year ended December 31, 2017 and $40 in the year ended December 31, 2016. The effective tax rate was 7,500% in the year ended December 31, 2017 and (12.7)% in the year ended December 31, 2016.

In 2017, our effective tax rate includes benefits resulting from internal restructuring of our legal entities in Brazil and Venezuela partially offset by the estimated impact of the enactment of the Tax Act. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21% and requires companies to pay a one-time transaction tax on earnings of certain foreign subsidiaries that were previously tax deferred. See Note 8 of the Notes to the Combined Financial Statements.

Net (Income) loss attributable to noncontrolling interest. Net (income) loss attributable to noncontrolling interest was $(9) in the year ended December 31, 2017 and $8 in the year ended December 31, 2016.

The increase in net (income) loss attributable to noncontrolling interest in the year ended December 31, 2017 compared to the year ended December 31, 2016 is due to higher profits in Brazil primarily due to income tax benefits.

Segment Results

We have three reportable segments: (i) Brazil, which distributes our offerings in Brazil under the SKY brand; (ii) South Region, which distributes our offerings in Argentina, Chile, Peru and Uruguay under the DIRECTV brand; and (iii) North Region, which distributes our offerings in Barbados, Colombia, Curaçao, Ecuador, Trinidad and Tobago and Venezuela also under the DIRECTV brand. Our segments are strategic business units that offer digital entertainment services in different geographies in the Region using satellite technology, as well as fixed wireless broadband service in certain countries in the Region, and are managed accordingly. Our customer base primarily consists of residential customers.

Our segment results presented below and in Note 2 of the Notes to the Combined Financial Statements follow the structure used for internal management reporting, and we evaluate the performance of our segments based upon EBITDA. Each segment’s percentage calculation of total segment revenue and operating income (loss) is derived from our segment results table in Note 2 of the Notes to the Combined Financial Statements, and may total more than 100% due to losses in one or more segments. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of internal management reporting and planning processes and is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. We also believe EBITDA margin is a useful performance measure of our business segments.

 

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Year Ended December 31, 2017 Compared with the Year Ended December 31, 2016

Brazil

The following table provides operating results and a summary of key subscriber data for the Brazil segment.

 

     Successor     % Change     Constant
Currency
% Change
 
     Year Ended
December 31,
2017