Salomon Smith Barney Analysis

Hughes Electronics Corp. [GMH] reported fourth quarter results last week that were devoid of big surprises. The company finished the year with some wind knocked out of sails of its satellite television unit, DirecTV, but managed to deliver on most of its financial targets and cut its overall cash needs.

DirecTV ended 2002 with only 975,000 net new subscribers, compared with 1.2 million in 2001 and its management’s forecast of 1 million to 1.2 million. That shortfall reflects the move by EchoStar Communications Corp.’s [DISH] DISH Network to break into DirecTV’s formerly exclusive distribution channels.

However, the general operating metrics for DirecTV’s business stabilized over the year and the company notched improved 2002 bottom-line results with DirecTV’s EBITDA (earnings before interest, taxes, depreciation and amortization) up nearly 250 percent versus 2001. The consolidated EBITDA for parent company Hughes rose more than 70 percent, despite a $111 million charge to close DirecTV Broadband, an ill-fated DSL venture.

Now that Hughes is free from its nearly one-year courtship with prospective merger partner EchoStar, Hughes management is addressing problems with the company’s non-core business and is aiming to cut its overall cash needs significantly in 2003. We think closing the DSL business was a good idea and hope the company can restructure struggling DirecTV Latin America.

Hughes management also indicated that it is attempting to resolve its litigation with the National Rural Telecommunications Cooperative. We believe settling this issue would improve Hughes’ financial outlook and make it a more attractive acquisition candidate. However, one-time charges are possible that are not in our estimates and could increase Hughes’ cash needs in 2003.

Armand Musey is a satellite communications analyst at Salomon Smith Barney (SSB). Part of the information provided herein includes excerpts, abstracts, and other summary material derived from research reports or notes published by Armand Musey as a member of the firm’s Global Equity Research Department. For a copy of the full research reports or notes or to view the research-report disclosure required by the NYSE and NASD rules relating to analyst independence and conflicts of interests, please visit http://www.ssbaccess.com or contact a SSB Financial Consultant. Valuation methodologies and associated risks pertaining to price targets, as well as other important disclosures, are contained in research reports and notes published on or after July 8,2002. Salomon Smith Barney or its affiliates beneficially owns 1% or more of any class of common equity of EchoStar Communications Corp.