EchoStar Corporation (SATS) Q4 2005 Earnings Report, Transcript and Summary

I would like to welcome everyone to the EchoStar fourth quarter 2005 earnings conference call. (Operator instructions) I will now turn the call over to Mr. Jason Kiser, Treasurer of EchoStar Communications. Mr. Kiser, you may begin your conference.

Thanks, James. Thanks for joining us. My name is Jason Kiser and I'm the Treasurer here at EchoStar. I'm joined today by Charlie Ergen, our Chairman and CEO; Carl Vogel, our Vice Chairman; David Moskowitz, our Executive Vice President and General Counsel; and Dave Rayner, our CFO. Let me give you a quick recap of the financial performance for the quarter and the year, and then I'll turn it over to Charlie for his comments before we open it up for some Q&A at the end. Before we get started, as most of you know, we do need to do our Safe Harbor disclosure. So for that, I'll turn it over to David.

Good morning, everyone, and let me add my thanks for joining us. As you know, we do have media on the call in a listen-only mode. We do ask that the media not identify participants and their firms in your reports. We do not allow audio taping of the conference call, and we ask that you please respect that. As you know, all statements we make during the call that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from historical results, or from any future results expressed or implied by the forward-looking statements. Now, I'm not going to go through a list of all the factors that could cause our actual results to differ from historical results or forward-looking statements, but I would ask you to take a look at the front of our 10-K for a list of these factors. In addition, we can face other risks described from time to time in other reports we file with the SEC. All cautionary statements we make during the call should be understood as being applicable to any forward-looking statements we make, wherever they appear. You should carefully consider the risks described in our reports and should not place undue reliance on any forward-looking statements that we make. We assume no responsibility for updating any forward-looking statements that we make as well. Please also note that during the call we will refer to certain non-GAAP measures, which are reconciled in our 10-K or on our investor relations website. With that out of the way, I'll turn it back over to Jason.

Thanks, David. Let's take a look at both the quarter and the full year, and we'll start with the total Company. Total revenue for the quarter was $2.2 billion, an increase of 2% over last quarter and 13% higher than the same period a year ago. For the year, revenue totaled $8.4 billion, an increase of 18% year over year. Continued subscriber growth and higher average revenue per subscriber were the primary drivers of the increase. From an EBITDA perspective, we generated $476 million during the quarter, a decrease of 6% from last quarter but 38% higher than the same period a year ago. EBITDA for the year was $2.1 billion, an increase of 79% over last year. Net income for the quarter came in at $133 million, a decrease of $76 million from the last quarter but $63 million higher than the same period a year ago. Net income for the year was $1.5 billion, compared with $215 million in 2004. We should point out that $727 million of the increase from the prior year resulted from the reversal of our recorded valuation allowance for deferred tax assets and from the gain on the EchoStar IV insurance settlement. Basic earnings per share for the quarter was $0.30 compared to $0.46 last quarter and $0.15 for the same period last year. Basic EPS for the year was $3.35, compared with $0.46 last year. During the quarter, free cash flow was negative $152 million. This represents a $342 million decline from last quarter and a $57 million decline from the same period a year ago. For the year, free cash flow was $268 million, which was $247 million more than 2004. The increase from the prior year resulted from the increase in net income, partially offset by an increase in CapEx. To take a look at the DISH Network specifically, despite what continues to be an increasingly competitive environment, we added 330,000 net new customers during the fourth quarter and 1,135,000, new subs for the year. This represents just over 62% of the incremental growth in the DBS industry for the quarter and approximately 49% for the year. We ended the year with 12,040,000 subscribers. We continue to believe that our Lowest All-Digital Price in America marketing message has highlighted our position as the low-cost provider, and we continue to see growth in areas where we offer local content, which is now up to 164 markets. Churn for the quarter was 1.6% compared to 1.86% in Q3 and 1.51% for the same period a year ago. Churn for the year was 1.65% compared to 1.62% last year. We continue to refine our customer segmentation to focus on finding the right balance between churn reduction and responsible and economic spending on retention. During the quarter, our average revenue per subscriber was $57.96, an increase of $0.18 per sub over the third quarter and an increase of $2.17 for the same period a year ago. ARPU for the year was 57.81 compared to 54.87 last year. The year-over-year increase in ARPU of $2.94 was driven by several items. We had price increases in February of 2005 on some of our most popular packages. We had higher equipment rental fees resulting from increased penetration of our lease program. We have increased the availability of local channels and now serve 164 markets. Lastly, we had higher digital video recorder fees resulting from an increasing number of subscribers with DVRs. Subscriber-related margins for the quarter were 49% compared to 51% in Q3 and 46% for the same period a year ago. Price increases accounted for the majority of the gains from Q4 of last year. Sub-related margins for the year were 49% compared to 47% in 2004. The year-over-year increase in sub-related margin was driven by several factors: the increase in sub-related revenue; a one-time $35 million vendor credit during Q3; improved efficiencies associated with our installation and in-home service operations, and an increase in the number of subs participating in our lease program. Since certain costs associated with this program are capitalized rather than expensed, our subscriber-related expenses decreased and our capital expenditures increased. During the fourth quarter, subscriber acquisition costs plus the capitalized portion and amounts recovered under the lease program increased 5% or $36 per add from Q3. For the quarter, we averaged approximately $706 per gross addition. All-in SAC for the year was $668 compared to $593 last year. The year-over-year increase in SAC was primarily the result of several factors: a greater number of DISH Network subscribers activating higher-priced advanced products like receivers with multiple tuners; DVRs; HD receivers and super dishes. The portion of SAC related to installation increased on a per-add basis, as a result of more time-consuming and technically complex installs resulting from activation of these more advanced products. Finally, higher costs for acquisition advertising and promotional incentives paid to our independent dealer network. Let's take a quick look at the balance sheet. At year end, we had approximately $5.9 billion of debt. We also ended the year with cash and marketable securities of $1.18 billion, which excludes $67 million of restricted cash. During the year, we repurchased approximately 13.2 million shares of our Class A common stock for roughly $363 million under our current stock repurchase program. On a total debt per subscriber basis, we ended the year at $493 a subscriber. On a net debt basis, that drops to $395 per sub. Capital expenditures in the quarter were $554 million, with about $275 million of that amount going for capitalized lease equipment and the remaining $279 million for satellites and general corporate CapEx, which included $200 million for the purchase of the Rainbow 1 satellite that closed during the quarter. Capital expenditures for the full year were $1.5 billion, with about $983 million of that going to capitalized lease equipment and the remaining $523 million for satellite and general corporate CapEx. That's everything on the numbers. With that, I'll turn it over to Charlie for some comments.

Thanks, Jason. I don't have a lot of comments, other than it was a pretty solid quarter and a pretty solid year for us. I don't think there's anything that really steps out to comment on this quarter, other than to take your questions. So with that, we'll take questions.

(Operator Instructions) Your first question is from the line of Tuna Amobi, Standard & Poor's. Tuna Amobi - Standard & Poor's: Thank you very much. Good morning. Charlie, I was just trying to get a sense of how sustainable you think this share gain is that you had in Q4? Obviously, 62% was much higher than most people thought. I think that probably had to do with DirecTV's unusually high churn. But as you look out to '06 and beyond, how do you see that trending forward? Secondly, I think most people were kind of caught by surprise on Michael Neuman's departure. If you could comment on perhaps if you plan to fill that President role and any thoughts on why he left so soon, that would be helpful.

As far as market share, 60%, I think you can get into trouble if you go quarter by quarter, in terms of market share, and put a lot of emphasis on it. Because what happens is a lot of times, your market share gain for example, I think DirecTV has alluded to the fact that they have tightened credit requirements. We tightened that back a couple years ago. So some of the gain in market share they might have had previously to last quarter might have been from a little bit too lax a credit, maybe part of it. That comes home to roost in churn later on. So I think that they are in that 15 million sub, we are in that 12 million sub range. I think that gives you a pretty good feel for kind of where the market shares are. There becomes an economic point where trying to gain more market share is not economic for you, and we probably are mature enough as an industry that you kind of know where you stand there. Obviously, they have a higher base. They have a higher base, 3 million, a higher base where their churn comes off of, so they have to increase in the gross numbers to have the same amount of net numbers. So that's probably a little bit misleading, from a market share perspective for one quarter. As far as Michael Neuman as President, that was a situation where it wasn't the right fit for Mr. Neuman or for EchoStar. I think the great thing about management here at EchoStar is that we can make decisions pretty quickly, and I think Michael can make decisions pretty quickly. When things are not a good fit, then it's better to move on, and that's exactly what he did. As far as the Company is concerned we still have probably the strongest management team we've ever had. We reassigned some of those roles. I've picked up a little bit, Carl Vogel's picked up a little, Michael Dugan has picked up a little bit. We feel like we are all a pretty good fit with each other, so I don't anticipate that's going to have an impact. Tuna Amobi - Standard & Poor's: Just a quick follow-up. How big were the international programming on the quarter?

You asked how big the international -- Tuna Amobi - Standard & Poor's: How big was that a factor in your gross adds for Q4?

I don't think we disclose that detail of information. In a general basis, international continues to be a material part of our business, but it's certainly not the biggest part of our business. Our biggest part of our business still continues to be the basic video subscribers that the cable industry is trying to go after, and now the phone industry is going after it. Yes, we are uniquely positioned in the international arena. I think we have about 38 different languages that we have been doing for 10 years. Tuna Amobi - Standard & Poor's: Thanks a lot, and well done.

Our next question comes from Aryeh Bourkoff, UBS.

Thank you, good afternoon. The first question I have is related to the AT&T marketing deal that you have. Obviously now, with AT&T getting bigger, are you going to go after that larger partnership to try to roll into the BellSouth portion of that deal? And then, second, if you could talk about their Homezone product, if you think you are going to see any progress on the sort of AT&T/DISH collaboration with respect to home sales?

Well, obviously, its AT&T's decision on how they want to -- they first have to get their acquisition done. I don't think you'll see any change in either our business or BellSouth's business or AT&T's business until they are actually approved for the acquisition. Then it will be up to AT&T to make the decision, the management of that new company to make their decisions on how they want to pursue the video business. We are not the insiders here to know how they might attack that. As far as the relationship, the relationship remains strong. We still work together well at the highest levels between our companies, and where the relationship wasn't as productive as both of us would have liked, we have made changes to that. So we did see some pickup in the fourth quarter in terms of their subscribers, and hopefully we can continue some momentum there. As far as the Homezone product, we think that that product has a lot of potential. Our engineering staff is working with AT&T and third parties to try to improve that product, the biggest challenge there being that MPEG-4 is kind of the new technology and the new standard, and make sure that we take the Homezone product that was originally targeted for MPEG-2 and upgrade that to MPEG-4. And that's not such an easy task. For example, we're really the only company that has an MPEG-4 digital video recorder out, HD, today. And that's not an easy product to do, and we have had that out for almost two months now. So we will continue to work with them. I think we all have high expectations for that product.

The other question is on the uses of cash. Obviously, you were active in the bond market post the quarter, raising additional liquidity, and also bought back a lot of stock in the fourth quarter. But it looks like it tailed off in terms of the buyback in the first quarter so far. Any comment on the use of cash as we go into the first quarter? It seems like you've curtailed the buyback a little bit.

I will Carl Vogel probably talk about it. He is the guy that looks at our cash every day and figures out what we might do with it. Carl Vogel: Well, right now we're investing it in short-term instruments. But we obviously, as we said when we went to the bond market, that we wanted to have some excess capacity to be opportunistic as we saw business opportunities present themselves over the course of the year. We haven't earmarked anything specifically, but as we've said on prior calls, we continue to look at numerous initiatives where we can leverage the operating infrastructure that we have and find businesses that are complementary to the customer base that we enjoy. So I can't get into any real specifics, other than to say that we will continue to work on growing our subscriber base. We will continue to work for putting advanced products into our customers' hands. We will continue to look at satellite opportunities, and we will continue to be active in looking at things that may make strategic sense. That's the principal order of our use of cash. If we are successful in doing that, we will talk about it a lot more. If we don't find those opportunities, we will certainly look at whether or not we want to continue to buy stock back.

Thank you.

Our next question comes from Jeffrey Wlodarczak, Wachovia.

Two questions. Are you expecting gross addition SAC and churn for 2006 to be higher than 2005? Charlie, your share price is at the same level it was four years ago. Do you have any issues with employee morale as a result?

We didn't disclose trends in SAC, or did we?

No, we don't.

So we haven't really disclosed any trends there. I can give you general comments about it, just to give you a feel for it. We have certain things that work against us to raise SAC in terms of competitive pressures, MPEG-4, higher-end boxes. We have things that work in our favor in the sense that as we get more efficient we have Echo X, which we successfully launched last month, which will allow us to eliminate, for the most part, SuperDISH, which allows us to put in an additional 1,000, which is a lower-cost installation and service and more efficient use of resources we have. Because we have been leasing equipment for three or four years now, we have reclaimed set-top boxes that have become an ever-increasing part of SAC reduction, to the extent that we can efficiently redeploy those boxes. So we've got some things that work against us. We have got some things that work for us, in terms of SAC. Obviously, if you look at the economics of SAC in terms of your ARPU, your churn, how much you are willing to spend -- we're comfortable where those economics are today, approximately -- whatever it is, $700 or so that we've spent to acquire a customer that averages almost $60 ARPU -- with the churn levels that we have, we're comfortable with those economics. We think we are still well, well on the plus side there. In terms of stock, you are right; I don't think the stock's moved in about five years. That's not the way I look at it. from a -- I look at it that we build value every day, and we have built a lot of value in our Company in the last five years. And it's one of two things: the market maybe overvalued us five years ago, or maybe they haven't recognized the value that we've built over the last five years, or maybe some combination of that. As far as employee morale, I think managing success is difficult. I think that you probably have some people who expected the stock to go up every day and split twice a year and have that kind of mentality, and I think that the people that are susceptible to that kind of mentality probably leave our Company over time. We have to have more disciplined people who see the value, longer-term strategic thinkers. Most of our top 200 employees are all fairly big stockholders in the Company, so they have to act like a shareholder and look at building long-term value. I don't think there's a particular problem with their morale in that regard, because they know that good things happen when you build value. That's what we try to do every day.

Thanks.

Our next question comes from Doug Mitchelson, Deutsche Bank.

I had two questions. First, in your 10-K, there continues to be unsatisfied demand for high-quality, reasonably priced television programming services. So you've been around 10 years now. So why is there still unsatisfied demand? Why haven't you gone out there and filled all the demand yet? And how much unsatisfied demand do you believe is still out there?

Well, we're not that good. We are not as good as we should be, and we can always get better. I think that we have a lot room for improvement in our marketing message, to make sure people understand about the value that we have vis-à-vis our competitors. Sometimes we've let people get the upper hand in that message. We've probably haven't done as good a job about the different choices. We've spent a lot more emphasis on giving customers a lot of choice. Family Pak is a good example, where we actually have a Family Pak packaged out in the marketplace for less than $20 that actually has some really good channels in it, like news channels, sports channels, movie channels in it. So it's not an attempt not to sell it; it's an attempt to sell it. So I think we have a lot of room for improvement there. On the other hand, we've done some innovative things like on the international side and particularly in rural America, we have done some pretty good, innovative things and got a real solid base of customers that we know is going to stick with us, even as competitive pressures come in from phone companies and bundling cable opportunities and so forth. You can only grow so fast, too. I think one of the things, when you are managing, and you have over 3 million gross additions, and you've got to have systems in place and you've got to be able to answer the calls, you've got to be able to bill the customers, you've got to be able to repair the equipment. We probably built a bit more complicated infrastructure than we needed to, and it takes a little bit more effort to manage that complicated infrastructure. So I think, for us to kind of continue on, we have a couple things. One, our message has to be a little better; we have to get a little simpler, in terms of how we have our infrastructure. We still see good demand. I think a lot depends on how some of these more exotic technologies either take off or maybe don't take off. We have to be prepared for either scenario. We have a pretty good track record of being able to do that. But we also have to be disciplined in the sense that we don't go for the flavor of the month and switch back and forth, back and forth, and make sure we understand what is going on out there with our customers and what the opportunities are, and make sure that we strategically focus on where we think the greatest risk/return is. One of the things I learned playing poker is I might start playing poker at 8:00 at night and I might fold every hand; I might fold the first 200 hands. So at 5:00 in the morning, when I get a good hand, I'll bet the pot. That is a discipline that most people don't have when they play poker. Most people want to play every hand. I like to bet a few hands and bet them big. We are patient. Carl Vogel: I think the other thing is demand has changed over the last 10 years. When we started, it was low-cost product in a digital format. We had that before anybody else. I think EchoStar has evolved to not only having programming packages that meet demand, but hardware products that meet the demand. So we see that landscape changing, and therefore we're trying to be ahead of the curve on DVR capacity, interactive capacity, portable capacity. As those demand sets evolve, I think we're well-positioned to participate on both a hardware and software basis. And as Charlie alluded to, I think we have been a bit more creative in terms of our programming packages. We continue to advocate that to the FCC and others, and we complement that with hardware products that meet the demand and how the people use the software products. So I think the demand set has continued to change over 10 years. We have stayed pretty consistent with the original message, and that's the Lowest All-Digital Price in America But we have enhanced it with, as I think, various hardware feature sets that address the different element of demand in the market and we continue to look at other things in portability and mobility as well.

That's helpful. Charlie, your poker analogy kind of leads into my next question, which is, it seems like you went all in on a hand. And that's in your 10-K; you noted a dramatically higher commitment for satellites than you had in your last 10-K. You're now about $1.6 billion of spending on satellites, I think, the rest of this decade. So the question is, how confident are you that you can earn a healthy return on this pretty large investment in capacity?

Well, I wouldn't say we are all in, but we have made an investment there, and we are pretty confident we can earn the return there. There's actually two pieces to that. One is, we have to protect our customer base. So part of that investment is, I guess the word is defensive. Part of that is to make sure we have in-orbit backup, because that could be a significant loss to our customers. So a fair portion of that is in-orbit backup. And some of that is making sure we have capacity in orbit or under construction to take advantage of some of the things we think may happen. We think that nobody approaches satellite from a broadcast, and nobody approaches, really, our company from an economic value in terms of broadcast technology. We don't think that's going away. We think there's going to be a lot of things that add to it, whether it be broadband or other forms of video IP, but the broadcast side of it is going to be there for long, long time. And we've done a couple of things. One, we have secured assets in outer space, in terms of real estate in outer space. Second, we have made the investment to put the satellite in that real estate. We haven't totally monetized all that, so we have some upside. It's interesting to us, and Carl maybe can speak to this a bit more than I can, but some of the multiples of fixed satellite service satellite providers are actually higher than our multiples. They are probably going to grow at 4% a year or something, fairly high to leverage. We think we're building a heck of different value there. Carl Vogel: Charlie points out what is going on in the FSS business. I think we have 14 satellites in the air, and that's a pretty significant --

Over the United States. Carl Vogel: Yes, over the United States. That's a pretty significant footprint, and we own that infrastructure plus the consumer business, yet our multiple is considerably less. So I think that we've got some interesting optionality there, and we think we also have opportunities to gain incremental revenues off some of the satellites that we haven't quite shown a return on to date. So we think there's some good opportunities there going forward.

You probably will see that in 2006 showing up, mostly high-definition television, where both us and DirecTV have put a fairly big investment in high-definition television to do quite a few more national channels than the cable industry can do with their analog plan; but in addition to going to the top local markets to be able to do local HD as well, which, of course, before this year was an advantage that cable had, which has now gone away. So, to the extent that HD does well in the marketplace, I think satellite is well-positioned to take advantage of it. If it doesn't do anything, we probably wasted some investment. So that is a bet we're making; we are making a bet that HD is going to have positive momentum.

The last question, a little bit more narrow. Your pre-marketing cash flow margin expansion in the quarter was pretty terrific. How much of that was due to the change in the relationship with SBC? And would you expect continued margin expansion in 2006?

Dave, do you want to --?

Yes. I'm not going to comment on what we expect in 2006. But in the fourth quarter, the pre-marketing cash flow really would not have been a big impact out of SBC. We'll see that over a longer timeframe, what the impacts will be there. Really, the increase in pre-marketing cash flow, just a focus on continued efficiencies, making sure that we are doing everything that we can do to the best of our ability, and that for every dollar that we bring in from a customer that we are keeping as much of it as we can.

40% is a pretty good metric, and 42% is very solid.

Thank you.

Our next question comes from Douglas Shapiro, Banc of America Securities.

Thank you. I had two things. One is, I guess, just as a follow-up to Doug's question. Could you just remind us of what your HD strategy is in terms of markets and timing? I think you recently made an announcement about that. As part of that also, how many of those markets you think or you intend to serve from 110 and 119? And the second question is, there's obviously been a lot of speculation in the market about you and DirecTV entering some kind of terrestrial program, wireless joint venture. If you were to pursue that kind of thing, does that mean you wouldn't need all the satellite capacity that you have under contract? And if so, are some of those contracts cancelable?

The HD strategy really is to do more national channels than anybody else. I believe we have 23 national channels up today, and that number will increase to perhaps as many as 30 over the next year -- maybe a little less, maybe a little more. I think we're in 12 cities with the big four networks in HD. I think the strategy is to go to about 25 cities this year, which, I guess, is about I think over half the population, from a satellite perspective. We also believe that there's a growing trend towards terrestrial antenna. As broadcasters convert their analog spectrum to digital, they are starting to put more high-power in it. The signal terrestrially is either on or off, so it's a much different dynamic than the old analog days. So we think we have strategies that -- because HD is very expensive. So there's lots of debate internally as to how many cities we would do HD from a satellite because of cost, and where you cross that number. We look at it from an economic point of view. So we think that for over half the customers today, or this year in the United States, you're going to be able to get your local HD from DISH Network and you'll get more national HD channels from us, and you'll get a DVR, if you want that, to record the channels. And you'll be able to go watch and record, and you can go to two rooms off of one box. We think that's pretty unparalleled technology, in terms of going forward. If you take a product like with our partner AT&T in Homezone, you will be able to do exactly the same thing from AT&T, and hook up your DSL connection and get a lot of different broadband features and interactivity and return path and download into movies and things like that to their product. So we think we've got a very compelling product in the HD realm. We think it's very difficult for cable to really attack -- cable is going to have to -- to put up 30 HD channels of cable means they have got to reclaim some of their analog spectrum. To reclaim some of their analog spectrum, they have got to continue to put set-top boxes in TV sets that are now getting analog and they've got to upgrade people to digital, which is typically about $10 to $15 or $20 more. So it's a nice position for us to be in, as long as we can execute on it strategically, and as long as HD becomes compelling for consumers. So we have to have TV sets get less expensive, we have to have more programming up there. That's something we don't totally control, in terms of how that demand curve goes. HD is off to a little bit slower start than I think we all expected. But we also know that, once it reaches that hockey stick kind of upgrade, it will go really quick and we are prepared for it. As far as the terrestrial stuff, looking at the rumors and speculation about us being involved in any kind of terrestrial spectrum, we continue to look at that. We certainly believe that you can make a compelling case that the satellite industry is probably better served to look at those advances in terrestrial wireless or those kinds of technologies that may give us a broadband solution, that that might be good to do as an industry and do it in a standardized way, because the build out costs would be excessive. That would make more sense to do that for 30 million subscribers rather than for 12 or 15 million subscribers. So we think that that makes some sense strategically. We don't have a timeframe for that, and we do not necessarily see a compelling system within terrestrial broadband today that makes sense for us. That doesn't mean that smart people can't piece something together. If something came together, we would certainly take a look at it. If something developed where we could do something with DirecTV, we certainly are keen on that idea if it makes sense. On the other hand, back to poker, we are not going to try to draw an inside straight. We are not going to place a big bet -- it doesn't make sense to do that, just to satisfy somebody on Wall Street or something like that. So we have a lot of confidence in our ability to make good decisions.

If I could just follow up on both, though, on the HD question, are you saying that you don't currently have any plans to go beyond the 25 markets? Are those all going to be served off of 110 and 119? On the latter, you haven't identified what all those -- I guess it's nine additional satellites under contract -- are going to be used for. But could you cancel some of those contracts if you ended up, for instance, entering into some kind of terrestrial agreement?

These cities are coming primarily off of -- I'll say it this way. Most of our analog signals come off of 110 and 119. Most of our HD local cities comes off of 129-degree satellite, which is the new high-powered location. We have EchoStar V there, and have been broadcasting to from four or five months now. Some of our HD cities, I think a half a dozen of them, come off of our 61.5 degree location for the East Coast. So that requires somebody to have a two-dish solution if they want HD in New York or Washington or Philadelphia or Boston, for example, which we think is a better way to do it than a much larger dish like SuperDISH, where we have had a lot of installation and service problems in the past. So we're pretty excited about that we've got this down to the sweet spot of where we need to be there now. We will take a look and see how the market has developed in those 25 markets and how HD develops, and decide whether it makes sense to go beyond those cities for HD local to local. We have ability to do that, long-term, and we have to decide whether that investment makes sense to do. In terms of -- David, you might speak to this. But we disclose, I guess, what our commitments are, right?

Yes, we've got the commitments on the satellite. Certainly, we have outs on some of those at certain points in time. And there is no --

Well, let me put it this way. We wouldn't have entered into those agreements if we didn't think we had a way to make a return there. We have to execute, and there's -- I'm sure most companies do it this way, I think. But we kind of try to learn as an industry. We make a bet on what we think is going to happen, and then we have a theory. We continue to analyze that theory, and if something changes, then we run for the exits and adjust or whatever. If it happens the way we think it's going to happen, then we typically have got ourselves in position to take advantage of what we think is going to happen. So there's been times, for example, in satellite broadband where we thought satellite broadband was going to being a lot more efficient alternative then it turned out to be. We made a bet, and when it didn't turn out the way we thought it was going to work out, we wrote it off and life moved on. But I think that you should see as a relative sign of confidence that we're willing to make those kind of commitments for CapEx for future generations that we can have a business plan that makes sense. Part of it, as you know, as I said, is to make sure that we have adequate backup for our customers today, realizing we have slots at 148, 129, 119, 110, 61.5., and also the use of a 77-degree slot now over Mexico. So we have a fair amount of -- and then we have the 121-degree FSS slot, 85-degree slot. So we have a lot of capacity in outer space and a lot of slots. That takes a lot of hardware up there to utilize that. It gives us room for capacity utilization to monetize some of those assets in a way we haven't yet.

Our next question comes from Vijay Jayant, Lehman Brothers.

Thank you. Charlie, in this quarter, was there any benefit from reversals of some of your hurricane-related charges in the third quarter? Following on that, a more philosophical question -- given what is sort of happening in the competitive landscape, RBOC mergers, maybe more cable mergers happening and different players that are all sort of chasing the same services into the house, and thoughts on a prospect of DirecTV/DISH coming back? It was not allowed the last go around. Any thoughts on that?

For the first part of the question, the hurricane stuff, I think that we were probably unique in that we took our hurricane-related losses in the third quarter and I think we knew what they were, so we went ahead and booked them. We worked really hard, and we probably gained some customers in the fourth quarter from other people's problems, where we had more aggressive ground and got our service up a little quicker. So it probably was a slight benefit in the fourth quarter, while it was obviously a negative in the third quarter. But that was really getting somebody else's customers. It probably wasn't any kind of material reversals; let's put it that way. We did have ongoing expenses in the fourth quarter from the hurricanes, but in general, I would say that the hurricane was not a material event in the fourth quarter, and it did have some slight negative impact in churn in the third quarter. As far as regulatory, I think we're the only telecommunication merger that has gotten turned down in the last 10 years. So I'm not the guy to ask about those kind of things; I'm like 0 for 100 in Washington, so I don't even know why anybody even asks me anymore. I'm surprised they actually asked me to testify or anything. Completely a non-factor.

Our next question comes from Lee Cooperman, Omega Advisors.

Thank you, a few questions. There's a lot of moving parts, but how would you characterize your view as to the change in the expected economics of the subscriber? Is it, on balance, favorable or unfavorable? Second, in '05, $0.20 of every new dollar of revenues was converted to free cash flow. What free cash flow margin do you expect to achieve in a normalized environment? And alternatively, the 10-K states that you expect CapEx to be higher in '06 than '05. Would you expect free cash flow to grow in '06 versus '05? I think you talked about it, but maybe I can focus a bit more. On balance, what does AT&T/BellSouth mean for us? Fourth, I know you are not going to answer this one, but it's got to show you I have a sense of humor, Charlie. To use your analogy, what level of stock price would you bet the pot? As I kind of reflect back, I think your original foray into stock repurchase was around October of 2003, your stock was around $34. You bought back $1 billion in a hurry and you authorized another $1 billion. The only thing, I think, that has changed is we have gone up from maybe 11 million subs to 12 million subs; your stock price has gone from $34 to $29. So I know you are not going to answer it. But I got to show you, like I said, I have a sense of humor. When do you want to bet the pot, what level?

I might add I think we bought back -- how much from Vivendi did we buy back? I can't remember. It was like $1 billion -- no, $600 million -- what was it, $1 billion? And that was a -- was that at $20 or something? I don't know. We always look at that, as Carl said earlier, it's just one of the investment decisions you make. We have a lot of potential uses for our capital. So I think we're opportunistic and --

I was only teasing. Let's get to the first few questions.

As far as the AT&T/BellSouth relationship, that remains unclear as to whether that's a positive or a negative or a neutral development for us because we haven't had a relationship with BellSouth, There is some potential -- obviously, positive situation there. The fact that they are going to get that much bigger and be that much more competitive in the video field could be a negative. It could be a positive because I think, with an AT&T brand name, they have got to be thinking -- this is me talking; I don't have any inside information here. I think they have got to look at the potential to go nationwide. There's not a lot of ways to do nationwide video except from satellite. So it remains to be seen how that is, but we entered into the relationship with AT&T because we felt that there were potential greater positives than the negatives. We have worked very hard as a Company to make that a beneficial relationship for both companies, and we're going to continue to do that side on our part, on our side, and make sure that we're responsive to them as a partner and a vendor, and also as somebody who is bringing us customers. So that part of it -- There's a bunch of other questions you asked, Lee. I don't remember; you'll have to remind me.

On balance, with all the moving parts, how would you characterize the economics of the subscriber? And then, the other question was the free cash flow in '06. You had mentioned in the 10-K about higher CapEx, but would you expect free cash flow to improve in '06 versus '05?

I don't think we comment. I like free cash flow. So I guess I would put it this way, Lee, that we would -- where we see opportunity to make free cash flow long-term, we will continue to do that. And that could be a CapEx expense, where your cash flow would go down. For example, we bought the 61.5 degree Rainbow satellite for $200 million in the fourth quarter, so cash flow went down. Having said that, we think that for the next 15 years, we're going to more than make up that $200 million in cash flow utilizing that asset. We also believe that, we would hope that we would manage our business to free cash flow. And we think, to have value as a company, we have to have more positive cash flow than negative cash flow, obviously, in the future. We are unique -- the cable guys haven't done a very good job with that, and I think we focus on that a little bit more. We don't focus on EBITDA as much, as an example. And we don't call EBITDA free cash flow, so we are not trying to be funny about it. We can't cash flow the same way you would in your checkbook at home -- how much money did you start with and how much money did you end with? We know we have got to end with more money to have value as a Company. As far as economics of a customer, in general, the economics of a customer -- we think that there's upside. There hasn't been a lot of change probably in the last couple of years, but we think there's some upside. We think HDTV, we think some other services, we think the new portability things with PocketDISH -- depending on how we secure the signal and depending on how programmers that we work with try to monetize that, we think there's some opportunity there. We think that on the international side, we continue to have opportunity. We think that there's other services we could sell. We have a relationship with the customer, so the fact that the customer knows us, if we can find other ways to -- and they trust us, how could we grow that relationship? So there's upside there. There's some negative trends. I think the bundle that the cable and phone companies have is a factor in stealing good customers away from us, where the customer love DISH Network but they want a broadband, phone, all on one bill for $99. They do steal some good customers from us from time to time. So there's some negatives to the economic of subscribers, as well. And it's our job, and it depends on how we execute and it depends on how other people execute. It's our job on balance to make sure we continue to grow those accounts. And we think there's some positive ways to do that. Carl Vogel: I think there's more opportunities to increase our revenues than there has been in the past, both in the HD interactivity and some VOD applications. But, as we discussed on this call, the investment in MPEG-4 and DVR and HD costs a little bit more money, but we think that the customer will likely stay with us for a longer period of time, as long as we have the complement of content that Charlie talked about in HD. I think the other thing that we need to continue to do and that we're very focused on, and that's leveraging the operating infrastructure. So, to the extent that we can increase the revenues of the added-value services, retain the customer longer with the enhanced features of the set-top box, leverage our operating infrastructure and lower our variable costs, I think the economics of the subs are pretty good, even though you might have a slightly higher investment over time. So, as I look at it, I think we have a lot of bullets in our gun on the revenue side. We have some opportunities to leverage the operating infrastructure and we still have a product that 330,000 net subscribers decided they wanted to be a DISH customer in the fourth quarter. So I think it's reasonably good at this point.

Thanks for taking the questions, and all the best. You guys are doing a very good job for the shareholders. I appreciate that.

Our next question comes from Tom Eagan, Oppenheimer & Co. Tom Eagan - Oppenheimer & Co.: Thank you. With 2006 CapEx expected to be above 2005, could you give us a sense directionally about 2007 CapEx? May that be above 2006? Regarding Adelphia, we expect that to be sold to Time Warner/Comcast over the next couple of months. I wonder if you could talk about whether that is a positive or negative for EchoStar sub growth in the near and then long term?

I don't think we are commenting on 2007 CapEx. I don't think we're commenting on that, other than we're going to manage this company efficiently and we're only going to spend money where we think we can get a return. Adelphia, obviously, the Adelphia transaction creates some potential negatives for us, in terms of much bigger cable companies, Time Warner and Comcast, particularly as they leverage their programming assets, if they are allowed to do so. And so I think we've got to take a look at how the FCC and Justice Department look at that and whether they allow it, first of all, and if they do, what kind of restrictions they might put on there. Adelphia financially was weaker, so the upgrades haven't happened as fast in their markets and some of those things. So that would make it probably a more challenging competitive environment for us. Also there's integration, you have interesting things going on. You have big integration in the telco companies. You have integrations in cable. Those are times when it's very difficult for management to continue your operations on a real solid footing, because you've got so many integration issues and you've got so many regulatory issues and you spend so much time -- I know it was difficult for us to run our business efficiently when were trying to acquire DirecTV. So we never even got to the integration part. So there's opportunities for us to take advantage of the marketplace during uncertain times for all those guys. But how it turns out? I would say, in general, the marketplace is more competitive. Tom Eagan - Oppenheimer & Co.: Right. So it could be that in the near term, there could be upside with the break in momentum for, say, an Adelphia subscriber; but longer-term it could be more competitive?

I'm not really speaking specifically of the Adelphia transaction. I just think, in general -- in general -- the marketplace was more competitive in 2005 than it was in 2004. We expect that it will continue to get more competitive in 2006, 2007, 2008. Having said that, we are getting better, too. And with Echo X up and HD and DVRs and the kind of things we have going on, we hope we're up to the challenge. Size is pretty easy to compete against. I'd much rather compete against a really large company than somebody like EchoStar. I wouldn't want to go out and try to compete against five EchoStars, if I could help it. Tom Eagan - Oppenheimer & Co.: Over at DirecTV, they had mentioned that 5 million of their 15 million subscribers have a broadband service somehow, whether through cable or DSL. How many of your subscribers already have a broadband data service?

I don't think we know exactly, but I don't think we would be too far off of -- I think we skew pretty much the way of the average. I think what a lot of people -- if you want the best video, you're going to get it from satellite. If you want the best broadband connection, you're going to pick between, probably, a phone company or a cable company. And there are people who pick video from satellite and pick broadband from somewhere else. The problem you have is when somebody does video and broadband, they can continue to try to get both -- once they've got one service in your house, they can continue to try to get more. So we have to be really, really good not to lose those customers. Tom Eagan - Oppenheimer & Co.: Thank you.

Our next question comes from Craig Moffett, Sanford Bernstein.

Thank you. Charlie, there was some talk around the time that you were doing your lifetime renegotiation that you struck a deal with Hearst-Argyle that resulted in substantially higher local retrans costs in those markets. How does retrans color your expectations regarding programming costs going forward for the next year or so?

Well, I don't know that there's a Hearst -- wasn't there an 8-K or something that we pay Hearst? Or not?

We have never put anything out about our costs that we pay to Hearst. And you'd really have to talk to Hearst about the prices that -- if they think they can disclose the prices they get from us. I think, if you look at their public filings, you might find that they are a little bit confusing and they may not actually lead to the conclusions that we pay a significant amount to them for retrans.

If at all.

If at all.

Okay. I think that retrans in general is a positive for the satellite industry. We have always. The way retrans has worked -- first of all, I hope Congress will step in and take away some of the abuses of retrans. We have fought against some of those abuses for a long, long time. But, having said that, we are also the Company that has been willing to pay retrans fees to all the independent broadcasters out there. In fact, it's no secret that we pay, in general, fees for retrans. And then, for the big conglomerates, typically what happens in the past -- this is all public information -- they typically would try to get people to carry another maybe not-so-great channel, in lieu of paying retrans, right? So there's other carriage obligations instead of retrans. We have negotiated any number of deals that have some variances to that. Cable, on the other hand, historically has not paid for retrans to the independent broadcasters. So it would be my expectation that, as the broadcasters get more secure in their own product, that they will not allow cable companies to continue to get their signal for free. So you'll see their price go up from zero to actually paying for retrans, so that raises their costs, and it gets closer to what our costs for local to local are. So I think that retrans is probably a slight positive for us, because we are already paying; it's already baked into our economics, and cable doesn't have it baked -- cable is not telling you they are going to pay for retrans. People like Nextar, I think, have indicated tens of millions of dollars that they are getting from retrans and broadcasters now. They fought a very difficult fight with some of the cable guys to ultimately get some retrans fees. Viacom has said, as a split-off entity, that no longer they are going to give away free retrans, and Viacom is going to charge for CBS. So that's going to be a fact of life. It's going to raise costs for local channels. It's going to make outdoor antennas, where you can get local channels for free, more important, and which we think we are well-positioned for. It raises our competitors' costs. It probably doesn't raise our costs, given that we already normally pay. We're basically the only company that offers local as an option to our customers. You don't have to pay us for local. If you have an outdoor antenna, and some of our customers do, then you get locals for free. And then, there's no retrans fee in that case. We don't get the revenue from it, so -- and I think Congress has to look and the FCC has to look at where broadcasters might abuse that privilege. But the downside there is for cable, not satellite.

Thanks, Charlie. A second question, can you talk about what it costs to upgrade a subscriber to HDTV today, in terms of the rooftop dish and the set-top boxes, and how many subscribers you're expecting to upgrade over each of the next couple of years?

Well, it varies by customers so you've got different situations. So it's relatively inexpensive. It's not materially more expensive for a new customer. So when a new customer starts with HD, it's not materially more expensive. And we think the MPEG-4 costs are higher today, but we think, over the next two years, they will come down and approach the same kind of MPEG-2 prices we have today. So there's a slight cost for new customers. For an existing customer who has our MPEG-2 HD, we've got to upgrade that customer. And there's a fair expense there, because we're not going to our current customers and make them pay a lot of money when they just bought an MPEG-2 box from us six months ago. So those customers, we have a higher cost. That's the highest cost we have. And then we have customers today who don't have HDTV today who want to upgrade. And those customers we expect to pay us something to get the privilege of getting new equipment in MPEG-4 format.

Does it include a new rooftop dish with a new LNB, in order to receive the signals from the additional orbitals, from the 129 or the 61.5 orbital?

For the most part, any customer who wants HD, whether it be a new customer or an existing customer, would have a set-top box cost and would have a new antenna, a DISH 1000, and one additional LNB and an insulation. So you've got several hundred dollars there, and then we typically -- today, we charge a customer for some of those services. And our basic HD package now is $20. So we would get $20 in ARPU from that customer. Or to the extent that he doesn't, then there's a $6 fee to the customer for access to HD if he doesn't subscribe to HD. So when you run all the numbers on that, what does that mean? That means that, in general, there could be a higher retention marketing for those customers but higher ARPU from those customers and probably less churn from those customers. It means new customers, there might be a little higher SAC to get the customer, but you have a higher ARPU from that customer and probably a little less churn from that customer. So we balance all those variables together and say, now we have an HD strategy of X, Y and Z. And you also have to balance the fact of what does it cost you to launch a satellite for HD? What does it cost you to bring your fiber back from the cities? Because it costs a lot more money to backhaul fiber. All those factor into beyond just your set-top box and your upgrade cost to a customer. Having said all that, we believe that HD can be a material positive for us, if the demand for HD increases like we think it's going to in the next four or five years.

Thanks, Charlie.

Tom Watts, Cowen & Co. Tom Watts - Cowen & Co.: Thanks. Charlie, can you just comment on credit quality of customers in credit screening? DirecTV has mentioned they tightened their screening during the quarter. What changes have you had over the last couple of quarters? Were there any changes in Q4?

We haven't had any material changes in credit screening for several years. If you went back to maybe some -- if you had to go back to maybe where some quarters we had some pretty significant numbers, and maybe significant market share in the market where we probably weren't as tight as we should have been, and that came back to haunt us six and nine months later when those people churned. So it's been at least two years, maybe three years, since we've had any material changes in credit scoring. Tom Watts - Cowen & Co.: Also, just on the income tax front, taxes were a little bit higher than we had expected. Can you just comment on that, and what we're likely to see going forward? In the past, you've said you might begin accruing for income taxes as well, even though you won't have any cash income taxes. Is that any closer?

Yes. Clearly, and I think we disclosed this in the K, that we expect our tax rate going forward to more approximate a statutory rate. And certainly, we will see tax provisions on the P&L going forward, as a result of the reversal of deferred tax allowance. But from a cash payment standpoint, cash tax payments are going to be relatively minimal until we burn through the NOLs. Tom Watts - Cowen & Co.: It didn't seem like we got to a full statutory rate this quarter. Is that something we could see in Q1?

Yes. Because of the accounting rules, you are still reversing some of the allowance for the provision for the quarter, so you are not going to see the full impact in the quarter. But we should start seeing in 2006 a more comparable statutory rate. Tom Watts - Cowen & Co.: So it may trend up throughout '06 from the current rate up to a 34% or something like that?

You should see something more approximate to the statutory rate in 2006. Tom Watts - Cowen & Co.: Thanks very much.

Thanks to everybody for joining us. I guess we will talk to you again in May. Is that fair? It's not that far away, for first quarter. And so we appreciate your time today.

This concludes today's EchoStar fourth quarter 2005 earnings conference call. You may now disconnect.