DISH Network Corp (DISH) 2002 Q4 法說會逐字稿

Good afternoon, my name is Shawn and I will be your conference facilitator today. At this time, I would like to welcome everyone to the EchoStar Q4 2002 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and then the number one on your telephone keypad. If you want to withdraw your question, press the pound key.

Thank you, Mr. Kaiser, you may begin your conference.

Thank you, operator. Thanks for joining us. My name is Jason Kaiser, I'm the Treasurer here at EchoStar. I am joined today by Charlie Ergen, our Chairman and CEO, David Moskowitz, our Senior Vice President and General Counsel, and Mike McDonnell, our CFO.

I'll give you a quick recap of the financial performance for the quarter and the full year, talk a little bit about where we are at with guidance for 2003, and then turn it over to Charlie for his comments before we open it up for Q and A at the end.

But before we get started, as most of you know, we do need to do our Safe Harbor disclosure. For that I will turn it over to David.

Good morning, everyone, and thanks for joining us. As you know, we do invite media to participate in a listen-only mode on this call. We ask that media not identify participants and their firms in their reports. We also do not allow audio taping of the conference call. We ask that you respect that.

As you know, all statements that we make during the call that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995. Those 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 statement.

Now I am not going to go through a list of all the factors that could cause our actual results to differ from our historical results or forward-looking statements. I would ask you to take a look at the front of our 10-K for a list of these factors. In addition, we are may face other risks described from time to time in other reports we file with the SEC.

All cautionary statements that we make during this 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.

Please also note that during this call we will refer to certain measures of financial performance that are not calculated and presented in accordance with generally accepted accounting principle. These performance measures include premarketing cash flow and EBITDA. Please refer to our fourth-quarter earnings press release, which is available on our web site under the heading "News Releases" for a reconciliation of free marketing cash flow and EBITDA to their most directly comparable GAAP measures.

With that out of the way, I'll turn it back over to Jason.

Alright. Thanks, David. Let's take a look at both the quarter and the full-year and we'll start with the total company. Fourth-quarter revenue came in at $1.3 billion, an increase of 8.3% over last quarter and 15.2% better than the same period a year ago. We ended 2002 with 4.8 billion in total revenue as a result of growing our subscriber base by 20% during the year.

Premarketing cash flow was $548 million or 41.3% of revenue in the quarter. This represents a $51 million improvement over Q3 and 116 million better year-over-year. Total 2002 premarketing cash flow was nearly $2 billion and grew by 386 million from both subscriber growth and margin expansion as premarketing cash flow margins increased 1.2 points for the year.

EBITDA for the quarter totaled $193 million, and 806 million for the year. While we believe EBITDA can, at times, be a helpful reference point when used properly, we also believe it has limited utility as a comparative performance measure in our industry. Let's take a look at the fourth quarter as an example.

Despite what we feel was a strong quarter, the $193 million of EBITDA is actually $4 million less than Q3, due to the strong subscriber growth in the quarter and the shift in mix between lease and sale transactions, each of which have negative effects on EBITDA.

In our industry, some operators only lease boxes which have no EBITDA impact. Others only sell boxes, which is 100% hit to EBITDA. At EchoStar, we do both. Our focus is on getting the customer, not which line it shows up on. As we always said, a dollar spent is a dollar spent, no matter where it ends up from an accounting treatment.

Now that's not the only issue we see with EBITDA. We operate in a capital intensive industry. When you look at EBITDA, it doesn't account for capital expenditures or the debt load to make it possible. As you guys know, anybody can spend money below the EBITDA line, but the question is whether you can pay it back and whether you can get a return on your investment.

At EchoStar, the key metric we focus on is free cash flow from operations. We believe it is one of the better measures on how you run your business from a margin perspective, how you grow your business through investments in customer and cap ex, and how you fund your business, either from effectively managing working capital, or taking on debt.

Our goal from day one has been to continually build value in our company, and we believe at the end of the day the path to creating real value for your shareholders is free cash flow from operations.

It is probably important to make sure everyone understands our definition, which we think is the right way to evaluate the pay television industry. We simply take the net cash flows from operating activities from our public statement of cash flows and back off the purchases of property and equipment shown in the investing activity section. It is clean, it is simple, and certainly holds you accountable.

The best part about the way we look at free cash flow from operations is that it is completely neutral to whether we add customers via lease transactions or through cash and carry, and it's 100% accountable to shareholder wallets. We think this is the best way to take into account how you are running the business, how you manage your working capital, how you invest in capital expenditures, and how you service your debt. Every single one of these categories are areas that can't be overlooked and are ones that we manage actively as an organization.

For the quarter, our free cash flow from operations was negative $476 million, and the year-end total was negative 369 million. Now despite our free cash flow from operations being negative for both the quarter and the year, it was due in large part to the $600 million break-up fee for the unsuccessful Hughes merger. Excluding the $600 million, we would have posted positive free cash flow from operations of $124 million for the quarter and 231 million for the year.

Let's take a quick look at some of the relevant DISH Network metrics. In the quarter we added approximately 400,000 net new customers, a 25% increase over Q3. That puts us at nearly 8.2 million subscribers for the DISH Network at year end after reaching the 7 million customer milestone only ten months ago.

We believe our lowest digital price in America message has highlighted our position as a low-cost provider in a rising rate environment and we continue to see significant growth in areas where we offer local content, which is now up to 59 markets.

Churn for the year came it at 1.59%, which was actually a basis point better than we managed last year. This is a metric we are extremely proud of and we believe it continues to be the lowest annual level in the pay television industry.

Our consumer strategy revolves around taking advantage of our low-cost infrastructure by combining low prices with best-in-class service and product offerings. We believe our churn rate directly reflects our continued success in each of these areas.

In addition to the strong subscriber growth, we increased our average revenue per subscriber, as well. For the fourth quarter, revenue per sub was $50.30 a month, an increase of $1.26 per sub over the third quarter. The increase was driven primarily by three things.

First, RPUs continued to normalize for customers rolling off our three months free and ILIC 9 promotions, after initially receiving discounted programming. Our current Free For All promotion, while still providing programming credit, does so to a lesser extent than prior promotions.

Second, increases in multiple box households that we specifically targeted show up as increased RPU from the additional fees we received from the second, third, and fourth boxes in the home.

And third, the same increase in local market penetration that drives subscriber growth provides incremental RPU benefit as well.

RPU for the year was $49.17, only slightly below the $49.32 mark we posted in 2001, despite having more impact from discounted programming offers during 2002. During the fourth quarter, subscriber acquisition costs, plus the capitalized portion in amounts recovered under the lease program, declined substantially. For the quarter we averaged approximately $489 per gross addition for the equivalent SAC metric, down roughly $13 from Q3. The reduction in SAC was primarily the result of two factors. The shift in mix away from leases actually helped SAC since lease customers tend to have higher number of boxes per household which increases the metric.

Additionally, the portion of SAC related to marketing decreased on a per add basis both as a result of more gross adds during the quarter and an overall decrease in aggregate spending for advertising. For the year we averaged $507 for equivalent SAC. Of course, that includes approximately $17 of one-time benefit associated with set-top box cost reductions earlier in the year.

Let's take a quick look at the balance sheet before we talk about our guidance. At the end of the year we had approximately $5.7 billion of debt, 375 million of which we have since retired on February 1 of this year. We ended the quarter with cash and marketable securities of $2.7 billion. Now the declining cash from the prior quarter is directly attributable to the buy back of Vivendi equity stake for approximately $1 billion and the $600 million break-up fee paid to Hughes.

On a total debt per subscriber basis, we ended the quarter at $703 a sub, and on a net debt basis, that drops to $374 per sub which is down a full $50 per subscriber from where we started the year.

Capital expenditures in the quarter were $80 million with about $38 million of that amount going for capitalized lease equipment and a remainder for satellites in general corporate cap ex.

For the year capital expenditures totaled $436 million. The breakdown in the annual amount was $278 million for capitalized leases and 158 million for satellites and general corporate cap ex, which includes our broadcast facilities, local market expansion, IT infrastructure, as the major components.

Now let's cover our view on guidance for the upcoming year. For 2003, we are taking a somewhat different tact with respect to giving guidance. So let me give you a little bit of a background, which hopefully, will make it easier to understand why we've decided to change.

And while we're cognizant of Wall Street's focus on quarterly results, we run the business from a long-term view of building shareholder value. We respect that you need to post numbers every 90 days, but the fact is, value is built over time and we make strategic decisions in our organization that don't always show up in a quarter and sometimes the payoff is not even in the same year.

Let's give you some specific examples. When you focus on an individual quarter, in the past, could you have mistakenly concluded that DBS economics were eroding when a churn number or SAC number was perceived to have gone the wrong way in a given quarter. The bottom line is, when you take a step back, on a gross basis we added more customers than a year ago. And despite churning off a higher base, we still had the exact same number of net subs when you look at the quarter year-over-year.

Our equivalent SAC for 2002 was generally in line with 2001. Our churn rate was virtually identical and our RPU was nearly the same even after offering more discounted programming up front.

No matter how you look at that those are not eroding economics. The problem is, the message gets lost if you only look quarter by quarter. It is still amazing to us to see the number of times that it is not yet understood that the SAC you spent today develops the churn in RPU metrics out in the future, not in the same quarter that the SAC was incurred.

When we make strategic decisions like going after higher end households with multiple box incentives, it hits SAC in the short term but we expect to more than make up for it years on down the road. We are not making those kind of decisions unless we believe they are adding value for the long term.

There are quarters where we will have significant shifts in lease versus sales mix like we did in this quarter causing EBITDA to move in either direction, yet free cash flow from operations is not impacted by the mix at all. That's one of the reasons why we don't place as much emphasis on fluctuations in EBITDA, but shifts in free cash flow from operations are constantly on our radar screen.

Now another example of how a single quarter doesn't always tell the story is that there are seasonal elements in the business that impact things like churn that are easy to extrapolate when you look beyond the 90-day period. We only need to look back to last quarter to see a churn that some thought had spiked and was getting out of control when all you really had to do was plot it against historical seasonality and you would have known we were right on track.

So our decision of how we approach guidance this year is an effort to mitigate some of the pitfalls of talking about the details, but still committing to overall results. What we want to try to do is give you what we believe should and would be the principle measures used in our industry to establish the goal posts for our performance going forward.

We are providing guidance for 2003 on three categories. Subscriber growth, cap ex, and free cash flow from operations. In 2003, we expect to add at least 1 million net new subscribers and we're basing this on what we believe are compelling offers in the marketplace, continued local market expansion and continued focus on customer service and product innovation.

Because we will be churning off a higher base this year, realize that this means we will need to continue to maintain our momentum, leverage our recent successes in expanding distribution and maintain our leadership position in mitigating churns to hit that target.

As far as cap ex goes, we are giving guidance on the portion not related to capitalized leases since it is neutral from a free from cash flow from operations perspective and difficult to predict, not only the lease mix, but the amount of equipment per lease and the potential distribution that may cater to that type of transaction.

The portion of capital expenditure not related to lease boxes is estimated at $300 million for 2003, which is 142 million more than we spent last year. Based on our momentum in the marketplace and some of the weakness we see in the competition, we think the timing is right to invest more on our growth and realize additional returns on our capital spending.

The $300 million will be used to fund satellite construction, continued local market expansion, IT infrastructure, and other general corporate cap ex. While we won't break out the specific categories, it is probably important to talk about the portion that will go toward satellite construction. There are really two elements to this.

One is completing the construction of Echo 9, a hybrid KU/KA band satellite we plan to launch later this year. And two is, the potential for additional satellite construction to take advantage of improvements in satellite technology that may make sense to build if they would increase the relative performance and efficiency of our space segment. Keep in mind, our current 8 satellite fleet is fully capable of handling our customer base today and has an average lifespan of approximately 11 years. So it simply becomes a cost benefit analysis for us if we decide to spend the money.

The final part of our guidance is free cash flow from operations. Based on our expectation for a million net new subs, our guidance for free cash flow from operations will be at least the amount we generated last year, assuming we hadn't paid the break-up fee. That amount was $231 million once you add the break-up fee back.

As you review our guidance, I guess there are a couple of key points to keep in mind. First, we are estimating $142 million more on cap ex this year than last.

Second, the discipline that we put in place on our metrics needs to remain in order to meet both the growth and the free cash flow goals simultaneously. We won't forsake growth just to post some free cash flow and we can't drive growth at the expense of free cash flow and still meet the numbers.

Third, we will continue to manage our working capital as efficiently as we did before, and you can't do that without effectively managing the growth elements of your business. Now you guys all understand marginal economics, so when you plug it into your models, you'll run a million sub numbers, your base case, and then you see what an extra 25, 50, 100,000 subs, or whatever increment you want to check, does with your models. You can sensitize the key metrics and easily see if we maintained our discipline. It is most importantly, we hope that you will check everyone in paid television the same way.

To wrap this up, the strong fundamentals and discipline that we employ to create efficiencies and value in our company have provided us the opportunity to produce a unique combination in our industry, simultaneously generating substantial growth and [INAUDIBLE] free cash flow from operations in 2003.

Our 2002 performance would have met the criteria a full-year earlier than even we had predicted had it not been for the failed merger. As you guys know, this is EchoStar, and we don't make excuses. We took the risk on the merger and we paid the price.

With the merger now behind us, we are poised to deliver on the goals that we've laid out. We are making the paid TV model work and we're doing it faster than anyone ever has. In 2003, as we complete our 7th year in the paid television business, and I believe for you history buffs, it's actually seven years to the day from when we lit up our first customer, who I also think is still a paying customer at this point.

We are on the path to positive free cash flow from operations and delevering our balance sheet. So far this year we've already retired our first piece of debt and it's now up to us to prove we can accomplish our financial goals while still attaining historically high levels of growth.

That's everything we have got on the numbers, but before I turn it over to Charlie for his comments, just a quick commercial for our upcoming Investor Day. On March 12, which I think is a week from tomorrow, we will be participating in the Janco Partners Media Conference here in Denver. The folks at Janco have been nice enough to host us again this year. The event is being held at the Hyatt in the Denver Tech Center and will be on from 8:30 a.m. until noon.

As most of you guys know, we don't do the public appearance circuit, so this is really a great opportunity to come out, see our product line-ups and get a feel for our management team. The Janco conference is a two-day event and there are plenty of other companies who will be presenting there, as well, so we hope you can make it out. You can register for their conference through their web site, which is janco.com.

I think that's everything I've got, so I will turn it over to Charlie.

Thank you, Jason.

Just a couple of comments. Obviously 2002 was an interesting year. We had a lot of good things happen, and we had some things that we didn't accomplish that we wanted to.

Obviously the first thing that we failed on, I have to take personal blame for, is that we were unable to consummate a merger that we had high expectations of being approved by the regulators, and we were not successful in doing that. And, therefore, we made a $600 million bet that we would get approval. Obviously the pundits in this case were correct, and we were unsuccessful in that, and we cost our shareholders $600 million as a result of that failed initiative.

And it was more than that, because we spent another $90 million on fees to get the financing in place, and with lawyers and so forth. And we spent a large amount of time, of senior management time, focused on the merger. Certainly my whole year in 2002, up until November, was strictly focused on the merger. So from that perspective, it was certainly a failed initiative, and we have to be accountable for that.

The second thing we didn't do so well was investment. We had a write-down, I think a total during the year of about $144 million. A writedown on strategic investments that we felt, particularly with the merger, made some sense. I think that was $69 million in the fourth quarter. So I just point that out as two things we did not do as well as I would have liked, and we get a failing grade on those two things.

On the other hand, on the core business, as Jason pointed out, I don't think we have ever had a year where we have done better on our core metrics that we hold our management team accountable for. And particularly, pretty young management team where a lot of people got to -- because senior management was so involved in the management, we had a lot of people step up and focus on those metrics who hadn't had the authority and the -- and hadn't had the experience to do that, and yet, as a company, obviously sub growth came in at well above our expectations.

You know, we did more subscribers than the entire pay television combined for the year. So it put cable and satellite together and they still didn't equate to the kind of growth we had as a company. And while doing that, we were still able to keep churn at historically low levels for the industry and below even the previous year.

Our RPU got off to a slow start because of things we had done in 2001, but obviously came on strong at year end. EBITDA came in. When you factor in the change in the mix, leases per buy, we did much better than anticipated in EBITDA. Free marketing cash flow came in where we expected to, a little bit higher in percentage.

You take out all the one-time extraordinary items. We actually had positive net income for the year of about 18 million, which Mike McDonnell can walk you through if you have interest in that. And most importantly to us, we had free cash flow from operations when you take out the merger, $600 million merger fee.

So in terms of the metrics that we manage to, I can't remember a year where we have really exceeded our -- our internal expectation on all of them, particularly, I guess it is a probably a good sign that senior management should probably take more vacations, but I really feel good about that because I know we are in good hands as we move forward.

A couple of things to point out. First, we managed a free cash flow from operations because it is the only metric that you really, from an equity point of view, it's hard to play games with. I think EBITDA is a fine measure if you are a bond holder to make sure that we have the kind of cash to pay our bonds back, but I think we have proven that we had the ability to do that and with the -- taking in our first set of debt on the very first day that we could do it economically, I think we have shown we are able to do that.

Our focus as a company has really shifted from worrying about our debt load and maybe keeping us up at night, to worrying about the fact that our equity is probably undervalued and now it is time -- and hasn't moved much in the last couple of years and now time to really focus on that.

When you focus on your equity value, the free cash flow from operations measurement is the only one that you can't play games with. It is easy to get EBITDA up if you want to go borrow money and spend money on cap ex even if you only get a 50 cent return on a dollar investment in cap ex, and you guys all know that. Well, on free cash flow, you better get more than a dollar return on your cap ex. In fact, you'd better get 3, 4, or $5 return on your cap ex or it is going to hurt you long term and hurt your bottom line. So from that perspective, that's why we focus on it.

You have to have a discipline in your churn, your RPU, your SAC, on your free cash flow. Every time somebody spends too much in SAC or too much in advertising or your RPU goes down or your churn goes up, that will affect your free cash flow. You can't play any games when you do that.

If you let customers stay on too long and they don't pay you and you write off with bad debts, it will hit new free cash flow. All the sins that can be hidden from investors can't be in a free cash flow environment.

The -- you know, I think we are proud of the fact that we, as Jason mentioned, we were the last company -- major company of the pay television business. Some of our competitors have beat us to the paid television business by over 30 years, and we are -- obviously, we're beaten in the satellite market by two and a half years to the party.

Yet we are the first company to do two things, which is to have high growth and free cash flow and also be free cash flow positive, and that's what we are going to do in our 8th year of business this year, and also delever at the same time. I don't think you are going to see anybody else that's going to achieve that to the same level that we are going to do it, even though they may have had 35 years to get there. And I think that really shows that the foundation of our company and the discipline in our company pays off.

It's hard for me to believe that, as an example, we had a bankrupt cable company that may pay a couple of executives over $40 million for a couple of years, I think for three years. I don't think our entire executive team has made that much money in 23 years. If it comes to competition, we know the game is over when companies are going to go out and pay that that kind of capital when they are not in a great financial situation.

That's the time when you have got to suck it up and stay three to a room instead of two to a room. And we know that game is over. If we get to compete on a level playing field in that environment. So we are excited about the momentum that we have post merger and excited about the fundamentals in our business and the fact that we are moving forward.

You know, we did mess up the merger, and that will certainly be held accountable. We did do something positive in the Vivendi buyback of our equity. We felt like it was undervalued and we felt like that was the best use of a little over a billion dollars of capital to do that. The net effect of that was that we wouldn't have sold the equity absent a merger and we're able to buy it back at over $4 million less expensively, that's nontaxable, to us. So that was one of the things that we probably did a little bit smarter and maybe makes up for some of those investment losses that we had that we didn't do so good on.

Without the merger we still have the same fundamental problems that we are trying to solve with the merger. And those are the things that we'll focus on in 2000-- We have started to focus on in 2000 -- late 2002 and will continue to focus on in 2003.

We still need capacity to build out our local markets and have the best high-definition television offerings in the industry. To do that, we are launching EchoStar 9. And it will be -- in several months it should be operational if all things go well this summer and that will give us additional capacity, albeit, a larger dish. It will give us capacity to do what we hoped to do with the merger. On the positive side, we don't have to change out boxes and customers and set top boxes. We, obviously, will have to change out an antennae, but certainly not the level of upgrading we would have had to do with the merger.

We still need a broadband strategy, and we have spent the last three months looking at every possible way to do broadband. I am convinced that-- of a couple things. One is that certainly EchoStar, and I think as an industry, we will have some effective broadband solutions we have proven to ourselves that technically we can do it. Now we are in the process of proving that we can do it economically.

And I believe that for a large part of the United States, particularly in rural America, I am convinced we will be able to do it, both technically and economically in the years to come, and certainly you will be hearing more about that from us as the year progresses.

I also think that broadband will become wireless just as video has become wireless, and things like Y-Fi and other things, as those technologies develop and as the government expands the capacity, that we will have new technology that will be able to compete with the cable companies in terms of broadband without spending tens of billions of dollars to upgrade plant and equipment to make this. So I think we will have effective broadband strategies and you will probably hear again, as the year progresses, you will hear more and more of that from us on that.

And finally, piracy still continues to be a concern in the whole pay television industry. You are kind of only as strong as your weakest link, and piracy takes away from both satellite and cable operators. takes away business.

And, you know, we have put some fundamentals in place and some disciplines in place and some extra costs in our set top boxes that have shown up in SAC over the last seven years, to prepare for that, and I am convinced we have the best system out there and we have the ability to keep our system economically on -- on an economic sound footing when it relates to piracy.

However, we are dependent on the cable industry and other satellite providers to do the same thing as well. And I think that's going to be something that, certainly from a risk perspective, is out there for all the pay TV providers, and something that I hope we can work together on to make sure that we can help that process. We are fortunate that we control our own destiny there to some degree, and that we control the technology that we use. And so I think that -- you know, we go forward with some confidence that we can keep our programmers getting paid for their product. And will work with others and we will have problems from time to time to make sure we take care of that.

I think with that we will take questions.

At this time I would like to remind everyone in order to ask a question, please press star and the number 1 on your telephone keypad. We will pause for just a moment to compile the Q & A roster.

Your first question comes from William Kidd with Lehman Brothers. [ Inaudible ]

Hello?

William, we have lost you.

Can you hear me.

Yes.

I guess the question that I had is, you've -- you obviously had a very good quarter on the gross demand side and you did that without a lot of spending. And at the same time, you know, I think there was some thinking that cable had strengthened during the quarter because Comcast AT&T had low net loss numbers. Can you explain where you got the subs and, you know, was it good hunting? Was it the seasonality? Was it the improved distribution? Where do you think you made the headway?

Yeah, I think first, we don't consider losing subs a strength. So, you know, hard to believe that AT&T would call that strength or Comcast.

You have got to work with what you've got, right?

Yeah, I guess you guys are more gullible than I thought. Our strength is really across the board. I would say it probably starts with local. We are up to 59 markets today. We are adding about one or two markets a month through the rest of this year. So it kind of -- we are covering about 75% of the country today, so end up the year, over 80%, probably. So that's probably where it starts.

I think we did have improved distribution. With Radio Shack and Wal-Mart coming on stream more in the fourth quarter than they did probably -- you know they came on a little bit each quarter. We know when we -- we know when we get side by side with our competitors that -- that we are the preferred customer -- I mean we are the preferred -- they choose us more times than not. So any time we can get in side by side that's an advantage us to, but it really kind of is across the board.

There's no -- you know, obviously where the -- we-probably did a little better where the cable operator is weaker, and maybe where some of their systems haven't been upgraded, as a general rule. You know, I think our marketing message is strong. Stronger than it has been. You've probably seen it a bit more if you get outside of New York.

Does that mean you are doing better in the second tier or rural markets than you were doing, say, a year ago?

I wouldn't say better. I would say they have been consistent. You know, we certainly -- if you looked at our total base of over 8 million subscribers, certainly we are stronger in rural markets than we were in the urban markets. We didn't have the consumer electronics distribution early on. So we built our base with our historic satellite retailers who tend to -- obviously we sold big dishes, so they tend to be rural America.

We are the dominant force, by far, in rural America. But that -- you know, I think that business has remained, you know, consistent for us, but where we are making headway is now in the urban markets because we have improved consumer electronic distribution, and we have more local cities that were more of a factor there.

I think one of the interesting things. This is -- you take out the one-time charges, which is kind of difficult in the fourth quarter because of the merger, but you go -- you take all that out. You really get an interesting comparison this time, because we have -- exactly the same number of net subs we had the fourth quarter last year.

And EBITDA -- and obviously we had to do more subs because of a higher base from a growth perspective, yet EBITDA increased, and that's given the fact that leases were a much bigger factor in 2001 in the fourth quarter than they were in the fourth quarter of 2002.

So you look behind all those numbers, and what you are seeing is that we are scaling -- we are scaling the high fixed cost of satellite and those are starting to scale in a fairly dramatic fashion for us. And, you know, it terms of the metrics that will ultimately put cash flow to the bottom line.

On that note, can I just ask one question on the cash flow or the guidance? Basically -- I understand the message clearly that the focus on the free cash flow side and that's the way you want to be judged. But at the same time, you know, can you give us visibility into, literally, the operating issues that are driving your business, such as the programming cost side, particularly what type of SAC level you do think is appropriate in '03? To not only grow your business but to have subs that you can obtain for a long time. Can you help us out there?

Yeah, I think the problem with that is that you are going to have to have confidence that we know what we are doing. We are happy to spend $700 for a customer that will generate $80 a month for us. We don't want to spend $300 on a customer who is going to, you know, be $24.95 a month for us.

So it's --

So -- you know, it's hard to talk in those general terms when I am holding management responsible for doing things in an intelligent manner. I think on the Pegasus call, you heard something I thought was fairly smart when Mark Fagan talked about the fact that he is actually looking at his customers and segmenting them, and churn -- if you have churn and that churn is in a $20 a month customer or -- you know, that's a big difference than if that churn is in a $100 a month customer. You don't have is ability if we give you a raw number of churn.

Behind the curtain here at EchoStar, we are looking at which customer churned and how much that really cost us. Quite frankly, there are a few customers that we actually have given the phone number of the cable company in their area and suggested they might give them a call because they are not profitable for us, and there's other customers who are very profitable for us that we want to learn, but all those -- that we don't want to lose, and all of those customers are in the churn number.

We can't make the guidance than we told you unless we continue to make efficiencies in how we run the metrics, whether it be SAC or churn or whatever. And I think, William, when you run your models, you can -- you've got a seven-year trend with us. I think you can -- I think you can interpolate where those numbers are likely to be in raw numbers, and you'll come out with your own model of where you might expect us to end up for the year.

But I believe -- you know, it was always frustrating -- I have said it 100 times on these calls, when the stock market was going up and you put dot com out there and worth a lot of money, anybody could be good. But, you know, the economy has not done very well the last couple of years. We are facing a war overhang today. You have got to be -- you have got to be pretty good to be successful today.

And you are starting to see a lot of people realize -- there was an article, I think in "Forbes" or "Fortune", you could certainly talk to some of the people who have invested on fundamentals for years, and EBITDA is a fake number if you are an equity guy in a capital intensive industry. And so you've got to ultimately get down to whether at the end of the day -- they haven't changed the law of economics since the history of mankind. If you have more money at the end of the year than you started with, if you do, you're growing value in your company. If you don't, you are putting your company at risk.

And, you know, we're -- you know, that's how -- I am an equity holder. I want to increase the value of the equity here. I am an accountant, a former accountant, so I know -- I know the time the company spends trying to manipulate numbers so that you guys can write it up and make them look like they are doing good when they are not.

The only number -- when somebody out here buys a computer or they fly first class or they -- they order a big meal at a restaurant, it all comes out of cash flow. And for us to manage the business, we have to make sure that all of our employees understand that when they spend a dollar, it costs the company bottom line. You know, that's -- that's the way we focus on it.

If you -- if you want to invest in a company that is not focused on that, I think that makes a lot of sense for some people, but this company is going to focus on those metrics, and that's how we think we ultimately will historically be judged in value.

I guess, Charlie, there is no disagreement. I guess what I am trying to get at is, you know, and obviously different subs require different SAC, but I guess relative to the prior year, relative to the average increment of subs that you are taking in, do you see a need to invest more, not just in terms of driving more demand from an elasticity standpoint, but do you see a need to give customers more equipment than you historically have, or do you see a need from a cable point of view to put higher-end boxes in the field to be better equipped for the long term?

I am trying to get an understanding when you modulate your capital spending, do you see a need to ticket up, both because of growth reasons, but also because of competitive reasons?

I guess -- I will answer two ways, William. One is that we look at each individual investment decision as to whether we get a return on it. Some customers we might put a PBR in for. Some customers we might not. And we might subsidize some customers more heavily than others.

As far as cap ex, we do see momentum in our -- in our market place, at least for our company. We do see -- we do see, with the economy the way it is, we are confident now that in good times and in bad trims, people still watch television. The ultimate reality show is getting ready to play on TV called, the war in Iraq. It will get huge ratings. They are going to need satellite dishes to watch it on all the news services, so we don't think that will will be a particularly short-term negative to our business.

So we have to invest in the future. So cap ex probably is going up a little bit more than some of you -- we probably were too conservative last year, maybe because the merger was going on and we didn't know exactly where we would get a return because DIRECTV had a lot of the assets that we need so we didn't -- obviously didn't want to spend cap ex where we didn't need to.

Now I think we are more optimistic about our future. We believe we have some momentum, and I think we are going to spend a bit more in cap ex because, you know, that's going to pay -- that's going to be free cash flow for us in 2005 and 2006. If we don't keep that to a certain level, then we would be a one-year wonder and we would disappear and we don't want to do that.

So, you know, at some point, you have to -- at some point, we can't give you every detail of our business. And if you put in a high SAC number, we don't make free cash flow numbers, right. If you put in a high churn number, we don't make free cash flow numbers. So we have to maintain the discipline we have in the past to make the goals that we -- to make the goals that we have set out for ourselves.

Much appreciated.

Your next question comes from Ty Carmichael with CSFB.

Congratulations on a great quarter. I just wanted to, Charlie, talk maybe from a more strategic perspective and a more longer-term perspective, you talk about segmenting your customer base and if you continue to grow at the trajectory you have grown over the last several years, as you guys point out, the churn ultimately catches up and it becomes more difficult -- just the net number goes down.

As you look at the business and look at the competitive landscape, how do you evaluate at that point in time whether you want to, you know, increase the spending to get subscribers that you otherwise wouldn't if it brings your IRR down, say from where I think it's sitting north of 30%, to say 20%, which is still pretty darn good, if it allows you to get a customer that you otherwise wouldn't get.

How do you look at that dynamic, or do you just kind of continue to grow the business as you -- the trajectory you are on and five years from now it just becomes -- just by virtue of the math difficult to add a new net subscribers.

I think there is a couple of things that you do. One is, obviously we don't spend a lot of time looking at IRRs today because they are extremely high and it's a no-brainer to spend $500 on SAC to get a customer, assuming your churn rates are where they are.

If it came down to 20%, we'd look at what else we can do with our money that might give us a better return. And if we could find something that gave us better return, we would probably spend it there. We are in a pretty comfortable zone to have a lot of leeway today in terms of what we might do there.

The second thing we look at is, is there a way to get additional revenue from a customer once you've made the investment, even though it may not be today? A lot of people talked about interactivity and future revenue there. We've always shied away from that recently, because we haven't been able to prove to you that there is money there, but I think the fact is, there will be money there in terms of that.

If the customer, there's also going to be revenue in high-definition television and other things once you have gotten a customer. You may end up with a customer who's a $50 RPU today, but because you have interactivity and high-definition television, and some other things, may be $70 or $80 tomorrow. You have to factor those things in that are not visible to you today, potentially in the IRR.

The third thing is that we -- from day one, again, you cannot call this company and talk to anybody but one of our employees. There is a reason for that. Because we build a relationship with the customer.

And when we -- if we -- if you like what you are getting from us on a video side, then it is not going to be hard to sell you broadband. If you don't like what you get from us on the video side, and somehow think we are not a good price value or don't like our customer service, then we're going to have a very difficult time to sell you broadband as that technology moves to a wireless direction where we can be competitive.

I think we are building those fundamental building blocks for our company going forward, and only time will tell whether the time and effort and expense that we have paid to build that foundation, with our employees talking to people on the phone, is worth it. It certainly would have been cheaper to use a third-party call center. Would have been a lot easier. Certainly been a lot more nights we could have slept and everything else, but we think that that relationship is going to pay dividends for us.

And Charlie, as -- as you look out at the competitive landscape continues to appear to be on the verge of changing, how do you evaluate, you know, whether -- or do you think you have the strength to go it alone? Or in the event you see, you know, further consolidation across the board both within cable and a new owner of DIRECTV. Do you think at that point in time, you know, you would be more seriously looking at a strategic relationship with another entity?

I certainly hope we have the strength to go it alone. I mean, I think the one -- the one company that I would not want to compete with is EchoStar.

Yeah.

You know, everything else -- everybody else -- we assume is going to do an outstanding job. We assume that DIRECTV, whether they stay as they are today or someone acquires some, or all, of the company, we assume they will be an outstanding company and that they will provide tremendous competition, as they do today.

We figure that every cable company will go bankrupt and come out of bankruptcy with no debt and be strong financially, you know. And we have to be able to compete in that environment, and we are confident we are able to do that.

Now as an equity, because we focus on equity, anything out there from a business perspective that would increase the value of our equity, whether that be acquiring a company or selling this company, obviously, those are things that we would look at and we would make a decision for the benefit of our equity shareholders. I mean, that's why we get to be management. And that's the responsibility that we have.

I think our debt guys can feel pretty secure, you know, today, with repayment of debt in February and free cash flow from operations as our goal this year. And I think our equity guys now have to get more confidence in what we are building.

And you are going to see -- the good news is, as we go through 2003, I think you will see -- you are not going to see the focus on a merger and the overhang and the one-time charges and you are going to get a better feel for the fundamentals of our business.

And if one analyst will just take the cable model and put it on our free cash flow from operations, there's no way a cable guy worth $4000 a is subscriber and our guys worth $1500 a subscriber unless you assume that every cable customer will take broadband and telephone and digital cable and I think they will probably peak out at certainly somewhere less -- somewhere maybe 40% for digital cable and something less than that for broadband, and yet, you know, people are getting credit for 100% of the customer base because they make an investment on 100% of their customer base and we don't do that.

So, you know, at some point, either we are going to go up in a per value per sub or they are going to come down or a combination of both.

I happen to agree with you. Charlie, given the focus on equity and you are on -- you have gotten the business to a point where it can grow and very predictably generate free cash from your existing subscriber base. You have about $2.6 billion of cash on the books. Is there -- how do you evaluate the use of that cash over the near term? Because, you know, particularly given the fact you feel your equity is undervalued?

Well, I mean, I think you -- we have a number of things that we are looking at that could utilize that cash. And you can go down the list of what those things might be, and certainly, if you felt like your equity was undervalued, it could make the top four, five things on your list. But we will have to wait and see, you know, in terms of what --

We think there will be some opportunities out there this year. And we had not focused on anything other than the merger last year. So we are just really finishing our strategic analysis of the things we can do with the excess cash that we have.

Okay. Just on the last front on that -- last question on that front would be -- there are rumors surrounding CableVision and their satellite platform. Is that something that you would view as a good -- at the right price would -- do you think you could get those assets at the right price [INAUDIBLE] economic, not only strategic, but economic to EchoStar?

And then on your cap ex guidance, does that include -- are you guys going to go forward a card swap in an effort to fight piracy?

On the piracy issue, we have our next generation card in the field today. It has been out there for some time. And we do have -- I won't go into detail, but strategically we will have some card swap this year.

And that's --

That will not have a material effect on earnings or cash flow, is that -- to say?

That's correct.

I think we have a plan for that, let's put it that way.

Okay.

The first part of the question was -- oh, CableVision. Nobody -- I don't know the Dolans (phonetic) all that well, but nobody ever gets a good deal from them. They are very shrewd operators -- business people. So I don't know how -- I don't know the specifics of that satellite and how that would -- it's a 61.5% satellite. We already have -- you know, the satellite there utilizing capacity. I don't know how much value that would have to us.

Okay. Thank you. And congratulations on just a great quarter.

Thanks

Your next question comes from Karim Zia with Deutsche Bank.

Thanks. Follow up, Charlie, on the growth acceleration that -- that you have done over the last several quarters. I wondered if it's possible in your mind that maybe the economy is somewhat working in your favor, you know, as the sort of lowest cost package in the marketplace? And along those lines have you seen any material shift in the composition of your -- subscribers that are taking AT 50 versus the others?

I would rather have a better economy, so I think that, you know, we always -- business always does better -- would normally do better in a better economy. I think that we recognize with that with the slower economy, there might be strategically some ways to improve our business.

We have -- I guess from a shift I would say, yes, we probably have as a higher percentage, people taking the lower-end package than perhaps we did last year. That's probably the result of two things.

One is that digital cable -- as you go digital, you -- you are forced to go into a -- you know, a $40-plus tier, and then customers -- may not be the customers want the digital signal, they just want the programming. So we are able to offer them something without having to go all the way up to the digital tier to get that and maybe that has an impact.

But the thing that should give you comfort is as you look at our RPU, right. If you were seeing a mass exodus to lower end tiers, then our RPU would be going down. So it's not happened to any huge degree.

You know, I think -- I think what you are going to see is divergence, but sort of between the satellite operators. I mean, I think that, the reverse strategy of that is I think that, that DIRECTV, quite frankly has done very well, is they go for higher -- you know with sports and so forth, and now with the NFL, they -- they are going to get a much higher-quality customer day in and day out with that focus.

And it might -- it might make a difference in total sub numbers, but in terms of their bottom line, that's probably a -- a very good strategy. So we have to react to their strategy with something a little different given some of the advantages that they have. And so I think we should do things a little different.

So we may see -- you may see a little bit of divergence within the satellite operators. And then cable side, I think you will see divergence and operators that had the financial balance sheets to go out and continue to upgrade their plant and equipment versus those cable operators that don't have the ability to do that today.

So you just -- this pay TV business is going to be a different animal four or five years from now with probably -- probably three or four, you know, strong companies probably made you up of, hopefully, two in satellite and probably a couple in cable.

Okay. And then a second question for Mike. When looking at the free cash flow from operations, clearly one of the biggest moving parts is the change of working capital. I think the last almost five years you've averaged almost $200 million a year in positive change in working capital. Can you just describe what the moving pieces are that have driven that in the past, and maybe at least directionally talk about what you would expect for '03 and '04?

Yeah, I think I can speak to, you know, the moving parts are -- are fairly, you know, obvious. You have got, you know, inventory and I think historically we have managed our inventory levels very well.

Certainly, receivables and payables/accrued expenses is a real big driver. And I think, you know, we have done an outstanding job on the receivable side. We have been very disciplined. We have very strict shut-off policies when people don't pay us. We shut them off as a matter of routine and discipline. I think the payables and the accrued expense is obviously -- there is some timing issues involved there, but we have managed that very well.

And the other side that you see is the deferred revenue. And when you are growing and billing customers in an aggressive fashion and shutting them off when you don't pay them in time, what you will see is your receivables will grow but also grow your deferred revenue because you are not recognizing revenue until you actually earn it through the service period. And so I think the receivables, the payables, the deferred revenue and the inventory, kind of the key items that you look at. Obviously you can't build working capital forever but when you are in a growth mode and adding subscribers, you are going to see positive working capital benefits for the most part.

And the way I look at it, we're -- I am trying to hold people responsible for the total business, and I -- I am not going to them and talking to them -- whether something goes on the balance sheet or income statement or receivable or payable inventory. I am saying you have to manage your inventory to a level that doesn't -- and get inventory turns to a level where we have an efficient use of capital.

I am making sure we turn customers off the moment they don't pay us. And we are not -- just to keep our sub count up, it would be very easy to leave them on for an extra 30 days. We'd put another 100,000 people on the rolls. That doesn't increase our cash flow, that decreases our cash flow because we have to pay the programmers for that.

So that discipline is required -- it means that working capital is certainly a source of cash flow if you have the discipline and if you manage it. And much of that working capital is permanent. And even if you weren't growing, some of that is permanent. So that -- you know, it is going to be very visible to you if we don't have that -- don't have discipline, right?

It is going to vary -- it's a little bit of a risk because our working capital will vary a lot quarter to quarter because, for example, we built inventory when we were worried about a dock strike. So we actually built about a 12-week supply of set top boxes because we were worried that the ports would shut down and we import a fair amount of our receivers. And, yeah, when the dock strike was less of a risk, we were able to get that inventory back down to our historic level.

You may see it shift around quarter to quarter but on an annual basis you will be seeing it in its true life. There are some businesses where, you know, are negative working capital and you have to make your own decisions as an investor about what free cash flow is important to you

Okay. Thanks, guys.

Your next question comes from Marc Nabi with Merrill Lynch.

Thanks very much. Charlie, just trying to follow up on some of the questions with respect to promotion, and what you in the near term try to strive to be. You have always said, you know, you want to try to provide the best level of service at the lowest cost, and right now in the marketplace today, you know, you have this promotion where you -- you have this $25 per month plan. And you have a lot of the cable companies, I know recently Comcast, AT&T talked about doing dish buybacks and we have seen obviously in the past when has happened. And they are trying to do $20 or less of that promotion -- for their monthly bills, trying to eat away what you have gained and made inroads in.

Can you talk a little about that and the dynamics there with respect to, do you still want to be viewed as that type of offering? I mean how do you move the customer up? And I have some other questions thereafter.

I think it is difficult for them to come after us there. You know, obviously there is some attempt where they may have three months for $9.99, or some period of time, but ultimately the bill goes up. And customers aren't stupid. They know what they pay for full year and for year number 2. So I don't think that really buys you much ultimately, the dish buybacks for our company haven't worked very well.

The customer ultimately -- we have been able to get the customer back or, you know, they spent a lot of money for -- again, they don't get a return for that investment in my opinion, so I think those things are probably failed strategies. Their broadband bundling is a more effective tool and obviously, we will have to talk to you more about broadband in the future.

So, you know, we are not -- one of the analysts I think had it right, which is we have a barbell approach which is, yes, we are the Wal-Mart of the retail industry. In other words, we have low cost foundation, so we have a discipline and foundation that, you know, allows us to be low cost and nobody really can -- can touch us on that because you can't suddenly go oops, I wish we hadn't have spent $6 billion of cap ex last year on digital set top boxes that are now obsolete if you are a cable company. I mean, you are stuck with that. I wish we could suddenly take $25 billion off our balance sheet. They are stuck with that for a while. Their foundation will not allow them to be the same low-cost producer that we are.

On the other hand, we have tremendous technology for high-definition television, for PBRs, interactivity, that also allow us to go for the high-end customers, and have a very effective product, and I think DIRECTV even does a better job of that to some extent, and we have a barbell approach and we get everything in between. I think your question infers that we are getting all these low-end customers. I think that is not the case. We are getting very solid customers who are in line with our, kind of, IRR returns across the board.

Charlie, can you also talk a little bit about churn trends in the near term with the rate increase just from historical views? You know, you put this rate increase through. When do you usually see it kick up prior to the March time frame and spill over to the second quarter? It was my understanding -- I just want to get a better sense of that as well.

Yeah, it will hit -- any kind of rate increase will -- not a positive from a consumer point of view. Obviously we think our rate increase was low comparatively to cable. We tried a few things different in terms of bundling this time, so we are going to learn something.

Having said that, I would say that with a rate increase, you typically will see some -- some churn when you make the announcement, which would be the February time frame. You would see more churn in March where a customer will have to pay his bill, and then in April, when, if he doesn't pay his bill it gets turned off. So it's in those three months, February, March and April that you will see the effect of churn. It's very rare that you see much -- once the customer has paid the new rate increase, it is relatively rare it has a material impact after that.

Having said all that, I think that you should take some comfort from the fact -- I believe Jason mentioned that our churn in 2002 was actually less -- slightly less than it was in 2001 and we did have a rate increase in 2002. So I think that we are on solid foundation from a churn perspective.

Our perspective is, that if you ask somebody at what point in their life they are not going to watch TV, the general answer is, I am going to watch TV for the rest of my life. And, therefore, we, as a company, shouldn't have a lot of churn unless somebody can get a better price value somewhere else. And our goal is to make sure you can't get a better price value somewhere else, and if we do that, then why would you churn? And that's what we have to focus on.

And, again, I think we have done a better job over the last seven years by a long shot that anybody else in the pay TV business. So if churn is your concern, we are a good investment.

Well, you know, I am always concerned, Charlie. But anyway, the other thing I wanted to talk about is local TV rollouts. And you talked about one to two per month, and you also talk about high-definition television.

I am trying to get a sense, do you plan on doing all 210 DMAs eventually? Is that something that makes economic sense? And also, a lot of the cable companies, what they try to discuss is their push for HDTV, and it is much more localized as opposed to a satellite television company, which has a lot of, you know, spectrum in the sky, and it's point to multipoint and the spectrum won't be as well utilized. I want to get your thoughts on that.

It's going to be an interesting dynamic. First, I don't believe all 210 markets are economical. Let's put it that way. And, therefore, I don't think that we would do all 210 markets.

Second, the -- HDTV will be a national product in the sense that you're going to watch HBO and Discovery and ESPN and so forth. It will also be a local market for the networks, which obviously, in the owned and operated stations we can do via satellite economically, and those other markets, you would have to get it, at least from us, probably in a terrestrial fashion that happens to interface with our digital box and digital recorder.

And we think that because the digital signal is either perfect or nonexistent that most customers will not have a problem if they want HDTV to put up a small outdoor antenna to get it. I don't think that will be a huge obstacle for our marketing team.

The interesting thing, and I think the thing nobody has focused on is, if the cable companies want to compete with us on local HDTV they will have to get you a tremendous amount of bandwidth which means they're going to take more analog channels off and convert their systems to, ultimately in fact, to 100% digital, which means there will be no analog basic package for those customers. So they will be between a rock and a hard place in certain situations.

If we can get a cable company between a rock and a hard place, then that vise will slowly, slowly squeeze and hopefully we are smart enough to understand which cable companies will have that problem. And, therefore, we will probably do pretty well in those markets.

I just think overall HDTV -- overall, as a general statement, it will be advantage satellite. That is not to say that a Comcast in Philadelphia isn't going to kick butt with local HDTV channels in sports. I mean, there are going to be some guys that have advantages, and some that don't.

The key for us is, where do you have an advantage, and where do you focus your money? What you are seeing from DISH Network is, we are not indiscriminately spending SAC. The SAC went down this year versus last year in the fourth quarter, and we got more subs and RPU. We are spending our money wisely and getting a return on investment that ultimately comes down to free cash flow from operations.

And Charlie, just one thing on the penetration you talked about. What do you think the magic number is? You go up to 100 markets? Is it 90 markets, 120? Any number you have in your business plans that say this is the number we really need to be at to get the local television signals out there and draw the customers we want.

I think -- I think -- I heard DIRECTV talk about 100 markets that they are going to do this year, and I think -- I wouldn't necessarily disagree with their -- they are pretty sound on their economics, the best I could tell, that is probably ballpark.

Great. Thanks very much.

Your next question comes from Vijay Jayant with Morgan Stanley.

Hi, Charlie, can you hear me?

Yes.

Talking about PBRs. Talking to some of the cable operators, as well as DIRECTV, talk about higher RPU and lower churn from PBR customers. How are you strategizing going forward with merger and pushing PBRs and how many units do we have out there right now?

Well, we have more PBR units than anybody in the industry. That's number one. So you can add up all that they've got, and know we have at least one more.

Two, we are better positioned in PBR than anybody else, and I believe that PBRs are, in fact, revolutionary and will change viewing habits over time and I think we have again put the foundation in place where we own our own technology, we own our own intellectual property. We do not pay a fee to anybody else. We do not have to partner with anybody else. And to the extent our system needs to be simpler or easier to use or we get customer feedback, we have ability to go in there and change the software and download it to the set top box.

Our PBR products I think are without question the most -- the most complete product line-up of PBR and with our HDTV PBR unit that comes out later this year, it will be another first for us. I think, again, if you -- I think advantage HDTV to satellite, I think advantage PBR to satellite.

You know, it is pretty hard to record on those old analog channels on a PBR in cable, unless you go stick an analog-to-digital converter in there, which adds cost to the box and then you have another set of problems and that vise just starts squeezing and squeezing again.

So -- we don't charge a PBR fee. We probably have some opportunity there. I think that we probably can charge a PBR fee. We haven't done that. I think we probably can do that. That is probably a source of RPU and revenue for us. I think we are way low on that today and other things, but I like our position in PBR.

And following up on that, Charlie, in terms of the new PBR921 box and now we're getting 250 hours of programming, when will we really see a launch of a true on-demand service where you will be caching movies to customers?

Essentially -- we have got to see if customers really want that. I mean, you know you -- I subscribe a little bit to that -- to technology. I -- I am a little bit concerned about -- I watch my own family and watch how other people use it, and the fact of the matter is, that I am not sure that true to the economics of true on-demand video to that extent are going to be profitable.

We will have to wait and see, but we're certainly capable technically of doing it, of downloading movies. If a new movie comes out at Blockbuster, we can download it and have it on your hard drive for you ready to play. My experience is most of our customers love the fact they can go into a guide and hit record and record what they want, and just like you go into a restaurant and you get to order off a menu, and one guy can order steak, and one guy can order chicken instead of everybody getting the chicken. It is unknown. I think we can do it either way.

I think the problem for cable is, they kind of got a bet the ranch on a video-on-demand architecture that doesn't scale -- if it is wildly successful doesn't scale very well. And if it is not successful, they are going to blow a lot of money. We, in turn, put a PBR in if a customer wants to pay for it or if the economics are good from a subsidy point of view to do it, and we get the best of both worlds. If you are in favor of video on demand being a killer app, you are a satellite investor, not a cable investor.

Thanks, Charlie.

You know -- how many shares do I own, Jason, of cable companies.

I think that would be zero.

I could be wrong.

Are you [INAUDIBLE] there, Charlie? [ LAUGHTER ]

I really can't talk about that. [ LAUGHTER ] I went to short Adelphia, when I saw the paper, you know I went to short them, but apparently it -- I wasn't able to do any of that. There wasn't any equity value. I was too late.

Thanks, guys.

Your next question comes from [Ari Borkov] with UBS Warburg.

Yes, thank you. Just a few questions actually. On your comment about having the cable operators in a vise and obviously, between a rock and a hard place. Can you talk about if you push them too far obviously, you have seen Adelphia already going through the restructuring process, and Charter obviously has had some difficulty with their debt balance? I there a risk that you push the cable operators too far in some areas and they come out a lot more flexible to compete without those sub costs on their balance sheet, is the first question?

The second question is, the cash on hand issue, which is obviously impressive. As you get through 2003 and you are building cash, obviously enhancing the cash position, you mentioned potential uses of the cash. Any sense of what you really believe is the right cushion you want to have of cash on hand as you go through those uses of cash in 2003, at your discretion obviously? I mean, do you want to have a billion dollars on hand or more?

And then if you could comment on whether you think a converts would be an attractive, you know, redemption opportunity given the fact you have been buying back some bonds? Thank you.

You know, I guess -- we don't know whether the cable companies coming out will have a lot more flexibility. I think our assumption is they will come out maybe stronger than they are today. It's hard for some of those guys to get any worse, but having said that, the alternative is not to let them survive.

I mean we are a competitive company. We love competition. Our whole existence has been competition. It's fun for us. You know, we still try to compete to see who can rent the cheapest car. You know, so -- everything is competition, whether it be a poker game or renting a car or trying to get a subscriber from somebody. So we just like to do it, and that's our culture. If we are not going to not push a company into bankruptcy because they are going to come out stronger, we will go ahead and take our chances and try to get the customers that we can.

In terms of cash levels, it -- it's hard to answer that, because it depends on what you -- you know, what you can do with the cash, and, you know, we pay -- we are paying a bit of a negative arbitrage today so you can imagine what our company looks like -- you can kind of extract out to, you know, 2004 and look at 10 million kind of subs and lower debt load and this, that, and the other, and you have a pretty attractive company when you start extracting this company out a couple of years. I don't know what we'll do.

But, you know, we look at all -- we look at all those things. We look at every use of cash. The best look of cash for us is probably in investment in our business where we are getting those 30% IRRs or an investment in somebody else's business that we can return higher than the -- something better than what we pay in on debt.

Last question was on the converts.

Converts, we look at the converts -- I feel bad for the convert guys, the only guys that really -- if they bought on -- bought at -- when we priced them they were actually under water, I think, or a little bit under water. So everybody else, I think, when they invested in EchoStar at one of our offerings has made pretty good money. You know, obviously I hope those guys make good money too.

But the best situation would be that our stock got above $44 a share and went to, you know, $60 a share and they made money that way. That would be the best way, but in this market environment, that may not happen.

They are doing better today. But the last question I have is just a clarification on the debt schedule in the 10-K. You mentioned purchase commitments of $359 million in '03. I may have missed it when you talked about it earlier, Jason, but can you talk about what that's for in terms of equipment and if that is a recurring?

Yeah, this is Michael McDonnell. I can speak to that. A lot of that is just open-purchase commitments for inventory and equipment and so forth. That's what the bulk of that is and that's not really out of the ordinary for us. We continue to manage it very tight and very well.

Your next question comes from Douglas Shapiro with Banc of America Securities.

Yeah, sorry. I was just curious, I guess, on two things. One is, if a vertically-integrated program or distributor should acquire DIRECTV, I was wondering if you guys would lobby for change in the program access laws to extend to all vertically-integrated providers?

The second question was, it looks like you have de-emphasized the Digital Home plan lately, a little bit, I was just curious if that was a temporary or a permanent shift?

We will have to cross the bridge if -- if -- you will -- on your first question, we will have to cross that bridge when we get to it. We will certainly hope we can always compete on a level playing field. We feel if we can, we will be very successful.

In terms of Digital Home plan, the marketplace has de-emphasized it to some extent just based on where cable and the competition is. Having said that, good management looks at ways to utilize something like Digital Home plan in another way if the marketplace changes, so I think that you probably -- my gut feel is you probably will see that -- that emphasis -- you probably see a -- a more robust Digital Home plan as part of our business in the second half of the year versus the first half.

You know, it doesn't really make any difference. That's why free cash flow from operations is so important, because it -- you have -- you have to have confidence that we are going to -- we are going to put stuff out there the best way we know how.

I will say that the reason I like Digital Home plan, to some degree, is my cost of SAC is much less -- my cost of churn is much less because, for the most part, I get the hardware back. To get to the same bottom-line cash flow, you can have a bit -- you can have a bit more churn in Digital Home plan. And so -- you know, I think strategically, we will look for ways to make that in today's competitive environment to make that a better product for the customer, but we will have to wait and see.

All right, thanks

Your next question comes from Matthew Harrigan with Janco Partners.

Charlie, can you give us any feel for what you think data penetration is among your customers? I mean, given that you still have a large base of rural customers. Is it still a big market opportunity if you update it in 2004 or do you think that in some instances it is fairly well penetrated?

And secondly, you said you are still working out the economic template for your broadband product, but if you look at the technical, competitiveness of it, do you think it will be competitive with the new generations of Doxis (phonetic) or the cable companies are putting out or what is the basis for comparison in terms of the technical side of it?

The -- I mean, most of our customers probably don't have a broadband solution today, particularly our strong base in rural America don't have that, so we have -- so it is an opportunity for us. In other words, you have to prepare for it.

The beauty of satellite is we can put a signal up that will basically go through the entire United States, and we can get broadband customers from anywhere in that -- that beam. And so, you know, we don't have to build out a city and hope we get 50% penetration. So I think we have got some ways to do it.

It is the only way that really we, as a company, have been unsuccessful at in 23 years. I can't think of anything else that we attempted that we didn't ultimately prevail on. So we haven't -- we think there are ways to do it, and we just have to go out and decide what economic risks we are willing to take and whether the numbers add up.

There are fundamental things that have to happen with broadband via satellite. One is, just as the cable industry went to a Doxis (phonetic) standard. I would love to see the satellite industry a Doxis (phonetic) standard because that would drive the costs down. And then obviously, there are developments in satellite construction that today -- if you built a broadband satellite today, it would be wildly more efficient than if you started building that satellite two or three years ago. And those economics -- so it is really a timing thing.

And then the broadband business, it is not running away from us. We have time to do it. We have time to do it right. We blew $150 million on it with Wild Blue and StarBand. We were up-front about it and saw we were headed in the wrong direction about 18 months ago, two years ago.

We wrote it off, we moved on, we didn't stop and we thought the merger was the right answer because we have scale. When that didn't work, we've got back and said we don't have the scale now, but can we still do broadband and I think the answer -- you know, we will have more to talk about when we can show you -- when we can show you real -- a real business plan and then you guys can decide whether we are nuts or not.

I am confident today that we will have, for the vast majority of our customers, we will have broadband solutions that are competitive with anything they can get anywhere else. And that we will -- it's the biggest competitor threat to our business, but I believe we will answer, as we have in the past, we will answer that challenge.

And, in fact, to the extent that maybe the cable company has spent money unwisely on broadband, we might have some advantages. Because we have -- we have the ability to multicast. In other words, we can send -- if you were going to watch "Victoria Secret's" on the Internet and there's 3 million people all banging away, that's 3 million individual hits to that, where as we can do that through satellite to everybody, with only one thing. So you can imagine streaming video for movies or football or sports or whatever it might be. We have some advantages via satellite.

Thank you.

Your next question comes from [Rob Hemowitz] with [INAUDIBLE] Capital Management.

Hi, good afternoon. A couple of quick questions for you. First, regarding number of set top boxes per household. Can you kind of shed some light about your mix currently of where that's headed in terms of set top box penetration relative to your reduction of churn?

Well, I mean, I think in general the number of set top box per household is a slow trend to more boxes per household. You know, in other words, people aren't satisfied now with just satellite television on one TV, they want it on all their TVs, and as a result, we -- I think our whole industry does, you know, slow trend upward there. It is not huge, but it is a slow trend upward.

Does it affect churn? It has an impact on churn if you can hook up every TV set in the house. That's a positive thing because they can disconnect their basic cable. Because we have always had customers in the past who have kept analog cable, you know, on three TVs, and then had satellite on one TV. Now they can put satellite TV -- I think both us and DIRECTV have promotions that -- for multiple set top box users.

Last year you came out with that new switch that allowed four boxes. Do you have any more products coming up that will help in client retention like that?

Yeah. I mean I think -- very few customers need more than four set top boxes, but can do 50 in your house, if you need us too.

Right. In terms of the broadband strategy. Wild Blue is being revived as we speak. What would be the -- is there any particular specific reason why you would not partner with Wild Blue, considering their revival at this stage?

Well, we still own some of Wild Blue and we certainly hope they are successful and they, in fact, have a satellite going up from Canada sometime the next year or so. We are not real good in partnerships where we can't make -- where we can't have an impact on the final decision. We just haven't done very well there, and so we've just really decided as a strategy, for the most part, not to get involved in things where we can't make the final decisions particularly from a technology point of view.

So we have -- we are hopeful that Wild Blue will be wildly successful and we have distribution rights to utilize their satellite and if they are successful, then we will be well-positioned, but at this point in time decided not to put more money into something that was managed by a committee.

Got it.

I don't know, there's something about sitting in a room and walking out with a decision that is a much more efficient management tool than sitting in a room and deciding to do a study on it.

All right. [ LAUGHTER ] And -- finally, you spent -- you said yourself a few minutes ago that you spent a good part of last year focusing on getting the merger accomplished. Yet you were kind of freed from that in November, and the fourth-quarter results sort of reflected a renewed focus by you and the management team. It was market -- there was a marked -- seemingly marked improvement. Do you expect to continue? I mean, do you tie the two together in any way? And should we expect your focus to continue as it has been in the -- in the coming year and forward?

I like -- that is a great softball question. I would like to take credit for the fourth quarter, but quite frankly, one of the real positives are, if I am not here, this place probably runs better today than if I am here, at least according to the people here. And I think that is a good thing.

I think one of the positives -- in a round-about way, one of the positives of the merger was that this company became a company that ran certainly without Charlie Ergen, and even some of our other senior people, and ran in a way that things were put in place that they're going to pay longer-term dividends for us.

Once I came back in November, there was a few things that needed cleaning up. You know, they -- you know, they started, you know, putting one person in an office instead of three, and things like that. So we straightened that out pretty quick, but for the most part, the marketing and the strategy is coming from the lower levels of our company and from our customers. This is a very predictable business today.

And, again, once you -- once you put the foundation in place, and it's taken us seven years to do it, once you put the foundation in place, again, realize that we control our own destiny and our technology and our encryption, in our customer service. Once you do that, you become very predictable and it becomes a much easier management thing.

I think, you know, the hard part will be strategically going forward, you know, what do we invest in and what don't we invest in and what customers do we invest in and that's probably where we need, that's where our CFO and finance guys come into play and -- to make -- because our marketing people will sell everybody, if they could. You know, as long as they have got a pulse and we are just not going to let them do that.

Okay, thanks very much.

Operator, we've probably got time for one more question

Your next question comes from Tom Watts with SG Cowan.

Hi, Charlie, congratulations on a good quarter.

Thank you.

Just a couple of updates. One, where do you stand in terms of FCC licensing for VisionStar at the 113th division?

And secondly, related to your broadband venture, is that -- how would you manage that for the focus on free cash flow from operations? Is that something that would you like to do on an off balance sheet basis? Something you wanted to be owned? Is it -- do you focus on that as a reduce as churn or is that going to be something that actually is a good business in itself?

On VisionStar we have asked for an extension of time from the FCC. They have not been very accommodating, historically for extensions for KA band. So we will have to wait and see.

Our first venture into KA-band, obviously, is EchoStar 9, which launches, again, will be operational, hopefully this summer, and that's where we will test the economics and our theory about how broadband should work. And to the extent we have proved yourselves that we can do it, then, you know, obviously we will have to figure out where we can get capacity, and if we, for some reason, don't have the 113 slot.

We have the -- we are building -- we are going -- we are 83 degrees slot, we have KA and we can build another satellite for 121 at KA band, which works for us as well. So we have some options within our own destiny there, and obviously, there are other people that have slots, and Wild Blue that will have capacity up there, as well. So we're -- there is no shortage of KA band -- it is not like DBS where there is a real shortage of spectrum. There's plenty of spectrum within KA, which is one of the great things about, perhaps, economics there.

You know, we will have more -- as the year goes by, you know, we don't do a lot of -- of going to things and talking about what we are supposed to do. We tend to just rather go out and do it and then tell you about it after we have already done it, but we certainly will be doing some things, if we can prove to ourselves that broadband, you know, that we can do broadband.

And just -- one of the concerns on satellite broadband is high subscriber acquisition costs that people typically associate with it. How would that fit into your model without diluting your cash flow objective?

I don't believe we can do broadband effectively if we have high acquisition costs. That means we have to make the product less expensive. The first step in that is to standardized how we do it.

The Doxis (phonetic) modem that cable has started out at probably $1,000 and was probably, is well under $100 today. The reason is, it was standardized. We started out at StarBand with $1,000 for the equipment and there is probably no reason long term we can't ultimately, you know, get that cost down to a couple hundred bucks. If we can't do that, we shouldn't be in the business. We have to prove to ourself we can do that.

You suggested you thought that you would like to see standardization on the broadband platform. Do you see hope for that? Something we could see in the next 12 months, at least?

Well, -- you know, I would like to see standardization on DBS for locals and everything else, we just haven't been very effective at getting, absent a merger, we just haven't been very effective of getting our companies to work together on that.

So we'll see -- I think to the extent we can take a leadership role there and get some people to look at that and come to the same conclusion, that's a possibility. It certainly -- Wild Blue is certainly looking at standards and certainly, we will have some input into that as a shareholder, and certainly other people are looking at standards in Europe and around the world.

You know, we adopted the MPEG standard when it was adopted around the world and it has paid real dividends for us, and I hope we can do the same thing here. There are about three or four different ways to potentially do it. And I think the right answer is going to be pretty obvious, in my opinion. But we will have to wait and see.

So the Wild Blue, you could end up on the same standard as Wild Blue?

I think that is a possibility or Wild Blue adopts something that we think -- it's hard to say.

Great, thank you very much.

Basically how we look at it, what's -- five years from now, what's the least expensive way we can do this and that's probably the standard we want as opposed to what is the cheapest today.

Good. Well, thanks a lot and congratulations on a great quarter.

Okay, I think that's -- That's it.

That's everything. I would like to thank you again for tuning in. We hope to see everybody in Denver next week. If you are debating on whether to come out, there's two feet of fresh powder up in the mountains.

Our next conference call will be right around the first week in May, I think.

Yep.

For our first quarter. Will be right around the first week of May. We have our shareholders meeting -- have we announced that yet?

Nope.

Can't say that then, huh. We will have a annual shareholder meeting and you are invited to come to that whenever we figure out what day it is. And I think that's it.

This concludes today's EchoStar Q4 2002 earnings conference call, you may now disconnect.