DISH Network Corp (DISH) 2004 Q3 法說會逐字稿

Good afternoon. My name is Elizabeth and I will be your conference facilitator today. At this time I would like to welcome everyone to the EchoStar third quarter earnings conference call. All lines have been place 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 1 on your telephone key pad. If you would like to withdraw your question, press star and then the number 2 on your telephone key pad. Thank you.

Mr. Kiser, you may now begin your conference.

All right. Well, 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; David Moskowitz, our Executive Vice President and General Counsel, and Paul Orban, our Controller.

Let me give you a quick recap of the financial performance for the quarter and then we'll open it up for some Q&A.

Before we get started, as most of you know, we do need to do our safe harbor disclosures, so for that I'll turn it over to David.

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

All statements we make during this call that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities 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 those 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 our historical results or forward-looking statements. I'd ask you to look at the front of our 10 Q for a list of these factors. In addition, we 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 also carefully consider the risks described in our reports and should not place undo reliance on any forward-looking statements that we do make.

Please also note that during the call we will refer to certain measures of financial performance that are not calculated and percented in accordance with generally accepted accounting principals. These performance measures include EBITDA and free cash flow from operations. Please refer to our 10 Q, which is available on our website for a reconciliation of EBITDA and free cash flow from operations to their most directly comparable GAAP measures. With that out of the way I'll turn it back over to Jason.

All right. Thanks, David. Let's take a look at the quarter and we'll start with the total company.

Total revenue for the quarter was $1.86 billion, an increase of 5% over the last quarter and 28% higher than the same period a year ago. Continued strong subscriber growth and higher average revenue per subscriber were the primary drivers of the increase. From an EBITDA perspective, we generated $327 million during the quarter. That's $31 million ahead of Q2, an increase of 10%.

Year-over-year EBITDA grew 66 million, which was a 25% increase.

Net income for the quarter was 102 million, an increase of 17 million over last quarter and 67 million higher than the same period a year ago.

Basic earnings per share were 22 cents compared to 18 cents last quarter and 7 cents for the same period last year.

At EchoStar, one of the key metrics we focus on is free cash flow from operations. During the quarter, free cash flow was negative $33 million. This represents a $2 million decrease from last quarter and a $168 million decrease from the same period a year ago. These decreases resulted from the cost of subscriber growth and increases in satellite payments and corporate capital expenditures.

Let's look at the DISH Network specifically. Despite what has been an increasingly competitive environment, we added 350,000 net new customers, or just under 44% of the incremental share -- incremental growth in the DBS industry for the quarter, similar to our year-to-date share of 45%.

We now have over 10,475,000 subscribers to the DISH Network, after reaching the 10 million customer milestone less than 5 months ago. We believe that our lowest all-digital price in America marketing message has highlighted our message as the low-cost provider in a rising rate environment and we continue so see significant growth in the areas where we offer local content, which is now up to 151 markets.

As you can see today, and with BTB's release from last week, DBS as an industry has seen record demand in the marketplace.

The third quarter has historically been the seasonally high quarter for churn, and this year is no different. Churn was 1.77% compared to 1.71% in Q2 and 1.72% for the same period a year ago.

Our consumer strategy continues to revolve around taking advantage of our low-cost infrastructure by combining low prices with best in class service and product offerings.

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 we increased our average revenue per subscriber to $56.11, an increase of 52 cents per sub over the second quarter. The increase was driven by several items.

First, RPUs continue to normalize from customers rolling off our discounted programming promotions. Our current Free-For-All promotion, while still providing programming credits, does so to a lesser extent than in prior periods.

Second, increases in multiple box households that we've specifically targeted, show up as increased RPU from the additional fees we received from the second, third and fourth boxes in the home. The same is true for advanced services and DVRs.

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

And finally, equipment sales, installations, and other services related to our relationship with SBC have contributed to the overall increase.

Year over year, RPU improved $5.23, which not only reflects the points we just talked about, but also our price increases from Q1 of this year.

Subscriber related margins increased by 66 basis points from Q2, primarily as a result of reversing prior period accruals. Included in the quarter was $13 million for Smart Cards and $8 million for other subscriber related expenses. The combination of these two items was a one-time benefit of 121 basis points of margin.

We continue to focus heavily on gaining efficiencies in our call centers, installation network, and cost-effectively managing our retention spending, all of which contributed to the controllable portion of the margin erosion we've seen on a year over year basis.

The less controllable portion of the margin decline is related to the accounting treatment for SBC subs, where we recognize the installation, a deferred portion of the equipment, and lower recurring margin. But for comparative purposes, these transactions will continue to cause margins to be below levels that existed prior to the partnership.

During the third quarter, subscriber acquisition costs plus the capitalized portion and the amounts recovered under the lease program, increased 2% or $12 per ad for Q2. For the quarter we averaged $588 per gross addition.

The increase in SAC was primarily the result of several factors. First, the continued shift in mix towards leases, which ads SACs, since lease customers tend to have a higher number of boxes and/or tuners per household, which increases the metric. We've also offered more free equipment, either through more set-top boxes or higher cost boxes for advanced services. And it is important to reiterate that while this has a negative effect of increasing SAC, there is a corresponding benefit in RPU, from less discounted programming and additional fees from multi-box households and advanced services.

Additionally, the portion of SAC related to installation increased on a per-ad basis as a result of more time-consuming and technically complex installs, resulting from multiple-box households and the SuperDish product.

Let's take a quick look at the balance sheet. During the quarter we wrote off $10.7 million of slow moving or obsolete inventory. And although not occuring in Q3, we reduced our debt costs on October 1st. We successfully issued $1 billion of new tenure money at 6 and 5/8 and used the proceeds to take out the most expensive paper in our capital structure at 10 and 3/8 on the first day that it was callable.

And whether $56 million of call premium and issuance costs will get charged in the 4th quarter and have a negative impact on net income and free cash flow, we reduced our annual interest costs by $37.5 million on a going forward basis and lowered our weighted average cost for debt to 6%.

At the end of the quarter we had approximately $5.5 billion of debt. We also ended the quarter with cash and marketable securities of $1.62 billion, which excludes $132 million of restricted cash.

The majority of the $102 million decline in cash from the prior quarter is directly attributable to the buyback of $87 million of stock in Q3 under our initial share repurchase program that we reported during our last call.

On a total debt-per-subscriber basis, we ended the quarter at $528 a sub. On a net debt basis, that drops to $374 per sub.

Capital expenditures in the quarter with $317 million, with about 187 million of that amount going for capitalized lease equipment and the remaining $130 million for satellites and general corporate CapEx.

Two other items of note before we open it up for Q&A. As I'm sure most of you have seen already, we did not repurchase any shares under our current buyback program, despite the stock trading at levels that were below our average purchase price for the initial billion-dollar buyback we completed in July.

There were really a couple of underlying reasons for this. The first is really just a function of how we've chosen to logistically manage our plan. We entered into a standard 10B-51 plan, where we've set the parameters at a point in time that then remain in place while our internal trading windows are closed, which is the last two months out of every quarter.

When we set the parameters, we look at a variety of factors, including what we think the financial markets are doing, how we think the investors are reacting to the sector and other general business issues. While nothing was triggered this quarter, nor do we know when or if anything will be triggered, going forward, we do evaluate the parameters of the 10B-51 at every open window.

The second reason we could be more conservative on our current buyback plan is related to the announcement of our first ever dividend. We declared a one-time special dividend of $1 per share for holders of record as of December 8th. That amounts to roughly $455 million of dividend payout.

On a pro forma basis, our current cash position would drop to $1.16 billion and our net debt would increase to $4.37 billion or $417 per subscriber, which is well within our comfort level.

As we've mentioned many times before, we are constantly evaluating our capital structure and how best to use our cash. At various times, we've retired debt, we've bought back stock, we have stockpiled cash, and now we are actually returning some to shareholders.

Favorable tax laws and confidence in our cash position were really the primary factors behind the decision to pay the dividend. We're fortunate enough to have the debt side of our balance sheet in pretty good order and we feel confident in the cash generating ability of our business going forward.

That's really everything we've got prepared on the numbers so, Operator, with that, I think we'll open it up for some questions.

One thing I want to add. I don't want anybody to get the wrong idea. Actually, our trading windows are a little bit more complicated than Jason described, but suffice to say that we do indeed evaluate the plan when we do have open trading windows.

And with that, I think we'll go ahead and open up it up to questions.

Thank you for clarifying.

At this time I would like to remind everyone, if you would like to ask a question please press Star and then the number 1on your telephone key pad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Douglas Shapiro from Banc of America.

Thank you. I wanted to ask a question about SBC and the nature of the SBC-EchoStar relationship. I think SBC has stated that it believes it has the right to transition the SBC DISH subs on network when and if it has an on network video solution. I was just curious, your reactions to that or whether you think they do have those rights.

Yeah, this is Charlie. You know, we -- obviously we have a contract with SBC so, and we don't really disclose the details of the contract, but I would say that that interpretation would not be entirely accurate.

I guess I would answer the question in this way: that, ironically, I guess, the DISH -- I mean, I guess a longer-winded answer, which is obviously our SBC relationship is one we value and one that EchoStar, we continue to put a lot of effort in to make sure we are a good partner for them.

Obviously as technology changes and as their strategy may change along with that, there may be instances where we are on the same side going forward, and there may be some instances where we compete, or there may be -- it may be a situation where the relationship just doesn't work at some point in time.

I think that contractually, that all those things were pretty well thought out by both sides prior to entering into the contract. It was not a new technology that suddenly stepped up after we did the contract, so, I think it is a fair contract that kind of protects both sides in that. And I was going to say, ironically, the DISH network subscribers that SBC has -- or the SBC subscribers to DISH network, are probably much safer subscribers for us than -- in general, than perhaps a cable subscriber has or a Direct TV has or our other subscribers, which, if we weren't in a contractual relationship, they obviously could go after. So I think it is all pretty well thought out. I think there is ample protections on both sides and I wouldn't characterize it exactly the way they have.

Great. Thank you.

Your next question comes from the line of Robert Peck of Bear Stearns.

Hey, Charlie. I was wondering if you could give us a little more color on churn. We had churn ticking up a little bit versus our estimates and we saw guidance in the Q for it to remain sort of up for the next 5 months, I guess, as contracts roll over, commitment contracts. Could you tell us how much of the churn is coming from that and how much may be coming from NRTC areas where Direct TV has been making more of an effort?

I guess I wouldn't say we've seen too much NRTC yet and I think that was kind of a one -- I think they have had about a quarter to -- I mean, if they only had a month or six weeks to really kind of play in that sandbox, so there's probably not too much insight we can draw there yet. Although, obviously, it's going to be more competitive in those areas going forward.

The churn itself, there -- it has been actually pretty stable versus last year. There is two factors that really account for the slight increase from last year which is we don't require a commitment now. And as we get -- the effect of that, as we get people rolling off the commitment that we sold last year to get to the 13th month, you have a higher churn in the 13th month and we have a more stable churn throughout the 13 months when we don't require commitment. So those two things are going to continue on for about 8 more months. Each month that has an impact on churn that over-estimates, over-states, probably what your underlying churn is and then after about 8 months, that all stabilizes from now. It probably under-stated churn in the past. Any time you put a 1-year commitment or 2-year commitment on a customer, you are understating churn, because when they roll off the contract, you're going to get a lot of churn in the month they roll off.

And the other one is SBC, a little bit new to the industry and they are still getting their feet wet in terms of their policies and how they interface with kind of -- the subs they want to acquire. And they would tend to have a slight negative impact on our -- versus our normal churn.

Economically it doesn't impact us as much -- it does impact us, because we lose revenue, but obviously we didn't have SAC in those customers.

And Jason, maybe could you give us a little more color on the favorable tax laws and why you chose to go more with the dividend than, say, stock buyback?

You want to do favorable tax law?

Who wants to talk about favorable tax law?

Sure. I think that there are really a couple factors working. Obviously, depending upon your tax situation and how long you hold the shares, currently dividends are taxed at a 15% rate and there is no telling whether that will continue to be the case in the years ahead. As we indicated in the press release for the dividend, there is also the potential that a portion of the dividend will actually be free of tax because of the amount of earnings -- cumulative earnings and profits that EchoStar has.

As we've said, we take a look all the time at the amount of cash that we have on hand and what the best use that we have for that cash is. And given the particulars of the tax situation currently, we felt that this made the most sense.

Yeah. Each shareholder will have to look at their own tax situation. We by no means are speaking for all shareholders. But there is -- because we have been in a pretty steady earnings environment, we had a one-time situation where, in this case, some of the dividend beyond our retained earnings will be treated -- could be treated for some shareholders as a return of capital, which would reduce their basis in the stock, but would actually be tax-free -- I shouldn't say tax-free. Tax-deferred to the shareholder until they sold the stock, at which time it would be -- their basis would be lower and therefore they would have capital gains on -- assuming that the stock was sold for a profit. So it is a unique situation that probably would not be available to our shareholders next year. So that was a factor, I think, in our board's thinking, in terms of why they would do something now versus maybe some of the other options we'd have with our cash.

Last question and then I'll let somebody else go. Has Echo IV basically recovered and should we expect 106 million insurance charge in Q4?

Dave can take that.

No. The answer is no. While the solar array has now deployed, the arbitrators in our claim against the insurers have concluded that that deployment is really irrelevant to a determination of what the payout should be under the insurance policies. And there are also other issues with EchoStar IV which limit the number of transponders that we can use beyond, at this point, the available power.

We didn't increase -- we didn't get any additional capacity because the solar panel developed, I mean unfolded.

Right. That's right. We still have the $106 million receivable on the books because we still believe that we will receive at least that much as a result of the insurance claim. Obviously, you can never be certain of these things, but we feel confident enough that we think that it should remain on the books at that level.

Thanks, guys.

Your next question comes from the line of Craig Moffett of Sanford Bernstein.

Yes, hi, good morning. If I could just touch on the share buyback for a moment. It looks like you have reduced the share count by -- by something like 6 1/2% over the last year and the public float by about 12 or 13. And the billion dollars would reduce the public float by another 14, 15% going forward. Does that enter into your weighing between share buybacks and dividends? And is there some level of public ownership that you would like to maintain in the stock?

I don't think we have defined strategies there. I think the dividend is a one-time dividend that our board looked at and there were -- you know, again, given the opportunities and given where our stock traded, you will notice that we did actually buy some shares in the third quarter. I think we bought 2.9 million shares in the third quarter. We previously announced it in our last conference call because it was before our conference call, but -- I think the average price of that was low -- was high 20s, $29.71. The stock really hasn't traded that low this quarter since that announcement.

So I guess -- I guess the theory being that, you know, as Jason said, we do set some defined limits where we participate in stock buybacks doesn't mean that the stock would drop that low. So in this particular case, given again, the board saw a unique tax situation, a situation where our stock had not traded as low as we had set in our buyback strategy and decided to pay a one-time dividend instead. That doesn't -- that shouldn't give you -- I don't know if that gives you a map or a strategy or anything to know what we would do going forward because we continue to look at the market and perceptions and value and a number of factors every day and then we make decisions based on the information we have at that time.

Thank you, Charlie.

Your next question comes from the line of Doug Mitchelson of Deutsche Banc Securities.

You're obviously benefiting from SBC marketing addition its territories. Are you seeing negative impact in the BellSouth and Verizon from their marketing of direct TV?

I'll tell you, it's too early to tell. I would think that, again -- I think that -- I certainly don't think it will be a positive. I think that the market is going to be more competitive, just because most of the Bells and phone companies are now marketing video, we're going to get, you know, our fair share of that in a positive way. But over time, the technology and some of the strategies that the Bell companies have talked about could of course bring further competition to our industry.

So we have to be prepared for all that. It is a kind of environment I think we like, as a company. Because the more competitive it is, the better you got to be to be effective and, you know, -- and you know, I shouldn't say nothing will ever be as competitive as what we'vegone through the last 25 years, but it certainly will remain competitive and we expect that the Bells will get some business.

I think it's going to have a bigger impact on cable companies. The demand in DBS continues to be strong. We obviously wish we got a little bit better market share, but our demand is still strong and quite a bit stronger than last year and we view all those things as positives, given that cable is really out there now with -- cable is giving it their best shot. They got video on command, the got DBRs, they got HD TV, they got voice-over IP, they got broadband bundles and, you know, as an industry, they are continuing to lose subscribers to satellite.

I think, again, the competitive nature out there probably is ultimately there will be some winners and losers. The winners probably will be solid financially. I think we have done that with our balance sheet today. I think they will be very efficient in their operations. We have a lot of room for improvement there. We have, you know -- we have at least another year to start getting our efficiencies in place. And they will be well managed and we have room for improvement there and those are kind of the three things we focused on. We've accomplished one of those goals this year and we've still got, really, management and efficiency goals to be able to really compete in a -- and we have done a lot of other things. We've got our customer service to a level that will leads the industry. So we have done something else positive. But that has come with an expense of efficiencies and we need to do a better job on that if we're going to compete long-term.

On the market share issue, in the NRCT territories, you know, direct TV had some quick successes, got gross [inaudible] something like 104,000 third quarter from [inaudible] thousand or so in previous quarters. Are they expanding the market in the NRTC territories, or was there a little bit of a share shift there between you and them in the quarter?

I would imagine there was a share shift. I mean, when you -- the NRTC territories, particularly Pegasus, had really been -- really had not been in the marketplace, and you know, not been in the marketplace with subscriber acquisition costs or anything else in the last, you know, probably 18 months, so I think Direct TV is better poised there to get more market share in those markets. First of all, you know, we're still a dominant factor in those markets, but clearly we'll be less dominant.

And then, last question, just curious you feel how you are set on installation capacity. The SBC occasionally during the quarter made noise about the pace at which they were able to add DISH subs. And again, they might be able to add subs faster if there was more installed capacity.

You know, they did about -- I'm sure their numbers are -- they did about the same level on the third quarter in net ads as they did in the second quarter. So we were -- we did have shortages in the beginning and we were able to ramp up and I don't believe that is a factor today.

Great. Thank you.

Your next question comes from the Niraj Gupta of Smith Barney.

Thank you and good morning. Two questions: First, just in the multi-unit homes, in particular the 4 TV leased households, I'm just curious if you could talk about what portion of the customers are being served by, you know, multi-room box solutions, i.e., boxes with two tuners, and also if you could just kind of talk about where the price point is on a two-tuner digital box for you guys versus the single-tuner box. And then I had one follow-up question.

That's a little bit -- it's hard to break that down. There are two tuner boxes in DRVs, for example, where a customer wants to watch and record at the same time. And that box only is going to go in one TV set.

Right.

And that -- the cost of that extra tuner, you know, probably adds 50 bucks to your SAC or something in that range. There is an additional kind of receivers that were unique in that we actually put two tuners in both DVRs and in a standard set box, where you actually can go to two different TV sets, and those two TV sets can share the hard drive if you have a hard drive or they can share the power supply. And that is slightly cheaper, for an [inaudible] level, than two separate boxes. And in that case, for example, we may save $50 in subscriber acquisition costs if they use it in that mode.

So net, net, net, -- SAC, and -- so two tuners and multiple tuners probably on average -- on average, add a little to bit to SAC because a lot of people use them in the picture and picture -- I mean, in the watch and record mode, and they also add complexity out at the satellite dish because you need more switching and you can put more cost into your low-noise amplifiers and your switching to accommodate multiple tuners to the house. So it adds some complexity as well.

So net, net, net, two tuners, while very -- you know, customers want that, it adds a little to SAC. On average we have done -- we -- adds less to SAC, for DISH Network than probably cable, because we've invented multiple tuners that go to multiple TV sets.

Right. That's where you are saving the money, is a box server and two TV sets.

And we save some. It is not as much as you might think because you still have to demodulate the signal twice and you still have to have a lot of of the same components in there, but you do share a power supply and you do share a hard drive. You save more on the hard drive part than do on the regular one. It is a bit more complex to install.

Yep.

One of the things that drove some of our inefficiencies is, we or course led the way with multiple tuner boxes in -- for multiple TV sets and it's a little bit more unique of an installation and service problem. Be -- we weren't very good at it early in the year. We've gotten better.

And Charlie, do you think over the next 12 months, forgetting the DVR aspect, but just the approach that you guys have taken where the leasing offer largely focuses on getting a box with two tuners to service the two TV sets. Do you think you will get enough efficiencies so that that will help keep SAC down a little bit as you focus more on HD and DVR additions?

I think that there is -- again, I think that is one factor, but the more material factor in controlling SAC costs is the fact that if a customer does turn on us, the vast majority of the time we get that box back and we get to redeploy it, thus saving us the SAC the second time around and just, historically, when we have always sold the equipment or given it away for free we don't get the equipment back so we never had a chance to recapture that. And that will slowly increase each month, that return of equipment, that slowly increases and reduces our SAC each and every month a little bit. And again, over time, you can run your own model on that.

Right.

But it is -- you know it is in the 10s or 20s or 30s or 40s or 50s of dollars over time.

And then, just one follow-up, you talked a lot about SBC on this call. If you can take a step back and you look at -- look at where you are today versus maybe where you thought you would be a year ago, how would you evaluate the success of the partnership to date, and maybe you could just talk a little bit about your expectations for the partnership going into the next 12 months. Thanks.

I think it is probably -- it is probably a better question for SBC and I think they have a conference call in a couple days. Because they really -- they are the ones that are driving the bus. They are a much bigger company and they strategically have initiatives that -- obviously we're not privy to everything. But from our perspective, it is something that -- we don't do a lot of partnerships but when we do them, we try really hard, SBC has been really good to work with.

We've had a lot of obstacles to overcome, whether it be installation or training issues or just -- it's not, you know, Direct TV and -- to some degree, EchoStar make this business look a little bit easier than it probably is. So we have had a lot of things that we've worked together on to overcome and obviously we believe that SBC will in fact deploy a lot of fiber to the curb and be in a position to do some video over broadband. But they're still going to have an awful lot of customers over the next 10 or 15 years who it's just not economically going to make sense to do that for and they're still going to want a video solution for them, number one, and so we think that it could be some very positive aspects long-term in the partnership.

And secondly, even if you can do video over broadband, I think that most customers are going to want a broadcast solution in their home in addition to even a broadband solution. Those are going to be some higher end customers, they're going to kind of want it all. People are going to want some of the benefits of the broadcast solution that I think is -- that DBS has a much better mousetrap perhaps than cable or fiber, in terms of just a broadcast mode.

I think that even in those homes -- it would be real interesting -- it's going to be interesting to see if fiber came by -- a fiber broadband solution came by one of the houses that have a satellite dish today, and you had all the things the R-box have talked about, how many of those customers would actually take a dish down. I don't think it's going to be huge numbers initially, and then the other part of the equation is, how many people will have cable today will switch to the broadband solution? I mean, with a bundled offering for voice and data, it that has an indirect negative impact on us, because it is one less customer we might otherwise get.

But it -- just, logically to me, is much, much, much more troublesome for the cable companies. You are in a situation where you have three or four people now in the video business, potentially. And it looks like cable has the biggest turf to defend. With 70% of the market they've got-- or 75% of the market, they've got a big, big turf to defend.

At a time when they are highly leveraged and continuing to lose their core customers and they've got pretty stiff -- I mean, news corporation is a pretty stiff competitor, but, you know, a much invigorated competitor than they had with General Motors owning them. And we typically can hold our own sometimes. And then have you the phone companies coming. That's a really interesting dynamic that will happen. And I think that, to the extent that some of the cable companies get turned upside down a little bit, you are going to have a free-for-all for 67 million subscribers and -- don't get me wrong. I don't believe some of the well-managed cable companies will get turned upside down. There are certainly half a dozen cable companies that will do very, very well. But the industry is changing.

Thank you.

Your next question comes from the line of Steve Mather of Sanders, Morris, and Harris.

Yes, first off, can you give as you quick update on DVRs, maybe how many current subs you have, how many boxes you might have added this quarter?

We don't disclose that, but we continue to be a lead in that segment of the marketplace. You know, again, we really own our own technology, we don't pay a license fee to anybody for it.

We certainly have room for improvement in making our DVRs a little simpler to operate and so forth, but we lead -- we certainly lead a lot of the technology in that field and we think -- you know, our customers like it and it is a revolutionary technology. It does change the way people watch TV.

The interesting dynamic will be -- the interesting dynamic to watch will be, are consumers going to prefer a DVR that they record what they want for their own video in demand, their own personalized video in demand, or are they going to be happy with video in demand that the cable operator says, this is what we think you want to watch. My bet would be return on investment will be much better on the personalized DVR.

Charlie, just secondly, there are a lot of good things going on in the quarter with subs and revenue, et cetera. Can you give us a little perspective on two of your challenges; the one with DISH Network and the other with 2-DISH local.

The biggest challenge that we have as a company is really to do spring cleaning, so to speak, and become a more efficient company. What you do when you got one or two million subscribers becomes increasingly difficult when you have 10 or 11 million subscribers. And, you know, your systems -- your systems are suddenly not big enough. Your complexity that you could do with human effort becomes tougher to do.

And so we have to go back through there and simplify what we do and become more efficient at what we do. And we have to make sure we have a management team that's capable of doing that, which means they have to have a financial understanding, that means they have to have a tenacity. And we aren't there yet on both those counts. And so that's really -- we have to be better managed and that's of course my fault. And we have to have a tenacity to become more efficient.

And it is going to take -- it took us a couple years to start to get the -- to start getting the inefficiencies kind of in the system and it is going to take us a couple years. We are about 6 months into really focusing on efficiencies and we've probably got 18 months more to go. And we'll start seeing -- you know, things like -- things like SuperDish are very inefficient. We did that to get to 150 markets, local-to-local. We did that so we could capture the flag in some of those markets, but it is an inefficient way for us to install and service dishes, and obviously new satellites that we have under construction will play a big role in getting this more efficient, even without management's help. But management has to get more efficient.

As far as 2-dish solution, obviously we did what Congress asked. I still get letters and calls from senators and congressmen wanting their local markets up on satellite. We were good guys and did what they asked us to do. And the broadcasting lobby, which now includes DirecTV because they are owned by News Corp, and of course they're owned by Fox, which is primarily a broadcaster, you know, obviously would like to see a one-dish solution in a timely manner.

Now, we're not actually at odds. We would like to see a one-dish solution as well because it would -- it would improve our efficiencies and obviously we have to compete against DirecTV or cable, who have either no dish or one-dish solutions. The problem is we have to build a new generations of satellites to do that and we can't do it in the 12 months that Congress has allocated for that. As a result of that, we're against the House legislation that would require us to do something that is not physically possible, unless somebody can get creative and figure out another way to do it. We don't think it is fair to punish a company who has done what Congress asked us to do. And it's a shame that the broadcasters can have that much power in Congress, and maybe they do, maybe they don't.

What's going to happen with the legislation will be one of two things: you'll see a bill pass that could be anywhere from the House bill to some compromise to the Senate bill, or you will see probably a simple 1-year extension and we'll revisit all this next year. Today we would be for an extension because it is very punitive set of legislation towards EchoStar.

Thank you for your time. Just one last --

By the way, our track record of course is not great. We have never won -- we have never won -- we have never won at the justice department and we have never won in Congress. So we're about 0 for 100. I don't know what the bet line is, but we're not -- we're not a factor in Washington at this point.

Charlie, one last thing. I tried to look at your satellite road map, if you will, and piece that together. It seems like there's a lot of options available to you. Is there any clarity you could share regarding that? And that's my last. Thanks.

The clarity is there are a lot of options available to us. A lot of it depends on how we see the market. I think you have to deploy your resources in a prudent manner. I think that, you know, we've now seen DirecTV is going to set their strategy. It is a pretty innovative strategy, it's a pretty good one. And, you know, we'll look and see what the phone companies and cable companies will do.

What we try to do as management is try to put ourselves in position that we have a lot of options so that no matter what happens, at least for the part of the business that we think we can be efficient in and be profitable in, that we think we have ability to compete. And I think we have done that and we'll have to -- you know, we'll have to wait and see how all the things develop. I think our strategy will become a little bit clearer next year as we get more -- we clearly want to more toward MPEG-4 which, basically, doubles our capacity.

And the time line for MPEG-4 is not clear yet, but it is certainly a year away. And we have to wait and see those things develop and exactly how we are going to transition.

Thanks much.

Your next question comes from the line of John Coates of Omega Advisors.

Hi, good morning. This is more of a follow-up to Doug Shapiro's question. Can you comment on -- have the Telco Fiber announcements changed your assessment of the ultimate value of a subscriber or of the company? And did this play a role in your decision to pay a dividend rather than to re-purchase stock? Also, could you comment on whether the economics of the subscribers that you were adding in the third quarter have changed significantly from previous quarters?.

Yeah, I would say -- to answer your second part, I don't think the economics have changed. They are a little higher, we don't really know for sure, right? Because the subscribers you add today is churned next year. So it takes a while to -- when you get undisciplined, your churn starts going up even though you may have some discipline in place at the time. And vise versa.

You may be undisciplined and you add a lot of subscribers and all of a sudden your churn looks like it's lower and then it will come back to bite you in the tail, you know, six months or a year later. So you have to be pretty careful about analyzing churn stuff. But I think churns is within the scope of where we expected it to be.

The Auerbach announcements, I would say, it is hard to know at this point how that might affect economics of subscribers. I think what we look at is how does it affect the economics of our company. Because we think people will need a broadcast mode, I think -- because programming contracts are very heavily discounted to the bigger players and, you know, we're on track to very shortly become the third largest MSO in the United States, and we're already the third largest when it comes to owned and operated subscribers, because Time Warner has some and there are [inaudible] that aren't -- that they manage, but don't own all of. But I think we are all well positioned there.

I think we are looking a little broader at what we do than just subscribers and how we as a telecommunications company will build value for our shareholders. It had no impact on our dividend announcement. That was strictly a case of not having hit a limit on share buy-backs and a -- and a potential one-time tax benefit to shareholders because of the portion that might be -- that return of capital and tax-free that won't be available to us next year, provided we have earnings.

Thank you.

Your next question comes from the line of Jeff Lobocek from Wachovia.

Hey, guys. Lebrocek. That's a new one. I guess I will ask about inventories. They were a bit higher than expectations even with the $10.7 million write-off. Is that a reflection of the type of demand you expect in the 4th quarter? Could you provide more color on your inventory levels?.

That's a case of inefficiencies. Management inefficiencies. I think you have to -- you have to forecast out about 6 or 8 months out on your product needs and last year we ran out and so we left a fair number of subscribers on the table that we could have gotten in the third and fourth quarters. I don't think anybody wanted to have that situation this year. We also had three new models and we didn't know whether the dual tuners would be successful or not, and so we on purpose had higher inventory levels because we didn't know -- we didn't want to run out. We ordered them a long time ago and we didn't know which models would be popular.

Having said that, I think that -- I think that you will see -- I think we are pretty consistent now in terms of the models we sell and we have a pretty good feel for that and I think that we have a great opportunity to become more efficient on the inventory level and I would expect that we'll have some improvement in that over the next two quarters.

And the --

The line is where it should be. It is not a efficient use of our capital at this point.

Okay. And then DirecTV said they saw a spike in involuntary turn in the quarter due to credit scoring issues. You've said in the past they were being particularly aggressive. Can you comment on that and are you seeing higher involuntary churn?

I would say we are probably -- you know, we had that problem a year ago --

Right.

where we probably -- and that tended to bite us in the tail, you know, the last few quarters. And I think that we resolved that problem early this year. And so we are not seeing -- I would say we are not seeing that particular problem.

But we're -- comparatively, we are a bit tighter on the credit perhaps than our competition. And have been. And it hurts your growth a little obviously, but when you are taking a long-term view of it, you don't want to spend 600 bucks SAC only to lose a customer before you get your return on him. So I think it is prudent.

One last question. I have to let you put your 2 cents in on DirecTV, NFL, 3 1/2 billion. Can you comment on that?

You know, I didn't get to listen to their call this morning. But if anybody knows the value of the NFL, it would be Chase and the folks at Fox. As usual, I would say there's probably things in that contract that are probably very favorable to them that perhaps aren't quite as obvious, and it looks like they are obviously paying -- given their previous contract, probably over a billion dollars in each of the last two years.

They also -- I would expect -- probably expect to have 20 million subscribers and over several million people buying the ticket from them and I think that they see a pass to make money on it, either directly or indirectly. Obviously indirectly you get retailers excited about selling your product when you have something exclusive. So it looks to me to be -- I have every confidence that those guys know what they are doing and that they probably -- if I had to bet I would say that they probably did a pretty good deal. We didn't have a chance to bid on it. So the NFL may have left some money on the table. The NFL has got the best franchise in programming in America. It's obviously disappointing to us if they continue to have it.

Having said that, it hasn't been a factor in our growth. Our customers are not our customers because we have NFL. I think it is going to have -- it is one more blow on the head of cable companies, because to the extent that that contract is in fact exclusive over cable until 2010, we don't have to face the pressure of cable and DirecTV having NFL season tickets. That would be a little tougher for us.

And just DirecTV having it continues to put pressure on cable. As cable gets weaker, we're going to get our fair share of cable customers.

So there are not good trends out there for cable.

Okay. Thank you.

Your next question comes from the line of Ray Schleinkofer of Sturdivant & Company.

Yes, I just wanted to follow-up a little bit on the transition to MPEG-4 and maybe how, when you are thinking about that it might shift your thinking in terms of emphasizing the leasing model because you would be recovering equipment that maybe you can't use as much and sort of how you would play around with SAC and some of the promotions.

Well, a few things. I think your transition impact for us is interesting but I think that strategically what you do, obviously, is HDTV is probably the first thing you transition and so we're not as aggressive in HDTV as we might otherwise would be, because we know a year from now we have to replace the boxes.

So those people who are not getting HDTV from you, you're probably leaving, for the foreseeable future, your core program and impact too, and so there is no really difference in the boxes they need. It is really a transition first to HDTV and from there you may go to some small local cities and some other things where you have manageable numbers.

When you trade boxes out, that you can redeploy in other places where people don't need MPEG-4 boxes. And so there is a strategy there. There is a way to do that. Some of that depends on new satellites and a transition. And again we're not totally nailed down on exactly how we'll do that, but I think we have several good options on how we do that and of course the efficiencies we gain from MPEG-4, we think are going to -- economically make sense to do that transition over a period of years.

Thanks, Charlie.

There isn't a cable company out there that's going to double its capacity, you know, almost overnight. That's what -- we double our capacity, we just have to do a transition to utilize it and so it is another thing that satellite has going for it, particularly in a broadcast mode.

Your next question comes from the line of Tom Watts of SG Cowen.

Just another question on the MPEG-4. Effectively, does that mean changing out the entire installed base of equipment? You said you would do it over four years. Is there any back road compatibility? And what are the CapEx implications of going to MPEG-4?

Yeah, MPEG-4 is back road compatible. We will in fact receive all of our MPEG-2 channels. So the boxes that are out today that are not forward compatible to MPEG-4, but MEG-4 is backward compatible to what we broadcast today.

You would probably do it over a 4-year period. You would start with HDTV and you won't take anything away from customers. So any customer with HDTV today will continue to get it, but as you add channels, as you add HDTV or HDTV local channels or HDTV whatever, that perhaps is going to be an MPEG-4, and a customer would need a new box to receive that.

That will have CapEx effects. to the extent that you don't get customers to pay for the entire cost of the box. And so that probably will be determined by competitive pressures and just how good your MPEG-4 offering is. My experience has been that typically you get some of the cost from the customer but not all. And so that will have some CapEx expenditures.

We wouldn't do it unless you we were going to get increased revenue from the customer. So, to the extend that a customer says, I just want an MPEG-4 box for free and it costs you several hundred dollars to give it to him, and you get no added revenue, that wouldn't be a good model for us. But to the extent that the customer paid half the cost and and bought $10 or more a month in programming from you, that's probably a trade we would make.

Okay. And then this is a finance question. Some companies such as yours who have substantial NOLs have found that even though the NOL -- even though they are not paying taxes that their auditors require them to start accruing for taxes once they have been profitable for a certain number of quarters. Have you looked at that issue? Is there a chance we will start seeing you start accruing for taxes for GAAP purposes?

Well, Mr. Orban, I have this new principal. What are you, a principal financial guy now or just a principal? Paul Orban is probably the guy to answer that. I'll put this over in front of him. But it is a good question.

We evaluate our NOLs quarterly and pursuant to the accounting rules we will, when appropriate, start to accrue for them for GAAP purposes. Currently we don't right now, but we may in the future. We have a disclosure regarding that the in the 10 Q.

And is there any hard and fast rule the auditors apply, or is this -- do you think this could happen in the next 12 months?

The rule is more likely than not that you will realize the NOLs. And we continue to --.

If you are more likely than not to realize them then you will recognize them.

Right. So, we are evaluating it and it could happen as early as in the next 12 months.

Okay. Thanks very much.

I don't know, the net -- I think the NOLs are on our books, but the net effective [inaudible] it is over $1 billion.

$1.1 billion.

1.1 billion so go talk to your GAAP accountants and see what they say.

Okay. Thanks.

Your next question comes from the line of Carrie Hart of CSFB.

Hi, thank you. Two quick questions. One, you mentioned that the MPEG-4 transition is about a year away. I'm wondering if this is later than originally anticipated, and if so maybe some -- if we can get an idea of what some of the hurdles are, if it's satellite or boxes involved with deploying MPEG-4.

And I'm also wondering currently what your HD capacity is. And then I have one follow-up.

It is a little bit later than we thought. We hoped to have MPEG-4 really at the beginning of 2005. I think -- you know, there will be some limit to quantities probably by summer. But I think from a mass production point of view, MPEG- 4 is at least a year away.

It is a function of getting the chip sets done, the standards done. Getting all those deployed in a set top box. It is meaningful. And both, I think, DirecTV and EchoStar are both moving in a similar direction there. The transition itself is not too meaningful next year because you are just adding some -- you are just adding some channels in HDTV MPEG-4 that you haven't had up before, so no customer loses anything. And we don't have a lot of HDTV capacity today until we launch additional satellites and, you know, I think we have some scheduled -- at least one or two satellites scheduled for next year and, you know, hopefully we can get additional capacity if we're successful and be able to start that side of our business a bit more aggressively than it is today.

Okay. And then a question related to subscriber related expenses. It looks like on a per subscriber basis, they increase sequentially and I wonder what this is due to, programming or maybe increased SBC-related costs and maybe where you see this trending going forward. Thanks.

Subscriber -- I think that that's true that they did probably churned up a little bit. And that is the core -- probably the core inefficiency of the company. And it's probably driven by retention costs. Probably number one on the hit parade. Some of it's inefficiencies on the installation and customer service side,

And some is the treatment of the SBC subs.

And some is the treatment of SBC subs. So it's a combination of that. We have room for improvement there.

We are, as I said in the last conference call, we are probably a couple margin points of inefficiencies. And you have those from time to time in business, but I'm disappointed that they have gone on as long as they have and that as a management team, we haven't been able to react a little bit faster.

Thank you.

Your next question comes from the line of Matthew Harrigan of Janco Partners.

A few questions. First, when you look at the Qwest situation where they decided to go over to direct on an exclusive basis, can you tell us, what are some of the decision variables without coming out expressly on where the parties were on that instance, not that Qwest is the most powerful marketing engine around, and secondly, most of my other questions were answered, but is there any relevance at all to you anymore of satellite broadband? That is literally something that has not come up in the last two conference calls.

Yeah, as far as Qwest, you would have to ask them. We made a proposal and they chose DirecTV. My understanding -- you know, we have to look at it with -- we're a little bit different when it comes to phone companies and how we have approached it in terms of not so much just resale agreements. That seems to be -- resale agreement's kind of a stopgap agreement. Nobody really gets -- it is easy to put in place, but it doesn't ever produce long-term results, in our opinion.

Neither company can control their own destiny and only time will tell whether our strategy made more sense or less sense. And Qwest didn't have a lot of capital to put into the program. So, you know, that was not something -- we're better off to go get those customers ourselves, than share the revenue. So, you know, but we certainly, put a proposal, we were happy to have done something with Qwest. I think DirecTV's was a better proposal and perhaps more aggressive.

As far as satellite broadband, I think that there is still a place for satellite broadband. You know, we have a lease agreement with the SCS Americom for a satellite that was just launched successfully where we have some capacity on a more prudent basis than we probably did last time in broadband and, you know, we expect that we will -- we will put our toe back in the water and see if there is a business there in rural America.

I don't think it is strategically as important, given all the things that are going on with fiber and cable and wireless. It may not be as important as we would have thought it would have been a year ago. You have seen DirecTV transition their broadband satellite to video as another indication where perhaps, you know, our feeling is it is not quite as critical.

But there is a business there and as long as we can do that in a profitable way we would put our toe in the water.

Thank you.

It is a 2005 -- you know, it is a year away, 2005-type product. And it's got a lot of, you know, Wild Blue, for example, is up testing, you know, the next generation of KA band, broadband. We will look at how that performs and let somebody else get a few arrows in the back this time than us.

Thanks, Charlie.

Operator, I think we'll take one more question and then we'll wrap up.

Your next comes from the line of Thomas Eagan of Oppenheimer & Company.

Thanks. You know, Charlie, with the Auerbachs trying to launch video and obviously negotiating with the content companies, they obviously don't have the size. Could you talk a little about with your content agreements that you have with the various content companies, what your limitations are regarding being able to be a resaler of sorts of the -- of your content to the Auerbachs. And secondly, you mentioned the margin decline with the SBC deal. What are your expectations regarding bringing EBITDA margins back up to the levels it was in 03. Thanks.

Well, I think on the first part, you know, each contract -- programming contract -- is a little different and our rights are a little different and it depends on whether we are selling DISH network or whether you are selling, you know, some other branded product. I don't think you can make a general statement in what you can and can't do. And I think the extent that -- having said that, even where we have rights, you know, I think that if you are an Auerbach employee, you tend to want to do everything yourself if you can. It is human nature, right? Our guys are the same way. And to the extent that people have that direct relationship, they probably are going to certainly attempt to pursue that. Whether they can do that in an economic basis, it is hard to tell. But we have some flexibility.

What was the second part of the question? Margin on EBITDA -- there is probably some slight permanent decline there, you know, based on SBC and -- is that right?

Yep.

And hardware revenue margins and things like that. Having said that, there is definitely room for improvement in where we are. And again I'm disappointed that we haven't been able to move a little quicker to get it back up to the level it should be. This is a pretty mathematical business in terms of margins and you either have to make up for the margin on revenue increases or you got to -- when you have things like SBC, where you have an odd ball thing the affects it, are you've got to make sure that you're running an efficient mousetrap. And there is not anybody that is super efficient right now in this business. I think it has got more competitive and people are -- you can see a lot of things out there that don't seem to make a lot of economic sense to me. And we have done a few ourselves. And it is my job to make sure that we start focusing on doing things in a prudent, disciplined way, So that we do get a return on our investments for our shareholders and I think that's very achievable and it requires you to really be on top of your business. You need a super management team that is strategically sound and operationally sound.

While everybody else is talking about technologies and all the things that are going on out there, we've got a big challenge ahead for us over the next year to put those things in place. The technology stuff takes care of itself. The other part of it is blocking and tackling. You can get away with some of those inefficiencies if you have exclusives and you've got, you know, you can -- the only game in town on a certain kind of programming or something like that, but if you really want to compete head to head, which we have done a good job of over the years, you have to be really good. And we're not that good yet.

Thanks.

I think that was it, right?

I think that was it.

We'll be back in March?

That's right.

That's for the year-end and thanks for joining us today.

I think we're done, operator.

Thank you. This concludes today's EchoStar third quarter earnings conference call. You may now all disconnect.