DISH Network Corp (DISH) 2005 Q2 法說會逐字稿

I would like to welcome everyone to the EchoStar second quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Mr. Jason Kiser.

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

Thanks, Jason. Good morning. My thanks to you for joining us as well. As you know we do invite media to participate in a listen-only mode on the call so we ask that media not identify participants and their firms in your reports. We also do not allow audiotaping of the conference call and we ask that you respect that.

All statements we make during the call that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 statements. I'm not going to go through a list of all the factors that could cause our actual results to differ from historical results. I'd ask you to take a 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 the SEC.

All cautionary statements we make during the call should be understood as applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our reports and should not place undue reliance on any forward-looking statements that we make. We assume no responsibility for updating any forward-looking statements that we do make.

Also note that during the call we will refer to the non-GAAP liquidity measure free cash flow. Please refer to our 10-Q which is available on our website for a reconciliation of free cash flow to net cash flow from operating activities. I'd also note for those of would you may be interested in EBITDA that our 10-Q contains a reconciliation of EBITDA to net income. With that out of the way, I'll turn it back over to Jason.

Thanks David. Before we get too deep into the numbers we should point out that during the quarter we reversed $593 million of valuation allowance previously recorded against our deferred tax asset. This resulted in a credit to our provision for income taxes for the current period. This needs to be taken into account when looking at net income and earnings per share. The reversal does not impact EBITDA or free cash flow. As we go through each of the numbers I'll give you both the reported number then how it comps both year-over-year and to Q1 which also needs to be adjusted for the Echo 4 insurance settlement that impacted EBITDA, net income, and EPS during that period. Total revenue for the quarter was $2.1 billion, an increase of 3.5% over last quarter, and 17.9% higher than the same period a year ago. Continued subscriber growth and higher average revenue per subscriber were the primary drivers of the increase.

From an EBITDA perspective we generated $555 million during the quarter, a decrease of 41 million over last quarter and $259 million higher than the same period a year ago. Without the $134 million Q1 insurance settlement EBITDA improved sequentially $93 million, or 20%. Year-over-year EBITDA grew 259 million, an increase of 88%. Net income for the quarter came in at $856 million including the 593 million tax adjustment, an increase of 538 million over last quarter and 771 million higher than the same period a year ago. Excluding the insurance settlement and valuation allowance adjustment net income increased $79 million from Q1 and 178 million from the same period a year ago. On an apples to apples basis net income grew 43% sequentially and more than tripled year-over-year. Basic earnings per share for the quarter was $1.89 compared to $0.70 last quarter and $0.18 for the same period last year. Basic EPS for the current quarter includes $1.31 per share benefit related to the valuation allowance. Q1 basic EPS includes a benefit of $0.29 for the insurance settlement. Adjusted for these benefits the current quarter increased 45% over Q1 and 222% over Q2 of last year.

During the quarter, free cash flow was $57 million. This represents a $117 million decrease from last quarter but an increase of $88 million from the same period a year ago. The decrease from the prior quarter resulted from less cash generated from changes in operating assets and liabilities and increased spending for satellites under construction and equipment under our lease programs. This was partially offset by an increase in operating margins.

Let's look at the DISH Network specifically. During the quarter we added 225,000 net new customers. This represents 50% of the incremental growth in the DBS industry for the quarter. We ended the quarter with 11,455,000 subscribers. Churn for the quarter was 1.69% compared to 1.44% in Q1 and 1.71% for the same period a year ago. During the quarter our average revenue per subscriber was $58.46, an increase of $1.46 per sub over the first quarter and an increase of $2.87 for the same period a year ago. The year-over-year increase in ARPU was driven by several items. We had price increases of up to $3 in February of 2005 on some of our most popular packages. We had higher equipment rental fees resulting from increased penetration of our lease program. Lastly we increased the availability of local channels which is now at 163 markets and that's helped to increase the ARPU as well.

Subscriber related margins increased 150 basis points from Q1 and 340 basis points from Q2 of last year. Price increases accounted for the majority of the gains but we're also making steady improvement in controlling the operational costs of the equation. During the second quarter subscriber acquisition costs plus the capitalized portion and amounts recovered under the lease program increased 7% or $44 per gross addition from Q1. For the quarter we averaged approximately $667 per gross addition compared to $623 for Q1 and $576 for the same period a year ago.

The year-over-year increase in SAC was primarily the result of several factors. First the decrease in the number of co branded subscribers acquired during the quarter, the continued shift in mix towards leases which adds to SAC 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. The portion of SAC related to installation increased on a per add basis as a result of more time-consuming and technically complex installs resulting from multiple box households in the SuperDISH product. Finally higher cost for acquisition, advertising, and promotional incentives paid to our independent dealer network.

Let's take a quick look at the balance sheet. At the end of the quarter we had approximately $6 billion of debt. We also ended the quarter with cash and marketable securities of 1.39 billion which excludes $58 million of restricted cash. During the quarter we repurchased about 3.1 million shares of our class A common stock for approximately $89 million under our current stock repurchase program. On a total debt per subscriber basis we ended the quarter at $521 a subscriber. On a net debt basis that drops to $399 per sub. Capital expenditures in the quarter were 344 million with about 208 million of that amount going for capitalized lease equipment for new customers, 26 million going for capitalized lease equipment for existing subscribers and the remaining 100 million for satellite and general corporate CapEx.

Just a quick correction, Jason. That was 334 million not 344 CapEx in the quarter.

Thanks, David. With that correction, I think that's everything on the numbers. So with that I'll turn it over to Charlie.

Well, I don't know if I can follow that. Thanks everybody for joining us. The quarter is again another quarter that's really pretty consistent with where we've been over the last year and a half or so Maybe perhaps the one difference is we continue to improve on the margins. Some of that I would temper you with that we had a price increase that was fully effective in the second quarter so as typically happens your margins increase with the price increase they tend to -- we don't typically change our prices during the year so they then have to come under pressure for the next three-quarters. Obviously to the extent that you become more efficient you can counter balance some of that.

The industry in general really we're in a -- really in kind of a holding pattern so to speak in terms of it appears to me that over the next couple of years there's been quite a bit of transition in our industry and satellite in particular. We have challenges and opportunities as we move forward to new technologies like MPEG 4 and HDTV and challenges because we have new entrants coming to the marketplace in the terms of phone companies and obviously bundles from cable companies as they get in the telephone business and the broadband business so it's going to be -- what we've done during this period and focused on really is knowing these challenges are going to be there, to strategically plan to be positioned well for those challenges and opportunities and at the same time to shore up our operations and be ready to take on those challenges. I'm really pleased that over the last six months we've really added some great executive talent and the people that I really wanted to get, obviously, Dave Rayner, our CFO, who joined us early this year. It's great to have Carl Vogel back on a strategic role with EchoStar and really will be handling all of our strategic initiatives going forward. Then Michael Neuman as our President and COO, who will be responsible for all of our operations in DISH Network.

I was doing all three of those jobs at the time beginning of the year. Not very well I might add. So these guys really have nowhere to go but up. And it will be -- but I'm very pleased that we've gotten the people that we want and have put ourselves in a strong -- we're probably in a strong position as strong or stronger position than we've ever been from a management perspective. My experience has been that great management can meet those challenges that you see out there. Certainly the challenges are not nearly as challenging when we were trying to launch on a Chinese satellite with no money, in a new industry that -- no programming contracts, no equipment in an industry that nobody knew whether it would be successful or not. These challenges that we face going forward are probably not at that same level yet we probably have a stronger management team. So that's really what we've focused on and the team is in place and I'm sure you'll have questions about where we're trying to go. There won't be a lot of detail probably in this call because in fairness to our new team they've only been here about four to six weeks and they have to -- I've handed off a fair amount of that as best I can and they will add their ingredients to that and run with it. With that we'll take questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Bob Peck with Bear Stearns.

Hey, Charlie. Just have a couple quick questions here. The first is -- we think down the road and try and think about the impact of fiber to the prem have you been looking at any of the trial areas right now and what sort of impact you've seen within those markets? I know it may be a little bit nascent but we're wondering what sort of results you're seeing as they try to roll out fiber to the prem? Tied into that question also, could you comment a little bit on your relationship with SBC right now and where you see that going in the future?

Okay. I haven't person seen a lot of the trial dats. Some of the people in our company, particularly Nolan Daines who runs our broadband division has looked at all that stuff. Certainly it's technically feasible. Certainly I think we think that it will go a little slower than maybe some of the projections. It tends to be a little more costly than some of the projections but it's certainly a very good technology and certainly will have an impact on our business going forward for those homes that have that opportunity to purchase it. Obviously if you're going to make that kind of investment you're also going to market regardless if you make particularly a lot of money at it. It's going to make those homes more competitive. We see the battle for those homes at least as we -- those battle homes will be a lot more between the larger cable operators and the phone companies than it will be necessarily for us. We're fortunate that we're a little bit more rural centric and although obviously on the margin that's going to have an impact on us.

As far as SBC as we certainly saw trending starting in the fourth quarter of last year the SBC has de-emphasized, and as they've said on their conference call, they've de-emphasized to some degree the DISH Network and satellite in favor of their project light speed. They've indicated that the current structure where they pay the SAC for the customer is not something that they're going to be aggressive on going forward. We're okay with that.

We believe that the deal we did with SBC was certainly incremental business to some degree for us because we weren't paying the SAC and even though we're giving up a lot of the economics it made some sense for us. Any business deal has to work for both parties and that particular program really hasn't worked for either one of us the last couple of quarters. We're not getting a lot of new subscribers. We counted on SBC, we probably were a little bit asleep at the wheel in some of the SBC territories. While we knew they were de-emphasizing us I didn't do a very good job of getting that to our marketing department making sure they maintained being agressive in those markets. So I think now we're back on track to realize that we don't -- won't rely on SBC from that perspective. Having said that the relationship remains very good between the two companies. I know our people and myself personally truly like working with SBC. They're a quality organization. To the extent that they have ideas or we have ideas to reconfigure our business relationship going forward then we certainly intend to do that.

I do think that any talks would focus on where I think it long term makes sense where they clearly know where they're going to go with project light speed today. In those areas they probably have a need for some customers who will want satellite and broadband combined, say in a single box. For a particular reasons, particularly HDTV and maybe some other reasons why they might want that. But more importantly for them, there's going to be areas where project light speed will be delayed or won't be rolled out for a long long period of time or maybe never rolled out. As they get into the bundling business and face competitive pressure from cable operators in the telephony side DISH Network still makes a lot of sense there. While we initially concentrated on the vast majority of the SBC areas, I think that any new arrangement would probably start focusing on areas where both our companies feel secure that there's long-term business for both of us and perhaps in a strategic way that the economics are shared in a sense that, and the returns are shared in a sense that it works for both parties. Because the relationship is good and because I think both parties are sharing strategies with each other and we realize to some degree we'll be competitors and to some degree partners, that perhaps we can restructure those things to make sense for both of us.

Your next question comes from Tom Watts with SG Cowen.

Good morning, Charlie. In terms of -- can you give us a sense of what percentage of your subscribers are paying for local service at this point and in terms of the ARPU lift from local are we towards the end of that process?

I don't think we break that out, do we? We don't break that out, but I believe DirecTV disclosed that the vast majority of their customers buy local and I don't think we're materially different in terms of the industry. We probably for basic analog, we are, we cover over 90% of the homes now so I don't think there's a lot of lift left there from an ARPU perspective. How HD, local, and HD itself transcend, there may be some opportunity but that's unclear from a competitive point of view whether it would be or not.

Secondly, Wild Blue is now -- their commercial launch is underway. After some initial hiccups it seems to be going generally well. Do you have any observations about that and does that affect your plans at all in terms of a satellite broadband solution?

Their system certainly is very technically sound from what we've seen. The economics remain a concern in terms of cost of equipment and the amount of income you can get out of the customer. There are -- it's certainly a good technology, good standard. There is another standard which is a more worldwide standard that we're looking at as well. And, of course, we have some K band assets in our space today. We are proceeding cautiously given our past history of not being successful in that industry and we're really looking to make sure that we are on the right standard with economics that make some sense. If we don't get to a point where we think that we can get there, then we're not going to pour more money into it. If we get to a set of economics that make sense for us and again, we believe that's possible, then we'll have future things to say on future calls, but today we're happy to see Wild Blue treading new ground.

Just a final question. You've done a good job of managing churn but on the higher SAC you mentioned people taking more boxes, more complex boxes. Is this the higher end customer, and is this the customer that somebody -- that might be looking more towards a bundled solution from cable or is this -- have you seen evidence that people are very happy just to focus on a high-end video solution and get their broadband elsewhere?

That's the million dollar question. I think we kind of break it down. We look first and foremost and say we don't know whether a 10-point scale, the bundle or the triple play or quadruple play will be a 10, a 5, a 2, or a 1. We don't really know the answer to that. What we do know is that there's a large percentage of homes out there that aren't going to have access to a bundle so we focused on those and we have a very solid base there. Secondarily, we look at those, if you look at where the marketplace is going to go the RBOCs, you've got to exclude Qwest from that to a large degree, but the RBOCs and the large cable companies, Time Warner, Comcast, and Cox are going to maybe focus on very very similar customers but there's an awful lot of cable companies who aren't really going to be able to finance and put together all that. Then you've got rural America, then you've got niche customers who are going to have issues such as international programming that aren't really going to be available through other people. So we've got a solid base there.

Then you look and say what are the customers. On the high end, there are going to be customers, for example, who want HDTV who are probably going to be satellite centric for at least HDTV and perhaps more and they may very well be hybrid customers who have multiple video pass or they may take satellite because satellite may be the very best in video and they may take a broadband or wireless connection from another provider because they're the best in that category. I think how all that shakes out will probably affect all the video players in a way that's a little bit unclear for us to predict. I think that for example, CableVision is probably going to be more successful in New York City than is the cable operator in Little Rock, Arkansas. So that's just going to be different for different parts of the country. Our job is not to chase every single home and swim upstream where we may not have a competitive advantage. The reverse of that is to run really hard where we do have an advantage. We're picking our spots and we're trying to do that from an economic point of view and not try to focus on just subscriber numbers but focus on -- focus on the total package of growth and profitability.

Thanks very much.

Yes.

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

Thanks. Just two things. One is I was wondering if you could give us a sense of what proportion of the installed base is currently on lease plans right now and then the second thing Charlie on the last call I think you mentioned that you were not yet sure that local to local HD was economic beyond a certain number of markets. Just curious what you're thinking about that these days.

Your second question, again, the economics for local to local, some markets will be economic, some won't. I don't know whether that's the 50th market or 20th market or 100th market, yet one of the problems is that the back haul costs are so costly and HDTV local to local is still not a big factor in the marketplace. Having said that we certainly have put ourselves in position to do as much as we think is economic, and that's kind of where we are today. HD itself is more dependent on MPEG 4 technology equipment right now than anything else, and that has gone slower than we would have hoped this year but we think that we're going to have that equipment as soon as anybody will have it. As -- what was the first part of your question? We don't -- I don't think we disclose the percentage of lease customers. I think you can get a feel for it from our CapEx that we do disclose per -- in terms of equipment that we have out there that we still have on our balance sheet. That you can get a feel for. I don't know, Dave, whether you have the number. I know this quarter it was $200 million that we put out there.

It's a big number. I think it's safe to say, and it is in the Q, that a large majority of our new customers are on a lease program so I think it's very safe to assume that the mix of lease to owned customers is certainly growing at a meaningful rate.

The reason I asked the question was because you gave that 26 million of capitalized costs associated with new subscribers, which is -- or existing subscribers, which is presumably a capitalized retention marketing, so that was really the number I was trying to get at, is understand -- maybe if you could give us a sense of what that number was in the first quarter or what that number was in the second quarter of last year, if you're willing to break out that CapEx.

I don't know whether we broke it out last year or not but Dave will look it up and see if we did. It's certainly -- I'd answer the question a little bit different. You didn't ask it this way but when we strategically decided to -- MPEG 4 is not a surprise to us. Obviously it's a technology that allows us to over time perhaps double our capacity from a satellite perspective so obviously we try to put in place a logical plan that says -- and we've been through this before with DISH 500 upgrades and we learned a lot of lessons where we thought it was going to cost us a lot of money and we're able to do a couple of things that reduced that capital outlay in terms of upgrading our customer base. Today most of our customers have DISH 500 when a few years ago they all had just the DISH 300. We were able to do that at -- upgrade them at less cost than we earlier predicted.

From an impact floor perspective as we go forward because we could foresee it the lease program is very strategic for us in terms of how we would upgrade customers and how we might incentivize customers to pay us for MPEG 4 or to deliver services without taking anything away from our current customers and how we might deploy boxes we get back. All that is kind of a big strategic direction that both Michael and Carl and Dave will spend a lot of time on but I think we have a lot of good ideas in place to do that. Clearly the upgrade path for our industry is going to be pressure on retention marketing and/or SAC because MPEG 4 boxes at least out of the gate will be a bit more expensive. Having said that they bring the cost of HDTV way down as you get mass production and obviously MPEG 4 technically really shouldn't cost much more than MPEG 2. Over time as we get into this time next year you're probably not going see a material difference in MPEG 4 cost. In fact, it will be less because MPEG 4 boxes, depending on how you strategically want to do it, all your MPEG 4 boxes in theory, could be HDTV compatible as well. Did we find out if we broke that out?

No, I can't find it anywhere. It was 26 this year. I think it's in the Q somewhere. I'm not able to put my finger on it right at this point.

The fact that we lease equipment and the fact that we just as cable companies have a chance to get their equipment back and redeploy it, the Street kind of looks at our all-in SAC then compares it against cable companies where you're only looking at their expense SAC, to the extent they even disclose it. So we kind of have a hidden asset there potentially that maybe the marketplace hasn't totally figured out.

Thank you.

Your next question comes from Tom Eagan with Oppenheimer & Company.

Thanks. I apologize if this was already asked and answered but on ARPU looking out to Q3 how much do you think that will be impacted by the $12 discount on the top 180 package? Then on MPEG 4, any changes to your expectations at Q1 that you'd have about 50 national channels HD and about 20 local channels? Lastly, if you could comment on any success you're having in converting the Adelphia subs over to DISH before they go to Time Warner or Comcast. Thanks.

Oh, boy. Let's see.

ARPU.

ARPU will be negatively -- any time you give something away for free for a month or three months it will be negatively impacted because you guys are financial analysts you can probably figure that out. I don't think we disclose exactly what that will be. We don't know how many people will take that program or not so we don't know exactly but it obviously will have a slight negative impact. The HDTV in terms of 50 national channels and 20 locals, that's a pretty good goal, I think, in terms of what we should be looking at. I think we'd be probably certainly you'd feel comfortable, we would feel comfortable with the economics of that kind of goal, and getting Adelphia subs, we've had good success in all cable areas. Some are easier than others. Not all created equal. Adelphia has some good properties and they have some not good properties just like other cable companies do. And obviously they're going to have a transition as Time Warner and Comcast take those over, those -- their own set of CapEx and challenges to keep those customers but there's certainly an opportunity for us for a while.

Thank you.

I want to go back real quickly to Doug's question. The number, the 26 this year compare, is just slightly double from where it was a year ago.

Okay. So about 13 million last year.

Just a little under that, right.

And I would say comparatively, retention marketing for us is a fair amount less than our competitors. We have -- we have chosen to have a little higher churn than upgrade customers who we know might have to get upgraded for MPEG 4. To go out and upgrade a customer today, high end customer in particular, to an MPEG 2 DVR and then to turn around three months from now and say, oh, by the way, we now have MPEG 4, doesn't make a lot of sense to us. I think the transition year for us that's going on, is going to be, as we get into this time next year, we'll have a lot of things that will be -- that will counteract some of the negative trends to SAC, you'll have some positive trends to SAC. And to churn in some sense because we'd be more willing to take our next-generation product and upgrade people with it.

Your next question comes from Jeff Wlodarczak with Wachovia.

How is SAC and gross additions relative to your internal expectations and do you think the balance of year SAC is going to be up over what we saw in the second quarter or are we going to start to see some effects from box per use?

We'd always like to have more customers and lower SAC. That's a Michael Neuman question. We're not letting Michael talk. I told him he couldn't talk on a conference call until he gets moved into his house. Only half the movers came yesterday. We thought maybe he'd get to talk today but we're not sure we're going to let him, but he will have to a lot to say on that. That's really going to be his bailiwick.

I think that we disclosed in the Q that there are some negative trends to SAC. MPEG 4 box today, particularly today is more expensive than an MPEG 2 box. Obviously it will make sense for us to transition certainly our high-definition customers going forward to MPEG 4 out of the chute in terms of new customers, so that you have some -- and other customers too, so you have some negative trends there. Obviously there's competitive pressures in the marketplace that continue and aren't going to get any easier. We still have SuperDISH out there, Echo 10 launches next year. We still have some configurations that are more expensive for us than otherwise would be and we have transition costs to a one-DISH solution as mandated by Congress. So we have those kind of things out there.

On the positive side, MPEG 4 is going to bring the cost of HDTV down significantly. The cost of MPEG 4 boxes is going to come down significantly over the next year. Launch of Echo 10 and the use of the 129-degree slot which we now have will eliminate some of our more complex configurations and reduce operating costs in that regard so -- then reuse of -- depending how innovative we are and how creative we can be in terms of reuse of existing equipment and how we might do that in the marketplace is an opportunity for us to bring SAC down as well. So how all those things come together and SAC goes up or down, it's too early to tell. But we believe we have -- oh, and the the other thing that's a negative to SAC, of course, is we have less SBC gross additions from SBC where they pay the SAC. So how all that balances out and then balance the SAC versus the revenue that you get from a customer, obviously an MPEG 4 customer buying HDTV you're going to get more revenue, probably have a little less churn. You have to balance all of those things out into an economic model. Again, that's what we get to do as management. We think we're well positioned to kind of chart the course there.

Two other quick questions. Can you talk about your decision to offer the reduced price (INAUDIBLE) for 12 months and 6 markets? Why go after Comcast instead of a weaker cable player? Then the second question is, can you talk about how important it is for you guys to foster an alternative broadband technology in your long term plans? I'm thinking sort of we Wi-Fi, Wi-Max.

I can't speak to -- I was actually on vacation when they started -- they picked their markets. That's really going to be a Michael Neuman question. I think the strategy was those were markets that SBC, that primarily were SBC markets where we -- SBC had indicated to us they were going to market heavily and had actually cut back on that marketing. So my mistake in letting our guys cut back on marketing, so I think they are just trying to reestablish ourselves to where we think we should be in terms of those markets. I don't think it was against any particular cable company per say or not. We'll take the data from those marketplace, we'll take that data and to the extent that things work or don't work, of course, obviously we can use that elsewhere.

As far as -- what was the second question about? Broadband thoughts? Wi-Max, I wouldn't say anything particularly different than maybe what you heard DirecTV say, obviously broadband, Wi-Max, all the technologies are certainly things that we're looking at. We certainly have a strategic disadvantage vis-a-vis a cable or phone company can bundle broadband with video, it's kind of a natural play to put those two together. We have to be prepared for two things. One is that we've never have broadband in our lifetime, so how would we operate our company if we never had broadband. We have to be really really good at what we do. We think there's a good business there.

The second is what are the new technologies and perhaps strategic relationships we could do to offer broadband alternatives. It's not just broadband, people are going to want to be mobile, they want to be portable. We just -- we're just bringing out something called PocketDISH, which is a portable video player that allows our video to travel with you and be portable. So there's lots of opportunity for us within that space, and we spent five years before we decided to launch the DBS satellite, and when we did we turned it on the day we were ready. We liked it -- we do our homework, we like to put things in place, and then we like to move. And we're still at the part strategically where we're putting things in place. When we get things in place and we think we have something we can do, then we'll move and we'll move fast, then we'll have something to talk about. That probably will be more of a Carl Vogel question in the future.

Thanks.

He's only been here -- have you moved into your house, too, Carl?

Never left, Charlie.

Never left his house. So Carl gets to talk next time, I guess.

Your next question comes from Craig Moffett with Sanford C. Bernstein.

Hi, Charlie. I'm going to sound like a broken record here because last quarter you told me that you hate the programming promotions but you were doing them anyway. Looks like they've expanded a bit. Can you talk about has your thinking changed any and can you make any money in that test market program that you're doing in six markets, that 19.99 for programming? Second question is, can you talk about where you are with respect to Hispanic and other non-English language programming?

No, I haven't changed. I hate discounted programming. I basically don't like the promotions, personally, mainly because from an economic overall perspective I don't like to discount what is our core service. Strategically that's what our marketing people and distribution people have come up with, and I'm not micro managing them, and they all have incentives that are bottom line oriented in this company, and if they choose to not make those incentives then they choose so to do. Having said that, these are relatively small economic points, and they are learning a lot about whether it works or not works. I believe there are other things you could do that could be successful. I think it would be very innovative. A lot of them are hard work. It's Michael Neuman's job to make sure that we're actually working harder rather than -- it's pretty easy to -- my analogy is it's pretty easy to sit in the office and look at the golf course and decide to give away stuff. It's a lot harder to go out and work in the field to get people to want it. I think we have to do more of the latter and that's Michael Neuman's challenge.

As far as Hispanic market and so forth, I think DirecTVs gotten a larger share, we've always been fairly dominant in that field. I think they're getting a larger share of that recently. The problem there, is there are certainly credit issues, Social Security issues, churn issues, and, we've chosen to just get a little higher quality customer in general than perhaps, given Wall Street some numbers that are going to end up being a churn for us down the road. We think the Hispanic market in general is still a great market. We still are very active there, we still do very well there. But we are trying to be disciplined. I think that's the balance we have. Again, I think there's more hard work that can be done there to improve that business but you have to stay focused. It's very easy to get consumers there. It's very easy. It's very easy to hold them for years until you get your money back.

And a quick follow-up question. How many HD and DVR subs do you have today, Charlie?

I don't think we've disclosed that.

Can you give us some ballparks?

Somewhere more than 1and less than 11.4 or 5 million.

I got it right. Thank you.

Again, we balance that with -- obviously we've been a leader in DVR, obviously we own our own technology, obviously we make our own boxes. Obviously we have, for example, the ability to do two rooms out of one DVR. We have some very innovative things. It's a good solid core side of our business.

Thanks, Charlie.

Your next question comes from Rob Sanderson with America Technology.

Hi. Good morning. A couple of questions. First, a housekeeping. Just mentioned in the Q that you had a one-time gain on a transmission expense. Can you give us the impact of subscriber margin from that gain?

That's a Dave Rayner question.

It was a pretty small impact. It was meaningful against that line obviously because it's a relatively small number line in the greater perspective so it didn't move the needle a heck of a lot but it was a material part of the variance and it was just a negotiated credit we got from the vendor.

So not anything that moves the needle more than like 10 basis points or something?

I'm not going to define how far it moved it but it was not a meaningful movement.

Got you. We've noticed some increased marketing from SBC. What are you seeing in terms of subscriber trends in the first five weeks of the quarter, and then what do you expect on launch of this integrated DSL and DBS access device that is I think coming second half of the year?

That's probably a better question for SBC than us. I would only say that, I don't think anything has changed from my perspective in terms of what we said last quarter where we believe they have de-emphasized satellite because of, one, a deal that isn't working exactly the way they anticipated, two, obviously project light speed, and I think it's -- the rational thing to do there is to -- although seasonality is pretty good for them for satellite their seasonality actually is best this time of year for them so they have that working for them but the real way to do that is to sit down with them and -- which our people are doing and look at all the pros and cons of what we're doing and the areas that we can improve as a company.

For example, we get a lot of data from them about how customers use our product and a lot of constructive criticism how we can make our product better and I know that's one of the areas that we're really working hard to prove our product is with customer experience, and SBC is very helpful there and very experienced at that at a level that we just never have been. The second thing is how do you do it to balance their strategy of light speed and in the areas that they're not going to have light speed. How do you do that in an economic manner for both companies. Again, I'm cautiously optimistic that our companies will be working together for a long time.

If could I get a follow-up, just on interactivity, we have been watching the numbers of applications you've been launching, and certainly think you're leading your competitors in interactivity. Can you give us any qualitative sort of thoughts on impact to ARPU and churn? Is it measurable at this point or still too small? And what do your early trends suggest longer term for the Company?

We're fortunate that our box, the large majority, or the vast majority of our boxes are interactive capable. We haven't really gotten a lot of killer aps that customers are demanding for that so we still have -- interactive is not a material part of our ARPU or churn reduction today. And we have teams on it, we have lots of potential there. Part of that is working with our programming partners, part of that is finding applications that are easy to use, that don't take a lot of bandwidth, and that are a little faster than they are today. There's still some -- you still have to load the application. There's some things we have to do to make it work and so -- then you're also fighting a whole customer base that for the most part when they watch TV, just want to go channel up, down, volume up, down, versus a computer where you try to interact with a computer. We're not trying to swim upstream there and force people into interactivity that don't want to be interactive but we do think that when you see something like America's Idol, where somebody goes and calls on the phone, millions of people would have to go call on the phone that there is -- if you could find the applications that there's probably some fairly large demand for that but it's not material to our business today.

You think that it could be a more exciting 2006 story or is it a little early to make that call?

I think DVRs and HDTV are more exciting for 2006. Interactive should be more exciting than it is in 2005 but I don't think it's going to get to the scale of HDTV and DVRs.

Got you. Thanks a lot, Charlie.

Your next question comes from Vijay Jayant with Lehman Brothers.

This is James Raccla for Vijay. Have you folks seen any change in the competitive landscape with the new DirecTV greater credit check, more disciplined growth strategy? Secondly, if you could talk a little bit about your thoughts on buybacks. For the moment, they seem to have accelerated a bit in 2Q but still at pretty modest levels.

We have not seen so much change in the marketplace. There was a segment of the population that perhaps didn't have much credit that we weren't going after, and so the fact that somebody else isn't going after those people today doesn't really -- hasn't really affected us. We both have always gone after the credit customer so that remains very competitive for any video provider. So I expect that the quality customers will remain competitive and we're always happy to see some of our competitors pick up some customers, in fact from time to time we actually give our competitors -- we actually give like the cable company's phone number out to some customers because they're not economical for us so we're happy to do that for our competitors. As far as share buybacks, we've been -- we're targeted, we've disclosed that we've got a bay back program and from time to time we purchase some. I don't know what the shares were this quarter.

3.1.

3.1 million shares. Look, we don't disclose the specific prices, but obviously you can get a pretty good feel from it by the number of dollars we spent from looking -- by looking at the number of dollars we spent and the number of shares we disclosed that we've repurchased. We're really not going to comment much beyond that.

We're just not smart enough to know any better. We know what the value of the Company is.

Thank you.

Your next question comes from Lee Cooperman with Omega Advisors.

I actually have four questions but I'll only ask three. The one I'm not going to ask, Charlie is with all this high-priced firepower you added what are you going to do with your free time? But we can talk about that later.

Actually, I want to answer that. I came to work -- honest to God I took a vacation, which I really had never really done before, and I came back, I didn't have anything to do. And so -- and golf game is getting better.

Good.

But in all seriousness--.

We can verify that is not accurate.

Actually my golf game is not getting better. That's true.

Well, you're talking to a non golfer. The three questions--.

In all seriousness it is a good question, Lee. What I do plan to do is get a plane and get to see something. I really, as you guys know I haven't been -- I've been head down focused on this business for the last 12 months, and because I have been doing multiple jobs, and not very well, and a lot of what -- what I call transition, a lot of what I think in terms of you might tread water awhile, you have a lot of things you have to put in place when you make the next move and that's going to be -- Carl is going to have the vast majority of that but there are things that are a little bit longer term. Carl will probably look at things over the next year or so. I probably will look at things from two and three and four, five years out and that requires you to be on planes and having a lot of more mind boggling conversations and trying to determine, I don't know why we as a company didn't start Google or we didn't start eBay. We certainly were capable of that. But, we didn't do it. And part of that is because the CEO was asleep at the wheel. So we really have a chance to -- we have a lot of expertise, we have a lot of people in place, have a good management team, we have a strong balance sheet so we really have a chance to do some things beyond what we're doing today and it -- you can't do that unless you're reading and talking to people and traveling and seeing things and touching and feeling, the things that are out there, because technology moves so fast. So I look forward to doing a lot of that stuff.

I'm sure the shareholders will benefit from that knowing you. The questions I had, was one, does the reversal -- let me just get them all three out, does the reversal of the deferred tax valuation allowance reflect a change in your view of the opportunity to add new subscribers or the profitability of the business? One. Two, a question I've asked often, have the expected economics on your new subscribers changed over recent months in your view? Finally in the absence of an investment in broadband are there any more economically attractive uses for your free cash flow at this point other than repurchasing your stock?

Change reversal I don't think has anything to do with anything other than we think that -- we're more likely than not to actually use our tax loss carry forwards. So I think perhaps we're confident today about the earnings of our company, Dave.

Yes, there are some pretty specific guidelines in the accounting literature as to when you should have that allowance out there and when you shouldn't. And we've been evaluating those criteria. This quarter we felt that we crossed a threshold, as Charlie said, to be more likely than not fail to recognize and realize those benefits in future periods, and so we reversed the allowance. It doesn't really change anything in terms of our outlook on the Company. It's just a matter of a threshold being met.

The economics to new subs, I think some are better, some are not as good. And I think the challenge for us is to make sure we're focused on making sure that we focus on any new subs we go after are economic for us, and so I think on balance the industry is a little bit more competitive and the economics are less today for a new sub than they were five or six years ago, but the economics are still very good. And what we look at is, where should we -- should we spend, you know, $1 billion in getting new subs, and, are we going to get a payback on those new subs. If we do what return do we get.

First is, could we spend that $1 billion on something else and what kind of return would we get there. So we -- today the economics of new subscribers is still the best place for us to spend our money. So I think I can -- so that's kind of where we are. Which is why from a use of cash perspective we haven't bought back -- we balance those things out in terms of where we are with equity or buying back debt or equity or paying a dividend or acquiring a company or investing in a company.

Today the primary use of our cash is getting new subs. You don't want to fall in love with your business plan, you want to make sure that if economics do change that you change with them and a lot of companies get into -- I think a lot of our competitors have gotten into a subscriber where they've gone in and upgraded the customer, then they upgrade them again and they continue to upgrade them, pretty soon they've never made any money on that guy and they invested 3,000 guys in a guy's house and he's going to move tomorrow and they never get their money back. So I don't know how a cable company gets $4,000 from a customer, from some of their customers. That's what they get valued at, but I don't know how they get $4,000 -- they'll get $4,000 from some of their customer but not all of them.

What about the last question?

I'm pretty sure we're going to get $700 from most of our customers, $600, whatever it is.

The last question, about the absence of broadband are there any more economically attractive uses for your free cash flow at this point other than the repurchase?

Potentially. That's a--.

That's your new job.

We're looking at, and I mean, we really do -- no joke, evaluate it every day, and then every week we really evaluate it, and then a lot depends on where the marketplace takes the stock, which we don't control, and a lot of it is which of those strategic things we're looking at based on due diligence and based on business deals make sense for us.

Thank you very much. Feel very comfortable being in your hands.

Thank you.

Your next question comes from Michael Pace with JP Morgan.

Hi. Thanks. Just to go back to some previous comments, you mentioned that HDTV users may be very satellite-centric. I'm wondering can you remind us what capacity you have and what product offerings for HDTV we expect over the near-term horizon, and how does that situate you competitively versus cable?

The difference is that cable's advantage in HDTV today would be that they can do local HDTV channels in certain markets. That's going to be -- that's going to go away as a strategic advantage at least from a DirecTV perspective because they've announced plans to be very aggressive in lots of local markets. It also goes away to the extent that somebody can -- if this digital transition takes place, and as broadcasters put up new towers a lot of HDTV is going to be available literally with rabbit ears or antennas in your attic or whatever where they haven't been available today. Thirdly, we're obviously going to do local to local in select markets that we think make sense for us. HD. So that advantage gets very less and maybe even goes away for cable.

Where satellite has always had the advantage is when you do nationwide HDTV channels which we do about 20 some channels now, we are adding 10 more Voom channels early -- as soon as we get MPEG 4 out, so it will be early next year probably. And then I just saw yesterday where FOX has got two new HD channels, one in national geographic, they've got one in FOX that's going to have a compilation of some of their product. NBC I think has got a new HD channel. I think Outdoor channel has got an HD channel. So we're starting to see a lot of -- ESPN 2 has got a new channel. We're starting to see on the horizon maybe a dozen new HDTV channels in addition to the 10 Voom channels. If you're an HD user, unless, hypothetically say we had our 50 channels and your local channels and your cable company has got the local channels but they only have 10 or 11 or 12 or 5 HD channels we're going to get your business. So it's funny that satellite still has a nice opportunity for a very high end customer.

For a long period of time, I think that -- I think that the HDTV takes more bandwidth and is more difficult for a cable company to put down a plant that is partially analog and, of course, as we do HDTV and as we're successful as an industry cable then has to convert from analog to digital which causes them a whole other set of problems, and opportunity for our industry. And phone companies as they roll out their fiber to the premise, HD is going to cause them a lot of problems. They're going to be a lot more successful with standard definition before they're going to be successful with HD although they'll probably get there with HD, but once you put HD in multiple rooms in the house and you try to make all that work--.

Well, particularly --

You're going to have issues.

Particularly where you're talking about fiber to the node rather than fiber to the premises and you're trying to run twisted pair for the last mile, and you're in an environment where five years from now there's rather than HDTV in one room you have HDTV sets is in five rooms and three different people are watching different HDTV programs at the same time it's going to be pretty hard to push that over twisted pair for that last mile.

I think that the momentum shift potentially goes to satellite for HDTV where it's been pretty balanced right now.

Sure. And I guess, Charlie, just getting back to the capital structure, and the cash on the balance sheet, you have some floating rate notes callable later this year, some 9% plus bonds that are callable early next year. You mentioned you want to spend the cash on getting new subscribers but you are generating positive cash flow. Historically you've said your comfort level for leverage is between $500 and $1,000 of debt per sub. Has that changed, and how does the capital structure shift in today's environment? Finally, asking Carl a question, if that's fair game, how does EchoStar and DBS in general compete with cable's bundled offering down the road? We'd love your opinion on that.

Mike, I guess I'll start. I think Charlie has pretty much articulated how the bundled offering is going to compete in various markets. The responsibility for that at EchoStar really resides with Michael Neuman, and as Charlie also articulated, I'm more involved -- in fact, only involved in the strategic aspects of trying to find other businesses that make sense for the platform that we've already created. Some of those may or may not enhance the ability to compete against the bundle and time will tell as we see those opportunities. In terms of the balance sheet, I guess I'll defer that to Dave or to Charlie, but, Charlie has told me the same thing he's told the market, 500 to $1,000 of debt per sub. We've got sufficient cash on the balance sheet and we'll look at opportunistic ways to enhance the capital structure and I'm sure we'll get plenty of offers from plenty of investment banks to refinance all sorts of paper on our balance sheet.

Obviously, we'll look at the paper when it comes due and look at the interest rates at the time. Obviously I think we're getting to be a stronger credit. If the Company has decided it's more likely than not that we're going to use up our tax loss carry forward, it may take S&P and Moody's a bit of -- may take them a few months or a few years to figure that out but I think that at least management believes we're a stronger credit under the rules. We have to make those determinations, so we've gone public with that determination now. So we think we're a stronger credit and we think those things benefit. I might turn it over, just Michael Neuman just to answer. Michael came from the satellite and the phone industry in terms of past life but the question was about how do you bundle, go against cable.

I think you may not have heard what David said a few moments ago, that I think is very poignant, and if you're looking for a clue as to what the future holds with respect to bundle, in an all-digital especially migration to HD environment, walk into a major consumer electronics store and look at televisions. That's what consumers are seeing. They're focused more on what is their next television and what can it do and what has the price of those TV's done in the last while. So whereas a few years ago you wouldn't have considered having anything but maybe a 14" tube TV in your kitchen. Now you can get a small HD LCD TV really for peanuts, by comparison, so that behooves you to start looking whether you're a satellite or a cable customer, start looking at whether or not you need a box there.

So as you look at the bundles available from a teleco or a cable company those bundles should really include in an HD environment, the third, the fourth, the fifth HD box, and so I think in that environment we start to look very attractive as customers start to want to put an LCD or a plasma HD-capable television somewhere in their house. So the bundle really has to be looked at in the context of not just wireless and broadband and television but the bundle of boxes on top of that. We're already there with respect to what I call a video bundle for HD and digital television everywhere in your house.

I think we have time for one more question.

Your final question comes from Lale Topcuoglu with Goldman Sachs.

Hi. It's Lale with Goldman Sachs. Just actually very quick two questions. One, now that you have a full management team in place, especially given Carl's experience dealing with the investor base from his previous life, are we going to see less of you, Charlie? Is that -- or is that the investor base mostly the sell side being overly analyzing the situation? And the second, in the SBC relationship, the integrated set-top box rollout for the latter part of the year, are you sharing the SAC for that set-top box, or is SBC still paying for the set-top box cost? Thank you.

Today our SBC pays the SAC for their gross additions, so that hasn't changed. But as we've indicated, that's not something that they feel they can be aggressive with going forward. So anything would have to -- any deal would have to change for them to become agressive. If they did and we got more economics and we thought the customer on our balance sheet was worth the same, obviously we look at those kind of issues. I'm not sure I totally understood the question. Will you see less of me? You haven't seen much of me because I've been working pretty hard here. I don't know that you'll see less of me, but I think you'll probably see more of our management in total going forward just because I think that many of the things that we're working on will need some explanation. So I think it's important that investors understand why we're doing certain things whereas as you go through transitions, we would certainly like to communicate why we're doing things and what our plans are. Again, as we define those over the next year I think that you -- you'll see those things.

It's interesting. We didn't talk a lot about it today, and we don't have a lot to say, but as you transition to MPEG 4 and how we might go about that versus how cable might go about transition from analog to digital and perhaps how DirecTV might transition to MPEG 4 and how perhaps phone companies might transition to fiber to the premise or fiber to the curb those are all interesting dynamics and we have to have an understanding of those here so we can make our decisions and I think we have a lot to share with people in terms of why we think our strategy is a sound one. And so I think -- I think in 2006 you probably will see more of EchoStar management.

Okay. I guess the -- to clarify that, it was more to say are we still going to have you on the conference call and get access to your insight.

I see. I plan on doing one more. And then -- I might do the annual one or something like that, but I -- our guys are going to be very capable of being on. If we're doing something that's a little bit longer term than a year, that's kind of where my bailiwick is going to be, and to the extent we need to explain that, maybe I'll participate. I'll probably be around and so forth, but I think from operations that's Michael Neuman, and Michael will probably take over the vast majority of that even next conference call, and strategically Carl is going to take a little longer time to put those things in place and he'll probably take over that side of the business, call it early next year.

Okay.

Thank you. We'll be back again early November, to talk to you then. Thanks.

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