DISH Network Corp (DISH) 2005 Q3 法說會逐字稿

Good afternoon. My name is Crystal. I will be your conference facilitator today. At this time, I would like to welcome everyone to the EchoStar Communications third quarter 2005 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Mr. Jason Kiser, you may begin your conference.

Thanks, Crystal.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; Carl Vogel, our Vice Chairman; David Moskowitz, our Executive Vice President and General Counsel; Michael Neuman, our President; and Dave Rayner, our CFO.

I'm going to give you a quick recap of the financial performance for the quarter and then turn I'll 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, so for that I will turn it over to David.

Good morning, everyone. Let me add my thanks to everyone for joining us. As you know, all statements that we make during the call that aren't statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from historical results or from any future results expressed or implied by the forward-looking statements.

Now, I'm not going to go through a list of all the factors that could cause our actual rules to differ from historical results or forward-looking statements. 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 with the SEC. All cautionary statements that we make during this call should be understood as being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our reports and should not place undue reliance on any forward-looking statements that we make. We assume no responsibility for updating any forward-looking statements that we make.

Please also note that during this call, we will refer to certain non-GAAP measures which are reconciled in our 10-Q or on our Investor Relations website. And with that out of the way, I will turn it back over to Jason.

Thanks, David. Let's take a look it the quarter. Total revenue for the quarter was up slightly from last quarter to $2.1 billion, which was $266 million or 14% higher than the same period a year ago. For EBITDA, we generated $508 million during the quarter, a decrease of $47 million or 8% from last quarter but $181 million or 55% higher year-over-year.

Net income for the quarter came in at $209 million, a decrease of $647 million from last quarter, $593 million of which was the result of the reversal of tax valuation allowance that occurred in the second quarter, as we discussed on the last call. Net income for the current quarter was $107 million higher than the same period a year ago.

Basic earnings per share for the quarter was $0.46 compared to $1.89 last quarter which included $1.31 per share benefit related to valuation allowance reversal. EPS this quarter more than doubled the $0.22 posted in Q3 of last year.

During the quarter, free cash flow was $189 million. This represents $133 million increase from the last quarter and an increase of $223 million from the same period a year ago.

Looking at the DISH Network specifically, during the quarter we added 255,000 net new customers. This represents 49% of the incremental growth in the DBS industry for the quarter. We ended the quarter with 11,710,000 subscribers. Churn for the quarter was 1.86% compared to 1.69% in Q2 and 1.77% for the same period a year ago. Our churn was negatively impact by the hurricanes in the Gulf region. We have made an estimate of the customers we believe are unlikely to continue as subscribers and have reflected that estimate in churn and subscriber counts for the quarter.

During the quarter, our average revenue per subscriber was $57.78 compared to $58.46 in Q2 and $56.11 for the same pared a year ago. The year-over-year increase in ARPU of $1.67 was driven by several items. We had price increases in February of '05 on some of our most popular packages. We had higher equipment rental fees resulting from increased penetration of our lease program. We've increased the availability of local channels and now serve 164 markets. Lastly, we had had higher digital video recorder fees resulting from increasing number of subscribers with DVRs.

Subscriber-related margins increased over 160 basis points from Q2 and over 440 basis points from Q3 of last year. Price increases accounted for the majority of the gains for the year. And we also had a one-time $35 million vendor credit in this quarter which had a positive impact on margins.

During the third quarter, subscriber acquisition costs plus the capitalized portions of the amounts recovered under the lease program, increased 14% or $82 per add from the prior year. For the quarter, we averaged approximately $670 per gross addition compared to $667 per Q2 and $588 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 portion of SAC-related 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 Super DISH product. 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. And finally, higher costs of per acquisition advertising and promotional incentives paid to our independent dealer network.

Quick look at the balance sheet. At the end of the quarter, we had approximately $5.9 billion of debt. We also ended the quarter with cash and marketable securities of $1.5 billion, this excludes $68 million of restricted cash. During the quarter, we repurchased approximately 761,000 shares of our Class A common stock for roughly $22 million under our current stock repurchase program. On a total debt per subscriber basis, we ended the quarter at $508 a subscriber. On a net debt basis that drops to $379 per sub. Capital expenditures in the quarter were $315 million with about $225 million of that amount going for capitalized lease equipment for new customers.

That's everything for a brief recap on the numbers. And with that I'll open up to Charlie and the rest of the team.

Thanks. Just a couple general comments. It was a solid quarter overall. Some things are a little bit misleading. The churn, as Jason mentioned, is -- we've used our efforts to make sure that we tried to contact our customers in the Alabama-Louisiana region and make sure we didn't just keep customers on because we couldn't contact them and then end up writing them off in the fourth quarter when they didn't pay us. We think that's the most economical thing. So we were forward-thinking on that. Absent that, you'll see in our disclosure that our churn is about the same as least year for the first nine months. So that's a little bit overstated, probably, from reality -- in terms of a normal year. Also of course, the third quarter is historically our highest churn quarter.

Our ARPU is lower and that's really two reasons. One is, as SBC we don't -- the way we accounted for SBC, when they had own subscriber acquisition costs, installation revenue went into ARPU. And of course, that has not been a big factor in the third quarter. So that has -- and also we give away some of our promotions -- we have and continue to give away some discounted programming for a period of one to three, four, five or six months even, in some cases. And that has an impact on ARPU until those promotions end and the customer goes back to the normal paying. So that has a negative impact.

Earnings and EBITDA and free-market cash flows were positively impacted beyond -- are actually overstated, in a sense, because we have a $35 million gain from a vendor and that would not be normal. That really should have been spread out over four quarters. And so our margins have been a little bit better the last year than maybe we've shown, probably not as good this quarter as we show on the margins.

But overall, we're on a measured pace, we've made a little bit of improvements in some of our efficiencies. We still have a long way to go. Still continues to be good demand for satellite television. I think almost 2 million gross adds in the quarter. And obviously, as an industry, we have lots of challenges but lots of opportunities going forward. So it continues to be, at least in our opinion, a good economic model. We continue to put our money where we think we can get the best return. With that, we will take questions.

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

Hi, this is [Kenal] for Bob. Quick question on the MPEG IV upgrade cycle that's expected to begin. How should we view the upgrade cycle in terms of the expense that should come in? What part of it should flow through retention? And what could be CapEx?

We haven't come to final conclusions on our MPEG IV upgrade strategy but I will highlight the disclosure that we have in the 10-Q. We talked a bit about it. One of the things that we did that's a little bit different is -- and I don't want to get too technical here, but we thought about MPEG IV several years ago, and we switched to an interim technology called 8PSK in all of our new customers several years ago. 8PSK, if you have powerful enough satellites, gives you -- can give you, in theory, up to 50% efficiency gains in terms of bandwidth. So we have an interim approach where we will probably get some bandwidth efficiencies over the next couple years using 8PSK technology. And that's somewhat dependent on the launch of -- the successful launch EchoStar 10 and maybe future satellites. If we're successful with those launches, we would be able, in theory, to go a little slower on MPEG IV development. If we weren't successful, we'd have to go faster.

We can get a fair amount of the efficiency gains in MPEG IV. As we -- obviously, from a practical point of view if we upgrade a customer on MPEG IV technology, we would expect to get a -- to get income more than -- more income than the investment in that customer for MPEG IV technology. So we just approach it from a prudent perspective and have a business plan to make an investment in MPEG IV we think we will get a return.

The only conclusion we've come to so far is that we believe that that -- we believe that the investment in MPEG IV is warranted for high-definition television. So you will see that all new customers, late this year and certainly into next year that subscribe to our high-definition television will, in fact -- we will make the added investment in MPEG IV. MPEG IV is a little bit more expensive than MPEG II technology. today. Over time it will probably come down but it's certainly starting more expensive probably by 10% or 15% more in terms of subscriber acquisition costs. We would expect to get a corresponding ARPU pick-up to justify it.

As far as current customers who want to upgrade to MPEG IV, that's something that we haven't come to final conclusions on. But again, we would make an investment in a customer that perhaps is going to ad to his high-definition television subscription where the investment might warrant it. Of course, we might ask the customer to pay for some of that upgrade. I think you can be assured that we'll be prudent, that any investment we make in the customer we believe we will get a return on. And that we have thought ahead of MPEG IV by several years and have some interim technologies that will get us partially the way there without having to go to the expense quite as fast as maybe others will have to. And additionally, some of the economics justify -- if you do the math, some of the economics justify launch of -- not launch of new generation of satellites which give you more power, which give you more efficiencies, rather than trying to upgrade your entire base. So we kind of look at all those factors and haven't come to final conclusions. But, feel like we -- we feel like we're going to be very prudent and economical in how we do it.

Thanks, Charlie. Just a quick one on [SHWERA], the deadline is another six months from now. How should we see -- how should we model the expenses relating to going from two DISH to one DISH solution? Thanks.

I think we've consistently said that we think it could cost us in excess of $100 million to make that transition. We have been able to secure the 129-degree slot, and we have a current satellite in the 129-degree slot. So that's going to be helpful, and that would tend to reduce our costs, somewhat. But the major hurdle for us is a successful launch of EchoStar 10 prior -- and put it in service prior to the June deadline. And the risk that we have is -- so I think if you think in terms of $100 million, that's a good over/under kind of number, as we've disclosed, in terms of cost. But the other piece of it is that EchoStar 10 launch needs to be successful or the risk is that we could some -- to comply, we would lose some local market absent extension by the regulatory agencies.

Thanks, Charlie.

Your next question comes from the line of Jeff Wlodarczak with Wachovia.

Can you talk about what your estimate was for subscribers lost from hurricanes?

No, we don't give that specifically. Other than I think that it is -- we don't think that the total loss from hurricanes -- and again, we have one more. Which is the one in quarter, Wilma? We have one more that's not in this quarter because we don't really have a handle on Wilma at this point, in terms of the loss of subscribers. That one actually affected more homes and more of our subscribers than did the others. Having said that, most people didn't lose their homes. It's more of a power outage situation. So more just a service call situation perhaps, than it was in Louisiana and Mississippi.

But we don't believe that the total loss from hurricanes at this point in time will be material to our business. Because the loss of subscribers is somewhat made up probably in the next -- probably in the next two quarters, is somewhat made up by a chance to get incremental gain from -- particularly from cable companies who may not have come back up to service as fast as they would have liked to or maybe haven't been able to take care of their customers to the extent -- to the level that we have been able to take care of our customers. While it does have an economic impact -- it does have a churn impact, we don't believe at the end of the year that will be material.

So you think, sequentially, churn will be down quite a bit in the fourth quarter?

Historically, churn is down from a seasonality factor to begin with. So I think that -- what I would point you to is our disclosure that says absent the hurricanes, our churn this year would be about what it was last year, in fact, I think we actually said it's slightly below last year. And so, that should give you some comfort from where we are on a churn perspective.

I think we're maybe a little bit more conservative as a company. And we think, from a practical point of view, if you're not -- if a customer's house is blown away and is not there any more, it's going to take them a year to rebuild it, we might not want to pay for that customer for the next year, we might want to just write them off now. You can put them on your books and leave them on your books and you've got costs associated with that customer to leave them on your books, and you could do that. But we try to manage our Company internally for reality. So -- did you want to -- ?

I was going to add, Charlie, while we have been conservative in our reporting of the impact of the hurricanes on our subscribers, we haven't been conservative in our approach to recovering customers in those markets that were affected. We have moved over 1,000 people from elsewhere in the country into both the Gulf region and Florida, to not only respond to the trouble calls and ensure that we keep as many customers as possible, but as soon as those trouble calls are completed or are trending down to a more normalized level, having had that kind of bench strength puts us in position to follow-up and go after opportunities that may exist in those markets that you alluded to.

For every negative, there's a potential positive. It remains to be seen how cable companies execute and how we execute, whether that's going to be positive or not. But we don't think, at this point, that the impact of hurricanes for the total year will be material.

Okay. One quick question, bigger picture. How much control do you actually have over your SAC given an increasingly aggressive DirecTV cable operators now have four products? If you reach a point where you think S A C is getting more uneconomic, are you able to ramp-down SAC given the increasingly competitive environment? Thanks.

We have total control of our SAC. Of course, it might affect our subscriber count. So we make an economic analysis basically every day, every week that says; if we're going to spend $670 on a customer, do we believe we're going to get -- on a net present value --more than $670 back on this customer versus spending $670 on buying something else or putting the money to work somewhere else. Today we still think that -- the best place for our money today is still in that kind of subscriber acquisition cost for the caliber of customer that we're getting today. We continue to evaluate that. We think there are some fundamental things that will reduce SAC for us over time. One has been our lease, which has had a positive impact in terms of our subscriber acquisition cost. And will have an increasingly positive impact going forward, I think. And secondly, as Echo 10 launches and we get away from things like super DISH, which are very expensive for us -- for some of our local markets, once we get past the mandated congressional change-out and we take our losses there --. Once we get past that, there are some -- some real efficiency gains in putting in a single DISH as opposed to two dishes or as opposed to a big super DISH. There are operationally some significant advantages there that can lower SAC.

On the other side of the equation, MPEG IV is more expensive but we think the ARPU from customers will be better. So MPEG IV probably doesn't approach MPEG II prices next year. Probably it's going to be -- will probably start the year out at 15% higher from a SAC perspective for an MPEG IV customer. And will probably ramp down to maybe 10% higher for our year-end. Those counter balancing force -- then you have the competitive issues. So I think that realistically, SAC will remain higher than we'd like it to be. But we don't think it will get out of control. From our perspective, if it got out of control, we'd do something else.

Thank you.

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

Thanks. Hi, guys. What was the amount of SAC savings from returned receivers in the quarter? I didn't see that in the Q this quarter.

I don't think we've disclosed it.

You can get to it with the numbers that are there.

I'll take another shot at it. Also then, just curious, is EchoStar 10 now fully paid for? Is there anything left to be paid on that? I guess you also have the launch. Any other satellites on order and how much is left to be paid on those?

Dave, you've got it better than I do.

We do still have payments remaining due with respect to EchoStar 10. If you go back and look at our 10-K for the year-ended December 31st, 2004 -- I think we disclosed about $2.3 billion in total forward-looking obligations, with respect to satellites. We don't break that out on an individual basis. But in answer to your question, yes, we do still have some payments with respect to EchoStar 10 remaining. Of course, that number at December 31st also includes both CapEx and lease payments in it. We do have other satellites that we have under construction, but for competitive reasons, we try to disclose those items only when necessary.

Lastly for Charlie, obviously a lot of noise the last couple of weeks. Not only the Sprint Wireless deal with a couple of the cable companies, but also some of the VODs that have been announced, DirecTV and Comcast yesterday. Can you give us your latest thoughts on your -- any thoughts on a telephony and wireless strategy for you, given you own a lot of spectrum? And also, any thoughts on cutting some of these VOD deals like DirecTV did?

I'll start -- the Sprint cable deal is -- probably that particular deal was probably not in and by itself super compelling. I think what could be compelling, obviously, is the relationship between some of the big cable operators and Sprint/Nextel in the sense there's some probably some very -- to the extent those strategic relationships work there's things they can do that can give the cable guys a more compelling product. They clearly, they don't have a wireless piece of their bundle. Wireless is becoming increasingly important from a voice perspective. And it gives them a way to play in that arena without having to spend their own billions of dollars to enter the marketplace. That, of course, remains to be seen whether that becomes a big part of that bigger deal. But it's certainly too early to tell. I'm sure the cable operators and Sprint wouldn't go into it unless it was good for their companies. And they probably have a vision of where they want to go and we'll have to watch it closely.

As far as the video-on-demand deals -- in general, anything anybody else can do on video-on-demand, we can do. There are some technical differences between how cable would do it and how satellite would do it. But, we own our own DVR technology, we have a large number of our units in the marketplace that are capable of the kind of things that were just recently announced. We actually have a bigger base than anybody else that are actually capable of those kinds of video-on-demand deals. But from a practical point of view, I think it remains to be seen if a customers will pay $0.99 for a delayed show that they just to have press a button to receive for free.

Our DVR technology is very simple to use. And you can record Law and Order by pushing the button -- Law and Order by pushing the button one time and you can record every episode of Law and Order. You can watch it whenever you want to watch it, you can watch it for free. I don't know that a lot of customers will pay $0.99 to have us download that automatically for them and then bill them $0.99. It's certainly something we can do. I think it probably will be more compelling on other kind of things than $0.99. Maybe for movies and those kind of things. So, we think we're -- we think we are well prepared in that space. And Mike, you might talk about portability -- .

Well, I'll just add, Charlie, on a video-on-demand basis -- once you have recorded every episode of Sesame Street for your kids on your hard drive and your DVR, now it's really a simple matter to have that also on your PocketDISH, now that we've launched PocketDISH. So that I envisage kids will be taking Sesame Street and anything else you might have recorded for them on DVR into the backseat of the car. So we've really created an extension of the value of DISH at home, into the car or anywhere elsewhere where you may want to watch television. I think that has extended the meaning of video-on-demand and the value of DISH Network video-on-demand for our customers.

Okay, thanks.

Your next question comes from Lale Topcuoglu with Goldman Sachs.

Hi, it's Lale with Goldman. I guess two questions. The first one is, looking at your cash balances it's about $1.5 billion cash and marketable, and clearly you're all operating it -- looking at net debt per sub, it's agrueably a fairly low level. Charlie, in your mind, what's the appropriate debt per sub should be? And I guess, we've never seen you pursue a bank line which, one could argue, makes sense when you are a developing technology, you're coming off the curb. But today it's a mature product, it has fairly stable cash flow streams. Why wouldn't you consider pursuing a bank line and maybe do -- increasing the share buy backs? And I have one more follow-up.

Okay. Well, to some degree -- and again, if you read the disclosure we -- our board had extended our shareback through December 31st. We've dabbled in the market from time to time to do that. But the negative -- I think we're swimming upstream a little bit. There's a lot of negative momentum about pay TV companies. Rather than try and spend our time trying to convince people otherwise, we just let the market do what it's going to do.

We don't need a bank line today because we have adequate cash to run our business and do what we need to do. If that were to change, we certainly would look at any form of financing, including bank lines. I will point out that we do have a $200 million commitment to buy the Rainbow Satellite that should close -- that we're confident now will close in the fourth quarter. I believe we've got an FCC approval, is that correct?

That is correct.

That will close in the fourth. So that will be a negative $200 million hit to cash flow in the fourth quarter. But we have adequate cash to do what we're doing and we've always said, and it really hasn't changed, that we think that we're comfortable -- we're comfortable with somewhere between $500 and $1,000 debt per subscriber. I think we're materially below that, but our net debt per subscriber is probably some $300 or so.

$379.

So we're below that. But the markets have been uncertain so we'd rather be a little conservative. But we certainly are below where we think -- if we could find something to use to use our cash for the grow our business, then we're prepared to do that.

Well, that actually brings me up to my follow-up question. Can you offer us any update on -- potentially on the broadband strategy? Whether you would consider working jointly with DirecTV maybe looking at [allor to s-band spectrums]? Thanks.

We don't have a fully developed broadband strategy. It ranges from -- it doesn't make sense to play in a broadband market. And we think it's going to become a commodity, so we'll build technologies and features around it, on the one hand. To the other hand, is there a way for us to be more involved in broadband to consumers -- and that could be anything from reseller agreements to owning spectrum. So you look at everything in between.

Obviously, there's difficulties -- whether you work with someone like DirecTV or a phone company or anybody else, there's always difficulties when you work with other companies. But to the extent that you could ever -- I think there are ways you can work with competitors and it just takes some creativity and it takes business proposition where no one company has benefited -- no one company has an advantage, but both companies benefit. That is more likely on things like sharing back-hall fiber feeds with DirectTV for high-definition television. That one is one where nobody gets a benefit but we save costs. That's a more likely scenario. But I think we're rational. To the extent that any of our competitors out there -- if there's any of our competitors out there in some form that we can work with that benefit us and also benefit them, without changing the dynamics, then obviously we're interested in that. Just take a look at it.

Your next question comes from the line of Kathy Styponias with Prudential.

Hi, actually it's Kathy Styponias. My questions relate to PocketDISH. Wondering if you can give us a sense of just the economics; what does the equipment cost, what do you charge a customer what wants it? And/or if you can kind of give us a sense of either the current traction you're it or pent-up demand?

Then the second question I have is, in light of the fact that the content players are now more aggressively trying to pursue new ways to get their content -- to monetize their content other than advertising, are you concerned at all about the fact that -- through the pocket DISH you don't have to pay extra for content that's basically ported over it? And whether or not there are any legal avenues that the content companies can pursue to try to get a piece of that revenue stream? Thanks.

PocketDISH today is really -- it's kind of a glorified test market for us, it's fairly small scale in the United States. We did make an investment -- the company that makes it is Argos, it's a French company, we did make an investment in them. Last year or early this year, I can't remember. [Inaudible - many people speaking at once] April of this year.

it is kind of a revolutionary product in the sense that it gives you video portability and it interfaces with our new generation of set-top boxes so that you can download stuff from the hard drive to it. The way we make money on it would be two ways. One is, we charge for the hardware and expect to make a profit on the hardware. Two, we have an investment in the company. And three, it helps our customers -- makes our product more appealing to our customers. Because they can take, as Michael said, they can take Sesame Street to the car and have the kids watch it, which you really can't do -- we make our video portable, which is something that other guys haven't been able to do. There are probably -- we don't allow people to take it out of the PocketDISH and stick it on the Internet or anything like that, so we have copy protection and digital protection. It only interfaces with our set-top box. So if you -- and you have to pay a subscription to get it. There's not another revenue stream for the video side of it. So it's really more of an expansion of our product and some profit on the hardware.

I think the broader question, there are -- we certainly have concerns that, as programmers extend their reach and so forth, that programming may, in fact, become free on the Internet. And we may end up with video being a little bit like audio is today where suddenly you have to pay for an NFL football game today and suddenly it's free on the internet because somebody pirates it sticks it on there. So I think, as an industry, we have to be very alert and very cognizant of digital rights.

PocketDISH is a great product. I highly recommend that you go out and get one, take a look at it, buy one. But from a legal perspective, we worked close well the content providers, and I think there may be some outliers. As a general rule, they're comfortable because, as Charlie said, you can't take the content off of PocketDISH and download to the other products.

Your next question comes from the line of Tuna Amobi with Standard & Poor's.

Hi, can you hear me?

Yes.

My question relates to, first of all, the hurricane estimate. What would you do if, indeed, it turns out that the subscriber losses that your projected comes in lower than expected? Would you charge all of that back to the Q4, or maybe even '06? That's question number one.

Question number two is, the SBC relationship. I know that you don't break out the subscriber numbers. But if I compare your situation to DirectTV and Verizon, it just seems that the trends are going the opposite direction, and that may well be due to the fact -- due to the way that you initially structured the agreement with SBC which you have now renegotiated. So the question is, what is that different, in terms of the current structure of SBC relationship that makes you continue to expect that the percentage contributions of subscribers who continue to decline -- at what point do you reach an inflection point or even peak out in terms of when do you expect this relationship to become completely immaterial?

Okay. First on the hurricane, what we really did is we went into the affected areas and tried to contact all of our customers that we -- in the affected areas. If we couldn't contact them, or if we did contact them, they said that their house had been destroyed, we went ahead and shut them off and became a churn. If, in fact, their house gets rebuilt or they move back to their house or they somehow decide that there are -- maybe we didn't contact somebody and suddenly they just were -- not home, or they live up north and they don't come back until wintertime -- then those will be new adds. And those would be new adds whatever time, whether it be the fourth quarter or next year -- whenever they come back on, they would just be a new add for us.

We've taken our best estimate. We don't think there will be a material change up or down to the estimate we've taken, but it could move around a little bit. We're not perfect on our estimates. But we wanted to go ahead and make an estimate as opposed to doing nothing and just waiting for it and disclosing it in the fourth quarter when we had --. If you call somebody up and he says his home is being destroyed, there's not a lot of reason to leave them on your books and wish and hope. You may choose to put your head in the sand and not call the guy -- not try to contact him, you can that. We just decided that internally we needed to know, and once we knew internally we disclosed it to you guys.

As far as SBC relationship, it probably is immaterial today. I think they disclosed that they did -- I can't remember what they disclosed, but it was -- it was like 10,000 subscribers or something. Whatever they disclosed, net new subscribers that they had, it wasn't a big number in the third quarter. One of you guys probably knows. And the relationship -- you're right, it the way that we structured our original deal with them, it didn't work as well for them as I think they would have liked. So therefore, it doesn't work for us, either. You have to have two parties to have a deal that works for both. It's been restructured. Remains to be seen whether that will materially change SBC's impact on our financials. But I think that it is certainly a deal that appears, at least on first glance, to be one that works better for them. And we're relatively indifferent to the two deals.

So I think DirecTV certainly has had a bigger impact from Verizon and BellSouth and Quest. Number one, they cover 37 states instead of 13 states, or 40 states instead of 13 states, because there's some overlap. Number two, those relationships have started -- they're not as mature as our SBC relationship. I think that the phone companies start out pretty fast out of the gate and they tend to slow down as they get the low-hanging fruit. And those guys still have a little bit of low-hanging fruit and SBC has probably picked up most of the low-hanging fruit. I think SBC has a much more precision attack in going after those where they don't plan to do a fiber build-out. In fact, th big difference in gross adds between our two companies in the fourth quarter, probably was primarily the difference between phone companies -- between the two companies.

Again, we as a company, believe we have to be prepared to -- the only thing we can control is what we do. And so we have to be prepared to run a successful business with our own efforts and we'd love -- to the extent the strategic partners can help you and it makes sense, that's great. But we don't control the strategy for the phone companies and SBC so we can't put our head in the sand and think that that's going to get us subscribers. We're a little asleep at the wheel the beginning of the year, end of last year, in thinking SBC was going to carry some markets for us. We were probably a little asleep at the wheel and we probably didn't market in those areas as strong as we should have. And today, we're happy we're SBC markets but we're going to market the entire country ourselves, as well.

And what's the settle, is it $500 million initial investment that they made? Was that also affected by the restructuring?

There was no -- I don't believe -- there was no change to the $500 million investment.

Separately, a quick follow-up question on promotions. You're running a lot more promotions than I would have expected, historically. But is that pretty much now rolled out across all your markets or just -- are they just in select markets?

This is Michael Neuman. We have rolled out a new promotion in the last several days that will carry us into November and December. It follows on the heels of another promotion that ended, at least in the public's view, ended -- coincided with the introduction of our new $19 promotion. Although both are available to customers that still want to take-up -- the one that coincided with the new one in the beginning of November. You're going see us continue to react to market forces. There is a lot of promoting going on in the marketplace, some discounting of the first month or first few months by a cable television in particular. As you've heard Charlie say on many occasions, he hates discounting programming and you can be sure that that phrase is indelibly etched in my mind as we go forward into next year. And I think we will, indeed, have opportunities to be more creative.

One of the challenges -- one that's reflected in our current activity, if you're watching our advertising in the newspapers, you'll note that we have gone forward with a very in-your-face ad campaign that drives home the value of our everyday low pricing compared to cable in each market. So you will see, for example, us comparing apples to apples against a Time Warner digital cable in Time Warner territories where a customer with our everyday low pricing can save nearly $400 a year. And as we point out in the ads, you can buy a lot of gasoline with that difference. One of the things I think we've failed to do, to some extent in the past, while we've always had very good value and continue to have good value with America's lowest all-digital price of our AT-60 products, is we have not been as aggressive at pointing out that value to cable subscribers, as we now are beginning to do. So as that becomes more apparent, we may indeed have an opportunity to back off discounting a little bit. Because, hey, we already offer very good value. Thank you.

Your next question counts from the line of Aryeh Bourkoff with UBS.

Yes, hi, good afternoon. Thank you. Just two questions. One, since you guys are obviously diligent on analyzing the return potential of the dollars that you spend. And it seems like the SAC costs are leveling out and you do after free cash flow positive model, as you mentioned. So you're not really increasing investment in terms of trying to accelerate the subscriber base, it looks like, as much as, steady as she goes. You also have $1.5 billion in cash and securities on hand. That seems like you would want to use those if you thought -- for buybacks, if you thought the stock could generate a better return than deploying it back into the business. Just wondering, how do you balance a decision of the return potential of buying your stock with that cash and accelerating CapEx to get more subscribers as you look at the return comparisons? And I have a follow-up.

We've answered this question a lot of times. But we really just analyze -- you have cash, what can you do with it? Are there new opportunities that you think you have a good chance to grow a business in? So you can kind of look at -- first choice is always the -- to go out there and put it in your current business and grow customers. And I think that's still kind of where we are. And I think we're growing customers at a healthy pace.

The other thing you look at then is, do you have new businesses that you could look at? Can you acquire a company, can you acquire a business, can you start a new business? And that kind of stuff. You then look at, do you have debt ? And, for example, we have debt that's over 9%. Can we replace that debt, or buy that debt back, call that debt? And you look at whether you should pay a dividend, and you look at whether you should buy your stock back. And you look at all those factors and you make judgment calls in consultation with your board on what your strategy would be. And obviously, we're not -- you guys have seen the last two or three years we've kind of done a little of everything. We've paid a little dividend, continued to acquire subscribers, bought some debt back, bought some stock back.

Tomorrow is another day. And we'll look at what opportunities are and make calculated decisions and see what makes sense. But, I think there's a negative momentum in video stocks, and so why swim upstream? All right?

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

Great. Thank you. First, I have a follow-up on MPEG IV. I'm wondering when the boxes will be deployed, both HD as well as standard set-tops. Then secondly, it sounds like you do not plan to swap out the HD boxes with the MPEG IV boxes right now because the 8PSK -- those boxes are sufficient. I just wanted to confirm that that is correct.

Right now we have about -- I think we have about 20 channels of -- maybe 16 channels of HDF today, in MPEG II. All new channels in MPEG -- all new HD will move up in MPEG IV. The boxes are MPEG IV boxes, they're coming off the production line today. They will enter the market late this year, so that's in the next eight, six weeks, whatever we have left; and possibly more dramatically in the first quarter next year. They won't have a material -- the MPEG IV development will not have a material impact this year. They will go to primarily, initially to new customers who, in fact, want all of our HD programming, including some local-to-local and major markets. Current customers will be incentivized and offered an opportunity to upgrade to MPEG IV and we think that will be a material factor, from a CapEx perspective, in 2006. But customers who don't expect to put -- have H D TV's. For example, if you have an HDTV set in your house, then you have two other TV sets that are normal TV sets, the fact of the matter is, you'll be fine with one HDTV MPEG IV box and you'll be fine with 8PSK boxes on the other ones. So we can save -- I think we have a very prudent approach to how we're going to approach it. We haven't come to all the conclusions in exactly how we're going do it.

We certainly have CapEx requirements that will -- in 2006, 2007, 2008, for MPEG IV. We certainly have pressure on SAC, caused by the new technology of MPEG IV boxes, the encoders are more expensive, the boxes are more expensive. That will have negative impacts in 2006, a little bit less of a negative impact in 2007. And MPEG IV probably will cost about the same thing as MPEG II in 2008. So probably won't be a material difference. We'll have more disclosure on that as we make decisions on it, particularly as we get into next year. And how it will affect our CapEx for next year. We won't spend money on MPEG IV unless we think we can get a return, either in getting more revenue from a customer, saving a customer, getting a customer we otherwise wouldn't have gotten; would be the factors we'd look at.

And I think we're -- put in this way. I think we're better prepared for MPEG IV development than most cable companies are for DVR or digital cable development, where they have to -- . So we don't really know exactly what -- well, MPEG IV will -- let me repeat, MPEG IV will add to subscriber acquisitions that will be somewhat offset by the fact we have leases and other things. But the MPEG IV itself is obviously a high cost.

Okay. And then my second question relates to HD and DVR services broadly. I'm wondering if you can give us a sense of what percentage of new customers perhaps are taking these services? Or maybe even how many advanced services customers you have? And then lastly, do you think that the penetration rates for HD and DVR service accelerates in 2006. Thanks.

I'm trying to predict -- the future is tough, nobody has really has a great track record of that. The technology probably, in general, has moved a little slower than people have thought. My gut feel is it probably, at some point, will reach an inflection point where it moves a little bit faster than people think. All we can do is get prepared and that's what we've done. We haven't finished our budget for next year in terms of forecast and so forth and how big of an impact we think HDTV will be. Michael, you might want to talk a bit about where satellite in general relates to pros and cons, versus, say, the competition.

That and just one additional comment to the one you've already touched on, Charlie. And that is that we have seen, as many of you have, the forecast of what the sales of HDTV sets look like in 2006, 2007. And, of course, it follows that there's really little point in upgrading to HDTV set unless you have an HDTV signal at home to make it all worthwhile. As customers begin to invest fairly significantly in HDTV, we believe that there will be -- coincident with that, a pull-through of HDTV source. And of course, we believe that we are well advantaged and provisioned to that source. We also believe there will be a willingness to pay for -- a premium for an HDTV signal and the equipment that it takes to get it, as much as there would have been for the TV set.

So all that to say that, as Charlie, I think, said this a different way a few minutes ago, there will be a pull-through effect on pulling our customers through to our MPEG IV boxes as a result of them having acquired an HDTV set, as opposed to us going out to significant quantities of our base and pushing MPEG IV. It's going to be pulled by market demand. But also in our case, unique to DISH Network, pulled by what we believe will be a superior content offering. And that will begin to unfold early in Q1, particularly as we come up to the consumer electronics show, we'll have a lot to say about both our hardware offering and our programming offering that will represent the fullness of that pull-through that I'm alluding to.

And I think people have always assumed that cable has an advantage in high-definition television. And I think that 2006 will change that dynamic and that thinking a little bit. Cable obviously has had an advantage in the local transmission of HDTV because they do it in a local basis to their cable plan. But they have a big disadvantage when it comes to national distribution of national channels in HDTV because they've got to use that bandwidth -- they've got to reclaim bandwidth in their analog from the basic spectrum, which forces them to get more and more customers to digital at higher prices.

DirecTV has a bit more aggressive approach. Both companies are going to do local transmission of high-definition television in 2006. So that in many markets, the cable advantage of local goes away, and the national advantage that we have, of course, will prevail in many cases. DirecTV has a bit more aggressive approach in doing that with their investment in K-band satellites that are up, I think, today. They've started rolling that out in Detroit.

We're a bit more cautious and a bit more conservative about it in terms of rollout. Because we think we can go -- we think we can go to fewer markets and go a little slower, particularly as the digital transition takes place from private broadcasters. Now that we have two bills in Congress that have passed, that it appears very likely that the analog turn-off is going to happen in late 2008 or early 2009. And I think when you factor that into the equation, we can be a little bit more cautious about how we approach it. But we do think that local-to-local high-definition television and certain markets makes sense via satellite. And we think that the satellite industry will have an advantage in HDTV and we hope to get our fair share of those customers. And I think that that's something the marketplace really hasn't focused on. Now, if HD is not popular or goes slow, of course that advantage is somewhat stretched out.

Your next question comes from the line of Michael Harkins with Levy and Harkins.

Charlie, how are you doing in Keller, Texas? And how long it will take you to evaluate whether Verizon's fiber to the curb is a vigorous threat or not such a big threat?

We pretty much have given up. We've moved all our -- we've closed in all our offices there, we've moved out. We've shut off our satellite over Texas, and we've called our customers and just told them that the Verizon -- we can't compete. And that the Verizon deal is what they need to take.

Careful, Charlie. People might believe you.

There's no tone of -- it's too early to tell. Look, I think phone companies are going to be a factor. I think they're going to have really a pretty good product for people. I think it's going to be expensive. It remains to be seen whether you get a rational return on that. But it's going to be a good product. And there's a fair amount of technology behind it. I think it's going to be most damaging to cable just because of the math. I mean, the cable has 70% of the business. So, when you go to Keller, Texas, when they're taking customers away they're taking seven out of ten of those customers are taking from the incumbent cable.

Then, you'll have to -- we'll have to differentiate ourselves from what the phone company is doing and what the cable company is doing. And we've thought about that a lot, we think we have strategies, we think we have rational strategies -- we'll see. Will we lose some customers to phone company's fiber plant? Yes, we will. Just like we lose customers to cable's digital cable and broadband. And just like we'll lose customers to DirecTV and their NFL Season Ticket and maybe some of their hi-def offerings. We'll certainly lose some customers.

Then the question is, where do we gain customers? And a good article in U.S.A. Today, where it talks about customers don't want to pay -- not all customers want to pay for everything. And you guys are rich, so you want to pay for everything. But if you saw -- if you saw the New Orleans TV -- there are people who just don't have $100 a month to spend for TV or TV and broadband. And we're -- we -- we kind of -- we're fortunate that we pretty much have a product for everybody; from the very high-end, where you want 30 channels of HDTV, to the very low-end where you just want plain old television. We think we can cover that range. And we think we'll get our fair share and we'll get our return on where we spend our money.

The key is not to get emotional about it and play the cards you got. If you do that, you financially you can put good numbers down. Southwest Airlines didn't say, we have to serve hot chicken meals to everybody and have international routes. They did one thing really, really well, which is, get you on the plane, get you to leave every hour, get you there on time at a low price.

We have to be the kind of company that does certain things very, very well. We're not going to get every customer in the United States and not going to be everything to everybody. But if customers are omniscient -- if they were omniscient, probably the majority of customers would take a serious look at our product. And that's really what we have to do. Where we have holes in our strategy, we have to say, how do we see if we can fill those holes in an economic way? And if we can, we'll be successful, if not, you're better off owning somebody else.

Thanks, Charlie.

I've chosen to own this company, just by a way of some degree of confidence.

Your next question comes from the line of [David Shoeman] with Bridger capital.

Hi. Just wanted to follow-up on some things that you've touched on. How will the launch of Echo 10 and the use of the 129 orbital slot affect operating costs going forward?

Echo -- well, both of them are our satellites, so we'll pay for Echo 10. From an operating cost perspective, Echo 10 requires us to build -- has required to us build four new uplink centers. The vast majority of that CapEx is probably being -- has been spent in 2005 or will have been spent in 2005. There will be some CapEx, some electricity and minor employees and that kind of stuff. But the benefit is more than outweighed -- those costs are more than outweighed by the fact that we can get to one dish instead of two dishes. We can eliminate SuperDISH, which is a very costly bigger dish that we put in that's caused us a lot of operational problems. And the fact that we can do more local markets and get incremental subs in markets that we're not in today. So it's not -- other than the CapEx to build the satellites, it's not a lot of expense.

Then just a follow-up question, I mean, you were able to upgrade from the 300 series boxes to the 500 series boxes fairly seamlessly. It looks like that's how you're positioning to introduce MPEG IV. And I'd be interested in hearing your's and Carl's perspective on satellite's transition to MPEG IV relative to cable having to reclaim the analog spectrum in order to go all-digital. What are the costs and benefits for both satellite and cable of those two transitions?

I think I would say this -- and we haven't made our final plans, this could obviously change. But I think because we thought about MPEG IV several years ago, and the 8PSK technology came out -- all MPEG IV is 8PSK, as well, or most satellite is. So we kind of bit the bullet and put a few extra bucks in our box several years ago to get the benefit without having to go to MPEG IV -- totally to MPEG IV. So I think our transition to MPEG IV will be a lot more efficient than, perhaps, anybody else in the satellite business. And I think it will be a lot more efficient than what cable is going to have go through to upgrade their customer base from analog to digital. And that ultimately, is going to result in a greater free cash flow to our bottom line, all things being equal, than our competition has. If we have greater free cash flow than we have more money to spend on something else, or pay down our debt or do whatever we want to do.

I just think that -- I don't know exactly what everybody else doing. But I think that we have a very prudent approach that we think if we're going to -- in MPEG IV we will get a long-term return. It's not one of those things where you just put money into something just to play defense and keep a customer. It's more than that. We think we get extra revenue. And we can go at a measured pace, depending on demand. The risk for us is that the demand is suddenly much greater than we anticipate and we miss a window of opportunity. Because people are standing up in droves to get HDTV tomorrow and suddenly we didn't -- we weren't as aggressive as maybe others. So we'll see, but --

Okay. And I guess the last --

I mean, nothing's changed in this company. It's not like we -- we're a bit more cautious and we missed some opportunities in the marketplace as a result of that. But we're relatively a conservative company. And we've stayed in DBS bands, we haven't focused as much on K-band. K band may very well be the future, but we haven't focused on it quite as much. We haven't spent as much on exclusive programming that we couldn't show a direct profit from. We haven't been as aggressive as spending money in retention marketing to keep a customer we think we might lose the next year anyway or that calls too many times or that doesn't spend enough money with us. We're bottomline-oriented. And I think it reflects in our EBITDA and our cash flows and our earnings, vis-a-vis some of our competitors in the video business, all things being equal

Given how well-positioned you are, and I know this was touched on a little bit earlier in the call, the bank loan market is very liquid right now. And there have been a number of precedent transactions where bank debt has been used at attractive rates to repurchase shares. While I respect your need to be conservative, given how much of the company you own, I think it is worth taking a look at the drag on your return on equity that's created by being underlevered at this point.

I'm not a great fan of leverage. But I think it's prudent from time to time, if you have another use of the money. And I think we kind of know where we say we'd like to be and where we feel comfortable. And we don't feel any great pressure, just because people want to us buyback stock, to go buyback stock. If we think it's a good investment in the marketplace -- as long as you -- maybe the market sets us down a few more bucks, it will make sense. I don't know.

Okay.

We analyze it everyday.

Thank you.

Operator, I think we got time for one more call -- one more question.

Your final question comes if the line of Benjamin Swinburne with Morgan Stanley.

Thanks for taking one more, it's Ben Swinburne. Two questions. One, you mentioned in the Q a lot about SuperDISH, the impact this year and the impact from launching Echo 10 next year. Can you give us a sense of how much of the $670 SAC was impacted by SuperDISH in the current quarter? I'm assuming it's material since it's in the Q.

Second, going back to everyone's favorite question about use of the financial capacity of your business, Charlie. What is it that you think your company does better than anybody else? Or what are your competitive advantages that you will use to analyze investment ideas that you might be willing to write a big check for in '06 and '07, as you look at new business opportunities?

I think that -- your second question, I think one of the things we do pretty well is -- once we spend a bit more time thinking about where we want to go and then working our way back to the future -- back to the present. And once we decide where we want to go, we typically are pretty good at executing to get there. But we spend a bit more time thinking about where we want to go, than some people. And rightly or wrongly, doesn't mean we make great decisions, cause we certainly have made a lot of bad ones. But at least we think about where we want to go.

As far as SuperDISH, it is a factor in SAC. The vast majority of our customers don't buy SuperDISH. But it shows -- but the elimination of SuperDISH will have slight improvement in SAC but it also has improvements in efficiency for our call centers and our installation crew and trouble calls and customer satisfaction and churn. Because the SuperDISH is just a little bit bigger and a little bit more expensive from the hardware perspective it blows a little bit more in the wind. The SuperDISH is more likely to blow down in a hurricane than a regular dish. It just has -- it was a bit more complicated than we would have thought on paper when we decided to do it. It was still -- in hindsight, we still would do it. Because we got customers we otherwise wouldn't have gotten. But it's not nearly as efficient from an operational installation point of view as our normal product. It will help. Somewhat offset by the cost of MPEG IV.

So, it's -- bottom line is, we're in the middle of our budget season, we're doing our forecast, we think we can compete in the video marketplace and we think we'll be around in -- what's that place in Texas?

Keller.

Keller, Texas -- we think we'll have some customers there. Even after everybody comes in and makes it a battleground.

Got you.

Okay. I think that's it. We'll be back, I guess, in late February with --

Early March.

Early March? I thought it was March 1st we had to file by. We'll be with you in late February to very early March.

No later than March 1st.

No later than March 1st for year-end. Thanks for joining us.

This concludes today's EchoStar Communications third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS]