Filed by EchoStar Communications Corporation
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12
of the Securities Exchange Act of 1934
Subject Companies: Hughes Electronics Corporation,
General Motors Corporation,
and EchoStar Communications Corporation
Commission File No. 333-84472
Date: May 6, 2002
Set forth below is a transcript of the first quarter 2002 earnings call of
EchoStar Communications Corporation. Certain text contained within the
transcript has been bracketed because it was inaudible or for clarification
purposes.
In connection with the proposed transactions, on March 18, 2002, General Motors
Corporation ("GM"), HEC Holdings, Inc. ("Hughes Holdings") and EchoStar
Communications Corporation ("EchoStar") filed preliminary materials with the
Securities and Exchange Commission ("SEC"), including a Registration Statement
of Hughes Holdings on Form S-4 that contains a consent solicitation
statement/information statement/prospectus. These materials are not yet final
and will be amended. Holders of GM $1-2/3 and GM Class H common stock are urged
to read the definitive versions of these materials, as well as any other
relevant documents filed or that will be filed with the SEC, as they become
available, because these documents contain or will contain important
information. The preliminary materials filed on March 18, 2002, the definitive
versions of these materials and other relevant materials (when they become
available), and any other documents filed by GM, Hughes Electronics Corporation
("Hughes"), Hughes Holdings or EchoStar with the SEC may be obtained for free at
the SEC's website, www.sec.gov, and GM stockholders will receive information at
an appropriate time on how to obtain transaction-related documents for free from
GM.
GM and its directors and executive officers, Hughes and certain of its officers,
and EchoStar and certain of its executive officers may be deemed to be
participants in GM's solicitation of consents from the holders of GM $1-2/3
common stock and GM Class H common stock in connection with the proposed
transactions. Information regarding the participants and their interests in the
solicitation was filed pursuant to Rule 425 with the SEC by EchoStar on November
1, 2001 and by each of GM and Hughes on November 16, 2001. Investors may obtain
additional information regarding the interests of the participants by reading
the preliminary consent solicitation statement/information statement/prospectus
filed with the SEC on March 18, 2002 and the definitive consent solicitation
statement/information statement/prospectus when it becomes available.
This communication shall not constitute an offer to sell or the solicitation of
an offer to buy, nor shall there be any sale of securities in any jurisdiction
in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such
jurisdiction. No offering of securities shall be made except by means of a
prospectus meeting the requirements of Section 10 of the Securities Act of 1933,
as amended.
Materials included in this document contain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
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 such
forward-looking statements. The factors that could cause actual results of GM,
EchoStar, Hughes, or a combined EchoStar and Hughes, to differ materially, many
of which are beyond the control of EchoStar, Hughes, Hughes Holdings or GM
include, but are not limited to, the following: (1) the businesses of EchoStar
and Hughes may not be integrated successfully or such integration may be more
difficult, time-consuming or costly than expected; (2) expected benefits and
synergies from the combination may not be realized within the expected time
frame or at all; (3) revenues following the transaction may be lower than
expected; (4) operating costs, customer loss and business disruption including,
without limitation, difficulties in maintaining relationships with employees,
customers, clients or suppliers, may be greater than expected following the
transaction; (5) generating the incremental growth in the subscriber base of the
combined company may be more costly or difficult than expected; (6) the
regulatory approvals required for the transaction may not be obtained on the
terms expected or on the anticipated schedule; (7) the effects of legislative
and regulatory changes; (8) an inability to obtain certain retransmission
consents; (9) an inability to retain necessary authorizations from the FCC; (10)
an increase in competition from cable as a result of digital cable or otherwise,
direct broadcast satellite, other satellite system operators, and other
providers of subscription television services; (11) the introduction of new
technologies and competitors into the subscription television business; (12)
changes in labor, programming, equipment and capital costs; (13) future
acquisitions, strategic partnership and divestitures; (14) general business and
economic conditions; and (15) other risks described from time to time in
periodic reports filed by EchoStar, Hughes or GM with the Securities and
Exchange Commission. You are urged to consider statements that include the words
"may," "will," "would," "could," "should," "believes," "estimates," "projects,"
"potential," "expects," "plans," "anticipates," "intends," "continues,"
"forecast," "designed," "goal," or the negative of those words or other
comparable words to be uncertain and forward-looking. This cautionary statement
applies to all forward-looking statements included in this document.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 1
ECHOSTAR COMMUNICATIONS
MODERATOR: MICHAEL MCDONNELL
MAY 2, 2002
11:00 AM CT
Operator: At this time, I would like to welcome everyone to the
EchoStar Communications Quarter 1 Earnings Conference
Call. All lines have been placed on mute to prevent any
background noise.
After the speakers' remarks, there will be a question and
answer period. If you would like to ask a question during
this time, simply press star then the number 1 on your
telephone keypad. If you would like to withdraw your
question, press the pound key. Thank you.
Mr. McDonnell, you may begin your conference.
Michael McDonnell: Thank you Operator. Hello everyone. Thanks for joining
us and apologies for the delay today. My name is
Michael McDonnell and I'm the Chief Financial Officer here
at EchoStar.
I'm joined today by Charlie Ergen, our Chairman and CEO,
David Moskowitz, our Senior Vice President and General
Counsel and (Jason Keiser), our Treasurer.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 2
I'm going to give you a quick recap of the financial
performance for the quarter then I'll turn it over to
Charlie for his comments. Then we'll open it up for some
Q&A at the end.
But before we get started, as most of you know, we need to
do our Safe Harbor disclosures and so for that I'll turn
it over to David.
David Moskowitz: Thanks Mike and good morning to everyone. Thank you for
joining us. As you all know just the ground rules, we
invite media to participate in this in a listen only mode
on this conference call. In addition, we ask that you not
identify participants and their firms in your report. We
also request that there be no audiotaping of this
conference call.
All statements contained in this call and in our 10Q as
well as in statements made in press releases and oral
statements that we may make from time to time by our
officers, directors or employees acting on our behalf that
aren't statements of historical fact constitute
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act.
Those forward-looking statements involve known and unknown
risks, uncertainties and other factors that can cause our
actual results to be materially different from historical
results or from any future results that might be expressed
or implied by those forward-looking statements.
And I would ask you to take a look at our 10Q and other
publicly filed reports for a list of those factors that
could cause our actual results to differ from historical
results.
In addition to those factors that we show in our
publicly filed statements, we may face other risks
described from time to time in future periodic reports
that
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 3
we file with the SEC. All cautionary statements that we
make during this call should be read as being applicable
to all forward-looking statements wherever they appear. In
this connection, investors should consider the risks that
we described in those reports and should not place undue
reliance on any forward-looking statements that we make.
With that out of the way, I'll turn it back over to Mike
for a recap of...
Michael McDonnell: Thanks David. Let's go ahead and take a look at the
quarter and we'll start with the total company. Please
note that all guidance figures and references for 2002
will not include the effects of our planned merger with
Hughes Electronics Corporation or its majority owned
subsidiary, PanAmSat.
In addition, all guidance figures and references assume
that the sluggish economy will continue throughout 2002.
Total revenue for the quarter was approximately 1.1
billion, a decrease of 4% over last quarter and 28% higher
than the same period a year ago. Lower seasonal hardware
sales partially offset by subscriber growth was the driver
of the decline in revenue quarter over quarter.
We continue to expect 2002 revenue to be approximately 20
to 25% higher than 2001 revenue of four billion.
Pre-marketing cash flow was 450 million or 41% of revenue
in the quarter. This represents an $18 million improvement
over Q4 and 99 million better year over year.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 4
EBITDA for the first quarter was 178 million, our best
ever as we continue to lever the economies of scale
inherent in the DBS platform. That's an improvement of
seven million over Q4.
EBITDA during the fourth quarter of 2001 was negatively
impacted by a one time $30 million arbitration charge
while EBITDA during the first quarter of 2002 reflected
higher subscriber acquisition costs in the fourth quarter.
Operating income was 95 million, an increase of seven
million over last quarter. Net loss for the quarter was 39
million.
Included in this quarter's results are the effects of
charges relating to our investment in StarBand totaling 36
million as well as interest charges relating to our bridge
financing commitments totaling 19 million. The StarBand
investment has been written down to zero at March 31,
2002.
Loss per share for the quarter was 20 cents. It is
important to note that the first quarter's EPS figure
includes an approximately 58 million of retained earnings
reductions resulting from the Vivendi transaction.
These items are not a component of net income but are
included in net income attributable to common shareholders
for purposes of computing EPS.
Now let's look at the DISH Network. Subscription TV
revenues increased 3% from the fourth quarter to
approximately one billion. Subscriber growth partially
offset by a decrease in monthly average revenue per
subscriber was the driver of this increase.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 5
Despite the effects of an economy, which continues to
struggle, we added 335,000 net new customers during the
first quarter and continue to expect to end 2002 with over
eight million subscribers.
Our average revenue per subscriber was approximately
$48.36 per month, a decrease from last quarter of $1.32
and an increase of 13 cents over Q1 of last year.
ARPU was negatively impacted during the first quarter by
certain promotions whereby qualifying customers received
three free months of programming. This decrease was
partially offset by price increases, which went into
effect during the quarter. We continue to expect 2002 ARPU
to be slightly higher than 2001 ARPU of $49.32.
For the quarter, our costs of acquiring subscribers
averaged approximately $430 per gross addition. We
previously provided guidance that we expected (Sac) for
2002 to be consistent with 2001 (Sac) of approximately
$395 per gross addition.
However, due largely to the effect of recent promotions
which are tailored toward subscribers with multiple
receivers resulting in higher equipment subsidies and
commissions, we currently expect 2002 (Sac) to be roughly
consistent with the first quarter.
We believe that this increased emphasis on multiple
receiver promotions along with heightened credit
procedures which were implemented during the quarter will
attract better long term subscribers than could be
obtained through less costly promotions.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 6
Equipment costs capitalized under our digital home plan
during the quarter, which are not included in the above
figures, were approximately 77 million. Cash and equipment
received from digital home plan customer disconnects which
are also not included in the above figures aggregated
approximately 12 million.
Turning to the balance sheet. At the end of the year, we
had cash and marketable securities of approximately 4.5
billion, which includes 176 million of cash reserved for
satellite insurance. This balance includes the approximate
$1.5 billion increase in cash as a result of the equity
investment made by Vivendi during the quarter.
We also had approximately 5.7 billion of debt as of
December 31, 2000, excuse me, as of March 31, 2002, which
includes two billion of convertible securities.
On a straight debt per subscriber basis, we ended the
quarter at roughly $801 per subscriber on a net debt basis
that drops to $197 per sub.
Cash capital expenditures in the quarter were 103 million.
During the remainder of 2002, depending on the strength of
the economy, we anticipate total cap ex of between 400 and
650 million with approximately 25% of that amount going
toward the construction of new satellites and
approximately 75% of that amount going toward capitalized
equipment under the digital home plan and general
corporate purposes.
That's everything on the numbers. So with that, let me
turn it over to Charlie for his comments.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 7
Charlie Ergen: I don't have a lot of comments other than just a couple of
general observations. One is we're obviously disappointed
in some of the financial metrics particularly the EBITDA
number because it we felt should have been higher in terms
of the operation of our business.
But we did make some strategic decisions during the
quarter to say we're willing to play, look at long-term
economic model and we've got to look at customers that we
think we get the best return on. And we saw some
opportunity certainly in the marketplace.
And certainly one of the negatives we've had as an
industry have been not being able to go after multi TV set
households and while those customers cost us a little bit
more because we've got to put in more equipment, we are
certainly hopeful that that strategy will pay off for us
in terms of a higher, a longer term customer and a higher
ARPU customer and a customer we might not otherwise get
because cable has that market fairly locked up, has in the
past.
So it's going to be too early to tell obviously since we
just started that and it'll take a few quarters to prove
that proposition.
Additionally, we had to strategically look at we think the
best way to get a handle on churn is one of two things,
either customers put in an investment in your equipment up
front or investors making a commitment to you backed by
credit to stay with you for a period of time so that we
can give them outstanding service and a great value so we
know they don't want to churn after we've had them for a
while.
And what we want to stay away from is customers being
able to get the equipment for free with no commitment
because we know that drives churn
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 8
and is a bad economic model for us. So the free program --
by offering free programming, we're able to get a
commitment out of the customer for cash up front or we are
able to get that long-term commitment.
So it's not something you want to do. You hate to give
away programming but it's something we felt that was the
best alternative in the environment that we're in and
gives us a chance for somebody to look at us for three
months to make sure that we do a great job of our service
during that period of time.
It does have the effect of lowering your revenue and has
the effect of lowering your ARPU. And when you factor in
the fact that we ran our "I Like 9" campaign, which was
very successful last year that continues to run for a
year.
So we have some customers on the "I Like 9" program that
are paying us on average say $20 a month instead of the
average $50 ARPU and you have customers who get three
months free. You don't pay until three months from now.
That net effect is what really lowered our -- net net was
what lowered our EBITDA.
So there is some strategy behind those numbers. There is
some logic behind those numbers and we felt like that was
the least risky way for us to play it.
The other negative I'm real disappointed is broadband and
writing down our final investment in StarBand and our
previous write down in StarBand and (unintelligible) we
now have no investment in our books. We're very
conservative. We may be the only company that's done this
but that are investors in these companies but we don't see
a path to getting a return on our money at this point in
time so we've written those down.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 9
We've tried really hard. It's something we haven't been
successful at as a management team. Obviously we're
minority investors so we didn't get to totally drive those
companies in some of the directions we wanted to go.
They still are good companies. They have good management
teams. They may very well be successful in their own right
but there wasn't a path where we could make money. We
actually had invested more in those companies at least in
StarBand's perspective beyond our $100 million investment,
we were investing day to day in customer service and
billing and other things that were also costing us money.
And we just didn't see a path to get a return on the
customer and we feel like those dollars can be better
spend acquiring video customers at this point. And without
seeing a path to being able to ultimately monetize those
customers it didn't make sense to continue doing that.
Not that doesn't mean that those companies can't go out
there and do that on their own and if those companies can
show us in the future a path to where we can make money,
we will jump back in with both feet. And again, I think
that the normal trends of churn have to be watched and so
forth.
On the positive side, I think our sub growth was solid.
It's certainly within line with where we thought we would
be and what still remains in our opinion a difficult
economy and notwithstanding some of the positive things we
read about in the economy, we see from a consumer
perspective still some hesitancy out there to spend more
on video or spend more on Pay Per View or and so forth.
And the other positive thing that I think was we were
able to balance long term or satellite broadband lack of
success with finally our first two DSL
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 10
dealers, DSL deals, one with SBC and one with EarthLink
where we don't see a negative impact to us from a monetary
point of view and we see the strategic advantage of being
able to partner with some of the folks who already have
the plant and equipment and for DSL who are already
experts in broadband and who cover people at a more
economical proposition other than the $70 a month we had
via satellite.
So while we don't really have much of a revenue
opportunity there, we think we have a strategic
opportunity to better compete in the short run with the
cable industry who has been very successful with their
broadband video bundlings.
So we think that's the proper strategy for us until we can
come back to the marketplace and take the lessons that
we've learned with satellite and come back with an
economical satellite broadband model.
Let's see, what else have we got? You know, I suppose
there'll be some questions about, you know, our merger.
That still is certainly our key executives' prime focus.
It is the future of our industry. It is the future of our
ability to compete as an industry. It's the future of us
to reverse some of the trends of (Sac), rising (Sac) or
rising churn, which have slowly crept up over the years.
That's the way we're able to reverse those trends and put
those in a more positive direction because we need the
added capacity.
The fact that we technically can do all 210 markets, the
fact that we believe technically we can do satellite
broadband together I think is very important for the
future. So if we only do one thing right as a management
team, we've got to focus on this merger.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 11
It certainly requires some of our lower level folks who
haven't been in a decision making process is a step up and
it's going to be a good maturing thing for our company to
have some of our folks be in a position to do that and
they're going to make some mistakes but we're going to be
a much stronger company as a result of their now getting
off the bench and getting in the game and having to
produce for us. And we're starting to see some positive
aspects of that going forward.
The merger itself, we kind of moved out of the public
arena of a Congress and now moved to the regulatory
agencies, the FCC and Justice where there's an awful lot
of work being done by those agencies and all the people
involved in the merger and lots of data being exchanged
and so forth. So those folks can make their decisions.
We think that that analysis will go on through the summer.
We think that September is the earliest the FCC has now
indicated that they might rule on this. We think perhaps
Justice would be ready to go before the FCC at this point.
So it looks like this merger could be very similar to
AOL/Time Warner and take up to a year, which would be
October for the final decision. Again, we're still
confident that the more we get into this process, the more
we're able to explain the way our industry works, the way
the world looks without a merger, the way the world looks
with a merger and the public benefit and the consumer
benefit that the facts are strongly on our side and that
we will in fact be approved sometime this fall to proceed
with that.
And again that is our -- if we only do one thing right,
that's certainly the thing that we're focused on.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 12
And I think with that, I think we're well positioned for
the second half of the year. By the way I think we've -
our relationship with RCA and new distribution with Radio
Shack will open up some opportunities for us and
distribution in the fall selling season that we've never
had before and give us some critical mass from an
advertising perspective and some branding that we've never
had before.
We don't anticipate a lot of that effectiveness in the
second quarter because we're still putting the marketing
things in place and outfitting the stores. But we do
expect it to have second half impact for us.
Obviously, we don't think there'll be a lot with the DSL
relationships at least for the next three to six months as
we test market those things and find out ways to make
those bundlings more attractive to people. But we do think
that's certainly going to be an impact for us next year
and maybe perhaps in the fourth quarter.
So I think we're doing all the putting all the long-term
things in place. I think we still have some work to do in
being better at targeting our markets and being more
efficient in how we market and realizing which customers
are the best for us and which ones we get the best return
on. We still could do a better job of that.
But overall in a time when most people are adjusting their
sub counts or perhaps not seeing the kind of growth they
want, I think we, you know, I think we were performing in
a solid manner and all of our customers are paying
customers. We do receive - there are a few of our
customers who may only pay us $5 a month because they're
on vacation but if they're not paying us $5 a month then
we don't count them as a sub and we count them as a churn
number.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 13
So, you know, I think we're trying to put our financial
statements out the way I need to see them as the CEO to
make decisions in the business and trying to present those
in the same manner so that you can make decisions whether
we're a good company to invest in or not. And, you know,
certainly I think that in the post Enron environment that
will prove to be a good strategy for us to do it in a very
conservative manner.
So with that, we'll take questions.
Operator: At this time, I would like to remind everyone, in order to
ask a question, please press star then the number 1 on
your telephone keypad. Your first question comes from
(William Kidd) with Lehman Brothers.
(William Kidd): This past quarter a number of cable companies reported
fairly weak subscriber results. Some of them identified
how many of those went to satellite and it wasn't that
many in general. Do you think this strong quarter for the
DBS industry in general and yourselves in particular is
coming from cable or is it more farming for new subs that
haven't really been untapped?
Charlie Ergen: It's coming from cable. We're kind of in an awkward
position. In rural America, you know, we don't have the
local channels to truly compete and we do have local
channels in the city so that's really what's driving our
business.
We're vulnerable as cable grows out more and more
broadband in those cities to that which is why the DSL's
so important to us. But most of our subscribers are coming
from cable.
I would imagine as people clean up their subscriber bases
and perhaps look at who, you know, when people paid them
and are they really customers and
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 14
things that may have had some impact in the cable industry
in terms of where they're going.
I think piracy, you know, I said this last year that
piracy was going to start taking a toll on cable that
satellite piracy would hurt cable as well as satellite
companies because if people can get it for free, you know,
you're not going to buy cable or satellite. So that, you
know, what happens is the guy's getting cable and now he
can get satellite for free, you know, he turns on cable.
So, you know, that's some of the things that are driving
their lack of sub growth.
On the other hand obviously, they're getting very positive
sub growth on broadband and a better class of customer as
a result of that probably a stickier customer of that. So
we don't want to put our head in the sand and not be
cognizant of the fact that that's a trend that long term
we had to reverse and that's why the merger, one reason
the merger's so important for us.
(William Kidd): You know, I know you don't want to think too much on the
path if Hughes is denied but if it is, if the transaction
ultimately is not approved, would you look at (SES's) new
announced capacity as a place of possibly expanding
EchoStar's footprint from?
Charlie Ergen: Well I mean I think that our problems and our future
problems in the industry will be beyond just capacity. I
mean I think there becomes an economic inflection point
where you have to have some critical mass whether it be to
get the best rate from programmers or whether to have the
ability to economically, you know, go to smaller cities
for local.
So, you know, we'll always need more capacity and
obviously new interest in the marketplace would be (SES)
or somebody else like the Northpoint spectrum could be
additional capacity there for a competitor or for somebody
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 15
in the business. But that alone wouldn't be enough to me
to drive our economics away. We want to drive them, which
is to be fully competitive with cable.
(William Kidd): And the last one's a housekeeping issue. I was just
wondering if we could get what (Sac) is per sub with
including the capital ex component but excluding the 12
million that you recouped?
Charlie Ergen: It was -- the acquisition costs I believe were 430. The
capitalized cost was another 124 for a total of $533. And
then the 12 million we reduced that by $19 to $533 and,
you know, we've told you in the past that those recaptured
boxes was an immaterial amount but obviously at 19 bucks
we felt like those were starting to be material.
I would expect that that -- the way I look at it, when I
look at (Sac) internally for my purposes, I obviously
don't know that I've got a cost of the box that I
recapture other than the new installation that I've got to
do for the customer and the cost I've got to retrieve the
box.
So that obviously saved us $12 million in cold hard cash.
(William Kidd): Are these recoup (unintelligible) multi set promotion?
Charlie Ergen: Yes, and it's one possible benefit of our strategy to be
able to lease a box. If it's going to be free, we should
own the box as opposed to the customer because that would
have cost us an additional $12 million if we didn't own
the box.
And again that number is going to go up each quarter. So
we'll try to break that out for you. I don't believe the
way to look at us from a (Sac) perspective
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 16
is just to take our acquisition costs and add capitalized
leases. That would probably overstate, you know, (Sac).
(William Kidd): Sure. Thanks Charlie.
Operator: Your next question comes from (Ty Carmichael) with Credit
Suisse First Boston.
(Ty Carmichael): Thank you. Charlie, just to follow up on that number. So
when you report you cap ex of 100 million in aggregate, is
that the net of 77 million and you deduct 12 million out
so you actually had a real tangible cash contribution here
in the quarter?
Michael McDonnell: Yes I can speak to that. No, it would include, the 100
million would include the full 77 million of the capital
ex cost (Ty).
(Ty Carmichael): Okay. So when you look at the financials I mean where
does that -- we're just looking at, you know, the capital
required to grow the business going forward. Where does
that positive contribution of the 12 million show up?
Michael McDonnell: Well it's a couple different places. One is you've got
some of it's cash. And then the second piece would be when
you actually retrieve a box, typically it would be retired
and placed in inventory depending whether it would be
ultimately released or resold and then if it's released it
would go back into the cap ex at that point in time.
Charlie Ergen: But one thing we get caught up in a lot of complicated
accounting stuff. All that stuff is below the line so it's
not going to be evident to you where that number is and
it's not, it's below the line kind of number. But we're
going to break it out for you because you get a better
picture of it.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 17
And when we do release the box, if we have a box that we
capitalize over four years which I believe is less than
the cable industry does by the way, it's been out there
for a year, say it was a $200 box. It's been out there a
year so it's got a book value of 150 bucks. We put it back
out and the next customer at the $150 value and we
continue to depreciate it for three more years.
And we expense the installation, which is something the
cable industry typically doesn't do. So we're very
conservative in how we do it and I think that what we're
trying to get to as management is what does it really cost
us to get a customer? And we know that advertising is a
cost. We know that our hardware's a cost. We know our
subsidy's a cost. We know the installation's a cost.
I would even make the case (Ty) that you should at least
look at this that some of the free programming offers that
we have, you could add those back into revenue if you
wanted to which would make our ARPU, you know, a dollar or
two higher but then you'd have to add it back in the (Sac)
right, which would mean our (Sac) is higher.
And we kind of look at that both ways internally and I
like to look at that free programming as cost of (Sac)
which would raise it say another $100 for if you're doing
three free months. And then I balance that with what kind
of customer I got and what's my churn against that
customer. And then I balance it with my ARPU. And I look
at it both ways to try to make sure that it kind of makes
sense.
So (Sac's) a funny number right. Everybody in the business
whether it be every cable company, every satellite company
do it differently and they're not apples to apples by any
means.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 18
And I believe that when you compare everything apples to
apples, you know, we're still an effective competitive
model today but we've got to continue to, you know, fight
harder every day and it gets more difficult every day and,
you know, it's up to us as management to continue to come
up with ways to compete.
(Ty Carmichael): On that front Charlie, with regard to the free
programming, as those promotions unwind and you've given
on your queue the guidance would still hold that you'd
expect a modest increase in the ARPU number year over year
on an annual basis, that would imply a pretty strong run
rate in the fourth quarter for your ARPU as these
promotions unwind.
When you look at your subscriber base today and you see
what ultimately they'll be paying you when the promotions
come up, is there any estimate on your part what that,
what we'll be looking at as a fourth quarter run rate on
the revenues you'll be collecting for your subscriber
base?
Charlie Ergen: I don't know if we'll disclose what the run rate in fourth
quarter but what was ARPU? It was 48 something. What was
it?
Michael McDonnell: Forty eight thirty six for the first quarter.
Charlie Ergen: Some of that was actually -- there's actually a
trend. I think you've seen it across the board for people
that Pay Per View continues to become weaker as CDs and
Blockbuster do better and there haven't been any fights
and big events on Pay Per View so that's hurt everybody's
ARPU in the industry if you, you know, I don't know, 25,
30, 40, 50 cents.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 19
The other part of that Mike I don't know whether you have
that "I Like 9" because it's still running and a certain
number of subscribers is impacting an ARPU by I don't know
if you know the number Michael but it's...
Michael McDonnell: Yes, it's in there somewhere. I mean, you know, it's
probably, you know, 50, 75 cents easily.
Charlie Ergen: And going down and then that kind of weans its way out
every month. That weans, you know, 1/12 more out. So that,
you know, if it was 50 cents today it would be 45 cents
next month that would affect our business or 40 cents.
And then the three months free affected us by probably 75
cents or $1 in ARPU. I don't know if you know what that
one is Michael.
Michael McDonnell: Yes, I think that's probably reasonable.
Charlie Ergen: So if you took the free programming out and said
what's your real run rate in ARPU then that is not, I
don't think that would cause anybody any concern on the
ARPU side of it.
But because from an accounting point of view we can't
count revenue we don't get, we put the effect of free
programming in ARPU not in (Sac).
(Ty Carmichael): So as that unwinds then it sounds like it's
(unintelligible).
Charlie Ergen: So as it unwinds, assuming we don't do free programming,
you know, then that will unwind over the second half of
the year and by the end of the year you're going to get
somewhere between a buck or two bucks back in ARPU that
aren't in there today.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 20
Are you with me?
(Ty Carmichael): Yes.
Charlie Ergen: I guess I would term it that ARPU is not a major concern
of mine other than the continued trend of Pay Per View to
have a downward impact. We don't have video on demand as a
satellite industry obviously and people rent CDs now or
DVDs. And or buy DVDs at Wal-Mart for 12 bucks and there
haven't been a lot of major events like boxing that are
driving Pay Per View.
So, you know, we have a Tyson fight in June but we don't
really see that trend turning around. And so, you know, we
probably only make 60% in Pay Per View of what we made,
you know, a year ago or a year and a half ago and the buy
rate is less on movies because our window is still 45 to
60 days after, you know, Blockbuster gets it and that
hasn't improved any.
So, you know, that's the only negative trend in our -- and
then I think, you know, the economy people take less
premium programming we have found and I think that's
probably true for other people and that has a slight
negative impact on ARPU as well.
So there are a couple of negative trends in ARPU but not
nearly what you see in the number this quarter.
(Ty Carmichael): Okay and then Charlie on the lease plan, it looks like the
as a percentage of gross subscriber additions it was
still, you know, down pretty considerably from the peak
level in the mid part of last year. And I'm just wondering
is there anything we should read into that that you made a
strategic decision to, you know, suddenly de-emphasize the
lease model relative to what you were doing in the second
and third quarter of 2001?
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 21
Charlie Ergen: Not really. We don't have any -- we're not at the point
where we think the lease plan's the best plan or it's not
a plan we should promote. I think we'd like to be at about
50/50, about 50% of our customers through lease and about
50% of our customers through purchase.
But we put the plans out there, you know, our retailers
kind of make their own decision as to which plan they want
to promote and they've just chosen to promote the a little
bit more the, you know, the cash and carry model and we
keep playing with that.
But we're not going to, you know, we're not going to
suddenly add more cost to the lease to get people to get
50%. We're going to put it out there at economics that
make sense and I think we're running about what 30%
leases?
Man: Thirty-two yes.
Charlie Ergen: And that anything over ten or 15% leases still makes
economic sense to us so we're not disappointed in that but
we think the lease model's got some more legs on it and
can be improved on.
(Ty Carmichael): Okay and then last question Charlie on the just on the
customer call centers you had talked about at the end of
last year, you know, perhaps plans to launch another
customer call center. And when you look at your
pre-marketing cash flow margins in the quarter they did
pick up.
I'm just wondering is it still in the plans this year to
open up a new facility and if so, you know, should we
anticipate a slight uptick in, you know, customer care
costs just per sub until you realize the scale
efficiencies in that plan?
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 22
Charlie Ergen: Yes, we actually did open up a call center. It was -- we
didn't mention it but we opened it up in the Philippines.
It was something that the government helped us with so
that we didn't have some of the costs we normally incur
when we opened it up. And it obviously is a more less
costly on a per hour basis, you know, day-to-day basis
call center.
So in opening that call center it really had no impact on
our pre-marketing cash flow as call centers normally do.
So the short answer is we've opened a call center with no
material impact and a negative basis to our operating
margins. Having said that to the extent we open one in the
United States and we'll have to open up another call
center before the end of the year, if it happens to be in
the United States that would have a slight negative impact
that probably would be in the third or fourth quarter if
we were to open it up.
If we're successful with our international model it might
not have much of an impact at all.
(Ty Carmichael): Okay, that's great. So the call center you were talking
about on the last call has already been opened up
(unintelligible).
Charlie Ergen: It's opened up and operational and again it's not fully
operational. We don't have 1000 people in there yet. We
probably have a couple hundred. But because of the way
that deal is structured it's not going to have a normal
impact, negative short-term impact.
And then obviously we hope it has a positive long-term
impact. That will take longer to see.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 23
(Ty Carmichael): Okay, that's great. Thank you very much.
Operator: Your next question comes from (Mark Nabase) with Merrill
Lynch.
(Mark Nabase): Hi guys, how are you? A couple more questions on the
subscriber acquisition cost just looking at the 10Q. You
had said that the total (Sac) number on the income
statement was $266 million getting you to the $430 income
statement (Sac) number.
What is it called? Fixed marketing or whatever that $6
million differential is. I mean is that expected to grow
substantially over time? That's my first question.
Charlie Ergen: I'm not tracking you. What $6 million differential?
(Mark Nabase): Well on the income statement you had $271 million of
subscriber acquisition costs. Yet in the 10Q you state the
subscriber acquisition cost per subscriber was, you know,
pre gross addition was $430, you know, using a $266
million number in the Q.
In other words it's like there's $6 million that's not
incorporated into the (Sac). I know these are moving
parts. I'm just trying to figure out what the differential
is.
Michael McDonnell: Right and Charlie what (Mark) is referring to is
non-acquisition marketing costs or retention marketing
cost.
Charlie Ergen: Okay, we have retention marketing costs. For us it was $6
million, would that be correct Mike?
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 24
Michael McDonnell: Yes.
Charlie Ergen: It was $6 million for retention (Mark) and I've heard
numbers in the industry materially higher than that but
for us it was $6 million. And that includes, you know,
sending somebody out and telling them their one-year
subscription's, you know, expiring. It's calling people
that might churn. It's advertising to them. I mean it's a
communications to them whether it be letters or phone
calls, that kind of thing.
And that's not a (Sac) cost for a new customer. That's a
retention marketing for our current customer and it's an
immaterial amount for us. And we think that's a proper way
for us to look at it.
I mean if we don't think that that's the way -- what we do
in retention marketing is truly dedicated to retaining a
current customer and that kind of goes and that number I
guess goes below ultimately the margin of what we make on
that customer.
(Mark Nabase): But Charlie that number, do you expect that to increase?
Charlie Ergen: That number as a percentage of our business has been
pretty constant so I would expect that that number to stay
consistent with, you know, obviously the six million will
increase but only as a percentage of our business it
probably won't materially increase unless churn were to
materially increase in which case we, you know, we'd have
to spend more time communicating with the customer.
But our retention marketing is in fact a dedicated
retention marketing effort and any dollar that we can
assume is to get a new customer. We try to get into
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 25
that (Sac) number so that as management we know what it
costs us to get a customer because if we don't really know
what it cost to get a customer then we can't figure out a
return on that customer.
(Mark Nabase): Right which leads me to my next point I guess. I was
actually very impressed with churn. I noticed that churn
had at least the way I calculate it, it went down about
ten basis points between the fourth and the first quarter.
And also was down again slightly from a year ago.
What's I mean I know that your strict credit checks are
one thing that are happening. But I mean is it give and
take as you said, you have increased costs right for
obtaining new customers but you're -- what's really making
that number go down versus I think others aren't seeing as
much of a drop quite frankly? You're the lowest in the
industry.
Charlie Ergen: Well I think that (unintelligible) it's about the same as
it was the first quarter last year and it is down from the
fourth quarter. But seasonally, churn is at least for us
and I believe our industry is always a bit lower in the
first quarter and I think we, you know, I think we work
harder at it. We sacrifice some customers that we could
get that we don't think economically makes sense for us.
But it also is a bit optimistic in my opinion because the
three months free programming right.
You wouldn't expect those guys to churn when you do that
so that when you really run your calculations, I would say
that we continue to have a upward trend seasonality wise
in churn. Even with all we're doing.
Not, you know, not as bad as the rest of cable guys or
whatever but, you know, I wouldn't be overly optimistic
that we've cured the churn, you know,
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 26
bogeyman. He's at the door every day and we got to be
vigilant and it's the factor that makes your economic
model really jump one way or the other.
And, you know, we're focused on it and certainly we're,
you know, it wasn't, you know, I think in general we're
pleased in the first quarter but not as optimistic as you
presented it.
(Mark Nabase): The other thing then just related, I'm just curious on
this one too. Of the 7., you know, it was over seven
million subscribers that you have today, what percent of
those are on a one-year commitment?
Charlie Ergen: I don't know the answer to that. I don't know the answer
to that. We started one-year commitments about two years
ago. Probably half of our customers we get, you know, each
month are on a one-year commitment then you got some
weaning off from last year.
It's probably, I don't know if I should guess or not but I
probably shouldn't -- I mean it's not 25%. It's less than
that. It's less than 20% would be my guess.
(Mark Nabase): And once I sign on for one year, after that one year...
Charlie Ergen: Having said that, once I got you for a year, you know,
churn kind of goes up the first three, four months, you
know, is where you have the most and then after a year it
spikes up again for anybody's that not on a one year
commitment. And then after that it drops back down again.
If you have three months free in programming it goes up in
the fourth, fifth and sixth month. So we expect that churn
will pick up in the second quarter
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 27
as a result of that and also seasonality churn is more in
the second quarter always anyway.
So, you know, we just have to wait and see. We don't know
what some of these people will do when they come off
one-year commitments. Again, we had to be vigilant.
You know, are they going to churn because they can get
cable broadband? Are they going to churn because somebody
else has got a better offer that hook all their TV sets
up? But, you know, do they want video on demand? They want
high definition television? You know, we've got a lot of
work to do but we feel comfortable that, you know, as a
company we can be a technical leader.
(Mark Nabase): Okay. Thanks very much.
Operator: Your next question comes from (Kareem) (unintelligible)
with Deutsche Bank.
(Kareem): Thanks. Mike, on the free programming am I right in
assuming the revenue is absent or there's no booking of
revenue and if the cost is not in (Sac) it would go in as
programming cost so it's depressing pre-marketing cash
flow?
Michael McDonnell: That's 100% correct (Kareem).
(Kareem): Okay and if that's the case and assuming the majority of
subs in the first quarter are coming in as free
programming for a few months and it would seem if you, as
that rolls off similar to the way Charlie described ARPU,
I mean it looks like pre-marketing cash flow margins year
over year would be
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 28
up a few hundred basis points. Is there some efficiency
that's being driven elsewhere that makes that accurate?
Michael McDonnell: Well I think there's some efficiencies that we're getting
in the business and if you're looking at it last quarter
for this quarter you have to remember that there was a one
time arbitration charge that was included in last
quarter's percentage as well.
(Kareem): Right. I was just looking at year over year.
Charlie Ergen: I think in general, the pre-marketing cash flow is on a
positive trend. It will be somewhat negatively impacted
through the rest of the year on (unintelligible) margins
that get reduced. You know, it's, you know, it's pretty
publicly known that people like ESPN raise their rates 20%
every year right.
Well that next price increase would be in August right. So
that will depress our pre-marketing cash flow from August
on right.
So, you know, you've got -- there'll be a day when that
pre-marketing cash flow gets to its limit that we can't do
much more because programming costs continue to eat away
at it. But, you know, it appears that we still have some
improvement we can do there.
(Kareem): Okay and then on the (unintelligible), it looked like
Charlie they were down almost 10% which would be a first.
Was there something in the first quarter last year that
was an aberration, conversions or something?
Charlie Ergen: I think we were down - I don't know what we were the
first quarter. What was net first quarter last year?
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 29
Michael McDonnell: Four-sixty.
Charlie Ergen: Four-sixty so we were materially down from our net
additions from last year in a factor in a bigger way than
historically we've been. And again, I think that's -- I
mean I think a little bit of that's the economy.
If you look at, you know, pay TV subscribers to the total
industry in the first quarter, you know, cable and
satellite, you know, you've seen a big drop there. Some of
that's the economy and not as many new homes being built,
people, you know, go into apartments and things like that.
So that has some impact and we're not as, you know, the
digital is built out now so if a guy, you know, we don't
have the advantage of being the only guys that have, you
know, the Speedvision anymore. And in our case, we didn't
pick up the YES network in New York so we, you know, that
obviously is a very flat market for us and probably a very
robust market for the people who have YES Network. And in
fact, we may suffer some churn there.
So, you know, all those factors go into it but yes, it's
tougher to get and we made the conscious decision to go
after a little different customer, a little better
customer we think's going to churn a little bit less and
give us a better return.
So, you know, we just make economic decisions on what the
best long-term return on our dollar's going to be and
we're not going to get growth at any cost. And, you know,
I think we're comfortable that we're going to get to eight
million subscribers this year but we're not comfortable
that we will go above that and we're not sure that it
makes economic sense to go above that.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 30
(Kareem): Okay, along the lines of higher quality sub growth, it
seems like there's two major sort of new consumer product
cycles. One's PVR and the other's high definition TVs and
the numbers are starting to get meaningful.
Is that starting to become meaningful to your growth?
Charlie Ergen: Well they're both offense and defense for us and we're
well positioned with both. But HDTV of course we'd love to
have the capacity with the merger will provide us to
really do HDTV in a big way. We have to do it with our
(wing) satellites today.
But we can do it on a national basis. There's many areas
of the country that the only way you can get HDTV. So
that's a short-term advantage for the satellite industry
if the merger becomes a long-term potential advantage.
The negative trend is and you're going to see a lot of
this with the cable industry next week at the (NCPA) when
you'll see a lot of announcements. They're going to do a
lot more with HDTV particularly if they're local channels
in their local markets.
So they're going to be forced by us to be more active in
that. That will be an advantage to them if they can pull
it off and generate the bandwidth to do it. That's going
to be a good battle back and forth but it's going to drive
both our industries I think.
And then PVR of course is a defensive move against video
on demand which the cable industry has a different model
to put big, you know, (unintelligible) servers and things
which we don't really have the ability to do. And yet we
think PVR has some advantages because it allows you to
stop all your -- pause
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 31
all your shows or record all your shows and has some
flexibility that video on demand doesn't have.
So, you know, we're well positioned in both of those and
it's just really a question of how we're driven and what
the customer acceptance is, how we're driven by the cable
model of video on demand to pursue it. And we're not
forcing it on the customers and taking them kicking and
screaming into PVR. You know, we're taking a more cautious
approach because it is more complicated and it does cost
us more.
We clearly get a better customer when we put PVR out there
and we think that like with Radio Shack, distribution
opens up some avenues. PVR's a more difficult product for
our distribution path to sell because people don't get a
chance to see it in a showroom, you know, time after time
after time as they would in a consumer electronic store.
So, you know, we'll have to wait and see but I like our
position there. I'm personally very optimistic about what
PVR and HDTV will do for our industry. I think they're two
big drivers and I think that, you know, have tough
competition from cable on them but I think we can out
execute them and that's again merger dependent to really
do it right.
(Kareem): And one last follow up. Do you think your disadvantaged
in doing high definition locals over the year?
Charlie Ergen: Well that's the way we have to attack. If cable goes to
high definition television on their cable, you know, our
competitive answer and it's not the perfect answer is that
we put the digital tuner in our set top box so that people
can get it over the air for free and in addition to our
national HDTV channels that cable probably won't be doing.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 32
And it'll just be an interesting battle. I mean there'll
be some homes where we think we'll be the better mousetrap
and there'll be some homes where cable will probably be
the better mousetrap. And it's our job to identify those
homes where we have the better mousetrap and spend money
there and not chase those customers where we're not the
right answer because then they'll churn on us ultimately.
So, you know, it's all economical. It's all mathematical.
It's, you know, a focus of how we do it and we don't
always guess right. I mean sometimes we I mean with our
broadband satellite broadband, we thought we had an
economic model that was going to work and as we got into
it some of the performances that we though we were going
to get we didn't get. Some of the customer service
problems we didn't anticipate that cost us a lot of time
and money on the phone.
The cost of the equipment didn't come down as fast as we
would have liked it to do. The cost of the satellite time
didn't scale because we didn't have spot. And as we
learned that, we had two choices. We could come to you
guys and say, Hey we screwed up and made a $100 million
mistake, you know, or we could tell you a story that, you
know, well, you know, tomorrow we'll make it work right
and we'll keep spending money at it.
And the fact of the matter is that, you know, put another
dollar into that today with no chance of return in the,
you know, without another generation of satellites and a
better, you know, a restructuring of what we need to do
there doesn't make sense.
So it doesn't mean that we can't make it work. It means
that that business plan has to be restructured. Everybody
has to go in the same direction and
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 33
learn their lessons and move forward and, you know, that's
what we like to do as a company and I just found that a
lot of companies out there don't like to do that.
So, you know, it doesn't do me any good to hide the ball.
(Kareem): Got you. Thanks.
Operator: Your next question comes from (Todd Mitchell) with Salomon
Smith Barney.
(Todd Mitchell): Hi, most of my questions have been asked but a couple of
quick ones. First of all, you mentioned that the satellite
costs are going to go up as a result of your launch. I'm
assuming this is a step function. Can you give some
guidance as to the incremental fixed cost per
(unintelligible)?
And second, is there any chance you could flush out some
of the details on the DSL deals specifically who assumes
the (Sac), the billing and how the R&D is going to go
forward?
Charlie Ergen: Okay. I'll take that second part first. With the DS deals,
they're basically reciprocal deals where making a long
story short, we kind of take care of the video part for
the customer. The phone company takes care of the
broadband piece to the customer.
We get a very small fee for broadband. They get a very
small fee for video, which really just covers our cost of
(unintelligible) in the business and marketing and so
forth. So it's not really a revenue generator for us nor
is probably the video commission we pay a big factor for
them.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 34
I'm hopeful that it will evolve into more, you know, more
aggressive marketing campaigns and so forth. But we're
going to test it to start with. I think you would look at
it as in general, we don't spend a dollar and we don't get
a marginal dollar back. We take care of our customers from
a customer service perspective. They take care of their
customers from a customer service perspective.
I think initially it's separate billing. Ultimately that
billing will come together which will give us some
economics when that happens because we'll be more
efficient and when we do that it'll save us some cost.
We're not spending any money on (Sac) for DSL nor are they
spending (Sac) money for video. And so it's kind of a
revenue kind of neutral thing but gives us capacity.
Now to contrast that with, you know, if we did it ourself
(sic), we would have had, you know, a several hundred
dollar (Sac) for a modem and we would have had, you know,
millions more of fixed cost to go to central offices and
put the equipment in. And then we would have made, you
know, 30 or $40 of ARPU from the customer but we never
could have paid back all the money (unintelligible) in
fixed cost investment so we just didn't go that route.
That model didn't scale for us.
(Todd Mitchell): Okay so the equipment subsidy basically goes to, the
video equipment subsidy goes to you. The voice goes to
them?
Charlie Ergen: Yes, if we get a bundled customer, our (Sac) and ARPU is
about the same for the customer as it always would be
except we get a stickier customer because he's got a
bundled product and he doesn't get churned out to cable.
That's a strategic advantage.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 35
And obviously we hope that the relationship grows beyond
that and I think that our partners would hope that the
relationship grows beyond that. But to try to figure out
what our true, you know, for both our companies to figure
out how that mix worked would have delayed us from getting
started.
(Todd Mitchell): Okay and on the satellite cost?
Charlie Ergen: Well in step functions every time you launch a satellite
the biggest cost I guess is your depreciation and it
starts right.
Man: Yes, (Todd) we can probably give you a little bit better
guidance on that and help offline. We don't have the
information to that level of detail here with us right
now.
But there is a step function on some of the costs relative
to (TP&C) and had we been carrying an orbit insurance it
would be the same for that. We'd have a step function
there.
So one way you could look at it is you could go back to
the point in time where we've had our other launches, look
at what the increase has been and it will generally follow
that trend, know that, you know, there'd be a seventh
satellite over a base of six.
But the majority of costs that you're seeing in that line
are G&A related into our broadcast facility so they are
not necessarily going to step up with the extra satellite.
And then if you want to go down Charlie's path, the (DNA)
would go up as well. But if you were just talking about
operating expenses, we'd get you a little bit better
detail but that's kind of how it would work.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 36
Charlie Ergen: And we do have some capital expense (ring coders) and,
you know, we do a local satellite. We've got, you know,
150 channels we add. That's 115 coders and the
modulators and stuff like that which are capitalized
right. And so I guess you see a depreciation. At the end
of the day, you're going to see a stepped up depreciation.
(Todd Mitchell): Okay, thank you very much.
Operator: Your next question comes from (VJ) (unintelligible) with
Morgan Stanley.
(VJ): Hi guys, a couple quick questions. The (unintelligible)
IRS ruling on the impact on your NOLs, can you sort of
give us an update on where those deductions are and
(unintelligible) change accounting at all?
Michael McDonnell: Yes, I can speak to that (VJ). The long and short is that
there have been no challenge to the deductibility of any
of our subscriber acquisition cost as we disclosed at the
end of the year. The IRS has questioned the timing over
which we take certain portions of our subscriber costs as
deductions and so it's strictly a timing issue as to when
we would actually have to start paying cash taxes. There's
no question on the ultimate deductibility.
And what I would say is that there's really no change or
update to that from what we said on the last call which is
that, you know, we believe that we've got very, very
strong arguments and that, you know, we will continue to
fight that question that the IRS has raised and, you know,
hopefully prevail at the end of the day to continue to
expense our subscriber acquisition cost as incurred for
tax purposes which is completely consistent with what we
do for book purposes.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 37
(VJ): But the question Charlie I have is cable industry you
know, capitalizes (unintelligible) more on a EBITDA
valuation. To be consistent with the cable industry, when
does, you know, how's your valuation story?
Michael McDonnell: Are you asking more of now of a GAAP accounting question
(VJ) in terms of...
(VJ): Yes, I'm just curious because I mean it makes a relative
accounting more similar than dissimilar.
Charlie Ergen: I mean my philosophy is, this comes from a former
accountant right, which is me. Just because somebody's
EBITDA is higher because they -- I mean if cable
depreciates a box over 60 months and we were doing the
same thing over 48 months, you know, we would have --
nobody should be putting up a greater value on them
because they had higher EBITDA than us I mean because the
bottom line result is do you take in more money than you
spend over time?
And I think things like, you know, I think ultimate is
free cash flow right, our free cash because maybe they're
making big capital investments and they're bad capital
investments but their EBITDA goes up in spite of that just
not getting returns. So ultimately it's free cash flow.
I think earnings are going to come back in style, you
know, like pretax earnings because when you make capital
investments you've got to depreciate it.
So we're going to get back to fundamentals in accounting
instead of all this. I think analysts are going to get
back to fundamentals in accounting that haven't changed
over the years. And these metrics that some of the metrics
that we've
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 38
all come up with whether it be EBITDA or pre-marketing
cash flow or some of those things will probably take a
back seat to ultimately you take in more money than you
spend.
And when you do that and I'll say it one more time, when
you do that and compare us with the cable industry on an
apples to apples basis, you're going to like what you see
vis-a-vis the cable companies. And, you know, we get a
better return on the dollar we spend and we've got lots of
challenges ahead of us and they're the incumbent and maybe
people are looking at them as a bunch of sunk cost and not
holding them responsible to get a return on those sunk
costs but that's not the way I look at it as an economic
animal.
My guys come in and say it's a sunk cost, I say we still
got to get a return on it or, you know, or we got to get a
better return on the next dollar we spend. So accounting,
it's very scary what's gone in the investment community
and companies in terms of the way things have been
accounted for because you can make accounting say pretty
much whatever you want to.
And ultimately that's why you buy management because you
got to have management that you know is going to put the
numbers out there that they're looking at and so that you
make the same decision that they're making.
And every day as management you get a way to spin the
story. And now we find out in the papers that even the
accounting profession and the lawyers are helping people
spin the story and that's scary and I'm proud of the
discipline that our folks have employed regardless of what
those numbers say.
(VJ): Talking about free cash flow, I sort of calculated that
you had (unintelligible) free cash flow positive
(unintelligible).
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 39
Charlie Ergen: I don't think we were.
Man: I don't know that we were at that level though.
Michael McDonnell: Yes, I don't think we were quite at that level and it kind
of depends on how you calculate it but.
(VJ): (Unintelligible).
Michael McDonnell: I assume you're backing out depreciation and so forth.
(VJ): Yes.
Michael McDonnell: Yes, so I think our number would be a little lower than
that but.
Charlie Ergen: But it was free cash flow. That's surprising. I didn't
really realize that we actually were which is good.
(VJ): And the question is, is that a mandate that you want to
have for the rest of the year (unintelligible)?
Charlie Ergen: We focused on it and we focus on that number a lot
more than EBITDA number. But I mean give me one number
that I want to make that's the one I want to make because
everything else is maniputable (sic).
(VJ): My final question...
Charlie Ergen: You know, I mean I'll say this. I believe we're building
value in our company every day. And I think, you know,
tomorrow we're going to be more valuable than we are today
and I think that there's lots of risk out there for us,
you
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 40
know, going forward in telecommunications. It's changing
very rapidly and it changes almost overnight.
But I think we have a really good feel for the trends and
a really good feel for the business and, you know, we're
solid financially and we have solid balance sheet. There's
not anything in our balance sheet, there's not a bad
receiver on our balance sheet. There's not a obsolete
receiver on our balance sheet. There's not a obsolete
investment on our balance sheet. And that's how people
ultimately are going to value companies.
They used to do that 20 years ago but they're going to
come back to that because that's the stuff that can't be
manipulated. And when they do then hopefully people will
have confidence in our management team and our company to
invest in us so that we can grow our company. And if
people don't recognize it, you know, this year or this
month then so be it.
(VJ): Charlie final question, with "I Like 9" (unintelligible),
do you have any sense in what your expectations are and
what portions of the customers will sign on
(unintelligible) going forward because the returns are
very...?
Charlie Ergen: I don't know. I mean it's a risk that concerns us
that some of those -- I mean we know that the day that
they get to their 13th month, we know we will have
increased churn on those customers. We know it'll be a
one-month spike on those customers.
And that's why I cautioned you on our churn that we still
think that's a -- that that trend is still rising for us
because obviously those customers are probably, the "I
Like 9" customers aren't churning as fast during the first
year as a normal customer would.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 41
And then 13th month they churn. So you add, with those
customers you add the 13th month to the first 12 months
and compare it to a normal customer who went 13 months and
see how they compare. And we just don't have any data on
that yet.
And but you got to try the experiment to learn right
before you know. And my gut feel is that when you compare
those two data points, you'll probably find slightly
higher churn in the "I Like 9" customer, you know, for a
total. But not off the charts more churn.
But if we did have off the charts more churn then
obviously that would have negative impact.
(VJ): Thank you.
Operator: Your next question comes from (Robert Peck) with Bear
Stearns.
Man: Yes hi, (unintelligible) calling for (Robert Peck) at Bear
Stearns, just a couple questions. First one Charlie, I
wanted to see if I could get some more color on the (SES)
agreement and how do you think it's going to affect you
and the DBS market as well as the merger approval process?
Charlie Ergen: I don't think it has a big effect on the merger approval
process because I think even without the (SES)
announcement the merger would be approved.
On the margin it clearly indicates to the regulatory
agencies this is not (unintelligible) to entry into our
business and that once people decide to compete and
(unintelligible) complaining that there's ways for them to
do that both the Northpoint ruling which opened up, you
know, 500 megahertz terrestrial for a competitor and of
course potentially (SES) and by the way
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 42
others. I mean there's other orbital slots that could be
used and compete against us, the Canadian slots, the
Mexican slots and some other ones that could be used.
So, you know, again these are all things that a lot of the
people who have written the press and a lot of the
politicians haven't thought about and that's why we said,
you know, people that are really trying to make the right
decision will wait till they get the facts to make a
decision. And all the facts still aren't in in terms of
what we're going to face in competition.
The (SES) announcement obviously I think we had to be
prepared as a company for increased competition from
cable, perhaps from phone companies, perhaps from
terrestrial wireless folks and perhaps some other
satellite competitors.
And the way we're going to be prepared for those folks is
to make sure we have enough capacity to give people the
services including local to local everywhere that they
want to continue to invest in new technologies like
broadband to the home in long term efficient manner and
continue to run our businesses and then good things will
happen to us.
Man: Right, my final...
Charlie Ergen: We can't stand still. I mean some people questioned our
merger. The merger is because we don't want to stand
still.
Man: Right. My final question is just on satellites, the
satellites how I noticed there was a pair of transponders
that were lost on Echo III, a temporary interruption of
the service. Wanted to just get a view from you on the
health of the satellites.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 43
Man: I think that the health of EchoStar III is generally fine.
There are no developments that we see that indicate a
trend that we would have material reduction in its health
just a couple of anomalies the nature that you get from
time to time on a satellite.
With the exception of EchoStar IV, which, you know, as you
know only had a couple of years life left on it and
(unintelligible) deteriorate, you never know. I think our
satellites are generally in good health and doing pretty
well. EchoStar VII we've completed on orbit checkout.
That'll become operational in very near term and
everything seems to be a go with that satellite as well.
Charlie Ergen: Yes we passed a big hurdle with EchoStar VII. It's passed
its health check and it frees up EchoStar IV as a spare
and frees up EchoStar II? No. It frees up EchoStar- what's
the other one at (119)? It frees up EchoStar V as backup.
So that's the way you insure yourself. I mean you take all
the cost of insurance that you would pay over a four or
five year period, you could build and launch another
satellite and have it up there in outer space ready to go
to protect your business in addition to your investment.
So, you know, we're excited that we needed EchoStar VII or
EchoStar VIII to be successful to feel really safe and
we've got EchoStar VII up there. We've got EchoStar VIII
hopefully launching in June and that, you know, just
allows us to compete better and we'll probably be a little
bit over-insured in outer space if EchoStar VIII is
successful but it's a good place to be and, you know,
that's the right strategy I think.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 44
Man: Right. My final question is just on the ABC litigation. I
know that you've entered a private settlement with ABC.
I wanted to know, is there a possibility that this goes to
court or has this been dismissed with prejudice?
Man: The part of the litigation dealing with ABC has been
dismissed with prejudice. So no, that won't go to court.
Man: Okay, thank you very much.
Charlie Ergen: That's a positive sense that, you know, once we were able
to sit down with one of our key programming vendors, we
were able to come to positive resolution for both parties
and, you know, it got a little crazy there when we first
announced the merger where everybody was trying to take
the merger and twist it in a way that just wasn't
conducive to our subscribers.
And, you know, I think, you know, we had to make some
tough decisions that the merger was important but, you
know, tying business arrangement to it wasn't the way we
were going to go.
Man: Okay, thank you very much.
Operator: Your next question comes from (Eric Hugle) with
(unintelligible).
(Eric Hugle): Can you give us a sense as to what impact any of the I
guess the price increases that became effective on March
1, if you'd be able to say if it had any impact with
regards to either 1, insurance or 2, any type of slowdown
in new additions in March that we could extrapolate going
forward?
Charlie Ergen: The increase was only $1. So we don't think it had a huge
impact. But when you raise your price a dollar, it
certainly never positive to your customer so
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 45
you'd probably have a slight, you know, maybe not
measurable for us directly in churn and certainly maybe
there's customers you don't buy your service so forth.
But we're still the lowest digital, you know, company out
there. I mean our $22 tier is materially lower than any
digital tier out there in America today and, you know, we
plan as a strategy to be the lowest cost guys out there no
matter what and we do that because we run a low cost, I
mean a fairly efficient operation that allows us to be,
you know, lower cost out there.
But you never like to raise price and it's a scary thing
when you look at the rate of increase of price increases
from programmers and the consolidation in the cable
industry, it's a scary thing to know that we got to try to
compete against that in the future and we really got to be
good so.
(Eric Hugle): My next question, is your expectation for eight million
or above subscribers by the end of the year, I guess is
that dependent on any level of sales or additional sales
out of Radio Shack or is that (unintelligible)?
Charlie Ergen: No, in our plan we didn't know that we would have Radio
Shack but we anticipated that we would have at least one
new major retailer although we think Radio Shack has
potential to be the predominant, you know, the preeminent
retailer for satellite.
But they're also carrying direct TV as well so it's not
anything that's exclusive to us. So and obviously when
somebody buys in Radio Shack, it's possible that same
customer would have bought in Sears. So we don't know the
impact.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 46
We don't know the impact of Radio Shack but we did factor
in the eight million more of our sales coming from a
national retail chain and still think that that's the kind
of number we're going to come in with based on the data we
have today.
(Eric Hugle): My final question, can you give us an update as to where
we stand with PVRs? Like how many we have deployed and
things like that?
Charlie Ergen: We're about a half a million PVRs out there. Again, our
goal is to get to a million. But we're not going to force
the issue.
Some of the promotions that we're doing don't involve PVR
and so the PVR stuff's a little slower but we technically
are pretty pleased with our product now. And, you know,
people who have them like it and they churn less.
But it's a very difficult product to advertise and market
and, you know, we think we need some more (CE) help to do
it properly and we're going to wait till we get that help
to do it.
But we think it's strategically one of the things that we
could do a better job on and it's a, you know, I think
it's a great product and we believe in the concept.
But there's been some, you know, PVR companies that have
not had stellar financial performance because they've
tried to push the marketing before the market was ready
and it's all timing. And we haven't seen with the economy
and everything else, we haven't just seen this great surge
on people to say I got to have PVR.
(Eric Hugle): Great. Thanks a lot guys.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 47
Operator: Your next question comes from (David) (unintelligible) at
(unintelligible).
(David): Hi guys, just one quick comment as an investor. You know,
we really appreciate the (unintelligible) account thing
and trying to drive the economic value and hope you're
successful with the IRS.
In the first quarter, you spent I think roughly about 65,
70 million on the boxes and I think if I got this right
that what you said was for the rest of the year, total cap
ex is four to 500 million of which 25% goes to satellites
and the rest to boxes.
So that implies like three to 375 for boxes?
Michael McDonnell: Yes, let me clarify that a little bit. The guidance for
the remainder of 2002 with respect to cap ex is 400 to 650
million for the rest of the year and 25% of that is
estimated toward satellites and the remaining 75% would be
for both capitalized equipment as well as just general
corporate cap ex combined.
So the 75% would be both the, you know, the cap ex under
the digital home plan as well as just general corporate
cap ex.
Charlie Ergen: And general corporate cap ex is not an instant significant
number particular spot being satellites where your IT
infrastructure and your uplink centers to do all the extra
channels, you know, have some material cap ex.
(David): So then you don't see either - I shouldn't take that kind
of gap between sort of roughly three times for the rest of
the year, three times the amount of subs so three times
the amount of boxes, cap ex for boxes is different than
that three to
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 48
375 and that difference is explained by the corporate cap
ex not by either an increase in the number of subs or in
more people going on a lease program?
Charlie Ergen: Yes, you can't infer that we have a big increase in subs
or a greater percentage going to boxes. We just don't
know. I mean our crystal ball's not that good.
We put the offers out that we think that the rational
consumer would be about 50/50 and so far those habits of
our retailers, you know, have been slow to change and they
just like to cash and carry better on average.
And, you know, our advertising has been a bit more geared
towards the multiple receivers and maybe your advertising
is really bad or maybe it just takes a little bit of time
to hone in the concept. And I've seen some Radio Shack
ads. I think they're very good on the concept and, you
know, we're going to stay the course and see whether that
starts gaining some momentum. But we haven't been at it
long enough to tell yet.
I wouldn't be shocked if the cap ex for boxes goes up and
it becomes more than 30% of our business or a greater
percentage in the quarters ahead. But I wouldn't be
shocked if it stays the same or declines slightly either.
(David): Thanks.
Operator: Your next question comes from (unintelligible) with UBS
Warburg.
Man: Yes, thank you, only three questions. First of all,
wondering if you could talk a little bit about the rural
areas and if you could distribute your net ads from rural
to urban and the NRTC had a tough quarter in the first
quarter it looks like. Wondering if you had more success
than those companies.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 49
Secondly, I was wondering if I'm not sure if you mentioned
bad debt or receivables balances compared to the fourth
quarter.
And then thirdly, if you could just give an update on
whether or not you actually rolled (unintelligible)? Thank
you.
Charlie Ergen: What was the last question, rolled in the?
Man: The broadband notes into the EDBS entity, the 10-3/8.
Michael McDonnell: Yes, I can speak to that. It's kind of a two-part answer.
For accounting purposes, the notes have been recorded down
at EDBS as sort of the bar has been crossed in terms of
triggering the need to do the exchange. We haven't
actually done the physical exchange of the notes yet.
That'll occur sometime later this year.
Charlie Ergen: And the other one (unintelligible) vast majority came from
cable. We did not have negative growth in rural as
possibly the NRTC did. They're still in business out
there.
It's a mature business because we don't always have the
thing that's holding us back there is not having local in
those marketplaces. So we've got and I think that
obviously the NRTC in terms of spending another dollar to
get a marginal customer based on area economics may not
make sense for them today. And so, you know, we anticipate
that their growth is going to be slow or negative.
But it's where we have local-to-local is where the
business is and the new bulk of the growth.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 50
And then what's the other question? Oh bad debt and
receivables, I don't believe we had any material change in
bad debt expense in the quarter or any kind of
receivables. And I think Michael, you would know this
better than I would. I think from at least what I look at
that the bad debt situation is pretty good because what we
do is we don't change when we turn customers off.
I mean we want your satellite bill to be one of the most
important bills you have and the recent polls have shown
it's not the most important bill for people. And if you
give people much leeway and when you turn them off, you'll
be the last bill they pay.
So we have not changed our procedure since inception of
our business in terms of when we turn people off and
that's a significant thing in accounting because if you
were to change that and maybe give people an extra month
to pay their bill, you could save hundreds of thousands of
churn numbers, you know, for the short term for as long as
you want to change your policy.
So, you know, we don't want to get into that game and
particularly in a weak economy, you want to be very tough
on turning people off and I think that's the way you want
to do it. That will lessen your churn in the long run. It
will hurt you while you're doing it but it'll be the right
thing to do and I think some of the cable guys' numbers in
their first quarter was indicative of maybe them having to
clean some of that up.
And, you know, I can remember back in the Primestar
acquisition as Hughes had to do, they publicly had to
clean up a lot of Primestar customers for that reason
ultimately and ultimately ended up in a restatement
because Primestar had maybe kept some people on a little
bit long. And I can't remember what Pegasus said but I
think they cleaned up some people recently as a result of
that.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 51
And you got to be careful of that because you guys are
going to give visibility to it and so you've got to trust
that the people running the company are doing it the right
way.
Michael McDonnell: I would just add to that that the real key to controlling
bad debt is really just getting the right customer in the
first place and in terms of, you know, credit procedures
or getting cash up front as we've said for a long time,
you've got to have one or the other and we just continue
to be very, very focused on that.
Man: What's the percentage of DISH revenue that is bad debt
expense?
Michael McDonnell: We haven't specifically disclosed that. We do include bad
debts in our subscriber related expenses but we haven't
specifically disclosed that. But I think what Charlie said
is accurate in terms of, you know, we haven't seen any
material changes in that we haven't seen any material
spikes in that trend.
Charlie Ergen: It goes up month to month but it's been very consistent
for quarters and I would wager a fair amount of money that
we're the lowest in the industry because I think our
procedures are by far the tightest in the industry. We
just don't like when people don't pay us.
Man: Fair enough. Thank you.
Operator: Your next question comes from (Ed Shapiro) with
(unintelligible).
(Ed Shapiro): Hi, a couple of questions. I want to make sure I
understand the ARPU progression.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 52
You took a pretty material sequential hit in the first
quarter because, largely because of the free programming
but that'll be one time basically for the first three
months, as you get into April, to the extent the ads don't
change dramatically, you'll have offset some new subs with
zero ARPU but you'll have the January, February, March
guys starting to pay. And that'll stay kind of steady all
else equal until...
Charlie Ergen: Yes, we'll have to show you that offline but it's a step
function. It obviously steps down for three months and
then it levels off for three months and then it steps up
for three months.
(Ed Shapiro): As soon as it goes away.
Charlie Ergen: So what you're going to see in the second quarter is that
that's usually the leveling.
(Ed Shapiro): And "I Like 9"...
Charlie Ergen: So we would expect a -- again, we don't know but we would
expect a small ARPU increase in the third, second quarter
because we level therefore we don't have the negative
effect therefore we have our traditional kind of small
increase that we'll have.
And then we would expect in the third quarter that's to
step up a little bit right each month and in the fourth
quarter you're back to level again but at a little bit
higher level. And then you've got your traditional
increase you would expect.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 53
Now that assumes that, you know, we don't, you know, focus
on programming so much in the second half of the year. So,
you know, which is what we think is going to happen but
you never know.
(Ed Shapiro): And the "I Like 9", you stopped offering that in January
so as you said, you're getting a modest increase just
because you're not adding subs at $9 anymore but until
you're anniversary, the first guys who put it in place in
August and churn aside, you're going to see a pick up each
month starting in September as those guys, the nine goes
to 40 or 50.
Charlie Ergen: That's right. So starting in September you get a step
function -- you actually have a step function now because
you're not being penalized as much by the $9 guys but in
September you start seeing it step up of a few cents a
month for sure.
(Ed Shapiro): And on the Pay Per View hit...
Charlie Ergen: And they don't totally wean out till a year from December,
a year from January.
So the ARPU stuff is kind of a headline but when you dig
behind it it's, there's a strategic reason why that's the
case. The counter to that is (Sac) is trending higher than
we'd like but counter to that is we think we're getting a
better customer for us in return than we otherwise would
given where the marketplace is and the cards that are
dealt to us.
But, you know, these are judgment calls and, you know, we
don't have the data to support that yet.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 54
(Ed Shapiro): But having said that, you didn't change your ARPU guidance
of up for the year despite this first quarter hit so it
implies a pretty significant rebound whether it comes, you
know, mostly in the fourth quarter or what.
Charlie Ergen: Yes, assuming we're not in the programming promotions in
the second half of the year then those step functions
should get us back to that kind of ARPU for the year but
again that's...
(Ed Shapiro): On the Pay Per View hit...
Charlie Ergen: I mean we just don't have any way that -- I mean we're
giving our best guess today.
(Ed Shapiro): Sure. On the Pay Per View hit, did you have to reduce the
number of channels available to meet all the
(unintelligible) requirements on January 1? Is that part
of it?
And related to that can you say what EchoStar VII when it
goes operational is going to do or are there going to be
local channels moved on to the core service, increased
channels? What's going to happen as a result of that
besides just increased backup?
Charlie Ergen: We did take some Pay Per View channels down as a result.
But we'll be able to put a few of those back up with Echo
VII. Echo VII will move a few people from the wing back to
the center. It may add a couple in other cities as well.
For example, we have beams in Alaska and Hawaii we're
looking at if we can get a signal back and depending on
how many broadcasters, you know, will pick
(unintelligible).
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 55
So we think we'd be some cities. But the real benefit to
Echo VII, when Echo VIII goes up we get to offload things
between Echo VII and VIII and that's when we really get
the efficiencies of satellite.
One of the problems of Echo VII is that it was at (119)
location where we only have 21 transponders and that's
where our core service is so we're not able to move things
around till EchoStar VIII's up. And if EchoStar VIII were
to have a problem, we would move Echo VII to the (110)
location and then move everything that way.
So, you know, the real benefit in the third quarter on
that.
(Ed Shapiro): Okay. Great, thank you.
Operator: Your next question comes from (Leon) (unintelligible).
(Leon): Thank you. Could you discuss kind of your current take on
the status of litigation with Gemstar and the financial
significance to us of a win or a loss in terms of the
effect on cash?
Charlie Ergen: We don't really have any more insight than what we said
before. I mean it has become public that the, you know,
the government as an observer what their opinion is. I
think that opinion was public that we do not violate their
intellectual property and that they did engage in patent
misuse.
That does not mean that the judge will accept that
finding. I think it's more indicative of what a jury would
find personally having watched the process. And so I think
we have greater confidence in going to a jury trial on
this later.
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 56
I mean obviously when you've got somebody who sits through
all the evidence and comes out on your side and who's very
technical and trained and intelligent then that's a very
positive sign.
But the judge will look at different things, look at the
record and is a unique judge and that was a patent
attorney, a patent examiner before so is very, very
knowledgeable and to make their own decision. And of
course it gets appealed without question the decision this
judge will make in June will be appealed by one or both
parties.
And then there's no monetary damages so it would go to
regardless of the outcome, I think it's going to go to
trial in our case in North Carolina and Atlanta. And then
we've also won the summary judgment argument antitrust so
it's clear the antitrust trial against Gemstar will go to
trial in Denver.
So the litigation process is going to go on for a long
time. The initial (ITC) strategy that they had I think was
in hindsight maybe not a good strategy on their part but
it's only the first step in litigation and we'll probably
give you guys as analysts and investors a feel for how it
might go long term.
But our belief is and we said this when nobody believed
this is that we don't violate the intellectual property.
We spent a lot of time to understanding the law and what
we do and we believe that there are serious antitrust
violations here and that the Gemstar has exposure
financially and that our exposure is somewhat limited
certainly in the ITC case.
And, you know, we just -- we're business people with
nobody to, you know, it's not that Gemstar's a bad
company. It's not that there wasn't potential to work
together. We never really had a problem with their
management and it's
ECHOSTAR COMMUNICATIONS
Moderator: Michael McDonnell
05-02-02/11:00 am CT
Page 57
just that if you're going to make a claim, you know, if we
violate, we'd be happy to talk to you. If we don't
violate, why would we pay you?
So, you know, we made the decision based on the evidence
that we had and, you know, it's unclear -- I'm not
handicapping it other than we're confident in our position
or we wouldn't have gone down that path.
(Leon): Thank you.
Michael McDonnell: Operator, I think we'll take one more question.
Operator: Your last question comes from (Joe Galdino) with CIBC
Company.
(Joe Galdino): Our question's have already been asked. Thank you.
Operator: There are no further questions. Do you have any closing
remarks?
Charlie Ergen: No. Our next conference call's going to be just because
I'm out of town is going to be August 15. So, you know,
we're going to go back to work until August 15 and see if
we can improve some of our metrics and do a little bit
better job and we'll talk to people August 15.
Michael McDonnell: And we'd like to thank everybody for joining us and
Operator, we'd like to conclude the call at this time.
END