Echostar Figures Strong; Internal Controls Might Not Be

In the 10K filing, EchoStar disclosed for the first time that it had discovered a “significant deficiency” in the company’s financial reporting, including an instance in which an executive officer “directed the preparation, in prior years, of inaccurate documentation that was used to determine payments made to a vendor.” Ergen confirmed the filing and said that recommendations from the audit committee include “remedial steps with an executive” that the company did not name. EchoStar also said in the filing that it “intends to vigorously defend” a class action complaint filed on March 11 in the U.S. Dist. Court of Colo. The initial complaint was “dismissed without prejudice” Wed., meaning it can be refiled.

There was no need for a financial restatement in light of the inquiries, said Ergen. Reported revenues were up 25% for the year, to $7.15 in 2004 from $5.74 billion in 2003, and up 28% for the 4th quarter, to $1.93 billion in 2004 from $1.51 billion in 2003. Net income for the year totaled $215 million, compared with $225 million for 2003. But net income for the quarter was $70 million, compared with $3 million 2003. Basic earnings per share were $0.15 for the quarter, vs. $0.01 a year earlier.

As for new subscribers, Dish netted approximately 430,000 during the quarter, bringing subscriber totals to 10.9 million at the end of Dec. That was up 1.48 million for the year. In Jan., the service reported that it had surpassed 11 million subscribers. Analysts homed in on EchoStar’s low churn, 1.62%. “We did make improvements in churn,” said Ergen, adding however improvements could be made in retention marketing. “We hit the wall in terms of growth and became a bit more inefficient than I would like,” said Ergen. “But what I don’t want to do is play the SAC game to get subscribers on our balance sheet and then spend money on a customer that we're not going to get any return from,” he said.

During the conference call, Ergen said EchoStar planned to launch a satellite-based broadband service this year, but on a much smaller scale than envisioned when it made investments WildBlue and later StarBand. EchoStar invested more than $100 million in WildBlue and StarBand 2000-2001, but later wrote much of that off as the 2 service stalled. StarBand filed for bankruptcy protection in 2002 and remains in operation, while WildBlue is expected to relaunch later this year with new financial backers. Ergen estimated “several million” of EchoStar’s customers would be interested in a satellite broadband service. A likely target for such a service is the estimated 15-20 million U.S. homes without access to DSL or cable modems, Ergen said. To reach those markets, EchoStar will seek to forge partnerships in several areas including WiMax, Ergen said.

“We lost some capital investments, but we know a lot about” satellite delivery of broadband services, Ergen said. “We'll reenter that market later this year, but in a small, niche way.”

While Ergen downplayed EchoStar’s broadband plans for this year, a series of satellites scheduled to enter service the next 3 years could greatly expand them. EchoStar-10, a Lockheed-Martin built A2100 satellite, is scheduled to launch in the 4th quarter, while EchoStar-11 -- a Space Systems/Loral FS1300 bird -- is expected to be completed by 2007, it said in an annual 10K filed with the SEC. EchoStar also signed agreements with Lockheed, in Dec. and this month, for 2 additional Ka-band spot beam satellites, construction of which is expected to be finished by 2008, the company said. It has transponder space on an SES Americom Ka-band satellite that will launch in 2006, EchoStar said.

EchoStar will continue seeking to expand the range of interactive services it offers. Having started offering interactive services with OpenTV about 5 years ago, EchoStar recently started carriage of TV Guide-Gemstar International’s TV Games Network, which broadcasts horse races. TV Games will be a “small percentage” of EchoStar’s business this year largely because interactive wagering is legal in just 13 states. About 90% of EchoStar’s receivers are compatible with interactive services, Ergen said. “I think you'll see it have a slightly positive impact on revenue per subscriber this year,” he said. “When you start to get to the point where you don’t have to plug in a phone line, then the business will grow.”

Meanwhile, EchoStar remains committed to buying the Rainbow-1 satellite from Cablevision for $200 million, Ergen said. The craft, located at 61.5 degrees W., supplies transponder capacity for Cablevision’s Voom HD satellite service over 13 transponders. The fate of Voom is expected to be decided this month as Cablevision Chmn. Charles Dolan seeks to secure financial backing to continue the service. Cablevision, which shut down Voom on Feb. 28, has given Dolan until March 31 to line up the necessary funding. EchoStar’s acquisition includes a ground station in Black Hawk, S.D. EchoStar operates the EchoStar-3 satellite at 61.5 degrees W. but has lost service on portions of the craft, reducing the number of transponders available to 26 from 32, the company said.

In a new development, EchoStar is appealing a federal judge’s decision that halted the delivery of distant network signals to customers previously grandfathered under the federal Satellite Home Viewers Act (SHVA). Federal law allowed EchoStar subscribers who signed on before Oct. 1999 to continue receiving distant network channels, EchoStar said. U.S. Dist. Judge William Dimitrouleas’ decision marked the latest chapter in EchoStar’s 7-year legal battle with broadcasters over delivery of distant network signals. TV networks filed suit against in EchoStar in Dec. 1998 seeking to block transmissions. It has since reached settlements with ABC, NBC and CBS, but the case remains pending with Fox and several affiliates.

EchoStar also has reached a settlement with Fox Sports Net for an undisclosed sum, it said in the 10K. Fox sued EchoStar in last June alleged breach of contract and overdue payments and interest of up to $25 million. The companies have a programming agreement that allows EchoStar subscribers to receive Fox’s regional sports networks in exchange for monthly license fees based on the number of subscribers to the networks. A Cal. Superior Court judge also rejected a motion to grant class action status to suit filed in 1999 alleging violations of the Cal. Consumer Legal Remedies Act, EchoStar said. The suit, filed by David Pritkin and the nonprofit Consumer Advocates, argued that EchoStar violated warranties by describing the satellite service with the expressions “crystal clear digital video,” “CD-quality audio” and “on- screen program guide.”