EchoStar posts solid profits, subscriber gains; eyes telecom merger situation

By Paul Deckelman

New York, March 15 - EchoStar Communications Corp. had what its chairman and chief executive officer called "a pretty solid quarter and a pretty solid year," nearly doubling its fourth quarter profit and coming in with 2005 full-year earnings several times what the Englewood, Colo.-based Number-Two U.S. satellite television broadcaster had notched in 2004.

And CEO Charles W. Ergen and other company executives on EchoStar's conference call with analysts held Wednesday after the release of the results expressed confidence that their company - and the satellite industry in general - was well positioned to continue to battle the cable television industry for access to the homes of customers seeking an expanded lineup of TV viewing choices. He said this was particularly true in the up-and-coming area of high-definition television, where he said EchoStar could offer many more HD channels than its earthbound cable rivals could.

However, the EchoStar executives were a little more cautious in assessing the long-term impact that the just-announced telecommunications industry mega-merger between AT&T Inc. and BellSouth Corp. might have on its prospects.

While EchoStar currently partners with AT&T in bundling its own television services with the telecom giant's offerings of conventional phone service and internet access, the executives acknowledged that the telecom companies are working to develop their own video networks and could begin deployment, EchoStar has said, as early as the second half of this year. Some years down the line, the telecom companies might not need the help of satellite operators like EchoStar or its rival, El Segundo, Calif.-based industry leader DirecTV Group Inc., which has a similar partnership agreement with BellSouth and with such other regional Bell operating companies as Verizon Communications Corp. and Qwest Communications International Inc.

Ergen, answering an analyst's query during the question-and-answer portion of the conference call following the company's presentation, said that it "remains unclear" whether the combination of AT&T and BellSouth "is a positive, or a negative or a neutral development for us. Because we haven't had a relationship with BellSouth (as DTV has) there's some potential obviously positive situation there.

"The fact that [AT&T] is going to get that much bigger and that much more competitive in the video field could be a negative. It could be a positive because with an AT&T brand name, they've got to look at the potential to go nationwide - and there's not a lot of ways to do nationwide video except for satellite."

However, he stressed that "this is [just] me talking" and that he had "no inside information."

It "remains to be seen how that is," Ergen continued, "but we entered into the relationship with AT&T because we felt that there were potential greater positives than negatives. We've worked very hard to make it a beneficial relationship for both companies and we're going to continue to do that on our side and make sure that we're responsive to them as a partner and as a vendor, and also someone who's bringing us customers."

Interested in internet plan

There has been some speculation in the financial media lately that EchoStar and DirecTV might team up to form a national wireless high-speed internet network that would allow the two big satellite broadcasters to compete on a more even footing with both the cable operators and the phone firms.

Ergen, in answer to an analysts' question, allowed that "that might be good to do as an industry and do in a standardized way, because the buildout costs would be excessive [for one company] and it would make more sense to do that for 30 million subscribers rather than for 12 or 15 million subscribers."

But while he said that EchoStar would "take a look at any proposals" and "if something developed that we could do with DirecTV, we certainly are keen on that idea if it makes sense," he cautioned that right now, EchoStar has "no timetable" on this and at this point does not see any "compelling plan" out there.

Making one of several analogies that he made during the call to playing poker, Ergen further warned that "we're not going to try to draw an inside straight - we're not going to place a big bet if it doesn't make sense to do that, just to satisfy somebody on Wall Street or something like that. We have a lot of confidence in our ability to make good decisions."

Earnings double

In the fourth quarter ended Dec. 31, EchoStar had net earnings of $133 million (30 cents per share) on revenues of $2.18 billion, about double the year-earlier earnings of $70 million (15 cents per share) on $1.93 million of revenues. EchoStar did not quite live up to the expectations of Wall Street analysts, who on average were anticipating 35 cents per share of earnings.

For the full year, EchoStar earned $1.51 billion on $8.43 billion of revenues - well up from $215 million of earnings on $7.15 billion of revenues in 2004. The company noted that its earnings in the latest period got a strong boost from a special one-time non-cash benefit of approximately $593 million to recognize the tax benefits of previously reported tax losses, as well as a $134 million gain related to the settlement of its EchoStar IV satellite insurance and related claims.

EchoStar added some 330,000 net new subscribers during the quarter, giving the company about 12.04 million subscribers at year's end, up 1.135 million from its subscriber count at the end of 2004.

Treasurer Jason Kiser said that the company ended the year with $5.935 billion of debt and $1.181 billion of cash and marketable securities, excluding $67 million of restricted cash. Net debt was $4.72 billion.

That works out to a total debt-to-subscriber ratio of about $493 per subscriber, or $395 per subscriber on a net-debt basis.

According to information released by the company in its 10-K annual report to the Securities and Exchange Commission, as of Dec. 31, EchoStar's debt included nearly $3.942 billion of senior notes, consisting of $1 billion of 5¾% senior notes due 2008, $500 million of floating-rate senior notes due 2008, $441.964 million of 9 1/8% senior notes due 2009, $1 billion of 6 3/8% senior notes due 2011 and $1 billion of 6 5/8% senior notes due 2014. It had outstanding $1.525 billion of convertible notes, consisting of $1 billion of 5¾% subordinated notes due 2008, $500 million of 3% subordinated notes due 2010 and $25 million of 3% subordinated notes due 2011. The level of outstanding senior notes and convertible notes at year end was about unchanged from year-end 2004 levels. There was also $468.337 million of capital lease obligations, mortgages and other notes payable as of Dec, 31. The balance sheet showed no bank borrowings.

The company expects to be able to satisfy its working capital, capital expenditure and debt service requirements primarily from existing cash and investment balances and from cash generated from operations.

Interest expense totaled $373.8 million as of the end of 2005, a decrease of $131.9 million or 26.1%, from 2004 levels of about $505.7 million. EchoStar said that the decrease primarily resulted from a reduction in prepayment premiums and write-off of debt issuance costs totaling some $134.4 million, and a net reduction in interest expense of approximately $40.2 million related to the redemption, repurchases and refinancing of previously outstanding senior debt which occurred during 2004. The decrease was partially offset by $38 million of additional interest expense during 2005 associated with capital lease obligations for the company's AMC-15 and AMC-16 satellites.

Kiser also said that EchoStar had repurchased some 13.2 million shares of its class A common stock last year for roughly $363 million under the company's current stock repurchase program

While 2005 was a relatively quiet year on the debt and liquidity front for EchoStar, it has made several recent moves, which were not reflected in the year-end numbers released Monday. EchoStar last month sold $1.5 billion of new 7 1/8% senior notes due 2016 in a Rule 144A transaction, and followed that up with the redemption on Feb. 17 of the remaining $441.964 million of outstanding 9 1/8% senior notes due 2009, at a price of 104.563 and a total cost to the company of $462.1 million. The call premium of $20.1 million, along with unamortized debt issuance costs of $2.8 million, were recorded as charges to earnings which will show up in the results for the current 2006 first quarter. EchoStar funded the redemption using a portion of the proceeds from the 7 1/8% note sale, with the rest of the proceeds expected to be used for general corporate purposes.

The two February transactions left EchoStar with total debt of $7.005 billion. For 2006, the company will have about $406.55 million of interest due on its various series of high yield and convertible notes.

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