Dish Network 2005 Annual Report Download - page 61

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS – Continued
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2004. These expenses will increase further in the future as we increase the size of our satellite fleet, if we obtain in-
orbit satellite insurance, as we increase the number and operations of our digital broadcast centers and as additional
local markets and other programming services are launched.
Cost of sales – equipment. “Cost of sales – equipment” totaled $271.7 million during the year ended December 31,
2005, an increase of $12.6 million or 4.9% compared to 2004. This increase related primarily to the increase in
sales of non-DISH Network digital receivers and related components to an international DBS service provider.
Charges for slow moving and obsolete inventory were lower during 2005 compared to 2004. This difference,
together with the decrease in sales of DBS accessories domestically discussed above, partially offset the amount of the
increase. “Cost of sales – equipment” represented 73.8% and 71.0% of “Equipment sales,” during the years ended
December 31, 2005 and 2004, respectively. The increase in the expense to revenue ratio principally related to a
decline in margins on sales to the international DBS service provider and on sales of DBS accessories domestically.
This increase was partially offset by the lower 2005 charges for slow moving and obsolete inventory.
Subscriber acquisition costs. “Subscriber acquisition costs” totaled $1.493 billion for the year ended December 31,
2005, a decrease of $35.3 million or 2.3% compared to 2004. The decrease in “Subscriber acquisition costs” was
attributable to a higher number of DISH Network subscribers participating in our equipment lease program for new
subscribers, partially offset by an increase in the number of non co-branded subscribers acquired and an increase in
acquisition advertising.
SAC. SAC was $693 during the year ended December 31, 2005 compared to $611 during 2004, an increase of $82, or
13.4%. This increase was primarily attributable to a decline in the number of co-branded subscribers acquired under
our original AT&T agreement, for which we did not incur subscriber acquisition costs and a greater number of DISH
Network subscribers activating higher priced advanced products, such as receivers with multiple tuners, DVRs and
HD receivers. Activation of these more advanced and complex products also resulted in higher installation costs
during 2005 as compared to 2004. The increase in SAC was also attributable to higher costs for acquisition
advertising and promotional incentives paid to our independent dealer network.
Penetration of our equipment lease program for new subscribers increased during 2005 compared to 2004. The
value of equipment capitalized under our lease program for new subscribers totaled approximately $861.5 million and
$574.8 million for the year ended December 31, 2005 and 2004, respectively. The increase in leased equipment and
related reduction in subsidized equipment sales caused our capital expenditures to increase, while our “Subscriber
acquisition costs” declined.
As previously discussed, our SAC calculation does not include the benefit of payments we received in connection
with equipment not returned to us from disconnecting lease subscribers and returned equipment that is made
available for sale rather than being redeployed through our lease program. During the years ended December 31,
2005 and 2004, these amounts totaled $86.1 million and $60.8 million, respectively.
General and administrative expenses. “General and administrative expenses” totaled $456.2 million during the year
ended December 31, 2005, an increase of $57.3 million or 14.4% compared to 2004. The increase in “General and
administrative expenses” was primarily attributable to increased personnel and infrastructure expenses to support the
growth of the DISH Network. “General and administrative expenses” represented 5.4% and 5.6% of “Total
revenue” during the years ended December 31, 2005 and 2004, respectively. The decrease in this expense to
revenue ratio resulted primarily from “Total revenue” increasing at a higher rate than our “General and
administrative expenses.”
Depreciation and amortization. “Depreciation and amortization” expense totaled $805.6 million during the year ended
December 31, 2005, an increase of $300.0 million or 59.3% compared to 2004. The increase in “Depreciation and
amortization” expense was primarily attributable to additional depreciation on equipment leased to subscribers
resulting from increased penetration of our equipment lease programs and other depreciable assets placed in service
to support the DISH Network. Further, depreciation of our AMC-15 and AMC-16 satellites, which commenced
commercial operation during January and February 2005, respectively, contributed to this increase.