EchoStar Corporation (SATS) Q1 2009 Earnings Report, Transcript and Summary

My name is Jean and I will be your conference operator today. At this time, I'd like to welcome everyone to the DISH Network Corporation Q1 '09 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions). Thank you, Mr. Kiser. You may begin your conference.

My name is Jason Kiser. I am the Treasurer here at DISH Network. I am joined today by Charlie Ergen, our Chairman and CEO, Tom Cullen, our Executive Vice President at DISH Network, Bernie Han, our COO and Robert Olson, our brand new CFO here and Stanton Dodge, our General Counsel. Before we open up for some Q&A, we do need to do our Safe Harbor disclosures. So, for that, I will let Stan to do that.

Thanks, Jason. Good morning everyone, and thank you for joining us. We invite media to participate in listen-only mode and ask that you do not identify participants or their firms in your reports. We do not allow audio taping and ask that you respect that. All statements we make during this call, they are not statements of historical fact constitute forward-looking statements, which involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from historical results and from any future results expressed or implied by such forward-looking statements. For list of those factors, please refer to the Form of our 10-Q. All cautionary statements we make during this call should be understood is being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our reports and should not place undue reliance on any forward-looking statements. We assume no responsibility for updating any forward-looking statements. With that all the way, I'll turn it back over to Jason.

Thanks, Stanton and operator, we're just going to go straight in to Q&A.

Your first question comes from Benjamin Swinburne from Morgan Stanley.

Hey guys, its Ben Swinburne, good morning. A couple of questions, I wondered if you would comment on over the air transition benefited gross ads in the quarter. I don’t know if there is a way to quantify that or even a qualitative comment would be interesting on our end and then second on the cost side, SAC was down quite a bit or is relatively whether you thought it would come in. Just wondering if there were any changes to your agreements with EchoStar, I think you renewed your agreement for another year, but whether changes to the price points, you are paying or the margin that they’re getting, or for how much the year-on-year box cost may have declined on a like-for-like basis, which is the comment that was in the 10-Q? Any quantification or comment there would also be helpful.

Okay. This is Charlie. Yes, we can’t really quantify over the year transition. I’d say it was a material to the quarter, when the last in terms of. We did sale set top boxes, that the dish that, our free TV, but there is no ongoing revenue there. Obviously, on the March we probably got some customers. Obviously in June 13th we will have a better idea, but that’s certainly one-time shot, kind of thing, but I don’t think, that will make us a big part for quarter. Bernie Han, will take the second part.

Then with respect to the SAC question, there was no change in our agreement between DISH and SATS with respect to the terms under which we buy equipment. The bigger drivers of SAC, I think we alluded to in the 10-Q filings, first and foremost was that, because we had a slightly different shift in mix in distribution channels for the quarter, a little bit more being sold through direct means versus third-party means. Our third-party incentives were down quite a bit from a year ago. Secondarily, the amount of marketing dollars that we spent in ARPU were actually down a bit from last year first quarter, even though it was higher than our typical run rate last year first quarter we have spent quite a bit in marketing SAC.

Maybe as just a follow-up Charlie, just generally how would you grade the company this quarter and you’ve made some management changes and you guys are positioned in the marketplace from a value perspective and you think you’re executing now better than you have been over the last 12 months, any comments there would be helpful.

I mean I don’t want to, probably give you the great idea, agree to guide internally. Again I think I just sum it up, last year we were get worse and so I think its for us is really to stabilize and start to get better and I think hopefully around the path to start getting better that’s and then once you get better, then you got to get to be best in class. So, we got a lot of work to do to get there. From big picture perspective, its always hard form an entrepreneurial company to make a transition to a generation of about management that can run the business with that, always that entrepreneurial influence of, but its very difficult for companies and that’s kind of transition, we have been trying to make and I feel very comfortable with the team that we have with Robert, new CFO and Bernie announced Chief Operating Officer and Tom Cullen, as Executive VP, who really has all the sales and marketing programming functions. So, we really have that transition is now pretty complete to really have the management team on place. The second part of the transition is, to know exactly what is that you're trying to accomplish and I think we know that and then now you go execute and I think once you get to the place, where you go execute, life gets easier for me for sure, but maybe not for these guys, but once you are all in the same pace, you'll execute. I think that's how you start gets better and I think that's the place we have to be a slow progress, it’s not going to happen overnight, but I think we have the team to move forward to go execute, to get better everyday. Hopefully, it may some incremental on the margin little, bit better performance in the first quarter than the fourth quarter of last year.

Our next question comes from Jeff Wlodarczak from Hudson Square.

Your subscriber related expenses were at the highest level as percent of revenue it seem quite a while, is most of that related the MPEG-4 box swaps and if you ramped your other retention market expend on materially from last year?

Yes, there is a number of things, again this is discussed in more detail in the Q, but there is a number of things driving our subscriber related expenses going up as a percentage of revenues. I think first of all, to know I'm surprised, the biggest component of subscriber related expenses, our programming costs and there is just a series of contractual increases related to our programming costs subscribing a little bit. Secondarily, as you know, we don't publicly disclose the absolute amounts of our retention spending but our retention spending has sequentially been increasing over the last six or seven quarters. So yes, we have been doing quite a bit more upgrading of existing customers in recent quarters versus past quarters. And then, I think last with respect to the cost of running our call centers and our installation services, we have been spending more there to try sore up our operations.

Thanks and then a follow-up on Ben's question. Does the absence of AT&T help SAC?

No. I don’t think it really had much of an impact.

Okay and, then just one last question. Charlie, you could get a TiVo ruling any day now. How do you feel regarding DISH Network's positioning in that and if that outcome were to go against you, other than a temporary stay, what are your realistic options?

Well. On the TiVo question I guess there's really two things that judge got to decide. One, is there any incremental damages during the period of approximately six months before we downloaded new software? Are there incremental damages during that period of time? Second, whether we are in contempt, so I guess it was actually two parts. And the second big question is, whether we are in contempt court. Stan you will take this. Let me just give a brief overview then Stan will bring you the more legal side of it. In fact, once you give the legal side of it, and then I will just comment back on the general side. Stan Dodge kind of answer that from a legal perspective.

So, the pickup which Charlie had talked to you, just supplemental damages issue and then the question of whether or not our design-around is more than colorably different than the products we are fond to infringe, and if the judge determines that they are not or they are only colorably different, then you will take up the issue of whether or not the design-around parts actually infringe.

And I think TiVo is proper question, whether we've violated injunction too.

Correct. And a question whether you violate the junction on its face by not turning up all DVR's in the field today, or substantial portion of them.

I kind of look at it when you go by the law, and having participated in a trial, or in the bench hearing, I think on the legal side, we know internally all the work we did to change our software and we know, I mean, how materially different our software is, so we know its probably different. So, we feel comfortable on the law that we're on the right side of the law. Having said that we haven’t been ripe on this case, we haven’t won a significant ruling at the district level, ever. So, one has to be cautious there, but when I think ultimately law is what the strongest basis you can have, and I think in that case, you know, we know, we’re probably different. So we don’t think we’ll loose the contempt hearing. Obviously I think, this case will probably going to continue on, regardless. We’ve unable to have had dialog with the TiVo, but nothing that was realistic from our perspective, so obviously they are very confident. And, no matter what the ruling is, probably one side or the other would appeal it and we'd have to look at the ruling to see whether we thought there was any revenue. No doubt, knowing what the ruling is, we wouldn’t really know how to respond to it. So, I can tell you as we are confident that we don’t violate their intellectual property today, and we think we ultimately will prevail.

Fair enough. Thank you.

Our next question is from Doug Mitchelson from Deutsche Bank.

Great thanks very much. So Charlie, just a couple. You said the digital transition benefit wasn’t material with the quarter, but it did seem to be material to some of your peers, since you have focused a lot on winning over digital transition customers. I am confused, is this because you took a low share of digital transition subs or whether it’s just hard for you to pin point, you're giving us your gut view of the impact?

There is two reasons, one is a little bit hard to pinpoint since a lot of our sales are through third parties, it's really hard for us to pinpoint who might be a digital transition customer, and second we're still not operating from an operational marketing point of view at the level that would make it easy for those customers to actually buy from us. So, I think that perhaps our competition made a little bit easy for those customers to buy from us. So, they may have seen more impact than we did.

So, then I think you talked in one or two of the last few calls about almost a holding back in terms of marketing aggressively as a company, just because you wanted to get the execution fixed first before you more aggressively market it. And I think, if I am doing the math right, if I back out AT&T, it looks like core DISH may be lost around 160,000 subs in the fourth quarter, and only lost about 45,000 in the first quarter. Is this a reflection that you're sort of revamping in those markets enough or is there still more to come?

Well, again I have said many times, I don’t like the discounting of programming and we are doing that today. I think we have a consensus internally that that’s probably not where we want to be long-term. And I think that that for us marketing is a lot more than running an advertisement, its lot about that customer experience, its lot about how you treat your customers. We have had a lot of room, we have a lot of room for improvement there. We are making some progress, and I think it doesn’t do us a lot of good to go out there in the marketplace to get a customer to come on board and be frustrated with us or its complicated process. So, we just have to simplify our business a little bit. I think we know how to do that now and then as we get better internally, I think that success bring success, and as you get better internally those marketing things just naturally kind of happen. Because the best marketing we have ever has Word of Mouth. You know our Word of Mouth, we're not best in class, and so we have to be best in class for Word of Mouth kind of thing.

Can you talk a little bit, you talked about the promotional discounting that you're doing, is that something that's kind of a flow through a little bit more to sort of Q2 and Q3 is kicks in or this is only a partial quarter in the first quarter?

It will take while at ramp up. Obviously, what we are offering right now is 999 for the first six months to new customers, so probably in the sixth or seven month will be at our peak, in terms of having the most customers enjoying that discount. So, that's what you're going to see the biggest impact in our financials.

I assume that is going to be put a caller on ARPU.

Right.

Fair, for the next two or three quarters and you running your model, but if you ran it through, right. Assuming that kind of the promotion ends in summer. You've got about six months so that runs the P&L for, I guess about three more quarters.

Our next question comes from Spencer Wang from Credit Suisse.

I guess, my first question is, I just want to go back to the disclosure on the queue about the mix shift to direct sales. Just curious is this by design on DISH's part or was it a function of what's going on the retail environment. I'm just trying to get a sense of the sustainability of the SAC per gross sub and then secondly, some of the other operators have talked a little bit about some more softness in the second quarter versus the first quarter. I was wondering if you guys could give us a sense of what you're seeing today versus what you saw in the March quarter.

Hi, Spencer, it’s Tom Cohen. Yes, we have made a concerted effort to bolster our internal direct sales capability, some of that we anticipated just because of the loss of the AT&T distribution. We are concurrently working hard to bring the third-party retailer base. We just met with all of them this weekend. We had our DISH team summit and so it's not moving so much away from third-party as much as we are just reinforcing over now and internally. So, I think we will continue to see some growth there and we put in new leadership there as well and we are making some fundamental changes on how we train and compensate those internal channels.

Okay and then on the second quarter trends, Tom?

I think it’s probably too early to tell.

Our next question is from Marci Ryvicker from Wachovia-Wells Fargo.

I have two questions. The first, in the quarter you disclosed that 5% of gross subs came from AT&T and a 17% last year. How much do your other Talco relationships contribute to gross subs on average?

Well, first thing the AT&T will probably be 0% next quarter and we can give you that guidance. The other Talcos are as well as smaller regional Talcos and they are an important part of our business, I don’t think we disclose how much that is, but that the important part of our business really for a couple of reasons. One is that that there is a little bit more [royal], which is more the royal basis and historically, but they also don’t compete with us. So, they are not getting the customer today and then longer term trying to switch him out to their video part is there when their minds (inaudible). So, they are good long-term strategic partners for us and they also work closely with that goes talking of the engineering side of the company to design products worms. So, they are valuable piece of, strategically where we go, going forward. We think they also fit very well with our retailer base or historic retailer base, where those guys have a better chance for maybe working together in a synergistic fashion. So, they are important to us strategically. You now obviously an AT&T or Verizon are much bigger, would been a bigger part of anybody's business and our collateral bigger parts of people's business than those guys, then the last they are long-term strategic partner for us.

We compliment each other well and the direction of the set-top box, roadmap is very complimentary with their broadband play.

I mean I guess I'd say, there is more opportunity for us to help and grow their business and our business to get, we are kind of working together long-term then perhaps we have with the bigger guys.

Okay. I have one more follow-up; did you see any impact in the quarter from the Charter bankruptcy in terms of subs?

Again probably not quite quantifiable, but I think on the margin, yes. I mean obviously, when a company goes bankrupt. You know I think on the margin there were some benefit from the digital transition, on the margin there were some benefit from Charter's bankruptcy.

Great, thank you.

I don't expect either one of those would be a big factor by the third and fourth quarter.

Our next question is from Vijay Jayant from Barclays Capital.

Charlie, just wanted to follow-up on, I think some of your recent comments that your team submit about, what are you seeing in the economy really in the housing market and also on the competitive front, a very general question. Incrementally if you look at video subscriber number across all the various providers, this quarter it seems like everybody gained relative to the fourth quarter, is that catch up from the fourth quarter, its not all digital transition. I think some of us careful on that front thanks.

Yes. I would have not expected the net gain that we saw among all video providers given what I saw on housing, but so I am not sure exactly, I don’t know where all that comes from myself or there maybe more dual technology homes or maybe people have basic cable and satellite or bios or who knows what. So may be some dual technology homes going on little bit more than normal. The housing, obviously if there is one factor that effects us in a general way, in a video way, it'll be housing and it looks like housing started up at least in this pockets of the country, it looks like housings may be it has, may be the worst days are behind it. So, and you got 8,000 of credit comment from the government, so forth. So, we have an opportunity. There is dishes that are foreclosed on their own by banks that have dish network on the roof. So, we have an opportunity when somebody purchases, I have to get a new customer and hopefully now these starts don’t look like there going to be real robust but obviously as you get housing starts may be off the bottoms, you've got a chance, you got a customer when he moves into a new house. So, those are because most new customers in housing will take a look at satellite as an alternative. It’s just a little bit harder to get somebody who has cable for ten years and he is happy with it.

Just a follow-up, there is a tax swing. I think $179 million benefit in this quarter. Is that you mentioned it’s like a timing issue. Can you, sort of talk about what that is, please?

Sure, it’s from a book standpoint in the quarter, we incurred, I think it was like a $187 million of income tax from a book standpoint. Typically, in the first quarter on March 15 there is true up payment for previous year taxes, of which we had no true up. And our first of the payments for 2009 did not take place until April 15, so you got a quarter which basically have no cash taxes occurring about a $187 million of book income taxes.

So, what Bernie said was, we over -- we over or we – I am not saying that, you're saying true up.

Yes. That is just timing difference between book and cash taxes that we usually see in the first quarter, a little bigger this year than last year probably because our earnings are little bigger.

Thank you.

Our next question is from Ingrid Chung from Goldman Sachs. Go ahead please.

Thank you. So my first set of questions is around the channel, I just wanted to dig a little deeper in terms of the retail channel. I was wondering if you could give us an idea of the impact of the retailer shutdown you had in 1Q on churn. Are you continuing to do more of these retailer shutdowns from the second quarter and I was wondering if you can give us some idea of what percentage of your sales are from, direct sales now versus the independent retail channel?

I don't think we talk generally about our mix of sales, with respect to the retailer shutdowns, I think you are probably eluting to, we had in the fall and into the spring a series of retailer terminations because of certain behavior they're engaging then that were against our company policies. And they represented, honestly a very small percentage of our retailers, most of our thousands of retailers we have very, very good relationships with, they are very, very good partners. And they do a lot of good for DISH, unfortunately there is a few outliners out of the thousands that we have, I think in the end we've terminated somewhere around 100 retailers over the last eight or nine months, again because of the activities. In terms of percentage of activations that they accounted for are relatively small in this scheme of things.

Okay. And, then my second question I guess is, I thought it was a really great time that you bought back some shares below $10. I was just wondering, why you didn’t spend more than $19 million on buying back shares?

This is Charlie. We obviously had to set a price. We don’t know what the price is going to, so we thought that was interesting price, I guess are like the better words that the board looked at it. Second, we also were looking at serious radio and how to keep a fair amount of cash, keep our powder dry in terms of looking at that. We didn’t know how that was going to turnout at the time. So, and now just serious, we are looking at lot of different things. So, that’s the reason.

Our next question is from Tuna Amobi from Standard & Poors Equity. Go ahead, please. Tuna Amobi - Standard & Poors Equity: Thank you very much. So, with regard to Q2 in relation to AT&T agreement, would you say the trends thus far for those markets are consistent with what you saw for the two months in Q1 or is there anything else that’s you are seeing out there in those markets that maybe is different from your expectations?

As you know, we don’t comment on the current quarter activity. I will just tell you that we're going to defend our base of customers regardless of what channel they originated from and we are doing that aggressively. Tuna Amobi - Standard & Poors Equity: So, you don’t feel that AT&T is doing anything differently now as opposed to in the prior period before the end of the agreement?

We’re monitoring market-by-market, the activities that are going on by AT&T and all other competitors. As I said, we generally don’t comment on current quarter activity.

I think we take the AT&T at their word, they’ve lot of agreement and there is obviously they can’t target our customers, our joint customer. So, we take them at their word, obviously we'll monitor that, but I think that our relationships we have with AT&T have been very professional regardless of which time we were on, so.

As far as our side of it concern, we said in the queue that we have roughly 1 million existing customers that are from the AT&T relationship. We’ve said that the churn rate that we see on this group of customers is slightly higher than the churn rate we see overall and then with respect to [subscribers] activations in the quarter, obviously the 5% that they did account for in the first quarter, obviously that was mostly in the month of January, when we still had the agreement with AT&T. So, from that you can come and do the math and figure out on our side, what the impact might be. Tuna Amobi - Standard & Poors Equity: Okay. Just one housekeeping question on depreciation and amortization, it seems like a significant decline there. Is this a good run rate? I know there was some prior year items, it seems like the software project was a part of that. So, when you strip that out in terms of the lease boxes, can you give us an idea we should expect for that?

Its hard to say, again when you have eluded is actually the biggest one item impact. Last year in the first quarter, we had a pretty big software product that we decided to discontinue aboard and we ended up having a large appreciation impact, in the first quarter. Outside of that, the biggest impact is related to our subscriber-related equipment and we just had a lot of equipment that’s been out there in the field that has fully run-off, fully been depreciated now, whether you can use that as an indicator or the future depends a lot on what we decide to do and how aggressively we are in the future with implementing newer boxes, MPEG-4 boxes things like that. So, I don’t think you can necessarily say that’s a great run rate. Tuna Amobi - Standard & Poors Equity: Okay and lastly on ARPU, I know if you noticed DirectTV had a major ARPU shortfall, actually at first time I think they have had a lower ARPU than you guys in years. So, I’m just wondering if you saw maybe the effect of the promotion in terms of your high number of disconnect activity. Did you sense that was a reason for some of the high trend that you had in some markets.

This is Charlie. Again I don’t know their business that level, but they have sports, NFL, sports net account for that kind of in the season. So, that have one impact and I expected next fall obviously our ARPU will grow up significantly because of the NFL. They obviously have been discounting for programming for a long period of time and have continued to be very aggressive in discounting their programming. So, that’s going to obviously affect their ARPU and run through their ARPU for the next. I think their offers today are six months or year. So, they have got quite a bit tick on that discounting in the programming.

Our next question is from Tom Eagan from Collins Stewart.

I guess two questions, first on free cash flow. So, it would appear that working capital was a source of cash in the first quarter, as it usually I guess in the first quarter. So, should we think that as per other quarters or previous years it will be a use of cash in the balance of the quarters and then I have a question on the offer? So, just on the 999 offer, could you just run again through the impact. Didn’t have an impact on ARPU, didn’t have an impact on gross ads, just kind of sense of what the impact was all around from that offer?

I'll answer the question about cash flow. So, to the extent free cash flow, as we just talked about a few minutes ago, the biggest driver I think the free cash-flow being so strong in the first quarter is the difference between book and cash taxes. Again, from a book standpoint, we had about a $187 million of income taxes from a cash standpoint it was very close to zero.

Right.

Normally that would even up over the course of the year, but this is the one thing Charlie was starting to allude to. So, typically in the second quarter April 15th you start making the first of four payments for 2009. The only issue there is, if you look at our balance sheet as of the end of '08, we had this big receivable, which represented at the end of '08, when we looked at everything, as it turned out we had paid more in taxes than we actually needed to pay. From a tax standpoint ordinarily you might see a little bit of a reversal in the second quarter, but in the second quarter in this case, you will not because of that phenomenon and that again, is probably the biggest seasonal driver. There is a little bit of book versus cash interest and some other things. Also, I take a smaller piece of the first quarter cash flow was because it's a short quarter in terms of number of days and our company agreements are on a 60 day payable basis. So, there is a little bit of timing difference between, there were some payments made to FAS immediately after the end of the quarter, because these payments the two companies will get executed on the 60th day. So, that will reverse, that's smaller piece maybe $20 million or so.

In general, our first quarter is our biggest. It's historically been our largest free cash flow and I think in terms of working capital, historically working capital has either been negative or slightly negative for the rest of the year in terms of working capital has either been negative or slightly negative for the rest of the year in terms of working capital that will depend a little bit on how we manage inventory and receivables and payables obviously. It depends a little bit on the transition that how much retention marketing we do in terms of upgrading people high definition and the television and things like that because we have to carry more inventory if we do that so. I think if you look at historical trends, this is your best guide.

Great, okay. And, then on the offer?

I'm sorry Tom. Would you repeat the question?

Yeah. Is it just sound that is all from your comments that the offer didn’t have much of an impact on the company's subscribers or financials, the ARPU or the gross ads and I was just trying to make sure that I was looking at the right way? Thanks.

Yeah. I don’t think -- obviously, an offer like that rings the phones and my feeling is that hanging your hat only on a promotional offer is probably loosing a little bit of legs and so you've probably seen how we modified the offer recently, so it includes locals and it is clear that it’s a six month periods. So, at the end of the day most people don’t get off the phone at 999 you've realized that.

Right.

So, it helps us generate activity in the marketplace but I think you'll see a change in how we position and the tone of advertising moving forward.

And, as far as ARPU, I think Bernie said, I think the [ARPU] started February 1st and this is going to effect your ARPU and your peak effect is going be six months, logically six months later.

Get you all six months worth of customers at that point who are getting 999 and from then until we discontinue the promotion you'll have six months worth of new customers getting that benefit.

So, the biggest impact would be in the third, I guess the biggest impact is third quarter, but certainly a bigger impact in second and third quarter.

Right, okay. Thank you.

Then the first quarter.

Our next question is from Jessica Reif from Banc of America. Jessica Reif - Bank of America/Merrill Lynch: Thanks. The first question is, can you talk about your priorities for free cash flow in terms of just prioritizing, in terms of buybacks, building your cash position, using for initiative like AWS, or acquisition [dollar] theory?

If we got a dollar to spend what's the most economic way for us to spend it? Is that to get a new subscriber, is that to go acquire a company, is that to pay a dividend, is that to repurchase debt and is that too repurchase equity. And obviously, we set a price to the equity that we thought was no or not [brainer] or not no brainer. I shouldn’t say note them to know brainer, we set a price that these are the best to price will buyback. We also obviously reported to look at Sirius radios. So those are the two big things that we looked at in the first quarter. We'll continue to look at things. If spending a dollar to acquire customers wasn't the best use of funds and we knows another use of funds, it was better than that. That's what we do. Ultimately we're economic animals that want to spend our money wisely, so we get a return on it, and historically the returns been very good in acquiring subscribers. It's little bit more competitive today. The market values to subscribers at last than I did a year or two ago. And I think, that you have to look at a lot of different thing on how you spend your cash, but as far as the company, we think the value of our company overtime is the discounted present value of the cash that we can generate. I don't know how you value a company anything else, quite frankly Jessica Reif - Bank of America/Merrill Lynch: Did the buybacks continue into the second quarter?

Well I mean again that's something that we look at every quarter and our Board makes those decisions and we don’t actually preannounce those things, but I think what we do know is that we have a plan where we can buy up to, Jason how much is it?

Close $12 billion.

So we have a plan, is that right?

Right.

We have plan that we can buyback a $1 billion and we bought back $19 million of it so far. Jessica Reif - Bank of America/Merrill Lynch: Okay. And then just wanted to completely different Jason question, but can you talk about what kind of take up you saw in HD and DVRs in the first quarter? And what is the current penetration?

We don’t disclose the penetration, but I think we are very competitive in marketplace with the number of customers who have DVRs in particular. We are probably had a cable and behind the other guys on HD from a general perspective. I think that I get that it’s a very majority of customers typically today that come into DISH Network, the majority of customers are buying this advanced service either a DVR and/or HD. So I think that trend kind of continues. And I think we are well positioned there. I think we currently have more HD channels than anybody in the marketplace, including Direct TV. And I think our DVRs have won the CNET awards. The last couple of years has been the best DVRs in the business. So we have a lot of opportunities there. We may not market it as well as we'd like to, but I think the at least the underlying product is very good. Jessica Reif - Bank of America/Merrill Lynch: Thank you.

Our next question is from Craig Moffett from Sanford C. Bernstein.

Hi, Charlie a question about the backdrop that set by the telecom operators in their core telecom business for a second. DSL has always been sort of your primary compliment I guess for providing broadband to your customers. How reliant are you on strong DSL product and what happens in markets where when the Talco rollup DSL and start to replace it with their fiber. How are you finding it to compete in those markets, when there isn't a non-affiliated broadband offering in the market? Then just one related clarification question, how reliant are you on fiber Talco access lines, I remember you used to require a Talco access line is the backchannel. As Talco access lines decline, are you seeing weakness in markets, where you don't have a natural backchannel for the customer, you have to charge little extra?

Good questions. I guess, from a big picture I think that, it certainly there is a risk factor for us, if there is not competition in broadband, right. If the only broadband provider happen to be the cable company, who has a video product or Talco, who has a video product that would be a long-term challenge for us and sometime we have to inherently aware of. We don't rely just on DSL. I mean we offer customers, whatever broadband source they can get, whether it would be our new 922 of cable or wireless or satellite our viewers often plug into it. So, our DSL often plug into it. So, I think that by the way and see how that goes and obviously, our marketplace is probably weaker where you U-Verse is and can do the whole bundle together, right. It would probably be one of the things strategically focused on, we don't have to, don’t think we have to play in the broadband space, We looked a lot and looked to the broadband, looked at the DirecTV in terms of looking at we're using broadband play and I think we both came to conclusion that's not a place we need to go today and do in the next spectrum and government policy really had a lot of new entrant into that space. As far as the phone lines, we don’t require phone line connection, but customers typically pay more, if they don’t have a phone line connection and, that is another trend that we got to watch because 20% of people don’t a line today and we think their technical solutions to that, a lot of people don’t have phone lines ever broadband connections. So, all of our products in the last year has been broadband compatible and you can plug broadband into it. A lot of advantages once we get a customer to install broadband, so I think the phone line is not a major issue, but I think that if there is not robust competition in broadband and the broadband provider is also video provider that is a concern.

What kind of trends do you see Charlie in the markets, where say U-Verse does roll out geographically? Do you start to see that immediately in your numbers and how do you combat it?

Well, first our weakest markets are where there is a good operator gives great service at great price that has the triple play right, quadruple play or even a double play. I mean that’s a market for us. I guess the question is, you compete by trying to differentiate yourself and you may decide to compete in other places. So, not every customer is equal to us and investment in the U-Verse market in the Northeast, where they are giving the great customer great service in the triple play for $99 may not be the best place for us to try to compete. Having said that, there is still plenty of markets, where we are very, very competitive and we think we have the best and so I think for us we have to focus on where we have the best product, but if I lived in up in New Jersey and lived in the million dollar house and it was a mile away from U-verse and U-verse lot of line in my house, I may buy U-verse, I might not.

May not, but I certainly look at.

You know if lived in [Idaho] I'm not going to buy U-verse.

Our next question is from Jason Bazinet from the Citi.

I guess, we get a lot of questions on this TiVo case, regarding sort of a worst case scenario and I think most people think, at least most people talk about the worst case being pulling DVR from the field and I guess with the inventory built you alluded to in the 10-Q, I’m assuming there is no linkage and has more to do with your expectation on HD DVR (inaudible). Can you just comment about that likelihood of pulling DVR boxes if you lose the case and is the inventory building all to that worst case scenario?

I don’t know, I will say in the say I, if I go to satellite launches, I will have any negative thoughts and on this case I don’t have any negative thoughts. So, it’s probably not the right thing for CEO to do, but we are just thinking it by losing.

Is the inventory built is your internal plans in terms of an HD DVR push organic. In terms of unrelated to TiVo's otherwise we would have to think about?

Yes.

Okay.

Our next question is from Todd Mitchell from Kaufman Brothers.

Could you talk a little bit, as about your efforts to stem piracy and how far you are long into that process and maybe help us a little bit as to what that in process details?

I'm sorry, Todd I didn’t hear the second part. In terms of the piracy and the upgrading of our smartcard, this is Tom by the way. We are very close to completing that project. It's a massive undertaking, one of those unpleasant things that you have to do to continue to secure the service. But, we are essentially every customer has received the new cards and we are within weeks of completing the entire process.

And what sort of dynamics do you think that will have on the subscriber base and in terms of the momentum basically with churn and gross adds?

It’s hard to forecast, and I'll be loathsome to give you a projections but as we have shut off certain groups already, you do this in waves and so we've already completed the internationals and we have completed Latinos and some of our other segments. And we are seeing a positive impact. Again, I would say it’s marginal at this point, but there is generally a lag associated with it from the time you shut off till the time they determine whether they are going to shop for new pay TV services or re-enroll legitimately.

Yes, and this is Charlie. The biggest impact we know we're going to see is just from our customer service perspective. So that as you get obviously, we are filing a lot of calls as customers didn’t get the card in the mail or threw it away by mistake or didn’t actually there is those message on their screen that they have got to get new card if they haven’t inserted it already, they'll lose the channel, they don’t really pay attention to it until they lose the channel. So I think it’s going to be interesting, but I think in the month of June, we're going to have some disruption as we complete the card swap out, and eliminate the stream that people have been pirating. And then the digital transition all at the same time. So its going to be interesting to see how all that going to translate, but it will be getting to July, now those things will be behind us and we should see some trends from a customer service perspective that gets us, would gets us ahead of the curve for the first time in a while that allows us to do much better job there.

Would you be willing to hazard I guess as to how pervasive the problem was?

Well, I would answer in general way, and I think if you read our 10-Ks or 10-Qs, you know, I think piracy and fraud as a group is a significant factor in our business. It's not just with DISH Networks, its whether the guys is stealing cable or is stealing Direct TV and there is multiple ways that people commit fraud and multiple ways that people still signal. Its little bit like whack-a-mole and we're knocking down those guys who have their heads up pretty high and we know that there will be some people following behind them. And the one thing that we will do is we'll work on next-generation smart card now, so that we probably will deploy that ahead of any major piracy and continue that process, so we know we've got four upgrades ahead of us. That's not we didn't do before I think we learned our lesson there, and I think we have dedicated team to look at people who are being fraudulent from – it could be simple as fictitious customer, you know the stolen social security number to flipping a customer, [retiring] existing customer to piracy to hacking through the internet. So there is lot of ways of people go after, I think we understand the current state out there and I think we are definitely getting better there. And but the whole industry has their problem, so if somebody else has a problem that affects us even if we don't have a problem. In fact like Microsoft and other people who have software it's a percentage of your business and there is room for us and the industry to improve there. I think we're getting our house in order, let's put that way.

Good to hear it.

Our next question is from Gerard Hallaren from JRPG. Go ahead please.

Yes. I was wondering, if you could comment, with the DTV change coming up, some of your spectrums going to free up and I'm just wondering what your plans are and what that might mean to the financial model in say over the next three, to six, to 12 months?

We are looking at a lot of different options there. And, now that we may have come to the conclusion there obviously, we would be very cognizant of CapEx [perhaps] in a business model that would give us a return for that CapEx. So, we think it’s a very valuable spectrum. We are glad, we have it. We want to be prudent about how we use it, and I think it's like anything else, but I think its all about the timing, how you do that I think. We've some indications, you know as Qualcomm freeze up, a lot of their spectrum, some indication with how they use their mobile television and see whether that has an impact and so forth that’s very valuable spectrum. I think there is number usage for it, and a number of potential people that you could partner with in a number of potential ways to keep your CapEx down with the spectrum.

Yeah. I think that’s true. Does the firming of the standards for mobile digital television and the seeming momentum coming out of NAB forum, mobile digital television? Does that change your thinking at all?

Gerard, this is Tom. We have a team dedicated to working on this project, and as you may or may not have heard, we have been very active with the broadcasting community and were at NAB. I don’t think it's going to a have a material impact on CapEx for the next several quarters. As you know, the standard on ATSC-MH S is still evolving a bit and then we have other decisions to make as to how to incorporate technology standards into a common chipset that can use multiple spectrums bands. So, we are actively working on it, but again we'll likely do some limited technology trial activity later this year, to firm up our beliefs around the technology compatibility as well as refining business model going forward, but as Charlie, said we are talking to a lot of people, because we think there are some natural partnerships here that may develop that would mitigate the total CapEx requirement on our side.

Just strikes me as a big asset out there that needs obviously some development, trying to understand what you are doing there is important?

Well, I think strategically one of the things, I mean you run the business, but behind that you’re trying to build building blocks for future business and 700 megahertz spectrum is one building block, in the one building block for the future. Sometime your building blocks don't pan out and you decide not to pour good money after bad, sometimes building blocks become the creation of multi-billion dollar businesses. So, you never know exactly where this going to turn out, but 700 megahertz is a very unique frequency that goes through the walls, but its one of a kind in real - and I expect I would be viable building block force.

James Ratcliffe from Barclays Capital.

One housekeeping question. It looks like you made some restatement to the 1Q '08 cash flow statement release, they are coming out with a lower one end of period cash balance, it looks you dropped the end of period for '07 cash balance and what’s behind that?

This is the change, I think made a couple of quarters ago. Part of our cash is invested in instruments card variable rate (inaudible) and previously we had classified as cash & equivalents because the way these mechanically work is we have the ability to liquidate these within five days. The way it works if the guaranteed to liquidate within five days is provided by a third-party, which it is, you have to look at the instrument by itself and the instrument by itself has a maturity that’s longer than five days. So, we classify these variable rate demand those from cash and equivalents to marketable investment securities and that we got a couple of quarters ago.

Thank you for joining. We will be back in August. For public record, I probably won’t be on that call because it’s my family birthday and family vacation scheduled during that first part of August depending on our regular release. So don’t be surprised when I am not on the call, but obviously Tom and Bernie and our new CFO Rob will be able to and Stan will be able to handle it. So, thanks for joining us.

Take care, guys.