EchoStar Corporation (SATS) Q1 2010 Earnings Report, Transcript and Summary

Good afternoon. My name is Sarah and I'll be the conference operator today. At this time, I'd like to welcome everyone to the DISH Network Corporation Q1 2010 Earnings Conference Call. [Operator Instructions] Mr. Kiser, you may begin your conference.

Thanks, Sarah. Well thanks for joining us. My name is Jason Kiser, I'm the Treasurer here at DISH Network. I'm joined today by Charlie Ergen, Chairman and CEO; Tom Cullen, Executive Vice President; Bernie Han, COO; Robert Olson, our CFO; and Sam Dodge, our General Counsel. Before we open up for Q&A, we do need to do our Safe Harbor disclosure. So for that, we'll turn it over to Stanton.

Thanks, Jason, and good morning, everyone. And thank you for joining us. We invite media to participate in listen-only mode on the call that's so you know how to identify participants or their firms in your reports. We also do not allow audio taping and ask that you respect that. All statements we make during this call that 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 a list of those factors, please refer to the front of our 10-Q. All cautionary statements we make during this call should be understood as 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. And with that out of the way, I'll turn it back over to Jason.

Thanks, Dan. Sarah, we're actually going to go straight into Q&A so if you want to open up the lines, we're ready to take our first question.

[Operator Instructions] Your first question comes from Tuna Amobi of Standard & Poor's. Tuna Amobi - S&P Equity Research: A couple of big picture questions for Charlie. So I guess first on the 700 megahertz, is there anything -- as you think about your strategy there, that perhaps the National Broadband Plan that was recently unveiled could impact how you move forward with that? Specifically regarding perhaps the provisions related to spectrum allocation and spectrum option as you think about how those things might evolve for wireless broadband providers, is there anything that could help to shape your 700 megahertz deployment there?

Well, I guess we're evaluating a number of things in 700 megahertz. We think, obviously, we think we have virtually nationwide spectrum. And we're looking at a couple of things. One, we'll see how Qualcomm does with their mobile video and see how that progresses. The second, we're actively participating with the broadcasting community with their trials on their potential use of their own spectrum, part in mobility. And then we're looking at other things that we think the 700 megahertz spectrum could be used for. And I guess the big thing is, we don't want to go out and spend a lot of CapEx without a real defined plan and know which way the best economic model is. Some of this is going to -- have to see how net neutrality ultimately shares out, we'll see if National Broadband shakes out, we'll see if there's more options of spectrum coming out. And you put all those things together and you kind of develop a plan. So we think we have a valuable asset there. We think the mistake would be to start building things out and then have to change plan midway through a buildout. So we're also looking for ways to build it out, obviously, much less expensively than perhaps others that have built out 700 megahertz in the past. So it's an active, strategic asset for us but we really don't have a defined business plan to share with you today. Tuna Amobi - S&P Equity Research: Is there any grounds perhaps that you see overlap with what the broadcasters have announced on the mobile DTV initiative? Did you suggest that there might be some common grounds there with what you might be envisioning?

We think -- well, we're testing with broadcasters and we're testing our spectrum along with their spectrum and part of that is looking at mobility. And again, we think there's some interesting results there. But it's all very preliminary kind of testing. And the broadcasting community is a bit fragmented as well. The SEC has talked about maybe reclaiming some of that spectrum. So all those things are factors, we're just not ready with a defined plan today. I guess, all i can say is that we think it's a good strategic asset that if properly deployed can build value for our company. It also could be something that if not properly deployed could cost our company money. So I guess my theory is, when you don't have enough information to make a good choice, you're better off not making a choice at that time. We just don't have enough information on a variety of factors: broadcasters, Qualcomm, government FCC policy, future auctions and product that would make that economical. But having said that, there are three or four things we've looked at that we think potentially could make sense. Tuna Amobi - S&P Equity Research: And if I can ask one more question related to advertising. Can you perhaps quantify how much of an advertising rebound was included in your numbers? And more specifically on interactive advertising, I was wondering if you can provide some more color on your recent announcement with DirecTV, and why you thought that DirecTV was the ideal partner for this particular initiative.

Tuna, this is Tom Cullen. In general, advertising revenues have grown and on pace with what we're seeing from the rest of the industry. So we're pleased with the rebound there. And regarding the interactive piece, the advertising groups between our team and DirecTV's team has been in discussion about this for quite a while. We both deploy similar interactive apps. And this announcement recently was simply a means for making it easier for the larger advertisers and their agencies to look at a common deployment of a single app that would traverse both of our plans. In other words, you can get to 30 million homes with the development of a single app. Each of those agreements would still be independent between DISH and the advertiser and DirecTV and advertiser. What we're trying to do is just aggregate a larger number of homes to create more interest. And so far, the response has been very positive. Tuna Amobi - S&P Equity Research: And presumably, this is going to be positioned as an alternative for the Canoe national advertisers, which is cable is developing as well. Is this meant to be a kind of direct head-to-head competitor?

Yes. It's clearly in the same vein as what Canoe is working on.

You're next question comes from Jeff Wlodarczak from Pivotal Research Group.

Your subscriber-related expenses as a percent of revenue improved year-over-year for the first time in a long time. And if you back out a one-time benefit you had last year and it looks like your expense per average DISH sub was actually flat year-over-year. So nothing's perfect, Charlie, but do you feel like you all have turned the corner on your operational issues, you can start to see a lot more leverage on the expense side of the equation going forward?

Yes, Jeff, this is Robert. It is indeed flat year-over-year. We've been working pretty hard over the past year on our variable cost, operating cost that we can control. With that being said, we're still fighting to offset increased programming cost. And that will be a battle that we fought over the last year and will continue to fight. So I think we've made some progress. And I think there's still a lot more work to be done on variable cost.

And then big picture, Charlie, you're SAC was up to its highest level in the history of the company. How would you say your incremental returns are of today versus where they've been historically?

Well, I don't think -- I think -- look at ARPU and expense line and SAC, the return on a new customer is not what it was five or six years ago. And that's something we always have to watch, particularly with all the discounting that's going on there, you really got to take a look at all those factors and say, what -- I think you have to start looking at what customer do actually -- which customers do you make a profit on and which customers you do not make a profit on. That hasn't been too much of a task in the past because you make profit on everybody, but I think -- then they get to be a little bit more selective today. In general, the trend in SAC has been because we've gone more to MPEG-4 equipment, a little bit heavier advertising in the first quarter. As we get to the vast majority of our customers in MPEG-4 equipment, hopefully that of course, then we look for cost savings in manufacturing lower-cost MPEG-4 equipment. So that's a factor. But we certainly have seen -- certainly the industry has gotten more competitive. And we've seen in general, trends to increasing SAC, although I think there's a limit to where that would go, at least for us. And we've seen more competitive -- more discounting of the programming side of it. So when you put those things together, I think we just have to be smart about how we go about the marketplace out there. And one of the big items -- the two big things we fight are programming costs, where we're not able to pass all those cost increases on to our customers due to the competitive environment. And the heavy degree of discounting takes away from ARPU because you're continuing to give a discount on a new customer for a period of time. So that has some risks. So we take a look at all those things. And on the other hand, from a big picture perspective, we can -- broadcasting's a super efficient means of delivery of TV, and particularly we get the high-definition television, now 3D coming, takes a lot of bandwidth, that as things become competitive, the people who are going to win are going to be the most efficient at what they do. And certainly, satellite broadcasting has some advantages when it comes to efficiencies there. So those particular trends are good for us. And so we've got the headwinds of competition and programming costs. We got the tailwind, so to speak, of heavy bandwidth uses for consumers that they want in terms of high-definition television and now 3D coming.

Your next question comes from Mike McCormack of JPMorgan. Michael McCormack - JP Morgan Chase & Co: Just looking at nice improvement in churn. I guess we're expecting churn to potentially go the other way based upon some of these contract expirations. Can you just walk us through what you saw in the quarter? I guess maybe first with respect to these contract expirations and then secondly, other drivers of churn improvement?

This is Robert, again, Mike. We did expect to see a relatively low churn. We described that in our Q that in February 2008, we extended our commitment period from 18 to 24 months. And so for at least one month, probably a little bit more, we had the benefit of that extension in first quarter. And obviously, that would go away in second quarter. Tom?

That being said -- this is Tom. The commitment period overlap is one thing. But we'd like to believe that we are making significant improvements in the delivery of customer service and improving the customer experience. And that will also flow through. Again, it's a work in progress. We believe we have made good progress in the last year on that front, but nobody's resting on their laurels here.

Your next question comes from James Ratcliffe with Barclays Capital.

You mentioned on the Q that you're increasing the range of HD DVR upgrades for competitive reasons and also continue to do MPEG-4 and I guess even some 8PSK swap outs. But look like retention CPE CapEx was down substantially year-on-year. Can you talk about what was driving that?

Yes. This is Robert. Retention CapEx does tend to fluctuate quarter-to-quarter. And so I wouldn't look at first quarter being a trend necessarily. We had a lot of different operational considerations. And just as a result, the retention CapEx just wasn't as high in the first quarter.

I'd also add, this is Tom, that we're continuously refining the segmentation and targeting, as Charlie alluded to, identifying profitability on a per customer segment basis. And as a result of that, we'll be more selective in how we approach retention marketing in general.

Your next question comes from Bryan Kraft of Cross Research.

I guess first, just on the TiVo expense accrual. It looks like you're accruing about $30 million a quarter. Are you accruing the $2.25 rate? Because if you are, it looks like that implies about 4.4 million boxes that the charges would apply to, which seems a lot lower than what's been talked about by TiVo and implied by the language in the court documents. So that's my first one. And then the other question I had is on satellite CapEx. On EchoStar XV, is there a lot remaining in terms of investment that'll hit for the remainder of the year, or is most of that been captured already?

Yes, this is Charlie. The TiVo is our best estimate of what the accrual would be by the court. So that's our just best estimate in what it is. So we don't give a specific number there. On the -- Robert, do you want to take the Echo XV [EchoStar XV]?

I missed the second question.

The Echo XV CapEx, has most of that run through?

Yes, it has. I mean, we had to launch contract in first quarter. We'll have a couple more quarters of Echo XV CapEx that'll be lighter than it was in first quarter.

If you look at the satellite and transmission costs for the quarter, they were up quite a bit sequentially. And I know you mentioned the additional satellite coming on lease in October, but fourth quarter was much lighter. So I just wanted to understand what the sequential increase was due to, and whether we could look at the first quarter as being sort of a clean quarter to use as a run rate.

Yes, this is Robert again. I think you can use first quarter as a clean quarter for a run rate. We mentioned the Nimiq 5 satellite being the big driver. We also took a couple of our satellites from a long-term lease to a short-term lease which had higher rates. But first quarter's pretty good run rate for satellite and transmission expense.

Your next question comes from Doug Mitchelson of Deutsche Bank.

So just following up on TiVo, Charlie. I know you love these TiVo questions. But it seems like we could be getting near the end of the court process. I know you hope not. But are you prepared to move pretty quickly with a license deal with TiVo if you don't get an en banc review and if Supreme Court doesn't hear an appeal?

Well I don't know what I'd do if I didn't have TiVo litigation going on. It'd be a -- real bored in my life. Maybe I get to see my kids. I think that -- I guess in general, I'd say a couple of things. One, we've always said that it seems like we should be working together with TiVo. We certainly -- as we got to know them, we have a lot of respect for what they've done. They've certainly done very well in the litigation process with us. And this has always been the case really about an honest disagreement on how our DVRs work. There's never been anything personal about it. The court case, obviously an en banc review. I guess the two places we're in the court, one is the en banc review for the Federal Court of Appeals [Federal Circuit Court of Appeals]. Those are not normally granted. So you got to take that into consideration. But this is an unusual case of course in terms of whether you can design around it, actually design around a patent. And then we have a design around based on what the judge in the court has said about how the system works, where we designed around it that's in front of the judge in Texas. And we hope that he'll look at that because obviously that would allow us to continue to ship boxes. But we are bejoined at the hip with TiVo in a sense that, one of the questions earlier, we booked $30 million for one quarter. So that's over $100 million just for the year on average in licensings fees for TiVo, which is materially more than they get for the rest of the entire industry. And so we're joined to hip in a sense that those, if we don't get a deal done, those fees will go away for them. And obviously, we'll lose customers. And so it reminds me a lot of our programming negotiation, where you both need each other and you end up with -- but it's also a zero-sum game, in a way. And in this case, it's not quite as much a zero-sum game as it is in programming because sometimes in programming when a customer leaves us, they have a choice to go someplace else where the programmer gets paid. In this case, most people who would leave us from a DVR perspective would not be incremental revenue to TiVo because they would probably go to one of the other players where TiVo already has a relationship with them. So there's no incremental or would be very little incremental revenues would be revenue lost. Secondarily, a strong DISH Network is probably beneficial to TiVo if we're utilizing their technology. So we'll have to wait and see. I don't think you should assume that we will get a deal done. I don't think you should assume that the courts are going to rule on our favor, but there is a logic to us working together.

And a couple more, I know you talked a bit on SAC cost already, but it's interesting that you're getting close to DirecTV SAC level but without their ARPU. I mean historically, you've been much more efficient than them. And you've got the multi-room DVR and they don't yet. I guess they're just launching now. So can you square that for me? Are your new customers coming in at higher tiers and they're going to be higher ARPU and the SAC level make sense? Or is DirecT [DirecTV]. Just getting a better return right now than you guys are?

Well, I think it's a combination, all of those. I think DirecTV historically is just skewed a little higher end customer. Their programming costs obviously are higher than ours in general, for the same programming that -- we're the lower-cost guys out there because we came with the marketplace second. They have the NFL Network which adds several -- they have some sporting things that we don't have that aren't necessarily a profit to them but add to ARPU for them. And then we're probably a little under-marketed in terms -- I think we have some room on the pricing side that we haven't taken advantage of. As we try to simplify our operations, we kind of foregone any kind of real increase so far this year because we needed to get some operational things under control about how we charge per product. And finally, the discounting side of it is we still feel the effect of -- I've always said I hate discounting, but we've discounted for the last couple of years and that obviously affects ARPU. So we've got room there to make improvements. And while we said, at least for the next three or four years, we'll have the disadvantage in football and some of the sports things.

I mean typically, when an operator like yourself steps up their performance, within a few months competitors run promotion to blunt the share shift. This time, it doesn't appear that, that's happening. And I looked at the last three quarters, your share's been pretty steady, pretty strong. At least all of our channel checks haven't picked up any real aggressive change by your peers. I mean, is that an accurate depiction of the marketplace? Because it seems like you should have another good quarter.

Is that a question for forward-looking statements? Obviously, we don't issue forward-looking statements. But I would challenge the assertion that this isn't a very competitively intense time from a promotional standpoint. We think we have done well in the last nine months even in the face of escalating promotions, discounts, channel economics. There are a lot of things moving around within this industry among all of the competitors. And I would say the competitive intensity is as high as I've ever seen it.

Your next question comes from Marci Ryvicker from Wells Fargo.

There's been a lot of commentary going back to TiVo regarding DISH or S-At [Scientific Atlanta] [ph](24:55) potentially buying TiVo. I guess, Charlie, what are your thoughts there? Is this an option that you're considering?

Well I haven't really thought about it too much, but I mean I guess those are always options. I don't think -- it's not something that I thought a lot about.

And then just the services agreement that you have with EchoStar that was in the Q, can you just talk about what they are, the benefits you intend to get from them and is there any particular reason why you're entering into them now?

The service interest. Why don't you take that?

Yes, I don't know how many specifics we've shared, but as we evolve into new businesses, there are technology opportunities for us for them to support our business. And so I think you'll see that probably as a fairly continuous interaction. It just happens to be that, that vendor is a related party. But we're working with a lot of new vendors on a lot of new technology opportunities. Because again, we view our mission is, our aim is provide the best value to our customers, the best customer experience. And part of that is evolving the product platform that we have available for our customers. So as we work on new technology opportunities, EchoStar is part of that plan in many cases.

And Marci, this is Robert. Those are currently pretty small relationships, each of those three that were new to the Q . They have to be disclosed because it's related party.

Your next question comes from Jason Bazinet from Citi.

So the cable investment communities, I think pretty nervous about the slippery slope we may embark upon with Title II. And my guess is that their fear is concerning rate regulation and potentially wholesale access to the data service. My question for Mr. Ergen is in the context of any investments that you might make on mobile broadband or otherwise, would you incorporate that possibility, albeit a small possibility, into your calculus? Or do you think that it's so remote that it's not even really worth thinking about in terms of getting wholesale access?

This is Charlie. Title II, as I've seen it coming from the FCC in terms of what they're thinking about from a recommendation is I guess what I would say very measured approach. It certainly doesn't go as far as we'd like to see it go. But it doesn't have the kind of ominous effects that you just mentioned on the broadband providers. Really -- obviously, the Comcast case required the FCC to protect net neutrality, have to come up with something, move a different direction. And Title II is probably was good a way to do it as any. And all they really said is that so far is that you can't discriminate against anybody in terms of the information that flows through your pipe. They haven't gone as far as saying that they would open it up to a wholesale basis or that there would be any kind of regulation on how much you can charge for your pipe. So I don't think it has any -- I think I would expect that the broadband providers will jump up and down and scream a little bit. But they're probably privately pretty happy that it's a very measured approach and doesn't go very far in terms of affecting how they'll make an investment. So I think that people may worry about that. I mean I think that it's a little bit like the gun lobby right, where they may not really be against machine guns, but they don't want you to ban machine guns because they think something else might be next, right? And I think I don't think the big providers are as worried about -- all of them had said publicly many, many times that they don't discriminate and they're not going to discriminate. So the Title II as proposed doesn't affect them at all as long as they are doing what they say they're going to do. So it's a little bit of trust-but-verified kind of mentality. But it doesn't go as far as we -- obviously, we like to see it go farther. But it doesn't do that. So I think there is a little bit of hysteria created by some. But I would not expect that these guys -- I don't think these guys are full bore out there trying to get their broadband pipes out as far as they can go and recourse is up. Where we'd like to see it is that there become a third and a fourth and a fifth competitor to broadband providers so that you wouldn't need any kind of government intervention. But that doesn't exist today.

Your next question comes from Craig Moffett of Sanford Bernstein. Craig Moffett - Sanford C. Bernstein & Co., Inc.: I want to go back to the comment you made about promotionality. I saw that you guys had actually been offering a, as I understand it, a full year of service in selected markets, if you show your DirecTV bill. Can you talk about the level of promotionality, specifically with respect and against DirecTV? And in retrospect now having pursued the sort of you-versus-DirecTV as opposed to satellite-versus-cable argument, has that worked to your advantage or would you expect to shift back to a more satellite-versus-cable stance which is more traditional of the way you guys have promoted in the past?

This is Charlie, and Tom may want to jump in at the end here. I think we did do some promotion for one day on the DirecTV thing. I didn't know about it. I would've killed it, if I had found out about it. I don't think that's productive for us, personally. And I think that the -- I think it was important for us to show our product. DirecTV is clear leader, very high brand image. We have not done well the past year versus DirecTV yet. We felt like we had a better product and a little bit less expense with the customer. So it was important for us to be associated in the same conversation with DirecTV. And I think that, that stance has worked on two levels. One is we got customers looking at us and comparing us DirecTV. And then I think their reaction to that where they put us in the same advertisement with them, which is we're not normally associated with DirecTV. So while some people, they might have increased our negatives in turn when somebody calls you a liar. Obviously, your negatives would go up. I think that it also, for somebody who is a clear brand leader, it took their brand down. Some of the research I've seen is that their brand suffers a little bit from that. Because I don't think people get turned off by that. So I don't think it's productive for the industry to do it. I would hope that, at least on our side, that clearer heads prevail in terms of how we look at things. But I would much rather see us comparing to cable as an industry than I would be talking about how somebody in the satellite business is a liar. And I think one of the good things about the advertising thing that we do with DirecTV is that the basis to work together where it benefits both companies and you go forward. But our guys aren't perfect, and I'm not perfect. But I think we need to focus on our business, in doing a great job for our customers. And I think comparisons are okay. And I think at least I personally have pretty thick skin. So whatever somebody wants to do and they should do, I'm pleased that we're in the conversation with DirecTV. Last year at this time, we weren't in the conversation. So I think in that sense, we made a lot of progress. And I think that -- there's another comment on the previous question, I think we've got our customer service levels back to where they historically have been. We've always been at the top or near the top in these industries for cable and satellite companies. And I think we've got that. I think that as you see surveys in the future and stuff, you're going to see that we've gotten back into that historically at-the-top or near-the-top kind of customer service. And that's taken a lot of hard work. But it's nothing to do with comparing ourselves to our competition. That's just internal that I think pays dividends for. And that's kind of where we'll try to focus. Tom, did you want to...

Craig, this is Tom. It sounds like this might be my last call as I'm preparing to put on my blindfold. The promotion that you talked about was a one-day event concurrent with the launch of our new 922 [ViP 922] receiver. So I wouldn't use that to extrapolate the extent of our promotions. We have run a common $15 off for 12 months, $180 worth of value. That's what we ran throughout the first four months of the year, relative to as you know, $29 off times 12 months plus $14 off times 12 months in the DirecTV universe. So I think our promotions have been more muted. But we do have it better everyday low price. So even at $39.99 which is our full price, it's very competitive. So I guess I'll leave it at that, unless you have a follow-on. Craig Moffett - Sanford C. Bernstein & Co., Inc.: But just -- the follow-on I guess is a more tactical question, that just as we think about ARPU, with your ARPU being up now sequentially and year-over-year again, is that -- I take it, it doesn't seem like the promotional activity decelerated any. So is that from customers taking a richer mix of premiums? Or is it in fact that you're being more successful now in up-selling customers? Or what drives the change in ARPU given the promotional backdrop?

Well we did have, as Charlie mentioned, some minor hardware fee adjustments in February. We have seen a slight uptick in premiums, and we've had a pretty good uptick in pay-per-view events in the last couple of months.

Your next question comes from Tom Eagan of Collins Stewart.

This is actually Frank Poerio filling in for Tom Eagan. My question is where are you seeing subscribers coming from? Are they migrating from cable, satellite or telco?

It's the same answer as last quarter. It really hasn't changed. The composition of the mix hasn't been significant. As Charlie said, we're glad to be in the conversation when there is a -- when a consumer has a satellite consideration set in mind, I think we have been successful in raising their awareness that we are a very attractive alternative in terms of value. That being said, we do not market only against DirecTV. We are marketing against cable. We have a lot of local market activities. Because we're a national footprint, we modify those whether it be Comcast, Time Warner, Mediacom, Charter, whatever we are, as well as with the telcos. So I don't think that the composition of the mix hasn't changed materially.

Yes, this is Charlie. The only thing I'd add to that, I think that we do see a general trend in shoppers in terms of one of the things that concerns me is when you sign up somebody for a one- or two-year contract it becomes a shopping event when the contract is over. And once you have enough heavy discounting upfront, you're going to -- I just think you have a general potential for a trend of shopping events, where one of two things happen when the customer's commitment period is up: You have to give them even -- you have to continue to give them a below-market deal to keep them or they leave and shop somewhere else. So you created this whole kind of network of shoppers. And I think that we see that more than probably we see in the past based on pretty much universal discounting in the marketplace. So that's potentially a trend that could be worrisome.

Your next question comes from Ben Swinburne of Morgan Stanley.

Maybe for Robert, if we go back to one of the earlier questions on subscriber-related expenses, I think of the $1.4 billion programming costs or probably $1.1 billion, $1.2 billion, and I'm sure those were up year-on-year on a per sub basis even. So I'm wondering what else is in that category that would been down enough to get such a strong performance this quarter. And I'm guessing it's the expensed retention marketing. But any color there would be helpful as we think about the rest of the year.

That's right. In subscriber related expense, we've got programming costs, we've got retention expense and we've got variable cost. There are a couple things, I mean some expenses in that category had some fluctuations things like that, that fluctuate from quarter-to-quarter, not materially but they do fluctuate. Potential we've talked about fluctuates. Also helping in sort of on a sequential basis, fourth quarter has 92 days, first quarter has 90 days. Some of the expenses, those variable cost in that category, are really more driven by the number of days than months. So all those things helped. But you're correct, in that, fairly unusual that would go down quarter-to-quarter given the sort of continued increase in programming expense this quarter.

And it seems like you were able to actually get that retention line under control despite the commentary about MPEG-4, because I would imagine that the expense portion of those upgrades is running through some travel-related expenses. Is that the case?

That's right. One thing we've been working on very hard on is to improve the efficiency of our installation work, and we've spent a lot of time there. So that's another part of that expense associated with retention.

Maybe for Tom, you've had two quarters now in a row of gross adds growth of over 20%. And I'm just wondering how much you would sort of attribute that to the increased marketing spend versus just the product is better, you're better positioned from a high-def perspective. I don't know if you have any color on channel that you'd like to highlight but it's just obviously pretty impressive, two quarters in a row kind of gross adds improvement.

I wouldn't say it's completely attributable to marketing. We do think reputation -- the fact that over the past year, we've been gradually building some momentum plays into that. As far as channels go, we have our annual retailer event tomorrow. Starting tomorrow, we have record attendance. We have very strong engagement. We believe what we know from our retailer and distributor partners. We continue to do well with our telco partners. And so really, channel composition hasn't changed materially. But we've focused very hard on working closely with our channel partners over the last, I'd say, nine months. It's stepped up significantly.

Is there any part of the increase in SAC per add, Tom, that's related to higher commission spending? I'm wondering if that's helping to drive the deal or network to...

No. It's not, Ben.

And Charlie, I was wondering if you'd comment on sort of what's happening in Washington on the tax front and how that might or might not impact your capital allocation strategy with buybacks and dividends. And I think you made a comment last year when you paid out a special dividend and taxes were on your mind. So I'm just curious if you could update us on that. And also just sort of your general sense on the economy out there since you guys really see the whole country, and you were first to sort of call the beginning of the downturn a while ago. So I'm wondering what you're seeing now.

I'll start the comment. I think we see what other people see, the economy generally has been improving throughout most of the country. But there's still -- housing still has issues so there's not a lot of new family formations and stuff. And so I think that will be interesting. And it'll be interesting that we don't have a digital transition this year either to help, although we have an election coming up next fall, which always helps. So in general, the economy's a little better. I would not say we're out of the woods yet. And clearly, from a macro point of view, it's a little scary when you look at the tax rates going up, probably some burdensome costs from healthcare for businesses. And a budget deficit that's historical proportions for America. So those things are going to be pretty worrisome. I think in general, having said that, people are going to watch TV regardless. And they're actually watching more TV and have more leisure time by being out of work. I don't know what it is but for us, we're in an industry that does -- should do pretty well regardless. Tax perspective would be something to look at, continuing to look at, obviously, this might be the last year that you could -- we weren't sure that they wouldn't raise taxes this year. And it turned out -- doesn't look like it's [ph] (43:14) going to, but this could be last year where the dividend could be taxed at 15%, capital gain at 15%. So -- and obviously, ordinary income is going to be going up as well. So we'll take a look at that in terms of what are the business opportunities we have. What is our cash flow. Is it positive, is it negative. How's the competitive environment out there. Are there acquisition opportunities. All those things and try to make a logical decision.

You're next question comes from Spencer Wang of Crédit Suisse. Spencer Wang - Crédit Suisse: The first question I have is on your rates. I think the rate increase you referenced in the Q was for the equipment rental. I was wondering if, I think on the last call you talked about potentially raising rates on programming packages later this year. Is that still the plan? And secondly for Charlie, I just want to clarify. I think you said, don't expect the court to rule in your favor, don't assume a deal will get done with TiVo and you haven't thought much about buying TiVo. So was just wondering if those are the parameters, what's the game plan, I guess, if those things don't happen, will you continue just working on a workaround? Or will you just shut down the boxes?

Well, we have a work -- we have a designer. But we're in a unique position where the judge hasn't heard or hasn't looked at our workaround but wouldn't allow us to do anything until he looks at it. So the only thing we can control is to shut down boxes. So we have to obviously, if we were to lose in the court procedures, then we don't really have a choice. We would have to shut down the -- not shutting out the customers, we have to shut down the DVR functionality of those customers. And obviously, if that scenario happens, that we can control, we can do that I think. And so we're prepared to do that. That obviously will have a material negative effect on our business. It will have a material negative effect on TiVo's businesses.

And Spencer, back to the rates, we did have a slight increase overall in equipment rental fees in the first quarter. And as far as anything in the future, rate increases are always a consideration but we don't have anything to share today.

Other than what I've said before, I think we have the room to do that.

Your next question comes from John Hodulik of UBS.

It's actually Lisa Friedman for John Hodulik. I just wanted to ask regarding CenturyTel or CenturyLink, which plans to buy Qwest and Verizon, which is giving a chunk of lines to Frontier. Since CenturyLink and Frontier are your partners, what is your outlook for this new combined companies? And what kind of opportunity or threat do these transactions represent?

This is Charlie, and Tom may want to come in here. I mean, obviously, both CenturyTel and Frontier have been good customers for us for a long time. And I think we've been a good partner. They would represent opportunity for us if they grow. They also -- this competitive market, now have, obviously, have choices before they get their video from a variety of ways as well. So we'd like doing business with them. We don't compete against each other. We've liked -- it was always a bit schizophrenic for us in terms of the AT&T relationship because on the one hand, we're spending SAC per customer that we knew when that they would come in and try to get the -- as soon as they brought U-Verse by, they would try to steal the customer back. That's not the case with CenturyTel and Frontier, where there's a better way to work together because we're not competing for that customer. We're doing that more as partners. So there's opportunities that they grow and also risk that for whatever reason they decide that they don't want to do business with us. So like any of our customers, there's not any of our customers who'd have to do business with us. We have to earn their trust everyday. And I think we're a materially better company than we were last year at this time. And we've made a lot of progress in our product and in our customer service and in our business. And strategically, I think we have a pretty good idea where we want to go in the future and our business is getting easier to get our arms around it. And I mean I think objectively, we have the best value out there for customers. We just need to make sure people understand it.

[Operator Instructions] Your next question comes from Todd Rethemeier of Hudson Square.

Could you just talk about bad debt expense this quarter compared to a year ago? And then what you're seeing sequentially?

Todd, this is Robert. As I mentioned before, it's down slightly but not materially. And you could perhaps credit the improving economy. As we've talked about before, it's a fairly small percentage of our overall sub-related expense.

There are no further questions at this time. I turn the call back over to the presenters for closing remarks.

This is Charlie. Thanks again for joining us. We'll be back again in August. I might not be here in August, as usual, I have my family vacation. So if not, you're in good hands with everybody else. And we appreciate you listening in on the call. See you in August.

This concludes today's conference call. You may now disconnect.