EchoStar Corporation (SATS) Q2 2010 Earnings Report, Transcript and Summary

Good morning. My name is Steve, and I will be your conference operator today. At this time I would like to welcome everyone to the Dish Network Corporation second quarter 2010 earnings conference 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. Jason Kiser, you may begin your conference.

Thanks, Steve. Thanks for joining us. My name is Jason Kiser. I’m Treasurer here at DISH. I’m joined today by Tom Cullen, Executive Vice President, Bernie Han, our COO, Robert Olson, our CFO, Paul Orban, our Controller and Stan Dodge, our General Counsel. Before we open up for Q&A, we do need to do our Safe Harbor disclosure. So for that we will turn it over to Stan.

Thanks, Jason. Good morning, everyone. And thank you for joining us as you know we invite media to participate in listen-only mode on the call and ask that you not identify participants or their firms in your reports. We also do not allow audio taping and ask that you respect that. All statements that we make during this call that are not statements of historical fact, constitute forward-looking statements, which involve known and unknown risks and 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, I refer you to the front of our 10-Q. All cautionary statements that we make during this call, should be understood as being applicable to any forward-looking statements that we make where ever 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, Stan. And we're going to go directly into Q&A so you can open p the line.

(Operator Instructions) Your first line is from John Hodulik from UBS. Your line is open. John Hodulik – UBS: Yeah. Thanks. I guess, first just to confirm Charlie is not on the call this afternoon?

Yeah. John this is Tom. You're stuck with us. Charlie and his family are traveling on holiday, so don't expect any Charliisms to quote this quarter. John Hodulik – UBS: Okay. Sounds good. I guess, just questions regarding some color around churn. What's driving it, if you guys could be more specific than you were in the release in terms of voluntary versus in-volunteer and do you expect the churn level to remain elevated going forward here?

Well, this is Tom, again. First of all, as you know we don't provide guidance so will talk – will restrict our remarks just to the second quarter. I’d say first of all, John, contrary to a lot of reports out there; we have not seen any significant improvement in the economy in general. We think unemployment and consumer confidence did have an impact on our quarterly results and as a valued provider in the industry we probably may feel that more than others, but being a national provider, we have visibility into every ZIP code in the U.S. and where there are economic hardships, we can certainly correlate some negative activity with our business in those same areas. That would be one. Two, no excuses. We still have a long ways to go in terms of our service provisioning, service quality, although during the quarter we were awarded the ACSI number one spot for all cable and satellite providers we're not satisfied with where we're at in terms of providing customer service and we continue to make improvements there. The third area I would touch on and I don't want to over play this or over state it, a year or so ago, about May of 2009 we introduced a pay in advance type of product and as you know with any pay in advance like offering, there has to be a strong focus on lower sack and lower OpEx in order to compensate for what should be expected higher levels of churn for those segments. And while we don't break that out separately at this point, there are – there is a bit of a contribution from the new pay in advance products to an inflated churn level. I should say on that on pay in advance, it’s a product that we continue to tweak, so we’ve increased credit thresholds. We changed the upfront pricing a bit. It’s a work in progress so I would say.

Your next question comes from the line of Tuna Amobi of Standard & Poor's. Your line is open. Tuna Amobi – Standard & Poor's: Thank you very much. So with regard to – you talked about competitive pressures, so can you provide some context around various channels which are the channels that you saw the greatest impact in terms of the gross additions and specifically with regard to the Telco channel was there any impact of this century tele-embark expiration, it doesn't appear that some of the Telco impact that you have had has translated into – I don't think it’s necessarily that translated into DirecTV gains in that channel, so I am just trying to get a sense of the dynamics of the channels, in particular at the Telco any commentary would be helpful.

Okay. Tuna, this is Tom again. A couple of comments before I get into the Telco, specifically. First of all in terms of channel composition of contributions to gross ads, there wasn't any material change from quarter-to-quarter. I would point out, though that this second quarter for DISH was somewhat different than our historical second quarters and let me explain why. Historically on February 1 DISH would introduce new product promotions, as well as whatever price adjustments were on the schedule for that year. This year we did not do that, on 2/1 we adjusted our set-top-box pricing methodology which any time you make changes to customer counts in terms of billing increases; you normally feel the effects for about 60 days after just simply because of billing cycle timing. So we felt a little bit of that in the early part of the quarter. Then in on 6/1 we increased the prices on our A2, 200 and 250 packages, but at the same time it wasn't until 6/1 we introduced our new promotion which is different than what we have done historically. So there is a little bit of gap there in the middle of the quarter where you’re transitioning from one promotion onto the next. The other point I’d make is we are consciously – over three quarters we added 730,000 net ads or so and now we’ve consciously are driving a greater discipline in the business around balancing subscriber growth, subscriber quality and more ambitious financial metrics. And I think where we are in terms of the maturation of the industry, that's an appropriate balance to try and strike at this point. As far as the Telco’s go, the century link conversion to DirecTV did not occur until 8/1, so that didn't impact this quarter. While we enjoyed our relationship with Century Link, after their proposed merger with Qwest was announced, it wasn't completely surprising to us because our renewal date was shortly after their announcement and Qwest had a very large base of satellite subscribers. They really essentially had the incumbency position. One other point on Telco’s that I’d like to clarify, there was a comment last week about DirecTV having exclusivity in – I think they mentioned 12 of 13 frontier states and I’m not sure, I think there was a bit of a confusion left after that call. Let me just clarify. Frontier operates in 27 states and within some of those states I think of the 14 states that were acquired from Verizon in the transaction, 11 of those were previously both frontier states and legacy Verizon states. So there may be some exclusivity in certain geographic areas within a state, but they're not completely – for instance, we would have exclusivity in many of those same states. So just a comment on that, but the Telco channel conversion didn't have any impact on Q2. Tuna Amobi – Standard & Poor's: Yeah. That's a very, very helpful clarification. And just one last question on the Tivo litigation, I was wondering if perhaps, if counsel is on the call to comment on how your views have perhaps evolved since the on bank decision that you’ve get on how does this play out from here, in terms of any kind of expectations in the near term and what strategies are you thinking about? Obviously, a very favorable churn of events for you guys and just some update there would be helpful?

Sure. This is Stanton. One, I would direct you to the introduction to our brief to get a feel for the points we made. It is about a 60 page brief in about the first five pages you can get a pretty simple sense of the main points we're raising. And as you noted, I think it was a favorable turn of events, going from pretty low odds to once the federal circuit grants on bank petition generally they over turn the lower or the original, kind of, decision about 50% of the cases and that being said, there are no assurances here, but we feel pretty good. I mean, if you read our brief, we think our outside lawyers did an excellent job crafting it and as well we should because if we didn't feel good about it, that means we didn't do a good job putting arguments for it. We also think we're on the right side of the law on this one as you will see our primary argument is that the federal circuit should take this opportunity to really bring the law of contempt for patent cases in line with the law of contempt generally which means the test should be quite simply that in the fairground of doubt as to the wrongfulness defendant's conduct and if there isn't, then concept which is a pretty extreme sanctions should not be used and you should simply go to a new trial as to whether the redesign device infringes. In concept should only be reserved for the most fragrant violations where someone is effectively thumbing their nose at the court and we put forth three ways that the court should consider to show that someone – that there is not a fair ground of doubt, one of which would be that your redesign device is actually more than colorfully different from the originally accused device and the second of course, if it doesn’t – it actually fringed the patent and the third would be that if the defendant has made a good faith effort to design around the patent, you’re bound to infringed and there is an objective basis for their belief that they no longer infringe and in our case we had 15 engineers spend about 8000 hours of time redesigning to remove the very features that Tivo accused our device of infringing their patent by, change for 20,000 lines of code and then we got opinions from the preeminent law firm on patent matters who actually testified at the sanctions hearing that we exercised the utmost degree of care in doing our design around so on all three points we think our designer it is more than colorfully different. We don't think it in fringes, but perhaps you can more importantly we worked as hard as hard as we could to design around the patent and an outside firm validated that. So as far as schedule goes, we filed our brief back in July 26th. Several make it’s file – their briefs last Monday, Tivo's apply brief is due on September 14 and our response is due on October 5, like we'll have a hearing in front of the federal circuit on November 9. We expect the decision probably sometime next spring, although there will be no certainty about that either.

Your next question comes from the line of Spencer Wang with Credit Suisse. Your line is open. Spencer Wang – Credit Suisse: Thanks and good morning. I just wanted to go back to the churn topic real quick. Tom, maybe you could just speak a little bit, too what you saw competitively. Was there anything different this quarter versus prior quarters in terms of competition versus either cable, DirecTV or the Telco’s and was there any impact from the digital transition sub from last year, were they on two-year contracts. And lastly, if you could just speak to maybe your thought process on retention spending. Did you pull back on that within the quarter? Thanks.

Okay. Thanks. I will try to get to all of those. As far as individual competitors, similar to what I said on the last call. The competitive intensity in this business right now is as high as it has ever been. You saw we spent more in advertising but I would assume that others spent even more. We did not respond to some of what we thought were inappropriate competitive ads in the middle of the quarter. However, I don't think there is any real discernible trend that it is more one player than another impacting our churn rate. As far as retention spending, similar to what I said earlier about trying to strike a greater balance in the discipline around financials, we did tighten both credit and retention policies during the quarter. And while we still have a clear focus on retention, we're going to manage programs and tactics that is we believe are economically rational. I think some of the activity over the last year we were on the edge in terms of some of those programs, both us and the industry at large and we have consciously made the decision to try and tighten that up a bit. And, you know, you have been around this industry a long time. There is only so many buttons to push and levers to pull and it’s a constant balancing act to try to find the right equilibrium there and that continues to be things – for instance, we adjusted some of those retention policies in the last 45 days, just as I said about PIA. We’ve continue to adjust the economics associated with those offers to try and find the right balance.

On the digital transition question, this is Bernie. Any customer that is would have joined us last year as a result of the digital transition, at least most of the customers would have come in under a 24 month commitment just like other customers would have at that time.

Your next question is from the line of James Ratcliffe with Barclays Capital. Your line is open. James Ratcliffe – Barclays Capital: Good morning, folks. Thanks for taking the question. A couple. First off, looking at – looks like inventories rose in the quarter and a big portion of that was a move in raw materials and there’s some comment in there that also this is a result of anticipated activation volume. What was that and does that indicate you're expecting gross ads to be rising. And secondly, you talk about launching the TV everywhere product, have you gotten any feedback from broadband providers on that, given it’s going to be looks like a pretty heavy demand on the upstream. And how does the current debate over net neutrality figuring to your launch plan for that product? Thanks.

James, this is Robert. I’ll handle the first question and then I think Tom will probably handle the second question. On the question on inventory, we built up our inventory in anticipation of the HD for free for life promotion. One month in and we think that was the right move to build up our inventory. Difficult to forecast what the activation volumes and the upgrade volumes would be associated with that HD free for life and probably the more difficult of the two is to forecast upgrade volumes, so that's pretty much the – why the inventory level is higher. We also noted in the queue that the inventory level was pretty low as of December 31 of last year. One other thing you should note is gradually overtime our mix of MPEG 4 receivers versus MPEG 2 receivers has grown in the inventory and the MPEG 4 receivers have a higher value obviously. We'll watch inventory over the next several months we typically order receivers six to nine months out, so it will take us a quarter or two to balance out that inventory.

One other comment before we get to TV everywhere. I would note that on the HD free for life we have seen a very meaningful increase in the HD attach rate for new customers, as well as DVR attach rate is also increasing. As far as TV everywhere goes, we are introducing – we've talked about our usage of sling with both iPads and just the tablet community in general which we think more and more tablets will be hitting the market in the fourth quarter. We will be more aggressive in deploying sling type applications. As far as the broadband providers, they have not contacted us and I think we're all aware of the general debate going on in DC and how policy is evolving overtime. Much of the use of the stuff, though is often in a Wi-Fi environment where it is not really tapping the broadband consumption as much as it is just a convenience for the consumer within an unthreatened area in a home or airport. So it will be – in time we'll see what kind of impacts those have in terms of broadband consumption, but leading into the net neutrality question we’ve obviously been very active in DC and vocal in ensuring that we as a non-ISP video competitor are not disadvantaged by evolving policy and evolving law and again we're early in that game and I think that game – that process will continue for quite some time, maybe Stanton has something to add to it.

Yeah. This is Stan. I would just add we're 100% behind Chairman Jenn Kowski [ph] with respect to the possibility of reclassifying broadband under Title II light touch methodology. And as Tom said, we think that an open internet is key to folks like us who are video providers doing broadband pipe, if you want to ensure that consumers have choice long-term and video doesn't become a closed garden for established MBTV that is they have their own broadband type.

Your next question is from Marci Ryvicker with Wells Fargo. Your line is now open. Marci Ryvicker – Wells Fargo: Thanks. I have two questions. First, can you talk about the different parts contributing to the increase in ARPU this quarter, what's set-top box, what's rate increases and secondly with the tax laws potentially changing next year, any thoughts on returning capital to shareholders maybe through a special dividend at some point this year?

Yeah. Marci, I will handle the ARPU question. The increase in the second quarter in ARPU is largely driven by the receiver price changes we took on February 1st. I think we mentioned this on previous call that when we implemented our price increase, it usually takes about 30 days for the full impact to clear through. So you would have seen very little of that in the first quarter, predominantly showed up in the second quarter. And then with regard to …

Let me just clarify. 30 days for the revenue impact to be materialized, generally a lag effect in terms of customer reaction. And – go ahead.

Marci, on the returning capital issue, we have nothing on the drawing board right now. As far as any plans for any capital special dividend or anything else at this particular time.

Marci, this is Tom, though. Back to the ARPU, as Robert indicated the primary driver was equipment, but I will say that we have seen a nice uptick in our pay-per-view business year-over-year and premiums not to the same degree as pay-per-view, but again positive. Also, the ad sales business has ramped fairly significantly for us, nearly 20% in the last year and there are a number of initiatives around localization and interactivity that will probably start entering the market sometime in the next three to nine months which is another area of growth for that particular line item.

(Operator Instructions) And your next question comes from the line of Tom Eagan with Collins Stewart. Your line is open. Tom Eagan – Collins Stewart: Thank you. I guess, you mentioned, Tom, that there was a high attach rate for HD for your subscribers. What percentage of your existing subscribers are asking or getting the free HD and then how was that accounted for? Is that accounting for going guard in lower ARPU or in higher costs and then I have a follow-up. Thanks.

Yeah. Tom, with regard to attach rates, we don't disclose that number. This is Robert. We don't disclose that number. And with regard to your second question of how that would be reflected to the extent that a customer opts for HD free for life that would simply be lower revenue. Tom Eagan – Collins Stewart: Okay. And then customers who have broadband, what would you estimate the percentage of those subs are that have DSL?

I have that number, Tom, but I don't have it in front of me. So I don't want to guess. I think of those with broadband I would probably peg it around 60%, but don't hold me to that. Around that area, though, I would say we are – we have a significant focus around our broadband connectivity. As I talked about earlier like the sling application, we are enhancing our IP VOD offering, so many of these things are required connected boxes. And so as we have heard from others in the industry, this is a central point of focus here as well and probably see more emphasis around that in the coming quarters.

Your next question comes from the line of Jason Bazinet with Citigroup. Your line is now open. Jason Bazinet – Citigroup: Thanks so much. Because you guys have sort of a unique philosophy, I guess, when it comes to communicating with the street and don't really have any prepared remarks, I guess one high-level question I have for you is for most of the other competitors in the pay TV space, it’s pretty clear to the street what the central narrative is. It is either return of capital or significant amount of innovation on the video side or significant repositioning of the firm in the content. And I think up until now, if the street had to guess at what the central narrative for DISH was, it was an operational turn around. And I suspect the reaction to your stock today is because people feel like that's sort of been interrupted. So can you just step back and give us a high level view of what you think the main focus of DISH is over the next sort of 12 to 18 months? In other words, why should people be buying your stock now?

Fair question, Jason, and that we are not as transparent, I guess, in most as most others in the industry. We have been very focused in the last 18 months on improving Customer Service and concurrently being a leader in providing the best video offerings at the best value. And I will let Bernie talk a little bit about where we are operationally. As far as we continue to maintain a strong value position, we think a very competitive position for a video offering that fulfills the vast majority of consumers needs. At the same time, we're pushing the envelope to try and do new things such as I mentioned earlier like sling applications which again we're not prepared to go into a lot more detail on that now. But we’ve introduced the 922, we’ve seen an increased usage of sling apps from both an iPhone and hopefully soon an iPad. We are also seeing a lot of android development activity you saw during the quarter. We announced our partnership with Google and the launch of Google TV which is a project that we have been working with them on for well over a year. And hopefully, we have iterated that, that product in the features of that product enough to where I think we're within a couple of months of launch. So those are newer feature functionality opportunities that we’re bringing to the consumer because we clearly see shifts as you all do in the consumption of video whether that be in home or on the road or whether that be through a packaged television service like we have traditionally been in or long form – long tail content consumption over the web. So we believe we're positioning ourselves to continue to provide consumers the best value and the best video experience they can get in the country.

The point of that the operation's turnaround is still a big piece of what we're focusing on in the company is not – this is Bernie. It is not the only initiative in the company, but it is clearly been one of our bigger initiatives over the last eighteen months. If you go back in time, our Customer Service results had deteriorated for five or six years consecutively. We saw our subscriber-related expenses growing consistently, and we have been doing a lot to turn that ship around. It has not been a fast ship to turn around, but we feel like we made a lot of good progress. Tom alluded to the fact that in this May’s results in the ACSI survey, we actually topped the list of companies in the satellite and cable space and we're pleased with that because it shows we have been making some progress. That said we still feel like – internally at least, we feel like there is still a lot more work to be done. We have identified a lot of things that we can still do and we're working on a lot of things still that we think can continue to improve service and that will manifest itself. And it is starting to already in terms of lower subscriber related expense. Obviously, the biggest piece of subscriber-related expense is our programming costs, but the second biggest piece is customer care and the cost of handling phone calls and cost of rolling trucks to customer's homes. And we're starting to see some improvement there. We think there is still quite a bit of room for improvement going forward based on the things we're currently working on and the things we’ve identified to continue to improve.

Your next question is from Matthew Harrigan with Wunderlich Securities. Your line is now open. Matthew Harrigan – Wunderlich Securities: Good morning. As you just commented, one area that you have been decent on the last three quarters is customer rough – subscriber related expenses per sub. I think you were up about 2% this quarter. For the period prior to that, it was high single digits and it was a real nasty situation for your business. I know some of that is some fairly draconian improvements and some of the elements that you just talked about, but you still have the underlying pressure from programming which is about 70% of it. I know you have more flexibility on your tiering [ph] than DirecTV does on some of your programmer arrangements, but how sustainable – I know you're not going to give explicit guidance but how she we think about that 2% increase? Was that like a nice bump in line with the industry on programming that was masked by some sort of onetime-ish improvements on truck rolls and things like that or is that really a quasi-sustainable number over a good period of time?

Matt, this is Robert. Your analysis of subscriber-related expense is correct. The bulk of that is programming expense, and we are subject to the same pressures of the rest of the industry feels on programming expense. What Bernie alluded to was the work that we're doing to control variable costs and that is a significant contributor to our relatively flat subscriber related expense over the last few quarters. And as Bernie mentioned, this is not a story that's been completely written. We're still working on that every day and we think we can continue to make improvements. We have seen some good improvements but when I look at the list of projects, we're working on, we should continue to make improvements. Will that continue to offset programming increases to the extent it has? I guess it just depends on the rate of programming increases, but I think we'll continue to make solid progress on our variable costs.

Your next question comes from the line of Todd Rethemeier from Hudson Square Research. Your line is now open. Todd Rethemeier – Hudson Square Research: Thanks. Two questions, if I could. First, could you talk about the gross add trends before and after you launched the free HD for life promotion? Did you see an improvement in the month of June? And then the second question, do you track where the customer that are churning where they're going and did you see any – have you seen any evidence that customers are just canceling their pay TV service completely?

Todd, this is Tom. Unfortunately, we don't disclose intraquarter trends and so we're not going to talk about the impacts before and after the promotion. As for where customers leave, it is an infrasize [ph] measurement, only about 20% to 25% of customers tell you where they intend to go. So you don't often capture it. And generally they're telling you where they're going in terms of another provider. We haven't seen any significant evidence of widespread cord cutting but that being said, we are seeing clearly everyone in the consumer electronics business is focusing on some form of connectivity to the living room. And so we're not under estimating that at all. We just don't have very precise data as to at what rate it is occurring today. I do think as I said earlier the general economic environment is not helping us one bit.

Your next question comes from the line of Rich Tullo with Albert, Freed and Company. Your line is now open. Rich Tullo – Albert, Freed & Company: Yes. When can we expect any impact from the Google TV, that from the cost side or from a revenue side?

What side?

Google. Rich Tullo – Albert, Freed & Company: Either from the cost side or the revenue side, is there any of the increase in inventory related the Google TV initiative and ….

I would – that won't have a material impact for several quarters if then. I mean, we're going to roll this out and deploy it somewhat surgically and selectively and learn from it. But, no, I don't think you will see any significant cost or revenue impact between now and – we can update as the quarters roll out, but certainly not going to be fourth quarter this year or first quarter next. Rich Tullo – Albert, Freed & Company: And just as a follow-up on the advertising front, when do you expect the bulk of the benefit from the initiatives you're now taking place? Is that going to be a third quarter story or fourth quarter story?

Some of it is based on technology testing that is under way. I couldn't really be precise on the quarters. It is clearly second half of next year, but I would lean towards the fourth quarter.

Your next question is from the line of Gerard Hallaren with TownHall Investment. Your line is now open. Gerard Hallaren – TownHall Investment: Good morning. My questions relate to your 700 megahertz spectrum and what impact Qualcomm's recent announcement regarding media flow in this country might have on your strategy. That would be my first question. My second question relates towards the android tablet and handset expectations?

Okay. On the 700, nothing significantly new to report there. We did as I indicated I think two quarters ago we have built out an isolated community with a system. So we can test our own assumptions around cost of buildout, if we were to use it for mobile TV. I would say given the Qualcomm announcement and other spectrum activity occurring across the country, we continue to evaluate options for highest and best use for the spectrum and nothing more to report beyond that. I’m not sure what the question was in terms of android. I just mentioned that as part of Google TV that's an android-based platform, so there is an opportunity for the android-development community to create new applications, once launched and we intend to do the same. And then independent of Google TV, we have android apps today that support sling and delivering sling-enabled products or services to android capable devices. Gerard Hallaren – TownHall Investment: Thank you very much.

Anything you want to talk about, Gerard?

Your next question comes from the line of Doug Mitchelson with Deutsche Bank. Your line is now open. Doug Mitchelson – Deutsche Bank: Thanks very much. Seems like a good quarter to harp on churn self. I will continue with some more churn questions. On rebalancing sub-growth and profitability you talked through earlier in the call, are you saying that in retrospect you are growing a bit too fast the prior three quarters and if so what have you learn that had made you believe that to be the case?

Yeah. I wouldn't say that we're growing too fast, Doug. It is just that we are – we think that as the market appears to be approaching saturation on the margin, the nth plus one customer is one that you have to take a harder look at in terms of your long-term profitability expectations. And so as we grew, we were comfortable with our growth, but we're now at a point where we're – I wouldn't say this is a complete pivoting or swing of pendulum but it is just a necessary part of the financial discipline that has to go into that ongoing balance between acquisition and retention. Doug Mitchelson – Deutsche Bank: If you look at – obviously you're doing segmentation work, everybody is – I mean you have had reasonable success over the years with DVR, HD penetration, increasing now even more rapidly, do you have a tail of two stories, one group of HD, DVR subs, higher ARPU, low churn and other group that are more economically sensitive, they are lower ARPU, higher churn and that's the group that sort of shifted here or is it across your mix of all different varieties of subs?

I would say your characterization, I wouldn't say that we're that much of a bar bell in terms of the composition of the base, but clearly the lower end subs are more sensitive to changes in price and changes in the economy. That being said, you mentioned segmentation, that's an area where we're significantly ramping up our efforts around segmentation and much more targeted. Even in our advertising approach, you have seen we’ve moved to more branding and a little less direct response in the last several months. We're also using more targeted tactics in acquisitions. So I think that's something you will see more from us than less. Doug Mitchelson – Deutsche Bank: Okay. So then I guess based on the economic sensitivity comments, you have been making, then it sounds like it is the involuntary churn that's picking up more than the volunteer churn or is that not a correct way to look at it?

Doug, this is Robert. I think clearly a quarter like the pay TV industry had this quarter was basically flat growth and impacts us on the margin. As Tom has brought up, we're a value provider and when you think about the industry historically growing at 300 to 500,000 subs a quarter. We would have taken the good chunk of those 300 to 500,000 subs. The economic issues are clearly impacting more than just our industry and 9.5% unemployment rate is just not sustainable, so we would like at those macroeconomic conditions improving in the future and helping our business. Doug Mitchelson – Deutsche Bank: All right. Fair enough. And then, a couple easier ones. You sold a small strategic investment, just curious what it was and on the spike in set-top box D&A in the quarter, if there is any unusual dynamics behind that or we should just sort of assume that set-top box D&A is going to be higher going forward?

Yeah. Doug on your first question we usually don't disclose those type of small investments. I didn't catch your second question. Doug Mitchelson – Deutsche Bank: Set-top box D&A spiked in the quarter and I think the 10-Q indicated it was…

Yeah. Okay. Doug Mitchelson – Deutsche Bank: … advance set-top boxes, but you’ve been issuing advance set-top boxes for a long time so I’m not sure you are depreciating your HD boxes to clean out this promotion faster or there some other changes or?

Doug, this is Robert again. It did spike a little bit. It’s really a couple of things. It’s sort of the cumulative effect of three quarters of very strong growth through last year and into the first quarter this year. And as I have mentioned on previous calls, we're seeing an increasing percentage of MPEG-4 receivers going into our new connect, so that had a contributing factor. The other and this is a pretty small contributing factor was – second quarter was the first quarter that we started depreciating Echo XIV which was launched a few months back. Doug Mitchelson – Deutsche Bank: On the MPEG-4 receivers you're depreciating them at the same length that you used to do the MPEG-2 HD receivers?

No. The MPEG-2 receivers used to be our over three years, that receiver base is largely depreciated. The MPEG-4 receivers are over a five year period for new connects. Doug Mitchelson – Deutsche Bank: All right. Thank you.

Your next question comes from the line of Bishop Cheen with Wells Fargo Securities. Your line is now open. Bishop Cheen – Wells Fargo Securities: Hi. On the – on your balance sheet, maintaining the way you generate free cash flow and maintaining $2.5 billion, should we anticipate that you’ll just keep raising your cash on the balance sheet as a hedge for any special events or litigation, et cetera, et cetera?

Yeah. Bishop, I think that's the best way to look at it. I mean, we want to be able to maintain maximum optionally. We talked about this before but we get a lot of different things from an M&A perspective that we look at, not ready to move on anything. There’s nothing really in the pipe right now. But we’ve seen deals and you’ve seen us in and around deals that we don't want to have to be relying on the market conditions at the time to go out and procure financing, so it’s a way for us to be prepared. Bishop Cheen – Wells Fargo Securities: Okay. Thank you.

Your next question comes from the line of Benjamin Swinburne with Morgan Stanley. Your line is open. Benjamin Swinburne – Morgan Stanley: Thank you. Good morning. A couple of questions. I wonder if you guys can comment on where you are in the MPEG-4 upgrade cycle, I don't think that was covered on the call yet? And is that a material amount of spending within retention marketing that at some point will edge off into the numbers as you guys wrap that up? I’ve got some follow-ups.

Ben, did you say you had two questions or just one. Benjamin Swinburne – Morgan Stanley: Bob, do you want me to give them all.

I’ll go ahead and answer. This is Robert. I’ll go ahead and answer the MPEG-4 question. That cycle is going to have a pretty long tail on it. We have quite a few MPEG-2 receivers with customers right now. Probably from a sort of a nearer term perspective but still several quarters away is the QPSK migration which is we have far less MPEG-2 QPSK receivers, but even still that's several quarters away. So I think what you should expect is sort of a gradual evolution of our receiver base going to more and more MPEG-4, certainly with new connects is the a very much a higher percentage but our base takes awhile to change. Benjamin Swinburne – Morgan Stanley: I guess, I was trying to get to the pre-marketing margin trends have been pretty good the last couple of quarters and looks like it is driven partly by a better/lower retention and want to see if that was sort of a piece of that story?

As I mentioned on the last call, it was a small piece. Retention spending actually appears three places in our financials. It appears in our subscriber related expense, which is largely insulation costs associated with upgrades and appears in our CapEx, largely the receivers associated with the upgrades. And third is an offset to revenue due to waivers and adjustments due to service disputes. So when we talk about retention spending we could be talking about any of those three areas the income statement. Benjamin Swinburne – Morgan Stanley: Okay. Have you guys seen any change in the piracy levels out there, I think, there was one group in California and Nevada who were picked up on charges of hacking DISH this past quarter, just curious if that was meaningful in the quarter at all?

This is Tom. It’s – we don't know – we don't believe that it’s meaningful, but it is a cold war and we're continuing to be very vigilant in trying to identify any new rogue activity. As you know, we upgraded our cards about a year and a half ago, feel good about that security system. But there is a never ending attempt to continue to break these things. So we along with our partners are enforcing security and trying to stay ahead of piracy as much as we can. But we never have a perfect assurance of that. Benjamin Swinburne – Morgan Stanley: Yeah. And then, Tom, if I could ask you a couple. If you go back to '08 when the economy really started to tank, I think you guys sort of made the decision not to be too aggressive trying to chase subs in a bad market. And then, last year you sort of turn that around and became much more aggressive even with Charlie sort of commenting that while he didn't necessarily like you guys were giving way programming, you did turned into nice subscriber growth. And now it seems like we're back to focus on bottom line. I’m just curious if you think that there is an inconsistency in how you approach the market that might be working against you over the last couple years changing the strategy or are we, looking at the numbers here externally thinking just too much about what's actually changing?

Yeah. Ben, I wouldn't say that we're inconsistent. I think we all have our different read of the current market conditions than what's the right highest priority during any particular quarter. But I think it’s probably over stating it to say that we're misreading materially and being inconsistent. Benjamin Swinburne – Morgan Stanley: Yeah.

And now, the economy changed in '08, and I’m not sure everybody thought that the economy would continue to be in the tank in two years. Benjamin Swinburne – Morgan Stanley: Yeah.

And as I said earlier, despite the reports, we're not seeing any significant evidence of robust recovery or a recovery at all. Benjamin Swinburne – Morgan Stanley: Yeah. And then the last question is sort of a Charlie question to be unfair but the stock now is at least my numbers under $800 a sub, pretty close to your subscriber acquisition costs. Does that number matter to you when you think about buying the stock versus investing in new customers? You’ve always talked about adding subs as the highest return investment for the company, but I’m wondering if that number means anything as you guys think about that allocation question?

Ben, it is Jason. It definitely means something to us. Benjamin Swinburne – Morgan Stanley: I don’t know…

I don't know how to give the answer any different way than we doing it in the past which is certainly one of the things we look at among all of the other things that we do as well and whether it’s a special dividend or whether it’s going out and on the M&A trail, whether it’s buying your own stock back, we’re looking at it, we look at it all the time. It is subject that is, talked about in great depth in great detail here consistently. So it has a lot of meaning. There is nothing that we pull the trigger on recently other than what you see that we’ve got a 10b5-1 in place relative to the point on the stock. But other than that it’s the same theory we’ve had before ourselves. The same answer holds. Benjamin Swinburne – Morgan Stanley: Okay. Thanks a lot, guys.

Yeah. I think, operator, we’ve got one – time for one more question.

Your last question comes from the line of Dmitry Khaykin from ClearBridge Advisors. Your line is open. Dmitry Khaykin – ClearBridge Advisors: Thanks. Yeah. Just want to go back to some of the previous questions including Ben's. What is hard for us to understand is, the industry is mature that’s clearly the case, but what is it that changed in one quarter period that made you feel less comfortable going after subscribers and more focused than the bottom line. And I would think that with Charlie and the rest of the team would be at the helm of the company you guys would have a more of a longer term focus on a business and not kind of swinging one way or another in the quarter-by-quarter basis and then I have a follow-up?

Dmitry, this is Tom. Let's not confuse the issue. We do maintain a long-term view here at the company. And it’s not like we were out of the market in terms of acquisition spending. So, I don't want to present this in too binary of a fashion. So we were spending. We were, we did change the promotion as I indicated earlier, the timing was different than most quarters and we are, it’s a very competitive space right now. So it’s not like we pulled in our horns and said we're not doing any acquisition. All I was trying to emphasize is that we’re balancing some of this with financial metrics and subscriber quality metrics. Dmitry Khaykin – ClearBridge Advisors: Okay. In terms of your pay in advance comments you made earlier…

Yeah. Dmitry Khaykin – ClearBridge Advisors: … in the conference call. I mean, how meaningful so if you look at the sequential churn moved up something like 20, 25 basis points. How meaningful of impact was the prepaid or pay in advance customers on the churn? I know you don't quantify it, but since you're still in the market offering that services, I understand that you’re tweaking things, pulling levers at different times, but is that a meaningful factor?

Yeah, Dmitry. This is Robert. There are a lot of contributors to sort of the quarter-over-quarter churn increase. Obviously, seasonality is an impact. We have talked about the extension of our contracts from 18 to 24 months, having an impact. And I think something Tom brought up earlier on the call, which was, we made a number of changes that this year were different than we have in past years. And I think, the receiver pricing change is probably I want to point to because if you think about historically when we have done sort of across the board price increases, it had about the same impact on every customer, with receiver price increases it had differing impacts by differing customers. We felt that was important to go ahead and implement the receiver price change because we thought that – we think that it’s going to be improvement to operations, make insulations more straightforward because we'll have consistent pricing across receivers, in the short-term it had an impact. Dmitry Khaykin – ClearBridge Advisors: Okay. And then, I have one, and it’s pretty big picture question, and hopefully, I can get on the call next time and have Charlie answer the same question if it’s still applicable, which I think, it will. If you look at the history of the company, the history has always been some differentiated content in terms of maybe some of the ethnic program and good relationships with the distributors, maybe more in a kind of rural environment setting and clearly a value proposition from the end customer standpoint. So if you look at the industry as it matured, if you have 14 million customers, some of peers are larger, some of peers are smaller, you probably don't have a whole lot of advantage on the program inside, in terms of cost of program. And you can definitely operate cheaper than some of the other peers can, and hopefully, get some improvements in a cost structure on a customer service side and installation and so on. But, the industry is not growing and becomes a zero sum game. What buttons can you push and what levers can you pull really going forward and should we expect you to be a little bit more aggressive in terms of, aggressive meaning more in line with the rest of the industry in terms of raising pricing to offset some of the pressure from competitive sides, as well as the programming costs?

It’s probably a more ambitious forward-looking strategic question than we would be comfortable answering on this call. Dmitry Khaykin – ClearBridge Advisors: Well, since we don't have any way to concept or communicate with you or Charlie or anybody else at the firm and as long-term investors and the stock, it’s, I think it’s pretty critical for us to understand what the long-term strategic feel of the firm is, so if this is not the right venue to address it than what is and I don't mean to sound offensive, but by any stretch of imagination?

No. No offensive at all. In fact, you touch on a number of things that are becoming evident in real time that this is a maturing sector, it is very competitive, we believe that we're rolling out new products and services that will help to differentiate us, and we will continue to focus on retaining the customers that we have. But as far as any longer term M&A or corporate expansion discussion, it’s not that we're not having those discussions, we're just not ready to share them publicly.

But you already alluded to some of the things that we consider, have considered and continue to consider our competitive advantages, one being cost structure, a second hopefully being customer service and I think a third being some product offerings along the lines and other things that we think help differentiate us from other competitors in this ever more competitive world. Dmitry Khaykin – ClearBridge Advisors: Okay. Can I just make a comment or observation as opposed to asking a question and hopefully it will get back to Charlie as well. I mean, you guys are running the company as a private company effectively, right? You’ve separated two businesses to hopefully make it a little more transparent, which I guess helps in the margin, but if the market is really not valuing you, the efforts that you are making and the success that you're having presumably that you can see from the inside, there is only 200 million shares outstanding. Now the capital market can probably finance it pretty easily, I mean, why bother?

Point taken. We'll take that as a statement rather than a question. Dmitry Khaykin – ClearBridge Advisors: Yeah. I mean, I don't expect necessarily…

Yeah. Look, you have made a valid point. Appreciate the point. Dmitry Khaykin – ClearBridge Advisors: Okay. All right. Thank you very much.

All right.