DISH Network Corp (DISH) 2002 Q1 法說會逐字稿

Good afternoon. My name is Samantha, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the EchoStar Communications Quarter One Earnings Conference Call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad.

If you would like to withdraw your question, press the pound key. Thank you.

Mr. McDonnell, you may begin your conference.

Thank you, operator. Hello, everyone.

Thanks for joining us and apologies for the delay today. My name is Michael McDonnell, and I'm the Chief Financial Officer here at EchoStar. I'm joined today by Charlie Ergen, our chairman and CEO; David Moskowitz, our senior vice president and general counsel; and , our treasurer.

I'm going to give you a quick recap of the financial performance for the quarter, then I'll turn it over to his comments. Then we'll open it up for some Q&A at the end. But before we get started, as most of you know, we need to do our Safe Harbor disclosures. And so for that I'll turn it over to David.

Thanks, Mike. And good morning to everyone. Thank you for joining us. As you all know -- just the ground rules. We invite media to participate in this, in a listen-only mode, on this conference call. In addition, we ask that you not identify participants and their firms in your report. We also request that there be no audio taping of this conference call.

All statements contained in this call and in our 10-Q, as well as in statements made in press releases, and oral statements that we may make from time to time by our offices, directors, or employees acting on our behalf that aren't statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

Those forward-looking statements involve known and unknown risks, uncertainties, and other factors that can cause our actual results to be materially different from historical results, or from any future results that might be expressed or implied by those forward-looking statements. And I would ask you to take a look at our 10-Q and other publicly filed reports for a list of those factors that could cause our actual results to differ from historical results.

In addition to those factors that we show in our publicly filed statements, we may face other risks, described from time to time in future periodic reports that we file with the SEC. All cautionary statements that we make during this call should be read as being applicable to all forward-looking statements wherever they appear.

In this connection, investors should consider the risks that we describe in those reports, and should not place undue reliance on any forward-looking statements that we make.

With that out of the way, I'll turn it back over to Mike for a recap of the quarter.

Thanks, David. Let's go ahead and take a look at the quarter. And we'll start with the total company. Please note that all guidance figures and references for 2002 will not include the effects of our planned merger with Hughes Electronics Corporation or its majority-owned subsidiary . In addition, all guidance figures and references assume that the sluggish economy will continue throughout 2002.

Total revenue for the quarter was approximately $1.1 billion, a decrease of four percent over last quarter and 28 percent higher than the same period a year ago.

Lower seasonal hardware sales, partially offset by subscriber growth, was the driver of this decline in revenue quarter-over-quarter. We continue to expect 2002 revenue to be approximately 20 to 25 percent higher than 2001 revenue of $4 billion.

cash flow was $450 million, or 41 percent of revenue in the quarter. This represents an $18 million improvement over Q4 and $99 million better year-over-year.

EBITDA for the first quarter was $178 million, our best ever, as we continue to lever the economies of scale inherent in the platform. That's an improvement of $7 million over Q4.

EBITDA during the fourth quarter of 2001 was negatively impacted by a one-time $30 million arbitration charge, while EBITDA during the first quarter of 2002 reflected higher subscriber acquisition costs than the fourth quarter.

Operating income was $95 million, an increase of $7 million over the last quarter. Net loss for the quarter was $39 million. Included in this quarter's results are the effects of charges relating to our investment in totaling $36 million, as well as interest charges relating to our bridge financing commitments, totaling $19 million. The investment has been written down to zero at March 31, 2002.

Loss per share for the quarter was 20 cents. It is important to note that the first quarter's figure includes approximately $58 million of retained earnings reductions resulting from the transaction.

These items are not a component of net income, but are included in net income attributable to common shareholders for purposes of computing EPS.

Now let's look at the Network. Subscription TV revenues increased three percent from the fourth quarter to approximately $1 billion. Subscriber growth, partially offset by a decrease in monthly average revenue per subscriber, was the driver of this increase.

Despite the effects of an economy which continues to struggle, we added 335,000 net new customers during the first quarter, and continue to expect to end 2002 with over 8 million subscribers.

Our average revenue per subscriber was approximately $48.36 per month, a decrease from last quarter of $1.32, and an increase of 13 cents over Q1 of last year.

was negatively impacted during the first quarter by certain promotions whereby qualifying customers received three free months of programming. This decrease was partially offset by price increases which went into effect during the quarter. We continue to expect 2002 to be slightly higher than 2001 of $49.32.

For the quarter our costs of acquiring subscribers averaged approximately $430 dollars per addition. We previously provided guidance that we expected SAC for 2002 to be consistent with 2001 SAC of approximately $395 per gross addition. However, due largely to the effect of recent promotions which were tailored towards subscribers with multiple receivers, resulting in higher equipment subsidies and commissions, we currently expect 2002 SAC to be roughly consistent with the first quarter.

We believe that this increased emphasis on multiple receiver promotions, along with heightened credit procedures which were implemented during the quarter, will attract better long-term subscribers than could be obtained through less costly promotions.

Equipment costs under our Digital Home plan during the quarter, which are not included in the above figures, were approximately $77 million. Cash and equipment received from Digital Home plan customer disconnects, which are also not included in the above figures, aggregated approximately $12 million.

Turning to the balance sheet. At the end of the year, we had cash and marketable securities of approximately $4.5 billion, which includes $175 million of cash reserved for satellite insurance. This balance includes the approximate $1.5 billion increase in cash as a result of the equity investment made by Vivendi during the quarter.

We also had approximately $5.7 billion of debt as of December 31, 2000 -- excuse me, as of March 31, 2002 -- which includes $2 billion of convertible securities.

On a straight basis, we ended the year at roughly, or, we ended the quarter at roughly $801 per subscriber. On a net debt basis, that drops to $197 per sub.

Cash capital expenditures in the quarter were $103 million. During the remainder of 2002, depending on the strength of the economy, we anticipate total cap ex of between $400 million and $650 million, with approximately 25 percent of that amount going toward the construction of new satellites, and approximately 75 percent of that amount going toward capitalized equipment under the Digital Home plan and general corporate purposes.

That's everything on the numbers, so with that let me turn it over to Charlie for his comments.

In fact -- thank you, Mike -- I don't have a lot of comments, other than just a couple of general observations.

One is, we're obviously disappointed in some of the financial metrics. Particularly the EBITDA number, because it -- we felt should have been higher, in terms of the operation of our business. But we did make some strategic decisions during the quarter to we're willing to look at long-term economic model and we've got to look at customers that we think we get the best return on. And we saw some opportunity, certainly, in the marketplace.

And certainly one of the negatives we've had as an industry has been not being able to go after multi-TV set households. And while those customers cost us a little bit more, because we've got to put in more equipment, we are certainly hopeful that that strategy will pay off for us in terms of a longer-term customer and a higher-ARPU customer. And a customer we might not otherwise get because cable has that market fairly locked up. It has in the past.

So it's going to be too early to tell. Obviously, since we just started that, it'll take a few quarters to prove that proposition.

Additionally, we had to strategically look at -- we think that the best way to get a handle on is one of two things. Either customers putting an investment in your equipment up front, or making a commitment to you backed by credit to stay with you for a period of time, so that we can give them outstanding service and a great value. So we know they don't want to after we've had them for a while.

And what we want to stay away from is customers being able to get the equipment for free with no commitment, because we know that that drives and is a bad economic model for us.

By offering free programming, we're able to get a commitment out of the customer for cash up front or we're able to get that long-term commitment. So it's not something you want to do. You hate to give away programming, but it's something we felt was a best alternative in the environment that we're in -- gives us a chance for somebody to look at us for three months to make sure that we do a great job of our service during that period of time.

It does have the effect of lowering your revenues and has the effect of lowering your and when you factor in the fact that we ran our campaign, which was very successful last year, that continues to run for a year, so we have some customers on the program that are paying us on average, say, $20 a month instead of the average , and you have customers who get three months free, you don't pay until three months from now, that net effect is what really lowered our net in -- that was what really lowered our so there is some strategy behind those numbers. There is some logic behind those numbers. And we felt like that was the least risky way for us to play it.

The other negative, and I'm very disappointed, is broadband. In writing down our final investments, StarBand and our previous write-down in StarBand and , we now have no investment in our books. We're very conservative. We may be the only company that's done this -- that are investors in these companies.

But we don't see a path to getting that return on our money at this point in time, so we've written those down. We've tried really hard. It's something we haven't been successful at as a management team. Obviously, we're minority investors, so we didn't get to totally drive those companies in some of the directions we wanted to go. They still are good companies. They have good management teams. They may very well be successful in their own right, but it wasn't a path where we could make money.

We actually has invested more in those companies, at least in StarBand's prospective, beyond our $100 million investment, we were investing day-to-day in customer service and billing and other things that were also costing us money. And we just didn't see a path to get a return on the customer and we feel like those dollars could be better spent acquiring video customers at this point.

And without seeing a path to be able to ultimately those customers, it didn't make sense to continue doing that. That doesn't mean that those companies can't go out and do that on their own can show us in the future a path to where we can make money, we will jump back in with both feet. Again, I think that the normal trend of have to be watched and so forth.

On the positive side, I think our is certainly in line with where we thought we would be. And what still remains, in our opinion, a difficult economy and notwithstanding some of the positive things we read about in the economy, we see from a consumer prospective still some hesitancy out there to spend more on video or spend more on pay-per-view and so forth.

And the other positive thing I think we were able to balance long-term are satellite broadband. Lack of success, with finally our two DSL one with DSL deals, one with SPC and one with EarthLink where we don't see a negative impact to us from a monetary point of view. And we see the strategic advantage of being able to partner with some of the folks who already have the plant and equipment in for DSL, who are already experts in broadband who cover people at a more economical proposition other than the $70 a month we had via satellite.

So while we don't really have much of a revenue opportunity there, we think we have strategic opportunity to better compete in a short run with the cable industry, who has been very successful with their broadband video bundling. So we think that's the proper strategy for us until we can come back to the marketplace and take the lessons that we've learned with satellite and come back with an economical satellite broadband model.

Let's see what else we got. You know, I'm sure there'll be some questions about our merger. That still is certainly our key executive prime focus. It is the future of our industry, it is the future of our ability to compete as an industry. It is the future of us to reverse some of the trends of , rising , our rising churn which has slowly crept up over the years. That's the way we're able to reverse those trends and put those in a more positive direction, because we need the added capacity. The fact that we can do all 210 markets, the fact that we believe technically we can do satellite broadband together, I think, is very important for the future. So, if we only do one thing right as a management team, we've got to focus on this merger.

It certainly requires some of our lower-level folks who haven't been at the decision making process. It's a step up, and it's going to be a good maturing thing for our company to have some of our folks be in a position to do that. And they're going to make some mistakes. But we're going to be a much stronger company as a result of their now getting off the bench and getting in the game and having to produce for us.

And we're starting to see some positive aspects of that going forward. The merger itself -- we're kind of moved out of the public arena of the Congress, and now moved to the regulatory agencies, the FCC and Justice where there's an awful lot of work being done by those agencies and all the people involved in the merger, and lots of data being exchanged and so forth.

So those folks can make their decisions. We think that that data analysis will go on through the summer. We think that September is the earliest the FCC has now indicated that they might rule on this. We think perhaps Justice would be ready to go before the FCC at this point, so it looks like this merger could be very similar to AOL Time Warner and take up to a year, which will be October for the final decision.

Again, we're still confident that the more we get into this process, the more we're able to explain the way our industry works, the way the world looks without a merger, the way the world looks with a merger. And the public benefit and the consumer benefit that the facts are strongly on our side and that we will in fact be approved sometime this fall to proceed with that and again that is our -- if we only do one thing right, that's certainly the thing that we're focused on.

And I think with that, I think we're well positioned for the second half of the year. By the way, I think we've -- I think our relationship with RCA and new distribution of Radio Shack will open up some opportunities for us and distribution in the Fall selling season that we've never had before and give us some critical mass from an advertising perspective, and some branding that we've never had before.

We don't anticipate a lot of that affecting us in the second quarter, because we're still putting the marketing things in place and outfitting the stores. But we do expect it to have second-half impact for us. Obviously, we don't think there'll be a lot with the DSL relationships at least for the next three to six months as we test market those things and find out ways to make those bundlings more attractive to people.

But we do think that's certainly going to be an impact for us next year and maybe perhaps in the fourth quarter. So I think we're doing all -- putting the long-term things in place. I think we still have some work to do in being better at targeting our markets and being more efficient in how we market and realizing which customers are the best for us, and which ones we'll get the best return on.

We still could do a better job of that, but overall at a time when most people are adjusting their counts or perhaps not seeing the kind of growth they want, I think we're performing in a solid manner. And we're -- all of our customers are paying customers. They do receive -- there are customers who may only pay us $5 a month, because they're on vacation. But if they're not paying $5 a month, we don't count them as a and we count them as a turn number.

So, you know, we're trying to put our financial statements out in the way I need to see them as the CEO to make decisions in the business and trying to present those in the same manner so that you can make decisions whether we're a good company to invest in or not. And, you know, certainly I think that in the post-Enron environment that will prove to be a good strategy for us to do it in a very conservative manner.

So with that, we'll take your questions.

At this time I would like to remind everyone, in order to ask the question, please press star and then number one on your telephone keypad.

This past quarter a number of cable companies reported fairly weak subscriber results. Some of them have identified how many of those who had the satellite, and it wasn't that many in general. Do you think the strong quarter for the in general and your in particular is coming from cable, or is it more haven't really be intact?

It's coming from cable. We're kind of in an awkward position. In rural America, you know, we don't have the local channels to truly compete, and we do have local channels in the city. So that's really what's driving our business. We're vulnerable as cable rolls out more and more broadband in those cities to that, which is why the DSL is so important to us, but most of our subscribers are coming from cable.

I would imagine as people clean up their subscriber bases and perhaps look at who -- you know, when people have paid them, and are they really customers and things, that may have had some impact in the cable industry in terms of where they're going. I think piracy -- you know, I had said this last year, that piracy was going to start taking a toll on cable.

The satellite piracy would hurt cable as well as satellite companies, because the people can get it for free. You know, you're not going to buy cable or satellite, so that, you know, the guy's getting cable, and now he -- and now he can get satellite for free. You know, he turns on cable. So that's some of the things that are driving their lack of subgrowth.

On the other hand, obviously they're getting very positive subgrowth on broadband and a better class of customers. As a result of that probably a stickier customer to that. So, we want to put our head in the sand and not be cognizant of the fact that that's a trend that long-term we have to reverse, and that's why the merger -- one reason the merger's so important for us.

You know, I know you don't want to spend too much on the package . But if the transaction ultimately is not approved, would you look at as new announced capacity as a place of possibly expanding EchoStar's ?

Well, I mean, I think that the -- our problems and our future problems initiative will be beyond just capacity. I mean, I think there becomes an economic inflection point where you have to have some critical mass, whether it be you're getting best rate from programmers, or whether they have the ability to economically, you know, go to smaller cities for local to local.

So, you know, we'll always need more capacity. And obviously, new interest in the marketplace with the or somebody else like the could be additional capacity for a competitor or for somebody in the business. But that loan wouldn't be enough for me to drive our economics away. We want to drive on what is to be fully competitive with cable.

housekeeping issue. I was just wondering if we could get what factors per including the component, but excluding the $12 million that you've accrued?

The acquisition costs, I believe, were $430. The capitalized cost was another $124 for a total of $533. And then the $12 million -- we reduce that by $19 to $533. And, you know, we told you in the past that those recaptured boxes was an inventorial amount, but obviously at $19, we felt like those were starting to be material. I would expect that that -- the way I look at it, the way when I look at the fact internally for my purposes, I obviously feel that I get a cost of the box that I recapture other than the new installation that I've got to do for the customer and the cost I've got to retrieve the box. So that obviously saved us $12 million in the cold, hard cash.

And these were ?

Yes.

OK. Thank you.

And it's one possible benefit of our strategy to be able to lease the box. If it's going to be free, why should own the box as opposed to the customer because that would have cost us an additional $12 million if we didn't own the box. And again, that number is going to go up each quarter, so we'll try to break that out for you.

I don't believe the way to look at us from a site perspective is just to take our acquisition costs and add capitalized leases. That would probably overstate, you know,

Sure. Thank you, sir.

Your next question comes from with Credit Suisse First Boston.

Thank you.

Charlie, just to follow-up on that number. So when you report your cap ex of $100 million in aggregate, is that the net of $77 million, then you deduct $12 million out, so you actually had a real tangible cash contribution here on the quarter?

Yeah, I can speak to that. No, it would include -- the $100 million would include this full $77 million of the capitalized cost, .

OK. So when you look at the financials, I mean, how does -- where does that -- we're just looking at, you know, the capital required to grow the business going forward. Where does that positive contribution from the $12 million show up?

Well, there's a couple different places. One is, you've got -- some of it's cash and case would be, when you actually retrieve a box, typically it would be retired and placed in inventory, pending whether it would be ultimately released or resold. And then, if it's released, it would go back into the cap ex at that point in time.

But the one thing we -- we get caught up in a lot of complicated accounting stuff. All that stuff is below the line, so it's not going to be evident to you where that number is and is not -- it's below the line kind of number, but we're going to break it out for you as soon as we get a better picture of it.

And when we do release, we -- if we have a box that we capitalize over four years -- which I believe is less than the cable industry does, by the way -- and it's been out there for a year -- say, it was a $200 box and it's been out there for a year, so it's got a book value of one hundred and fifty bucks. We put it back out and the next customer -- it's $150 value and we continue to depreciate it for three more years. And we expense the installation, which is something the cable industry typically doesn't do.

So we're very conservative in how we do it and I think that what we're trying to get to as management is what does it really cost us to get a customer.

Yeah.

And we know that our advertising is a cost. We know that our hardware's a cost. We know our subsidy's a cost. We know the installation's a cost. I would even make the case, , that you should at least look at this that -- some of the free programming offers that we have, you could add those back into revenue if you wanted to, which would make our ARPU, you know, a dollar or two higher. But then you'd have to add it back in the SAC, which would mean our SAC is higher. And we kind of look at that in both ways internally.

And I like to look at that free programming as cost of SAC, which would raise it, say, another $100 for three months. But I'm getting -- and then I balance that with what kind of customer I've got and what's my turn against that customer, and then I balance it with my ARPU, and I look at it both ways to try to make sure that it, you know, kind of makes sense.

So a funny number, right? Everybody in the business -- every cable company and every satellite company do it differently, and they're not apples to apples by any means. And I believe that when you compare everything apples to apples, you know, we're still an effective competitive model today, but we've got to continue to, you know, fight harder every day and it gets more difficult every day and, you know, it's up to us as management to continue to come up with ways to compete.

On that front, , with regard to the free programming, as those promotions unwind and you've indicated that the guidance would still hold that, you would expect a modest increase in your ARPU number year over year on an annual basis. That would imply if the run rate in the fourth quarter for your ARPU as these promotions unwind. When you look at your subscriber base today and you see what ultimately they'll be paying you when the promotions come up, is there any estimate on your part what that -- what you would be looking at as the fourth quarter run rate on the revenues you'd be collecting from your subscriber base?

I don't know if we'll disclose what the run rate is for a quarter, but what was our ARPU, it was 48-something.

What was it?

Four-thousand eight-hundred thirty-six for the first quarter. All right, some of that was actually -- there's actually a trend. I think you've seen it across the board for people that pay-per-view continues to become weaker as CDs and Blockbuster do better. And there haven't been any fights and big events on pay-per-view so that's sort of everybody's arc in the industry if you -- I don't know, 25, 30, 40 . The other part of that, Mike, I don't know whether you have that. I like nine because it's still running and a certain number of subscribers is impacting ARPU by -- I don't know if you know the number, Michael, but it's ...

Be -- it's in there somewhere. I mean, you know, it's probably 50, 75 cents easily.

And going down, and then that kind of weans its way out every month. That weans one-twelfth more out, so that if it was 50 cents today, it would be 45 cents next month that would affect our business -- our 40 cents, and then the three months free affected us by probably 75 cents or a dollar in ARPU. I don't know if you know what that one is, Michael.

Yes, I think that's probably reasonable.

So you -- if you took the free programming out and said what's your real run rate in ARPUs and then that was not -- I don't think that would cause anybody concern on the ARPU side of it, but because from an accounting point of view, we can't count revenue we don't get, we put the effect of free programming in ARPU, not in .

OK. So as that unwinds, and it sounds like it's logic ...

So as it unwinds, assuming we don't do free programming, you know, that will unwind over the second half of the year and by the end of the year, you're going to get somewhere between a buck and two bucks back in ARPU that aren't in there today.

OK.

You with me?

Yup. Yup.

I guess I would term it that ARPU is not a major concern of mine, other than the continued trend of pay-per-view to have a downward impact. We don't have video on demand as a satellite industry, obviously. And people rent CDs now -- I mean DVDs. And they'll buy DVDs at Wal-mart for 12 bucks, and there haven't been a lot of major events like boxing that are driving pay-per-view.

So we have a Tyson fight in June, but we don't really see that trend turning around, and so we probably only make 60 percent in pay-per-view of what we made a year ago or a year and a half ago. And the buy rate is less on movies, because our window is still 45 to 60 days after Blockbuster gets it.

And that hasn't improved any, so that's the only negative trend in our -- and then I think the economy people think of less premium programming, we have found. And I think that's probably true for other people, and that has a slight negative impact on ARPU as well. So there are a couple of negative trends in ARPU but not nearly what you see in the number this quarter.

OK. And then, Charlie, on the lease plan, it looks like the -- as a percentage of growth subscriber editions, it was still down pretty considerably from the peak level in the mid-part of last year. And I'm just wondering is there anything we should read into that that you've made a strategic decision to slightly de-emphasize the lease model relative to what you're doing in the second and third quarter of ?

Not really. We don't have any -- we're not at the point where we think the lease plan's the best plan, or it's not a plan we should promote. I think we'd like to be at about 50/50, about 50 percent of our customers through lease and about 50 percent of our customers through purchase.

But we put the plans out there. Our retailers kind of make their own decision as to which plan they want to promote. And they've just chosen to promote a little more the cash-and-carry model, and we keep playing with that. But we're not going to suddenly add more cost to the lease to get people to give 50 percent. We're going to put it out there in economics that make sense, and I think we're running about what 30 percent leasing.

Six-hundred thirty-two, yes.

And that -- anything over 10 or 15 percent leases still makes economic sense to us, so we're not disappointed in that, but we think the lease model's got some more legs on it and can be improved on.

OK. And last question, Charlie, on the customer call centers, you'd talked about at the end of the last year perhaps plans to launch another customer call center. And when you look at your premarketing cash flow margins in the quarter, they did pick up.

I'm just wondering is it still in the plans this year to open up a new facility and if so, should we anticipate a slight uptick in customer care costs just for sub until you realize the scale of efficiencies and that ?

We actually did open the call center. We didn't mention it, but we opened it up in the Philippines. It was something that the government helped us with, so that we didn't have some of the costs we normally incur when we opened it up. And it obviously is less costly on a per-hour basis, day-to-day basis call center.

So we're hoping that that call center, it really had no impact on our pre-marketing cash flow as call centers normally do. So, the short answer is we've opened a call center with no material impact, and the negative basis operating margins. Having said that, to the extent we open one in the United States -- and we'll have to open a call center before the end of the year.

If it happens to be in the United States, that would have a slight negative impact that probably third or fourth quarter if we were to open it up. If we're successful with our international model, it might not have much of an impact at all.

OK. So that the that you were talking about on the last call has already been opened up.

It's opened up and operational. And again, it's not fully operational. We don't have 1,000 people in there yet, we probably have a couple of hundred. But is structured, it's not going to have the normal impact, negative short-term impact. And then, obviously, we hope it has a positive long-term impact. That will take longer to see.

OK. That's great. Thank you very much.

Your next question comes from with Merrill Lynch.

Guys, how are you. A couple of more questions on subscriber acquisition calls, just looking at the 10-Q the total number on the income statement was $266 million, getting you to the $430 income statement number. What is it called? Fixed marketing or whatever that $6 million differential is. Is that expected to grow substantially over time? That's my first question.

I'm not tracking it. What $6 million differential?

On the income statement you had $271 million of subscriber acquisition costs. Yet, in the 10-Q you state the subscriber acquisition costs per subscriber was -- you know, per gross addition was $430, using a $266 million number in the Q. In other words, there's $6 million that's not incorporated into the , and these are moving parts. I'm just trying to figure out what the differential is.

Right. And, Charlie, what is referring to is non-acquisition marketing costs or retention marketing costs.

Oh, OK. We have retention marketing costs. For us it was $6 million. Would that be correct, Mike?

Yes.

It was $6 million of retention marketing. And I've heard numbers in the industry materially higher than that, but for us it was $6 million. That includes, you know, sending somebody out and telling them their one-year subscription, you know, expiring, and it's calling people that it's advertising to them -- I mean, it's communications to them, whether it be letters or phone calls. That kind of thing. And that's not a cost for a new customer.

That's a retention marketing for our current customer and it's an immaterial amount for us. And we think that's a proper way for us to look at it. I mean, we don't think that that's the way -- what we do in retention marketing is truly dedicated to retaining a current customer. And that number, I guess, goes below, ultimately, the margin of what we make on that customer.

And, Charlie, that number, do you expect that to increase?

That number is a percentage of our business. It's been pretty constant. So I would expect that that number to stay consistent with -- you know, obviously the $6 million will increase, but only business it probably won't materially increase, unless were to material increase, in which case we, you know, we'd have to spend more time communicating with the customer.

But our retention marketing is, in fact, a dedicated retention marketing effort. And any dollar that we can that we can assume is to get a new customer, we try to get into that number so that -- as management we know what it cost us to get a customer, because if we don't really know what it cost to get a customer, then we can't figure out a return on that customer.

Right. Which leads me to my next point, I guess. I was actually very impressed with churn. I noticed that churn -- at least the way I calculate it -- went down about 10 basis points between the fourth and the first quarter, and also was down slightly from a year ago. I know that your strict credit checks are one thing are happening, but, I mean, it's give and take, as you said.

You have increased costs, right, for new customers, but you're -- what's really making that number go down versus, I think, others aren't seeing as much of a drop, quite frankly. You're the lowest in the industry.

Well, I think that it's about the same as it was the first quarter last year, and it is down from the fourth quarter. But seasonally churn has released for us, and I believe our industry, is always a little bit lower in the first quarter. And I think, you know, we work harder at it. We sacrificed some customers that we could get that we don't think economically makes sense for us. It also is a bit optimistic, in my opinion, because of the three months free programming. Right?

Right.

You wouldn't expect those guys to churn when you do that. So when you really run your calculations that we continue to have an upward trend, seasonality wise, in churn, even with all we're doing.

You know, not as bad as the rest of cable guys or whatever. But, you know, I wouldn't be overly optimistic that we've cured the churn bogeyman. He's at the door every day and we got to be vigilant. And it's the factor that makes your economic model really jump one way or the other. And, you know, we're focused on it. I think, in general, we're pleased in the first quarter, but not as optimistic as you presented it.

The other thing, then, just relate -- I'm curious on this one, too. You know, there's over 7 million subscribers that you have today, what percent of those are on a one-year commitment?

I don't know the answer to that. We started one-year commitments about two years ago. Probably, half of our customers we get, you know, each month, are on a one-year commitment, then you got some weaning off from last year.

It's probably -- I don't know if I should guess or not, but ...

I probably shouldn't -- I mean, it's not 25 percent, it's less than that. It's less than 20 percent would be my guess.

And once I sign on for one year, I have to ...

Having said that, once I got you for a year, the turn kind of goes up the first three, four months, and you know, it's where you have the most, and then after a year it's spiked up again for anybody that's going to be on a one-year commitment. And then after that it drops back down again.

If you're three months free in programming, it goes up in the fourth, fifth, and sixth months. So we expect that turn will tick up in the second quarter as a result of that. And also, seasonality turn is more in the second quarter, always, anyway.

So, you know, we just have to wait and see. We don't know what some of these people will do when they come up one of your commitments. Again, we have to be vigilant. You know, are they going to turn because they can get -- I mean, cable broadband, or are they going to turn because somebody's else has got a better offer that hook all our TV sets up. But, you know, they want video-on-demand. They want high-definition television. You know, we've got a lot of work to do, but we feel comfortable that you know, as a company we can be a leader.

OK. Thanks very much.

Thanks. Mike, on this free programming, am I right in assuming the revenue is absent -- there's no booking of revenue, and if the cost is not intact it would be -- it would go in as programming cost so it's depressing premarketing cashflow?

That's 100 percent correct.

OK. And is that the case in assuming the majority of in the first quarter are coming in as free programming for a few months? And it would seem if you, as that rolls off, similar to the way, Charlie, you described our , I mean it looks like pre-marketing cash flow margins year-over-year would be up a few hundred basis points. Is there something -- is some efficiency that's being driven elsewhere that makes that accurate?

Well, I think there's some efficiency that we're getting in the business, and if you're looking at it last quarter for this quarter, you have to remember that there was a one-time arbitration charge that was included in last quarter's percentage as well.

Right. I was just looking at year-over-year.

I think in general the pre-marketing cash flows on a positive tend to be somewhat negatively impacted through the rest of the year on margins that get reduced. You know, it's, you know, it's pretty publicly known that people like raise their rates to 20 percent every year, right?

Yes.

Well, that next price increase would be in August, right? Well, that will depress our pre-marketing cash flow from August on, right? So, you know, you've got -- there'll be a day when that premarketing cash flow gets to its limit that we can't do much more, because of programming costs continue to eat away at it. But, you know, there appears that we still have some improvement we can do there.

OK. And then on the ads. It likes they were down almost 10 percent which would be a first. Was there something in the first quarter last year that was an aberration -- conversions or something?

I think we were down. I don't know where we were for first quarter. What was in that first quarter last year?

Four-hundred sixty.

Four-hundred sixty. So we were materially down from our net additions from last year, and the factors in a bigger way then historically we've been, and again I think that's -- I mean, I think a little bit of that's the economy. If you look at, you know paid TV subscribers to the total industry in the first quarter, you know, cable and satellite, you know, you've seen a big drop there. Some of that's the economy, and new homes being built. People, you know, go into apartments and things like that.

So that has some impact. And we're not -- you know, the digital is built out now, so if a guy -- you know, we don't have the advantage of being the only guys that have, you know, the speed vision any more. And place we didn't pick up the in New York, so you know, that obviously is a very flat market for us, and probably a very robust market for the people who have . And in fact we may suffer some turn there.

So, you know, all those factors go into it. But yes, it's tougher to get a -- and we made the conscience decision to go after different customers, a little better customer we think's going to turn a little bit less and give us a better return.

OK.

You know, we use to make economic decisions on what the best long-term return on our dollars is going to be, and we're not going to get growth at any cost. And, you know, I think we're comfortable that we're going to get the 8 million subscribers this year, but we're not comfortable that we will go above that, and we're not sure that it makes economic sense to go above that.

OK. Along the lines of hard quality subgrowth, it seems like there's two major sort of new consumer product cycles -- one's , and the other high-definition TVs. And the numbers are starting to get meaningful. Is that starting to become meaningful to your growth?

Well, they're both offense and defense for us, and we're well positioned with both. But of course we'd love to have the capacity with the merger who'll provide us to really do in a big way. We have to do it with our wing satellites today. But we can do it on a national basis with many areas of the country that the only to get . So, that's the short-term advantage for the satellite industry. With the merger, it becomes a long-term potential advantage.

The negative trend is, and you're going to see a lot of this with the cable industry next week, when at the when they announce -- you'll see a lot of announcements. They're going to do a lot more with , particularly with their local channels and their local markets. So they're going to be forced by us to be more active in that.

That will be an advantage to them if they can pull it off and to make the bandwidth to do it. That's going to be a good battle back and forth, but it's going to drive both our industries, I think. And then of course is the defensive move against video-on-demand, which the cable industry has a different model to put big, you know, file servers and things which we don't really have the ability to do. And yet we think has some advantages because it allows you to stop all your -- pause all your shows and record all your shows and have some flexibility that video-on-demand doesn't have.

So, you know, we're well-positioned in both of those, and it's just really a question of how we're driven -- what the customer acceptance is, how we're driven by the cable model of video-on-demand to pursue it. And we're not forcing it on the customers, and taking them kicking and screaming into . You know, we're taking a more cautious approach, because , and it does cost us more.

We clearly get a better customer when we put out there, and we think that with Radio Shack distribution, it opens up some avenues. a more difficult part for our distribution path to sell get a chance to see it in a showroom, you know, time after time after time, because they wouldn't in consumer electronic store.

So, you know, we'll have to wait and see. But I like our position there. I'm personally very optimistic about what and will do for our industry.

I think they're two big drivers and I think that, you know, will have tough competition from cable on them, but I think we can out execute them and that's, again, your dependence to really do it.

And one last follow-up. Do you think you're disadvantaged in doing high-definition vocals over the air?

Well, that's the way we have to attack -- as cable goes to high-definition television on their cable, you know, our competitive answer -- and it's not the perfect answer -- is that we put the digital tuner and our box so that people can get it over the air for free.

Right.

And in addition to our national channels that cable probably won't be doing, and that'll be -- it'll just be an interesting battle. I mean, there will be some homes where we think we'll be the better mousetrap and there will be some homes where cable will probably be the better mousetrap. And it's our job to identify those homes where we have the better mousetrap and spend money there and not chase those customers where the answer, because then they'll turn on us ultimately.

So you know, it's all economical; it's all mathematical. It's, you know, the focus of how we do it. And we don't always guess right. I mean, with our broadband -- broadband, we thought we had an economic model that was going to work, and as we got into it some of the performances that we get, we didn't get. Thought we were going some of the customer service problems we didn't anticipate. They cost us a lot of time and money the phone.

The cost of the equipment didn't come down as fast as we would have liked it to do. The time didn't scale. you know, well, you know, tomorrow we'll make it work, right? And we'll keep spending money at it and the fact of the matter is that, you know, put another dollar into that today with no chance of returns, you know, without another generation of satellites and a better, you know, restructuring of what we need to do there doesn't make sense.

So that doesn't mean that we can't make it work. It means that that business plan has to be restructured. Everybody has to go in the same direction and take -- learn their lessons and move forward and, you know, that's what we'd like to do with the company and I just found that a lot of companies out there don't like to do that, you know. You know, it doesn't do me any good to hide the ball.

Got you. Thanks.

The next question comes from with Salomon Smith Barney.

Hi. Most of my questions have been asked, but a couple of quick ones.

First off, you mentioned that the satellite costs are going to go up as a result of your launch. I'm assuming this is a step function. Can you give some guidance as to the incremental fixed cost per . And second, is there any chance you could flush out some of the details on the DSL deals; specifically, who assumes the SAC, the billing and how the R&Ds is going to go forward?

OK. I'll take that second part first. With the DSL deals, they're basically reciprocal deals where -- making a long story short -- we kind of take care of the video part for the customer, the phone company takes care of the broadband piece of the customer. We get a very small fee for broadband. They get a very small fee for video, which really just covers our cost of being kind in the business and marketing and so forth, so it's not really a revenue generated for us, nor is probably the video commission we pay a big factor for them.

I'm hopeful that it will evolve into more aggressive market campaigns and so forth, but we're going to test it to start with. I think you would look at it as, in general, we don't spend the dollar and we don't get a marginal dollar back. We take care of our customers from a customer service perspective; they take care of their customers from a customer service perspective. I think initially a separate billing. Ultimately, that billing will come together which will give us some economics when that happens because it'll be more efficient and when we do that it'll save us some cost.

We're not spending any money on SAC for DSL nor are they spending SAC money for video. And so, it's kind of a revenue, kind of neutral thing that gives us the capacity. Now, contrast that with us, you know, we did it ourself, we would have had, you know, a several hundred dollars SAC for a modem and we would have had, you know, millions more of fix cost to go to central offices and put the equipment in and then we would have made, you know, $30 or $40 of ARPU from the customer, but we never could have paid back all the money we did in fixed cost investments, so we just didn't go that route. That model didn't scale for us.

OK. So the equipment subsidy, basically, goes to -- the video equipment subsidy goes to you, the voice goes to them?

Yeah. If we get a bundled customer, our SAC is about -- our SAC and ARPU is about the same for the customer as it always would be, except we get a stickier customer because he's got to bundle the product and he doesn't get churned out the cable.

OK.

That's a strategic advantage. And, obviously, we hope that the relationship grows beyond that and I think that our partners hope that the relationship grows beyond that. But to try to figure out what our true -- you know, for both our companies to figure out how that mix worked would have delayed us from getting started.

OK. And the satellite cost?

Oh, well, on the step functions every time you launch a satellite, the biggest cost you have, I guess, is your depreciation and the starts, right?

Yes.

, we can probably give you a little better guidance on that in help off-line. We don't have the information to that little detail here with us right now.

OK.

But there is a step function on some of the costs relative to TP&C, and had we been carrying in-orbit insurance, it would be the same for that; we would have a step function there. So one way you could look at it is you'd to the point in time where we've had our other launches look at what the increase has been and it would generally follow that trend; know that, you know, there'd be a seven-satellite over a base of six, but the majority of costs that you were -- if you were just talking about operating expenses. We'll get you a little bit better detail, but that's kind of how it would work.

Yeah. And we do have some capital expense for encoders and, you know, we do have local, local satellite and we've got , you know, 150 channels, we add up to 150 encoders and modulators and stuff like that, but capitalized, right? And so, you'll -- I guess you see a depreciation. At the end of the day, you're going to see a stepped up depreciation.

OK. Thank you very much.

Your next question comes from .

Can you give us an update on where those discussions are and do you believe change the accounting at all?

Yeah, I can speak to that, . The long and short is that there's been challenge to the deductibility of any of our subscriber acquisition costs which we take certain portions of our subscriber costs as deductions. And so, it's strictly a timing issue as to when we would actually have to start paying cash taxes. There's no question on the ultimate deductibility.

And what I would say is that there's really no change or update to that from what we said on the last call, which is that, you know, we believe that we've got very, very arguments and that, you know, we will continue to fight that question that the IRS has raised and, you know, hopefully prevail at the end of the day to continue to expense our subscriber acquisition cost as incurred for tax purposes, which is completely consistent with what we do for book purposes.

question, Charlie, I have is the cable industry, you know, capitalizes their stock and amortizes it over five years, and I think the investment community is starting to look to value EchoStar more on an EBITDA valuation. To be consistent with the cable industry, wouldn't this, you know, help your valuation story?

Are you asking more now of a accounting question, , in terms of ...

Yes, I'm just curious, because, I mean, it makes relative accounting more similar than dissimilar.

I mean, my philosophy is -- this comes from our former accountant, right, which is me -- just because somebody's EBITDA is higher because -- I mean, if cable depreciates a box over 60 months and we were doing the same thing over 48 months, you know, we would have -- nobody should be putting up a greater value on them because they had higher EBITDA than us, because the bottom-line result is, "Do you take in more money than you spend over time?"

And I think things like, you know, I think ultimately it's free cash flow, right, our free cash, because maybe they're making big capital investments and they're bad capital investments, but their EBITDA goes up in spite of that because they're not getting a return. So ultimately it's free cash flow. I think earnings are going to come back in style, you know, like pretax earnings, because when you make capital investments you got to depreciate it.

So we're going to get back to fundamentals in accounting instead of all this -- I think analysts are going to get back to fundamentals in accounting that haven't changed over the years, and these metrics, some of the metrics that we've all come up with, whether it be EBITDA or pre-marketing cash flow or some of those things, will probably take a back seat to ultimately you take in more money than you spend.

And when you do that, and I'll say it one more time, when you do that in comparison with the cable industry on an apples-to-apples basis, you're going to like what you see vis-a-vis the cable companies. And, you know, we get a better return on a dollar ...

We've got lots of challenges ahead of us, and they're the incumbent, and maybe is a bunch of sunk costs. And not holding them responsible to get a result on those sunk costs, but that's not the ...

What's gone on in the investment community and companies in terms of the way things have been accounted for, because you can make accounting say pretty much whatever you want to. And ultimately that's why you buy management, because you got to have management that you know is going to put the numbers out there that they're looking at and so that you make the same decision that they're making.

And every day as management you get a way to spin the story, and now we find out in the papers that even the accounting profession and the lawyers are helping people spin the story, and that's scary. And I'm proud of the discipline that our folks have employed regardless of what those numbers say.

talking about free cash flow, I sort of calculated that you had a net free cash flow of positive $50 million.

I don't think we were that -- I think we were.

We were? Oh, we were free ?

It's positive. I don't know that we were at that level, though.

I don't think we were quite at that level, and it kind of depends on how you calculate it.

not adjusting for how you move cash between and so forth.

I'm assume you're backing out depreciation and so forth.

Yes.

Yes. So I think our number would be a little lower than that.

But it was free cash flow? That's surprising.

Positive.

I didn't really realize that actually were, which is good.

And the question is, is that a mandate that you want to have for the rest of the year, to have positive cash...

We focus on that number a lot more than , but I mean, give me a number -- give me one number that I want to make, that's the one I want to make, because everything else is manipulatable for us, you know, going forward in telecommunications, it's changing very rapidly and it changes almost overnight.

But I think we have a really good feel for the trends and a really good feel for the business and, you know, we're solid financially and we have a solid balance sheet. There's not anything in our balance sheet, there's not a bad receiver on our balance sheet, there's not an obsolete receiver on our balance sheet, there's not an obsolete investment on our balance sheet.

And that's how people are ultimately going to value companies. They used to do that 20 years ago, but they're going to come back to that, because that's the stuff that can't be manipulated. And when they do, then hopefully people will have confidence in our management team and our company to invest in us so that we can grow our company. And if people don't recognize it, you know, this year or this month, then so be it.

Charlie, final question. I like commitments that are falling off starting in August of this year. Do you have any sense in what your expectations are on what proportion of those customers will sign on, on a $30-plus package going forward, because the returns are ...

I don't know. It's a -- I mean, it's a risk that concerns us that some of those -- I mean, we know that the day that they get to their 13th month, we know we will have increased churn on those customers, we know it'll be a one-month spike on those customers, and that's why I cautioned you on our churn that we still think that that trend is still rising for us, because obviously those customers are probably -- customers aren't churning as fast during the first year as a normal customer would. And then the 13th month they churn.

With those customers, you add the 13th month to the first 12 months and compare it to a normal customer who went 13 months and see how they compare. And we just don't have any data on that yet. But you got to try the experiment to learn, right, before you know. And my gut feel is that when you compare those two data points you'll probably find slightly higher churn in the customer, you know, for a total, but not off the charts more churning. But if we did have off the charts more churn, then it obviously would have a negative impact.

Great. Thank you.

Your next question comes from with Bear Sterns.

Yes, hi. calling for at Bear Sterns. Just a couple questions.

First one, Charlie, I wanted to see if I could get some more color on the SES agreement, how do you think it's going to affect you and the DBS market, as well as the merger approval process.

I don't think it has a big effect on the merger approval process because I think even without the SES announcement the merger would be approved.

On the margin, it clearly indicates to the regulatory agencies these are not barriers to entry into our business and that once people decide to compete that there's ways for them to do that, both the Northpoint ruling, which opened up, you know, 500 megahertz terrestrial for a competitive, and of course potentially SES -- and by the way others, I mean there's other orbital slots that could be used and compete against us, the Canadian slots, the Mexican slots and some other ones that could be used.

So, you know, again, these are all things that a lot of the people who have written the press and a lot of the politicians haven't thought about, and that's why we said, you know, people that are really trying to make the right decision will make until they get the facts to make a decision, and all the facts still aren't in, in terms of what we're going to face in competition.

The SES announcement obviously I think we have to be prepared as a company for increased competition from cable, perhaps from phone companies, perhaps from terrestrial wireless folks and perhaps from other satellite competitors.

And the way we're going to be prepared for those folks is to make sure we have enough capacity to give people the services, including local-to-local everywhere, that they want, continue to invest in new technologies, like broadband to the home, in long-term efficient manner, and continue to run our business, and then good things will happen to us.

Right. My final ...

We can't stand still. I mean, some people have questioned our merger. The merger is because we don't want to stand still.

Right. My final question is just on the satellite's health. I noticed there was that were lost on Echo III, temporary interruption .

I think the health of EchoStar III is generally fine. There are no developments that we see that indicate a trend that it only has a couple of years of life left on it and it could further deteriorate.

You never know. I think our satellites are generally in good health and doing pretty well. EchoStar VII we've completed on-orbit checkout and that will become operational in the very near term, and everything seems to be a go with that satellite as well.

Yes, we passed a big hurdle with EchoStar VII, it's passed its health check, and it frees up EchoStar four as a spare and frees up EchoStar II? No. It frees up EchoStar -- what's the other one . It frees up EchoStar V as backup.

So that's the way you insure yourself. I mean, you take all the cost of insurance that you would pay over a four-, five-year period, you could build and launch another satellite and have it up there in outer space ready to go to protect your business, in addition to your investment.

So, you know, we're excited that -- we needed EchoStar VII or EchoStar VIII to be successful to feel really safe, and we've got EchoStar VII up there, we've got EchoStar VIII hopefully launching in June, and that, you know, just allows us to compete better. And we'll probably be a little bit overinsured in outer space if EchoStar VIII is successful, but it's a good place to be.

Right.

You know, that's the right strategy, I think.

My final question is just on the ABC litigation. I know that you've entered a private settlement with ABC. I wanted to know, is there a possibility that this goes to court or has this been dismissed with prejudice?

The part of the litigation dealing with ABC has been dismissed with prejudice. So, no, that won't go to court.

OK. Thank you very much.

That's a positive sense that, you know, once we were able to sit down with one of our key programming vendors we were able to come to a positive resolution for both parties. And, you know, it got a little crazy there when we first announced the merger where everybody was trying to take the merger and twist it in a way that just wasn't conducive to our subscribers.

And, you know, I think we're -- you know, we had to make some tough decisions, but the merger was important, but, you know, tying business arrangements to it wasn't the way we were going to go.

OK. Thank you very much.

Your next question comes from with .

Can you give us a sense as to what impact any of the, I guess, the price increases that became effective on March 1? Do you feel that they've had any impact with regard to either, one, churn, or to any type of slowdown in new in March that we could extrapolate going forward?

The increase was only a dollar, so we don't think it had a huge impact. But if you raise your prices a dollar, it certainly is never positive to your customer, so you probably have a slight, you know, maybe not measurable for us directly in churn and certainly maybe there's customers who don't buy your service .

But we're still the lowest digital, you know, company out there. I mean, our $22 tier is lower than the digital tier out there in America today. And, you know, we plan as a strategy to be the lowest-cost guys out there no matter what, and we do that because we run a low-cost -- I mean, this is from in the cable industry, it's a scary thing to know that we got to try to compete against that in the future. And we've really got to be good.

My next question is ...

we anticipated that we would have at least one new major retailer, although we think Radio Shack has the potential to be the predominant -- you know, the preeminent retailer for satellite. But they're also carrying DirecTV as well, so it's not anything that's exclusive to us.

And obviously, when somebody buys in Radio Shack, it's possible that that same customer would have bought in Sears, so we don't know the impact of Radio Shack. But we did factor in the $8 million more of our sales coming from national retail chain, and still think that that's the kind of number we're going to come in with based on the data we have today.

My final question is, can you give us an update as to where we stand with PVRs, like how many we have deployed and things like that?

We're about a half a million PVRs out there. Again, our goal is to get to a million, but we're not going to force the issue.

Some of the promotions that we're doing don't involve PVR, and so the PVR stuff is a little slower. But we technically are pretty pleased with our product now, and you know, people who have them like it and they churn less.

But it's a very difficult product to advertise and market. And you know, we think we need some more CE help to do it properly, and we're going to wait till we get that help to do it. But we think it's strategically one of the things we could do a better job on. And it's, you know -- I think it's a great product, and we believe in the concept.

But there's been some, you know, PVR companies that have not had stellar financial performance because they've tried to push the marketing before the market was ready, and it's off-timing. And we haven't seen, with the economy and everything else, we haven't just seen this great surge on people to say, "I got to have PVR."

Great. Thanks a lot.

Your next question comes from with .

Hi, guys. Just one quick comment as an investor. You know, we really appreciate the clean accounting and trying to drive the economic value. I hope you're successful with the IRS.

In the first quarter, you spent I think roughly about $65 million, $70 million on the boxes. And I think, if I got this right, that what you said it was the rest of the year, total cap ex was $400 million to $500 million, of which 25 percent goes to satellites and the rest to boxes. So that implies $300 million to $375 million for boxes?

Yes, let me clarify that a little bit. The guidance for the remainder of 2002 with respect to cap ex is $400 million to $650 million for the rest of the year. And 25 percent of that is estimated toward satellites and the remaining 75 percent would be for both capitalized equipment as well as just general corporate cap ex, combined. So the 75 percent would be both the, you know, the cap ex under the digital home plan as well as just general corporate cap ex.

And general corporate cap ex is not an insignificant number, with particular spot being satellites where your IT infrastructure and your uplink centers can do all the extra channels, you know, have some material cap ex.

So then you don't see either -- I shouldn't see that kind of gap between sort of roughly three times for the rest of your -- three times the amount of subs, or three times the amount of cap ex for boxes is different than that three to 375. And that difference is explained by the corporate cap ex, not by either an increase in the number of subs or in more people going on a lease program?

Yes, you can't infer that we have a big increase in subs or a greater percentage going to boxes. We just don't know.

Right.

Our crystal ball's not that good. We put the offers out that we think that the rational consumer will be about 50/50.

Got it.

And so far those habits of our retailers have been slow to change. And they just like the cash-and-carry better on average. And our advertising has been a bit more geared towards the multiple receivers and takes advertising is really bad. Or maybe it just takes a little bit of time to hone in the concept, and I've seen some Radio Shack ads I think are very good on the concept.

And we're going to stay the course, and see whether that starts gaining some momentum. But we haven't been at it long enough to tell yet. I wouldn't be shocked if the cap ex for boxes goes up and it becomes more than 30 percent of our business, our greater percentage in the quarters ahead. But I wouldn't be shocked if it stays the same or declines slightly either.

Thanks.

Your next question comes from with UBS Warburg.

Yes, thank you. I promise only three questions. First of all, I was wondering if you could talk a little bit the rural areas distribute your net at from rural to urban -- and the NRTC had a tough quarter in the first quarter, it looks like. Wondering if you had more success than that, than those companies. After these .

Michael, can you ...

Yes, I can speak to that. It's kind of a two part answer for accounting purposes, the notes have been recorded down at as sort of the bar has been crossed in terms of triggering the need to do the exchange. We haven't actually done the physical exchange of the notes yet. That'll occur some time later this year.

And the other one, let's see what was the question? Rural -- vast majority came from cable. We did not have negative growth in rural, as possibly the NRTC did. That is -- there's still business out there. It's mature business because we don't always have -- the thing that's holding us back there is not having local in those marketplaces, so we've got -- and I think that obviously the NRTC in terms of spending a margin -- another dollar to get a marginal customer based on their economics may not make sense for them today.

And so we anticipate that their growth is going to be slow or negative. But it's still -- it's where we have local-to-local is where the business is and the new bulk of the growth. And then what's the other question? Bad debt and receivables, I don't believe we had any material change in bad debt expense in the quarter or any kind of receivables. And I think our -- Michael, you would know this better than I would.

I think from at least what I look at that the bad debt situation is pretty good, because what we do is -- we don't change when we turn customers off. I mean, we want your satellite bill to be one of the most important bills you have, and the recent polls have shown it's not the most important bill for people.

And if you give people much leeway in when you turn them off, you'll be the last bill they pay. So we have not changed our procedure since inception of our business in terms of when we turn people off. And that's a significant thing in accounting, because if you were to change that and maybe give people an extra month to pay their bill, you would -- you could save hundreds of thousands of churn numbers for the short term, or as long as you want to change your policy.

So, we don't want to get into that game and particularly in a weak economy, you want to be very tough on turning people off. And I think that's the way you want to do it. That will lessen your churn in the long run: it'll hurt you while you're doing it, but it will be the right thing to do. And I think some of the cable guys' numbers in the first quarter was indicative of maybe them having to clean some of that up. And you know, I can remember back in the PrimeStar acquisition as had to do, they probably had to clean up a lot of PrimeStar customers for that reason ultimately, and ultimately ended up in a restatement because PrimeStar had maybe kept some people on a little bit long. And I can't remember what Pegasus said, but I think they cleaned up some people recently as a result of that.

And you've got be careful of that, because you guys don't give visibility to it. And so you've got to trust that the people running the company are doing it the right way.

I would just add to that that the real key to controlling bad debt is just getting the right customer in the first place. And in terms of credit procedures or getting cash upfronts, we've said for a long time you've got to have one or the other. And we just continue to be very, very focused on that.

What's the percentage of dish revenue that is ?

We haven't specifically disclosed that. We do include bad debts in our subscriber-related expenses, but we haven't specifically disclosed that. But I think what Charlie said is accurate. In terms of -- you know, we haven't seen any material changes in that -- we haven't seen any material spikes in that trend.

It goes up month to month, but it's been very consistent for quarters. And I would wager a fair amount of money that we're the lowest in the industry.

OK. Thank you.

Because I think our procedures are by far the tightest in the industry. We just don't like when people don't pay us.

Fair enough. Thank you.

Your next question is from with .

OK. Couple of thoughts, questions. I want to make sure I understand the ARPU progression. You took a pretty material sequential hit in the first quarter, because largely because of the free programming. But that'll be one time basically for the first three months. As you get into April, the extent the ads don't change dramatically, you'll have offsets of new subs with zero ARPU. But you'll have the January, February, March guys starting to pay, and that'll stay kind of steady or else equal ...

Yes, we'll have to show you that offline, but as a step function, it obviously steps down for three months and then it levels off for three months up three months.

As soon as it goes away?

So what you're going to see in the second quarter is that that's usually the level.

And

We'd expect a -- again, we don't know, but we'd expect a small ARPU increase in the third, . In the fourth quarter, you should be level -- you're back to level again, but at a little bit higher level. And then you've got your traditional increase you would expect.

Now that assumes that we don't focus on programming so much in the second half of the year which is what we think but you never know.

And the you stopped offering that in January. So, as you said, you're getting a modest increase just because you're not adding stuff at nine dollars anymore, but until your anniversary the first guys who put it in place in August .

Sure. Step up a few cents a month for sure.

And on the pay per view hit?

And they totally wean out for -- still a year from December, a year from... mcdonnell: A year from January. ergen: A year from January, so ... shapiro: Right. ergen: So that the ARPU stuff is kind of a headline. But when you dig behind it, it's -- there is a strategic reason why that's the case. The counter to that is SAC is trending higher than we'd like. The counter to that is we think we're getting a better customer for us in return than we otherwise would, being where the marketplace is and the cards that are dealt to us. But you know -- and these are judgment calls, and we don't have the data to support that yet.

But having said that, you didn't change your ARPU guidance of up for the year despite this first quarter hit. So it implies a pretty significant rebound whether it comes mostly in the fourth quarter or what? ergen: Yes, assuming we're not in the programming promotions in the second half of the year, then those staff functions should get us back to that ARPU for the year. But again that's ...

On the pay per view hit ...

You know, we just don't have any way to -- we're giving our best guess today.

Sure. On the pay per view hit, did you have to reduce the number of channels available to meet all the requirements on January 1? Is that part of it, and related to that, can you say what EchoStar 7 when it goes operational is going to do.

Will it be local channels moved on to the core service, increased channels? What's going to happen as a result of that, besides just the increased backup?

We did take some pay-per-view channels down. As a result, we're looking at it if we can get a signal back, and depending on who -- how many programmers, how many broadcasters will give us the -- will pick must-carry. So we'd think we'd be some cities, but the real benefit to Echo 7, when Echo 8 goes up, we get to off-load things between Echo 7 and 8.

And that's when we get the efficiency of the satellite. One of the problems to Echo 7 is that it was a location where we only have 21 transponders, and we don't have -- that's where our core service is. So we're not able to move things around until EchoStar 8's up.

And, in fact, EchoStar VIII were to have a problem, we would move Echo VII to the location and move everything that way. So, you know, the real benefit in the third quarter on that.

OK. Great. Thank you.

Your next question is from with

Thank you. Could you discuss kind of your current take on the status of the litigation with Gemstar, and the financial significance to us if a win or a loss, in terms of the effect on cash?

We don't really have any more insight than what we said before. I mean, it has become public that the government's, as an observer, what their opinion is. I think that opinion was public, that we do not violate their intellectual property and that they did engage in patent misuse.

That does not mean that the judge looks at that finding. I think it's more indicative of what a jury would find, personally, having watched the process. And so, I think we have greater confidence in going to a jury trial on this later.

I mean, obviously, when you've got somebody who sits through all the evidence and comes out on your side, and who's very technical and trained and intelligent, then that's a very positive sign. But the judge will look at different things, look at the record. And it is a unique judge and was a patent attorney -- a patent examiner before, so is very, very knowledgeable.

And they'll make their own decision. And, of course, it gets appealed, without question. The decision that this judge will make in June will be appealed by one or both parties. And then there's no monetary damages, so it would go to, regardless of the outcome, I think it's going to go to trial, in our case, in North Carolina and Atlanta.

And then, we've also won the summary judgment argument on antitrust. So it's clear the antitrust trial against Gemstar will go to trial in Denver. So the litigation process is going to go on for a long time.

The initial ITC strategy that they had, I think, in hindsight, maybe not a good strategy on their part, but it's only the first step in litigation. And we'll probably give you guys, as the analysts and investors, a feel for how it might go long-term. But our belief is, and we said this when nobody believed us is, we don't violate the intellectual property.

We spent a lot of time understanding the law and what we do. And we believe that there are serious antitrust violations here and that Gemstar has closure, financially, and that our exposure is somewhat limited, certainly in the ITC case.

We're business people. It's not that Gemstar is a . We'd be happy to talk to you if we don't violate, why would you pay you. So, you know, we made the decision based on the evidence that we had and, you know, it's unclear. I'm not handicapping it, other than we're confident in our position or we wouldn't have gone down that path.

Thank you.

Operator, I think we'll take one more question.

Your last question is from

Our question has already been asked. Thank you.

There are no further questions. Do you have any closing remarks?

No. Our next conference is going to be -- just because I'm out of is going to be August 15. So, you know, we're going to go back to work until August 15 and see if we can improve some of our metrics and do a little bit better job and we'll talk to you August 15. We'd like to thank everyone for joining us. The operator's disconnecting the call.