DISH Network Corp (DISH) 2002 Q2 法說會逐字稿

Good morning. My name is Rebecca and I will be your conference facilitator today. At this time I would like to welcome everyone to the EchoStar Communications Second Quarter Earnings Release 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 period. If you would like to ask a question during this time, simply press star then the number 1 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.

Hello, everyone. Thanks for joining us. 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 Jason Kaiser, 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 Charlie for his comments and 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 disclosure so for that I'll turn it over to David.

Good morning, everyone. Thanks for joining us. Just the ground rules.

As you all know, we do invite media to participate in listen-only mode on the conference call. We therefore ask that you not identify participants and their firms in your report. We also require that there be no audiotaping of the conference call.

Additionally, all statements that we make during this call and everything we said in our 10-Q as well as statements made in press releases and oral statements that may be made by officers, directors or employees acting for us that aren't statements of historical fact do constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 expressed or implied by the forward-looking statements.

I'm not going to go through a list of those factors, but recommend to you our 10-Q and 10-K for a list of the factors that you should consider in that regard. In addition to those factors, we face other risks described from time to time in our reports filed with the SEC.

Any cautionary statements that we make in our 10-Q or during this call should be understood as being applicable to all forward-looking statements wherever they may appear. In this connection, investors should consider the risks described in our forward-looking statements disclosure and should not place under-reliance on any forward-looking statements that we make.

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

Thanks, David. Let's 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 PanAmSat. In addition all guidance figures and references assume that the weak economy will continue throughout 2002.

Total revenue for the quarter was approximately 1.2 billion an increase of 6 percent over last quarter and 21 percent higher than the same period a year ago. Subscriber growth was the driver of the increase in revenue quarter over quarter. We currently expect 2002 revenue to be approximately 20 percent higher than 2001 revenue of 4 billion.

Premarketing cash flow was 487 million, or 42 percent of revenue in the quarter. This represents a $37 million improvement over Q1 and 100 million better year over year. It is important to note that premarketing cash flow during the quarter was positively impacted by non-recurring benefits of approximately 10 million primarily related to final resolution of certain legal matters.

EBITDA for the second quarter was 237 million, our best ever, as we continue to lever the economies of scale inherent in the DBS platform. That's an improvement of 59 million over Q1. EBITDA during the second quarter of 2002 was positively impacted by reductions in estimated royalty obligations of approximately 17 million as well as the non-recurring benefits previously mentioned.

Operating income was 146 million, an increase of 51 million over last quarter.

Net income for the quarter was 46 million. Included in this quarter's results are the positive effect of the royalty adjustments and the legal resolutions. Net income for the 6 months ended June 30, 2002, was 7 million.

Basic earnings per share for the quarter was 8 cents. It is important to note that the second quarter's EPS figure includes approximately 9 million of retained earnings reductions resulting from increases in the estimated value of the Vivendi contingent value rights. These reductions are not a component of net income but are included in net income available to common shareholders for purposes of computing EPS.

Now let's look at the DISH Network. Subscription TV revenues increased 5 percent from the first quarter to approximately 1.1 billion. Subscriber growth and increased revenue per subscriber were the drives of this increase. Despite the effects of an economy which continues to struggle we added 295,000 net new customers during the second quarter and continue to expect to end 2002 with over 8 million subscribers.

For the quarter, our average revenue per subscriber was approximately $48.85 per month, an increase from last quarter of 49 cents. We currently expect RPU for all of 2002 to remain near current levels. Our current -- our cost of acquiring subscribers during the quarter averaged approximately $386 per gross addition.

It is important to note that subscriber acquisition costs were reduced by approximately $26 per addition as a result of the royalty reductions previously mentioned. We continue to expect subscriber acquisition costs for all of 2002 to approximate Q1 levels of $430 per gross addition. Capital expenditures under our Digital Home plan during the quarter which are not included in our subscriber acquisition cost figures were approximately 89 million. Cash and equipment from Digital Home plan customer disconnects which are also not included in our subscriber acquisition cost figures aggregated approximately 9 million.

Now let's look at the balance sheet. At the end of the quarter, we had cash and marketable securities of approximately 4.5 billion which includes 168 million of cash reserved for satellite insurance. We also had approximately 5.7 billion of debt as of June 30, 2002, which includes 2 billion of convertible securities.

On a straight debt per subscriber basis we ended the quarter at roughly $769 per subscriber. On a net debt basis that drops to $186 per sub.

Cash capital expenditures during the quarter were 142 million. During the remainder of 2002, depending on the strength of the economy, we anticipate total capital expenditures of between 200 and 400 million with approximately 20 percent of that amount going toward the construction of new satellites and approximately 80 percent of that amount going to our 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.

Okay. I just have a few quick comments and then we'll take your questions. In general, the second quarter was one of solid results. Obviously, challenging economic and market conditions out there.

But I think, I think a lot of the things that we put in place in terms of building a foundation at EchoStar will start to pay dividends for us and have started to pay dividends for us because the discipline that we have had as a company, uhm, is -- I've always said, anybody can look good when -- when, uhm, people have, uhm, over exuberance in the marketplace but you really got to be good to perform in -- when people get overly pessimistic and obviously we have a -- there is a confidence crisis both in management and CEOs in particular and particularly in the telecommunications industry. So we not only have a general lack of confidence in management across the country but particularly in telecommunications.

So you know, our -- you know, I'm proud of the fact that our employees have hung in there with our leadership and our company to hang in there and while people were - had exuberant salaries and just a lot of, uhm, business practices, uhm, that always -- always made me wince, you know, I think that -- that we have been able to hold the line. I think that pays dividends, you know, in the marketplace where those folks have some problems and, uhm, we're able to maintain, you know, our growth pattern. And you see companies that have been able to do that in industries.

You think of Southwest Airlines. All the turmoil in the airline industry those guys are still able to -- to be profitable.

And I think that no matter how much turmoil we have, in telecommunications, it is possible for some companies to maintain their focus and we have a long way to go and we'll certainly have our ups and downs and certainly if the waters are choppy out there, but I think that we have built our company from the ground floor up. Very similar to the Wal-Marts and the Southwest Airlines of the world to be able to take advantage of market conditions where other people maybe have always thought the Sun would be shining all the time.

We did switch auditors to KP&G. We have gone to extensive review of our books with them. We didn't feel the need to go through an entire new audit, pay the fees to do that, uhm, mainly because I was under the mistaken impression as CEO that we were supposed to be telling the truth all the time.

I didn't realize that up until yesterday we didn't have to tell the truth. So we try to tell the truth, uhm, all the time so we didn't the we needed a reaudit but they have gone through our books and met with our Audit Committee and we don't anticipate any changes to our accounting methodology or restatements.

As far as the quarter was concerned, I mean, I think the disappointing thing probably for the quarter and for the rest of the year is that we're not going to achieve our RPU goal of up modestly from last year. We made a conscious decision based on the competition from cable, which of course continues to be very strong, that we needed to, uhm, have -- and also the addition of, uhm, Radio Shack and Wal-Mart to Sears and Costco distribution retail chains that we needed a strong cash and carry offer, that we needed something that would compete with cable and we basically, uhm, have extended, uhm, some discounted programming offers that we did last year.

We had anticipated doing that, uhm, but felt that that strategy made sense with our distribution partners and the CE distribution side, uhm, and in doing so had to give up on our RPU target and so, you know, we have had to downsize that so that's probably the one -- the one negative on the results. It also will result in our revenue, also has hit the revenue obviously and also has some negative impact on EBITDA and earnings, obviously, but, uhm, we still hope to -- to hit those guidance numbers in EBITDA.

On the positive side, I mean, I think that most of our metrics, uhm, that we set out for this year and what we thought would be, uhm, at least a neutral type economy, I don't think we -- I think we have a more challenging economy than we anticipated earlier in the year but I think that we're able to maintain most of our outlooks in terms of our key metrics. In terms of this year.

The merger update, uhm, is -- you know, we're still playing to win there and again, we believe that the merger on the merits, if the merger is looked at on the merits and we have every indication that that's how the Justice Department will look at it, and the politics doesn't come into play there, where obviously we have strong opponents that are very politically strong in News Corp. and the National Association of Broadcasters, NRTC, that the merger will be approved.

We look for some meaningful discussions with the regulators in the third quarter and again we are hopeful that the merger will be approved -- certainly before the end of the year and I would hope that it would be in the October time frame. But we really haven't had meaningful discussions yet, so we look forward to doing that over the next month or two.

I guess yesterday or the day before yesterday, Vivendi had made some comments about potentially selling their EchoStar state. That is something that they cannot do based on our agreement. -- until the merger definitively approved or not. And even then, after that, there would be some Rule 144A restrictions in terms of number of shares that they can sell.

Having said that I mean, we obviously understand, uhm, the position of Vivendi strategically is taking now in a new direction and we are certainly not opposed to having discussions with them in terms of how they -- there might be a way for them to do that. But, you know, based on the agreement that we had today, they certainly are not able to do that. -- at this time.

We're anxiously awaiting our EchoStar VIII launch next week on the 20th. Actually I think it's the 19th US time. Obviously, that will give us some backup in outer space.

Obviously, that allows to us do a few more local cities and reduce some of our two dish solution scenarios which cost us some extra money we hadn't planned on this year. It would take us about 45 or 60 days to put that satellite into use. So sometime in the -- probably the late October time frame, that satellite hopefully will be operational.

On a legal side, you know, we had a lot of positives particularly with the Gem Star. Actually two rulings on Gem Star in our favor and dramatically in our favor. From the from the ITC and from a court in North Carolina, again, that was expected on our part. But maybe not expected by the marketplace.

And having said that obviously, the Gemstar has certainly made clear they will continue to sue and continue to sue again, we're confident in our positions and we'll continue to fight that. There is the high cost of that litigation but we felt that it was responsible for us to take that challenge on and we felt we didn't infringe and obviously we have reconsideration by the ITC that they can reconsider. They in the past have typically reconsidered portions of rulings. So obviously there is still a lot that will go on out there in the legal front with Gemstar.

We were able to settle some other lawsuits particularly the News Corps -- attorneys who represented us on the News Corp. litigation were able to settle that and also on a positive side, there is a case with one of the financing companies where we had a -- were able to settle a fair amount of the $10 million that we reported and was in our favor there. Probably on the one area I point you out to is the state Attorney Generals have indicated they are looking at some of our business practices it's relates to consumers. That we have in our 10-Q there.

Again, that's something that some of the things they have asked us about they maybe misunderstand. Our industry, they indicated our hold times are too long at our phone centers and again, we track that religiously and we're certainly within our metrics of our call times and we believe our call performance is better than probably most telecommunications people in the industry. We clearly have rated number one or two in the consumer surveys in the last four or five years in. In the pay television business, we think we do a good job there.

Having said that obviously there is anything that -- that -- they have made some very constructive criticism, I think, of some of our practices and anything that can make our methodology and procedures easier for consumers to understand, uhm, I think there's ways to -- for improvement there and I think we certainly take very seriously the comments that they have given us.

And some, we think they have maybe have a misunderstanding of the way our industry works, but some of them are very constructive criticisms of some of our policies and I think that we can probably make some improvements there that I think will be good for our consumer, therefore will be good for our business.

You know, obviously with the merger, we come under a lot of scrutiny from a lot of different organizations, and it's always a good check of your company to do that and, you know, that's probably a benefit -- a side benefit of the merger procedures that we have gone through over the last 10 months is the sense that we -- we really get to look at our total company there. And certainly if there is room for improvement, we're able to do that.

I think that's about it in terms of, uhm, comments you would have and then we'll take questions. Operator, we're ready to open it up for questions.

At this time I would like to remind everyone in order to ask a question, please press Star 1 on your telephone keypad. We'll pause for just a moment to compile the Q & A roster.

Our first question comes from William Kidd of Lehman Brothers. Mr. Kidd, your line is open.

Let's go to the next caller.

Your next question comes from Kareem Zia of Deutsche Banc.

Thanks. Charlie, as you look at the increases in gross SAC over the last year, would you say most of it is reflecting multiple boxes as opposed to higher subsidies or some other form of commissions or things?

Uhm, and then if you take a step back, uhm, do you see gross SAC costs leveling off over the next few years in light of the competitive issues and things and how does that balance against what your sort of expectations are for churn and RPU, you know, the kind of balancing act over the next years?

Yeah. I guess, you know, that's -- that's kind of a merger non-merger world but obviously, digital cable is -- has gotten more aggressive with the digital cable product. They now have broadband. Some cases telephony to bundle together. So clearly, you know, the marketplace continues to get challenged -- more challenging every year. And certainly, if you take satellite industry from inception to SAC in general has gone year, churn in general has gone up every year.

And you know, there's a point where you would get where your margin -- where you wouldn't make a marginal dollar by an investment in SAC based on your churn and RPU. I think you've seen, you know, uhm, then RTC and Pegasus that they have already gotten to that point where they have decided that marginal dollar development doesn't just take place.

We have seen those kinds of trends develop and you know, I think our answer to that was the merger where I think you get -- you get to play on a level playing field with -- or almost a level playing field with cable where you free up the capacity, do locals in all the cities where you can do broadband and make the investment in broadband, to compete with cable. And you get some synergies to reduce your SAC or keep it less than otherwise would be. And I think that's the reason we think the merger is so important.

As to the merger, I think those trends, you know, will continue to some degree and we're trying lots of different things to see, uhm, what might have an impact on churn or SAC and so forth.

But it's clear that those metrics have continued to go up, uhm, clearly the biggest part of SAC this year increase is probably multiple boxes. But, you know, customers have more and more TVs and you have new things like HDTV and PVRs and new features that you don't necessarily get the customer to pay for. So you know, I mean, that becomes challenging for us.

I think we're well positioned to take on those challenges in the company based on, you know, our vertical integration and, you know, our in house engineering, the fact that we do on our PVR, the fact that we have our own guy that's now survived a major test and those kind of things. But you know, we have challenges out there and it won't be easy.

All right, thanks.

Your next question comes from William Kidd of Lehman Brothers.

We still can't hear William.

Is his phone on mute or something?

Operator, we probably need to go to the next call

Your next question comes from Armand Musey of Salomon Smith Barney.

Operator, there must be --

Armand, your line is open.

-- can't hear Armand either.

What do they have to hit to --.

Star 1.

Okay.

Let's try somebody else.

Your next question comes from Ty Carmichael of Credit Suisse First Boston.

Good morning. Charlie, I just had a couple questions for you. To begin, with regard to the Radio Shack contribution in the quarter, if you can just give us some perspective on that and your expectations going forward and how performance was relative to your expectations going in and I guess the same would be on a forward-looking basis for Wal-Mart, and I have a couple of followups.

Second quarter Wal-Mart was not a factor. We just really started going into those stores in August.

I would say that Radio Shack was a relatively immaterial part of our subscriber count in the second quarter, we expect that it will be a material amount in the second half of the year. -- of our subscriber count so we think we have some upside there from those two companies.

Primarily, Radio Shack, we were in the process of putting the stores, training their people in the second quarter. We did get some business from them but we certainly didn't move as fast as probably Radio Shack and us would have liked it and, of course, they still sell other people's products, as well.

So... but we do look for bigger contributions in the second half of the year and in the fourth quarter from Wal-Mart.

On a follow-up on the churn and SAC question, Charlie, I was curious as to the what type of success in terms of percentage of boxes you have been able to capture among those Digital Home -- Digital Home -- the digital customers that churn out with the leased boxes. And what the -- you know, what your expectations are going forward. It looks like the cash benefit declined a little bit sequentially.

I'll let Michael --

Yeah, I think my answer on that would be that you know, we continue to make progress in our efforts to recover equipment.

One thing that's important to note is that the recovery number, while it is down, what you need to understand is that the recovery does not include set-top boxes that we recover that we are going to turn around and redeploy in the Digital Home plan. It only includes set-top boxes that we are going to use as service units or turn around and get another activation through a sales promotion. So we only capitalize units one time and to the extent that we recover and intend to redeploy, we would not include it in that recovery number.

So over time, what you'll see as you get deeper and deeper penetration from some of the newer set-top boxes is that the bulk of that number is really going to be just the cash recovery over time and a think as far as the overall retrieval, you know, we continue to make progress there. As we have said publicly before, we budget about an 80 percent recovery and we continue to work toward that and I think that, you know, we are getting better at it all the time.

Okay.

And just for clarity case I think it was $12 million of recovery in the, first quarter was 9 million recovery in the second quarter but that doesn't tell the whole story. It's actually much more positive than that clearly,uhm, when we get boxes back from a customer, it reduces our cost of churn and so in that respect we think Digital Home plan, you know, still makes sense and obviously the cable industry has been doing their version of Digital Home Plan for a long time so it's important for to us have that as an outlet.

Having said that I will say that you probably can expect Digital Home Plan to be a lesser percentage in the second half of the year because our CE distributors typically don't participate in the Digital Home Plan. It's a little bit complicated for what they do. They tend to want to cash and carry type item which is what, you know, we have done with some of our campaigns for them in the second half of the year.

So I would expect that even though it we're still enthusiastic about the leasing of boxes, we're also not, you know, we also realize we have to have plans that our distribution partners work for their particular distribution outlets and so we think that as Radio Shack and Wal-Mart, Sears, Costco and those folks, you know, in the fall selling season Christmastime where those guys become a bigger part of our business, we are likely to do more cash and carry there.

Then at DirecTV we have seen a line item that they define as retention and marketing grow pretty strongly over the past couple of quarters and they have attributed that to subsidizing second -- the growth to second set-top boxes to existing customers. I wanted to just get your perspective on how you manage that -- that -- you know, that balance between decision to subsidize since the upgrade of a existing subscriber versus letting that customer go, that type of -- obviously has the potential to erode the business model economics a little bit on your margin side.

I'll let Michael jump in here but I believe any second set-top box we put in SAC we do not put that in retention marketing. We do have a category for retention marketing. That's the to mail out to a customer that is one year subscription is up and does he want to renew and maybe a phone call to a customer to -- or maybe he's turned off and find out why and maybe try to get him turned back on again.

I would just add --

Any hardware we would --

Any hardware that we would give to an existing customer in order to upgrade, et cetera, or subsidize would show up in our customer care and other line and it's not a hugely material amount.

To give you an idea, I would say that that number is less than $10 million, more like $6 million per quarter.

Yeah.

That number I don't believe is materially changed over the last couple of years. So... we're not having to, uhm, pay people to stay on as customers. You know, I mean, you know, we have -- in -- that - so we just account for that a little bit differently than they do. I'm not sure exactly what's in their retention market. So the point --

So the point is all of those costs that we just talked about are factored into our premarketing cash flow number. The only retention marketing that's not factored in would be, you know, specific things that we do that are non-hardware related to retain customers, and that's a very, very immaterial number.

Okay. And do you have any -- it seems like DirecTV is -- is incurring with regard to those costs a much larger number. Is there any policy -- is there any kind of decision policy you make to determine which customers you want to help keep and subsidize the equipment costs and let others go or... because --

I think you start with, Ty, you have to start with that you have a great value in your programming and service. So why would a customer leave you? You know, you have to have a great value to start with. And then you got to give them outstanding customer service. If you do those two things in an outstanding manner, then you -- you know, you're going to be able to reduce your retention side -- you know, that's kind of a bad drug to have to use.

Now, there's times when you should use it obviously, and, uhm, I don't know specifically what DirecTV does but obviously when we have a customer who pays this -- buys our "everything" package for $80 a month, pays on time, through automatic credit card that customer may be 10 times more valuable to us than a customer who buys our basic package for $22 and calls us every month complaining about something. So obviously, we would do something a little more for that customer, uhm, than we would for the most basic customer.

And I think one of the marketing challenge that is we maybe have as an industry and certainly we have at EchoStar is, you know, identifying those people that, you know, that are are our most valuable customers and making sure that when we have churn that the churn we are getting, uhm, churn doesn't tell the whole story, that the churn we're get something in those least valuable customers. You know, that we're not making a return on. We actually have customers that we give the name of the nearest cable company because we don't make any money on them.

Okay. And then the last question, Charlie, there was some news earlier this week with regard to a proposed 5 percent California state tax on consumer satellite TV bills and I was just curious if you had any perspective on whether or not there is a real chance of that getting a proved, and, uhm, you know, if you are aware of any other moves on that front in any other states.

Yeah, David's going to take that one.

Ty, as you know, the law is that local communities can't pass taxes on satellite, but states are permitted to do so. And a number of states have done so, and, you know, while we generally try to get involved and educate states as to the reasons why they should look at alternative sources to raise revenue -- and I think that, you know, we've been active in California in that regard, the real place you want to educate them is to be sure that you don't end up with a tax on satellite that doesn't also apply to cable.

If there is a fair level playing field we can play on that playing field. But certainly you pass the cost of taxes on to consumers, uhm, if you have to. But what you don't want to do is end up in a situation like California where it was a tax that was supposed to apply to satellite and not to cable. And that's what we really try to focus our efforts. Right now, my understanding is that that particular piece of legislation is on hold. I -- I don't -- you can never tell you about it looks like that probably is not going to pass this year.

And DirecTV has done the -- a lot of work on that because they're based in California, obviously, so I know they have worked on that very hard.

Okay. Thank you. And congratulations on an excellent quarter.

Your next question comes from William Kidd of Lehman Brothers.

I hope the third time is the charm!

William! You're on!

You don't know how good it is to actually hear from you.

I thought you were using Worldcom and had to switch over -- [ Laughter ]

With respect to the EBITDA guidance of 80 to 100 percent growth, is it possible that you could detail the capitalized, you know, acquisition expense that's embedded in that assumption?

Could do what?

Could you tell us how much you're assuming you're capitalizing of acquisition costs in order to come up with your EBITDA guidance for the full year.

I think on that one I'd refer back to Charlie's previous comment which is that, you know, obviously equipment that we capitalize under the Digital Home Plan does not hit our EBITDA metric and I think that, you know, our assumption is that our lease model probably over the rest of the year maybe the penetration goes down a little bit with the, you know, some of the new promotions and some of the new distribution channels that we have in place.

So we would actually be expensing more. I mean, based on the trends that we see in the distribution, we probably are expensing more and capitalizing less in the second half of the year than the first half of the year and the other thing I'd point out, William, is our EBITDA targets are based on, obviously, an 8 million type sub count to the extent that we would go over that number, obviously, that's the drag on EBITDA because you have SAC per customers you didn't expect were you going to get. So that's a positive from our perspective.

We would rather go over 8 million subs but that could have an -- to the extent that we would go over 8 million subs by -- [INAUDIBLE]. We are not projecting that particularly at this point but to the extent we did, that would have a negative impact on EBITDA so we have a couple of things that will have negative impacts on EBITDA. One is that we will be expensing more in cash and carry, and, two, any upside in sub count would be negative. If we fall short of 8 million, it will have a positive impact on EBITDA.

Sure. And with respect to -- maybe this is a little off the topic but with respect to the state of C Band, C Band subscribers have been falling precipitously and I'm just wondering, you do have a conversion program in place.

Is that at all material today of your growth that, you know, within the 10 percent camp or is it -- if it is at old material, is it going to be an issue once C-Band conversions or the dissolution slows even further?

It's not a material part of our business. It's been pretty steady, uhm, I'm looking at Jim here. It's been pretty steady but it's obviously C-band continues to erode but it hasn't been a, you know, if 10 percent is a defining number, it's not a material amount of our business. And I should be -- it should be more than up by CE distribution that we gained.

And with respect to that CE distribution --

And I would expect the C-band business to go on for a few year, by the way. It's still in the 700,000 kind of numbers. So it's going to be out there for several more years.

Right. With respect to the retail distribution, there is I guess been at least some acrimony from Best Buy at least and Radio Shack and even Blockbuster with DirecTV that they have recorded, you know, less sales. I guess now that you have entered some of those channels, obviously I assume that they hope to reinvigorate their sales a little bit.

But is some of their problem the fact that they might make less per sale in terms of actually revenue per installation with EchoStar than DirecTV and I guess can you comment on the differences or rough differences in economics in those specific channels or in generalizing between those channels between yourselves and DirecTV?

I don't really know what DirecTV does in those channels in terms of what their payments are. I know with Radio Shack in particular, they had the NRTC issue where my understanding Pegasus refused to pay Radio Shack, uhm, any kind of SAC for their territories and obviously DirecTV didn't want to pay for Pegasus where they didn't get their majority of revenue from the sub so I think that had a large impact on Radio Shack. And that's a major difference between how we do it. But I think that the --

Are you doing --

I think our SAC and -- our SAC and the CE distribution chain and our SAC in the professional satellite chain which has been our traditional distribution chain is about the same. I'm looking to Jim here to make sure that's right. There's not -- I mean, CE distribution is a little different in terms of how they might advertise or they use a higher percentage of the co-op and stuff, but our programs are pretty much the same for everybody. And it's kind of like let the best guy win out there.

And I guess my last question relates to --

I don't know - I can't tell you, I don't know if DirecTV has that same philosophy -- or if they do something a little different for the CE guys versus the professional.

The reason I asked, I thought Radio Shack said that with EchoStar, that you guys are doing relatively more installations than they did with DirecTV and so that was a revenue impact but not necessarily a sales impact, you know so --

Uhm... yeah, the -- one of the things we did with Radio Shack is we -- that you can, you know, purchase a certificate and I think when you do that, that the revenue -- the revenue that they get is not as much but the profit's the same.

Okay.

So it's a -- so you are going to have a little harder time probably measuring those guys on -- I mean, on revenue gains versus profit gains because they make -- they actually make a higher return on revenue on us because they don't have to stock equipment. It's a very efficient model. And they get paid their activation fees without incurring a lot of inventory costs.

I appreciate that. My last question is with respect to PanAmSat. I'm sure you saw the customer disclosure in their quarterly filing about their backlog. And I'm just wondering how does that disclosure affect your interest in the company if at all?

Well, I mean, any kind of disclosure like that would -- would raise concern, obviously, when you see that. But I mean, begin again, we're playing to win and, uhm, we're playing for the broader transaction which includes PanAmSat and Hughes, and you know, that's our full focus. And that's what we expect to be able to consummate, you know, later this year.

Much appreciated. Thank you, sir.

Your next question comes from Armand Musey of Salomon Smith Barney.

Can you guys hear me this time?

Also a Worldcom user! [ Laughter ] We can hear you.

Okay, great. First kind of a big picture question. I think throughout the multichannel industry or at least certainly in the DBS side we have seen -- we haven't seen a lot of RPU growth in the last year or so. Can you talk about longer-term trends in the next say 2, 3, 5 years, what kind of RPU growth you think that we'll see? And if you think that has changed over the last couple of months?

It's going to be interesting. I don't know the answer.

But clearly we're -- despite what, you know, the economists have been saying, I think the economy, uhm, you know, very stagnant and I think, you know, it's hard for me to believe that we are having the kind of real growth that people are talking about, at least as it relates to the video side of the business. And I think customers have looked to where they can cut back their expenditures and obviously, it shows up in the premium and the pay per view.

Pay per view is impacted by DVD , sales where you go to Wal-Mart and buy a DVD, for $9.99 and maybe you don't need to order a pay-per-view movie and our windows are 60 days out. So those are things that we see they are he's out there from a trend perspective. We haven't developed inter activity. We haven't developed a PVR model. Yet. Haven't reached critical mass there yet.

And we haven't developed a broadband model that's economical so we have our work cut out for us and to revive some of that RPU growth. And I think the growth that you see that you will see is going to come from price increases as, you know, I'm very -- concerned about the cable industry, which has spent 50 to $60 billion to build -- rebuild their plant and equipment, may not have been the most efficient use of $50 or $60 billion, at least that what I think history may show.

But they have to get return on that and so you can look for some big, big price increases absent effective competition from a satellite industry. You are going to see some pretty big price increases throughout to help justify those expenditures. And that will definitely increase RPU growth but it will come from price increases.

So the recent sort of slowdown in RPU growth is more due to people not being able to afford higher-end packages as opposed to increased competitive pressures?

No, I think it's a combination of both. In our case to the extent that we weren't answering the competitive pressure from cable, we actually have RPU growth, right? But we sacrificed some of that by offering some discounted programming. We had three months free, for example, up until last month. That three months free -- we have to account for it in RPU but the other way to use it is to look at an increase in SAC. If you wanted to count the RPU that we gave up, you could look at it as an increase in SAC. So you know, it costs us money to do that that's from competitive pressures from cable.

Also, talking about financial pressures, large number of the media companies, some of the content providers, are seeing just huge declines in their stock prices. Obviously we have seen in some companies face even more significant problems than that.

Does that provide any opportunities for you either strategically or in terms of ability to negotiate different kinds of arrangements, maybe that they wouldn't have considered a couple of years ago?

Most -- you know, I -- you know, I don't know. Most of our contracts are long term in nature. They're already set. There would be no reason for a programmer to reduce our rates just because they're having tougher times and in fact, they're looking to increase their rates because they are not getting as much advertising revenue that they counted on.

So -- and with cable consolidation, what's going to happen is the biggest cable guys will go in there and perhaps get some better pricing and they are going to have to make it up on somebody else and that somebody else is going to be the satellite guys unless we're allowed to consolidate.

So, uhm, people don't realize that we compete with the cable companies for the programming contract. And therefore, we have to be able to be the same kind of scale as the Comcast/AT&T to effectively compete for them on programming contracts whether it be with networks or with individual programmers.

So I think there's a lot of fundamental shift out there, and, you know, government policy can't -- government policy can't be to put all the Telecom companies out of business. And the marketplace you guys and investment community and the banks and the people who lend capital are looking for synergy and looking for efficient operations. And that's exactly what our merger does.

Something in the neighborhood of $50 billion of efficiencies that are gained by efficient use of spectrum. And that's why I think that when you look at the facts of this, you know, our margin -- merger will be able to go through because that's what the marketplaces are looking for to invest capital. And that's you'll see consolidation in the cable industry, as well.

And the consumer is not better off because Worldcom, you know, phone service doesn't work or because Adelphia's having problems. The customer is just not better off as a result of that.

And the government policy has to be very careful of that George W. Bush, I see a speech where he talks about broadband deployment to all Americans. We have come up with a plan that will do broadband deployment to all Americans.

And the President of the United States has made it one of his highest priorities and we have done it without government subsidy, uhm, except we have to be able to use the spectrum efficiently and get critical mass to risk the capital to do that and that's what -- that's why America was able to build railroads and highways and everything else. And I hope we're allowed to do that in this marketplace.

Okay. Last question is actually somewhat direct. In the event that the merger is not approved sometime in the fourth quarter, when do you expect EchoStar would actually cut a check for PanAmSat?

I mean, I think, as soon as -- well, first of all, we're not focused on that I mean, we're focused on the broader transaction. So I can't say that I thought a lot about, you know, what ifs because when you play to win, you don't spend a lot of time on what if's. But, uhm, I think that we would want to own PanAmSat as soon as we possibly could. I don't know how long that would take.

Do you see litigation or any other issues that would delay the closing or -- Or to try to reduce the price.

I would hope not.

Okay, fair enough. Fair enough and congratulations.

Your next question comes from John Stone of Ladenburg Thalmann.

Hey, guys. Congratulations on a good quarter. My first question is kind of following up on the previous questioner and the issue there is terms of RPU trending, at least some of it I have felt is due to a change in the overall demographic of the DBS viewers from what was originally a high-end specialty item, it's going mass market and, therefore, the average cohort of new subscribers coming in has a different demographic than your existing base.

I was wondering if you could give me some idea on how RPU is trending for your subscribers that have been around for some period of time as distinct from the effect of perhaps your new subscribers coming in and having an average RPU lower than your existing base.

I guess there's a very, very slight truth to what you said, but on average, the fact of the matter is, I'll make it real simple for you. The average customer is going to spend 50 bucks on video and he is going to decide what he gets for his 50 bucks. And this -- in this economy to try to spend a lot of money to improve that, you know, you probably are working against yourself.

So that's absent sports pack action. Sports packages would be on RPU on top of that. So, we don't really have those.

You know, our customers -- current customers are very close to that. There may not be a buck difference between the kind of customers we got today and some we got two years ago. But it is trending a little bit lower as you do go more mass market, uhm, slightly. And that trend may accelerate. I don't know.

And what I don't know is how much of that's economy-related and how much of that is your theory, which is as we go more mass market, we're just going to get, you know, a lower end customer. I wouldn't be shocked in Wal-Mart, uhm, if we don't trend a little lower, uhm, than we do in Sears or Radio Shack. For example. I think that would be logical.

Okay. Gotcha. Shifting gears a little bit, we're uhm --

The key, I mean, I think that we're aware of the RPU situation and I think, you know, we believe that, you know, we can manage our way through that but it's obviously, uhm, you know, challenging environment.

Well, just wanted to look at it a different way of slicing it really with that question. In terms of my next question, I'm interested in video on demand.

Obviously, with -- there's been some press releases from Starzz and DirecTV about their efforts and, of course, the cable operators are claiming that it's going to be their salvation. I wanted to get kind of an update in terms of what -- where you are in terms of VOD rollouts with EchoStar and how much do you think -- when you think it's going to start to contribute to your RPU significantly.

I think, you know, a lot of people -- the different names for video on demand. We're kind of near video on demand as a satellite industry. I think the cable industry has determined that they -- with their big servers, you know, they can give you a true video on demand type product whether it be watching the NBC news whatever time you want to watch it or whatever. I think you are going to see the [vergence] of the industries there.

Our approach would be the PVR approach where you as a customer can get your own video on demand by choosing to record shows and watching them at your leisure, stopping, pausing, rewinding, a lot of features you won't be able to do with the file server technology that cable has. And you'll be able to kind of control your own destiny. And then I think that's going to appeal to a broad range of customers.

I think the cable industry is going to, uhm, focus on the big server and try to charge people for watching certain shows, video on demand, but not everything. So you are not going to necessarily be able to -- you are not going able to, you know, pause and, you know, the sports -- ESPN sports but you will be able to pause NBC News when you watch it. And I just going to be - It's a different strategy, different approach. Cable has some advantages in what they are trying to do. We hopefully will have some advantages in what we're trying to do.

With the merger, which is what we think we truly need to compete, we'll have the capacity with three satellite locations to do more true video on demand by putting, you know, movies up that rotate all the time that are always being downloaded to our hard drive, always being recorded to the hard drive, unbeknownst to the customer, and he will have true video on demand to compete with what cable is going to do.

And that's one reason we need more capacity because that's a big capacity hog to do that. So with the merger, we think we have effective competition to what, you know, cable is going to do and hopefully we have some enhancements to that with our PVR features.

Any sort of a time frame that would you venture to guess?

Well, you know, it's all timing. It's -- everything that we have looked at -- first, we had to have the merger and second you have to wait for the demand to build for the customer. If a customer is only willing to spend $50, he has already spent $50, it's going to be hard to get that extra money out of that customer until you can make the process simpler, easier, maybe better windows for movies and there are a lot of things that have to happen to into making the customers part of the few more bucks out of his pocket.

So I think the economy has slowed down a fair amount of the interactivity and PVR development that we would have thought would have had material impacts this year. And maybe it stretches it out a year. Maybe it stretches it out 18 months. But we don't think it makes sense to swim upstream. And we have had to make some tough calls as a company. We couldn't see the light at the end of the tunnel in broadband, uhm, with what we currently were doing and we couldn't see a path to an economic model.

And as painful as that was to -- to write off some investments that totaled well over a hundred million dollars, it was only going to be more painful next or next month. And you know, so we -- you know, we had to do that and bite the bullet.

And we don't want to now, go out there foolishly pushing -- you know, swimming upstream for video on demand or interactivity when customers aren't willing to embrace that because they don't understand it or because the technology hasn't improved enough or we don't have enough services to go along with it to make it economical for them to use it so we'll just keep developing it and have it ready when the customer's ready, you know, then we'll be there for them.

Great. Thanks a lot. And again, congratulations on making profits in another quarter.

Your next question comes from Vijay Jant from Morgan Stanley.

Couple of questions. You got a favorable IRS ruling. Can you explain what that really means now? Can you use your - all your [INAUDIBLE] profits?

Mike will answer that.

Vijay the answer on that is that we did have an audit challenge which arose which was favorably resolved during this quarter. As we have said in the past, it was never a question of the deductability of any of our costs. It was the question of the timing over which we could deduct our subscriber acquisition costs so really it was a time value of money issue that was favorably resolved. So the impact of that, what will happen is that we will actually not -- I guess actually the net impact of that is that we will become a cash taxpayer much later than we otherwise would. Our NOL will protect us for a longer period of time than they would otherwise would as a result of that favorable ruling.

It's a material impact on our cash flow. It was -- it is a material impact. (overlapping speakers) -- you know in the numbers of it, you know, obviously we were free cash flow this quarter again and you know, not many people in the telecommunications or the video business can say that. And many people won't be able to say that for a long time. If ever.

I mean, I -- you know, I think the thing that we have done better than anybody else is the money that -- if you look at the money we've spent, the money we've spent has gone into tangible assets that are technically state-of-the-art, they're 100 percent digital, they're satellites with long lifetimes, we don't have analog product in our warehouse, we don't have analog plant, we don't have upgrades that we have to continue to do. That's what got the fiber guys in trouble. They're always chasing their tail to upgrade because the fiber technology was always getting better and by the time they upgrade their plant, it was obsolete. The half-life was 18 months. They had to upgrade it again. Cable -- the wired industry has that kind of problem. Now they have file servers they have to put in. The next time they have to put a thousand Megahertz plant in, they have to chase the curve and never get the return on the investments that they have. We have been a very efficient use of capital. It doesn't mean we're the right answer for every home. But it means that we're in a position to get a return on our investment.

Charlie, following up on your comments about, you know, your promotions have been impacted RPU, hypothetically, if you had charged that to SAC, what would your RPU look like right now given all the various promotions.

It's a buck or two impact on SAC -- I mean on RPU for one year. It's only for a year. Or 3 months and in certain cases it was three months in some cases a year depending on which promotion it is. So... you know, we would have been closer to 50 bucks RPU instead of whatever the 48 whatever we did, you know, first half of the year.

Now that the anniversary --

You know, I don't want to dodge questions. You could -- if you wanted to make RPU 50 bucks, then you would be at, what, I don't know, 30, 40 bucks to SAC? I don't know.

But you would also be recording revenue that exceeds what --

You can't do that accounting principles. You can't do that under GAAP rules. But the net effect would -- you could do it -- we mentally calculate it both ways internally.

Right? So that we're not as worried about the RPU number as you guys might be. Right?

Because I think we understand the dynamics of it. Having said that our SAC is not as positive as you might think. All right?

And I -- and a think our churn, the other aspect of that is our churn has some risk as people roll off of those -- those promotions, then we have -- we have a risk of higher churn that we just don't have a handle on yet. Right? Because when you are paying -- when you get 3 months free programming, you are not going to churn, right? And so that delays that decision process for those folks. And so, you know, we have some added risk there.

Charlie, given that the anniversary of the I Like 9 on the one year commitment ends in August, right now, is an expectation that churn would be higher in 3Q?

It's possible. It's somewhat counterbalanced by the fact that we have similar promotion to I Like 9 going on where you get a $12 credit.

So yes, you probably -- you clearly are going to get some added churn from a customer who is a year old but you are going to get less churn from a new customer so we don't know how that balances out. My biggest concern is the customer -- we're still the best priced value out there right? So we don't think the customer is suddenly going to go off over $9 a month and say gee I can go somewhere else and get a better deal. We still are the low-cost guys in America, right? And, you know, we can hope to continue to be that. The risk is probably more from a piracy perspective.

That the customers that -- once they get introduced to satellite TV finds out that he might be able to get the system for free from somebody else or he might be able to even get a card on our system, and get it for free, and piracy is a very difficult problem, uhm, for to us solve by ourselves or DirecTV to solve by themselves because it takes both of us to solve the problem, otherwise all the pirates just move from one system to the other.

It's a huge cost in SAC, a huge cost to customers who are legitimate to pay for those people who are pirating. So one of the great benefits of the merger is that because we have to replace one set of boxes out there anyway in the merger, at the cost of a couple billion dollars we also are able to replace the security system for no incremental cost at the same time and then we get a lot of new customers who are pirating today. So that's another added benefit to the merger is that we can actually cure the piracy problem.

And the piracy problem, I have said it for the last two years, it affects cable, too. The poor cable guys can't get a customer to pay for cable if he can go a satellite system and watch it for free. And so that's -- I said it b they will have negative -- some of those guys are having negative growth and the reason they will have negative growth is because people are pirating satellite television. And we're powerless to solve that problem by ourselves. So... you know, that's something we'll have to monitor. There's been some press about piracy and how bad it really is.

And I lived through the C-band business where it was really bad and people stuck their head in the sand for a long time before they admitted there was a problem and we obviously have a problem out there.

One final housekeeping question. Can you give us the lease was in [INAUDIBLE]

What the what?

Leased hardware was the purchased hardware?

The amount of leased hardware? We don't disclose the specifics of customer promotions. I would say that, uhm, you know, as we have said, we had total Cap Ex for the quarter, I believe that number was, uhm, 142 million and, uhm, for the rest of the year, we expect that probably --

Six months or a year?

142 million for the quarter.

Leased?

No, that's total Cap Ex.

Total Cap Ex. But looking ahead - How much of that was leased boxes?

We haven't disclosed the specifics of the components of our Cap Ex but we do expect for the rest of the year that about 20 percent of what we spend on Cap Ex will be satellites and then 80 percent will be leased hardware as well as general corporate Cap Ex and the bulk of that would be the leased hardware.

Thank you very much.

Your next question comes from Marc Nabi of Merrill Lynch.

Thanks very much. Just a couple of more questions.

One relates to customer service, Charlie. And you saw a big bump in the second quarter. And does that relate to the two dishes that you have to put on the local and the local or, you know, you haven't really seen this type of cost per average subscriber on the customer service side since like 2000. I was wondering what the big jump was for.

Yeah. We opened a call center in the quarter, uhm, and when we open a call center, it bumps our customer service care.

It then takes about 6 months for that call center to become efficient. And then to the extent that we had opened a call -- we hadn't opened a call center for about four quarters prior to that so that's why you saw customer care kind of trend down and then you saw it kind of go back up. That's one component.

The other component, it was and still is the two dish solution where we put in customer care when we give a customer second dish free that goes to customer care. It goes in plus all the phone calls we got, uhm, it the -- with the two dish solution.

Despite what the broadcaster says, the customer is happen which the two dishes solution. They are calling and taking advantage of that opportunity from us and, you know, it's the only way we can comply with [INAUDIBLE].

So that's a decision we had to make. We it costs us many millions of dollars to comply and give customers dishes. That's what we have done.

Charlie, eventually that number is going to disappear, right? So the 98 million, what percent of the 98 million would you say relates to the two-dish solution?

You know, certainly not -- certainly it's a small percentage of that 98 million. I think the key to look at is the percentage of customer care over your -- what percent customer care is over your total revenue in DISH Network and that percentage you get dollar amount --

The percentage?

I -- I don't have the number. We track it internally by - [overlapping speakers]

It's about 8 percent with two dishes.

So what, 10 percent of that 98 -- I'm back to the envelope and that, uhm, half of that increase from 8 to 9 percent, half of that was opening a call center. Inefficiencies.

And half of it was probably two dishes. And so -- Yes, that number -- both of those numbers should go down over time but I have expected those numbers will still be in that 9 percent range in the third quarter. I mean, you know, I don't expect that we are going to have big improvements there.

Okay. Next question relates to when looking through your 10-Q and the revisions that you have provided, you know, you talked about revenues being lower, the lower RPU. I've gone through and looked at all your expectations for 2002 -- the second half of 2002 on the cost side.

And also the SAC number of about 430 which is consistent with what was in the first quarter. And I'm having a hard time getting to an 80 to 100 percent up EBITDA growth number.

Maybe you just can walk through some of the metrics as to why that's going to happen, particularly if premarket and cash flow margins are at 40 percent for the remainder of the year.

I think you have to look at it first of all, as Charlie mentioned previously, a lot of that depends on how many subscribers that you add and we would be happy to sacrifice a little bit of EBITDA for more activations. I think the other thing you have to remember --

Run your model on 8 million.

The other thing you have to remember is in the cash and carry promotions, while there are no cost capitalized which has a negative impact on the customer, you are getting cash out of the customer. So that's the fairly, uhm, low SAC promotion which will help your EBITDA significantly. You have to factor that in, as well.

Right. But that's part of your $430 income statement SAC number, correct?

Yes, that would be factored into the $430.

Okay.

And you also have our box sales. Typically, a little higher in the second half of the year, as well.

Okay. Next question relates to --

You know, we're -- all we do is put out our goals out there and do the best job we go out there to get them. And, you know, every month, when we get new financial data, we go and look at that and see whether any of our hypotheses have changed or not but right now, you know, that still looks like an achievable goal for us whereas revenue doesn't. RPU doesn't today.

Your RPU does not look like an achievable goal?

Well, no, our new RPU number. We reduced our RPU guidance.

Correct.

The reduced looks achievable. Obviously, what our previous guidance did not look achievable to us based on our promotion for the second half of the year.

Last question --

Bottom line is we call -- we -- you're getting the same information I'm getting as management in terms of what we think we're going to be able to do.

Okay. Last question relates to just getting your understanding on churn. Now, you are going now again as you said before to these larger consumer electronic chains, also going to Wal-Marts.

You are also doing this promotions of getting a lower-paying customer because that's what they want.

What -- in your experience, what is churn and what do you think churn is going to do as a result of that going after a lower-paying customer? I mean, we all know you've done a very good job on the credit check side. I'm just trying to figure out, you know, are these not --

Realize we -- we've been consistent with two things. One is that we do a credit check and get a commitment from a customer for a year. Or number two, we get cash from the customer. All right?

You don't see an EchoStar offer where you don't have to put a credit card -- have credit and have cash -- and a year commitment. You don't see an offer where you can get the system for free from us. All right?

Unless you are making a commitment, right, backed by a credit card and the ability to pay us if you don't go the full year. So... you know, we're very disciplined in that, all right?

And if you go to Wal-Mart, you are going to have to buy a system for $149 or $199 with two receivers. So when we get cash from the customer -- when we get $200 from the customers, those are actually our lowest churn customers.

That's very interesting.

So... you know, what -- what we think a mistake is where you don't get any cash from the customer, you give it to them for free, he has no commitment, you are going to get churn. And that's what -- if you look at digital cable and the cable side, that's why they're experiencing 5, 6, 7, 8 percent churn on digital cable. They are just putting it in for the customers, no commitment, no cash from the customer and they have high churn. You know?

We think some of the business practices in their industry where the equipment got bought down and you ultimately ended up with, you know, I can remember in -- I can't remember exactly, but it was, you know, you could buy systems for $19 or something and no commitment. I think those things have kind of gone away. But when those things were happening, I think that was the recipe for disaster. Based on our experience.

So... we're not -- we don't think, uhm, we don't think Wal-Mart -- we're a different model than Wal-Mart than perhaps has been there in the past in the sense that the customer is paying $199 for the system or $149 for a single system. He is not likely to throw that investment away.

As long as -- as long as we do two fundamental things. One is we give them a great price value for what he gets and we give him outstanding customer service. Where else is he going to go??

One thing --

A lot of people fly Southwest Airlines to get from you Point a to Point B cheaper than anybody else. They don't give you a great four course meal, they give you a bag of peanuts but they get you from Point a to Point B, they leave on time and they can get your luggage there so people fly 'em.

Interesting. One thing related to the whole Southwest analogy is, you know, relative to like six months ago to today or even a year ago, what percent of those subscribers that are your new gross additions are coming from cable versus the expansion of the multichannel industry, a year ago or six months ago to today?

Are you seeing a lot more customers coming from cable than you would have seen from someone not having any multichannel service?

The majority of our customers today come from areas where we do local and from the cable company. All right?

You have seen NRTV go negative or at least Pegasus go negative in the rural areas. We haven't gone negative in the rural areas but you've seen them. But we have local-local in the cable companies. Right?

On the other hand, our biggest churns comes from the cable industry where the cable company has put in broadband and bundled the service and given people an opportunity to get a product we don't have. So it's -- it's... hey, the rougher tougher more competitive it gets, the better we're going to love it. We were built on -- nobody's giving us anything in this business. Right?

We started with nothing. Uhm... and, you know, we know how to compete. We like to compete.

And we believe we spent our money wisely, we believe we have had the discipline in place and our overhead structure would be our uplink centers in Cheyenne, Wyoming, our corporate headquarters or, you know, our officers' salaries. You know?

We think we have had the discipline in place to compete effectively and we just need to the capacity to be able to truly be effective.

Thanks very much for your time, guys.

Operator, before we take the next call, I just want to quickly correct a remark that I just made. We did in fact disclose the amount of equipment that we capitalized under Digital Home Plan for the quarter that number was 89 million and with that, we can take the next question

Your next question --

That's what I thought. 89 million was capitalized.

During the second quarter. Second quarter of 100 and the Cap Ex was 142. Total Cap Ex was 142.

Your next question comes from Robert Peck of Bear Stearns.

Guys, my first question is actually for David. David, relating to PanAmSat yesterday, did their disclosure that 20 percent of their backlog is in potential jeopardy, uhm, pose a material event for EchoStar?

Well, I mean, obviously, we -- we're concerned about their disclosure and, uhm, we're going to, uhm, continue to keep a good eye on the business. But, you know, our focus is not on stand alone and PanAmSat transaction right now. Our focus is on the broader merger that we think should and can be approved.

I understand. As far as the stock purchase agreement that we took a quick read through, it look, like you're still required to buy PanAmSat if PanAmSat experienced general market conditions that hurt conditions or even industry-based conditions that hurts business. So with that sort of -- would that sort of indemnify them for having this be a material event?

I think, you know, everybody can take a look at it and read the PanAmSat purchase agreement. It's on public file. Everybody can draw their own conclusions about what events do and don't trigger.

Okay. Great.

I think good management doesn't worry about what ifs. You worry about what is the objective you want, what do you want to accomplish, and you go after it. You go put all your efforts into going after it. For us, that's the transaction includes PanAmSat and Hughes, so this we can effectively compete for a long period of time in the video business and the broadband business.

And as far as Hughes, is there a deadline coming up as far as you getting the financing done, and do you need to get another waiver from Hughes to extend that deadline?

There is -- obviously, we have the financing done that we're required to do in that we went out and got a 5 1/2 billion-dollar bridge. That's been taken down over time as we have gotten what I'll call for lack of a better term take-out financing.

And we certainly expect -- it's our hope and expectation that prior to completion of the merger, we'll get that bridge down to zero. But the financing that we're required to obtain in order to complete the merger is there now, the bridge isn't fully papered up. But the commitment and the obligation is there.

We'll get papered up. Of course, it's quite expensive so we prefer to finance -- refinance the bridge. I don't know take-out finance not bridge.

Last question here. As far as the FCC and must carry, what are the near-term events going on there? I know they have had issues with the two-dish solution. Can you jive us an update there?

Well, we've -- we have complied with -- I think they had, uhm, about six suggestions of any one of which might have satisfied the -- their concerns. I think we did four of the six things they suggested.

And our customers I think are pretty happy, and... you know, we think that -- and we've -- we think that satisfies what they have talked about and we think we're -- we think the law is clear that we complied even before we did those things.

So..., uhm, you know, we think that that's -- that now they haven't given, uhm, they haven't definitively said, yes, this is okay or whatever. But they haven't said it's not okay.

And we're pretty convinced that legally it is -- you know, having worked in the legislation, I can only speak from personal experience. Having worked on the legislation myself personally, I believe that what we're doing is fully within the scope of what the legislation that was passed. And there were specific provisions that you could broadcast from more than one orbital slot.

What's more, we feel good about it because we think it's within the spirit of what was passed, as well. And we think our customers are satisfied with it.

I mean, the broadcasters would like to change the rules after the game. You know?

That's -- you know, we think that would take, you know, new law in Congress. But the FCC is certainly one aspect of decision-making process there. And they have come down with a ruling that we have complied with now. More than complied with.

One last question here.

But obviously, I -- you know, in a worst-case scenario we would be taking down cities.

Okay. One other question here is, uhm, Echo V and VII looks like they are having a couple --

The merger solves the problem, by the way, not to get back to the merger but... Obviously, one of the benefits of the merger is we've committed to doing all dmas on one dish, you know, so -- so we're problem solvers. We got all these problems out there in terms of not having broadband to every American, not having one dish for local, not having local in all the markets and we got solutions for it. And our competitors may not want to compete against us. But, you know, this is about the consumer, not about the effect on our competitors. And that's why we think when you look at the broader anti-trust law that the benefits of the merger -- they are -- not everything is positive about the merger. It certainly has some things that potentially could be negative and we think that the benefits outweigh the negative and we have to work with the regulatory officials on those negative -- possible negative effects. So anyway.

Just one last follow-up question here. As far as Echo V and VI, it looks like they have run into problems. Is there a similar problem on VIII? And maybe just give us a general feel for the health of the satellites.

The solar arrays on EchoStar VII are new generations of [Loral] solar arrays. They have flown on a number of missions subsequently I don't know the exact number. I know it's over 5 missions and none of those satellites with the new solar arrays have experienced any anomalies and obviously, with respect to both EchoStar V and VI, there haven't been significant numbers anomalies they're very isolated. A lot of time in between the occurrence of them. We certainly haven't seen anything from our satellites or from the satellites of others which have a similar issue which would indicate that we should expect a major problem but, you know, when there's an issue with them, we'll -- we let you guys know.

Okay. Thanks, guys. Great quarter.

Your next question comes from Michael Pace of J.P. Morgan.

Hi, guys. I was wondering if you could clarify the Attorney General --

Mike, we can't hear you - I'm sorry. Someone suggested to me if your question was if the delay of EchoStar 8 had anything to do with the solar arrays, the answer is no.

I'm sorry. Am I still on? Can you guys hear?

Just talk really loud. You're really faint.

Sorry about that. Can you clarify the Attorney General's probing of some of the business practices and the call response times and other policies and what exactly they're looking at in some of the things that you've given back to them?

Yeah. I think we -- the -- disclosed the general nature of it but it has been things like, you know, we didn't -- I mean, I'll give you an example.

On the one hand they have said that a customer said the only way you could get a refund was by writing us a letter. Another customer said that the only way to get a refund was by e-mailing us on the Internet. Well, the fact is, you can get refunds either way.

But for some reason, the Attorney Generals took literally what people said and we have to go through the facts and show them that, yes, you can get a refund either way.

Uhm, they -- another example would be maybe that a customer signs up for a year. And he only keeps the service for 8 months. And then, you know, we charge the customer, you know, the $200 penalty because you didn't keep it per the contract. And they feel like that should be pro rata or, you know, and we don't believe it should be. And we believe that there is a pro rata mechanism already built in because the customer could have paid just the last four months, you know, and that would have been a pro rata for him.

I mean, we think of a -- if a customer more makes a contract with us, they ought to honor it. So we have a difference of opinion on that.

So... you know, it's issues like that, that we need to look at and, you know, if it's an issue of disclosure to the customer, they didn't understand -- maybe we have to make them, uhm, initial each page of the document instead of just sign the document. I mean, it's things like that that we make sure that the customer fully understands the commitment that they make to the Dish Network and that our business practices are convenient for a customer so that he can, you know, that -- whether it be telephone, email or letter, he can get a refund.

We have to make sure that we make that easily accessible to customers and so I think that, uhm, I'm willing to put our customer practice up against anybody. I mean, I -- you know, we're not perfect. We're still learning. You know, as a business, uhm, but, you know, and I think we can do -- we can certainly do a better job and there's certainly, uhm, some helpful suggestions in our discussions with, uhm, State Attorneys General and as we see the big picture, and some of it relates to dealers, right?

In other words, people beyond our control in terms of what might be -- you saw something in Los Angeles where a retailer was apparently doing some telemarketing against Adeletia. Well, you know, that's not us. That's a retailer. If we get evidence that a retailer is breaking our rules, then we'll terminate them. So it's a lot of issues like that.

That's helpful. Could you go over the logistics and your intentions for the --

You need to speak up. We cannot hear you.

I apologize. Can you go over the logistics and the timing of the changing controls on the bonds assuming that the merger does go through and what you plan on doing by that? I see a September 15 deadline in there going back to --

Maybe.

What's your [INAUDIBLE] doing.

David may have some comments on this but in general, there's a couple of our debt instruments where I think there clearly is a change of control provision. We would be required to offer to repurchase at 101. There are some other ones where we're still evaluating those. And we have a September 15th deadline to come up with a plan, uhm, for General Motors. On how we would do that. Which is -- I believe was extended by them --

It was previously an earlier date it was extended by agreement. Do you want to add something to that, David?

No. I think that's exactly right. I couldn't hear all the question so I'm not sure if we answered his question.

I think you have. Thank you.

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

Your final question comes from Chris Little of [Osterlife] Capital.

Hey, guys. Could you comment a little on the Cap Ex guidance? It's a pretty wide range of 200 to 400 for the second half.

And just based on your comments that the digital lease plan might be a lower percentage in the second half. It doesn't seem that the Cap Ex expenditures will tick up. You got to the 20 percent on the satellite manufacturing side. So is it correct to assume that the low end of that guidance is the probable course especially given the economic environment? In other words, the 200 million rather than the 400 million?

Yeah, I think, you know, as we have said in our guidance, it really depends on the strength of the economy and then the other variable, you hit it on the head, is what's the -- how much we capitalize under the Digital Home plan because the satellites are a lot more predictable. But to the extent that the penetration, uhm, on the Digital Home plan is a little low in the second half of the year, and to the extent that the economy continues to struggle, you know, I think it is reasonable to assume that you know, we could potentially be closer to the low end than the high-end.

And there's nothing on the satellite manufacturer or the infrastructure side in terms of the stuff that you know, could spike that up closer to the 400 number? It's more a fraction of if you had 60 percent of the new customers taking the lease plan, then that would really drive it up or is there something maybe with the FCC in terms of timing payments or like that?

There is nothing above and beyond what we disclose.

There is nothing contractually. It doesn't mean we won't acquire something but we don't anticipate that today.

Thanks, guys.

I think it's prudent to be cautious out there today. The market's not moving in a straight line, it's a pretty choppy environment.

Having said that, it's an environment we love as a company. Because it's tough. You got to be good. You have to be real good.

We'll see what our company and management team is made of and, you know, the next 4 1/2 months are going to be very interesting. Lots going to be happening. And, uhm, you know, we got a lot on our plate.

So, uhm, with that, our -- we'll -- our next conference call will be November, I guess, first couple of weeks of November. Is that right?

Yeah. Probably the first couple of weeks of November. And, uhm --

No later than November 15.

We are going to try to stay focused on our business, and continue the path that we're on. And obviously, the merger will be the center point of what we're doing. Over the next, you know, through the end of the year. But, uhm, other than that.

I think that's it. We would like to thank everybody for joining us. Please stay tuned. And operator we would like to conclude the call at this time.

This concludes today's EchoStar Communications second quarter earnings release conference call. You may now disconnect.