DISH Network Corp (DISH) 2006 Q3 法說會逐字稿

Good afternoon. My name is Lu Ann and I'll be your conference operator today. At this time I'd like to welcome everyone to the EchoStar quarter three earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you.

I'll now turn the call over to Mr. Jason Kiser, Treasurer of EchoStar Communications. Please go ahead, sir.

Thank you, operator. Thanks for joining us.

My name is Jason Kiser and I'm the Treasurer here at EchoStar. I'm joined today by Charlie Ergen, our Chairman and CEO, Carl Vogel our President, David Moskowitz, our Executive Vice President and General Counsel and for the first time, Bernie Han, our new CFO.

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

Thanks, Jason, good morning, everyone and let me add my thanks to all of you for joining us.

As you know, we do invite media to participate in listen-only mode in the call so we ask that media not identify participants and their firms in your reports. We also don't allow audio taping of the conference call and we ask that you please respect that.

All statements we make during the call that aren't statements of historical fact constitute forward-looking statements within the meaning of the Private Litigation Securities Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that could 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 all the factors that could cause our actual results to differ. I'd ask that you take a look at the front of our 10-Q for a list of these factors. In addition, we may face other risks described from time to time in other reports that we file with the SEC.

All cautionary statements that we make during the call should be understood as being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our reports and should not place undue reliance on any forward-looking statements we make. We assume no responsibility for updating any of our forward-looking statements.

Also note that during the call we will refer to certain non-GAAP measures, which are reconciled in our 10-Q or on our Investor Relations Web site.

With that out of the way, I'll turn it back over to Jason.

Thanks, David.

All right. Well let's take a look at the quarter. Total revenue for the quarter was $2.47 billion, a slight increase over last quarter and 16% higher than the same period a year ago. Continued subscriber growth and higher average revenue per subscriber were the primary drivers of the increase.

From an EBITDA perspective we generated $580 million during the quarter, a decrease of $34 million from last quarter but $68 million higher than the same period a year ago.

Net income for the quarter came in at $140 million, a decrease of $29 million from last quarter and $69 million lower than the same period a year ago. We should note that the net income for Q3 of last year included $73 million of a tax valuation allowance reversal.

Basic earnings per share for the quarter was $0.31compared to $0.38 last quarter and $0.46 for the same period last year. During the quarter free cash flow was $181 million. This represents a $27 million increase from last quarter and $8 million lower than the same period a year ago.

The decrease from last quarter resulted from an increase in purchases of property and equipment partially offset by an increase in net cash flows from operating activities.

Let's look at the DISH Network specifically. During the quarter we added 295,000 net new customers, ending the quarter with 12,755,000 subscribers. Churn for the quarter was 1.76% compared to 1.70 in Q2 and 1.86% for the same period a year ago.

During the quarter our average revenue per subscriber was $62.86, an increase of $0.15 per sub over the second quarter and an increase of $4.99 for the same period a year ago. The year-over-year increase in ARPU was driven by several items.

While we had price increases in February we also had smaller programming discounts during the quarter than we offered in our 2005 promotions. We had higher equipment rental fees resulting from increased penetration of our lease program.

We continue to see increases in advance set-top box households which show up as increased ARPU from the additional fees that we receive. The increased availability of [inaudible] in both standard and high definition helped to increase ARPU, as well. And lastly we're starting to see an impact from fees generated for our DISH Home Protection Plan.

Subscriber related margins decreased 51 basis points from Q2 and about 178 basis points from Q3 of last year. The decrease in sub related margins from Q3 last year was primarily driven by a couple of factors. First, there were lower programming margins, most of which was the result of a one-time vendor credit that had a positive impact on last year's number.

We should point out that when looking at comps versus last year, the $35 million credit in Q3 of '05 provided for approximately 165 basis points of non-recurring benefits margins in that period, however, we did have higher refurbishment and repair costs for returned receivers associated with increased penetration of our lease program and higher costs from the expansion of our in home service and call center operation to support subscriber growth and improve service levels.

As we mentioned last quarter, our SAC calculation no longer includes certain benefits from our lease program. Instead these benefits will be separately discussed and all prior period SAC amounts have been revised to conform to the current calculation.

During the third quarter subscriber acquisition costs plus equipment capitalized under our new subscriber lease program decreased $9 per add from the same period a year ago. For the quarter we averaged approximately $688 per gross addition compared to $683 for Q2 and $697 for the same period a year ago.

The decrease in SAC from Q3 of last year was primarily driven by several factors: First we experienced reduced hardware costs per receiver. We also had fewer receivers per installation due to the use of more dual tuner receivers.

We were also able to redeploy more equipment return by disconnecting lease subscribers. And lastly, we experienced a reduction in accessory costs related to the introduction of less costly installation technology and our migration away from relatively expensive and complex super dish installations.

Separately, the benefit of payments we received in connection with equipment not returned to us from disconnected lease subscribers and returned equipment that is made available for sale rather than being redeployed was $29 million for Q3 compared to $30 million in Q2 and $25 million for the same period last year.

Take a quick look at the balance sheet. At the end of the quarter we had approximately $7 billion of debt. We also ended the quarter with cash and marketable securities of $2.8 billion, which excludes $197 million of restricted cash and marketable securities.

On a total debt per subscriber basis, we ended the quarter at $547 a subscriber. On a net debt basis that drops to $328 per sub.

Capital expenditures in the quarter were $377 million with about $267 million of that amount going for all capitalized leased equipment and the remaining $110 million for satellites and general corporate Cap Ex.

That's everything on the numbers. So with that, operator, we will take questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Michael Pace with JPMorgan.

Oh, hi, thanks.

First question is I'm just wondering if you can make some comments on, you know, given that the competitive environment is obviously changing, cables, triple plays has been rolling out more and more over the course of 2006. I'm wondering if you can comment on any changes to the quality of the subscribers that you're getting, you know, comparing to maybe 12 months ago and maybe even 24 months ago and what internal metrics do you use to judge that?

This is Charlie.

I would say in general [inaudible] hasn't been much change to the subscribers that we're getting. It's been fairly consistent. I think that's backed up by fairly consistent churn ratios for us, you know, the last four or five years.

You know, we certainly, perhaps on the high end with HDTV and DVR, more advance services we probably do perhaps get more than our fair share, you know, versus cable system but haven't seen perhaps as much impact from the triple play kind of thing that we read about every day. Yet, obviously that's a factor and obviously it's something we've got to keep our eye on certainly competitive for us in the marketplace.

The customer, there are many customers that decide they want high-speed broadband and they may get it from a phone company or a wireless company or they may get if from a cable company but if they want the best video, it's 100% digital, best quality, most high-definition television, most advance DVRs then they tend to look at satellite. I mean they look at satellite, I think we get our fair share of those customers.

Your next question comes from Bryan Kraft with Credit Suisse.

Thank you.

Just want to find out what your latest thoughts are on the potential for an investment in a broadband entity. Is this something that's still much of a priority for you? And if so, should we be thinking about it as more likely a minority equity investment or could it perhaps be something more substantial, something you take a larger stake in?

This is Carl.

I think that we continue as we've said in the past number of quarters to look at all opportunities that present themselves vis-a-vis broadband. We have announced that we're doing more with Wild Blue on a satellite broadband venture and we have announced that we're doing more with reselling DSL through our connected venture.

Our threshold is that we'll look at anything that makes sense as long as the economics make sense. We don't have a preference for owning a network or not. We want to make sure that whatever we invest in makes a lot of sense and that we can get an adequate return on our investment.

And as Charlie indicated, we seemingly are doing fairly well holding our own in terms of gross and net connects revenue per sub, et cetera. But we continue to look at broadband opportunities.

We will make an announcement when we find something that makes sense and it could range anything from reselling, as I commented earlier, to making an investment in a fairly large scale if we find something that makes sense.

Thank you.

Your next question comes from Jason Bazinet with Citigroup.

Thanks so much.

One quick question I guess in terms of earning an economic return on whatever business you enter. Can you just remind us again in terms of offering some sort of for lack of a better word, a Vonage type phone offering, why that doesn't make sense from your perspective given that there's nothing embedded in your equity for that sort of revenue stream today and you could offer it at a deeper discount to the cable guys and potentially reaccelerate your video net adds. What doesn't make sense about that logic?

Again, I don't think we're having any problem with our gross or net video adds and we haven't been presented an economic model where we think we can get an adequate return on the net incremental profit from reselling anybody else's product.

And with respect to Vonage specifically, I think we're more focused on having a broadband data product. If the consumer wants to select those VoIP products, they can do whatever they want as a consumer.

But we haven't seen any model that makes the resale economics particularly compelling to us at this point and therefore, and we haven't seen a tremendous amount of demand out of our subscriber base for a VoIP product. I can see why that would be very good for Vonage, but we haven't seen an economic model that makes sense to us.

This is Charlie, just to follow-up on that.

I think that there is a point to your question. We have the opportunity for brand extension with customers, if they like us and like the video service that we provide them, there are things that we certainly can sell them in the future.

Having said that, we don't want to defocus on our core business and certainly our priority has to be to our core video business which is fairly robust. In terms of gross adds, it was certainly the most we've done in a quarter for a long time.

I guess the --

There's an opportunity there it's just when you spend a dollar there, you don't make as much return as we do going out getting a video subscriber today. So we had to focus on, you know, you focus kind of where you make the best return but that, I don't think we lose sight of what you're saying, I think we're looking at those kinds of things if we have availability of having a brand extension.

One of the things you have to do if you look at that is you better be really good at your customer service to begin with. And that's an area where we slipped a little bit in the last couple of years and where we've made a bigger investment in customer service and you see that a little bit in the margin this quarter.

We opened up a new call center domestic in the United States call center in Texas. Those are never very efficient when you first open them up, but it puts us in a better position to take care of our customers. We spend a lot of money in our installation service side of our organization in terms of training and making that sure we do a better job there.

You've got a little, we've still got, we've got work to do on customer service, we're not rated number one in every poll like we used to be and if you do have great customer service, then you can do the kind of things you're talking about.

If I could just follow-up.

I guess the, I agree the near-term metrics are right but I think what has the Street a little bit concerned is they're looking at Cablevision's video net adds now that they're well along in their phone deployment and they're guiding at a growth rate that's faster than the industry's category growth.

And if you take that and as all the other cable operators rollout phone and you augment it with your partners on the telco side becoming your competitors, you know, there's this nagging sense that things could get pretty nasty pretty quickly in spite of your robust quarter this quarter. And I guess, am I hearing that there's not a sense of urgency strategically to do something that's more pervasive than just a video offer as long as your near-term metrics are robust?

No, we're very active as I said, I've said this on every quarter. We look at every opportunity that we can to make brand extensions to the DISH Network platform and leverage our operating overhead. It isn't any necessarily sense of urgency.

I don't particularly buy into the fact that Cablevision's the benchmark for EchoStar nor the benchmark for the industry having run a cable company for myself in the past. I think Cablevision has a very unique set of demographics, a very unique market footprint, and very unique elements of scale in terms of density, in terms of what they already had from a backbone standpoint though their [SELAC] business and they've been very, very successful with a very aggressive model with great demographics. We don't do well in New York, we don't even carry the S-Network.

But in terms of our telco partners, I believe AT&T has publicly said that their telco opportunity, where they're going to build a hubris product is about half the footprint. That leaves the other half of the footprint available for a combined Homezone EchoStar footprint product and I believe that represents somewhere in the neighborhood of 18 million homes.

So it's not that we don't have any sense of urgency and it's not that we're not looking at strategic investments that make sense, but if we're reselling a product that has a market value, or a retail value of $19 we're getting half that profit at 10, the economics just don't work if there's a lot of call volume and there's no quality of service and everything else. So we're looking at resale opportunities that make sense as I indicated with respect to our Get Connected program.

We're aggressively looking at broadband opportunities that may be our own, where we make our own investment network. We went to the auction, we've been very active in looking at opportunities and it's not that we're breaking our arms patting ourselves on the back for a good quarter forgetting about the future, we're very aggressive in those areas and we see opportunity in those areas, but we're going to do something that makes sense economically.

Okay. That's very helpful. Thank you.

Your next question comes from Doug Mitchelson with Deutsche Bank.

Thanks. A little general and variety of questions today.

You just mentioned the Homezone set-top box. Can you tell us how it performed in the test markets? Would you expect the Homezone product to increase the pace of gross additions from AT&T?

Well, the --

I think you'd have to ask AT&T they just rolling out in the test markets and the current Homezone product I just pointed out is an impact two product because we think the kind of customer that wants Homezone is going to be a higher-end customer.

We think that our real, our focus at EchoStar is to make sure that that product gets transitioned into the impact four product we're doing for all of our HD customers today and so I think the test market's going to reveal a lot in terms of potential demand and I'm sure AT&T will give you some guidance and discussion of that.

And we are internally, I can just say we're very optimistic about that type of product as long as it has the feature set that we think it needs, which the one it's lacking today is MPEG-4. That is part of what we're working with Homezone folks from an engineering perspective to make sure that that's the kind of product that we envision is the one that's out there long-term and in the meantime, a lot of testing's going on, a lot of lessons learned.

And I think it's going to be, I think it's like anything else we probably over estimate day one what it can do and probably underestimate what it will do a year or two from now.

And then, so AT&T in the press release didn't list EchoStar as contributed to the development of the Homezone set-top box but it sounds like you are. What's the involvement that you have technology-wise?

The integration to use our operating system so that it works with our satellite system so we have been involved in the integration efforts. I would say that the heavy lifting of it has been done by the Homezone --

Two Wire.

The company called Two Wire has done the heavy lifting of that particular development. We've been a bit more active on the MPEG-4 implementation, although Two Wire and AT&T both are involved in that.

And then, I don't know if you can remind us or maybe it hasn't been disclosed yet but how does that work when they issue a Homezone box are you going to bear the burden of that cost or they bear the burden or is it split somehow?

Depends on --

We're not disclosing --

Yes, we're not disclosing that kind of split but it's not too distant [inaudible] than how we do it today. With AT&T.

Okay.

Then, so on the 10-Q and then Jason also mentioned implementation of a technology that's reducing cost of accessories relating to the lower cost of installation. So can you tell us what technology you were referring to there?

That's the DISH Pro Plus technology whereby we don't have to penetrate the house with two wires for a dual [inaudible] we only have to penetrate it with one.

We've developed some technology really, it's fairly complicated when you're looking at three satellites in terms of switching in terms of wires that would come into the house. And we've developed technology with the help of others that allow us to come in, at least from an installation point of view, once the dish is installed outside, everything else is relatively simple to come in.

And I guess the other piece of that is, I don't know if that's, is that we've also simplified, we've got to high-powered satellites at the 129 degree location and not doing as much with the medium powered satellite today which [calls] a larger dish which any time you have a larger dish, you exponentially have service calls, wind loading, and additional installation cost so we've improved there.

Okay.

And then I don't suppose you want to give us a sense of, you mentioned you leaving, that leaves it to a dual tuner question about what percentage of installs these days are dual tuner installs?

We don't disclose that, but one of the things that are again, this is something we do different from anybody else in the industry is and, again, we don't get a lot of value for our engineering group but, again, we have one of the most sophisticated digital engineering groups in the world today that has developed some pretty amazing products.

One of thing is dual tuner, which allows you to watch and record but it also allows you to go to another TV set in your house without paying another set-top box charge so that saves our customers $5 a month or $6 or $7 or $8 over what cable will charge you. Again, hurts our ARPU a little bit, but does when you add up, when you add up the true cost of a triple play bundle and then you also look and say I want to buy video separate and I want to buy DSL separate, and I want to buy voice separate, if you really do the math, many times DISH Network will come out ahead of any of the promotional offers and certainly the long-term offers that are out there.

And I think ultimately customers are economic animals and once they do the math, you know, we're in pretty good shape. And one of the ways that we're able to save $5 or 6 or 7 or 8 over our competition is that second tuner for our customers.

Then two last questions I'll just ask them at the same time at the risk of having Moskowitz have to give a laundry list of information here.

Your press release, previous press release you were working on a work around related to the TiVo [inaudible]. Is that still the case and how's that progressing?

And the second question for you, Charlie, is just how you feel about the returns you're getting on your investment in new subscribers today and do you think they're going to go up and down as you look forward?

The second part I'll answer first.

I mean returns on new customer subscribers today it's still the best place for us to invest. It's been fairly constant for the last 18 months. It's probably not what it was eight years ago, but it's still by large factor better than anything we can find to put our money today and still a very good return compared to what most businesses get in return.

On the capital, I think if you look at our capital structure and look at return on capital we've done pretty well.

TiVo, I guess I talk in general about TiVo, I mean we've got certainly good news there in the sense that the, I mean there's really two ways for us to make sure that TiVo is not an issue for us and, of course, today it is not an issue. All of our customers that are using their DVRs, we're shipping DVRs, the Court has mandated a stay and the injunction from the District Court. So our customers aren't impacted.

The Court also said that we, and Appeals Court also said that we had a, let me get the right words, strong case on the merits. Substantial case on the merits. Substantial, not [inaudible] case on the merits and they've already made one ruling that the Court erred in not letting us present to the jury our non-infringement legal opinion. So we've already got that happen.

Of course, the other thing that's happened is that the other part of your question is that TiVo during trial did explain to the jury and the judge exactly how they believe exactly their system works. You could logically look at the fact that if we have a set of world-class digital engineers and we now totally understand how at least TiVo says their system works, and they certainly, under perjury and penalty of perjury have said how it works, that certainly looking at alternative technology's something that we will and can and should look at.

And that obviously would have a long-term positive impact should we be able to design something that would give us an alternative technology not impact the quality of our product. And so that's one reason of having an engineering organization is important.

And you'll notice, I will point out that we are not accruing any kind of contingency for TiVo at this point. So the only thing that we've accrued, I think we stopped at the end of July.

The judge had awarded damages through July 31st. and so we did accrue the full amount through July 31st. We've taken a look at it more recently and concluded that we are more likely than not that we will prevail on the appeal.

And consequently, we've concluded that we do not need to continue to accrue for any further damages with respect to TiVo, whether it be a per month fee per household or whether it be additional interest on the judgment. We're not accruing any additional amounts because of our conclusion.

And I'll point out that we still have our own patent litigation against TiVo where we believe they violate the EchoStar DVR patent so, the intellectual property we have so that's kind of that case.

I might take this opportunity while we're talking about legals maybe talk about distant signal. Distant signal litigation where the news is not as good as in the TiVo side where we got reversed on the Court of Appeals. And even though we got a settlement with all of the broadcasters other than the FOX owned and operated systems, the District Court did not feel that they had the ability to accept that settlement offer.

So we, under an junction to turn off customers by December 1st, and you'll read in our disclosure that we have approximately 900,000 customers who may get at least one distant network signal from us.

So there's really two things there. One is, obviously, at this point the only entity that could save legal customers would be Congress and they are meeting in special session November 13th. And we certainly have been on Capitol Hill, and have, I believe we do have support to make sure that customers, legal customers lose network signals.

Having said that, it's obviously an uphill fight in a lame duck session to pass something that would save those customers, but we certainly are going to try to do that.

Obviously the only real company that's against us on Capitol Hill is FOX/DirecTV. They have an understandable business reason why they would be against us but we have, obviously, the fact that the broadcasters were willing to settle shows we had broad support there.

To put in context, I think we disclosed that we're taking in about $3 million of revenue a month in distant signals so it's not a huge revenue situation. The majority of those 900,000 customers do in fact already get local from us or have the ability to get local-to-local because we do it in 170 markets and I believe we're launching five more markets before December 1st. So we'll be in 175,markets, so we're in about 96% of the households where people can receive their network signals from local.

Having said that, we obviously skew towards rural America and we still have 40 markets that we're not doing distant signals. There's some very complicated things in the law in terms of short markets where there's not all the broadcast stations in the local market.

There's another 11 of those we do today. There's RV owners, and so gets a bit complicated.

I think our attitude is, so certainly, you know, on a balance could increase churn and could increase some of our expenses to out and put [offer] antennas for customers that we'll put in for free for those customers and it could increase churn if customers decided to go to an alternative provider. We certainly will encourage customers to go to lifeline cable or an outdoor antenna.

Our attitude really is if we're not as competitive in some of those markets, then we've got to go get our customers somewhere else. Some of the energies we focused in those markets we'll focus some place else.

If somebody gets a customer from us in one of those markets, then we've got to get two of their customers from a different market. We're competitive and it's not acceptable for us to, as a management team, to be talking about the fact that we have an excuse of why we might not have as good of subscriber count one month and we have to go out and be smart and focus our attention on where we do have advantages in the marketplace and there are significant advantages that we have in many parts of the market.

On the other hand we hope that Congress will look at that. These customers have done nothing wrong, they're legal customers. I think Congress has indicated they want competitive environment out there and they really want to do that.

Congress has the ability to make sure those that customers are taken care of but we have to wait and see how it all turns out. Regardless of what Congress does, we're going to be out there fighting for our fair share of customers and if we lose any customers, we're going to fight to replace them.

Thanks for all the time, gentlemen.

Your next question comes from Todd [Chenko] with Jupiter Research.

Yes, good morning.

The past year certainly been the year of portable video dominated, of course, by Apple iPOD. I was wondering if there was a way for you to capitalize on that phenomenon with your investment in ARCOS specifically a pocket dish DVR. If you could talk a bit more about that.

Well, I think it's, we certainly have an investment in ARCOS they certainly are the dominant portable video provider in Europe. They're not as well versed here because Apple certainly is a very strong competitor.

They have new product that they're bringing to marketplace. We had hoped to have them out for Christmas, but they've been delayed. We think those are formidable products.

When you talk about earlier question about brand extension we think that there's some brand extension we can do with ARCOS in terms of portable video because we think many of our customers who watch our video in their house would like to take it with them. And there's certainly the programmers we need to work with to make sure everybody's comfortable with security and everything else and right now our biggest holdup there in and being more aggressive there is just a better product from ARCOS and the operating system was a little bit hard to use in our opinion.

And we went in and worked with them on a new operating system and some new features that we think will be important that I guess you'll probably see at the CES show that we think that will be the product next year that has some potential.

Thank you.

Our next question comes from Michael Harkins with Levy, Harkins.

Charlie, in London, BSkyB for about 11 weeks has had a broadband product that seems to be satellite based or satellite download. What advantage do they have over you and why can't EchoStar do something like that? And what sort of costs would be incurred? Thanks.

Again, I'm not all that familiar with what BSkyB is doing but they did invest in a terrestrial wired network and what they may be doing is doing one way terrestrial and the second was return path via satellite.

Hughes did that years ago here when the first direct way product. It wasn't very popular because, and now it's probably even less attractive in the United States in my opinion because if you can do something via cable, you can do it two way today, you don't really need to, there is a company in the United States that does it the way you describe it. They don't have a ton of subscribers.

We think, so if you look at kind of the engineering side of it, we think there's, we think the best way to do it is probably if you had to pick a way to do it, you would probably do it terrestrial wireless, probably secondly you'd do terrestrial with a wire and thirdly, you'd do it satellite, two way via satellite.

The only reason you don't do it terrestrially wireless in the United States today is all the spectrum really hasn't been consolidated and nobody's spent the tens of billions of dollars of Cap Ex to be able to do that, but you're starting to see, media Wi-Fi and you're going to see people like Clear Wire and others that are certainly working at that.

Our focus today is, obviously, to do what we can do and that's work with people who have an infrastructure and let us piggyback on that and let us sell the product for them on a partnership basis and then, of course, with Wild Blue we know that we have a fair number of subscribers who are outside the range of addressed to wireless products, or outside of the range of our wire product, and so as Wild Blue launches a new satellite later this year and make that operational next year, they'll have more capacity to do some more there.

And again, we're not putting big investment there. We don't get the kind of returns there that we would on our core video product but to the extent that we could make a little bit of money there and satisfy customer need and perhaps secure a customer from a churn, possible churn, make some sense to us to do it.

And then we continue to evaluate all of the technologies in broadband and there certainly are going to be quantum leaps in broadband technology. And it's unclear to me, you know, who's ultimately going to prevail there and whether billions of dollars in investments are going to get a return or whether billions of dollars in investment in satellites will get a return or whether billions of dollars in investment in wired terrestrial will get returned. But I think we'll be as good as anybody in figuring that out.

Thanks, Charlie.

Your next question comes from Lale Topcuoglu with Goldman Sachs.

Hi, guys.

Charlie, to the extent you can answer, where do you see the direction in terms of the profitability of your business? Obviously third quarter was great.

And I'll be a little bit more direct about this question too. As a controlling shareholder, how would you evaluate a decision to either own 100% of this business or own it not at all? Is it just as simple as an economical calculation and based on your ROI?

And the second question I have is, obviously, there's been a lot of news whether DirecTV gets owned by Liberty or not. Would you expect the competition with DTV to get worse or don't expect much of a change should Liberty Media actually ends up owning DirecTV? Thanks.

Well, I think the Liberty/DirecTV question, obviously the fact that DirecTV at least is play in the press is certainly on a slight margin probably a positive for us because it certainly creates some anxiety in management and employees within DirecTV.

If you live in Los Angeles, are you still going to have a job? If you live in New York, are going to move it to Denver? Are you a Liberty guy or News guy? And there's obviously so forth and so on.

So I hate to manage, I would hate to manage that -- have to manage the day-to-day side of that because employees talk and gossip and worry. And we're fortunate that we're able to chart a pretty, a little bit steadier course as a company.

Having said that, clearly there's probably nobody I respect more than the folks at News Corp and Liberty so they're equally formidable and equally smart. I would see no advantage, probably one way or the other if they decided to do something on that other than there's always that transition period where things are in flux and probably on the margin a slight advantage for us.

As far as our own company, you know, I look at it, we run the Company for shareholders and that includes myself, but includes probably people on this call. We try to make sure that everybody's who's ever trusted us enough with one of their dollars that they're going to get a return on that and that we're doing the right thing for them.

And we've shown in the past that there have been two times where I've given up control to merge with DirecTV because that was the right thing to do for the shareholders, and if there's something that's compelling out there either to own more or to own less, if it's the right thing for shareholders, then we would always take a look at that and our board of directors would be looked at that and that's how we look at it. I think we're economic animals.

Okay.

As a CEO, you know, as a shareholder, I'm passionate about the company and love coming to work and love to achieve more than that we've achieved today and love to take on new challenges and everything else. But I look at my job as being a CEO and so I can't let that part of it, you know, come into play.

Somebody else earlier asked about the return on our invested capital in our internal rates of returns on our new customers and we still see that as a very compelling economic. And I think all of you that follow this business know that if we slowed down on the growth side, we would generate tremendous amounts of free cash flow.

But we have, at least to this point, decided that there's greater opportunity in adding new technology and enhancements to our platform working to be fixed, mobile and portable and making those investments to play out that revenue opportunity and hopefully leverage our operating infrastructure to do that.

As we look at our plan, we still see the best return on our dollar which continues to drive the DISH network video service brand as far as we can. And that being said, to the extent those economics change, there's tremendous cash flow opportunity that comes off of this business but we certainly haven't gotten to that point yet.

Thanks, guys, I appreciate it.

Your next question comes from Matthew Harrigan of Janco Partners.

One very high ROI niche for you has always been the foreign programming, I mean, you're really practically the only source apart from Spanish and some nice bouquets across a lot of European and Asian languages.

Have you pretty much locked up a good number of the rights medium-term in that or is that an area where you see some accelerating competition from Comcast and others?

And then secondly, as your business matures and you have 12.7 million customers, obviously, a lot of the SAC expenses incurred is just maintaining the water that's in the sink as opposed to adding customers. If you really were running the Company for cash flow apart from the plain vanilla SAC issues and the point that Carl made about expanding the venue for EchoStar, is there a lot more that you could do, you know, to increase free cash flow?

In other words, if you did decide to do something, do you think that the Street may actually under estimating the steady state free cash flow generation if you weren't inclined to grow the business as much?

Let me talk about the foreign programming first. It is a segment that is becoming increasingly competitive, but the good news is that we've been a good partner to our foreign programmers for over 10 years and the good news is we've provide ubiquity of footprint across the entire country.

We do see some impact from both DirecTV and cable operators to expand their international offerings, but we're very comfortable with where we're at. We continue to work hard to maintain our relationships with our programmers.

It's an important segment of our business, it is profitable but that's not to say we may win some and we may lose some going forward. But it's an area where we spend a lot of time, we have focused people both on the ground in the states and in Europe and Asia in the Middle East, so it's an area that we continue to maintain focused on and I think we'll continue to show decent results.

In terms of the free cash flow opportunities, I think, you, you know, the Street can do the math. Jason went through what we generated in cash flow, what we spent in capital expenditures, where we spent it, I believe two-thirds of our Cap Ex spend was for SAC related items and you can do the math and you can come to your own conclusions.

I think this quarter we ran at somewhere around a 23-ish percent EBITDA margin. And I think that when you look at running more of a steady state business, your marketing costs change, your Cap Ex costs change, we would still be aggressive in maintaining our satellite fleet. But as I think you all know, those are capital expenditures that come in somewhat of peaks and valleys.

We believe there's certainly material opportunity to increase cash flow if we slow down the business but I don't want to get anybody to get the impression we're slowing down the business because we're not. We still think there's plenty of opportunity there.

And the Street can come to their own conclusions as to how we spend our money, what money would be necessary to go forward, the timing of those expenditures, and I think when you do that math we're a pretty compelling investment opportunity.

So it wouldn't just be a linear function of what percentage of the gross adds were incremental net adds that you think it would be beyond that?

Yes. I don't think it's quite that simple.

Okay. That's what I suspected. Thank you.

Your next question comes from Jeff Wlodarczak with Wachovia.

Hello, guys. Congratulations on a strong quarter. And Charlie, thanks for participating on the call. Two questions. Charlie, can you provide--

I missed you guys last time.

No, we missed you.

He's been preparing for weeks for this.

I just happened to be in town today.

Well, hopefully you were somewhere warm.

Charlie, can you provide more color, it's a bit old now, but I would certainly like to hear more or your commentary that there were $3 billion in synergies from a DISH/DTV merger.

And then, can we drill down a bit on the subscriber related expense line? It was up sequentially. Carl, last quarter you said there was some one-time items related to EchoStar 10, single-dish transition. Was that continuing in this quarter and then were there any [inaudible] conversions in that expense item this quarter? Thanks.

I mean, there's obviously a lot of synergy. I don't know what the number of synergy would be between DirecTV and a DISH Network, it's obviously a big number.

We looked at it years ago when we tried to acquire DirecTV, it was several billion dollars. I imagine it's in some ways a little better in some ways a little worse now but it's not something we're spending time on, let's put it that way. We can spend our time running our business.

And the expense thing I think is a good question and something that certainly we're focused on in terms of the customer related expenses. There's a lot of buckets in there from retention marketing to installation and service to call center. Those would be your three biggest buckets.

And again, Jason mentioned that the margin is a little misleading because of the one-time gain we had last year. Even said that, we made a strategic decision as a company that our customer service level wasn't at the level that we wanted it to be.

And so we really had some management who were out there really controlling expenses, but doing it by not answering the phone as fast or not showing up as fast to do an install and that's not the way you run a business. So we gave strict direction that we're going to make sure that we're meeting our metrics from a customer service perspective.

We then come back in behind that and say, okay, now your expenses went up but you've got to control your expenses, but you've got to maintain those levels of customer service. And we've got a fairly young team and had some new people and we're having to give them a little bit more direction than perhaps I'd like to, but nonetheless committed to that.

So we opened a new call center so we can answer our phone calls in a more timely manner that costly, it's new people, it's inefficient when you first do it. We do more service call, in the summertime you have more service calls because of lightning and those kinds of things,

We want to get in installer systems a little faster so we don't lose the sale because somebody else comes in before we get there. That requires manpower to do that. Our business has been stronger, strong so you've got over time that you're paying time and a half on and so forth.

So -- and then retention marketing, we continue to -- we now have our MPEG-4 product so we didn't want to go out and put an MPEG-2 DVR in and then come back and put an MPEG-4 DVR in six months later so we now have our full complement of product. We've had one of the only performing HD DVRs on the marketplace and we're able to go out to those customers from a retention point of view that perhaps were waiting in previous quarters.

So that's your biggest bucket. I don't think you've turned those kinds of expenses around overnight in one quarter. And I think that we -- it will need some significant oversight.

And the other thing is we brought in Bernie in as our CFO and our prior CFO, Dave Rayner, is now running the service organization. So he's, number one, he knows the business, he knows our company now and he's out in the operations with a very financial, strong financial background to put some controls in place there and some things that maybe didn't exist at the level we'd like him to do. So I think we're in much better shape to attack that.

And it's certainly not wildly out of control by any means, but we're perfectionists and we've got room for improvement there. And I hate to lose money in operations because you lose it forever. You never -- you get no benefit by being inefficient

And so we'll see how it goes the next, probably the next four quarters to see what kind of steady progress we make.

Thanks.

Your next question comes from [inaudible] with Lehman Brothers.

Thanks. I've got two questions.

First on the Homezone product. Charlie, or actually Carl, you mentioned that it's going to be deployed in like half of the AT&T territory where IPTV is not deployed.

Can you envision eventually the Homezone product to instead of the DSL from the phone company that that side could actually be an IPTV product and bundled with a broadcast TV signal via satellite for [inaudible] video? Is that potentially a product that could evolve given, I believe that IPTV may be bandwidth constrained for multiple TV homes?

And second, on distant signal issues, can you tell us how many of those customers are in areas such that they can get local channels but will require a truck roll to enable those local channels given their satellites? Thanks.

I'll start with the Homezone. We do believe there is a potential IPTV application there. We are somewhat agnostic at the moment what that broadband connection may be.

And as Charlie indicated, we're working on our own MPEG-4 version of a set-top box that provides additional content and additional on demand content through a broadband connection. So an IPTV certainly may be part of that.

And as I said, we're somewhat agnostic about the broadband connection and as I said earlier, we're looking at our own opportunities to provide our own broadband connection. So I think conceptually we like the potential marriage of our broadcast satellite business combined with some type of a broadband connection to enhance the viewer experience through IPTV or whatever it may be. In terms of distance, I guess Charlie or Dave.

Again, the majority can get local, and certainly the vast majority of that majority does not need any additional equipment. Having said that, I mean, we are out there installing new equipment for the customers who need it today.

It's a very tight window, we've asked the judge to give us more time, there's no guaranty that the judge will give us more time beyond December 1st. I don't know that we would with weather and everything else I don't know that we would be able to accomplish all that, you know, all the installations necessary.

But we're working hard at it and working to make sure that no customer gets disrupted where they in fact can get a local channel. And then we'll deal with those customers who can't get a local channel, again, an offer antenna, maybe the lifeline cable, maybe they'll switch to our competitor.

Those are all things that we'll have to deal with. And that they switch to our competitors, we're going to have to get new customers to replace them.

Thank you.

Your next question comes from Doug Shapiro with Banc of America Securities.

Thanks a lot. Just, I got a couple, as well. And I apologize if you addressed this earlier on the call.

Charlie, I think this is the strongest gross add, growth quarter you've had in the last couple of years and it doesn't look like your promotions were really that different or more aggressive than they were at this time last year. I was just wondering if you could talk about what the source is of the strength. Is it just blocking and tackling, or is there anything specific that you can cite?

The second thing is I didn't know if you could quantify what you mean when you say that the majority of your business signal customers can get local-to-local. How big is that minority?

And the third thing is in the Q you cite the amount that you'd have to pay on a monthly basis if the TiVo litigation isn't resolved in your favor. Should we assume that that's based on $1 or $1.25 per sub per month or can you tell us how that math works?

The math really is from what we looked like the judge and jury were awarding them on an ongoing basis and it's an estimate, I don't think we know for sure what it would be. David?

We don't know for sure what it would be and it's a little more complicated than that because there's also a calculation for interest, which would compound. We've assumed if notwithstanding our belief that we'll win on appeal, we don't, we assume might compound at some rate. It's not quite so simple as it's this many customers at this many dollars a month and there are some assumptions in there.

But it's based on the trial and what the jury said and how they're forming it. We don't totally understand their formula, but if you can figure it out and analyze it, more power to you. We've made the best estimate of what we think it would be.

In terms of doing something different, I don't think we really did much different. Mostly blocking and tackling, we did advertise a bit more, we did spend a bit more money on that so that was one thing that drove margins down a little bit because we thought we had a strong NFL offer with an NFL Channel Network 24 hour. So we did a bit more there and I think that early odds are that was probably pretty productive for us.

I think -- I don't think anybody delivers better video than the satellite guys. And I think, you know, at the price points and the quality and I think that cable's pretty flat in terms of new subscribers for video.

And where they're getting their growth is broadband connections and customers, and clearly it's a great product and people want broadband. And they're getting some phone connections where there may or may not be much money in it.

And I just think that the satellite guys are probably, I point out something too. Within the satellite guys, some of the satellite business is coming from phone companies, but as it relates to EchoStar and DISH Network, we really control our own destiny a bit more than that.

I think AT&T reported the number was 50 something thousand net new subs that they got. I think the net subs that perhaps DirecTV got from Qwest and Verizon and Bell South were materially more than that.

I think as an independent company, we're doing pretty well. We have a product that people want and we give them good customer service and they know how to use our operating system. It's a bit hard to pry them away from us.

I don't know if I read the analyst stuff, I'd expect the sky to fall tomorrow but every time I go to my computer and look at how we did last, yesterday or today, you know, we don't see that yet. So logic tells us it's going to be more competitive.

Logic tells us that there may be something to all this investment that other people are making. But logic also tells us that there are a lot of people, not everybody drives a big fancy car and lives in a big house, there's a lot of people in America that are middle class.

And a lot of people in America that want the best and we do pretty well that that middle class and we do pretty well with people who want the best. So I don't know. We'll have to see.

We've been pretty steady. We haven't had a lot of ups and downs and we haven't changed our credit score. We haven't changed what we're doing.

We haven't gone out and looked for a weaker customer or a better customer. We've kind of just keep doing what we're doing. And sometimes it's dependent on what other guys do and what their promotions are and sometimes that affects you in a particular quarter and I just think that we think that there's going to be demand for satellite for a pretty long time.

To Carl's question about the IP, I think people don't care where they get their video. I think there's a huge, going to be a huge demand -- I think every customer if they were on [inaudible] would want a satellite dish to get HDTV or get their best video.

I think they would supplement that with IP, I think they're going to supplement that over the next five or ten years with IPTV. They're going to supplement that with mobile video they can get through a Wi-Fi connection.

They're going to supplement that with perhaps a local connection from cable or a phone company and our ARPU side of the equation might change a little bit, but I think the number of households that we can get into, we still have a long way to go.

I don't know which number it was in the order, but the other question I had was about what's the proportion of the 900,000 that live outside of the local and the local footprint?

We haven't disclosed that and there's a reason it gets a bit complicated because just to give you an idea. Certainly the majority, you could probably use some logic here, but 95% of households are in a local-to-local market.

Of the 900,000, the majority of them, obviously, live in a local-to-local market. But because we skew rural, right, obviously, we have a disproportionate number of people in the 5%, those 40 markets that we don't do local-to-local, we have a disproportionate percentage that can't get local. That's one factor that drives the number a little higher than you might expect.

The second thing is that in some markets the market itself doesn't have all the networks, it only has two of the networks. So they're short of some of the networks and if we lose our 119 license, it's unclear that we can bring in those other two channels, which effectively makes us less competitive with that particular customer.

And the third factor that we don't know today is we have RV owners who are truly RV owners that would have qualified, but they didn't send in their RV because they already qualified as a distant networks. They didn't send in their RV material.

So they may be in a local-to-local market, but have an RV, which means they would qualify for DISH Network when they're using their RV and we don't know how many of those customers just never sent the paperwork in. So it gets a little bit confusing but it's a factor.

It's going to affect us as we disclose in I think logically a little bit less ARPU and a little bit higher churn. It depends on how we manage around that.

You know, we had a hurricane last time this year we had a hurricane. And that affected us and we had to manage around that and everybody came in and said we're going to lose subs and this that and the other and as a management team we said, no, we're not going to lose subs because of the hurricane, we're going to gain subs because we're going to figure out how to go out there -- and we lost subs for a while and then we went back and got the subs back because the cable company didn't get, or our competition didn't get there as fast as we did, or they were building new houses and we were in there ready to go when they were building new houses. So we'll certainly recover from it.

And it's disappointing. I think the part that I feel worst about is customers trust us and customers rely on us for their networks and we as a management team made some poor decisions in hindsight. And so there's consequences, potential consequences to customers who did nothing wrong.

And I hate to make mistakes and I don't feel good about it. And having said that, I worked in the legislation, I know that it is not Congressional intent for these customers to lose their signal and we'll see if Congress will do something about it.

All right. Thank you.

Operator, I think we've got time for one more.

Sir, your final question comes from Spencer Wang with Bear Stearns.

Thanks. Two quick questions.

Your ARPU growth has reaccelerated over the last two quarters or so and you said a couple different reasons in the Q. Is there one factor maybe more so than others that's causing the reacceleration?

And then just secondly, can you give us a sense what proportion of your sub base is commercial and was that segment a material driver of your net adds this quarter? Thanks.

A very small percentage of our base is commercial and it was not a material driver of our net ads this quarter. In terms of ARPU increase, a good portion of it is rate increase driven. And then I think we had some successes in advance services, principally DVR and HD.

So I'm just trying to find my -- I think I got it. I think that's it. I'm just looking at the comparison here. And we had a little bit less discounted programming in 2006 rather than 2005.

So it's really a combination of additional DVR and lease fees, HD and then a lesser extent on a percentage basis, but rate increase, as well. We've had good growth in our DVR and HD business and hope to sustain that growth.

Thank you.

Okay. I guess --

Wrap it up there.

I don't know if I'll be back, but we'll I guess we're back next time, February, March?

Late February, early March.

So appreciate the calls and appreciate your time. Thanks.

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