DISH Network Corp (DISH) 2007 Q1 法說會逐字稿

Good morning. My name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the EchoStar first quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you.

Mr. Kiser, you may begin your conference. (technical difficulties)

Let me add my welcome and appreciation to everyone for joining us. Where are we here? As you know, we do invite media to participate in a listen-only mode on the call so we ask the media not identify participants and their firms in your reports. We also don't allow audiotaping of the conference call and we ask that you respect that.

All statements we make during the call that are not statements of historic fact constitute forward-looking statements within the meaning of the Private Securities Litigation 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 of the factors that could cause our actual results to differ from historical results, I would ask you to take a look at the front of our 10-Q for the list of these factors. In addition, we may face other risks described from time to time in other reports we file with the SEC.

All cautionary statements 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 forward-looking statements we make.

With all of that out of the way, I think we're just going to open it up for questions. Operator, we're ready to take questions.

(OPERATOR INSTRUCTIONS). We'll pause for a moment to compile the Q&A roster. Your first question comes from Jeff Wlodarczak with Wachovia.

I couldn't tell if Charlie Ergen was on the call or not. The beginning of the call cut off. Charlie, are you on?

Yes, I'm here today.

Great. As usual, thanks for joining the call. Congrats on the result. I'll limit myself two questions. Can you provide more color on the very healthy 12% ramp in growth additions. Is that mostly related to significant ramp at AT&T? You've got that pace that's going to continue through the balance of the year.

Secondly, you're under levered, you're generating significant amounts of free cash. Another quarter of very solid results. Your stock appears attractively valued. That's holding you back from buying back more stock or making acquisitions, and there's some noise in the press last week that you're looking at TV stations. Thanks.

Ok. This is Charlie, I'll take the first part and give the second part to Carl. The strong subscriber growth was a number of factors. There were certainly seasonal high definition television subscription business. We had obviously -- I think we have more of the more consumer friendly DVRs out there and we also had HD-DVRs. So, we had that and that HD business usually stays pretty strong up until the Super Bowl. So, almost into mid February with that.

And then, I think we still -- we have a strong distribution base of satellite professionals and obviously, we have strong phone company support, too. Not just AT&T. Other companies like Embark and Frontier and others. As they get more familiar with the product, they continue to make progress. So, there's no one factor on strong subscriber growth. But it is a combination of a lot of things that probably, you know, if you had to point to something, you would probably say the seasonality of HD was stronger than we thought.

And Carl, the balance sheet?

Free cash flow. Jeff, in terms of -- we are generating and continue to generate a decent amount of free cash flow. As we've said on many, many calls, many, many times, we continue to look for things that we think are complementary. I can't comment on specifically on any rumors, but we do think there are complimentary assets to what we do, where we can leverage our ability to build set top boxes and to provide content and to bill and collect into service customers, certainly broadcast assets we think are similar to what we do today. And we find that category attractive.

In terms of buying back stock, as Charlie has said and we've said on many calls, we are excited about other opportunities that we think can enhance the value of our stock over the long run. And that is on the list but it is not at the top of the list. We see things to where we can, again, leverage our expertise and our infrastructure, our hidden assets we see in our EchoStar technologies group is probably more in the forefront. We continue to look at things. We continue to actively participate in things but we don't have anything specific that we can speak to at this point, but when we do, we'll certainly outline why we did something and how we see that fitting with us in the long-term but we still remain extremely active and interested in expanding our business.

Thank you.

your next question comes from Tuna Amobi with Standard & Poor's.

My first question is, as I look at the net adds across the cable and DIRECTV just having reported as well. Everyone seems to be reporting relatively strong net adds. Given the pay TV industry, which is essentially mature, I'm just trying to understand where all of these customers are coming from. Are they incremental users? Or maybe Charlie can help me get a better understanding of what's going on in terms of those numbers.

Yeah, I mean -- all we can speak to is -- our subs. I think that -- obviously, the population is growing. There's new housing starts. Notwithstanding some of the subprime problems that may be a factor, and I think there also may be some -- the statistics get a little confusing when you compare cable to satellite. But there are certainly perhaps becoming more multitechnology homes where you may have -- there may be a phenomenon going on, you know, we don't have direct access to this, but where a customer -- if he wants the best video, it is pretty clear he picks satellite. If he wants broadband, and he wants the best broadband, in many cases, he may pick cable. And he may downgrade his cable service to just basic for local channels. Because he gets a better deal on his broadband package.

You may end up with -- that customer then would continue to show up on the cable company's books although at some slight negative impact from ARPU from a video perspective. Obviously he's now a broadband customer but he shows up on our books as a full-fledged video customer with the kind of ARPU we're showing you. He may just not -- he may not buy local from us. We do offer local a la carte. So, he's not required to buy local from us. So, that's potentially one of the things that there may be more two technology homes out there.

The other part is just the economy's been strong in the first quarter and there has been new housing starts and I think satellite gets probably gets the majority of the new housing starts in terms of new customers.

Ok, that helps.

We're fairly strong in the International side and continue to have immigration to the United States as well.

Ok. On the Google deal, just trying to understand, if you can quantify perhaps the percent of your ad inventory that's covered. Is that just remnant inventories or do you have prime spots in there and on that deal, also, does that include an interactive component in addition to the linear?

In terms of the Google deal, we're not going to disclose what percentage is available to Google but it is a full-service rep-like relationship that we've had with others in the past. And it is not just remnant space. It is space across all of our avails. It does include an interactive component. I think what we find attractive is we have the technology that we've developed ourselves to get the appropriate information in terms of viewer statistics and we think that that creates a better and more tangible database for advertisers to determine the effectiveness and depth of their ad and with certain advertisers, we'll provide an interactive component as well. So, it is a wide-ranging rep relationship similar to what we've had in the past. Using some technology we find interesting from Google. We think it will improve our position in the advertising market. We think it will bring us more advertisers than we have had in the past. We're excited about the prospect.

Ok, finally, real quick on the VOD deals, now that you seem to be ramping up that as well with the most recent deal with Disney, can you comment in general since now you have about seven of the major studios. Can you comment in general on how you see that business doing in the context of cable's VOD trials and when will you start breaking out those revenues?

I don't know that we'll ever break out those revenues specifically. But we have been active in our studio acquisitions. We think we can add more VOD titles to our hard drive as we expand the capacity of our hard drives which is part and parcel of our technology road map. We think that there's nothing precluding us from getting day and date trials either. We see VOD as an important additive piece of our business. We see it as a revenue opportunity as well. And we'll continue to try and attract more and more titles and put more and more titles out on our hard drives and to the extent we can, expand our additional on-line dish presence as well.

Thank you.

Thank you.

Your next question comes from Vijay Jayant with Lehman Brothers.

Thanks, I've got some cost questions. G&A expenses up $30 million year-over-year. Any thoughts on what's really driving that? I know the business is expanding but it seems to be tracking a little faster. Second, subscription expenses were also up $220 million. Any color on how much of that is programming but also understand you're putting box refurbishment cost in that line item. If that's correct, how much is that and any color on the trends there. And finally, one housekeeping question, if I could which is CapEx, what was EP CapEx?

Well, I'll try to start. This is Carl. In terms of our subscription cost, the vast majority of the increase in the quarter was programming costs. About half of that is a function of volume over the previous four quarters and about half of that is the timing of various rate increases that occur generally for us on the first of January where the impact of our rate increase you won't see until the second and third quarter and so we've got somewhat of a lag there but clearly, the vast majority of our increase is attributable to programming costs for the reasons I mentioned.

We have had as we said in prior quarters, made investments in our customer care and our service levels and in our D & S business so we can improve our own customer care statistics in which seemingly has paid off because of our ranking in the ACSI study brought us back up to number one. So, we have been making investments in those categories. We will continue to make investments in those categories. But we -- your point is well taken, Vijay. We've got to begin to see some stabilization in that cost structure so we can bring more revenue growth down to the margin level but, again, the vast majority is programming cost. Probably 70% to 80%. The rest is attributable to adjustments we've made in our care facilities and in our service elements as well.

In terms of Cap Ex, I don't have that answer. I don't know if Bernie or Jason has that. Bernie, do you want to respond to the G&A question?

The G&A question, as we mentioned in our -- as we mentioned in our 10-Q that we filed this morning, there's not any particular item that is noteworthy in terms of being a majority of the increase. I think it is as we note in our 10-Q, personnel expenses, outside professional expenses across our entire company, across various departments to support a growing larger business.

I think Bernie, you've got the CP.

On the Cap Ex, for the total quarter, we had $331 million, about $251 million of that was (technical difficulties) lease equipment.

Thank you.

I just would follow up on the customer service side, you know, we did open up a new -- I think the service side, has continued to increase, you know, somewhat disproportionately. We opened up a new center in Spartanburg, South Carolina, which will take awhile to ramp up and be efficient. As you do more high definition and DVRs, you have more service because you have a moving part. You'll have a bit more service for a more complex product. Through the hard drive. It is from time to time, it is going to lock up. From time to time, it is going to fail, more than a nonhard drive product. So, you know, that's something that we need to get more efficient.

On the positive side, we did open up a new customer call center and that is -- that's ramped up now in the first quarter to be an efficient call center and you know, we've made progress there in terms of efficiencies there. So, but certainly, the expense line operating expense line is a focus for us. It is a little bit more difficult when you're growing as fast as we are with subs, to do all of the things you want to do. But we continue to focus on that and Carl and Bernie both, from day to day perspective look at that and hopefully we'll improve.

Your next question comes from Spencer Wang with Bear Stearns.

Thanks. Good morning. I just wanted to go back to that original question about the strong subgrowth in the quarter. Can you just give us maybe a little bit of clarity on where the sub growth is coming from. Is it coming from one particular geographic region or is it perhaps fairly well dispersed across the national footprint?

And then also just in terms of the sack per sub costs. That seems to be very well under control. Can you give us a sense of what's driving your sack cost per sub. Is it declining equipment costs, changes in the sales channel mix, et cetera, et cetera?

Our business was pretty strong across geographically. You know, we probably scale a little less in the northeast. We probably scaled a little less in the south since AT&T is not yet selling our product there. Our angles are a little worse than the northeast. Of course, the weather is a little bit worse there in the winter but it was pretty strong across the entire country. No particular -- I mean obviously we're ok. Small cable companies are a little more vulnerable than the big guys. Strong growth from every part of the country.

In terms of the sack costs, we have dueling things happening there. We're putting in more expensive equipment and -- which puts pressure on sack. On the other hand, our leasing program allows us to reuse equipment that saves us money and some of our technology of two tuners that do -- I mean one box that do two TV sets for multiple TV set homes, we have some efficiencies there. So, those factors will continue to play out throughout the year and it is kind of good news/Bad news. If our sack costs were to go up, it means we're putting more HD in and that's a good thing because ARPU would be better and it is a stickier customer. On the other hand, we don't want sack to get out of control. We do make a better return on those customers. We balance that out every day and try to find the sweet spot and it has been relatively under control for the last year or two.

Thank you.

your next question comes from Doug Mitchelson with Deutsche Bank.

I have a few questions. I'll ask them one by one. Along the line you were just talking about Charlie, there was no mention in the Q that I saw related to advanced set top boxes asa driver in the change in sack costs. You guys said you're putting more of those in. So, is that right? Are you actually adding more DVRs and HD than you did last year?

I think that the trends are definitely up for advanced products and that includes both HD and DVR. I don't think HD --

And HD-DVR.

And HD-DVR. I don't think -- I mean I think from an advanced set top then we also have MPEG 4, and we've got MPEG 4 drivers, we have high definition drivers and DVR drivers and then you get kind of to our 622 receiver that really has HD, DVR and MPEG 4. Those all cost a little bit more. MPEG 4 is a premium today over MPEG2. We expect that will drop over time and perhaps a year from now it won't be a big premium. We have to balance the fact that we put in an MPEG 4 product in today, we don't have to go back to the customer and switch them out from MPEG 2. We'll continue to drive more and more MPG4 as it relates to how we upgrade.

We balance the whole thing with strategies of how you keep customers you have today without having to retouch them unless they're going to buy more services from you and if they're going to buy more services from you, then you don't mind going in there and paying a cost to upgrade them because you're going to get more return before you do that. And again, we don't randomly go to retention cost. We don't treat everybody the same and we try to do it from a practical, economic point of view where we feel like we're making an investment to the customer, we're going to get a return on it.

Whether you're a new customer today, or whether you've been a customer with us for five years or five months, we would look at what kind of return we're going to get from you if we make an incremental investment in you. Because you call and complain and cost us money on the phone all the time, when you call up to upgrade, we would probably give you Comcast's phone number because we don't make any money in you. Doug, because you call all the time and complain, and you cost us money on the phone all the time, then when you call to upgrade, we'd probably give you Comcast's phone number, because we don't make any money on you. But Vijay is a great customer and pays his bill on-time and he's automatic billing and he calls up to upgrade to HD. He signs up for $20 more a month. We're happy to go in and put the latest 622 in for him. That's just how it works.

I just called to complain about share repurchases, not your service.

It still costs us $1 a minute when you call.

The commentary in the 10-Q regarding the receivers getting cheaper year-over-year. That must have been related then not to the advanced set top boxes but rather to the fact that you're getting the lease boxes returned and you're refurbishing and reissuing them. Is that the cause of the lower cost-per-receiver?

All receivers come down a little bit in cost just because of volume and new technology. Very slightly but the major driver from a total set top box is the fact that the leasing program allow us to -- reuse a box for free that otherwise would cost us as a new box. That overall has a positive impact.

You still seem like you're at the point where you're allowing customers to pull PVRs from you. You're not necessarily assisting the demand curve because you don't need to. Given that cable is making advances in VOD and you have your own VOD offering which levels your PVR, do you see the point where you get more aggressive subsidizing PVRs for customers where it becomes a standard offer?

For a knowledgeable customer, it really is pretty standard today. Having said that, there is a large portion of our customer base who for whatever reason, doesn't want the complexity of the DVR and in fact, when we put a DVR in, actually, generates service call and wants something else because they don't know how to operate it because there's more buttons, right. So, that's one aspect. Second aspect is many people put a DVR in for for just TV or two TVs and not every TV in their house. My personal opinion is if everybody was omniscient and if they're willing to spend 10 minutes to learn how to use the DVR, everybody would want it but we're not forcing people to take DVR so we give them choice. It is certainly a very strong asset of our company in terms of our intellectual property, our DVR technology, or ease of use. The fact that we do have the ability to download video on demand movies to it and now that we have more studio contracts, it becomes a robust offering. Things we may be able to do in the future with our DVR certainly is an advantage.

Last question for you; your year-over-year ARPU growth have accelerated four years in a row. In the fourth quarter, it was 11% year-over-year ARPU growth, and then slowed dramatically to what is still a healthy pace, but slowed to 6.5% in the first quarter. Can you walk me through the variance from the acceleration all the way up to 11 then the drop down to 6.5.

I can give you a general answer on that. Our price increase -- ARPU is driven by advanced services, HD, DVR fees, extra boxes, people who come in at low end who see other product they would like to buy from us and so forth. And also price increases. And everything is pretty much on track although we had a price guarantee on our low end package for two years. So, we did not have a price increase on our low end package this year. And our price increase on our other package was actually a little bit less -- quite a bit less than the rest of the people in the marketplace. So, the bad news is that puts some pressure on our margins and our growth and ARPU. The good news is there is a fairly significant gap between our pricing and our competition. We have room -- we have room there to -- we probably have less cost pressure on us on than others. To the extent we decide to take advantage of the in the future we can do that.

I thought that would be about 100 to 200 basis points of it. Was there more aggressive promotions year to year, do you think?

Yes. We have been giving away free programming, which of course I hate but they continue to do. They don't listen to me. But we have given away free programming and it is ten months. I think it is $10 off for ten months. That's relatively standard in the industry today. We're the guys that actually started it first so we should probably be the ones to be hung out to dry on it. But what happens there is the first month, you only have, you know, one month of customers getting it. By the time you get to ten months, you have ten months of customers getting free programming.

It has a negative impact on your margin for ten months then it reverses the other way as long as you get rid of the free programming. Then it reverses the other way and you start getting back to reality. You will see negative pressure on margins for another year. Although they probably peak in the summer and then it starts going the other way for you. When you give away free programming. That is a factor there for sure.

And I don't know how many basis points it is but I guess I would say it from an income statement point of view in terms of where we are from a cost structure. I think we have room for improvement on our margins and our ARPU and we have -- we certainly have room for improvement on how we service and refurbish our product. And probably a little bit from G&A in terms of using outside services and stuff like that. I think we have some room for improvement there. And the good news is we do have room for improvement. We're not perfect. We can focus on that and make maybe some better promotions where we don't give away as much free programming and those margins improve. We certainly have the ability to increase our price vis-a-vis the competition in my opinion.

Very helpful. Thank you.

your next question comes from Craig Moffett with Stanford Bernstein.

Good morning. Couple of quick questions. First, on the AT&T side. I just want to make sure I understand, it used to be a little bit more disclosure about the difference between which subscribers acquired through the Telco channels were gross and which ones were net. Are the ones you're seeing today now largely net additions or is there still some roll in of existing subscribers into those pricing plans? And then Charlie, a broader question. You're obviously aware of the constant rumors about AT&T and EchoStar combinations. I wonder if you could just talk about what the benefits of a closer relationship might be if one were to happen. On the cost side and strategically.

Well, it is probably a better question for AT&T. I don't think we disclosed the gross and net from AT&T to our phone companies but certainly the phone companies are, more than an asterisk of our business, they're certainly a material part of our business and you know, we enjoy having the partners, particularly because strategically, I think the fact is, without us having to build out broadband plans they provide us, a broadband pipe through DSL. So, I think that opens up a lot of combinations for giving customers a great broadband product along with a great video product. And we expect that that side of our business will continue to increase not only from AT&T but other Telco partners.

I forget the other part of the question. Certainly, from a strategic point of view, you would have to ask AT&T. From an EchoStar perspective, again, AT&T has a brand. They have marketing dollars. They have broadband. They have wireless phone. They have long distance and local phone. So, they have the ability to allow us to get our customers a quadruple play that some of the cable really can't offer.

We don't have to build out that infrastructure and try to compete with that and there is -- on the negative side, there will be a build-out of video platforms, there U-verse or light speed video platform. In that case, they're a competitor. We have to make sure that we have the ability to compete no matter what happens in the market place. Our expectation is the relationship with AT&T will continue and we have the multiyear contract. We'll honor that contract and expect that they will as well.

Just one housekeeping question if I could. And forgive me, Bernie if you already gave the number for this but did you mention what retention marketing capital spending was this quarter?

No, we did not. I don't think we usually do.

We don't break that out. It is in the total cost structure but again, just to put your mind at ease, retention marketing, we look at each customer and again, I repeat. We look at -- we don't spend money knowingly on retention marketing unless we believe we're going to get an economic return on that. And I think we're probably -- I think we have historically been lower than probably most people on that kind of thing but in part because our product is upgradable. Sometimes on the leading edge of technology so we haven't had as much issue there. But it is something we monitor and if our retention marketing went up, you balance that with your return.

So, you have to run the economics about what retention marketing costs you versus what churn costs you. You have to run the model every day to determine whether the churn is actually cheaper for you than the money in retention marketing. I'm not saying we get it right every quarter but we certainly focus on that from a financial perspective and make sure that we're constantly adjusting that model and what the offers are to our customers and so forth. And you know, we think we're in the ballpark. We think we've been in the ballpark of the proper retention marketing spend for the last year at least. Maybe five or six quarters. So, hopefully we can continue that success.

Thanks, Charlie.

your next question comes from Jason Bazinet with Citigroup.

Thanks so much. This is maybe an artificial construct but it seems as though there's two broad ways you could manage the business. One way is you keep your IRRs quite high but you let the net adds on the business decrease from where they are now in which case the business generates a ton of free cash. On the other hand, if I'm going to make numbers up, if your WAC is 10 and your IRR is 30, you keep spending to acquire more customers because you're adding economic value but the IRR over time decreases and the reason I ask the question is my fear is that a lot of your investors today want the free cash.

If the IRRs do, over the next three to five years, begin to contract, the street is going to rerate the installed base you have as if that's the new IRR and you'll get this paradox potentially where you're adding economic value but the shares goes down because the Street assumes the marginal IRR is the new run rate IRR for the install base. So, with that backdrop, is there a preference you have in the way you're going to manage new net adds going forward?

You have a valid comment there in terms of how perhaps the street would look at it. I can tell you how I look at it. I look at it as I'm a shareholder of this company and I stick the shares in a drawer and I'm going to look at them in five years and see how we did. And we're going to try to make long-term decisions that build value for our shareholders. And that could be a variety of different things. One of which has primarily been the last ten years to get subscribers in the United States. That continues to be a very solid strategy. It doesn't mean that that strategy will be valid five years from now. Given many things that could take place in the market place. We have to be flexible enough and adept enough as a management team to make sure we have a strategy to take advantage of other things. Or to change course if, in fact, the IRR on a new subscriber were to go down to a point where we could make money somewhere else.

We try to manage the business as if there was long-term growth strategies. I think we're fortunate in the sense that the management team is able to -- there's not a lot of talk about quarter numbers or what Wall Street thinks around here. We've not done a lot of presentations about what the number is today versus yesterday. We do spend a lot of time around here talking about how our company will be more valuable five years from now. I think historically, we're in the upper echelon of returning value to our shareholders in the last ten years and I think part of that is because we take a long-term view.

If a shareholder wants something quick or wants cash flow or tomorrow or something like that, maybe we're not the right place to invest. Maybe they should go in a hedge fund. I personally don't have any money in a hedge fund. I personally have 99.99% here in EchoStar so I'm either stupid or I'm a long-term investor that expects to get a return.

Very helpful. Thank you.

your next question comes from Tom Eagan with Oppenheimer.

Hi, good afternoon. This is actually [Dorothy] for Tom Eagan. Wanted to ask in terms of how many HD-DVR upgrades did you have in the quarter?

We don't disclose that. We had some. And it ultimately showed up in ARPU and a customer but it also showed up in sac and retention marketing. We balance that out to make decisions and I hope our shareholders hire this management team to run the business and they don't want to micromanage us and that's what we try to do.

Can you speak in terms of maybe how many high tier subscribers you have that will eventually maybe perhaps migrate to the HD-DVRs and maybe how much you spend per upgrade?

I would say it a different way. I think that -- HD is a compelling enough product that at some point, just as everyone went from black and white to color, I think people will go from color to HDTV. All 13 -- almost 13.5 million customers we have today are potential customers for HD. But the key will be timing. Obviously we can upgrade a customer to HD next year cheaper than this year because the product will be less expensive. Obviously that customer can buy a less expensive HDTV set next year than he can today.

HD probably won't be off the charts this year in terms of the product. I think it is going to really jump up when the digital transition takes place in 2009 assuming if that's when it really happens. It is certainly a factor. It's a profitable business for us. But there are not 100 channels to put up. We carry everything today in HD that is worth carrying. I think we have 30 -- 32 channels and we think there's another -- there may be another half a dozen channels coming up this year that are worthy of taking but there aren't 100 channels to broadcast in HD today. If it is good, we have the capacity to broadcast anything that's relevant in HD today.

Ok. And then in the quarter, did you see any sense of more subscribers perhaps coming from the difficult that the cable may be having with the integration of its acquired system?

I'm sure change causes some -- we've had that work against us when we lost distant signals. We lost some customers. We'll have the work against us as we lost Major League Baseball In Extra Innings. If a cable company acquires somebody and changes the bill in a minor, minor way, that probably works to our advantage. But yes -- Carl?

We didn't see anything materially different because of the integration of Adelphia systems. We have some peaks and valleys. I think we did pretty well in the fourth quarter and it carried into the first a bit through the NFL network where we had the NFL network and our AT100 package and others didn't. I don't know how long that's going to sustain itself but I didn't see anything particularly dramatic that we could tie directly through to integration activity.

Ok. Then you spoke on the new customer service center. And our question was whether you saw any -- heavy call volume due to maybe service upgrades for advanced services. How did that impact margins if at all?

I would say that in general, from a customer service perspective, we made progress in terms of controlling those variable costs. The progress we had, it has taken a long time to get in place. We have customer service agents to answer our calls. We made the investment to try to answer our calls within 30 seconds. Once you go through the pain of that, once you can answer all of your calls, then you can start working all of the things you need to do behind the scenes to improve your business there. We had a call center that opened up in Texas. They always take six months to train people and get them to where they can answer the basic questions. You get inefficient for the first six months, you're relatively inefficient then you become equivalent to the other call centers and more efficient.

So, our upgrade from our customers is pretty linear. I mean obviously you want more upgrades -- you see more upgrades for HD before the Super Bowl but then you have less after the Super Bowl. So, for the quarter, it is pretty linear. We expect that HD becomes a more seasonal factor in the fall than it would be this time of year. So but on the other hand, maybe people are upgrading more to DVRs because they're tired of commercials or whatever. So, it is pretty linear. We just manage it. For whatever reason, statistically, we don't suddenly get a million people calling for upgrades.

Ok. That's fair. Lastly, seeing as to how you think the margins were a little below what we expected for the quarter, any outs on what margins may be for the balance of the year?

No. Other than obviously we have room for improvement.

Ok. Thank you.

Your next question comes from Kathy Styponias with Prudential.

Yes, hi. Charlie, I was wondering if you can update us on your thoughts on pursuing a broadband wireless investment and in particular, whether the more onerous build-out requirements that the FCC is looking for with respect to the 700 megahertz spectrum makes it less likely you'll participate in those auctions. Thanks.

Well, I think in general we've participated in pretty much every auction that FCC has put out there. We haven't won a lot, but we've certainly participated. The 700 megahertz rules aren't finalized yet. Obviously for a new entrant, the build-out would be a negative versus an incumbent. I guess we're disappointed in that part of the rule so far. We're used to doing impossible things as a company and I don't think that in and by itself would be a reason not to participate.

Thanks.

Your next question comes from Benjamin Swinburne with Morgan Stanley.

Thanks, good morning, guys. A couple of questions. Maybe first, Charlie, if you sort of step back, big picture and look at how the business is running, from an execution perspective, it seems like over the last maybe three quarters, four quarters, you guys have been doing a better job than you have over the last maybe three or four years just across the board, cost management, market share and I know you had had some senior management turnover a few years ago and now the team has been in place for awhile. Could you sort of comment on -- this is all happening in the face of triple play being deployed. A lot of us were just at NCTA and heard about the fantastic things that triple play is doing. Your numbers seem to be solid. Can you comment on how you think you guys are executing now maybe over the last three to four years and any thoughts on how you stack up with the triple play in the market place going forward.

Carl may want to speak to this but obviously Carl and Bernie and others have been a big addition to the management team. That's obviously helpful when you've got knowledgeable people that work hard and could be good leaders. But you know, I think -- I don't try to get too excited when things go great and I try not to get too depressed if we've got obstacles in front of us. I think the last three, four years have been pretty solid. The stock price didn't reflect it but I believe we built as much value for this company in our shareholders in 2004 as we did in 2006 even though the stock price didn't reflect it. Obviously we were fortunate enough that people were logical to sell stock back at $28 a share. And we appreciate all of those that sold it to us.

I think that -- I think that we have a number of obstacles today. You mentioned one which is triple play. I think the actual technical side of the business from a competitive point of view is -- it is not so challenging today but it will become more and more challenging and we'll have to figure out how we participate that with -- in that, in that new world and we think that we think when we're ready to make that bet, we'll make that bet on how we will do that and in the meantime, we'll continue with what we know -- nobody delivers video to homes across the country better than satellite and we like to think in the satellite business, nobody does it better than we do. We don't think that's going to go away no matter what. Customers who have had satellite of it just don't go to an interior video play.

Clearly, broadband starts becoming more entwined. That's why partnerships with people like AT&T are important. Other people who want to compete against cable in the broadband space will be important for us. We see a number of wireless technologies like WiMax and clear wire and other people have interesting things and we'll continue to monitor and to the extent we thought we could make money, we would invest. We haven't figured out how we could make money at that yet. Carl? So better off not spending the money on infrastructure when somebody has the infrastructure in place.

I just add to what Charlie said. It is not just the management. It is really the hard work of our people that are out there in front of the customers every day and doing as good a job as they can. I think we also have a good price value proposition and we have good technology and we've been a beneficiary of that over the past three, four, five quarters. And I think that the cable guys having been one in the past were on message and well trained at the NCTA. Everybody pretty much said the same thing. The fact, at least for this quarter is between EchoStar and DIRECTV, we had 75% of the net adds. That's not a broken business.

We recognize broadband is more important going forward. Charlie has mentioned on this call and prior calls that we continue to look at our own broadband opportunities and investments and we continue to work with our telco partners to sell their product. I think we've gotten decent momentum as a company. It is just not our management team, it is the support of our partners and the support of our people in the field. The support of our retailers, our RSPs, everybody that's involved in the EchoStar complex and we recognize that there are challenges ahead but our mantra here is to be the best video provider that we can be and that's why we continue to make investments in satellites and in HD and MPG4 and try to continue to have a price value equation that meets the expectations of the market because not everybody is looking for a triple play.

Can I just a follow-up on the on-demand side. Another message point out of NCTA is the VOD explosion and how much usage is going up. You're limited a little bit in that you need a hard drive in the home to deliver that sort of programming offer. And I think the home zone product you have with AT&T which is in its second generation or soon will be in its second generation tries to address some of the issue by using a broadband pipe to deliver more content. What are your thoughts on those sort of competitive positioning of the product. Is that exciting? Do you see that as a big deal over the next 18 months to be able to tap into effectively an on-demand IP library of content rather than pushing it by the satellite?

This is Charlie. What I would -- I guess I would say in general, that our goal and our expectation and our focus is to make sure we'll provide you the best video experience in your home. At a minimum, in your home. We'll provide you the best video experience. That means we'll have to have more flexibility in what we do today and be in demand. That will include larger hard drives and more stuff we automatically download to you. It also means that we will integrate broadband into our set top boxes as we have done with home zone so that instead -- it is always a leapfrog thing.

Today we offer about -- we offer about truly on demand movies about 20 or 25 on our with people who have hard drive. A good cable system could be in the hundreds of TV shows or movies. They may have an advantage but as we add the broadband home zone connection or that kind of technology, we're able to add to your repertoire 20,000 movies potentially from a video on-demand which leapfrogs where cable is today. We think that we have all of the pieces in place today with our broadband partners to deliver to customers the best video experience now and in the future and of course, we already deliver more HDTV and a better quality. We already deliver a better DVR. We already deliver a better choice and lower cost from a video perspective. We need to beef up that video on demand.

It is not a huge factor. Interactivity is not a huge factor in the market place but you get both of those on steroids as we add a broadband connection to the back of our box. Our new series of receivers, our VIP receivers -- VIP but it really stands for video IP. All of those are capable of quite a bit of stuff with the broadband connection. That broadband connection could be a cable connection. It could be a wireless connection into there. So, it is capable of quite a bit of stuff. You'll see that us and I think you'll see that kind of stuff from DIRECTV as we get into the fall. You'll see more and more of that. I think it will become obvious to people that satellite is not going to be left behind from a video experience. In fact, it is going to continue to have significant advantages.

Thank you.

Operator, I think we can take one more question.

your last question comes from [John Smitty with Qualepad].

Hi, good morning. I have a specific question in alternative markets because in Mexico, there are a lot of noise in the market of potential deal to start offering the DH pay TV services in Mexico through a joint venture with the MDS or Vargas family. I don't know what comments you have about this.

Well, obviously we haven't released any plans specifically for Mexico. I would just say that we do have access to the 77 degree slot which is a Mexican DBS slot with high power. We currently have a satellite in that slot today. And that slot has the ability to deliver product into Mexico and/or the United States and if we can come up with a business plan that makes sense, then we're positioned to do something. As of yet, we haven't figured out a business plan that makes sense.

I think that's it. I guess we're back in August. I might not be here in August if it is during my family vacation as it was last year. Carl will be here.

Unless it is my family vacation.

Casey will be here unless Casey is gone. Somebody else will be here. Just kidding. We appreciate your support and we'll see you hopefully in August.

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