DISH Network Corp (DISH) 2008 Q1 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time I would like to welcome everyone to the DISH Networks Q1 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you.

Mr. Jason Kiser, you may begin your conference.

Thanks. Thanks for joining us. My name is Jason Kiser, I'm the Treasurer here at EchoStar, joined today by Charlie Ergen, our Chairman and CEO, Carl Vogel, our Vice Chairman, Bernie Han, our CFO and Stanton Dodge, our General Counsel. Before we go straight into the Q&A, we do need to do our Safe Harbor disclosure, so for that I'll turn it over to Stan.

Thanks, Jason. Good morning everyone. Thanks for joining us. As you know, we do invite media to participate in a listen-only mode on the call so we ask media not identify participants and their firms in your reports and we also do not allow audio taping of the conference call and we ask you respect that. All statements made during this call that are not statements of historical fact constitute forward-looking statements. Such 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 such 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 our historical results or forward-looking statements, but I'd ask you to look at the front of our 10-Q for this list.

All Cautionary Statements that we make 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 assume no responsibility for updating any forward-looking statements. And with that out of the way I'll turn it back over to Jason.

Thanks, Stanton. I think we'll just open it up for Q&A so you can compile the queue us.

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

Hi, guys. Charlie, could you provide more color on DISH's competitive position? It appeared that the vast majority of your peers had better than expected results in the first quarter. And do you feel that DISH has turned the corner on the operational issues that emerged in the third quarter? And then if I could follow that up by just asking about the plans for the 700-megahertz spectrum you purchased and can you give us an idea of the cost, time frame and other partners that will share in the cost. Thanks.

I'll let Carl address the 700 megahertz but in relation to yours I would say our competitive position vis-a-vis the industry probably within the cable side probably maintained about the same, but I would say vis-a-vis DirecTV and the phone companies who have entered the marketplace, they got the lion's share of new video ads. Phone obviously because they're new to the marketplace, they basically have know where to go but up and don't have a big base to churn and they've got a competitive product and DirecTV because I think they're performing better than we are both operationally and from a competitive primarily in the HD space. So we really have three areas that we have to work on as a Company and that we're focused on.

First is Operations where we just weren't providing the kind of customer service and experience that we're used to at DISH Network and it's showing up in some of the surveys and where we've slipped year-over-year in terms of our total Customer Service. I basically have got involved in the Operations, as I said I think on February 1st. So I've gone around and seen most of the operations and I would describe the operations at least as of February 1st, they weren't broken but the wheels were wobbly, so we had the lug nut wrench out and tightened up the lug nuts and we made good progress in making sure we're answering our phone calls now and we've got that back under control. We still have a lot of work to do in reducing the reasons for people to call, doing a better job on our installs the first time, making our product a little bit simpler and communicating a little bit easier to how to operate the system. But again, it's just hard work and it took us probably three years to get out of the alignment and it will take us a little bit of time to get it back in alignment but we've got the right team there to do it.

The second area that we have to work on is from a competitive point of view is really in the HD field sense and of course, yesterday we launched 22 HD channels and these are things like Disney and ESPN News and SciFi and Bravo and pretty big name HD services and we haven't had those services, because we planned to put them up on AMC14 satellite that failed. When that satellite failed we had to do rejigger an awful lot of stuff to move things around, it took us a bit of time to do that, but we're able to do that and so now we have a very competitive HD offering in the marketplace. So that should help in that and obviously we're on our path towards 100 channels in 100 local markets, so we think we'll be very competitive vis-a-vis everybody in the industry, probably highly competitive compared to cable and on a level playing field with DirecTV. They've got the momentum and they've certainly got the brand awareness of HD, but we'll have a competitive product there.

The other thing that we're doing better probably that probably doesn't come to the forefront is we probably are ahead of the pack in terms of the technology side of it. So our set top boxes and the way our HD DVR's work and our HD product works is probably superior to what is out there in the marketplace and so we have to highlight and use that to our advantage. Probably the third area that we have is we still have a fraud and piracy issue out there with our system and we'll start this summer with the card replacement to start plugging that place. And one of the things -- and so when you're not operationally sound, when you've got a fraud piracy problem and when you aren't quite as competitive as you want to be in HD, that really leads to higher than normal churn and higher than what we would expect in terms of churn. And while the number wasn't terribly bad in the first quarter, the first quarter is a seasonally low time for churn, so we certainly didn't meet our metrics that we have internally for the first quarter. So -- but piracy plays a hidden roll there and it's hard to quantify it, but obviously when you have people who can get your service for free, they just evaporate in your system and you don't really know why, and so we've had some of that and we have -- so I guess the good news is we have the right team in place operationally now. We know what we're focused on and working hard at that and we're competitive today, we're more competitive than cable today in my opinion. We probably have some brand awareness and marketing and things to do to catch up with DirecTV on HD, and we have a plan starting this summer to attack the fraud piracy program. Carl?

In terms of 700 megahertz, I mean, the acquisition spectrum dovetails with our broader philosophy that we want to be the best we can at video and our principal interest in this is to provide some mobility and portability options that dovetail I think nicely with both our traditional DISH customer base as well as our Sling product. In terms of the investment, we think we've got an excellent value on a per megahertz comp basis. We think it's a strategic asset that will allow us to have broad discussions with a number of parties, but whether or not SATS participates is a question that is still open. But I think overall, our intent is to certainly bring in partners, could be SATS, could be others that certainly has the capacity to help us with any personal media players that may lend themselves to this business, but our overall goal is this is a strategic asset that we think has excellent value in terms of working with other people to build a mobile platform that's an added value product to DISH and a stand alone product as well. We're a long, long, long way from building anything out. We're a long, long, long way from deciding who our partners will be and when, but we do think it is a valuable piece of spectrum that gives us an opportunity to have numerous strategic discussions that will provide an asset that's additive to the business that we already have.

All right, thank you.

Your next question comes from the line of Vijay Jayant.

Thank you. Hi, it's James Radcliff for Vijay. Couple questions if I could. First off, can you talk about the impact of local HD in particular on subscriber growth? Did you see differing growth add and churn trends in markets where both you and DTV have local HD versus markets where they did and you didn't? And second of all it looks like free cash flow in the quarter benefited from a large working capital swing. It seems to be related to payments to SATS. Should we expect that reverse or does this sort of set a new level of ongoing payables? Thanks.

In terms of HD local-local, clearly, just like analog local-local, or SD local-local, certainly where you have HD local-local, you're more competitive and in an area where DirecTV would have local-local HD and we don't, we're less competitive. In an area where we both have it, it's a pretty level playing field now with our addition of 22 channels, so that's a factor. It's a bit unclear how much a factor it's going to be. It may not be as big a factor as SD was, because with the digital transition, people are going to be able to put up and use rabbit ears in a lot of cases or put up a small antenna in their attic and actually get all of the local channels for free in HD. And they are going to be able to get not only the channels that we carry via satellite but all of the sub channels and maybe channels that we don't carry on satellite. So the digital transition will be an interesting phenomenon probably starting about this fall and probably going in through about this time next year. So there's probably about a six or seven month window where we're just not going to know how that's going to to affect us. All we can do is get ourself in a position to take advantage of whatever might happen, so a couple things.

When I say our set top boxes and our technology we think is superior, our set top boxes have a off-air -- an off-air digital tuner in them, so they will take a digital signal off-air. And that means that if you don't want to -- if we're in the area where we don't have local HD or even if we do local HD, you aren't required to buy the HD programming from us, the local channel -- we do sell it a la carte -- and a customer can put an antenna in and now he's got a digital signal into our set top box and if he's got one of our DVR's, he can actually stop and record those local channels. And that's pretty unique in this industry, so we try to give you the best of both worlds and could save the customer some money. So we'll just have to wait and see but obviously, the fact that we're in 55 markets versus 30 something markets last quarter is beneficial to us. We have two satellite launches this year and with those two launches, we'll get to at least 100 channel -- 100 cities with HD. So we're on track for 100 HD channels and that's really all that we really see out there to put up. We don't really see materially more than that of any value and 100 -- at least 100 cities in HD, so I think we'll be very competitive going into the selling season this year. The second question part of the question was what?

Free cash flow.

Oh, working capital. You want to take that, Bernie?

Yes, if you look at our free cash flow about $200 million of it this quarter was driven by the difference in payables and receivables, so we're a net payer and the net of payables versus receivables went up by a couple hundred million dollars relative to payments to and from SATS. I think this is one-time. Whether or not it reverses itself depends on a couple things. The biggest piece of this is because in this particular quarter we have three months of payables and three months of receivables which is right at the end of the quarter, March 31st was right around the cusp of when January payments would normally be made. And in this quarter, the January payments have not been made yet as of March 31st. So it's going forward, we're making payments timely within the 60 days -- net 60 day turn, you would see some of that reverse in the second quarter but again, the end of the quarter was right on the cusp of that third month, so depending on the rate at which -- the pace at which we're paying SATS in the future, that will reverse or not reverse in part by about 1/3 for the extra month.

There's a piece of working capital that's simply increases. Anytime your accounts payable grows, if it's because your Company is growing or for any other reason, any time your accounts payable grow, it's a one-time benefit to cash flow. It won't reverse, but it won't repeat itself and in this case, it's not the growth that's causing payables to increase, but simply because we're paying margins on set top boxes and on some of the uplink and transponder services that we previously didn't. Our payables increased and again whenever your payables increase here it's a one-time issue, it's not going to reverse itself, but it is a one-time source of capital.

Yes, and I think that obviously that we plan to pay on time, so in theory, some of that is about a one-time thing. I think a real easy way to look is take our EBITDA less our CapEx and that would give you a pretty consistent feel for cash flow in the Company. That's kind of how I look at the it, back of the envelope, and that gives you pretty good basis to compare quarter to quarter, year to year. Jason, is that fair?

Yes, I think that's fair.

So just take EBITDA less CapEx and it gives you a pretty good feel for it on a consistent basis run rate.

And one housekeeping question. Can you give us a number for total CPE CapEx in the quarter?

Yes, it's $238 million.

238?

$238 million.

Great, thank you.

Your next question comes from the line of Tuna Amobi.

Okay, thank you very much. Charlie, I just wanted to follow up on the issue of litigation of the Boom channels. What does that mean in terms of your long-term carriage of those channels and is that factored into your numbers that you're targeting in the near term, continue the carriage of those?

Dan, if you want to jump in if I get it wrong because I'm not a lawyer, but the Boom channel, we believe they breached -- we had a long term agreement for 15 Boom channels. We are up to 15 channels. We believe they breached that agreement. They filed a preliminary injunction, which was ultimately granted as they normally are, but -- for a while, but then it was reversed and so the preliminary injunction is not in effect. So we're free to take the Boom channels down and, in fact, have taken down I think 2/3 of the Boon channel and we'll be taking down the rest as soon as we can. Once somebody breaches an agreement, there's not a long-term relationship there and so that's just where we are. And we believe that we can replace those channels with other channels that may have more value to our customers. We really are the only company besides the Boom themselves or Cablevision on the other part of Boom to carry the channels. They weren't able in the marketplace to go out and get anybody else to carry the channels. There just wasn't the consumer demand for them.

So when you talk about a hundred, that's excluding those channels just to make sure I understand, right?

Yes, that would exclude Boom.

All right, great. And on the AT&T/BellSouth situation, I know that you guys had been transitioning April 1st, am I correct? What's your outlook for potential upside from those markets? What are you seeing now and is there any -- how should we think about impact of that in Q2 and beyond?

Well, there's -- we don't talk, we don't give forward guidance but obviously from a logical point of view we're getting customers from BellSouth today that we weren't getting a month ago or two months ago. But we also, it's not quite all a bed of roses because you loss lose some customers your other distribution was getting for you and they become less apt to sell your product, because of a competitor coming in the marketplace. And then you also balance the factors that DirecTV has become very aggressive obviously with promotions to prove to Wall Street they won't lose any subscribers based on AT&T and they're not important to them. So it's a very competitive -- that's a very competitive area of the country and we will have to see how it all shakes out. But I think I'd look at it as a long-term positive and obviously strengthens our relationship with AT&T and puts your companies more aligned to go out there and fight for video customers, even though when AT&T does U-verse, obviously they're a competitor to us, but for the most part we're on the same team and that partnership is one that we continue to invest a lot of time and effort into to make sure that we're a good partner for them.

So it sounds like you're still waiting for some more visibility. Let me switch gears on the churn. It seemed like really higher than we were expecting even though seasonality may have to do with that, but net adds at 35,000, a little bit more in there, beyond the competition and the slowing economy that you cited in the Q, is there anything else that we can think of as far as what's impacting the business? Is there -- how is that trend and can you comment after Q1, is that going to turn around in that metric or anything underlying the trend that you saw, which I'm sure was probably much less than you were expecting in the net adds as well.

Yes, I don't know if it was less than we were expecting, because we knew -- obviously we know we have things we need to work on but I think I would say it this way. We should be getting -- with two satellite providers, we should be getting half the business if we're -- if we're a Company that's executing properly and we didn't come close to getting half the business, right? We got very small percentage of the business and so we have the last couple quarters, so we're not operating as well as we should have. There are, again, I'll just repeat there's really three factors. One is just the operations themselves and we made fair amount of progress there certainly identifying what we need to do and now we're out there executing to fix those operational problems and have gone a long ways in the call center. Already we are answering our phones on time for the first time in a year and that's kind of where the customer starts and now we just got to reduce those calls that are coming in.

We're not as competitive from the HD field. I think arguably people would say 15 Boom channels probably weren't as impressive as Disney or Sci-Fi or Bravo or CNBC or CNN or TBS or TNT, those kind of channels that we now have. And then it's obviously more competitive in terms of there's heavy discounting out there. Our experience in that has been that heavy discounting for a period of months and then you raise the price on the customer and then you raise your price every year, the customer starts getting two and three price increases in a year, that ultimately adds to churn and some customer dissatisfaction. And without having our operations under control, and without having a totally competitive HD product, it didn't make sense for us to chase that business. And so we really focused on some of the fundamentals back in place and trying to generate good income and good cash, while we are patient to fix those issues and then go back with more long-term solutions as opposed to heavy discounting, maybe something that's a little bit more long-term for consumers, so they learn to trust you and learn to understand that their price isn't going to go up two or three times in a year. So we've made some of those mistakes in the past. We see a lot of that going on today and that's just not -- that's a game that got us into trouble and certainly not a game we want to try to repeat.

Okay. That's very helpful. Just a last numbers question. I promise this is the last question. In terms of potential impact of a spin, it seemed like there was some swing in D&A expense, depreciation and amortization, G&A. Those were all cited in your Q as a potential result of the spin of SATS, so my question is the run rate that we saw this Q1, is that simply kind of the trend rate that we should see adjusted for the SATS spin? Or for those line items?

Right. Largely we noted in our Q that there's a couple line items largely SATS and part of our subscriber related expense, the part related to retaining those existing customers because we are now paying a margin on the equipment that we buy from SATS. That's going to increase our cost structure over time. So the full impact of that wasn't felt in the first quarter, because in the first quarter we were still exhausting inventory that was on the books at the time of the spin. So roughly about 1/2 to 2/3 of the quarter we were without markup and about 1/3 to 1/2 was with markup in this quarter. By the second quarter, you should see fairly ramped up steady state as to what our P&L will look like.

So your sack would now stay above 700 just following up on your comment, right? Is that a fair -- ?

All else equal, that is correct, but there are a number of factors that contributed to our sack increase this quarter.

What's the margin that you're paying to SATS for?

I don't know we've disclosed that, but if you look at the SATS P&L, you can get a rough idea I think through the margin that is charged between the two.

All right, thanks a lot.

Your next question comes from the line of Doug Mitchelson.

Thanks, hi, guys. A few questions for you. So Charlie, from the comments that you just said, is it fair to say that retention spending is is down year-over-year? I know you don't like to give percentages or dollar amounts but is retention spending down?

I don't know. Let's see.

We just want to get a sense of how sustainable is the free cash flow? Obviously we'll take the working capital out.

Retention spending I don't think I would term it as down. I think, in fact, given the churn numbers, retention is probably something we could take a look at and whether we need to do more there. We do considerably less than does DirecTV and in part we have, in part because of new product coming out and you just don't want to spend retention marketing to upgrade somebody and then have to upgrade them again, but I do think that we've lost some customers to HD where customers didn't know we have HD. And I'll give you an example. We had about seven or eight channels in HD and MPEG-2 and now we've got 75, we've got 80 channels, I've got over 70 additional channels so I think a total of about 85 channels in HD. The vast majority, of course, are in MPEG-4. Well, if you had an MPEG-2 receiver, you didn't know you had all those other HD channels, so we've got to go out and upgrade those folk from MPEG-2 to MPEG-4 which would make sense for us to do and would fall into retention marketing. So we probably -- given the churn, probably have underspent there, but it's not down by any means.

I know with over the last few years you've been putting out satellite dishes that are MPEG-4 compliant, right? So as you swap out those MPEG-2 boxes, do you have a sense of how many of them -- like what percentage might need a new satellite dish versus you just go swap a box out?

Well the vast majority are just boxes and there aren't that many of them but it's still disconcerting that we probably weren't on top of of our business enough in the sense that the customers -- I was at the neighbor's house and they said when are you going to have more HD channels and I said I've got 85 channels and they said we have eight channels and they didn't know we have those channels, notwithstanding all the communication efforts that we give, so we probably need to be a bit more proactive in that. And my long story short, retention marketing is -- from a cash flow perspective is not something that -- retention marketing spend didn't generate the increase in flow, because we spent at least as much if not more retention marketing this quarter, but we probably -- we are well well under what our competitors spent.

And then on the capacity issue still, your 10-Q talked about 8PSK and MPEG-4 and the possibility of converting the remaining portions of your sub base. So you kind of just talked about swapping out the MPEG-2s, so is there any current plans this year to swap out anybody whose not on an 8PSK box to go all 8PSK?

No, not really and just to give you a feel for it, there's two benefits you can get in compression and channel line-up. One is 8PSK which gives you, let's call it, 50% increase if you have enough power in your satellite and our new satellites are more powerful so you could get anywhere from 30 to 50% benefit in 8PSK. We've been delivering 8PSK receivers exclusively for about four years now, so our base is -- the majority of our base is on 8PSK. The next increase you can get on top of that is you can get another 50% increase on top of the 8PSK increase by going to MPEG-4. We've been delivering MPEG-4 boxes, although not exclusively, for about two years. So the logical step for us would be to go to 8PSK at some point in time, as the economics make sense when we have enough, we don't have to swap out a lot of people for 8PSK. And the way we would do that is maybe your premium channels or maybe high-end customers would go to 8PSK and some of your low end channels would stay at QPSK. That strategically reduces our capital needs to upgrade our base to be competitive over time.

Other people in the industry, cable for example, has to go from analog to digital. They don't have an in-between path, and DirecTV has to go from MPEG-2 to MPEG-4, in fact they have to go MPEG-4 Ka band, so they have a dish an LNB and a satellite receiver issue there. So their capital costs are materially more than ours to get their channel count up over time, and that allows us to have extra CapEx for additional satellites and 700 megahertz and other things that we're doing. So I think strategically, while operationally we may not be exactly where we want to be, I think strategically, we're pretty pleased where we are strategically in terms of how we would transition and how we take advantage of maybe the things that are going to be coming down the pipe.

So let's stick on that CapEx, in your 10-Q, you indicated that you had $352 million of satellite CapEx left in 2008. So I'm excluding the payment remaining on the 700 megahertz auction and the dollar amount indicated is $352 million. And this contrasts a bit with comments you made in the last call where you indicated the three satellites going up this year, most of the costs for those satellites had already been paid out. So is that $352 million a good number to use for satellite CapEx the next three quarters? It seems high.

Well there's several components and Bernie you may want to jump in there, but we just started a new satellite Echo 15 because we lost AMC14, so that's additive to where we were. And then we've got obviously two more launches and we have another satellite that is under construction, I think launched in 2010, in that range, Echo 14. So we essentially have four satellites under construction, fair?

Correct.

And so that's, we need to be, we'll be building a satellite every year for just replacement as an example. And satellites are several hundred million dollars.

On the table in the 10-Q which refers to satellite related obligations, you may note there's a footnote right below it which says for 2008 payments actually include the balance of payments made for the 700 megahertz in 2008.

Right.

So part of that is related to that. And the satellites that we talked about but also --

What was the total of those satellites?

352 is net of the hundred megahertz payment.

That's right.

Yes, so we have four satellites about $352 the rest of the year?

Yes and a piece of that line by the way is besides CapEx there's other satellite related payments, (inaudible) other types of satellites.

Yes, but those aren't --

So the bottom line is by the end of the year we'll have two of those four satellites up and we'll still be building two satellites and, in theory, maybe we start another one a year from now.

All right, great. That's enough time for mine. I'll hand it off to the next guy.

Your next question comes from the line of Tom Egan.

Great. Thanks. Charlie, if you look back, say, about 12 months, obviously it's been a turbulent 12 months for all cable and satellite players, but clearly you've gained less subscribers and had more churn than others and maybe you had expected. If you could look back 12 months, what would you do differently in terms of, say, launching more HD channels more quickly, say in terms of spending more for retention, any thoughts? Thanks.

Yes, I think if you look in the mirror and self- criticize I would have got more involved in the operations. In other words the problem is in operations, if you're not out in the operations, it takes a while for number to reflect really what's going on, right? And just because we're answering our phones today, you're not going to see that in a metric tomorrow. You might see it in a metric six months from now, because it affects your churn rate in a positive manner, but you aren't going to see it tomorrow. So I probably wasn't as aware of the operations as I should have been. And again, you trust your management when you get answers, you trust them and you you find out that's maybe not where things are, you have to go and make changes. So certainly I would have been more on top of the business than I probably was from an operations point of view. I was very involved strategically, but not involved operationally, so that's certainly the biggest mistake.

I think we probably missed the HD window last year. We concentrated strategically more on the DVR which I think will pay dividends for us, because there's a lot more people buying DVRs than HD, and certainly a large portion of our base, although we don't disclose it, is either in DVR or RHD or HD DVR, so we have a very solid base in that sense. But we probably in hindsight missed some opportunity there. And then there's some things that you just can't change. I would have liked, -- we had two satellites ready to launch last year and the satellite industry was shut down because of launch failures and we weren't able to get those up in the time frame that those satellites were ready. So there are external factors that sometimes the best plans don't work. So I've learned in life and management that I never get too excited when things are going great and I never get too worried when things aren't going as well, as long as you have plans and processes in place to fix those things. And I also learned when I play poker I better be patient and I've played poker some nights where I've folded for 10 hours in a row and I walked out a big winner when the game was over an hour later. So we bet when we have cards and we're patient when we don't. And we think that things are going to be better for us and we think we're doing a lot of the right things.

I would say it this way. We're very -- we're strong as we've ever been strategically. we're probably as strong as we've been management wise, although we have a lot of new people and people that aren't quite as experienced in our Company, we don't have a lot of holes and we've got a team that's working together and focused. And we're obviously not as -- so we're not as good operationally and the competition is a little tougher out there, not just because we don't have or didn't have HD, but just general competition is tougher and I think the economy is in a situation it hasn't been the last five or six years. So our job is to take that management, take that strategic expertise, take that technical expertise we have where we're ahead of the pack and then add to that operational expertise and efficiencies and then good things happen. And I think that DirecTV has done that. They're strong strategically, they're strong competitively, they're strong management wise and they're operationally very strong. So they're hitting on one more cylinder than we are today and that makes all of the difference in the world out in the marketplace and there's really no excuse for us not to be operationally efficient.

It's a little tougher for us because we typically own our own call centers, we typically have our own people installing and when you don't operate efficiently, you've got a lot more mouths to feed to go fix it as opposed to a third party. But once you get it right doing it yourself pays huge dividends for you because your people have a lot more pride and you can give a little bit better customer service, can be a little bit more -- you can turn on a dime a little quicker and you build expertise in-house instead of having to pay a third party for it. So that's kind of how I look at it and we'll see if we can go execute and do the things that we're trying to do.

I guess after you fix some of the customer service and operations issues, what -- is there a run rate level that you think you can get to?

Well, I think that, I would say it this way. We think that 1.6% churn is probably where your -- it's kind of a sweet spot. You could go as high as 1.7, you may go as low as 1.5 and 1.7 you'd say I'm not operating as good as I should. 1.5 maybe you're leaving some economics on the table. We have a high Hispanic base, so they move a little bit more. They're going to churn a little bit higher than a normal customer, but it's a good marketplace. There's strategic reasons to be there. So we're a full disclosure Company. We have EBU adjustments that they happen every quarter, so EBU adjustments typically come, at least for us, because we raise prices our EBU unit have to -- get changed in a negative way there, so we accrue I think for that every quarter. So those EBU adjustments are in our churn numbers. There's not a one-time hit for us.

So we kind of try to give, we look at the way I look at the numbers which is I need full facts, I need everything up front, I need to know what the ongoing business trends are and how does all that work. And so at the end of the day we're looking at cash flow and seeing how we're doing as a Company, because everything else is kind of different depending on how companies do it. But the cash flow kind of is what doesn't change for people and so that's just how we do it and we have a long-term perspective and I think we're disappointed in how we are operationally today. We're disappointed in our competitive and sales perspective but we think that both of those things we have in place things going on that will make us better in both those areas. We have to execute and future quarters will tell whether we do or not.

Any other detail on the the demographics of the folks that churned out?

I mean, it comes across the board. Obviously, the biggest churn is your low end customers, because the economy's hurt them the worse. But from a competitiveness, we certainly have had some people in the HD side churn. They just didn't know we had HD or we didn't have the service that they wanted, so I think that changes pretty dramatically going forward.

Thank you.

Your next question comes from the line of Jason Bazinet.

Yes, I had two questions. When I look at your cash from ops, it's about $900 million. You spent about 270 in this working cap that was alluded to earlier and about 270 in CapEx. When you annualize that cash flow it's about $1.6 billion, which implies you got about a 10% free cash yield and you're pretty close to being a full tax payer. And yet when I look at your debt level, you're leveraged on a net debt basis about one turn. And I would guess that, even in this environment, your after-tax cost of debt is way below 10%, So can you just elaborate on why you've been reluctant thus far to buy back shares, that's my first question. And my second question is you mentioned that you feel like you're in a better position strategically than you've been in some time and my guess is that the reason the market is giving you a 10 multiple on your free cash is the market believes your strategic positioning is actually quite precarious. So can you just elaborate on what gives you your confidence strategically vis-a-vis where you were a few years ago? Thanks.

Well, I guess I would say a couple things. One is we have so many building blocks in the Company and the building blocks are first a strong balance sheet, right? In today's environment that's -- you didn't have to have a real strong balance sheet a year ago because you just could raise money for -- you could borrow 120% on your house with no job. That's changed. We have good management team,so we're solid across the board there and we've got -- and we're probably stronger than we've been. We're technically more solid than we've been with really industry leading DVR products with the ability to do Sling and take video with you with the state-of-the-art satellites in outer space and enough satellites that as the industry has slowed down in terms of the ability to launch we still have satellites up there, right? So HDTV which is going to drive a business, we have the ability to be a leader in. DVRs which is going to drive the customer experience for a long time, we have the ability to be a leader in. We probably are in a position for more portable and mobile video if that's what customers want or we think we can make a buck at, so assets that are out there in the marketplace aren't being bid up by private equity firms at values that we don't think are sustainable. So we're more competitive where we might not acquire a company, whereas before, we would always be outbid for companies.

So that's why I think we're -- internationally, there's things going on that are attractive perhaps to us if things develop. So I think that that's why I say we're strategically better. From a cash flow perspective, obviously we're generating cash flow and again, one option we look at is buying back shares and obviously we have a buyback program out there, but we also look at what we can do strategically and so we have $1.5 billion -- potentially $1.5 billion to debt coming due this year. We don't want to be in a -- we're pretty conservative. We don't want to be in a position to say oh, gee, we don't have the ability to pay back our debt. We want to make sure we have $1.5 billion to pay back our debt in case the markets are shut down for -- the debt markets are shut down, so we've been very conservative. We'll see how things go going forward. I do agree with you we're underleveraged in the term. It doesn't -- if you just look at it from a financial point of view and you looked at it just in a vacuum, we certainly underlevered and we certainly probably could increase our financial performance and we certainly can justify more debt. We're just pretty conservative and so we'll see how it kind of looks like the markets may be getting a little bit more liquid. Things may change a little bit. But for now, we've been just conservative and making sure we've got enough money to pay back what we owe. Bernie do you have anything to add to that?

The market can value however the market wants to value and they 're a lot smarter than we are.

Okay, thank you.

Your next question comes from the line of Richard Max.

Hi, this is [Richard Marachek] at Knott Partners. I know you already answered one working capital question, but to dig a little bit further, I'm trying to understand what in particular gave rise to the $281 million in trade accounts receivable due from EchoStar. Can you elaborate on that?

Yes. That's actually somewhat of a transitional aberration. I would look at the two in net between DISH and SATS. But just to answer your question specifically, there are purchases in the first quarter that DISH continued to make on behalf of SATS, largely because logistical issues. These were purchase orders that already were open at the end of 2007 to buy manufacture equipment from third party manufacturers. Since those POs still existed into 08, logistically it was much easier just to continue paying them from DISH rather than canceling those POs and reinitiating those POs from SATS. So there was a good deal of equipment in the First Quarter where DISH still bought it on behalf of SATS and SATS still owes that money to DISH. And as I mentioned earlier, the payments haven't traded hands as of March 31st, but they will by the time you'll see our next results.

This is for the set top box division?

Right. Correct.

Okay so that portion will reverse. The other portion, --

Right, and then I was looking at net and the net of the two was about a $200 million source of cash flows. I think a large part of that will reverse and, going forward, we will be paying within 60 days rather than just beyond 60 days in this case. And part of it is a one-time increase that won't reverse but won't continue which is our payables growing versus what they've been in the past because of the higher margins and having payables for some of the satellite services that we previously didn't have.

I think cash flow is a little bit harder to get a handle on this quarter. It's a little bit overstated from what the run rate would be because of the split of the companies and so it's a little bit overstated. And on the other hand, it's not -- there is going to be a portion that -- I mean I guess it's a little bit overstated, but the way I would look at it is just take EBITDA less CapEx and just go back and look at previous quarters and that gives you the trend really.

Right.

I'm having a hard time looking at it too, because I look all of the numbers too, in probably more detail than you guys. And I'd look at it EBITDA less CapEx and then working capital. In general working capital has been a positive for us as we grow. There generally is positive working capital but I assume I don't have positive working capital and so where are we on a run rate.

Okay and will you be integrating some of the Sling box functionality into your set top boxes going forward?

Yes.

So basically, what we can get off a Sling box, will a lot of that be integrated and provided to the customer at some -- either free or at some markup going forward?

Yes. We think, I mean I think that if you're late to travelers, maybe college kids, I think people like to take their TV with them and Sling allows you to do that and today it's a separate box, but there's no reason that couldn't be integrated. Some of that may depend on whether there's EchoStar can get other customers to buy that technology from them, but certainly from a DISH perspective we're very interested that product because we think there's -- I mean, the world is changing, right? And broadband is becoming part of the video landscape and it's both friend and foe. It's an opportunity for us, but also a potential source of competition. So today, you could go to your computer and watch CNN and watch the election results. You don't need a satellite system to do that. You don't need a phone system to bundle to do that or cable bundle to do that. So how do you play in that world and that's why I say strategically I think we're pretty solid because technically, I think we have spent a fair amount of time understanding how we think all of that is going to go together and now we have to go execute and put those building blocks together.

Are there patents that prohibit other parties from doing -- providing the same service that Sling box provides?

Sling does have intellectual property. Obviously as TiVo is a good example of that, they may or may not prevent people from doing what they're doing. But I'm sure that Sling will fight as TiVo has on what they think their intellectual property is.

Okay.

But the only thing, I know enough about -- the only thing I know about patents today is that they're always hard fought and people have different opinions.

Okay, thank you.

Your next question comes from the line of [Gerard Halloran].

Yes, hello. This is a follow-on to the 700 megahertz and the portability questions. I understand you've begun some testing and you will get your spectrum in February of next year. Can you talk about how quickly you might be able to roll some of the services around that out?

Not really because as I said, we're in numerous discussions with numerous parties to figure out what makes the most sense. I mean, we are testing DV VSH, we've made that announcement. We think that has some complimentary applications between both the satellite and a terrestrial platform and we'll kind of leave it at that. We are as I said very, very early in the process, very, very far away from deploying any meaningful amounts of capital and really want to get a sense as to where the technology is going with not only us but other holders of 700 megahertz capacity to see if we can put together a suite of services that are compelling. So we are doing testing. We have investments in SATS and other parts of the world that are also looking at various technologies. And again, we're going to be judicious about how we spend our money here. We're not in a hurry to deploy capital for the sake of deploying capital. We think we bought the 700-megahertz asset at an excellent value. We think it gives us a seat at the table on a number of very strategic initiatives and we are going down the path to test multiple transmission technologies. And as we get further down that road, we'll see where that takes us. But we're not in a hurry to deploy capital for the sake of deploying capital.

We want to make sure that we find a standard that's open. that's consistent with what we've done with dish DISH Network and we are always looking for the lowest cost of entry from a handset or a personal media player standpoint. We think there are other applications across the mobile field, so don't read too much into our testing other than we're trying to get well educated about a number of various technologies so when we come to market and who we come to market with gives us the type of cost framework that allows us to make a profitable business out of this that's complementary to what we already do.

Nobody has made money in the mobile business today, so -- that I know of. So we would like to -- I mean I will be prepared when we get our spectrum next year, I think we will have gone through the testing and we will know what we think makes sense, right? Whether we deploy capital at that point will be dependent on the marketplace. But we think that money spent perhaps in the past around the world and the United States has been inefficient -- more inefficiently spent because you didn't have the power levels or you didn't have the critical mass or the handsets and so forth, so all those things kind of have to come together or else you deploy capital in a little bit less efficient manner.

Do you anticipate that this would be an offering that you'd be marketing generally or primarily to your existing customers saying, here you go, you can now take your TV with you and maybe sell them an Arcos box or something like that?

Well, I don't think -- I think we'd look at making money and if other people have a customer base, we would be happy to work with them.

So we're not, I mean, we may package it differently to DISH subscribers. But as Charlie said, our goal is to get the broadest access to the broadest market as possible and, to the extent that we can bundle that with a DISH subscriber on an effective basis, there's lots of ways to make it more interesting and more incentivized for a DISH customer or a non-dish customer to participate in a product that has the capabilities that we've got with our DVRs, our Sling product, coupled with a mobile application, we think we are pretty well positioned but that's not going to foreclose us from looking at other distribution channels through other customers to get a decent return on the investment that we'll ultimately make.

How do you see your offering fitting with the local broadcasters and the -- as you pointed out before, the sub channels and the alternative channels that they're likely to be offering?

Well I think the broadcasters are testing technology and again, we think there's potentially a marriage there between what local broadcasters want to do and what we have in 700 megahertz. Obviously we have more of a national play. They have more of a local play. The technologies they're looking at, you have to figure out how you might interface those technologies with how we would look at it and the modulation schemes are a little different. And when you look at where we think mobile television goes, we think the modulation schemes that we're looking at probably are a little bit more efficient than what the local broadcasters are married to a standard that was set years ago and it looks like they can make that more efficient and looks like they can make that a little better and maybe we can merry those two things together but we've got to -- we've got to see them pick a standard first.

Well, yes, I mean --

You can imagine a product that you've got your local channels from their spectrum and you got the national channels from us. And that would make -- that would be sensible but that's only one of many possible scenarios and outcomes.

Yes, have you tested the waters with any handset manufacturers to see what they're willing to do in terms of installing a chip that would support their system or a chip that would support ATSC?

We haven't picked a system yet nor have they, so I think that would be getting ahead of our skis but all we look at -- technically could you do it? Yes, you could.

Well technically it's all possible.

It would not be a huge cost to put two modulation schemes in a handheld or a phone.

So I think we need to wrap up right now. We need to clear up one question that we had earlier, the one that Doug Mitchelson had asked earlier on the satellite obligation.

There was one thing I was remiss in mentioning. We were talking about the satellite related obligations going forward. Our Controller here has reminded me at least in 2008-2009 time frame the satellite related obligations include payments that we now make to EchoStar to SATS for the lease of satellites that we spun off as part of the transaction. So if you want to get a rough idea of the size of that, if you look under our P&L for satellite and transmission expense year-over-year in the quarter, most of that increase is a result of the satellites we are now leasing from SATS. So that was again a big part of the '08 and '09 numbers. I apologize for missing that.

So, thanks for joining us today. We'll wrap up. Just so you all know, I will not be on the conference call in August for the next quarter because I'll be on vacation with my family. I think I did this a couple years ago. It's hard to plan -- with five kids, it's hard to plan your vacations around conference calls, so i will not be on the conference call, do not be alarmed by that. I will just give you a disclosure now and we have an able team to answer the questions for you next quarter. And I guess it will be probably in early August or some time. All right, thanks.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference call. You may now disconnect.