DISH Network Corp (DISH) 2009 Q2 法說會逐字稿

Good morning. My name is Sean, and I will be your conference operator today. At this time I'd like to welcome everyone to the Dish Network Corporation Q2 2009 earnings conference call.

(Operator Instructions)

Thank you. Mr. Kiser, you may begin your conference.

Alright thanks, Sean. Well, thanks for joining us. My name is Jason Kiser and I'm the Treasurer here at Dish Network. I'm joined today by Tom Cullen, Executive Vice President, Bernie Han, our COO, Robert Olson, our CFO, Paul Orban, our Controller, and Stanton Dodge, our General Counsel. Before we open it up for our Q&A, we do need to do our Safe Harbor disclosures. So for that, I will turn it over to Stan.

Thanks, Jason. And good morning everyone, and and thank you for joining us. As you all know, we invite media to participate in listen-only mode on the call, and ask that you not identify participants or their firms in your reports. We also do not allow audio taping and ask that you respect that. All statements that we make during this call that are not statements of historical fact, constitute forward-looking statements, which involve known and unknown risks and uncertainties, and other factors that could cause our actual results to be materially different from historical results, and from any future results expressed or implied by such forward-looking statements. For a list of those factors, please refer to the front of our 10-Q. All cautionary statements that we make during this call, should be understood as being applicable to any forward-looking statements that we make where ever 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. With that out of the way, I will turn it back over to Jason.

Thanks, Stanton. And Sean, we are going to go straight into Q&A, so you can open up the lines.

Very good.

(Operator Instructions)

Your first question comes from a line of Jeff Wlo -- I'm sorry -- Wlodarczak from Hudson Square. Your line is open.

Hey, guys. Good morning. This is the first time subscriber terms are down year-over-year in two years. Can you provide more color on what came together this quarter to drive the much better than expected churn result? And do you feel like you've turn the corner on your involuntary churn issues? And then I have one follow up.

All right. Jeff, this is Tom. I see they did an equally bad job with your name on this call as well.

Yes. Exactly.

Yes, the churn is, there's a few things contributing to it. One of it is obviously, that we hope that our focus on improving the customer experience is beginning to have an effect. But as you know, it's also related to previous promotional period activity from a year ago. So both of those in combination, I think are what's driving it. At this point, we are encouraged by the early returns but we still have a long ways to go.

Right, this is Bernie, we mentioned I think on the last call that at least over the last several quarters, we had been increasing the amount of retention spend within the Company. And we think some of what we are seeing now is a result of the efforts that took place in prior quarters with respect to retention activity, and making sure that we get good quality customers on the front end.

So looking forward in the short to medium turn, is there any reason beyond the economy reweakening why the year-over-year churn improvements would reverse?

As you know it's our policy not to provide guidance. So I can't really comment on anything beyond June 30th, but as I said at every level of management we are focused on improving the customer experience. It's very, an intense focus at this point, and we would hope to be able to continue to show improvement in that area.

Okay. And then on key though, can you give us your latest thought there then. And then how is the most recent patent ruling different from the last patent ruling that was in your favor and ended up being reversed? Thanks.

And -- so this is Stanton. I guess -- I'll take the second question first and if you want to add any specificity on your first question, I would be happy to answer anything. The decision from the US Patent and Trademark Office last week, we viewed as favorable in a couple regards. One, the Patent and Trademark office ruled at least initially that the construction of the patent was similar to what we had believed it was, which was on the parsing claims, that it requires start code detection and indexing, and with respect to the flow control claims it requires blocking. And basically, when we redesigned around Tivo's patent, that is --- that's what we had in mind. So we think it supports, one, that our redesign was more than colorably different than the original devices. Because quite frankly what the Patent and Trademark office found, is exactly what TiVo argued to the jury. So if we took out those two features, which we did in the design around, we say to ourselves, how could it not be more than colorably different? Additionally, we believe because we took that stuff out it no longer infringes the patent. And then finally, because we took those thing out, we believe that it shows we actually acted in good faith in the design around attempt, and therefore we shouldn't be subject to any sanctions, even if for contempt, even if our design around is found to actually infringe down the road.

Okay. Thank you very much.

Your next question comes from the line of Vijay Jayant from Barclays Capital. Your line is open.

Thank you. A couple questions. First, can you talk about sort of the genesis -- on reading the 10-Q -- it suggests that now DISH is liability for the full TiVo amount of DISH -- s a big amount there. I thought it was prospectively it was going to be SATS (inaudible) I think at January 1, '08. I just wanted some -- so how so that sort of came about. Second, I think Echo 5 went out of commercial service. Was there any commercial, consumer impact from that? Did you lose any channels, or any refunds or anything associated with that? Thank you.

I'll hit the Tivo question first. When we actually -- both of the companies, DISH and SATS went back and looked at actual agreements related to the time of the spin and determined that based on those, DISH is responsible for the vast majority of any damages or sanctions that would be awarded by the court. And SATS has agreed to effectively pony up limits of indemnification obligations under the agreement pursuant to which DISH buys receivers from SATS.

Vijay, this is Tom. On the Echo 5 issue, fortunately it did have very little impact on the customer base. We had previously know there were issues with satellite, and fuel consumption, with a head of previous schedule due to movements. So we had migrated the vast majority of the customer base. It was literally in the single thousands of customers that were impacted, and we have since moved that programming to accommodate the vast majority of those.

If I could ask a follow up, any color on any impact from digital transition in the quarter, some folks have tried to put a number around it, if you could do so it would be great. Thank you. Thank you.

Unfortunately, I won't be able to put a precise number around it. But clearly we did see a positive impact. We can measure that in call volumes in and around June 12th. The difficulty in putting a precise number around it, is that during the quarter we implemented a number of things. And just as, kind of serendipituously, the completion of our card swap occurred very close in time to the digital transition. So those two thing occurring at the same time make it difficult to isolate which was driving how much. But clearly, the two of those had a positive impact for us. In addition, during the quarter as you know we changed our approach in advertising quite a bit. And we think the tonality and the value message, that we we are driving through advertising is also having an impact.

Thank you.

Your next question comes from the line of Marci Ryvicker from Wells Fargo. Your line is open.

Thanks, I have two questions. First, your thought process on share repurchases. It looks like you didn't repurchase anything this quarter. Can you comment on that? And then secondly, you have a marketing campaign particularly targeting DIRECTV. How effective has this been, and is any of your subscriber gains coming from DIRECTV?

Sure, this is Jason, I'll take the first. On the share repurchase, this is the same question we've gotten several quarters in a row, and our position really hasn't changed. It really comes down to capital allocation for us, and trying to figure out what we think at least at the time is the best use of the next dollar that we got available to us. I mean there is a lot of things, the stock has traded cheap at times. There's been times, we've been in the market prior. And the thing of it that most people don't see, is kind of strategic elements that we are looking at, and what they may require from a capital standpoint. So when you take all that in context, we tend to operate in a world where we use 10b5-1 plans. You put them in place early, you have to strike price on those at levels that your comfortable with, given the other things that you are looking at in the business, and the timing and which those may occur.

And a lot of times in those cases you can be looking at thing and they are on the table for a long time. Some of them don't come to fruition. Some of them come to fruition, but in any case you have to be ready for them. And especially these days where the capital markets haven't always been, either accessible or at least haven't been favorable, you want to make sure that in your a position to act on the things that you want to take advantage of in the business. So we've taken a pretty conservative route on what that means towards the share repurchase. It is something that we constantly evaluate, as well as the rest of the capital structure.

And MarcI, this is Tom, on the marketing campaign, it's no secret we are in a fiercely competitive marketplace. And so there are share shifts occurring between and among all competitors. The campaign that we've been running recently, is as I said earlier really trying to reinforce the comparative value of DISH to other multichannel providers. It's not our only tactic in the marketplace. We are also driving calls through direct response television, and other tactics. We are seeing, still a recessionary environment. Consumers are belt tightening and they are looking for value. And we think we are well-positioned to reinforce that message. And we are also seeing that customers are increasingly hungry for information and education. We can certainly measure the time and the traffic to our website, and the time customers spend on our website tied to our advertising spend. So that tells us the customers are really looking for -- this is an informed decision that they are making, when they are selecting a pay TV provider.

Thank you.

Your next question come from the line of Spencer Wang from Credit Suisse. Your line is open.

Thanks, and good morning. So the subscriber related expenses were up about 7.6% year over year and I know in the Q, you guys cited programming cost increases, as well as investments in the call centers and customer retention. So was just wondering if you could give us a little bit more color on how much of that increase was the programming cost side versus the investment in call centers and customer retention. And then just on churn really quickly, I know Nagravision 3 has helped your gross ads, so I was wondering if that has a positive impact for churn as well.

This is Robert. On your first question, we don't typically break out the details. We have mentioned in the past that, that programming expense is up year-over-year. slightly faster than rate of inflation. We have mentioned also that we are investing in our call center to improve our customer service. And that's about the extent of that. Tom, you want to handle the churn question?

Yes, just to clarify, we have completed a large slate of programming renewals in the last eight months as well as all retrans, we are pretty comfortable that we are in line with what others are experiencing as reported. As far as the churn on Nagravision, I'm not sure what the question was. We have completed the card swap. We clearly, pirates -- former pirates don't identify themselves when they call up to subscribe, so it's hard to isolate exactly how much of that is driven by that. Could you clarify what your question on the churn piece?

I was wondering were people churning off before because they were able to pirate the service. I know it's a tough thing to quantify but if had you a rough sense. Maybe as you made the transition to Nagravision 3?

I don't have an answers for that. Obviously security is important to everybody in the industry, so as everyone's system becomes secure it helps all of us.

Thank you.

Next question comes from Tuna Amobi from Standard & Poor's Equity Group. Your line is open.

Alright, thanks a lot. So I guess -- one of the other factors you cited for subscriber growth this quarter, in addition to digital television and the swap out , I think was the sales and marketing. And presumably that arose mostly from the $9.99 offer, which I believe you commenced in February. So the question is, how much of that was a factor -- if you could put color around that for Q2. And that would be helpful. And separately, with regard to your, the source of your add, I was wondering if in Charter territories you saw some kind of lift from the subscriber trends there, particularly given that your period DIRECTV -- it seemed like they were running aggressive advertising in those territories, and I believe they ended up settling with the Charter. So just some color around what you saw in those areas -- and that would be helpful.

Okay Tuna. This is Tom. First of all, the $9.99 clearly was the first quarter where you saw the full effect across all three months. However, I think I mentioned on the last call, it's effective in ringing the phones, but very few customers are actually getting, signing up at 9.99. For instance, we modified the advertising shortly after launching it, to reflect the inclusion of locals and promoted more around $14.99. That being said we did think it had a positive impact in growing the gross add number. We are continuing to grow our direct sales channel, but we are very fortunate the retailer and distributor base, as well as our existing teleco partner base is very engaged with us right now. And you probably saw we've modified the offer at 81.

Yes.

As for Charter, I would say on the margin we saw a little bit, but it's not material.

Okay. If I can have one follow up, Can you update us on the HD channels. I think -- believe you guys are well north of 100 channels, and you've been quietly launching those. Can you tell us where you stand now, and where how much of a kind of a pull through that you are seeing in terms of HD -- national.

I honestly don't have the exact number in front of me because we are adding stuff literally every week. We launched a number last week, for instance, in Puerto Rico. We do feel like that we have a lead in HD now, both nationally and in local markets. We anticipate with future satellite launches, we will be able to continue that march in the local markets. It's obvious more and more consumers are buying HD and subscribing with HD in mind. So we think we are positioned for the future, but it's also a bit of an arms rates where everybody is trying to achieve parity in the marketplace.

Thank you.

As far as HD, penetration goes as in the past we don't disclose that, but fair to say that our HD penetration for existing and new customers has been growing, as it has been for all of our competitors.

Okay, thanks.

Your next question comes from the line of Ingrid Chung from Goldman Sachs. Your line is open.

Good morning. Thank you. So I have two questions mainly around credit. First, recently DTV said that they are tightening credit going forward. Have your credit standards varied this year versus last? And then secondly, and you can correct me if I'm wrong here, but I think you've gone to a policy of allowing debit cards. I was wondering if that's open open a whole new market for you, and what impact that's had on your gross ads.

I think, I mean in general -- as I alluded to earlier we alluded to earlier -- we are always on existing customer side, we are always try to fine-tune how much we are spending on retention, and whether we are spending too much or too little. And clearly there was a phase a couple of year ago where we thought we were spending too little, and we've been slowly ramping that up. With respect to new customers, a similar exercise with respect to making sure that we are getting good quality customers. We don't want to just drive growth activations for the sake of short term subscriber numbers. We are trying to make sure our subscribers that we take on, are going to be a net positive value over the course of their lives. So we do make adjustments from time to time about various for purposes of payment that we take for purposes of qualifying customers. We do make adjustments from time to time about the credit scores that we set in terms of thresholds. Besides that, I don't think we will get into more specifics about where we set the thresholds.

Okay. I was also wondering if you could comment on the monthly trends in the quarter two. Typically June is probably your weakest month out of the quarter, but given additional transition in the event of anti-piracy initiative and your marketing, it seems to make sense if June was your strongest month out of the quarter, and I was wondering if you carried that momentum going into July?

Again, as Tom alluded to we don't give any forward guidance. He's already mentioned that two of the events that we could distinguish, which were the digital transition and completion of our securities system replacement were completed in the month of June.

Okay. All right. Great. Thanks.

Your next question comes from the line of Craig Moffett from Sanford Bernstein. Your line is open.

Good morning. Two questions. First, a question for Stanton. The TiVo has asked for close to $1 billion in the compensatory and punitive damages phase. In a worse case scenario, where Judge Folsom were to rule in Tivo's favor, how would you go about financing that? Looking at your balance sheet, that is equal to pretty close to all of your cash and marketable securities on hand. You mentioned in the Q that you might have to raise capital. I'm wondering if you could say some more about that. Second, a different question about capital. You just mentioned a few minutes ago your potential strategic initiatives that you look at. Are you referring to wireless as that option, and could you say more about what that might entail?

So, thanks, Craig. On the first question, one, as I said, we think the fact that we acted in good faith should result in zero, if you will kicker from a sanctions perspective. But even if Judge Folsom disagrees with us on that, we have take an issues with Tivo's calculation of what if the appropriate amount should be. And really beyond that, there are just so many ways it could actually shake out, I mean we would rather just not speculate at this time until we actually have a number from the judge, and cross the bridge at that time. And related to that, it looks like we will have a number before the Federal circuit -- here's the appeal which they are trying to schedule in November but the judge has -- the trial judge -- Judge Folsom, has stayed in imposition of those sanctions until after the entire appeal is resolved.

So you would have a number, but you wouldn't actually have to race the capital potentially, if there was a capital raise requirements you wouldn't have to do that until after the appeal.

We wouldn't have to raise any money or post a bonds until after the appeal.

With respect to the strategic initiatives that you are talking about that you mentioned in the conversation about share repurchases and what else you consider.

That was in reference to nothing in particular, Craig. That was just to give you the, the original question was how we think about it, and it's, the answer was intended to be to mainly -- keep our powder dry on things.

Could you talk about then what you are thinking about in terms of wireless and the 700 megahertz spectrum and update us on that?

Yes Craig. Sure, this is Tom. You won't see any material spending around the 700 megahertz in the shorter run. We are doing primarily networking testing in a single market just to better understand what the eventual build out cost would be, propagation, coverage, interference, all those types of things. So we have an engineering team and a small team working on 700, but it's not something you'll see significant public activity around for quite awhile.

And the product you're thinking about is presumably a mobile video product? Is that right? Or does it include some level of a data component?

The first iteration that we are viewing is a mobile video product.

Thank you.

Your next question comes from the line of Bryan Kraft from Cross Research. Your line is open.

Hi, thank you. A couple questions. One, just want to see if you can comment on how the deployment of the new SmartCards affected expenses during the quarter. Second. also wanted to know if you could talk about when the cycle of investment in the call centers might end, and when you can start to realize more scale off that investment. And then lastly, how do you think the long-term margin structure of the Company is going to be affected by what appears to be a need to discount more, and spend more on retention in order to improve subscriber metrics? Thank you.

Brian, this is Robert. Let me kind of hit on your last two questions, as far as the cycle of customer service spend, we -- I think talked about this a couple of quarters ago. Third and the fourth quarter of last year is when we started putting more focus on the customer service, and as a result that's when the spend went up. Now regarding your question on long-term margin, obviously that's not something we comment on, but it is something that we obviously are working on very hard, and working on very hard on our business model and business rules on how to keep the customer service level at high levels, and drive cost down. So it's not an easy thing, and maybe Bernie can comment more about that. But it's simply you have to take each business rule and look at it in detail to figure out how to restructuring it to be a lower cost.

Well, first of all with respect to the SmartCard question, the cost of actually implemented the SmartCards over the course of the last 12 months was expensed, as we went along so they've been reflected in our financials, and I would say largely they are relatively small in the scheme of thing. One things of note going forward, is that how we account for SmartCards in the future will be a little bit different than in the past based on the structure of our current agreement. Is that right?

All right. Never mind. We may change from -- right now the cost of a card is actually reflected in the cost of a receiver, and hence its embedded in our stack cost. And we may switch to a scheme in which it's reflected as a variable cost or a subscriber related cost going forward. So that's with respect to SmartCards.

With respect to our spending on customer service, and how it is impacting our margin we are clearly trying to do things, we are focusing first on improving customer service. Ultimately we want to improve customer service and contain our costs. I think a lot of what we've seen, we've talked about spending more on retention. And that's something we evaluate from time to time to see whether or not we are spending enough or not spending enough. With respect to the other big bucket that we've talked about in the Q and talked about on this call, which is our call center operations. Part of the increase in costs, is because we are taking more phone calls.

And part of that, is because gradually over time our business has become a little bit more complex, particularly over the last three or four years. And keeping customers educated, keeping our agents and employees educated about all these new channels of distribution, all these new types of equipment, all these new packages, all these new fees, all these new promotions, we probably haven't kept up in terms of explaining those things and describing those things. So it drives a lot of questions, a lot of confusion from customers. We are trying to do a better job with respect to that. Besides call volume going up ever so slightly, the amount of time on an average call has gone up by quite a bit. And that is partly our investment we feel in the business.

We are trying to spend more time on phone calls to make sure we give proper disclosures, and we set expectations properly at the start of a sale, or at the start of a transaction. What we have found is that we haven't done the best job a at making sure customers know what the -- what their bill is going to look like when they sign up for DISH, or after they do an upgrade or after they change programming. We haven't done the best job with respect to setting expectations as to what their equipment is going to be, and whether or not we are matching their needs based on what they tell us. And we haven't done the best job with respect to making sure that we are picking the right programming package based on the channels that they like to watch. So as a result we are spending more time on our phone calls trying to set those expectations properly up front.

That obviously costs us some money in terms of longer talk time on the original calls, but we are hoping that that will eventually result in fewer phone calls because customers won't be as confused and their expectations won't be -- will be set properly. So generally those are the things that are driving the call costs going on right now. We have more calls because of the complexity is the of the business and we've got to get better at explaining that and making our business simple, quite honestly. And we are spending a lot of effort right now trying to get our rules and promotions and pricing and packages simpler, and then part of it is higher talk time because we are trying to do a better job of setting expectations to the

Okay. Great. Thanks so much.

Your next question comes from the line of Doug Mitchelson from Deutsche Bank. Your line is open.

Thanks. Hi, gentlemen, just a couple. First, you sort of touched on churn and you made a comment that you've been over time increasing retention spending, but because of the significant change in the quarter were improved, was there specifically a change in retention strategies during or leading into 2Q that might have helped churn.

I don't think so, Doug.

Nothing abrupt.

So it was more sort of the ends of a bunch of different cycles sort of hitting at the same.

I would say that's the case.

And then, I think in the Q you mentioned that EchoStar 12 had some anomalies, but it wasn't quite clear weather it was a significant or not. Any comments you can make there?

Nothing significant. Echo5 was the big story for the quarter.

On 5, was there anything left to write down, or was that fully depreciated?

Fully depreciated.

So that one was fine. Last question, again, I mean you don't want to talk about forward-looking, but this is pretty innocuous.. How far a long on the cost efficiency cycle do you think you are for MPEG4 DVR's?.

I mean like what inning are we in, for bringing the cost of those down as they scale? Because its been a couple years now.

I think we are still in the early innings would be my view. Tom, do you see?

We are constantly working with our vendor on cost reductions on all of our set-top boxes. But the MPEG 4 activity is ramping. I don't know how you would categorize that in terms of a baseball analogy.

Well I guess I was probably thinking dollar amount of cost, where we were, when we started a couple of year ago versus where we might end up. It seems like we have a little more than halfway, there but there's more to go and what are they to confirm that you thought there were more efficiencies to squeeze out of that box. Great. All right. That's it. Thanks.

Thanks, Doug. I didn't mean to avoid it. I just don't know how to answer it specifically. We are constantly working on cost reductions in the boxes, and I think it's incremental.

Well I was going with the baseball analogy because I was asking if you thought where the price was now, and where it was going you probably wouldn't answer that.

That's correct.

Thanks.

Your next question comes from the line of Tom Egan from Collins Stewart . Your line is

Great,. thank you very much. I guess two questions. First, you mentioned about continuing to improve the customer experience. So does that mean that the bulk of the churn reduction in the quarter was a decline in the voluntary churn rate versus involuntary? And then I have a second. Thanks.

Yes, well, there has been improvement in the voluntary churn rate. But clearly we are still in a recessionary time, and there is, it's not like involuntary churn has gone away, I'll tell you that much.

So do you think that the bigger reduction was more a reduction in involuntary or involuntary.

I think more on the voluntary.

More on the voluntary side than the involuntary side.

And then secondly, DirecTV noticed in their call that there was a significant decline in number of premium subscribers which impacted their RPU, HBO, Showtime and Starz. Did you see that too, and what penetration did you have of your subs in the premium networks?

Yes, Tom, we've definitely seen some softness in both pay-per-view and premium, and as I said earlier we are in this victim of belt tightening and wherever a customer can look to save some money we are seeing some percentage of customers looking for that. So that's consistent. As far as our premium penetrations, we haven't disclosed that historically, and we are not going to now either.

Sure. Any sense of the drop from Q2 last year to this year? Is that a 5% drop in penetration or?

We haven't broken it out.

Okay. Thank you.

Your next question comes from Jason Bazinet from Citi. Your line is open

Thanks so much. I maybe missing some nuance in the Q, related to the TiVo, litigation so maybe you all could clarify a little bit. It seems there were three separate things that were said. One that DISH agreed to sort of indemnify EchoStar for the liability, second, that the liability seems to have been capped at $5 million related to the receiver agreement. And then it goes on to say that the liability sort of isn't capped, and so I got more confused after reading it than I thought I was before the Q came out. So can you just sort of reconcile those items?

Sure. So - it's actually pretty simple. DISH has agreed to indemnify SATS for any liability resulting from the TiVo litigation. SATS has agree to pay DISH $5 million related to that. And if there is any intellectual property resulting from a successful new design around, DISH and SATS have agreed that they would jointly own that and have cross licenses to that technology.

Okay. Got it. Okay. Thank you very much.

Your next question comes from the line of Benjamin Swinburne from Morgan Stanley.

Thanks. Good morning, guys, Tom, if I go back and ask the MPEG -- MPEG 4 question a little differently. You guys have been migrating your MPEG 2 HD customer base over I believe to MPEG 4. Just wanted to know how far along you were on that front. You can use a baseball analogy or not, but anything would be helpful there.

How a little bit of tin music. I would refer to Bernie about whether or not we have broken it out specifically.

No, we have not. But we have talked about two types of equipment technology transitions. One is going from different forms of encryption -- which is -- I'm sorry modulation, which is going from QPSK to 8PSK, and with respect to that transition , while we are not close to finish I would say the bulk of our receivers that are out in the field today are 8PSK. modulation. With respect to encoding, which is the MPEG 2 to MPEG 4 we are much closer to the beginning than we are to the end, in terms of getting our entire customer base to MPEG

Is the 8PSK upgrade, is that a software download or a whole new box?

It's a whole new box. The box is either QPSK. or 8PSK. Both of those eventually, if you ever go to where all your boxes were 8PSK you can broadcast your signal in 8SPK, only and you could realize bandwidth savings. And likewise when you get to MPEG 2 to MPEG 4 which is still a long ways off, you could send all your signals in MPEG 4 encoding and save even more bandwidth.

It looked like the retention marketing at least the capitalized piece fell to $30 million to $35 million which is a pretty low number considering you guys are increasing your spend there. Wanted to know if there was any color? Was that recycled boxes from churned customers.

Benjamin, this is Robert, it was indeed a higher percentage of remanufactured receivers. The other thing on retention CapEx spend, we typically do have a higher first quarter because we have available installation techs, more available installation techs in the first quarter to do that retention CapEx work. So it's not unusual to see second quarter, a little bit lower than first quarter.

Got you.

Also, Ben Retention is one of the areas where we are constantly revisiting and responding to what's going on in the competitive market. It's difficult to assume that, A., thing were consistent throughout a quarter, and B., the speed at which we might make changes going forward.

Understood. And I just wanted to ask you. In the markets where you had AT&T as a partner. There were a couple quarters, quarter and a half away, how far are you from getting back to flat on a distribution basis in those markets are you? I'm sure you've remarked other channels, direct sales, your independents, are you getting closer to the point where you made up that lost channel, or is that still a ways away?

I don't think I will give specifics, but we have made a concerted efforts into growing our direct sales channel, which I'm pleased with the progress we are making. But more importantly we've put a high value on the relationships we have had with distributors, retailers, and our teleco partners. And the engagement level, I think on the last call we had just come off a team summit, and were encouraged by the interactions and strengths of those relationships and we continue to feel that way.

Cool. Thanks a lot.

Your next question come from the line of Todd Mitchell from Kaufman Brothers. Your line is open.

Thank you. I have two questions. The first question is, you had some changes in your distribution footprint year-over-year using the telecos. And I noticed in the fourth and first quarters you got rid of a lot of your own retailers. Could you speak to basically the changes, the mix of gross adds both year-over-year and sequentially?

Well, somewhat related to the last question, first of all as far as the termination of retailers I think Bernie touched on that in a previous call. While it received a fair amount of attention on a percentage basis, of our total retailer base it was de minimis. And we have thousands of retailers that are good operators, and that's not the focus of where we are at. We were focused a year ago on fraud and security issues. There was a small number of what I would say bad apples, and those have been, are no longer working with us. In terms of the teleco footprint, obviously that's growing and you guys probable net operating loss that more precisely than up that 25% to 30% of the country now has an option of four providers. So that increases the marketing intensity in those specific geographies.

But because of our base, and because we operate nationally we are able to satisfy and drive sales from all geographies, and not be just dependent on those more urban markets where the teleco are over building. As far as the miss in gross adds by channel we don't break that out, but as I've said with the loss of AT&T, as a partner we have put a concerted effort into building direct sales, while also reinforcing the alignment of our relationships with our other third party channels.

Okay. My second question relates to RPU. It was up 2% year over year. Can you give us a little bit more color? I understand you have a price impact, price increase helping that go up, pull back in premium helping and some aggressive offerings helping it to go down. And assuming you are going through your upgrade cycle, can you give us kind of a breakdown in that 2% up, what the big levers were, and what the small levers were?

Well, we think you got the main points. Obviously every year at this point in time we see the reflection of price increases that have taken place. We've already talked about premiums and pay-per-view, which has been rather are rather than a one quarter event, it's been somewhat gradual over the last year, year and a half or so that we've seen it steadily decline. As we talked a little bit about more retention activities, remember that retention activities can be both upgrades as well as adjustments, being made on certain customers accounts and things like that. So there can be a small impact with respect to RPU related to those activities as well as.

Okay. Last question here. I have heard that everybody;s advertising business is down year-over-year. I heard that yours is actually up because of some changes in the way you sell inventory. Can you comment on that?

I don't know that it's attributable to the way we sell inventory. It's, we have invested in our ad sales organization significantly in the last couple of years, have opened new offices and recruited from experienced people from the industry. So while it's modest, we are, we feel fortunate to be up in an environment like we've observed over the last year. But I wouldn't say it's how we sell our inventory.

Okay. Thank you very much.

(Operator Instructions) Your next question comes from the line of Abe Bronchtein from Troubh Partners. Your line is open?

Hello? Can you hear me?

Yes, Abe

I wonder if I can just get some clarification. In response to an earlier question about the TiVo (inaudible) you seem to focus on the potential meaning of that language of it in terms of the colorability issue. Is their not a larger potential -- if these two claims are disallowed by the heart of the software claims, is not there an opportunity or possibility for the entire judgements to be reversed?

That's a great question. Certainly with respect to everything that's currently pending in front of the judge, yes. But it's as I understand it somewhat of an open issue on the original infringement of the patent. Whether we would actually will be able to go back and recover the original amounts we spent, or were required to pay which is about $105 million that was release from escrow. But rest assured, if the patent office ultimately finally invalidates its patent, and it's upheld on appeal, we will take a hard look at that.

Okay. Thank you very much.

I might just add to Jeff's sort of initial question it was somewhat general, how do we feel about the case. I just want to note that our appeal brief is now online, and our Investor Relations side. I would encourage folks to take a look at that, because that's says pretty concisely our position on appeal.

Mr. Kiser, we have no further questions at this time.

That's great. Then thank you very much everybody. And we will go ahead and wrap the call up, Sean.

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

Thanks.