DISH Network Corp (DISH) 2010 Q1 法說會逐字稿

Good afternoon. My name is Sarah and I'll be the conference operator today. At this time, I'd like to welcome everyone to the DISH Network Corporation Q1 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. (Operator Instructions) Thank you. Mr. Kiser, you may begin your conference.

Thanks, Sarah. Thanks for joining us. My name is Jason Kiser, I'm the Treasurer here at DISH Network. I'm joined today by Charles Ergen, Chairman and CEO, Tom Cullen, Executive Vice President, Bernie Hahn, COO, Robert Olson, our CFO and Stanton Dodge, General Counsel. Before we open it up for Q & A we need to do our Safe Harbor disclosure so for that we'll turn it over to Stanton.

Thanks Jason. Good morning everyone and thank you for joining us. We invite media to participate in listen only mode on the call and ask 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 we make during this call that are not statements of historical fact constitute forward-looking statements which involve known and unknown risks, 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 we make wherever they appear. You should carefully consider the risks described in our reports and should not face 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. Sarah, we're actually going to go straight into Q & A so if you want to open the lines we're ready to take our first question.

(Operator Instructions) Your first question comes from Tuna Amobi of Standard & Poor's. Your line is now open.

Thank you very much. Good morning everyone or good afternoon wherever you are. So, a couple of big picture questions for Charlie. So I guess first on the 700 megahertz, is there anything as you think about your strategy there that perhaps the national broadband plan that was recently unveiled could impact how you move forward with that, specifically regarding perhaps the provisions related to spectrum allocation and spectrum option as you think about how those things might evolve for wireless broadband providers. Is there anything that could help to shape your 700 megahertz deployment there?

Okay, well, I guess we're evaluating a number of things in 700 megahertz. Obviously, we think we have virtually nationwide spectrum and we're looking to see how Qualcomm does with their mobile video and see how that progresses.

The second, we're actively participating with the broadcasting community with their trialing on their potential use of their own spectrum in part and mobility and then we're looking at other things that we think the 700 megahertz spectrum to be used for and I guess the big thing is we don't want to go out and spend a lot of CapEx without a real defined plan and know which way the best economic model is and if some of this is going to, I've seen on net neutrality ultimately shakes out, we'll see what the national broadband shakes out and see if there's more options of spectrum coming out and you put all those thins together and you kind of develop a plan so we think we have a valuable asset there. We think the mistake would be to start building things out and then have to change plan midway through a buildout, so we're also looking for ways to build it out, obviously much less expensively than perhaps others have built out 700 megahertz in the past. So it's an active strategic asset for us but we really don't have a defined business plan to share with you today.

Is there any grounds perhaps that you see, you know, overlap with what the broadcasts have announced on the mobile DTV initiative? Did you suggest that there might be some common grounds there with what you might be envisioning?

We think, well we're testing with broadcasters so we're testing our spectrum along with their spectrum and part of that is looking at mobility. And again, we think there's some interesting results there but it's all very preliminary kind of testing and the broadcasting community is a bit fragmented as well.

The FCC's talked about maybe reclaiming some of that spectrum so all those things are factors. We're just not ready for the defined planned to. All I can say is I think it's a good strategic asset, that it's properly deployed, can build value for our Company.

It also could be something that if not properly deployed could cost our Company money. So I guess my theory is when you don't have enough information to make a good choice you're better off not making a choice at that time and we just don't have enough information on a variety factors, broadcaster, Qualcomm, government FCC policy, future auctions, and product that would make that economical, but having said that there are three or four things we've looked at that we think potentially could make sense.

And if I can ask one more question related to advertising, can you perhaps quantify how much of an advertising rebound was included in your numbers and more specifically on interactive advertising, I was wondering if you can provide some more color on your recent announcement with DirecTV and why you thought that DirecTV was ideal partner for this particular initiative?

Hi, it's Tom Cullen. In general, advertising revenues have grown on pace with what we're seeing from the rest of the industry so we're pleased with the rebound there and regarding the interactive piece, the advertising groups between our team and the DirecTV team have been in discussion about this for quite a while. We both deploy similar interactive apps and this announcement recently was simply a means for making it easier for the larger advertisers and their agencies to look at a common deployment of a single app that would traverse both of our plans.

In other words, you can get to 30 million homes with the development of a single app. Each of those agreements would still be independent between DISH and the advertise in DirecTV and the advertiser and what we're trying to do is just aggregate a larger number of homes to create more interest and so far the response has been very positive.

Presumably this is going to be positioned as an alternative for the Canoe national advertise which cable is developing as well. Is this meant to be a kind of direct head-to-head competitor?

Yeah, it's clearly in the same vein as what Canoe is working on.

Thank you very much.

Your next question comes from Jeff Wlodarczak from Pivottal Research Group. Your line is now open.

Good afternoon guys. Your subscriber related expense as a percent of revenue improved year-over-year for the first time in a long time and if you back out of one-time benefit you had last year it looks like your expense per average DISH sub was actually flat year-over-year so nothing is perfect Charlie but do you feel like you all have turned the corner on your operational issues, you can see a lot more leverage on the expense side of the equation going forward?

Yeah, Jeff this is Robert. It is indeed flat year-over-year. We've been working pretty hard over the past year on our variable cost, operating cost that we can control. With that being said, we're still fighting to offset increased programming costs and that will be a battle that we fought over the last year and we'll continue to fight, so I think we've made some progress. I think there's still a lot more work to be done on variable cost.

That's good to hear, and then big picture, Charlie, your SAC was up to its highest level in the history of the Company. How would you say your incremental returns are today versus where they've been historically?

Well, I don't think, I think look at ARPU and expense line and SAC, you know, the return on a new customer is not what it was, you know, five or six years ago and that's something we always have to watch, particularly all of the discounting going on you really got to take a look at all of those factors and say I think you have to start looking at what customer, which customers do you make a profit on and which customers do you not make a profit on and it hasn't been too much of a task in the past because you made a profit on everybody but I think you have to be a little bit more selective today. In general, the trend in SAC has been because we've gotten more to impact equipment and a little bit heavier advertising the first quarter.

As we get to the vast majority of our customers and impact for equipment hopefully that of course we look for cost savings and manufacture at lower cost impact for equipment. So that's a factor but we certainly have seen the industry has gotten more competitive and we've seen in general trends to increasing SAC, although I think there's a limit to where that would go at least for us and we seen more competitive, more discounting of the programming side of it so when you put those things together, I think we just have to be smart about how we go about the marketplace out there.

And one of the big items, the two big things we fight are programming costs where we aren't able to pass all of the cost increases on to our customers due to the competitive environment and the heavy degree of discounting takes away from ARPU because you continue to give a discount on a new customer for a period of time, so that has some risk.

So, you know, we take a look at all of those things and on the other hand from a big picture perspective, we can, you know, broadcasting, broadcasting is a super efficient means of delivering TV and particularly when you get to Hi-Definition television and now 3D coming, it takes a lot of bandwidth. As things become competitive, the people are going to win are the most efficient at what they do and certainly sound like broadcasting has some advantages when it comes to efficiencies there, so those particular trends are good for us and so we've got the headwinds of competition and programming costs. We've got the tail wind so to speak of heavy bandwidth uses for consumers they want in terms of Hi-Definition television now 3D coming.

Thank you.

Your next question comes from Mike McCormack of JP Morgan. Your line is now open.

Hi, guys, thanks. Just looking at nice improvement in churn and I guess we were expecting churn to potentially go the other way based upon some of these contract expirations. Can you just walk us through what you saw in the quarter first with respect to these contract expirations and secondly other drivers of churn improvement, thanks.

Yeah so this is Robert again, Mike. We did expect to see relatively low churn. We described that in our Q that in February 2008 we extended our committment period from 18-24 months and so for at least one month a little bit probably a little bit more, we had the benefit of that extension in first quarter and obviously that will go away in second quarter. Tom?

Well that being said. This is Tom. The committment period overlap is one thing but we would like to believe that we are making significant improvements in the delivery of customer service and improving the customer experience, and that will also flow through. Again, it's a work in progress, we believe we have made good progress in the last year on that front but nobody is resting on there royals here.

Thanks, guys.

Your next question comes from James Ratcliffe of Barclays Capital. Your line is now open.

Good morning guys. You mentioned in the Q that you're increasing the rate of HD DVR upgrades for competitive reasons and also continue to do MPEG 4 and APSK swap outs but it looked like retention CPE CapEx was down substantially year on year the can you talk about what was driving that?

Yeah, this is Robert. Retention CapEx does tend to fluctuate quarter to quarter some so I wouldn't look at first quarter being a trend necessarily and a lot of different operational considerations and just as a result of retention CapEx wasn't as high in the first quarter.

I'd also add, this is Tom, that we're continuously refining the segmentation and targeting as Charlie alluded to identifying profitability on a per customer segment basis and as a result of that we'll be more selective in how we approach retention Marketing in general.

Great. Thank you.

Your next question comes from Brian Craft of Cross Research. Your line is now open.

Hi, thank you. Had a couple questions. First, just on the TiVo expense accrual looks like you're accruing about $30 million a quarter. Are you accruing into the $225 rate because if you are it looks like that implies about 4.4 million boxes that the charges would apply to which seems a lot lower than what's been talked about by TiVo and implied by the language in the court documents, so that was my first one and then the other question I had was on satellite CapEx. On EchoStar 15, is there a lot remaining in terms of investment that will hit for the remainder of the year or is most of that been captured already, thank you?

Yeah, this is Charlie. The TiVo is our best estimate of what the accrual would be by the court, so that's our just best estimate and what it is, so we don't give a specific number there. On the, Robert do you want to take the--

I missed the second question.

EchoStar 15 CapEx, has most of that run through.

Yeah, it has. We had the launch contract in first quarter. We'll have a couple more quarters of Echo 15 CapEx that will be lighter than it was in first quarter.

Okay, and if you don't mind if I could just squeeze one more in. If you look at the satellite and transmission cost for the quarter, they were up quite a bit sequentially and I know you mentioned the additional satellite coming on lease in October, but, you know, fourth quarter was much lighter so I just want to understand what the sequential increase was due to and whether we could look at the first quarter as being sort of a clean quarter to use as a run rate? Thanks.

Yes. This is Robert again. I think you can use first quarter as a clean quarter for a run rate. We mentioned the Nemick 5 satellite being the big driver and we also took a couple of our satellites from a long term lease to a short-term lease which had higher rates but first quarter's a pretty good run rate for satellite and transmission expense.

Okay, thanks very much.

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

Great. Thanks. A few questions. So just following up on TiVo, Charlie, I know you love these TiVo questions but it seems like we could be getting near the end of the court process. I know you hope not but are you prepared to move pretty quickly with a license deal with TiVo if you don't get an unbonk review and the Supreme Court doesn't hear an appeal?

Well, you know, I don't know what I'd do if I didn't have TiVo litigation going on. It would be a real void in my life. Maybe I could see my kids. I think that I guess in general I'd say a couple things. We've always said that it seems like we should be working together with TiVo. We certainly as we got to know them we have a lot of respect for what they've done. They have done very well in the litigation process with us and this has always been a case really about an honest disagreement on how our DVR's work. There's never been anything personal about it.

The court case, obviously and unbonk review, I guess there's two places one is the unbonk review for the Florida Court of Appeals. Those are not, you know, those are not normally granted so take that into consideration but this is an unusual case of course in terms of whether you can actually design around a patent. And then we have a design around based on what the judge and the court has said about how the system works where we designed around it and that's in front of the judge in Texas and we hope that he will look at that because obviously that would allow us to continue to ship boxes, but we are joined at the hip with TiVo in a sense that one of the questions earlier, we booked $30 million for one quarter so that's over $100 million just for the year on average and licensing fees for TiVo. Which is materially more than they get with the rest of the entire industry and so we are joined at the hip in the sense that those if we don't get a deal done, those fees will go away for them and obviously we'll lose customers and so it reminds me a lot of our programming negotiation, where you both need each other and you end up with, but it's also zero some gain in a way, and in this case, it's not quite as much as zero sum gain as it is in programming because sometimes in programming when a customer leaves us they have a choice to go someplace elsewhere the programmer gets paid.

In this case, most people who would leave us from a DVR perspective would not be incremental revenue to TiVo because they would probably go to one of the other players where TiVo already has a relationship with them so there's no incremental or it would be very little incremental revenue so it would be revenue lost. Secondarily, a strong DISH Network is probably beneficial to TiVo if we're utilizing their technology,.

We'll have to wait and see. I don't think you should assume that we will get a deal done. I don't think you should assume that the courts are going to rule in our favor but there is a logic to us working together.

And a couple more. I know you talked a bit about SAC costs already but it's interesting you're getting close to DirecTV SAC level but without ARPU. Historically you've been much more efficient than them and you've got the multi-room DVR and they don't yet, I guess they're just launching now, so can you square that for me? Are your customers coming in at higher tiers and they're going to be higher ARPU and the SAC level makes sense or does Direct gain a better return right now than you guys are?

Well I think it's a combination of all of those. I think DirecTV historically is skewed a little higher end customer. Their programming costs obviously are higher than ours in general for the same programming that we're the lowest cost guys because we came into the marketplace second. They have the NFL Network which adds, think they have some sporting things that we don't have that aren't necessarily a profit to them but add to ARPU for them and then we're probably a little under marketed.

I think we have some room on the pricing side that we haven't taken advantage of as we try to simplify our operations, we kind of have foregone any kind of real increase so far this year because we need to get some operational things under control about how we charge for a product. And finally, the discounting side of it is we're still, we still feel the effects of I've always said I hate discounting but we've discounted for the last couple years and that obviously affects ARPU so we've got room there to make improvements and at least for the next three or four years we'll have the disadvantage in football and some of the sports things.

All right, last question for me. I appreciate the time. Typically, when an operator like yourself steps up the performance within a few months competitors ramp promotion to blunt the share shift. This time it doesn't appear that's happening when I look at the last three quarters your share has been pretty steady and strong. At least all of our channel checks haven't picked up any real aggressive change by your peers. Is that an accurate depiction of the marketplace because it seems like you should have another good quarter?

Is that a question for a forward-looking statement? Obviously, we don't issue forward-looking statements but I would challenge the assertion that this isn't a very competitively intense time from a promotional standpoint. We think we have done well in the last nine months, even in the face of escalating promotions, discounts, channel economics, there are a lot of things moving around within this industry among all of the competitors and I would say the competitive intensity is as high as I've ever seen it.

So you've been right in ahead of them. Okay, great. Thank you.

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

Thanks. There's been a lot of commentary going back to TiVo regarding DISH or SAT potentially buying TiVo. Charlie what are your thoughts there? Is this an option you're considering?

Well I haven't really thought about it too much but I guess those are always options. It's not something that I've thought a lot about.

Okay, and then just the services agreements that you have with EchoStar that was in the Q, can you just talk about what they are, the benefits you intend to get from them and is there any particular reason why you're entering into them now?

I don't know how many specifics we've shared but as we evolve into new businesses, there are technology opportunities for us for them to support our business and so I think you'll see that probably as a fairly continuous interaction, it just happens to be that that vendor is a related party, but we're working with a lot of new vendors on a lot of new technology opportunities because again, our mission is, our aim is to provide the best value to our customers, the best customer experience and part of that is evolving the product platform that we have available for our customers, so as we work on new technology opportunities, EchoStar is part of that plan in many cases.

And Marci, this is Robert. Those are currently pretty small relationships, each of those three that were new to the Q. They have to be disclosed because it's a related party.

Okay, thank you.

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

So the cable investment communities I think pretty nervous about the slippery slope we may embark upon with Title II, and my guess is their fears concerning rate regulation and potentially wholesale access to the data service. My question for Mr. Ergen is in the context of any investments you might make on mobile broadband or otherwise, would you incorporate that possibility albeit a small possibility into your calculus or do you think it's so remote it's not even really worth thinking about in terms of getting wholesale access, thank you?

This is Charlie. Title II as I seen it coming from the FCC in terms of what they are thinking about from a recommendation is I guess what I would say very measured approach. It certainly doesn't go as far as we would like to see it go but it doesn't have the kind of ominous effects that you just mentioned on the broadband providers. Really obviously the Comcast case requires the FCC to protect net neutrality we would have to move a different direction and Title II is probably as good a way to do it as any and all they really said is so far you can't discriminate against anybody in terms of the information that flows through your product.

They haven't gone as far as saying they would open it up to a wholesale basis or that they would be any kind of regulation on how much you can charge for your pipe so I don't think it has any, I think I would expect that the broadband providers will jump up and down and scream a little bit but they are probably privately pretty happy that it's a very measured approach and doesn't go very far in terms of affecting how they will make an investment. So I think that people may worry about that.

I mean I think that it's a little bit like the gun lobby, right? Where they may not really be against machine guns but they don't want you to ban machine guns because they think something else might be next, right? I don't think the big providers are as worried about, all of them have said publicly many, many times that they don't discriminate and they aren't going to discriminate so Title II as proposed doesn't affect them at all as long as they are doing what they say they are going to do so it's a little bit of trust but verify mentality but it doesn't go as far, obviously we would like to see it go farther but it doesn't do that so I think there was a little bit of list area created by some but I would not expect that these guys, I think these guys were full bore out there trying to get their broadband pipes out as far as they can go and of course where we would like to see it is there become a third and fourth and fifth competitor to broadband providers so you would need any kind of government intervention but that doesn't exist today.

Understood, thank you.

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

Hi, good morning. I want to go back to the comment you made about promotionality. I saw that you guys had actually been offering as I understand it a full year of service in selected markets, if you show your DirecTV bill. Can you talk about the level of promotionality specifically with respect and against DirecTV and in retrospect now having pursued the sort of you versus DirecTV as opposed to satellite versus cable argument has that worked to your advantage or would you expect to shift back to a more satellite versus cable stance which is more traditional of the way you guys are promoted in the past?

This is Charlie and Tom may want to jump in at the end here. I think we did do some promotion for one day on a DirecTV thing. I didn't know about it. I would have killed them if I would have found out about it. I don't think that's productive for us personally and I think it was important for us to show our product. DirecTV is the clear leader, very high brand image.

We have not done well the past year versus DirecTV, yet we felt like we had a better product and a little bit less expensive to the customer so it was important for us to be associated in the same conversation with DirecTV and I think in that sense it's worked on two levels. One is, we got customers looking at us and comparing us to DirecTV and then I think the reaction to that where they put us in the same advertisement with them which is we're not normally associated with DirecTV so while some people, they might have increased our negatives when somebody calls you a liar, obviously your negatives would go up. I think that it also for somebody who has a clear brand leader, it took their brand down some of the research I've seen is their brand suffers a little bit from that because I think people get turned off by that and so I don't think it's productive for the industry to do it. I would hope that at least on our side that clearer heads prevail in terms of how we look at things, but I would much rather see us comparing to cable as an industry than I would be talking about how somebody in the satellite business is a liar.

I think one of the good things about the advertising thing that we did with DirecTV is that's a basis to work together where it benefits both companies and you go forward, but our guys aren't perfect and I'm not perfect but I think we need to focus on our business and doing a great job for our customers and I think comparison are okay and I think at least I personally have pretty thick skin, so whatever somebody wants to do and they should do and I'm pleased that we're in the conversation with DirecTV. Last year at this time we weren't in the conversation so I think and that's made a lot of progress so I think that just another comment on the previous question.

I think we've got our customer service levels back to where they've historically been. We've always been at the top or near the top in this industry for cable and satellite companies and I think as you see surveys in the future, you'll see that we've gotten back into that historically at the top or near the top kind of Customer Service and that's taken a lot of hard work. That has nothing to do with comparing ourself to our competition, that's just in turn all that pays dividends and that's where we'll try to focus. Tom?

Hi, Craig. This is Tom. Sounds like this might be my last call as I'm preparing to put on my blindfold. The promotion that you talked about was a one day event concurrent with the launch of our new 922 receiver so I wouldn't use that to extrapolate the extent of our promotions.

We have run a common $15 off for 12 months, $180 worth of value and that's what we ran throughout the first four months of the year. Relative to as you know $29 off times 12 months plus $14 off time 12 months in the DirecTV universe so I think our promotions have been more muted but we do have it better every day low price so even at $39.99 which is our full price, it's very competitive. So I guess I'll leave it at that unless you have a follow on.

Just the follow on I guess is a more tactical question as we think about ARPU with your ARPU being up now sequentially in year-over-year again, is that, I take it doesn't seem like the promotional activity decelerated any so was that from customers taking a richer mix of premiums or is it in fact that you're being more successful now in upselling customers or what drives the change in ARPU given the promotional back drop?

Well we did have as Charlie mentioned some minor hardware fee adjustments in February. We have seen a slight uptick in premiums and we've had a pretty good uptick in pay-per-view events in the last couple months.

Okay, thank you.

Your next question comes from Tom Eagan of Collins Stuart. Your line is now open.

Thank you. This is actually Frank Porillo filling in for Tom Eagan. My question is where are you seeing subscribers coming from? Are they migrating from cable, satellite or Telco?

Tom will take that.

Well it's the same answer as last quarter.

Okay.

It really hasn't changed the composition of the mix hasn't been significant, as Charlie said, you know, we're glad to be in the conversation when there's a, when a consumer has a satellite consideration set in mind, I think we have been successful in raising their awareness that we are a very attractive alternative in terms of value. That being said, we do not market only against DirecTV.

We are marketing against cable. We have a lot of local market activities because we're a national footprint. We modify those whether it be Comcast, Time-Warner, Mediacom, Charter, wherever we are as well as with the Telcos, so I don't think that the composition of the mix hasn't changed materially.

This is Charlie. The only thing I'd add to that is we do see a general trend in shoppers in terms of one of the things that concerns me is when you sign up somebody for one or two year contract, it becomes a shopping event when the contract is over and once you have enough heavy discounting up front, you're going to, I just think you have a general potential for a trend of shopping events or one of two things happen when the customers committment period is up you have to give them, you have to continue to give them a below market deal to keep them or they leave and shop somewhere else so you've created this whole kind of network of shoppers and I think we see that more than probably we seen in the past, based on pretty much universal discounting in the marketplace, so that's potentially a trend that could be worrisome.

Great. Thank you.

Your next question comes from Ben Swinburne of Morgan Stanley. Your line is now open.

Thanks, good morning. I've got a couple. Maybe for Robert. If you go back to one of the earlier questions on subscriber related expenses I think of the $1.4 billion programming costs are probably a $1.1 billion, $1.2 billion and I'm sure those were up year on year on a per sub basis so I'm wondering what else is in that category that would have been down enough to get such a strong performance this quarter and I'm guessing it's the expensed retention market but any color would be helpful as we think about the rest of the year?

That's right and subscriber related expense we've got programming cost, we've got retention expense and we've got variable cost. You know, there are a couple things. I mean some expenses in that category have some fluctuations, things like bad debt fluctuate from quarter to quarter not materially but they do fluctuate, retention we've talked about fluctuates and also helping on sort of a sequential basis fourth quarter has 92 days, first quarter has 90 days and some of the expenses those variable costs in that category are really more driven by the number of days than months, so all those things helped but you're correct in that fairly unusual event would go down quarter to quarter given sort of the continued increase in programming expense this quarter.

And it seems like you're able to actually get that retention line under control despite the commentary about MPEG4 and I would imagine that the expensed portion of those upgrades is running through subscriber related expenses, is that the case?

That's right. One thing we've been working very hard on is to improve the efficiency of our installation work and we've spent a lot of time there, so that's another part of that expense associated with retention.

Great. Maybe for Tom. You've had two quarters now in a row of gross adds growth of over 20% and I'm just wondering how much you would attribute that to the increased Marketing spend versus just the product is better positioned from a High Def perspective. I don't know if you have any color on channel you'd like to highlight but it's obviously pretty impressive two quarters in a row gross adds improvement.

I wouldn't say it's completely attributable to Marketing. We do think reputation, the fact that over the past year we've been gradually building some momentum plays into that. As far as channels go, we have our annual retailer event tomorrow. Starting tomorrow, we have record attendance.

We have very strong engagement we believe. Well, we know from our retailer and distributer partners. We continue to do well with our Telco partners and so really channel composition hasn't changed materially but we focused very hard on working closely with our channel partners over the last I'd say nine months, it's stepped up significantly.

Is there any part of the increase in SAC per ad, Tom that's related to higher Commission spending? I'm wondering if that's helping drive the dealer network too.

No, it's not Ben.

And then lastly, thanks for all of the time, Charlie I was wondering if you'd comment on sort of what's happening in Washington on the tax front and how that might or might not impact the capital allocation strategy with buybacks and dividends and I think you made a comment last year when you paid out the special dividend taxes were on your mind so just curious if you could update us on that and also your general sense on the economy since you see the whole country and you were first to call the beginning of the downturn a while ago so I'm wondering what you're seeing now.

I'll start with the economy. I think we see what other people see the economy has been improving throughout most of the country but housing still has issues and so there's not a lot of new family formations and so I think that that will be interesting and it will be interesting that we don't have a digital transition this year either to help although we have an election coming up next Fall which always helps so in general the economy is a little better.

I would not say we're out of the woods yet and clearly from a macro point of view, it's a little scary when you look at the tax rates going up probably some burden some costs from healthcare for businesses and a budget deficit that's historical proportions for America so those things are going to be pretty worry some. I think in general having said that people are going to watch TV regardless and they are actually watching more TV and have more leisure time by being out of work, I don't know what it is but for us, we're in an industry that should do pretty well regardless.

The tax perspective would be something to look at, continuing to look at, obviously this might be the last year because we weren't sure they wouldn't raise taxes this year and it turned out doesn't look like they are going to but this could be a last year where a dividend is taxed at 15%, capital gain at 15% and obviously ordinary income is going to be going up as well, so we'll take a look at that in terms of what other business opportunities we have, what is our cash flow, is it positive or negative, how is the competitive environment, are there acquisition opportunities, all those things and try to make a logical decision.

Thank you. Thanks a lot.

The next question comes from Spencer Wang of Credit Suisse. Your line is now open.

Thanks, good morning. The first question I have is on your rates. I think the rate increase you referenced in the Q was for the equipment rental. Was wondering if I think on the last call you talked about potentially raising rates on programming packages later this year. Is that still in the plans, that's the first question and secondly for Charlie, I just want to clarify. I think you said don't expect the court to rule in your favor. Don't assume a deal will get done with TiVo and you haven't thought much about buying TiVo, so was just wondering if those are the perimeters, what's the game plan I guess if those things don't happen, are you just working on a work around or will you just shut down the boxes? Thanks.

Well, we have a design, but we are in a unique position where the judge hasn't looked at our work around but won't allow us to do anything until he looks at it so the only thing we can control is to shut down boxes, so we have to obviously if we were to lose in the court procedures, then we don't really have a choice. We would have to not shut down the customers, we have to shut down the DVR functionality of those customers and obviously if that scenario happens, that we can control, we can do that I think and so we're prepared to do that. That obviously will have a material negative effect on our business, it will have a material negative effect on TiVo's business.

And Spencer, back to the rates, know, we did have a slight increase overall in equipment rental fees in the first quarter and as far as anything in the future, rate increases are always a consideration but we don't have anything to share today.

Great. Thank you other than what I said before, I think we have room to do that.

Thank you.

Your next question comes from John Hodulik of UBS. Your line is now open.

Hi it's actually Lisa Friedman for John Hodulik. I just wanted to ask regarding Century Link which plans to buy Qwest and Verizon which is giving a chunk of lines to Frontier, since Century Link and Frontier are your partners, what is your outlook for these new combined companies and what kind of opportunity or threat do these transactions represent? Thanks.

This is Charlie and Tom may want to come in here. Obviously, they both have been good customers for us for a long time and I think we've been a good partner. They would represent opportunity for us if they grow. They also is competitive market and they will obviously have choices of where they get their video from a variety of ways as well, so we like doing business with them. We don't compete against each other.

We've liked, there's always a bit schizophrenic for us in terms of AT&T relationship because on the one hand we are spending SAC for a customer we knew they would come and try to get as soon as they brought U-verse by they would try to steal the customer back.

That's not the case with Century Tell and Frontier where there's a better way to work together because we aren't competing for that customer, we are doing that more as a partner, so there's opportunities that they grow and also risk that for whatever reason, they decide they don't want to do business with us, so like any of our customers, who have to do business with us, we have to earn their trust every day and I think we're a materially better Company than we were last year at this time and we've made a lot of progress in our product and our Customer Service and in our business and strategically I think we have a pretty good idea where we want to go in the future and our business is getting easier to get our arms around it and I think objectively, we have the best value out there for customers, we just need to make sure people understand it.

(Operator Instructions) Your next question comes from Todd Rethemeier of Hudson Square. Your line is now open.

Thanks, a lot of my questions have been answered but can you just talk about bad debt expense this quarter compared to year ago and then what you're seeing sequentially?

Yeah, Todd, this is Robert. As I mentioned before, it's down slightly but not materially and you know you could perhaps credit the improving economy as we've talked about before. It's a fairly small percentage for our overall subrelated expense.

Okay, thanks.

There are no further questions at this time. I'll turn the call back over to the presenters for closing remarks.

This is Charlie. Thanks again for joining us. We'll be back again in August. I might not be here in August. That's usually when I have my family vacation so if not you're in good hands with everybody else and we appreciate you listening in on the call. See you in August.

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