EchoStar Corp (SATS) 2008 Q1 法說會逐字稿

Good afternoon. My name is Tracy. I will be your conference operator today. At this time, I would like to welcome everyone to the EchoStar Corporation Quarter 1 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. Kaiser, you may begin your conference.

My name is Jason Kiser. I am joined by Charlie Ergen, Chairman and CEO, Carl Vogel, our Vice Chairman, Bernie Han, our CFO, and Stanton Dodge, our General Counsel. We are going straight into Q&A, but we do need to do our Safe Harbor disclosure.

Thanks, Jason. Good morning. Thanks for joining us. 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 future results expressed or implied by these forward-looking statements.

For a list of those factors please refer to the front of our 10-Q. All cautionary statements 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 forward-looking statement update, and not place undue reliance on any forward-looking statement. We assume no responsibility for updating any of these forward-looking statements.

With that I will turn it back to Jason.

Tracy, I think we will go straight to questions.

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Kit Spring.

Hi, this is [Nate Dresser] for Kit. Several questions for you. I will start with the FSS business and CMBStar. Can you give us an idea of what the performance criteria are that CMBStar is not satisfying, what you think your chances are of working around those are, and whether or not it could be something that could be redeployed in North America?

I won't go into specifics about it, but the specifications, I think I would say can be fixed, like anything in satellites, usually time and money you can fix anything, so the specifications can be fixed. The satellite has, we think about whether we would continue to build that satellite as is remains to be seen.

There are other uses for the satellite, and other potential uses. It has the advantage of kind of a two-year head start in the construction process, and there aren't a lot of, it is in the S-band range, and there is obviously a lot around the world going in S-band today. So I don't know how you exactly balance the risk, but we are okay with where we are with the satellite.

We think the most likely scenario is that it ultimately it will be probably used for it's intended purpose, but we think we have options if that is not how it ultimately gets used. And then we have obviously a worst case scenario where nobody, where if we can't get the performance that we need, we can't find another customer, can't reuse it, in which case we might have a write-down.

Is there a timeframe that you would have to redeploy it, or find another use for it, in order to avoid the 100 million write-down?

No. I mean, I think the history, I am trying to think of it. The history of satellites has been, in my experience over the last 20 years, probably been a number of times that there has been situations similar to this, and every time the satellite has been redeployed some way. They are a pretty limited resource. They take a long time to build, and there are typically uses around the world where people need them.

One that comes to mind recently was, I think there was a satellite that was built for the Chinese where the government wouldn't let the, wouldn't let Loral export it, and so ultimately I think it was maybe two years later, that satellite was ultimately redeployed over India, and it was sold and redeployed over India. I think it is fully leased up, or the majority of it is leased up. The general history is that satellites that get redeployed get redeployed.

Sometimes there is a cost to reconfigure them. Many times people make more money redeploying the satellite than they did for the original customer. And sometimes satellites have issues when they are being built. Those get fixed, and everything goes smoothly.

I guess Ico, or Boeing maybe, and that is in litigation, so I am not sure how that one turns out. Maybe there has been some times when satellites have been written down, but for the most part it is a pretty good asset to have.

On the rest of the FSS business, it looks like you added a small cost to that side? Is there any color you are willing to give us on that? Again is there any timeframe, any hurdles that you have to jump there, in order to avoid the write-down on the satellites?

I guess I would say that the business has a lot of capacity, so it has got upside, in terms of growth and EBITDA and so forth, but the market is relatively soft for the kind of capacity that SATS has. What is unique about SATS, it is more of a value-added provider in the sense that it can do set-top boxes uplinking, has a fiber network that it can provide most cities in the United States, it knows encryption, subscriber management, has the ability to do installation and service at a local level. So there is a lot of synergy and things that can be done there, but obviously it just got spun off.

We have got to build the sales force. The lead time in selling capacity is typically about a year. And so I guess my expectation would be that we will continue to grow that business. How fast, a lot depends on how well we do in terms of executing, and to some degree how firm or soft the market is.

And your expectation on adding customers to the FSS business would be 12 months out, or something like that?

No, I would say it differently. I think every month there continues to be customers that potentially need capacity, but there are also a lot of competitors out there that have capacity. So we are all fighting for the same mouth to feed. What is unique about SATS, is of course we can do things that other people can't do. So there is a little bit of a value add.

We are looking for the customer that would be more attracted to us that might want more than just the commodity of satellite spectrum. So I think it is kind of a slow build, right, and we just build that into a business over time. But it doesn't, you don't snap your fingers and it happens overnight. But it doesn't necessarily take a year to get customers, either.

Just the lead time is for most customers is a year, because of the planning process, the budget, they start talking, they normally have capacity already, and it is rolling off, those deals are rolling off, so there is a pretty standard formula about how it works. Usually you can close about a third of the business that you are talking to. And so we started from pretty much from scratch.

And how much longer do you think Echo-3 and Echo-4 are going to last?

I don't know what the disclosures on those are.

Echo 4 is fully depreciated.

They are nearly depreciated. Echo 4 is fully depreciated.

Usually we fully depreciated them, because we think that there is not a lot of life in them. 3 is probably not fully depreciated.

3 is not quite. 4 is.

There really weren't any new anomalies on either one of those.

So they are just going to last as long as they last?

They last as long as they last, and I think we would put in place, we think we have plans in place for replacements there.

Of the 61.8 million of CapEx, what was the satellite CapEx on that?

The CapEx on this quarter, a bigger piece of it --

Did we disclose that? On the 10-K, Echo 3 has two years of life left. Is that fair?

Yes.

Did we disclose echo 4?

It is fully depreciated.

Two years of life left for depreciation.

I was just thinking more about years left of service, like how much longer you expect it to be operating?

We normally track the depreciation and what we think the length of service is is close.

Okay. I understand that.

Year-over-year CapEx last year being around 50 million, this year 60 million. The mix this year is a little more heavy towards in this quarter, at least, a little heavier towards up-link equipment versus satellite.

Okay. Set top box business, there is a fairly meaningful increase in the revenue there. It says in the Q you added an international customer or customers. Any color you can give us on that, and geographically where that came from?

You are referring, if you are referring to the equipment sales other?

Yes.

I I believe that is still the same when we were part of EchoStar Communications Corporation we already had third-party customers, and I believe the revenue that was generated this quarter is off the same base of customers. It is just a larger quarter for revenues out of those customers.

So not a new customer, just expanded sales?

That is correct.

Okay. I am going to go to the receivables from DISH. I was listening to the DISH call, so I know roughly what is going on there. Is a good run rate to look at that roughly two-thirds of revenue to DISH?

Two-thirds of a quarter?

Two-thirds of a quarter.

I think that is the case, right. Again we have three quarters of Receivables here, the payments from DISH were not made as of March 31, and if they are going forward, was high we believe they will be, that will come down by a third.

And on the payables to DISH, most of that is for equipment that DISH paid for you guys.

Correct.

So most of that will go to 0?

Right. It won't go to zero, because we still pay DISH for professional services that they provide for IT, legal, finance, HR. But the bulk of it will go away with time.

The equipment that they paid for.

Right. That is a temporal phenomenon.

Okay, I am done. Thank you very much.

Your next question comes from the line of James Ratcliffe.

Good afternoon again. Two questions related to AMC-14, if I could. First of all, I understand you have the right to capacity on a replacement for AMC-14. Are you obliged to take that capacity, or is it your option? And second, the Nimiq 5 agreement, is it a coincidence of timing, or was that reached as a result of the AMC-14 failure? Thank you.

I don't believe we have the rights to any AMC-14 replacement capacity, and therefore we are not obligated to do that, and, in fact, these are from an EchoStar perspective. We at this point haven't decided to replace that capacity, and then we had insurance for our portion, but I think that with capitalized interest, the one thing you should be aware of, I think it's adds $13 million loss to SATS, for the loss of the satellite, and that is primarily capitalized interest.

And the insurance premiums.

And a little bit of the insurance premium. The lease from Nimiq 5 was a bit of coincidence, I would say. Those two were kind of going down parallel paths, and they weren't related, the loss of AMC-14 wasn't related to the lease of Nimiq 5.

Great, thank you.

Your next question comes from the line of Richard [Murawczyk].

This is Richard Murawczyk, Knott Partners. Can you talk a little bit about the increase in the FSS revenues from DISH? Looks like they are up to something like 108 million for the quarter, from maybe 90 million in Q4? Do you see these revenues increasing as DISH rolls out HD this year?

I think the answer to that is no.

Referring to fourth, comparing to fourth quarter?

Right.

I think the answer is no. I think that DISH has leased the capacity they are going to lease, and they have got their HD stuff covered.

Okay. And then I have two follow-ups. You noted in the Q that AMC-16 experienced an anomaly, and is no longer capable of operating at full capacity. Can you tell us how large a reduction of capacity there is on the satellite? Are you talking one or two transponders, or is it more significant?

Today, it was not a significant amount of capacity. In a way, it is good news, because that satellite is not completely leased out, so it reduces our obligation, since we are leasing that from a third party, but it is not a significant reduction yet.

Having said that there has been in the industry some anomalies with solar cells that slowly degrade, where you lose a string of cells, and it has gone across different platforms, different satellite manufacturers. It is not totally predictable, but it tends to be a slow degradation. So it probably, if the held to form, would probably reduce some of the obligations long term, but today it is not material.

Are you using AMC-16 currently?

Yes.

Okay.

But not to it's full capacity. The anomaly there has no effect on customers today, and won't. We have backup with AMC-15, so it doesn't have an effect on customers, but ultimately long term, in theory, it will reduce some of the capacity we have and some of our obligations.

Okay. When EchoStar 15 goes up, will a lot of the capacity that is being used at AMC-16 be moved away?

No.

Okay.

Independent events.

Okay. And then you talk about the $503 million of strategic and financial debt and equity investments of public companies. Can you give us more details on these investments, what companies they are?

No, it is really strategic. I would say that SATS or EchoStar has really got three unique businesses. It has got set top box, engineering design business, second one is satellite, in terms of leasing capacity to others, and satellites in general. We have built some expertise there. We know a fair amount about satellites. We have good relationships with the launch providers and satellite manufacturers around the world.

The third part is the international side of our business, looking for opportunities to take some of the expertise that we have around the world. So strategically you can imagine that we are in one or more of those buckets, right, in terms of strategically where we might want to invest. But in terms of specifics, we are not ready to talk about that until we have got something broader going on.

Okay. And then just --

We could sell out of those investments, those investments are things we could move in and out of. They are putting us in position to maybe do some interesting things, but--

they may not happen.

--may not happen. If they do happen, obviously you guys will be the first to know.

Right. Also, to flesh out that Account Payable issue, I don't want to belabor the issue, but of the $280 million of Accounts Payable to DISH Network, let's say next quarter we are going to see roughly a $280 million increase in the inventory of SATS, and a $280 million decrease in the cash of SATS, and then how quickly will that inventory be used as these components are built into finished goods and then sold to DISH, is that the right way of thinking about it?

No. It shouldn't have any impact on inventory whatsoever.

Okay.

It is simply the fact that DISH, for the period of certain purchase orders that exist on financial systems for DISH, continues to make purchases from vendors, that going forward, and I think we are already at the point where it is largely gone, if not entirely gone, so as of today, for example, SATS is paying for these boxes directly from the manufacturers, and there is no DISH intervention. It was just DISH in the middle for this period of time, because of the legacy of having these POs set up prior to the spin.

Is SATS going to basically purchase the inventory that DISH bought in Q1?

That states very little inventory risk.

The PO basically offsets the inventory, right?

Let's assume for a second that went to 80 million that Payable next quarter, because it went down.

Is that $200 million more cash to EchoStar, or is that a receivable?

The Receivable would drop by the same amount, or a very similar amount.

The receivable at DISH would drop by that amount, and the payable at SATS would drop by that amount, but in order to make the payable drop you are shelling out cash at SATS, and I assume you are getting inventory in return?

Right. DISH is buying this right now on behalf of SATS, but SATS is turning right around and selling it to DISH, so in the end it will net out.

So there won't be a cash impact on SATS, is that correct? This $280 million payable is reduced, to say 80 million, there won't be a cash impact?

Again, I would like at the two in net. There is a $200 million net receivable right net. The two in net I would say would get reduced next quarter to the extent DISH pays us on the net 60 terms.

So it gets reduced, no cash impact.

Right.

Just a reduction in receivable and payable?

Well, the net being reduced will have a cash impact to the good for SATS, and for the bad for DISH. The net of the two being reduced. It is a net payable to DISH, it is a net receivable to SATS, the net receivable being reduced, which we expect it would be if the payments are made before the end of the quarter. That reduction will be positive cash to SATS, and a negative cash for DISH. You can figure it is about a third of the payable, of the net.

Third of the sales. About third of the sales, right. So I think the answer that I'm hearing is, that you could expect that SATS cash would go up, and DISH cash would go down, and if you were to ballpark it, it is about a third of the sales of the quarter's sales to DISH.

To DISH, okay. So of that 475 million or thereabouts.

Right.

Got it. Thank you.

Your next question comes from the line of Daniel [Simmons].

Hi. I am just looking at the equipment sales other, and obviously, someone already mentioned this quite a lot of growth there this quarter over last year. I was just wondering how much of that was due to traditional set-top boxes to pay TV, and how much, if there was any indication how much of it was for new things, like you bought sling boxes, and I believe you moved into the free to air terrestrial boxes as well. Is there any indication there?

Sling is a very small percentage of the overall revenues at this point, so most of the increase that we talked about earlier, the same customers that we have had on a historical basis, just a higher revenue quarter this time around.

Okay.

The set top boxes are getting a bit more sophisticated. Obvious we are producing a bit more MPEG-4 product, very little MPEG, very little. We still do some MPEG-2 product, but less. The digital terrestrial product is not out for another month. So there is no revenue in there from that.

Okay. Brilliant. Just looking, it says sales down to ExpressVu are down, so revenue should be down to them. And revenue to DISH is down slightly, as well. So I just wondered, does that mean there has been an increase to, is it Telefonica and Polsat that used to buy Telefonica in Brazil, and Polsat in Poland?

They also were our customers but they are not as material as, obviously DISH is the main customer. ExpressVu would be number two. But there are other customers around the world, that do require products from time to time.

With respect to ExpressVu, as noted in our Q, while you are right, we mentioned in this quarter, we were down a little bit in volume, there was a greater mix of advanced receivers, which offsets the reduction in volume.

Okay. Got it. Thanks for that. That is my question answered.

Just because I hear everybody asking this similar question, obviously we hope that SATS, when their set-top business can build the business around the world with other customers, obviously DISH is their biggest customer. Today they have got some big projects going on for DISH.

But they certainly have technology that should be attractive to cable companies or phone companies, or other direct to home people around the world. If they get into the value-added stuff. I don't know that SATS is particularly competitive with a foreign import of just a basic box, right, but if you want to add features, if you want to add a sling feature, or a DVR feature, or an HD feature, or features that might improve your cost from a customer service basis, or the ability to get data for advertisers, and things like that, obviously SATS has some advantages.

That again is a bit of a business that takes a bit of time to build, because you have got to go in and get sales people talking to customers about what they would like to have, and show them what you can do, and in some cases you have to actually engineer a product specifically for a company that might want that particular product. Obviously the cable business is a bit different business than the direct to home business.

Some foreign customers might have a different modulation scheme or a different standard, different power supply, different encryption, and so forth, so it takes a little bit of time there. But again, it's core asset is world-class digital set-top box design. That is hard to duplicate, and very few companies have that with the kind of breadth that are in SATS today.

Thanks.

Your next question comes from the line of Tim [Lan].

Thanks for taking my question. Just wanted to get a sense of, I think you mentioned earlier that you saw some softness in the FSS business in the first quarter. Did I hear that correctly? If so, could you be more specific? I know Intel SATS North America was roughly stable.

I would say that in North America that there probably is certainly adequate supply of capacity for people out there. It's not, I wouldn't say it's a huge oversupply, and I certainly wouldn't say it is tight. But there is more capacity that will go into the marketplace over the next couple of years, and there certainly are customers that roll off from time to time, and if there is imbalance, that is probably not an inaccurate description. But imbalance in a slower economy can be soft. One satellite problem in our space, and it could be tight tomorrow, but today I would say imbalance is probably an adequate description, but it is a soft economy.

Got it. You see that in a broader picture? Do you see consolidation continuing in North America?

It is hard to say, because there is a fair amount of discrepancy between the companies and the debt levels and the capital structures. So I think it is hard to tell.

Got it. Then with the CMBStar satellite, I don't know if you have this level of detail, but you know what size reflector it would have had, and how many spot beams?

Well, we know that, yes. We know it. It is an S-band satellite. It has got a large reflector. It is not too disonerous than some of the other S-band designs that you have seen around.

Is that apples to apples with the same frequencies for the [BSS] band players, like Echo and TerraStar?

The frequencies are a little bit different, but obviously S-band tubes have some range. And you may have to modify them, if you want to get them to a specific range. So some of the frequencies, I mean, S-band is a little bit different in all parts of the world, and if you want to use it for a different customer, it is possible that you would have to do some redesign of the tubes. And you may have to retune them. But you are not starting from scratch, probably. You are certainly not starting from scratch on the reflector, which is usually the long pole in the tent, or the bus. Satellites are, this satellite is relatively adaptable, let's put that it way.

Got it. Follow up on set-top boxes. You mentioned your core IP, about design and technology. Could you talk about, are the encryption standards around the world, particularly NDS, is that sort of a barrier for you, or how do you see your encryption standard proliferate, and where are the opportunities? Is that what we should be following where that standard goes? Is that the path that you would look to follow, in terms of selling in set-top box?

Well, obviously SATS knows more about the Nagra system probably than any other. They certainly are probably the experts on that particular system, but that doesn't prevent SATS from putting a different standard in a box if a customer wants it. In some cases, you have to license it. In some cases, the customer already has a license. In some cases you have to license that technology, and the engineering timeframe to do that would be longer, right, so their easiest path to grow the business is anybody who wants the Nagravision conditional access business, but if someone wanted ERDETO, or a different one, they certainly have the ability to do it.

Got it. Thank you.

Your next question comes from the line of Paul [Orlin].

Hi gentlemen, I was wondering if you could comment on your plans for the Sling media technology right now, and what the commercial applications of that are?

Well, I mean, I would say it is a core technology for portability and mobility of video. Just as I think the DVR is a core technology for time shifting, right, really Sling is play shifting. So the key is, how would you develop that technology in a way that would be easy for consumers, and something that people would want to more robustly deploy.

And again, if you just look at it from a logical point of view, it really is a technology for travelers, and probably college students who are looking at computer screens, as opposed to TV sets. Anybody who has a broadband connection at their video source is a potential customer. So I think there is a lot of development for technologies that can be more widely deployed.

It has the ability, it also has some social networking potential, in terms of the ability once you have your video sources, obviously people can share video, so it has some social networking capabilities as well, and I think the key for Sling today from a strategic point, is for that management team to go out and get it more widely deployed. People who use it love it. It is a hard product to explain, kind of like a DVR was hard to explain initially. Kind of reminds me of a lot of that. It reminds me of the days when we were doing a DVR with DISH player, and Tivo was out there, and a company called Replay was out there, and it took a while for people to jump on the bandwagon, but once they did it rapidly evolved out there.

It is a core fundamental building block that I think people are going to want in their video experience, because they are going to want to be able to take their video with them, and obviously a lot of things we can do in terms of software, in terms of the sharing experience. A lot of things we can do in terms of integrating the chipset into other chipsets to go in anybody's set-top box, whether it be a cable company, or a satellite company, or a phone company. There are other products they can do. You have seen Apple do some things with AppleTV, that certainly Sling has the capability to do a similar kind of thing. It is a building block for the future, and it is going to take a little time to I want great it, but that is a focus.

Is there a significant revenue base in that right now out of selling the Sling boxes, or is it pretty much you acquired the technology, and try to figure out the best way to monetize it?

I would not say that Sling is material significant today as part of SATS, in terms of revenue. But I think it is significant in terms of strategy.

When do you think we might get a clear picture on how you are going to deploy that? What is your sense of where you are on how to proceed on that?

I think a bit of it is a little bit of timing in the marketplace, I would say it this way. It is product you have to demonstrate to people, so they understand how it works. And once you do that, then you are able to get, you have to get some critical mass of the product out there so that enough people know about it, have heard about, know how it works, enough people to show you how to install it, and that takes a little bit of time. I have seen this with DVR, I have seen it with like a Blackberry, where word of mouth is what sold that product until they got some critical mass, then it became companies and advertising sold that product. I think we are still kind of in that start-up phase with Sling, because you really have to show it to people. When you show it to people, they want to buy it. We need to do a better job of showing it.

Where are the cable companies on that, or even just DISH, in terms of using that to transport their pictures?

Well, I think there are a lot of discussions going on with DISH. The cable companies I think are interested, but certainly I think they are also concerned that that the common ownership between DISH and SATS is something that they may not want to support, right. So they would probably be less, they would probably be more hesitant to deploy the technology. They run the risk if they do that, of the technology being deployed in a competitive way that they can't address.

So I can only tell you my personal experience. When I am working at DISH, the I hope the cable companies never, ever deploy Sling, right, because it would be a great competitive advantage for DISH. When I work at SATS, when I go over there, we would bargain in good faith with any cable company, and give them exactly the same terms and conditions we would give DISH Network, if they want to deploy it, right.

But my experience has been that normally companies get emotional about decisions, and so they don't always make the long-term choices, but we will be prepared to do well with Sling technology regardless. And obviously from an international perspective there is upside, because there is not a DISH/SATS issue there. I would say the same thing about DirecTV.

They would probably say, gee, we're not jumping up and down to deploy the technology, right, because of the DISH common ownership. On the other hand, if they wanted to deploy it, we would be happy to talk to them about it, and they would certainly get a fair deal. I mean, we buy programming from our competitors, so it is not an issue for most management teams, but emotion does come into play, I think.

Thank you.

Your next question comes from the line of Steve Farley.

This is actually Adrian Meli. A few questions. First question, would the new DISH satellites be put into SATS, and if not, why wouldn't they be?

Some satellites DISH will decide to manufacture themselves, and in some cases SATS will probably do the satellite, and DISH may or may not be a customer of some of that capacity. And the reasons would be, a lot of reasons, but one is DISH is looking for the best deal they possibly can get, it depends on where they want to deploy their capital, orbital slots may be different, so in a case where DISH owns an orbital slot, they are more likely to build it for their orbital slot. In a case where they don't own the orbital slot they're more likely to use a third party, including SATS to build that satellite, so there could be a variety of reasons of why.

The Echo-15, the replacement satellite for AMC-14, SATS was building AMC-14, and DISH is building the replacement, because it is going to go to a DISH slot. And that was the best economics for DISH, given what SATS was willing to bid that satellite at.

Okay. Thanks.

I mean, there are interesting discussions and negotiations that go on there.

And that may change over time. As Charlie point out, the vast majority of capital that is deployed by DISH for satellites is in the orbital slots, that effectively are at from about 110 to the west. And those are satellites, and those are orbital slots that have a legacy of being inside of DISH. It dovetails with our credit agreements. We may or may not rebuild those inside of DISH, but at the present time that is kind of where we are headed.

Great. With regard to Sling, with my limited technical understanding of the technology, I was curious to hear your thoughts on, my understanding of Sling was that it was a good mobile video application, that perhaps as people gravitate towards Blackberries and mobile devices, and 4G Internet comes out, that would allow to you attack that segment. Can you explain to me how having spectrum, with the combination of Sling helps, and how it does so, and if ultimately the business model for Sling is to charge a couple bucks a month or something per subscriber, or how you see the charging working?

There are a number of models of how it could work, but certainly Sling could work in a mobile technology. They developed software for Blackberries. It can work on anything with Windows Mobile. It can work on a Palm or other devices. It can work on your computer, when you plug into it, when you have a Wi-Fi hot spot, or you plug into it a broadband connection. It probably can work on any number of other potential things, that have a high-speed connection.

Really what it does, it takes your video and converts it to video IP, and puts it on a broadband, anywhere you have a high-speed connection, you can watch your TV from your home. You can watch exactly the same TV. That is really what does it.

There is an interesting concept when you look at adding 700-megahertz to it, because that would probably broadcast the same channel to everybody, so that would probably broadcast, Sling is unicast, which means you get your own personal signal. And so those two in conjunction make for an interesting potential play. But again, all I can tell you, I think we have a lot of the building blocks in place.

You have to put those building blocks into a strategy. You also need partners, other people that share the vision of where you want to go, and you also have to surround that with a business plan that can make money. We've spent a fair amount of time over the last three years putting the building blocks in place. Now you have to go out and execute and find out which partnerships work, which partnerships don't work, where people are interested, where people aren't interested, and then surround that with a way to make money.

My experience has been, that even if you have building blocks and willing partners, you don't always after plan that makes money. So there are probably a number of things that we had a lot of things in place that we ultimately didn't pursue, because we couldn't make any money at it. Broadband via satellite was one of them. You guys can remember we invested in Starband and Wild Blue, and we ultimately decided to write those things off, because we couldn't figure out how we would make money even though we had willing partners and the technology and the building blocks. So we have made some mistakes along the way. It remains to be seen whether 700 megahertz, or Sling, or anything, or satellites, or anything we are doing, we can piece together to make money at, but we think the odds are in our favor.

Okay, great.

I hate to say this as management. We don't always have all of the answers at any given time. But what we do have is a lot of confidence that we can be adaptable to what is going on in the marketplace, and come up with ways that over time, can make money.

Okay. And finally, do you guys have any plans, in the analog to digital converter boxes, are there any plans to, I don't know with the DVR functionality in some of the boxes, are you guys planning to sell Pay Per View, or put any Internet plug into it, the are there any plans to make money beyond just the hardware sales?

That is a good question, we really have three products. We have the basic government approved digital transition box that is coupon adaptable. Basically it just takes your digital signal, converts it to your analog TV set.

We have a second product which will come out early this fall, which will be basically a built-in digital VCR in that box, so it is a DVR, so it takes your local signals and gives you all the DVR functionality, it is not coupon compatible, so the customer will have to pay for it, but it essentially is a digital DVR and converter box all in one.

In some cities there is a lot of programming being broadcast by the local broadcaster, and a lot of customers are going to want to record that, and we give you ability to watch and record, watch one show, record a different show, use your DVR, and we think that even some of those 13 million homes what aren't paying for TV have VCR's, so they will be interested to upgrade to digital.

If you want more than that we have satellite receivers for people. And again, some people may decide it is time to go ahead and go into paid TV at this point. So we have three different products. The digital transition is unclear whether that is, it is certainly an opportunity. It is unclear how that transition will take place, and whether there is any money in it. But we have products positioned for that digital transition.

I don't think we're going to know until February. And is the government really going to stay to that time schedule and so forth. But we have very good products in the digital transition world. We have a little bit of experience, because we were involved in the U.K. distribution of digital transition. And there is a business there, and we know that some customers will go to pay TV, in which case they will go to cable or it satellite. Some customers will just want a box, and some customers may want a box with a DVR. We will be ready regardless.

Okay, thank you guys very much.

Your next question comes from the line of Chris Sommers.

Hey, guys, wondering if you could comment on how many satellites that you have committed to purchase, or are under construction currently?

I think we can, but I think that today we do not have any, we have one lease with the Nimiq 5 satellite in the footnotes that will you see, and that is the only commitment we have as of today, is that fair? Oh, and CMBStar. Those are the two that we have. CMBStar we are building, and Nimiq we are leasing. We are looking at any number of other deals around the world, but those are the two we have.

Got it. And then going back to the satellite market, the FSS markets in North America, you guys expect capacity to tighten up, as standard definition television transitions to High-Definition television?

I would say that the opportunity out there for all the FSS providers is High-Definition television takes more capacity so that is a good thing. The negative thing is, Hughes has been using a fair amount of capacity for two-way broadband, and as they have transitioned to their own satellites in the K-band spectrum, they need less of that, so that puts some capacity in the marketplace. We will have to see how those things transition.

Having said that, at SATS, if you just want HD capacity, we will be competitive with people, but we can offer so much more. How do you get that HD signal to the uplink? We already have fiber connectivity to 175 cities. If you want a set-top box to receive that HD signal, we build those. If you want encryption, we know how to do it to secure your signal. So we have other things we can bring to the party, and for us, we hope that we are going to be a little bit different company, a little bit more of a value-add than just a traditional commodity seller.

got it. On your income statement you had a separate line item for G&A related to DISH. Does that include one-time items, or would quarterly be about $6.5 million to DISH?

That is a pretty steady run rate, for now, at least. During the transition period we are paying DISH for them helping out with legal, HR, finance, IT services.

And that's running at north of 25 million a year?

Right around that point, right. That first quarter number is about indicative right now. Over time we may choose to perform some of those services ourselves, and not rely on DISH.

I would say it a little different way. As we can perform those tasks, and it makes sense for us to perform those tasks, we will do it. Having said that, we are not going to do it cheaper than we are doing it today. We have real economies of scale sharing it with DISH today, so the costs won't go away. It just means that we can do it, in come cases we have enough things to do, we should be doing them ourselves, and as we build expertise and have the people to do it.

Then the lease income you guys would get from the parent corporation, from rather DISH, where would that flow through in the income statement? Is that a revenue item?

It is in the FSS digital Broadcast operation of other services in DISH Network.

Okay. And then you guys mentioned in your footnotes that there was a one-time revenue benefit recognized in the quarter.

Yes, in the FSS, in other services, other, you saw an increase year-over-year of 12 million. Embedded in there was a one-time revenue benefit that we saw that we will only see this one quarter, we also mentioned elsewhere in our 10-Q that the leasing our spectrum to TerraStar, there is some of that going on. The increase as we look at the year-over-year, it is roughly one-third, one-third, one-third, between the one-time items, the leasing of spectrum to Terrastar, and then through increases in the FSS business.

Got it. Thank you.

I think we have time for one more question, then just as a point of reference I will not be on the conference call in August, due to prearranged vacation with my family, so don't be surprised when I am not there. And we will take the last question.

Okay. Your last question comes from the line of Adam Ritzer.

One question that wasn't answered. Can you give us any more detail on the Bell Expressvu deal? I noticed the terms were changed from a lower pricing per box, but now you have a monthly service fee. Can you give us any color on that?

Yes. Bell Expressvu wanted to get, they competitively bid the product, so the product price we sell to them is very much market-driven price at lower margins that we historically we had. On the other hand, we do a lot of things for Bell Expressvu that other companies wouldn't do. We do a lot of things. It could be something like giving the ability to monitor their box, to understand what their signal strength is in their set top box. We that takes engineering and resources for us to develop that. We have kind of just done a package deal, where we do a fair amount of services for them.

Anti-piracy efforts, things in the set-top box health, perhaps the ability to get data for advertising, et cetera, et cetera. Very similar things that we do for DISH Network, and we take those economies of scale, and we just get kind of a maintenance fee, so to speak, from Bell Expressvu to do those things for them on a monthly basis.

Can you also give us any color on the margins on the set-top box business? It looks like it is about 15%. I assume that is somewhat of a transfer pricing that you talked about in your initial prospectus and on the last call, but is there any upside to that over time, how do you see this developing?

I would say that we would prefer to make better margins on set top boxes. It is a pretty competitive field out there. Obviously when you have a big customer like DISH or ExpressVu, they can extract a lot from us. And I think it is up to us to continue to develop value-added product services. Things like Sling, and things perhaps we could do a little bit better margin on, if we can develop things that have value-add, but it is a pretty competitive world and we have to be efficient enough to work on pretty low margins.

Is that 15% fixed over the--, I think there is a two-year deal with DISH, and if you -- I would assume any outside business that you add on, is going to be at higher margins?

Well, I guess I would like to say we would like to be able to do. That having said that, we expect that DISH will go out to other vendors, and get bids, and will probably extract their pound of flesh from us.

On the other hand, we know we can do things for them that other people can't do, so I am sure that will be an active negotiation over time, but obviously the relationship there is good, and we do a lot of things for them that other people can't duplicate. But if the came down to a simple set-top box, that didn't have a lot of value-add to it, whether that is a business that makes sense for us kind of remains to be seen.

Great, thank you very much.

Again, we'll see you, well I won't, but everybody else will see you in August. We appreciate, is this our first call, our introductory call? Our second one. First time we had real numbers. I think the business will come, as we go through the year we will see, I think what we are trying to do will become a little bit more evident over time, so thanks.

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