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EchoStar Communications (NASDAQ:DISH)

Q2 2007 Earnings Call

August 10, 2007 12:00 pm ET

Executives

Jason Kiser - Investor Relations

R. Stanton Dodge - Executive Vice President, General Counsel, Secretary

Charles W. Ergen - Chairman of the Board, Chief Executive Officer

Carl E. Vogel - Vice Chairman of the Board, President

Bernard L. Han - Chief Financial Officer

Analysts

Vijay Jayan - Lehman Brothers

Tuna Amobi - Standard & Poor’s

Doug Mitchelson - Deutsche Bank

Ben Swinburne - Morgan Stanley

Thomas Eagan - Oppenheimer

Jason Bazinet - CitiGroup

Albert Lee - Wachovia Securities

Jonathan Chaplan - JP Morgan

Craig Moffett - Sanford Bernstein

Spencer Wang - Bear Stearns

Lee Cooperman - Omega Advisors

Robert Barson - Post Advisory

Presentation

Jason Kiser

…that and we do need to do our Safe Harbor disclosure and Stanton’s going to take that.

R. Stanton Dodge

Good morning, everyone. Thank you for joining us. As you know, we do have media to participate in a listen-only mode on this call so we ask the media not identify participants and their firms in their report. We also do not allow audio taping of the conference call and we ask that you respect that.

All statements we make during this call that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from historical results, or from any future results expressed or implied by such forward-looking statements.

I am not going to go through a list of all the factors that could cause our actual results to differ from our historical results or forward-looking statements. Instead, I would ask you to take a look at the front of our 10-Q for a list of those factors. In addition, we may face other risks described from time to time in other reports we file with the SEC.

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 report and should not place undue reliance on any forward-looking statements that we make. We assume no responsibility for updating any forward-looking statements that we make.

With that out of the way, I’ll turn it back over to Jason.

Jason Kiser

Thanks, Stanton. Operator, I think we are going to go straight to Q&A, so you can open up the queue.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Vijay Jayan with Lehman Brothers.

Vijay Jayan - Lehman Brothers

Thank you. I really like the format. Can I ask Charlie to sort of address the competitive landscape? This quarter we saw some shift changes happening in terms of video subscriber growth. Can you talk about has there been any real shift in the competitive landscape in the last quarter in terms of the RBOX entry, promotions and so forth? Is the housing market at all impacting anything? Thanks.

Charles W. Ergen

I think that’s a great question. The competitive landscape I think is probably more competitive than it’s been, primarily because the dynamics that are out there are obviously you’ve got cable, who continues to have a good offering with the triple play bundle, and you’ve got really new entrants in both the Verizon and AT&T with their own video offerings, and Verizon’s obviously a little denser population. The Northeast is more of a factor probably there than the more vast territory with AT&T, but they obviously have their own video service.

That’s somewhat counterbalanced from a DVS perspective because there also is a move towards more things like high-definition and DVRs advanced services, where I think DVS has an advantage in terms of those product offerings, both in terms of quality and in terms of product hardware.

So it’s that kind of -- it’s going to be an interesting dynamic to see how that all kind of shakes out in terms of -- because particularly as you go, the phone companies go for a little bit higher end customer because of the cost of that service and those customers want multiple HD, they want DVRs and things like that. So satellite seems to be getting their fair share of that.

And then cable has some historical issues in the sense they have to move from analog to digital and as they move from analog to digital, of course they have to upgrade people to more set-top boxes and higher costs and yet people just really want -- don’t want quite as many channels and so that dynamic is an opportunity for satellite companies.

So that backdrop probably hasn’t -- while it gets more competitive, maybe it has not materially changed but I do think that potentially, and I guess it is probably a little early to tell, but I think potentially maybe the biggest negative that is out there from -- it’s not really competitive but it’s the macro economic viewpoint, that housing logically may have an impact on any video provider in the sense that if you have fewer housing starts, you have less growth in single family homes to actually put video in.

That growth has been pretty good the last four or five years in terms of housing starts. If that slows down, and it looks like it has slowed, it looks like it has and is slowing down in terms of new starts, that will be less opportunity for new video providers. That is somewhat of a disadvantage to somebody who is not -- if you are an incumbent in a house, that’s okay but we get our fair share of new housing starts as an industry, so that may have an impact.

And then, of course, the sub-prime issue where somebody actually has a house but now has to give the house back to the mortgage company, you actually have people moving out of houses and maybe they are moving to apartments or moving back in with their parents or God knows what they are doing. Now you have a cable connection or a satellite dish hanging on that house with nobody living in it, so that could have an impact out there.

I would probably -- I think our focus is to make sure we are well-positioned within all that and the things that we’ve done -- strong balance sheet, we’re very low leveraged, going off positive cash flow as a company, make sure our operation in terms of things can control in terms of expenses, that we are doing all the right things there and we made some improvement this quarter with our expenses, and then take advantage of those things, those opportunities for us which we see today primarily is to play in that customer who doesn’t necessarily want all the cost of digital cable and that customer who wants an advanced service, whether it be a DVR or HD or both.

Vijay Jayan - Lehman Brothers

Great. Thanks.

Operator

Your next question comes from the line of Tuna Amobi with Standard & Poor’s.

Tuna Amobi - Standard & Poor’s

Thank you very much. Good morning. I guess historically, you haven’t provided a breakout of your HD DVR boxes, nor penetration, nor have you provided the percentage of upgrades to MPEG-4 compared to MPEG-2. But you have, Charlie, I think commented generally as to the tradeoff that you make in terms of upgrade and retention versus churn and what kind of factors that you look at as you decided to either upgrade or spend more on retention.

I guess this leads me to maybe the question of can you provide some more granularity on the model that you actually use in terms of, for example, what may be your target IRR as you look at a customer and at what point do you -- at what churn level do you -- kind of what kind of churn parameters do you factor into that model? If you can also quantify any other parameters that go into your model, because I think you said it is an ongoing process.

I’m trying to understand kind of the general factors that you look at before deciding how much you spend on upgrade or retention, et cetera, et cetera. I guess you can also comment within that context on the economics of a new HD DVR customer compared to a non-HD DVR, if I’m making sense. Thank you.

Charles W. Ergen

That’s a fair question. We don’t provide that breakout, and I’m not going to start that today. Again, we feel like it is good information we have that is competitive information that’s important to us and we just don’t release because we release -- all those factors flow down into our ARPU, cash flow and churn and SAC and you see the whole rollup and so forth.

The way we look at is everything is economic for us, so all customers are not created equal so we, for lack of a better term, would give a rating to our customers in terms of how long they’ve been a customer, what their ARPU is, how much investment we have in them, have they ever upgraded, when’s the last time they upgraded, and then we make a fairly general analysis then as to what we would, if we were to continue to invest in that customer or whether we wouldn’t continue to invest in that customer.

Obviously if you have a customer who spends $100 with you, has been with you for seven years is a lot more valuable than a customer who spends $29 a month with you and has been a customer for six months, right? So you take all those things into consideration and then you decide what you would do.

In some cases, if a customer, a customer may have to make an investment to upgrade, sometimes a customer doesn’t have to make an investment to upgrade, and so it just depends on the value of the customer to us.

We look at, in terms of IR, we look at the IR and say we have this amount of capital -- we do we make the best return? And today that’s still investing in a $600 and something SAC and a customer, and it may be $700 or $800 on a high-definition DVR customer because his ARPU is higher and he churns a little less. So you run those dynamics, and to make a long story short, if you took our total IRR and our total length of a customer, it is not materially different whether it is a high-end customer or a low-end customer. The numbers, the economics are the same.

We might only spend $200 SAC on a low-end customer, we might spend $1,000 on a really, really high-end customer and the return on that customer in terms of the IRR we expect to be generally the same.

And then if there is another investment out there that is better than a customer, then that is where we channel our money in something else. So if we saw something else that we thought could get us a better IRR than getting a new subscriber for $700, we’d put our money there.

There’s been times where we bought our stock back or bought debt back where we had excess cash to do that, so it’s -- I mean, I think in generally you should feel confident that we are economic animals and trying to basically run our business from an economic point of view and we are not worried about the next quarter or the next two quarters or what analysts are going to say or whatever. We look at all internal metrics and say how do we build value for this company long-term? For shareholders that are interested in that kind of thing, then we are probably a pretty good company. If you are a hedge fund that needs to make a quarter number, we may or may not be good for you.

Tuna Amobi - Standard & Poor’s

Okay. That’s fair. Thank you.

Operator

Your next question comes from the line of Doug Mitchelson with Deutsche Bank Securities.

Doug Mitchelson - Deutsche Bank

Thanks. Good afternoon. I guess good morning for you gentlemen. A few questions for you; first is Major League Baseball, could you give me a sense of what the contribution might have been to sub losses in the second quarter? Also, was it actually profitable getting rid of Major League Baseball? Maybe the programming costs were actually greater than the value of the subs you lost?

Carl E. Vogel

I think we publicly announced through our testimony in Washington that we had about 50,000 customers last year that took advantage of the Major League Baseball package. We lost some of those but it didn’t have a significant impact on our business.

In terms of the MLB out of market package, that was a consignment-like package that was marginally profitable for us but what we didn’t like is the deal going forward. It forced us to carry a network that we hadn’t seen at a cost that we didn’t think was reasonable and in a package that we didn’t think would help the economics of our

AT100 package and be reasonable for our consumers.

We saw some marginal loss from that in the second quarter. Again, we didn’t have much to lose. I know we didn’t lose all 50,000 and the quality of the response that people give you from disconnects varies but I would say it had a small incremental impact. But we felt that was in the best interests of the company and our consumers going forward rather than add additional costs in our package for content that we think is fairly widely available today between ESPN and regional sports and other products that we already paid for. That will be the philosophy that we take going forward. Unless we think it can provide meaningful incremental growth, we are going to try and maintain the packaging and pricing advantages that we’ve enjoyed over 10 years so we can be competitive in the marketplace.

Doug Mitchelson - Deutsche Bank

Okay, well that kind of leads right into my second question then, which is -- and Charlie might get a kick out of this. I went back and looked at your last 41 quarters, so essentially almost from the time the company started service and $101 million of sequential pre-marketing cash flow growth was by far the biggest you’ve ever done. Could you give us anymore insight as to why 2Q was so good on the margin side?

Carl E. Vogel

Well, I think Charlie touched on it and we’ve been talking about this I think for at least the last six to eight quarters, is that we’ve been focused on trying to improve our operating efficiency and some quarters are going to be better than others. And this quarter was, as you point out, record setting.

I don’t know that we can sustain that but certainly we’ve worked very hard on improving our processes, our talent, investing in people and call centers and in our DNS business. Our technology has continued to improve. Over time, our two-room DVR has been helpful. The fact that we are redeploying boxes that we put out in the past has been helpful, so I think that we have begun to deliver, at least in this quarter, some of the scale economies that we are intensely focused on.

As Charlie said, we are focused on things that we can control and some of the things that we can’t control is our customer care levels, our efficiency from a personnel standpoint, and we just happen to have a better-than-average quarter this particular quarter. Not that -- we’re going to have peaks and valleys in that business or in that system and we are going to spend more in certain quarters to get the benefit in future quarters because we are playing for the long-term.

You probably recall probably four quarters ago we said we were going to invest in customer care and open additional call centers. We’ve done that. We are beginning to see the fruits of those efforts. As I said, it may not be consistent up and to the right for the quarter but we saw some benefits of those activities this quarter.

Doug Mitchelson - Deutsche Bank

Shifting over to another cost item, the SAC costs were pretty impressive. Every time I ask Charlie in the past about costs, he’s never been satisfied no matter how well Dish has been doing so --

Carl E. Vogel

I’ll vouch for that. That has not changed.

Doug Mitchelson - Deutsche Bank

So I’m curious, given where SAC costs are now, could they continue to be driven lower? We know some of the drivers there but beyond the multi-room DVRs and lower set-top box costs and the lease model, is there anything else that you are doing to try to drive SAC costs lower?

Charles W. Ergen

Well, we continue to -- obviously because we have our own engineering company, of course, you try to engineer cost out and we have cost reduction models coming that will reduce costs, particularly on the MPEG-4 side. MPEG-4 chipsets were pretty expensive last year. They are still materially more than an MPEG-2 chipset but as volumes go up, that will continue to decrease. The hard drives, we have a little different philosophy. We can save a bit more on hard drives but we tend to put a bigger hard drive in as the cost of hard drives come in. We tend to spend about the same amount of money on a hard drive, just go to a larger size. We have strategic reasons why we are doing that.

We’ll continue to work on SAC and again, there are certain customers we pay more SAC for and certain customers we pay less for and it may be a bit more of a function of the marketplace an what customers are available. This is not a time in my opinion where you would go out and lower your credit standards. In fact, you may raise your credit standards today in terms of getting new customers, so you may find that the better customer is a higher SAC customer who is buying a higher-end product than a customer who can’t pay his mortgage today and has very poor credit.

The marketplace may dictate a bit about where the opportunities are for us and we just have to be disciplined so that -- and be in touch with the kind of customers that we are getting and making sure that the SAC is relevant to the churn and the ARPU that you get from a customer.

Doug Mitchelson - Deutsche Bank

Last question for you; some of us have talked in the past on lack of share purchases. I guess for the moment you’re looking pretty smart, having a good balance sheet. Given that I think your NOLs run out next year, and if not next year, certainly pretty soon, the inefficiency of the capital structure becomes more pronounced. Can you give us an update on what your thoughts are regarding use of your excess capital for share purchases?

Charles W. Ergen

Well, I like where we are from a capital structure today, given what is going on in the marketplace. But I think your point is well taken in the sense that as we move to a tax paying -- potentially a tax paying customer, depending on what the opportunities are, depending on where the financial markets are, we’ll see what there is to -- what we might do to take advantage of that situation. But I’m not opposed to paying taxes. If I’m paying taxes, things are good so we’re not going to run the company to never pay tax. But obviously there are things you can do to take advantage of tax situations that are smart business, in addition to getting the benefit of saving taxes and those are the things we’ll look at.

I like where we are positioned today because we have a lot of flexibility in a market that is probably not going to have as much liquidity and flexibility for other companies. We are not leveraged like cable. You know, there’s some highly leveraged cable companies out there and that may not be where you want to be. There’s some highly leveraged buy-out things that have gone on or are going to go on out there. Odds are things are probably fine in the marketplace but to the extent that there is any kind of recession or any kind of correction in the marketplace, major correction in the marketplace, we would certainly be able to do well in that environment. And to the extent that the economy clicks along like it has been, I think we’ve shown we can do well in that environment as well.

Doug Mitchelson - Deutsche Bank

I guess implicit in the question is the simple question, which is do you think your stock is cheap here?

Charles W. Ergen

Well, I can -- personally, I’m not selling any shares. I don’t know. We are always happy to see it go down if we want to buy back, if it goes down enough. But today -- we like where we are today and we’ll see.

Carl E. Vogel

We don’t think the multiple reflects what we are doing at the top line, at the EBITDA level or at the free cash flow level. We’ll be opportunistic as we’ve always been.

Charles W. Ergen

We build value every day, is what we try to look at. I think the company is worth more today than it was yesterday. I think it is worth more today than it was three months ago. That doesn’t always get reflected in the stock market, for a variety of reasons. But our focus has to be on building value every day.

Doug Mitchelson - Deutsche Bank

All right. Thanks, gentlemen.

Operator

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

Ben Swinburne - Morgan Stanley

Thanks. Good morning, guys. A couple of questions; first, marketing spend -- I think you spent about $10 less per gross add this quarter versus last quarter on the discretionary line. Could you give us a little color there as to what the strategy was? Is this something that you are doing, sort of pulling back because maybe the consumer weakness out there means there is no reason to throw money at it when we’ve got softness?

Charlie, you’ve always been very candid about the company’s execution. Was there anything this quarter -- obviously a lot of great things happened on the cost side. I think this quarter you were a little disappointed in the churn number comes to mind. I’m wondering if you think that is a function of the marketplace, if you’re happy with it or if you think maybe there were some execution missteps. Just looking for a little color around the result there from your perspective.

Carl E. Vogel

Ben, in terms of the marketing spend, I wouldn’t take that trend as a trend. I think that the second quarter is traditionally weak for us. We think the opportunity is again, as it has been for the past 10 years, in the third and fourth quarter. We are not going to spend money just for the sake of spending money and we are not going to run programs just for the sake of running a program.

We will be probably more aggressive in upcoming quarters as we move into our prime selling season where we tell the market about our Dish DVR advantage, our two-room technology, our positioning vis-à-vis HD TV, the strength of our price points, how our value matches up to other operators’ values.

I think it is more timing than anything else. That being said, we are judicious about how we spend and we are looking at ways to spend where we can get the greatest bang for the buck. So I think we’ve become a bit more focused. How we spend our money and where we spend our money -- said differently, we just don’t do every tactic just for the sake of saying we can do every tactic.

I think we’ve been a little bit more precise but we will probably look to spend a little bit more as we move into our selling season. I think that was more seasonal than anything else.

Charlie can speak to execution. I think, as I mentioned, we’ve done a better job from a call center standpoint but we still have some variable cost issues in our operation that we need to address. We need to continue to be focused on operating leverage, principally in our Dish network installation area. It’s been good, not great, better than the past but still plenty of work to do.

Charles W. Ergen

I think in terms of market, we’ve made some changes in our marketing department. We have a new executive in marketing today and I think part of the reason we haven’t spent as much is we haven’t had really, in my opinion, a lot of good stuff coming out that is worthy of spending money on. Again, a lot of what we’ve done is give -- again, I told you I don’t like to give away programming and we are actually not doing much of that now, starting the first of August. We are not giving away our basic programming anymore, so that gives you extra money then to go out and do some things in the marketing side of the business.

Operationally, we have lots of room for improvement across the board. We’re not out of control anywhere but I’m a perfectionist and we certainly could do better. It’s really a question of getting all our divisions to work together. I mean, our engineering guys make a set-top box and there’s things we can do to make that set-top box work better and be more -- and not have -- people understand what’s going on and not have to call in and all kinds of things like that.

You mentioned churn. Churn is always something that is a factor and we would always like to do better but there are lots of things going on. I think our churn was actually a little bit better than it was in 2006 for this quarter, but you are always trying to find the right balance between what you spend in retention marketing. A lot of your churn you get today is some decision you made last year or two years ago and the timing of a certain promotion.

I think there is room for improvement there too.

Ben Swinburne - Morgan Stanley

If I could ask just one follow-up on the product side; Home Zone, the second version of Home Zone, the HD version, got a little bit of press or a little bit of attention in the AT&T earnings release. Can you give us some color on how you think that product plays in the marketplace, if it’s an important part of your strategy, their strategy in the second half of this year and if you think that the integration of DVS and a two-way DSL VOD pipe is something that is particularly powerful in the marketplace?

Charles W. Ergen

First of all, I think AT&T will have to answer the question but my personal opinion is the HD Home Zone product is a good product. The first product that was an impact to -- kind of very complicated product and I think that they’ve gotten a lot closer to the kind of product that makes sense.

I think a set-top box that does, that you can put DSL into and has an operating system that allows you to get any one of 500 channels live and in HD and a perfect picture on your TV screen, but you also have the advantage of being able to go out and get a pay-per-view movie from the Internet, one of 20,000 say on video on demand as opposed to one of 500 maybe the cable operator is offering, or allow you to go out and get YouTube or allow you to download music and so forth -- this is going to be a powerful product.

I think that we have a lot of experience now with that kind of format. I don’t think it is as complicated as some of the media centers people were talking about. I don’t think it is as complicated a product as the original Home Zone product, but there is a sweet spot there where the consumer who wants a bundle and wants a triple play or a quadruple play, in my opinion we have a great opportunity to make sure that every customer who wants a bundle at least has video coming from satellite as a core piece of that. And part of that is hardware and software and putting those two things together and that’s where we have a hidden value in this company in our ETC organization, in the sense that they have shown time and time again that they, from a digital set-top box perspective, they tend to build better products than most, and we own a lot of our own intellectual property.

We have to do a better job of using that to our advantage and we probably need to spend a bit more focus on that side of our business but I think -- my vision of things out there are that the most people are going to want -- when you look at HD TV and that kind of thing, you are going to want to watch Monday Night Football live in HD TV and you are not going to get that through the web and Internet. You are going to get that from the best source possible and I think that satellite delivers a better, despite all the feuds and lawsuits that are going on out there, I’m very convinced that satellite brings the best video quality for HD TV and gives you the most choice and most selection.

As soon as you add broadband to that in a seamless way to consumers, you’ve got something that gets you in every household. So while we have 13.5 million subscribers today, we have a lot of upside in terms of getting into more households.

Ben Swinburne - Morgan Stanley

Thanks a lot.

Operator

Your next question comes from the line of Tom Eagan with Oppenheimer.

Thomas Eagan - Oppenheimer

Thank you. A couple of questions; on the HD, Charlie, DIRECTV commented on the importance of having a critical mass of HD channels. I was hoping you could give us your thoughts on how many channels you have to have, how many HD channels you have to have to grow your HD sub base? Or is it more about having external hard drives, as I think you may be launching soon, about having external HD drives?

Secondly, all the cable operators lost more basic subs in Q2 than I think people had expected, regardless of the seasonality. Churn for DIRECTV was also a little bit higher than we had expected. You mentioned it was a little bit lighter than last year but it does see as though there’s a lot of subscribers that are churning back and forth, so I was looking for your thoughts on that. Thanks.

Charles W. Ergen

I’ll take the churn question first and Carl may want to jump in on the HD question. I think that again, I think that some of the turmoil in the housing business probably showed in the second quarter. I think it probably showed up in cable first. They are the incumbents so they are the ones that got probably hit by that a little bit more. So you end up with a little bit more bad debt. You see it a little bit in bad debt and receivables and that kind of stuff.

Obviously a guy who can’t pay his mortgage doesn’t pay his cable bill, he switches to satellite if he can pass the credit standard, which he might still be able to do in certain circumstances, or if he’s a satellite guy, he might not pay his satellite bill and then go back to cable. That’s what you would do as a consumer if you start having trouble paying your bills.

I think you are seeing some of that in the second quarter that may explain a little bit why maybe cable lost a few more subs than we would have expected as well, and how that -- it is too early to tell how that affects satellite and cable going forward. Satellite is not the incumbent in most houses but we are maybe a little bit more insulated from it, but we are not certainly -- I don’t think we are immune to it.

I think that would be something that certainly we’re keeping an eye on every day here and it remains to be seen what kind of impact that will have.

On the HD content side, I don’t think having 100 channels or 70 channels is as important as having good quality stuff that people watch. People aren’t going to -- word gets around, I’ve got 70 channels and nothing to watch, that doesn’t make a lot of sense. But I do think that DIRECTV is generally correct that 100 channels of HD is kind of a good round number to get people excited about switching to satellite and taking advantage of that.

We have over 50 channels today of HD so we have more than anybody today, and obviously people who buy an HD TV set want to put content on it, so I think there is some number, there is some critical mass number. Having said that, there is not 100 channels of HD TV that I would watch today. There’s probably only 30 or 40 channels of HD TV that are worthy of watching and it’s up to the programmers to come up with new and exciting things to make HD a little bit better.

That’s going to be the big driver. It won’t be the 100 channels that you have. It will be the fact that people like Discovery who do something like Planet Earth, which is just a fantastic program to begin with but even that much more compelling in HD TV, as we see more and more of that kind of thing it is going to drive people to HD TV and I think there satellite has an advantage.

While it will be a factor this year in 2007, it will be a bigger factor in 2008 and it will be a much, much bigger factor in 2009 when we go through the digital transition. It is our job to get prepared to take advantage of what we think is going to be a pretty big business in the next couple of years going forward. I don’t know that it’s a huge business, as big as people might expect this fall because there’s still -- TV sets are still expensive and there’s still not as much content as we’d like.

Carl E. Vogel

Tom, I think you touched on the point that it’s the marriage of the content in HD and the marriage of the hardware in HD. We think we are pretty well-positioned there with our HD DVR, our ability to serve multiple rooms, the seamlessness of that product.

We also think we are extremely well-positioned from a price point standpoint, where you can buy an AT100 for $29 and you can be in the HD category with a DVR at $49. So we think it is the combination of the content and Charlie voiced his opinion on the critical mass. I tend to agree with him but it is also the technology that delivers that content and the price point and packaging, at which customers can get into that content as they spend money for HD TV in the marketplace. We think we are pretty well-positioned on all three fronts.

Thomas Eagan - Oppenheimer

Great. Thank you.

Operator

Your next question comes from the line of Jason Bazinet with CitiGroup.

Jason Bazinet - CitiGroup

Thanks. Two quick questions; while I tend to agree with you guys that your stock is undervalued, a lot of clients we speak with I think are using legacy data points regarding the rural nature of your footprint, and the reason it comes up is because you can imagine more people are focused on Verizon and AT&T’s video rollout.

There is a website that I think you guys run that suggests that 90% of your customers are in the top 100 DMAs. I was just wondering if you could confirm that data point, and I have a second question as well.

Charles W. Ergen

I don’t actually know the answer to that question.

Carl E. Vogel

I don’t either.

Jason Bazinet - CitiGroup

It’s dishmediasales.com, so I think it’s part of your advert, your push to sell national advertising.

Carl E. Vogel

Well, you know, you never know. It sounds good to me. I think that we’re not going away from our rural base, if it’s there. I think you just have to look at the macro trends. Our ARPU is continuing to increase, $66, $67. I do think we’ve got a good mix in many markets and I think that is an advantage of DVS because the extent that we are weaker from a competitive standpoint in certain places, we have the opportunity to reallocate our marketing dollars, segment our efforts, focus on places where our offering is stronger than it may be in other places.

I’m sure that mix moves around a bit but I’m going to have to go find that website.

Jason Bazinet - CitiGroup

All right. My second question is when I go back to the ’01 proposed merger between Hughes and EchoStar, I think you guys targeted about $700 million or $800 million of synergies just from churn reduction. Given your sub base was about 17 million at the time, and your SAC was running in the mid-500s, it implies about 40% to 45% of your churn was actually between DVS and direct. I was just wondering, now that you are almost twice the size, if any of those churn metrics between the two DVS providers has changed. Thanks.

Charles W. Ergen

I don’t know that we ever did a synergy analysis that we did. Maybe some analysts did about synergy between churn but it’s probably less between the DVS providers today than it has been because of the -- you know, you have new entrants and cable’s got a better product with triple play, so it is probably a little bit less than it was back then. Of course, the raw numbers would be higher because the gross numbers are almost 30 million now.

Jason Bazinet - CitiGroup

Thank you.

Operator

Your next question comes from the line of Jeff Wlodarczak with Wachovia Securities.

Albert Lee - Wachovia Securities

Thanks. This is Albert Lee on for Jeff Wlodarczak. Can you talk about some possible synergies of working more closely together with DIRECTV under -- control, potential upside on sharing advertising platforms and how quickly can you realize these possible synergies? And I just have one quick follow-up. Thanks.

Carl E. Vogel

As Chase said, I mean, it’s easy to talk about, it’s hard to implement. I think that there are certainly things where there is commonality of interest but there are also a lot of logistics to work through. Advertising is clearly a place where we think there might be some opportunity. Their 30 million sub interconnect is a compelling opportunity for both us and the advertising community.

We continue to have discussions from time to time. I wouldn’t say anything is imminent but I think we both see the opportunity yet we both are pretty focused on what we need to do from our own business day to day, so it’s a -- there’s interest. It’s not I think at the top of either one of our lists.

I used to work at Liberty. I think Liberty owning DIRECTV has pluses and minuses. Certainly they will be a strong competitor, as they always have. We can see their offices and they can see ours and we know each other and to the extent opportunities present themselves, we’ll look at them but I think we’re more focused on running our own businesses today.

Charles W. Ergen

I do notice that our lights are on later at night, and earlier in the morning, for what it’s worth.

Actually, sharing stuff is at the top of my list because I think there is clear stuff where there is no advantage to either party, whether it’s sharing back haul or advertising. There’s not really a -- and then there are also things -- we went to auction together for spec and not a clear advantage to either party and there is synergy there and things we can do.

It is difficult as competitors sometimes to -- and you may think you have an edge, short-term edge in one of those things or another, so it all has to kind of fall out. But I think that there is certainly in excess of $100 million that both companies could put to the bottom line with some pretty simple things to do and plan out.

Now, having said that you have contracts and it takes time for those things and obviously nothing is really going to happen until Liberty has a bit more control, gets their deal done and takes a look at that. But they are financial animals too and there are certainly things -- you know, we have a common competitor in cable and there are certainly things that we could do there that make a lot of sense.

It is a bit more difficult to share spectrum because our HD stuff is different. We are actually using standards in MPEG-4, so some of that stuff becomes more difficult. It would have been nice to do it back in 2001.

Albert Lee - Wachovia Securities

Right, and as for the follow-up, I just want to get your thoughts on the 700-megahertz spectrum auction and your participation, and then your latest thoughts on a potential broadband alternative to the telcos and the cable guys. Thanks.

Charles W. Ergen

I think two things are happening. One is we have to read the rules, the actual rules when they come out. We’ve seen the general press release but the rules will obviously tell us a lot more but we’ve participated in most auctions. I think we are competent and know a lot about auctions and I think we will look and see whether the rules allow us to realistically have a chance to gain some spectrum. 700-megahertz is valuable spectrum. There’s a lot of things that could be done with it. There are certainly strategic things that we would be interested in.

Having said that, I think the good news is that there is a fair chance that broadband becomes a commodity, that as you get -- you get at least two pipes with phone companies and cable companies, you get a third wireless pipe, particularly if there is some open access components to that and 700-megahertz goes a long way there. WiMAX is a technology that is going to get you there. You have cities and municipalities doing things. Then you are going to end up with DVS being less disadvantaged, as long as there are multiple pipes out there. With things that Sprint and Clearwire are working on, we’d be less disadvantaged there and then the quality of our video and that experience where we believe we had advantages, significant advantages would be more of an impact than the fact that we have a better video product today but we don’t have a broadband product today.

We’ll see how -- it’s not clear that DVS providers have to go out and have their own broadband path and spend that capital to do that if others are going to do that or if other paths are going to become available.

It is unclear that the return on a broadband pipe is going to be as good as the video return as well.

It is very difficult -- I guess I’ll say it a different way -- there’s only two companies that are going to have a nationwide video play with virtually any HD content that’s any good and very, very good picture quality, even on a 70-inch screen and that’s DIRECTV and Dish. No phone company is going to have a nationwide play and no cable company has a nationwide play and they’ve all got to run some wires and maintain those wires in what is becoming an increasingly wireless world.

It is our job to make sure we go through the minefields and figure out strategically how we make the best investment decisions and so forth. And if there is opportunity to participate in broadband, we’d like to do it but we are not going to do something crazy.

Albert Lee - Wachovia Securities

Thank you.

Operator

Your next question comes from the line of Jonathan Chaplan with JP Morgan.

Jonathan Chaplan - JP Morgan

Good morning. Thanks for taking the question. I wanted to follow up on the earlier questions on some of the cost savings that you guys saw this quarter. So one of the areas that you got a fairly substantial savings is on the G&A side. I think the disclosure in the Q was that that was driven by, at least in part, by accruals for legal expenses that have come down. I’m wondering how sustainable those reductions are, whether there was any element of that reduction that was one-time and if there are further opportunities for cost reductions there.

And then in terms of the savings you got on the call center side, I’m wondering if you can give us a little bit more detail on exactly how those savings are achieved. Was it a matter of consolidation of call centers or is this something that you are able to do now that a lot of your subs are with AT&T and maybe some of the customer care is handled by them?

And I think you mentioned that there was opportunity for further cost reductions on the call center side as well. I’m wondering if you could just give us some more detail on how those are to be attained.

And then just one basic housekeeping question; the revenue share that you have with AT&T, where is that captured on the income statement? Thank you.

Carl E. Vogel

Well, I’ll start on the G&A and the call centers. We didn’t really consolidate anything. In fact, we invested more and opened up additional call centers and what we’ve been able to do is just increase the efficiency of that operation and reduce the call volume because we are doing the job right the first time.

In previous quarters we talked about making that investment, which we did, but we didn’t see the benefit of that investment and that’s going to go on a peak and valley from quarter to quarter anyway.

We are not looking at necessarily consolidating a lot of things. We are looking at doing better with the assets that we have and getting greater operating leverage out of those assets.

In terms of going forward, I didn’t say that we had a lot of opportunity in the call centers. I said we had some variable cost issues in our DNS area, which is our Dish network services area, where we think we have an opportunity to increase our efficiency over time as our technology gets better, as we work together as teams, as we have some of the MPEG-4 technology in the field for a longer period of time, as we simplify our dish configurations -- those are all things that have been going on for the past five to six quarters.

We are not looking for material increases there. We are just looking for better operating efficiency.

In terms of G&A, on legal expenses, they go up and down depending on what is in play at any particular time but in general, I expect as we are looking to maximize the span of control of our senior leadership all the way down to the director level, we’ll looking at making sure we are doing things right the first time and improving our operating efficiency and deliverables to the customer.

In terms of where the rev share is --

Bernard L. Han

It’s in the same place as our core subscribers. The revenue is in the revenue that is -- by ARPU, the COGS, it’s in our subscriber related expense, the acquisition, in acquisition it’s just to different degrees versus our core customer.

Charles W. Ergen

The other thing I’ll point out is while we’ve obviously made improvements on the expense side and particularly on the margin side, the second quarter reflects your price increase, the full quarter of your price increase and then as you go through the third, the fourth and even the first quarter of next year, you get programming cost increases throughout the rest of the year and you don’t raise your prices, so that tends to put pressure -- you know, the second quarter ends up normally being your best margin quarter and then you get pressures. That doesn’t mean we can’t make improvements and so forth but you have to look at the raw numbers to as well as the percentages. So we still have work to do there.

You know, G&A as a percentage is probably not far off from perfection, 5%. At some point you are cutting things you don’t need to be cutting.

Jonathan Chaplan - JP Morgan

That’s very helpful, thanks.

Charles W. Ergen

There is certainly room in customer care and installation service and that kind of stuff. Again, there you have to continue to make investment depending on the complexity of your product.

Jonathan Chaplan - JP Morgan

Thanks very much.

Operator

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

Craig Moffett - Sanford Bernstein

Good morning. Two questions, if I might; first, Charlie, your name has been mentioned in the last couple of months as having been a bidder for Ion or the old [Pacson] assets intel set and you were even talked about as having considered a bid for Dow Jones. I’m wondering how you think about M&A and what kinds of assets do you think it would make sense for you to add to the portfolio at this point?

Second, you just touched briefly on the DTV transition coming up next year, about a year from now. Are there any particular plans and should we expect a meaningful increase in subscriber growth as we get close to the February 19th date for the digital TV transition next year?

Charles W. Ergen

One is, we don’t have any plans -- honestly, we don’t have any plans to be in the newspaper business but I imagine we are going to get thrown around as the bidder for anything that Newscorp bids for, we’re probably going to get thrown in there. But we are not in the newspaper business and that one doesn’t seem to be a fit for -- I guess I would never say never but we have a hard enough time knowing the business we are in today versus the business we don’t know much about.

Having said that, obviously [NLSat] is a business we know about. It’s a distribution business, satellite business. Ion was a distribution business. We know something about it. So anything that would fit the category of recurring subscription from a customer or technology or distribution or satellite or wireless, those are all things that could make some sense for us.

The digital transition I think is something that we don’t know how that is all going to happen and if it is going to happen in 2009, but we think as a technology player and as a wireless company that the digital transition, and having a network of people who can go to people’s home and install things, if you look at all the assets we have, we think that there is potential in the digital transition for us to play a part in the digital transition of America and to the extent that we play a part, we would only do that if we thought we could increase the value of our company somehow.

I don’t think we have well-defined plans there yet because we got -- I think that we are putting things in place that we would position ourselves should the transition really take place, you know, in 2009.

Craig Moffett - Sanford Bernstein

You sound like you are skeptical about whether it will.

Charles W. Ergen

Well, I mean, my political sense tells that you have an election year in 2008 and that the broadcasters want to delay the transition, then you know, they get everybody scared they are not going to have product and nobody is going to be running for office and have people lose their TV at the same time they are taking the oath of office.

Politically, the way it lines out is you may see an extension or some portions of extensions of it and that, the 700-megahertz auction will put a lot of pressure to actually make the transition happen on time. So we’ll have to see how that plays out but it won’t take -- it really depends on what the NAB wants to do. To some degree, it is in their best interest for the transition to take place but to the extent they want to extend it, they would probably be able to do it politically.

I wouldn’t bet the ranch it is going to happen in 2009.

Craig Moffett - Sanford Bernstein

Thank you, Charlie.

Operator

Your next question comes from the line of Spencer Wang with Bear Stearns.

Spencer Wang - Bear Stearns

Thanks. Good morning. I just wanted to go back to the earlier question about SAC per sub, which was down. I know the equipment costs are declining but was there any sort of change in demand for advanced services? If you could tie that back into your ARPU growth, which has been decelerating a little bit, was that a function of demand for advanced services or just -- I think you alluded last quarter to taking fairly moderate rate increases.

My last question is just I believe in the past you guys have updated us on the call on CP CapEx. If you could just give us that number for the quarter. Thanks.

Charles W. Ergen

I don’t know if we -- do we have CP? It’s probably in there somewhere.

Carl E. Vogel

Jason will look. In terms of demand for advanced products, that hasn’t slowed down at all.

What the benefit of SAC is what Charlie indicated earlier -- we are making things for a little less than we have in the past, we are getting some benefit of scale, we are redeploying assets that have been through our lease program, and in terms of ARPU, the decline in ARPU on a percentage basis reflects the decision that we made as a company in early 2007 to not take a rate increase on our most popular package. So obviously when you don’t do that, and that represents a meaningful portion of your subscribers, your ARPU is going to decline.

Also, I think we’ve been --

Charles W. Ergen

Well, ARPU didn’t decline. It just --

Carl E. Vogel

Well, the rate of growth is going to --

Charles W. Ergen

There’s room for improvement there because we didn’t raise prices on our low-end package.

Carl E. Vogel

In addition, Charlie mentioned this earlier as well, we’ve been in the market with promotions where we’ve given away programming and we are going to migrate away from that going forward.

So our ARPU growth has not been diminished as a result of less demand for advanced services. It has been a function of decisions we’ve made from a competitive standpoint with our various packaging and price points.

And CCE --

Jason Kiser

During the quarter, it was $217 million.

Spencer Wang - Bear Stearns

$217 million?

Jason Kiser

Yes.

Spencer Wang - Bear Stearns

Thank you.

Operator

Your next question comes from the line of Lee Cooperman with Omega Advisors.

Lee Cooperman - Omega Advisors

Good morning. Thank you very much. Let me just first say this -- I couldn’t think of a smarter group of people running a company than you guys, and I say that most sincerely.

Secondly, I’ll confess to being a hedge fund -- I’m a hedge fund with a very long-term horizon. As you know, I’ve been a long-term holder of the company’s shares and I’m trying the best way I can to get inside your head because I have such enormous respect for you as a business manager and really as an asset manager.

If I recall correctly, I’m on the road, Charlie, so I don’t have every number in front of me but I think our original stock repurchase program was announced in the fourth quarter of 2003. We bought back $190 million worth of stock at the end of ’03 and I think the stock was trading around 10% lower than it is now, around 33, 34.

In 2004, we bought about $800 million back and the stock traded for the year between 28 and 40. My guess is we probably paid high 20s, low 30s. In 2005, we bought $363 million worth of stock back in the high 20s, low 30s range.

I believe when we announced a buy-back program in ’03, we had something like 10 million subs -- a little bit more, maybe 10 to 11, but I think closer to 10. I think currently we have 13,585,000 as I see from the release.

So I’m assuming either you have other designs for your liquidity or do you see the world as being sufficiently uncertain that husbanding liquidity would make sense, but you say you are economic animals with a long-term view. We seem to think the shares are under-valued.

I’m just trying to see if you can let me inside your head and to help me figure it out, but again, I’m very happy with you running the company and doing what you’re doing because I think you are fabulous.

Charles W. Ergen

Again, the answer is really the same, and I might mention that I think in 2007, we actually took $1 billion off the table because there was a convert, right?

Lee Cooperman - Omega Advisors

Correct. That’s true. That’s a good point. I missed that. That’s a good point.

Charles W. Ergen

So we actually took $1 billion off the table and that would have converted I think around $44 a share, so we actually have, at least we look at it that we had a pretty significant share buy-back this year.

We look at it -- the second thing that happens is we are in some kind of -- 10B51 or whatever, so we have to set a price and we try to factor in the mood of the market and everything else, so we set a price and that doesn’t necessarily change during the quarter, so that either happens or doesn’t happen, right?

You are correct. I think most of the stocks that have been purchased back, and again I may be off a dollar or two, around the 30 -- it’s public information -- around $30 is where most of the buy-backs were taking place.

I think we’ve had a nice balance between buying back stock and having liquidity for things we think are going to happen. For example, there’s an auction. There’s a 700-megahertz auction. It is going to take billions of dollars to play in that auction. We are not going to know the rules for that auction for a while and the auction is not until January.

There is the digital transition maybe happening in 2009. There is a tremendous opportunity in high-definition television. There perhaps now are companies that are going to have liquidity problems of their own that are good companies but just have a liquidity problem.

Are we more cautious today than we were a month ago? We probably are but tomorrow may be a different day and we would be less cautious.

We evaluate it literally every day and have a meeting on it every week and discuss where we are and what the best use of our capital is and right now, right now we are well-positioned for any number of things that we think may take place.

Lee Cooperman - Omega Advisors

Good. Thank you very much and I’m not being gratuitous, but I’m very, very comfortable with you calling the shots.

Jason Kiser

Operator, this is probably our last question here.

Operator

Okay, your last question comes from Robert [Barson] with Post Advisory.

Robert Barson - Post Advisory

I always seem to end up getting the last question but thank you for the opportunity. Congratulations to you guys for becoming the third largest pay TV provider. That’s something that I think that the market didn’t expect years ago and maybe you guys didn’t even expect it either.

That leads to my next question; as you are growing larger and larger, on the programming side, do you think you will be able to take advantage of that size, or is that benefit of size going to be outweighed by the fact that there are new competitors coming in and thereby bumping up programming costs? In short, what are your thoughts about programming expense going forward?

Charles W. Ergen

No matter what your size, the programming costs are going up so even for Comcast, programming costs are going up and programming costs in general are going up higher than the market’s ability to go price the rate increase. Again, I don’t know the exact numbers but programming costs, at least in the press, have been talked about going up 8% or 9% a year and people aren’t raising their prices by that amount, so that continues to be a challenge.

I think there’s a lot of strategy there. Major League Baseball is a typical example where if all your competitors are going to have Major League Baseball and you get to pass that cost on to every single customer, maybe you should be the one guy that doesn’t have the out of market games, particularly if you can get them on the Internet, right, for half the price.

There’s a lot of strategies you can play there and I think at some point you are going to see differentiated video players where everybody doesn’t have exactly the same thing in their package. We try to position ourselves to have as much -- I think we have the most flexibility in our contracts in terms of how we play in that environment. It’s no secret that our boxes are interactive. It’s no secret that we have the ability to have viewer measurement internally. I don’t think it’s a coincidence that there may be the channel we take off the air because we think they are charging too much money for it because we may look at the Nielsen ratings and all the stuff and we may have a different opinion about what our consumer base considers important, and we may consider the fact that viewer measurement 13 million boxes is more accurate than viewer measurement of 2,000 boxes.

I just think we are well-positioned there to make those things. We’ve made some really good calls on programming. We missed a few but long-term, I think we have a strategy of where we want to be in the marketplace.

Robert Barson - Post Advisory

As a corollary to that question, I guess the one thing that you didn’t mention, Charlie, as a potential synergy between yourselves and DIRECTV was programming. Between the two of you, you are a Comcast type size company and that means you can create programmers if you felt that was the need, or if that was the opportunity.

Is that something you thought about -- is that something that you will think about going forward?

Charles W. Ergen

I think Liberty has a tremendous expertise there and to the extent that Liberty -- I think we would follow their lead a bit more on that and to the extent that Liberty wanted to increase their presence in the programming business and there was a business deal that makes, and we’d be their partner in a business deal that was fair to us, I think we would do that.

But I think they are so good at that today and they already have a fair number of programming assets that, assuming we have a good working relationship with them, we would kind of look to them. They might look to us a bit more on the technology side, as an example, to do things from a technology point of view that would help both of us.

That’s the way I would envision it potentially happening. Now, whether competitive juices get in the way of all that and human emotion and everything else is another story but you certainly could see the DVS industry creating content that made sense. I would imagine Liberty would want to sell that to anybody who would want to buy it but maybe people don’t want to buy it, so who knows.

Robert Barson - Post Advisory

Well, congratulations on being number three.

Charles W. Ergen

But you know, DVS does have 30 million homes today, and growing, so --

Robert Barson - Post Advisory

Thank you.

Jason Kiser

Operator, I think we’re done.

Charles W. Ergen

We’re done and I think we’re back on in November. Thanks for joining the call today.

Operator

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

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