U.S. Markets closed

Edited Transcript of DISH earnings conference call or presentation 9-Nov-17 5:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 DISH Network Corp Earnings Call

Englewood Nov 13, 2017 (Thomson StreetEvents) -- Edited Transcript of DISH Network Corp earnings conference call or presentation Thursday, November 9, 2017 at 5:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Charles W. Ergen

DISH Network Corporation - Co-Founder, Executive Chairman & CEO

* Jason Kiser

DISH Network Corporation - Treasurer

* Steven E. Swain

DISH Network Corporation - Senior VP & CFO

* Thomas A. Cullen

DISH Network Corporation - EVP of Corporate Development

* Timothy A. Messner

DISH Network Corporation - Senior VP & General Counsel

* W. Erik Carlson

DISH Network Corporation - President & COO

================================================================================

Conference Call Participants

================================================================================

* Craig Eder Moffett

MoffettNathanson LLC - Founding Partner

* James Maxwell Ratcliffe

Evercore ISI, Research Division - MD & Senior Analyst

* Jason B Bazinet

Citigroup Inc, Research Division - MD and U.S. Cable and Satellite Analyst

* John Christopher Hodulik

UBS Investment Bank, Research Division - MD, Sector Head of the United States Communications Group, and Telco and Pay TV Analyst

* Marci Lynn Ryvicker

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* Philip A. Cusick

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Thomas William Eagan

Telsey Advisory Group LLC - MD & Senior Research Analyst

* Walter Paul Piecyk

BTIG, LLC, Research Division - Co-Head of Research and MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the Dish Network Corporation Quarter 3 2017 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jason Kiser, Treasurer. Please go ahead, sir.

--------------------------------------------------------------------------------

Jason Kiser, DISH Network Corporation - Treasurer [2]

--------------------------------------------------------------------------------

Well, thanks for joining us. This is Jason Kiser. I'm joined today by Charlie Ergen, our Chairman and CEO; Tom Cullen, EVP of Corporate Development; Erik Carlson, President of DISH Network; Steven Swain, our CFO; Paul Orban, our Controller; and Tim Messner, our new General Counsel.

So before we open up for Q&A, we're going to do our safe harbor disclosures, and we'll let Tim take that.

--------------------------------------------------------------------------------

Timothy A. Messner, DISH Network Corporation - Senior VP & General Counsel [3]

--------------------------------------------------------------------------------

Thanks, Jason, and good morning, everyone. Thanks for joining us.

A few reminders as we begin. First, we ask that media representatives not identify participants or their firms in their reports. We also don't allow audio taping and ask that you respect that.

All statements that we make during this call that are not statements of historical facts constitute forward-looking statements, which involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from historical results and from any future results expressed or implied by such forward-looking statements. For a list of those factors, please refer to (inaudible). Our cautionary statements that we make during the call should be understood as being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our reports and not place undue reliance on forward-looking statements, which we assume no responsibility for updating.

With that said, I'll turn it over to Steve Swain, our CFO.

--------------------------------------------------------------------------------

Steven E. Swain, DISH Network Corporation - Senior VP & CFO [4]

--------------------------------------------------------------------------------

A couple of quick comments on our subscribers. During September, Hurricane Maria caused extraordinary damage in Puerto Rico and the U.S. Virgin Islands, which resulted in widespread loss of power and infrastructure. Given the devastation and loss of power, substantially all customers in those areas were unable to receive our service as of September 30. In an effort to ensure customers would not be charged for our services, we proactively paused service for those customers. Accordingly, we removed approximately 145,000 subscribers from our third quarter ending Pay-TV count. This adjustment represents all of our subscribers in Puerto Rico and the U.S. Virgin Islands.

In the 50 States, net Pay-TV subscribers grew approximately 16,000 in the third quarter. This growth included the impacts of Hurricanes Harvey and Irma.

Combining the one-time removal of 145,000 subscribers in Puerto Rico and the Virgin Islands with the 16,000 net additions in the 50 States, Pay-TV subscribers declined approximately 129,000.

Please note, in order to reflect underlying trends in the business, other metrics including gross new Pay-TV subscriber activations, net Pay-TV subscriber additions or losses and Pay-TV churn rate were not adjusted for the impact of Hurricane Maria. In the weeks following Hurricane Maria, we have been focused on disaster recovery efforts, such as setting up satellite Internet at hospitals and FEMA registration sites. Over the next year, it is our goal to economically reconnect to the majority of our subscribers in Puerto Rico and the Virgin Islands. However, we cannot predict when customers will be able to receive our service, or how many would -- may return to active subscriber status. In light of the situation, we expect to incur certain installation expenses in connection with reactivating our returning customers. For that reason, any returning customers will be recorded as gross new Pay-TV subscriber activations for the period in which they return. Lastly, while we expect to have lost revenue and additional expenses as a result of Hurricane Maria, we do not expect to them to have a material effect on our financial position or operating results.

With that, I will open up the call to Q&A. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We'll take our first question from Philip Cusick with JPMorgan.

--------------------------------------------------------------------------------

Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [2]

--------------------------------------------------------------------------------

I guess first, Charlie, could you talk about the wireless space in what looks like a long term [for] player market? How does that change your strategy around your spectrum and your ability to drive partnerships going forward?

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [3]

--------------------------------------------------------------------------------

Well, I -- and I think it doesn't change anything too much other than, perhaps, there's a few more options on the table for us. But our vision of it, really, is that the wireless network of the future is more of a connectivity network. And it's not just about people and going to phones and tablets, but it's more about connecting microprocessors and things in addition to connecting people. And so there's going to be, obviously, hundreds of billions of (inaudible) connected. So the -- because there's a paradigm shift in the technology, particularly within 5G, to connect a lot of things, and because there are paradigm shifts in almost -- and disruption in almost every industry that we see out there. And based on the fact that probably everything that people on this call have invested in, need -- those companies need massive connectivity in the future and that we have an opportunity to build a network that does that. And it would be, I don't know exactly what the right analogy is, but, again, it's a bit like starting an airline, it'd be like you'd be in the '50s -- it'd be like being back in the '50s and starting an airline with all jet engines instead of having to start an airline with -- instead of having an airline with a bunch of prop planes that you slowly upgraded to jet engines. So we have some advantages there. Technology's all about timing. And we were very fortunate to hit the satellite television market when Congress had passed a law that cable programmers had sell to us, and that the technology was -- had gotten good enough to build big satellites and the digital compression impact, too, was actually -- actually worked not just in laboratory, but worked for consumers. So that -- we hit that at the right timing. For wireless, we think we hit that at the right timing as 5G comes about and as connectivity becomes greater -- a greater need for companies, and the people in the business today have really good networks for voice and design for voice, but they haven't and they can't overnight upgrade their networks to connectivity networks. They'll get there over time, but they're changing the tires on a car going down the highway at 100 miles an hour, that's always difficult to do, whereas we get to do it from a blank sheet of paper. So -- and we think we have a few more options today, but we've -- we're -- no matter what, we've always thought we'd be in a very competitive market.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Our next question from Walter Piecyk with BTIG.

--------------------------------------------------------------------------------

Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [5]

--------------------------------------------------------------------------------

Charlie, have you started any dialogue with the -- or your designated aides starting dialogue with the FCC on -- following that court order that came out?

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [6]

--------------------------------------------------------------------------------

We have made known that we're ready and available to talk to the FCC whenever they're ready to engage. So -- but again those -- I don't know how -- I don't know whether that will be in a public forum or a private forum, so I think that's going to be up to the FCC to decide. But obviously, we're encouraged that the courts- the court saw it, kind of, like -- I think I saw it, which is that historically there's always been an opportunity to cure -- if in fact there was a control issue, there's always been an opportunity to cure that on a fair basis. And we were disappointed that we were denied that opportunity by the previous administration.

--------------------------------------------------------------------------------

Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [7]

--------------------------------------------------------------------------------

Also, can you tell us if -- I know you guys oppose the AT&T-Time Warner transaction. Has the DOJ come back to you in the past week, and I don't know what the proper terminology is, but I guess, try and get a deposition out of you in preparation for the suit or a suit?

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [8]

--------------------------------------------------------------------------------

We've -- nice try, but we're not going to comment on that.

--------------------------------------------------------------------------------

Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [9]

--------------------------------------------------------------------------------

Okay. And then just lastly I guess, ops slice, Pay-TV business, the traditional -- the sat business excluding Sling -- I know you don't give out the individual numbers, but was the subscriber loss there better or worse than last quarter, excluding the 140,000-plus hurricane impact?

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [10]

--------------------------------------------------------------------------------

And Erik may want to jump in on this. But in general, the -- I say it this way. I think when I came back as CEO, probably, the first thing I saw was that in an effort not to disappoint Wall Street, we did things that weren't -- we didn't treat each customer economically, and we did things that probably -- we took on customers we probably shouldn't have. We gave big deals that we -- free programming, things that probably weren't long-term economical for us. So we really focused on the first -- probably 6 months when I came back, that's the first thing we focused on. And I think we got -- I think we as a company got a -- maybe got ahead of the curve a little bit before other people did. And so Erik and his team have really stabilized -- linear TV has still got issues and still got problems in part because of the way programmers continue to raise rates while they have declining ratings and they have too much advertising revenue. But having said that, the content's still really, really good. So it -- to some degree, it's fixable with rational people [starting making] more rational long-term decisions. So we were able -- we've been able to stabilize our core business a little bit better, even though it's a shrinking industry -- continues to be a shrinking industry. But we're also -- we also have a bit of a floor in the sense that rural America is still a strong part of our company, and we have programming designed for rural America, and we have a lot of our distribution designed for rural Americans. So I think we've taken some of the hard licks. And not to say -- I'm not saying it's a linear business or growing business, but I think we're on firmer foundation than we were a couple of years ago. Erik, do you want to -- and not only the video business but other parts of our business, so...

--------------------------------------------------------------------------------

W. Erik Carlson, DISH Network Corporation - President & COO [11]

--------------------------------------------------------------------------------

Yes, I mean, I don't think there's much to add there, Charlie, other than -- obviously, we've taken a much more disciplined approach to satellite TV. And Charlie pointed out, more rural strategy but also just a more disciplined strategy. And -- obviously, how we go about either acquiring or retaining customers, and I've talked a little bit about this in the past. But obviously, on the retention side, it's really having programs in place to help rightsize customers versus just giving folks credits and having a discipline about which customers you're willing to see to kind of reinvest in or save. So whether it's a Flex Pack, which gives customers choice, we're not subsidizing television for the programmer and the customer. And a Flex Pack type scenario, all 3 customers win, whether it's going to customers that already have an operating antenna and broadcast and allow them to integrate all fair with, obviously, satellite TV and that integration occurs in the guide, search and all that type of stuff. I mean, obviously, it can drop through locals and save a bit of money. That also helps to rightsize. And then on the operational side, I mean, we definitely have improved not only our discipline, but our ability to execute. And kind of a combination of those things really help us to, I think, have a longer tail on the linear satellite-TV business, but it's -- we are focused, and it's not easy. There's a lot of competition out there, and price value with OTT is obviously -- it's growing, so...

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

We'll take our next question from Vijay Jayant with Evercore.

--------------------------------------------------------------------------------

James Maxwell Ratcliffe, Evercore ISI, Research Division - MD & Senior Analyst [13]

--------------------------------------------------------------------------------

It's James Ratcliffe for Vijay. Two if I could. First of all, on the Pay-TV business, can you give us any color about where you're seeing the customer base from the virtual -- at Sling coming from? AT&T I think mentioned they thought only about 10% of their DTV now customers were coming from DTV or U-Verse. Are you seeing similar trends where the vast bulk are coming from outside of the existing DISH platform? And secondly, on the wireless side, Charlie, can you talk about any changes you've seen in the relative appeal or cost of adding wireless capacity through more spectrum versus through densification? Because it certainly seems like you're seeing players like Verizon pushing very hard on the densification front. I wonder if you're seeing any change in that dynamic.

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [14]

--------------------------------------------------------------------------------

Yes, I'll take the wireless side of it. The -- there's -- it's not as simple as looking at, kind of, spectrum and macro -- maybe macro spectrum versus densification. Verizon was in a situation where they had to densify because Voice over IP as opposed to -- requires a little bit denser network than GSM or CDMA. So there was already -- but because of their millimeter wave acquisitions, that requires really, really, really dense network. So there's a bit more strategy to what they're doing than would be maybe normal in a network. I think the key is going to be -- I wouldn't densify for -- I think there's not -- I think as a general rule, it's going to be easier -- it's going to be less costly and less OpEx, CapEx and long-term cost to have spectrum versus densification. The second thing I would say is that even if that wasn't true, additional spectrum gives you another bullet in the gun long term that you can always densify. The problem is that densification has limits. And so if you don't have enough spectrum, core spectrum going in, and you densify like crazy, and you still have connectivity needs in the future, you don't have -- you've -- reached the limit of densification. And so -- the first small cell costs X, but when you get to the 10th small cell, it's not nearly -- the law of physics today, you're not -- it's not really effective at all and it costs 10x. So it's -- as a financial -- former financial analyst, I think that those are -- and then you end up a lot of cost with signal processing to reduce interference. It is from the bunch of costs, you've got to look at the total system design. And in -- as a generalization, I would say that I believe, strategically, you're better off with additional spectrum. And worse case is, you -- even if I'm wrong, you can always densify in the future, whereas if you bet everything on densification, you are definitely in deep trouble if you run out of -- run out of capacity. So -- and it's a bit more involved in that because you're starting to hear things about NFV and virtualized networks and virtualized cores and things like that, those also play a role and to some degree, to get to that technology, you've got to have a little bit more densification. And you're starting to hear about storage at the edge, you need a little bit more densification for that. So there is a method to the madness of densification. So -- but you've got to look at it as a total system. And -- look, when you talk to Wall Street and your company, you don't always tell everybody everything. Because some part of your story is good and some part of your story is not so good. And it's up to you guys to go separate the wheat from the chaff. And on Sling, does anybody -- you want to take Sling, Erik?

--------------------------------------------------------------------------------

W. Erik Carlson, DISH Network Corporation - President & COO [15]

--------------------------------------------------------------------------------

Yes. I think, I mean, traditionally when it comes to, kind of, home TV service cannibalizing the DBS service, from a geographic perspective, we've been focused on different areas, right? Charlie and I alluded to the idea that DBS traditionally (inaudible) in rural America. That's where our strengths are, that's where our focus continues today. That's where our distribution is. And so generally for Sling, obviously, to work, you need broadband. And so that points you more towards a bit of an urban -- suburban type profile. So we're not seeing -- just based on our targeting strategy, we're not seeing a ton of cannibalization on the Sling service to the DBS service.

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [16]

--------------------------------------------------------------------------------

Yes. And I would just add that our vision of OTT was to go -- I felt like as -- that we as an industry lost an entire generation of people in Pay-TV. And it was difficult until Disney made a kind of a courageous choice at the time to say, "We'll do OTT." Everybody else kind of liked the idea of OTT, but not unless everybody else did it. So there was not a lot of leadership until Disney came in. But our goal was to go get back and get that generation that we'd lost in Pay-TV. It is a -- so there wasn't much overlap in between Sling and DISH at all initially. That trend is changing slightly where there is a bit more overlap as things like DIRECTV -- and the outcome in the marketplace, which is really a replacement for cable, really. It's almost cable -- it's actually cable, it's just in an OTT format. So -- and then people like YouTube and Hulu and others. So that is now a -- now OTT's going more mainstream. That may be a good thing or a bad thing, but it is changing. And we're still -- and so we'll change with it, obviously.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Your next question from John Hodulik with UBS.

--------------------------------------------------------------------------------

John Christopher Hodulik, UBS Investment Bank, Research Division - MD, Sector Head of the United States Communications Group, and Telco and Pay TV Analyst [18]

--------------------------------------------------------------------------------

Could you guys talk about competition in the live streaming market? It seems like YouTube, Hulu and DIRECTV Now have all gotten a bit more aggressive in trying to increase their profile. Has that affected the, sort of, growth rate that you're seeing at Sling? And then, Charlie, getting back to that point where you talked about the sort of evolution of the wireless market, do you think that live streaming TV returns the sort of live TV bundle to growth, sort of, similar to what Fox was saying last night? Or do you still expect a decline in the overall number of Pay-TV subs going forward?

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [19]

--------------------------------------------------------------------------------

Well, you're correct. There is a tremendous amount of competition in the OTT space. I mean, there's probably approaching a dozen companies. Some -- the fact when you start putting Google in there and then you put -- and then Hulu, of course, owned by the content providers themselves, there's certainly a tremendous amount of competition there. Having said that, it's still going to boil down to -- not everybody's selling exactly the same thing. And so what's going to happen is that the market's going to get more fragmented. And as a result, that's -- consumers will have some choices. And not only will they have choices, but they can move between packages with a click of a button on the Internet. So I think that, that's going to be tricky for content providers because not everybody has to buy sports programming. Not everybody has to buy Now, whereas in the traditional linear bundle, there was a 90% chance you're going to have to buy a sports bundle. That's not the case in OTT and certainly not the case probably where OTT goes. So I think it's going to be tricky for content providers because the market gets a little bit more segmented. There is better advertising opportunity because it's the unicast and we can do an interactive ad to consumers. I think that the content's gone -- that's gone beyond traditional content -- I've always said that in the -- the people who have had skin in the game, who've launched satellites or build cable or build fiber were going to -- take a bit of -- a different approach to actually run programming as a profit and loss. As you get into things like YouTube, they make their money on data. So they would not necessarily -- they want eyeballs, they don't necessarily care about security and piracy, as an example, as much as, say, DISH would where we have our own in-house force to look at people who are pirating things. We have 85 boxes in our lab today that's still programming on the Internet from companies, right? That's not something that the content owners anticipate and they don't totally understand it. So they -- but they understand they get a contract and they get a headline and maybe their stock goes up for a week, but they don't understand the unintended consequences. So I think there's some real potential problems out there. Having said that, and also, Now gets people thinking about on the -- linear TV is not dead. And linear TV is suffering declines, in part, because it's not as good a product, it's more expensive, rates have gone up while viewership goes down. And probably the worst thing is that the commercial load is so -- you're talking about 30% of the viewing minutes are commercials. That's an unhealthy consumer experience. So there's things we can do as an industry to change that. And if the industry starts thinking about creative ways to compete, then that marketplace can stabilize a little bit. And so we have a good feel for it. We understand the industry pretty well. We understand the piracy side, we understand the consumer side. We understand the profit -- P&L side of the business pretty well. We understand the technology side of the business pretty well. And so we think we -- we think we're -- we think we can offer solutions to people that can make our industry a little bit better. And we think we're well positioned for that. But how people go and what people think short term or long term or decisions they make, we're not the person who deals with that, we're not that big a company. So we play the cards that are dealt to us. And we think within the video business that we still -- that, that's still a real good business and has -- and content has -- and the distribution system for content has a lot of legs. And we're involved on the satellite side, we're involved on the broadband side with OTT. So we're well positioned there. And we're certainly well positioned for the connectivity side and the wireless long term. Not many companies that can say that.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

We'll take our next question from (inaudible) from Goldman Sachs

--------------------------------------------------------------------------------

Unidentified Analyst [21]

--------------------------------------------------------------------------------

Just two questions. And the first one is just to clarify around the suspended accounts in Puerto Rico and the U.S. Virgin Islands. The way I heard your remarks, it sounds like all of the financial impact of that is going to begin occurring in the fourth quarter. But I was hoping you can clarify. Were there any revenue credits or revenue reserves at all in the third quarter? And then on the cost side as you suspend these accounts, does that mean you're not going to be paying and incurring the programming expenses? And the bigger picture question I have is, on the last call, I believe it was the last call, you were talking about how it's taken a really long time to develop the advertising platform with Sling, but you really felt like you were starting to get it. And I'm just curious if you could give us some view here on how you think the addressable advertising opportunity is going to start scaling at Sling? And if you're getting to a point where you think that's going to start factoring into the revenues of that product in a more meaningful way?

--------------------------------------------------------------------------------

Steven E. Swain, DISH Network Corporation - Senior VP & CFO [22]

--------------------------------------------------------------------------------

Yes, on the first question, because the hurricane was on the 19th, 20th of September, we did have a slight revenue adjustment in the third quarter, both to us as well as the customers. And then -- you're right, if we don't have paying customers, we don't pay programmers. So that's just the way that works.

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [23]

--------------------------------------------------------------------------------

But you can run the math. You lose 145,000 customers going to pause and -- what's your ARPU? $87 a month. It might be a little bit less in Puerto Rico. But you can see the impact of that till customers come on the revenue side, right? And then we don't have the cost for that customer, right? So -- but you could probably extrapolate the impact. Having said that, we believe that, that's not a long-term material impact on us. In fact, in some degree, there's a bit of opportunity in Puerto Rico because I think Liberty Global, who's the cable company in Puerto Rico, I think they just -- they don't know that, that -- I mean, I'm guessing that they're devastated as well as we were. And they haven't disclosed yet the impact, other than they kind of counted their customers as through August 31. Because they don't know -- they probably don't -- they probably know the impact now, but they probably didn't know the impact when they reported. So those customers are going to take a long time to come online, satellite's a little bit easier to bring online. So there could be some opportunity for us, but it is -- that island is devastated, and it's -- we spend a lot more time on the humanitarian efforts than on the P&L side of it at first, which I think -- I'm proud of our guys for doing that.

--------------------------------------------------------------------------------

Unidentified Analyst [24]

--------------------------------------------------------------------------------

And on the addressable advertising?

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [25]

--------------------------------------------------------------------------------

A majority of our -- some of the programs moving slow. But the majority of our programs on Sling now have dynamic ad insertion where we can stream an individual ad. And again, as we'll get better and better at that and as the tools get better and better at that, that's going to be something continues to go -- grow from a revenue opportunity for both programmers and us. And I think that we're on the leading edge of that technology, and it's certainly not easy. But as programmers see some of the results, they're getting more excited about that. So it definitely is -- it definitely is a -- is one of the keys to making OTT profitable.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

We'll take our next question from Marci Ryvicker from Wells Fargo.

--------------------------------------------------------------------------------

Marci Lynn Ryvicker, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [27]

--------------------------------------------------------------------------------

I have two questions for Steve and then sort of big picture for Charlie. So Steve, given pressure on EBITDA at the core DBS business, I guess, how do you stay comfortable with your leverage and paying debt down? And then as a corollary to that, how can you keep free cash flow stable? What are the puts and takes? And then the bigger picture question for Charlie, I'm just going to ask you what I get asked. At the current stock price, you're either getting spectrum at a massive discount, or there's negative equity value for the DBS business. So what do you think the market is getting wrong?

--------------------------------------------------------------------------------

Steven E. Swain, DISH Network Corporation - Senior VP & CFO [28]

--------------------------------------------------------------------------------

All right. So Marci, the -- your first question on DBS pressure, leverage, free cash flow, it's all kind of combined. We do look at fundamentals. As Charlie mentioned, with the backdrop of traditional Pay-TV distribution maturing and now declining, we're laser-focused on cash flow. I'll go through the different products that we have, satellite, Sling TV and dishNET, and how we look at it '17 and going forward. For DBS, as Erik and Charlie already mentioned, we're acquiring and retaining higher-quality subscribers in the rural geographies where we see less bundling pressure. And we are more disciplined on retention core credits as well as we are executing on several cost initiatives to offset some of the programming price increases. We're also rightsizing our customers into skinnier packages. Erik already mentioned Flex Pack. And we're also -- we have also introduced the Hopper and antenna solution where customers can drop locals and save. Lastly, to partially offset some of the EBITDA pressure that we see on DBS, we're spending less on PP&E CapEx by using more remanufactured boxes versus buying new. Looking at Sling TV, we are seeing ARPU and margin expansion. For example, I -- Charlie already mentioned this. We're seeing ARPU tailwind from increasing addressable advertising revenue as we have more and more channels available for sale for addressable advertising as well as incremental products like DVR. And as you would expect, Sling TV is certainly gaining scale as it grows. dishNET, we've pivoted from the wholesale model where we are now seeing a very modest P&L favorability due to lower acquisition costs. Looking at beyond operations into interest payments and taxes with incremental debt year-over-year primarily from low-coupon convertible bonds, cash interest expense is up on a year-over-year basis. But cash tax, without a sizable taxable gain from derivatives like we had last year, with lower 2017 pretax income, higher cash interest and planning for the incremental tax deduction from amortizing our newly acquired 600 megahertz licenses, we are expecting to pay significantly less cash tax in 2017. So because we're focused on cash, we are comfortable that we'll have the flexibility as we hit maturities, which are spaced out nicely over the next several years that we'll have the flexibility to pay those maturities off or have flexibility in the market.

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [29]

--------------------------------------------------------------------------------

Yes, this is Charlie. And I don't know that the marketplace is getting anything wrong or that -- in the sense. I think it's more a question of short term versus long term. I think if you looked at -- if you -- and so what -- I used to be a financial analyst, and so when you -- and always -- guys here all know, I always teach that you look at the numbers and then you take a step backward and look at all the other factors. I call that house logic. But you look at all the other factors that affect it. So as an example, if you ran a bunch of aerospace engineers, they would say a bumblebee can't fly because they look at the aerodynamics of a bumblebee. I look at that house logic and say, "I see it flying, I'm pretty sure it flies." And so you look at the math, in short term, maybe we're fairly valued, maybe we're overvalued, I don't know. But long term, because -- first of all, video business -- we probably don't get as much credit for our video business than we should. It's not dead, it's a -- it's still a very, very profitable business. And there's things that the industry can do to -- to continue to do that if they move in that direction. And then on the connectivity side, people underestimate just how -- there is an -- I've never talked to a CEO and the last CEO for any company, including Fortune 500, who doesn't need massive connectivity to do it. And there are companies that are worth over $500 billion today, one worth almost $1 trillion, that they don't have a business unless they're connected. And their debt -- that'd be a scary position if your whole net worth was -- if most of your profits were based on connectivity and you don't have any more insight into today. And if you want to keep that connectivity, and you want to reduce your costs and be more efficient, you're going to have to get to more -- you're going to have to move from the cloud to the EDGE. And when you do that, connect -- wireless connectivity just plays a bigger part. And you name it, whether it be the artificial intelligence or virtual reality or autonomous vehicles or industrial or municipalities or healthcare or consumers and homes and everything else, the efficiency gains, the connectivity -- what we're going to be able to do within a 5G technology is going to be massive. And there -- they are going -- the next $500 billion company's going to come out in connectivity.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

We'll take our next question from Tom Eagen with Telsey Advisory Group.

--------------------------------------------------------------------------------

Thomas William Eagan, Telsey Advisory Group LLC - MD & Senior Research Analyst [31]

--------------------------------------------------------------------------------

On Sling, could you give us a little bit of color on what's happening with churn? Is that increasing or decreasing? And what have you found to be the drivers of churn? Is it quality of service? Is it sampling? Is it folks that were looking for certain channels? And then, I guess more strategically, you talked about targeting certain markets. Could you give us a sense of which broadband provider most of your Sling-to-be subscribers use? And has that changed over time?

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [32]

--------------------------------------------------------------------------------

Yes, I don't -- I'm not sure we know the broadband providers. I mean, it would typically skew pretty much what you see in market share with cable industry having a -- the biggest part of the market share. And we probably track almost virtually identical to the market share of the cable guys versus, say, the phone guys. The churn is I think the biggest -- not surprise to us, but the biggest kind of lesson learned is the churn within OTT is much more seasonal than it is -- has been in linear TV. For example, if you are a college football fan, you probably are going subscribe DS -- but let's say, you're not a big NBA fan or a hockey fan, you probably are going to subscribe to ESPN for September, October, November and December, but you're probably not going to -- you're probably going to -- you may go to a different package or a different OTT provider for the rest of the year. I mean, if you're a big Game of Thrones fan, but not necessarily -- and you have Netflix, you probably are an HBO subscriber for 6 weeks out of the year, but you don't -- you've got plenty of movies on Netflix, so you don't -- so maybe you switch or maybe you switch between Showtime and HBO, depending on the series. So obviously, there's things that the content provider can do to have content throughout the year, and I'm sure they're working on those kinds of things. But there's a bit more seasonal approach to it, and I don't think we totally understand that but we know that that's there. And then obviously -- you're going to have to have good user interface and good technology. In other words, consistent service, which is extremely difficult to do for live TV when you don't control the Internet, the public network, it's -- that's extremely difficult but you have to have reliable service and those are factors that we see from consumers.

--------------------------------------------------------------------------------

Thomas William Eagan, Telsey Advisory Group LLC - MD & Senior Research Analyst [33]

--------------------------------------------------------------------------------

Is there anything that you guys can do on Sling in terms of the programming to lower the churn?

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [34]

--------------------------------------------------------------------------------

Well, I mean -- yes, I mean, I think we need content that is relevant to people all year long. And then make it -- and then provide a consistent service and a user interface that's easy for customers. When they go somewhere else, the grass looks greener, but they come back because the other system doesn't work as well, right? Or we have content packaged in a way that the other person doesn't have it. So it's -- I will say that today, there's 3 or 4 of the biggest guys not named Sling look pretty much alike. And I think that, that -- so they get a buyer for the same customer. We look a little different with Sling. We actually have 3 packages for people, and we look a little different. And so we're not attractive to some people, but the majority of people, I think, like what we have.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

We'll take our next question from Craig Moffett with MoffettNathanson.

--------------------------------------------------------------------------------

Craig Eder Moffett, MoffettNathanson LLC - Founding Partner [36]

--------------------------------------------------------------------------------

Charlie, two questions, if it could. One, I wonder if we just dig into this economics of Sling that you've been talking about a little bit, and if you could just revisit some of the comments you've made in the past about the customer lifetime value of Sling customers versus traditional satellite customers. I know that customer acquisition cost is obviously dramatically different. But if you could just maybe put some more meat on the bones about the total customer lifetime value and how you think about it. And then, second, if you could just clarify for -- when you talk about connectivity in your wireless business, are you still talking about a narrowband IoT network? Or are you now -- I'm going back to the more broadband data network that you've been talking about in the past? Because I think architecturally, they would be quite different.

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [37]

--------------------------------------------------------------------------------

I'll let Tom take that second -- that question, Craig. On Sling, I think it's still a little bit remains to be seen. But the technology of OTT and what we're able to do with Sling in the platform that we have, we believe that customer can -- will have a longer-term life than a linear subscriber in the urban markets. And there are -- and so I don't -- obviously, the SAC can be virtually nothing once you get a customer and you get them on your profile, even if he leaves you to come back. And again, the advertising model and the relationship with the consumer through a direct connection, there's a lot of revenue opportunities there that maybe aren't evident today. So I don't think it's proven yet. But we like the technology of what we're able to do with reaching customers through an app that allows us to do a lot of things beyond just TV. So with that, I'll may be...

--------------------------------------------------------------------------------

Thomas A. Cullen, DISH Network Corporation - EVP of Corporate Development [38]

--------------------------------------------------------------------------------

Yes, Craig, on the wireless side, what Charlie was referring to earlier around 5G and massive connectivity, we view that as more phase 2 after the 5G standards are defined, after our 600 megahertz spectrum is cleared and so forth. So that's probably a 2020 and beyond thought. In the interim, we are still focused on the narrowband IoT build. As we shared in March with the FCC, had a very good quarter in terms of progress. We've expanded the wireless team considerably. We've finalized contracts with more than one global vendor for radio access equipment and other associated equipment that goes on towers. We're in negotiations right now with several chipset and module vendors, which we hope to finalize in the next couple of months. We've initiated contact with a wide range of tower owners and have begun those discussions as well. So we think we'll have some of those agreements wrapped up early in 2018. So because of the unique spectrum configuration of meeting our license requirements for both AWS-4 and 700, the radios require development. So we've paid those development fees, and we would expect to have radios later in 2018 and begin deployment shortly thereafter.

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [39]

--------------------------------------------------------------------------------

But that's a material -- that's not a network that's going to be a paradigm shift for our business, right? But it is a network that's going to give us -- that is a network that's going to work and going to provide value and maybe even more importantly, and it's going to -- consumers are going to be able to use it, but it -- and companies are going to be able to use it. But it's the testbed for us to get to the second phase, which is basically -- it's probably revolutionary, the ability to connect in a way that you just can't today. And we're not saying -- we're not totally wireless experts. We don't have 30 years in the wireless business, so we're -- we need to learn. And one of the things that we need to learn, and we also need to learn to work with certain companies who become our partners long term. And it's exactly the way we did the satellite business where we still had the same partners -- when we started building our first satellite in 1992, we still have many of those same partners, and we really didn't really know anything about satellite at that time. And we got a lot of help. And people were willing to help us and people were willing to partner with us. And there's a lot of people on the wireless business that are willing -- they're doing the same thing. We're appreciative that they're willing to take chances on us, and we're all in. I never thought we'd get a second chance to do something pretty revolutionary, and we're able to do that and we're building that team of people to do that. And there's no guarantee of success. But as logically, there's not any question in my mind that people have to be connected. And I don't understand AI, and I don't understand virtual reality and I don't understand smart grids. And I don't understand jet engines that download terabytes of data and every millisecond. And I don't -- I just don't understand any of that stuff. And I go -- there's people in Silicon Valley, I don't understand what they do. But I've never seen one of those guys that can make money without being connected.

--------------------------------------------------------------------------------

W. Erik Carlson, DISH Network Corporation - President & COO [40]

--------------------------------------------------------------------------------

So Craig, just to finalize on that, we're very confident in meeting the March 2020 requirements for those licenses, and we're also encouraged by the growing adoption of narrowband IoT. You've probably seen a number of the global operators announcing deployments already with new consumer products just in the last couple of weeks. So there's an opportunity there for us to cooperate with some of those carriers, we've had those discussions as they start satisfying the needs of multinational deployments.

--------------------------------------------------------------------------------

Craig Eder Moffett, MoffettNathanson LLC - Founding Partner [41]

--------------------------------------------------------------------------------

And just to make sure I understand, so -- because you won't have the 600 in time for the 2020 deadline, does that mean that both the downlink and the uplink initially in the IoT network are going to be done in your AWS-4 band and AWS-3? Or is there a different architecture there?

--------------------------------------------------------------------------------

Thomas A. Cullen, DISH Network Corporation - EVP of Corporate Development [42]

--------------------------------------------------------------------------------

We haven't shared the spectrum configuration that we're deploying, but it will be consistent and compliant with 3G PP.

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [43]

--------------------------------------------------------------------------------

But I think, Craig, we -- for 2020, we're certainly looking within the AWS-4 and 700 bands.

--------------------------------------------------------------------------------

Craig Eder Moffett, MoffettNathanson LLC - Founding Partner [44]

--------------------------------------------------------------------------------

Does that mean using 700 for uplink?

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [45]

--------------------------------------------------------------------------------

I didn't hear that?

--------------------------------------------------------------------------------

Unidentified Company Representative [46]

--------------------------------------------------------------------------------

(inaudible)

--------------------------------------------------------------------------------

Craig Eder Moffett, MoffettNathanson LLC - Founding Partner [47]

--------------------------------------------------------------------------------

Do you think (inaudible)

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [48]

--------------------------------------------------------------------------------

Yes, our 700 is downlink. Yes, so 700...

--------------------------------------------------------------------------------

Thomas A. Cullen, DISH Network Corporation - EVP of Corporate Development [49]

--------------------------------------------------------------------------------

Obviously, we have uplink but we'll -- we're not sharing the configuration. I think we have very creative solutions, let's put it that way. But they're not standard radios, which is why we're having to pay develop -- why we're paying development fees and stuff to do it right. But it's not -- but it's creative. And so we haven't shared those creative details yet I guess is fair.

--------------------------------------------------------------------------------

W. Erik Carlson, DISH Network Corporation - President & COO [50]

--------------------------------------------------------------------------------

So operator I think we have time for one more question from the analyst community.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

We will now take our final question from the analyst community. (Operator Instructions) Our final analyst question comes from Jason Bazinet with Citi.

--------------------------------------------------------------------------------

Jason B Bazinet, Citigroup Inc, Research Division - MD and U.S. Cable and Satellite Analyst [52]

--------------------------------------------------------------------------------

I just had a quick question for Mr. Ergen. Regarding keeping the video business and the spectrum together under one stock, is that motivated by financial considerations? Meaning you need the free cash flow to build something out? Or do you still see strategic merits in keeping them together, even though we're talking more about an IoT network that we were maybe 3 years ago.

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [53]

--------------------------------------------------------------------------------

Yes, we all realize now IoT space won. So we really -- but the answer is yes, we think strategically they go together. We think that in the marketplace maybe there's a little (inaudible) on bashing video business. But the biggest use of a modern -- the biggest use in terms of data on networks in the future is probably going to be video. So they make sense to being together. Having said that, we're not rigid. I mean, if somebody's got a better idea, and there's an opportunity and the net-net effect is a positive for our shareholders, we certainly take a look at that. But as we sit here today, those assets were built for a purpose, those assets go together for a purpose. And we think -- we just think that maybe the marketplace is -- doesn't appreciate solid foundation of the video side of the business. But we may be wrong, too.

--------------------------------------------------------------------------------

W. Erik Carlson, DISH Network Corporation - President & COO [54]

--------------------------------------------------------------------------------

Okay, operator. Let's move to the press.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

We will now take questions from members of the media. (Operator Instructions) Our first media question comes from Gerry Smith with Bloomberg News.

--------------------------------------------------------------------------------

Unidentified Participant [56]

--------------------------------------------------------------------------------

Mr. Ergen, I'm actually filling in for my colleague, Scott Moritz. I want to follow up, you said earlier in the call that you see more options today in wireless for DISH. Are you referring to the Sprint T-Mobile talks collapsing and one of those companies possibly being a partner? And then if I might ask a second question, I know you said you didn't want to comment about whether DOJ had called you guys in regarding the AT&T-Time Warner deal. But I was wondering if you had any thoughts in general about the AT&T-Time Warner deal and specifically this idea that DIRECTV might get sold off.

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [57]

--------------------------------------------------------------------------------

And your question is important though, so we'll try to answer it. The optionality, the answer is yes. In part, if Sprint, T-Mobile are not going to attempt to go together, then that obviously, perhaps are some announcement -- that's not the only options that are kind of out there. And I think that they continue to be -- as people get the better understanding for connectivity, there continue to be additional, kind of, options. On AT&T-Time Warner, I only say in general, my experience has been -- you're talking to a guy who the DOJ, we turned down -- they turned down our merger with DIRECTV and, of course, paid at that time one of the largest breakup fees ever. At the time, we didn't have quite that much money, so. But having said that, I've learned through the experience with DOJ that they -- that despite maybe what you read in the press and everything, that it's a pretty -- that they actually have a lot of information that, perhaps, we don't have or the press doesn't have because they do a pretty thorough analysis of things. And they -- the staff, in particular, look at it per the law and look at data that we don't have. And despite the fact that I was very disappointed that they turned our merger down, I grew -- I had a great deal of respect for what I learned in that process, at how they do their job so I wouldn't ever second-guess -- I wouldn't say never, but I wouldn't probably second-guess the process. And we'll see how that merger proceeds. I think by no means is it dead, and I think there's certainly maybe ways that they can work it out, so we'll see. But we think there's definitely legitimate concerns about that merger, right? That definitely would be a huge concentration of content and distribution in one company. And the net effect of that, as many people have highlighted in the press and to the Justice Department, certainly could have negative impacts on the consumer. And ultimately, their job is to protect the consumers.

--------------------------------------------------------------------------------

W. Erik Carlson, DISH Network Corporation - President & COO [58]

--------------------------------------------------------------------------------

Okay, I think there no other media -- are there other media questions in queue, operator?

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

There are no further questions at this time.

--------------------------------------------------------------------------------

Charles W. Ergen, DISH Network Corporation - Co-Founder, Executive Chairman & CEO [60]

--------------------------------------------------------------------------------

All right. Well thank you, everyone. We'll talk to you the next time.