Highlights From DISH's Q3 Conference Call - Q&A Session

November 9, 2009 3:31 PM EST

DISH Network Corporation (NASDAQ: DISH) reports Q3 EPS of $0.18, the analyst estimate of $0.44. Revenue for the quarter was $2.89 billion, which compares to the estimate of $2.93 billion. Shares are up 4.20% today.

Highlights From DISH's Q3 Conference Call - Q&A Session:

(Q&A) Was hoping you could shed more light on the very strong churn result? In the 10-Q, you mentioned part of the result is timing related to the shift from 18 month to 24 month subscriptions. Is your expectation therefore that you'll probably see improvement but the going forward, the magnitude of the third quarter decline was one time and then I have one follow-up.
(A)Yes I think that one factor that was mentioned is one of many factors. So that one item by itself will reverse itself or go back to its old state come this spring of 2010 but there were a number of other
factors that contributed to churn B improvement in the same period. We had seen some improvement as a result of the piracy mitigation, some fraud mitigation. The market place in terms of households moving has declined or fewer movers, which means less churn for pay TV providers. We had talked about last - on the last call that we're constantly trying to fine tune our credit rules and thresholds with respect to customers coming in the door. And I think for a period of time, we were perhaps tighter than we had been in other periods of time and perhaps tighter than we should have been. And I think those factors and other factors all contributed to churn being improved in this period. That one item about commitment periods is a one-time thing that we'll see for the next six months.

All right. Thanks. And then one more. On the subscribed related expense line, as far as I can tell, it's the highest level it's been in the history of the company. If you could provide any color as to how much of that's driven by MPEG-4 upgrades to existing subs and your initiatives to free up bandwidth? That would be very helpful.
(A)Yeah, it's not a lot of that. Three big items in that line are programming costs, variable costs and retention expense. Programming costs for us, we talked about spending more money on our call centers to improve customer service.
(A)Jeff, this is Tom. Really, the biggest driver as Robert said, we're investing to re-establish our leadership in customer service. And we've been doing that and we're seeing some improvements in some see metrics. I think that is also associated with the turn improvement. But over time, as we're seeing the improvements, we also expect to ring out efficiencies in those lines going forward.

My first question is regarding ARPU. I guess really two parts. Can you give us a sense of what ARPU growth was, excluding the pay-per-view movie impact? And then if you could give us a sense of how you plan on managing ARPU versus growing your subscriber base? And then my second question is on subscriber-related expenses. Again, on a per sub basis, that decelerated from 9% in the -- from 8 to 9% in the first half to about 6% in the third quarter. Should we expect that trend to continue into the fourth quarter and beyond? Thank you.
(A)Hey, Spencer, it's Tom. On the ARPU side, we don't break out the individual components within that but I will tell you that the biggest driver of the suppression of ARPU is programming discounting. And as
you know, we had an aggressive discount February 1 through August 1, so we had one month of that in the quarter. We're now down to a more reasonable discount on a per month basis. However, fortunately, the market has responded so the volumes are high in August and September as well. That being said, we are focused on waning ourselves off of programming discounts, going forward. That doesn't -- obviously, we'll do what we have to do to remain competitive but we don't think that's the best way in the long-term for the business to grow. As far as subscriber-related expenses, I'll let Robert elaborate. But as I said earlier, we're heavily focused on reestablishing a leadership position in customer service. We're seeing some early returns on that, but we have to get more efficient in the line item going forward.
(A)Yes. And Spencer, as you know, we don't give forward-looking guidance there but we are working very hard to make our operations more efficient. And that will deliver really good customer service and a better cost structure.

So, with regard to your programming costs and retransmission, I know you did a slate of deals over the past year. How would you -- what's your outlook for programming expenses going forward? I know you just said it's a big part of your subscriber-related expense growth. Can you perhaps give us what your --a little bit further outlook on programming and retrans?
(A)Yes, this is Charlie. The programming costs will continue to go up. They're fixed price contracts typically, our fixed contracts for a period of time. Generally, programming costs are going up at greater than rate of inflation because we haven't had inflation obviously. And there is a lot of concentrated power in terms of programmers on some side. So, that's just a cost that will get -- that I'm sure the industry will pass on to consumers.As those costs go up and as the third largest provider of television, I think that we are well positioned in terms of programming costs, vis--vis our competition and you know, and I just think we're ultimately going to have to recap that programming cost through price adjustments to your customers and you'll see that probably from the industry we've pretty much seen on an annual basis where those costs are passed on. I think the area for us that we can control of course is our operations and our potential marketing and - by doing a great job there. We haven't done a great job there yet. But we are getting better every day and putting our self in position to do better on the cost side but we're not there yet. We still have some infrastructure problems. We still have some focus issues to tie everything together to do that but we've got - but I think that we are getting better every day and its going to be certainly well into next year before we get to the level we'd like to get to on an expense side.

Okay. And lastly, I want to ask about TiVo. I know you have an upcoming hearing this month. Many thoughts on that and any change in your outlook for the potential outcome?
(A)Well, one, we already had a hearing - we had a hearing I think this week ago? Last Monday we actually had a hearing. The oral arguments at The Court of Appeals and The Court of Appeals is really hearing two main issues. One, whether we're allowed to download non-infringing software to set top boxes and other whether well our new software is currently different from TiVO today. And so I think that we've done an excellent job on the briefs - written briefs before The Appeals Court and I think we did a good job in oral arguments. So we sit back and wait.

Is the ruling expected this month? Is what actually was getting at or is there anymore...
(A)The rule could come at anytime. I think rulings typically have taken several months at The Court of Appeals. But they could come at anytime. I mean, once the oral arguments are presented, the judges could rule at anytime. And I guess in general, I would say that what I've always said which is, I think ultimately, regardless of what this outcome is, we'll have a relationship with TiVO. It's a good company there, good product. there's things we can do together. Not regarding intellectual property. We have an
honest disagreement on intellectual property where they've won just about every decision in the lower courts and where The Court of Appeals has reversed it a number of times. So we know we know how hard we work to change our intellectual property based on what TiVO has told the court and how their system operates. We know how - we know what we did we think is legal and we trust the legal system and you know, we look forward to a ruling. But at some point, the path will be clear.

A couple of questions, Charlie, in the past, you've been very cautious about giving away programming. You've talked about that a lot today. If you remember back, I think DirecTV in '03 was very aggressive. Bringing in new subs and then there was a lot of churn on the back end. Can you just give us a sense for your confidence level in your current screen growth ads that you're not going to see that backend spike on churn when these contracts roll-off?
(A)Yes. It's a good question. I have been on record. I continue to be on record. I hate giving away programming. I hate the discounting that we do today and in part because it does cause you problems
in the back end. So when that 18 months or 24 months is up, your customers are going to see a significant price increase and they probably have seen a price increase maybe even in the mean time before the contract term is up and I just don't think that's a great customer experience. One of the things we're starting -- so, I think a lot of -- we spent a lot of time strategically on how we might wean ourself away from that. It is difficult when I can't make this up. I read where DirecTV was going to waste $700 worth of programming this month. We did this NFL season ticket and that was like $300 and then you got $26 off a month for 12 months and then you get an extra $5 if you signed up with a credit card which something was pretty incredible number. And so we have to be cognizant where our competition is in terms of what they give away. We have spent a lot of time trying to figure that out. But I think on average, you delay some of your churn during that 24 months and then you get a spike in the 24th month. It is just inevitable. So we haven't been in the discounting business as long as other people. So we probably that - it's something we got to worry about a year from now or two years from now as it the affects churn. I think we just keep an eye on it and then develop ways to go to customers and explain to them that we're a great everyday low price and you don't have to necessarily - if you buy a discounted program, your package - your costs are going to go up. And Tom, maybe you want to speak to this because you're a little closer to it than I am in terms of what we're seeing from the customers.
(A)Yes, following up to that, Ben, we do think we're going through a more sensible periods in terms of consumer shopping and flipping. And I will tell you from sitting on a lot of calls and being out in the channels, it seems like the customer is more focused on the overall value equation and particularly focused on what happens when the promotional period ends. So even if we have a 12 by 15 offer in the marketplace, they're very focused on what happens after that 12th month. And as Charlie said, as long as we maintain our relative cost structure and we will be the everyday low price leader, we think that serves us well in the long run.

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