DISH Network Earnings Call Insights: Sprint Bid and Sub Related Expenses

DISH Network Corp (NASDAQ:DISH) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Sprint Bid

Doug Mitchelson – Deutsche Bank: A question for Charlie and Tom and then one for Joe. So we’ll start with Charlie and Tom. Is there anything you’ve learned subsequent to your Sprint bid announcement whether it’s on your offensive with investors and regulators or from discussions with Sprint or your bankers that’s been favorable or unfavorable relative to your initial view of the value of DISH-Sprint tie up?

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Charles W. Ergen – Chairman: I think that we haven’t been allowed to go and do due diligence, we haven’t started due diligence yet on Sprint itself. So most of the information we have is obviously peripheral to that. but everything we’ve seen is only makes us more confident and I think the biggest thing is SoftBank now has come in with more details about their synergies and bill plans and so forth and so on and there is lot of good ideas in what they are presenting. And a lot of synergies that are, most of the synergies, the vast majority of the synergies are talking about what also will be available to us. So and obviously they have had the benefit of more active diligence process. So I think that to SoftBank’s credit and to some degree our credit that there is a real value in Sprint that in a proper strategic fashion, whether that would be Softbank or with DISH that value-creation can be achieved and obviously that’s good for Sprint shareholders.

Doug Mitchelson – Deutsche Bank: Are you still comfortable with how your bid is positioned relative to theirs?

Charles W. Ergen – Chairman: Yes, very comfortable because I think our bid today is $7 and – a little over $7 based on cash and their bid is $6.38 based on the fact that he’s getting 45% of Company for $5.25 and then $7 for the other piece of it. So, I think the interesting part of that is that – ultimately, I think the way it really boils down, I mean, there’s a lot of sideshow stuff going on, obviously, in a big merger like this. But we believe in our synergies and we bid $7 because we believe in those synergies. We bid actually little more than $7 now depending on our stock price. They’ve now come up with more synergies, they actually come up with synergies that they are starting to articulate now, but they haven’t increased their bid based on those synergies. So, I would expect that if you – since we believe in our synergies we bid a higher price. If they believe in their synergies, I would expect that obviously they may top our bid. If they don’t believe in those synergies, obviously, they wouldn’t…

Doug Mitchelson – Deutsche Bank: A question for Joe. You’ve taken a more aggressive marketing posture than the Company has historically and I think you said you are very happy with how the Hopper is doing. Is there anything in the numbers that you see underneath the surface for subs brought in on these promotions over the past year that you can share that can help us understand how the Hopper investment is going to ultimately pay-off? For example, is the average ARPU higher versus previous promotions, is the average churn better versus previous promotions, average credit scores better? Is there something that we need to surface regarding the promotional subs brought in the last year that you can share with us?

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Joseph P. Clayton – President and CEO, DISH Network: I’m going to have Robert answer the first part, and then I want to comment on that as well Doug.

Robert Olson – EVP and CFO: Doug, this is Robert. I think Hopper has performed exactly as we expected. As you know the average monthly revenue we received from the Hopper customer is about $10 per month and you haven’t really seen that in the ARPU yet, because it’s still – the base is still growing. But over time, that’s going to be a significant contributor to our offerings. We’ve seen through the first year, churn about where we expected. It’s really kind of early to tell sort of the long-term benefits of the Hopper until you’ve had customers for a couple of years. So, right now, everything is right on track.

Joseph P. Clayton – President and CEO, DISH Network: Doug, this is Joe. Obviously, we want to sell a better mix here with Hopper and Hopper with Sling and credit scores are better. They buy more of our services and additional packages. I firmly believe churn will be lower as we move forward, and to some degree, it’s kind of like conundrum, given this particular point in time where a little bit of being a victim of our own success. We’re selling Hoppers probably at a faster take rate than we might have thought originally and it’s becoming a greater part of our sales mix. As Robert said earlier, the product cost reductions, which come with longer timing, greater volume have not really kicked in yet, but they will as we move into the second half the year as the volume grows even greater. So, we see this as a very positive sign to our business, but it does necessitate upfront spending and cost to generate this positive momentum…

Bernie Han – EVP and COO: This is Bernie. The reason Robert mentioned it will take a little while for us to see the churn benefit, the product being so new most of the customers who have the Hopper whether they are new or whether they were upgraded they are still in the commitment period and typically our churn is relatively low in the commitment period. In that period what we are seeing so far is that the Hopper churn has been a bit lower than our traditional equipment, but like I said it in a period where a churn is naturally pretty low already. When we look at things like surveys of customer satisfaction, the customers that do get the Hopper it definitely does skew quite a bit better than customers on our prior equipment.

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Sub Related Expenses

Benjamin Swinburne – Morgan Stanley: I wanted to ask maybe Robert about the sub related expenses on broadband I think they were $28 million in the quarter, just curious if those were all wholesale payments to EchoStar or if there were other expenses in there?

Robert Olson – EVP and CFO: As you obviously saw we acquired a lot of new subs in the first quarter. The bulk of our sub related expenses for broadband are indeed wholesale payments either to EchoStar or ViaSat or to CenturyLink. However we also had some variable costs associated with those broadband subscribers and so if you are trying to do the math on the broadband business. Those variable costs in the first few months of the subscribers life are typically higher they tend to call in more. We tend to solve more problems in the first few months than we do the longer tenure. So if you are doing the math on the gross margins of the broadband business. It is very difficult to do that in a business that’s growing so quickly. As we get towards the end of the year, you’ll be at a more of a steady state run rate on the gross margin. I think we’ve talked about this before that we see the broadband business in the long-term having roughly the same gross margins as the pay-TV business.

Joseph P. Clayton – President and CEO, DISH Network: Let me add to that. Just like we need upfront investments in our Hopper and Hopper with Sling products, dishNET, our broadband satellite business will require upfront investment for this new product introduction as well.

Benjamin Swinburne – Morgan Stanley: Make sense. If I could just a couple of follow-ups quickly, Charlie, one of the numbers in the presentations of SoftBank that I’d love to hear your thoughts on was the $6 billion spectrum cost build out over three years for — I think for your spectrum was in their slide deck, which was obviously a big number and part of their argument. Tell us if you had any thoughts on that piece? And then Joe, we heard from DIRECTV they are very happy with Genie. It sounds like Genie and Hopper are doing very well. How do you compare those two products in your mind and you think you guys are moving ahead of cable perhaps?

Joseph P. Clayton – President and CEO, DISH Network: Charlie, let me take the last one first then we’ll turn it back to you. The comparison of Hopper and Genie is probably a lot of smoke and mirrors at least from their standpoint because they do not have PrimeTime Anytime, they do not have AutoHop. They have a one terabit hard drive; Hopper has two terabit hard drive, so it’s double the storage capacity. They do not have DISH Anywhere, they do not have Hopper Transfers and they do not have the Hopper second-screen app. So, if you are taking account here, I would say just by the numbers standpoint, we are far superior in terms of features and customer experience. I’ll give Charlie you can take the second part of the question

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Charles W. Ergen – Chairman: Thanks. Then I just add to the Hopper. I mean I think every review that’s been done particularly the Hopper has gotten almost the highest rating you can get, five stars or four and a half stars in every review I’ve seen. I’ve seen a dozen of them and when compared to the Genie, it’s always come out ahead of the Genie. Having said that, I think DIRECTV does perhaps a better job from the marketing front. Obviously they’re able to run network commercials. We’re not able to do that, because networks won’t run our commercials due to AutoHop. So – but I think their marketing is quite good and they have traditionally done a really good job of marketing. So, I think we have lots – we have – we start with fundamental what you want, we have a great product and the satisfaction scores are not only better, they are pretty much off the chart versus our traditional product. But we got to do a better job of making sure people understand the product and experience the product you know from a marketing perspective and we’ve got a good team that’s committed to doing that. On the SoftBank proposal, that was the missing thing that I didn’t totally understand myself to be honest with you, because we’re bringing $10 billion of spectrum and we got no credit for that in their presentation. In fact we got a negative synergy of $6 billion to build it out. If that was the case, obviously what we would do is just sell the spectrum. We would look exactly like the SoftBank offer except we would come in with $10 billion of cash versus the $5 billion incremental cash they are coming in. So, that is a baseline if you didn’t think the spectrum had any value or you thought to build that cost was going to be expensive, you just sell the spectrum, now you’ve got $10 billion of cash or more probably. So, having said that, I do think that they bring up a good point which is ultimately the synergy and the value to Sprint is going to be a big, big, big portion and maybe the most important portion, just who would be able to build out the network more efficiently. And we think DISH wins on all counts there because we bring both low-band spectrum or 700 megahertz spectrum and we bring mid band spectrum which is adjacent to Sprint’s spectrum. So, it fits – its propagation characteristics are almost identical to that propagation characteristics of Sprint’s current and we do fit on the towers and we propagate the same amount. So from a network system design, right, if the analysis done in total I think you’ll find out that ultimately the build out for DISH, Sprint would be that we can add a lot of capacity on the same towers and propagate the same amount without having to use as much of the 2.5 Clearwire Spectrum which means we need less towers or we have more coverage. And secondarily one of the big problem Sprint has is in fact national coverage and we think that our low band spectrum in conjunction with their spectrum gives us some additional capacity to make the build out for coverage much more inexpensive. That ultimately will end up with our spectrum you are going to end up with much, much more than $10 billion of value because you are going to get the value of capacity and throughput and so forth and so on and then you are going to get additional CapEx savings of billions of dollars and then you are going to get ongoing OpEx savings and net-net that’s going to be a pretty big number. But I did think that was a slight hand to try to show that our spectrum was a actually a negative synergy of $6 billion. Worst case is that it would be positive of $10 billion and that’s if you sold it. You wouldn’t want to sell it, because it’d be in the hands of your competitor it would make them stronger. And the fact that they would pay $10 billion for it only means that it must have value to them and makes them stronger, so you wouldn’t want to do that, you want to have that asset in the company.