DISH Network Corp (DISH) 2011 Q2 法說會逐字稿

My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the DISH Network Corporation Q2 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Mr. Jason Kiser, you may begin your conference.

Well, thanks for joining us. My name is Jason Kiser and I'm the Treasurer here at DISH Network, I'm joined today by Joe Clayton, our new CEO; Tom Cullen, Executive Vice President; Bernie Han, COO; Robert Olson, our CFO; Paul Orban, our Controller; and Stanton Dodge, our General Counsel.

Both Joe and Robert have some prepared remarks to start today and then we'll open it up for Q&A after that. But before we do that, we do need to do our Safe Harbor disclosures. So for that, we'll turn it over to Stanton.

Thank you, Jason, and good morning, everyone. Thank you for joining us. As you know, we invite media to participate in listen-only mode on the call and ask that you not identify participants or their firms in your reports. We also do not allow audio-taping and ask that you respect that.

All statements we make during this call that are not statements of historical fact 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 the front of our 10-Q.

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 reports and should not place undue reliance on any forward-looking statements. We assume no responsibility for updating any forward-looking statements. And with that out of the way, I'll turn it over to Joe Clayton.

Thanks, Stanton, and good morning. First of all, let me start by saying that it's great to be back in the satellite services business. Over the last 20 years, I've been extensively involved in the satellite TV, telecommunications, and satellite radio industries. And with Charlie Ergen's recent asset acquisitions, I believe that DISH will have a significant role in the evolving world of wireless communications. And this is the principal reason that I am here at DISH today.

Now, our earnings call today will follow a different format than in the past. I will open with some general comments. Then our CFO, Robert Olson, will walk you through the basic metrics for our business. Lastly, we'll open it up for your questions.

Over the last quarter, the press has been preoccupied with Charlie's recent acquisitions. DBSD spectrum, Hughes network, Blockbuster, and more recently, the TerreStar assets. Clearly, Charlie Ergen believes that these actions have been the best possible usage for the Company's available capital.

We could have chased low margin, pay-TV subscribers, purchased rights for additional programming, or even acquired complementary technology platforms. We have elected not to pursue these alternatives for now.

What we are doing is systematically developing the building blocks that will help shape the future of our Company and the wireless industry. While there are still some regulatory hurdles to navigate with our new spectrum assets, we like our position.

Then the obvious question is what's next? In that regard, we will be somewhat nebulous. We will keep our options open. We will not tip our hand, and we will continue to pursue the necessary assets to shape our long-term strategy.

This could include additional acquisitions, partnerships, alliances, or even parting with assets that might not prove to be strategic going forward. 1 of the reasons that Charlie and the Board of Directors brought me to DISH is the fact that I am an outsider. I can look objectively at all aspects of our current business and the potential of our future asset portfolio.

My first observation is that we have a solid core video business. But it has under-performed most recently. This, we plan to rectify in the third and fourth quarters of this year. With this perspective, let's review DISH's second-quarter commercial, operational, and financial results.

The best way that I can describe this quarter's performance is murky. It will be clouded by startup operations for Blockbuster, some accruals against possible litigation settlements, financial payments resulting from the previously announced TiVo settlement, and by the destructive discounting taking place in the video category. These extraordinary items will color our financial results.

Commercially, there is no question that pay-TV industry growth has slowed dramatically. The market is becoming increasingly saturated. Industry double-digit growth rates have passed, and there will be slower growth as the economy rebounds and new home formations grow.

In this competitive environment, we lost 135,000 subscribers in the second quarter compared to the previous quarter. We elected not to chase low-margin likely to churn customers.

We had a deliberate strategy to dial back on advertising and marketing dollars. Did we over-correct? Possibly. But that will not be the case as we move into the second half of the year. Yes, we have lost sales momentum. And one of my primary objectives will be to provide more focus on all of our commercial efforts.

We will build back our sales results with both short-term tactics and long-term strategy over the next few quarters. We know where we are going and we have an ambitious plan in place that will commercialize our technology, clearly reenergize our distribution channels, and enhance our branding.

We did have a major win in our sales group during the quarter, as was announced last week. We have reached agreement on a multi-year strategic partnership with Frontier Communications. Under the terms of the contract, we will offer DISH's digital TV service to Frontier's nearly 4 million customers in 27 states.

This is an important step for DISH as we continue to explore new opportunities and strengthen existing relationships within the telecommunications industry. This is indicative of the type of sales focus that we will have going forward, not only in the telecommunications channel, but also in the TVRO, national accounts, special markets, direct marketing partners, direct sales, and commercial sales distribution channels.

We'll also continue to expand our sales activity in our recently acquired Liberty Bell CLEC operation. As we used to say in the television business, stay tuned.

Operationally, we improved on most key measurements. Churn, customer service, installation, and retention. Plus, we are making a significant investment in our information technology. This will allow us to have future enhancements in our billing, order process, and customer service functions. For more of the financial details, here's our CFO, Robert Olson.

As Joe described, we saw mixed results in the second quarter. Clearly, our new activation results were disappointing. The industry is increasingly competitive and moving to large upfront discounts, rather than everyday low prices.

On the other hand, our subscriber churn of 1.67% was about where we expected and consistent with our historical second-quarter performance. Subscriber-related revenue grew by 5.4% year-over-year, driven by 6.9% increase in ARPU, but partially offset by subscriber reductions. The improvement in ARPU was primarily due to the pricing increase we took in February.

Total revenue of 15.3% year-over-year, as we had roughly 2 months of Blockbuster assets incorporated in our results.

Subscriber-related expenses increased by 4.9%, compared to the second quarter last year, driven by higher programming expenses and higher retention expenses.

The programming expense increase was due to contractual rate increases and was consistent with the trends we have seen during the last few quarters. Retention expenses increased off fairly low base in second quarter 2010, as we had constrained upgrade activity last year during our HD Free-for-Life rollout.

Total cost of sales increased year-over-year, as 2010 did not include Blockbuster's results. We've outlined our initial estimate for the fair value of Blockbuster assets in the 10-Q.

If you follow Blockbuster, you know we are able to purchase those assets at a far lower price than the previous book value on their balance sheet. As a result (inaudible) historical levels for Blockbuster cost of sales in the second quarter. This impact will diminish over time, although precisely quantifying the future change at this time is difficult, given that we are in the process of renegotiating most of Blockbuster's studio agreements.

While we had modest positive net income margin for the Blockbuster business in the second quarter, we still have a lot of work ahead of us on the domestic stores. We have improved the customer pricing, re-invigorated their marketing, increased store inventory, and as previously announced, accepted slightly more than 90% of the domestic store leases.

Total subscriber acquisition costs were down considerably year-over-year due to the lower activation levels. Subscriber cost per activation of $795, however, was up $52 versus second quarter last year.

Hardware costs were up year-over-year, driven by a higher percentage of MPEG-4 receiver installations and due to a buildup of inventory at our third-party retailers and installers. This was due to our weak sales in the quarter and should reverse during the next few quarters.

Administrative expenses were also impacted by the Blockbuster acquisition. G&A expenses for the DISH satellite business were largely consistent with recent trends. We did accrue $24 million of litigation expenses in the quarter associated with the court ruling on specific damages with respect to our litigation with ESPN.

Net income was up 30% versus second quarter last year. This improvement was driven primarily by the price increase in February and the lower activation levels. We generated $244 million of free cash flow in the quarter and $855 million through the first 6 months of this year. This performance was achieved despite a $290 million payment to TiVo, as part of the settlement agreement reached in May.

There were 3 significant changes on the balance sheet versus last quarter. Long-term debt increased by $2 billion due to the 6.75 notes we issued in May. We incorporated the assets from Blockbuster, with most notable impact on inventory, and we included the investment in DBSD in the non-current asset section.

While we have largely funded DBSD, the timing of the deal closing depends on FCC approval. Similarly, we expect to largely fund the TerreStar deal in third quarter, but the timing of final closing depends on FCC approval. Let me now turn it back to Joe before we start Q&A.

This was a transitional quarter. It will take some time to regain our momentum. Yet, we have a solid core business and we are investing in and exploring new business opportunities. Now, we'll open it up for your questions.

(Operator Instructions) Jeff Wlodarczak, Pivot Research Group.

I was hoping you could shed some more light on what gives you confidence from proved third quarter fourth quarter gross adds and are you already seeing improved trends so far this quarter?

I'll take that, Jeff. Obviously we're going to have to tweak some of the commercial offers going forward and we're now in the process of doing that. As I indicated in my preliminary statements, we'll focus the next couple of months and tactics, because that's about the only way that we can, modify the offers that we currently have in place. But by the time we turn the corner into the fourth quarter, we will have more strategic elements in place with a new advertising agency, with an enhanced consumer offers. So I would say the next 3 months is basically tactics of trying to capitalize on some areas where we think our competition might have some weaknesses. But as we go into the fourth quarter, we'll have more control of our own destiny with our own offers and with new re-branded advertising.

Thanks, and I just have 1 quick follow-up, did you all raise your upfront credit standards again during the quarter?

Jeff, this is Robert. Those credit standards move from quarter-to-quarter. There was no significant change this quarter, but we have been very focused on making sure that we get good quality subs in, and obviously you saw the churn result for second quarter, which was on top of a $5 price increase in February.

Okay. Thank you.

Doug Mitchelson, Deutsche Bank.

Just further for Mr. Clayton, usually when pay-TV companies re-accelerate growth there's a corollary hit to margins or ARPU or both. Is that what investors should expect as you start to reinvigorate the Company? Is there going to be an investment phase over the next few quarters or year?

I would like to say we're going to try to spend our money a little more smarter as we go forward. And a more focused area, as we try to move our customers up the food chain, more step-up selling, if you will. I don't think we've done as good a job as we should. I think that's reflective in some of our premium channel revenue, pay-per-view as well. So if we do this smartly, I think we can do it within budget and forced the customer to move up to better packages, and that's our focus with our new advertising and our new commercial offers.

I just wanted to make sure, as you sort of step in and review the metrics that historically drove marketing. Do you have, or is the Company going to have a little different return hurdle for new subscribers that will either be tighter or looser, do you think it should be in a different place than it was historically?

No, I don't think we should loosen up our credit standards. In fact, the exact opposite. I'm looking for a better class of customer, because they will give me -- they will buy the better packages and give me a higher ARPU. That's not in our plans.

And the last question, just to jump all. Was churn at all, I know which was a good number improved year-over-year and the best churn since 2003, but was it impacted at all by the record price increase last quarter? Is there potential that we could see further improvements in churn?

I was surprised that the number was so good, to be honest with you, after taking a fairly significant price increase. I think that bodes well as we go forward. But I will caution that by saying that the third quarter is normally the worst quarter for churn, followed by the second quarter. So I'll say I'm cautiously optimistic because I think we're doing the right things in retention and in terms of keeping our customers with us.

Great. Thank you very much.

Marci Ryvicker, Wells Fargo.

I have a couple questions on Blockbuster. The first is how much did Blockbuster contribute to EBITDA in the quarter?

Marci, this is Robert. Blockbuster basically contributed close to the, the net income line. There's very little depreciation, very little interest. So the net income that we reported in the segment income reporting was close to what the Blockbuster EBITDA was.

Okay, and I think it was Joe, you mentioned you're renegotiating the studio agreements. So do these negotiations allow for an all-you-can-eat type bundle or still more pay-per-view like what Blockbuster does currently?

Marci, this is Robert again. There are all kinds of different agreements that we're working on right now. And we've been working on this actually before we actually closed the Blockbuster deal. And that work continues. But this is obviously a very important part of the equation for the success of the Blockbuster store operations. Therefore, we want to get it right going forward.

Okay, and last question, I know you spent upwards of $300 million on the actual acquisition. There's been some concern that you could spend $1 billion incrementally in turning Blockbuster around. So any thoughts there?

I don't have any concerns about spending $1 billion, because we're not. But I will tell you in regards to the brand, and I'm an old brand guy, maybe some of you folks on Wall Street thinks that image is tarnished a bit. Maybe it is. But to main stream America, Blockbuster's all about movies and families and we think that plays well within our corporate assets.

And, Marci, just to correct 1 thing you said. We actually ended up spending about $233 million to buy Blockbuster. That was the net purchase price. And then on top of that, we acquired slightly north of $110 million of cash. So the, so the net impact was right around $120 million to Dish. So clearly, we purchased those assets at a very good price, and we're going to give a run at proving that. You should also note that we have a lot of flexibility with the store leases. We've negotiated kick-out clauses for more than half of the store leases, and we have most of the remaining on fairly short-term leases.

All right. Thank you so much.

Jason Bazinet, Citi.

I have just 2 quick questions for Mr. Clayton. Understand your comments about maybe overshooting in terms of dialing back the marketing spend, affecting the gross adds. But I guess my question is, was the decision to dial back at all, was that a tactical decision sort of based on where the competitive dynamics are now in the economy? Or is there something sort of strategic going on, where you're sort of looking at sort of the aggregate returns of a marginal sub and your likely view of where, pay-TV growth is going to go? And my second question is without tipping your hand regarding what's next in terms of the use of the assets that you've recently acquired, is there any sort of broad parameters you can give us in terms of what your expectation is whenever this goes live? In other words, is this 5-plus years, is it less than 5 years, is it 3 years? What sort of timeframe should the street be thinking about? Thank you.

All right. I'll answer the first 1 about dialing back on the advertising and marketing spend. I think it's a combination of the above. The economy and quite honestly, I don't think our message was as strong, and we elected to pull back on the dollars and focus them more in the second half of the year where we think we have greater growth potential. In terms of the assets that we acquired, I think it will depend on the particular asset. Obviously, we want to get moving quicker on Blockbuster, but in terms of the Spectrum, we haven't even gotten FCC approval on that as of yet. So that's going to take more time. So is it 1 year, 2 year, 3 years or 5 years? I'm not that smart. But the Spectrum assets I would think would take place over a longer-term than the Blockbuster asset.

Okay, thank you very much.

Ben Swinburne, Morgan Stanley.

Joe, how are you thinking about positioning Dish's product, the core product in the marketplace? For those of us who covered the Company for a long time, we tend to think of Dish as being more rural focused geographically, more value, price/value marketing message, using a lot of independent retailers. But you've improved the product on the technology side quite a bit. You've brought in Sling, now you've got the Blockbuster brand and some of the presence Blockbuster has on connected TVs, you're doing a lot with TV Everywhere.

How are you thinking about repositioning the Company from the consumer perspective to try to drive the top-line or is the Business now so mature and so competitive and maybe even irrational on the promotional side that it just makes sense to run this Company, the DISH Network Business just for cash flow and maintain your sub-base, but not really try to grow over time.

Ben, I'll try to take that. First of all, it's true that we have a strong customer base and you called them rural markets. I'll call them secondary and tertiary markets. I am rural, so I do understand what the term means. But there's nothing rural about Blockbuster. It's in mostly metro markets and a lot of suburbs, and actually that's going to help our penetration I think for Dish going forward.

Second question in terms of the message, we have a history here of having more of a financial message to the consumer, which is cheap, cheap, cheap. I'm not sure that's the right way to go, as you correctly pointed out, as we move to a more advanced technical platform with our products. I would prefer to move in a direction, and you'll see it in our upcoming advertising, more of an emotional focus, experience-based type of message to the buying public. And then the third question in terms of cash flow and trying to manage the Business to cash flow, well, if they needed someone to come in here and cut the price and take a reduction in work force and to maximize cash flow, they wouldn't need me. That is not what I do. I build businesses. I grow businesses, and that's, that's who I am. So that is not part of our strategy going forward. If it is, I hadn't been told that.

Thank you for the color, Joe.

Bryan Kraft, Evercore Partners.

I had 2 questions. 1 on Blockbuster, just wanted to understand what is your appetite to make upfront investments in content for a Blockbuster SVOD Service? In other words, would you be willing to get -- to enter into fixed cost contract licenses in order to build the subscriber base over, over time? And then just secondly, Joe, can you just talk a little bit about where you think Dish's competitive advantage, sustainable competitive advantage is going to come from going forward in the DBS business? Do you think it's better marketing and offers that you need, or do you think there's a lot of value that's already there, just not being realized? If you could comment on that, that would be great.

All right. I'm going to take the second 1 first, then I'm going turn it over to Tom Cullen, whose responsibility is Blockbuster.

Hey, Bryan. As you know, we've entered into SVOD contracts before on the Dish side, so it's not a foreign concept to us, but we'll look at it on a case-by-case basis with each studio. We have expanded the dedicated team on the Blockbuster digital side, and have invested resources in enhancing the digital platform, which I think is key to us in the long-term. But specific studio deals, not really ready to comment on.

Okay, and Bryan, I'm going to take the competitive advantage question, and we have had a lot of firsts at this Company. In the past, we were first with DVR, we were first with HD. Going forward, first with Sling. Just to use some examples, but I don't think we have capitalized on our advantages both in a message to the buying public and most certainly not from an advertising perspective. So technology will be 1 of the drivers as we go forward.

I think we could be much more focused, too, in our marketing and ad spend. Once again, I have some experience in this area. And let's face it, the Blockbuster acquisition, I believe, gives us a significant competitive advantage over any of our competitors that I'm aware of. I don't know the number of movies, but it's, it's a bunch, and I'm thinking in the thousands and thousands of area. So all of those I think will help improve our position in the marketplace.

Okay, thank you.

Stefan Anninger, Credit Suisse.

As you look out next year when you're not planning to take up price increases, could you talk about your optimism to see ARPU growth and how you'd drive ARPU growth without a price increase? And then secondly, you have shown very nice sub-related expense growth over the last several quarters, although this quarter we saw a bit of an uptick on a per subscriber basis. Is the uptick something that we should expect going forward? In other words, I think we were at about 6.5%-ish on a per subscriber base year-over-year. Is that the kind of growth rate we might look to see going forward? Thanks.

Okay. I'm going to talk about the optimism in terms of ARPU and turn it over to Robert for the specifics in terms of percentage. I do believe we can move our ARPU in a positive manner, not just through price increases. Of course that's the easiest 1, but as I mentioned earlier in my comments, through step-up selling. Our technology improvements should help us sell a better mix and with improved customer offers, that's programming packages, to step-up sell. So we might get them in the door with the low price, but it is our philosophy, selling philosophy, to move the customer up into better margins, more attractive pricings and margins. Robert?

Okay, Stefan, in addition to the sell-up that Joe mentioned, you should note that the price increase we took in February actually went into sort of effect from a revenue perspective on a weighted average basis in March. So for next year, we'll have 2 months of that price increase in the 2012 results. In addition to the sell-up that Joe mentioned.

On the sub-related expenses, as I have mentioned in previous calls, there are a few things in that category. 1 is programming expense, and that constitutes the majority of that expense. We also have variable costs to service the customer, and then retention expense. I mentioned in my prepared notes that last second quarter, we had abnormally low retention expense. And so on a year-over-year basis, in addition to the contractual price increases in our programming contracts, we had increased retention expense year-over-year.

Now, we continue to make good progress on our variable costs and we've talked about that in prior calls, how we are improving the process flow of our operations. Bernie Han and his team have done a lot of work in that area and we continue to see good cost performance in that area. So I look at all these things combined and we'll continue to see cost pressures in programming costs, but we expect to see additional improvements in our variable cost.

Great. Thanks. Could I ask just 1 quick follow-up on your plans with respect to wireless and I know that you're a bit reticent to discuss them. But we would have expected to see I think a license transfer request for the TerreStar assets at this point, at least based on our reading of the TerreStar purchase agreement. Is there any way you can give us a sense of timing as to when you might either file that document or what you may be thinking about in terms of a request?

Yes, we'll be filing the document. This is Tom. Within the next 2 weeks.

Okay. Thank you very much.

Michael McCormack, Nomura.

Just 2 quick ones. First, on the subscriber environment in the current quarter; obviously coming off the recent price increase, just trying to get a feel for what you have interpreted out there in the marketplace, whether or not that could have been a detriment as far as getting new subscribers in the door this quarter. Obviously pricing environment generally I think has been a little bit tougher this quarter. Heard that from several of the video providers. And then secondly, on the economics of the Frontier deal, I know you probably don't want to get too specific with that, but can you give us a sense for whether or not you're helping them on some of their promotions? I know they often offer a free year of TV. Or maybe just a quick comment generally about the economics versus a normal subscriber. Thanks.

I'm going to try to take a portion of the Frontier, since it was done basically before I got here. But I do have a vested interest, since I used to be CEO of Frontier, a former company. Obviously there are financial metrics and investments and subsidies as part of the agreement. As we market into Frontier's nearly 4 million customers. Now, the specifics of that, neither Maggie nor I would like to discuss with you today, but let's be safe in saying that it's a mutually beneficial to both companies and we expect a significant uptick in subscribers from this new relationship, as they -- not only in their legacy territories, but in the new markets that they recently acquired back in 2010. And tell me the first question again.

Yes, just trying to get a sense for the recent price increase and whether or not that had a detrimental impact on your gross add share in the quarter.

I really don't think it was the price increase. I think it was more of a function of the economy. Significant discounting in the industry. Most players, as you've aptly indicated, were down in the category, and in this environment, we pulled back on the spend. It's just that simple. And I think that was the smart thing to do. So I'll carry over some of those expenses that we -- or funds that we plan to spend in the second quarter and reallocate them to move into the third and fourth quarter. I think we have a saying in the south, you got to go hunting when the geese are flying, and I think they are going to be flying more in the second half than they were in the second quarter.

Yes, I think with churn relatively stable, I would be interested to get your thoughts on whether or not the over the top is playing a role or having a resurgence of any kind with this cord-cutting debate. It seems like with churn levels the way they were, you weren't really losing subs to alternative technologies.

Well, I think the only way I can address that Michael, is we really didn't have a lot to talk about. And that being said, why spend money and not being able to move the needle? So I pulled back. We've pulled back, and the third quarter I think we'll start to see some improvements, probably at the tail-end. But I expect to be fully ready to put this back on a growth trajectory in the fourth quarter. That's about all I can tell you.

Okay, great. Thanks so much.

I've only been here 50 days, Marko. I mean, give me a chance.

It's Mike. Thanks, though. I appreciate it.

Tuna Amobi, Standard & Poor's.

I have a few as well. So I know you won't talk about the economics of the Frontier deal, but 1 question I had in my mind was, given I believe Frontier has a fairly sizable number of DirecTV and FiOS subscribers, does this preclude you from potentially marketing to those folks and/or are there any kind of other limitations in terms of that agreement where if those customers are rolling off, that perhaps you guys could benefit from that?

Well, I think 1 of the key aspects of the relationship and the strategic partnership is not only what we provide from a programming standpoint and services standpoint at Dish, but also what our sister company, EchoStar, does in some of their IP-based products. I think that was a huge factor in us arriving at this relationship. That being said, obviously as customers roll off of these other technology platforms, we're going to aggressively solicit them for our Dish digital TV service.

Okay. That's interesting. So it seems like there's some EchoStar economics that was part of the overall consideration is what I understand. How many of these smaller telco resale deals do you have now? Is it 7 or a 12? How many?

Yes, it's primarily Frontier, Windstream, and TDS are the 3 primary partnerships that we have in the telco arena. I'll just comment back on Frontier. The agreement did incorporate some new, I would say creative promotional aspects that we'll do jointly. But the decision on how to target the customers within their territory primarily resides with Frontier and not with Dish.

Okay, that's helpful. Let me switch gears to another question. I thought it was very interesting, your collaboration with Charter and it's not often that satellite companies like you guys work with cable companies like Charter. So given the focus that a lot of cable operators now have a non-video subs, I guess the first question is how is that coming along? It wasn't clear to me how you guys actually get paid when you add a data or voice subscriber that presumably are subscribing to Charter video. So that's number 1. And number 2, is it something perhaps that you see kind of rolling out to some other cable operators, or are there markets or regions where this kind of cooperation would be off-limits?

This is Tom again. First of all, on the trial that we completed with Charter, our primary motivation is connectivity. We want our customers connected with broadband. We're indifferent to the underlying distribution plant. Obviously, we would never do this in any territory where we had a telco partner.

That being said, where there is connectivity, we want not only the customer to have connectivity, i.e., more broadband penetration, but also to connect our boxes. In the Charter case, there were no special economics. These are separately billed services that we jointly marketed. I think that Charter in some of the direct mail pieces included some additional offer to enhance or to entice the registration of services. But we're separately billing them.

We did put in place pretty strict process controls to avoid any flipping. And we've been monitoring it closely that there is an unusual churn in that area and it's worked so -- so far, it's worked well for both parties. Would we do it with others? We're open to that discussion. But, on a stand-alone basis, we are confident that our video service can compete head-to-head and we know consumers are going to pick broadband connectivity 1 way or the other.

That's very interesting. So you touched on the question of connected boxes. So I guess following on from your answer, do you -- where do you see -- what's your -- have you set any near-term targets on that? And do you have a business plan now and how you expect to pursue that beyond this kind of Charter collaboration or other collaborations? And last question on Blockbuster, just housekeeping, I know that last call, it appeared there were about 370, my understanding, profitable stores. And subsequent to the call, you guys are keeping the majority of those stores now. So do you expect that the -- the majority of those stores are going to be profitable, or do you intend to keep running some -- virtually most of those stores for other reasons beyond perhaps driving profits for each and every location? In other words, are there any strategic reasons why you need to maintain the majority of those stores, even when they might not be individually contributing on a store-by-store basis to your overall cash flow? Thank you.

Okay, Tuna, this is Tom again. I'll take both of them. First of all, connectivity of boxes via broadband is a very high priority inside the Company. We realize that going forward, the consumers will want their linear satellite delivered video services complimented with on-demand types of services that could be provided via that IP infrastructure. So, yes, we have set very aggressive internal targets. We haven't disclosed any external targets. But we're pleased with the clip that we're on in terms of adding connectivity. And I think I've said it on previous calls. Every install, every service call, every upgrade, we're looking for that opportunity. As -- so that's an independent initiative, whether that be, regardless of the customer's source of broadband.

As far as the Charter-type model, as I said, we're open to the discussion and we'll monitor it on a case-by-case basis. As for Blockbuster, since we closed on the acquisition, which was only really, we closed on April 26. So we only had about 60 days between that date and the end of the quarter. As Robert indicated earlier, we reviewed all contracts and leases and we terminated those that we didn't think gave us enough latitude and flexibility moving forward. The number of profitable stores, we're betting on success here. We've invested in the Company. We will continue to invest. We modified the studio agreements right out of the gates. We cut corporate overhead very significantly in the first few weeks.

By doing those 2 things, we were able to restock the stores. In early June, we began marketing the product. It was June 6 when the first marketing hit. We're encouraged by the early returns on foot traffic and transaction growth at the store level, but we still have a long ways to go. It's early in the game. We have several more promotions, and Dish synergistic opportunities that we're exploring and will implement in the third and fourth quarter. I should comment, for instance, that in a couple of dozen stores, we have trialed the sale of Dish services in those stores and we're encouraged by the results and we'll be expanding that in the coming next 2 weeks to many, many other stores to continue to look for opportunities to work together with the Blockbuster company.

Thank you.

James Ratcliffe, Barclays Capital.

3, if I could actually. First of all, could you just talk about to what degree the timing of the TiVo settlement affected your deployments or CapEx in the quarter? Secondly, regarding the litigation with Starz, or I guess and potentially with Disney, didn't see any mention in the Q. Is that because you don't believe it to be material, or is it too early stage to be in the Q? And third, could you just give us an idea, cash taxes have been dramatically below book taxes for the first half of this year. Last year sort of balanced out through the year. Should we expect that going forward, and is there a point where stimulus causes that to actually reverse? Thanks.

I'm going to change your order of questions just a little bit here, James. We'll have Stanton Dodge discuss the Starz situation first.

Sure, and you're correct. This is Stanton. We just did not view the case as material, so that's why it's not in the Q.

Right.

And then Robert will pick up the timing of the TiVo and the cash taxes implications.

Yes, James, TiVo didn't really impact our CapEx. It did impact our cash flow for the quarter, paid about $290 million. As you recall from last quarter, about $180 million of that is related to prior expense and about $100 million or so was related to prepayment. And that prepayment will be amortized over time. We -- but it didn't impact CapEx. Like I said, it just impacted free cash flow.

With regard to your question on cash taxes, you are correct that through the first half of the year, our cash taxes have been far lower than our book taxes, and that is primarily a result of the 100% bonus depreciation that Congress passed last September. We look for that to continue for at least 1 more quarter. It's hard to get perfect visibility right now in the fourth quarter, whether that will continue. But that clearly has been a benefit to our free cash flow in 2011.

And would you expect to see that to then reverse in '12 and thereafter? Where cash tax is being above book?

I don't think reverse in '12, because at least my information right now says we'll go back to 50% bonus depreciation in 2012. If that's the case, then it probably won't reverse in 2012. If we ever move back to sort of normal depreciation, in the year that that occurred, there would be some reversal.

Great, thank you.

(Operator Instructions) Craig Moffett, Bernstein.

Joe, welcome back to the satellite industry, it's good to work with you again. Let me ask you a question as you described yourself as an outsider. Coming in with that perspective, how do you view the need for a broadband pipe for DISH Network?

Well, I think it's extremely important to get the maximum benefits of the type of programming that we offer. Now, how that will be done, whether it's wireless or fiber or whatever technology means, I think it's extremely important to us.

Do you feel like you need to have 1 as a part of the bundle so to speak, or are you talking about it primarily as a way to deliver video programming?

Well, obviously, we're a video pay-TV Company, so video is our primary objective, as we go forward. But, we're also very interested in wireless broadband, for a lot of our secondary and tertiary customers throughout our markets. So it will take an increased emphasis, broadband in total with Dish as we move forward.

And is that how we should see the wireless strategy, in the context of broadband strategy?

Well, I think if the signal is sent wireless, whether it's video, audio, broadband, obviously we're interested in it, because that's what we're providing to our customers.

All right. Thank you, Joe.

Richard Greenfield, BTIG.

This is actually Walt Piecyk stepping in for Rich. You had mentioned that you're going to make the filing on TerreStar in a couple of weeks. What's your expectation of the closure -- when you're going to get the license transfer? And for that filing, do you expect to file any type of business plan asking for a waiver, or do you think the FCC will require that?

Walt, this is Tom. Obviously we will -- we're not going to discuss what we intend to put in the filing at this point, but it will be public when we file it. And I'm sorry, what was the first 1?

Timing.

Oh, the timing--

When you expect the license transfer.

Yes, I'm respectful of the FCC process. We'll just work through it with the FCC on their normal clock.

Okay, and then also, you had previously commented, saying that wireless might be more of a long-term strategy. I think there's been some speculation I think primarily kind of induced by comments by Sprint's CFO about a potential deal on October 7 involving you guys. Can you talk about I guess the potential for anything in the near-term that would I guess review, or I guess kind of reveal what your wireless strategies are as a possibility, or is this -- go ahead.

I wouldn't expect anything in the near term. I am not familiar with that particular comment. But, no, we've mapped out a number of options for the use of this Spectrum that we think will be complimentary to Dish in the long run and provide an attractive shareholder return. But there's nothing eminent.

Okay, and just the last question. I think the Qualcomm spectrum was kind of linked to the AT&T deal. If that transaction was blocked and AT&T was not able to buy that spectrum, it would clearly fit nicely with what you already have. Would there be interest on Dish's part on perhaps bidding on that spectrum if it was available?

I think that would be speculative at this point. But obviously we're on record of posing both of those AT&T transactions.

Great, thank you.

David Sharret, Barclays Capital.

I realize there's -- there are many different wireless options you're considering with respect from position. But as you think about financing them over long-term rate, do you think you can finance these opportunities, since they are organic, with just free cash flow, or do you think you'll need incremental capital above the expected TerreStar financing in the third quarter? And as you think about M&A as well longer-term, you currently have loan at leverage. Do you have any kind of constraints or targets in mind with where you kind of have an upper-bound of where you would take leverage to as you pursue different opportunities in wireless?

Yes, David, it's Jason. I would just say that we haven't put any leverage targets out there, nor do we have any in mind at this point. The free cash generation profile of the Company is robust, but hard to predict what could come up in the future. So I don't know how to tell you whether we would go back to market or not on that.

I mean, any constraints as far as maintaining your credit ratings? Would that be a constraint?

It would be something we would consider.

Okay, thank you.

There are no further questions at this time. I would turn the call back over to the presenters.

I want to thank everyone for calling in today. I know we have a little different format. It's our intent to provide you with as much information as possible, and I look forward to working with all of you as we go forward. Thanks again. Have a good day.

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