DISH Network Corp (DISH) 2011 Q4 法說會逐字稿

Editor-- Portions of this transcript marked (technical difficulty) indicate audio problems. The missing text will be supplied if a replay becomes available.

(technical difficulty - start) Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the DISH Network Corporation 2011 earnings conference call. All lines are placed on mute to prevent background noise. After the speakers remarks there will be a question and answer session. (Operator Instructions)

You may begin your conference.

Thank you, Nicole. Thank you for joining us.

My name is Jason Kiser and I'm the Treasure here at DISH Network. Joined by Charlie Ergen, our Chairman, Jeff CEO. Tom Cullen, Executive Vice-President, Bernie Han, COO, Robert Olson, our CFO, and Paul our controller, and Stanton Dodge, our general counsel.

Before we open it up for Q&A, we general D&O need to do our Safe Harbor disclosure so we will turn to Stan.

Thank you for joining us.

We invite media to participate in listen only mode on the call and ask not identify participates or firms in their reports and we don't allow audio taping and ask that you respect that all statements we make during the call are not statements of historical fact and constitute forward-looking statements which involve known and unknown risks. Uncertainties and other factors to cause other results to from historical results and future results expressed or implied by forward-looking statements. For a list of those factors refer to the front of our 10-K. All cautionary statements that we make during the call should be understood to be applicable. You should carefully consider the Ricks described in our reports. We assume no responsibility for updating any forward-looking statements.

And with that out of the way, I will turn it back to Jason.

Thank you. And I believe both Joe and Robert have prepared remarks they like to go through before we open up the lines for questions.

Thank you, Jason. Good morning.

Now last spoke to you all back in November. I sculsed the steps that we had taken to refocus our business. I also told you all that we expected to see improved financial and sales performance in the fourth quarter. This momentum would spring board us into the new year. Then we launch a host of new strategic initiatives to enhance our ongoing transformation. Well, I'm pleased to report that the fourth quarter was a positive quarter for both commercially and financially. And today I'm also going to briefly discuss our exciting new product and marketing programs that we announced last month at the Las Vegas Consumer Electronics Show.

The first let me provide you all with an update on our DBSD and TerreStar and spectrum assets. As you are aware we are working with the SEC to gain approval on our transfer and waiver rights, or requests so we can proceed in closing both transaction. We anticipate receiving a response from the FCC in the coming weeks. Until then we cannot comment on our specific plans. But I will say that we are anxious to move beyond the regulatory phase. And we want to optimize these wireless assets in order to drive a compelling customer offering. This is the way the American consumer is going. Wireless video, wireless voice and wireless Broadband. A little later, Charlie can also speak to these assets when the question arises. (technical difficulty - end)

Now let's spend a minute updating you all on our Blockbuster segment. For the third straight quarter, the overall business was break even. For the third quarter, the overall business came in very close to where we'd expect it. And we have been very clear from the beginning that we would take action when necessary. As a result, the first quarter, we will close roughly 500 domestic stores for a variety of reasons, such as under performance, footprint size or lack of landlord flexibility. The vast majority of these stores have flexible termination provisions. Now our goal is to reach a steady state store count, so that we can leverage with our current pay TV business and our future wireless enterprise, similar to the way that we've incorporated Blockbuster @ Homes, by mail and streaming services into our pay TV business.

Now let's take a look at the current pay TV market environment. When the economy changes, the consumer changes, technology changes, and the competition changes. Guess what? You better change. There is no question that the significant shifts are taking place in the pay TV industry today. The market is most certainly approaching a saturation point. It will still experience single digit growth as the economy rebounds and new home formations restart. And within this mature environment, there will be some growth segments, like the Hispanic market and the consumer B-to-B, or business market. These are two of the categories that will receive a much greater business focus from us as we move into 2012.

We've also spent the last six months re-tooling and re-energizing our core pay TV business. This includes launching new products, new promotions, a new brand image focused on variety, innovation and value, new corporate partnerships, new marketing communications, including a new website and new national advertising, and even new corporate mascots. Again, it is no secret that the pay TV industry has been too focused on price. It is being driven today by aggressive new customer discounting, at the risk of alienating existing customers. And our current products have had consumer-friendly names, like our own ViP, 722k.

Going forward, we want our DISH products to be perceived more like the mobile phone industry, with names like the RAZR, the iPhone and the Droid. So we've introduced new corporate kangaroo mascots, Hopper and Joey, to symbolize a new era for DISH. They give a personality and an attitude to the product itself. The revolutionary new Hopper is the satellite industry's smallest, energy efficient, and feature laden HD whole home DVR. Hopper's side kick is the Joey, a tiny, lightweight, and easy-to-hide companion for multiple room viewing. Our Hopper HD DVR solution lets the customer watch TV shows and movies in up to four different rooms at the same time, record as many as six HD programs at once; and it is equipped with the fastest and simplest user interface in the video industry today.

And to further differentiate our new product and technical platform from our competitors, we will bring more music, more movies, and more magic to the American public. First, in terms of music. Hopper will offer 73 channels of Sirius XM commercial-free music, including nine new Latino stations. And because we are a visual company, the album cover of the appropriate song will also appear on the screen. Secondly, more movies. The Hopper also possesses a 2-terabyte hard drive, stores up to 2,000 hours of sports and entertainment content, the industry's largest video library. And lastly, the magic. With just one click, the Hopper can automatically record every prime time show in high definition, ABC, CBS, Fox, and NBC, for eight consecutive days. We call this unique feature PrimeTime Anytime, and we are confident that it will capture the minds and imagination of the buying public.

Now another thing about Hopper magic is its ability to offer On Demand content for customers with limited or no internet access. We call this capability DISH Unplugged, and it delivers hundreds of the most popular movies and TV shows via satellite. More music, more movies, and more magic, all product attributes that the cable industry and DIRECTV cannot match.

You know, DISH has always had a history of technical innovation, but we were reluctant to tell anybody about it. That will change going forward with very focused promotional and advertising activities. The centerpiece of our first quarter marketing campaign will be our Blockbuster @ Home promotion. This is basically our original Blockbuster Movie Pass announced last fall, but now enhanced with an additional 6,000 stream family and kid shows. A large number of these titles address the Hispanic market, thanks to a new programming agreement with Univision.

Our Sling-enabled TV Everywhere product is another DISH first, and this has been under publicized. We've enhanced this capability to allow subscribers to watch DISH on-line content via tablets and other mobile devices. And to ensure that potential customers have the ability to sample our compelling content, we've introduced DISH Test Drive, which lets consumers view video on their tablet, PC or smartphone at no charge for 24 hours. And finally, our Hopper launch will be supported by a product-focused national advertising campaign beginning March 15. So, as we used to say in the TV business, stay tuned.

So we've basically revamped our pay TV and commercial direction; and going forward, we want to communicate to the American public an image that represents family, fun and wholesome entertainment. Now one last product announcement at CES was our new broadband satellite partnership with ViaSat. We've just started offering broadband satellite bundled with our own DISH video services. This will make available download speeds of up to 12-megabits to millions of customers in rural America.

Now let's move on to the highlights of the fourth quarter. We gained 22,000 subscribers in the fourth quarter compared to the third quarter, both from increased activations and improved churn. We ended 2011 with a total net loss for the year of 166,000 subscribers; but more importantly, we generated positive sales momentum in the back half of the year. An additional plus, churn came in at 1.54% for the fourth quarter and 1.63% for the full year. With our price freeze on core programming packages this year, the stage is also set for a good churn number in 2012. Originally -- operationally, we continue to make improvements in customer service, installation and retention. Plus, we are making a significant investment in our information technology. For example, we expect to launch our new billing system in late March.

In terms of financial performance, net income increased year-over-year in both the fourth quarter and for the full year 2011. Cash flow was also significantly higher year-over-year, and Robert will give you more detail in a few minutes.

Now looking forward into 2012, we will focus on providing the best product and value in the industry. We will also accelerate our operational initiatives to increase our number of internet connected customers, and to increase overall levels of customer satisfaction. As I previously stated, we had a strong year in terms of net income. In 2012, we will not have the benefit of a price increase to offset higher programming costs; however, with our new product and marketing plans in place, we are striving to maintain our net income level.

Now to give you some additional highlights into our fourth quarter financial results, here is our CFO, Robert Olson.

Thank you.

As Joe described, our fourth quarter results were generally in line with expectations. While most metrics improved, we still have a lot of work ahead of us. We were pleased with our churn rate of 1.54% for the fourth quarter and 1.63% for the full year, which indicates our everyday value message is starting to resonate with our customers.

Subscriber-related revenue grew by 3.4% in 2011 compared to 2010, and increased by 1.7% year-over-year in the fourth quarter. ARPU was up 3.5% year-over-year in the fourth quarter and increased by $0.31 relative to the third quarter. As discussed in our last call, pay-per-view revenue and ad sales revenue typically improve sequentially in the fourth quarter. Total company revenue increased by 13.3% year-over-year in the fourth quarter, and by 11.1% comparing the full year 2011 to 2010. The revenue increase was largely driven by the incorporation of Blockbuster into our results and our pay TV price increase in early 2011.

Subscriber-related expenses increased by 2.5% in 2011 versus 2010, and by 1% year-over-year in the fourth quarter. We continue to work on driving down our variable cost through process improvements in operations. These variable cost reductions were offset by higher programming expenses. The programming expense increase was due to contractual rate increases and was consistent with the trends we have seen during the last few years.

Total cost of sales increased year-over-year, as 2010 did not include Blockbuster's results. As Joe mentioned, we are closing roughly 500 Blockbuster stores in the first quarter. We analyzed profitability at the store level and these stores were not able to reach acceptable levels of performance. We expect the shut down costs associated with these store closures to be minimal. As we have discussed before, we were able to purchase the Blockbuster asset at a far lower price than their previous book value. As a result, we saw lower than historical levels for Blockbuster cost of sales in 2011. This impact will diminish over time, as Blockbuster's inventory is replenished with new content; so we still have a lot of work ahead of us to improve the retail stores. Our focus is to keep the business near break even while we test new marketing ideas, both integrated with the pay TV business and stand alone.

Our SAC for the year was $771, a slight improvement versus 2010 due to a higher percentage of redeployed receivers, which was driven by an increased mix of MPEG-4 receivers in our installed base. SAC in the fourth quarter was $778, a significant improvement year-over-year, as last year's number was distorted by the impact of programming rate disputes on our new activations level. Administrative expenses were also impacted by the Blockbuster acquisition. G&A expenses for the DISH pay TV business were largely consistent with recent trends.

Net income was up almost 54% for the full year, and increased 24% in the fourth quarter on a year-over-year basis. This improvement was driven by the pay TV price increase in February, lower activation levels and lower litigation accruals, partially offset by increased interest expense this year due to higher debt levels.

Our effective tax rate in the fourth quarter was about four points lower than the run rate, driven partly by a true-up on state tax rates, based on our recent filings. Going forward, we expect our effective tax rate to be in the 37% to 38% range, similar to our full-year height.

We generated $398 million of free cash flow in the quarter, and almost $1.8 billion for the year. Improved year-over-year net income less capital spending, and favorable cash versus book taxes due to bonus depreciation, have all contributed to this performance.

There were two major changes on the balance sheet versus last quarter. First, on October 3, we redeemed the remaining $915 million principle balance on our 6.375% senior notes. Second, we paid out $893 million of cash on December 1 to support our $2 per share dividend. While we have largely funded DBSD and TerreStar, the timing of the deal's closing depends on FCC approval. These acquisitions will be consolidated as of their closing dates.

Let me now turn it back to Joe before we start Q&A.

Thanks, Robert.

A new year, a new DISH, new product, new promotions and new opportunities. After eight months here at DISH, we are about where I expected us to be. In other words, we are on schedule in terms of our transformation plan. Plus, we've just passed the 14 million subscriber mark. We have a solid plan in place and we are working hard every day to accomplish it.

Phase One of our transformation plan is now complete. We have identified the areas for improvement. We have set specific objectives, and these include increased net activations, lower churn, improved customer satisfaction, decrease customer contact rate, increase broadband connectivity, grow market share, and improve ARPU. And lastly, we've developed a detailed game plan or strategy. In fact, we've already prioritized and launched key improvement initiatives.

And now, Phase 2 begins. And that is all about execution. As we move forward, we will fix the things that need further improvement, implement additional plans and, where required, modify the game plan accordingly. With hard work, an improved economy, and successful implementation of our plan, we should be hitting on all cylinders by year end.

Thanks for listening and putting up with my cold today. Now we will open it up for any questions.

(Operator Instructions)

Your first question comes from the line of Stefan Anninger from Credit Suisse. Your line is open.

Good morning. Thanks for taking my question. Could you discuss your outlook for 2012 ARPU growth? And what are the things you are doing to help boost that growth, given the lack of a price increase in 2012? And perhaps specifically, you could talk about the roll-off of the Starz promotion and how you have gone about trying to moving those subs perhaps into a premium package and how that may be going? Thank you.

Stefan, this is Robert.

We talked a little bit about this on our last call, that we are very focused on sell-up opportunities. Premiums are an important focus for us. We have been working very hard on that. And I think that as the year progresses, we should see some slight improvement in ARPU as a result of that. We had some, as I mentioned in my speaking notes, we had some favorable benefit in the fourth quarter as a result of normal seasonality. So I would not look for that improvement to be really material until the second quarter.

Thank you. Could I ask one quick follow-up question? Could you comment just briefly on the [Voom] litigation and the recent developments there, and how you think about the financial risk associated with that litigation?

This is Stanton.

We are obviously disappointed with the ruling from the appeals court. And as we disclosed in our K, we intend to and have filed briefing to actually appeal that to the next highest level court. And we hope that they will take that up on an interim basis; and if not, we will certainly pursue that after the trial.

Thank you very much.

Your next question comes from the line of Marci Ryvicker from Wells Fargo. Your line is open.

Thanks. Two questions. Joe and Robert, you pointed out churn in the quarter, which was significantly better than expected. Can you give some color on what drove this? Is it Blockbuster? Is it better customer service? Is it anything specific?

And then the second question, it looks like you are closing the gap in churn with DIRECTV, based on the fourth quarter. So turning to ARPU, do you think that over time the new products you are offering, the Hopper, et cetera, will allow you to close the gap in ARPU with DIRECTV? And if so, how long do you think it will take for this to happen? Thanks.

Well, I think we are doing a much better job on retention. And it started about the time the Sunday Ticket rolled off, back in the fall. And we work hard every day to work on our retention levels and I'm very pleased with the direction that it's been heading in. And we feel good about moving into 2012 where we won't take a price increase, so that should give us a little bump.

In terms of ARPU, I think we will narrow the gap as we sell a better mix of product hardware and a better mix of programming. How fast that gap will narrow and to what degree still remains to be seen.

Thank you.

Your next question comes from the line of Doug Mitchelson from Deutsche Bank. Your line is open.

Thank you so much. Couple things. First, I just want to make sure I had this right. You said the goal was to strive to maintain net income levels in 2012 from 2011, is that right?

Yes.

Okay. So there was $1.5 billion of net income in 2011, so the goal is to hit that.

Doug, Doug, this is Robert,. Let me clarify that.

Obviously, we are not going to overcome the favorable litigation accrual reversal that occurred in 2011. And then second -- that was roughly $300 million at the operating line, $200 million at the net.

And then second, we are very focused on, as Joe mentioned in his speaking notes, about the pay TV business maintaining roughly flat net income. We have made investments in the spectrum business. As we consolidate that business, we will incur some depreciation and administrative expenses associated with that business. Once that business is -- once the approval for that business is obtained, we will break that business line out separately.

All right, great. That's helpful. I'm not used to getting guidance from DISH, so it takes a little getting used to.

On the DVR prices, I'm curious, with the commitment to customers to not raise your programming prices, that still should leave you some flexibility to raise equipment prices, I would think. And your DVR pricing is low relative to a lot of your competitors. Is there any thoughts around the potential for raising equipment prices this year? Is that what helps you get to flattish net income for the base business?

Doug, this is Robert again.

You know, obviously, we are looking at all of the aspects of our business. We have no plans right now for a equipment price increase. However, we will look at that throughout the year. We are fairly confident in our ability, as Joe mentioned, to sell up to higher packages and to more premiums.

Right. And then lastly, I'm not sure what you are willing to say on wireless spectrum, but there is some concern that it could take a while to get approvals. Just sort of given the nature of these particular waivers, sort of the unusual circumstances around the potential for windfall profits, is there any sort of thoughts around timing as is a strategy around the wireless spectrum change at all, since you first started pursuing acquiring it? Thanks.

This is Charlie.

I guess I will start you better with a big picture look at that. One is we obviously, the last four years, have been putting things in place to get in the wireless industry; and we think that's a key and even a transformative strategy for us. But we can only enter that business -- I look at it and say, do I have an 80% chance of success -- to be successful? And if so, you go in full bore and give it your best effort.

When we started DISH Network, we thought, if we could get past the launch, get the satellite up, that we had an 80% chance of being successful. A lot of people didn't think it was that high, but that's kind of where we were. And so that you always have that point -- the hardest point of a new initiative is usually getting started. For us in the satellite business, it really was that Chinese launch that had to be successful. We had 20 minutes of that launch. We had no control over it. The rocket was either going to be successful or not. And if it's not successful, we probably wouldn't have been able to enter the business, because the time to get another satellite built and another launch would have been too great.

We are in a very similar situation as we enter the wireless business, where I think we have an 80% chance or better of being very successful in that business today, with the spectrum that we have accumulated and with the leap frog in technology to LTE, which is a major leap frog from where it is today, very similar to where MPEG-2 was a major leap frog in analog video in DBS. But we essentially have exactly the same problem as the Chinese launch, in that we are in front of the FCC for a much-needed waiver, which has been granted before to other companies, so it's not a new precedent. In fact, waivers been granted in many, many different things, because it just has to be in the public interest. That waiver is a little bit like the Chinese rocket, in the sense that the FCC really has their hand on the button. And that waiver is either going to be granted, or they will push the destruct button for our business plan -- would be just like a Chinese launch failure. In other words, they could not rule on our waiver at all, which will be the effect of killing it, or they could go to a rule making, which would be the effect of a long delay before we could do anything.

And the reason the delay is so important is that our chip sets and our infrastructure is at a different frequency that's not used in the United States today. So our lead time to build those products and invest in those products -- we had to start from scratch. That's a major hurdle to overcome. And you really can't start that process until you kind of have -- know the rules of the game for you entering the market. So we need a waiver not to have to put a satellite link in our handsets. Otherwise, it wouldn't be competitive.

So we are waiting to see if our launch is successful. We think that where it stands with the FCC today is that their self-imposed 180-day window from the time we filed our combined application is up on March 12. We would expect that -- what we've asked for is a decision on our waiver request and our merger request. We would hope that they will keep those two together and make a decision on those two things. There has -- the standard for our waiver, again, would be, do we serve the public interest? And as opposed to maybe some people in the past, we have -- it's a fairly supportive rule making. We have gone through the full rule making process that maybe others haven't in the past. The comments -- there is no material opposition, even from our competitors, to our getting granted the waiver. The GPS industry has come out in favor that we do -- not in favor, but the GPS industry has supported our initiative that we do not interfere in the GPS range with our frequencies. In fact, we have very few interference issues. And we have a situation where there is 40 megahertz of spectrum that could be put into place. And every day that we go by is a delay; and whoever uses that spectrum, it's a delay in the use of that spectrum, where we have, obviously, a spectrum crunch.

So we are just awaiting to see whether we can get into the business. If by chance, we were not granted a waiver, or it was kicked down the road without a decision through a rule making, then I think that we will have to consider the risk. And at this point, I would say that we probably don't have a chance of success, an 80% chance of success in the business, and we'd have to look at other alternatives of what to do with the business in the spectrum, which would be unfortunate. Additionally, we probably -- we may have to write down some of the DBSD TerreStar assets, because obviously to the extent we couldn't use them, they probably wouldn't be worth the $3 billion or so that we paid for them.

That's where it stands. It's not many companies. Washington picks winners and losers all the time. We aren't the first company that's faced this proposition. The reason we made the investment and have taken the risk is really because of what the President of the United States has said and what the FCC has said, where the President said, we have a spectrum crunch. Give many speeches on it, as has the FCC. He is concerned that companies are hoarding cash and not making investment. And we have gone out and spent $4 billion for spectrum, and $3 billion on spectrum and S-band, even before we can get approval. So we are a company that has not hoarded the cash and has gone and invested that to grow the business.

And of course, the administration has talked about needed competition in the wireless business and innovation in the wireless business, and I think we have a history of being disruptive in the video business. I think we'd be disruptive in the wireless business. So that gives us some degree of confidence we would meet the standard to be in the public interest to grant the waiver. And if so, then we are prepared to enter the business and go full force to make a business out of it. And I think it would transform not only our company, but I think it would transform the way that people use wireless today in the United States. It's frustrating for me to be in New York City and my phone not work. There is really no reason that the phone can't work. It's just an investment to make it work. And there are many features I see in hand sets throughout the world where the wireless innovation is greater than the United States, and I think that much of that could be brought back here.

We are very excited about the business. We have everything in place to enter the business, and we will wait for the next couple of weeks and see whether we will be in or out.

Great. Thank you very much.

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

Thank you. Good morning. I wanted to ask about the outlook for '12, since you gave some comments early on. Joe, are you thinking about trying to grow gross adds in 2012, or do you see churn as the big opportunity, as we saw in the fourth quarter, to help drive not only market share growth, which is one of the bullets you laid out, but also drive that net income number you guys are targeting as well? And as part of that, do you see yourself look to unwind some of the discounting? You made some really interesting comments about the alienation of the existing customer base by giving big discounts to new customers, and I think the satellite industry has been offering somewhere around $30 a month off for 12 months for probably over a year now. Is that something you think you can unwind, or will unwind, or try to unwind this year to help on the ARPU side?

One, we're looking at growing gross adds. And two, we're looking at improving churn, which would give us a double bubble. And three, yes, we are looking at trying to simplify our pricing scheme, if you will, to avoid the $31 discounting that you see in the second year of some of our competitors' promotions.

If I could ask one follow-up on the broadband side. I don't know if you would be willing to size up how many customers you have connected to the internet today and as to what your goal is on the set top box front? And on the Via Sat satellite broadband deal, is that a product you see as competitive to wire line broadband? You mentioned it will help you in the rural markets. But 12 megabits is a decent speed; I didn't know if that was something you could use to go to market in wire line territories. I know you have an agreement with Charter to, at least in some markets, bundle cable broadband with DISH network TV. Curious if you could spend a minute on that as well.

One, I do believe that it is a great alternative to the 8 million to 10 million rural households that's only alternative is slow speed DSL. I think it's going to play very fine there. In terms of going forward, I think it will actually improve its capabilities, in terms of capacity and possibly even speed. But it's not going to be as good as fiber to the curb.

Thank you.

Your next question comes from the line of Mike McCormack from Nomura Securities. Your line is open.

Hello, guys. Good morning. This is Mike Liddell in for Mike. I just have two questions. Can you provide any color on the trends and the equipment subsidies both in 4Q and how that will adjust with the new Hopper and Joey boxes? And then secondly, can you provide any color on the impact of the Charterco marketing deal and how that influenced gross adds in the quarter?

Mike, I think that with the Hopper, obviously it really depends on what the take rate for that new receiver will be. However, the Hopper has comparable capital expense relative to our current DVRs and it will generate comparable results.

And at this time, Collin, as far as the Charter relationship, obviously neither company is disclosing specific subscriber numbers, but we continue to be encouraged with the progress. We do think that we are kind of operating here in an era here of surprising alliances, as we have seen over the last couple of months. And many people thought this was surprising when we did it last year. But they, I think, are genuine in their focus that they are increasingly a broadband company more than a video company. We obviously run some risk at the termination or the expiration of the initial contract. But our job is to make sure the customer understands what a damn good video experience we deliver. And then when they are forced with that next opportunity to leave, they'll be convinced to stay with us and with Charter's broadband.

This is Charlie.

Just a couple of points that Joe hasn't made. In the Hopper, there's two possibilities there. When you go to multi-room HDTV home, our SAC is actually less to do that through a Hopper, because it can do every TV set in the home in HD, whereas the products we have today don't do that. They're one HD and one SD. In a multi-room house, our SAC would actually go down from where it is today. The multi-room DVR is a one-time DVR fee, but it's $10 instead of the normal $7, so there's probably a little bit of -- to the extent that the Hopper is successful, there is a little bit of an ARPU potential there as well. We actually have some opportunity on the SAC side to improve it as we get into multi- HDTV households, and also on the ARPU side. Of course, it depends of the success of the Hopper.

Great, guys. Thanks for the color. Just one quick follow-up. When does the deal with Charter expire? Is that a trial one-year deal, or is that multi-year?

It was set as a one-year deal with ongoing renewals, and that's where we are at now.

Got it. Thank you very much, guys.

Your next question comes from the line of Tuna Amobi from Standard & Poor's. Your line is open.

Thank you so much. I have a few questions as well. First, I'm trying to clarify the internet connected subs. I know there was an earlier question on that, and I wasn't sure if you provided any targets in terms of the connection of internet subscribers this year, and potentially how do you reconcile that with the DISH Unplugged product that you mentioned, which presumably some of that is being targeted to non-internet subs. So any color on how you balance that would be helpful, especially in a given market.

Well, we do have specific targets, but we aren't going to get -- let's just start with that, because we don't give guidance. Of course, DISH Unplugged, there will not be targets on that either, because that's more of a market driven situation. So this question is not helping you. My answer is not helping you at all, even if you could hear me.

Okay. That's fine. Let me move on to another question then. With regard to Blockbuster, so you have been around, operating around break even now for the past nine months. I'm trying to get a sense of how much tolerance do you have for that business in terms of potential losses that you can tolerate, granted that you talk about how you are using it to leverage several other areas of your paid TV business. My question is, do you perhaps look at that business in isolation from a profit center perspective, or are you willing to kind of continue to maybe stomach accelerated losses as long as you view the benefits on the paid TV side to justify those losses? Any color on that would be helpful.

Hello, Tuna. It's Tom.

Yes, we do look at it as a separate business. And even though there is benefit accruing to the DISH side through the joint efforts, we look at Blockbuster separately and we have low tolerance for losses going forward. That's why we are watching it very closely, made the changes that we have made. Along with store closures, of course, comes reduction in overhead that would be more appropriately sized with a smaller store base. Mike Kelly and his team are working this day and night and I think coming up with some creative ideas how we can improve the remaining store traffic in revenue. It's a work in progress, and we will keep a very close eye on it. So our tolerance, to your core question, is very low.

Okay. And with regard to the spectrum relocation deal with Sprint, it's my understanding you paid about $114 million in Q4. So I'm just trying to clarify if that payment was expense, or if there is a potential club back of some of that amount if the waiver is not granted or the regulatory process doesn't go through, will be helpful.

So, Tuna, this is Robert.

That payment was classified under other non current assets. We view that as integral to the spectrum purchase. And so we evaluate that along with the amounts we spent on TerreStar and DVSD.

What does that mean? It hasn't been expensed.

Hasn't been expensed.

But to your second question, there is no claw back. We view it as another demonstration of what steps we have taken that do serve the public interest to bring more spectrum to the market sooner. So by clearing up that multiple year issue that was hanging over the S-band, we think that deserves consideration as well.

This is Charlie.

My experience is I do think that government and businesses have to work together. And I think a lot of CEOs take a different approach. I always spent a lot of time trying to work with government, rather than against it. And I think that we have taken some calculated risk, and Sprint payment being one of them, which obviously would be a waste of money if we can't get into the business. It also was an obstacle for -- it was a legitimate claim by Sprint, A, and something that other people have committed to, and an obstacle for us to get approval. It made sense for us to take care of that, both from a regulatory point of view and also from a -- to clear the deck to make it in the public interest. That's a standard that -- in the current environment with some of the criticism that the Commission has gotten from the LightSquared side from Congress, which just -- it would obviously make somebody more cautious to going forward. No matter how unwarranted that criticism might be, when you try to do the right thing, sometimes you get criticism. You just tend to be more cautious. And that's a human nature kind of thing, and I think we just put everything in place that we can to make sure that that doesn't happen.

Okay. That's help. And lastly for Charlie. You talk about 80% chance of success as your hurdle rate. As you think about the past couple of months what is happening in the wireless environment, whether it's LightSquared or AT&T T-Mobile rejection and whatnot, how do you see your chances of success been affected by the events of recent months, and how does that perhaps affect your plans in terms of possible partnerships or other route that you might go in the wireless? Thank you.

Well, I think that's a good question. I think it's one of the reasons timing is so important. I think that the landscape now that the deck has been reshuffled, obviously with the rejection of the AT&T T-Mobile merger, and obviously with LightSquared not at this point having overcome their interference issues. Obviously, the United States is in even a worse position now from a spectrum crunch perspective, because it's pretty clear that the LightSquared 40, 50 megahertz isn't going to come into use any time soon.

We think that that is a positive for where we are trying to go, and a large positive. One is, we are a company that can relatively immediately work on the spectrum crunch that's been exasperated. And two, because it does open up opportunity for partnerships in a variety of way. And obviously, we are prepared to go it alone in the business, just like we did in DBS. Because we begged people to build satellites for us and nobody would, so we had to do it ourself. Obviously, there is partnership relationships that can make a lot of sense for us. Could be a simple as something like network sharing, where Sprint has now lost LightSquared as a tenant, at least for the near term. We just saw this morning where T-Mobile is going to build out some more of their network. That could make some sense. There is obviously some other players that there could be partnerships, and they could be any variety of shape, and that would potentially be a way to enter the marketplace sooner and reduce risk. And obviously, as rational business people, w would look at all those things. But you to have be in the game to be able to do that. And as I said, we aren't in the game right now.

Thanks a lot.

Your next question comes from the line of Craig Moffett from Bernstein. Your line is open.

Hello. Good morning. Charlie, you've talked in the past about the return on new customer acquisition and how you think about the promotional subsidies or the promotional costs or free programming flowing into that. Can you update us kind of how your thinking has evolved, whether the level of gross adds you are getting today is a function of selection for customers that you think you can earn a good return on? Or is it, as you project forward bigger gross adds, is it because you think you will do better in the segments you are already targeting?

I look at what it takes to give a customer, and I add the opportunity cost in my SAC. I don't look at us really having a $771 SAC. I look at us having a SAC that is greater than that because of the free programming that we give away, that we otherwise don't get a margin on, right? And I look at that total cost and then look at how long the customer -- look at the return on investment of the customer. That's the first step.

The second step I look at, that I have been looking at, is what is our ability long-term as a customer -- as a company to fight the inevitable competition that's going to come from over the top, and broadband integration into video -- and even if we weren't giving discounts, can we hold on to that customer as we project in the future where that's going. I always think it's crazy to give discounts for two years in a two-year contract, because the customer obviously -- one of two of things is going to happen after those two years. The customer will go to another provider and get another discount, or you will have to give that customer a bigger discount to stay -- continue to give him a discount to stay with you. So you never ever get a return on that customer.

We've tried to be very disciplined in our approach. We've obviously been the least aggressive of anybody in the business, in terms how we discount. And the second thing is, we have gone out and tried to prepare for the future, which is to put ourself on the wireless business, where you've seen the cable industry sell their wireless assets. And we've positioned ourself to be in the wireless business where we think that we can combine and bundle many different services to our current customers, and therefore increase our likelihood that, even though we know there's competitive disruptions are coming, that we have a greater likelihood of keeping those customers. We are much more confident today that when Joe goes out and gets a customer that we can hold on to that customer long term, because of where we are strategically.

Can I ask a follow-up to that then, which is, to the extent that you didn't get the waivers, as you talked about in front of the FCC, would that mean that without a broadband product you would be less inclined to aggressively go after growth additions in your core business? It sounds like what you are saying is they go hand in hand.

I think there is a high correlation between what we are trying to do in wireless and our current business. And to the extent that we aren't able to enter the wireless business, then I think you have to look at all alternatives, in terms of where you would go long-term. And that might be that -- I think that there is -- I think the business we are in today and wireless is really a package deal, to be honest with you. I think that you have to put those two together, long term. No customer wants just fixed video. He is going to buy mobile video and he is going to buy mobile data and he's going to buy mobile voice and he's going to buy fixed data. So he will buy a bundle of services.

And right now, the cable industry is the best positioned to take advantage of that, and probably AT &T and Verizon. AT&T and Verizon have 60% of the market. I hope this is an administration that wants some competition to that. But the way not to get competition to that is not to make decisions, and to be cautious. And then you will end up with AT&T and Verizon probably having 70% or 80% of the market, right? And you've seen Verizon do a smart thing in buying the cable spectrum. We would like to play, but you've got to get asked to the dance.

Thank you.

Your next question comes from the line of James Ratcliffe from Barclays Capital.

Good morning. Thank you for taking the question. Two, if I could. First of all, have you gotten any push back from the networks regarding the PrimeTime Anytime offering and essentially making their content available on demand? And secondly, if you could just -- any more color regarding the impact you saw from existing customers regarding Blockbuster Movie Pass thus far in its rollout, what sort of take up you're seeing or if you're seeing any impact on churn. Thanks.

I will take the first one first. -- or the last one first. We did have a positive impact on Blockbuster Movie Pass. I think for the small increases that we received, I think I would attribute that to the Blockbuster Movie Pass and to some seasonality. And the first portion was --

On PrimeTime Anytime and what sort of response you've gotten thus far from the broadcasters themselves on it.

There was some interest given by how it works by one broadcaster. Outside of that, it has been very quiet.

Great. Thank you.

Your next question comes from the line of Bishop Cheen from Wells Fargo. Your line is open.

Hello. Thanks for taking the question. Going back to your big picture talk about spectrum and the management of it via the Administration and Congress, how confident are you that both the White House and Congress will move forward in a timely fashion to try and get spectrum out to the marketplace and to manage it without undue bottlenecks?

Well, I guess I'd say two things. I think that the -- beyond our application at the FCC that's just a couple weeks away from being decided on, there really is no clear cut way to allocate more spectrum in a timely manner, really for two reasons. One, there's not a lot of spectrum out there. And two, the Congress and the White House really can't do it unilaterally, because for example, one of the biggest places that you might find spectrum might be in the broadcaster side, where the broadcasters would voluntarily, based on the recent budget legislation that was passed, would have to voluntarily give that up. There is some spectrum that the Department of Defense has. They would have to voluntarily give it up. That's not normally something that they do readily, given the effect on our defense of the country. And there is some other spectrum that is within the FCC that will have to be looked at, and that typically would go through a rule making process that will take a long time.

I don't see anything on the horizon that brings much spectrum into the marketplace any time soon, and probably the best hope is the D-block. I think there is some spectrum in the D-block for public safety that has some possibility of moving forward in the next few years. Really that's one of the things that gives us some hope that we would be approved, because obviously we could come into the marketplace and start working on it within a couple of weeks.

And it would seem a little bit unusual -- to me, it would seem a bit unusual to go through -- I think we first filed our application in May of last year. So you go nine or ten months, and then you decide at the end of that process to do a rule making when you probably could have decided to do the rule making nine or ten months ago, if that was the route you wanted to go. I think we are the country's best hope, and I think that that's a good position to be in. I will say that Washington -- many companies and CEOs and Chairmans have been blindsided. Washington works in funny ways and it is a complicated process, and there's issues that we wouldn't know about that they might have at the administration level or the FCC that we wouldn't have visibility to, they'd just be issues that we wouldn't know about behind the scenes that would cause people to make decisions that otherwise might not seem logical.

Good color. Thank you.

Your next question comes from the line of Tom Eagan from Collins Stewart. Your line is open.

Super. Thank you very much. First, a follow-up question. Charlie, you mentioned that there is a possibility of the FCC initiating some kind of MPRM rule making on the waiver. If there is a NPRM on the waiver, would you sell the spectrum? And then I have a follow-up. Thanks.

I think if they went to rule making, we would look at the risk profile which, if we look at it today, would say that our risk profile would increase substantially, and I think it would may be too risky for us to enter the business place, in which case all options would be on the table for what -- how we would move forward with the Company and the spectrum.

You had said before that you had thought that --

Today the only option on the table for us is we want to get in the business. And we've spent a lot of time and hard work to get there, and we are ready.

You had said before that the chances of probability were up about 80% from previously. What do you think the probability is of the waiver being approved?

I would go broke betting on Washington. I'm about 0-for-100 in Washington. So I'm hoping that Dumb and Dumber line, you know, I think there is a chance. We haven't been very successful normally, which is why we are paying high retrans fees. We are not very successful.

And then I have a follow-up. Robert, you mentioned that the net income being roughly flat. And I'm not sure if I quite got what you were saying. But assuming that the revenue growth is going to be somewhat limited, and assuming there is going to be increased marketing expenses, should we think that the EBITDA margin decline is going to be offset by a positive that would be below the line? Thanks.

Tom, no. I think, once again to clarify, you have to pull out the litigation accrual that occurred in 2011, the accrual reversal. And then as I clarified before, it's on the paid TV business, so the fact -- to the extent the spectrum business, once we start consolidating that, it will bring depreciation and some administrative expenses, I need to pull back on that. Then just focusing on the pay TV business, the challenge for us is to continue to do a good job of controlling the expenses. Obviously, programming expenses are going to go up, and then the success factor for us in 2012 is our ability to sell up on revenue. It won't get us a lot of ARPU, but it will get us some. And that's the thing we need to deliver in order to hit our targets.

Great. Thank you.

Nicole, I think we have time for one more question and then we will wrap up.

Your next question comes from the line of Todd Mitchell from Brean Murray. Your line is open.

Hello. Thank you. Can you talk a little about the Blockbuster over the top tie-in to the DISH Network and whether it was more impactful as a churn mitigation for existing customers or if it helped you drive gross adds?

Obviously, we think it's helped us grow gross adds, by evidence of the performance in the second quarter -- third quarter -- fourth quarter. The Blockbuster brand is a significant brand in the marketplace which focuses on family and movies and that clearly what DISH is all about. And it's also the reason that we were changing it just slightly to DISH @ Home with our first quarter promotion which adds 6,000 streaming titles. We see this as both an acquisition and as a retention tool, because a large portion of that new product is also Hispanic. 70% of our new customers are Hispanic. And it is a growth category for us.

Okay. And can you talk about just in terms of your acquisition of streaming rights for that offering? How far along are you in doing that, and is there some way that you feel that you are approaching it different than some of your competitors? For instance, do you feel that with the, basically the Hopper recording all of the networks that it can be Slinged on without streaming rights?

Hello. This is Tom.

As you saw, we added some additional content to the Blockbuster @ Home product in January. We continue to look at additional content offerings, both for DISH and non-DISH. And I would say between DISH and EchoStar, we are continuing to work on streaming options, but we don't have anything further to disclose today.

Okay. And lastly, I noticed that TiVo is no longer supporting the Blockbuster on-line store. What, if anything, should we read into that? Is that part of a re-launch strategy? And also, what would -- what is your strategy with regards to ultraviolet?

I'm sorry. The first part, what was the question, on TiVo?

Well, I just noticed that TiVo no longer supporting the Blockbuster store. The on-line store.

Yes. It's underlying platform changes that we're pursuing, as I said earlier, between Dish and EchoStar. So that de facto you lose some of the distribution as you make those changes. And the second part? Ultraviolet. So ultraviolet obviously is a promising development and concept. I would say it's still in the early innings and developing, but that's an opportunity for us to forge tighter relationships with the studios that would benefit the stores as an example. Because the studios do -- most of the studios I should say, they're not all in lock step, do see opportunity with ultraviolet and having a physical location and being able to do some -- to provide access to the existing store traffic that we have has changed the conversation a little bit with the studios.

Okay. Thank you very much.

I now turn the call back over to the presenters.

Alright. We will see you next time. May, I guess. Thanks.

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