Dish’s Q2 Disappoints With Subscriber Losses And Declining Profits
Dish Network (NASDAQ:DISH) recently reported its Q2 2012 earnings. The company lost about 10,000 net subscribers due to a seasonally weak Q2 and focus on getting only high quality subscribers. [1] As far as subscriber losses are concerned, Dish’s performance was still decent enough compared to rivals Comcast (NASDAQ:CMCSA), DirecTV (NASDAQ:DTV) and Time Warner Cable (NYSE:TWC) that reported much sharper losses. However, what was disappointing about the results were the revenue decline in pay-TV business and negative operating income reported by the Blockbuster movie rental business. These two developments suggest a short-term pressure on Dish Network’s growth.
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Blockbuster’s performance is important as it relates to Dish’s bundling business and helps make the subscriber base more sticky. The company has been closing under-performing stores and focusing more on streaming, which is the right thing to do. However, this quarter, the division reported an operating loss. Margins suffered due to seasonally lower sales resulting in lower revenue per store and some other costs related to transformation of the business to a more efficient unit. It appears that margins might continue to remain low for the remainder of the year.
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Dish has decided not to increase prices for its customers for a while, and that is actually hurting the company and hitting both its revenues as well as margins. While the revenues declined, the programming costs increased by more than 5%, leading to a decline in gross margins. The margin pressure will continue to build unless Dish decides to raise its prices or drop some channels. The latter approach was evident when the company announced that it will drop some AMC channels. [1]
As far as the wireless spectrum is concerned, nothing has changed much. The company is still in talks with the FCC and expects a resolution in a few months. It must be noted that Dish Network bought a large amount of wireless spectrum with the acquisitions of Terrestar and DBSD North America last year, and it plans to launch a broadband network.
Overall, we believe that the current earnings demonstrate a short-term pressure on Dish Network’s financial performance. As far as the long-term strategy is concerned, Dish remains solid with a focus on quality subscribers and the revival of Blockbuster, except for one loophole – margin pressure. With the decision to withhold price increases, Dish faces a greater pressure on profits compared to its rivals.
We are in the process of updating our pricing model for Dish Network in light of the recent earnings and will have an update ready soon.
Our current price estimate for Dish Network stands at $34.30, implying a premium of more than 10% to the market price.
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