Dish’s Results Could Be Dialed Back On Low Subscriber Gains And Margin Pressures

What should we expect as Dish Network (NASDAQ:DISH) reports its Q3 2012 earnings on Nov 6? We believe the company’s Q3 results could be soft due to the nearing saturation of the pay-TV industry, better performance by cable companies such as Comcast (NASDAQ:CMCSA), and Dish’s decision to keep prices constant. Additionally, the company’s decision to drop AMC Networks in Q3 could have affected its subscriber gains. We also expect Blockbuster’s performance to remain soft as the company’s commitment to the streaming business is in doubt and its physical stores are not performing well. However, investors should watch out for any color that Dish provides on its wireless broadband strategy and the schedule of legal settlement payments to AMC.

See our complete analysis for Dish Network

Subscriber Gains Could Be Low

It is no news that pay-TV subscriber growth in the U.S. is slowing and consumers may be looking to reduce their spending on pay-TV. ^[1] In such a situation, pay-TV companies are looking to poach subscribers from each other and are resorting to price increases as well as marketing advanced services to ensure revenue growth. This along with the fact that cable companies are doing better and reducing subscriber losses, Dish could feel a pinch in its subscriber gains. Additionally, the company decided to drop AMC Networks from its programming package in Q3 over a legal dispute. This could have led to subscriber dissatisfaction and a mild negative impact on subscriber gains.

It must be noted that Dish started offering satellite broadband bundle by partnering with ViaSat in early 2012. It will be interesting to see if the company can give any color on how that is playing out and whether it has had any notable impact on subscriber additions.

Slow Revenue Growth And Margin Pressure

Given our expectation of soft subscriber additions and that Dish has not raised prices unlike its rivals, we expect revenue growth to remain low. Even though the penetration of advanced services is increasing, the average revenue per subscriber will see low to moderate growth in absence of price rises. This, coupled with rising programming costs, could lead to some margin pressure for Dish. The second quarter of 2012 was similar when subscriber-related expenses increased by 5.6% while revenue declined by 0.5% compared to Q2 of 2011.

Dish Network is in a transitional phase of making its subscriber base higher in quality and a lot stickier. This means that customers are less likely to cancel their services and more likely to have additional premium services. In the last couple of years as telcos ramped up their fiber optic services and DirecTV continued heavy marketing, Dish Network’s business slipped. The company lost subscribers quite frequently with occasional gains and its appeal to value-conscious customers was not effective enough. However, Dish Network is now focusing on quality subscribers and that suggests that price increases are quite possible. Despite this, the company has resorted not to do so in order to have a competitive edge and build a base for the future. Ultimately, it will have to raise prices in order to combat rising programming costs.

Payment Schedule To AMC

Dish Network recently settled its case against Cablevision’s AMC for $700 million, avoiding a worst case scenario where Dish would have had to pay over $2.4 billion in charges. ^[2] Such a situation could have wiped out close to 15% of Dish’s value (see Dish Faces Legal Battle With AMC In $2.4 Billion Trial). We’ll look out for any color the company can provide on its schedule for the payment of $700 million to AMC. This can help us forecast any near-term margin pressure that the company may face due to the legal payments. Overall, the settlement is positive news for Dish as it not only avoided heavy charges but also brought back AMC to its subscribers, and that’s good from a long-term view. The market received this news on a positive note, lifting Dish’s stock to a 52-week high.

Our price estimate for Dish Network stands at $33, implying a discount of more than 5% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Pay-TV Subscriber Growth Stalls As Economy Takes Toll, Investors.com, July 5 2012 [↩]
2. AMC’s Settlement Returns Mad Men to Dish Networks, Bloomberg, Oct 22 2012 [↩]