Dish Network Posts Impressive Results Driven By Growth In Pay-TV Subscribers

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Dish Network (NASDAQ:DISH) recently reported its Q3 2013 earnings. The company reported net income of $315 million for the quarter as compared to a net loss of $158 million during the same period the previous year. Earnings per share were $0.68, compared with a net loss per share of $0.35 during the same period in 2012. [1] Dish delivered impressive results driven by the pay-TV subscriber gains and higher ARPU. The promotional schemes such as a free iPad offer seems to have attracted more customers for the satellite company. We continue to believe that satellite TV will grow in the near term and Dish will benefit from its Hopper DVR, which will help it gain more customers.

As far as wireless plans are concerned, the company is focused on three primary events in the coming months – the LightSquared auction in December, where Dish is serving as a stalking horse with a leading bid of $2.2 billion, the H-Block auction in early 2014, and a waiver request with the FCC to convert the company’s existing spectrum to downlink. [2] Dish has been amassing spectrum over the past few years and plans to offer wireless services in the U.S. The spectrum is of great importance with some reports suggesting the value of those to be around $12 billion. [3] It will be interesting to see how these events turn out for Dish and what the company decides to do with the amassed spectrum. We have revised our price estimate for Dish to $50, based on the third quarter earnings announcement.

See our complete analysis for Dish


Trends In Dish’s Pay-TV Business

Dish Adds More Pay-TV Subscribers

Dish reported a gain of 35,000 pay-TV subscribers in the third quarter compared to the loss of 19,000 during the same period in 2012. Subscriber-related revenue grew 6% to $3.46 billion for the quarter driven by higher ARPU, which increased by 5% to $81. [1] Dish like other pay-TV operators such as DirecTV (NASDAQ:DTV), Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) has seen subscriber losses in the past due to the increasing competition from telcos and the rise of alternative video platforms such as Netflix (NASDAQ:NFLX). Time Warner Cable in particular witnessed huge subscriber losses in Q3 led by the  CBS (NYSE: CBS) dispute (Read – CBS Dispute Weighs Heavy On Time Warner Cable Results, Broadband And Pay-TV Subs Decline). It was clear that many of those subscribers would go for cord switching with other operators such as DirecTV and Dish.  Both the satellite companies saw an increased subscriber base in this quarter.

Dish To Close All Blockbuster Stores In The U.S.

Dish recently announced that it will shut down the remaining 300 Blockbuster stores as well as by-mail service in the U.S. The company’s wholly-owned Blockbuster Mexico subsidiary is also held for sale. [4] The primary reason for this decision is obviously the rise of alternative video platforms. People now prefer to receive the content digitally as opposed to physically and the original Blockbuster business model was predicated primarily on the physical distribution of video.

Dish will retain all of its licensing rights to the Blockbuster brand as well as other key digital assets, including the company’s significant video library and digital technology. It will continue to use the brand while expanding its digital offerings such as Blockbuster@Home streaming service. The company will incur future losses between $15 million and $30 million associated with the shutdown of this business. [2]

A Deal With Disney Is Nearing

Disney (NYSE:DIS) and Dish’s programming agreement expired at the end of September, but they have been in discussions and have so far averted a blackout of Disney’s networks for the satellite provider’s 14 million customers. Dish has rallied against the high costs of programming and has earlier hinted at its willingness to go without Disney channels.  Disney’s contracts are relatively long term in nature and the current negotiations are around the technology front. Ergen stated that Dish would not want to go back to Disney and ask permission to do something in the future, and similarly Disney won’t want to come to Dish and ask permission if there are different forms of distribution for them. If Dish were unable to reach a deal with Disney, it would be at a significant disadvantage given the popularity and demand of Disney’s networks. But at the same time, Dish will see significant drop of $800 million (estimated) in costs. However, Ergen recently stated that he is still cautiously optimistic about reaching a long-term deal with Disney. [2]

Dish Is Focused On Near-Term Events In The Wireless Space

Towards the end of September this year, a Manhattan bankruptcy judge approved an auction process that will include Dish’s $2.2 billion bid for 40 MHz of LightSquared’s wireless spectrum. [5] The auction will take place on December 6 and it appears that Dish will succeed in acquiring the spectrum given that no other party has shown interest so far. Moreover, Dish’s idea to change how LightSquared’s frequencies would be used, designating them for uplink connections for mobile and fixed wireless Internet devices, may not cause GPS interference issues. However, Harbinger Capital is seeking additional bids to Dish’s offer and has contacted more than 90 potentially interested parties. [6]

Dish has asked the FCC to let it use the already owned spectrum for downlink in conjunction with the LightSquared’s uplink frequencies. In return for FCC’s favor, the company will commit a $1.5 billion bid at an FCC auction for H-Block in early 2014. [7] The FCC auction is supposed to raise money for a national emergency responder communication network. Dish’s bid commitment would mean having a guaranteed minimum price in a sale that’s crucial to the FCC. Moreover, Dish said it would agree to the FCC request of restrictions on some former broadcast TV frequencies that Dish bought in 2008. It will be interesting to see how things unfold from here and if Dish manages to acquire LightSquared spectrum and FCC approves Dish’s request of the uplink-downlink arrangement with the airwaves.

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Notes:
  1. Dish Network’s SEC Filings [] []
  2. Dish Network Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, Nov 12, 2013 [] [] []
  3. Dish Acts to Boost Value of Spectrum, The Wall Street Journal, Sep 13, 2013 []
  4. Blockbuster to End Domestic Retail, DVD By Mail Services, Dish Network’s Press Release, Nov 6, 2013 []
  5. Dish Is One Step Closer To Acquiring LightSquared’s Assets, Trefis, Oct 3, 2013 []
  6. LightSquared Still Seeks Wireless Spectrum Asset Bidders, Bloomberg, Nov 4, 2013 []
  7. Dish Network’s LightSquared bid is part of a larger spectrum bet, Denver Business Journal, Oct 17, 2013 []
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