Dish’s Q2 Earnings Likely Driven By Higher Pay-TV ARPU

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Dish Network (NASDAQ:DISH) will report its Q2 2014 results on August 6. We expect to learn that the satellite company lost fewer subscribers as compared to 78,000 it lost in the prior year period.  In the previous quarter, the company added 40,000 subscribers, which took revenues 7% higher. [1] While Q2 is seasonally low quarter for the industry, we believe Dish likely benefited from continued strength in DVR sales, which will help it lower the subscriber losses.

The monthly subscription fee (ARPU) has also been on an uptrend for Dish over the past few years.  We believe this will continue for the foreseeable future, as the company periodically increases package prices to match incremental increases in programming costs. The company saw half of the benefit of its most recent price increase during the first quarter and the full benefit will be seen in second quarter, according to Dish’s management. [2] Accordingly, we estimate ARPU (as reported by Dish) will grow to $84 during the quarter. We will look for confirmation with the release of earnings.

Last month the company expressed its interest in low band spectrum, which will be auctioned by the FCC in 2015. [3] We’ll be closely watching for any update on Dish’s wireless plans.

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Pay-TV Operations In Focus

The U.S. satellite TV operations contribute close to 40% to Dish’s value, according to our estimates. The U.S. pay-TV industry is facing headwinds due to a combination of market saturation, fierce competition, and the increased focus of providers on acquiring higher-value subscribers. Dish has managed to add pay-TV subscribers despite slowdown in the industry, given the demand for its advanced AutoHop DVR, which skips commercials while recording. We believe that the company likely saw continued growth in pay-TV revenues and fewer subscriber losses driven by its advanced services.

Apart from the number of subscribers, another important driver for pay-TV revenues is the monthly subscription fees. Dish’s ARPU has seen continued growth over the past few years. Programming costs have risen annually as well, due to the periodic increases in the carriage fee for various channels, which are a critical part of the multi-year agreements between media companies and pay-TV service providers. In order to protect margins, the pay-TV companies typically increase prices periodically and thus subscribers bear the burden of increased programming costs. We expect this trend to continue and drive average subscriber fees up for Dish in the coming years.

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Notes:
  1. Dish Network’s SEC Filings []
  2. Dish Network’s (DISH) CEO Joseph Clayton on Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, Dish Network, May 8, 2014 []
  3. Dish tells FCC will participate in 2015 spectrum auction, Reuters, Jul 9, 2014 []