Dish Trims Pay-TV Subscriber Losses In Q2

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Dish Network (NASDAQ:DISH) recently reported its Q2 2014 earnings. The company’s revenues grew 6% to $3.69 billion while net income came in at $213.3 million, or 46 cents per share, compared with a loss of $11.1 million or 1 cent per share in the prior year quarter. If we look at the two important trends, pay-TV subscribers and average revenue per user (ARPU), both were positive for the company. The pay-TV subscriber losses declined to 44,000 as compared to 78,000 in the prior year quarter and ARPU improved 4% to $84.15. [1] Going forward, we expect Dish to add more subscribers in the near term and see steady growth in ARPU driven by its periodic price increases.

On the wireless front, the company stated that it is open to all possible routes for the use of its spectrum. It may sell its spectrum, build its own network or create strategic alliance or partnerships with other players in wireless arena. [2] Since Sprint has walked away from its bid for T-Mobile U.S., this may put it on Dish’s radar for a possible deal (see Sprint’s T-Mobile Deal Called Off, CEO Replaced As Turnaround Efforts Pick Up).

We currently have a price estimate of $64 for Dish, which we will soon update based on the recent earnings announcement.

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

Dish’s pay-TV operations contribute close to 40% of its value, according to our estimates. The business saw steady growth in the second quarter driven by ARPU growth. However, subscriber-related expenses also increased by 9% in the second quarter versus the prior period, reflecting higher pay-TV programming costs. Dish saw lower subscriber losses and its churn rate narrowed to 1.66% as compared to 1.67% during the prior year period. [1]

The 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. Given this trend, cable operators have been losing subscribers over the past few years. However, Dish has seen been able to stick to its subscriber base during the same period. This can be attributed to its attractive promotional offers and its unique DVR, which can skip commercials while recording a program. However, the company in its conference call stated that they have now tightened credit qualifications and scaled back promotional discounts, which will impact its sales in the short term. [2] This move reflects the company’s continued focus on attracting and retaining high value subscribers and reducing its churn rate.

In the long run, the company will face stiff competition from the rise of alternative video platforms such as Netflix (NASDAQ:NFLX), Amazon Prime and Hulu. Netflix has been growing rapidly and has gained many subscribers in a short span of time. Accordingly, we don’t expect any change in Dish’s subscriber base in the coming years. We expect Dish’s subscriber base to be around 14.2 million in 2014 and remain relatively flat going forward. However, APRU will continue to grow steadily in the coming years driven by periodic price increases. Programming costs rise each year due to periodic increase in the carriage fee for various channels, which is a critical part of the multi-year agreements between media companies and pay-TV service providers. To protect margins, pay-TV companies typically increase prices periodically and pass on the burden of increased programming costs to subscribers. We expect this trend to continue and drive ARPU up. A stable subscriber base and higher ARPU will translate into annual pay-TV revenues of over $13 billion by end of the decade, according to our estimates.

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Notes:
  1. Dish Network’s SEC Filings [] []
  2. Dish Network’s (DISH) CEO Joseph Clayton on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha Aug 6, 2014 [] []