Dish Loses 12,000 Pay-TV Subscribers In Q3

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Dish Network (NASDAQ:DISH) recently reported its Q3 2014 earnings with 5% revenue growth and over 50% drop in net income to $0.31 per share as compared to $0.68 in the prior year quarter. It must be noted that the prior year quarter benefited from $106 million in other income from marketable financial securities and derivative instruments. This time around, other expenses were $56 million, which led to a decline in net profits. [1]

Looking at the two important trends, pay-TV subscribers and average revenue per user (ARPU), the company lost 12,000 video customers while ARPU (As reported by Dish Network) grew 4% to $84.39. Looking forward into the fourth quarter, we expect Dish to lose more subscribers after it dropped 8 of Time Warner’s (NYSE:TWX) cable networks including CNN and Cartoon Network. The company’s management stated that they are prepared to drop even the popular TNT and TBS networks. [2] However, the company seems confident will extend its deal with CBS Corporation (NYSE:CBS).

The company plans to launch its over the top video service by end of the year. The streaming service will be priced around $30 a month and will target 18-35 demographic, which are currently not subscribed to pay-TV. The service will offer some of the popular networks such as ESPN. [2]

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On the wireless front, there was another development related to LightSquared’s restructuring. The new structure would give Charlie Ergen, Chairman of Dish Network, controlling stake of 60% in new LightSquared and $1 billion in new junior debt. [3] While Dish’s management refused to comment on this development in the earnings call, it is an interesting development and we are eager to learn if Dish can somehow use the spectrum that Ergen may acquire from LightSquared. We’ll be closely watching for any update on this front and see how this story unfolds in the near term.

See our complete analysis for D ish Network

Pay-TV Operations See Continued Growth

Dish’s pay-TV operations contribute close to 40% of its value, according to our estimates. The business saw steady growth in the third quarter driven by higher ARPU. The subscriber-related revenues increased over 5% to $3.65 billion during the quarter. However, subscriber-related expenses also increased 8% in the quarter versus the prior year period, reflecting higher pay-TV programming costs. Dish’s pay-TV subscriber churn rate increased slightly to 1.67% as compared to 1.66% during the prior year period. [1]

We continue to believe that APRU will 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. We estimate the ARPU for Dish to be around $64 by end of the year, reflecting 3% growth over 2013.

We currently estimate revenues of around $14.4 billion for Dish Network in 2014, with EPS of $1.9, which is in line with the market consensus of $1.5-$1.9, compiled by Thomson Reuters. We currently have a $65 price estimate for Dish Network, which we will soon update to incorporate the recent quarterly earnings.

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Notes:
  1. Dish Network’s SEC Filings [] []
  2. Dish Network’s (DISH) CEO Joseph Clayton on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Nov 4, 2014 [] []
  3. Dish’s Ergen to Control LightSquared in Newly Announced Deal, The Wall Street Journal, Nov 3, 2014 []