Dish’s Positive Earnings Performance Overshadowed by Likely Disruptions With $3.3 Billion Auction Discount Repayment

+102.58%
Upside
5.77
Market
11.69
Trefis
DISH: DISH Network logo
DISH
DISH Network

Dish Network (NASDAQ:DISH) reported its second quarter earnings recently. [1] The pay-TV subscriber base continued to shrink, but growth in ARPU translated into higher pay-TV revenues for the satellite company. Arguably the most important piece of information came during the earnings call when CEO Charlie Ergen conceded that Dish’s future plans might be severely affected if the FCC cancels the $3.3 billion discount the company received in the AWS-3 spectrum auction. An additional liability of that magnitude could stall future M&A activity and cripple Dish’s plans to bid for spectrum at future auctions. The company might also be forced to sell or lease its spectrum in order to cover the additional expenses.

See our complete analysis for Dish Network

AWS-3 Discount Might Become Dish’s Bane

Relevant Articles
  1. With Echostar Merger Approaching, What To Expect From Dish’s Q3 Results?
  2. Can Dish Network Stock Return To Its Pre-Inflation Shock Highs?
  3. Dish Stock Has Big Upside Potential To Its Pre-Inflation Peak
  4. How Will The Cyber Attack Impact Dish’s Q1 Results?
  5. Is Dish Network Stock A Buy Despite Many Headwinds?
  6. Will Dish Network Stock Continue To Underperform?

Dish CEO Charlie Ergen stated on the earnings call that the cancellation of the $3.3 billion discount the company received in the AWS-3 spectrum auction might derail the company’s future plans. [2] The company spent close to $10 billion at the auction, but also received a bidding credit/discount of 25% (Approximately $3.3 billion) as it bid through small partners SNR and Northstar. The FCC is set to reject the discount as the commission feels that Dish’s bidding partners do not qualify for the small business discount. If the FCC cancels the discount, Dish will owe the commission the disputed amount, effectively increasing the company’s liabilities. (Read more – FCC Cancelling Dish’s Auction Discount Would Lead To A 9% Correction In Our Price Estimate)

Dish’s ability to spend is already severely weakened by the fact that it paid out around $8.7 billion in AWS-3 FCC license deposits during Q1 2015 and has around $13.8 billion of debt on its balance sheet. [3] Paying more than $3 billion to the FCC will only add to the misery. The additional spending could thwart future M&A transactions, such as the rumored merger with T-Mobile (NYSE:TMUS). Regarding the T-Mobile deal, Ergen stated that “from our perspective, the discount was the most complicating factor.” The additional liability could also affect Dish’s plans to bid for spectrum at future auctions. As the FCC is almost certain to scrap the small business bidding credit rule, the company will now have to compete on an equal footing with cash-rich companies such as AT&T (NYSE:T) and Verizon (NYSE:VZ) and could find it difficult to mobilize finances. (Read more – Dish Might Find It Harder To Acquire Future Spectrum, Limiting Stock’s Potential Upside)

Ergen also indicated that the management is toying with the idea of selling or leasing spectrum, stating that these options appear very attractive from a cash perspective. We estimate that Dish’s spectrum holdings have a pre-tax fair value of around $39 billion and constitute 61% of Dish’s stock value. Dish’s Spectrum provides the company with an opportunity to diversify and enter the wireless business. Ideally, Dish would not want to sell or lease its spectrum. However, the company might not be left with a lot of choice once the FCC cancels the discount. Without its spectrum, Dish’s biggest segment will be its saturating pay-TV business. Pay-TV penetration is currently very high, with more than 85% of the U.S. TV households subscribing to at least one pay-TV service.

Pay-TV Revenues Grow Despite Subscriber Losses

Dish’s pay-TV operations contribute close to 30% of its value, according to our estimates. The business saw steady growth in the quarter, driven by higher ARPU. The subscriber-related revenues increased 4.3% to $3.8 billion during the quarter. [4] The company lost 81,000 video customers while reported average revenue per user (ARPU) grew 4.5% to $87.91 for the quarter. [4] Dish included metrics of its online streaming service Sling TV into its reported pay-TV numbers for the quarter. The inclusion of Sling TV numbers has helped reduce the rate of decline in the subscriber base but has also capped the growth in ARPU as the service’s base package is offered at a considerably cheaper $20 a month.

Dish’s management believes that Sling TV is well poised to take advantage as consumers increasingly shift to alternative platforms in order to consume content. The company management has previously stated that their immediate goal is to keep the service attractively priced in order to gain more subscribers. [5] We believe that this is a good strategy for Dish as the pay-TV market has become increasingly saturated and pay-TV companies have lost thousands of customers over the past few years. The availability of content on online streaming platforms such as Netflix (NASDAQ:NFLX), Hulu, HBO Go, etc., is encouraging traditional pay-TV subscribers to shift to such platforms. Offering Sling TV at competitive pricing will help Dish in reducing the pace of decline in its subscriber base. Accordingly, we believe that Dish will continue to lose pay-TV subscribers in the near term, albeit at a slower pace.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. DISH Network Reports Second Quarter 2015 Financial Results, August 5, 2015, Dish Network Press Release []
  2. DISH Network (DISH) Charles William Ergen on Q2 2015 Results – Earnings Call Transcript, August 5, 2015, Seeking Alpha []
  3. Dish Network’s SEC Fillings []
  4. Dish Network’s SEC Filings [] []
  5. Dish Network’s (DISH) CEO Charlie Ergen on Q1 2015 Results – Earnings Call Transcript, May 11, 2015, Seeking Alpha []