Dish Network (
) recently reported its Q2 2012 earnings. The company lost
about 10,000 net subscribers due to a seasonally weak Q2 and focus
on getting only high quality subscribers. As far as subscriber
losses are concerned, Dish's performance was still decent enough
compared to rivals Comcast (
), DirecTV (
) and Time Warner Cable (
) that reported much sharper losses. However, what was
disappointing about the results were the revenue decline in pay-TV
business and negative operating income reported by the Blockbuster
movie rental business. These two developments suggest a short-term
pressure on Dish Network's growth.
See our complete analysis for Dish Network
Blockbuster's performance is important as it relates to Dish's
bundling business and helps make the subscriber base more sticky.
The company has been closing under-performing stores and focusing
more on streaming, which is the right thing to do. However, this
quarter, the division reported an operating loss. Margins suffered
due to seasonally lower sales resulting in lower revenue per store
and some other costs related to transformation of the business to a
more efficient unit. It appears that margins might continue to
remain low for the remainder of the year.
Dish has decided not to increase prices for its customers for a
while, and that is actually hurting the company and hitting both
its revenues as well as margins. While the revenues declined, the
programming costs increased by more than 5%, leading to a decline
in gross margins. The margin pressure will continue to build unless
Dish decides to raise its prices or drop some channels. The latter
approach was evident when the company announced that it will drop
some AMC channels.
As far as the wireless spectrum is concerned, nothing has
changed much. The company is still in talks with the FCC and
expects a resolution in a few months. It must be noted that Dish
Network bought a large amount of wireless spectrum with the
acquisitions of Terrestar and DBSD North America last year, and it
plans to launch a broadband network.
Overall, we believe that the current earnings demonstrate a
short-term pressure on Dish Network's financial performance. As far
as the long-term strategy is concerned, Dish remains solid with a
focus on quality subscribers and the revival of Blockbuster, except
for one loophole - margin pressure. With the decision to withhold
price increases, Dish faces a greater pressure on profits compared
to its rivals.
We are in the process of updating our pricing model for Dish
Network in light of the recent earnings and will have an update
Our current price estimate for Dish Network stands
, implying a premium of more than 10% to the market price.
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