Dish Network's Q3 Disappoints - Analyst Blog

Satellite TV major Dish Network Corp.’s (DISH) third-quarter earnings slipped 12.3% on higher subscriber-related costs and litigation expenses associated with TiVo Inc. (TIVO). The company reported earnings of $80.6 million, or 18 cents per share, compared to $91.9 million, or 20 cents in the year-ago quarter and well behind the Zacks Consensus Estimate of 43 cents.

The Englewood, Colorado-based company said total revenue declined 1.5% to $2.89 billion, from $2.94 billion in the year-ago period. The decrease was caused by a 0.8% contraction in subscriber related revenue to $2.86 billion as average monthly revenue per subscriber (ARPU) reduced by $0.31 to $69.51.

The lower ARPU was the result of discounts on programming to new subscribers, retention efforts and reduced premium movie revenue, partially offset by price increases on popular programming packages, changes in the sales mix towards high-definition (HD) packages and advanced hardware offerings. Equipment sales and other revenue plunged 44.2% year over year to $23.4 million, due to lower sales of non-subsidized direct broadcast satellite (DBS) accessories and digital converter boxes.

Dish added 241,000 new subscribers during the quarter, while average monthly subscriber churn rate (turnover rate) decreased 45 basis points (bps) to 1.57%. The growth in subscribers was driven by sales and marketing promotions as well as improved churn. The company’s churn rate reduced due to the recent completion of the security access device replacement program and increased new subscriber commitment period.

However, growth in subscribers continued to be adversely affected by sluggish economic conditions, intense competition from rivals, such as DirecTV (DTV), fiber- and Internet-based pay TV operators and signal theft. Dish Network, which focuses on the lower-end of the market, was also affected by the termination of distribution relationship with AT&T (T) in January of this year.

Subscriber-related expenses increased 5.8% year over year to $1.62 billion, caused by higher programming content costs and expenses related to call center operations. Subscriber acquisition costs rose marginally by 0.4% to $439.6 million, primarily due to a rise in new subscribers, partially offset by a decline in advertising and hardware costs per activation.

During the quarter, Dish also recorded an expense of $131.9 million related to a patent infringement dispute with TiVo, which makes digital video recorders (DVRs). General and administrative expenses grew 6.8% to $157.6 million on higher personnel costs and professional fees to support the network. Accordingly, operating income plunged 53.4% to $194.7 million, while operating margin slipped to 6.7%, from the year-ago level of 14.2%.

Year to date, the company generated $1.89 billion of cash from operations and deployed $724.3 million towards capital expenditure. Dish raised $1 billion in senior notes due 2019, bought back stock worth $18.6 million and made debt repayments of $20.0 million. The company also purchased marketable securities worth $4.06 billion, while proceeds from matured and sale of investments were $2.12 billion during the first 9 months of 2009.

Last week, archrival DirecTV reported third-quarter earnings of $366 million, or 37 cents per share, missing the Zacks Consensus Estimate by 2 cents. The company added 136,000 subscribers in the U.S. during the quarter driven by its co-branded satellite service with AT&T and record demand for premium services.

Meanwhile, the Zacks Consensus Estimate (derived from 12 covering analysts) on Dish Network’s full-year earnings has slipped by 6 cents over the past week, and is currently pegged at $1.73 per share. The most accurate estimate is more bearish at $1.70 per share.
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