Dish Network (DISH) will report its Q4 2012 financial results on February 20. After a disappointing Q3, we expect a slight seasonal improvement but expect pressure to remain on subscriber additions as well as revenue growth. Dish’s decision of not raising prices in 2012 hasn’t turned out to be productive. In addition, subscriber losses in the past two quarters haven’t helped either. Given that DirecTV (DTV) continued its strong subscriber additions in Q4 that and Comcast (CMCSA) improved and lost just 12,000 net subscribers, we believe Dish may not see a great quarter. The U.S. pay-TV industry is becoming saturated and a good performance from competitors usually implies the opposite for the company. However, there is a buzz around the company’s aggressive efforts at building a wireless spectrum, and we’ll look for any concrete plans or updates regarding that.
Dish headed into 2012 with healthy subscriber momentum as it improved from a loss of 111,000 subscribers in Q3 2011 to a gain of 22,000 subscribers in Q4 2011.  This momentum continued as the company performed surprisingly well in Q1 of 2012, gaining 104,000 net subscribers and beating its main competitor DirecTV. However, Q2 was seasonally weak as expected as Dish Network lost close to 10,000 net subscribers. The real disappointment came in Q3 when the company lost 19,000 net subscribers while DirecTV gained 67,000. In addition, while DirecTV managed to grow its revenues by 7% and 6% in Q2 and Q3 of 2012, respectively, Dish recorded negative growth in Q2 and just 1.2% growth in Q3. What initially appeared to be a significant turnaround in subscriber trends, seems to have disappeared. We expect low revenue growth and margin pressure to continue on rising programming costs.
While the pay-TV business’ performance might remain weak, there may be some margin improvement for Blockbuster as Dish Network has been trimming this business and closing down underperforming stores. Recently, the company decided to close another 300 Blockbuster stores and once the store closure program ends, it will be operating close to 500 stores.  This is substantially below the number of stores that Blockbuster had when Dish acquired it in 2011. While this will affect the company’s revenue growth, it will be good in terms of profitability and long-term growth for Blockbuster’s business.
The closure of stores is also supported by the fact that renting physical DVDs is a dying business. Netflix (NFLX) pioneered the DVD-by-mail rental business and is also phasing it out now. The company deliberately raised the prices of its hybrid plans (DVD+streaming) in 2011 that forced a lot of customers to drop their current plans and shift to streaming-only subscriptions. Kiosks such as Redbox are still doing well due to their convenient locations and competitive prices. However, even Redbox has now launched a streaming service in partnership with Verizon (VZ). The landscape of video rental is shifting to streaming and strategically Dish would be better off by spending money on enhancing Blockbuster’s streaming service instead of supporting its underperforming stores.
Our price estimate for Dish Network stands at $36.20, slightly below the market price.
- Dish Network’s SEC Filings
- Dish to Shut 300 Blockbuster Sites; 3,000 Layoffs Loom, The Wall Street Journal, Jan 22 2012
Disclosure: No positions