Dish - Zacks Investment Research



|DISH Network Corp. | (DISH-NASDAQ) |$29.81 |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: Flash Update: 1Q18 Earnings

Prev. Ed.: Mar 21, 2018: 4Q17 Earnings Update

FLASH UPDATE [Earnings update in progress; to follow]

DISH Network delivered 1Q18 EPS of 70 cents which declined 7.9% y/y.

Revenues slumped 6% y/y to $3.46 billion.

Segment Details

Subscriber-related revenues (99% of revenues) declined 6.1% from the year-ago quarter to $3.42 billion. Pay-TV video and related revenues fell 5.3% to $3.35 billion. Broadband revenues plunged 30.2% y/y to $75.1 million.

Equipment sales and other revenues dipped 1% to $35.8 million.

United States contributed 99.7% of revenues which declined 6% y/y to $3.45 billion. Canada and Mexico contributed the rest of the revenues which fell 1% from the year-ago quarter to $9.5 million.

Subscriber Loss Continues

DISH exited the quarter with 10.845 million DISH TV subscribers and 2.303 million Sling TV subscribers. Total Pay-TV subscribers were 13.148 million, down from 13.528 million reported in the year-ago quarter.

Net Pay-TV subscribers declined approximately 94K as compared with a decline of roughly 143K in the year-ago quarter. Pay-TV average revenue per user (ARPU) declined from year-ago quarter’s figure of $86.55-$84.50.

Net DISH TV subscribers declined approximately 185K and Sling TV subscribers increased almost 91K.

DISH TV's average monthly subscriber churn rate was 1.47% against year-ago quarter’s 1.92%.

Operating Details

In the first quarter, subscriber-related expenses declined 2.6% y/y to $2.18 billion. However, as percentage of revenues, subscriber-related expenses expanded 220 basis points (bps) on a y/y basis to 63.2%.

Total subscriber acquisition costs (SACs) plunged 32.4% from the year-ago quarter to $196 million. As percentage of revenues, SACs declined 220 bps to 5.7%.

Operating income declined 12.8% y/y to $529.5 million. Operating margin fell 120 bps to 15.3% in the reported quarter.

Balance Sheet & Cash Flow

As of Mar 31, 2018, cash & cash equivalents (including marketable investment securities) were $2.35 billion as compared with $2.05 billion as of Dec 31, 2017.

Cash flow from operating activities was $751.6 million, while free cash flow was $387 million.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON DISH

Executive Summary [NOTE: Only highlighted material has been changed]

DISH Network Corporation (DISH or the company) owns and operates the DISH Network, one of the largest and fastest growing multi-channel video distributors in the industry. DISH Network offers a high definition line-up with more than 200 national HD channels, the most international channels and award-winning HD and DVR technology.

Key factors for evaluating an investment strategy for DISH Network are as follows:

• DISH Network provides satellite television products and services in the United States. It offers pay-TV services under the DISH brand and the Sling brand. 

• As of Dec 31, 2017, DISH Network had 13.242 million Pay-TV subscribers in the United States, which includes 11.030 million DISH TV subscribers and 2.212 million Sling TV subscribers. 

• Some of the main competitors of the company are Comcast Corporation (CMCSA) and Charter Communications Inc. (CHTR).

Growth Path: The company initially targeted rural markets; however, with the rollout of local channels, DISH Network has successfully extended its reach into the metropolitan markets.

Of the 15 analysts in the Digest group covering the stock, five rendered positive ratings, eight assigned neutral ratings while two held a negative stance. Target prices provided by the analysts range from a low of $37.00 to a high of $89.00, with the average being $62.23. The expected return over the current share price is 60.4%.

Positive or equivalent stance (5/15 or 33.33%) – These analysts maintain a bullish stance on DISH Network on the basis of its product and service launches, like Sling TV, dishNET, Hooper DVR and Joey with their increasing popularity, growing operational efficiencies, strong balance sheet and attractive valuations. The launch of high-end services like HD and DVR are also expected to boost ARPU.

Neutral or equivalent stance (8/15 or 53.33%) – Despite strong fundamentals and new product launches, these analysts remain cautious owing to the spectrum issue and network build out requirements of the FCC coupled with a saturated U.S. pay-TV market. Moreover, stiff competition, rising churn and failure to strike any deal with wireless operators to deploy a nationwide wireless network has been a major drawback for DISH Network in recent times. This has caused the analysts to remain on the sidelines.

Negative or equivalent stance (2/15 or 13.33%) – The bearish analysts believe that despite growth in Sling TV, subscriber losses in the pay-TV market continue to mount. Moreover, low competitive barriers to entry and price pressure may lead to higher churn risk, thereby hurting ARPU. Additionally, analysts anticipate rising programming costs and cord-cutting to dent the company’s near-term profits.

Mar 21, 2018

Overview [NOTE: Only highlighted material has been changed]

Based in Englewood, CO, DISH Network Corporation (DISH or the company), previously known as EchoStar Communications Corporation, spun off its technology and certain infrastructure assets on Jan 1, 2008, and retained only the pay-TV business. It offers pay-TV services under the DISH brand and the Sling brand. As of Dec 31, 2017, DISH Network had 13.242 million Pay-TV subscribers in the United States, which includes 11.030 million DISH TV subscribers and 2.212 million Sling TV subscribers. 

It provides a wide range of selected local and national high definition (HD) programming. In addition, its subscribers enjoy access to hundreds of video and audio channels, the maximum number of international channels in the U.S., industry-leading Interactive TV applications, Latino programming, and the best sports and movie channels in HD. DISH Network offers its customers a variety of package and price options, including the lowest all-digital price in United States.

The analysts identified the following issues as critical to evaluating the investment merits of DISH Network:

|Key Positive Arguments |Key Negative Arguments |

|New Products: New product launches, including Sling TV, DISH On |SAC, Programming cost and Churn Rate: Increase in SAC and churn rate |

|Demand and Portable DVRs, are expected to significantly enhance |coupled with higher programming costs may affect the company’s growth |

|consumer satisfaction. |prospect. |

|Strong Positioning: DISH Network is one of the largest and fastest |Competition: The pay-TV business model continues to face stiff |

|growing multi-channel video distributors in the industry with 13.242|competition from the over-the-top (OTT) online video streaming service |

|million Pay-TV subscribers. |offerings. |

|Spectrum Holdings: An extensive wireless spectrum portfolio is |Delay in Wireless deployment: There is significant expenditure involved |

|likely to be a major long-term positive for the company and should |in deploying wireless network. |

|spur growth onwards, going forward. | |

Its website is .

Note: DISH Network’s fiscal year coincides with the calendar year.

Mar 21, 2018

Long-Term Growth [NOTE: Only highlighted material has been changed]

Going forward, DISH Network is interested in exploiting opportunities in segments that have been under-served by the big cable players. Meanwhile, the analysts anticipate DISH Network’s future growth to primarily emerge from acquiring new subscribers at an acceptable cost, while at the same time boosting, or at least maintaining, subscriber-retention rates. Moreover, the analysts believe that the company must focus on remaining competitive in the main-line service offerings of HD and DVR. Moreover, the settlement of TiVo litigation issues should further improve the company’s cash position, which in turn will be used to return capital to the shareholders.

DISH has created an extensive spectrum of portfolio, which is the most important component of wireless networks. In fact, the company has a portfolio of 80 MHz of radio frequencies of different bands, which will be used to deploy 4G LTE wireless network in top 100 U.S. markets. Several industry analysts have estimated the value of DISH’s wireless spectrum at around $50 billion.

DISH Network forayed into the Over-the-Top (OTT) video delivery market with the commercial launch of its Internet TV service – Sling TV – across the U.S. Unlike conventional cable TV, Sling TV does not require a contract or extra hardware installation. The service is supported by iOS, Android and Roku devices and is available at exceptionally low prices starting from $20 per month. The service allows access to top-rated TV channels such as ESPN and Disney Channel. In addition to the option of multiple users, subscribers will gain access to 21st Century Fox channels for the first time. This Sling TV offer is in sync with the latest trend in the pay-TV industry where programmers are designing skinny packages. DISH Network’s cropped bundle is one of the numerous online TV offerings in the market. Thus, by giving in to consumer demand and becoming more flexible, DISH Network aims to better cater to families with multiple viewers.

DISH Network strives to benefit from increased expenditure by broadcasting companies in the digital advertisement space. With the digital advertisement industry experiencing burgeoning demand of late, media companies have jumped on the bandwagon to provide data-driven target audience-based advertising. As this form of advertising gains popularity, DISH Network would benefit from it by transmitting the content of these broadcasters. Notably, DISH Network offers both the pay-TV and Internet TV service, which should be particularly advantageous for a digital marketer.

According to the analysts, DISH Network has been able to maintain a relatively high subscriber growth rate by capitalizing on its rural market expertise, expanding the broadcast of local channels to new markets, and transforming itself from a low-priced pay-TV service provider to a premium service provider, thus reducing churn rate. The company is concentrating its marketing efforts on higher-priced subscribers while also raising the prices of its products, allowing discounts, and launching innovative service and products.

However, the company faces an increasingly competitive environment. Further, with the launch of VoIP services, the cable industry is attempting to offer competitively priced service bundles that would largely offset the consumer price advantages that DISH Network held in the video arena. Most analysts believe that this battle for market share is far from over and DISH Network intends to be one of the major players. Moreover, the company’s gross new Pay-TV subscriber activations and Pay-TV churn rate may be hurt if it is unable to renew its long-term programming contracts before they expire or if it loses access to programming as a result of disputes with programming suppliers.

Mar 21, 2018

Target Price/Valuation [NOTE: Only highlighted material has been changed]

|Rating Distribution |

|Positive |33.33%↔ |

|Neutral |53.33%↔ |

|Negative |13.33%↔ |

|High |$89.00↔ |

|Low |$37.00↔ |

|Avg. Target Price |$62.23↓ |

|No. of Analysts with Target Price/Total |14/15 |

Risks to the achievement of the target price include a slowdown in the company’s growth, faster-than-expected changes in PayTV consumption, rising churn rate, inability to stabilize subscriber losses, negative regulatory developments such as price regulation, unexpected rise in costs such as programming expenses, mounting debt and increasing competition.

Recent Events [NOTE: Only highlighted material has been changed]

On Jan 5, 2018, DISH Network has entered into a partnership with comScore to measure the effectiveness of addressable advertising campaigns across its legacy pay-TV service using Hopper set-top box and its next-generation Sling TV service, which provides online TV streaming (OTT) on various handheld gadgets.

On Nov 30, 2017, DISH Network recently reached a multi-year agreement with Lilly Broadcasting for carriage of the broadcaster's channels in Puerto Rico, U.S. Virgin Islands, and three other markets in Pennsylvania, New York and Hawaii. The terms of the deal have been kept under wraps.

On Nov 24, 2017, DISH Network inked a multi-year program licensing deal with CBS Corp, after resolving a three-day blackout. The latest deal not only restores CBS’ local stations but also adds Showtime, CBS Sports Network, Pop, and Smithsonian Channel to the company’s satellite-TV service.

Revenues [NOTE: Only highlighted material has been changed]

According to the company’s press release, total revenue in 4Q17 was approximately $3,483.9 million, down 7.2% y/y, lagging the Zacks Consensus Estimate of $3,546 million.

Segment Revenues

Subscriber-Related Revenues (99.1% of total revenue in 2017)

Subscriber-related revenues comprise sales from basic, movie, local, pay-per-view, Latino and international subscription television services, equipment rental fees and other hardware related fees, including fees for DVRs and additional outlet fees from subscribers with multiple receivers, advertising services, fees earned from DISH HOME Protection Plan, equipment upgrade fees, HD programming, and other subscriber revenues. However, certain amounts included in Subscriber-related revenues do not recur on a monthly basis.

In 2017, segment-wise, subscriber-related revenues grossed $14,260.4 million, down 5.1% y/y.

At the end of 2017, DISH Network had 13.242 million pay-TV subscribers, down 3.1% y/y. DISH TV subscribers were 11.03 million, down 9.4% y/y. Sling TV subscribers were 2.212 million, up 47.4% y/y. During 2017, DISH Network lost 0.995 million DISH TV subscribers but gained 0.711 million Sling TV Customers.

Pay-TV ARPU (average revenue per user) in 2017 was $86.43 compared with $88.66 in 2016. DISH TV churn rate in 2017 was 1.78% compared with 1.97% in 2016.

Equipment Sales and other revenues (0.9%)

Equipment sales and other revenues include the unsubsidized sales of DBS accessories to retailers and other third-party distributors of equipment, domestically and to DISH Network subscribers.

Equipment sales & other revenues totaled $131 million, down 26.6% y/y.

Outlook

DISH Network forayed into the Over-the-Top (OTT) video delivery market with the commercial launch of its Internet TV service – Sling TV across the U.S. The service is supported by iOS, Android and Roku devices and is available at an exceptionally low price of $20 per month initially. The company also offers some top-rated TV channels, such as ESPN and Disney Channels of The Walt Disney Co., HGTV, Food Network and Travel Channel of Scripps Networks Interactive Inc., TBS and CNN of Time Warner Inc. and several channels of AMC Network Inc. Going ahead, the company plans to expand the programming content offered by Sling TV.

The bullish analysts believe venturing into the Internet TV industry and capitalizing on the opportunities therein should help the company minimize its losses in the legacy pay-TV business. Moreover, such value-added services should drive the company’s top line higher. Not only that, it should also help the company curtail subscriber churn rate and boost ARPU numbers in the coming quarters.

Interestingly, television companies have been lately seeking higher prices for their programs, resulting in frequent channel blackouts for cable and satellite companies. Moreover, DISH Network, like other pay-TV operators, has been persistently losing video customers. Thus, analysts believe that settlement of disputes with television companies are a huge relief for DISH Network as a failure to strike a deal with them might result in further churn and a decline in average revenue per user (ARPU) as well. Further, the renewal of various multi-year content carriage agreements with Frontier Communications, lifestyle media channel owner Scripps Networks Interactive, EPIX, FOX News and CBS Corporation should also boost revenue growth.

In addition, an extensive wireless spectrum portfolio should further spur growth, going forward. Moreover, the company’s plan to deploy triple-play services coupled with the increased rollout of its popular Hopper devices will help it counter intensifying competition and drive subscriber growth in the upcoming quarters.

Also, DISH Network is poised to benefit from increased expenditures by broadcasting companies in the digital advertisement space. With the digital advertisement industry experiencing burgeoning demand, media companies have jumped on the bandwagon to provide data driven target audience-based advertising. With this form of advertising gaining more popular, DISH Network poised to benefit from the same by transmitting the contents of these broadcasters. Notably, DISH Network has both pay-TV as well as Internet TV service, which should be particularly beneficial for a digital marketer.

However, the analysts with a bearish outlook view DISH Network affiliates’ act of giving up 197 spectrum licenses worth $3.3 billion to the FCC, on having denied the discount and even paying a penalty of $413 million, as a key negative. Further, they expect top-line growth to remain under pressure, as DISH Network’s failure to strike any deal with wireless operators to deploy a nationwide wireless network has been a major setback for the company in recent times. Also, mounting programming expenses may force the company to increase the rates it charges from its subscribers. This could in turn cause the company’s existing Pay-TV subscribers to discontinue service or lead to potential new Pay-TV subscribers not opting for its service. Under such circumstances, the company might see lower revenues.

Moreover, availability of Internet TV at an exceptionally low price, along with the accessibility to some top-rated TV channels may become a game changer for the pay-TV industry while posing significant threat to cable MSOs (multi-service operators). This is because the risk remains that a large chunk of DISH Network’s existing subscribers may opt for the lower-priced Internet TV service instead of the much broader but expensive satellite TV service. Also, despite growth in Sling TV, pay-TV subscriber losses continue to mount at DISH Network. The analysts fear that low competitive barriers to entry and

price pressure in the OTT video delivery market may lead to higher churn risk, thereby hurting ARPU further.

Also, DISH Network is likely to face challenges as the merger between Time Warner Cable and Charter Communications has been completed. The merged entity, with solid subscriber strength of almost 24 million, would attempt to throttle its network on running any third-party based video streaming app. This could prove detrimental to Sling TV’s prospects, going ahead.

Margins [NOTE: Only highlighted material has been changed]

According to the company’s press release, EBITDA in 2017 was $2,423.1 million compared with $3,306.9 million in the prior-year quarter.

In 2017, operating expenses were a little over $12,823.610 million, down 0.5% y/y. Operating income was $1,567.8 million compared with $2,319.3 million in the year-ago quarter.

Outlook

DISH Network’s ability to compete successfully will depend, among other things, on its ability to continue to obtain desirable programming content and deliver the same to its subscribers at competitive prices. Thus, going forward, the company might face higher churn and more pressure on its margins if it fails to renew its long-term programming contracts on favorable pricing and other economic terms.

Moreover, as a result of this increased competitive environment and the maturation of the pay-TV industry, future growth opportunities of the company’s core pay-TV business may be limited resulting in reduced margins. Also, some analysts believe that escalating programming expenses coupled with rise in subscriber acquisition cost due to increased rollout of innovative devices will continue to restrain the company’s margins, going forward.

However, the analysts with a positive outlook believe that DISH Network’s billing and customer service system could lead to lower costs and improved customer satisfaction, which could aid profitability. Moreover, the company’s ability to gain and retain high margin customers from HD and DVR will benefit it in the near term. Moreover, the launch of various value-added services, like Sling TV, should not only drive the company’s bottom line higher but should also help curb subscriber churn rate.

Earnings per Share [NOTE: Only highlighted material has been changed]

According to the press release, earnings per share (EPS) in 4Q17 of 57 cents were a penny higher than the Zacks Consensus Estimate.

Outlook

Some analysts believe that an extensive wireless spectrum portfolio, higher broadband subscriber growth, better cost control, innovative product launches such as Sling TV, and improved ARPU should drive EPS in the upcoming quarters. They believe that the company might utilize excess cash to repurchase shares, which in turn, will enhance EPS. However, increasing marketing efforts associated with the sale of new devices along with rising programming expenses, increase in cord-cutting and high churn rate will continue to act as a deterrant to EPS growth, going forward.

At the end of 2017, DISH Network had $1,980.7 million of cash and marketable securities and $15,134.4 million of outstanding debt on its balance sheet compared with $5,359.3 million and $16,478.9 million, respectively, at the end of 2016.

Mar 21, 2018

|Research Associate |Madhura Bhattacharyya |

|Content Ed. | |

|Reason for Report |Flash: 1Q18 Earnings |

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May 8, 2018

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