EUR 850.00 For Business Accounts Only

Morningstar | Dish Customers Losses Worsen, but Profitability and Wireless Remain the Focus

No-moat Dish Network continued to struggle during the fourth quarter, with satellite television customer losses coming in roughly twice as high as our expectations. The market reacted negatively to this development, sending Dish shares down 8%, but we believe this response is shortsighted. Dish has made no secret in recent years concerning its desire to maximize the return on its television customer relationships rather than drive growth. The decision to effectively walk away from agreements with Univision and AT&T/HBO and endure customer losses reflects this position, as does the relative stability in cash flow during 2018 despite a 6% decline in revenue during the past year.

More importantly, Dish’s fate rests far more heavily on its wireless aspirations than its declining television business. Little has changed on this front as Dish continues to plow ahead with the buildout of a narrowband Internet of Things network to meet the FCC’s looming buildout requirements. We don’t plan to materially change our $43 fair value estimate, but we reiterate our view that Dish is a very high uncertainty investment.

Dish lost 381,000 net satellite customers during the quarter, far worse than the 121,000 shed a year ago. The firm again blamed the loss of programming disputes, claiming that the loss of Univision and HBO content accounted for more than half of net losses during the period. Management seems to believe that the worst of the Univision-related losses are behind it and noted that the pace of customer defections excluding Dish Latino subscribers is at historic lows. Losses related to HBO may have more room to run given the last new episodes of Game of Thrones are set to air shortly. We believe Dish is playing a weak hand the best it can, negotiating hard with programmers who’ve made content available to customers outside of the traditional pay-television ecosystem in search of a pricing advantage against other providers.

Total revenue declined 6% year over year during the quarter, the result of a 10% decline in the number of satellite customers served, partially offset by growth at Sling. Sling’s customer growth improved slightly versus the prior quarter but, with 47,000 net additions during the quarter, remains modest versus levels seen through early 2018. Average revenue per customer (both satellite and Sling) also surprised us to the upside, growing slightly year over year. This metric had declined for seven consecutive quarters as the customer base shifts toward the Sling offering. In addition, the loss of revenue from HBO and its sister Cinemax networks should have pressured revenue per customer. Given the delicate political situation Dish faces, we believe it is possible Dish has been conservative in calculating its customer totals this quarter, which could, at least in part, explain the higher reported revenue per customer.

Despite the turmoil, Dish continues to generate solid profits. The elimination of Univision and HBO content and slower customer-growth costs helped lift the EBITDA margin slightly during 2018 to 19.9%, excluding the benefit of accounting changes, which added another percentage point during the year. We still don’t believe margin expansion is sustainable, but Dish is delivering on its push to focus on profit rather than revenue. Free cash flow continues to slowly drift lower, but working capital needs due largely to declining payables have been the primary cause. Dish generated $1.2 billion during 2018, down from $1.4 billion in the prior year. Nearly all cash flow has reduced net debt, which declined $1.1 billion during the year to $13.1 billion, or 4.6 times EBITDA. Net debt is down from a peak of $14.9 following the 2017 broadcast spectrum auction.