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Morningstar | Dish Reports Strong 2Q; Satellite Sub Decline Slowing Down but So Are Sling Adds

Dish posted a strong second quarter as revenue met consensus expectations and EBITDA came ahead of the Street projection. The company lost 156,000 net pay-TV subs in the quarter despite the continuing growth at the Sling OTT service. Sling now has 2.34 million subscribers, up from 1.8 a year ago. The satellite segment (Dish TV) ended the second quarter with 10.7.8 million subs, down from 11.5 million at the end of the same quarter in 2017. Our no-moat rating and our $51 fair value estimate for Dish are unchanged.

Total revenue fell just over 5% year over year to $3.5 billion as the company continues to replace higher-revenue satellite customers with lower-revenue Sling ones. Dish remains disciplined about not chasing lower-profit customers with promotional pricing, helping to lower subscriber acquisition cost for the quarter to $763 per subscriber from $806 a year ago. Dish TV churn fell to 1.46% from 1.83% from the same quarter a year ago due in part to the higher quality subscriber base. We note that the firm’s new Dish TV specific churn rate continues to show strong quarterly improvement as the second quarter rate was the lowest of the past six quarters. Adjusted operating income margin expanded to 16.5%, up 150 basis points year over year as the lower costs from a smaller subscriber base more than offset increased content costs.

We now have a more accurate view into the growth of the current leader within the nascent OTT pay TV market due to the breakout of Sling subs. With 2.34 million subs, Sling remains the largest player within the total OTT pay TV landscape of over 6 million subscribers. DirecTV Now remains the second largest operator in the space with 1.8 million subscribers at the end of the first quarter. Note that the gap between the top two players continues to shrink with only 535,000 separating the two providers, down from 836,000 at the end of the first quarter. While Sling grew with 41,000 net adds in the quarter, the pace of expansion continues to slow down as the service added 120,000 subscribers in the second quarter of 2017 and 91,000 subscribers in the first quarter of 2018. In contrast, DirecTV Now added 342,000 subs in the second quarter of 2018 versus 152,000 in same period in 2017 and 312,000 in the first quarter of 2018.

We believe that part of reason for the slowdown at Sling are the 2017 launches of YouTube TV and Hulu with Live TV. Hulu reported at the beginning of May that its overall subscriber base recently crossed the 20 million subscriber milestone which implies net adds of roughly 3 million since the end of 2017. Hulu’s CEO later reported that Hulu with Live TV hit 800,000 subscribers at the end of May. We think that Hulu has a tremendous opportunity to sell its live TV product to current base of over 19 million subscribers that only use the SVOD service since the live TV offering includes the commercial SVOD tier at no additional cost. We also note that that both YouTube and Hulu are still rolling out their services market by market as more local affiliate broadcasters sign up. Additionally, both platforms are spending on advertising that highlights the unique aspects of each of their services. We expect that all of the OTT pay-TV services including Sony’s PlayStation Vue will continue to add subscribers but project that YouTube TV and Hulu with Live TV will expand the fastest.