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Morningstar | DISH Updated Forecasts and Estimates from 08 Nov 2018

No-moat Dish Network posted weak customer metrics during the third quarter as its dispute with Univision exacerbated the general decline in the satellite television business. Sling growth also slowed sharply, mirroring the experience of AT&T’s DirecTV Now. Management believes that Internet-based television continues to grow in popularity but that increased competition and "irrational" pricing have pushed customers to newer offerings, like YouTube TV. In our view, pricing is more rational than Dish thinks, and the situation is likely to get worse as more players position television within broader ecosystems of services. Dish provided little new information concerning its wireless network build-out plans, saying that it expects the narrow-band "Internet of Things" technology it is deploying will meet the Federal Communications Commission's build-out requirements. We continue to believe there is a chance that the FCC sees things differently, which is the primary reason we recently lowered our fair value estimate to $43.

Dish shed 367,000 net satellite customers during the quarter, nearly 70% more than a year ago, reversing the steady improvement in losses seen during the first half of 2018. The firm blamed the loss of Univision programming for about half of the net loss, so it's possible that improvement would have continued absent this contract dispute. Dish seems resigned to losing Univision permanently, indicating that adding the programming back now would risk a backlash from remaining customers who’ve found cheaper ways to access this content. Dish also commented on the dispute with AT&T’s HBO, stating that agreeing to AT&T’s terms would amount to business "malpractice," given the minimum customer guarantees AT&T has demanded. While we agree with Dish’s point, we also suspect there’s an element of grandstanding here. These disputes ultimately highlight the power that content owners have gained as the number of ways to reach customers has expanded.

Total revenue declined 6% year over year, the result of an 8% decline in the number of satellite customers served, offset by growth at Sling. Sling’s customer base has grown about 16% over the past year, but the service added only 26,000 net new customers during the quarter. Dish claims that it expects to expand the Sling customer base over time as newer online competitors become more rational with pricing and less successful players drop out of the market. Management highlighted increased rationality at DirecTV Now as a reason for optimism, but we believe this is more the exception that proves the rule. Both AT&T/DirecTV and Dish are attempting to recreate the profitable television model they’ve enjoyed over the years. We don’t believe other entrants are as driven by profit. In any event, Dish admitted that whether Sling is profitable today or not depends on how you measure it.

Overall, however, Dish remains solidly profitable. The elimination of Univision content, general cost-cutting measures, and slower customer growth more than offset the impact of steadily rising content costs. The EBITDA margin (21.7%) increased 2 percentage points versus a year ago (excluding the benefit of accounting changes, which added another percentage point). We don’t believe margin expansion is sustainable, though, as Dish will need to maintain agreements with the majority of its content providers.

Free cash flow continues to slowly drift lower but remains healthy. Dish has generated $1.2 billion over the past year despite shouldering nearly $1 billion in interest costs. Net debt declined about $300 million during the quarter, hitting $13.3 billion, or 4.7 times EBITDA. Net debt is down from a peak of $14.9 billion five quarters ago immediately following the broadcast spectrum auction.