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Morningstar | Programming Disputes Continue to Inflame Dish Customer Losses

Dish Network posted another ugly contraction in its television customer base during the first quarter, but, as usual, still managed to generate solid cash flow. Management continues to use the quarterly earnings call to make the case for its wireless spectrum plans while lamenting the unfortunate timing of the buildout requirements on its spectrum licenses versus the ongoing development of 5G technology. We don’t plan to change our $41 fair value estimate or no-moat rating.

Dish lost 265,000 net satellite customers, an improvement from the 381,000 losses in the fourth quarter but significantly worse than a year ago (185,000). Programming disputes continue to worsen the broader impact of declining demand for traditional pay television, as management again claimed that the loss of Univision and HBO content accounted for around half of net losses. Management also continues to claim that the pace of customer defections sits at historic lows, when the impact of lost programming is excluded. We believe Dish’s assessment is generally correct, as remaining customers are more likely to live in rural areas or otherwise have a strong affinity for the service. However, we don’t believe the firm will return to consistent customer growth over the next few years, even with Univision returning to the Dish lineup in late March.

We still believe Dish is playing a weak hand the best it can, negotiating hard with programmers that have made content available to customers outside of the traditional pay-television ecosystem in search of a pricing advantage against other providers. On Univision, the firm would only say that it was able to reach an agreement that aligned both firms’ incentives and that future agreements with other firms need similar terms. Dish specifically referenced Disney, saying it is unsure of the role a firm like Dish will play in Disney’s direct-to-consumer plans. We suspect comments like this one reflect posturing on Dish’s part in advance of negotiations.

Total revenue declined 8% year over year, the sharpest decline for the firm yet. The number of satellite customers served has declined 11% over the past year, only partially offset by growth at Sling, which added a modest 7,000 net new customers during the quarter. Dish doesn’t disclose average revenue per satellite or Sling customer, but management highlighted several high-margin revenue tailwinds at Sling, including the $5 price increase on the Orange package taken last fall, strong uptake of add-on services, and a near doubling in ad sales revenue. Dish has said satellite ARPU is increasing, which likely implies double-digit ARPU gains for Sling (the firm includes ad revenue in its ARPU figures).

Despite the accelerating revenue decline, Dish continues to generate solid profits. A large portion of the firm’s cost structure, including programming expenses, is variable, and the elimination of Univision and HBO content benefits costs per customer. Customer-related expenses actually declined slightly as a percentage of revenue. The firm has seen deleveraging against general and administrative costs, but these are less than a tenth of customer-related expenses. Customer acquisition costs were flat year over year despite a sharp slowdown in gross customer additions. The firm claims it is putting more expensive equipment in customers’ homes as part of its strategy to seek only high-value accounts. The EBITDA margin declined 1 percentage point versus a year ago to 14%. Free cash flow for the quarter totaled $322 million, down from $387 million last year. Dish is now sitting on $2.4 billion in cash, enough to handle a $1.3 billion debt maturity later this year while continuing to invest in the wireless business.