Dish – low investment in subs, broadband suggests deal is near

We’re not sure why we see Dish Network in such a dim light – it is a satellite TV direct to home company, it has big repeat revenues, which are falling but only slightly; it has predictable fixed costs, some leases on satellites in the air, and predictable costs for adding each new subscriber. Okay it has a rising cost of programming, but on the reverse it has an advanced experiment in OTT services and a speculative position in wireless and spectrum.

Most investors love it for all of those reasons above, but we continue to see it as the poor man’s DirecTV, weaker on content and on execution, service, delivery, infrastructure and partners. And we can only see the downside of the gambler’s position on the wireless assets which appear to have less and less potential buyers or partners ready to build them out.

This week Dish reported revenue of $3.68 billion for Q1 down from $3.83 billion for the corresponding period in 2016 with net income at $376 million, compared to net income of $400 million a year ago.

The quarter was an uneventful one. It bought assets from its cousin EchoStar in return for Dish’s 80% holding in the Hughes Retail Group. Dish took OTT software developers, a managed fiber network, wireless spectrum assets, its uplink business, and the 10% stake in Sling TV which EchoStar held.

Dish’s ability to attract new customers fell yet again in the quarter with it activating 547,000 gross subscribers, down from 657,000 a year ago. In all,  pay TV subscribers declined by 143,000 in Q1, compared to a decline of approximately 23,000 in the first quarter 2016. That means that much of the decline was accounted for by its inability to attract quite so many total new customers. It lost perhaps a few more existing customers than last time – in the region of 690,000, offset by the 547,000 it acquired. That’s a staggering number.

Today Dish has 13.528 million pay TV subscribers, compared to 13.874 million at the end of Q1 2016, a fall of 846,000. At this rate it could churn its entire customer base in about 5 years.

Finally there has been a notable fall in ARPU, which at first site seems nothing like the amount that you might expect, given that most estimates have Dish adding between 100,000 and 150,000 Sling TV subscribers each quarter, making about 1.15 million of its subscribers Sling TV customers only, with an ARPU of $20 to $25, or so. Satellite DTH subscribers are likely to be as low as $12.38 million. What we don’t know is the rise in ARPU among these DTH subscribers, and the precise ARPU of the Sling TV OTT customers. If we did we could reverse engineer the split between the two, whereas for now we can just guess, which we have done below.

Remember that during 2016 Dish cut 2,000 jobs so that it could remain profitable, and this quarter there is no further mention of these, so no further cuts, so far.

The ARPU is now at $86.55, and this compares with the year-ago when it was $87.94, down roughly a $1.39. If 100,000 new subscribers took Sling at say $25 each, including at least one $5 add-on, that could be like the calculations below using our numbers.

At that rate next quarter revenues would fall by another $174 million to around $3.5 billion, and in another year by $700 million to $3 billion a quarter. The ARPU would still be roughly $85. By which time it would clear to everyone what was happening to Dish.

At the same time its broadband customer base has the look of something that has begun to decline, except it hasn’t. Dish said that it lost 25,000 net broadband subscribers in the first quarter, bringing its broadband subscriber base to approximately 555,000.

But this is disguised by the fact that it has stopped selling broadband on its own account, but instead sells it for Hughes Communications and ViaSat. Those sold for Hughes, which use Hughes equipment, have gone from being counted as wholesale and adding to Dish figures, to acting as an authorized rep. In other words Dish is transitioning out of owning the subscription so that it can scale down this business, without losing its revenue. It said clearly that subscriber activations generated in this agreement are not included in its broadband subscriber count.

All of which leads to one thing and one thing only – the business is being prepared for a transaction of some type. Dish may well sell off its broadband business to someone. But the main business either has to have more money spent on acquiring customers, and the only reason we see Dish as not prepared to do that right now is because it is planning another type of transaction – a sale of the entire business, or a merger or a sale or lease of all those juicy spectrum assets.  But it had best happen in the next two quarters, or the slide may no longer be reversible.