DISH Network Underperforms

DISH Network Corp. ( DISH - Analyst Report ) declared weak financial results for the second quarter of 2012 way behind the Zacks Consensus Estimates. Nevertheless, despite facing stiff competition from DIRECTV ( DTV - Analyst Report ) and other cable TV and telecom operators, in the previous quarter, DISH Network lost a net total of 10,000 subscribers compared with a huge net loss of 135,000 subscribers in the year-ago quarter. At the end of the second quarter of 2012, DISH Network had approximately 14.061 million subscribers.

Quarterly GAAP net income was $225.7 million or 50 cents per share compared with $334.8 million or 75 cents per share in the year-ago quarter. Second-quarter 2012 earnings per share of 50 cents were significantly below the Zacks Consensus Estimate of 63 cents.

Quarterly total revenue was approximately $3,571.8 million, down 0.5% year over year and also below the Zacks Consensus Estimate of $3,650 million. This poor performance was mainly due to weak Subscriber-related revenue.

Segment wise, quarterly Subscriber related revenue was $3,295.8 million, down 0.5% year over year. Equipment and merchandise sales & other revenue were $270.3 million, remaining same year over year. Equipment sales, services, and other revenues from EchoStar were $5.7 million, down 35.5% year over year.

Average monthly subscriber churn rate in the second quarter of 2012 was 1.60% compared with 1.67% in the prior-year quarter. Average revenue per user in the reported quarter was $78.11 compared with $78.06 in the year-ago quarter. Average subscriber acquisition cost in the previous quarter was $806 compared with $795 in the year-ago quarter.

In the reported quarter, Subscriber-related expenses crept up 5.6% year over year to $1,825.8 million, driven by higher programming content costs and expenses related to call center operations. Subscriber acquisition cost increased 18% year over year to $404.5 million. Depreciation and amortization expenses were $299.1 million, up 26.2% year over year.

General and administrative expenses grew 0.7% year over year to $327.7 million on higher personnel costs and professional fees to support the network. Second-quarter 2012 operating income decreased by 34.8% to $468.4 million, while operating margin reduced to 13.1% from the year-ago level of 20%. Accordingly, quarterly EBITDA was around $760.2 million compared with $935 million in the year-ago quarter.

During the first half of 2012, DISH Network generated $1,348.1 million of cash from operations compared with $1,258.3 million in the prior-year period. Free cash flow (cash flow from operations less capital expenditures) in the first half of 2012 was $927.9 million compared with $855.6 million in the year-ago period.

At the end of the second quarter of 2012, DISH Network had $4,945.7 million of cash and marketable securities and $9,399.5 million of outstanding debt on its balance sheet compared with $2,040.9 million of cash and marketable securities and $7,493.8 million of outstanding debt on its balance sheet at the end of 2011.

Recommendation

We maintain our long-term Neutral recommendation on DISH Network. Currently, it has a short-term Zacks #3 Rank (Hold) on the stock.