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Satellite

In Q1, Dish, DirectTV Give Investors Something to Like

5/14/2012 12:01 AM Eastern

In a bit of a role reversal last week, Dish
Network reported stronger than expected first-quarter
new customer additions while perennial satellite subscriber
leader DirecTV came in slightly short of analysts’
expectations, a result of its plan to deliver steady, profitable
growth.

Dish soundly beat analysts’ consensus estimates for the
quarter, adding 104,000 net new subscribers. But the second
largest satellite operator missed some
revenue and cash-flow targets.

“[It] was a clear and decisive beat for the
operating line item that is probably the
most single important one in determining
future profitability,” Sanford Bernstein cable
and satellite analyst Craig Moffett said
of Dish’s net new subscriber growth. Consensus
estimates were for the satellite giant
to add about 62,000 net new customers,
and churn was a record low 1.35%, which
helped drive the numbers.

Dish, which has see-sawed between
gaining and losing net subscribers the past
several quarters, saw its stock fall slightly
on May 9, to $30.29, down 61 cents.

On a conference call with analysts, Dish
CEO Joe Clayton said the net new customer
growth was due to a decision not to raise
prices during the period and new products
like its Hopper whole-home DVR.

Clayton said the results show Dish is
making progress, but that more work needs to be done.

“There will be ups and downs as we move forward,”
Clayton said on the call. “But we are committed to improving
our Dish business approach with the right people, the
right programming, the right product, the right promotions,
the right advertising and the right customer care.”

On the downside, Moffett noted flat revenue growth —
subscriber-related revenue rose just 0.8% — and a decline
in cash flow. While earnings before interest, taxes, depreciation
and amortization at $892 million beat most analysts
estimates of about $868 million, it was still 27% below
the $1.2 billion generated last year and included about $110
million in one-time items that drive the results down even
further.

“If that’s the ultimate measure of a successful turnaround,
then there’s still a ways to go,” Moffett wrote.

POSITIVE METRICS

Other analysts focused more on Dish’s positive subscriber
metrics and free cash-flow growth, up a strong 12% to $689
million in the period.
“This has been a company that desperately needed a positive
operational quarter — and it defied all expectations,”
wrote ISI Group media analysts Vijay Jayant and Judah Rifkin
in a research note.

Dish chairman Charlie Ergen also added some insight into
its wireless spectrum plans, telling analysts that he had no
need to acquire additional wireless licenses, including those
from troubled rival LightSquared. LightSquared, backed by
hedge fund billionaire Philip Falcone, has run into a few regulatory
and funding snags as it tries to build its own ultra-high
speed wireless data network. Last Monday, several published
reports stated LightSquared received a one-week extension
from creditors, staving off a bankruptcy filing for now.

Ergen said he believes Dish has enough spectrum — about
45 Megahertz, if it receives the necessary approvals from the
Federal Communications Commission — and will most likely
seek a partner for its wireless offering.

“If we’re allowed to enter the marketplace, our 45 MHz of
spectrum is certainly enough for us to enter the marketplace
and compete,” Ergen said.

Over at chief satellite rival DirecTV, net new subscriber
growth slowed to 81,000 in the period, less than half the
184,000 it added in 2011 and missing consensus estimates of
92,000 additions.

On the financial front, U.S. revenue rose 7%
to $5.5 billion (slightly behind consensus), and
operating profit before depreciation and amortization
increased 3.4% to $1.4 billion, matching
consensus estimates. DirecTV’s stock fell
less than 1% (39 cents), to $47.64, on May 9.

ANALYSTS SPLIT

Analysts were split concerning DirecTV’s U.S.
performance, with some expressing concern
over the weakness in the U.S. operations and
others claiming that the satellite giant is delivering
steady, profitable growth.

“In our view, DirecTV’s 1Q results further
our concerns regarding the health of the U.S.
operations, as well as the costs of operating in
the Latin American markets,” Nomura Securities
analysts Mike McCormack wrote in a research
note. “U.S. incremental margins were
negative for the second quarter in a row, and
without a subscriber beat to soften the blow,
investors should question the operational strategy.”

Finding a positive, Moffett agreed that DirecTV’s U.S. operations
are slowing down. But he noted the company is dramatically
lowering churn — at 1.4%, 6 basis points below last
year — and raising average monthly revenue per unit, up 3.6%
to $91.99 in the period.

“That’s the ideal formula for profitability,” Moffett wrote.

While domestic operations were mixed, DirecTV’s Latin
American division continued to shine. DirecTV Latin America
added 593,000 net new customers in the period, and revenue
increased 33% to $1.49 billion. OPBDA rose 22% to $468
million.

September