Updated: Dish Network Stock Rises Behind Q2 Results

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Dish Network beat most analysts' estimates for the second quarter, reporting a 26,000 rise in net new subscribers, and its stock soared as high as $20.40 per share (up more than 10% or $1.98 each) before settling down to close at $19.30 each (up 5%, or 88 cents) in Monday trading. 

Analysts' had expected the second quarter would be another one of heavy losses for the satellite TV giant, with consensus estimates for a loss of 131,000 subscribers.

On a conference call with analysts, Dish executive vice president Tom Cullen said the subscriber growth could be attributed to two factors - the federally mandated digital transition, which took effect on June 12 and Dish's own migration to new set-top conditional access cards from Nagravision, an effort to combat piracy.

Cullen said that the digital transition did have a positive impact on subscriber growth, but because it occurred around the same time as the migration to the new Nagravision cards, he couldn't pinpoint which had the greater impact.

"Former pirates don't identify themselves [when deciding to pay for service]," Cullen said on the call.

He added that the second quarter was also the first full quarter for the company's $9.99 per month promotional offering. While Cullen said that that deal also had a positive impact, particularly in boosting gross subscriber additions, most new customers are paying a higher rate.

"It's has been effective in ringing the phone," Cullen said.

While Dish beat analysts' estimates soundly, most who follow the No. 2 satellite company don't believe it is out of the woods yet. Subscriber acquisition costs were markedly higher in the period -- SAC was 7.5% above the first quarter levels at $708 per subscriber, mainly due to promotions and advertising costs.
Revenue in the period declined 0.4% to $2.9 billion and operating income declined 57% from $620.7 million in the prior year to $262.8 million.

In a research note, Sanford Bernstein cable and satellite analyst Craig Moffett wrote that while the subscriber gain was encouraging -- he noted that Dish boosted customers the "right way" through gross subscriber additions - the SAC increase points to bigger problems.

"But as is so often the case with Dish Network, it's where investors weren't looking that holds the key," Moffett wrote, adding that despite the subscriber gains the company's cost structure continues to be weak - high subscriber related expenses eroded adjusted cash flow margins in the period to 24.3% from 29.8% in the prior year.

"Valuations based on old assumptions about margins, earnings, and free cash flow will all need to be revisited... and not for the better," Moffett wrote.
Cullen also said on the call that Dish is conducting some preliminary engineering work around it purchase of a large block of 700 Megahertz wireless spectrum last year, http://www.multichannel.com/article/132522-Dish_Network_Cox_Among_700_MH... but that no major developments are expected for quite awhile.
"We have an engineering team, but it's not something you will see significant public activity around for awhile," Cullen said, adding that the first product iteration to come from the project would be a mobile video product.

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