Earning Scorecard: DISH Network

DISH Network Corp.(DISH) reported its first quarter 2011 financial results, where the bottom line exceeded the Zacks Consensus Estimate but the top line fell short of the Zacks Consensus Estimate.

The strong results were primarily attributable to higher total revenue and lower subscriber promotion subsidies, which declined 27.7% year over year.

Fourth Quarter Highlights

Quarterly GAAP net income was $549 million or $1.22 per share compared with a net income of $218.2 million or 52 cents per share in the prior-year quarter. Adjusted earnings per share (EPS) (excluding one-time items) of 72 cents were well above the Zacks Consensus Estimate of 68 cents.

Quarterly total revenue increased 5.4% to $3,220.6 million from $3,056.7 million in the year-ago quarter; mainly driven by higher subscriber related revenue. However, total revenue failed to beat the Zacks Consensus Estimate of $3,235 million. DISH Network added 58,000 net subscribers during the reported quarter, thereby raising its total subscriber base to 14.191 million as of March 31, 2011.

Agreements of Analysts

Of the 15 analysts covering the stock in the last 7 days, none revised their estimates for the second quarter as well as for the third quarter of 2011.

For fiscal 2011, out of the 15 analysts, none increased or decreased their estimates. Similarly, for 2012, out of the 16 analysts, none revised their estimates.

Currently, the Zacks Consensus EPS Estimate for the second quarter of 2011 is pegged at 76 cents per share. The projected annual growth rate is 32.75%. Similarly, for the third quarter, the current Zacks Consensus EPS Estimate of 63 cents per share reflects a year-over-year growth of 15.15%.

Magnitude of Estimate Revisions

For the second and third quarter of 2011, during the last 7 days, the current Zacks Consensus Estimate remained unchanged at 76 and 63 cents, respectively. Likewise, for fiscal 2011 and 2012, the current Zacks Consensus Estimate remained unchanged at $2.85 to $2.74, respectively, in the last 7 days.

Earning Surprises

With respect to earnings surprises, the company notched up an average earnings surprise of 13.31% in the trailing four quarters, implying that the company has exceeded the Zacks Consensus Estimate by the same magnitude over the last four quarters. The ongoing quarter contains an upside potential of (essentially a proxy for future earnings surprises) 1.32%, however, the third quarter of 2011 reflects a downside potential of 1.59%. Likewise, for fiscal 2011 and fiscal 2012, Zacks Consensus Estimates upside potentials are 5.61% and 2.19%, respectively.

Our Recommendation

Higher subscriber additions along with lower subscriber promotion subsidies will drive the company’s top-line and bottom-line growth in the upcoming quarters. Moreover, the company is upgrading their service quality by teaming up with EPIX as well as increasing their HD channel line up. This is expected to reduce the company’s churn rate going forward.

However, stiff competition, higher programming content costs and higher churn rate will act as headwinds for the stock. Recently, the company has settled its pending legal battles with TiVo Inc. (TIVO) related to patent infringement. DISH Network and EchoStar Corp. (SATS), which is a sister concern of DISH Network, will pay $500 million to TiVo, of which $300 million will be paid initially and the remaining $200 million will be paid in six equal installments by 2017. This will certainly put more pressure on the company’s cash flow, in our view.

We, thus, maintain our long-term Neutral recommendation for DISH Network. Currently, DISH Network has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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