DISH Stumbles Along, but the Hopper Is a Winner

For a while now, DISH Network (NASDAQ: DISH  ) has spent its time and money acquiring spectrum, lobbying the U.S. government, and attempting to partner with a major telecom company in hopes of launching its much-anticipated wireless network. The company made solid progress throughout 2012, but it still has a long way to go and billions more to spend in addition to the $4 billion it has already laid out. In the meantime, core business growth has slowed and the company missed analyst expectations on the bottom line on the most recent earnings statement. How is DISH doing compared to its peers, and should investors expect a return to growth in the future?

Earnings
Overall, DISH Network's fourth-quarter earnings were just OK. The company met Wall Street's expectations for revenue, but missed on EPS, as mentioned. Specifically, DISH brought in $3.59 billion in revenue in the quarter. The Street was expecting something around $3.56. Certainly not a bad performance when compared to the sometimes unreliable analyst estimates. On the EPS front, though, the company brought in just $0.46 per share. Analysts wanted an average of $0.52 per share. More important, the company's bottom line came in 33% under the year-ago quarter. Gross margins fell 4.1%, and net margins were down 3.8% from the year-ago quarter.

So what happened? Was it just that the company is pouring everything it has into spectrum? Not exactly.

Poor-performing asset 
DISH made the poor decision to acquire Blockbuster a few years back. Even at a bargain price, Blockbuster was facing irrelevancy that has now come on full force. The company recently announced it would be closing 300 stores, and reiterated this in the quarterly conference call. That leaves DISH with 500 stores remaining with which they plan to "maximize value from the brand and monetize the nonstrategic assets." As I wrote recently in an article devoted to the disaster that is Blockbuster, DISH needs to ditch this dinosaur and just forget about it. Owning all of that real estate so that it can sell a few DISH subscriptions is not the best use of real estate, personnel, capital, or anything else I can think of.

Blockbuster is a drag on DISH's balance sheet and is charging the company the equivalent of 10 million late fees.

User count 
In 2011, DISH lost 166,000 subscribers. In 2012, it added back 89,000. That certainly doesn't hold a candle to competitor DIRECTV's (NASDAQ: DTV  ) half-million-new-subscribers-per-quarter performance, but it is nonetheless a sign that people are still finding DISH an attractive option while most cable operators are seeing a flight in subscriber base for streaming options. 

According to management, this is due heavily to the success of the uber-controversial Hopper -- the DISH box that lets users skip commercials. While it has attracted serious backlash from major networks and content providers, the Hopper has proven very popular among customers and is truly an innovative product. I would go as far to say that it's the best thing DISH has going for it.

Charlie Ergen, chairman of the board and the company's largest shareholder, made a rare appearance on the conference call Wednesday to tell investors and analysts his thoughts on the Hopper -- and he was spot-on. Simply put, Ergen believes the current advertising system is on its way out and DISH is being punished for being one of the first to realize it. On the call, he quipped, "I believe customers will watch meaningful advertising and they'll be happy they're paying less for programming as a result." As for the current ad model, "I don't believe that's a good model for us or sustainable for the networks," he said.

It's a very good point. Why is targeted advertising the method du jour for ultra-disruptive Web companies with an ad-based revenue model, but traditional media insists on making me watch Androgel commercials? I may need topical testosterone juice one day, but right now I think I am just fine. And no, menstrual cramps aren't keeping me from getting through my day. Cable companies could charge more for ads if they were specifically targeted to the current show's audience. 

The Hopper has great potential for DISH if it were to refocus on its core business -- satellite television. Unfortunately, DISH is still fixated on spectrum.

Spectrum and guidance 
To be honest, the spectrum and wireless network could end up being a huge win for DISH in the near future. For me, though, it's too much of a guessing game and dependent on factors beyond management's control.

Overall, DISH had its ups and downs for the quarter and the year as a whole. The stock has fared better -- up more than 25% in the last 12 months. With EPS estimates at $0.60 for the coming quarter, the company has its work cut out for it to reverse the trends from the fourth quarter.

Investors should remain cautious looking ahead. The spectrum game is a pricey one to play, and with no guarantee of a payout. As always, I would steer interested investors to the company's competitor, DIRECTV.

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