Tremendous increase in subscriber related revenues led DISH Network Inc. (DISH) to post excellent second quarter 2010 financial results. The results significantly beat the Zacks Consensus Estimate. However, the loss of net subscribers makes some analysts skeptical regarding DISH Network’s future prospects.

Second Quarter Highlights

Total revenue increased 9.1% year over year to $3.17 billion and exceeded the Zacks Consensus Estimate of $3.12 billion.

Second quarter earnings of $257 million or 57 cents per share were higher than $63 million, or 14 cents reported in the year-ago quarter. Quarterly earnings also came in well ahead of the Zacks Consensus Estimate of 53 cents.

DISH Network lost approximately 19,000 net subscribers, ending the quarter with approximately 14.32 million subscribers. This was primary due to increased competitive pressure, which negatively impacted both gross activations and churn in the quarter.

During the quarter, average monthly subscriber churn rate was 1.78%, compared with 1.73% in the year-ago quarter. Average monthly revenue per subscriber was $73.05, compared with $70.73 in the second quarter of 2009.

Agreements of Analysts

Despite posting strong results, the overall earnings revision trend is mixed. For the third quarter of 2010, 5 out of 17 analysts covering the stock revised their estimates upward, while 6 analysts revised their estimates downward, over the last 30 days. For the fourth quarter, 3 out of the 16 analysts covering the stock revised their estimates upward while 7 analysts moved downward, over the last 30 days.

For fiscal year 2010, 6 of 15 analysts increased their estimates, while 3 revised their estimates downward, during the same period. Similarly, for the fiscal year 2011, 5 out of the 18 analysts revised their estimates upward and 5 analysts decreased their estimates.

We believe negative sentiment comes from net subscriber loss. As a low-cost satellite pay-TV operator, DISH Network needs a steady pace of net subscriber addition for its survival. In contrast to DISH Network, its closest rival DIRECTV (DTV) generated a significant subscriber growth in the same quarter.

Furthermore, in the U.S., pay-TV market is highly competitive. DISH network is currently the third largest pay-TV service provider with around 14.318 million subscribers, well below Comcast Corp. (CMCSA) (23.212 million subscribers) and Direct TV Group (18.76 million subscribers). Time Warner Cable (TWX) is quickly approaching DISH Network with 12.706 million subscribers.

Magnitude of Estimate Revisions

In accordance with the overall trend of estimate revisions for DISH Network, the Zacks Consensus Estimates for the third quarter 2010, fourth quarter 2010 and fiscal year 2010 remained flat in the last 30 days, while for the fiscal year 2011, the Zacks Consensus Estimate decreased by 1 cent to $2.20.

Our Recommendation

Nevertheless, of late, management had taken some steps including new marketing strategy and expansion of HD line up to boost its growth. An improving U.S. economy may also help regain its subscriber growth. But in the near term, we believe the stock will mostly follow m the broader market movement.

DISH Network is also opting for an innovative advertisement campaign in order to gain maximum foothold in the intensely competitive U.S. pay-TV market. Recently, the company has launched an ad-promo for its new “Free HD for Life” service. With this, DISH Network will offer customers free High Definition (HD) service for a lifetime while almost all its competitors including its closest rival DIRECTV charges an extra fee (around $10 per month) for HD service.

DISH Network currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.

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