Better-than-expected earnings and less-than-expected subscriber losses helped propel shares of satellite TV provider Dish Network (Nasdaq:DISH) to a one-trading-session gain of more than 17% to start the week. But tough trade conditions and intensifying competition could make such enviable comparisons increasingly difficult to achieve in future quarters.

IN PICTURES: Eight Ways To Survive A Market Downturn

Sharp Drop in Promotion Expenditures Leads to Surprise Earnings Gain

The good news was that earnings per share for the first quarter period came in at 70 cents - well ahead of analysts' consensus expectations of 56 cents. A drop in subscriber acquisition costs was the key factor behind the surprisingly stronger earnings. Subscriber losses, while hefty at 94,000, were still fewer that the 128,000 analysts had feared. Also, average revenue per user increased to $70.03 from $67.93 a year earlier. Less positive was the fact that customer churn rate, the monthly rate at which subscribers are lost, increased from 1.68% to 1.83%.

Consumers Tuning Out
Minimizing these subscriber losses and gaining new customers at an acceptable cost are now the key challenges faced by the company. Unfortunately, times are tough and getting increasingly tougher in the pay-TV industry. The recession has prompted consumers to cut back on perceived non-essentials like cable and satellite TV. And of those keeping their subscriptions, only 37% indicated they were getting good value for their money according to a recent poll. With free content on websites like Google's YouTube (Nasdaq:GOOG), and videos for purchase from NetFlix (Nasdaq:NFLX), which recently upped its subscriber guidance for 2009, it's no wonder that providers like Dish as well as rival companies like Comcast (Nasdaq:CMCSA) and Cablevision (NYSE:CVC) lost subscribers in 2008.

Loss of Key Partner Will Hurt New Subscriber Growth
Finding new customers is going to be doubly hard for Dish now that its key partnership with AT&T (NYSE:T), which allowed the phone company to package Dish's video service with AT&T's telephone and internet bundles, came to an end earlier this year. Rival satellite TV provider DirectTV (Nasdaq:DTV) replaced Dish in the AT&T arrangement, and has seen its subscription rates rise.

Legal Risk Remains High
Also adding to Dish's current challenges is the ongoing uncertainty stemming from a patent infringement lawsuit brought by digital video recorder maker Tivo (Nasdaq:TIVO). Dish has already had to pay $104 million to Tivo, a further claim Tivo has filed could potentially cost Dish hundreds of millions of dollars each month.

The Bottom Line
Despite gains to start the week, Dish has some serious challenges to contend with. The recent share price run-up was a bit of investor exuberance, which can be used as a selling opportunity. (Read Buy When There's Blood In The Streets to learn how contrarian investors find value in the worst market conditions.)

Related Articles
  1. Stock Analysis

    How Toyota Succeeds at Home and Abroad (TM)

    Japan's biggest car manufacturer is also one of North America's biggest, delighting shareholders with its high profit margins.
  2. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  3. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  4. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  5. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  6. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  7. Investing News

    Is the White House too Optimistic on the Economy?

    Are the White House's economic growth projections for 2016 and 2017 realistic or too optimistic?
  8. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  9. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  10. Economics

    Can the Market Predict a Recession?

    Is a bear market an indication that a recession is on the horizon?
RELATED FAQS
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center