| NEW YORK
NEW YORK U.S. satellite television provider DISH Network Corp (DISH.O) reported a surprise quarterly loss in subscribers as it lost ground to cable and phone competitors amid a weaker economy, sending its shares down more than 5 percent.
Although the subscriber loss meant lower installation costs for DISH, which helped boost its second-quarter profit to above Wall Street expectations, analysts said on Monday the customer loss boded ill for the company's growth prospects.
"This is not pretty. It's the first ever loss of subscribers by a major satellite TV company," said Craig Moffett, analyst at Bernstein Research. "DISH appears to have lost its mojo when it comes to attracting new customers."
DISH, which is facing stiff competition from cable companies' competitively priced 'Triple Play' bundles of video, phone and high speed Internet, said it lost a net 25,000 subscribers during the second quarter.
That compared to the average forecast of 72,000 net additions from five analysts polled by Reuters. A year ago, DISH had added 170,000 subscribers in the second quarter.
"It's not a good number and obviously we're disappointed," said Charlie Ergen, chief executive of DISH Network on a conference call with analysts.
The company blamed "weak economic conditions, aggressive promotional offerings by our competition" and heavy marketing of high-definition programming by its larger rival DirecTV Group DTV.O.
DISH also highlighted the growth of "fiber-based pay-TV" service from phone companies like Verizon Communications Inc (VZ.N) and AT&T Inc (T.N), as well as signal theft and other operational inefficiencies.
Customer churn, a key industry metric used to measure the rate of customer loss, rose to 1.87 percent from 1.68 percent.
Ergen told analysts that signal theft through illegal set-top boxes bought over the Internet or elsewhere was one of the factors that had a material impact on DISH's customer churn during the quarter. He said the company is rolling out new security measures to prevent signal theft.
DISH's management said in a regulatory filing that it is focused on improving customer service and other operations, as well as launching new high-definition services. But it cautioned these could come at a cost.
"Given the increasingly competitive nature of our industry, it may not be possible to reduce churn without significantly increasing our spending on customer retention incentives, which would have a negative effect on our earnings and free cash flow," the company's filing said.
DISH also noted that in the first six months of the year, a joint marketing partnership with AT&T accounted for 15 percent of its gross subscriber additions. On June 30, AT&T said that it intends to terminate the agreement, effective December 31.
"Our ability to maintain to grow our subscriber base will be adversely affected if we do not enter into a new agreement with AT&T," said DISH management in the filing.
Todd Mitchell, analyst at Kaufman Bros, said the loss of AT&T and an aggressive HD offering will likely put pressure on DISH's average revenue per user while causing subscriber acquisition costs to rise.
The Denver-based company's net profit rose to $336 million, or 75 cents a basic share and 73 cents per diluted share, from $224.2 million, or 50 cents a diluted share, a year earlier as an 11.5 percent drop in gross subscriber additions meant lower customer acquisition expenses.
Revenue rose 5.6 percent to $2.91 billion during the quarter, helped by a rise in programming prices.
Analysts polled by Reuters Estimates had been expecting profit of 60 cents a share on revenue of $2.9 billion.
DISH Network, formerly known as EchoStar Corp, ended the quarter with 13.79 million subscribers, trailing DirecTV, which reports results on Thursday.
Shares of DISH were down $1.50 to $27.46 while DirecTV shares dipped 34 cents to $26.58.
(Reporting by Yinka Adegoke; Editing by Derek Caney, Dave Zimmerman)