Dish Network has been pretty adamant over the years in insisting that it can build a state-of-the-art 5G network at a lower cost than any of its competitors, but on Thursday, showed that it all depends on where you’re looking.
In releasing its Q3 results Nov. 4, Dish again insisted that it will cost about $10 billion to build its 5G network, but also revealed that it will spend about $13.6 billion over the long term on tower leases. That, coupled with another delay for the launch of its first market -- Las Vegas -- and the general lack of visibility around the wireless product spooked investors enough to drive the stock down more than 15% on Thursday.
“For a network that is supposedly only going to cost $10 billion to build – and, yes, they haven’t even started really ‘building’ yet – they are already $14 billion underwater,” wrote MoffettNathanson principal and senior analysts Craig Moffett in a research note Thursday.
Moffett added that the tower leases will be spread out over a period of at least 10 years and should be counted as debt, with the bulk of payments coming after 2025.
“This enormous accrued liability will steadily come to the income statement over a period of at least a decade (fully $7.4 billion of the obligation is for periods after 2025),” Moffett wrote, adding that only $1.6 billion of the $13.6 billion in long-term obligations is for capex.
“By comparison, their $281 million of 5G Network Deployment capex in Q3 is a drop in the bucket,” he continued. “But it is nevertheless nearly 13x what they spent a year ago, and is now starting to be a material drag on free cash flow.”
Dish shares fell as low as $36.44 per share on Nov. 4, down 15.4% or $6.65 each, after the company said it would spend $13.6 billion on long-term tower leases for the network. The company maintained in securities filings that it still expects the 5G network to cost about $10 billion to construct. The stock closed at $37.08 per share on Nov. 4, down 14% each. On Friday, shares rebounded slightly, closing at $37.87, up 2% or 79 cents each.
On a conference call with analysts to discuss Q3 results Thursday, Dish chairman Charlie Ergen said no one should be surprised about costs rising because Dish is building the network at a lower cost than anyone has ever built a national wireless network before. Dish has been signing on partners for the service for months, including Amazon’s AWS, to help build out the network, which is based on Open Radio Access Network (ORAN) technology that utilizes a series of small antennas and base stations to deliver service via the cloud. But Ergen added that Dish hasn’t been so good at explaining what it is doing.
“We’re not exactly understood by the industry as much, and part of that is because we don’t spend a lot of time going through strategically what we’re doing,” Ergen said on the call. “It’s a complicated story and it’s a little bit easier for us to just go do it and show people, as opposed to trying to explain it.”
Dish now expects to launch its first 5G wireless market, Las Vegas, in the first quarter of 2022, the third delay in what was originally expected to be a Q3 and later a Q4 launch of the product. Dish CEO Erik Carlson said on a conference call to discuss Q3 results that Dish is beta testing the service with ''friendly users” (mainly its own and vendor employees) in that market currently.
“I think about it as a pre-production environment or a development environment until fairly recently,” Carlson said of the Las Vegas network. “Just getting the radio software and the core network software to work well together and be reliable. …Vegas is coming along. We’re in beta test mode and we’ll progress that in the course of the next 90 days and look forward to launching Vegas sometime in the first quarter of 2022.”
On the conference call, Dish said it had about 42 markets under construction, including Las Vegas.
Other analysts weren’t as down on the wireless business. In a note to clients Friday, Barclays Group media analyst Kannan Venkateshwar said while the higher costs and the slight Las Vegas launch delay probably contributed to Thursday’s stock decline, it is the general lack of visibility around its biggest potential growth product (wireless) that has many investors worried.
“The bigger issue with Dish is that it is a story stock with very little by way of milestones beyond small data points around network build,” Venkateshwar wrote. “In that context, management's commentary during the call may have introduced some degree of pessimism around the pace of network build.”
The analyst added that while Dish doesn’t seem to be affected by supply chain issues yet, the time-sensitivity associated with its market launches and regulatory deadlines do put the company in a bit of a predicament if equipment vendors were forced to prioritize.
Adding to the concern is the possibility that Dish may have to seek outside financing in the future. Venkateshwar believes that Dish is likely to need external financing in 2022, and the company didn’t rule out the possibility of an equity raise, which may have rattled investors. Even if Dish was merely keeping its options open, taking on more debt -- which would likely be high interest due to declining free cash flow and a leverage ratio north of 5 times cash flow -- should be a cause for concern.
Venkateshwar also mentioned the accelerated decline of Dish’s prepaid wireless business. Boost Mobile lost another 121,000 subscribers in Q3, its fifth consecutive quarter of decline. Boost has shed more than 1 million customers since Dish closed its purchase in July 2020.
Although Venkateshwar said the losses aren’t surprising given the transition from the Sprint network to T-Mobile, “it does highlight the challenge of scaling a facilities-based service from scratch.”
In his note Venkateshwar wrote that he expects continued subscriber losses at Boost wireless adding that investors appear to be underwriting what they believe is significant execution and capital structure risk. At the same time, he wrote that the lack of visibility and round the network build out and additional needs for funding, make it difficult to keep the story going.
“Therefore, while the [share price] move yesterday may have been excessive, it is not a stock that can be defended on valuation because investors don’t even have an outline of a business model or ultimate capital structure yet,” Venkateshwar wrote. “As a result, volatility is likely to be a constant feature in this stock in the coming months.”
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