Mixed Verdict on EchoStar’s Q3

11/14/2004 7:00 PM Eastern

EchoStar Communications Corp. reported mixed results in the third quarter, with net new subscriber additions falling short of estimates, but revenue and earnings growth ahead of most expectations.

EchoStar added about 350,000 new subscribers in the period, below some analysts’ expectations of about 400,000 additions. Revenue in the quarter was up 28%, to $1.86 billion, and net income tripled to $102 million (22 cents per share) from $35 million (7 cents per share) in the same period last year.

Churning Away
There has been an upward trend in the number of customers Dish Network has lost to churn in recent years.
Source: Company reports and Sanford Bernstein & Co. analysis
Q1 Q2 Q3 Q4
2001 N/A N/A 327,755 310,513
2002 301,693 353,528 406,138 370,868
2003 333,744 424,794 454,080 417,002
2004 418,470 501,971 537,638 N/A

Cash flow was $327 million in the period, up 25% from last year. Churn rose to 1.77%, up from 1.71% in the prior period, in what is traditionally a higher-churn quarter for satellite services.

In a research report, Sanford Bernstein & Co. analyst Craig Moffett said his biggest concern is that recent figures show churn to be on a slightly upward track over the past four years, resulting in more subscriber losses each quarter.

According to Moffett’s report, customers lost to churn have increased from 327,755 subscribers in third-quarter 2001 to 537,638 subscribers in third-quarter 2004.

“The net result of flat churn, coupled with a growing subscriber base, is that more customers are lost to churn each quarter,” Moffett wrote. “This will serve as a bigger and bigger anchor, slowing EchoStar’s growth.”

While the results appeared strong, on a conference call with analysts EchoStar chairman Charlie Ergen warned that increased pressure from telephone companies entering the video business could affect long-term growth.

Already, large telcos like Verizon Communications Inc. have announced plans to offer video services along with voice and data offerings. Though no telco has launched video service, Ergen said the threat should be taken seriously.

Ergen even hinted that SBC Communications Inc. — which struck a deal to market EchoStar’s Dish Network to its customers last year — could become a competitor.

SBC announced earlier this year that it will begin building an advanced fiber-optic network that will allow it to deliver video signals directly in 2005.

“The SBC relationship is one we value and one we continue to put a lot of effort in,” Ergen said. “Obviously, as technology changes, and their strategy may change along with that, there may be instances where we are on the same side, some instances where we compete, or there may be a situation where the relationship doesn’t work at some point in time.”

While Ergen said that the SBC relationship is working — in its 10-Q quarterly filing with the Securities and Exchange Commission EchoStar said SBC accounted for a material number of its new subscriber additions in the third quarter — he said there have been some obstacles to overcome.

Involuntary churn — or customers removed from the rolls because they fail to pay their bills — is a little higher with SBC, Ergen said, mainly because the telco is new to the video business.