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EchoStar Posts Impressive Quarter

3/09/2003 7:00 PM Eastern

EchoStar Communications Corp. had a blowout fourth quarter — beating analysts' estimates in revenue growth and subscriber additions — and expects to be free-cash flow-positive this year, well ahead of many of its cable competitors.

The Littleton, Colo.-based direct-broadcast satellite provider added about 400,000 new subscribers in the fourth quarter, beating analysts' estimates of 360,000 net additions.

Revenue growth was 15 percent. And cash flow, or earnings before interest, taxes, depreciation and amortization (EBITDA), rose 13 percent.

Chairman Charlie Ergen told analysts on a conference call that the company would have had positive free cash flow in the quarter, but for the $600 million charge associated with the break-up fee for its failed merger with Hughes Electronics Corp., parent of archrival DirecTV Inc.

Otherwise, EchoStar would have reported cash flow after interest payments and capital expenditures of about $124 million in the quarter and $231 million for 2002.

Ergen apologized to investors for the failed merger attempt, blocked by the Federal Communications Commission in December as anti-competitive. Including about $90 million for merger-related costs, the total bill for the Hughes merger was $690 million.

"It was certainly a failed initiative, and we have to be accountable for that," Ergen said on the call.

Big sub gains

Robust subscriber numbers — EchoStar finished the year up 1.3 million subscribers, about 24 percent higher than DirecTV's 1.05 million additions — helped boost the stock.

EchoStar rose 6.6 percent on Tuesday, or $1.70, to finish at $27.65 in 4 p.m. trading. It continued to climb Wednesday, up another $1.11, to $28.76.

Ergen said analysts should focus on free cash. "EBITDA is a fake number if you're an equity guy in a capital-intensive industry," Ergen said.

Most cable companies are looking to 2004 and beyond to generate free cash flow. Cox Communications Inc. expects to hit that milestone this year.

Average monthly churn among EchoStar's Dish Network subscribers was relatively flat at 1.59 percent for the year, down from 1.6 percent in 2001.

"Along with Comcast and Cox, EchoStar is one of few pay TV operators that we expect to be free cash-flow positive for the full year 2003, leaving it as one of the best positioned issuers in the sector from a financial flexibility standpoint," UBS Warburg cable and satellite analyst Aryeh Bourkoff said in a research note.

Analysts also were impressed with EchoStar's 2003 subscriber growth guidance of more than 1 million new customers, a 12 percent hike. EchoStar ended 2002 with 8.18 million.

Subscriber acquisition costs were lower in the fourth quarter — $489 per subscriber as opposed to $476 in the third quarter. For the full year, SAC was about $507.

Ergen expressed little appetite for further acquisition attempts.

He said a proposed satellite-TV offering from Cablevision Systems Corp. would be an unlikely target, given Cablevision chairman Charles Dolan's traditionally high asking prices.

"I don't know the Dolans all that well, but nobody ever gets a good deal from them," Ergen said on the call. "They are very shrewd operators. I don't know how much value that would have to us."

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