DirecTV, EchoStar Pay Dearly to Add Subs

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DirecTV Inc. and EchoStar Communications Corp. reported strong subscriber growth in the first quarter -- adding a combined 800,000 net new subscribers -- but that growth came at a cost.

DirecTV blew by analysts’ expectations for net subscriber additions, bringing 460,000 new customers into the fold, nearly double the 278,000 net additions most analysts predicted.

But cash flow at the No. 1 direct-broadcast satellite service provider fell far below consensus estimates -- $145 million, compared with expectations of $261 million -- largely due to higher subscriber-acquisition costs and additional expenses related to rolling out additional set-top boxes and digital-video recorders.

SAC rose to $645 per subscriber, ahead of the consensus estimate of $638. However, churn was in line with expectations (at 1.45% per month), as was average revenue per unit (ARPU), at $63.60 per month.

At EchoStar, subscriber additions rose by 360,000 in the quarter, but SAC costs increased by 26% year-over-year to $604 per subscriber and ARPU was flat at $51.76 per month.

Monthly churn was also higher (at 1.48% versus 1.38% last year). Revenue rose 16% to $1.58 billion.

The SAC rise was dramatic -- it was just $479 per subscriber last year -- and it reflected EchoStar’s aggressive promotion offering new subscribers three set-top boxes free-of-charge.

In a research report, Banc of America Securities LLC cable and satellite analyst Doug Shapiro said the promotion, while costly, may prove to work out in the long run as these subscribers pay more for advanced services like HDTV and DVRs and churn less.

Cash flow was down 20% in the period to $224 million for EchoStar, again a reflection of the aggressive promotion.

“On balance, we believe the higher SAC is being well-spent, and returns on the gross additions remain healthy,” Shapiro wrote in a report. “Thus, the drop in [cash flow] reflects an investment in the core business that should yield strong returns and is good news in our view.”

Sanford C. Bernstein & Co. cable and satellite analyst Craig Moffett had a different view. He called EchoStar’s results “sloppy” in a research report and stated that rising programming and operating costs point to declining marginal returns on new subscribers.

“All of this suggests that EchoStar will have no choice but to raise prices,” Moffett wrote. “But higher prices will present their own problems, compromising what has been perhaps the primary engine for subscriber growth for EchoStar.”

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