Pegasus Hammered for Slow Growth


Shares of Pegasus Communications Corp. dropped to their lowest trading price in a year last Wednesday, one day after the DirecTV Inc. reseller reported slower-than-expected subscriber growth for fourth-quarter 2001.

In an earnings report issued late last Tuesday afternoon, Pegasus said it added 23,000 net new subscribers during the fourth quarter of 2001, after grossing 93,000 new subscribers for the period. In the fourth quarter of 2000, Pegasus added 73,000 net new subscribers.

For the year, Pegasus added 116,000 net new subscribers, compared to 255,000 net new customers in 2000.

"The December sales experience was disappointing relative to our expectations," Pegasus CEO Mark Pagon said during an analyst call after the market closed Tuesday.

The company's net-subscriber additions for this year would increase by 2 percent to 5 percent, Pagon projected, but he also said he expects first-quarter net-subscriber additions to remain flat compared with last year's first quarter.

Pegasus served 1.5 million direct-broadcast satellite customers at the end of 2001. Its average revenue per subscriber increased to $48.59 during the fourth quarter, the company said.

The net loss for the quarter was $82.5 million, compared to $73.7 million for fourth-quarter 2000. The company's net loss for the year was also up, to $328 million in 2001 vs. $200 million in 2000.

Alpert & Associates president Mickey Alpert suggested that Pegasus management has shifted its attention to determining how the company will resolve its contractual issues with DirecTV, as well as how it will fit into the DBS landscape if and when the merger between EchoStar Communications Corp. and DirecTV parent Hughes Electronics Corp. is completed.

"That's much more significant than subscriber numbers," he said.

Pegasus' improved cash-flow performance for the quarter was a positive sign, Alpert added. Some Wall Street analysts agreed.

"In our view, management's change in strategy to drive cash flows rather than subscriber growth under a questionable economic model was a positive event for the company and may have averted a liquidity crisis," Morgan Stanley satellite analyst Vijay Jayant wrote in a research report last Wednesday.

Although some on Wall Street downgraded Pegasus stock last week, UBS Warburg LLC bond analyst Aryeh Bourkoff issued a statement reiterating his buy recommendation, citing cash flow that exceeded expectations.

In the earnings call, Pagon said Pegasus broke ranks with the rest of the DBS industry three quarters ago, moving away from the goal of growth at any cost toward becoming cash-flow and free cash-flow positive.

To meet its new goals, Pagon said, Pegasus has focused more on reducing churn, improving distribution and increasing average revenue per subscriber.

Encouraging programming commitments from new customers will help to reduce churn, which tends to be highest during a subscriber's first year, Pagon said.