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November 08, 2005

Echostar: I Prefer Other Multichannel TV Stocks

Echostar (DISH) reported 3Q05 revenue and EBITDA right in line with expectations at $2.1 billion and $501 million, respectively. However, the EBITDA figure included a $35.1 million one-time benefit. Therefore, EBITDA appears to be short of expectations and is likely the reason the shares are trading down over 2% as the conference call wraps up. Another possible cause of the weakness is ARPU coming in at $57.78 vs. consensus estimates of about $58.60. Closely watched subscriber acquisition costs matched analyst estimates at $670. Churn was up in the quarter but apparently the company proactively called subscribers in Alabama and Mississippi t turn off their subscriptions as opposed to billing them knowing a write-off would come in 4Q. Excluding the hurricane impact, churn appears in line with expectations....

I have not listened to a lot of DISH calls over the years so I am not sure how to interpret the fact that the call had little discussion of the EBITDA shortfall. Margins contracted which must be because ARPU was light and/or promotions were high. DISH has a very aggressive campaign to win customers from cable and also uses an everyday low pricing strategy.

Most of the questions concerned long-term issues such as technology upgrades. The implication is that analysts are very concerned about the company's competitive positioning given the single product nature of the business. While management was quite open with its discussion of analyst questions, I didn’t get the impression that much new information was added to the discussion.

Another line of repeated questioned concerned the company's balance sheet, cash flow, and future share repurchases. DISH has $5.9 billion in debt and $1.5 billion in cash, leaving net debt per sub at less than $400. On the call, management noted that it is comfortable with debt per sub in the $500 to $1,000 range. However, management was unwilling to explain how it planned to increase leverage and would not commit to a significantly larger share buyback. In fact, CEO Charlie Ergen was quite blunt when he noted that the Street was quite negative on Pay TV and there was no reason to fight it with accelerated share repurchases. Maybe I misinterpreted, but this seems a low vote of confidence in the business.

On the subject of broadband strategy, management was also non-committal, admitting that they had no fully developed strategy. This has been a hot topic since BSkyB in the U.K, bought a terrestrial broadband company in late October.

DISH has an interesting financial profile with low debt and high free cash flow. On this basis, an argument can be made for owning the shares. However, I find the same argument can be made about Comcast where I am more comfortable with the competitive landscape as at least they can compete across the full bundle of products. DISH seems most likely to appreciate if the company is sold to private equity or to a telecom company that wants to totally control and gain immediate access to a multichannel TV product.

Posted by Steve Birenberg at November 8, 2005 02:51 PM in DISH