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March 01, 2007

Strong Quarter For Echostar Communications

Echostar (DISH) reported very good 4Q06 earnings. EPS, revenue, and EBITDA were 34 cents, $2.6 billion, and $615 million compared to consensus estimates of 32 cents, $2.54 billion, and $603 million. There were a number of EBITDA estimates in the $590 million range as well. Subscriber metrics also looked very good. The bottom line is that it was a clean beat and estimates are headed higher. The shares are up sharply against a weak tape and the move is well deserved.

More important than the headline financial numbers were the excellent subscriber metrics. Net adds accelerated sharply to 350,000 well ahead of analyst estimates which ranged from 240,000 to 280,000. Gross adds looked good as well but part of the beat on net adds was an all-time best churn rate of 1.50%. Analysts were expecting churn of 1.6% or more. Strong upsell of advanced services like DVRs and high def caused ARPU to come in at $64.29, again well ahead of analyst estimates which were mostly under $63. Even better for DISH longs is the fact that all these new subscribers paying more than expected were brought in without a spike in subscriber acquisition costs. SAC was $678 in the middle of analyst estimates.

The conference call didn’t cover a lot of new ground but was especially interesting because DISH CEO Charlie Ergen took all the questions. I am not a regular on DISH calls but apparently he only comes once each year. He expressed a lot of confidence and noted a few times that he is the largest shareholder and he wants to do well for himself, especially over the long-term.

Several topics of interest that came up in Q&A...

• The company believes it si underleveraged but doesn’t know what to spend the money on. A share buyback has been completed via retirement of a convertible but no commitment to further share buyback was made.
• 4Q results may have benefited from DISH carrying NFL Network while many cable companies did not.
• Management admitted that margins could have been better. DISH is having some trouble scaling the business as it relates to customer service. This is likely to work out favorably and provides some upside down the line.
• DISH has no idea of what it will do as far as a broadband offering is concerned.
• DISH is not that worried about being a one product company as many consumers have shown a willingness to hold one product out of the triple play or quadruple play bundle. Also, the deal with AT&T (T) to bundle DISH provides help.

I don’t have a strong opinion on DISH. The company is performing well and the stock is also supported by its asset value as a potential acquisition target for T whenever Ergen becomes a willing seller. That could be never but it still provides support for the stock. The idea of a merger with DirecTV (DTV) also supports the shares. The outcome of the Sirius-XM merger in Washington seems like it will offer some clues as to whether a merger of DISH and DTV would be approved.

Overall, it appears that all the satellite and cable companies are managing to perform quite well at the financial and subscriber level. This suggests to me that the management teams aren’t stupid when it comes competition. That is good news for shareholders of all the industry players including DISH.

Posted by Steve Birenberg at March 1, 2007 04:44 PM in DISH