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.

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.