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EchoStar Rallies on Sub Gains

EchoStar (DISH - Get Report) posted a second-quarter profit Tuesday and set plans to buy back up to $1 billion in stock.

The Englewood, Colo., provider of satellite television service said earnings for the quarter ended June 30 fell to $85 million, or 18 cents a share, from the year-ago $129 million, or 27 cents a share. Revenue rose 26% from a year ago to $1.78 billion.

The latest-quarter numbers fell shy of Wall Street's bottom-line expectations of 22 cents per share, but were above the Thomson First Call analyst revenue estimate of $1.67 billion.

On Tuesday afternoon, shares of EchoStar were up $1.74, or 6.4%, at $29.

Earnings before interest, taxes, depreciation and amortization -- a widely followed cash flow measure -- amounted to $296 million, just shy of the $298 million First Call median forecast.

EchoStar, operator of the Dish Network satellite service, added 340,000 net new subscribers during the second quarter, giving it a total of 10.1 million at June 30. That's ahead of the 299,000 consensus estimate compiled by Schwab SoundView, but not quite the blowout performance posted by DirecTV DirecTV (DTV), which added 455,000 customers in the June quarter rather than the less-than-300,000 subscribers that analysts had expected.

In any case, EchoStar and DirecTV are posting strong subscriber gains, while their big cable rivals mostly lost basic subscribers in the latest period. And, as was the case with DirecTV, Wall Street appears happy to overlook a bottom-line miss given subscription growth numbers.

Also heartening to investors was EchoStar's gain in average monthly revenue per subscriber, or ARPU -- an area in which EchoStar has clearly lagged behind DirecTV. ARPU amounted to $55.59 in the second quarter for EchoStar, up from $51.69 a year ago but still a distant second next to DirecTV's $65 in the latest quarter.

On a conference call with analysts Tuesday, EchoStar CEO Charlie Ergen complimented DirecTV on its "pretty incredible performance" in adding subscribers. But he said that EchoStar spent only a fraction of what DirecTV spent to retain old customers, and indicating he thought it was a poor choice to overspend on retention marketing to cut EchoStar's rate of subscriber cancellations -- 1.7% a month -- which is higher than DirecTV's. "We can get our churn down to 1% a month," Ergen said. "But we'd bankrupt our company."

While calling EchoStar's quarter "pretty solid," Ergen said he was most disappointed by the company's customer care and subscriber related expenses, which he attributed to inefficiencies in such areas as equipment installations. "We blew $30 million last quarter on inefficiencies," Ergen said. "I hate that."

Among other issues facing the company, Ergen said EchoStar had increased its inventory of home satellite receivers so that it wouldn't relive past problems of having not enough set-top boxes to meet unpredictable consumer demand. As analysts have already pointed out, Ergen said that DirecTV's recent move to regain its distribution rights in rural markets would probably hurt EchoStar's subscriber growth in those areas.

In response to various speculative questions about strategic actions EchoStar might one day take, Ergen said he could envision EchoStar and DirecTV one day sharing satellite capacity to make it easier for them to deliver extensive local programming in high definition television. He also sketched out a scenario under which SBC (SBC) -- the regional bell which is partnering with EchoStar in offering a bundle of voice, video and data services -- would continue the partnership even after it developed a video-capable plant comprising fiber to the home. That technology, said Ergen, might be appropriate for delivering an old movie via video on demand, while the Dish Network would be a better choice for delivering, say, a live football broadcast.

Upgrading EchoStar from a hold to buy, analyst William Kidd of Janney Montgomery Scott's Vintage Research was heartened by the ARPU gain and the subscriber growth, which was accompanied by lower acquisition costs per gross new subscriber than Kidd had expected.

"We have been quite critical of EchoStar's somewhat recent inability to generate ARPU growth, which we believe has been among the worst, if not the worst, among major pay television providers," Kidd wrote Tuesday. "Consequently, we interpret this quarter's ARPU improvement ... very favorably."

Continued Kidd, "We believe analysts will be inclined to raise long-term estimates on the ARPU gain, supporting our rating change."

Subscriber acquisition cost, or SAC, as EchoStar notes in its 10-Q, can be calculated a variety of ways. By the measure Kidd chooses, it was $576 in the most recent quarter, up from $441 a year ago but well below DirecTV's $645 in the latest quarter. EchoStar's SAC, it should be noted, is helped by the company's alliance with telco SBC (SBC).

Kidd has a price target of $38 on the stock.

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