Pegasus Communications (PGTV) is saying "whoa" to subscriber growth.
The direct broadcast satellite company, which markets home satellite service alongside
, cut revenue guidance Thursday night, admitting that customer acquisition costs were getting so high that the company could hope for little better than break-even on new subscribers.
"We regret that what is obvious to us now was not equally obvious to us four quarters ago," said CEO Mark Pagon on a conference call following the company's release of financial results for the first quarter. "We took a wrong turn," he said, adding that Pegasus intended to return to a model of "sustainable and compelling growth."
Leading up to the quarterly announcement, Pegasus' shares rose 12 cents to close at $26.08.
The company's confession indicates that you don't have to be a venture capital-funded Internet company to find yourself spending more to acquire a customer than you could ever hope to recover over the customer's lifetime.
Pagon said that the average cost to sign up each new customer had grown to $491 in the first quarter, from $321 one year earlier. But the company has discovered that churn, or the rate at which subscribers are lost, was substantially higher for new customers than it has traditionally been. The upshot, Pagon said, was that the company was effectively spending $1,000 for each net new subscriber, but could only hope to get a total of $1,000 in cash flow from that subscriber over the expected five-year customer lifetime. Historically, Pagon said, the company had been able to make back its acquisition costs within two years of acquiring a customer, and hold onto that customer for six or seven years.
To turn things around, said Pagon, Pegasus will cut back on the money it spends to acquire subscribers, as well as its projections for revenue and subscriber growth. Instead of direct broadcast satellite revenue of $890 million to $990 million for 2001, the company is now forecasting $875 million. Instead of net subscriber growth of 180,000 to 260,000 for the year, Pegasus is now forecasting 150,000.
Meanwhile, the company hopes to increase its cash flow under the new regimen. Instead of DBS-related earnings before interest, taxes, depreciation and amortization of $40 million to $55 million for 2001, Pegasus now expects to show EBITDA of $75 million.