Updated from noon EST EchoStar ( DISH) returned to the black in the fourth quarter, but its shares fell 4.8% Friday as the latest numbers failed to impress Wall Street. The company reversed a steep year-ago loss and posted a solid rise in total revenue. But earnings and per-subscriber video revenue fell short of analysts' forecasts, and EchoStar warned of a likely rise in spending to counteract so-called churn, which measures the proportion of subscribers quitting the service in a given period. The developments come as EchoStar faces increased competition from the likes of DirecTV Group ( DTV) (formerly Hughes Electronics) and the nation's big cable operators. As a result, analysts are keeping a close eye on the costs and benefits of subscriber growth at EchoStar. As EchoStar Chairman Charlie Ergen acknowledged on a conference call with analysts Friday, increased competition will continue to put pressure on the industry's subscriber acquisition costs, or SAC. Still, he suggested per-subscriber revenue would rise as well, and churn would stay constant. "I think there's pressure on SAC," he said. But, as Ergen has pointed out before, satellite operators, in contrast to cable companies, are showing subscriber growth: "It's the industry that's getting new subs," he said. Shares in the satellite broadcaster, after falling as much as $1.66, were trading at $33.90 Friday afternoon, down 74 cents. For the fourth quarter ended Dec. 31, the Colorado-based company posted net income of $3 million, or a penny a share, reversing the year-ago loss of $716 million, or 45 cents a share. The Wall Street analyst consensus estimate called for a profit of 9 cents a share. Revenue for EchoStar, which operates the Dish Network satellite television service, rose 14% from a year ago to $1.51 billion. Average monthly revenue per subscriber, abbreviated as ARPU (for "average revenue per unit"), amounted to $50.70, according to Schwab SoundView. That's up from the year-ago figure of $50.42 but below the SoundView-calculated analyst consensus of $51.35. Subscriber acquisition costs rose to $522 per gross addition, said SoundView, up from $504 a year earlier and just above the consensus of $512. SAC, however, is a hard figure to pin down. On a conference call with analysts, EchoStar said subscriber acquisition costs for the quarter were $488 per gross addition, $498 including equipment capitalized under an equipment lease program, and $554 after ignoring a reversal of estimated royalty obligations. Churn -- the percentage of subscribers who drop the service each month -- averaged 1.53%, according to SoundView, below the 1.61% consensus. In its 10-K, EchoStar says that its programming dispute this month with Viacom ( VIAB), which climaxed in Dish Network's dropping of Viacom-owned cable channels for two days, would temporarily increase subscriber churn in the first quarter. But EchoStar said it didn't believe the Viacom dispute would have a material effect on net subscriber additions this year.
Costs related to subscriber retention programs, including new and upgraded equipment for current subscribers, will likely "materially increase," said EchoStar, "as we introduce more aggressive subscriber retention programs to reduce subscriber churn, to respond to competition and for other reasons." EchoStar had previously reported that the Dish Network added about 340,000 net new subscribers during the fourth quarter, giving it more than 9.4 million subscribers as of Dec. 31, 2003, up about 1.2 million from 2002. The company's release of its fourth-quarter and full-year results for 2003 was delayed because of a discussion with the Securities and Exchange Commission over proper accounting for the replacement of smart cards used in subscribers' home equipment. The fourth-quarter results included $51 million in charges associated with bond redemptions and a $56 million cost reduction associated with royalty obligations. EchoStar's loss a year ago was dominated by charges of $690 million relating to its failed merger with the former Hughes. Of course, DirecTV is now under the control of Rupert Murdoch's News Corp. ( NWS) after a deal with former parent General Motors ( GM).