EchoStar Communications [DISH] is back on the acquisition prowl. A recent indication came from a March 4 conference call that revealed an unusually positive set of numbers for year-end 2002. The key financial metrics reflect the strong business model that the Littleton-Colo.-based direct broadcast satellite (DBS) operator has refashioned.

Now that the EchoStar-Hughes Electronics [GMH] merger is off the table after a thorough rejection by the U.S. government, EchoStar’s top management is focusing on the basics of customer acquisition, cash flow, and managing costs. Comparatively, El Segundo, Calif.-based rival and Hughes unit DirecTV ended 2002 with 22.8 percent fewer net new subscribers, and somewhat less favorable overall statistics in the areas of churn, subscriber acquisition costs (SAC) and average revenue per unit (ARPU). In another comparison, EchoStar’s stock price rose 10.8 percent during the week of March 3-7, while DirecTV’s stock dipped 1 percent for the same time frame.

EchoStar’s Numbers

During the EchoStar conference call, Charlie Ergen, its chairman, CEO and founder, said that free cash flow from operations would be his company’s best measure of financial success in the multi-channel video arena. He also noted that EchoStar had more growth than its rivals in the U.S. cable and satellite industries combined during 2002.

As year-end, EchoStar had approximately 8.2 million subscribers. That total represents about two-fifths of the U.S. DBS market share. DirecTV holds slightly less than three- fifths of the total. EchoStar also offered local signals to 59 local-into-local markets. In addition, EchoStar achieved a multi-channel industry low churn rate of 1.59 percent for 2002. EchoStar’s average revenue per unit (ARPU) reached $49.17 for the entire year and $50.30 for the fourth quarter. The all-important subscriber acquisition cost (SAC) number was a reasonable $507 for 2002 and a respectable $489 for the fourth quarter. EchoStar’s $5.7 billion in debt amounts to approximately $374 per subscriber.

Ergen also noted some negatives in the form of a $690 million charge for the foiled merger with Hughes and a $140 million write-down of investments in broadband ventures, such as WildBlue and StarBand. Roughly $600 million of the $690 million charge was the result of a breakup payment to Hughes to fulfill their merger contract. The other $90 million was spent on other costs and fees tied to the failed merger. On the flip side, Ergen noted a value of more than $400 million from the buy-back of Vivendi’s share in EchoStar. That gain occurred without a negative tax implication. EchoStar-9, the company’s next planned satellite, is scheduled to launch in mid-year, and is expected to enhance the DISH Network’s capacity to carry enough local market signals to reach an estimated 80 percent of all U.S. viewers by year-end 2003.

Looking forward, Ergen gave a guidance of at least one million net new subscribers for 2003. Free cash flow from operations was also projected, as well as some indication of capital expenditures, including $300 million aimed at new satellites and deployments into more local markets.

Based on The Carmel Group’s end-of-February estimates, EchoStar’s subscriber base now rests at 8.3 million subscribers. This number equals a 42.4 percent market share, and gives EchoStar almost 57 percent of the total DBS subscribers added during the month. The estimate for February growth shows DISH Network adding almost 75,000 net new subscribers. Estimates for January and February combined show EchoStar with 150,000 net new subscribers.

DirecTV Data

DirecTV may well end up ahead of EchoStar when it comes to its own set of year-end 2003 financial metrics. This is because of DirecTV’s intensified focus on finding valued subscribers. DirecTV’s analysts’ call in January featured President Roxanne Austin noting that: 1) earnings before interest, taxes, depreciation and amortization (EBITDA) and revenues were up in 2002 compared with 2001, 2) operating profitability had been achieved, and 3) DirecTV earned the JD Power No. 1 Ranking for customer satisfaction during 2002.

Additionally, DirecTV and its parent collected $600 million from archrival EchoStar when their merger unraveled. DirecTV likely will gain another major infusion of cash and investment, once the company is sold to a different buyer.

Matched against EchoStar, DirecTV’s February estimates by The Carmel Group show a subscriber base of just over 11.3 million subscribers. That number gives DirecTV a DBS market share of 57.6 percent. This means that DirecTV added an estimated 60,000 net new subscribers in February. As a result, DirecTV added a higher percentage of the industry’s overall net new subscribers than it did a year ago.

Industry Datapoints

The chart entitled, “3-Year Net New Sub Growth (In Millions)” indicates a steady downward trend in the growth rate for adding new subscribers for the time frame of early 2000 to early 2003. This steady decline matches the predictions and analyses by The Carmel Group (SN, Jan. 6, 2003, pp. 4-5). No longer is the “low-hanging fruit” available for easy pickings by any operator in the multi-channel universe. Moreover, these days new subscribers not only must be fought over, but existing subscribers must be wooed vigorously to keep them from moving to rival satellite and cable systems.

The chart titled, “YTD Net New Sub % Growth: Feb ’02 vs. Feb ’03,” shows overall industry growth for the year has declined more than 40 percent over what it was in February 2002, according to Carmel Group estimates. Despite the slowed growth, expect the U.S. DBS industry to top 20 million total subscribers, at the rate it is headed, next month. An update will be provided at The Carmel Group’s Eight Annual Satellite Entertainment conference scheduled for April 30 in Monterey/Carmel, Calif. A special guest speaker will be Federal Communications Commissioner Kathleen Abernathy.

Despite the downturn, The Carmel Group continues to forecast that the U.S. DBS market place will top 30 million total subscribers, or almost one in three total U.S. TV households, by 2008.

Jimmy Schaeffler researches, analyzes and writes this monthly report. He is a subscription TV analyst at The Carmel Group, a publisher of industry databooks and the monthly newsletter DBS Investor, and a consultancy based in Carmel-by-the-Sea, Calif. (http://www.carmelgroup.com). The company specializes in telecommunications (e.g., cable, satellite and wireless), as well as computers and the media. He can be reached by e-mail, [email protected], or phone, 831/643 2222.