Wall Street Analysis

By Tom Watts, SG Cowen Securities

EchoStar Communications [Nasdaq: DISH] disappointed investors last week with third quarter results that sent its shares down 13 percent on the same day as the company’s announcement. More than half of the drop came after a conference call with management in which Chairman and CEO Charlie Ergen offered mea culpas and a downcast assessment of the quarter, even though the numbers themselves were not that bad.

EchoStar’s increase in churn during the third quarter stood out the most. Churn rose to 1.71 percent from the second quarter’s 1.65 percent, despite management’s goal of cutting churn. However, EchoStar tends to incur seasonal churn every third quarter, due to certain subscribers opting out of the DISH service to subscribe to DirecTV’s NFL Sunday Ticket package. For example, churn rose in 2002 from 1.58 percent during the second quarter to 1.76 percent in the third quarter, then fell back to 1.51 percent in the fourth quarter. In 2001, third quarter churn increased to 1.75 percent, then fell back down. Ergen accepted the blame for the latest rise in churn, but he did not provide the historical context to put the rise in perspective.

Management also partly blamed a dearth of high-definition (HD) programming for its weak third quarter results. It is true that EchoStar’s new 811 HD receiver with its SuperDish capability will not be out until Nov. 15. However, EchoStar customer service representatives confirmed to us that the 6000 series HD receiver, which does require two DISH 500 antennas, has been available through retailers for one to two months. Ergen only mentioned the production delays of the new HD products, while remaining silent about the availability of existing HD receivers.

Many have speculated that it could be in EchoStar’s interest to have a lower stock price right now. It would certainly make the company’s planned stock buyback less costly. Regardless, we think the sell-off of EchoStar’s shares is overdone. We expect the shares to bounce back in future quarters.

Tom Watts is a managing director and satellite analyst at SG Cowen Securities. He can be reached by phone at 212/278-4260 or by e-mail at . Readers should assume that SG Cowen Securities Corp. and/or its affiliates intend to offer services in investment banking to the above referenced companies within the next three months, and to seek compensation for such services.