EchoStar sacrifices revenues to gain subs, yet posts Q2 profit

EchoStar Communications, faced with competitive pressures from cable television, has lowered its revenue per unit [RPU] estimates in a trade-off to add subscribers, the company said while announcing second quarter earnings results today.

However, the company posted a $37 million – 8 cents per share – profit compared with a loss of $6 million, or 1 cent, in the same quarter last year. Its revenues rose to $1.17 billion from $966 million, but its subscriber acquisitions were less than the second quarter a year ago when the company added 350,000 customers.

The DBS player, in the process of acquiring Hughes Networks’ DirecTV unit, added 295,000 subscribers during the quarter using retail tactics that included a three-month free offer.

Looking forward, EchoStar said it expects revenues to grow 20% for full year 2002, compared to an earlier forecast of 20-25%, with cash flow guidance remaining unchanged at 80% to 100%.

“The disappointing thing for the quarter and the rest of the year is we're not going to achieve our RPU goal,” said Charlie Ergen, EchoStar’s chairman and CEO. “To the extent that we weren’t answering the competitive pressure from cable, we’d actually have RPU growth.”

The satellite provider added Radio Shack and Wal-Mart to a retail arsenal that includes Sears and Costco because “we needed a strong cash-and-carry offer, something that would compete with cable,” Ergen said. The company also extended some discounting offers that it had planned to end.

Ergen again made a case for the EchoStar-DirecTV merger to compete with cable and to spread broadband high-speed Internet services by wringing more value out of satellite spectrum. A larger company, too, is necessary to vie for programming with giants like the merged AT&T Comcast, he said.

“There’s a fundamental shift out there and government policy can’t be to put all telecom companies out of business,” he said. “There’s in the neighborhood of $50 million in efficiencies that are gained by efficient use of spectrum.”

Cable, Ergen pointed out, will probably increase rates to pay off its $50 billion to $60 billion infrastructure upgrade.

“It may not be the most efficient use of $50 or $60 billion, but they have to get a return on that, so I think you can look for some pretty big price increases absent effective competition from the satellite industry,” Ergen said.

The merged company, he promised, would answer calls for widespread broadband deployment.

“[President] George Bush talked about broadband deployment to all Americans,” he said. “We’ve done it without government subsidy except we have to be able to use the spectrum efficiently and get critical mass to risk the capital to do that.”

On a different government tack, Ergen said that EchoStar has come under scrutiny from state attorneys general “looking at some of our business practices as they relate to consumers.”

While maintaining some issues stem from misunderstandings concerning how the business model works, Ergen said others were “very constructive criticism of some of our practices … and we can probably make some improvements there.”

The main improvement Ergen is seeking, though, is government approval of the planned merger with DirecTV. Earnest discussions will begin with government officials in the next several weeks, and, while an end-of-year closing is possible, he would like to see the deal okayed and ready to go by October.

It will happen, he said, in a “pretty choppy environment. It’s an environment we love as a company. It’s tough. You’ve got to be good. You’ve got to be real good. The next four-and-a-half months are going to be very interesting; a lot’s going to be happening and we have a lot on our plate.”