EchoStar Racing Skyward (News) November 2, 1999

EchoStar Racing Skyward

By Richard McCaffery (TMF Gibson)
November 2, 1999

Count EchoStar Communications (Nasdaq: DISH) among a group of companies that may be too risky for many to invest in, but are fun to watch bloom.

The Englewood, Colorado company is growing like a wildflower. In the last year its stock price soared (adjusted for splits) 420% as it solidified its position as a leading satellite television provider and alternative to cable.

The company reported a third-quarter net loss of $124 million, or $0.55 per diluted share, for the period ended September 20. This compares to a loss of $52 million, or $0.34 per diluted share, from a year ago. The losses were $0.12 wider than analysts expected.

Unless you're a warrior-type investor who plunked money in, say, cable stocks or e-commerce companies, these kinds of losses blow the mind, especially for Foolish investors who scour balance sheets for light business models and profitability in all aspects of operations.

But look, too, at EchoStar's rapid revenue growth, subscriber base, and general corporate pluck for a glimpse of a services company built from scratch into one of the country's largest multichannel operators in the brief span of four years.

EchoStar is one of two companies -- along with Hughes Electronics' (NYSE: GMH) DirecTV subsidiary -- that are licensed to beam high-power satellite services to U.S. consumers. These fast-growing players have locked up a duopoly in a new growth industry as both wage a war against cable companies.

In October, EchoStar announced it exceeded the 3 million subscriber mark just nine months after reaching the 2 million threshold. At its present rate, the company will add more than 300,000 subscribers in the fourth quarter and over 1 million next year. It could be generating positive operating cash flow and earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of next year.

Revenues for the quarter hit $427 million, up 82% from revenue of $235 million last year. For the nine months ended in September, revenue reached $1.1 billion, up 58% from $696 million last year. Long term, EchoStar is expected to grow earnings 63% annually. In addition, average revenue per subscriber moved to $43 in Q3 1999 from $40 in Q3 1998.

Charles Ergen, EchoStar's chief executive and cofounder, has set the tone in terms of hardware pricing. This has been key to gaining widespread subscriber acceptance since not many people were interested in satellite television when it cost more than $400 just for the antenna and related equipment.

Ergen was the first to push equipment costs below $200 because he understood the importance of grabbing market share and gaining a steady stream of subscriber revenue. Now, EchoStar offers rebates that in some cases amount to full subsidies on equipment costs.

Of course, the company takes a hit on its income statement for subsidizing equipment, and this loss has widened as subscriber growth picks up speed. EchoStar's cost of acquiring a consumer jumped to $390 in Q3 1999 from $240 last year, and could continue to rise.

Subsidies also increased marketing and operating costs and contributed to EBITDA losses of $47 million in the latest quarter, compared to positive EBITDA of $9 million last year. (Note: While EBITDA shouldn't be confused with earnings or operating cash flow, it's a good measure for valuing the real earnings power of a growing company in a capital-intensive industry.) Without marketing costs (including subsidies) EchoStar would have reported positive cash flow of $153 million for the quarter, up from $74 million last year.

Investors interested in satellite stocks have to read EchoStar's financial reports thoroughly. The company carries a whopping $2.1 billion in long-term debt and faces many political, legal, and competitive issues investors need to understand.

Also, valuing the company is a tough nut to crack. It has no earnings, positive cash flow, or free cash flow, and it's hard to make a comparison with DirecTV since Hughes doesn't break out all of the relevant numbers.

There are about 90 million homes in the U.S. that could receive EchoStar's services, but it's unclear how much of that audience is a realistic target considering competition from DirecTV, cable, and wireless cable vendors.

Still, it's hard to argue with EchoStar's ability to attract subscribers and push the satellite television industry into the spotlight. If you can live with risk, EchoStar is worth a closer look.

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