Monitoring the ongoing performance of communications giants like Verizon
SAC, ARPU, and churn, however, offer a way through the clutter to a quick measure of a telecom company's health. Yes, they sound vaguely obscene, but in fact SAC, ARPU and churn are benign terms for, respectively, the cost of acquiring one subscriber ("subscriber acquisition cost"), average monthly revenue per subscriber (ARPU), and the monthly percentage of users canceling subscriptions ("churn rate"). SAC, ARPU, and churn help predict future cash flows which, after all, are how most telecom companies are valued.
Let's illustrate the point by looking at EchoStar
Increased SAC, however, is not itself cause for panic, as long as revenue from subscribers increases commensurately. In other words, if SAC goes up, ARPU must as well. The most recent numbers show that while EchoStar's ARPU is continuing to rise, it is doing so at an underwhelming rate: ARPU went from $50.60 to $51.76 sequentially.
What about churn? With SAC at about $530 and ARPU at about $52, a quick equation tells us that a new subscriber must stay with EchoStar for over 10 months in order for it to break even. If a subscriber churns before then (perhaps in response to an aggressive new promotion from DirecTV), EchoStar will lose money.
While subscribers who churn early in the subscription life cycle are especially damaging, every user who churns from the service, regardless of when, represents a small stream of cash flow dropping from EchoStar's financial projections. That's why churn rate is so critical -- as churn rate rises, future cash flows sink (read that book for a while and eventually you get to Chapter 11). Happily, EchoStar's churn rate is trending in the right direction -- the company drove monthly churn down to 1.48% from 1.53% the previous quarter.
Two final points about SAC, ARPU, and churn: First, there is no uniform standard, so it's important to note how a given company calculates them. For example, EchoStar reduced its reported SAC in recent quarters by offering to lease its equipment to subscribers. By maintaining ownership of the equipment rather than providing subsidies for users to purchase it, the company capitalizes the equipment's cost instead of accounting for it as part of SAC. Looks good for SAC purposes, but there are no real savings to the company.
Finally, SAC, ARPU, and churn are, of course, not the whole story. Future profitability also depends on factors like operational efficiency. EchoStar's recent brawls with Viacom
Anyway, there you have it. SAC, ARPU, and churn helped me cut through the clutter of EchoStar's earnings release and raised a red flag: the cost of acquiring new subscribers is increasing much faster than the revenue generated from subscribers. Even with the news of increased subscriber retention (reduced churn) and net subscriber additions of $360,000, this gap shows a company getting bruised in a wicked fight for customers within an intensely competitive industry.
Time Warner's a Motley Fool Stock Advisor recommendation. To learn more, or to sign up for six months, risk-free, just click here.
Fool contributor Ted Rogers is a writer from Virginia. He owns shares of XM Satellite Radio and EchoStar. He welcomes critiques and suggestions for last-minute Mother's Day gifts.