Record churn burns EchoStar

Shares tumble 15%; turnover a 'solvable' challenge

Shares of EchoStar Communications were in free fall Monday amid investor concerns that economic challenges and subprime woes are cutting into the satellite TV giant's subscriber growth.

Also, sluggish subscriber trends in the latest quarter might reduce the chances of a sale of EchoStar to AT&T or other suitors at an attractive price tag.

The stock was Monday's biggest decliner on The Hollywood Reporter Showbiz 50 stock index, dropping 15.8% to $40.83.

EchoStar late Friday reported a 43% increase in its third-quarter profit but weaker-than-expected net subscriber gains of 110,000 because of record customer churn, or turnover.

In a conference call Monday, chairman and CEO Charles Ergen called the increase in churn from 1.76% to 1.94% "unacceptable" and said he shouldn't have allowed it to go this high. He also acknowledged that his firm might have signed up some lower-quality subscribers but added that EchoStar has tightened its credit standards in recent weeks and sees churn as a "solvable" challenge.

Nonetheless, analysts expressed concerns Monday, with some arguing that EchoStar might not have been strict enough in its credit policies and that a sale of the firm could be more difficult amid weakened fundamentals.

"Relative to the competition, EchoStar's low-value, low-price subscriber strategy may finally be showing it has a darker side," Wedbush Morgan Securities analyst William Kidd said.

In his call, Ergen defended his company, saying "we are getting high-value customers."

Citi Investment Research analyst Jason Bazinet downgraded his rating on EchoStar shares from "buy" to "hold" and cut his price target $7 to $52, arguing that churn was at "the highest level ever."

"We suspect elevated rates of churn (will) persist until the end of 2008 due to subprime mortgage defaults," Bazinet said.

He reiterated his view that there is a 65% chance of some kind of sale or deal involving EchoStar during the next 12 months. "However, the risks have increased of the shares pulling back due to more tepid fundamentals," he said.

Asked about a possible deal, poker player Ergen didn't show his cards Monday. While he acknowledged expectations that telecom giant AT&T — which bundles its services with EchoStar and competitor DirecTV — will by year's end decide on a single partner, the EchoStar CEO said he will be ready for either outcome. He did call the partnership "strong" and AT&T "our single-biggest partner."
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