Rising costs slow EchoStar Q3

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NEW YORK -- Satellite TV operator EchoStar Communications posted a lower third-quarter profit Tuesday as higher programming costs and a year-ago tax benefit dragged down the bottom line, but its subscriber gains for the latest period exceeded Wall Street expectations.

The stock closed up 1.9% at $35.98 after hitting a 52-week high of $37.28 during intraday trading.

Chairman and CEO Charles Ergen said he has seen little impact on EchoStar from cable companies' triple-play service bundles and expressed confidence that his firm will prevail in litigation with DVR pioneer TiVo Inc.

However, he signaled that EchoStar's financials will take some hit when it has to cut off distant network channels it provides to about 900,000 subscribers unless it can reverse a recent court ruling through the courts or an act of Congress.

Asked about the likely effect of a possible takeover of competitor DirecTV Group by Liberty Media in a transaction with current owner News Corp., Ergen said it might be "a slight positive" as it will create some transition worries, but he lauded Liberty and News Corp. brass for their savvy.

He also told investors that analysis of the potential benefits of a DirecTV-EchoStar merger is "not something we're spending time on," even though he admitted that when the firms considered a combination a few years ago the expected synergies amounted to several billion dollars.

EchoStar posted a profit of $140 million, down from $209 million a year ago, which included a $73 million tax benefit. Revenue rose 16% to $2.5 billion, beating average analyst estimates.

EchoStar said it added 295,000 subscribers, ending the third quarter with about 12.8 million.

Bear Stearns analyst Spencer Wang said the better-than-expected revenue growth was driven by "strong subscriber gains" that beat his 194,000 estimate and Wall Street's 206,000 consensus estimate.

Oppenheimer & Co. analyst Thomas Eagan called the results "impressive" and said they beat most of his customer and financial estimates.

He suggested that EchoStar might have taken customers from cable operator Adelphia Communications as it was recently acquired by Time Warner Cable and Comcast Corp. He also suggested that the company's third-quarter net user gains "likely beat DirecTV's." News Corp.-controlled DirecTV Group posts its latest financials today, with Eagan eyeing 225,000 net subscriber growth.

In a regulatory filing Tuesday, EchoStar said its average revenue per customer rose to $62.86 per month in the third quarter, compared with $57.87 a year ago. User churn, or turnover, fell from 1.86% to 1.76%.

EchoStar also said average subscriber-acquisition costs fell from $697 to $688.

However, in one disclosure that worried some, EchoStar said subscriber-related expenses rose 22.3% to $1.2 billion overall. The firm cited higher programing costs, among the factors.

Ergen said Tuesday that he has "not (seen) as much impact" from cable's bundled service offerings as market talk would suggest.

Last month, a federal judge in Florida ordered EchoStar to stop offering customers network programming from providers that are distant from them. Ergen said his firm gets about $3 million in monthly revenue that it could lose starting next month.

Asked about the TiVo litigation, EchoStar executives said Tuesday that the firm stopped accruing funds for possible further damage payments since the end of July as management feels they are more likely than not to prevail in the legal battle.
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