Shares of EchoStar Communications Corp. fell nearly 16 percent Monday as economic woes and service missteps caused customers to drop the pay-TV provider at a record rate.
Shares of the Douglas County-based company closed down $7.68, or 15.83 percent, at $40.83, their lowest close in 7 1/2 years.
Prior to Monday’s trading, EchoStar shares had risen about 10 percent since late September, when the company said it would split its TV and technology divisions, sparking speculation that AT&T would acquire EchoStar’s Dish Network TV business.
That run-up has quickly evaporated in a volatile market, said Kaufman Bros. analyst Todd Mitchell.
“The market is acting crazy and overpricing any perceived change in competitive position,” he said. “Dish got hit for high (customer loss). It just got hit harder because it had an acquisition premium built in.”
During a conference call with analysts Monday, Echo Star chairman and co-founder Charlie Ergen said lower housing starts, higher foreclosure rates and an overall weak economy contributed to the customer loss, known in the industry as churn, but said poor customer service and installation missteps were a major factor.
“That level of churn is unacceptable to us. It’s a much more competitive environment because of the economy,” Ergen said. “We haven’t really executed very well operationally during the last six months. I am looking forward to spending more time in the operations side so I understand it better.”
Although EchoStar — the nation’s second-largest satellite- TV provider, with 13.7 million customers — on Friday reported third-quarter profit growth of 43 percent, “subscriber churn,” or the rate of customers leaving Dish Network service, was 1.94 percent, the highest ever for the company. The company added 110,000 new customers in the third quarter, down 62.7 percent from the same quarter a year ago. For the third quarter of 2006, EchoStar reported 295,000 net new subscribers.
Analysts were disappointed with EchoStar’s churn, saying the results signal a period of slower growth. Citi Investment Research analyst Jason Bazinet downgraded the company’s stock from “buy” to “hold,” while Craig Moffett, senior analyst for Sanford C. Bernstein & Co., rated the stock “underperform.”
“If high churn persists for another five quarters, the market will likely assume the worst and adjust the value of the equity accordingly,” wrote Bazinet in a research note. “Our analysis suggests the higher levels of churn will reduce EchoStar’s equity value by $3 per share.”
EchoStar said it is turning off unpaid customers’ service sooner than it previously had and has tightened some of its credit standards, affecting churn. The company said that although it has a fair percentage of “high-end” customers, there’s a segment of low-end customers that are more likely to cancel their Dish Network subscriptions, particularly customers that use Dish’s monthly prepaid card.
“EchoStar’s exposure to lower socio-economic tiers means that the company’s subscribers would likely face the impact of an economic downturn earlier than those of, for example, Direc TV,” Vijay Jayant, an analyst at Lehman Brothers Holdings Inc., said in a report.
Jayant, based in New York, recommends that investors buy EchoStar shares.
Ergen wouldn’t comment on speculation that the company is in merger talks with AT&T. However, he said the company — and rival DirecTV — is in discussions with AT&T regarding its bundling partnership. Currently, AT&T partners with EchoStar to provide Dish Network service, but its recently acquired BellSouth territories partner with DirecTV. AT&T is expected to choose a single provider for all its territories by the end of the year, Ergen said.
“We feel we’re their stronger partner for a variety of issues,” he said. “If (they don’t choose us), we’ll have to compete. … We’ll be prepared either way.”
Bloomberg News contributed to this report.
Kimberly S. Johnson: 303-954-1088 or kjohnson@
