EchoStar: Spinoff Plans; Sling Financials; Slowing Economy Affecting Growth

Details are emerging on EchoStar’s (NSDQ: DISH) proposed spinoff of its technology and infrastructure business, including the recently acquired Sling Media, whose financials are available for the first time. From an SEC filing late last week including information on the new EchoStar Holding Corporation:

Sling Media: In 2006, Sling’s revenue was $29 million, nearly triple its 2005 mark of $10.9 million. Net losses in the period also expanded significantly to $20.9 million from $3.6 million, as costs increased in all areas. Through the first half of the year, the company has revenue of $14.7 million, up 80 percent from last year’s $8.2 million, while year-to-date net losses total $16.9 million. The second half of the year includes the holidays and is clearly the company’s bigger period. As of June 30th, Sling Media had $10.8 million cash in the bank and total stockholders equity of $21.5 million.

Operations: The spinoff would consist of EchoStar’s digital set-top box business, fixed satellite services and Sling Media, which was recently acquired for $380 million. The company believes it can market its set-top box technology to third party video operators, which previously avoided deals with a competitor. While EchoStar will continue to be its primary customers of satellite services, the company says it will have excess capacity that can be used for digital video distribution, data, corporate communications, and government services. In total, business from EchoStar represents 80 percent of the company’s revenue, with much of the rest coming from Bell Canada’s ExpressVu service.

Group financial data: For the year 2006, the group that would make up the spinoff had revenue of $1.52 billion, up slightly from $1.51 million in 2005. Net losses for the year narrowed to $34.1 million from $44.9 million. For the first six months of the year, revenue was $778 million, up 3 percent from last year’s $755 million. Including certain pro-forma adjustments, the company did 2006 revenue of $2.08 billion with net income of $176.8 million. The pro-forma numbers may make for a more meaningful baseline going forward, since they factor in a profit margin on sales that an independent EHC would have charged its parent company. Also included are certain assets that will be contributed to the new company, as well as Sling Media’s numbers.

Risks: Two obvious risks stand out for the spinoff. the ongoing legal dispute with Tivo, which has accused the company of patent infringement and the lack thus far of confirmation from the IRS that the spin-off will be tax free.

Also, late on Friday after the bell, the company released its Q3 earnings figures. Revenue for the quarter hit $2.79 billion, up 13 percent from last year’s $2.47 billion. Net income rose 43 percent to $199.7 million from $139.6 million, helped by improved operating leverage. But the stock is down 11 percent today, as the report and the accompanying 10-Q filing contained some red flags:

— Gross adds of 904,000 came in below last year’s 958,000, which the company attributed to adverse adverse conditions associated with the weak housing market.

— Churn increased to 1.94 percent from 1.76 percent, owing to increased competition and a greater number of disconnects due to non-payment. Looking forward, the company warned that it may need to up its spending considerably in order to reverse this trend. The higher churn rate contributed to a 62.7 percent fall in net adds to 110,000 from 295,000.

Earnings release

Conference Call: CEO Charlie Ergen described the company’s increased churn rate as “unacceptable”, indicating that the company has done a better job in the past of installation and responding to customer requests. Ergen also sees the economy as currently or soon to be in a recession, according to the WSJ, echoing of the company’s filing. One option for the company is to diversify internationally: “If there are opportunities internationally, we would certainly look at them.”

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