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EchoStar (NASDAQ:DISH) shares are sharply lower Monday morning following the company’s disclosure of third quarter results after the close on Friday. (Did they think no one would notice?)

The basic financial results were fine: DISH reported third quarter revenue of $2.79 billion and EPS of 45 cents, compared with Street expectations of $2.81 billion and 43 cents. But the company also reported 1.94% monthly churn in the quarter, which analysts say is the highest level ever, and well above expectations. The theory is that the company is being hit by fallout from the sub-prime mortgage mess.

In its 10-Q filing with the SEC on Friday
, the company specifically blamed the housing market for its troubles: “We believe our gross new subscribers additions have been and are likely to continue to be negatively impacted by increased competition, including the relative attractiveness of promotions; adverse economic conditions, including, among other things, the deteriorating housing market and increased mortgage defaults due to subprime lending practices and weakness in the economy; and operational inefficiencies.”

Citigroup’s Jason Bazinet this morning cut his rating on the stock to Hold from Buy, and wrote that “sub-prime churn is our new concern.” He says the high churn rate will likely persist through 2008 due to sub-prime mortgage defaults. Bazinet does say, however, that he still thinks there is a 65% chance that the company is acquired by AT&T (NYSE:T) at some point in the next 12 months. “However, the risks have increased of the shares pulling back due to more tepid fundamentals,” he writes.

Other analyst notes Monday morning likewise focused on churn. Kaufman Bros.’ Todd Mitchell wrote that the “spike in churn is a red flag that marred an otherwise uneventful quarter.” He notes that the 1.97% churn rate was up from 1.76% a year ago, and above his estimate of 1.7%.

Craig Moffett, an analyst with Bernstein Research
, notes that gross subscriber additions fell 6% year over year, which lead to net subscriber additions of just 110,000, down from 295,000 a year ago, the “lowest total since the company’s earliest days as an operator in 1997.”

Moffett notes that the company tends to serve the low end of the market, which is not the right place to be at the moment. “EchoStar is a well run company,” he writes. “It has a good product. It offers customers a compelling value proposition. But EchoStar operates at the low end of the market, and the low end, it would seem, is the wrong place at the wrong time.”

EchoStar shares Monday are down $5.51, or 11.3%, at $43; shares of rival DirecTV are down 34 cents, or 1.3%, at $26.78.

Source: EchoStar Churn Driven by Subprime Woes