EchoStar Corp (SATS) 2008 Q2 法說會逐字稿

Good afternoon. My name is Jessica, and I will be your conference operator today. At this time I would like to welcome everyone to the EchoStar Corporation quarter two 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. Mr. Kiser, you may begin your conference.

Thanks, Jessica. Well, thanks for joining us. My name is Jason Kiser. I am joined today by Charlie Ergen, our Chairman and CEO, Barney Han, our CFO, and Stanton Dodge, our General Counsel. Before we open it up for some Q&A, we do need to do our safe harbor disclosure. So for that I will turn it over to Stan.

Good morning, everyone. Thank you for joining us. We invite media to participate in listen-only mode on the call and ask that you not identify participants or their firms in your reports. We also do not allow audio taping and ask that you respect that. All statements we make during this call that are not statements of historical fact constitute forward-looking statements, which involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from historical results and from any future results expressed or implied by such forward-looking statements. For a list of those factors please refer to the front of our 10-Q. All cautionary statements we make during this call should be understood as being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our reports and should not place undue reliance on any forward-looking statement. We assume no responsibility for updating any forward-looking statements. With that out of the way, I will turn it back over to Jason.

Thanks, Stan. Jessica, we are just going to go straight into Q&A, so you can open up the line.

(OPERATOR INSTRUCTIONS). The first question comes from the line of Kit Spring.

I have several questions, can we start with why the sales to DISH Network were down so much sequentially. Is there a natural seasonality? Was there some kind of pricing or volume change or do they have to do with inventories? That is my first question.

Okay. That's a good question. Really two factors, one is obviously DISH leases capacity, so to the extend that the seasonality's churn is higher in the summer. so they have more boxes that come back from a lease perspective and therefore require less boxes from that perspective and also if you just listened to the DISH call, their gross subscriber adds were not as high as they were this time last year. That had a negative impact. The other probably more significant impact, which is good news/bad news is DISH has been migrating, and you saw the announcement of Turbo HD, they have been migrating to the MPEG-4 technology.

So the bad news about that is as you make a transition to MPEG-4 technology, you want to make sure that you have less MPEG-2 boxes on hand. The good news is that the -- by going to MPEG-4 technology, DISH is in a situation that has to go to a slightly higher more expensive box, more technically advanced. As you upgrade people you have increased demand for those set-top boxes regardless of what your gross additions are. I think that SATS is well positioned -- it is well positioned with DISH in a MPEG-4 transition, but it is also well positioned with express of its other customer who obviously will make the same kind of decision at some point, if they haven't already, to transition MPEG-4 and potentially other customers around the world who want to take advantage of an MPEG-4 type technology.

Okay. And then on targeting new customers which I think is the key to the equity here, who do you think realistically is your best chance on both the set-top box side and the fixed satellite services side as far as a major customer.

Well, on the satellite, on the set-top box side, I think that there's any number, but probably from a custom perspective probably international customers might be the -- I guess domestically cable companies would tend to be, would be tougher sells in general because of, they perceive the DISH influence, which isn't there, but they perceive that. Right. So obviously DirecTV is a competitor of DISH so that is a little tougher. Internationally you don't have that dynamic. That's perhaps a more likely type scenario and then obviously there's possible for phone company type business in terms of set-top boxes that phone companies are going to go look for the best price value regardless of where it is going to come from. So they're not quite as emotional about it probably as maybe some of the cable companies might be. And that is not to say that SATS is going to give up on the cable industry. We think that we can still make a great box for the cable industry, even though it might compete with other companies.

From a fixed satellite service business, that business could come from anywhere. That business there is, obviously we have an abundance of capacity today. There's not a huge amount of capacity out there today and there are new people, particularly as you look at HD and other forms, that are using capacity, there is opportunity out there. We are a little bit new to the business, but we do offer a value add that other people can't. We have set-top boxes. We have encryptions disservice, we have installation and service networks. We have good back up capabilities. And we just have got to go out and find those customers who haven't done it. A lot of customers are in long-term contracts. If we can get customers as those contracts roll off and we can get new people as they enter the business. But there's no one source that that business is going to come from. It is going to come from a number of companies.

Okay. Are there particular satellites that you think are much more attractive or likely to get additional customers there?

All of our satellites are pretty attractive. They really are. One of the interesting things is it costs a lot more money to build a satellite today. There's huge amount of inflation in the satellite industry, whether it be from launch services or whether it be construction of the satellites, a lot of the parts are made overseas and the value of the dollar's really increased the cost of the satellite. The fact that we have satellites up in outer space that were bought or leased at fairly low prices should put us pretty well positioned there. The satellites are all state of the art and very good and very powerful and there's upside for our business there and we think we have got the right guy running that business. We are working hard to grow it.

I noticed you lowered the potential write-down on your existing satellites from $300 million to $250 million to $200 million this quarter. What gave you the confidence or what changed to lower that liability?

We removed -- I think if you saw our previous disclosure, we had three satellites in there which were Echo-9, AMC-15 and AMC-16 and we updated our analysis based on current cash flows related to all three and we think the risk at Echo-9 being written down is de minimus and thus we removed that from the previous amount.

We made some, it may not show up the total numbers yet, but we made some, I guess, we made some improvement in the second quarter, obviously, in that side of your business.

Okay. Any update on the potential for write-down at CNB or what you are going to do with that satellite?

No update there. Certainly still risk remains there, but we think there's also -- satellites today would cost a fair amount more money to build and we think there's opportunity there. There aren't a lot of satellites of that design around. So we think there's unique situations around the world and we just haven't gone through all of the analysis, but we probably will decide in the next few months exactly what we are going to do there.

Do you expect to have to write-down the TerraStar assets since the stock price is lower?

I think it is a possibility. I mean -- .

We are accounting for, as we talked about in the 10-Q, we are going to be accounting for TerraStar on a fair market basis. As there are changes in the price of stock that we own or the debt that we own, they will be reflected quarter by quarter going forward.

Okay. Can you talk about the impact of TIVO to SATS, you talked about it at DISH. How would it differ at SATS.

It is a bit different. For SATS it is opportunity. For DISH, the risk is you have existing customers that may lose part of their functionality. So that's a kind of consumer risk where, in theory, you are going to have to replace the box, right. It doesn't make sense, this is kind of a crazy thing. I didn't answer it in the last call but I think TIVO's position is well you can send the guy, you can send somebody a 211 box today, but if he has a 211 box you have to turn it off. He can spend it back to you and you can send him a new one, that is okay. But he can't use the existing one that you have if you download new software to it. Kind of a conflicting thought process but DISH has got consumers. that's their kind of risk.

SATS it's an opportunity. They don't have consumers they deal with directly but what they do have is to the extent TIVO was successful as inventing the DVR and the only people in the world that have access to DVR and the only people that -- everybody would have to license from them. If everybody has a choice of licensing from TIVO or from SATS, because SATS is found not to violate TIVO's patent, then it is an opportunity for them to go out and build set-top boxes for people and include the DVR functional for people where it gives them an option not have to pay TIVO for a license. So it is a great opportunity for them and certainly it is a high risk reward, not much risk for SATS but there's high reward there.

I will let someone else go. Thank you.

Your next question comes from the line of Chris Sommers.

Hello. I have a few questions also. One, I noted in the 10-Q that DISH is currently building satellites that may cause them to no longer need EchoStar satellites. I was just curious to learn more about the background there and why DISH would spend money on satellites that would displace EchoStar satellites if I was understanding that was kind of the motivation for the spin off was to put that capability at EchoStar.

Well, I guess I would say it a little differently. DISH is, excuse me, where DISH can build a satellite, owns a spectrum and can build a satellite for less expensively than they can build it, get it from SATS, they, their board may make that decision. A variety of factors to look at. But who owns the orbital slot, what is the actual cost of building the satellite and what do you want to do with your cash, do you have alternatives for your cash. From a SATS perspective, they're going to build satellites where they think they have got a customer. At this point, wow, DISH could always decide at some point they don't want to lease capacity from SATS. I think from a profitable point of view, when you have got customers looking at -- once you get a number of customers looking at a particular satellite location it is very difficult economically for somebody to decide they do not want to lease that capacity. It is possible and they certainly have that optionality. But from a SATS perspective we are pretty confident that once we get people looking at our satellites it is more difficult for people to leave us because there's a cost of changing those guys out.

Okay.

I think the other thing that I would probably throw in there, the fact that DISH lost the Echo-2 satellite last quarter is a positive for SATS in that capacity side of it.

Got it. Next question would be with respect to the binding purchase orders Bell ExpressView has from you guys, the sales in this quarter were those above and beyond the binding purchases, the minimum amount they were required to purchase, or are they kind of purchasing at a previously contracted rate?

I guess I would let ExpressView answer that question but I would generally just say that ExpressView is buying, at this point the relationship is good there and they're just buying -- they are buying based on the needs that they have.

Okay.

And I don't know, I don't know that they're necessarily buying per contractual number. I think their business is good enough that that's not an issue, but they would probably be able to answer that. I don't know -- I'm not privy to all information, so you would have to really ask them.

Got it. And then I guess so far this year have you guys been marketing internationally and if so in what countries?

We have some business in Europe. We have some business South America and we are marketing there. We have some marketing efforts now in Asia. We pretty much solidified kind of our sales effort internationally. Those sales lead times are fairly long and then once you sell it you have got to engineer it. So, you have got kind of two factors working there that extend lead times maybe more than the marketplace really understands in the sense that you have got to sell it and then you have got to go build it. Most international designs are somewhat different than US designs. It is not something -- most of the time we can't take an off the shelf US design and go plop it down somewhere because the voltage is different, the modulation scheme is different, the encryption is different and so forth. Those are long lead times that we are really putting a lot of effort in place to sell. I think that is a key, a key strategic focus for SATS is to continue to build their customer base beyond DISH. That would include the international business, the fixed service business and the set-top box business.

Got it. Then last question, if you guys start marketing MPEG-4 boxes to DISH, are those going to be subject to the same cost plus margin agreements until the expiration or will those be outside of that agreement?

They are covered by the current agreement with -- we already sale MPEG-4 equipment to DISH today.

Okay. Got it. Thanks very much.

Your next question comes from the line of [Richard Monroe].

Hi. It is Richard Monroe of [Chick] and not Partners. I am just calling to find out how does the MPEG-4 transition change transponder loading? Should we expect to see an increase in the utilization of the transponders at the existing sets fleet?

MPEG-4 does a couple of things. One is you generally need more power on your satellite to give to the same satellite dish size. So it makes a need for more power for satellites and again SATS is pretty well positioned with pretty powerful satellites today. Second thing it does it does tend to give you anywhere from a 50% to 100% efficiency gain on the actual satellite transponder itself. Again that's a good news/bad news situation. From a SATS perspective -- from a fixed satellite service perspective it frees up capacity so it makes more capacity out there so it makes a little tougher to sell. On the other hand, you can sell capacity cheaper and put it in smaller bits so more people can enter the marketplace. That's a dynamic that tends to be neutral over a period of time.

But what it does do it makes the, even though an MPEG-4 product today cost more than MPEG-2 product, the efficiencies that you gain on the other side in terms of satellite capacity usage means you can invest more in MPEG-4 boxes. Second thing is MPEG-4 boxes are the technology of the foreseeable future from a modulation scheme. So therefore you can invest for the long time, long haul. So that's a real positive for SATS because it means that people around the world are going to start looking at MPEG-4 as being more efficient from a satellite perspective and having a long, much longer tale in terms of technology and therefore people will start migrating. They're doing it today and I think that it is going accelerate that people will migrate to MPEG-4. As they do, the set-top box business, because SATS has many MPEG-4 designs including DVR designs and now sling design, they should be competitive in the marketplace.

They offset to freeing up the capacity, I guess, is that DISH is rolling out HD in more locations. Should we see increase in transponder utilization or a decrease transponder utilization.

Well, you will -- I guess you will see an increase in satellite utilization for sure. I could term it from a, again, from a, I assume, from a DISH perspective that they wouldn't want to have capacity out there they aren't using.

Say that again.

I don't think any user of satellite capacity, whether it be DISH or anybody else, wants to have idle capacity because you make no revenue on idle capacity. So capacity utilization of the transponder you are leasing should go up. It doesn't mean -- it takes a little longer to mean, for you to say I need new capacity. That is a different question. In other words, all of the capacity you lease today you are going to want to utilize as efficiently as you can and, i.e., you want to have 100% utilization. That then drives you to need more satellite capacity in the future, but you have a longer time then you need it because MPEG-4 givers you better efficiency. So I know I am not answering -- maybe I don't understand your question but MPEG-4 works both ways and it is kind of neutral from a capacity point of view in terms of the leasing capacity to people.

It means you are more efficient and people don't need as much capacity, but it brings new interest into the marketplace, whether it be for HD or it be any other business. If a transponder was $100,000 a month and you could put 10 channels on it. That is $10,000 a month. You can put 20 channels on it, it is $5,000 a month. So there's a lot more users at $5,000 a month than there are $10,000 a month. It brings new people into the business. Suddenly it makes sense to, from a business TV perspective, to lease more capacity. Suddenly it makes more sense to send a proprietary signal to your 20,000 locations across the United States. Suddenly it makes sense to switch all of your capacity from a bunch of land lines to satellite. And those dynamics tend to neutralize each other.

Okay.

I remember when we used to have one channel per transponder; right. Now we have ten. Now we are going to 20.

And then, in the commitments and contingencies portion of the 10-Q there has been a significant increase in the purchase obligations of EchoStar Corporation, which I assume is for set-top boxes. How quickly does that work through the income statement?

You want to take that, Bernie.

Yes. I am sorry. You are referring to the commitments section under -- ?.

Yes. The commitments and contingency section. On March 31st you had purchase obligations of $632.5 million, today's 10-Q we see a little over $1 billion of purchase obligations. I think that's all set-top boxes.

That's mostly related to satellites and you can see it is in 2008 is where that shows up. So that is not just set-tops, that's -- a big increase there is probably satellites themselves. Satellites.

No, it is purchase obligations. It is on page 24 of the Q.

I think these are, these are our fine set-top boxes from manufacturers and the big increase was again last quarter because of old POs that were created prior to the spin-off. DISH was actually had those obligations and were buying them on behalf of SATS. And as those old POs have worn off, those obligations now show up on the SATS side.

Okay.

So that difference between $600 million and $1 billion is not exactly what it seems. Probably most of that is roll off from DISH POs that now SATS has.

Okay. There's really no finance -- .

Some of that may be MPEG-4 and the fact that MPEG-4 is a bit more expensive.

Right. But that's entirely a pass through. There's really no financial risk at SATS for that purchase obligation.

Those obligations we have customers for, correct.

Okay. Thank you.

The next question comes from the line of Adam Ritzer.

Two quick questions. Can you update us on your capital spending needs for the second half of 2008 and then potentially give us any view into '09? And then my second question just had to do with you received about $40 million of an insurance settlement in the quarter. But I read elsewhere that you don't insure your satellites. So I was just wondering if you don't insure them how did you receive an insurance settlement? Was it a one-off deal that you had set up?

We don't -- we haven't -- we don't normally insure satellites. We did insure this particular satellite. So, luck of the Irish, I guess. But in the particular case, in part because we looked at the rates and we kind of calculate what we think a fair risk is based on the satellite and the launch vehicle. In this particular case the rates were low enough that we decided to purchase insurance. Historically in the last two or three years we felt like the rate was higher than the actual risk. So we didn't insure but this particular case we did. You want to take the other part of the question?

Yes, as it pertains to CapEx outlook, I think the schedule we were just talking about on the previous, with the previous call is probably the best place to look, which we lay out our obligations both from a satellite, from a set-top box and from an other stand point for the balance of 2008 and the years going forward. That's what we, the best we know today based on commitments that have been made.

But is that more -- are there new builds involved with that? Is it part maintenance spending as well? Maybe you could give a little color on what the satellite spending is.

The satellite, I mean the satellite obligations are simply launch and satellite payments that are based on satellites we have in queue to be built here at SATS. This is forecasting out those payments that will need to be made relative to those satellites.

Okay. How many new satellites does that include?

I think embedded in here on the SATS side I think are, is Nimiq, Nimiq and CMB Star is still on the SATS side right now.

Is the CMB Star is that fully paid for, is that built or how much more spending is on that one.

On which one.

The CMB Star.

Actually I don't think that's in our future obligations right now. The other thing -- .

There's really not much left on that.

That one is basically done.

Unless we reconfigure that one.

Just pointed out to me, we also leased a couple of satellites on the side, AMC-15 , AMC-16.

So it includes our obligations to AMC-15, AMC -16. Includes --

Nimiq.

-- a Nimiq satellite.

Okay. The Nimiq-5 you give some details of that within the filing. That one is to-be-built. Is it in process? Maybe you could just tell me where that stands.

That is being built and I believe scheduled for an end of 2009 launch.

I thought it was mid '09. I think it is about half way done.

I think it is about half way constructed and scheduled for launch, I am going to say second half of next year.

Okay. So really that is the only one of what is called a new-build.

Yes.

That's it. The rest are obligations, leases but that's really the only new build you have coming.

That's correct.

Great. I appreciate it. Thank you.

(OPERATOR INSTRUCTIONS).

Good, maybe we don't have any questions.

Okay. There's a question in queue from the line of Gerard Hallaren.

Good morning, again. I will ask you the same question here that I asked you at the other place. What's going on or how are the trials progressing in Atlanta? And what kind of experience are you getting and having with devices and what not there.

And really the question for those people who didn't listen, the last call was about DVB H and dashes, all kinds of DVB standards. But basically it is trials that we are conducting for terrestrial satellite and mobil kind of frequencies in terms of how you might utilize those, whether it be to phones or portable devices, or computers, or whatever. Again the trials are interesting. I think we are excited about what we see from a technology point of view when you start looking at OFDM type modulation schemes in general because you can use multi-path to be additive instead of from an interference perspective ike most modulation schemes. Additionally you can reuse frequencies terrestrial and also via satellite if properly done, or in theory. A lot trials are really to prove those theories and to understand kind of what the opportunities are, what the costs are.

Most things in engineering deal with physics and there's some times trade offs in terms of costs or response or efficiencies. So, I think that working with people around the world who are involved in this we try to get a pretty good feel for perhaps what the best mouse traps are out there, what is the best long-term wave place for us to be. SATS believes that as it builds that expertise that there's a role for it to play in that terms of that technology in terms of building devices, whether those be portable devices or set-top boxes or whatever, to use those kind of different modulation transmission schemes. You have to invest in R&D to be figure it out. That's part of what we do and the trials will continue for a bit longer and then I think we will probably have to make some decisions.

I should have asked this part of the question on the other call. Does the DISH content licensing, DISH Networks content licensing, will that extend into these hybrid networks and mobile devices?

If, I guess not for, not typically. SATS is a separate Company, so it typically wouldn't have any, in general wouldn't have any particular programming rights as it relates to DISH. It doesn't mean that DISH -- it doesn't preclude DISH from somehow utilizing frequencies or technology that is provided by SATS or any other company for that matter and using their own programming agreements to do that. But SATS wouldn't have on its own programming agreements for the -- .

Right. No.

We may have some but for the most part it doesn't have, it doesn't necessarily have programming agreements that allow it to do this kind of transmission. It does have some programming agreements as it relates to sling and that technology. And it does have, it is working with, with programmers to try to do something that in a way that protects those programmers copyright in a way the UTube doesn't today. So they have their own contracts for that.

Okay. And in terms of CMB Star, what would the -- I am sure their bound up trying to make decisions to make the Olympics work and get the air clean and things like that. What is the likelihood that you could sell them other excess capacity or was there something unique about CMB Star that made it particularly useful or relevant to China.

CMB Star was designed for China. It was designed to their specification for them to use their S band frequencies in conjunction with a nationwide mobile service. Right. And obviously China -- some of the United States it has a lot of rural areas that just can't get from the cities. So it really was designed that way. Because China hasn't fulfilled their obligations under the contract so far, right, we are looking at other alternatives for that satellite that we think there's an opportunity because of the kind of world's increased use of S band and some timing issues where people could lose licenses in S band, if there is some opportunities to reconfigure that satellite to a customer who can fulfill their obligations. And so we are looking at the cost and the timing of doing that and how long that would take and how much it would cost and whether we have willing customers to do that. So that -- and I think the disclosure is about where we are today. It is not too dissimilar to where we were last quarter and I think probably within the next quarter we will have to make decisions there.

Yes. Is it too speculative that China won't make a decision until the Olympic are over.

Again, we have to be prepared -- I think our goal is to be prepared to move ahead without the Chinese.

Okay. Thank you very much.

The next question is a follow up from the line of Chris Sommers.

I don't have a question.

Okay.

The next question is from the line of Chris Hill.

Hi. I was just trying to understand where in terms of your CapEx budget, if I am looking at your commitments and contingencies, where additional broadcast equipment would fit into that on the terrestrial side, that is non-satellite related purchases.

Give me a second. I believe DVO equipment would also be under purchase obligations, to the extent we have any orders for equipment that resides on our uplink center. We obviously don't order those very far out. They're probably going to be part of that big lump that's in the big 2008 number.

Great. Thank you.

The next question comes from the line of [Tim Lash]. Tim your line is open. You may proceed with your question.

Thank you. Could you clarify the CMB Star situation? Previously you mentioned that the satellite didn't meet the specs of the standard, the Chinese standard, thereby sort of implying that it was a satellite issue, a manufacturing issue. Now you are saying that China didn't live up to their end of the agreement, I guess, with respect to whatever operational or operating agreement that you had in place. Can you clarify? Is it a satellite problem or a business relationship problem?

I think it is both. I mean I think that the satellite hasn't met the spec. We are looking at ways for it to meet the spec, but -- therefore the Chinese haven't had to live up to their agreement. But to the extent it meets the spec, they would have to but there's no guarantee they would at this point. It is a bit more complicated. And again, all we can do is be in position to use the satellite and make money at it.

All right. Thank you.

At this time, there are no further questions in queue.

Okay. We will be back again in November. Thanks for joining us today.

This concludes today's conference call. You may now disconnect.