EchoStar Corp (SATS) 2008 Q3 法說會逐字稿

Good afternoon. My name is Ashley and I will be your conference operator today. At this time I would like the welcome everyone to the EchoStar Corporation third quarter 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, Ashley. Thanks for joining us. My name's Jason Kiser. I'm joined by Charlie Ergen, our Chairman and CEO; Mark Jackson, our President; Dave Rainer, our Chief Administrative Officer; Bernie Han, our CFO; and Stan Dodge, our general counsel. Before we open it up for some Q&A we need to do Safe Harbor disclosures, so for that we'll turn it over to Stan.

Thanks, Jason, and good morning, everyone. Thank you for joining us. We invite media to participate in listen-only mode on the call, and if you were on the Dish call earlier we are serious about that and ask that you not identify participants or their firms in your report. We also do not allow audio taping and ask that you respect that. All statements made 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 your 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 (inaudible) and should not place undo reliance on any forward-looking statements. We assume no responsibility for updating any forward-looking statements.

With that out of the way I'll turn it back to Jason.

Thanks, Stan. Ashley, I think we're going straight to Q&A so you can go ahead and open up the lines, please.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Kit Spring with Stifel Nicolaus.

Yes. First can you talk about how you think your traction with new customers has been. I think the Market's been a little disappointed. Are we being too aggressive in our optimism. or how do you feel about that? We'll start with that.

I think it's a good question. I think it's gone along about as expected. I think that -- domestically in the United States I think the relationship with DISH in terms of -- my ownership of both makes it different for a competitor to say they want to buy a product. Having said that I think we, by far, have the best DVR out there. We by far have, obviously, sling technology that nobody's got on par with that. And we do a lot of things in the set-top box that saves the operator cost, whether it be interactivity or whether it be ability to troubleshoot ov -- troubleshoot the set-top box over the phone in ways that other people can't do. So I think that's going to be a longer lead cycle. I think people have to -- will have to think non-emotionally at some point and maybe they will and maybe they won't. And they also have to realize that there has some element of trust that they know they get treated fairly because, obviously EchoStar is different com -- separate company.

Internationally we have, I think, a much better chance to be successful because those issues don't come into play. And so while we have a lot of domestic efforts out there the lead cycle -- the sales cycle's long term we also have a lot going on around the world and those cycles are long, as well. So I'm hopeful that we're going to have more projects than we can handle in terms of product for people because we really do build -- in terms of the digital world some of the best stuff out there and have one of the greatest teams of digital engineers around the world. So we think it's a great asset for us and time will tell, but I think that maybe the economy is going to hurt in a way that maybe we didn't expect or maybe it'll be beneficial for us because people want to save money.

Okay.

At this point we're along the lines of where we thought we'd be.

Okay. Can your talk about the sustainability of DISH's revenue. You had a pretty big increase, looks like you were up 35%, maybe both on the set-top box side and the chick satellite services side?

Well, because DISH has moved to all MPEG-4 now those are a little bit more advanced boxes, or a little bit more expensive so in that sense we would expect the DISH revenue to be strong. The reverse -- the negative side is, of course, DISH's business is soft per se and the economy's going affect them so we have to see -- that would be the counterbalance to that. But in terms of the product itself tey're buying sophisticated products, more state-of-the-art stuff. MPEG-4 product by its nature it costs more than MPEG-2 products. In terms of the -- the satellites are leased I think for another year or so and then we'll have to -- then we have set top-box orders for another year -- a little over a year and then I'm sure is that DISH will be looking for other vendors and we'll be looking to keep the business.

Okay. And then can you talk about why there's such a large working capital and will that reverse at some point? There's a drain of $107 million year to date.

Yes, that was primarily a fair number of MPEG-4 boxes that got shipped probably most part of that -- and correct me if I'm wrong, Bernie, but -- or Dave -- but to DISH as they gear up for the fall -- I mean Christmas. As they make -- then they're making a conversion MPEG-4 so you never know which product -- they don't know if they need MPEG-2 parts or MPEG-4 products so they might buy a little bit more than they normally would.

All right, I'll let someone else go. Thanks.

Our next question comes from the line of Jason Bazinet with Citi.

Thanks so much. I just have a question regarding the FSS business. Can you just talk a little bit about how much -- I guess the question is, is the capacity fungible between KU and KA band on those three satellites that have KA capacity? And, B, if you can just give us any color if it is fungible how much? Or maybe if it's not fun --?

No, I think from a practical point of view KA band capacity and the KU are both -- they're both separate. The KA bank capacity there's -- it's the limited amount of KA band capacity and I believe some of that's been leased, right?

A little bit of it's been reserved.

Some of it's been reserved? So we have a customer who's reserved some of that. One of the satellites has a power degradation and so there would be a point in time where we have to pick between a KA band customer or a KU band customer, but I don't think we're at that point today. Obviously we have excess KU band capacity so we're not at that point today.

Okay.

But they really are -- your KA band customer is materially different than the KU band customer? Your KU band customer's traditionally video, your KA band customer's traditionally data. Although you can do data on KU band.

Okay. Thank you.

Our next question comes from the line of Christopher Sommers with Greenlight.

Okay. I have a question on the obligations and future capital requirements on page 48 of the 10-Q. At the end of the second quarter your purchase obligations for the rest of 2008 were $1billion, now they're about $1.5 billion for the last three months, I was wondering what's in there --?

It's mostly se-top boxes. It's the buildup towards the end of the year.

Got it. And so the $1.5 billion of purchases, how do we think about that in terms of your sales cycle through to DISH and what it means for fourth quarter revenues? In other words if you're spending $1.5 billion presumably on set-top boxes in the fourth quarter --

What this schedule represents is purchase orders that will eventually manifest them as receivables. When we find out --

But they're not all fourth quarter. The timing -- it's a little dangerous try to translate that to a specific timing in terms of revenues, but by definition it is -- it's going to be largely all future revenues.

Got it. And then can you talk about some of the investment impairments you took in the quarter, breaking out between TerraStar and perhaps some other entities you're invested in?

I would say that the big bulk of it is TerraStar and, again, maybe Bernie can explain a little better, but we did a sto -- I think we did a stock transaction. We got stock for some spectrum that we put in, right, and we had made some investment and that -- we wrote that down to market. Right, fair?

There's -- yes, if you look at on P&L under other income there's a couple of lines there. One line is $163 million and that represents assets that we account for on a fair value or mark-to-market basis, and a large part of that, obviously, is TerraStar. And as the value of those investments go down we take a hit, as the value of the investments go up it also is reflected there. The line item below that is other assets that we have invested in, largely nonpublic assets that we from time to time evaluate -- I'm sorry, public and nonpublic, I apologize, which from time to time we evaluate for impairment and we impaired, obviously, a number of those asset this quarter.

I just think with the way the economy turned and things that would require capital expenditure and things -- the marketplace just isn't ready for that, so we took an impairment there.

Right. The second category of $155 million there's a footnote -- I believe it's on page 17 -- which better describes or breaks out those and it includes some terrestrial spectrum that Charlie alluded to that we also took an impairment of during the quarter.

Got it. But all the TerraStar stuff's in the $163 million and the $150 million or so is other stuff?

Right, that are -- that is not -- the distinction is being accounted for by fair value method, which is the $163 million and then the other line is everything else.

Got it. And then in terms of capital spending you're up roughly $150 million year to date. What's the mix of that between spending on satellites under construction versus some notion of a recurring capital spend number?

Well, the two components, I think, are satellite that we have on our side and then the other component of that is equipment and facilities for our uplink centers. And I don't think if we've historically broken that out, but those are generally the two large pieces and I think as on the DISH side, we prefer not to break that detail out.

Got it. Okay, that's all I have for now. Thanks, guys.

Our next question comes from the line of Adam Ritzer with CRT Capital.

Hi, guys. How are you? My question really focuses on your stock buy back. You guys when you first were spun off, you came out with a $1 billion buy back. Looks like you've done about 60,000 shares so far through September. I don't know if you've done anything in October yet, but I also noticed you reduced buy back now to $500 million and you still have the same amount of cash, roughly $1 billion, yet the stock is down 50%, traded at a significant discount to book value and I don't really see any other huge capital needs. Can you talk about why you're not more aggressive and why you reduced the buy back?

Well, I can't talk about what we've done since the quarter's ended but I believe we had about -- we had just under $800 million of cash at end of the quarter and we do have capital obligations for satellites and other things that we think are prudent, so we just -- I think $500 million was a realistic number.

OKay. But is there any reason why, with the stock at these levels and this type of discount to book value you haven't been more aggressive, I guess?

I guess we look at -- cash is such a critical commodity today, right, and we haven't really gotten any real cash flow business yet with EchoStar. We evaluate everything and I think we're -- obviously we bought back stock in the 20s and we like it better where it is today, but we have to balance that with every other opportunity we have and we think there's a number of opportunities out there and we look at those things every day and we make a decision --

Okay.

-- about what the best place to use cash is and that -- and again, that's something we evaluate from time to time and obviously, we thought it made sense to buy back in the 20s and today's -- the marketplace is a different place today. I don't know really how to answer it. We look it at and we have those discussions and we have good debates about it and what we want to do is make the best long-term decisions for growing the business. And some of our business units come in with capital expenditure requests or investment requests and we have to balance that versus buying our own stock back versus paying a dividend and so forth.

Okay. Fair enough. Thank you.

(OPERATOR INSTRUCTIONS) And we do have a question from the line of [Michael Davey] from Yorkville.

Hi. Charlie, do you see any opportunities with any distressed assets, maybe distressed satellite assets, in the next year or two? Are you monitoring that area?

Yes, I don't know that I can specifically say distressed satellite assets but I think that we expect there will be some. We just think that the problem in the marketplaces today, obviously, there are some good businesses out there where people just don't have enough to get over -- their cash flow has all gone for debt, right, so we have to look at those situations, as I'm sure others will. We have three distinct businesses and one of those is satellites and leasing out satellite capacity, so we definitely are monitoring that.

Do you see that that could be something that EchoStar could take advantage of given your cash position?

Well, I think anybody who's got cash is in an envious position today, so I like where we stand there. But we're not generating cash flow today in the business, so my focus today, quite frankly, is to make sure we can generate our own positive cash flow and make sure that we build a book of business, both in our satellites and our set-top box manufacturing and international business to do that long term. Having said that, if something compelling was available that made sense strategically that would help us do that then we'd be interested. So -- and I expect that's probably -- I expect there'll be a number of those things that'll happen over the next year.

Okay. Thanks very much, Charlie.

And we do have a follow-up question from the line of Christopher Sommers with Greenlight.

Hey, guys, I thought of a couple more. Regarding the TelMex NVS JV that you guys are involved in, are you involved there on the satellite side or the set-top box side or both?

Well, I don't we -- I think there's any -- what? Yes, I don't think we have anything to announce on that.

Got it. And then the second question regarding the [Two Media] investment in South Korea, was that one of the investments impaired in this quarter?

I don't think we go into detail on what was or wasn't impaired.

Okay. Thank you.

And we do have a question from the line of Kit Spring with Stifel Nicolaus.

Okay, I have a few more also. Is there anything to read into the future revenues of SATS at the inventory build at your sister company DISH? There's a pretty significant inventory from 3Q to 2Q and I think we saw that last year, although there's also somewhat of an inventory build year over year.

Yes. I think that -- typically, as you go into Christmas season, your customers would build a little bit of inventory and then we'd normally wind that down after the first of the year, so I think that's more -- I think that's more of a normal pattern. I think it's a little bit -- it's also heightened by the fact that the transition that our customer DISH is transitioning from MPEG-2 to MPEG-4 and you have to build up some MPEG-4 inventory to take -- for that transition otherwise, you run out, right. I think it's those two factors and I think the question -- the really question is then does that -- does DISH have sustainability in MPEG-4 or do they end up with business slowing down and they have inventory that they don't need to order as much.

Okay. And then anything you can give some color on the Bell ExpressView contract that ends in the first quarter. How do you feel going into that? Who do you think your biggest competition for that is, if there is any?

Well, there probably is competition for that and it would be the -- some of the -- probably the Motorolas of the world and some of the international -- some of the Korean, Chinese and other customers obviously who've had a good relation -- long-term relationship there. It's not so easy to -- and obviously Bell ExpressView understands our product lineup and sophistication of our product lineup and how some of the things that we do can save them money and it's not so easy to switch out encryption systems and uplink. We do an awful lot of work for Bell ExpressView that's behind the curtain that people don't see. We -- certainly before that contract expires that would be probably number one on our list to go out and renew that one.

Okay. Then on the potential write-down from some of your satellite assets, I think in the past you mentioned you were confident you might be able to find another use for the CMB Star satellite. Has that changed now that the world has changed?

I don't think so. I think that it's always possible and certainly the environment is not as good as it was six months ago, but satellites -- in fact, I can't even think of a satellite, but a satellite's historically been able to be used for a variety of things. The real question is, if you had repurpose a satellite what's the cost of repurposing that satellite, and then when you re purpose it are you going to get a return when you add all those costs in?

And then on AMC 15 and 16 where you've noted a potential write-down of $200 million, is there some timeframe upon which you need to get new customers before that write-down would occur?

I would say there's several factors. One would be -- Kit, the way the business works you build a book of potential business and [you hit big] on a percentage of that and so you would look at whether you're hitting on what you think the normal percentage would be on those potential customers, because you got to forecast that out,and then I think the general economic conditions and where the prices are going on that kind of capacity and so forth and you look at all those factors. And again, based on where we are today we don't see the need to write it down, but we'll reevaluate that again at the end of the year.

And then on TIVO where you are indemnified by DISH network does that include boxes that you sell to other parties?

DISH does not indemnify for boxes we sell to other parties.

Okay. And then I can't remember if your addressed this or not, can you talk about what you think the impact --

By the way, the extent people think that TIVO has value in their intellectual property to the extent that DISH is successful in their litigation with TIVO, obviously SATS has -- EchoStar has a alternative methodology to TIVO and most people today are having to sign licenses with TIVO, so that's another potential asset. So there's a lot of positive upside there.

Do you think --

There's risk and of course, there's positive upside.

Do you think you could sign deals at similar economics as competitors, given that you've already gone through litigation in the event that it didn't turn out in your favor?

Well, I would say it a different way. I think regardless of -- I would say regardless of how the litigation turns out -- and again, my personal opinion is that DISH will prevail -- there's reasons to work with TIVO for other things. There are other things that TIVO does and that we do that makes sense to do some things together. The problem is what value does TIVO bring and what value do we bring? TIVO would say if they have intellectually property to survive the court systems and all your challenges, they would bring more value. We would say to the extent that we have our own intellectual property that survived the court system we bring more value, right? Those issues aren't decided yet, but regardless of how it turned out I think there's a relationship there -- a potential relationship there.

Okay. And then I have my own quantification, but you want to give a possible quantification of the loss of AT&T at DISH Network's two SATS?

I think we probably -- we don't know. As EchoStar we will hope that -- and do everything to help DISH replace that business, but we're not involved in that side of the business for DISH and we would expect that -- and I think they talked about that being close to 20% of their business. That's probably not something they replace overnight so that is a risk for us.

Thank you.

Our next question comes from the line of J.C. Torres with Sloan Capital.

Hi. As you look to grow the set-top box business, where specifically do you see the greatest opportunity to generate the economic returns that you would -- that you require; Latin America, Europe, or domestic accounts?

We would see it in Europe short term. We believe that we don't have the common ownership issue that Charlie alluded to before, so we think we're going to make some good progress in Europe and we have a team working hard on that.

And I'm showing that there are no further questions at this time.

Well, great. Thanks for joining us and we'll be back in February or March -- I guess March, probably, right? All right, thanks.

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