EchoStar Corp (SATS) 2009 Q2 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the EchoStar Q2 2009 earnings conference call. All lines have been placed on mute to prevent background noise. After the remarks there will be a question and answers session. (Operator Instructions) Mr. Jason Kiser, you may begin your conference.

Thank you for joining us my name the Jason Kiser. I'm joined by (inaudible), Mark Jackson, our President EchoStar Technologies, Dean Olmstead, President EchoStar Satellite Services, Bernard Han, our CFO, Paul Worbin, our Controller, and Stanton Dodge, our General Counsel. Before we open it up for Q&A we do need to do our Safe Harbor disclosures. So for that we will turn it over to Stanton.

Thanks, Jason, and good morning, everyone. Thank you for joining us. As you all know 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 are 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 10Q. All cautionary statements we make during this call should be understood as being applicable to any forward-looking statements wherever they appear. You should carefully consider the risks described in our reports and should not place undue reliance on forward-looking statements. We assume no responsibility for updating any forward-looking statements. And with that out of the way, I will turn it back over to Jason.

All right, thanks, Stanton. And Jennifer, we are just going to open -- go straight into Q&A, so you can go ahead and open up the lines, please.

(Operator Instructions) Your first question comes from the line of Jason Bazinet of Citi.

Hi, thanks. I have three quick questions. One, I guess, related to Sky Mexico. Can you just give us an update on whether or not that's a transponder agreement or set-top box agreement or both. And then second, I think all of us are having a little bit of trouble just understanding the huge swings in the revenue line. So if you can just comment qualitatively on why -- why there is so much volatility. And then lastly, that $110 million gain that you booked on the income statement, is that related to the purchase of [serious] debt that you all made a few quarters back? Thanks.

On Dish -- I think you are referring -- you said Sky Mexico, I think you are referring to Dish Mexico.

Dish Mexico, excuse me. Yes, Dish Mexico, thank you.

Thank you. I guess first comment on Dish Mexico is that it's -- we kicked that off as really our first international platform and it's doing extremely well. We are very pleased with its traction in the marketplace. In terms of your question is it a box deal or a capacity deal, it's both. It's a good example of one of the places where Echo has brought all of its capabilities to bear. So there is a both a transponder lease and a box sale component.

With respect to the swings -- I can't remember, you said swings in revenue.

Just revenue, yes.

So obviously, below the line we've got certain investments that we account for on a fair value method and that drives some of the swings below the line. On the top-line obviously our biggest single source of revenues are dish receiver sales and it is a function of Dish's particular inventory situation. I think we had eluded to in our 10k at the beginning of the year that Dish's inventory had built up to higher than historical levels and that they may be looking to work down some of those inventory levels and I think what you saw in this quarter is partly a result of that. If you look at Dish's 10Q, you can see that their inventory levels are now back down to where they had been on a historical basis.

Perfect. And then in a serious debt, is that $110 million on the income statement on realized gain.

Actually, Jason, Bernie has mentioned that the gains were related to increases in market value. We don't break out the individual investments.

Okay. Thank you very much.

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

Adam, you there?

And that question has been withdrawn. Your next question comes from the line of [Michael Guerstin] with MSD Capital.

Hi, guys, how are you today.

Good.

First of all we just wanted to thank you for the clarity, the disclosure around the TiVo liability and the indemnity that Katz has from (inaudible) it seems like it limits the liability to the $5 million payment. So that was helpful and clear. Then just two questions. First of all, I guess, on the set-top box business, there is this kind of product upgrade cycle that SATS has been working on with Dish. And I guess we are wondering, once you get past that where the development matters stand with regard to the new Sling enabled box that it sounded like Dish would maybe be introducing later on this year and then also third party discussions with customers. And the second question would then be about -- around the other side of the house over on the fixed satellite services business, some of the disclosure doesn't necessarily make this clear. But I wondered if you could talk to or describe how mission critical or not the services that SATS is performing for Dish are on that side of the business. And then secondly, also discuss just the kind of third party business development matters going on there.

Thanks, Michael. This is Stanton Let me just make one slight clarification on TiVo. You are correct, based on agreements between the parties, SATS exposure is limited to $5 million, but by virtue of the fact that Dish and SATS years ago were sued together, any damages or sanctions resulting each party is jointly and severally liable for those. So, to the extent that Dish is not able to make any payment, then SATS would be responsible for any portion they don't pay.

Right. (inaudible) Dish has credit risk on that, as I understand it. Or is the way I would look at that. Is that right?

Yes. It means, basically, if for any reasons Dish can't cut the check, for lack of a better way to put it, then SATS is on the hook for the remainder. But the parties have agreed between themselves that SATS' exposure is limited to $5 million.

Okay, well great. Well, thank you for clarifying that.

Sure.

So, Michael, in regards to our set-top box business, yes, we are going -- we are working with Dish constantly on upgrading their product line and I think we will see them move more towards MPEG-4 technology as high-definition because more prominent in the customer base. In the Sling enabled box, it's called the 922 and we are working with Dish still on when we are going to launch that. The product has got a lot of great capabilities and we keep adding more to it.

So we have got to keep feature creep from happening, but we are working with them to launch that hopefully soon. And we are taking that technology and we are -- and we are developing product for other markets, both in the United States and outside the United States. And that's going fairly well. And we are also working with some customers that just want standard Slingboxes to possibly integrate into their existing products until we can get a integrated product worked with them. So we are encouraged by the market in general, but we do not have much to repot on any new design wins yet. But we are optimistic that hopefully we get some soon.

It sounded like you were doing some customer pilots, Mark, I guess, on the last call.

Well, we are --we're -- I guess the best way to say is we are developing product on the com. It is kind of like if you build it they will come. It's Field of Dreams type stuff where we believe that we have a great feature set and also some other great technologies to offer customers. So we are developing that and showing it to customers and we are doing some tests with certain US and international customers.

Have the -- have the TiVo matters kind of been an overhang in other customer discussions?

No, they haven't.

Okay.

And, Michael, I guess, your third question was on FSS. You had two parts to that and one was do we perform mission critical functions for Dish. And I would like to -- the answer is yes. And there are a couple of components to that. One is that we fly Dish's satellites. So if you recall, Dish has maintained asset control for a few satellites. We actually provide the, what's called the TTNC and we fly those satellites. That's very mission critical. In addition we fly a set of satellites that we lease to Dish and those are increasingly important within the Dish business plan. And thirdly we operate the up link, so all of the capacity, the channels that are pushed up to the satellite we operate on their behalf. So, yes, we do provide a very mission critical role.

And Dean, on that point I guess, is it safe then to assume that the satellites and services are more than just kind of rudimentary backup for Dish that some of those are offering unique coverage and spectrum.

It's a primary service offering.

Okay. I just think there have been some -- that wasn't necessarily coming across clearly in some things that I read.

Okay. Right Michael. We -- under the MSA, under a service agreement we provide all of these functions for them. he second part of your question was third party business development. I gather you mean our capacity leasing to parties other than Dish.

Right, it sounded like there was quite a bit of unused capacity still. I know that has been the case for the past year that's been available for potential new customers and I just kind of wondered how some of those discussions might be going.

That's progressing. As you know, we are up against a couple of tough incumbents in that market segment. Also a difficult market environment, but we are growing. Growth is modest but it's -- it is growing. We are filling the capacity at a gradual rate, both in what we call the FSS segment, as well as in the BSS segment. As we just talked about Dish Mexico, that's a customer for some of our BSS capacity now. So we are growing, albeit modestly.

I see. And would you say there has been any kind of change in tune or trajectory of those discussions over the past year or two.

Not dramatically. I would say that there has been some softening of prices in the -- in the FSS arena.

Okay.

There is a -- there is a whole food chain and everybody has to -- to respond to that in the marketplace. But on the other hand, there seems to be a continued solid demand for new DTH product around the world and t That drives capacity demand for us. So in the case of Mexico we are able to meet that demand. We've mentioned that we are launching a platform in Taiwan that will not be on our capacity but it will also drive demand in that region. On the one hand softening in prices for a particular segment and on the other hand continued demand for video product.

Great. And I guess one thing we, just to wrap this up, Dean, but I was wondering, we kind of understood about your offering maybe a year or two ago was that you were trying to package together, I guess, I'll call it a unique slate of services for the satellite side from uplink to satellite to all of the other kind of services you could provide a potential broadcast over that spectrum. Is that -- it that proving to be differentiated out there?

Yes, I think it is, particularly in the DTH segment. So we talked about mission critical functions we are performing for Dish, now we are doing a lot of that for Dish Mexico.

I understand, okay.

We certainly got the ability to replicate that. It's much more important for us to do the big platforms like that than it is to lease half a transponders. So we continue do that as well, but that's not really the big -- that doesn't move the meter very far.

I got it. Okay. Thank you, guys. Understand, I guess, I was think about what you said earlier, when you answered my question. I think it's obvious but so I'm clear. Essentially Dish would have to be unable to pay for this to come back to SATS.

Beyond the $5 million.

Right, okay.

Correct.

So whether that's Dish having some or whatever that would mean. But Dish would basically have to -- it would be a deterioration of Dish credit or whatever that would look like.

Whatever it might be.

Bankruptcy or whatever.

And then -- and then of course that sort of a claim against Dish for that amount, that's the way it works. Even though you are jointly and severally liable, then depending on how parties have agreed to distribute the liability or other reasons, then there's -- the other guy can seek contribution from the other guy if there is a basis for it.

Right. So Dish would essentially have to be insolvent, I guess, is what -- the way I am going to take that.

I won't speculate on the reasons.

Okay, understand. Well, thank you, guys, very much, I appreciate you taking our questions.

Thank you, Michael

Your next question comes from the line of [Mike Ritzer with Shannon Todd Capital]. Hi, guys. Mike.

Couple questions. First, could you go into a little bit more detail on the expansion in the margins for the satellite services and then also is that a good run rate going forward or which way do you see the margin there moving from here? Also if you guys are able, could you provide a utilization rate on the satellites or give some guidance there? And then just lastly, do you have any update on the -- the Chinese satellite?

Let me see if I can give you a little bit of satisfaction. But I will say that we don't provide any guidance on business going forward. It's been our policy and approach. On margins, I think probably the biggest factor is simply the -- the leave operating leverage that we get as we continue to fill capacity. As you know our fixed costs don't go up while we increase revenue on current capital assets. In terms of the fill rate, we won't break down that number for you, but it is continuing to grow or continuing to fill at a modest rate and we still have room for revenue growth in the FSS segment.

Your costs did decline year-over-year, correct, in the satellite services business?

Yes.

So what was driving the decline?

As we described in the Q, the decrease really related to decreased costs associated with our fiber back hall.

Okay. Anything specific there? Was that one time?

You can see that decrease.

There has been a transition of the network from really fixed circuit to a MPLS and that's enabling efficiencies.

Okay. So you'd expect that to continue?

Continue, but moderately.

Okay. And then on the Chinese satellite, do you guys have any updates on the status there?

No, it's sitting in the cooler and continuing to look for the right opportunities for C&B's head.

All right, that's all I have. Thanks very much.

(Operator Instructions) Your next question comes from the line of Chris Sommers with Greenlight.

Hi, guys. On the TiVo patent issue, if the Patent and Trade Office ultimately concludes that the software claims and TiVo's patent are not valid, does that take the litigation between the two of you completely off the table then as they would have no basis to go after your solution?

Well, it's -- it's -- really it's a great question in that it really -- what it really comes down to is timing. Because what we have today is the initial office action from the US PTO, TiVo's an opportunity to respond and then you get a final action, then it can be appealed to the Trademark Appeal Board or to court, so forth and so on. So to get to the ultimate end answer will take sometime. And if you get the ultimate end answer during the course of the current proceedings, which are the contempt proceedings, or any -- if we went on appeal any subsequent trial it would certainly impact that. The trickier question is for the original trial where we've already, or Dish rather, has released $105 million to pay for the original royalty damages awarded, there is really -- I don't think there is a single case out there that says if the patent is subsequently invalidated what actually happens to the money you've already paid.

But you can rest assured we will look into it and to the extent we -- we ultimately -- the Patent and Trademark Office ultimately finds the patent invalid, we certainly would like to get our money back or Dish would rather. I would just note, since you asked a TiVo question, as I said on the other call, our appeal brief is actually up on our investor relations website and I'd encourage folks to go take a look at that because it really lays out, I think, in pretty understandable terms what our arguments are with respect to contempt.

Right. But just to be clear, the major issue between the two of you relates to the software component of that patent. So if the software component of that patent is rendered invalid, then there is really no basis for them to go after you guys.

I think as a general matter that's correct. It is just a question of timing when you might get a final determination that the patent is invalid.

Right.

And if our -- if the current litigation has run its course by that time, then you are kind of back in the same position we are with the original trial. Which is you have to go -- you try and go back and undo something that is settled. Got it. It's an interesting question.

Got it. Okay. That was it, thank you.

Your next question comes from the line of Jon Franklin with Franklin associates.

Hi, thank you for taking the question. I'm just trying to get a little better understanding of what's going on in the FSS business, and maybe I could ask the question like this. So Dean Olmstead having come on, I guess, a year and a half ago with very well regarded in the industry and had a lot of impressive operating experience, can you say from your perspective what was he brought on to do and to change and how far along in that process are you?

Dean, would you like to take that?

Thanks, Jon. Jon, the main thing I was brought on to do was to help shape up a FSS Company out of the spun assets. And there are -- I should say generally a satellite company. And there are three segments of that company. One is the BSS segment, obviously, Dish is the biggest customer there. The second is the FSS or the leasing to third parties of C&K bank capacity. And the third is the mobile. And as you know, recently we had the success of the TerraStar launch.

So each of those segments are progressing and each face their own dynamics. But generally speaking we are becoming a satellite operator that can compete with any of the existing satellite operators in any of those segments and we can out perform them in certain cases and in other cases they have fairly entrenched positions that is going to take time for us to wittle away at. But I think our growth in all areas demonstrates that we are getting traction, but cycle times are extremely long in the satellite business, as you are acquainted with.

Yes, sure, I'm sorry, I didn't realize you were on the call. And I can see they are very long cycle times, but do you have -- I mean maybe I could ask a question like this, are you happy with the pace at which new contracts with third parties have come on. Has that -- has that been more difficult for you to achieve than you had anticipated. And anything we can do to change the strategy to bring them on more rapidly and utilize some of this -- some of this capacity that's really very low cost to incrementally utilize.

Right., And so the question is how do you differentiate the product, your existing product in the existing market against the incumbents and we don't have a lot of tools. We have a good quality assets, so we have to look to price and contract terms and conditions to be more creative than -- than the incumbents. And we have been doing both of those, so our yield per unit capacity is slightly less than we'd like it to be over time, but the strategy is to fill up the empty seats and then try to -- to improve the quality and yield overtime. And that's -- that's just a very long-term process. More important to us, and this is what I was trying to convey earlier, more important to us is having assets positioned that we can utilize for supporting new -- the launch of new DTH platforms, both in this region and elsewhere around the world. So we continue to evaluate that. Thank you so much.

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

Hi, good afternoon. I had a quick question regarding your -- the cable Slingbox enabled rollout I think you guys had announced some products at the cable show of three, four, five months ago, but could you update us on how that's going, if there is any beta testing going on with any customers yet.

There are numerous beta tests going on with that product right now. So we continue to test it with a bunch of different cable companies. And we will have to see in the future which ones decide to roll it out if any.

Okay. Do you think we are going to have any clarity on that by year-end or what -- can you give us maybe a timeframe on when we might get some feedback from those customers.

We are hopeful that we will have some announcements before the end of the year, but I can't guarantee that we will see that or not.

Okay. And the only other question I had is on the balance sheet, looks like you guys have a little over $1.2 billion cash, securities, et cetera, which works out to somewhere above $14 a share. Pretty much where the stock was trading at before today. I was wondering how come you are not more aggressive on your buyback, either the market doesn't value your other assets for much, why not take advantage of that and shrink the float and create value for the other shareholders who want to stay in this for the long haul.

Adam, it's Jason and I can't speak for what the market's view on it is, but from our perspective we did have activity in our 10b51 plan. And it's something that we -- we look at in the process of evaluating this along with other alternatives every day. All part of our balance sheet management. So we spoke with our wallets and we bought shares in this quarter and it remains to be seen where we will go from here, but we take it in context of other things that we potentially could be using our capital for.

Right, but you guys have had a -- right on the spinoff you had $1 billion dollar buyback announced. I know it's down to $500,000. Is there a reason why you are not more aggressive. I mean a million or so shares isn't that very -- isn't that aggressive in my opinion.

I'm not going to get into a debate on what's aggressive and not aggressive. It's just that you have to take it in context with other things that we are evaluating.

Okay. Understand, thank you.

Your next question comes from the line of JC Torres with Bloom Capital.

Hi, guys. Could you help me understand the sequential increase in CapEx for the quarter? Was it driven by satellites, what's -- what's in there?

Give us just a second. We are getting the detail on it.

During the quarter we had a large payment related to a satellite that we are building.

Building for SATS or Dish?

For SATS.

SATS. Can you help me understand the equipment sales to Dish, please. I know that they are down over 30% year-over-year. But the gross margin's only down, I think -- for the margins are only down about 40 basis points I think year-over-year. What -- what equipment or what kind of equipment are you -- are you selling aside from set-top boxes.

There is -- set-top boxes make up the bulk of the dollars from an equipment sales stand point. But the -- the outdoor equipment, the reflecter, the antennas, remote controls things like that are also sold as well. I think the -- there is per our agreement between the two companies,there are set margins for different types of equipment, so the small changes in overall margin reflect mixes, but largely it is driven by receivers and for which we get a 10% margin. And with respect to the fluctuations, we -- I think we address that -- 15, I'm sorry, 15%. And then with respect to those fluctuations in volume, we addressed that, I think, earlier in the call.

All right. Thank you.

And there is no further questions at this time.

Okay, great. Thank you, very much, for joining us. And, Jennifer, I believe it was, we will go ahead and close out the call.

This concludes today's conference call, thank you for your participation you may now disconnect.

Thank you.

Thank you, sir. You have a great day