EchoStar Corp (SATS) 2011 Q1 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 first-quarter 2011 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, Jason Kiser, you may begin your conference.

Thanks, Jessica.

Well, thanks for joining us today. I'm joined today by Mike Dugan, our CEO; Mark Jackson, President of EchoStar Technologies; Dave Rayner, our CFO; Ken Carroll, CEO of EchoStar Satellite Services. We actually have in the states today, Steve Schaver, President of EchoStar International, and Stanton Dodge, our General Counsel.

Before we open it up for Q&A we need to do our safe harbor disclosure, so for that we'll turn it over to Stanton.

Thank you, Jason and good morning, everyone and thank you for joining us. As you 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 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 material 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 statement we make during this call should be understand as being applicable to any forward-looking statements we make where ever they appear. You should safely consider the risks described in our report and should not place undo reliance on forward-looking statements. We assume no responsibility updating any forward-looking statements.

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

Thanks, Stanton. Operator, before we open it up for Q&A, I think MIke had some opening remarks he wanted to make.

Thanks, Jason.

Thank you for all joining us today. Before we open it up for questions, we'll give you a brief update on a few things. As you see in the releases, overall our revenue was down about 23% from the same period last year and 6.4% from fourth quarter. This is due in large part to lower set top box sales to DISH Network, which had been anticipated with all of their higher than normal inventory levels which we have communicated in previous calls and filings. We expect that DISH sales will be somewhat depressed until they work through their inventory.

As you would expect net income was lower due to the decrease in top line revenue. In addition, we recorded large investment gains in the first and fourth quarters last year attributed primarily to investments like TerreStar, which we did not see in this quarter's results. Our pending acquisition of Hughes Communications continues to move forward. We've received [hards] Cupertino approval and are awaiting final approval from the FCC.

In the meantime, EchoStar and news management are working together on key integration and strategic initiatives, and we'll continue those meetings until we're allowed to close. The respective team's working really well together and prospective have identified initiatives several key initiatives (inaudible) technology devices and some very interesting international (inaudible). We have been impressed, and I've personally been impressed with their capabilities and their culture fit to our engineering culture, and we continue to be very excited about the prospects for the combined company.

As you're aware, we, along with DISH Network, we were able to reach a settlement with TiVo over our long-running litigation. In summary, under the terms of the settlement, TiVo will be paid $500 million over time, of which we will be responsible for approximately $20 million. We're pleased to have this issue behind us and look forward to the future development of our DVR technology with the advantage of having the TiVo license and technology.

With that, we'll open it up for questions.

(Operator Instructions) We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of James Ratcliffe from Barclays. Your line is open.

Good morning, thanks for taking the question. Two, if I could. First, could you give us a little more color around the potential benefits you see out of the TiVo deal, both in terms of what you could do with the IP that you are now licensing from them, and secondly, IPs of yours that you could potentially be contributing to TiVo and potential revenue sources for EchoStar out of that? And secondly, does DISH's success in acquiring DBSD make you more or less interested or either in looking another look at TerreStar? And if you were to take another look do you feel you have the financial fire power available to do, say, both TerreStar and Hughes, if both deals made sense? Thanks.

As for TiVo, I would just state what's been clearly communicated in the releases, which is that it puts the litigation behind us. It gives us the ability to move forward on DVR production for DISH network and other customers that are stated in the releases, but it also gives us the ability to be a little bit more aggressive, let's say, in the design of our DVRs. And yes, we can utilize the specific patents that were outlined in the releases. This is not a total cross license. It deals with specific issues of indexing and so on. So, yes, there's some advantages there, but I wouldn't over blow them at all. So, the second part of the question, I think I'll let Mr. Rayner, our CFO, deal with the TerreStar investment.

Yes, James, as we talked about last quarter, we had made an offer to buy TerreStar, which obviously we mutually agreed to terminate that offer. And, that was prior to a writing conjunction, around the same timing at least, with the Hughes transaction. Hughes gives us a little more bit more definitive business plan, less speculative than a TerreStar investment would be, and so at this point in time we're choosing to invest our money in things where we know we've got a business plan that we can build around versus a more speculative investment.

All right, thank you.

Your next question comes from the line of Jason Bazinet from Citi. Your line is open.

Thanks. Two questions. With the TiVo litigation behind you, do you think that raises the prospects of you being able to win incremental US-based set top box business? And then second, in the FSS business, would you characterize a lack of scale in that business as being one of the impediments to that business growing more briskly? Thanks.

Okay. First of all -- this is Mike Dugan again. I would say that there's no question that the TiVo litigation was an overhang on our sales organization and certainly our customer negotiations for the cable set top boxes that were in final validation on certain customers and even in the international place in some cases, so settlement of that it makes a great deal of stability for the sales organization. I guess we'll have to see how much that influences our ability to execute on other partnerships, and we'll just wait and see about that. As far as FSS, I would say that we may have a little bit of a scale issue, but why don't we ask Ken Carroll to comment on that from an ESS prospective?

I think, certainly, that's one of the near-term issues that we do face. The -- and that's why we focused on niche markets. We've definitely gotten a pretty strong foothold in US government activities through our value-added resellers, but I think more importantly, as Mike mentioned, as we move forward with the -- completing the Hughes transaction, I think there's a lot of opportunity to look at satellite opportunities; and as you all know we have both -- KET Sat is planning to launch here in the August/September time frame, and we have another satellite under construction at this point and time. So, we're small and we're continuing to grow, and we see a lot of strategic opportunities moving forward.

Okay. Thanks very much.

Your next question comes from the line of Amy Yong from Macquarie. Your line is open.

Hi, everyone, and thank you for taking my questions. Just a couple for me. With the Hughes assets, are there any particular projects or potential customers you plan on going after on the FSSI that you can talk about? 2, are you more interested in potential satellite deals like Telesat, and if so, can you update us on the progress that you are making over there? 3, if you don't plan on going after TerreStar, what do you plan on doing with the cash proceeds once the auction ends? Thanks.

Well, I think it's a little premature to specifically say what we're going to do with the Hughes assets. We see some synergies. We see joint projects for the international community between Hughes assets and design community and the EchoStar design community. We certainly are reviewing areas to combine broadcast facilities and the way we operate both networks. We see some synergies on the way they run their quad-based infrastructure and the way EchoStar runs similar infrastructure, but as to a specific set of projects and their priority, I don't think it would be appropriate to discuss that on this call. I'll pass your other 2 questions off to Mr. Rayner, and why doesn't he deal with the TerreStar question and --

Well, the proceeds of the -- assuming that the auction process is successful, I mean, hopefully we have some proceeds coming out of that process, and obviously those are going to go on the balance sheet to be used for general corporate purposes. We don't have a specific intent identified for those. We think there's lots of opportunities to continue to invest in the business, both on the EchoStar side as well as the future of Hughes portion of the business, so, I think, Amy, you had another question in there, but I'm not sure if I caught it or not.

Are you more interested in potential satellite deals like Telesat, and if so can you update us on what your thoughts are?

I think we're interested in anything that's going to help us grow the business. We've got a broad reach of assets when we -- if you assume that Hughes does end up closing between the satellite broadband, their ground infrastructure engineering, our set top box engineering, Sling, Move, as well as the FSS business. We've got a broad reach of assets, and I think we would look to make investments across all of those platforms as it makes sense and we see opportunities to grow the business.

Okay. Thank you.

(Operator Instructions) Your next question comes from the line of Patrick Comack from Zachary Investment Research and Management. Your line is open.

Yes, how are you doing? So, are you telling the market right now that you're definitely not bidding on the TerreStar assets when they come up for auction?

I think at this point and time we are viewing ourselves as Investor and we're supportive of management maximizing value of their assets.

So, are you going to bid -- do -- you officially own half of the assets already and then you've got DBSD, so I'm just asking you straight up. Can you tell us that you're not going to show up at the auction?

At this point and time, we do not have any plans to show up at the auction. Thing can't change, but at this point and time that's the plan.

Okay. Thank you.

And there are no further questions in the queue at this time.

So, let's just give it one more minute there, operator.

(Operator Instructions)Your next question comes from the line of Josh Lipchin from Eaton Vance. Your line is open.

I had a question on the ESS side. I saw revenues grew there, but it looks like EBITDA was down year-over-year. Can you talk about what is going in the ESS side?

Sure, I think if you look overall you saw about a $4 million increase quarter to quarter. In -- we have a couple of things going on. 1 is in the first quarter of 2010, we did not have the EchoStar lease in the first quarter -- EchoStar 1 lease in the first quarter of 2011; you see the impact of that as we move forward. That was offsetting on the revenue side. Second of all, we have the Hughes transaction going on, so we've seen legal fees coming through on that as well. So, those are really the 2 major offsets to the revenue stream at this point and time.

And just to be clear there, from a segment-reporting standpoint, we did put the Hughes acquisition cost that we've incurred to date in the ESS segment if for no other reason other than a financing standpoint; obviously ESS and Hughes will be the financing vehicle and the debt issuer, so that's why that's there. Overall, there were a couple of things that happened on the revenue. Ken addressed some of the expense increases, but we also had some pretty strong revenue in non-DISH increases. We also had a decline last year with the launch of a dish on satellite in the middle of 2010. There were some revenues getting on with Echo 3 in first quarter last year that has not incurred this year, so the revenue growth was actually quite nice, but as Ken pointed out, there were some additional expenses and the lease cost on Echo 1 as well as the legal costs.

Is it early to break out the legal costs associated with Hughes? Quantify it?

No. I mean yes, there is, but nothing that's in the queue that would allow you to do that.

I'm just trying to compare operationally, taking out this one-time cost associated with the acquisition. Okay. All right, thank you.

(Operator Instructions) Your next question comes from the line of Walter Piecyk from BGIT.

I got dropped off of the call, so I apologize if this has been asked before, but on the DISH call there was some commentary surrounding DBSD, which I think started out saying that you would look to another partner because Terrestrial is not what you knew and you even referenced LightSquared at one point. And later in the call, I think, there was some reference to saying you were satisfied with returns satellite and that terrestrial wouldn't be a part of the picture. Can you help to clarify that a little bit. Thanks.

I think those were questions that came up the DISH call and obviously we can't comment on what DISH sees as an acceptable return or not.

I guess it would relate to the TerreStar spectrum.

And TerreStar at this time and time is a financial asset for us and that's how we view it.

Does EchoStar have any view on whether you can get a return on a terrestrial build out versus a satellite-based service?

No.

No, you don't have a view or you don't think there's a return? Isn't it silly not to be able to comment across entities?

I'm sorry, say that again.

Isn't it kind -- you have these 2 assets that obviously would fit together very nicely. It's a little odd to be able to comment on one side, but not on the other as far as whether you would view a return on a terrestrial versus a satellite-based build out.

Well, this is Stanton. I would say 1, it's truly speculative, and 2, they're 2 separate publicly traded companies. It's entirely appropriate not to comment on what DISH might be thinking for it's side of the business; and quite frankly, we don't know what they're thinking.

Okay. Thank you.

You need to recognize that the 2 companies, I think, view the assets-- their respective assets, differently. DISH owns or will eventually own DBSD where as we have an investment. We own the debt -- a portion of the debt of TerreStar, so I think the 2 companies are in relatively different positions in terms of their ability to comment on strategically what they plan on doing with two different assets.

That's true but you can't obviously ignore the common owner and the fact that the assets put together are worth much more together than they are separate?

I think we've been clear on the EchoStar side that we saw our investment as a very valuable investment because we support the belief that Spectrum is a significant value. The commonality between the 2 companies is a -- understanding that spectrum is very valuable and we believe it's going to be valuable going forward, but I agree with Dave that our position's been from day one. This is an investment and you're asking us to comment outside that situation.

All right, just the last question on this. Would you be willing to sell your stake in that investment to another company, for example, DISH?

Well, our objective all along in the investment was to make money, so, if somebody comes with the right offer, I'm sure we'll consider that.

All right, thank you.

Your next question comes from the line of Adrian Mele of Eagle Capital. Your line is open.

Hi was hoping -- in terms of your vision of the future of multi-channel videos, can you guys comment on if you think over the next 3 to 5 years, if you think linear multi-channel video -- if you guys think there will be more households with multi-channel video television than there are today over the next 3 to 5 years in your v-line.

You mean on the total marketplace?

Yes. Realizing we're going to have 1.5 million new households formed and then have some people continuing to go to other types of watered down services and just your net view it?

I think our investment strategy is clear that what we're planning to do is build out and as we have already done and will continue to do with the assets we've acquired like Move and some of the other capabilities that we have to work on non-linear delivery of video by IP or potentially even we're certainly helping DISH deliver video over satellite that is not necessarily linear video. I don't -- I personally and this is not an EchoStar position. I guess it's more my personal position that I don't believe the transition from the typical MSO structure is going to happen in 2 to 3 years, which I've seen people predict. I certainly don't see it in the next 5 years.

I think we're going to see some structural changes in evolution over the next 10 years, but I still believe there's going to be a significant linear business. People just don't change that fast and there's still a lot of value in the linear space. We're going to attack most it of. We're internally trying to do a better job, and we are going to be focused on being the absolute best at delivery of linear service to DISH Network and the other customers that we service through the FSS sphere. And, we're also going to be focused on IP delivery through Hughes and through the other EchoStar assets by implementing cloud-based infrastructure that stable and provides the best possible performance, which we're already doing. I don't know if that answers your question, but it's the best I can give you.

Thanks. That was very helpful.

(Operator Instructions) Your next question comes from the line of Kenneth Miller from Nokomis Capital. Your line is open.

Hello, thanks for taking my question. One thing that came up in the DISH call is that they had built up some excess inventory as I continue to see in case they lost the TiVo case. Can you give us any sense for how much inventory there is they need to work off and how that will effect the purchases from DISH going over the next few quarters.

Obviously, first of all I wouldn't know what their inventory position is. I did hear that. I did listen to the call. I will tell you that because we run the service, the broadcast service, I know that there continues to be a focus to allocate more bandwidth to other services other than linear channel, and the key way to do that is to move parts of their base to the mpeg4 platform which frees up bandwidth; and so although I understand that they probably are holding some inventory, I personally, on the EchoStar side, am not pessimistic about their need to move more mpeg4 boxes and replace mpeg2. We're working on strategies to replace some of their mpeg2 inventory to other markets. We've seen some upside in their numbers, so I guess that's the best prospective I can give you right now.

Okay. And you touched on some of this already, but I was just trying to get a sense for the scale of the one-time cost in your SG&A; obviously, it was up quite a bit this quarter and it sounds like it was largely due to legal costs around the Hughes acquisition. Were there any other unusual or one time events in there were and can you give us a sense for how much those were?

Yes, you also had the TiVo -- at least the current portion of the TiVo which, as we put in the Q was about an $8 million for past periods and so that would have flown through SG&A also.

Okay. I thought that, that was subsequent to the quarter. It wouldn't have been in the March 31 quarter.

No, we reflect it in the quarter as a type one subsequent event.

So, it's reflected in the SG&A cost of the March 31 quarter?

Correct, and the remaining $12 million will be then amortized over future periods.

That's helpful. Your share count was up quite a bit? Was that just due to the increase in the stock price or were there some other grants that were given recently or anything else going on with the share count?

Hold on. We're not prepared for that question. We didn't think that was the case, so let us look at it.

There were certainly grants quarter over quarter. They weren't significant, so I'm unclear as to what you're referring to.

I thought I'd seen the share count tick up from $85 million diluted as your Q4 to $92 million? If I got that wrong, I apologize.

I can only tell you that neither Dave nor I noticed that.

I'm not sure what would have driven up that share count like that, but if you want to send me an e-mail and follow-up I'll be happy to try to follow-up after the call.

Okay. Thanks, that's all for me.

(Operator Instructions) Your next question comes from the line of Chris Little from Longfellow. Your line is open.

Hi, guys. Could you just comment a little bit on the drop year over year and the set top box sales for Canada and DISH Mexico? Do you view that as a temporary 1 quarter phenomenon? It was my understanding that DISH Mexico's has been growing pretty robustly, so if you could just comment on growth in those 2 businesses going forward?

Sure, this is Mark. So, I think all of our customers probably had a little bit too much inventory coming into the year, given the economy and how they were built up, but I think we're seeing our customers burn through that and I expect to see and have seen upside from all of our customers going forward. So, the latter half of the year, I'm optimistic.

Thanks for your time.

There are no further questions in the queue at this time.

Okay. In that case, thanks everyone for participating. I guess, we'll terminate the call and we'll see you next time, next quarter.

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