EchoStar Corp (SATS) 2011 Q2 法說會逐字稿

Good morning, my name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the EchoStar Corporation Q2 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) Mr. Deepak Dutt, Vice President of Investor Relations, you may begin your conference.

Thank you, Stephanie, and good day, everybody. Welcome to EchoStar's Second Quarter 2011 Earnings Call. I'm joined today by Mike Dugan, our CEO; Dave Rayner, CFO; Pradman Kaul, President of Hughes; Mark Jackson, President of EchoStar Technologies; Anders Johnson, President of EchoStar Satellite Services; Grant Barber, CFO, Hughes; Dean Manson, Acting General Counsel; Paul Orbin, Controller; and Ken Carol, Executive Vice President, International Business Development. 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 that you respect that. Let me now turn this over to Dean Manson for the Safe Harbor disclosure. Dean?

Thank you, Deepak, and hello, everyone. 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 that 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 undo reliance on any Forward-looking Statements. We assume no responsibility for updating any Forward-looking Statements.

Let me now turn it back to Deepak.

Thanks, Dean. We will start now with the comments by Mike Dugan. Mike?

Okay, thank you, Deepak, and welcome, everybody, to today's call. We're pleased to have delivered a solid second quarter with strong growth and profits. I would like to highlight some important events from the second quarter. As many of you are aware, we closed on the Hughes transaction on June 8, 2011. We continue to be very excited about this acquisition. This combination with Hughes improves our revenue diversity and strengthens our competitive position domestically as well, and more importantly, internationally. The Hughes fast-growing North America consumer business, as well as their managed network business, when combined with the Hughes global presence in over 100 countries, greatly enhance our growth opportunities in the coming years. Hughes has a strong engineering organization and a technology portfolio that is first-rate, leading-edge and has a proven track record of innovation. These attributes, combined with our existing satellite expertise and fleet presence, our industry-leading set-top box technology and engineering, and our cutting edge services from Sling and Move networks make for a powerful combination.

Integration activities are well under way between the two organizations, with the key objectives of maximizing efficiencies and the acceleration of growth in all aspects of the combined Company progressing well. In connection with the Hughes transaction, we also closed a $2 billion debt issue in the quarter, comprised of $1.1 billion senior secured 6.5% notes, and $900 million senior unsecured 7.625% notes. The issue was oversubscribed and we are very grateful with the strong investor response to the EchoStar and Hughes combined story, and are very pleased with the attractive pricing on the notes.

At the cable show in Chicago, in June, EchoStar launched a new US cable operator solution called Aria. Aria is an innovative solution for US cable operators that will allow them to utilize their existing cable plant and offer subscribers premium features and services like video on demand via their DOCSIS data networks. Aria utilizes EchoStar's expertise in digital set-top box design and video distribution to create an innovative ecosystem. As launched, the ecosystem includes digital set-top boxes, transactional VOD, TV everywhere using sling technology, and system operation and maintenance.

Users new order input was 36% ahead of last year's pace on a year-to-date basis through June of 2011. Significant orders in Q2 included Safeway, Wyndham hotels, ExxonMobil, Beverage and More, Cedent, and Cracker Barrel in the North America business unit. Key international orders were from Avante, Fintex, Nigeria, [Tim and Talmar] Brazil, Central Bank of India, and National Telecom Corporation of Ecuador. Hughes also recorded a large order in Q2 from Boeing for their MEXSAT project. This strong order activity resulted in a non-consumer order backlog of over $1.1 billion going into Q3. This, together with another $1.1 billion of contracted backlog in our ESS business puts us in a strong position with significant visibility into future revenues. Hughes also ended the quarter with a consumer base of approximately 626,000 subscribers, a growth of 15% over the base at the end of Q2 2010. Of the 626,000 subscribers, approximately 464,000 were on Spaceway 3 and the rest on leased KU band transponder's.

Since the Hughes transaction did not close until June 8, our second-quarter financial statements only reflect 22 days of Hughes activity. As you may know, we have three satellites currently under construction, namely EchoStar 16, [Ketsat] and Jupiter. Ketsat is a leased BSS capacity satellite that has capacity that's expected to be utilized in the third quarter, and an operation -- and fully operational in the fourth quarter. It's intended use is for delivery of video service to DISH Network and DISH Mexico. EchoStar 16 is a BSS satellite scheduled to launch in the second half of 2012 and will be leased completely to DISH Network. Finally, construction of Jupiter 1, our new high-throughput KA band satellite is progressing very well. The project's on schedule and we expect launch of Jupiter in the first half of 2012.

I'm also proud to report that we continued to strengthen the EchoStar Management team this quarter. In addition to the depth and experience we gained with the addition of the Hughes management team, Anders Johnson joined us as President of our EchoStar Satellite Services business, bringing with him many years of experience at SES. That enabled the promotion of Ken Carol to head up our newly reorganized business development and international strategic business unit. Also, this quarter I'm pleased that Pradman Kaul has agreed to join the EchoStar Board of Directors, along with Anthony Federico, currently Chief Engineer Xerox Corporation. With over 37 years of experience at Hughes, Pradman has a deep knowledge and understanding of the satellite and satellite broadband industry. Tony has over 40 years in business development, customer relations, and engineering in various roles within Xerox Corp.

Looking ahead, the Management team and I are looking forward to executing on the many exciting opportunities for growth in our Company's revenue and profitability. This includes accelerating some of the KA band satellite-based opportunities in North America, and various reaches of the world, as well as leveraging our combined technology strength. I will turn it back over to Deepak.

We are now ready for the question-and-answer part of the call. So operator, would you set it up, please?

Certainly. (Operator Instructions) Your first question comes from the line of Anthony Klarman from Deutsche Bank. Your line is open.

Hi, I have a few questions. First, I was wondering if you can give us an update on the timing and the amounts of the remaining CapEx that is due to be spent on Jupiter 1 and Echo 16 and if there have been any more tighter time frames given to the launches of those satellites.

Well, the launches are the same as I referred to in my opening comments. Echo 16 is next year, and Jupiter is hopefully first quarter next year. But as you know, there has been some shifts in some of the launch windows, but with the satellite production, construction is on schedule. I will let Dave talk about the capital investments.

In terms of Echo 16, we've got about $111 million remaining as of June 30, and on Jupiter, about $135 million remaining. Both of those are inclusive of launch agreements.

Great. So that's a fully costed number. That would also include all of the insurance premiums and everything else?

That includes -- does not include the insurance premium. That's a satellite plus launch.

Okay, got it. Satellite plus launch. I was wondering if you could provide maybe a pro forma look at what Hughes would have contributed? I think in the Q, you lay out sort of $22 million or so for the period that you owned it, and that run rates to a number north of $60 million of EBITDA for the quarter, and I think they had done $53 million or something in the prior-year period. Is that the right way to think about what the Hughes run rate EBITDA would have looked like for a full quarter?

Yes, I'm not sure I'm willing to stick a number out there, in terms of what it would have been for the full quarter. Obviously, the review of the activity for the 22 days is what we put into the financial statement. That's what was reviewed by internal staff. That was what was reviewed by KPMG. Speculating on what it would have been for the full quarter is probably not appropriate.

Okay. And just a final question on TerreStar. Obviously DISH wound up being the winner of that asset. I think your Q lays out a carrying value of that debt of around $675 million. I was wondering if you had a view as to what the timing of that would be, and whether that cash would all come into the parent level, or whether any would be put down at the EHHC subsidiary level.

The TerreStar investment is held at the parent level, and so that's where that cash would come into. In terms of timing, I would expect to have some of the proceeds potentially in the third quarter. But I would also expect that it's going to take quite a bit of time to fully resolve through the bankruptcy process, final distribution of all proceeds.

Okay, thank you.

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

Yes, I have two quick questions. I think in the third quarter of last year, before EchoStar acquired Hughes, Hughes sort of laid out expectations between 11% and 15% of 10% growth, top-line growth per year, with sort of margins moving into the low 30s. And I wanted to make sure that now that is under the SATS moniker, if you will, that you're still comfortable with that sort of broad-based outlook. And second, I don't think you guys have commented on this, but are there any sort of cost savings that would result from the combination of EchoStar and Hughes? Specifically I'm thinking of FSS leasing--?

Let's let Grant answer the first question. I'll take the second one.

Yes, this is Grant. The guidance that we gave last year was really a five-year outlook. I think if you have seen the results that we released in Q1, as our last public Company, we said consumer business was growing at 15%, and our international was in at 15% to 19%, and the overall Company was growing in the 9% to 10% range. But we've only picked up 22 days this period. I think you'll see the actual components are still very much in line with the guidance that we gave out almost a year ago at this time.

Okay. Thank you.

As far as efficiencies, obviously we continue to be focused on the combination of certain activities and functions to improve the actual bottom line, but we don't see a lot of redundancy. I think we've said that several times. The two Companies are very complementary. There's very little redundancy within the engineering organizations. But there are expertise's that -- for instance Hughes has in the RF domain that we're starting to utilize on the EchoStar side and vice versa -- I think there's some procurement and some functionality that EchoStar can bring that's going to help Hughes procure at a better rate, and provide some additional savings there. We're also looking at the basic combination of facilities and policies and procedures that will bring some efficiencies. The real focus, as I said in the initial comments, is to drive both organizations to higher revenue, and better efficiency, rather than to dramatically reduce expenses.

Okay. Thank you very much.

Your next question comes from the line of James Ratcliffe from Barclay's Capital. Your line is open.

Thanks for taking the question. I'm wondering if you can talk directionally about the opportunities you see internationally, and particularly how the legacy or prior Hughes assets and prior SATS assets sort of fit together to target that. Thanks.

Okay, well I think Hughes has a solid track record internationally. They've done a great job of partnering in the various countries that they've launched broadband services. They either provide the entire end-to-end solution, or they provide significant portions of the equipment and infrastructure with international partnerships. I think EchoStar, on the other hand, has a very successful partnership in the DISH Mexico operation, and we believe the combination of video audio and data capability from Hughes is going to let us attack other markets much more aggressively than we were able to do as individuals. So we really see the combined suite of a very effective set of tools for us to go into the international market more aggressively. You'll see us follow the Hughes approach to international and the partnering we did at DISH Mexico as the type of strategy that we're going to develop in the future internationally.

Great. Thank you.

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

Hi, can you update us on the progress you're making on Aria? Earlier today, DISH said their recent agreement with Frontier took into consideration EchoStar. Do you think we should see an agreement being signed in the near future? Also can you talk about your acquisition of Troppus? How much did you pay for it, and will this be integrated into Move or your IPTV solution?

Okay, well first of all, the comment I believe they made about Frontier is that we are working with Frontier on various technologies around the Move acquisition, and some of our ability to deliver certain services on an IP network through their DSL and fiber networks, which does not have much, if anything, to do with the Aria product. That product is more aimed at the cable market, rather than the DSL type market. At to Troppus, I'm not sure if the information about what we paid was public, but it was around the $10 million mark, and we're continuing to build that organization up, in combination with another engineering group, in the same area. We're very focused on utilizing that in some of our own internal use, and external as well.

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

Hi, guys. So you've been pretty opportunistic historically, and I was curious if in the past few months you've seen the various assets you follow globally that are interesting to you come down into more reasonable price range, or if there is still a frothy private equity bid on them.

I think certainly there's any number of things that we've looked at over time, and will continue to look at on an opportunistic basis. I mean valuation is always going to be a key criteria, whether there has been significant movement in the value of those assets. I'm not sure I could really speak to that accurately. Value comes down to perception of the seller and the buyer. And so I don't know that there's been any significant movement in values.

Okay. Thanks very much.

(Operator Instructions) Your next question comes from the line of Anthony Klarman from Deutsche Bank.

Hi, Anthony Klarman, just a follow-up. I was wondering if you could talk a little bit about the opportunity you see for Hughes on potentially doing something on a resale basis with the DISH side. Obviously, that's an area that they've dabbled in a bit with Wild Blue and I think that contract is not -- for not much longer, and I was wondering what your thoughts were on the ability to sort of more aggressively ramp up the potential growth rate at Hughes by going forward with a bundling offering with DISH.

Well, I think the real issue, you used retail, I would say it's more the consumer market, and certainly we're looking at a partnership with DISH, and we've been in negotiations with DISH, between the Hughes operation and now the EchoStar operation, with DISH Network. There has nothing been concluded yet, but certainly we hope to leverage the strong relationship with DISH into some sort part of partnership on satellite broadband going forward.

Okay. Thank you.

Your next question comes from the line of Kenneth Miller from Nokomis Capital. Your line is open.

Hello. I listened to DISH's call earlier. They referenced a build-up in excess inventory at their installers and distributors. Obviously your set-top box business with DISH was down 30% year-over-year. Do you think we've seen the effect of them trying to reduce purchases to reduce this inventory? Or do you think that line of your business will keep trending down as they clear out this inventory they referenced?

Well, we certainly know that they have built inventory. We've actually talked about that, I think the last two or three calls. We've certainly taken proactive measures to deal with that within our plans and budgets. We do -- we're very optimistic that the changes in Management at DISH are going to change the focus on deploying new hardware, and new services, that hopefully will give us additional opportunity to deliver services as well as hardware to DISH in more of an up market. But the proof's in the pudding. We'll have to see how the new management does.

Obviously, with it being down quite a bit, do you think that part of your business has bottomed, or is it still unclear?

Well, I think we're working very aggressively into other areas than just delivering hardware, because set-top boxes are not a huge expansion business right now. We do believe we have a very stable set of products, and a really great partner, and you know, bottomed might be the right word, but we don't see any other major erosion coming right now.

Okay. That's helpful. Thank you.

I'm showing no further questions at this time. I turn the call back over to the presenters.

Okay, thank you, operator. I believe that brings us to the end of the call, if we have no more questions. Thank you everyone for participating, and have a good day.

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