EchoStar Corp (SATS) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. This name is Martina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Echostar Corporation first-quarter 2012 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).

I would now like to turn the call over to Deepak Dutt, Vice President, Investor Relations. You may begin your conference.

Thank you, operator, and good day, everyone. Welcome to Echostar's first-quarter 2012 earnings call. I'm joined today by Mike Dugan, our CEO; Ken Carroll, CFO; Pradman Kaul, President of Hughes; Mark Jackson, President of Echostar Technologies; Roger Lynch, Executive Vice President Advanced Technologies; Grant Barber, CFO Hughes; Dean Manson, Executive Vice President and General Counsel and Secretary; and Tom McElroy, Controller at Hughes.

As you know, we invite media to participate in listen-only mode on the call, and I ask that you not identify participants or their firms in your reports. We also do not allow audio taping, which we ask that you respect. 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 the forward-looking statements. For a list of those factors and risks, please refer to our annual report on Form 10-K.

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 statements. We assume no responsibility for updating any forward-looking statements. I'll now turn it back to Deepak.

Thank you, Dean. We will start the call with comments by Mike Dugan. Mike?

Thanks, Deepak, and welcome, everybody, to today's call. We are pleased to have delivered a solid quarter, and I would like to highlight some important events from the quarter. First, a few financial highlights. First quarter of 2012 revenue was $765 million, compared to $480 million in the first quarter of 2010.

Service revenue more than doubled to $370 million, and now represents 48% of our total revenue, which is consistent with our strategy of increasing the service content of our revenue. From a liquidity perspective, we ended the quarter (inaudible) in good financial shape with $1.7 billion in cash and marketable securities.

Now for a few recent highlights. We successfully launched the Hopper and Joey product line with DISH network, on which press and public reviews have been very overwhelmingly positive. Our delivery plan has been on track to expectation. The hard drive supply programs due to flooding in Thailand have been well-mitigated by our supply chain organization, which allowed us to meet the customer requirements.

We launched a new hard drive-based STB for Bell HDTV -- Bell TV, and will soon launch a new HD DVR set-top-box offering for Bell TV. Here again our team did a great job of mitigating supply issues with hard drives into the Bell TV family. DISH Mexico subscriber count remains on plan, approaching 2.1 million customers. HDTV growth is on the target, and continues to be focused on the higher-tiered customer base.

Several new tablet and mobile phone applications for Sling were launched in Q1. The iPhone, iPad Sling app ratings are at an all-time high with four stars on I-tunes, and the Android app also has solid ratings at 3.5 stars on Google Chrome. We continue to improve the user experience for DISH Network customers via DISH remote access and DISH online.

Most of our advanced data centers are now open and fully operational and are supporting our Hughes cloud services and hosting offering. Our target customers will be requiring the highest level of enterprise security, on fully managed and redundant networks which we are fully geared up for.

EchoStar-17/Jupiter, our Ka-band satellite under construction at Space Systems/Loral has successfully completed the final major test phase. The satellite is now in the final assembly and checkout phase in preparation of shipment to French Guiana for the launch. Recently, Arianespace completed their vehicle readiness review, and approved the commencement of the final assembly of the Ariane 5 launch vehicle that will launch EchoStar-17. Crossing these major milestones paves the way for the planned launch in late June 2012.

Used new order input continued at a strong pace in Q1. Significant orders in our North American enterprise business included TJ Maxx, JCPenney, Bartlett's national stores, government enterprise trading networks, and key international orders were from Camelot, [UNSEB], Telemar, [Renner], RTCom, [Yasa] and Vodacom. Key orders from the telecom systems business were [DVSB] and Boeing MEXSAT.

This strong order activity resulted in substantial new non-consumer orders and backlog of over $1 billion as of the end of the first quarter of 2012. In addition, we had another $1.9 billion of contracted backlog in our satellite service business from satellites in orbit and under construction, thus continuing our strong visibility into future revenue. Hughes also ended the quarter with approximately 634,000 subscribers.

The Echo-16 spacecraft remains on track for completion at Space Systems/Loral by mid-summer. The launch is scheduled for the second half of 2012 aboard a Proton M/Briz-M rocket from the Baikonur Cosmodrome in Kazakhstan. The team is currently completing the dynamic and alignment phase of the program, and is preparing to start the compact antenna test range phase. The spacecraft is designed with three spot beam antennas, and one CHRONOS antenna.

Our Brazilian subsidiary was awarded aN orbital slot in an auction conducted in August of last year by Anatel, a Brazilian telecom regulator who has since been in discussions with Anatel. On April 17, 2012, we received notification from Anatel to proceed with the formalities for executing a license agreement for the 45-degree west slot.

They have since completed the prerequisites, included the required 10% down payment, and expect to acquire the license agreement rights soon. We're looking forward to expanding our business in one of the fastest-growing regions in the world.

Finally, we continue our integration efforts between Hughes and Echostar, and continue to make good progress. HSS accounting has been fully transitioned to the SAP system, and the legal and HR functions are integrated and now under newly announced leadership. Use of Echostar's fleet by Hughes is increasing.

All the above exciting technology and service announcements position us very well for revenue and margin expansion in the near and longer term. I think we're now ready for the question-and-answer part of the call, and I'll turn the call back over to the operator.

(Operator Instructions)

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

Hi. Good afternoon. This is Chris Lo on behalf of Jason. Two questions. First, as we look at the current satellite fleet, just wondering if you could comment on the potential for any incremental satellite CapEx for satellites approaching the end of their estimated useful life? I understand that Echo-16 is set to launch in the second half of '12, but just wondering if you foresee any additional satellite CapEx, beyond Echo-16 and 17?

And then I have a second question on set-top-box.

Well, as far as satellites, we continually work with our major customer, DISH Network, to look at their future requirements, both from a bandwidth standpoint, and also satellite health and life issues. I would say right now, we don't have anything that we're ready to go right now. But we certainly, once we get the license in Brazil, we'll be working through a plan to support that with existing assets, and probably another satellite build there. So, certainly we're a satellite company, and you can expect us to continue to invest in satellites going forward.

Great. (multiple speakers) And just --?

You had a question about set-top box, right?

Right. And second question on boxes -- there was lower set-top box revenue in the quarter year-over-year, and just wondering if that might be related to the launch of the Hopper and Joey boxes at DISH?

Well, certainly we have talked about it in several calls. The new architecture that was developed by ETC is much higher performance, but also was targeted to lower the requirement for multiple HD installations. And as DISH's mix goes heavily HD, they have got a better solution now, which is more cost effective. So, certainly, the number of units continue to go up, but certainly the new technology is affecting the total revenue stream. And we do believe Hopper and Joey will become much more successful after Team Summit. They've got a big push going on this week with all the dealers and distributors, and the reviews have been just outstanding on the product.

Finally, we had a little bit of an impact in Q1 to some of the customers on the hard drive shortage, and that's been pretty much resolved. And most of those missed shipments pretty much have been made up either last month, or will be made up by the end of this month. So, that affected us slightly.

Great. Thanks very much.

(Operator Instructions)

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

I just wanted to ask a question on the Brazil orbital slot. Now that you're imminently going to be awarded the slot this month, I was wondering what the next steps are, from this point? Hello?

Well, I think -- this is Ken. I think, as we move forward with this, obviously the key hurdle is to get the finalized agreement with Anatel, which we do anticipate coming pretty quickly.

Second to that is, we're in process today, looking at the long-lead items that we need to bring the service to fruition in Brazil. And then third, as we've mentioned before, we're in discussions with a number of potential partners down in Brazil. So, I think we're looking to build -- to get the infrastructure up and going, and set to deliver service into Brazil. And we're looking to get the right partner to assist us in bringing that service into operation into the Brazil market.

Do you have any -- sorry, just a follow-up. Do you have any timing expectations on this or --?

As we do at DISH and Echostar, we always move very, very quickly. It would be premature to try to give you a specific answer on that. I expect that you'll hear a lot more in the next couple months as issues progress. And depending on the partnership, and who we would end up partnering with or going it alone, it could change very significantly. So, we're just not ready to speak to that right now.

Okay. And then just one more. On the -- I'm sorry, you already commented on the set-top box business, but I wanted to maybe get more color as far as -- I mean, DISH recorded year-over-year cost increases due to set-top boxes. I was wondering how did that not flow through to you guys?

Well, I'm not exactly sure of the question. Again, I think it's fair to say that I didn't hear -- didn't listen to the DISH call, but we certainly know that they have a lot of inventory, and we think that they've also accelerated their reman stuff, so, I can't speak directly to their numbers. Our numbers -- they certainly have transitioned a lot of their new buy to the Hopper and Joey line, and that provides a lot lower second and third TV installation solution for them going forward. So, as that mix changes, you'll see that going more and more. I do believe that you're going to see a big uptake in unit sales from them. But we'll just have to see how -- what the outcome is of their latest marketing and sales.

Great. Thank you. (multiple speakers)

-- the product itself had great reviews.

Great. Thanks.

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

Hello. Thanks for taking my question. I wanted to ask a little more about the set-top box business. You were down pretty significantly year-over-year with DISH, off a pretty significantly negative comp. And you indicated in your MD&A you were shipping a higher volume. DISH talked a lot in their call about how they thought the Hopper and the Joey were the most technologically advanced products on the market, and the best [set] DVR system. Do you expect that to lead to a resumption of growth in your sales to DISH, or is the lower ASP going to more than obviate the increased volume?

I couldn't hardly hear his call --?

I think the answer to your question is that we expect higher sales, but at the same time, the cost of the unit is lower, so, fundamentally they'll probably even themselves out. But we haven't done the analysis to say that for sure.

Well, it seems like you're innovating your way to lower profits that way. I mean, usually when a technology company provides the most advanced system in the market, they either charge -- get a higher ASP for it, or a higher margin. It seems like your contract with DISH means your margin is relatively fixed. So, when you deliver a better system for a lower cost, it's kind of resulting in lower profits instead of higher.

I think the recent events with the car companies in the US indicate that if you stop innovating, then you stop addressing the marketplace needs, you end up in serious financial situation. I think we're well ahead of that. We're doing exactly the right thing to remain competitive in the set-top box business. And we really believe that the new architecture is going to allow DISH to service twice or three times the number of TV sets they did in the past, because they've got a very cost-effective solution. Plus, we think that the features that have been integrated are very, very important as well.

Okay. It does seem like a fantastic system, but it seems not as good for your Company, if it's not resulting in higher profits. Do you have the ability to sell this same type of system to other service providers, or does DISH have exclusive rights --?

Certainly. We provide it to Bell. We provide similar systems to DISH Mexico. Everybody's starting to look at the architecture of the DISH Hopper and Joey that we developed. So, I think you'll see additional customers be very interested in the feature set.

Okay. I wanted to ask about the launch insurance on the Jupiter satellite. Could you give us a little more detail on what that covers, whether it's the full construction cost or only a portion, and maybe a little more color around that.

Would you restate the question? We're really having a hard time hearing you here.

Sure. I'm sorry about that. I was asking for additional details around the launch insurance on the Jupiter satellite, whether it covers the full construction cost of the satellite, and what the terms of the insurance are? Trying to figure out what the -- how much your risk exposure to a failed launch is?

Yes. Hi, this is Pradman Kaul. Yes, I don't have the final numbers here in front of me. But I think we finally -- covered insurance for a value of up to about $330 million. And that obviously covers -- doesn't cover the full value of the satellite and the launch and the insurance, but it covers -- it made sense from, in terms of what the market was willing to sell us at a reasonable price.

Okay. That's helpful. I appreciate it. My last question is a general question about your balance sheet. It's pretty obvious that the -- right now, the cash and short-term investments on your balance sheet are earning significantly less than the interest you're paying on the debt. Are there any thoughts to making your balance sheet more efficient, by either buying back stock or reducing debt or doing other things?

Obviously, you're going to have some future satellites to construct, but it seems like, with your strong operating cash flow, you would be able to largely fund that out of operating cash flow, instead of needing to keep $1.8 billion in cash and short-term investments? So, could you just help me understand how you're thinking about your balance sheet? I don't know if you're waiting for the next financial crisis to buy more distressed debt, or if there's other reasons you are carrying so much cash?

Yes, so, this is Ken again. So, I think we're constantly looking at operating more efficiently from a financial perspective. I would say, at this moment in time, we have a number of activities going on that we're looking at from a strategic standpoint. So, I think we're kind of weighing those out versus, to your point, looking at the cash on the balance sheet, and looking at opportunities to become more efficient. We do have the ability to do a stock buyback that's been approved by the Board. We've not utilized that at this point in time, and don't anticipate doing that moving forward. I think right now, we're looking at those things, but no action is planned.

Okay.

Next call, operator.

Your next question comes from the line of [Wayne] Walden from Thornburg. Your line is open.

Hi, good morning. Regarding the Jupiter launch, could you give us your latest thinking on the timing of the launch, and then, what the key milestones or next steps would be from there?

Well, again, we're hoping to launch in June -- toward the end of June. If all goes as planned -- as you know, there's a lot of steps that go forward from now. The satellite is being packaged, and then it will ship. And it's got to be unpackaged, mated to the launch vehicle, and there is a lot of steps in there. But everything's on -- very much on schedule, if not a couple days ahead of schedule, as of this moment. Obviously, launch takes place, then we have orbit raising.

Then we end up starting our in-orbit test, which we're doing our best to work with all resources between Echostar and Hughes to ensure that test is thorough and as quick as possible. We've done a lot of that. We have a lot of history there. And then finally, the launch of the high-speed service, which includes a new outdoor unit and new indoor unit, which they are finalizing the approval testing on those parts in parallel to the spacecraft, and building the first production runs of all that equipment right now.

So, [broadening] --?

I don't want to give you specific dates right now, because we will want to announce those publicly.

Yes.

Certainly by the end of the summer you'll see some exciting things, we hope.

Yes. And regarding just broad commercial availability, would that be a this-year event?

Oh, yes.

Generally or --?

Yes. We hope to launch first service to customers this summer -- the end of summer.

Okay. Great. Thank you very much.

Your next question comes from the line of Barry Kaplan from Maple Tree Capital. Your line is open.

Hi. Good afternoon. Just two questions. One is -- could you give us any kind of an update on Mexico, what's happening with DISH Mexico operationally? And then the second question is -- just with respect to Sling, how are you guys thinking about some of these potentially competitive services like Nimble TV, and how Sling might position itself going forward against them?

I'll let Mr. Jackson answer both questions. ETC's the major subcontractor to the DISH Mexico JV, and then he'll talk to Sling as well.

In general, I'd say we've been very happy with the DISH Mexico, and the progress that system has been making in Mexico. They're north of 2 million subscribers. [They] don't give out the exact count, but they were one of the fastest growing TV services there. We're looking to transition into more higher-end product with DISH Mexico into the A and B markets with the high-def offering. And there's some future plans that we hope will really help this growth in that area.

On the Sling side, a lot of these competitive products do things a little differently, which I think they're going to have a lot of legal issues. We're working very hard to work with everybody to make sure we don't cross over that line. To that end, we've been licensing a lot of the SIC manufacturers to help us with that. And I think we will see more and more people want to use Sling, as the rights still stay with the programmers. If the rights kind of go away from the programmers, and they license it out so you can do streaming more and more often, you'll see the need for Sling going down. But right now, we haven't seen that happening, and we've got some pretty good major engagements with big operators. And we're also going to refresh the retail product lines this fall.

Okay. Just coming back to Mexico, can you make any kind of comment on the profitability there, or lack thereof, or prospects?

I think the venture itself would have to comment on that. We could not do that.

Okay. Thank you.

Your next question comes from the line of Josh Rosen from Act II Capital. Your line is open.

Hi. Thanks for taking the question. Just had two. One -- can you give us any color around the discontinuation of the Aria line? And then second -- on Jupiter, is there anything you can share in terms of distribution partnerships, pricing, and then also just trends you've seen in the broadband business around churn, and any impact of ViaSat-1?

Well, I'll take the first one. I'll hand the second one off to Pradman and his guys. On Aria, the bottom line is that as we work with the Tier 2 and Tier 3 cable operators, we had to come to a realization they not only wanted to buy set-top boxes, but they needed additional services, and needed support to operate those for an extended period of time, once you made the first product sale. And when we ran the math at the lower volumes that those size entities would take, and the amount of month-to-month and year-to-year support, just wasn't something that we thought would give us the right ROI.

So, we've decided to move back into areas that we're more familiar with, which is a DBS business and the Brazil activities, and we're going to continue to drive a lot off the [youth]-based line as well. So, it was strictly a return on investment decision. And had a great product, but we really felt that the volumes that the customers were willing to commit to were too low to continue the business.

So, second question, I'll let Pradman answer.

Yes, we're continuing fundamentally with the same distribution strategy that we have at HughesNet today, when we introduce Jupiter and Gen 4, which will be our new high-speed offering. So, we have both direct and indirect distribution channels. On the direct, we'll continue with our direct mail and television commercials campaigns that we've used for the last five years, very successfully.

Indirectly, we have signed up, on an exclusive basis, six of our top sales agents. And so, they'll be selling our product exclusively. We are also negotiating a wholesale arrangement with DISH and one other carrier, which we hope in the next few weeks to close. So, that will be an additional distribution channel from what we have today. All in all, I think we're in very good shape. All our distribution channels are lined up, ready for the satellite to be launched, and ready to go after that.

Okay. Great. And just any comments you can make around churns you've seen in trends, gross adds, impact of ViaSat-1's offering?

No, we are not seeing any negative impact from ViaSat-1, so far. We have always been concerned that we'll have this gap between the time ViaSat-1 is launched, and Echo-17 is launched. But so far, our gross adds are pretty close to what we normally experience in the different cyclical time period, and our churn is staying in the same range that it has in the past.

I think it's fair to say that we're very pleased with the sales agents that Hughes has online. They're doing a great job of continuing to sell the product, and we're optimistic.

Is there anything you could share around how you're going to price the Jupiter product, versus the current Hughes product? And ViaSat, I guess, changed the kind of method that they priced it versus WildBlue. Anything you could say about that?

No, we're maintaining our HughesNet brand. It's a powerful brand. It served us well. We will differentiate the new service by calling it HughesNet Gen 4. But fundamentally, the HughesNet brand will be a continuing brand, which is different from obviously what ViaSat did.

Okay. Thank you.

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

Yes, hi. Thanks for taking my follow-up. Just had a quick question on your satellite services segment, particularly just the QuetzSat satellite. I understand you were thinking about retasking it, or just delivering it for DISH. I was wondering -- where are you on that, and has it been repositioned?

Well, it's QuetzSat. I know it's a -- I can't pronounce it, and I can barely spell it.

Sorry about that.

But it's QuetzSat. And to be honest with you, the great success we've had with the Brazilian auction in that slot, given us a lot to consider, as we look at the entire fleet. And as the previous question asked, as we look at satellite life and so on, I expect to have more definitive decisions on QuetzSat here in the near term. But right now, we have not decided whether to use it at any specific location, and we're looking at three or four different alternative missions for it at this time.

Okay. Thanks. That's all I have.

(Operator Instructions)

Your next question comes from the line of Josh Rosen from Act II Capital. Your line is open.

Hi. I just had one follow-up. In the Q, I think you guys noted that there was a couple more satellite anomalies. Any concern around capacity to support DISH, or anything else in terms of reducing your lease payments?

Well, I've got to tell you, one of the most enjoyable part of my job is dealing with satellite abnormalities. Ken and I really have a lot of experience with that, and we really enjoy it. But the good news is that, although we've had some minor power reductions on one or two solar panels, and we have to disclose those, there's nothing right now that causes us imminent or serious concerns at this moment. I would say that this business is tough; we're continuing to look at every parameter. That's part of why we built our own team that does most of our own telemetry, and our own decisions about how we fly the spacecraft and worries about fuel and all that stuff. We are probably the most involved of anybody that has a business relying on satellite.

But right now, I like to do green, yellow, red here, and it's real simple for me. When somebody comes to me with a problem, I ask for a rating. Right now, I'm pretty happy with all our satellites. And I think we're generally in the green.

Great. And just lastly, any progress on selling set-top boxes outside the US, in Europe -- anything more to Liberty or any other potential customers?

So, yes, our relationship with Liberty continues to grow. We're doing very well by them, and them by us. They picked up quite a bit on the business there. We're also selling a lot of digital terrestrial and freesat products, particularly in the UK. That business is picking up. And we have a couple new opportunities that we're pursuing in Europe. So, Europe's doing much better for us this year.

Thank you.

There are no further questions in the queue. I turn the call back to Mr. Dutt for closing remarks.

Thank you, operator.

Thank you, operator. And I think this brings us to the end of the call, since there are no more questions. Thank you for taking the time to attend the call today. At this time, we'll close the call.

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