EchoStar Corp (SATS) 2013 Q1 法說會逐字稿

Good afternoon. My name is Therese and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2013 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 turn the call over to Deepak Dutt. Go ahead, Deepak.

Thank you, operator, and good day, everyone. Welcome to EchoStar's First-Quarter 2013 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; Ken Carroll, Executive Vice President Corporate and Business Development; Grant Barber, CFO Hughes; Dean Manson, General Counsel; and Tom McElroy, Controller. 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, 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 such forward-looking statements. For a list of those factors and risks, please refer to our Annual Report on Form 10-K and our Quarterly Report on Form 10-Q, filed in connection with our earnings. 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 you should not place undue reliance on any forward-looking statements. We assume no responsibility for updating any forward-looking statements.

I'll now turn the call over to Mike Dugan.

Thanks, Dean, and thanks, everybody, for joining the call. I'll start with a few highlights of our operational performance for the quarter and then I'll turn it over to Dave Rayner, who will give us some insight into our financials. Starting with the Hughes business unit, as you are aware we commenced our HughesNet Gen4 consumer internet service on our K-band EchoStar 17 satellite on October 1, 2012. It has much faster download speeds of up to 15 megabits and significantly increased monthly data download allowances. In addition to continuing to offer our traditional retail offerings, we also launched significant wholesale offerings through DISH Network and Frontier Communications. We added a net of 56,000 subscribers in our first quarter of 2013, continuing strong performances demonstrated in the fourth quarter. This strong market demand did become a key driver in our decision to build EchoStar 19, which is code named Jupiter 2, for the next satellite build.

This satellite will have over 160 gigabits of throughput and the new K-band satellite will have approximately, or is targeted to have, 60% greater capacity than EchoStar 17. It's expected to be the world's highest capacity broadband satellite when launched. It is planned for launch in mid-2016 and will cover all of the Continental US and much of Mexico and Canada. Hughes non-consumer order input in the first quarter of '13 also continued at a strong pace; 123 million of new orders, a 3% increase over first quarter 2012. Significant orders in our North American enterprise business included Xplornet, Row 44, Yum! Brands, Rite Aid, Kmart, and Shell. Key international orders were from the Saudi Ministry of Foreign Affairs, Visa International, Row 44 for Russia and Europe. We also have African Development Bank, Camelot, [Hasmid] electronics, [Tomad] Brazil, the Bombay Stock Exchange, and State Bank of India.

This strong order activity resulted in an order backlog of approximately $1 billion for our used business at the beginning of second quarter of 2013, which, together with the approximate $1.4 billion of contractor backlog in our satellite service business, continues a strong visibility into future revenues. These backlog numbers do not include our consumer and set top box businesses. We announced HughesON, a new and comprehensive suite of managed suite of solutions, optimized to the unique needs of distributed enterprise and government organizations. It provides better reliability, greater application performance, and industry leading security and significantly higher capacity and savings than MPLST1 solutions. Turning to ETC, our EchoStar Technologies group, we had healthy sales of our award winning Hopper with Sling in the first quarter, with revenue growth of 4.5% over first quarter 2012. We believe this product line is the best full-home HD DVR system on the market and also provides the ultimate in application called Hopper Transfers -- I'm sorry place shifting services with Sling. We also launched, with our partner DISH, a very exciting new application called Hopper Transfers, which can be used by consumers to move high-definition and standard definition TV recordings from the DVR to a pad product, like an iPad, for future travel.

Customers can take their favorite sitcom, reality shows, or even last night's game with them to watch anywhere; giving them an unparalleled TV anywhere experience. Along with updating the DISH [Anywhere] web portal with our latest streaming over the top video delivery technology, we also developed the DISH Explorer experience, which is a second string application DISH recently launched. DISH Explorer expands the functionality of the Hopper family of whole-home DVR systems and enables customers to quickly discover popular and trending shows across the 100s of live TV channels and TV recordings. It also includes coverage of the On Demand program. It allows you to engage with fans with the same show over Facebook, on their iPad, or other pads and control the Hopper from an iPad tablet, including channel guide navigation and recorded set up. These features are available on the iPad today and will be available in other pads in the near future.

We started shipment of a new set top box to Bell TV in Canada. This is the latest in our line of HD products that is upgradeable to a DVR by the end user with a simple addition of an external USB hard drive. We also worked diligently to adhere to the [EPG] ENERGY STAR recommendation and have achieved the ENERGY STAR V3 rating with this new product.

In our satellite service group, known as ESS, our latest satellite, Echo 16, was launched in late 2012, as previously discussed, and has fully reached the DISH Network and began generating revenue in the first quarter. With the successful launch of EchoStar 16, [Ketsat 1] has been deployed to its intended permanent location at 77 degrees and has become the primary provider of service to our DISH Mexico joint venture and also provides service to DISH Network. We now have several mid-life space assets available to deploy on short-term missions. Our ESS also secured new orders in the first quarter of 2013 from SpaceNet, SES Americom, government services, and Nice Guy and as stated earlier, has contracted backlog of $1.4 billion as of the beginning of the second quarter of 2013. On the business development front, we continue to explore opportunities to enter the Brazilian direct-to-home market; conversations continue to be ongoing with multiple potential partners.

As the next step, we intend to move a satellite asset to the 45-degree orbital slot to demonstrate the capabilities of the high powered BSS satellite delivery and initial testing of various aspects of the service to be more capable of quickly launching a full video service in the Brazilian market. In addition, we continue to explore other international opportunities to deploy satellite-based platforms. In anticipation of a question you might ask, we will not be commenting on any impact that a DISH/Sprint deal would have on EchoStar. Any comment we would make would be highly speculative and thus inappropriate for today's conference.

Before handing it over to Dave, in summary, I'd like to say I'm very pleased with our results this quarter and the hard work and creativity of all of our employees in the EchoStar family. Their efforts have positioned us very well for the growth in the near and longer term.

I'll now turn it over to CFO, Dave Rayner, to comment on the financials.

Thank you, Mike. I'll provide just a couple of brief highlights on our financial performance in the first quarter 2013 before we get into the Q&A session. Revenue in Q1 of 2013 was $795 million; a 4% growth over the first quarter of 2012. EBITDA was $172 million in the first quarter 2013 compared to $276 million last year. Net income was $3.5 million and diluted earnings per share was $0.04 compared to net income of $126.5 million last year and diluted earnings of $1.45. The declines in EBITDA and earnings were primarily due to approximately $109 million of lower gains from sale of market securities this year than we had in the first quarter of 2012. All of our operating units reported increased revenue over the first quarter of 2012.

ETC revenue for the quarter was $427 million, an increase of 5%. This increase was primarily driven by an increase in equipment sales and services to DISH Network, partially offset by lower sales to Bell TV. EBITDA for the quarter was $30 million, an increase of 22% driven by the higher revenue and improved operating margin. EchoStar Satellite Service revenue for the first quarter was $74 million, relatively flat from the first quarter of 2012. But EBITDA was up $65 million, an increase of 24% driven primarily by lower satellite lease expense and a one-time gain of $7 million associated with the reduction in our lease obligation on our AMC satellite. Hughes revenue for the first quarter was $289 million, an increase of 6% from the first quarter of 2012. This increase was primarily driven by strong consumer and enterprise growth, somewhat offset by lower non-recurring revenue in other areas.

EBITDA for the quarter was $64 million, a decrease of $5 million or 8%, driven lower primarily due to an increase in sales and marketing efforts related to the consumer business. We ended the quarter with 692,000 broadband subscribers. We've made a slight modification of the way we count and report broadband subscribers. In previous periods, we included in our subscriber counts users of our satellites that were customers of third parties who leased satellite capacity from us, as these capacity leases were incremental and variable in nature. Under our Echo 17 arrangement, we have leased specific beams to a third party and there is no variable component to that capacity. Therefore, we believe it is more appropriate to exclude these capacity users from our subscriber counts.

For comparison purposes, we've also removed them from our historic numbers. There were 28,000 of these users as of the end of the first quarter, 23,000 at December 31, 2012, and 26,000 at the end of Q1 2012. The 56,000 net adds Mike mentioned earlier are net of these exclusions. Finally, we ended the quarter with approximately $1.5 billion of cash and marketable securities, giving us adequate resources to pursue growth opportunities.

With that, we're ready for the Q&A part of the call and I'll turn it back over to the operator.

(Operator Instructions) Jason Bazinet, Citi.

I just had a quick question on the Hughes segment. If I look at the fourth quarter and then the first quarter, the EBITDA was down year-over-year, but the magnitude of the decline was less pronounced. You talked about the sales and marketing expenses causing some of that in the first quarter. As we think about the trajectory of EBITDA over the course of the year, do you think it's reasonable that can grow from here or do you see sort of continued sales and marketing or other outlays that might cause the EBITDA to remain depressed, even if the sub numbers are quite healthy? Thank you.

Yes, Jason, let me try and address that. This is Dave. Clearly, yes, you're going to see less of an impact Q4 to Q1 on the sales and marketing, because obviously, we were doing extensive sales and marketing also in Q4. We're going to continue that marketing effort going forward, but as we add subscribers, you're going to be adding gross margin that's going to start offsetting it. I would expect to see EBITDA growth on the Hughes business going forward.

Thank you very much.

Tim Quillin, Stephens Incorporated.

Nice results, especially at Hughes. I just want to make sure I understand the apples-to-apples subscriber addition number in the fourth quarter. It sounds like the [Barret]-related subs actually worked against you in the fourth quarter in terms of additions, so is 46,000 the right net add number in 4Q?

In Q4, on a apples-to-apples basis compared to how we're reporting subs now, it would be about 40,000 net adds in Q4 and really, the transition happened effectively in Q1. The third party started selling on the Echo 17 on the capacity lease late in Q4, so you really start seeing a bigger impact going into Q1.

Right. The end of period subscribers, apples-to-apples at the end of September, would have been 596,000?

I'll take your word on that because I don't have it in front of me, but yes, since you had 40,000 net adds, yes, that would be correct.

That's correct, Dave. That's the right number.

56,000 is a big number in Q1. Is that an unsustainable pace? Would you expect to come down or would you expect that to go up? Because maybe, over time, you're going to work through some internal migrations on the retail side and maybe accelerate from those levels?

Pradman, do you want to take that?

Yes, I think that's a sustainable number. Just keep in mind the seasonality in our subscriber acquisitions. Q1 is the best quarter that we have from a seasonality perspective. Q2 goes down and then Q3 and Q4 comes back up, but we think we can sustain that level.

How pronounced would the seasonality be or how much different would you expect 2Q to be versus 1Q?

We don't really give guidance by quarter in terms of number of subs, but there has always been a certain amount of seasonality. If you look at our numbers in the last couple of years you'll see that trend.

Okay. What impact might you see based on the ruling that mVSs can keep their spectrum, essentially, but how might that impact either the growth at DISH Mexico or the value of DISH Mexico? Thank you.

Yes. This is Ken. We certainly view that as a positive outcome for mVS. As you know, we are in partnership with them in DISH Mexico, essentially at a 50% level. We view it positive for mVS and frankly, positive for the joint venture. It'd be pure speculation at this point in time to say what is the positive outcome, how does it impact the growth of DISH Mexico at this point in time.

I'd say probably more favorable or more direct impact was the recent Mexican Telcom Reform Act, which gives, we believe, when you're talking to DISH Management gives DISH Mexico Management, gives them the ability to carry the local channels and today they are actively working on augmenting uplink capabilities and broadcast capabilities in anticipation of probably carrying around 13 local channels in their platform. That has been, in the past, a key competitive advantage of the other providers, so we should even the playing field somewhat with that aspect.

Absolutely, thank you.

Amy Young, Macquarie Capital.

This is Andrew for Amy. I just wanted to get a little more color on the timing around Brazil. Are you guys still confident to launch service by year-end? Secondly, I know that DISH Net added about 66,000 in the quarter, and I was just kind of wondering if you guys, on the wholesale retail mix, was it still mostly wholesale as far as your net adds are concerned? Thanks.

Take the second question.

Yes, this is Dave. I'll take the second question, then ask Mike or Ken to address Brazil. The mix is not predominantly wholesale. The mix is probably closer to 50/50 when you look at what DISH has reported from a net add standpoint. You've got to remember there's a mix of Hughes and other product in there, plus given the base that they're selling off of, which is essentially zero, that they've got minimal churn.

The net add mix is different than the gross add mix. I think this also goes back to a conversation we've had in the past, a number of people on the call and myself and Deepak have had in the past, in terms of additional metrics that we can provide. The metrics are still in a state of flux as we absorb the Wholesale business. As things settle out, I think we'll be able to get a little bit better visibility as to what's going on. But no, I would not say the majority of the gross adds were wholesale at this point.

Okay. I'm sorry to interrupt, but as far as the Jupiter 1, is most of the net adds at this point, would you say the vast majority is coming from that satellite?

Yes, Echo 17. I think that's fair although we do, we have offered higher performance services on SpaceWay in the areas not covered by Jupiter. Most of the growth, in fact, virtually all of the growth in the area that Jupiter covers on the US, those subs are all going on Jupiter and we are bringing subs off of SpaceWay to Jupiter in those areas. But in the SpaceWay territories, there's still some growth and there's still a new program that's been addressed to give better performance for people that need that service.

Great. I'm sorry on Brazil?

On Brazil, I think I stated we continue to be optimistic. We're moving a spacecraft to the slot. We're going to start demonstrating capability and testing delivery into Brazil. You would say that our confidence continues that it's a great slot and it's a great market and we've got some unique capabilities to build a service there and we're working very hard to get an in-country partner. A demonstration of our commitment by moving the satellite and so on, as it takes things a big way towards getting it done.

Would it be accurate to say that moving the satellite over Brazil is giving you -- you're more confident that something will happen soon?

I think we're just demonstrating that we're very serious about the Brazil market and we're going to figure it out one way or the other, is our internal plan, so that's where we're going. I can't say a whole lot more than what we've said.

Fair enough, thanks.

Craig Baum, Harvest Capital.

Congratulations on another good quarter. First, as a follow-up to Tim's question on DISH Mexico, there are some news reports floating around that Carlos Slim or American Mobile has an option to purchase a controlling stake in that entity. I realize that you guys can't speak specifically and are somewhat limited in what you can disclose, but can you just comment on whether there's a third party that has an option to buy either a portion or all of that asset from us?

Yes, I don't think we can really comment on that at this point in time.

Your earlier statements were quite good about us not being able to comment.

Okay, fair enough. One quick question regarding the capital structure, if you look at it on a net debt basis, you guys are about 1 times levered. Given the visibility for the FSS segment and then Hughes, where you generate the vast majority of your earnings, you're arguably pretty significantly under-levered. Can you just talk through the rationale for the current capital structure and then your priorities to either return cash to shareholders or put that capital to work with the cost of capital effectively zero today?

Yes, as both Ken and Mike have commented on, one in Brazil and two in other locations that we haven't specified, we're continuing to look at opportunities to deploy assets, including cash and resources to develop additional platforms on an international basis. We've got the capital structure today that will allow us to do that. Clearly, the building of Echo 19 is a commitment of cash into the North American broadband market.

From a capital structure standpoint, I think you're correct. Today, I think we still have some room to add leverage if we need to. I don't see an absolute need to do so unless there are opportunities that present themselves that are greater than the cash resources. In terms of returning capital to shareholders, we have no plans at this point in time. We still believe that there's opportunities to deploy that cash into operating entities that will return better than, I should say, acceptable returns to shareholders through the operation of the business versus the return of cash.

Okay. Fair to think that if there are opportunities to put cash to work that would require additional leverage, you guys would absolutely consider that?

Yes, if we can, if the cost of that capital is less than the returns that we believe that we could generate on those ventures, yes, we would be willing to take additional capital.

Okay, great. Thanks guys.

Tim Quillin, Stephens.

On Brazil, is part of what's going on here is that you're demonstrating the value of your assets and I think you have great orbital slot there and you're moving your satellite there. Is it, for you, is it a matter of getting the right economics on the partnership that you ultimately pick?

That better be our goal. That's all I can say. We're not going to do a deal that doesn't make sense. I think some of the past negotiations, people have questioned whether we're honestly serious or if we were just setting on the slot as an investment or something. The answer is we're serious, we're going to demonstrate the seriousness by bringing up this test system on a live satellite with very good coverage in Brazil. I think it's a very important market and we're chasing it pretty hard. There's not a lot more to say about it.

Right. Just wondering if there's a bid ask around the economics. It doesn't sound like it's that simple where it's just the partners wanting better economics or you wanting better economics. There's more to it than that.

We don't consider the satellite we're putting there the final solution for long-term DTH business. It's a fairly complicated deal because we've got to come up with a capital structure and start the construction of a Brazil-specific satellite. When you have to start off a JV with that kind of an investment, you've got to be serious about it.

I think, to Mike's point, we got out of line with the right fundamental in-country partner that's willing to, that can provide the sales and marketing capabilities and expertise that can provide the distribution platforms to get, to reach on a national basis and frankly, is willing to invest the time, effort, and capital to do so. We're willing to put the investment in.

You're familiar with DISH or any of the pay TV, satellite pay TV Markets, it's a substantial investment to grow that subscriber base quickly and efficiently. I think those would be the complicating factors to be able to get to an agreement with the right partner.

Got it. In the set top box business, you are up pretty strongly with DISH, and I think in the past, you talked about DISH maybe needing a refresh this year, down elsewhere. If you could talk about the factors that are driving DISH up and other customers down and if you think that overall that business can grow for the year?

I think the DISH business, hopefully you listened to some of our call. Again, I think Hopper has been a successful product. It brings HD to all places in the home, which is a huge step forward. It's a shared DVR experience within the home, so you get HD on every set plus you get the same content, whether it be satellite content or internet content available in any room, so it's an industry setting system. On the other hand, it does have a little bit higher SAC and we're working hard on that and there's some additional features we can bring to bear to make it even more exciting in the next 12-14 months.

I would believe they're going to, they've been successful with the product and it's the core feature that they're offering going forward. The rest of the providers, I think, are just a little bit delayed from DISH. You can look at the history and we took a delay at DISH where they ran older product and so on for a little bit longer period of time while we got the right solution done for them and I think the other providers are going to be following suit on that in the near future. I can't really comment on the trends on their specific business, but I can only say we've got the best product offer to help them drive the business if they choose to do it.

Right. Lastly, the Hopper with Sling is a great set top box business. I'd like to have it and I'm not a DISH customer, but there's got to be international opportunities to sell that box or maybe to sell the Sling technology. Where are you in terms of other -- maybe winning other partners there or customers?

We're excited about the Sling product refresh, which is standalone. It's not the DISH product we're talking about. I think that product line was well done, and well thought out and we're pretty happy with it and it is taken hold in some international markets where we were a little bit off in the past. Hopper with Sling, as we all know, the European community has been fairly constrained because of financial issues.

That goes directly into the direct-to-home business and people that are trying to compete where there's definitely some economic struggles. I won't say Hopper with Sling at this instant in time is the exact right solution in some of those markets, but I'm sure there's some that are going to develop.

Okay, thank you.

(Operator Instructions) There are no further questions.

Okay, thank you, everybody for joining in this conference today and have a good day. This brings us to the end of the call.

Ladies and gentlemen, thank you for joining today's conference. Thank you for your participation. You may now disconnect.