EchoStar Corp (SATS) 2013 Q2 法說會逐字稿

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Good morning. My name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 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) Thank you. Mr. Deepak Dutt, you may begin your conference.

Thank you, Tiffany, and good day, everybody. Welcome to EchoStar's second-quarter 2013 financial earnings conference call. I'm joined today by Mike Dugan, our CEO; Dave Rayner, CFO; Pradman Kaul, President of Hughes; Mark Jackson, President of EchoStar Technology; Anders Johnson, President of EchoStar Satellite Services; Kenneth Carroll, EVP Corporate and Business Development; Dean Manson; and Tom McElroy. Dean Manson is General Counsel and Tom McElroy is our 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?

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 at being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our report and should not place undue reliance on any forward-looking statements. We assume no responsibility for updating any forward-looking statements. I will now turn the call over to Mike Dugan.

Thanks, Dean. Good morning, everyone, and welcome to the call. I will start with the highlights of our performance for the quarter and then Dave Rayner, our CFO, will give you some financial overview. In our ESS business unit, American government services exercised their option to our 257 megahertz on EchoStar 9, with renewal up to the second quarter of 2014. Also, Harris CapRock extended their contract for a limited period through 2013. We signed a short-term lease with DISH Network for full use of EchoStar 8. We also took an impairment charge on EchoStar 12, which Dave Rayner will expand on in the financial statements.

On the business development front, we continue to actively pursue the joint venture initiative to enter the Brazilian DTH market. Negotiations with potential partners have progressed considerably, although not to a point where I can provide many details. We have moved EchoStar 15 into the 45 degree orbital slot to demonstrate the capability of the high power DBS satellite and initiate the testing of the various aspects of the service.

We will be ready to quickly launch our service once we have an agreement. Results have been very positive and, in addition, we continue to explore our international opportunities to deploy satellite-based platforms around the world.

Now let's talk about Hughes. In our Hughes Internet Service business, we have added another 44,000 subscribers in the second quarter of 2013, continuing the strong performance since the launch of our HughesNet Gen4 service on October 1 last year on the spacecraft known as JUPITER 1 or EchoStar 17. Given that Q2 is seasonally our weakest quarter for subscriber adds, we're very pleased with this performance.

In the last three quarters, starting with the launch of the core service on October 1, we have added a net of 140,000 subscribers. We ended Q2 '13 with a total of 736,000 subscribers.

Our sales agency relationship with DirecTV for this consumer service was launched late in Q2, so while it did not have a meaningful impact on Q2, we are very encouraged with DirecTV contribution in July. All of DirecTV channels are now available to the service as distribution channels for the service, and we look forward to them being a significant contributor going forward. We are also very pleased (technical difficulty - start) to now have both DISH network as our channel partners in the consumer internet business.

Though it is still early in the cycle, construction of EchoStar 19 is still on schedule. It's over 160 gigabits. Over 60% greater capacity than EchoStar 17, which is known as Jupiter One and is expected to be the world's highest capacity broadband satellite when launched. It's planned for launch in mid-2016 and will cover all of the continental US and much of Mexico and Canada.

Used non-consumer order import in the second-quarter 2013 also accelerated at a strong pace with $206 million in new orders, a 71% increase over the second-quarter 2012. Key contributors to the strong growth were -- a row 44 signed three large monthly year contract for provision of the space segment, network operation center service, and maintenance as other ancillary services in support of the North America college European, and transatlantic service footprint. The current service footprint covers approximately 480 Southwest Airlines and Norwegian aircraft. -- used Europe to provide connectivity services to over 3000 in the UK, Germany, France, Italy, and Spain during the initial phase. This will transform film distribution in Europe from -- to content delivered.

I am pleased to announce used to supply its Latin American subsidiary with Jupiter class equipment and related services to power their first commercial broadband service. In multiple companies in Latin America, gateways will be installed in the second half of 2013 with terminal deliveries later in the year. Other significant orders in our North American enterprise business include National, Varco, Chevron, (inaudible). Other significant international orders were from Brazil, State Bank of India.

The strong order activity resulted in an order backlog of approximately $1.064 billion for our used business at the end -- at the beginning of the third-quarter 2013, compared to $968 million at the same time last year. Together with the approximately $1.29 billion of contracted backlog on our satellite services, we continue the strong visibility to future revenues. These backlog numbers do not include our (inaudible).

Turning to EchoStar Technologies. Our sling mobile apps have reached an all-time high rating across IOS and Android. This includes DISH mobile applications, DISH anywhere place shifting, explore second screen will -- and DISH is rated at 4.5 plus stars. Swing also (technical difficulty - end) successfully launched DoD support in additional mobile applications recently. Finally, we launched the retail Slingbox 350 in Japan in Q1 '13 following several years of solid performance with the prior Sling product line. We are now breeding expectations and forecasts for Q2 '13 with a new product.

In summary, our existing business segments continue to perform well as we expand our global presence, and we continue to explore key partnerships within the international markets. I will now turn it over to Dave Rayner, our CFO.

Thank you, Mike. I will provide a few highlights of our financial performance in the second quarter before we get into the Q&A session. Revenue in the second quarter was $830 million, up 3% over the second quarter of 2012. EBITDA was $149 million compared to $184 million last year.

This decline is primarily due to the impairment loss of $35 million due to anomalies on our EchoStar 12 satellite. Over time, EchoStar 12 has been experiencing a loss of electrical power. Our ongoing engineering analysis has concluded that further loss of power is likely, thereby reducing future revenue producing capacity. This satellite is leased to DISH network in connection with the preparation of our financial statements for the second quarter, we determined the future net cash flows from DISH would not be sufficient to recover the carrying on of the satellite. As a result, we recorded $35 million impairment charge.

Net income attributable to EchoStar shareholders in the second quarter was a loss of $9.8 million, and diluted loss per share was $0.11, compared to net income of $35.7 million and diluted earnings of $0.41 -- diluted earnings per share of $0.41 in the second-quarter last year. The year-over-year change was impacted by the impairment charge, as well as higher depreciation expense as a result of Echo 16 and 17 being in service. Our free cash flow, defined as cash flow from operations, less capital expenditures was $57 million in the current quarter, as compared to $58 million use-of-cash in the second quarter of 2012.

As of June 30, we had $1.6 billion of cash and marketable securities giving us adequate resources to pursue our planned growth opportunities. Capital expenditures for the quarter were $86 million, compared to $164 million last year. The drop is primarily a result of lower satellite spending. Last year, we had both Echo 16 and 17 in late stages of construction. This year, we are in the early stages of construction of Echo 19. For the full-year 2013, we are expecting capital expenditures in the range of $365 million to $385 million.

Now a couple of financial highlights from our business segments. ETC revenue for the second quarter was $426 million, a decline of $20 million from the second-quarter last year. The decrease was primarily due to lower sales to Bell Canada and other international customers, partially offset by higher revenue from DISH Network, equipment sales, uplink services, and professional services. EBITDA for the quarter was $32 million, compared to $39 million last year, the decline primarily due to the lower revenue.

ESS revenue for the second quarter was $85 million, a 19% growth over the second quarter of last year, driven primarily by additional revenue from the lease of Echo 16 and QuetzSat 1. Partially offset by EchoStar 6 and 8 coming off lease at the beginning of the year, although as Mike mentioned, DISH entered into a new short-term lease on Echo 8 in the second quarter, which contributed somewhat to the growth.

EBITDA for the quarter was $34 million, compared to $52 million last year. Once again, the impairment loss of $35 million impacting that growth. Excluding this impairment loss, ESS EBITDA grew 28% over the second quarter of last year. Hughes revenue for the second quarter is $315 million, an increase of 11% from the second-quarter last year, the increase was primarily driven by strong consumer and enterprise growth, partially offset by revenue in mobile satellite business, which is largely opportunistic in nature and was pretty strong last year.

EBITDA for the quarter was $73 million, an increase of $3 million over the second quarter, driven primarily by the revenue growth, offset by -- somewhat by higher subscriber acquisition costs. I will now turn the call over to the operator to conduct Q&A.

(Operator Instructions)

Jason Bazinet with Citi.

Just had two quick questions. Did I hear correctly on the call? I think this is new information that you gave -- CapEx outlook for '13. I guess that's my first question, that $365 million to $385 million. And then my second question is, if you think about what you expect at the profile of the Hughes broadband subs to be, before you launched this next gen surface. Are there any surprises or differences in terms of the customers that are coming on? Either in terms of what broadband they had before or whether or not they had your prior service. Any sort of color you can give us and any surprises would be helpful.

In regards to CapEx, yes, you heard correctly. $365 million to $385 million for 2013. On the broadband subs, I will turn it over to Pradman, let him address that.

Yes, sure, thank you Dave. No, I don't think we will be surprised. We have been very pleased, in fact, that at the rate at which we are signing up new subs. Characteristic of the sub is pretty consistent with what we had in the past.

Okay, okay. Thank you very much.

Tim Quillin with Stephens Incorporated.

Good morning. Nice quarter in a lot of ways. How should we think about the ESS revenue and the margins, which are also real nice there. Should we expect some kind of drop off in revenue related to EchoStar 12, or are the results that we saw in the second quarter at a sustainable level?

I think -- I'm not going to give you forecast on ESS, but obviously the margins on the ESS business are very strong -- just given the amount of capital expenditures that go into it, so that is what drives EBITDA. EchoStar 12, we are forecasting a decline in capacity on that satellite -- over a future period. Exactly how fast, some of those -- how some of that power loss is going to contribute to capacity loss is a little bit more art than science, but there is no question that we are not anticipating the same amount of revenue off of Echo 12 going forward, that we have seen in the past. How quickly it will roll off I think is still an uncertainty. We've got our forecast, but as I said, it is not science.

Right. Can you give us any sense of what kind of revenue you are doing with that satellite?

No, we've never broken out the revenue on a satellite-by-satellite basis.

Okay. Then moving onto Hughes. You know, again, an excellent quarter in a lot of different ways, but how should we think about seasonality now in the third quarter? I know that second quarter is probably your low ebb, in terms of subscriber additions. And maybe the impact to DirecTV is going to offset any seasonality anyway or add to the sequential increase, but how are we thinking about things in the third quarter?

Well, generally, Q2 as you mentioned, is our lowest quarter. Q3 is the second lowest, Q4 is the second-highest, and Q1 is the best. So we expect that trend to continue, and so far in July we are seeing that trend. Of course, as you mentioned, DirecTV is going to help the growth in the next couple of quarters.

That sounds encouraging. In the 10-Q, there was mention of a Dish net or the DISH net fees being based on volume thresholds beginning January 1, 2014. What does that entail?

Yes, I'm not sure that --.

Give us a minute to look at that. I'm not sure that's something we can answer right away.

Okay. I will move onto the next question. I just wanted to ask Pradman, about your non-consumer business, where your bookings were obviously excellent. There's a couple different elements there, but I wonder if you could comment just generally on the demand for managed network services and what you are seeing in terms -- of maybe a macro-economic turn there? And then I was wondering if you could comment on what you are doing with Telefonica and what that might -- what the financial details of an arrangement like that or even a generic example of a big [kay avant] rollout like that might mean for you?

Okay. Very quickly on the managed network services, again, the numbers have been very encouraging. After a few years of flat to declining enterprise revenues in North America, we have seen growth in that sector. I think it's primarily due to the change we made a few years ago to offer our customers -- (technical difficulty). We are having an echo problem. Okay. Anyway. Our managed network services are getting a great response from the market, because for the first time we are basically telling our customers we use the best access technology available for each branch. And the value added to the customer, as a single point of contact, and a complete offering irrespective of the technology that's used for accessing each branch. So we are using DSL, or using wireless, we are using cable, and of course, we are using satellite -- to offer our customers the best solution.

That switch has really found [inter responsive call] for major enterprises in North America and Europe and has resulted in the significant improvement in our enterprise business. In terms of media networks, like Telefonica, we are basically providing equipment for two gateways, one in Texas and one in Chile; and this will cover nine countries in South America. We have the satellite that has been used is continuing capacity on a Hispasat satellite, and our role for media networks is just supplying equipment. So we will be supplying gateway equipment and we will be supplying remote CPE, D-sat terminals. Very, very excited about this because it introduces a Jupiter platform, all over Central and South America, and expands the coverage of our technology globally.

Great. Thank you. I will step back into the queue.

Our next question comes from the line of Andrew [Agaspier] with Macquarie Capital.

Good morning. Just a question on Brazil. I was just wondering if with the recent Sat Max UniSat transition, it also -- what is the impact with that with DISH Mexico, and is there any underlying impact to Brazil? On the competitive front.

Well, you threw me a curve there at the end. Probably not [the bet] DISH Mexico because, no, we don't think that relationship should have much of an impact to the DISH Mexico business plan, let's just put it that way. To Brazil, I think we continue to see it as a solid market obviously. The economy is not as robust as it was -- say, a year ago, but we continue to look at options. Certainly, there is still some strong potential for partnerships with existing services down there. That's about all I can say to that.

And secondly, on the Echo 12, which you are having the power drain, is there any -- at this point, are there any contingencies as far as potentially replacing a satellite in the near future, or at this time, you are just going with what you have?

This is Anders Johnson. Echo 12 right now is deployed to DISH as itself a backup spacecraft at the 61.5 degree orbital location. As its capabilities degrade, as the power budget shrinks, we are modifying our restoration plans to provide DISH with other capacity that is available on other satellites. I don't think we would be launching a new satellite -- strictly speaking -- as a backup, but we do have quite a few satellites in the air that are available for restoration services, and that's part of our contingency planning.

Great. Thank you.

Our next question comes from the line of Chris Quilty with Raymond James.

Good morning. Wanted to follow-up Pradman, I think you mentioned that the constitution of your retail net adds in the Hughes Net business is sort of unchanged. Can you remind us of what the mix looks like there, sort of wholesale versus retail?

We don't, obviously, disclose that mix publicly. As Mike said earlier in the -- DISH wholesale channel, it's doing very well.

Okay. And with regard to -- I know you don't provide specifics, but maybe trends on the churn, and the ARPU, and the SAC, and those businesses. Are there any material changes?

Not this quarter. The ARPU, obviously, as our wholesale mix increases from where it used to be a year ago, the ARPU obviously declines a little bit, and that is sort of a natural phenomenon of having a mix of wholesale and retail. We don't really give you data on churn, but from the net adds, you can probably get a feel of what the churn is.

Right.

Let me add a couple things in there, Chris. Certainly, the ARPU, we are expecting that to -- I mean, it's come down from where it was pre-wholesale, and we expect it to go further as we add additional wholesale customers. You know, the churn, I think generally speaking, that the churn is probably higher than we would like, but it's been very good on the Jupiter service. We continue to see, you know, the legacy customers churning as they did in prior periods, pre-Jupiter, giving us an incentive to try to get as many of those people on to use Gen 4 service as possible. In terms of SAC, if you look at SAC across all of the subscriber base, SAC is going to come down on a per customer basis, once again, simply because of the wholesale arrangement. I think compared to where we were prior to wholesale on certain retail customers, SAC is about the same as it was previously, as is ARPU.

Okay. Now, the DirecTV relationship as that ramps up, are we going to see an increase in SG&A related to fees associated with that, or is it sort of offset by the wholesale with DISH?

Well, DirecTV is a sales agent just like many of our other sales agents, so they are treated exactly the same way, so you shouldn't see any difference there -- except as we increase our subscriber count, then obviously, the total SAC expense would increase as a result of that. DISH is a classical wholesale relationship, so there's a big difference between the two.

Okay. And one other item on ARPU. How has the new VOIP service been received, and has it met expectations at this point?

Yes, I think at this stage -- we just kicked it off a month or so ago, and it's doing very well. The numbers aren't huge yet, but it's meeting our expectations of the start of service, and we have good hopes that that will be a valuable asset to our marketing and revenue aspirations in this business.

Okay. And Pradman, while I have you, you mentioned the domestic D-Sat business, but didn't comment on international.

Yes, I think international has been doing well too. You know, if you look at the list of wins that we had this quarter that Mike talked about earlier, you see the numbers are growing. Europe is doing particularly well this last quarter. We had some big wins in Europe. We -- India is doing well. Brazil is struggling a little bit because of the economy, but still holding its own. Again, our international business is meeting our expectations.

And is there any particular application that's driving the growth? You know, whether role, telephony or classic enterprise, D-Sat?

It depends on the vision. In India, the major application has been the rural banking and rural ATMs, so we are building a huge network connecting all the rural banks, which is the biggest growth industry in India. In Europe, it is very much like North America. It's managed network services for enterprises. In Brazil, it is cellular back haul, because as their cellular grow the need for back haul is increasing dramatically, so it's different applications in different regions of the world.

Great. On Brazil, the Hispasat opportunity, was that a competitive bid on the equipment side?

Well, Hispasat actually contracted with Telefonica media networks and sold them their space segment, so we didn't directly have a relationship with Hispasat. Obviously, the wind in media networks Telefonica, both are very competitive procurement against our classical D-Sat competitor, which we were successful in winning. So that was a big win for us.

Okay, and the fact that Eutelsat just announced last week that they are acquiring a satellite with -- I believe, 24 KA band transponders for the Brazilian market, you have now got two satellites coming into Brazil with KA band capacity. You obviously are playing on one of them. It is probably fair to assume that Eutelsat will continue to build with Viasat. Does the capacity coming into Brazil in any way either motivate or dissuade you from the opportunity of potentially putting a satellite with KA band capacity in Brazil or the Latin American market?

Brazil is a very interesting opportunity for us. As you know, we've been in the enterprise business in Brazil for many, many years and doing well. It is a market we intend to play in for a long time. I think the availability of KA band space segment we view as an opportunity for us. You know, we hope we will use it in the right way to grow our business in Brazil. We have nothing to announce at this stage.

Okay. Great. Thank you.

(Operator Instructions)

Our next question comes from the line of Anthony Klarman with Deutsche Bank.

Hi, thanks. It's Anthony Klarman with DB. I wanted to try to go back to one of the prior questions on the mix. I think at the time when EchoStar acquired the Hughes business, one of the advantages that we talked about was there was this big unserved and underserved penetration opportunity. I think there was something like 20 million or so homes that were completely unserved by broadband and there was another big slug that was relatively underserved or underpenetrated. As you look at where your growth is coming from, is your go-to market strategy in place to kind of attack that unserved and underserved market, or as you look at the subs that you are getting from some of your wholesale partners, whether it's DTV or DISH, are they coming from more of the traditional segments where you have some fairly robust competition from cable and other broadband providers?

You know, our traditional market segment has been the unserved and underserved markets, not cable and DSL markets. That's where most of our subs have been coming from in the past, and continue to come from in the present. So we are still focused on that market segment. We are trying to maintain our ARPUs at level that they are.

I think it's fair to say that the subs from all channels look pretty similar. We don't see a huge difference from any partner that is attacking a segment they shouldn't be. I think we have worked too close with the wholesale and the sales channels to ensure that we all focus on the same type of sub, and we have been pretty successful.

Yes, that was exactly my question. Thank you for that clarifying point. Another follow-up maybe for Dave. As you look at the liquidity here, obviously, it's pretty strong. When you look at the CapEx plans that you've talked about and if you can extrapolate out. Are there any other additional investments that you will have to make with CapEx on the older portions of the fleet that might still be getting released by DISH? As you look at the liquidity, there's only about $180 million or so down in the restricted group where the bond-restricted group is, so a lot of it is that the parent. How do you think about what other strategic things you might be looking at the parent, are you considering other forms of M&A like you did at the time when you acquired Hughes business?

Yes, I think to answer that second part first, I mean, we are certainly looking at other M&A opportunities. You know, there's a number of things that are interesting. Obviously, we are interested in things -- at the right price -- that dig into our overall business strategy. You know, with that said, you can never say -- yes, we are going to do it, or no, we are not going to do it -- but we are going to continue to look at opportunities. Overall, in terms of liquidity, obviously, a number of things that we are working on from the business development with Brazil being front and center. Brazil is a, obviously, a major focus of ours right now. That will be the use of some of that available cash. In terms of replacement cycle on some of the older satellites, I will let Anders expand on it, but we are going to look at it on a case-by-case basis. One of the things you got to understand is the technology has changed in terms of the amount of capacity you can put on satellite from when some of those birds were originally launched. But Anders, you want to --?

Yes, as Echo 16 was launched last year and put into service with DISH early this year, it's a perfect example of that. The satellite effectively took over the capacity of two older satellites, as well as offered up significant expansion capacity for DISH, which they are still in the process of ramping up as they bring additional HD local-into-local into service using the spot beam capacity that the satellite affords. So, on a going-forward basis, there isn't necessarily the need for a one-for-one replacement, but we work very close with DISH in evaluating their needs from a demand side and match it with capacity. Right now, DISH has under construction themselves, the Echo 18 program, which we are managing for them, which thereto will provide them both with capacity that is otherwise distributed across multiple satellites as well as growth capacity and restoration capacity in the event of the fleet contingencies. There's nothing right now that I could identify in a replacement-sense that specifically DISH is in need of.

Okay, great. Thank you very much.

(Operator Instructions)

There are no further questions at this time.

Okay, operator. Thank you very much. We will close off the call at this time. Thanks, everybody, for joining us.