EchoStar Corp (SATS) 2013 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by. At this time I would like to welcome everyone to the EchoStar Corporation third-quarter 2013 earnings conference call. All lines have been placed on mute to prevent any background noise. Later, there well be a question-and-answer session.

(Operator Instructions)

Thank you. I would now like to turn the call over to Mr. Deepak Dutt. Please go ahead, sir.

Thank you, operator, and good day everybody. Welcome to our third-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; Dean Manson, General Counsel; Grant Barber, CFO of Hughes 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.

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 should not place undue reliance on any forward-looking segments. We assume no response ability for updating any forward-looking statements. Let me now turn the call over to Mike Dugan.

Thank you, Dean, and welcome everybody to today's call. As usual I will start with a few highlights of our performance for the third quarter of 2013 and then Dave Rayner will give some financial highlights.

First, we had a strong quarter with $849 million of revenue for a growth of about 11% over third quarter 2012 with all three business segments showing solid revenue growth. Secondly, we had a record quarter in terms of subscriber adds in our Hughes consumer business. Thirdly we entered into negotiations to form a joint venture with GBT to provide pay-TV service in Brazil. Finally we made some exciting announcements related to our Sling division.

Now for some specific details. In our Hughes consumer internet service business we added a net 72,000 subscribers in the third quarter of 2013 which was an all-time record for net adds in a quarter. This represents a 63% increase over the 43,000 net adds in the second quarter of 2013.

This growth came from solid contributions from all of the sales chains. In the 12 months since the launch of our broadband Gen4 service on October 1, 2012, we've increased our subscriber count by 212,000 to 807,000 total subscribers with 441,000 of those subscribers being served from the EchoStar 17 satellite. We ended the third quarter of 2013 with 807,000 subscribers, as I mentioned previously.

The still early in the cycle, construction of EchoStar 19, our second Jupiter cloud satellite, is proceeding on schedule. This new Ka-Band satellite will have over 60% greater capacity than EchoStar 17, which was previously known as Jupiter 1, and is expected to be the world's highest capacity broadband satellite when launched. It is planned for launch in the first half of 2016 and will cover the continental US, a significant portion of Mexico and Canada, and provide capacity for continued growth in our Hughes broadband business.

Hughes non-consumer order input in the third quarter of 2013 was strong with 183 million of new orders. Key orders were from TJ Maxx, Ferguson, Enterprise, Xplornet, Murphy Oil, Dillards, Row 44, Yum! Brands, Costco, BP Europe, Beachhead International, Telemark Brazil and State Bank of India. This strong order activity resulted in an order backlog of approximately $1.1 billion for the Hughes business at the beginning of the fourth quarter of 2013, which together with the approximate $1.2 billion of contracted backlog in our satellite services business, continues with strong visibility into future revenues.

These backlog numbers do not include our consumer and set-top box business. As many of you are aware we have for some time been working on finalizing the joint venture in Brazil for providing pay-TV service. To that end we acquired the 45-degree westward orbital slot in an auction conducted by Anatel, the Brazilian regulator, as previously discussed.

We relocated EchoStar 15 to this orbital slot in order to complete testing with the objective of starting the pay-TV service as soon as possible. I'm delighted that we are able to advance our negotiations with GBT as a partner in this joint venture. GBT will be an outstanding partner and the teams are working diligently to finalize the joint venture agreements and other related documents in order that the joint venture can commence through PH service.

Turning to EchoStar Technologies, we continue the evolution of the innovative, multi-tuner award-winning Hopper set-top platform and continue to deliver upgrades and enhancements to DISH Network as we explore delivery of this technology for other operators. We also have taken several steps to expand the reach of our Sling family of products.

We've been working with ARRIS Group to innovate Sling technology into ARRIS's equipment fleet. We expect product to roll out in Q1 2014 to ARRIS' proxy customer base in North America and also expect to commence the integration of Sling technology into ARRIS's other product lines.

We continue our international expansion with launches of Slingbox SOLO and PRO-HD retail in El Salvador. We will continue to launch in other countries in South and Central America in preparation of delivering Sling products for the upcoming World Cup football and Olympics. This will include a soft launch of Slingbox 350 in Brazil. In addition we launch Slingbox 350 in the UK with the Nordic countries.

We continue innovation on our current platforms with updated releases for the 350/500 and the SlingPlayer app. We are also expanding Slingbox's retail reach in the US with distribution through Costco and Verizon stores.

In our ESS business we received orders for new and extension services with a contract value of about $15 million with Arctel building and Spacenet bringing the [cue] customers. We have been in negotiation contracts for our Brazil-specific DSS satellite and will be in position to place the order as soon as the JV agreements are finalized. We also are very pleased that the EchoStar 18 satellite construction is proceeding on plan.

Before handing it over to Dave, in summary I'd like to say that I'm pleased with the strong and balanced results that the divisions have delivered this quarter across all our business segments and we are focused on continuing to identify growth opportunities in all areas. I'll now turn it over to our CFO, David Rayner.

Thank you, Mike. I'll provide a few highlights of our financial performance in the third quarter of 2013 before we get to the Q&A session.

As Mike said, revenue in Q3 was $849 million, up 11% over the third quarter of 2012. EBITDA was $168 million in third quarter of 2013 compared to $164 million same quarter last year. When adjusted for one-time gains in 2012, EBITDA this quarter was up about 16% over last year.

Net income attributable to shareholders in the third quarter of 2013 was $4.3 million and diluted earnings per share was $0.05, compared to $22.6 million and $0.26 in the third quarter of 2012. Significant contributors to the lower net income this quarter versus last year were higher depreciation as a result of Echo 16 and 17 being placed in service, lower capitalized interest in 2013 and higher gains on sales of investments in 2012.

Our free cash flow, defined as cash flow from operations less capital expenditures, was $91 million in the third quarter of 2013, an increase of 27% over the third quarter of 2012, and 60% higher than Q2 this year. We ended the third quarter of 2013 with approximately $1.7 billion of cash and marketable securities, giving us adequate resources to pursue growth opportunities.

Now a few financial highlights from each of our business segments. ETC revenue for the quarter was $456 million, a growth of 10% over the third quarter last year. This increase was primarily due to higher sales of equipment to DISH Network partially offset by lower sales to international customers.

EBITDA for the quarter was $43 million compared to $25 million last year, primary result of a higher revenue this year and some one-time charges in the third quarter last year. Hughes revenue for the quarter was $302 million, an increase of 6% from the third quarter of 2012. This increase was primarily driven by strong consumer service and equipment revenue as well as overall North American enterprise service growth. This was partially offset by revenue decline in the mobile satellite business.

EBITDA for the quarter was $66 million compared to $76 million in the third quarter of 2012. The decline primarily the result of a large gain from the sales of strategic investment in the third quarter of 2012. Without the effects of this gain last year, EBITDA would've increased by 5%, the revenue and margin growth being partially offset by higher sales and marketing costs associated with Gen4.

As Mike mentioned, we added a net of 72,000 subscribers in Q3 and ended the quarter with 807,000 broadband subscribers. These numbers exclude customers or third parties who lease satellite capacity from us.

ESS revenue for the third quarter was $86 million, a 31% growth over the third quarter last year, driven primarily by additional revenue from the lease of Echo 16 to DISH and the short-term lease of Echo 8 to DISH partially offset by termination of the Echo 6 lease in the fourth quarter last year. EBITDA for the quarter was $69 million, a growth of 21% over the third quarter of 2012, primarily result of the revenue growth.

In the all other and elimination segment, where we record gains and losses from sales of securities and eliminations for inter-segment sales, we saw a decline of $15 million in EBITDA in the quarter from the same quarter last year. Due primarily to a gain from the sale of investments last year and the incremental cost of leasing Echo 15 from DISH in Q3 20113. As we mentioned earlier, we moved Echo 15 to the 45 degree slot for the Brazil DTH service earlier this year. We're now ready to take some of your questions and I'll turn the call over to the operator to conduct the Q&A session.

(Operator Instructions)

Jason Bazinet, Citi.

I just had one question regarding the $1.7 billion of cash and marketable securities you alluded to. Whether that -- you talked about pursuing growth opportunities. Whether it's organic or sort of via M&A, do you mind sharing anything you can at the high level in terms of what areas of the marketplace you see the most opportunities?

Clearly, we're moving into Brazil. Part of that $1.7 billion will be used in Brazil. Our contribution into the JV will be a combination of asset services and cash. So, certainly, a piece of it will be there. We're looking at other opportunities on a global basis for DTH and broadband opportunities and so part of it would be earmarked for those kind of things too.

Okay.

Yes, I agree. We're going to stay focused on the business units we have in place. We don't see stepping outside the satellite industry and so on right now, although we continue to look at all options. It is kind of where we're at.

Okay. Very helpful, thank you.

Amy Young, McCord Capital.

Yes. Hi, this is Andrew for Amy. I had a few questions on the net adds growth fee you had. What's the wholesale/retail mix right now and how much did DISH contribute to your net adds in the quarter?

Well --

Yes, I think we don't disclose that data in the mix. But suffice to say that both segments, the wholesale and the retail, grew nicely during Q3. The exact mix is something we don't normally present to the outside world.

You said in the past that you're looking to get to pretty much 50/50. Is it getting close to that or is there still a wide disparity between the two?

I think on the gross adds it's getting close to that. But the one thing you got to remember obviously on the net adds it's weighted a little bit more towards wholesale, just because you get a different base that's churning. So, gross adds I think, while not exactly at 50%, moving in that direction. But obviously even with the exact same churn in wholesale and retail, you're going to have higher net adds on the wholesale business.

Great. And lastly, just the mix of subs that pretty much have no option but to use your services versus those that you're taking share from ViaSat or DSL? Can you comment on that?

Well, almost all subs that we get can also be -- can also get their service from ViaSat since both satellites have roughly the same coverage. So that's always the choice. Very few of them have a choice of DSL because we still focus on the unserved and underserved market.

Got it, thank you very much.

Tim Quillin, Stephens.

Good morning, nice quarter. Did DTV end up contributing meaningful subscriber additions for you, or how did that end up shaping up for the quarter?

I think, again, we're not going to the disclose the mix of where the subscribers come from. But suffice to say they've been a good partner for the Hughes broadband and we continue to work closely with them to help them with the selling process and improve their performance. But we're certainly not disappointed.

Yes. So Tim, I think to echo what Pradman said a little while ago, I think all the sales channels are working well right now. All of our sales channel partners and agents, of which DIRECTV is one, are working well and our wholesale customer base is growing. So once again, echoing Pradman, I think everything is working pretty well at this point.

Okay. And then you may have seen that ViaSat had relatively high subscriber churn in the quarter, I think annualized something like 37%. And where they're seeing the most churn is in areas where there are better service options. And I know you all focus more on unserved markets. I am just wondering if your churn rate is and you're retail channel is below that level?

Yes> It certainly below that level. It's something we want to keep working on hard to try to improve. Again, we don't give out the actual numbers, but it's something that we work every day to make it as low as we possibly can.

Okay. And then on -- you mentioned that part of the Delta in the other eliminations EBITDA was around the lease of ES 15 from DISH. And I'm just wondering is that something that continues? I guess it was something like negative $9.3 million in the third quarter. Is that a level that we should think about going forward?

No, I would expect that once we finalize the JV structure that, that will become an obligation of the JV, or at least a contribution to the JV depending on how we finally structure it, but it will either be an obligation of the JV or a contribution into an investment account. So it will be coming off our P &L.

Right. And I know you're working diligently towards getting that JV finalized. Do you have a sense of when it might get finalized?

There are a lot of agreements that need to be finalized and a lot of paper that has to be -- a lot of trees to be killed to create the paper. So we're working it diligently, but I don't think we are predicting a in-service date.

The other thing that contributes to that is we have a lot of work to do with the Brazilian authorities to get certain approvals and so on that it's very hard for us to say how long it will take to get through certain processes there.

Right, right, fair enough. The ETC margins were -- EBITDA margins were 9.4%, relatively high compared to what you've seen over the past few quarters. Was there anything non-recurring in that, or is that just a function of relatively high sales into DISH?

No, I think it's just good performance coming out of ETC. We've over the last 12 months -- and there was a significant charge last year that we took in Q3 for restructuring some of our operations. And so one, on a quarter-over-quarter basis, year-over-year basis certainly you're seeing the impact of that. But we're also seeing the impact of the reduced operating cost coming out of those restructured operations. So, Mark, I don't know if there's something else you want to add?

Well, I think we've also got to get jobs being here, costs down there, goods sold out, but that's also (inaudible) margins.

Okay. And then on ESS, should we still expect some kind of decline related to the EchoStar 12 degradation?

Yes. I mean I think as we've disclosed over the next couple of years we're going to see a gradual decline in the amount of capacity that that satellite is capable of providing. And so we'll see a gradual decline in revenue also.

Okay. And then just lastly, would you be able to share your expectations and how we should think about the economics of your relationship with ARRIS? If you can talk about at all the per box contribution to EchoStar or anything like that would be helpful? Thank you.

Well, what we hope to happen with ARRIS is that we'll also make money on hardware sales, but we'll also have some license agreement as we get integrated. And then there's also some costs for backend services that will get charged back to ARRIS over time. But overall we think they'll be a great sales team to help propagate the Swing technology throughout the industry.

Okay, thank you.

(Operator Instructions)

Chris Quilty, Raymond James.

Thanks. Just a follow-up on the last question. Based upon the nature of the relationship with ARRIS is it fair to assume that the impact will be more on the margins than it will be on revenue as a licensing agreement?

I think that's fair to say, yes.

Okay. Big question for you is Hughes. Congratulation on the net adds. Can you help -- well, is that level of net adds supportable on a go forward basis or can you help us walk us through the seasonality trends of what we should expect on a sequential basis and going into Q1, which is usually your record quarter?

Yes, it's a difficult thing to project because we had a number of different things that have happened in this third quarter. One was we got DIRECTV going full blast.

There is a seasonality effect that you mentioned, third quarter is good, first quarter is good, fourth quarter may not be as good. But suffice it to say, Chris that as I mentioned earlier I think all our channels are working very well and I expect that we will continue to see strong results over the next couple of quarters.

Okay. So likely down sequentially and then back up in Q1, if we follow the normal sequential pattern?

You are going to have to figure that out. (laughter)

Chris, just to add onto what Pradman said, we've got a lot of different dynamics going on that we haven't experienced in the past, right? So we now have 12 months of Jupiter service, Gen4 service under our belts.

We've got one cycle, if you will, of a new product. You've got new elements with wholesale that we haven't had before a year ago. You've got a new sales partner in DIRECTV that we've now had really going full bore for a quarter. So there's a lot of different dynamics and we're not totally certain that the historic seasonality will hold up. It may or it may not, so that's why we hedge a little bit.

Okay. That's fair enough and appreciate the color there. I think you also kicked off the media network's activity in Latin America. Is that correct? And where would that show up on the P&L?

That shows up in our international business.

So the international portion of Hughes.

Start at Hughes.

Okay. And you mentioned that the North American enterprise VSAT was good, but you didn't mention international. Should we assume --

International is strong, a strong, good backlog, but the foreign exchange variations and the strength of the dollar and the weakness of the rupee and the reais in Brazil impacted the revenues a little bit. So it kept it relatively flat with the same quarter last year.

Okay. And speaking of international, DISH Mexico looks like it's still limping along. When do you expect to see an impact from the new carriage rules that went into affect I think last quarter in Mexico?

We're optimistic that with the launch of locals on the service in DISH Mexico that we will see some growth in that area. But we have to prove that out and see that it happens. But we are optimistic that it will get there.

Okay. And not to get too far out in front of the skis, but with TVT, when that get signed and inked and you've got a long-term relationship in place, is it fair to assume that some point in the future you would most likely construct your own satellite specifically for that 45 degree slot to replace the temporary Echo 15?

That's certainly the right assumption. Yes, once we get everything done. Certainly we thought EchoStar 15 would be an interim solution, but there's a lot to be done between now and then.

Okay. Dave, the SG&A down 10% year-over-year and you mentioned some of the cost cutting initiatives from the past year. When I look at the SG&A and putting aside seasonal effects, is this a fair level -- I should say SG&A operating expenses. Is this a fair level on a go-forward basis or were there some one-time benefits to the quarter that lowered OpEx?

No, I don't think there were any significant one-time items in the quarter. Certainly, I think over the course of the last year there have been some one-time items, but I'm not aware of any real significant -- you've always got one-time items, it's a matter of how significant they are. But, no, I think -- I would see this as a relatively clean quarter from that standpoint.

Great, congratulations on the result, gentlemen.

Thank you.

Adam Spielman, PPM America.

Thank you. Just a couple quick ones. Just trying to understand, you'd mentioned the $12 million gain in the prior quarters, is that booked through other -- is that the other income that we're seeing in the prior quarter or did that run somewhere else in the income statement?

Yes, that would've run through other income.

I got it. So for doing our own calcs and above the line, that's not in there. Okay.

Right.

Great. And then you made a comment about declines in mobile satellite revenue, I just didn't catch what you said. Could you repeat that?

Yes. You want to elaborate on that, Pradman?

Yes. Our mobile satellite segment as we've said many times in the past is an opportunistic segment. We get these major system contracts and so it tends to be lumpy. Wherever right now we are in the low end of that lump, some of our old contracts have completed the work and the new ones haven't come in at the speed -- at the rate that we'd like.

So our revenue and profits in that sector this quarter compared to the same quarter last year are lower. And that's one of the effects that Dave mentioned in the total revenue off use.

Okay. So this is sitting in the used non-consumer business?

Correct.

Yes. Hughes, basically we have the North American business, the international business and the mobile sat business. So this is in the Hughes mobile sat business.

Got it. Okay. And then just finally on -- one more on the strategic investment view. Do you guys look at large-scale or outright acquisitions of a public company any different than you do the strategic joint venture that you're undertaking right now? How should we think about, as you evaluate all of your options, is there any area that you are focusing in terms of size, the investment that you make?

No, I don't think so. We continue to evaluate a lot of different opportunities. As Mike said earlier, we are going to continue to be primarily focused on the satellite space and looking for opportunities there. If the right opportunity came for an M&A deal versus an organic growth in terms of the JV, we would certainly have an interest in that and would look at it.

And there are things that we've looked at and some things we've decided to take a pass on because it wasn't the right fit. Other things we've taken a closer look at, but just weren't comfortable with the price points that some things have gone for. So, yes, if your question primarily is would we consider M&A over organic the answer is yes.

I think you've got to look back at our history a little bit, because certainly the Hughes acquisition was a big step forward. It was a difficult negotiation and then integration. But the guys have done a terrific job at Hughes.

We're very pleased with -- it met the objectives of diversifying our revenue and strengthening us technology-wise. So it's certainly obvious assumption to believe that we're going to continue down a path similar to that for investments in the future.

Yes, and if you look before that even we had Sling and we had Move Networks were deals that we did once again taking technology we found interesting and incorporating it into our overall portfolio.

Great, thank you.

Chris Quilty, Raymond James.

Thanks, circling back, Mike, you mentioned EchoStar 18 I believe in your script?

Yes.

And I think that's a Loral LS-1300 large GEO. Is that potentially a DBS satellite that you could use for the 45 degree?

No. EchoStar 18 right now has a set of missions, one of those missions theoretically would allow it to be deployed, based on the structure of the spacecraft, to a number of slots. But right now it's under development for DISH Network and for DBS service.

And to be clear that -- we are managing the procurement, the construction and ultimately the flying of Echo 18, but that is a DISH satellite.

Got you. And that's why I don't see it on your balance sheet?

Right.

When are they going to start naming them DISH something instead of EchoStar?

(laughter) I don't think they are.

We are going to start naming them DISH 1. (laughter)

Speaking of stray satellites, can you give us a little insight onto what you have going on at the 103 degree slot with SES and CL and DISH?

I think it's an eight-slot development deal and we're not going to comment on it beyond that.

Okay. But you're bearing some costs associated with the transponder lease without any revenues at this point, correct?

There is a transponder lease associated with that, once again for development purposes.

Okay. And I think TerreStar hopped onto your balance sheet this quarter at $10 million or some ridiculously low number. Can you give us a background of how or why it would show up on the balance sheet this particular quarter?

Yes. If you go into our related party section there is a description of the arrangement that we have with DISH regarding TerreStar 2. And essentially we are funding some construction work there in exchange for certain rights.

There were asked assets -- DISH acquired some assets that were ground-based and we know we've developed enough satellites that if you just let it sit in a warehouse somewhere it continues to depreciate and eventually becomes obsolete. So we've been working with DISH to maximize the opportunity for those ground assets that they acquired.

If I remember correctly, Hughes actually made the ground-based beam forming system for that satellite which is an S-band technically.

It was TerreStar 1.

To be clear they did it for TerreStar 1, which is in orbit. What we're looking is TerreStar 2 that is still on the ground.

So DISH has the one in the air, you have the one on the ground?

Well, we have certain rights associated with the one on the ground.

Okay. Fair enough, though still don't quite know what you're doing there. (laughter) We'll wait to be surprised.

Then we accomplished our goal. Just hope we know what we're doing there.

Okay, that's good enough. Thanks, guys.

(Operator Instructions)

There are no further questions. I will now turn the call back to management.

Yes, we'll go ahead and terminate the call and, again, appreciate everybody supporting us this morning.

Have a great day.

Thank you all for participating in today's conference call. You may now disconnect.