EchoStar Corp (SATS) 2014 Q1 法說會逐字稿

Good morning. My name is Cherice and will be a your conference operator today. At this time, I would like to welcome everyone to the Q1 2014 earnings call for EchoStar Corporation.

(Operator Instructions)

After the speaker's remarks, there will be a question-and-answer session.

(Operator Instructions)

I would now turn the conference over to Deepak Dutt. Go ahead, Deepak.

Thank you. And good day, everyone. Welcome to EchoStar's first-quarter 2014 earnings call.

I am 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; Dean Manson, General Counsel; Grant Barber, CFO Hughes; and Tom McElroy, Controller.

As you know, we invite media to participate in a 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 request -- rather that you respect.

Let me turn this now over to Dean Manson for the Safe Harbor clause. Dean?

Thanks, Deepak, and hello, everyone. All statements we make during this call that are not statements of historical facts constitute forward-looking statements, which involve known and unknown risks, uncertainties, and other factors that can 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 statements. We assume no responsibility for updating any forward-looking statements. I'll now turn the call over to Mike Dugan.

Thank you, Dean and Deepak. First, I want to thank all of you guys for joining us, or guys and gals, for joining us on the call today. I know you've got a ton of other companies to follow and your interest in EchoStar is very much appreciated.

I'll first give you a brief overview of our progress the first quarter of 2014, and then Mr. Dave Rayner will follow up with some specifics about our financial results. Once again, we had another solid quarter with $826 million of revenue, compared to $795 million in the first quarter of 2013.

We also had another quarter of subscriber growth at our used consumer business. We are pleased to announce that we closed our satellite transaction with DISH that was discussed in last quarter's call. Finally, we closed on an agreement to expand our broadband consumer service to Brazil.

Specifics on EchoStar Technologies, we had previously made several exciting announcements relating to our set-top box and Sling product lines. In the first quarter, we launched a product called Super Joey for DISH, which expands the already Hopper whole-home DVR system or network from a three tuner system to a five tuner system.

Additionally, the virtual Joey software application for certain models of LG Smart TVs and the PlayStation 3 gaming console was launched in the first quarter, this allows those devices to run off the Hopper as if it was a Joey. The whole-home experience includes live TV recordings and navigation, and with the expansion to five tuner's, gives a dramatic improvement along with PrimeTime Anytime.

These innovative enhancements offer flexibility and content access unlike any other products still in the marketplace. In addition, Channel Master introduced the EchoStar designed DVR+, and ultraslim, over the air DVR with an integrated guide for all content. The ability to host an external hard drive and, of course, it's fully Sling compatible.

We also launched the Slingbox 350 for retail sales in Mexico with our distribution partner Eckart Crossroads at leading retailers, including Costco, Sony, Sears, Liverpool, and others, and directly via the online store.

Turning to our used consumer Internet service business, we had another solid quarter with 54,000 net subscriber as growth came through contributions from all of our sales channels including our wholesale side. Since the launch of our broadband Gen4 service on October 1, 2012, we have added a net of 319,000 subscribers, and we ended the first quarter of 2014 with 914,000 subscribers.

Our used Brazilian subsidiary entered into a 15-year contract with Eutelsat for the use of the entire Ka-band capacity available for Brazil service on the upcoming Eutelsat 65 West A satellite, scheduled to be launched in early 2016. The satellite will generate 24 gigabits of capacity and will cover a significant portion of the Brazilian population.

High-Throughput Jupiter Technology from Hughes will be deployed for the ground system and customer premise terminals. This project will be a springboard for us to provide broadband service to consumers across Brazil. As many of you already know, our Brazilian Hughes subsidiary has been serving the enterprise market for many years and this new consumer service will be a great complement to that service.

Hughes non-consumer order input in the first quarter of 2014 was again strong with $190 million of new orders, compared to $122 million in the first quarter of 2013, for an increase of 56%. Key order were from Charlotte Russe, Xplornet, Young Brands, GTECH, and Saudi Ministry of Foreign Affairs, SEC, Baja, Nextel, Seduce, Telemar, Elko, State of Bank of India, Taria, and Inmarsat.

Strong order activity resulted in order backlog of approximately $1.2 billion for our Hughes business at the end of first quarter of 2014, that's a 15% increase over the backlog at the end of first quarter 2013. These backlog numbers do not include our consumer business.

In the EFS business unit, we signed an agreement with the Space Systems/Loral to build EchoStar XXIII, a high-power, flexible Ku-band satellite capable of providing service from any of eight different orbital slots. This satellite will use the existing bus from CMB sat, which we placed on hold several year ago. Launch is planned in 2016.

The EFS business development teams have also been busy with follow-up activities on the Solaris Mobile acquisition, which we closed in December. Solaris is a licensee of two 15-megahertz blocks of S-band spectrum in the EU. As a result of the Solaris acquisitions, we entered into an agreement with DISH to complete the buildout and purchase of the TerreStar-2 satellite to provide services to the EU market for voice and data communications.

On March 1, we closed the previously announced transaction with DISH, which we acquired five of their satellites. As a result of that transaction and other new sales, the SS contract and backlog was $2 billion at the end of the quarter. Dave Rayner will comment further on this transaction.

I want to address briefly the matter relating to the lawsuit filed by our competitor ViaSat against Space Systems/Loral. ViaSat alleged many, among other things, that SS/L infringed three patents and breached its contractual obligations through the use of this patented technology to manufacture EchoStar XVII, previously known as Jupiter 1.

A jury trial was held in the case in March and April 2014, and the jury found that SS/L directly infringed the patents and breached certain agreement with ViaSat. While we were not a party and are not a party to this case, we have been following it.

We understand SS/L and Loral disagree with the verdict and intend to pursue all available avenues to have it overturned. SS/L is currently building EchoStar XIX for us. We will not know whether EchoStar XIX will be impacted, and if so, how until there are further developments in the case.

While I completely understand that as investors you have an interest in how these legal issues could affect our business operations, we hope that you will understand that at this time, we're really not able to offer further comment on the matter. So as you can see, we started to deliver on our commitment to invest for growth while also achieving our shorter-term financial goals.

We are well-positioned for a strong 2014. I will now turn things over to the CFO, Dave Rayner, and let him talk to specific financial performance. Dave?

Thank you, Mike. I'll make a couple comments on our financial performance and then we'll open it up to questions. As Mike mentioned, EchoStar revenue in the first quarter was $826 million, compared to $795 million in the first quarter of 2013. This growth was a result of strong growth in ESS and Hughes revenue, partially offset by a decline in EchoStar Technologies' revenue.

EBITDA was $192 million in the first quarter of 2014, a 12% increase over the first quarter of 2013, with all three segments contributing to the growth, partially offset by a large one-time gain that we recorded last year which results of a sale of certain investments. For the three operating segments, EBITDA increased 30% over the first quarter of 2013.

Net income attributable to EchoStar common stock was $12.7 million, compared to $3.5 million in Q1 2013, and diluted earnings per share were $0.14 in Q1 this year, compared to $0.04 last year. EchoStar's capital expenditures in the first quarter were $114 million, compared to $72.6 million in the first quarter of 2013. The majority of the spending was on satellite construction and Hughes consumer CPE.

With the increase year over year being the result of spending, primarily result of spending on EchoStar XIX. Cash and marketable securities at the end of the quarter were $1.7 billion, an increase of $87 million from the beginning of the year.

Specifically, on each of the business segments, EchoStar Technologies' revenue in Q1 was $406 million, compared to $427 million in the first quarter of 2013. The decline was primarily due to lower equipment sales through our international customers. EBITDA in Q1 was $39 million, a growth of 30% over Q1 2013, driven primarily by lower expenses this year.

Hughes' revenue the first quarter of 2014 was $315 million for a growth of 9% over the first quarter last year. This growth was primarily from increases in consumer service revenue. Hughes EBITDA in the first quarter was $82 million, an increase of 28% over last year, primarily due to strong revenue growth and improving margins in the consumer business.

The consumer business had another strong quarter, as Mike mentioned, with 54,000 net adds and we ended with a total of 914,000 subscribers. EchoStar satellite services revenue was $101 million for the first quarter, a growth of $36 million over the first quarter of 2013, primarily the result of additional revenue from applied Hughes satellites that we acquired from DISH effective March 1, and the revenue from the lease of Echo VIII which started in the second quarter last.

ESS EBITDA in the quarter was $85 million, a growth of 31% over last year, directly as a result of the increased revenue. In our all other segments where we report gains on sale securities, elimination for inter-segment sales, and other corporate transactions, EBITDA in Q1 was a negative $13.8 million, primarily due to the lease costs associated with the Echo XV satellite, which is used at the 45 degree slot for Brazil. The EBITDA $12.9 million last year was due primarily to the large gain on the sale of certain investments.

As you are aware, on March 1, we completed our previously announced transaction with DISH whereby we acquired five satellites from DISH in exchange for tracking stock issued by HSSC and EchoStar that tracks 80% of the assets and results of our retail consumer broadband business. Which we refer to as the Hughes Retail Group, or HRG.

The result of this transaction is the tracking stock received 80% of the economic benefit of HRG while common shareholders received the other 20%, in addition to all the economic benefit of our wholesale consumer broadband business, which includes wholesale economics in the HRG subs. In addition, the five satellites generates significant cash flow from leasing them back to DISH.

In our 10-Q filing, we have provided attributed financial information for the Hughes Retail Group as a separate exhibit in our filing. As your review of this financial information, I would like you to note that the HRG tracking stock was issued on March 1, 2014. As a result, the attributed financial information for HRG for the first quarter only includes one month of results under the new HRG policy statement, which revised the basis for the transaction between HRG and the rest of EchoStar.

The other two months for the first quarter, as well as prior period, reflect actual costs incurred for certain items, or are based on allocation of actual costs incurred from shared resources. An example of the differences this creates would be, as of March 1, HRG pays a wholesale charge per subscriber for the Hughes Net service, whereas prior to March 1, HRG would have had an allocation of network operating costs and depreciation on an asset, including satellites used in delivery service.

Business depreciation on the financial statements historically would have been included a cost to give so. Also, after March 1, there is an additional markup incurred by HRG on consumer premise equipment. As a result of these difference, the attributable financial information prior to March 1, 2014 may not be directly comparable to the corresponding attributed information after March 1, 2014.

While I realize that this financial information may be difficult to understand because of the changes that occurred on March 1. Therefore, later today, we will be posting additional information regarding HRG accounting transactions on our website that we hope will assist you in understanding the impact of the transaction. We are now ready for the Q&A session, so let me turn it back over to the operator.

(Operator Instructions) Jason Bazinet, Citi.

Thanks so much. It may be an odd question to start off with. Regarding the transaction with DISH that you announced, you did a good job explaining the benefits to both companies on the last call.

And I was wondering if there might be one other benefit that you could comment on. And the hypothesis is that if DISH does go down the path of trying to merge with DirecTV, now that you have five additional satellites, would that put you in a position to offer wholesale video services in the US the way you do in Mexico to help facilitate a merger, to the extent that government gets concerned about the monopoly position the pro forma entity would have in the non-cable markets?

And is there anything that prevents you from playing that role legally or regulatorily?

This is Mike Dugan. That is a very interesting question. However, most of the satellites acquired are currently fully leased back to DISH and currently provide guest service to DISH customers, either from the Western Arc or Eastern Arc. So I wouldn't attribute those additional satellites to giving us capability for wholesale distribution.

It is true that Anders and the ESS group continue to expand their service out of the ESS business unit for non-DISH type uses, but I wouldn't directly attribute the five satellites to preparation for any kind of merger by any companies to be honest with you. Dave Rayner, I don't know if you've got any other comments to add, but I think that's the right answer.

No. I think you are correct. That the satellites that we acquired are fully leased back to DISH. That there is no excess capacity nor frequency license that we could use for any sort of alternate wholesale service off those satellites.

Yes. I hope we answered your question.

No. That's perfect. Thank you very much.

Okay.

Andrew Spinola, Wells Fargo.

Thanks. I had a question about the Brazilian video business and maybe where you stand on that right now?

Does the announcement that you're going to pursue a broadband business in Brazil lead us to assume that you will go forward with the video business, either alone or in a partnership? Or are these two opportunities completely separate?

Well, they're certainly not separate. I mean we work pursuing broadband in Brazil, actually prior to the pursuit of the slot and the DBS business, so we find Brazil a very interesting market as a lot of people do.

The reason we decided not to comment very much on the DTH process in Brazil is we're going to say the same thing we said in the last two conference calls, which is we don't have a partner. We're working on it.

We have put a lot of continued efforts this quarter into locating the ability to uplink out of Brazil, which we think will be a requirement for any kind of service launch. So a lot of the infrastructure work and actually the development work for set-top box and so on continues on pace, but I don't have anything exciting to announce from a partnership standpoint at this time.

But it's certainly still on the radar, hard at work across the organization, just not much to communicate. Got it. And then on your CapEx guidance, you had previously said $800 million to $825 million, excluding Brazil.

And I'm wondering, you came in lower than I would've thought this quarter, and then also does Eutelsat 65 count or not count because it's Brazil? And how does XXIII fit into this? Where do you stand with your CapEx guidance right now?

Yes.

Dave, why don't you talk about that. Yes, I didn't upgraded it Andrew because frankly there was nothing to update. We are still comfortable with that range. The Eutelsat satellites is not part of the exclusion for Brazil.

When I say not including Brazil, that's not including that DTH project. But as I look at our CapEx for the year, I still think it's going to be in that same range, probably more likely towards the lower end of the range, but that $800 million to $825 million I think is still a good number as we sit here today.

Great. And then just one last one for me, after the HRG transaction, I guess we assumed that maybe there was something in the works. And so, I'm just wondering if was there a transaction that maybe didn't work out? Or are you still looking and or negotiating other transactions?

Well, I think -- first of all no. There wasn't a transaction that didn't work out. Okay? So -- but certainly the transaction is based on preparing us for bigger and better things.

And part of the reason we have a business development organization under Ken is because his mission is to go out and look at a number of different opportunities for us to invest our capital. And we think that transaction definitely gave us a leg up to be able to look at bigger things and we're excited to continue that work, but I don't have anything to announce today.

Thank you very much.

Thanks Andrew.

Chris Quilty, Raymond James.

Thanks. I wanted to dig into a little bit the international opportunity. It looks like the numbers, at least equipment, going into DISH Mexico continue to decline. Down I think from like $15 million to $8 million in the quarter.

Do you still expect to see a lift in that business from the restrictions that the government lifted about broadcast content? And their ability to provide local channels?

We're still excited about DISH Mexico. I think I'll let Mark talk about. I think we had a seasonality issue on the set-top boxes rather than major reduction, but, Mark, do you want to talk about that?

Yes. I think the big thing is is our ability to put local channels up. I mean, we had tremendous growth when we launched the platform, but our big handicap is we had no local content. It's like the equivalent of having no ABC or CBS on your platform in Mexico.

So with the rules and regulations change, we are going to be able to launch some of those channels and we have seen some good growth since we've done that. And our next horizon will have to be hi-def and see how we expand into hi-def.

We tried to get it up market it in some of our customer base in Mexico, and the team in Mexico is working very hard on that and they are doing a pretty good job. So, we continue to expect some growth in there, mainly because of the locals right now.

And do you have the right satellite capacity on orbit for increasing HD services and other potential services?

We certainly have some capacity for growth plans in Mexico. There's certainly a limit to that over time. But as the business grows, I'm sure that will be able to find some capacity or lease some capacity from some other spots to help expand their business over time.

Okay. And the CNBC star, the reengineering of that satellite into Echo XXIII, would that satellite have the ability to flow into the slot for Brazil and replace Echo XV?

Well, as you know, we built a ton of satellites to date. From EchoStar I to what we're building now. We've learned, because of the Eastern-Western Arc requirements, because of the diversity of all of the satellites up there to make satellites capable of going to a diversity of locations, and that's done with developed technology by Loral and adjustable reflectors, so on and so forth.

And so, there's a ton of flexibility on XXIII. I do believe one of those eight locations could be allocated to Brazil. But we actually just started construction of the satellite, so everything's not finalized at this moment.

Okay. And with regard to Echo XIX, in light of the court judgment, does it make sense at this point to just begin implementing some kind of a workaround to the IP issues at issue?

To the -- you said the IP issues?

The -- there's three patents involved -

Right.

-- and the question is, does it make sense to go into Echo XIX now and begin designing around those patents? Or do just continue on the same path?

As you know, EchoStar has had a lot historic experience with patent issues from TiVo to other areas. The fluidity of this situation is quite different because we are not directly involved, so we are really not able to comment further on this point.

As always, however, if and when we have something material to report, we certainly will do that. But because it's with a vendor and not with us directly, it's almost impossible for us to comment further. And I'm not trying to duck the question, I'm just being honest here, so I'm sorry.

Okay. And finally on the Hughes business, where you happy with the subs, the net adds here in the quarter? Were you seeing any particular issues with churn or direct competition?

And just as a catch up here, Q1 is typically your strongest quarter of the year, so we should probably expect sequential down going into Q2?

I'm sure if you talk to the Hughes team, they'd tell you I'm never happy. And so, to say that I'm totally happy with the number of subs we've added, sure, I would've liked to have done more. I'm not sure about the historical Q1.

Pradman, do want to talk to that at all? I think we were pretty much on target, but there's areas to improve and we are going to continue to do that.

Yes. I think -- Mike, this is Pradman. We are definitely on target and, Chris, you are right, Q1 is traditionally our strongest quarter and followed by Q2, which is traditionally and are slowest quarter. So we certainly expect that trend to continue this year. But all in all, we are very pleased with our Q1 numbers.

And can you comment on with regard to the shift between wholesale or retail business? It looks like your equipment sales for wholesale were down going into the quarter here?

Yes. That's sort of varies quarter to quarter depending on the amount of inventory that DISH has and in a particular thing. So the number of units they take will not directly be proportional to the number of subs we actually sign up that quarter.

It's also a function of the inventory there at any particular time. So I wouldn't read too much into that.

Okay. Great. Thank you very much.

Thank you.

(Operator Instructions)

Amy Yong, Macquarie Capital.

Yes, hello. It's Andrew for Amy. So I wanted to ask you on -- do have any timing around offering services in Europe through Solaris? And secondly, the Eutelsat 65 satellite is using some of the technology you are using and Jupiter 1 and I guess the future Jupiter 2.

I was wondering if there's any potential risk from the current or future litigation that ViaSat is undertaking with SS/L? And if you could comment on that? Thanks.

Well, I guess, Ken, you could talk about -- I really don't think we have any specifics to share on Solaris customer availability, but Ken or Anders, if you have got any update that you want to give, feel free.

Well, there's certain regulatory milestones that the European commission will hold Solaris accountable to. Those milestones basically relate to the establishment of the satellite infrastructure and then the commencement of the offering of services.

At a very high level, 2016 will be the year in which the infrastructure is established and the commencement of services will occur. Right now, we're on a trajectory to satisfy those milestones, so that's our expectation as well.

On the Eutelsat -- I don't know if we have anything specific to say about that, Pradman. As far as the patents and so on. I assume we don't.

No I don't think so. I think our answer is similar to what you mentioned on Jupiter 2 or Echo XIX. The same issues have to be resolved over the next few months.

Right.

Great. Thanks.

(Operator Instructions)

Well, if there are no more questions, I guess we can end the call, Deepak. It's up to you.

Yes, I think that is correct. Operator?

Yes, Sir?

We will end the call now since there are no more questions. And let me just close by thanking everybody for signing onto our conference call today and good day.

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