EchoStar Corp (SATS) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2014 conference call.

(Operator Instructions)

Thank you. I would now like to turn the call over to [Deepok Vett]. You may begin.

Thank you, operator, and good day, everybody. Welcome to our second-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, EVP, Corporate and Business Development, and Cleo Belmonte, Associate General Counsel. As you know, we invite media to participate in listen-only mode on the call, and ask that you not identify participants or their phones in your reports. We also do not allow audio taping, which we ask that you respect.

Let me now turn this over to Cleo Belmonte for the Safe Harbor disclosure. Cleo?

Thank you, Deepak, and good day, 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 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. Let me now turn the call over to Mike Dugan.

Thank you, Cleo. I would like to point out that although Cleo has done an excellent job, we are missing Dean Manson this morning. He's on vacation, and don't worry, he's still with us. So let's go on.

All in all, our financials for Q2 are positive, and continue to be consistent with our expectations and forecast. EchoStar revenue in the second quarter of 2014 was $880 million for a growth of 6% over Q2 last year, and EBITDA was $233 million per growth of 50% -- 56% over Q2 last year. Dave Rayner, our CFO will address our financials in more detail a little bit later in the call.

This call we are changing our format, and we are going to have our three major business segments and their presidents report on their own results, and give you their firsthand perspectives. Today we will start with Mark Jackson, President of ETC, who will then be followed by Anders Johnson, President of ESS, and then Pradman Kaul, President of Hughes. Finally, Dave Rayner, our CFO, will then give you a better overview of our financials. As usual, we will end the call after a brief question-and-answer session. Mark?

Thank you, Mike.

We are pleased to announce that once again we have extended our exclusive equipment partnership with Bell Canada through the end of 2015. Bell has been a longtime partner, and we are thrilled to continue to offer our superior products to their DTH service.

Our joint venture with Dish Mexico continues to see solid growth. Their complete channel lineup of local TV rebroadcasting continues to drive customer acquisition, control churn, and drive demand for EchoStar set-top box equipment. We are continuing to work with them on enhanced features and services that will help them respond to the competitive pressures in Mexico. We are excited with the improved trends of Dish Mexico, and look to drive substantial growth for both companies.

Q2 was an extremely eventful period with respect to product launches to our customers. Specifically, Dish network launched a highly anticipated Wi-Fi Joy to their customer base. Wi-Fi Joy is a wireless version of the whole home DVR client that offers installation of Dish network programming in areas of the home where a wired install is not preferred, or cannot be achieved. The best-in-class solution offers a quality of service experience that is second to none, and leverages the latest 802.11 AC wireless standard that delivers throughput speeds that are optimal for HD video distribution in the home. Obviously, this product is consistent with our commitment to ensure Dish network customers enjoy an outstanding television video experience.

Additionally, to follow up on our Q1 announcement of the flash-based DVR plus product for our customer Channel Master, we expanded this product line in Q2 by offering a 1 terabyte hard drive version that significantly expands the DVR capabilities of this product, and now offers storage to enhance the customer experience. Customers are now able to record live content onto the hard drive that helps expand the functionality offered to the consumers. Channel Master has also expanded their distribution partnership to include Amazon, and Best Buy online for their products.

We also announced two new Sling retail TV Anywhere solutions that dramatically strengthen our offerings in this consumer space. The new Slingbox M1 and Sling TV solutions were launched in mid July to our retail and online partners. These new products, along with just launched It's On advertising campaign, and the redesign of our Sling website will help enhance Sling's leadership position in the consumer market as the ultimate entertainment solution for those customers who desire a no compromise experience while consuming their home TV content on PCs, remote television, and mobile platforms.

With a MSRP of $149, the Slingbox M1 offers tremendous values, as well as improved feature set that now include wireless connectivity to our entry-level product. The price of $299 MSRP, the Advance Sling TV offering positions Sling as a great living room TV solution with a highly graphical on-screen programming guide that exploits social media feeds for a powerful personalized viewing experience, as well as a platform for future entertainment-based streaming applications.

The early results of these new products has been very promising from a sales standpoint, and from a review standpoint from all the industry trade racks. Finally, on our Sling OEM business, through our partnership with ARRIS and their Moxie whole home solution we have just launched the MS4000 with two cable MSOs, Service Electric and Comporium. With many other cable operators trailing, this fully integrated TV anywhere user experience, we expect solid growth over the remainder of the year for this business line.

So with that, let me turn it over to Anders Johnson

Thank you, Mark.

Our financial results for the quarter were very strong, and obviously impacted by the five satellites we acquired from Dish in the first quarter, which will then leased back to them. We are continuing to move forward with a number of initiatives that we mentioned on previous calls. We currently have three satellites under construction for EchoStar, plus EchoStar 18, which we are managing for Dish. EchoStar 21, also referred to as previously as TerreStar-2 is an S-band satellite planned for use by our Solaris mobile venture in Europe, with a planned launch in the first quarter of 2016.

EchoStar 23, which we announced in the second quarter of this year, is a very flexible Ku-BSS satellite, that can fulfill the multiple missions capabilities, including the deployment at the 45 degree west slot for Brazil. And that is planned right now for launch in the third quarter of 2016. Pradman will be commenting later on EchoStar 19, also known as Jupiter-2, but all satellites that are under construction plus the 65 degree west payload hosted on the EUTELSAT satellite, we have, obviously, got a very full agenda on the spacecraft side. All of the satellites are progressing according to their original construction time lines, and at this time the launch of those satellites are all nominally on target.

One of the launches on our manifest is on the ILS Proton, although today no commercial launches has been impacted by the situation between the US, Russia, complicated by the Ukrainian activity, but we are very closely following those developments, and considering alternative launch platforms. Finally our service arrangements for AMT 15 and AMT 16 satellites with SES are on scheduled to expire at the end of the year and early 2015, respectively.

We are currently working with SES on an extension to these arrangements, as well as a long-term replacement solution for 105 West orbital location. Until we have an agreement in place, we potentially will be impacted with regards to our ability to grow the SES revenue on these on the satellites.

Now I would like to turn the call over to Pradman Kaul.

Thank you, Anders.

Hughes had a very strong second-quarter in all our business segments. In addition, our key strategic goal of expanding our Ka-band Jupiter platform all over the world continued to achieve unprecedented success. Consumer service revenues showed strong double-digit growth in Q2 2014 over Q2 2013, as well as for the six months ending June 2014, over the six months ending June of 2013.

Gross adds continued to be strong in Q2 despite the traditionally low seasonality of the second-quarter, reflective of continued strong demand in the market. Our churn across all channels was higher than we would have liked, especially in the wholesale channel, and is an area where we can improve. The impact of churn on the largest subscriber base obviously has an impact on our net adds. We ended Q2 2014 with 935,000 subscribers, for net adds of 22,000 in the quarter. Also as we start seeing some of our beams filling, growth in those beams will be slow.

After these results, we are adjusting our marketing efforts and will likely fill our beam in order to maintain our growth momentum. ARPU and margins continue to be strong, and contributed to the strong consumer service revenue and EBITDA. This quarter, we also achieved a significant milestone by shipping our 1 millionth Jupiter terminal in slightly less than two years after we started, a record for us in two-way data broadband business.

Our enterprise business had a record quarter for a order input. We booked orders in Q2 of over $373 million, for a growth of 81% over the second quarter of 2013. Let me highlight now some of the major orders we booked. Xplornet Communications, Canada's largest rural broadband provider committed to a lifetime lease for all of the Canadian satellite broadband capacity on EchoStar 19, our next-gen high throughput satellite due for launch in the mid 2016. In addition to satellite capacity, Xplornet will take delivery of satellite gateways operational and support services, and consumer user terminals in the program that's expected to be worth more than $200 million.

GTECH, the US's the largest lottery provider extended their service agreement with us by seven years through September 2022. Services include space segment of operations and maintenance for over 100,000 sites. Continued expansion and extension of contracts within our franchise-oriented markets, particularly the young brands which is KFC, Taco Bell, Pizza Hut and Chevron. Most of these new contracts include hardware upgrades and 36 months service commitments.

Our international enterprise business also had a strong quarter. We signed contracts with KA Internet and KA Satellite in Russia for the supply of gateway infrastructure to be deployed on the RSCCAM 5 Ka-band satellite. Based on Jupiter high throughput technology, this is the first of its kind of network delivering affordable satellite broadband for the eastern part of Russia.

Our Brazilian subsidiary signed a contract extension with TeleMark division of broadband services for approximately 3,200 sites. Our Indian subsidiary continued to expand their rural bank and ATM network. We now have over 100,000 sites in service in India. In the mobile side business segment, Globalstar signed an agreement with us to develop additional features to their radio access network, and we also signed an agreement with Boeing to develop and build user terminals for the NEXSAT system.

So in the six months ended June 2014, we booked new nonconsumer orders of $563 million, an the increase of 72% over the same period in 2013. This strong and balanced all-around growth in our orders contributed to our backlog growing to $1.4 billion as of the end of June, a 32% growth over the backlog as of June 30, 2013, and a [fevial] growth of 17.6% over the backlog as of March 31, 2014. As usual, these backlog numbers do not include our consumer business. Backlog is a leading indicator of future revenues, and we are very excited about its impact on our future.

Our Ka-band technology platform is now deployed with service available through us directly, or through our partners in a large part of the world. This includes the United States, Canada, Central and South America with Telafonica Media, Europe and Africa with Avanti, Middle East and Africa with Yassat, and to be deployed shortly in Russia with RSVC. In addition, we have a couple of other deals that will be announced during this quarter. The strategic advantage of being able to offer our customers global service on the same platform is obviously very important.

Now regarding our satellite Jupiter 2 Echo 19, construction is proceeding as planned. We expect to launch the satellite in early 2016 to augment capacity for our consumer business. Another key development this quarter was that we signed a 15-year contract with EUTELSAT to lease the entire Ka band capacity connected to the Brazilian service area on EUTELSAT 65 West A satellite.

Slated to be launched in early 2016, EUTELSAT 65 will host a Ka-band payload with 16 spot beams, which will cover a significant portion of the Brazilian population and generate approximately 25 gigabits of throughput. High throughput Jupiter technology from Hughes will be deployed for the ground system and customer premise terminals. EUTELSAT 65 will be our springboard in Brazil for broadband services to consumers and businesses.

I will now hand the call over to Dave Rayner.

Thank you, Pradman

As Mike mentioned, EchoStar revenue in the second quarter was $880 million, compared to $830 million in the second quarter of 2013, a growth of 6%. EBITDA was $233 million in the second quarter, up 56% over the second quarter of 2013, with all three segments contributing to the growth, partially offset by a one-time gain that we recorded last year as result of sale of a certain investment.

Net income attributable to EchoStar common stock growth was $33.8 million, compared to a net loss of $9.8 million in the second quarter of 2013, and diluted earnings per share were $0.36 this year compared to a net loss of $0.11 in the second quarter of last year. EchoStar's capital expenditures for Q2 were $156 million, compared to $86 million last year. The spending increase was related to satellite constructions, primarily EchoStar 19, EchoStar 21, and the 65 West satellite, and to a lesser extent early spending on EchoStar 23.

I am currently expecting our full-year CapEx to be in the $750 million to $780 million range, down from previous indications as a result of delays in some start dates on certain satellite programs. Free cash flow, which we define as EBITDA minus CapEx was $77 million in the second quarter of 2014, an increase of $13 million or 29% over the same quarter last year, driven primarily by the strong EBITDA growth, partially offset by the higher CapEx.

Now regarding EchoStar business segments, EchoStar Technologies revenue in the second quarter 2014 was $416 million, compared to $426 million last year, the small decline primarily due to lower revenue from equipment sales and uplink services to Dish, somewhat offset by higher equipment sales to Dish Mexico. ETC EBITDA this year was $42 million, growing 32% over last year in the second quarter, driven primarily by higher professional services billing, higher margins on equipment sales, and decreased SG&A expenses. Sequentially, ETC EBITDA grew 8.5%, and EBITDA margin expanded to 10.2% in the second quarter, compared to 7.5%.

Hughes revenue in the second quarter of 2014 was $330 million, for a growth of 5% over the second quarter last year. The growth was primarily from increases in consumer, international service revenue. Hughes EBITDA in the second quarter was $90 million, an increase of 23% over last year, primarily due to the strong revenue growth and improving margins in the consumer enterprise business. Year-over-year EBITDA margins at Hughes increased over 4 percentage points, and increased 1.4 percentage points from Q1 of this year.

EchoStar satellite service revenue was $129 million in the second quarter, a growth of 52% over the same quarter last year, primarily results in additional lease revenue from the five satellites acquired from Dish effective on March 1, and the lease of EchoStar 8 to Dish, which wasn't in place for the full second quarter last year. ESS EBITDA in Q2 was $112 million, an increase of $79 million from last year, as result of the increased revenue, and in addition to a $35 million impairment charge last year.

In the all other segment, where we record gains on sales of securities elimination for intersegment sales and other corporate transactions, EBITDA in the second quarter was a negative $11.9 million, primarily due to lease costs to Dish associated with the Echo 15 satellite, which is positioned at the 45 degree Brazilian slot. EBITDA was $10.1 million last year, due primarily to a sale of certain investments in the second quarter of last year.

In summary, our revenue is strong with generally increasing margins and EBITDA across all three business segments. We continue to have a very robust balance sheet, with approximately $1.7 billion of cash and marketable securities.

Let me now turn it back over to Mike Dugan.

Okay. So before we go to the question and answers, I thought I should speak to a couple of other important activities, status on previous calls, as mentioned in the latest news.

We have modified our arrangement with Dish network for the evolution and operation of a Dish digital service that's known as Over-the-Top. Under this new arrangement, EchoStar will continue to provide engineering and platform operation services to this Dish digital development, but we will no longer have an obligation to fund one-third of the ongoing cost of evolving and growing this important service. We continue to believe that real opportunity exists in the future of the platform, and I believe the new structure will allow us, EchoStar to focus on evolving the best technology and solution, while gaining the ability to utilize it for other areas of EchoStar operations.

In the new arrangement, we also retain a right to 10% of the value created by the growth of Dish Digital. The Solaris project that developed S-band, MSS, and Terra terrestrial spectrum in the EU continues to move forward. As Anders reported, the EchoStar 21 satellite, previously known as TerreStar 2 continues towards completion and is currently scheduled for a 2016 launch.

We continue our focus on meetings with the EU and member states to more concretely defined and harmonize the regulations around both the MSS and terrestrial spectrum. Our user organization continues to develop the required ground infrastructure technology and business plans for use in this key initiative.

In regards to our Brazil pay TV project as previously discussed, we have located Echo 15 to the 45 degree slot for ongoing development. Our approach remains to partner with a local company to provide pay-TV service, while they provide the set-top boxes, satellite capacity and related technology and services.

Finally, a couple quick comments on strategy. We continue to -- we intend to continue to explore opportunities for expansion into international markets through partnerships and joint ventures, with reputable and established local companies, and through acquisitions. Dish Mexico, the Brazil pay-TV and broadband initiatives currently underway, as well as the Solaris acquisition, are prime examples of this strategy. We arguably have the best set-top box and satellite broadband product lines in the industry, along with world-class operating platforms that will help us achieve this expansion.

Our Hughes business continues the expansion of their Ka-band Jupiter technology and perform all over the world -- in platform all over the world. As Pradman mentioned earlier, we have already deployed this directly, and through our partners in a large segment of the world with more to come. Our business development group is very busy looking at opportunities to expand our product capabilities, and in the international market. We have an outstanding management team in place to -- well -- did I say that?

Yes, you did.

We have a --

Pradman and I recorded it.

Yes, you helped me with this. Anyway, we have an outstanding management team in place to execute on these strategies, and I feel very confident we will accomplish them. It is now time for question and answers, so operator, would you please start that process?

(Operator Instructions)

Our first question comes from the line of Jason Bazinet with Citigroup

Yes. I guess, a two-part question. It seems like when you guys first separated from Dish, I think it was back in 2008, it was a little slow coming off the blocks, and it feels to me like the number of initiatives that you have working now is sort of accelerating? And if you could just confirm that that's true?

And then second on the -- when you did the transaction with Dish in May earlier this year, I think you talked about a giving you a bit more strategic flexibility. Would you say that that flexibility is sort of encapsulated, in terms of all the initiatives you just went through in the preamble to the call? Or are there more things that you are considering pursuing? Thanks.

Well, obviously from the list of projects we are trying to manage, and we are certainly looking at a ton of different things, both within the Hughes group and then within the legacy EchoStar group. So yes we definitely are accelerating our focus on new business.

Could you clarify the second part of your question, as to the initiatives that you were talking about?

Sure Well, when you did the transaction with Dish, I think you said -- at least when I think about it in simple terms it gave EchoStar more EBITDA and more cash flow in the near-term, maybe in exchange for a long-term call options on revenue and cash flows from the retail broadband business. So my question was is that incremental flexibility that you got, required to pursue all of the initiatives that you just outlined on the call? Or is there something else above and beyond that that you have your eye on? That's all.

Jason, this is Dave. No, I think certainly the initiatives that we've identified to date, or at least publicly identified to date certainly could be accomplished within the existing structure prior to the HRG transaction. So with that HRG transaction, we continue to have greater capability to pursue other initiatives as we see fit.

Okay. That's great. Thank you very much

Thank you.

Your next question comes from the line of Andrew Spinola with Wells Fargo

Thanks. On the increased churn in the quarter, can you give a little bit more color about what's driving this? Is this competitive losses to other technology things like that, or is it really just sort of concentrated in the wholesale channel for maybe distribution that is not working out, et cetera?

Well I think first of all, there has been a lot of discussion in the industry, I think most, if not all broadband providers are struggling with churn. Their customers certainly are trying different initiatives, there's competition, there's a lot of factors including Q2 that have in fact -- yes we aren't terribly happy with the amount of wholesale churn that's added into the numbers. But we are not happy with any churn.

And I can only tell you that because of the focus that we have got in place we are going to continue to do anything and everything, we can possibly do to make customers happy, and to sell to the right areas, and ensure that we make positive progress on churn. So is not unique to the satellite broadband, but everybody is focused on it across the industry, and that includes us.

Is it your sense that the problem with churn for you specifically is related to distributing the product to people that might not be appropriate for, i.e. people that aren't familiar with the data caps? Or do you have any sense of whether it's price competition from the RLX, or any other sort of pressure that's driving the churn?

Well, I think we have got data that says yes, some segment of it's related to the caps, and maybe a little bit of miss-selling, and we are certainly suffering through that as we launch the service and took off so quickly. But again, I think a fair amount of the churn is related to customers trying other options. And I wouldn't say necessarily, it's just a price competition, but yes there's a lot of competition out there.

Okay. And then just related to the issue around some capacity starting to fill up on some of the beams, is there any way to think about Jupiter-1 in terms of how much capacity is currently in use, and how much is remaining? Or with spot beams is it too difficult to sort of look at it that way?

Yes, this is Pradman. It is difficult to look at that way, because you can almost look at it beam by beam. If you look at the aggregate capacity of Jupiter, we probably are about 60% full, but that's 40% still remaining to be filled up over the next time.

But if you look at it beam by beam, there are some beams that obviously already saturated or close to saturation, and more beams will be hitting that stage over the next six months or nine months. But then there some other beams that are very lightly loaded, that will take a long time to fill up. So it's very difficult to talk about in the aggregate. You almost have to go beam by beam to discuss that.

Got it. Thank you very much

Your next question comes line of Amy Yong with Macquarie Capital

Yes, hello, it's Andrew for Amy, I just had a question on, first on Mexico, strategically can you comment on what's going on after American Mobile said they would not exercise their option for a majority stake?

Secondly, on Brazil, obviously Telafonica made a bid for GVT. Just wondering if anything has changed there, as far as what you're looking for a partner?

And lastly, the Cap Ex in Brazil would that slightly go up as you are putting in Jupiter technology onto EUTELSAT satellite? Thanks.

Well, I think TelMex publicly announced their response to the recent changes in the Mexican regulatory environment, and intends to sell certain assets and waive certain rights, and that included the right to acquire 51% in DISH Mexico. We are currently working with DISH Mexico and TelMex on evaluating how such a waiver might be implemented, and I don't know whether there is surely that much more to talk about.

It was driven heavily by the changes in the regulations, and what companies are required to do related to that. Brazil, Dave talked about the Cap Ex on the payload for broadband I guess. And although I can't give you specific outlooks on that we are focused on it, and we are certainly going to invest what we have to get that service up and running, and it's a longer-term strategy but --

Yes, outside of the satellite payments in 2014, we won't be spending any significant CapEx in Brazil in 2014. Obviously the majority of that, in terms of ground infrastructure will start happening more of that next year.

Great. And just one more question on, your net adds for the quarter just wondering you talked a lot about the churn on the wholesale side. But what about gross ads, are you seeing strength from both wholesale and retail?

Yes, I think we had a good quarter in Q2 for gross adds when you compared to Q2 of last year. But obviously as the beams start filling up, we expect that the gross adds will start declining over the next year. And when you compare to the corresponding quarter in the last two years, the filling up of beams is definitely going to have an impact on gross adds going forward.

So and that will obviously will then result in lower adds, lower net adds when you compare it with the comparable quarters in previous years. So that's probably the single most important factor in impacting gross adds over the next three or four quarters.

The other thing we want to make sure you understand, the same discussion you've heard from other providers, and that is as the base grows, the calculation for churn, you have got to take into account the size of the base that you're working. And every provider with large bases, whether it's DISH or whether it's now the Jupiter high-speed service, as that base grows, churn becomes a bigger issue, and we are focused on it.

Great. Thank you

Your next question comes from the line of Tim Quillin with Stephens Incorporated

Hello, good morning. With regards to the churn, is the churn within your retail business still similar to where it was four or five years ago, when Hughes was reporting as a public company around, let's call it 2% to 2.4%? And is the wholesale churn then north of 2.5% now?

Well, we don't really publicly disclosing our actual churn numbers, but then they do vary quarter to quarter. But they are in generally those regions -- in those areas.

Okay. And then on an ATC business on the margins. So the margin profile is clearly changed here over the past year. Maybe talk about what is driving the improved margins, and how sustainable is a 10% EBITDA margin in that business?

Yes, this is Dave. Let me make some comments and Mark can expand on it, if he wants. I think overall, we have got a little bit of a product mix change, a little bit more service-oriented and in some revenue areas, which is contributing to higher margin. In some cases we've got R&D spending that we are able to bill to customers, which is obviously helping the EBITDA profile.

So, overall, we have got some number of things impacting margin improve -- gross margin improvements. And on top of that, that ETC management is focused on eliminating expenses, where they are not producing revenue or won't produce revenue in the future, and that's why the SG&A is going down.

Mark, I don't know if you want to expand on any of that?

Yes, Dave, I think the only other thing I would add is we have been fairly aggressive on getting cost reduction on our product lines to help improve our margins also.

Okay. And yes, and then Dave on the Cap Ex, I mean, your new CapEx guidance still implies much higher spending -- excuse me -- in the second half than the first half. But maybe you could talk about as we get into it more specifically about what's driving that CapEx ramp-up, and what slipped out, that made you revise down the full year CapEx guidance?

Yes, I mean the second half is still going to be driven highly by satellite spending, all the programs that we have got in place are going to continue to accelerate. You have got Echo 23 that started only very recently here in the second quarter, so as that ramps up, you are going to have increased spending. You are starting to get into the guts of what's getting spent on EchoStar 19. So all the programs are ramping up.

What is really driven it down from previous estimates, we have had some delayed starts, not only on the programs that we have announced, but also some programs that we are still anticipating may be coming, and we will be spending on that. But very clearly, the increased spending pretty much across the board is going to be satellite related. That's really going to drive the increase, first half to second half.

And just to play devil's advocate I guess on the Brazil pay-TV venture, but -- I think you have been discussing it for a while, positioning for a while, and as you said you have Echo 15 that is already positioned. You're building a satellite albeit flexible one that could be used for Brazil. But is it -- maybe part of the difficulty of identifying a joint venture partner is that may be that market is not obviously needing another pay-TV provider?

I think the market needs a provider. I think the reality is, and you have seen the dramatic changes in the market whether it's the recent proposal on GVT, and some of the other things going on, it certainly a very fluid situation right now. And to be honest with you, we are trying to be very cautious and not make a misstep. And now it's changed so much, we kind of taken a short pause, and try to make sure we clearly understand the options for partnership. So that's about the best I can tell you right now.

Okay. Thank you, and then just two last quick questions. But one, Dave, could you talk about any run-off of depreciation that we should think, about as we model the depreciation amortization over the next couple quarters? I am thinking Echo 7 will be fully depreciated?

And then on R&D, remind me, it is a pretty significant declines this year, but remind me is that largely in ETC, or where you are able to -- where are you able to get that R&D efficiency? Thank you.

I mean the R&D is in both -- obviously we have R&D spending primarily in Hughes as well as ETC. The spending as it gets reported on the face of the financial statements, is not really reflective of all of the R&D that we do.

If we are doing research and development work, and we are getting paid by a customer, that cost ends up being cost of goods sold. It is still R&D work, we still own the intellectual property that gets developed and the technology, but it may from time to time get reflected as R&D spend is down. We are actually as a Company very focused on increasing our overall R&D spend, and increasing our engineering staff and looking at more advanced products.

Hopefully in some cases we will get customers to pay for some of that, in which case it will continue to show up in cost of goods. If we don't have an identified customer to fund that, then it will show up in the R&D lines.

But I wouldn't read too much into a P&L that says R&D is down. I think clearly as company, our R&D spending is actually on the rise.

And depreciation?

I don't have on those schedules in front of me unfortunately, I apologize Tim. I can follow-up later and help you with your model.

Yes, no worries. Thank you very much.

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

Thanks. I want to follow-up on the Hughes business both the enterprise side, and any changes or growth opportunities you see going there? And I'll follow-up with the retail side of the business.

Yes, I think lot happening in the enterprise world, globally as I mentioned in my initial remarks, we are expanding the deployment of the Jupiter platform in many, many regions of the world. And that's generating [operating] revenues by selling the equipment, but we are also offer services, either operation operating services or maintenance services, so both the hardware sales and the services revenues are increasing nicely with that.

Our international business with our three subsidiaries in Brazil, Europe and India, are also doing very well, showing growth, lot of opportunities. So we are very excited about our enterprise business. And obviously, leveraging off our consumer business because of the volumes that we generated in our consumer business in the United States, gives us a significant advantage as we use the same platform in another part of the world.

And I missed the beginning part of the call, but was the step up in the backlog entirely enterprise applications, or was there anything in there on the mobile satellite side?

It is primarily the enterprise.

Okay. On the consumer side of the business with the churn issue, are -- do you see any signs of churn between yourself and ViaSat, or can you track that, and is it almost entirely going to terrestrial or wireless solutions?

I think it's anecdotal. We don't have sound information on that. But from the anecdotes, I would say that there's not much between us and ViaSat with each other.

I think it's more people just deciding that -- you can break it up into collections and performance. On the collection side, people decided that they don't want to pay that kind of money for broadband, and is not really necessary.

So they decide to churn out, or they can afford to pay which is a second element. And there is a small piece where people do move to cable or fiber in regions where it's available.

Okay. And are you seeing with the economic back drop, any kind of an increase or an improvement in customer's ability to pay? Sort of issues with the pocketbook?

I don't think we see a significant change there.

We wish it was that way.

I think it's been relative -- we track it every month, and I don't think we are seeing much movement in that aspect of it.

Yes, I think what we have seen on non-paying churn if you will, is that the impact of more seasonal than anything else, and what we haven't seen a lot of impact there. I mean, it is interesting though, what we are seeing is an increase ARPU as Pradman mentioned in his comments that, that ARPU obviously on the retail customers, is exceeding what we really had planned. And I think it is a positive sign.

And what's important with what Dave just said, is even though we have a higher churn than we would like, our revenues and EBITDAs in the consumer business because of the increased ARPU and improved margins are really doing very well.

I would agree there. A question on the ETC segment. It looks like for the first time in a couple years, you actually saw an uptick in non-DISH customers Bell TV in your international business. Is that anything other than just a long overdue recovery, or are there other trends at play, and do you see potential for new customers?

This is Mark. Basically what we are seeing is with the launch of local stations on DISH Mexico, DISH sales in Mexico have gone up fairly substantially. And we are working hard with them to try to continue that upswing, but we will have to see how that goes longer-term. And then yes, we are definitely working aggressively to get more customers in the set-top box business from primarily overseas, and then we are also looking at a couple new business segments that we could possibly get into.

Okay. And the -- I think you mentioned during the call, Mike, that you changed the relationship on the DISH Digital, which I know DISH on their call was now promoting that. If I recall you had a higher equity stake in that business previously, and was it stepped down to 10% from a higher level?

Yes, it was stepped down. What we ended up doing is effectively, is going to a very similar structure to the way, Mark, does virtually all his development for DISH network, whether it is set-top box or infrastructure, we just pretty much adopted that relationship on the DISH Digital development. And there is a lot of synergies there, between the infrastructure Mark is doing for Sling, the infrastructure that -- continue to enhance the Hopper platform in the applications, and all of the things going on there with the infrastructure, there is a fair amount of commonality there.

So we went back to a similar structure, to that where there is a bit of margin on the development and delivery that we make to DISH. And an exchange for that -- the difference is, we don't necessarily have a 10% ownership in all the other businesses that Mark supports. So we are pretty pleased with the changes there.

Got you. And final question on Brazil -- it sounds like you're committed to a partnership and will not greenfield something there. But is there something that you think is going to change in the marketplace, maybe it's the post World Cup environment, or expectations are set lower, or what dynamic is going to change? It has been a pretty long slog in trying to find a partnership?

Yes, well, I would say it's been long and we can't pretend that it hasn't been. On the other hand, I have been involved with EchoStar for over 20 years, and one thing I have learned is I never say never about anything. So we are going to continue to do our very best to monetize that investment, and we are going to work all avenues.

A partnership is highly preferred, is because we learned that you really need a strong presence on the ground, with experienced people that fully understand the market. The only caveat there is the [Hughes] organization has a good on the ground presence already in Brazil, so it's a little bit different than some of the other areas of the world. But we are going to continue to focus on partnership.

Okay. But you are going in the building out a retail infrastructure to support the broadband with the EUTELSAT payload correct?

That's true. But it is a hosted payload, it is not at -- Pradman has talked about it actually on previous calls. There's opportunity for consumer, but there's also opportunity for wholesale or enterprise use of the payload. So we think that's a pretty safe investment.

And Chris, I mean there are significant differences behind a pay-TV operation and a broadband operation. And as we look at Hughes and their ability to do retail sales on broadband, you can do that without having to get programming agreements, and without an necessarily having the same scale that is necessary to make money on a DTH platform.

So there are some significant business differences and business model differences between the two, where we are comfortable that the Hughes current personnel and infrastructure have the ability to manage a broadband business, whereas the marketing and the programming requirements on a DTH, we continue to believe we are better served with a local partner.

Got you. All right. Good luck with that effort.

Thanks Chris

Your next question comes from line of Walter Piecyk with BTIG.

Thank you. I just want to get an update on -- I just want to get an update on Solaris. I don't paid attention -- I am sure you have, on what Inmarsat is doing as far -- I guess, they are trying -- I forget the words they used -- extend the value or retain the rights on that spectrum. What have you been doing, and maybe you could comment on what Inmarsat's been doing, and is there a possibility that you could -- at a minimum partnership with them in their plans to do this ground to air program with that spectrum? Thanks.

I'm going to let Ken and Anders fill your field the questions

Yes, I think -- obviously Inmarsat has come out and stated that they're looking to do an air to ground type effort with their S-band. They are building an S-band, or have announced they are building an S-band satellite, but it seems their focus is on using the terrestrial for air to ground. Our focus is two-fold.

I think right now, we are very focused as Anders mentioned. We have got a satellite under construction. We are working with the Hughes mobile set group to develop the ground infrastructure for an MSS service.

We are looking at multiple alternatives there, including voice type applications and data type applications. In addition, we are really working with the EU and the member states on the regulatory front to get the CGC, which is the complementary ground component or the terrestrial spectrum, getting that harmonized across all the member states. So those are the focuses, and really we are planning to have an operational business by kind of mid 2016 for the regulatory requirements.

So do you not think there is an opportunity maybe -- could -- I think the Inmarsat, the long-term plan, if they ultimately get some type of terrestrial use of that spectrum, may be initially air to ground, but then ultimately just true terrestrial. Obviously, you have been -- well, not you guys -- but DISH has been successful in something similar in the US.

Do not see that this is as a similar opportunity? I mean, I understand it's more complex, because you are dealing with whatever 26 different countries, but are you just ruling that out as a possibility at this point?

We are not necessarily ruling it out, but the applications that Inmarsat appears to be pursuing with regards to their segment of the MS allocation, may be mutually exclusive to some of the development plans that we have on our roadmap. We just don't know enough about it now.

There are a number of technical analyses that are ongoing in the various regulatory bodies in Europe, insofar as examining how a [narrow] use of the spectrum might coexist with an LTE terrestrial use of the adjacent spectrum. So pending the outcome of those tactical exercises, we are not quite sure that there is a synergistic approach there, to the extent that they are solely focused on narrow use, and we are more focused on leaving our options open.

Okay. And then at the end of the call I think you talked about, you're looking around the world for strategic opportunities. Obviously, there was a change in the structure of the Company as it relates to DISH that makes that a little bit easier.

If I just looked at Latin America, obviously there is plenty of things going on in Brazil and Mexico, would you consider maybe a more direct market strategy, given some of the assets that are -- they are either distressed or going to be coming up for sale as a result of -- excuse me -- as a result of regulatory actions? Is that a possibility in the context of what you are talking about at the end of the call?

Well, again that is an awfully broad question. Would we consider a distressed purchase? Certainly, if you look at the Solaris investment, that's exactly what it was. We are certainly going to look at other areas where people have thought about de-committing, or run out of cash and can't move forward. We are financially very stable and very capable, even more

No, I was thinking more about non-existing business, but perhaps complementary businesses. For example, you would ever be a wireless operator in Mexico or Brazil, terrestrial wireless operator?

That's a very focused question. The answer is, I don't think so, but again, never say never

Okay. Thank you.

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

Thanks most of my questions were asked and answered, I just had two follow-ups, maybe for Dave. On ESS for the quarter, is this the right run rate to be thinking about, as we think about what the financial impact was of the deal that you signed with DISH? Or are there other puts and takes that happened sort of throughout the year as kind of the new contracts come online?

Yes, obviously things are going to change as the satellite arrangement get modified going forward. But as I look at Q2, I think it's a pretty good indicator of run rate going forward in the near term.

And so, when we look at obviously the margin impact in sort of Q2 2014 versus 2Q 2013 in ESS, the margin is up obviously pretty significantly. Is that just attributable to how the new five satellites were priced with DISH, versus the legacy satellites, or are there other sort of variables that impact that?

I think it is two things. One, obviously the five satellites came in at very, very high margins, just given that all the operating expenses were already being incurred associated with those satellites. Plus when you compared it to Q2 last year, you need to remember that there is a $35 million impairment charge in the second quarter of last year. And so as you look at Q2 versus Q2, you need to look take that one into consideration.

That's perfect. And then maybe just a different sort of tack, on the strategic question. Obviously, with the liquidity that you have, and the additional cash flow that you have that you're able to relever, if we were to sort of think about your capital structure the way it is now, and the confines that you have around leverage, is it safe to say that sort of we are talking about things that are not transformational in nature, or they are more complementary in nature?

And then, what is the right time horizon to think about, around when you sort of expected to deploy that $1.7 billion? I know it is obviously dependent upon opportunities, but how long will you sort of sit with that cash excess cash on the balance sheet, as opposed to just deploying it back into the operations of the business?

Let me take a piece of that, and then Mike can add on to it. I mean, in terms of how long we will sit on the cash, I can say we won't sit on the cash past 2019, when the first tranche comes due. (Laughter).

In terms of expectations of timing, we would have -- in an ideal world, we would have deployed that, not have the negative carry that we have got on that cash. And opportunities have come up in the past to deploy some of that capital.

But at the same time, we are not going to do something, just for the sake of doing something. It's got to be the right opportunity, and it has got to make sense to us.

And so, we are going to be patient. We are not going to move, before we are ready to move. And when we move, we are going to be certain that it's the right move to make.

I think we have borrowing capacity you know above that $1.7 billion. I think we have considerable borrowing capacity beyond that $1.7 billion, for the right opportunity. And that was the reason we did the HRG transaction back in May, to give us that flexibility, not only to the increased cash flow that we immediately get, but also the ability to lever that cash flow, to increase our capabilities.

Yes, that's great. Thanks. And one last question, DISH is -- if you sort of do some probably not that difficult speculation, DISH has been involved in some fairly significant M&A discussions, when you look at the public proxies that have been filed on a few deals, including obviously I think they were even public yesterday, that they have had discussions with DirecTV. Can you just remind us what your rights are under your agreements with DISH, as it relates to the services agreement back and forth, and if -- how that sort of contemplates potential changes of control in DISH over time?

That is a multi layer and complicated answer. And it, frankly, any answer I gave, would be covered about a thousand different hypothetical conditions.

So let's leave it that, we are a key provider to DISH. When you look at it at almost any different aspect, what you think of as DISH Network is really provided by EchoStar Technologies and EchoStar Satellite Services. We own most of the key satellites. We own all the uplink facilities. We own the conditional access, and we control all those assets to benefit of DISH Network.

So transactions, and the impact -- any transactions at DISH and potential impact that EchoStar, you give me a specific scenario, and tell me X is going to happen. I can try and predict, what Y, the outcome on EchoStar is. But beyond that, it becomes very hypothetical.

Yes, the key thing is that even the DISH Over the Top, we are doing all of the infrastructure build. We are doing all the technology. We will have access to that to use elsewhere in the world, just as we deployed the technology for Bell and DISH Mexico and so on and so forth. We will continue to be a key vendor and a key partner of what ever the future structure of DISH Network is. I am confident of that. But as to every stipulation, every agreement, that's pretty difficult

Yes, I think I was actually leaning more towards the positive potential outcomes in the sense that, given that you are in the central part of the piece of the infrastructure if someone were to acquire DISH for the DBS business, you -- they would almost have to then, sort of figure out how you figured into that relationship, given that you are the critical piece of the infrastructure for them. I guess it sounds like you --

Yes, absolutely.

Absolutely.

Okay, great. Thank you very much for the clarification

I think I would like to turn the call back over to Mr. Dutt for closing remarks.

Yes, I think we pretty much reached our allotted time. So let me just close the meeting, by saying thank you all for participating today, and good day.

Again thank you for your participation. This concludes today's call, you may now disconnect.