EchoStar Corp (SATS) 2015 Q1 法說會逐字稿

Good morning. My name is Nichole and I will be your conference operator today. At this time, I would like to welcome everyone to the EchoStar first quarter 2015 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions)

I would now like to turn the conference over to your host, Mr. Deepak Dutt, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. Good day, everybody and welcome to our call. I am joined today by Mike Dugan, our CEO, Dave Rayner, CFO, Pradman Kaul, President of Hughes, Anders Johnson, President of EchoStar Satellite Services, Ken Carroll, EVP, Corporate and Business Development, and Dean Manson, 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 firms in your reports. We also do not allow audio recording, which we ask that you respect. Let me now turn this over to Dean for the Safe Harbor disclosure. Dean?

Thanks, Deepak, and hello, everyone. All statements we make during this call other than statements of historical fact constitute forward-looking statements that 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 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 will now turn the call over to Mike Dugan.

Thanks, Dean and welcome everyone to the Q1 2015 earnings call. EchoStar revenue in Q1 2015 was $799 million compared to $826 million in the first quarter of 2014. This decline is primarily due to lower set-top box sales to Dish Network. Dave Rayner, our CFO, will address our financials in more detail a little bit later in the call. During the fourth quarter conference call, I commented on our strategic initiatives. Let's recap some specific initiatives and investments that we are making to drive market share and revenue growth in the medium to long-term -- longer term.

Each of our three divisions continues to play a role in this strategy, so the management of these divisions will elaborate on this in their respective sections. In addition to the 24 satellites that we own, lease, or manage, we have five satellites currently under construction, planned for launch in the next couple years. Our new investments also include a broadband consumer business and launch later this year. Additions to our satellite fleet for consumer broadband and FSS services in North America, mobile satellite services in Europe, and continued opportunities for DTH service in Brazil.

Also with our strong balance sheet, we continue to look at other M&A opportunities that are consistent with our business and strategy. We are well positioned and are excited about these initiatives, which we expect will drive our growth in the next couple years. We would now like to talk in a little more detail about each of our business units. Since Mark Jackson, our President of ETC, is not able to join us today, I'll try to make a few comments on ETC before turning it over to Pradman and Anders. Dave Rayner will then give you an overview of our financials, after which I will come back with some closing comments before we start the question and answer.

From an EchoStar technology standpoint, revenue for the first quarter was $346 million compared to $409 million in the first quarter of 2014, again driven by lower set-top box sales to Dish Network. As we indicated on the Q4 call, we are at the tail end of our product development cycle with Dish, where their inventories and returns from EchoStar customers are at a level where they have lower needs for new product deliveries. We are currently in the final stages of development of the next generation set-top box for Dish, which is planned to ship late this year. In the interim, we continue to expect to see lower levels of sales of the current generation of set-top boxes.

Our first quarter has been busy supporting Dish Network with the launch of their OTT service, branded Sling TV, and that's gone very well with large growth in customers. Similar to our support of their broadcast platform, EchoStar is providing the infrastructure and development expertise with our patented adaptive streaming technology and our proven OTC television distribution platform. We will continue to work with Dish to expand the Sling TV service and improve its performance and expansion to other devices.

There are several new products on the roadmap for launch this year, as part of our longstanding set-top box business. One of the products in which we're most excited is the already announced 4K Joey, the first 4K ultra-HD set-top box from a paid TV provider that is compliant with all HDMI 2.0, HDCP 2.2, and compliant for all 4K televisions. Dish Network already announced this product earlier this year at CDS.

We continue to enjoy the introduction of leading edge technical products that we continue to deliver to other customers as well. We are continuing development of our security and home automation platform, Sage. We believe Sage is compared to current products and services in the marketplace, and very unique and highly competitively priced ecosystem that will be well received by consumers. We are planning a launch with a core set of features and supportive devices that will provide a solution that is economically and feature rich, and easy to use. The potential of this product line is unbelievable compared to the devices that are standalone in the industry at this time.

I now would like to turn it over to Anders Johnson to talk a little bit about the ESS operation.

Thanks, Mike. ESS revenue in the first quarter was $125 million, a growth of 24% over the first quarter of 2014. This growth was primarily from the five satellites that we acquired from Dish as part of the huge retail group transaction that was effective March 1 of last year. The ESS team continues to focus on the management and expansion of the EchoStar satellite fleet. The three EchoStar satellite programs that we have under management, EchoStar 21 for our European Union mobile venture, formerly known as Solaris, now EchoStar Mobile, the EchoStar 23 DBS Satellite, and the EchoStar 105 KU band Satellite are currently on schedule and in line with expectations. Pradman will address the two satellite programs that Hughes is managing in a few minutes.

We also continue to manage the Echo 18 program for Dish Network. In addition to the satellite fleet expansion, we are aggressively pursuing additional spectrum rights for future business development activities. Moving on to sales, as I mentioned in the fourth quarter call, with the extension of the AMC 15 and AMC 16 service agreements with SES, and the contract for the new EchoStar 105 Satellite, we are aggressively pursuing revenue growth opportunities on all of these satellites. We continue to be very excited about the future of ESS, as we grow our fleet and our satellite related businesses.

I'll now turn it over to Pradman.

Thank you, Andres. Hughes hit another strong quarter, ending March 31, and the Q1 revenue was $325 million, up 3% over Q1 of last year. All major segments of our business performed well, with the North American consumer unit being the primary driver of revenue and margin growth. So let me start with the highlights of the North American consumer business. Gross ads for the quarter were 98,000 subs with retail contributing nearly 70% of these gross adds. This metric is a clear indicator of the continuing strong demand for our service. We had net adds of 22,000 in Q1 2015, a 30% increase over the net adds in Q4 of 2014. The makeup of these net adds continues the pattern from last year.

In 2014, our Gen 4 net adds increased by 251,000 and the legacy subscribers reduced by 134,000. In Q1 2015, Gen 4 net adds were up by 45,000, offset by a reduction of 23,000 legacy subs. This is once again very much in line with our strategy of increasing the subscriber base on our Gen 4 platform, while reducing our legacy base.

We are also very pleased that our churn management actions continue to yield results and churn was down for the third consecutive quarter. We ended the quarter with 998,000 subs, an increase of 9% over the same quarter last year and consumer service revenues once again showed a double-digit growth of 11% year-to-year in Q1 2015.

We continue to be the undisputed market leader in the satellite based internet service provider space. The high growth that we've seen in subscribers since the launch of Jupiter 1-Echo XVII has resulted in the high demand beams on the satellite filling up. To address this, we've adjusted our marketing strategy to focus on the geographies where we have the most satellite capacity available, and we also made some significant enhancements to our Gen 4 plans, featuring a new generation of performance enhancing innovations in downloading, browsing, and data usage management, including a data cap of up to 100 gigabytes per month in some plans.

While we expect to grow the consumer business in 2015, the rate of growth in subscribers will be lower than it was without the capacity constraint. We expect to remain capacity constrained until the launch of our new high throughput satellite, Ka-band satellite, Jupiter 2-Echo XIX in the second half of 2016. Echo XIX will augment nationwide capacity for our consumer business in the US and Canada, as well as expand our ability to provide service in Central America. Once this additional capacity is available, we expect to resume strong growth in our consumer business.

During the Q4 earnings call, I mentioned that we signed a 15-year contract with Eutelsat to lease the entire Ka-band capacity covering the Brazilian service area on the Eutelsat 65West-A satellite. Construction of the satellite is proceeding well with an expected launch in early 2016. Eutelsat 65 will host the Ka-band payload with 16 spot beams, which cover a significant portion of the Brazilian population, and will generate approximately 25 gigabits of throughput. We'll use Jupiter technology for the ground system and customer premise terminals. Satellite construction and operational planning are on schedule and we expect to be in service in mid-2016. Eutelsat 65 will be our springboard in Brazil for broadband services to consumers and we are actively looking at other opportunities to expand our broadband consumer service in Latin America.

Let me now turn over to our enterprise business.

Despite continuing currency headwinds and unsettled conditions overseas, our subsidiaries and the US-based international hardware business held their own. Backlog at the end of Q1 was $1.2 billion, and this does not include our consumer business. In North America, we booked large orders from IGT, Xplornet in Canada, Kohls, Exxon, Sherwin Williams, York, Sunoco, and CVS.

In our international business, we booked large orders from Telemar, the state of Santa Catarina, [TIMM] and Grupo Ultra, all from Brazil, HDFC Bank and FSS in India, Media Networks for Peru, and [Yasat] and [Cavelot]. Our delivery of global managed network services, whether satellite or terrestrial for enterprises also continues to expand through our various international subsidiaries, as well as through our service partners.

Beyond providing services directly, we also provide the infrastructure to other operators around the world, which has enabled them to provide services in their individual markets. A measure of our success is that we've shipped satellite systems to over 100 countries and now delivered over 4.8 million remote terminals around the world. We are very well positioned to build on this leadership and grow our revenues and earnings going forward.

So to wrap up, we continue to expand our market leadership in both consumer and enterprise products and services. Our North American consumer broadband service is the largest and most successful satellite service in the world, and with the Jupiter 2-Echo XIX launch, our ability to grow will be even further advanced. This growth will continue to expand globally as we will see our first expansion of consumer service beyond North America in 2016, as we deliver broadband services into Brazil.

I'll now hand the call over to Dave Rayner.

Thank you, Pradman. As Mike mentioned, EchoStar revenue this quarter was $799 million compared to $826 million in the first quarter of 2014. EBITDA was $214 million in the first quarter, up 11% over last year. EBITDA margin increased 4 percentage points to 27%. Net income attributable to EchoStar common stock was $33.4 million, compared to $12.7 million in the first quarter of 2014 and diluted earnings per share was $0.36 compared to $0.14 last year. Our capital expenditures for the quarter was $178 million compared to $114 million in the same quarter last year. The spending increase is primarily related to the ramp up in satellite construction. As indicated on the last earnings call, I would expect 2015 spending to be in the mid $800 million range with satellites and related ground infrastructure accounting for well over half that amount.

Free cash flow, which we define as EBITDA minus CapEx was $36 million in the first quarter, compared to $78 million last year, with the decline primarily due to the ramp up in satellite construction. Turning to the business segments, EchoStar technology revenue in the first quarter was $346 million compared to $409 million last year. The decline is primarily due to lower equipment sales to Dish Network, which we expect will continue for the rest of 2015. ETC EBITDA in the first quarter of 2015 was $26 million, compared to $39 million last year, the reduction being primarily due to the lower revenue as well as some increased litigation costs. In addition, EBITDA was negatively impacted by development and startup costs of our Sage product line. We would expect that Sage will continue to have a dampening impact on ETC results in the short-term.

Hughes revenue in the first quarter of 2015 was $325 million, for a growth of 3% over last year. Growth was led by consumer services in the mobile satellite revenue, offset partially by lower hardware sales to Dish for their wholesale services. Our international sales had solid performance in spite of foreign exchange headwinds impacting reported results. Hughes EBITDA in the first quarter was $91 million, an 11% increase over last year. Contributors to the strong EBITDA growth were a higher mix of consumer service revenue with the associated higher margins, offset partially by higher sales and marketing expenses in the consumer business.

EchoStar Satellite Service revenue was $125 million in the first quarter, a growth of 24% over last year, primarily from the lease of the five satellites acquired from Dish as part of the HRG transaction effective first quarter last year. ESS EBITDA in Q1 is $106 million, an increase of 20% from last year due primarily to the higher revenue, offset partially by the conversion of AMC 15 and 16 from capital lease to operating lease treatment. The capital lease conversion had an almost $4 million impact in Q1, and that would be a negative impact, and we expect approximately a $17 million negative impact to ESS EBITDA for the full year.

In all other and eliminations where we record gains on the sale of securities, eliminations for inter-segment sales and other corporate transactions, EBITDA in the first quarter was a negative $9.6 million compared to negative $14 million last year. The change primarily due to equity in earnings of various unconsolidated entities.

We continue to have a very robust balance sheet with approximately $1.7 billion of cash and marketable securities. Our indebtedness to cash flow ratio as defined by our debt covenant stands at 2.88 and last week, S&P raised our corporate ratings and the ratings in our outstanding bonds.

Let me now turn it back over to Mike.

Thanks, Dave. Before we go to question and answer, I'd like to make a few closing comments. First of all, we signed an agreement with the Kudelski Group, which forms an organization that will be focused on delivering a broad portfolio of world-class, feature rich consumer devices to the broadcast and broadband markets. We believe this partnership will close in the second quarter and will expand our global reach and create new business opportunities for the Company.

The EchoStar Mobile, which we formerly called Solaris Mobile, S-band venture in Europe continues to be on track to deliver a commercial MSS service mid next year. EchoStar 21 Satellite is proceeding accordingly and is scheduled to launch in early 2016. The development by the Hughes Mobile Sat team of ground infrastructure, including the gateway and calibration earth stations, as well as the terminal components of the network are progressing well. We continue to be in contact with potential customers of the service in advance of the 2016 service launch. We continue to work with the EU and member states to more clearly define and harmonize the regulations related to operation of satellite and terrestrial delivered services in order to offer a more robust product offering to the EU marketplace.

On the Brazil DTH video project, we continue to have discussions with telecom operators in the region, but we do not have additional specifics to report at this time. Finally, our business development group has been very busy evaluating multiple projects and potential acquisition opportunities. We will continue to be diligent in examining these opportunities and will not put ourselves in a position of overreaching or over spending just for the sake of getting a deal done.

It's now time for question and answer. So operator, would you please start that process.

(Operator Instructions) Your first question comes from the line of Andrew Spinola with Wells Fargo.

Thanks. Anders, I was wondering, I saw the announcement about the 4K Joey and I'm wondering what Dish's position is in terms of capacity on the satellites to be able to handle 4K introduction. What sort of outlook do you have for that, for the ESS business, and the revenues in that business if there's a ramp in 4K?

This is Mike Dugan. Obviously, Dish's 4K plans are not totally visible to us, nor are we able to comment on that publicly. Obviously, 4K, Pay-Per-View, and special events is where it appears the industry is going to start. And the development of the Joey to allow it to be added to current systems was an attempt to ensure that they have all of the features necessary to be competitive as 4K rolls out. But right now, we don't have any real specific expectations nor are we planning for any major increase in Dish revenue based on 4K bandwidth requirements. They have to manage where they allocate their bandwidth on their own. And right now, there's no major initiatives to get them a dramatic improvement in bandwidth, and therefore increase Anders' revenue.

Got it. Any chance you can give us an update on the specific number or direction of the regulatory authorization from the UK regulators during the quarter, whether the ground or the space authorizations?

You're talking about the S-band initiative?

Yes, just wondering if the numbers of countries that have approved your use of the license has increased.

This is Anders. We continue individual conversations with member states, as well as an ongoing dialogue with the folks in Brussels. Each of those conversations is unique because for the most part, the licenses country by country are unique. We're working towards trying to harmonize many of the high-level conditions so that we have a landscape upon which we can build a business across Europe. But the conversations are ongoing. We currently have many of the licenses that we need to launch both an MSS service and a terrestrial service, but there are other countries where our licenses right now are not clearly defined as to what services we're entitled to launch. But that's an ongoing exercise.

Understood. And last question from me. Pradman, just given the lack of capacity and the seasonality going into the summer months here, sort of just a general guide. Do you think net adds will remain positive in Q2, Q3 here? Or what can you tell us about where you think things go?

Well, as you know, we don't give guidance of specific numbers or quarters for on a prospective basis. But generally, we should see the -- with the capacity and the beams filling up, we should see net adds going down from what we saw in Q1 for the rest of the year -- for the rest of the three quarters this year.

Got it. All right. Thank you very much.

Operator?

Your next question comes from the line of Andrew DeGasperi with Macquarie Capital.

Thanks. I read in the 10-Q that you would be potentially launching some internet of things products in Mexico. I just wanted to get an idea of what exactly you were thinking about there. And then secondly, do you have any color as far as what Inmarsat is doing with their spectrum in Europe, with the other 30 megahertz? Thanks.

Could you maybe clarify the first question again?

Yes, in your 10-Q filing, you mentioned that you're looking -- you're exploring the potential of new products and services in Mexico, alongside in the internet of things market.

All of us are a little bit baffled by the enter in the Q. Jupiter 2-Echostar XIX has beams over Mexico that could be used for a broadband service in Mexico and it's possible that's what you're asking about, and certainly, we're looking at partnerships or the approach to make sure we utilize those beams in the most economical way possible. We also believe the Sling TV infrastructure is usable in multiple countries and so on. And we are starting to explore how that total developed set of products could be used to support other markets, but not Mexico specifically.

Okay. And on Europe?

Yes, relating to Inmarsat's potential use of their 30 megahertz and spectrum, I mean we -- what they publicly disclosed is at least in its first phase they're going to be utilizing some or all of the spectrum in an air-to-ground application, supported both by a satellite, as well as a terrestrial network for the provisioning of mobile broadband to aircraft. Beyond that, we don't have any special insight as to what they're doing.

Got it. And on the set-top side, obviously, the next generation is coming out soon, by the end of the year, Ibelieve. Should we be seeing a similar trajectory as far as growth is concerned that we saw with the Hopper?

I think you're going to have to apply some of those questions to Dish. Because our product's not into production, we don't even have much of a forecast other than very preliminary numbers. We do know we're in the middle of a transition. Hopper with Sling is nearing the end of its production life and it'll probably be built in parallel to, I think, the -- let's just call it Hopper next generation for now because I don't think they've even released a name for it. So I think they'll both be built in parallel for a while. But total numbers, our objective has always been to develop boxes that allow Dish to lower their stack and improve the customer experience. The next generation is focused directly on that.

As we've talked about on conference calls in the past, as we develop higher functionality set-top boxes with more tuners and more capability, we've kind of continued to design our way into lower set-top box production. So we would hope that they continue to have some growth and therefore that will drive their set-top box requirements.

Great, thanks.

Andrew, just a clarification. I think I found the reference you were referring to regarding internet of things, and just to be clear, that is not referring to Mexico. There's a lot of things discussed in that paragraph and that 'internet of things' reference is really a generic reference to our Sage product.

Got it. Thank you very much.

(Operator Instructions) The next question comes from the line of Jason Bazinet with Citi.

I just had two questions and maybe my notes are wrong, but I thought Echo XIX was originally slated for 2Q 2016 launch, and I think you said on the call it moved to the second half of 2016. I just wanted to confirm that's a change.

So yes, right now there's -- it's a very high capacity satellite. We made it clear that we were kind of doing a generational change. There is a lot of disturbance in the force right now, both in the production of Echo XIX and the launch slot. So we as a group decided to put Q -- the end of the year, the last half of the year in, instead of saying Q2, because we're not sure all that's going to line up for that launch right now. And if I had real -- a lot of things are in play right now and I don't want to give you guys unreasonable expectations. So that's why we decided to put it in the Q that way.

Okay, perfect. And then a question on the backlog. The -- at least relative to I think our numbers and the Street's, the revenues were a bit light and the backlog also went down, I think, versus your last disclosures. Was that more of an FX issue that caused that to happen? Or is there just sort of less new business coming in the top of the funnel, if you will?

Well, remember, we don't include our consumer's backlog in that number. So that's primarily the enterprise backlog and you have -- at this stage in the year, you always have seasonality. We book a significant number of orders in Q4 and then in Q1, we don't book quite as much. So I think that's only a temporary phenomenon on a seasonality basis. It's not that the market is going away or that we're losing any jobs. We are still very comfortable with the numbers for the year.

Understood. Okay. Thank you.

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

Hi, thanks. I wanted to follow-up on that last question just from a slightly different angle, but the dollar has strengthened pretty appreciably against some of the currencies where you do business. And I guess I was wondering from a macro perspective how you think about planning for both inorganic and organic growth in light of the dollar? Is that a consideration, some of the FX headwinds that are in the market right now?

Well, you can look at it two ways. We have service companies in Europe, Brazil and India. Most of their revenues and costs are in local currency so that the dollar strengthening doesn't really impact them very much. The product sales business that we have from (inaudible) in the United States gets impacted in terms of affordability in countries.

For example, we sell products into Russia. The Russian ruble has depreciated significantly with respect to the dollar. So the product obviously is more expensive. And so there is some impact in terms of what our customers can afford in their local currencies. But that's again a small portion of our total sales. So we'll have some impact from these headwinds, but nothing traumatic or dramatic.

And most of the local businesses, it sounds like, are self-funded from the perspective of they don't require kind of external dollars on a funding basis.

Right, right. No, they're absolutely locally funded.

And then for Dave, leverage has come down a lot at the restricted group where the bonds are due to free cash flow growth of the business and also, obviously, bringing over the cash flow from the Dish assets when you did that transfer. Do you have any views on sort of how we should think about leverage here given that you're thinking about potentially some strategic things, which could involve inorganic growth?

And how should we think about the capital structure? There's no pre-payable debt at the bond restricted group, but the maturities are sort of getting shorter dated. At some point, do you think about a recapitalization as a part of a more strategic type of transaction?

Yes, I mean certainly if we execute on a large M&A transaction, depending on what that is and the nature of it, we may need to tap the capital markets and raise additional funds to complete that. But I think that would be a standalone transaction. Right now, the debt structure and the repayments on a status quo basis does not cause me any reason for concern. So I don't think we'd be looking at any sort of standalone recapitalization off the balance sheet at this point in time.

And I guess do you have a view on leverage? I mean leverage is a lot lower from the time of the original transaction because cash flow has grown and you did the Dish transaction, which brought cash flow from Dish over to SATS. Do you have a view on sort of what you think the upper echelons are of leverage that we should think about as a potential sort of goalpost for where you think it could go?

Yes, there's certainly an upper goalpost where I start becoming uncomfortable, but a lot of that depends on a transaction that would require that leverage to go up. If it's going to be a situation where we have to maintain that leverage on a long-term basis, obviously you're going to want a lower level. But in terms of if it's going to delever quickly because of the transaction, you're more willing, obviously, to take a higher initial leverage ratio. So it's a hypothetical question that I really don't have the ability to answer hypothetically. Certainly, where we are now, I'd be quite comfortable taking it up if necessary to get the right transaction completed.

Thanks, and then just final from me. You had mentioned the timing of some of the satellite launches coming up. I was wondering if you could just refresh us on what the cycle looks like in terms of the replacement of the Dish fleet that services the contracts that you have in place with Dish, when the sort of lumpy periods are there for the replacement cycle on those birds?

This is Anders. We have one satellite that we're managing, which is Echo XVIII, which is a dish spot beam satellite, which will be put into orbit to both add capacity but also more importantly, add redundancy. As far as the replacement cycles on Dish's other satellites, including those which moved over to us last year, we don't contemplate replacements right now because the current network, or space age network has sufficient redundancy as well as longevity to it that we really don't have anything as of yet in our pipeline.

Okay, thank you very much.

(Operator Instructions) And there are no further questions at this time.

Okay, then. Thank you for joining us on the call and we'll see you next quarter.

That concludes today's conference call. You may now disconnect.