EchoStar Corp (SATS) 2016 Q2 法說會逐字稿

Good morning. My name is Shamika, and I'll be your conference operator today. At this time, I would like to welcome everyone to the EchoStar second-quarter 2016 earnings call.

(Operator Instructions)

Thank you. I would now like to turn the call over to Mr. Deepak Dutt, Vice President of Investor Relations. You may begin your conference.

Thank you, operator, and good day, everybody. Welcome to our call. I'm 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 of Corporate and Business Development; and Dean Manson, EVP and General Counsel.

As usual, 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 recording, which we ask that you respect. Let me 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 result and from any future results expressed or implied by those 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 the 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 report, and should not place any 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. Good morning, and welcome everyone to our second-quarter 2016 earnings call. Let's start the call by reconfirming information from the 10-Q, that Mark Jackson, President of EchoStar Technology recently resigned his position after over 20 years of service. Over the years, Mark helped provide us with innovation, technological leadership, and helped develop to some of the best product for EchoStar Technologies and DISH Network. The entire EchoStar management team wishes Mark the best, and we'll miss his friendship and contribution.

I have recruited Vivek Khemka, who has been CEO at DISH, to replace Mark. Vivek will be transitioning between roles over the next few months. We look forward to combining his experience in product development with the vast engineering expertise that exists within ETC, to create new opportunities for unique product creativity and developments going forward.

In addition, we continue to review our ETC project strategy to ensure that we are focused on areas that we are confident will produce positive bottom-line impact. The initial cut at these efforts has also resulted in a decision to discontinue SAGE home automation and security product, that we launched earlier this year. Although the product has a number of groundbreaking features, a dramatic change in the competitive landscape heavily impacted our chance of this product producing significant positive long-term results for EchoStar.

ETC will continue to develop consumer-facing products, and we'll take hard lessons learned from our SAGE effort. ETC continues to innovate industry-leading products and features for our customers. Expanding solutions for the Hopper family product line, we have introduced two new products, the Hopper Go and Voice Remote, which DISH is now offering to their customers.

The Hopper Go is a pocket-sized DVR the lets users securely transfer up to 100 hours of recorded TV shows and movies from a Hopper 3 or Hopper 2 DVR for on-the-go online viewing. This revolutionary solution creates its own private wireless cloud to support up to five appliances via DISH anywhere X, no Internet connection. The new voice remote is a simple-to-use, yet incredibly accurate remote that features voice search and command, while backlighting an applicable touchpad for swipe and scroll navigation. These two both solutions provide DISH customers more options to enhance their TV entertainment experience.

As the broadcast video industry continues to evolve, we're looking at new solutions that will change the way people watch, create, and consume audio content. We continue to heavily invest and develop the Sling TV service for DISH Network, and we are excited about the advancements we are making and believe that our upcoming innovation will continue to influence the industry.

So now let me turn it over to Pradman Kaul, who will talk about Hughes and their success over the quarter. Pradman?

Thank you, Mike.

First, a few financial highlights. Q2 2016 revenue was $339 million, slightly more than the same quarter last year, while EBITDA for Q2 2016 was $106 million, 3% growth over Q2 of last year, driven primarily by the North American consumer business. In the consumer business, we ended Q2 with 1.030 million sub-subs, compared to 1.014 million at the end of Q2 last year. In this quarter, we lost approximately 8,200 subs, primarily attributable to our wholesale channel. EchoStar team continues to be at capacity in many beams, thus constraining growth in the subscriber base.

Key enterprise orders in Q2 were from OneWeb, Rite Aid, British Petroleum, JCPenney, York Telecom, Jack in the Box, Global Eagle, ITT global, IT com, State Bank of India, Avanti, and Bank of India. We ended the second quarter with $1.5 billion of enterprise order backlog, an increase of 28% over the backlog at the same time last year.

The Echo 19 Jupiter 2 satellite construction is substantially complete, and we have completed environmental testing. Final testing is proceeding well. It is scheduled for launch in the fourth quarter of this year, and we expect to place the satellite into service in Q1 2017. It will provide capacity primarily for our consumer business in the US, as well as additional capacity in Canada and Mexico, and help resume the growth rate of our subscriber base.

On July 1 we launched our consumer Internet service in Brazil, using our hosted Ka payload on the Eutelsat 65 West satellite. This is the first expansion of our successful consumer service outside of North America. I'm very pleased that we were able to complete the project on schedule and within budget. The rollout is being implemented on a state-by-state basis, and we are targeting all 20 states of Brazil to be active this quarter.

Our lease of the Ka payload on the Telesat T19 satellite scheduled for launch in the second quarter of 2018, will further enhance our capacity in Brazil, and other parts of South America. On the OneWeb LEO project, we were awarded a significant order for development work on OneWeb's gateway, and we continue to make progress and have completed the preliminary design review for our gateway design. We remain very excited about this project. To summarize, I'm very pleased with our performance in Q2, and we are well positioned for growth going forward.

Let me now hand it over to Anders.

Thank you, Pradman.

ESS revenue for the second quarter was $101, million compared to $125 million for the second quarter last year. EBITDA in the second quarter of 2016 was $84 million, compared to $104 million last year. Management of our fleet expansion initiatives continues to be a significant focus for ESS, with four EchoStar satellites, EchoStar 21, 23, 105, and 19 scheduled to launch by the end of this year.

Pradman has already mentioned the EchoStar 19 and the launch of the HughesNet high-speed Internet service in Brazil utilizing the 65 West capacity. I will address the remainder.

Our F-band satellite, EchoStar 21 has substantially completed construction. The launch was scheduled for Q3 2016; however the last ILS mission on Proton, while successful, experienced some off-nominal conditions, which are still being analyzed by Khrunichev. As a result, we have learned that the scheduled launch date for Echo 21 will likely move to November -- October or November of 2016.

Our subsidiary, EchoStar Mobile will utilize a portion of the Echo 21 capacity to provision its next generation all-IP enabled mobile communications network, and the integrated mobile satellite service network with its CGC component in the EU. Despite the delayed launch, the EchoStar Mobile MSS service expects to be able to reach all required regulatory milestones by the end of 2016.

Regarding the other two satellites scheduled for launch this year, EchoStar 23, a flexible KuBSS satellite designed to fulfill multiple mission profiles, has slipped slightly, and is now scheduled to launch on a SpaceX Falcon 9 vehicle in early Q4. It will initially be deployed over Brazil, at the 45 degree West orbital position.

EchoStar 105, the hybrid Ku Ka and C-band satellite that will replace AMC-15 at the 105 degree west orbital slot under an agreement with SES, is also scheduled to launch in the fourth quarter of 2016 on a SpaceX Falcon 9. We expect our Ku-band capacity, offering customers increased power and expanded coverage of the Gulf of Mexico and the Caribbean, to be available in early 2017. Obviously, the fourth quarter is shaping up to be extremely busy for us.

I will now turn it over to Dave Rayner.

Thank you, Anders.

EchoStar revenue for the second quarter of 2016 was $758 million, compared to $794 million in the second quarter of 2015, with a reduction primarily attributable to EchoStar Technology and EchoStar Satellite Services, offset partially by an increase in Hughes' revenue. More about this when I talk about the specific segments.

EBITDA was $221 million for the second quarter, compared to $212 million in the second quarter of last year, an increase of 4%. Net income attributable to EchoStar common stock was $56.1 million, compared to $33.9 million in the second quarter of 2015, and diluted earnings per share were $0.60 compared to $0.36 last year. The increase in net income was primarily due to the higher EBITDA, lower depreciation, and lower net interest expense.

Capital expenditures for the quarter were $142 million compared to $179 million for the same quarter last year, primarily due to lower CapEx on satellites as they near construction completion. For the six months ended June 30, capital expenditures were $353 million compared to $357 million last year. Assuming that the launch schedules stay as currently planned, we expect full-year 2016 spending to be in the low $800 million, with satellites and related ground infrastructure driving the bulk of the spend. Free cash flow, which we define as EBITDA minus CapEx was $79 million for Q2 2016, compared to $33 million for the same quarter last year, the change being primarily due to the lower CapEx in Q2.

Turning to the business segments, Hughes' revenue for the second quarter of 2016 was $339 million, up slightly from last year. Consumer broadband revenue was up 5%, driven by increased subs and ARPU. This increase was largely offset by decreases in the mobile satellite and international businesses.

Hughes' EBITDA in the second quarter was $106 million, an increase of 3% from last year. The primary contributor to the EBITDA growth was a change in revenue mix towards consumer services, which has a higher margin, partially offset by investment activity, and an increase in G&A, primarily as a result of bad debt reserve for a large international customer who declared bankruptcy.

EchoStar Technology revenue for the quarter was $315 million compared to $332 million last year, the change being primarily due to lower equipment sales at DISH and international customers, as well as a non-recurring item last year. Offsetting these amounts were increases in billing to DISH to support the Sling TV product, as well as other engineering services.

ETC EBITDA for the second quarter was $20 million, compared to $29 million last year, the decrease being primarily due to lower revenue and increased marketing spend on SAGE. As Mike mentioned, we have discontinued the SAGE product within the ETC segment, and I would expect to have charges associated with that in the third quarter of 2016.

EchoStar Satellite Service was $101 million for the second quarter, compared to $125 million last year, with the decline primarily caused by the termination of leases with DISH for EchoStar 1 and EchoStar 8 in the fourth quarter of 2015. EBITDA was $84 million, compared to $104 million in the same quarter. The decline was a result of reduced revenue.

In our all other and elimination segment, where we record gains and losses on sale, security, eliminations for inter-segment sales and other corporate transactions, EBITDA for the quarter was $10 million compared to negative $24 million last year. The increase being primarily due to the termination of our lease with DISH on EchoStar in Q4 last year, and an increase in equity earnings of unconsolidated affiliates, a gain on a sale of an investment, and several negative impact items last year.

We continue to have a strong balance sheet, and ended the quarter with approximately $1.5 billion of cash and marketable securities, which is about the same as we ended the year 2015. Obviously, not included in this are proceeds of the bond issue that we launched and closed in July for $750 million in senior secured notes, and $750 million of senior unsecured notes, both due in August 2026.

Let me now turn it back over to Mike.

Thank you, Dave.

In closing, I am honestly very pleased with the progress we've made in Q2, and our numerous strategic initiatives, while also delivering solid results in the quarter. It's now time for questions, but first, let me answer a question that is sure to come up-- that is, what is our plan for the now $3 billion in cash that we have.

As we have discussed previously, we have numerous plans on the drawing board for satellite projects on a global basis, as well as pursuing other strategic opportunities. While we are not prepared to discuss anything specific at this time, given the satellite builds are a multi-year endeavor and we have debt maturity in three years, derisking the financing on these projects made total sense to us.

Operator, we will now open the call for questions.

(Operator Instructions)

Rick Prentiss with Raymond James.

A couple of questions, if I could. First, obviously 1Q to 2Q, the equipment dropped because I think you have extra sales in the first quarter. How should we think about equipment sales in the second half of versus the first half?

Rick, are you talking about ETC or are you talking about Hughes?

Yes, sorry, on the ETC side.

I think what you can expect is to see continued sluggishness in the set top box sales to DISH. I don't think it's any secret that their subscriber numbers are continuing to decline, as they reported on their call. So, without growth within the DISH Network subscriber base, it's tough to see a big uptick in the near term.

Your question about the change -- remember, we introduced Hopper 3, and there were a not a lot of initial shipments to DISH to get their pipeline full, so that has something to do with the changes that you just asked about.

Exactly. The other question, I think you mentioned second quarter had a bad debt expense for a large international customer. Could that possibly be Ole, and if so, what's the process to look at being able to recover that, or what's your potential for further write-downs would be?

Well, I'm not going to comment on the specific customer. Obviously, we work this process to try to recover the maximum amounts, but it's early in the process. We have made it what we believe to be a reasonable assumption, and accrual to that bad debt reserve. Depending on how the bankruptcy proceed, obviously that could be subject to further adjustment, but at this point, it's our best estimate of the potential loss.

Any thoughts on the magnitude of what the SAGE discontinued ops might be?

Not at this point in time. We're still working work through that -- and so nothing I'm ready to talk about publicly at this point.

Okay. Thanks.

Andrew DeGasperi with Macquarie.

My first question is, on Echo 21, the slight delay, I think you highlighted that you don't expect any change to that regulatory milestone. Can you remind us what was that initial milestone at this time?

Our most meaningful milestone by the end of 2016 is to commence our commercial service in Europe. So, at this point, given the dates that ILS is giving us, we are still confident that we can have the satellite deployed and sufficiently tested, to be offering minimal service by the end of the calendar year.

Thanks. And then secondly could you update us on the CGC progress in Europe at this point?

Well, we have been focused on all things attendant to the MSS service, and not necessarily focused on fine-tuning or pursuing the CGC licenses, as the MMS service precursors anything that might be done in the CGC arena. We continue to have discussions with the individual member states and their respective regulators, regarding our desire to have a single harmonized standard relating to CGC across Europe. That is not currently the case, but certainly the discussions that are ongoing both in Brussels and many member states regarding a single digital Europe, such a harmonization would certainly be consistent with that theory.

Got it. And I know this is early with the change at ETC, but what kind of customer products are you looking at potentially, that might be going beyond what you are doing with the Hopper and Joey box right now?

The Hopper architecture lends itself to great evolution. So, I think Vivek's team at DISH have been looking at a lot of things that are very important to continued satellite customers. Along with that, we're looking at how we apply some of that technology to expand OTT type services and capabilities to the average consumer. So there's a lot of development right now, along those lines.

But in addition to that, we're continuing to look at alternate product lines that might go direct to consumer. We just decided that although SAGE was aligned for that type of introduction with a competitive atmosphere, we decided even though it might have been a semi-successful product, we just didn't think we would get the bottom line performance we needed, and we're looking at reapplying those resources elsewhere.

Last question for me. You highlighted some Brexit risk in the 10-Q. I'm wondering if you could let us know if that's really more regulatory, or is there some kind of financial component, as well? Thank you.

This is Dean. We don't at this point anticipate major financial impact of Brexit. It's a little too early to tell. Obviously, it would affect transfers, both in the labor market and in the marketing of our services between the rest of the EU and the UK. So, we are keeping an eye on that. At this point, we don't anticipate major impact.

Great. Thank you.

Andrew Spinola with Wells Fargo.

Thank you. Wanted to ask a question specific to maybe your long-term strategies, and particularly around the capital that you have raised. When you look at the international markets, historically, I think you've talked about wanting to maybe expand to more of a global footprint, a global platform for your FSS business. Given all the distress in that market, and what appears to be excess capacity, do you still look at the FSS market internationally as an attractive business, as something you want to participates? Or has your view of that market changed?

This is Anders. I think as you point out, there is certain instability in the FSS sector, at this point. There's probably some rationalization that will occur. We continue to monitor and have discussions with folks who are in the sector, both about collaborative activity, where it makes sense, as well as other more strategic activities. I know that's somewhat sidestepping the question, but it certainly holds our interest because we do have a long running stake in the satellite business, and continue to have faith that it will present the opportunity for the creation of shareholder value going forward.

And maybe along the same lines, when you think about strategically where you want to be, I think in one of the previous conference calls, Pradman made the comment that he thinks Ku-band will ultimately win in the mobility markets. When you look at the bands in particular, do you have a preference internationally or domestic, -- obviously domestically you do, but internationally, would be Ka-HDS that you are focused on, or are you still also interested in traditional Ku-band as an opportunity?

This is Pradman. For the markets that we are addressing at Hughes, which is the consumer access to the Internet, I think clearly Ka is our focal point, because of the cost per bit, and the amount of bits you can get in Ka-band. I think clearly Ka-band would be the right solution for consumer Internet access. And that includes a lot of the mobile applications, like aeronautical and maritime.

Fair enough. I wanted to understand, Pradman, following on that commentary, so, your investment and your desire to resell OneWeb's Ku-band capacity longer-term, I'm just wondering how Ku capacity is going to fit into your overall Ka strategy. Do you see yourself doing dual mode antennas? How are you going to integrate those two businesses longer-term?

Obviously, if you look at the globe, it's going to be a long time before we have Ka covering every square inch, right? So when you look at aeronautical applications, maritime applications, we're looking at dual-band antennas. So that you can switch from a Ku satellite to a Ka satellite.

Now, as you know some of the big FSS operators are building spot beam Ku satellites. I can envisage that we would use some of that capacity to provide global coverage. But the major markets, I think, would be at Ka.

Understood. Last question for me, just on SAGE, Mike, I think you made the comment that there was a significant shift in that market. Could you maybe help us understand what happened in that market specifically, that made you decide to step away from that product line? And if the product area in general that you have long-term interest in, or not?

I think we were clear that all you have to do is look at what has gone on for the last year -- there's a myriad of competitors, a lot of the small startups and so on that have come into that market. I would say our concern was being highly successful, and again large contribution to EchoStar's bottom line, and we felt that with all the focus on satellites and all of the potential investment opportunity, as someone pointed out, there's so much confusion in the satellite business, we just felt that as a corporate entity, we were better to focus on some of those rather than in the consumer marketplace, SAGE has to develop marketplace. So, I still think the product has potential. It has some great features and so on, but for EchoStar, we just weren't ready to proceed with that, at this time.

Got it. Thanks.

Jason Bazinet with Citi.

I have two questions. First, when I look over the last eight years of your capital spending, it seems like there were three eras. There was the pre-Hughes era, where you were spending about $200 million. There was the Hughes era where we went to $500-ish million -- $400 million or $500 million. And the modern era where you have been launching a bunch of new satellites.

And intermixed in there, you went through the transaction with DISH, which I think was designed to push some of your CapEx down. So, what's a little unclear to me is, as we think about steady state capital in this business assuming that you don't to make more satellite announcements to launch more satellites, what is the right steady-state CapEx for the business as it exists today?

You are very correct, Jason. There have been evolutions over the last eight years. Certainly the last couple of years have been very, very intense, in terms of capital expenditures around building fleet, as Anders and Pradman spoke to, and a lot of that fleet gets launched this year. We would expect CapEx to drop in 2017 quite significantly, probably down to the sub $400 million range.

We will have a slight step up at Hughes, because we will have an increase in subscriber acquisition, and thus driving up consumer equipment. So, that portion of the CapEx will increase. We'll also have ground infrastructure scaling costs associated with both Echo 19, as well as Echo 21. So, if you want to get down to sort of what is a recurring CapEx level, even as I said, even 2017 will still be a little bit higher than that maintenance level. I would think the maintenance level, short of significant new satellite projects, is probably somewhere in the $300 million range.

Okay. Then, maybe this question is a little out of bounds, so feel free, of course, to deflect but given the linkage with Mr. Ergen across both DISH and EchoStar, would you view it as out of bounds for EchoStar to get involved in operationalizing DISH's spectrum, is that something we could contemplate as a potential use of capital, or is that not in the scope of what you are currently thinking?

Well, you're pretty far out of bounds and obviously I think that DISH is going to need some serious technology support to utilize their spectrum, and we expect to be part of that. But, specifically how much and where and what we would be expected to do, it's really unclear at this time. But, certainly there's a lot going on there right now.

Okay. All right. Thank you very much.

Mark Drucker with B. Riley.

With respect to average revenue per subscriber and subscriber acquisition costs, can you quantify both of those metrics, please?

Those are not numbers that we publish. Certainly, ARPU has continued to tick up and sac has continued to tick down, but beyond those trends, it's not numbers that we publish.

Okay, and with sac ticking down, is that primarily a function of lower equipment cost, or is there something else embedded within that?

No, the principal reason is lower equipment costs.

Okay. Now, in your Hughes segment, your subscribers went down a little bit. Is that a function of capacity in any way?

Yes, obviously there was capacity. In this quarter it was really our VoLTE channels that have a negative drop in subscribers. But in both cases, it's primarily that all the beams -- there are a lot of subs that are essentially full. For the rest of this year until we launch Echo 19, Jupiter 2, we're going to be facing the same phenomena.

Okay, and with the launch of Echo 19, do you expect -- I guess, to what extent do you expect to launch to mitigate capacity limitations?

It will totally mitigate it, right? Because we have a fresh satellite with a lot of capacity and beams.

Thank you, as a follow-up, do you have any forward perspective on your subscriber base into the rest of 2016 and 2017?

Yes, we have said on the last several calls, that we expected 2016 to be a tough year for growth given the lack of available capacity, that continues to shrink. This quarter the loss, as Pradman said, was driven by our wholesale channels, which we have a little less ability to control than our retail channels. But, we see no reason to say that we're going to see significant growth or any growth, for that matter, until the launch of Echo 19. And so starting really Q2 of next year, we would look to a return to growth on the subscriber base.

We have to be careful about the launch of the satellite and the launch of the server, they are at least a quarter different. So, just understand that as well.

That's all for me. Thank you.

Chris Quilty with Quilty Company.

I've got a question on Echo 23. I think I heard Mike say during the introduction that you had at least initially put it in the 45 degrees, can you give us an idea of what backup plans might look like, if you are unable to secure a partner in the Brazilian market?

Well, this is Anders, Chris. I won't speak to the Brazilian development, which we've been pretty consistent in what we have said about that in the past. But Echo 23 is capable of a number of optimized configurations, and our current plan post-launch envisions it ultimately getting to 45 degrees west and satisfying our regulatory milestones, as far as bringing the license into service, and being capable of providing service. As far as its future use, we designed to the satellite to do many things. To the extent its future is ultimately deployed in another slot, it is fully capable of doing that.

Okay. Did I hear you say that -- was Echo 15 the placeholder that you terminated the lease on that satellite?

Yes, Echo 15 -- we co-terminated the leases on Echo 15 which we were leasing from DISH and Echo 8, which DISH was leasing from us in November of last year. So, those were reciprocal leases at the same rates, we had initially used 15 for some of the early milestone requirements for the Brazil license. It was no longer needed, and so we terminated those reciprocal leases November last year.

And so are there any issues with the timing of the launch and your ability to maintain the slot?

No -- well, the timing of the launch is for driven by the construction of the satellite and the availability of the launch vehicle. Echo 15 was initially deployed at the 45 degree location, to do some testing, but has subsequently been returned to DISH and moved back to the eastern United States [DDS arc]. Right now, our plan envisions Echo 23 launching in the fourth quarter, and ultimately being at the slot by the end of April of next year which is in satisfaction of our milestones.

Okay, great. A question for Pradman. Can you give us an update on what you are seeing happening in the aviation market? [Do you] have any important new product announcements on the modem side, but are you planning up any potential customers for capacity deals on the Echo 19, as you move forward?

Would you remind repeating it, someone dropped. I didn't hear the initial part of your question.

I was just saying, you had some announcements around a new modem for the aviation market. Have you yet pulled together a strategy that you can elaborate on, about where you're going in the aviation market, when you have Echo 19 online?

Sure. Today, as you are probably aware, we have a partnership with Global Eagle and have over 700 planes outfitted with our modems that fly in only in the US, but in some other international markets. All that is operating at Ku band. When Jupiter 2 or Echo 19 is launched we will have a lot of capacity available over Mexico and US, and some parts of Canada. So, our objective, then, would be to put our dual mode antenna and dual mode terminals in the plane, which could operate both at Ku and Ka, so when they're flying over the United States, we would expect to use -- Mexico or the United States -- we would expect to use the capacity on our own satellite on Echo 19. And when the plane goes over the oceans or in other parts of the world, where we don't have KA capacity at that time, we would use leased KU band capacity from one of the existing FSS guys.

Can you remind us the status of that dual-band antenna and where you stand in terms of certification and STCs for aircraft?

We'll be ready to launch -- Jupiter 2 will go into service, as Mike mentioned, early in the second quarter of 2017. Actually in the late first quarter, early second quarter. The new dual band product, aeronautical product will be ready at about the same time.

Got you. All right. Thank you very much.

(Operator Instructions)

There are no further questions at this time.

Operator, I think we have reached at the end of the call. I want to thank everybody for participating today. And have a good day. Thank you.

This does conclude the conference call for today. You may now disconnect.