EchoStar Corp (SATS) 2016 Q3 法說會逐字稿

Good morning my name is Tammy and I will be your conference operator today. At this time, I would like to welcome everyone to the EchoStar Corporation third-quarter 2016 earnings conference call.

(Operator Instructions)

Thank you, Mr. Deepak Dutt, you may begin.

Thank you, operator. Good day, everybody. Welcome to our earnings call for the third quarter of 2016. I am joined today by Mike Dugan, our CEO; Dave Rayner, COO and CFO; Pradman Kaul, President of Hughes; Anders Johnson, Chief Strategy Officer and President of EchoStar Satellite Services; Vivek Khemka, President of ETC; and Dean Manson, EVP and General Counsel.

As you'll [rule in light media] to participate in a listen-only mode on the call and ask that you not identify participants on the phones in your reports. We also do not allow audio recording, which we ask that you request -- respect, rather.

Let me now turn this over to Dean for the Safe Harbor disclosure.

Thanks, Deepak. 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 as those forward-looking statement. 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 to the call over to Mike Dugan.

Thank you, Dean. Good morning and welcome everyone to our third-quarter earnings call.

In our last call, I announced that Vivek Khemka, who has been CTO at DISH, is serving as President of EchoStar Technologies. Subsequently, we made a few other significant announcements. Anders Johnson has stepped up to the role of Chief Strategy Officer, while continuing to serve as President of our ESS division. Also, Dave Rayner has been appointed as Chief Operating Officer and will continue to serve as CFO of EchoStar.

These new appointments have enabled me to devote more time to [SaaS] business growth, while Anders' appointment at CSO provides additional focus on pursuing strategic opportunities in the satellite sector.

Let me now turn it over to Pradman Kaul to talk about Hughes and their performance this quarter.

Thank you, Mike. First a few financial highlights. Q3 2016 revenue for the Hughes segment was $356 million, a 5% growth over the same quarter last year. Hughes EBITDA for Q3 was $112 million a 10% growth over Q3 of last year.

In our consumer business, we ended Q3 with 1.018 million subs. Echo 17 continues to be at capacity in many beams, thus constraining growth in the North American subscriber base. The Echo 19 Jupiter 2 satellite is scheduled for launch in little over a month from now, and we expect to place the satellite into service by the end of the first quarter of 2017. It will provide capacity primarily for our consumer business in the US, as well as additional capacity in Canada, Mexico, and other countries in Central America, and help resume the growth rate of our subscriber base.

We have completed the ground tests on the satellite and ground system and the satellite is currently at Cape Canaveral. The original specification for Jupiter 2 was to have a total capacity of 162 Gbps, but we now expect that the system will have a total capacity of approximately 220 Gbps, a significant increase over Echo 17.

This is obviously very exciting because of the additional subs and revenue that it will support. Our North American team is currently developing the new HughesNet Gen5 plans that will be available on EchoStar 19.

As you may be aware, subscriber online time and video consumption have continued to increase, and today subscribers are looking for faster speeds and higher data caps. With HughesNet Gen5, we will be offering more data and materially higher speeds than we are today, and in addition, built-in WiFi and a range of features to enable our customers to optimize there online experience.

Our target markets will continue to be the geographies not penetrated by cable and fiber. We believe that the improved service offering will allow us to expand our addressable market of underserved homes. We intend to announce our Gen5 service plans and pricing in January followed by pre-launch marketing. We're obviously very excited about launching the new Gen5 service and Echo 19/Jupiter 2.

Updating you now on our Aero business, our leading customer Global Eagle Entertainment has grown the fleet of aircraft to service our equipment to over 750 aircraft, and it expanded its plan based to include a number of international codes, carriers, serving regions throughout the globe. These include among others Southwest Airlines, Icelandair, Norwegian Air, flydubai and now Avianca Brazil. We are particularly pleased to report that we are on track to launch our next generation of our Aero services and Echo 19 in early summer of 2017.

As part of this launch, we are on schedule for commercial release of our next generation high-speed Aero terminal capable of exceeding 200 Mb into each plane. We have already delivered preproduction units to several of our partners for initial testing and advanced integration into their systems.

It should be noted, that while Echo 19 will be a tremendous asset to the North American aero market, this new terminal is fully compatible with both KU and KA band satellites and thus will enable our clients to offer its services throughout this world. As part of this global service strategy, we're also bringing to market an advanced new dual band KU/ KA aero antenna that will give service operators superior capability to survey lines that [announce that] span multiple satellite footprints.

On July 1 we launched our consumer Internet service in Brazil, using our hosted KA payload on the Eutelsat 65-S satellite. This is the first extraction of our successful consumer service outside of North America. I'm very pleased that we were able to launch the service on schedule and all the beams are now open for business.

We have approximately 300 dealers sending our services as of now. The hosted KA payload on the [Telesat T-19] satellite scheduled for launch in the second quarter of 2018, will further enhance our presence in Brazil and other parts of Spanish-speaking South America.

Turning to our enterprise business, key enterprise orders in Q3 were from BP, Whole Foods, Dillards, York Telecom, Level 3, Phillips 66, the Oil and National Gas Commission of India, IV STAR, and Boeing Mexsat. We ended the third quarter with a $1.5 billion of enterprise backlog, an increase of 30% over the backlog of the same time last year.

In addition in October, we had two significant strategic contract wins. One is a large S-band mobile satellite system in Asia and the other is a significant contract in our defense business. Our work with OneWeb is now in full swing. We continue to be excited about the potential of LEO satellites in both our equipment and service portfolios.

To summarize, I'm very pleased with our performance in Q3, and we are looking forward to strong growth going forward.

Let me now handed over to Anders.

Thank you, Pradman. ESS's third-quarter revenue was $101 million compared to $124 million for the third quarter last year. EBITDA in the third quarter of 2016 was $84 million compared to $104 million last year. ESS continues to focus on the fleet expansion initiatives we've discussed on previous calls, with three EchoStar satellites Echo 19, 21, and 23 scheduled to launch in December. However, two of the launch providers have yet to return to flight operations after anomalies, so there is a risk that some of these could slip into early 2017. In addition, EchoStar 105 is now expected to launch in the first half of 2017.

Pradman has mentioned EchoStar 19, I will address the remainder. As we announced in September, our S-band satellite Echo 21 completed construction and was placed in storage pending a launch date from ILS. The launch, originally scheduled for the second quarter of this year, has been delayed while Krunichev completes analysis of an off-nominal condition which occurred on the last ILS Proton mission. ILS and Krunichev have currently provided a launch date to us of December 22.

A portion of the EchoStar 21 capacity will be used by our subsidiary, EchoStar Mobile, to provision its next-generation all IP enabled mobile communications network and integrated mobile satellite service network with its CGC component in the European Union. In light of the delayed launch, the EchoStar Mobile team has been working closely with the EU and individual country regulatory bodies regarding the required regulatory milestones for its mobile satellite services.

We have two satellites that were scheduled for launch on Space Ex's Falcon 9 earlier this year. EchoStar 23, a flexible KU-band BSS satellite designed to fulfill multiple mission profiles will initially be deployed at the 45 degree west orbital position over Brazil and EchoStar 105, the hybrid KU, KA and C-band satellite that will replace AMC 15 at the 125 degree west orbital slot.

Space Ex continues to analyze the anomaly that occurred in September during a pre-launch static fire test. Pending the outcome of that investigation, we expect EchoStar 23 to be launched either in late December of this year or early in the first quarter of 2017. As I stated, EchoStar 105 will be launched in the first half of 2017.

For those of you keeping track, if all these launches should occur as scheduled, we'll have two to three launches in a row in the second half of December.

I'll now turn it over to Vivek.

Thank you, Anders. Good morning, everybody. ETC revenues for the third of 2016 was $283 million compared to $295 million in the third quarter of 2015. EBITDA was $9 million compared to $26 million in the third quarter of 2015.

As Mike stated, I joined EchoStar three months ago, and this is my first earnings call as President of ETC. Being new to EchoStar, I focused my last three months in understanding the business, visiting our key customers, meeting critical vendors and reviewing our product road maps, engineering and technical operations. I have been pleased with what I have seen so far.

Based on my review, I've set the following goals for the EchoStar team. First, continued support for Sling TV. Last quarter, we rolled out the new Sling TV interface to more devices and improved general performance and stability of the platform. In Q4, we will continue to support the Sling TV product road map and scale the platform to meet Sling TV's growth projections.

Second, continue to support the DISH core business at the Hopper product line. We continue to develop new features like YouTube on Hopper that helps DISH meet the needs of its customers and also offer key (inaudible) industry.

Third, leverage our expertise in video to diversify and launch new products in 2017. Last, continue to build and meet this talented team at EchoStar as the industrial landscape continues to evolve.

Thank you, and I will now hand it over to Dave Rayner.

Thank you, Vivek. EchoStar revenue for the third-quarter 2016 was $742 million compared to $761 million of the third-quarter 2015. The reduction primarily attributable to EchoStar Technology and EchoStar Satellite Services offset partially by an increase in Hughes revenue. EBITDA was $211 million for the third quarter, compared to $217 million in third quarter of last year. Included in the quarter was a $14 million nonrecurring charge related to home automation product in our ETC segment.

Net income attributable to EchoStar common stock was $36.6 million compared to $30.1 million in the third-quarter 2015, and diluted earnings per share were $0.39 compared to $0.32 last year. The increase in net income was primarily due to lower depreciation and amortization, lower income tax provision from a lower effective tax rate, and an increase in equity earnings of unconsolidated affiliates. Offsetting these items were the lower EBITDA and higher net interest expense primarily from the new notes issued in July.

Capital expenditures for the quarter were $157 million compared to $123 million for the same quarter last year, primarily due to higher CapEx and satellites under construction. For the nine months ended September 30, capital expenditures were $510 million compared to $480 million last you.

Given the delays in the satellite launches that Anders spoke to, we expect full-year 2016 spending to be around $700 million, with once again satellites and related ground structure driving the bulk of the spend.

Free cash flow, which we defined as EBITDA minus CapEx, was $54 million for Q3 2016, compared to $93 million last year. The change primarily due to the higher CapEx this year.

Turning to the business segments, Hughes revenue for the third quarter of 2016 was $356 million up 5% from last year, driven primarily by domestic equipment sales and consumer broadband partially offset by international equipment and services.

Hughes EBITDA in the third quarter was $112 million, an increase of 10% from last year. Primary contributor to the EBITDA growth was the higher revenue and the product mix.

EchoStar Satellite Service revenue was $101 million through the third quarter compared to $124 million last year with the decline primarily caused by the termination of leases with DISH for Echo 1 and Echo 8 in the fourth-quarter 2015. EBITDA was $84 million compared to $104 million in the same quarter last, the decline being a result of the lower revenue.

EchoStar Technology revenue for the quarter was $283 million compared to $295 million last year, the change being primarily due to lower equipment sales to international customers partially offset by higher service revenue from DISH. ETC EBITDA for the third quarter was $9 million compared to $26 million, the decrease being primarily due to lower revenue and the previously mentioned charges associated with the discontinuance of the home automation product SAGE.

In our all other and elimination segment, where we record gains and losses on sales of securities, eliminations for inter-segment sales and other corporate transactions, EBITDA for the quarter was $6 million compared to a negative $15 million last year, the increase being primarily due to termination of our lease with DISH on EchoStar 15 in Q4 last year, as well as an increase in equity earnings of unconsolidated affiliates.

We continue to have a strong balance sheet and ended the quarter with approximately $3 billion of cash and marketable securities. Included in this are proceeds of a bond issue, which 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.

Thanks, Dave. In closing, I'm pleased with the progress we've made in Q3 and on our numerous strategic initiatives while also delivering solid results in the quarter. As we've discussed previously, we intend to use our strong balance sheet and network and operational expertise to continue to pursue many strategic opportunities. While I'm sure you'd like details, at this time we're not ready to discuss any specifics.

It's now time for questions, so operator would you please start the Q&As.

(Operator Instructions)

Ric Prentiss, Raymond James.

A couple questions.

First, can you weigh in a little bit: obviously, some delays, but not too bad. What are your thoughts as far as how the delays would affect your financials and your strategic set up? And what if the delays were to extend out a little further?

What delays are you talking about?

Just slipping from for 4Q to being late December or early 1Q, is there any (multiple speakers).

You must be talking about satellite launch delays, is that we are question's around?

Yes.

Okay. Obviously, as we all have been open to the news, the launch providers have had a number of struggles with some past launches, which have delayed things. We're going to continue to be pretty conservative in returning to flight on some of these launch providers, and we don't have a lot of control over the exact launch dates. Right now, I'd say my own personal perspective is, we're in better shape than I thought we would be in three or four months ago. Anders, do you have anything to add to that?

No, I think, obviously, all of the business plans related to the various satellites are in lockstep with the launches. To the extent our launches occur in December, in the case of Echo 21, that would be almost a nine-month delay relative to original expectations. We've kept all of our regulators and other license issuers apprised of our status with regards to 21 and EML specifically.

On Echo 19, as Pradman mentioned, the satellite is at the launch site, now awaiting the two launches that are ahead of us. That one, as was mentioned, will stand that service up after the first quarter of 2017. Echo 23, which is similarly late relative to our original expectations of a launch in October, to the extent we get off in December we believe we still have the time necessary to do all the things we were hoping to do with, including meeting our regulatory obligations in Brazil. As was mentioned, Echo 105's lateness results in us having to continue to lease the AMC 15 satellite at the 105 orbital location, which remains stable, until the new satellite arrives.

But all of the business plans are remaining fully intact.

Ric, a little bit more in terms of specifics on financial impact. Echo 19, I think, is on schedule where we've expected to be for some time now, so there's no impact there, as Anders described. On 21 and 23, the financial impact on that was expected to be relatively minimal in near term. Those are both strategic assets, as we discussed previously, and so the slight delay is more of a regulatory risk than it is a financial risk. We feel very comfortable that Anders and the regulatory team have that well in hand.

105 will have a financial impact in two aspects. Anders just spoke to the additional lease expense that we will have on leasing AMC 15 for an extended period of time, as well as a delay in ramp of service revenue off of 105. It's yet to be seen exactly how much that delay would impact, but on the expense side it's probably going to run us somewhere about $4.5 million to $5 million a quarter in additional expense that we would hope to eliminate going forward, until we can replace AMC 15. Then obviously, the revenue delay with the higher capacity.

Great. That's exactly what I was looking for. Thank you.

Andrew Spinola, Wells Fargo.

Thanks.

I had a question on the US subscribers in the Hughes business, this quarter down 12,000. I'm just wondering, since you've lost 20,000 subs in the last two quarters, do you have enough capacity even before 2019 to be adding subs? Or is this a function of having so little capacity that you're not actively marketing the service at this point?

No, we're actively marketing. I think our gross adds for this quarter was close to 80,000 subs. What we're doing is, as some subscribers churn out of the popular beams, we'll fill them back up with new adds. We're actively marketing. We can't grow because we don't have enough capacity to grow, but we're trying to stay as close to the status quo until we get Echo 19 into business.

Got it. I wanted to ask, Pradman, could you give us an update on the progress so far in the Brazilian broadband business?

Yes. It's been very good. We launched the service on July 1, as I mentioned, which was on schedule. The initial uptake has been pretty much like we projected. We have about 300 dealers that are selling and installing our product right now. We expect to grow the number of dealers over the next six months, so we'll get to many more dealers than the 300 we have today. Everything is going like planned. We're pleased that we're getting the important number of calls to our call centers. We're getting good response from the customers on the service, and the system has been operating flawlessly. All in all, I think everything looks good right now.

Could we get the sub count in that business?

Because it's just starting, the numbers are not significant, so at this stage we haven't decided when we'll start giving the sub counts. The few subs that we have in the first few months are included in the total sub counts that we talk about in the consumer business.

Got it.

(Multiple speakers) right now, the slope is good. It's growing at a nice pace.

Right. I think on the [bond] call you mentioned that you would expect to end the year with 25,000 subscribers. Do you still think you can hit that target in Brazil?

It's probably going to be a little less than that because the ramp-up is a little slower than we expected. We don't have a wholesale partner yet, which is what's impacting it. On the retail side, we're pretty much on track.

Got it. What's the visibility to a wholesale distribution partnership down there?

We are talking to one or two major operators, but we don't have a deal yet.

Understood. Question for Anders.

Just given the change in the ESS business with DISH, the satellites that have rolled off, a couple of satellites you have that are closer to the end of life, I think historically you guys have said that you expect that business to be roughly flat over the medium term. Can you update us on what your outlook is for that business?

Our relationship with DISH on the older assets is pursuant to contracts, which have in their terms normal expiries. The assets that we got back last year, we did so at the end of their respective contracts. Right now a lot of effort is being put into finding other opportunities to deploy those assets; first and foremost using them strategically for regulatory purposes. We're also right now in discussions over some deployments that could result in some revenue generation. The business with DISH is certainly very stable and very predictable, and we look at other opportunities to work with DISH in satisfying their needs going forward.

Thanks. One last one for me: Dave.

The Harris CapRock asset changed hands recently. Just wondering, given you've raised significant capital, I thought that might've been a business that could've interested you. Would you be willing to just say that you gave that more than a passing look? Or are those type of businesses at all an interest to EchoStar? Thank you.

Yes. As Mike said in his closing comments, at this point in time we're not ready to comment on any specifics around our strategic opportunity initiatives.

Fair enough. Thank you.

Andrew DeGasperi, Macquarie.

Thanks.

First question: can you maybe tell us what drove the capacity increase on Echo 19?

We mentioned that we expect it will be able to support 220 gigabits per second, so you can do the arithmetic in terms of number of subs based on the different plans and the capacities that we will assign on a per sub basis.

But was there anything that (multiple speakers). Was there anything that, technologically, did you figure something differently that, this time, that essentially gave you that leap as far as the capacity?

(Multiple speakers). Obviously, the engineers have been tracking this as we've gone through the test phase, and Pradman's has announced where we think it's at right now.

Got it. Secondly, --

It's a combination of technology improvements both on the satellite and the ground segment.

Got it. Okay.

Secondly, it seems your revenue grew slightly in the quarter despite the decline in subs year over year. So I was wondering should we assume that ARPU was up nicely in the quarter?

Yes.

Got it. Was this due to mix as far as wholesale/retail?

Yes, that's part of it too, but the ARPU per sub in the retail channel did go up and has been going up every quarter for the last four quarters, which is not a question of mix. In both the retail and the wholesale channel, the ARPU has been creeping up.

Got it. Last one for me: have you had any discussions with the EU as far as potentially delaying the S-band satellite? Or is that a conversation you're going to have if and when you're sure you going to miss the milestone for December? Thanks.

We've been keeping both CoCoM as well as the member states apprised of our situation pretty much all year, so everyone's aware of what our situation is, what has caused the delays. We don't believe anyone is going to act unpredictably here, so right now we're on track for a launch on December 22. Once the satellite is in orbit, and shortly thereafter, we get through a series of deployments, we would expect to enter into service and be offering commercial service in the first quarter of 2017.

Great. Thank you.

Chris Quilty, Quilty Analytics.

Anders, on that last point of delivering service beginning in the first quarter, have you defined better what those services will be and what sort of revenues we might be able to project from those services?

As far as technically the services themselves, we've worked over the last almost three years with our team at Hughes in developing a product. we have a product -- we refer to it as a portable data terminal. It is a device which, over the satellite, would create a Wi-Fi hotspot in areas that are not connected terrestrially. That's a device which we currently have in production, and we have a small but growing inventory of them, which we'll be offering into the market. We have a distribution arrangement with a European telecommunications service provider that's going to be distributing the unit.

But that's a particular product. We also have a number of other applications. In fact, one of them is currently being tested across our existing payload, the W2 8 payload on the Eutelsat satellite, as well as in discussions for just the provisioning of power and bandwidth for other applications, which we won't necessarily own. As far as revenue expectations of those, I'd say let's get in the air and get the system qualified, and then we will start selling the product and see where it goes. I don't know if Dave wants to create any expectation as far as revenue.

Got you. Would these services be mutually exclusive of work that you're doing with OneWeb, which is also looking to provide mobile Wi-Fi access on a global basis? Is it the fact that it's a regulatory service that would keep it protected from other proposed services?

I'm not quite sure I understand the question, but it's a strategic initiative for us that we've been developing, not necessarily in coordination with other investments we have in other developing companies.

Okay. Fair enough. Question for Pradman.

You had mentioned two strategic wins, and I think that was on the enterprise VSAT side, with a defense customer, and I think it was an Asian S-band deployment. Can you give us any additional details on the size and scope of those?

The Asian S-band mobile SAT system is a contract worth about $69 million, so that is significant revenues and EBITDA margins. It's a system that's very similar to the system that delivered to MEXSAT in Mexico. I can't tell you the name of the customer yet, but I'm sure in the next couple of months we'll be able to name the customer.

The second one was very important strategic win in our defense sector. And again, because of the nature of that contract, we can't disclose what exactly that system is and what the customer is.

Understand.

And on the Echo 19, with the technical changes that you've made on the satellite and system, how comfortable are you that all of the components, both ground equipment, terminals, and satellite, will be coordinated at launch? Or are there additional investments or upgrades that you need to do with the gateways in order to launch that service?

Well, no. The system has been being developed for the last three years, and no changes were made at the last minute. It's just that the performance of both the satellite and the modulation in their reporting that we used has resulted in performance which was better than what we had originally spec'd. So, all that's been tested on the ground. We've integrated it to the necessary components, so I don't expect any changes in launching this service from where the system is today.

Okay, and Dave, I missed your updated forecast for CapEx for this year.

I'm glad, Chris, to hear that you missed it. But I didn't give one. Oh, I'm sorry, for this year.

Yes, we're right around $700 million is where we're expected, down a little bit from what we had said previously, because of the satellite delays. As a result, next year's CapEx is probably going to be a little bit higher than we had previously indicated. We're in the middle of a budget process. And probably next year we'll probably be between $350 million and $400 million before we start any new projects.

And if you stripped out any of the satellite CapEx, can you remind us, what's just your maintenance CapEx?

The biggest component after the satellite and ground infrastructures is Hughes' consumer equipment. And that's the biggest component; we've got ETC maintenance CapEx in both the Uplink, as well as starting to, I don't know if you call it maintenance CapEx, and continue to build out the Move Network. Those two items combined are the two biggest other components, and that's going to probably run, call it $200 million on an annual basis.

Got you.

And just for reporting purposes on a go-forward basis, you're going to have some growing subscriber counts in your international markets. Do you intend to disaggregate maybe domestic versus international? Or are we just going to get a consolidated gross net ad for Hughes on a global basis?

I think as Pradman indicated, for now we're going to combine them. Once Brazil and other international markets become more significant, I think we'll probably end up giving them separately. But for right now, as Pradman said, the numbers aren't significant enough to really warrant separate disclosure.

Perfect. Thank you.

Umesh Bhandary, Jefferies.

Thanks for taking my question.

Maybe first one, your relationship with DISH; and you alluded that, that revenue stream has remained stable. Maybe, why was the last two satellites not renewed? Were they just out of life? Or what happened to that particular contract?

Yes. Both of the assets were at the ends of their natural fuel lives. So we had managed them pretty much to the end of their station-kept capabilities, and immediately after we received them back from DISH, we put them into incline orbits to extend their lives.

And then that capacity from those two satellites, how did that sit? Did you go into some of your other satellites, or how did that get managed?

Well, in the case of both of those satellites, were at the time they were returned to us in a backup deployment, meaning that the actual traffic that had previously been on them when they were younger, had already transferred onto more modern satellites that we had launched and put into service with DISH. So those assets had been acting as backups, if something anomalous were to occur to one of the operating satellites.

Got it. And then are there, in a similar end-of-life satellites coming here in the next couple of years? How should we think about the trajectory of that revenue stream?

There is only one other satellite currently that I would characterize as being in a similar point in its life, which is Echo 12. But otherwise, the other assets that we have with DISH are anticipated to remain with DISH.

Got it, and just maybe a little bit of more interesting question for you.

For some of the content to move over the top, the Sling TV or whatever have you, and how does that change DISH's requirement for satellite capacity? Does that necessarily reduce the satellite capacity, satellite need? Or is that really more incremental of what it's coming through over the top?

You know, this is Mike Dugan.

Obviously, over-the-top programming options or the way they launched that has almost nothing to do with satellite capacity. That's all delivered over Internet, although a few of those channels probably start the same place in our broadcast centers. It's all before they move to satellite, so there absolutely is no interaction between the two services.

Okay, so what I was trying to understand was, when they moved like through the Internet, they are not really necessarily being taken off from the satellite transmission world?

Well, channels are delivered to our over-the-top service a number of ways. I'm sure a few of those come off of other satellite capacity that has nothing to do with DISH. Again, any channel that's shared that's on the DBS service versus the Sling TV, for instance, that channel is typically different than what's on DBS and where it isn't, it's taken off and made available to Sling TV customers before it goes to the DBS service. So again, I'm not sure --

This is Vivek here.

If the question is, does the over-the-top reduce the need for satellite service, the answer is no. There are millions of customers on the DISH satellite service that have no access or will never be able to access that (inaudible) over-the-top. So, as long as there are any customers still continuing to use the DISH satellite DBS service, the need for satellite capacity will continue to be there.

Okay. That's actually what I was going after. Thanks for that clarification, very helpful.

One final question for me. Just in terms of your leverage philosophy, I know you're looking at various growth opportunities. As you look at those opportunities, what is the general philosophy, and where you want to keep your leverage target at?

Certainly, the leverage right now is a little bit on a gross basis. It's probably at a comfortable level. I should say we're not uncomfortable with it; we could take it higher for the right opportunity. On a net basis, the leverage ratio is minimal. It's certainly, we need to put money to work and we need to generate returns of the cash that we have. With the leverage ratio, while we don't have a specific target in mind, it more depends on what we use the funding for and how quickly, if we lever it up further from here, how quickly we could delever it.

Got it. Thank you very much, those are all my question.

(Operator Instructions)

And there are no further audio questions.

Thank you all. I think we've come to the end of the conference, so let me just say, thank you all for participating in the conference today and good day.

Thank you.

Thanks, everybody.

Ladies and gentlemen, that does conclude today's conference call. You may now disconnect.