EchoStar Corporation (SATS) Q1 2015 Earnings Report, Transcript and Summary

Good morning. My name is Nicole, 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] Thank you. I would now like to turn the conference 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’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, Corporate & Business Development; and Dean Manson, General Counsel. 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 now turn this over to Dean for the Safe Harbor disclosure. Dean?

Thank you, 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 earning. 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’ll 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 grab market share and revenue growth in the medium to longer-term. Each of our three divisions continues to play a role in this strategy, so management of these divisions will elaborate on this in their respective sections. In addition to the 24 satellites that we own, lease and manage; we have five satellites currently under construction, planned to launch in the next couple of years. Our new investments also included broadband consumer business and launch later this year. Additions to our satellite fleets were 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 of years. We would now like to talk in a more little detail about our 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 about financials after which I will comeback 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 for $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 the 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 plan 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 as been busy supporting DISH Network with the launch of their OTT services branded Sling TV and that's gone a very well with our 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 OTT 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 long standing set-top business. One of the products and which we are most excited is the already announced 4K Joey, the first 4K Ultra HD set-top box from a PayTV provider that is compliant with all HDMI 2.0, HDCP 2.2 and compliant their all 4K televisions. DISH Network already announced this product earlier this year at CES. We continue to enjoy the introduction of leading edge technical products that we continue to deliver to other customers as well. We are continuing to develop and security and home automation platform sage, we believe sage is compared to – is compared to current product and services in the market place a very unique and highly competitive to echo system that will be well received by consumers. We are planning a launch for the course for the future and supported devices that will provide a solution that is economical and future 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'd now 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. 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 XXI for our European Union Mobile Venture formerly know Solaris now EchoStar Mobile. The EchoStar XXIII BSS satellite and the EchoStar 105 Ku Band Satellite are currently on schedule and in line with expectations. Simon will address the two satellite programs that he is just managing in a few minutes. We also continue to manage the Echo XVIII for DISH Network. In addition to the satellite fleet expansion we are aggressive pursuing additional spectrum rates 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 agreement with SES and the contract for the new EchoStar 105 satellite, we’re aggressively pursuing revenue growth opportunity on all of these satellites. We continue to be very excited about the future ESS as we grow our fleet and our satellite related businesses. I’ll now turn it over to Pradman.

Thank you, Anders. Hughes had 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, but the North American consumer unit being the primary drive of revenue and margin growth. So let me start with the highlights of the North American consumer business. Gross adds for the quarter were 98,000 subs with the retail contributing nearly 17% of these gross adds. This metric is clear indicator of the continuing strong demand for our service. We have net adds of 22,000 in the 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 Gen4 net adds increased by 251,000 and the negative subscribers reduced by 134,000. In Q1 2015 Gen4 net adds were up by 45,000 offset by reduction of 23,000 negative subs. This is once again very much in line with our strategy of increasing the subscribers based on our general platform, while reducing our legacy base. We are also very pleased that would 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 19% 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 results 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 significant enhancements to our Gen4 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 U.S. 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 65 West A satellite. Construction of the satellite is preceding well and 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 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 scheduled and we expect to be in service in mid-2016. Eutelsat 65 will be our springboard in Brazil for broadband service 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 uncertain conditions overseas, our subsidiaries at the U.S. 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 larger orders from IGT Xplornet in Canada, Exxon, Sherwin-Williams, York, Sonoco and CVS. In our international business, we booked large orders from Tell Omar, State of Santa Catarina, TIM and Grupo Ultra all from Brazil, HDFC bank and FSS in India, Media Networks of Peru and [Indiscernible]. Our delivery of global management of services whether satellite or terrestrial for enterprises also continues to expand through our various international subsidiaries as well as through our service partner. We are providing services directly. We also provide infrastructure to other operator around the world which is enabled them to provide services in their individual markets. Our major of our success is that we’ve shift 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 with that we continue to expand our market leadership in both consumer and enterprise products and services, and North American consumer broadband service is that largest and most successful satellite service in the world. And with the JUPITER 2/Echo XIX launch our ability to grow beyond further in that. This growth will continue to expand globally as we will see our first expansion of consumer service beyond North America in 2016 as we delivered 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 $240 million in the first quarter, up 11% over the last year. EBITDA margins 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 primarily related to the ramp-up in satellite construction. As indicated on the last earnings call, I’d 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 first quarter compared to $78 million last year, declined primarily due to the ramp-up in satellite construction. Turning to business segments, EchoStar Technologies revenue in the first quarter was $346 million, compared to $409 million last year. The decline is primarily due to lower equipment sales of DISH network which we expect will continue for the rest of 2015. ETC EBITDA in the first quarter of '15 was $26 million compared to $39 million last year. The reduction being primarily due to the lower revenue as well as an increased litigation costs. In addition, EBITDA was negatively impacted by development and start up costs of our SAGE product line. We would expect that SAGE will continue to have a dampening in – at an ETC result in the short-term. Hughes revenue in the first quarter of 2013 was $325 million for growth of 3% over last year. Growth was led by consumer services and the mobile satellite revenue offset partially by lower hardware sales of DISH for their wholesale services. Our international sales had solid performance in spite the foreign exchange headwinds impacting reported results. Hughes EBITDA in the first quarter was $91 million and that 11% increase over last year contributed to the strong EBITDA growth were 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 lease with five satellites we acquired from DISH as part of the HRG transaction, effective first quarter last year. ESS EBITDA in Q1 was $106 million, an increase of 20% last year due primarily the higher revenue offset partially by the conversion of AMC 15 and 16 from capital lease to operating lease treatment. A capital lease conversion had almost $4 million impact in Q1 and that would be a negative impact and we expect approximately $17 million negative impact to ESS EBITDA for the whole year. In all other elimination were report gains on sales securities our locations for intersegment 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 is primarily due to equity and earnings are various unconsolidated entities. We continue to have a very robust balance sheet with approximately $1.7 billion of cash and market securities our to cash flow ratio is found by debt convenient stand at 2.88 and last week S&P raise our corporate rating and the ratings on our outstanding bonds. Let me now turn the call over to Mike.

Thanks, Dean. Before we go to question and answer I would like to make a few closing comment. First of all we signed an agreement with the Bell TV Group, which forms and organization that will be focused on delivering a broad portfolio of World class future risk, consumer devices for the broadcast and broadband. 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 formally 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 just proceeding according and it’s scheduled for launch in early 2016. The development by the use mobile set team of ground infrastructure and putting the gateway in calibration earth station as well as the terminal components for 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 EU and member States to more clearly define and harmonize the regulations related to operation of satellite and to rest filed delivered services in order to offer 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 did not have additional specific 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 and examining these opportunities and we will not put ourselves in a position above or reaching a robust spending just for the sake of getting a deal done. It's now time for question and answers, so operator would you please start that process.

[Operator Instructions] We'll pause for just a moment to compile the Q&A roaster. 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 am wondering what DISH's position is in terms of capacity on the satellite to be able hand 4K introduction – what sort of outlook do you have for that to the ESS business in the revenues in that business, if there is a ramp in 4K?

This is Mike Dugan. Obviously, DISH's 4K plans are not totally visible to us nor we are able to comment on that publicly. Obviously, 4K paper view and special events is where it appears the industry is going to start, and the development of 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 rolled out. But right now we don't have any real specific expectations nor we plan any, for any major increase in DISH revenue based on 4K bandwidth requirements they have. They have to manage where they allocate their bandwidth on their own and right now there is no major initiatives to get them a dramatic improvement in bandwidth and therefore increase on DISH revenue.

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

You are talking about the aspen initiative?

Yes, I just wondering if -- the numbers of countries that have an approved your use of the license has increased?

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

Understood. And last question from me Pradman you've just given the working capacity in the seasonality going into the summer months here to 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, we don't give guidance of specific numbers of quarters on prospective basis. But generally we should see the capacity and the beams filling out we should see net add 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.

Thank you. Operator?

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

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

Could you maybe clarify the first question again?

In your 10-Q filing, you mentioned that you are looking – you are exploring the potential new product and services in Mexico alongside any Internet of Things market?

I am not sure – all that’s little bit [indiscernible] to enter in the queue, JUPITER 2/ EchoStar XIX has beams over Mexico that could be use for a broadband service in Mexico and it’s possible that’s what you are asking about and certainly we are looking at partnership or the approach to make sure we utilize those beams in the most cost – 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 the Europe?

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

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

I think you going to have to apply some of those questions to DISH. Because their products not into production. We don't even have a much of a forecast other than very preliminary numbers. We do know we are in the middle of transition, Hopper with Sling is near in the end of its product life and it will probably be build in parallel to I think the -- let's just call it Hopper next generation for now, because I don't think they have even release the name for it. So I think they are both built in parallel for a while. But total numbers, our objective as always been to develop boxes that allow DISH to lower the SAC [ph] and improve the customer experience. The next generation is focused directly on that. And as we talked about on conference calls in the past, as we develop higher functionality set-top box is with more tuners and more capability, we trying to continue 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 there set top box requirement.

Great, thanks.

Andrew just to the clarification I think I found the reference you are referring to regarding internet of things. And just to be clear that is not referring to Mexico there is a lot of things that discussed in that paragraph and that internet of things reference is really generic reference to our SAGE product.

Got it. Thank you very much.

[Operator Instruction] 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 19 was originally slated for 2Q, '16 launch and I think you said in the call that move to the second half of 16. I just want to confirm that change?

So, yes, right now there is -- it’s a very high capacity satellites we made it clear that we were kind of doing that generational change there is lot of disturbance in the course right now both in the production of Echo 19 and the launch slot. So we as a group decided to -- at the end of the year in a last faculty year in and so to say in Q2 because we are not sure all that's going to line up for that launch right now. And if I had real 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 [Indiscernible].

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

But remember we don’t include our consumer’s backlog in that number so that primarily the enterprises in 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 temporary phenomena on a seasonality basis. It’s not that the market is going way or that they losing any chance. We’re 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 a follow up on that last question just from the slightly different angle but the dollar has strengthen pretty appreciably again some of the currency 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 inline of the dollar is that consideration some of the FX headwinds that are in the market right now?

Well, you kind of look at it two ways, we have Service Company in Europe, Brazil and India, most of their revenues in cost and local currency so that the dollar strengthening doesn’t really impact them very much. The product sales business that we have from German car in the United States gets impacted in terms of affordability in new countries, for example we sale products into Russia. The Russia 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 will 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 or they not require kind of external dollars on a funding business?

Right, right. No, that's absolutely locally funded.

And then, for Dave leverage has come down a lot at the restricted group where the bonds are do due to a free cash flow growth of the business and also obviously bringing over the cash flow from the DISH asset when you did that transfer. Do you have any views on sort of how we should think about leverage here given that you are thinking about potentially some strategic things which could involve inorganic growth? And how should we think about the capital structure there is no pre-payable debt at the bond restricted group but the maturities are sort of getting shorter David at some point do you think about recapitalization as a part of our more strategic type of transaction?

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

I guess we have a few on leverage -- I mean, leverage is a lot lower from the time of the original transaction because cash flow has grown and this transaction which brought cash flow from DISH over to SATS, do you have a view on sort of what you think the operational lines are of leverage that we should think about is a potential sort of goal post for where you think you could go?

There is certainly an upper goal post where. I start becoming uncomfortable that a lot of that tends on a transaction that we require that leverage to go up. If it’s going to be a situation where we have maintained that leverage on a long-term basis, obviously you’re going to won at lower level. But in terms of -- if it’s going to delever quickly because of the transaction, you more willing up 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 completely.

Thanks. Then just a final from me, you have 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 therefore the replacement cycle on those [indiscernible].

This is Anders. I mean, we have one satellite that we are managing which is Echo 18 which is a DISH spotting satellite which will be within orbit to both end capacity, but also more importantly add redundancy. As far as the replacement cycle on DISHs other satellite including those which moved over to us last year and we don’t contemplate replacements right now, because the current network, space station 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 [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.