EchoStar Corporation (SATS) Q2 2011 Earnings Report, Transcript and Summary

Good morning. My name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the EchoStar Corporation Q2 2011 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. Mr. Deepak Dutt, Vice President of Investor Relations, you may begin your conference.

Thank you, Stephanie and good day everybody. Welcome to EchoStar’s second quarter 2011 earnings call. I’m joined today by Mike Dugan, our CEO, Dave Rayner, CFO, Pradman Kaul, President of Hughes, Mark Jackson, President of EchoStar Technologies, Anders Johnson, President of EchoStar Satellite Services, Grant Barber, CFO of Hughes, Dean Manson, Acting General Counsel, Paul Orban, Controller, and Ken Carroll, Executive Vice President, International Business Development. As you know, 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 taping and ask that you reflect that. Let me now turn this over to Dean Manson for the Safe Harbor disclosure. Dean?

Thank you, Deepak and hello everyone. All statements we make during this call that are not statements of historical facts, constitute forward-looking statements, which 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, please refer to the front of our 10-Q. All cautionary statements that we make during this call should be understood as being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our reports and should not place undue reliance on any forward-looking statements. We assume no responsibility for updating any forward-looking statements. Let me now turn it back to Deepak.

Thanks, Dean. With that, now with comments by Mike Dugan. Mike?

Okay, thank you, Deepak and welcome everybody to today’s call. We are pleased to have delivered a solid second quarter with strong growth in profits. I would like to highlight some important events from the second quarter. As many of you are aware, we closed on the Hughes transaction on June 8, 2011. We continue to be very excited about this acquisition; this combination with Hughes improves our revenue diversity and strengthens our competitive position domestically as well and more importantly internationally. The huge fast growing North American consumer service business as well as our managed network business when combined with the Hughes global presence in over a 100 countries, greatly enhance our growth opportunities in the coming years. Hughes has a strong engineering organization and the technology portfolio that is first rate, leading edge and has a proven track record of innovation. These attributes combined with our existing satellite expertise and fleet presence, our industry-leading set-top box technology and engineering and our cutting-edge services from Sling and Move networks makes for a powerful combination. Integration activities are well underway between the two organizations with the key objectives of maximizing efficiencies and acceleration of growth in all aspects of the combined company progressing well. In connection with the Hughes transaction, we also closed a $2 billion debt issue in the quarter comprised of $1.1 billion senior secured 6 1/2% notes and 900 million senior unsecured 7 5/8% notes. The issue was oversubscribed and we are very grateful with the strong investor response to the EchoStar and Hughes combined story and are very pleased with the attractive pricing on the notes. At the Cable Show in Chicago in June, EchoStar launched a new US cable operator solution called Aria. Aria is an innovative solution for US cable operators that will allow…

We are now ready for the question and answer part of the call. So, operator, would you set it up please?

Certainly. (Operator Instructions) Your first question comes from the line of Anthony Klarman from Deutsche Bank. Your line is open. Anthony Klarman – Deutsche Bank: Hi, I had a few questions. First, I was wondering if you can give us an update on the timing of the amounts of your remaining CapEx that is due to be spent on Jupiter-1 and Echo-16 and if there been any more timeframes given to the launches of those satellites?

Well, the launches are the same as I referred to in my opening comments. Echo-16 is next year and Jupiter is hopefully first quarter of next year, but as you know, there has been some shifts in some of the launch windows, but the satellite production construction is on schedule. I’ll let Dave talk about the capital investment.

In terms of Echo-16, we got about a $111 million remaining as of June 30, and on Jupiter about $135 million remaining and both of those are inclusive of launch agreements. Anthony Klarman – Deutsche Bank: Great, so that’s a fully cost number, that would also include all the insurance premiums and everything else?

That includes, does not include the insurance premium, that’s the satellite plus launch. Anthony Klarman – Deutsche Bank: Okay, got it. Satellite plus launch. And then, I was wondering if you could provide maybe a pro forma look to what Hughes would have contributed I think in the Q you lay out sort of $22 million or so for the period that you owned it and that runrates to a number north of $60 million of EBITDA for the quarter and I think they’ve done $53 million or something in the prior year period, is that the right way to think about what the Hughes runrate EBITDA would have looked like for a full quarter?

Yes, I am not sure I’m willing to speculate a number out there in terms of what it would have been for the full quarter. Obviously, the review of the activity was 22 days is what we put into the financial statements, that’s what was reviewed by internal staff that was – what was reviewed by KPMG, speculating on what it would have been for the full quarter is probably not appropriate. Anthony Klarman – Deutsche Bank: Okay, and just a final question on TerreStar. Obviously, DISH wound up being the winner that asset and I think your Q lays out a carrying value of that debt of around $675 million. I was wondering if you had a view as to what the timing of that would be and whether that cash would all come into the parent level or whether any would be put down at the EHHC subsidiary level?

The TerreStar investment is held at the parent level and so that’s where that cash would come into. In terms of timing, I would expect to have some of the proceeds potentially in the third quarter, but I would also expect that this can take quite a bit of time to fully resolve through the bankruptcy process, final distribution of all proceeds. Anthony Klarman – Deutsche Bank: Okay, thank you.

Your next question comes from the line of Jason Bazinet from CITI. Your line is open. Jason Bazinet – CITI: Yes, I have two quick questions. I think in the third quarter of last year, before EchoStar acquired Hughes, you sort of laid out expectations between 11, 15 at 10% topline growth per year, margins moving into the low 30s. And I want to make sure that now that that’s sort of the under the SATS moniker if you will that you are still comfortable with that sort of broad based outlook? And second, I don’t think you guys have commented on this, but are there any sort of cost savings that would result from the combination of EchoStar and Hughes? Specifically, I’m thinking of FSS?

Let Grant answer the first question, I’ll take the second.

Yeah, the guidance we gave last year was really, it was a five year outlook. I think if you have seen the results that we released at Q1 as our last public company which has consumer businesses growing at 15% and our international was in a 15% to 19% and the overall company was growing in the 9% to 10% range. But we only ticked up 22 days this period and I think we’ll see the actual components. They are still very much inline with the guidance that we gave out almost a year ago this time. Jason Bazinet – CITI: Okay, thank you.

Now as far as efficiencies, obviously, we continue to be focused on the combination of certain activities and functions to improve the actual bottom-line, but we don’t see a lot of redundancy. I think we’ve said that several times, that few companies are very complementary. There is very little redundancy within the engineering organizations. But there are expertise as that for instance, Hughes has in the RF domain that we're starting to utilize on the EchoStar side and vice versa I think there is some procurement and some functionality that EchoStar can bring. This can help Hughes procure at about a rate and provide some additional savings there. We are also looking at the basic combination of facilities and policies and procedures that will bring some efficiencies. The real focus as I said in the initial comments is to drive both organizations to higher revenues and better efficiency rather than dramatically reduce expenses. Jason Bazinet – CITI: Okay, thank you very much.

Your next question comes from the line of James Ratcliffe from Barclay's Capital. Your line is open. James Ratcliffe – Barclays Capital: Thanks for taking the question. Wonder if you can talk just directionally about the opportunities you see internationally and particularly how the legacy or prior Hughes assets and prior SATS assets fit together to target that? Thanks.

Okay, well, I think Hughes has a solid track record internationally. They’ve done a great job of partnering in the various countries that they launched broadband services they either provide the entire bandwidth solution or they provide significant portions of their equipment and infrastructure within the national partnerships. I think, EchoStar on the other hand has a very successful partnership in the DISH Mexico operation and we believe the combination of video audio and data capability from Hughes is going to let us attack other markets much more aggressively and than we’ll be able to do as individuals. So, we really see the combined suite of the very effective set of tools for us to go into the international market more aggressively you’ll see us follow the use of products international and the partner and we did at DISH Mexico is a type of strategy we are going to develop in the future internationally. James Ratcliffe – Barclays Capital: Great, thank you.

Your next question comes from the line of Amy Yong from Macquarie. Your line is open. Amy Yong – Macquarie: Hi, can you update us on the progress you are making on Aria? Earlier today DISH said they have recent agreement with Frontier it took into consideration EchoStar. Do you think we start to see an agreement being signed in the near future? And also can you talk about your acquisition of Troppus, how much did you paid for it and will this be integrated into Move or your IPTV solutions?

Okay, well, first of all, the comment I believe they made about Frontier is that we are working with Frontier on various technologies around the Move acquisition and some of our ability to deliver certain services on an IP network through their DSL and fiber networks which does not have much of anything to do with the Aria product. That product is more aimed at the cable market rather than the DSL type market. At the Troppus, I’m not sure the information about what we paid was public, but it was around $10 million mark and we are continuing to build that organization up in combination with another engineering group in the same area and very focused on utilizing that in some of our own internal use and external as well.

Your next question comes from the line of Adrian Mele from Eagle Capital. Your line is open. Adrian Mele – Eagle Capital: Hi, guys. It’s pretty opportunistic historically and I was curious in the past months you’ve seen the various assets you follow globally that are interesting to you come down to more reasonable price range or if there is still a frothy private equity bid?

I think certainly, there's many number of things that we’ve looked at over time and we’ll continue to look at on an opportunistic basis. I mean, valuation is always going to be a key criteria, whether there has been significant movement in the value of those assets. I’m not sure I could really speak to that accurately. If value comes down to the perception of the seller and buyer. And so, I don’t know that there has been any significant movement in values. Adrian Mele – Eagle Capital: Okay, thanks very much.

(Operator Instructions) Your next question comes from the line of Anthony Deutsche Bank. Your line is open. Anthony Klarman – Deutsche Bank: Hi, Anthony Klarman. Just a follow-up, I was wondering if you could talk a little bit about the opportunities for Hughes on potentially doing something on a retail basis with the DISH side. Obviously, that’s an area that they’ve dabbled in a bit with the WildBlue and I think that contract is – for not much longer and I was wondering what your thoughts were on the ability to sort of more aggressively ramp up the potential growth rate at Hughes by going forward with a bundling offering with DISH?

I think, the real issue, you can use retail I would say it’s more of a consumer market and certainly we are looking at a partnership with DISH and we’ve been in negotiations with DISH between the Hughes operation and now the EchoStar operation with DISH Network, there is nothing been concluded yet, but certainly we hope to leverage the strong relationship with DISH into some sort of a partnership on satellite broadband going forward. Anthony Klarman – Deutsche Bank: Okay, thank you.

Your next question comes from the line of Kenneth Miller from Nokomis Capital. Your line is open. Kenneth Miller – Nokomis Capital: Hello, I was listening to DISH’s call earlier, they referenced a build up in excess inventory at their installers and distributors. Obviously, your set-top box business with DISH was down 30% year-over-year. Do you think we’d see the effect of them trying to reduce purchases to reduce this inventory or do you think that that line of your business will keep trending down as they clear off this inventory they’ve referenced?

Well, we certainly know that they have built inventory. We’ve actually talked about that I think the last two or three calls. We’ve certainly taken proactive measures to deal with that within our plans and budgets we do. We’re very optimistic that the changes in management at DISH are going to change the focus on deploying new hardware and new services that hopefully will give us additional opportunity to deliver services as well as hardware to DISH in more of an up market. But it proof is in the pudding, we’ll have to see how the new management does. Kenneth Miller – Nokomis Capital: Obviously, with it being down quite a bit, do you think that part of your business is bottomed or is it still unclear?

Well, I think we are working very aggressively into other areas on just delivering hardware, because set-top boxes are not a huge expense to business right now. We do believe we have a very stable set of products and a really great partner and bottomed might be the right word, but we don’t see any other major erosion coming right now. Kenneth Miller – Nokomis Capital: Okay, that’s helpful. Thank you.

I am showing no further questions at this time. I’ll turn the call back over to the presenters.

Okay, thank you, operator. I think that brings us to the end of the call if we have no more questions. So, thank you everyone for participating and have a good day.