EchoStar Corporation (SATS) Q4 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the First (sic) [Fourth] Quarter and Full Year 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Deepak Dutt, Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator, and good day, everybody. Welcome to our fourth quarter 2013 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; Dean Manson, General Counsel; Ken Carroll, Executive Vice President of Business and Corporate Development; and Tom McElroy, Controller. As you know, we invited media to participate in listen-only mode on the call. And as you know, identified participants for their firms in your reports [ph]. We also do not allow audio taping, which we all ask that you respect. Let me just now turn this over to Dean Manson for the Safe Harbor disclosure.

Thank you, Deepak, and hello, everyone. All statements we make during this call that are not statements of historical fact 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 and risks, please refer to our Annual Report on Form 10-K filed in connection with our earnings. 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 the call over to Mike Dugan.

Thanks, Dean. Welcome, everybody, to this morning's call. We obviously have some pretty good participation. I will start with some general highlights, and then turn the call over to Dave Rayner, who will give you some financial highlights of the fourth quarter 2013. First, we had a strong quarter with $808 million of revenue compared with $786 million in the fourth quarter of 2012. Secondly, we had another strong quarter in terms of subscriber growth in our Hughes consumer business. Third, we made some exciting announcements related to the Hopper Joey family and the Sling product lines. Finally, we closed on agreements to acquire Solaris on a strategic transaction with DISH Network. Now for some details. In our Hughes consumer broadband business, we added a net of 53,000 subscribers in the fourth quarter of 2013, which represents a 29% growth over the net adds in the fourth quarter 2012. This growth came from solid contributions from all of the sales channels. Since the launch of our broadband Gen4 service on our October 1, 2012, we've added a net of 265,000 subscribers and we ended the fourth quarter of 2013 with a total of 860,000 subscribers. Construction of EchoStar XIX continues to be on schedule. This new Ka-band satellite will have over 60% greater capacity than EchoStar XVII, which previously was known as JUPITER 1, and is expected to be the world's highest capacity broadband satellite when launched. It's planned for launch -- it's still planned for launch in the first half of 2016 and will cover the Continental U.S. and a significant part of the territory of Mexico and Canada, and provide capacity for continued growth in our Hughes Broadband. Hughes nonconsumer order input in the fourth quarter of 2013 was again very strong with $201 million of new orders compared to $190 million in the fourth quarter of 2012. Key orders were with Row44, U.S. Satellite Corps, CBS, Yum! Brands, ConocoPhillips, Denny's, GTECH, Best Buy, Media Networks Latin America, BP Europe, Camelot, Telefónica and so on. This strong order activity resulted in an order backlog of approximately $1.15 billion for our Hughes business at the end of 2013. These backlog numbers do not include our consumer business. Turning to EchoStar Technologies or what we internally call ETC. We have made several announcements related to our set-top box [ph] product line and also the Sling product line. We launched the Channel Master DVR+ with it's an OTA/OTT DVR product that they will use in a retail through our partnership with Channel Master. With a sleek, integrated guide for all content and the ability to host an external hard drive for DVR capability, we believe this product will appeal to those subscribers that do not want a monthly video subscription. We also expanded our whole-home DVR product line with the introduction of what's known as a Super Joey, which adds 2 additional tuners to the Hopper's internal private network, for a total of 5 tuners, and the Wireless Joey, which, as the name implies, has wireless connectivity as well. We also launched what's known as the Virtual Joey, which is an application included in the LG television and PlayStation game consoles that allow these devices to provide an experience virtually identical to the Joey or Super Joey and part -- and have access to whole-home DVR capabilities. These are all very significant enhancements to the already popular Hopper with Sling product line. These innovations, enhancements offer flexibility and content access unlike any other product in this market. On the Sling line of products, we launched SlingPlayer 3.0, which enhances discovery, navigations, sports and the social experience, while offering placeshifting in Windows 8.1 native app, Blockbuster On Demand, Enhanced My Media and full AirPlay support. We partnered with Roku to add SlingPlayer to their channel offering, and we are excited about now being able to sell to their installed base of 4 million Roku boxes. At CES, we demonstrated the MS 4000 Streamer and adapter in partnership with ARRIS, which provides up to 4 simultaneous Sling sessions, and launched Slingbox in Brazil with online availability in November and expanding to retail availability this quarter. At this year's Consumer Electronics Show in January, ETC was again a recipient of a number of product awards, 9 to be total, including the Best of CES for the Virtual Joey product. We continue to be an industry leader in innovative technology for the Pay-TV market. Switching to the EFS business unit, we've signed satellite service agreements with SES Americom, government services, State University of New York, telecommunication systems, Boeing and an uplink service contract with New Frontier Media. We ended the year with $1.1 billion in backlog, and our new arrangements with DISH will push it over $2 billion, a significant increase. Our EFS team has also been busy with follow-up activities on the Solaris Mobile acquisition, which we closed in December. Solaris is an Ireland-based company, which is an authorized mobile satellite system, or MSS, complementary ground component, CGC, provided for the E.U. markets. Solaris is a licensee of 2 15-megahertz [ph] blocks of S-band spector. As a result of the Solaris acquisition, we entered into an agreement with DISH to complete the buildout and ability to purchase their TerreStar-2 satellite asset to provide services to the EU market for voice and data communication. In regards to Brazil, we had previously indicated we were in discussions with GBT, a subsidiary of Avende [ph], to form a joint venture to provide Pay-TV service in Brazil. And we disclosed in December, the 2 parties were unable to conclude a definitive agreement and the discussions were terminated. We continue to hold the license for the 45 West slot [ph] where we have relocated the EchoStar XV satellite. We continue to be optimistic about delivering a unique Pay-TV service in Brazil and are actively working on alternate plans to do so. Finally, we agreed to a series of transactions with DISH Network effective March 1, 2014, in which we will receive 5 of DISH's currently owned satellites, namely EchoStar I, VII, X, XI and XIV, in exchange for shares of newly created preferred tracking stock representing 80% of their economic interest of the retail satellite consumer broadband business of Hughes. EchoStar will retain ownership of all assets associated with delivery of Hughes satellite broadband services, including Spaceway 3 and EchoStar XVII. And Hughes will continue to manage and control the day-to-day operations of the broadband business going forward, just like today. We have entered into long-term operating leases for transponder service to DISH on the 5 satellites that we will receive in this transaction. The satellites we are receiving are already managed by us -- by our ESS organization and along with other satellites that DISH is retaining. So we have really no operational risk and no real incremental challenges in integrating them into the fleet. This transaction is consistent with our strategy of increasing the scale of our satellite service business with high-margin revenues, while continuing to benefit from the growth of the satellite broadband business. It will provide an immediate boost to our cash flow to allow us to further pursue other strategic objectives. So as you can see, we've had a busy few months since we last spoke. We ended the year strong with all our business segments contributing significantly to financial performance, and we've developed exciting new product enhancements, relationships and additional sales force. We feel we are very positioned for a strong 2014 -- very well positioned for a strong 2014. I'll now turn it over to our CFO, David Rayner.

Thank you, Mike. I'll summarize EchoStar's financial performance for the quarter and the full year, and then we'll open it up for some questions. Overall, I'm pleased with the performance of our 3 segments. The year-over-year results are somewhat masked by investment gains and dividends we received in 2012, but the underlying performance is solid. EchoStar revenue in the fourth quarter, as Mike said, was $808 million compared to $786 million in 2012. EBITDA was $161 million for the fourth quarter of 2013, down $9 million compared to the previous year. In the fourth quarter of 2012, we recorded significant gains on sales of investments, as well as a dividend from strategic investments, somewhat offset by some asset impairment charges. When adjusted for these transactions, EBITDA this quarter was up $20 million or 13% over last year. Net income for the fourth quarter was $4.5 million compared to $26.2 million in Q4 2012, and diluted earnings per share were $0.05 compared to $0.28 per share last year. The primary contributor to the lower net income in the fourth quarter were the lower EBITDA, already discussed, plus the higher depreciation on Hughes satellites. For the full year 2013, our revenue was $3.3 billion versus $3.1 billion in 2012. EBITDA was $650 million in 2013 compared to $794 million in 2012, the decline being primarily a result of a $185 million less in sales of investments and dividends in '13 versus '12. Net income for 2013 was $2.5 million compared to $211 million in 2012, once again, the variance being primarily a result of the reduced EBITDA and the higher depreciation resulting from EchoStar XVI and XVII being in service for a full year. EchoStar CapEx in the fourth quarter was $127 million, of which $57 million for the construction of our EchoStar XIX satellite, and the rest was primarily Hughes consumer equipment SAC and ETC and Hughes ground infrastructure equipment. For the full year, we had $392 million of CapEx. For 2014, we expect CapEx will be in the range of $800 million to $825 million, with virtually the entire increase being spending on satellites. This is exclusive of any potential investment in Brazil. Given the nature of satellite construction, this amount could move up or down materially based on schedule changes. Now to our business segments. EchoStar technology's revenue in the fourth quarter was $407.3 million, a growth of 4.5% over 2012, driven primarily by higher equipment sales to DISH, offset partially by lower sales to our international consumers. EBITDA in the fourth quarter was $31.1 million, a growth of 40% over Q4 2012, driven primarily by the revenue growth and lower G&A expense and an asset impairment charge in 2013. Hughes revenue in Q4 was $311.6 million compared to $315.7 million in 2012. The consumer business had another strong quarter of 53,000 net adds, a growth of 29% over the same quarter in 2012. We ended the year with a total of 860,000 subscribers. Hughes EBITDA in the quarter was $78.5 million, an increase of 55% over last year, primarily due to strong consumer adds over the past year, as well as an asset impairment charge we took in the fourth quarter of 2012. The domestic and international enterprise business with Hughes continued to perform well, with higher Q4 order volume than last year. The year-over-year quarterly revenue and EBITDA were affected by 2 significant international hardware contracts that were delivered in the fourth quarter of 2012, and an asset impairment that was recorded in the fourth quarter of 2012. EchoStar Satellite Service revenue was $85.2 million for the fourth quarter, a growth of 27% over Q4 2012, primarily as a result of incremental revenue from DISH for EchoStar XVI and EchoStar VIII, partially offset by the termination of the EchoStar VI lease at the end of 2012. The EBITDA in Q4 was $68.7 million for a growth 38% over the fourth quarter 2012, primarily as a result of the higher revenue. In our other segment, EBITDA in Q4 was a negative $17.2 million. This is due to costs associated with our Brazil project, primarily the lease of the EchoStar XV from DISH. In regards to the transaction with DISH, it is effective March 1, and we expect to generate an incremental $145 million of high-margin revenue in 2014 from the additional satellites. This will be in the ESS segment. The new tracking stock will track the assets liability and operations of the retail consumer broadband business and will represent 80% of the economics of that business. We will retain the remaining 20% of the economics, as well as all the economics associated with the provisioning management of the satellite broadband service offering, including wholesale services. We understand that this is a confusing structure, but a simple way of looking at it is that the tracking stock business Hughes retail group will be at wholesale customer of Hughes and will pay a wholesale fee to Hughes. We will continue to report the Hughes consumer broadband business as part of our Hughes segment. In accordance with SEC guidelines going forward, we'll be including in our filings financial information specific to the tracked operations. With that, we're ready for the Q&A session. So let me turn it back over to the operator.

[Operator Instructions] Your first question comes from the line of Andrew Spinola of Wells Fargo.

I can understand the strategic rationale to this transaction with DISH. But I'm wondering if you could step back and realize it's a complicated transaction, but maybe walk us through how you look at the value that you're giving up versus the value you're getting and that -- and why you concluded that this is not just a fair transaction, but a good transaction for SAT [ph] shareholders?

Yes, let me try and walk through that. We did valuations, obviously, on both sides of the transaction. Really using discounted cash flow projections on the business -- on the broadband business, as well as on the satellites. And that's how we got both to the 80%, as well as the $11 million of cash. So we put all the factors in there in terms of what we believe was going to happen with the broadband business going forward and as well as the satellites. To be clear, that the satellite backlog, of which I referenced or Mike referenced, is only that piece that is committed. We would expect to have additional revenue above and beyond that, but there were certain commitments and then extension periods beyond that in the satellite agreements. The broadband business, as I said in my comments, you need to view this as a wholesale arrangement. We're keeping all the whole -- we will be retaining the wholesale fees that we'll be charging to the HRG. And so the economics associated with that remain within the EchoStar family, and not part of the tracker.

Got it. And on that whole -- the wholesale economics, can we -- you had a wholesale business prior to this, can we think of the rates that are being charged to HRG as being the same as what were charged to DISH and your other wholesale partners going forward? Or was there a new rate negotiated, and was it lower or higher than the historical rate?

I'm not going to answer that question other than to say that there was a wholesale rates that was negotiated, where we came out being satisfied with that rates, but I don't want to start referencing rates because we don't have one wholesale rate across our entire wholesale customer base. So it becomes a little bit competitively sensitive.

Okay. Just a last question, I guess. You mentioned that the new satellites that are coming onboard give you substantially more EBITDA. Obviously, no debt being taken on. You're in a better position to do acquisitions. How important is the opportunity to do acquisitions going forward as a driver of this transaction, and specifically, in scaling the FSS business?

I mean, it certainly gives us greater cash flow in the near term, and in reality, significantly greater cash flow in the near-term. It gives us greater leverageability. But in terms of where that could be used, I'm not going to comment on that at this point in time. It certainly gives us greater ability. And the FSS business is attractive. There are other businesses that are attractive also. So we will -- I mean, as we have been all along, we'll continue to evaluate M&A opportunities as they are presented to us.

Your next question comes from the line of Jason Bazinet of Citi.

I also had a question about the proposed transaction with DISH. Once this transaction is complete, is it fair to say that you will only be reflecting the wholesale ARPUs for the Hughes consumer business? In other words, will all retail activity occur within the tracking stock?

Yes. The -- so if you want to think about it from a separating the tracking stock from the rest of the business, the ARPUs and the tracking stock that the pure retail arm will be higher than the wholesale ARPU, obviously. But as -- so going forward, as I've said, we'll be providing additional financial information on the tracker. That tracker ARPU will be representative of the true retail rate.

And then is it fair to say also that all of the subscriber acquisition costs will also be reflected in the tracker stock, that you're just going to have CapEx from this satellite and any future satellite and then just wholesale payments and whatever costs to run the satellite? Is that the right way to think about it?

Yes, that's why my comment about the satellites giving us significantly higher near-term cash flow is because the tracker is where most of the -- or at least 80% of the SAC will be absorbed. And obviously, SAC is a significant expenditure. But I want it to be clear that all of the operations will be consolidated within HSSC and EchoStar. We will break out the tracker as supplemental information, but everything will continue to be consolidated.

Okay, I think I understand. So there's no real change to what -- to our Hughes model, it'll just be sort of separate? Is that the right way to think about it?

No, EchoStar level, there isn't any change. I mean -- so our -- everything that we have going forward will be the same from a reporting standpoint. This is just one other piece of equity that has been deployed, and we'll report on that equity separately.

Your next question comes from the line of Chris Quilty with Raymond James. Chris Quilty - Raymond James & Associates, Inc., Research Division: I'm actually a little baffled by the transaction. As I look at it, you just sold the majority of financial interest from the most exciting part of your business, that's growing rapidly, to DISH in return for 5 satellites with terminal revenue generation capability that's going down and increases your exposure to a customer where you're exposure is already too high. What am I missing around the strategic rationale for this investment?

Well, I think there's a couple of things, Chris. First of all, you need to look at the real growth of the retail business since we launched Gen4. While our total subscribers have grown by 265,000 in total, the majority of that growth has been coming from the wholesale business. So when you look at the incremental growth coming off of pure retail that we're talking about here, it's not as much growth. And the growth on the wholesale business is unaffected by this transaction. Chris Quilty - Raymond James & Associates, Inc., Research Division: All right. But the retail business is more attractive in terms of the financial returns.

It is until you start backing out a wholesale fee. I mean, the one thing you've got to take into consideration here is we are retaining a wholesale fee on all of those retail subscribers. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. Let's cut this from a different direction. Since you're going to provide the disclosure of the $280 million-or-so of EBITDA that you did in the Hughes segment last year, what percent is coming from the consumer versus the enterprise?

I don't have that information in front of me. And obviously, we haven't put it in the K, so I'm not willing to disclose it. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. Tell me if I'm totally off here the way I run the numbers. If I assume -- let's be generous and give the enterprise business a 25% EBITDA margin, it's about half the revenues, which means 75% of your EBITDA is coming from the consumer business. And I don't know how to disaggregate the retail versus consumer, but if I just apply 80% to that, it's an EBITDA stream of around $160 million, $170 million. And on the flipside, if I annualize the revenues off the satellites you're requiring at $175 million, give you an 80% EBITDA margin, it looks like about $140 million of run rate EBITDA. And so just at face value, it looks like you're giving away a bigger EBITDA stream that's growing against an EBITDA stream that's smaller and is going to decline over time.

So there's 2 things, I think, that you're missing. Once again, the wholesale fee that is retained by EchoStar, not part of the tracker, significantly reduces the EBITDA loss as you're describing it. And once again, remember that this is an equity instrument. We're not giving up anything at this point. But that wholesale fee significantly reduces what you described as the loss. I would also say that your incremental margin assumption on the satellite business is pretty low. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. Well, I mean, obviously, the reason your stock is down 8% is because we don't have any of the numbers to figure out whether we got a good deal or bad deal here. And at least, at face value, it looks like a bad deal.

I understand that. Management and the Board went through significant analysis on this. We do not believe it is a bad deal by any stretch of the imagination. We believe it is a positive deal and fuels our ability to pursue other strategic objectives. Chris Quilty - Raymond James & Associates, Inc., Research Division: So your view is...

Yes, I think you guys have a reason to wonder, "Are we doing the right thing?", but I can only guarantee, as we've told you a number of times, that we're very anxious to expand our business profile. This was a way to get us into a position where we really are financially in a better position to look at investments and things like that. And we still maintain 100% of control of operations of the core business that you guys value so highly. We value it as well. And we actually think this is a very positive step for EchoStar, and maybe not tomorrow, but over the -- if you want to look out a little bit longer, you're going to see a significant advantage that this provides us. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. Can you help me, the -- I think DISH provided lease payments in their 10-K on the satellites, which if I run a discounted cash flow, I come up with a net present value of around $650 million, $700 million. Is that a fair assessment?

I think in round numbers, that's not too far off. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. And so your judgment is the access to cash flow and the ability to do something with it outweighs the sure thing of complete ownership of the consumer business? You think you can create more value through acquisitions of assets or investment in assets than maintaining full control over the business?

Well, I will say that we believe the satellite broadband business is a very well-understood structure, that's why we were able to assess the value of what we -- for this transaction. And it has a specific growth profile. I would say without the strong support of our wholesale partners, which includes DISH, our growth in that segment could have been less. I think our competitors have shown that this isn't the easiest business to compete in. And we do believe that there's expansion capabilities or possibilities for EchoStar that could provide better long-term value. And we didn't see where we were giving up a lot to get ourselves into the position to do that, I guess. Because we -- first of all, this is a specific agreement, yet we continue to have full management and operational control of the assets. Chris Quilty - Raymond James & Associates, Inc., Research Division: And presumably, if you launch anything in Brazil or internationally, you would gain, under the current agreement, 100% ownership of those assets and opportunities.

Absolutely. This is U.S.-based subscribers.

Your next question comes from the line of Amy Yong with Macquarie.

I have a bunch of questions on the deal. But can you actually give us a percentage breakdown of retail versus consumer? I know someone else asked that, but it looks like you have 635 retail subscribers. And I think you have a total 800 plus. So do we just -- is it just simple math?

860. It's pretty simple math.

Okay. Can you confirm whether or not the tracker will be listed as a separately traded stock or...?

No, it is not a public tracker. It is a private tracker, it will not be listed.

Okay. Now does this give you flexibility to divest certain assets? I mean, can we, in the investment community, look at this transaction on the other end?

I'm not sure I understand the question, Amy.

Well, could you potentially divest, let's say, DISH Mexico? You talked a little bit about M&A and just potentially looking at assets to buy, but what about just the flexibility this allows you to divest your own assets?

I mean, I don't think this changes our ability, one way or the other, to do anything in that regard, although I would say we have no plans or intentions on any asset divestiture.

Okay. Do you, at all, lose scale for the other part of your businesses, including the commercial side and just the international portfolio?

No.

No, not in any way. I mean, to be honest with you, our day-to-day management focus in all the business units, not except [indiscernible] a little bit, is not going to change in any way. On the other hand, our -- I would expect you to see our business development organization under Mr. Carroll to become much more focused on looking at opportunities because I think we've given him a better toolbox. And I understand it's a little bit confusing, and I'll be honest with you, it took me a little while to get my hands and my mind wrapped around all of the complexities that this transaction presented when we first considered it. However, I think the management here is very excited about our future and where we're going to go. I think, to be honest with you, the strength of the consumer business allowed this to go forward because of the Hughes team's done such a great job, and they continue to improve their numbers. They continue to provide great consumer value, and none of that is going to change. I think in reality, this is a way for us to tap some internal value that just wasn't totally visible to the Street.

And then just one last question on just financing. Does HRG have capacity to raise debt? Or does the debt need to be raised over at EchoStar?

HRG has no reason to raise any debt. I mean, it will be internally funded just like it would today. So if at any given time frame, SAC exceeds the cash flow of the retail business, we will fund it from internal resources. But there is no intent to have HRG be a debt-raising entity.

Your next question comes from the line of Tim Quillin of Stephens Inc.

Could you -- Dave, could you give us a sense of what the detriment to EBITDA will be on a net basis to Hughes, including the wholesale revenue that you'll be getting from the tracker?

Okay, I'm not sure I quite understood the question. But I mean, for our reported numbers, there'll be no change from what we've done historically. So when you look at HSSC, there is no change -- or at EchoStar, for that matter, there is no change associated with the tracker in terms of the numbers that we will report. Obviously, we will report incremental revenue associated with new satellites. But from a tracker standpoint, it's an equity. It would impact earnings per share, but it would not impact reported revenue or EBITDA.

So I guess the point being that -- I guess what we're trying to figure out is that when we do the math and we'd say that you're gaining x amount of EBITDA and losing x amount of EBITDA, you're saying we're not factoring in the wholesale benefit that you'd get selling to the tracker? And so I'm trying to figure what the net impact would be in terms of lost EBITDA at Hughes relative to the EBITDA you gain with ESS.

Yes. And once again, you can't just look at EBITDA. You've got to look at the entire operating cash flow because the SAC will also be attributed to the retail business. And SAC is not an insignificant cost associated with that. And the other thing I want to point out again, that the growth in the retail business, since we launched the Gen4 service, has been about 40,000 customers. The vast majority of the growth in our overall subscriber base has come from wholesale. Wholesale growth has been very strong. All the wholesale economics in that business is being unimpacted by this transaction. So I want to emphasize that the wholesale business has been what's driving the overall growth. And that's important to keep into consideration that we're not losing that wholesale growth.

Well, I may not be smart enough to figure out this transaction until it's -- until you report it. But I think one of the aspects is the freeing up some borrowing capacity. And how would you quantify that? And so -- and do you have an acquisition in mind that might diversify your FSS business and, ultimately, to a higher value for the overall business?

There is no specific acquisition that we're willing to discuss. I mean, we're always looking at alternatives. Ken and his group are very active in looking at opportunities, but there is nothing specific that we're ready to announce or discuss other than we are interested in growth to M&A.

Right. Why wasn't EchoStar XV part of the deal?

DISH had a requirement to keep a minimum number of satellites under their indenture. And so they're -- we couldn't move all of them across.

Okay. And on the $800 million to $825 million in CapEx, is that -- right now, is that just T2 EchoStar XIX? Or does it include any CapEx related to another satellite for Brazil?

It has got -- it certainly got EchoStar XIX. It has got T2, and it has several other satellites that we have not yet announced. Once we have finalized contracts on those, we'd be willing to discuss those. But we need to finalize the contracts first.

Okay. And can you give us any hint about what the -- what kind of markets those would be targeted for?

We'll wait till we announce it.

Okay. And then just lastly on Hughes. Would you -- now that you're starting to fill up capacity in certain of your more popular beams, how would you think about Hughes' subgrowth in 2014 versus 2013?

Yes. Obviously, some of the more popular geographic areas, the beams are beginning to fill up, and we are constantly tethering our sales plans to extend the life of each of those beams. And that's an effort that's going on in real time. So far, we have been able to make sure that no beam is closed, and we hope to continue that for the next x months. And we'll see what the effect will be as we go forward. But we have beams we label high-fill, and we have -- we're going to be coming up different economic plans to extend the life of those beams.

Your next question comes from the line of James Ratcliffe of Buckingham.

Again, on the transaction, a couple, if I could. Just economically, is the right way to think about how this affects the numbers just going forward, take HSSC call it EBITDA less CapEx, incorporate the CapEx portion of SAC, and then subtract out 80% of whatever HRG generates and EBITDA less CapEx, then I get the proportional cash flow for Hughes regardless of how it actually gets reported based on GAAP?

I have to apologize. I'm going to have to ask you to repeat that. It was very low volume. Your question...

Yes, the volume was very low. It's hard for us to hear you, sir.

Just thinking about how to think about this regardless of the way GAAP is going to treat it for accounting purpose. Is the right way to just take HSSC, call it EBITDA less CapEx, and then subtract 80% of whatever HRG's EBITDA less CapEx is to get kind of the proportional cash flow that's really attributable to HSSC?

No, I don't think it's as simple as that. I mean, we're going to be allocating our costs within the Hughes group between the wholesale cost and the -- let's call it the wholesale business and the retail business. Those costs that are attributable strictly to retail, things like billing, SAC, customer service, those costs will be attributed to HRG. And then 80% of that will be represented by the tracker.

Got it. Okay. And running the payments that DISH has cited out, I get sort of more like $800 million NPV, but somewhere at the $700 million, $800 million range. So it implies about $1 billion for all of HRG in value. And DISH is sitting on an absolute mountain of cash, considerate enough to come up with an extra $200 million. So why not just sell them the whole business outright, rather than having this tracker structure and retaining 20%?

Well, part of the -- the purpose of the entire transaction, the way it was structured, was to make sure it was a tax-free exchange for both parties.

And then on top of that, I think, to be honest with you, DISH was motivated to keep the Hughes management and organization in place managing the business because of their strong performance. Just a -- it's a different animal than DBS, and believe me, I know, from my involvement with the satellite-TV business. What the guys are doing on the broadband side is significantly different, and that team is very important to the success.

Great. I guess, finally, on that note, since this isn't, as I understand, and correct me if I'm wrong, going to actually change how the day-to-day business is run. They're just going to effectively create another cost allocation and profitability allocation entity that gets in HRG the day the ops don't change. Did you shop this -- the opportunity to buy 80% of those cash flows to other entities? Or was DISH the only party you looked at for this?

No, we didn't. I mean, what we were looking for was to do a tax-effective transaction that increased our short-term cash flow, which this effectively did.

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

Just one more question on the deal that was announced. I guess I'm wondering if there are any implications for your future CapEx arc as you think about what you may have to spend. I know that some of the satellites you're getting were already effectively replaced, even though some of the older ones are still in orbit. There's, I think, Echo 1 is actually through its useful life. So I'm just wondering if you could talk a little bit about whether there are implications on the capital side for this longer-term in terms of how you would have to set a replacement cycle up for the birds that you're taking in?

I think potentially, longer-term, the debt may be there, but I don't think in the near term, it changes any of our capital spending plans. The increase in CapEx that we discussed for 2014 is unrelated to this transaction. So I think the answer, at least in the near term, is no to that.

Right. I think you have to look at the fact -- first of all, most of the satellites, although they are a little bit older, although XIV, I wouldn't consider an old satellite in any way, or even some of the other ones, but have long lives ahead of them. The transaction numbers were done based off of calculated life and capability. I think EchoStar I, by the way, continues to be in orbit and provides very significant capability long after its calculated life because, as you all know, EchoStar I was put in orbit at the end of 1995. And we still consider it a pretty good asset. So there's a lot of things that track satellite health and life, and the ones that are transitioned in -- the cost and the value of those satellites was done on a reasonably conservative basis. So there's a -- we have a lot better potential to, for instance, use EchoStar I in a financial way than DISH would have had because DISH has very limited use for its satellites. So you have to consider that flexibility as a hidden advantage to the transaction.

Understood. And then if I could ask a question about Solaris. Is it fair to say that your ability to get the Solaris deal done really, at the end of the day, came down to the fact that you had line of sight to a satellite that you could use to fulfill the requirements that they were sort of failing to fulfill on their own?

I would say the fact that TerreStar 2 was available to us certainly provided EchoStar additional motivation to consider the investment. And I also think that the fact that we had a satellite we could reasonably quickly redefine and reconfigure and get into orbit makes it very attractive to the entities in Europe. There's no question about that. So yes, was the availability of that satellite important to that deal? Yes, for sure. But that wasn't the only thing.

I may have missed it in the MD&A, because I thought I heard you mention something, but you have a $55 million payment that you can exercise in 2014 to essentially take over the purchase right of T2. Has that been exercised? Or when do you anticipate that happening?

It hasn't been exercised at this time.

Okay. And then finally on Solaris. You mentioned the spectrum that they use, obviously, it's probably not ironic that it's the same band in the U.S. that both SAC [ph] and DISH had owned through the 2 restructurings where you came to own the AWS-4 spectrum. Is there a spectrum angle here that we should think about as well in addition to just the regular satellite service that you're looking to provide? And as you think about potential M&A opportunities, should we not limit ourselves to FSS and perhaps also think about some other sort of wireless or spectrum-related opportunities?

Well, we never advised you guys to only think about FSS. In fact, we've constantly told you that we're looking at all kinds of things outside FSS. There's no question there's a lot of synergies in the infrastructure for DISH's U.S. play and the Solaris activities for Europe. And actually, the Hughes division here is heavily involved in some of the early work on that, and there's some synergies there as well on that. Over and above that, I don't know how much more we can talk about.

Yes. I mean, the only other comment I'd make is similar to the U.S. The Solaris assets and licenses include a terrestrial aspect to it, which is called CGC, or complementary ground component, over there. So clearly, it's not the -- well, MSS is the main constituent of that. It also has a terrestrial component to it.

Your next question comes from the line of Walter Piecyk with BTIG.

First question is can you -- is the tracking stock able to be used for any type of acquisitions?

I'm not sure I -- can you expand on that question, Walter?

Can you issue a tracking stock to acquire assets? Or is it -- is how it works is it can't be for acquisitions? I know it's not going to be publicly traded or anything, but obviously, you can issue stock in an acquisition, even if it's private stock.

Right. I mean, certainly, we could. I mean, there's no intents to do that at this point in time. I mean, the tracker that we have issued is specific to a set of assets and operations. We wouldn't be looking to issue another tracker related to that.

And how does the corporate governance work on -- who makes that decision? Is it -- since DISH owns 80%, is it their decision -- obviously, I understand that there's no intent to do it, but if you want to build additional assets in that kind of residential broadband, there's no -- from a corporate governance tracking doesn't give them those types of rights. So I assume that this would still be your decision, one way or another, on whether to use that stock for acquisitions?

Yes. I mean, obviously, they've got anti-dilutive rights. So we can't dilute their position in the existing assets. They've got a series of investor rights that we've agreed to associated with that. And so if I understand your question, if we wanted to use HRG to do other acquisitions in a related field, we could certainly do that, but we would have to do that in conjunction with DISH and so would be dilutive to their position.

Okay. And on the -- as far as the kind of who owns what. The tracking stocks, I remember, in the old days, they were always a challenge. If someone buys -- comes to your doorstep and buys you, what I read in the 10-K is that then you would have to buy the 80% stake back from DISH. So whoever is buying you, unless there's an incremental negotiation with DISH, is also buying that asset. So then you then have to buy, in that situation, that 80% from DISH. How would that valuation be determined as far as what price you'd have to pay? And then similarly, it's the same question, but I guess if DISH ever got bought, you'd have to buy back -- I think you have to still buy it back as well. So how does that -- in those situations where either DISH or you get bought, how is the value of HRG determined when that gets sent back to EchoStar and its ownership?

So first of all, to clarify, yes, there are change of controls for both, under an EchoStar change of control, as well as a DISH change of control. I don't think there is a have-to. There are options become available to the respective parties based on the change of control by the other party. In terms of how the value is determined, it would be an agreed-upon forecast. Very similar to how we create the value today, looking at what the model is, doing a discounted cash flow of future activity and agreed-upon valuation. There are mechanics in the agreements, by which if we could not agree -- mutually agree upon the value, then there is a process to determine that value.

Understood. So just one last question on that. The 10-K, the way it's worded there, it says, EchoStar would have to repurchase the tracking stock. Would that be ultimately -- if DISH didn't want to actually sell it to you, could they say no? Because the point is, I guess, if someone wants to come to you and buy everything, would you at least say to the buyer, like, "Okay, we definitely have the rights to actually be able to sell everything including the Hughes business."

I believe that the change of controls are options that are not automatic triggers.

Your next question comes from the line of Michael Bressler of Kensico Capital.

I just had another question on this transaction because I know it's confusing. But when previously, just in the old way, you guys always used to say that your NPV for retail and for wholesale from a subscriber perspective was roughly the same. That was, I think -- is that a correct way that it was communicated?

Yes. I mean, I think that's a fair statement.

Okay. So when previously, under the old regime, when DISH would sign up a customer, you would get wholesale economics for that customer. They would cover the SAC, they would cover the billing and you'd get paid for running the satellites, which you do so -- which you do, right?

That is correct. Correct.

Now when DISH signs up a customer, you still get wholesale economics, just like you did before, but you also get all these satellites, ownership on them going forward. Is that correct?

That is correct.

Okay. So from your perspective, since you're kind of saying, "We think most of the subscribers we're going to sign up are going to be wholesale, we're not really losing much because we weren't selling that many retail customers anyway." So from your perspective, it's a big win for the company.

Yes. And I don't want to say that we weren't selling a lot of retail customers. We were selling an enormous amount of retail customers. However, you've got an established base that had churn on it. And so the net growth on the pure retail was not as significant as it was on the wholesale because, obviously, the wholesale, all we're seeing is the net impact because we weren't incurring SAC, et cetera. So I think there's some nuances around what you say. But in general, I think we agree with how you're viewing it at a high level.

Would you be willing to share right now, not specific, but just representative numbers, to -- it was $50, we got $25 -- just is that something just representative, simple, none actual numbers? Because I think that would go a long way to helping people understand like the way the cash flows work. Because I think there's more confusion than there should be, in light of the fact that most of your subscribers in the future will come from a bundled relationship. I think that's what you're saying, either through DISH. I mean, is that correct?

No, you got to remember DirecTV is involved in this, too. And that's part of the retail...

Well, yes, the retail business is still very strong. And again, the difference is the retail business was working against us, 500,000 to 600,000 installed base, where the wholesale business DISH brought had a fairly small base and had no base for Hughes at all. They were -- their subs were actually additive. So I think there's -- we probably created some sort of a misperception here that the wholesale, which was frontier [ph] and DISH was additive, but the retail business was much -- was very significant except that it would also had significant churn reducing its net numbers. So I don't know if I helped clarify the information.

Okay. And then it doesn't -- I highly, highly, encourage some numbers behind this. They don't have to be -- it could just be algebra-based numbers in the supplement you put out because I think you're getting a pretty good deal, and I think the entire world, especially evidenced by your stock, doesn't think that. So if you had a little bit of a, b, x, y, z, with like arrows and whatnot, I think that would really help. Last question. Do you think your relationship with DTV is going to be affected by this transaction?

Again, we hope that the retail business continues -- it's going to run exactly the way it's been in the past. The financials will be exactly the same, so we think it's an under-penetrated market. And we're going to continue to add subs through all the retail channels.

So DISH is going to own 80% of subs that DirecTV adds?

I think you could say [indiscernible].

To be clear, DISH owns a tracking stock representing 80% of the retail business. And to my...

But DirecTV is a wholesale subscriber. If you said -- if DirecTV...

No. DirecTV is a sales agent for our retail business.

Okay. So now if DirecTV installs a subscriber through Hughes, they're effectively going to be -- there's going to be an economic benefit to their competitor, DISH, based on this agreement?

There will be a benefit in terms of a value created within a tracking stock.

Okay. That -- it seems like DirecTV's behavior may be modified in the future in light of that fact.

So operator, I think we're past the end of the call.

You can go ahead with any closing comments.

Well, I don't think we have any closing comments at this point except to say, thank you, everybody, for participating, and have a good day.

Thank you. That concludes today's conference. You may now disconnect.