EchoStar Corporation (SATS) Q3 2017 Earnings Report, Transcript and Summary

Good morning. My name is Hope, and I will be your conference operator today. At this time, I would like to welcome everyone to the EchoStar Third Quarter 2017 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. Deepak Dutt, Vice President of Investor Relations, you may begin your conference.

Thank you, Hope, and good day, everybody. Welcome to our earnings call for the third quarter of 2017. I’m joined today by Mike Dugan, our CEO; Dave Rayner, COO and CFO; Pradman Kaul, President of Hughes; Anders Johnson, Chief Strategy Officer and President of EchoStar Satellite Services; and Dean Manson, Executive Vice President and General Counsel. As usual, we invite the media to participate in a listen-only mode on the call, and ask that you not identify participants on the phones in your report. 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?

Thanks, Deepak. All statements we make during this call, other than statements of historical facts, 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 those forward-looking statements. For a list of those factors and risks, please refer to our Annual Report on Form 10-K and our Quarterly Report on Form 10-Q filed with the SEC. All cautionary statements we make during the call should be understood as being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our report and should not place any undue reliance on any forward-looking statements. We assume no responsibility for updating any forward-looking statements. I’ll now turn the call over to Mike Dugan.

Thanks a lot, Dean. Good morning, everyone, and thank you for joining us on the earnings call. As you recall, we entered 2017 with one of our most challenging set of actions ahead of us. I’m very pleased with the team’s performance as we balanced the long-term strategic initiatives with delivering on the short-term objectives. We successfully introduced service on EchoStar XIX and at the same time, we launched three new satellites in a time of significant launch constraints within the industry. We also completed the asset swap with DISH to enable us to become a leaner, more focused satellite and broadband player. We establish partnerships to accelerate our global consumer Internet expansion and prepare for the future with the development – with getting under development EchoStar XXIV, which is internally known as JUPITER 3, our largest and most powerful satellite today. We just concluded another busy and productive quarter. Our EchoStar XXI satellite, which was launched in June completed all of its in-orbit testing successfully on August 29. Echo 105 was launched on October 11 and has just completed initial testing phase. We expect both of these satellites to be placed in service later this year. In addition, we launched consumer Internet service in Colombia at the end of September. The management team will expand on these events in their comments. Our focus remains on expanding and improving our service offerings in our existing markets and expanding our service footprint globally. We have previously discussed our South American ambitions and our European mobility initiative. Pradman and Anders will go into more detail on these as we take the call. We also are continuing to look at other opportunities elsewhere. Finding the right situation and partners is critical, and as you can be assured that when we decide enter a new market, it will be with a well thought out plan. Now let me hand this over to the management team to give us some details before we get to the question and answer. First off is Anders Johnson. Anders, take over.

Thanks, Mike. The last few quarters have been among the busiest times for EchoStar Satellite Services. We launched Echo XXI, Echo XXIII and Echo 105 and resolved the potential contention issue with Echo III and retired it, all as a result of excellent teamwork. Since the successful launch – successful completion of in-orbit testing of the EchoStar XXI S-band satellite in August, the team has been working on end-to-end integration of the satellite and its terrestrial network in preparation for the anticipated launch of commercial services across the European Union in the fourth quarter of this year. Echo XXI, which will provide EchoStar Mobile with capacity for connectivity throughout Europe, is located at the 10.25-degree east orbital slot. The EchoStar Mobile service will initially be distributed by longtime Hughes partner, Bentley Walker. We are also collaborating with Thales to develop services for the public safety community in France and hopefully, throughout Europe. After a delay of almost a year, our final satellite launch in 2017, that of EchoStar 105, the hybrid Ku and C-band satellite, also known as SES-11, occurred on October 11 aboard a flight-proven SpaceX’s Falcon 9 launch vehicle. EchoStar 1.5 at this point has completed in-orbit testing and is actually in transit to the 105-degree orbital position as we speak. Launch of the commercial service on Echo 105, which will replace the Ku-band capacity there Fixed Satellite Services team currently provides via AMC-15 at the 105-degree west orbital location is expected before the end of the year. We are excited to have this high-powered satellite with 24 x 36 megahertz Ku-band transponders with coverage of 50 U.S. states and an expanded reach into the Gulf of Mexico and the Caribbean available for this service. Our fixed satellite services team has been aggressively pursuing revenue growth opportunities. New business for Q3 includes a multimillion dollar multi-transponder deal that will continue into 2018. Upon transfer of customers from AMC-15 to Echo 105, we will terminate our operating lease of AMC-15 with SES. I’ll now turn it over to Pradman.

Thank you, Anders. As our second quarter earnings call, I mentioned that we awarded a contractor, SSL, to build an ultrahigh-density satellite, which we call EchoStar XXIV JUPITER 3. To recap, the new satellite will provide a dramatic increase in capacity in our markets in the Americas at a very competitive cost per bit. It will enable us to offer speeds of 100 megabits per second and higher to the subscriber. The beam coverage will be optimized to where we anticipate demand rather than uniform blanket coverage. All our traditional markets, including consumer, enterprise, aeronautical, cellular, backhaul and community Wi-Fi will be served. We continue to believe that the market for satellite broadcast in the United States – satellite broadband, sorry, in the United States remains large at over 18 million households, with about half of these being unserved and the other half underserved by existing wireline technologies. With our new range of HughesNet Gen5 services offering speeds of 25 megabits per second coast-to-coast in the U.S., we continue to see strong demand in the areas currently covered by DSL, including areas with high-speed DSL. And now some thoughts on wireless broadband. By moving to soft data caps, we are the approach in the LTE industry where the major carriers are offering data plan they describe as unlimited. All of these wireless plans have, in fact, soft data caps typically around 23 gigabytes per month, with lower data caps or higher prices for use of the device as a hotspot. As measured by price, data and flexibility, our plans offer a very competitive and attractive value for use within the home compared to those wireless plans. With satellite Internet countries serving fewer than 2 million subs, we believe there’s significant opportunity for material growth in this segment remains. Consumer satisfaction continues to be very high with the Gen5 service, and retail churn in North America in Q3 has been trending down very nicely. It is a first ubiquitous coast-to-coast Internet service that meets the FCC 25/3 broadband standard. We continue to be the market leader with over 60% market share in the Americas, and we intend to sustain this position going forward. And our new satellite will be the engine that powers our future growth. I’m delighted to inform you that we already have over 340,000 Gen5 subscribers as of September 30 after about six months of operation. We ended Q3 with 1,140,000 broadband subs in North America and Brazil. This number comprises of customers that subscribe to our retail, wholesale and small and medium-enterprise channels. This represents a net increase of 50,000 retail and wholesale subs in the quarter compared to a decline of 12,000 in Q3 of last year and an increase of 41,000 in the second quarter of this year. Echo XIX also provides capacity for service in Canada, Mexico, Colombia and other Central and South American countries. Our partner in Canada, Xplornet, started offering service on the system in the second quarter; and our partner in Mexico, StarGroup, commenced services across Mexico in Q3. These are capacity sales which are not included in our subscriber results, but certainly add to our revenue and returns. We launched customer consumer service in Colombia in September of this year, and we’ll follow the service launches in additional countries in 2018. The hosted payload on Telesat T19V satellite is scheduled to for launch in mid-2018 and will augment the capacity currently being provided by Eutelsat 65 West and Echo XIX to enable continued growth in these markets. Our target markets continue to be those that are unserved or underserved by cable and fiber, and we are excited about the prospect of entering these new markets to build on the success we have seen in North America and Brazil. The new HughesNet Gen5 will be a strong and viable alternative for the many millions of households across the Americas that have limited or no access to high-speed broadband service. Now to our aeronautical business. Since our last call, we have completed DO-160 certification on our broadband aeronautical modem, and we’ve also completed the build-out of the entire ground infrastructure for SES and Thales in the U.S. and Canada. We expect them to begin service for airline customers using this infrastructure very shortly. The service will utilize a combination of Jupiter and SES space segments, and our system will switch seamlessly between beams and satellites as planes travels the country. Global Eagle continues to be our largest aeronautical partner. In conjunction with Global Eagle Entertainment, we demonstrated our Jupiter aeronautical system aboard Global Eagle Entertainment’s Albatross flying test band at the Airline Passenger Experience tradeshow this past August. Clients and prospective customers were able to test the system in-flight and were impressed with the performance. Our dual Ku/Ka-band aeronautical antenna is also progressing on track through the final stages of testing. Etihad Engineering and Yahsat will jointly be demonstrating a preproduction unit mounted on an Etihad A320 at the Dubai Airshow next week. Our enterprise business also had an outstanding quarter in terms of new orders, both domestically and abroad. We received a large order for $190 million from OneWeb for gateway equipment for their ground network, which would include gateway sites, each of multiple tracking satellite access points to support operations and handoff of high-speed user traffic between satellites. This order builds on the original development order, bringing the total contracted amount to over $300 million. This equipment will be deployed in OneWeb satellite network portal globally. We have commenced production of this equipment. Other key orders in Q3 were from IGT Global Lovs, Texas Department of Public Safety, Sonic, Big 5 and ConocoPhillips domestically and then from – and also from Volkswagen, Huawei, Hindustan Petroleum, Boeing MEXSAT and Thuraya internationally. We ended the quarter with $1.7 billion of enterprise backlog, an increase of 19% over the backlog of the same time last year. We do not include the consumer business in our backlog number. At the second quarter call, I also mentioned that we crossed an important milestone by shipping a total of 6 million ViaSat terminals worldwide. In October, we crossed another major milestone by shipping over 2.4 million high-throughput terminals on the Jupiter platform. So to summarize, I’m really pleased with our performance in Q3. And as you can see, we are very well positioned for growth in our business, both in the short-term and in the longer-term. Before I hand it over to Dave, I wanted to inform you that Hughes has been very active in supporting the disaster relief efforts in Puerto Rico and the U.S. Virgin Islands and is deploying communications, services, utilizing our Echo XIX and Spaceway satellites. Our new HughesNet Gen5 service is delivering 25 megabits download and 3 megabits upload speeds to the entire affected area. That flexibility of our Spaceway satellite design allowed us to move additional capacity over the islands to meet expected demand. We have established local warehousing and logistics support to move quickly and efficiently to meet demand. We’ve installed dozens of systems for various federal agencies such as FEMA, Department of Interior and Customs and Border Protection, and additional systems will be installed in the coming days in partnership with the federal agencies. The agencies are pleased with the system performance and our commitment to the region. We are also partnering with various relief organizations in support of critical infrastructure needs and humanitarian efforts. Examples are establishing communications for relief camps and regional medical facilities. Let me now hand it over to Dave.

Thank you, Pradman. As a reminder, on February 28, we closed on the agreement to exchange our equity interest in certain companies that held substantially all of our EchoStar technology businesses and certain other assets in exchange for DISH’s interest in the HRG tracking stock. As a result of the exchange, we no longer operate the EchoStar technologies businesses, and the tracking stock was retired. The EchoStar technology businesses have been presented as discontinued operations in our current financial results. Regarding our financial results for the third quarter, revenue was $481 million, a 5% growth over the third quarter of 2016. EBITDA was $220 million for the third quarter or a growth of 16% of the third quarter last year. Net income attributable to common stock was $34.7 million in the third quarter compared to $36.6 million in the third quarter 2016. A little bit more on those variances as I get to the segment results shortly. Capital expenditures for the quarter were $192 million compared to $140 million for the same quarter last year, the increase being primarily from the Echo XXIV construction and the increased spending on CPE for the consumer business, partially offset by reduced spending on the other satellite programs that were completed earlier this year. Free cash flow, which we define as EBITDA minus CapEx, was $28 million for the Q3 2017 period compared to $50 million last year. The change being primarily from the higher CapEx, offset partially by increased EBITDA this year. Our CapEx estimate for 2017 is expected to be approximately $575 million. This is somewhat higher than we indicated last quarter due to the expectation that reimbursement of costs related to construction of EchoStar 105 will not be received until early next year. Hughes revenue in Q3 was $380 million, an increase of 7% over last year, primarily driven by increased in sales of broadband equipment and services to our retail subscribers and also from our North American enterprise customers, offset partially by lower wholesale subscribers and lower revenue in the international enterprise business. EBITDA in Q3 was $132 million compared to $126 million last year due primarily to the increase in revenue and gross margin, offset partially by higher sales and marketing expenses connected with the increased consumer service activity in North America and Brazil. ESS revenue in Q3 was $97 million compared to $101 million in Q3 last year, the change being due primarily to lower FSS lease revenue. EBITDA was lower by $6 million primarily from a lower revenue and an increase of costs to certain services from DISH resulting from the transaction earlier this year. As we have previously indicated, DISH has not renewed the lease on the Echo XII satellite, which expired at the end of Q3. This will have an approximately $9 million annualized impact on ESS revenue going forward. In addition, we expect to terminate the AMC-15 operating lease later this year, which will have a positive annualized impact on EBITDA of approximately $19 million. EBITDA in the corporate and other segment in Q3 increased by $30 million over the third quarter of last year, primarily due to $20 million in gains of certain trading securities, a decrease of $6 million in G&A expenses and dividends of $2 million received from certain strategic equity investments in Q3 this year. Let me now turn it back over to Mike.

Thank you, Dave, and thank you, Anders and Pradman for your update. As you can see from this quarter’s performance, we continue to execute on our plans. The satellite industry continues to go through a transformation driven by innovative technology and service offerings. We believe that consolidation is desirable and inevitable, and we believe that we will be a key participant in these transactions. We continue to explore M&A opportunities while we continue our organic growth. With successful execution of our strategy, great teamwork and continued investment, I believe we have set the stage for a very successful 2018 and beyond. Let me now turn it back over to the operator to start our question-and-answer session.

[Operator Instructions] Your first question comes from the line of Andrew DeGasperi with Macquarie.

Thanks, and good morning. Pradman, could you first maybe comment on the international retail subs this quarter? I think in the Q and your comments, I think it was mentioned that there was a little weakness. But just curious to know, what was the reason for that? And then maybe secondly, could you maybe quantify, I know there’s a lot of moving pieces in ESS, specifically with SES-11 coming on by quarter end, Echo VIII getting taken out and then AMC-15 obviously improving EBITDA. Can we know what SES-11 is expected to add maybe if we – within those parameters? Thanks.

Anders, you want to take the second question first?

Sure. SES – or Echo 105 as we refer to it, you referred to it as SES-11, is really a – it’s a hybrid satellite where we will control for the lifetime of the satellite, the Ku-band payload and the SES will have the C-band payload for their use at the 105 orbital location. The payload represents not only numerically greater capacity than we currently lease from SES, but also in our opinion, better capacity because of its higher power and extended geographic reach. We have a number of customers to whom we have presold capacity, which will go on the satellite once it arrives and is placed in service at the orbital location. I think relative to current performance in the 2017 time frame, it is a valid expectation to expect increased revenues in 2018 relative to 2017. I hope that’s responsive to your question.

Yes, thanks.

Okay. On the international side, I think the remark was meant to be that the total international revenues showed some slight weakness. But the consumer part of our international business has been doing – has been growing very strongly, and we continue to see good growth in that business.

Understood. And you obviously had really good gross net add numbers in the third quarter. Some of your peers have highlighted LTE plans as – unlimited LTE plans as potentially impacting their business, but it doesn’t seem to be the case with you. Are you doing anything different or additive to wireless operators’ change of tactics?

No. I don’t – I mentioned in my remarks of the fact that the impact of wireless is limited because as we see the growth of both the LTE and the 5G, the frequency at which they’re operating and the markets that they’re involved in are not markets that we are going into. We continue to go after the unserved and underserved markets where we don’t see the – if – see an expansion of the 5G and the LTE networks. And we haven’t seen much of an impact.

Got it. And Dave, last question for me is the EBITDA margins came in much better even if we took out the gain in securities, the $20 million gain. Anything driving that? I would have thought subscriber acquisition cost would have probably taken that down a little bit.

Yes. I mean, certainly, the sales and marketing component of that does have a negative impact, and it is a drag on EBITDA growth. But overall, I mean, you’ve got very, very strong margins on the consumer business. That’s where we’re seeing the most growth, and that’s overcoming the drag that the sales and marketing costs will have. Pradman and his team have done a really good job of managing costs, not letting get things get out of control. And I – that the margin results are real. There’s nothing magical in there other than a bunch of really hard work.

Great, thank you.

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

Thanks. I just have some housekeeping questions. So I think the timing on the reimbursement of Echo 105, I think, moved your CapEx up about $75 million this year. Do you think we’ll see sort of a below normal CapEx number next year as reimbursements come in? Or do you think there’s enough sort of stuff going on where it’ll sort be invisible to us as we’re sort of modeling because other things sort of backfill that?

No. I think we expect to see sort of major initiatives, you can expect to see CapEx lower next year. I mean, partly because that $75 million, as you referenced it, slides into the first – hopefully, the first quarter. And we just don’t have the same amount of satellite activity next year. Wrapping up the three launches and really the fourth, if you go back to Echo XIX in fourth quarter last year is, we really had four in the last 12 months. That level of activity drops down. We’ve obviously got Echo XXIV going forward. But the overall satellite spend should be coming down.

Okay. And then in the comments on Echo XII not getting renewed, that $9 million headwind that you alluded to is both sort of a revenue and an EBITDA headwind, but the AMC is just an expense savings, that $19 million. Is that the right way to interpret your comment?

Yes. The Echo XII will have a – the revenue impact. And obviously, a very high percentage of that falls to the bottom line.

Yes. Okay, all right. And then my broader question is, you guys have been pretty consistent about this high-teens opportunity in the consumer broadband space of underserved or not-served households. What is the – yet when I sort of go down and I measure sort of the net adds, I mean, it was sort of in line with our estimate. But the net adds you guys put up sort of quarter-to-quarter don’t imply that there’s the 16 million households out there. So what is the missing piece? Is it that there has to be more marketing or more – or partners? Or better identification of these households? What’s the gating factor if we’ve got this great product out there in the field and presumably consumer demand?

Yes. I think the challenges, obviously, with the large base of subscribers that we have, the churn takes away a significant number of the subs that we are acquiring every quarter given there are the net subs of the numbers that we are aiming at. So it’s – we’re doing very well according to the plans that we have laid out. And as we drive the churn rate down, hopefully, we’ll see some improvement in the net sub above and beyond what we are very – our present numbers, which we are pleased with, and it’s consistent with our operating plans.

Okay, all right.

Yes. The other thing we gotta to point is, we run the consumer business to make sure we get the right consumers. We’ve learned some hard lessons from other businesses and so on. We could increase the number of gross adds and even net adds, but in the long term, some of those subs won’t stick with us. So we’re very focused on the right sub right now.

Understood. Okay, thank you very much.

Your next question comes from the line of Andrew Spinola with Wells Fargo.

Thanks. I was wondering if you felt any material impact from the natural disasters in the quarter on your net add activity, gross net add activity.

Just a little bit. Nothing significant. We had a few subs. I don’t think the numbers are of any significant in light of the numbers that we are presenting here.

Understood. Do you – I think on the last call, you said you expect sort of sequential improvement in Q3 and again in Q4. It seems like your marketing has picked up, just some sort of general observation. And you typically – this has been a seasonally strong quarter. So do you continue to expect an uptick again in Q4?

Well, generally, if you look at the seasonality of our subs, Q3 is the best quarter, followed by Q4. So I think we’ll continue to follow the seasonality statistics that we have demonstrated in the past few years.

Understood. And just trying to understand where the strength is coming. One of the things I wanted to just ask about is, JUPITER 1 had that big hole in the sort of Western half of the country where you didn’t have any coverage. If you were to look at your net adds today, are they disproportionately coming from that area? Or are you getting just as many subs from places where you’ve had capacity traditionally? Is there anything notable?

No, I don’t think there’s anything notable. The hole that you’d mentioned is clearly – got from a population perspective, a small number of subs coming from there compared to the East Coast and the West Coast. So it’s not impacting our distribution of the subs that we are acquiring.

I wanted to ask, following up on Andrew’s question, your EBITDA margin was quite strong in Hughes in the quarter. And I was just wondering if there was anything relative to – I guess, Intelsat had noted that they did a big renewal with you. I’m wondering if you saw some benefits on the capacity side in your international and domestic business that might have kicked in, in Q3 and will be sustainable going forward.

No, I don’t think so. I think the – everything that – there’s nothing extraordinary occurring in there.

Got it.

I think the Intelsat deal that you’re mentioning is for our existing customers where they lease Ku-band transponders from Intelsat. We just had to renew a few transponders.

Got it.

It didn’t have anything to do with our consumer business.

Yes. I guess just to follow up, Pradman, which is – it sounds like the consumer business, I’m just kind of looking at your Hughes segment as a whole and trying to understand why with the gross add ramp that occurred in the quarter, you had pretty material margin improvement for the whole segment. So I’m kind of assuming that some of it’s probably coming from your legacy Hughes business, not the consumer broadband.

Yes, no. I think the consumer business is by far the largest contributor to our margins.

Understood. You talked about your aero opportunity and how you’ve completed some of the build-out there, and you also talked about, for JUPITER 3, you’re sort of working on designing the beams to where the demand is. I’m wondering, could you maybe, in some level, explain to us how you think about the existing satellite, the next satellite, what you might be adding to those satellites other than consumer broadband in the U.S.? So I don’t know if you want to mention percentages of revenue or anything like that, but how should we think about those other applications and how big they might become – and as much of a focus as they might become going forward?

Well, I think you have to – the answer to that question depends on the geographic area that we are dealing with. In the United States, we’re focused on the basic residential consumers, and that by far will be the major element of our business. As we go into the international regions, that changes as things like applications like cellular backhaul, consumer community Wi-Fi, they start becoming the bigger and bigger portion. And these are semi-enterprise like markets and the characteristics of the market are very similar to what the enterprises show. So – and then even in the international segment, you break it to the more advanced markets and the newly emerging markets, and they have different characteristics. So there’s no one simple answer, but the bottom line is that, depending on the region we’ll serve these three or four major different applications.

Got it. And just one last clarification, Anders. You made a comment that Echo – well, you said you expect to increase revenue in 2018 versus 2017. That’s not for the entire ESS segment, correct? That’s just for the Echo 105 contribution versus AMC-15.

Correct. I was addressing that specifically.

Got it. Thank you.

Your next question comes from the line of Giles Thorne with Jefferies.

Thank you. I have three questions, please. The first question was coming back to infrastructure competition and consumer broadband, it was touched on around terrestrial earlier. And it’s obviously in infrastructure competition from other satellites, too. You’re in a unique position where you’re effectively a leading incumbent in consumer broadband via satellite, but at the same time, also a supplier and investor in a potentially competing satellite platform. And I’m obviously talking about OneWeb. So just to play devil’s advocate for a moment, could you talk us through the logic of enabling what could be a direct competitor? Second question was and still on OneWeb. Back in 2015, when the first big equity round was done that you participated in, there were actually rumors that this was all the contribution of assets in kind by people like yourself from Qualcomm and Airbus. You’ve now announced a contract, $190 million and $300 million in total. Would you mind confirming that this is actually cash that you’ll be receiving rather than any further equity in OneWeb, and that whether there’s any operational milestones linked to the orbit of the workflow. And then lastly, on Brazil – in fact, shall I be like in America and I’ll pause there and I’ll – in my third question in a moment.

We won’t remember your first question by then.

All right. I’ll tell you. I think you do remember. So I won’t repeat it. Do you want me to repeat the first question?

No, no, no, go ahead. I remember.

Okay, very good.

So the first question clearly is the potential synergy that we like to call between the OneWeb system and our system. And I think there’s significant synergy. The characteristics of OneWeb allow us to very effectively serve areas where you don’t have much concentration of subscribers. And the geo systems like Jupiter 1, 2 and 3 allow us to focus on high-density areas. So when you look at our networking strategies, we plan to use the geo – high-throughput geo satellites to address markets where there’s a high density of subs – relatively high density of subs. And we’ll use OneWeb to serve the more remote areas where we don’t have the density in the subs. And the 2 – and since we’re designing – helping design the systems, we expect that the network design takes them into account, and it’ll be very, very efficient. And we’ll be able to address, hopefully, if you look at the region of the founders of OneWeb, every subscriber in the world, to basically provide access to the Internet to everyone. And that’s the vision. And I think with the combination of the two technologies, we expect that will work fine. Your second question on the contractual relationship, there is no in-kind payments. All the transactions are in cash in both directions, and we expect to continue operating in that manner with OneWeb.

And just on OneWeb, you’ve announced this, this was in the original release, but certainly, the Intelsat investment or the exclusivity around OneWeb capacity into, if I remember right, aviation and connected car, did you have any type of similar exclusivity around distribution?

At this stage, I think those contractual relationships are confidential. I don’t think we have the freedom to explain those relationships. But at the appropriate time, we’ll, I’m sure, announce them.

Understood. Okay. And then finally, my third question was on Brazil. It looks like – well, it does look like, you are setting an extremely high price point for the service in that market, higher even than fiber. And it’d be interesting to hear the reason for that approach. Is it specifically positioning the service for price over volume? Or is this an early-adopter pricing strategy and prices will come down to drive take-up. It’d be interesting to hear some color there.

Very simple. Unserved and underserved. We’re not competing against fiber in the markets that we’re serving.

Well, it wasn’t so much – to be honest, my question is not even really about price points against fiber. I was just saying that you’re much higher than fiber. It’s about affordability, I suppose. If the average Brazilian can’t – needs to – if fiber in Brazil needs to be priced to BRL 150, BRL 200 to get to the – across an affordability threshold. The fact that you’re at BRL 253, BRL 100 looks quite – well, I don’t know, just stands out a lot. But it’s not about infrastructure competition, it’s more just on affordability.

Yes. I think we’re very comfortable that we are addressing the needs of that market at this price point. And we’re growing our business in Brazil nicely. And at this stage – just like in the U.S., we haven’t changed our price in the last five years. For sub, we have maintained our ARPU. And I think we’ve picked the price point in Brazil, and we were getting all the subs we want at this stage, and I think we’ll continue to do well in the Brazilian market in the future.

Thank you very much.

Okay. [Operator Instructions] Your next question comes from the line of Chris Quilty with Quilty Analytics.

Thanks. Just a follow-up on that last point on Brazil. I missed the very first point – part of your commentary, but did you give a breakdown of either gross or net adds and how they fell domestic versus international? And Dave, is that something you’re going to give us in terms of granularity in the future perhaps?

I think as the South American business – or let’s just say the non-U.S. business gets to a critical mass, I think we will consider breaking out those results. But as of right now, Brazil, as Pradman said, we’ve been very pleased with our success in Brazil. At this point in time, we’re not ready to start breaking out that level of detail.

Okay. And did – do I ever recall a press release saying that you launched service in Colombia?

You did. At the very end of September.

Okay. The Hughes backlog in the quarter, did that reflect anything from the OneWeb contract?

Yes.

Obviously, just a piece of it, not the whole thing?

No. The whole thing.

Okay.

Well, the incremental $190 million would have been incremental backlog.

Got you. And are you going to do that all in the next year?

No. The delivery is primarily over the next two years. Next year will be a significant jump but will continue – most of the contract will be fulfilled in 2018 and 2019.

Got you. And just a follow-up on the OneWeb development. I think you said you’re moving towards production or in actually building revenues for building out the ground infrastructure. Is this new hardware, new technology development that you’ve already completed? Or how much are you able to leverage the existing Hughes portfolio?

It’s new technology, and we’ve been developing this ground system for almost two years now, almost two years. And so we’ll begin the production activities, the buying parts, et cetera, in Q4 of this year. And we’ll get into full deliveries around the middle of next year.

Got you. And are there any other pieces of the architecture that you are dependent on, either antenna or satellite specs that you could potentially – could slow down the portion of your contract? Or can you pretty much move along independently?

No. We are doing the whole ground terminal. This is not the user side. This is the gateways, and we’re doing the complete gateway and it should be – anything outside our control.

Great. And final question. The enterprise business, I know you mentioned that the international portion of it was down. But I mean, just holistically, are you guys – as I try to run through the numbers, are you up enterprise on a year-over-year basis, either in the quarter or year-to-date?

I don’t think, Chris, we break out our international – our enterprise business in international and domestic. Dave, you may want to comment, but I don’t think we break out those numbers.

No, I don’t.

Yes. I mean, what you got to remember, Chris, is what we include in enterprise, you got the OneWeb program, as we just discussed, is part of enterprise. You’ve got the Xplornet services into Canada is part of enterprise. That’s not part of the consumer business. So when we look at that on a year-over-year basis Q3 versus Q3 as well as year-to-date, frankly, the North American enterprise business is up year-over-year.

Okay. That’s a good color then. Thank you very much.

Your next question comes from the line of Ric Prentiss with Raymond James.

Thanks. Good morning, guys. Appreciate to taking the questions like Chris had to get on little bit late have three companies report. Couple of questions, if I could. One, the – in the 10-Q, it’s talked about, while you don’t break out domestic versus international. It did say that there was a decrease in new subscriber additions in the international retail channel. Was that just a decrease in the adds? Or was it actually a loss of net adds type thing?

It was definitely not a loss of net adds.

If it says that, it’s probably not correct.

I’m sorry. Say it again.

Our international retail customers went – I think, we grew that market segment. I don’t think we had a reduction in that.

Okay. And then also in the Q, it mentioned that your obligations for your satellite projects, all the projects went up from like $700 million to $1 billion. Were you able to break out kind of what the new obligations? Was it just the JUPITER 3? Because I thought that might have been partially in the last Q as well – in the 10-Q, not to the quarter.

Yes. I mean, the – certainly, the obligations are higher. We signed that contract in Q3, and we announced it on the last quarter call, and that contract was signed in Q3.

Okay. So that was just consigned there. And then back to the OneWeb question. Obviously, we’re going to continue to have OneWeb questions, I think, in The Street. SoftBank, on their presentation for their earnings last week included some interesting slides on OneWeb in there. And it shows it in aviation, it shows it on cell sites. So just trying to think is SoftBank thinking – and in particular with Sprint, not just in rural areas, is there maybe a different vision that SoftBank maybe has as far as where OneWeb services make sense?

I would hate to speak for SoftBank, but the system can obviously technically serve any market. The comment that I made was how we would incorporate it in our networks. But that doesn’t mean that you couldn’t do other things with that.

Sure. Okay. And the final one from me, obviously, a big game from the preferred investment that was part of an IPO that now became, I guess, common Class B. Will that still be reported and represented into the EBITDA line? Or is it moving somewhere else on the balance sheet in how it gets reflected? Any changes in that valuation of the asset going forward?

The valuation of that asset going forward will run through the P&L.

So through the P&L. Okay, great. Thanks, guys.

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

Hey, sorry. One quick question. The Xplornet and StarGroup capacity sales, I guess that flows into Hughes. I was just wondering, can you tell us or quantify how much should we be thinking about in terms of revenue contribution or directionally?

No. I don’t think we can do that.

Yes. I mean, those were our obviously confidential contract terms, and we wouldn’t disclose any specifics associated with that contract, unless the customer wanted us to.

Got it. And sorry, the $2.4 million VSAT sales, can you let us know what customer vertical, what does it attributed to because it seems like a very high number if that was all in the third quarter.

I’m sorry. Can you say that again, Andrew?

The $2.4 million VSAT terminal sales? I think it was mentioned earlier.

That was the number that Pradman indicated. That is a cumulative sale.

Cumulative sale.

That’s on the Jupiter platform. We were distinguishing between all the $6 million VSATs as a whole that we had shipped to date. This includes the enterprise, consumer, domestic, international. And the combination of that – out of the $6 million shipped that we hit the milestone of $2.4 million using the new Jupiter platform. By the platform, we don’t mean the satellite, but the ground – but the terminal platform.

Understood. Thank you.

By the platform, we don’t mean the satellite, but the ground – but the terminal platform.

Right. Understood, thanks.

Your next question is from the line of Andrew Spinola with Wells Fargo.

Thanks. Can we get an update on Echo XXIII? Anything changed there? Any new thoughts? And also, you referenced in the Q that there’s a possible penalty for failing to meet the S-band and Ka-band requirements. Any sense on how big that could potentially be? Thanks.

Anders?

Yes. Well, relating to the development with Anatel, I mean, the recent determination by them relating to the S and the Ka-band frequency rights itself is a very complicated situation. Brazil’s rights in those bands presented a very challenging coordination situation given the relatively junior priority at the ITU. We had requested that Anatel give us some additional time relative to our milestones to resolve some of those challenges but our request was denied. The loss of those rights to those bands was unfortunate, but generally, were somewhat peripheral to our core interest, which is in the Ku BSS rights, which are now completely solidified with the in-service of Echo XXIII earlier this year at the slot. We remain fully committed to the long-term development of high-power BSS in the Latin American market and our discussions with potential partners are continuing, and we remain optimistic.

Thank you, Anders. There are no further questions at this time. I would now like to turn the call back over to management for any further or closing remarks.

I don’t believe we have any, except to say to everybody thank you for joining in today, and good day. Operator, you may terminate the call.

Thank you. This does conclude today’s conference call. You may now disconnect.