EchoStar Corporation (SATS) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the EchoStar Earnings Conference Call for Fourth Quarter or Year-end of 2019. At this time, all participants are in a listen-only mode. [Operator Instructions] Please stay advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Mr. Terry Brown. Thank you. Please go ahead.

Thank you. Good morning everybody, and welcome to our earnings call for the fourth quarter of 2019. 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, General Counsel. As usual we invite media to participate in a listen-only mode on the call and ask that you do not identify participants or their firms in your reports. We also do not allow audio recording, which we ask that you respect. Let me now turn this over to Dean for the safe harbor disclosure.

Thanks Terry. All statements we make during this call, other than statements of historical fact, constitute forward-looking statements that involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from the historical results and from any future results expressed or implied by the forward-looking statements. For a list of those factors and risks, please refer to our annual report on Form 10-K filed today 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 reports 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 very much Dean. Good morning everyone and welcome to our earnings call. Overall, I'm very pleased with our performance in 2019, we delivered solid financial results by growing revenue and adjusted EBITDA compared to 2018. We completed a transformative transaction with DISH that is simplified our organization, allows us to focus on expanding broadband and connectivity markets. We also closed our joint-venture with the offset in Brazil as well as acquired Helios Wire Corporation, which holds global spectrum rights for S-band mobile satellite services and systems. Let me now turn it over to Pradman, who will talk about the Hughes. He'll be followed by Andres who follow up with ESS and S-band EML and then finally, Dave will provide an overview of the actual financials. Pradman?

Thank you, Mike. I'm pleased with our financial performance. Fourth quarter revenues increased 11% year-over-year, despite relatively full beams in North America on our Jupiter satellites. And in 2019 our orders increased by 49%. In the consumer Internet business, we ended the fourth quarter with approximately 1,477,000 HughesNet subscribers with net adds of approximately 20,000 in the quarter and approximately another 20,000 subscribers acquired as part of the closing of our joint venture in Brazil with the asset. Our international consumer subscriber base is now approximately 237,000. As announced earlier this year, we're up and running with our consumer service in Mexico, which began on October 1 with 23 beams dedicated to Mexico, our services reached 95% of the population. Our focus in Mexico in the fourth quarter was to solidify our operations, while investing in our brand awareness. Our service now in seven countries in Central and South America should continue to provide international subscriber growth. Since our capacity in North America is relatively full, we'll continue to look for ways to generate higher yields and our beams and grow revenue. We're focused on managing churn, and when churn does occur replacing these customers with higher ARPU plans. We continue to believe they will extremely large addressable market of unserved and underserved households within the United States. We are monitoring the FAC activities related to the rural digital opportunity fund, but do not anticipate any material impact on our target market or existing customer base due to that program. As mentioned in November, we closed our joint venture with Yahsat's, which expand our ability to provide Internet solutions and enterprise solutions in Brazil. The integration of the Hughes Brazil and Yahsat Brazil operations is progressing well. The main streams are the installation of a Jupiter gateway pointed to the IVR 3 satellite, the migration of the existing Yahsat Brazil selves to the HughesNet platform and the absorption of the assets distribution network by Hughes Brazil. The new organization will help us achieve scale in the consumer business like gaining access to new capacity, new coverage areas and new distribution channels. We'll also better position Hughes Brazil to pursue new applications, specifically cellular backhaul and community WiFi. We continue to work on closing our joint venture agreement with Bharti Airtel in India, which will help us bring greater scale, operation efficiencies and market reach to Indian customers. This is still subject to regulatory approvals that are expected to be received later this year. We continue to explore and discuss other joint venture opportunities elsewhere in the world. Our community WiFi service offering or Hughes expressed WiFi is expanding rapidly throughout Latin America. This service in partnership with Facebook has now been deployed in approximately 800 locations. We plan to continue to expand our network of Rural WiFi hotspots, the users can access the internet on a prepaid for use basis making it more affordable and accessible. A keystone to our strategy is the use of a single broadband platform, the Jupiter platform that enables all our applications in every region in the world. This broad coverage reduces recurring and non-recurring costs and helps to improve our margins. In addition, the same platform serves various applications and market segments from the consumer to government, mobility and enterprise. As we continue to innovate, any announcements of one segment becomes available to the benefit of all segments. Our North American enterprise business also had a very strong quarter with new orders. Significant enterprise order includes signing a new customer in Town Sports International for a fully managed network as an athletic clubs. As well as a seven year extension with retail platform customer quick check. Our franchise business, which primarily addresses the gas station and quick service casual dining market, also saw continued booking from operator. As British Petroleum, Phillips 66 and Exxon. In the energy sector, we extended our relationship with Marathon Pipelines and Buckeye Pipeline and in the in-flight connectivity market we signed a deal with SES to deploy the Hughes Jupiter system. That contract provides for the initial implementation of an aviation connectivity platform across the Americas, Caribbean and the Atlantic Ocean, utilizing the SES 17 Satellite starting in 2021. In the international enterprise we're pleased to announce that a major telecom service provider in Brazil has selected us to provide Internet services to approximately 1,600 schools in rural area. Our Indian entity completed the deployment of over 20,000 sites in all retail automation for Indian Oil, Bharat Petroleum and Nayara and Hindustan Petroleum using Jupiter technology. Hughes India, which was the first in the country to receive licenses for offering maritime and broadband services, is now in the process of deploying maritime services to their first two customers. We are also in the process of deploying the Jupiter system for the [indiscernible] connect new generation high throughput satellite for Western Europe and Africa, which was recently launched. In Indonesia, the BAKTI program where we are providing the Jupiter system to all five selected service providers continues to roll out successfully with now over 1,000 cellular backhaul sites operational. Speed gas, a trusted provider or remote communications and IT Services has also chosen the Jupiter system to power 3,000 community WiFi locations in the Philippines. Our defense and government business continues the strong performance but several awards during the quarter. These included the satcom system for a military airborne drone and a contract with the US Postal Service to provide a VSAT Network and I think hundreds of postal service facilities across the United States and Puerto Rico. We expect to see continued orders in the revenue growth in this business in 2020. As you probably have heard one word, second launch occurred on February 6th, and like its first launch last year was a success. This launch included 34 production satellites. Our work on bare ground infrastructure continues to progress extremely well as we continue to deliver gateways seven of big championship to date. We continue to believe that GEO and LEO systems will be complementary and as new systems come online in mature, the optimal solution will be a hybrid of both. We believe GEO satellites will continue to provide the lowest cost per bit and lowest cost per terminal for high capacity density applications. LEOs will provide wide coverage and enable low latency applications as well as work for mobility in areas that are less populated. In the future to reach everyone and ensure that everyone is connected, we'll need every type of data transport, including terrestrial GEO and NGOs. All in all, a very strong partner in year and I'm looking forward to another exciting year in 2020. Let me now hand it over to Andres.

Thanks, Pradman, good morning. Fourth quarter ESS continuing operations revenue was $4 million which was consistent with the fourth quarter of last year. We continue actively exploring opportunities to lease are available KU-band capacity. However, the environment for commercial FSS services remains challenging. In other developments, the 2019 World Radiocommunications Conference, also known as the WRC, while held with the ITU every three to four years concluded this last November. The EchoStar regulatory team successfully protected our existing and planned operations in both KA, and Q and V bands, ensuring the spectrum can be used for Jupiter 3 and future broadband satellites and also provided for expansion in F band protecting flexibility to provide both terrestrial mobile and MSS services. With regard to the S-band developments, as we mentioned last quarter, our EchoStar global subsidiary acquired Helios Wire and its Australian subsidiary Sirion Global pursuant to which we acquire global spectrum rights for S-band mobile satellite services, construction and launch of our first flight of S-band LEO satellites remains on track with launches targeted for next month. EchoStar Global broader mission is to continuing exploration of opportunities to develop S-band platforms that we expect will reduce the cost of satellite delivered in IoT services, including machine-to-machine communications, public protection and disaster relief and other end-to-end services. We continue to work with a number of strategic partners in designing a future system architecture, which will support all these products and applications. We also continue to make good process with our European platform EchoStar mobile. Our new Hughes 4,500 omni-directional terminal has been well received since this November launch, and we've seen a lot of enthusiasm for our new terminal roadmap from several new distribution partners. Our 4510 terminal a hybrid MSS terrestrial version of the 4,500 terminal should be available in mid 2020, and we are pushing forward plans, develop new technologies that will enable us to offer devices, it will greatly increase the potential addressable market for global satellite delivered MKM and IoT services. Full integration of the S-band satellite services into 5G networks remains our longer term strategic goal and we also continue to explore ways to integrate our complimentary ground component authorizations into these and other developments. I'll now turn it over to Dave.

Thank you, Anders. Like last quarter, I will be speaking to our adjusted EBITDA measurement. The measurement excludes from EBITDA certain nonrecurring items as well as gains and loss on our investments and unrealized gains and losses on foreign exchange. More details are in the GAAP to non-GAAP reconciliation in our earnings release. We believe that adjusted EBITDA more closely represents our operating efficiency and financial performance. Before I discuss our results, I'd like to address a few items that impacted our financials in the fourth quarter. As discussed in more detail on our 10-K and press release, the Supreme Court of India issued an order affirming certain license fee assessments, interest penalties, and interest on the penalties imposed by the Indian Department of Telecommunications. Related to a license fee dispute with the government of India, to-date back that dates back over a decade and as affected the entire Indian telecom industry. On February 14, 2020 the Supreme Court of India denied the petitions filed by us and other telecommunications service providers asking the court to modify the order to permit DOT to calculate the final amount to an extend the payment deadline. As a result the Supreme Court decisions and based on the DOT's current apology for assessing penalties and interest we booked an additional crew of $61 million during the quarter. This accrual impacted SG&A expenses by 2 million and interest expense by 59 million. Net income attributable to non-controlling interests had a corresponding offset of 9 million. Adjusted EBITDA excludes all activity related to this dispute. We now have $80 million accrued for this matter as of December 31, 2019 any eventual payments made with respect to the ultimate outcome may be different from our cruel and such differences could be significant. We also made a change to our accounting process and how we report our equity method investments by shifting reporting to a three month lag. We believe this will remove some of the variability from our reporting due to periodic adjustments within the organization to the entities we've invested in. Because of this change our Q4 results in equity and earnings of unconsolidated affiliates line excludes Q4 '19 activity. Finally, with the closing of the Yahsat joint venture in Brazil Q4 includes December operational activities for the new organization with the assumption of assets and liabilities that were part of the transaction. As Pradman mentioned, we are excited about the conclusion of this transaction and the new opportunities over five. Now to the financial results. Consolidate revenue in the fourth quarter was $499 million a growth of 10% of the same period last year driven primarily by growth in our Hughes segment. Consolidated adjusted EBITDA in the fourth quarter was $156 million compared to $131 million last year. Our net loss from continuing operations was $56 million in Q4 the loss declining by 73 million from last year. This change was primarily due to the impact of asset impairment in Q4 2018, higher net gains on investments and higher operating income excluding the asset impairment. This was partially offset by higher interest expense, which increased by 45 million due to the impact of the $59 million from the Indian license fee dispute. Capital expenditures in the quarter were 104 million compared to 140 million in Q4 of last year. The decrease was primarily due to lower spend on construction and infrastructure associated with satellites. Free cash flow defined as adjusted EBITDA minus CapEx was $52 million during the quarter. With regards to our capital spend in 2020, we anticipate it will be higher in the $418 million total that we spend in 2019, primarily driven by continued spend on the Jupiter 3 satellite program and associated infrastructure as well as consumer premise equipment in South America. Turning to the segment. Hughes revenue Q4 was $492 million, an 11% increase over last year, driven primarily by growth in Hughes consumer service and enterprise hardware sales offset partially by lower enterprise services. Hughes adjusted EBITDA in Q4 was $177 million, a 17% increase over Q4 last year, primarily from a higher margin associated with our consumer business, which grew twice as fast as our other business groups in 2019. ESS revenue in Q4 was $4 million flat to the same period last year; adjusted EBITDA was $2 million in Q4 also flat year-over-year. Adjusted EBITDA in the corporate and other segment in Q4 was a loss of $23 million compared to a loss of $22 million last year. Corporate overhead and other spending increased primarily due to continued investment in corporate development activities such as EchoStar Mobile. We are also seeing the impact of certain real estate that was transferred to DISH as part of the BSS transaction, which was not treated as discontinued operations. These unfavorable impacts were offset by lower loss than equity in earnings of affiliates impacted by the change in our equity accounting that I discussed previously. We ended the quarter with $2.5 billion of cash and marketable securities. We continue to invest in opportunities that we believe have attractive returns on constantly evaluating ways to faster growth both organically and inorganically this includes potential investments in technology services or joint ventures that can expand our footprint or product roadmap. We constantly evaluate our capital structure and like the optionality our balance sheet provides. Let me turn it back over to, Mike.

Thanks a lot, Dave. Our goal in 2020 is to continue to operate the business in an efficient manner and pursuit ways to increase the yield on our revenue generating assets. We're also very focused on managing the build out Jupiter 3, electing a launch provider and implementing the associated ground infrastructure. We will continue to explore opportunities in pursuit of our strategy of being a global connectivity provider of people, enterprises and things. These are extremely exciting times for our industry and we're well positioned from a technology and financial standpoint to continue to be a global leader in broadcasts [Technical Difficulty] With that, let me close, by saying [Technical Difficulty] operator please start question and answers.

[Operator Instruction] Your first question comes from Ric Prentiss of Raymond James. Your line is now open.

A couple of questions. First within the fourth quarter, Dave, were there any one time items to call out as far as what might've helped revenues and EBITDA? If I read the 10-Q quick on a busy day looked like your offset JV might've contributed less than $1 million in the quarter. But just wondering, any other one-timers we should be thinking about?

No, I don't think there was anything specific on last profit. If anything that comes to mind, the offset, the operational impact and financial impact in Q4 obviously it was only one month and it was relatively minor as you point out with there was probably an acceleration of some of the OneWeb shipments in Q4 that probably helped a little bit. But we anticipate that's going to be ongoing now with the launch of their satellites. Pradman, is there anything else you can think about?

I agree with you.

I think I saw the Jupiter free launches looking like 2021 still needs a select launch provider, but any estimate as far as what timing you're looking for the satellite to be completed, construction and targeting for launch and service?

Yeah, Rick as you know, I mean these are complex bills and over an extended period of time 2021, I understand it's pretty broad range, but given how far we are out still on it we, we feel comfortable saying a launch in 2021 but really are not comfortable getting more specific than that.

Okay. And I think probably, well the top question we've been getting really this whole calendar year has just been how does the issue's business compare to what's happening with all the new LEOs that are being launched? Pradman you mentioned there's a hybrid future maybe between GEOs, LEOs and terrestrial, but a lot of people were just wondering what does Starlink mean? What does OneWeb mean? What does it mean from addressable market but also a competitive dynamic?

Sure. You know, the basic premise here is of course that what LEOs bring to the party is coverage and latency in the fact that you don't have the delay problem that the GEOs have. So those are the two advantages of the LEOs. The GEO bring to play the fact that you can address high density areas with a lot of capacity at the lowest possible cost and so that's the advantage of the GEO. So the idea is when we are providing network services globally, that creating a hybrid configuration between the LEOs and the GEOs, we're able to first of all cover every square inch of the globe, not only with the GEOs but with the LEOs and then we have the capacity and the cost efficiencies of the GEOs to address high density areas like beams or New York or San Francisco or the major metropolitan. And then a lot of our customers still come from. So by creating a hybrid structure based on the application in where the latency comes into play and based on the geography between the two we'd have a very strong service offering to the market.

Okay. And if people think about the ground equipment costs, what are you seeing out there as far as the cost curve for some of the LEOs from their user equipment side versus yours?

Well there are two models there. One is a model for the enterprise market, like for sellers or back haul, et cetera. Where you know the phase remind tenure, which is the main cost element, is today higher than what it would be, you know, two, three years from now. So currently the phase tenure, I probably was going to be around a $1,000 but it's rapidly decreasing in price over the next three, four years. The consumer market will obviously not be able to support $1,000 antenna. So the initial applications of LEOs will primarily be for the enterprise market where that price is a reasonable number to be able to meet the business requirements, but to get to the to the residential market as the largest volumes the cost has to be driven down to the next level, which I think would happen as technology moves on in the next two or three years.

Yes, that's an ongoing conversation, Rick, part of the issue that we have is our accounting systems aren't set up to accommodate that. We're continuing to work and look at ways to do it. Obviously if we start defining different segments, we have to be able to allocate costs to those segments and many of those operations today are combined in those cost allocations, obviously have to be in a format and enough discipline behind it that they could be audited to allow us to disclose different segments. So it's something we're interested in doing. It's something that is constantly on our mind. But certainly for the end of Q4, we chose to stay traditional segments that we have.

[Operator Instruction] Your next question comes from Christopher Quilty of Quilty Analytics. Your line is now open.

Thanks. I didn't have time to go through the 10-K in full, but it looks like the quarterly net adds were sort of restated with from what they had previously been for the consumer business. And I was wondering, can you well clarify whether that I'm in fact correct on that? And B gives a sense of, what the underlying changes were those resulted to the new numbers?

Yes. Chris, we're all looking at each other with a questioning look. We were not aware of any changes that we made in how we'll disclosed those numbers relative to historical numbers.

Okay, that's fine. I must've hit upon a incorrect section there or my read of it. Second question here is, how are you going to account for the JV subscribers on the go forward basis? Do those all accrue fully to Hughes and then you've got a minority interest back on the partnership?

Yes, I mean, the combined joint venture operations will be fully consolidated. We'll account for everything on that basis and obviously minority interest from the financial statement stand point.

And the subscribers that you brought in was that the whole some of their existing installed base?

Yes. Okay.

So they've got a lot of room to grow, presumably, or can you remind us and when, when did the satellite, if you can remind me, come online?

It came up, the 1 billion and 3 billion.

IR3?

Yes, IR3 came on board about a year ago.

Okay. So and I think was the number 20,000 subscribers that they brought on in the first year?

Yes. That's the number of subs that we -- that we're recording as acquired. Yes.

Understand. And were the subscriber plans similar to what you've been offering through your Hughes Brazil's subsidiary?

Yes, very true.

Okay. Shifting over to India, I mean, what are your expectations for the potential growth there in the maritime market? And I guess for Dave, how does that all get reported as enterprise revenues or does that flow through also in the consumer side?

I'll let Pradman talk about the prospects from an accounting standpoint, pretty much everything in India is enterprise.

Yeah. I think it's, this maritime market is a brand new market for us and for our Indian subsidiary, we've got the initial two customers and this is addressing primarily the coastal market around India. I mean, if you're familiar with the geography of India it has a large coastline that goes from the West to the East side. And so this market is going to address the ships that fly that line. So it's right now just two customers there's a few ships, but we are hoping that as we develop the service that -- it'll generate some decent revenues so for us, and then we are also taking that same kind of technology into potentially other international markets, which have similar applications.

Understand. So is this intended as a regional lonely coastal service or it sounds like you're indicating that perhaps you would look for ways to integrate that service with a roaming or mobile type capability either that you build or partner with others?

Yeah. Initially it's clearly a regional service because the satellite that covers India goes a little bit outside so it can cover the coastal areas. If you had a ship that was going from India to Europe, it obviously wouldn't have the same satellite, so you'd have to develop roaming relationships. It's a bit premature for us to address that market, that's the market and some of the larger maritime satellite carriers address. But you know, we'll see how it develops. But right now it's focused on us as a regional service provider.

Okay. A question for Anders. I think you indicated that there were some perhaps hardware product announcements this year. Is there a particular, you know, trade show or event that we should look to for those announcements?

Well, the ML teams have been participating in sort of the relevant trade shows across Europe. I know that there recently there was a utility show, I believe it was based in the UK at which they, introduced some of the road, the product roadmap to the market. I guess we're targeting a couple of different verticals initially and are only starting to participate in the respective industry conferences and the like. So I think you'll see more and more of our presence at those and it would be through those venues that would be -- we would be targeting and rolling out specific products and applications.

Great. And it sounds like you've reserved a lunch slot for the LEOs satellites. When would you expect those to be in service and can you give us an idea of what the sort of prototyping, testing, customer data, slash rollout to services will look like over the course of the next year or two?

We haven't spoken much about that publicly. I think the only things that we've discussed, the fact we have a number of satellites in the manufacturing process, two of them are nearing completion and as I stated previously, we're going to launch two next month on two different launch vehicles.

With a number, a number in production what would theoretically be the size of the constellation?

We haven't disclosed any of that, and I don't think this is the appropriate time to do so.

Thank you. And we have no questions at this time. Presenters, you may continue.

Okay. Thank you, operator. Thank you everybody for joining and we look forward to talking to you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you everyone for participating. You may now disconnect.