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Hughes Communications, Inc. (NASDAQ:HUGH)

Q4 2008 Earnings Call

February 26, 2008 11:00 a.m. ET

Executives

Deepak Dutt -Treasurer and Investor Relations Officer

Pradman Kaul -President and CEO

Grant Barber - Executive Vice President and CFO

Analysts

Jennifer Fritzsche – Wachovia

Chris Quilty – Raymond James & Associates

James Ratcliffe – Barclays Capital

Scott Malat – Goldman Sachs

Matthew Barnett – Jet Capital

Operator

Good day ladies and gentleman and welcome to the fourth quarter 2008 Hughes Communications Incorporated earnings conference call. My name is Eric (ph) and I’ll be your audio coordinator for today. (Operator Instructions) I would now like to turn the presentation over to Mr. Deepak Dutt, please proceed.

Deepak Dutt

Thank you Eric, and good morning everybody. Welcome to our fourth quarter 2008 earnings call. Before we begin I want to remind everyone that this conference call including the question and answer session may contain statements that are forward-looking as that was defined by the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on management’s current beliefs as well as assumptions made by and information currently available to management and are subject to risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements and we refer you to the documents filed time to time with the SEC, specifically our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our periodic 8-K filings including the 8-K filed with this press release and our registration statements on Form S-3.

In addition to reporting financial results and reporting in accordance with the Generally Accepted Accounting Principles or GAAP, Hughes reports non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures with comparable GAAP results that can be found on our earnings release and on our investor relations website.

I will now like to introduce the Hughes management team joining today's call, Pradman Kaul, President and CEO and Grant Barber, Executive Vice President and CFO. We will start with a business overview by Pradman Kaul followed by a financial overview by Grant Barber. Pradman will then make closing comments and we will follow this with a question and answer session. So let me turn the call over to Pradman.

Pradman Kaul

Thank you Deepak, good morning. Let me start by addressing up front what’s probably on everyone’s mind and that is for effect of the current economic recession on our business. My short answer is that we’ve seen very little if any negative impact and all indications are that we will continue to weather the storm very reliquent forward.

I believe that primary reason for this is that (inaudible) of our business. Our global enterprise business represents about 47% of our total revenue with a fairly even split between North America and the rest of the world. The consumer business in North America is about 35% of our revenues and the global telecom system segment business represents about 18% of the global revenues.

So we’ve not only enjoyed good geographic diversity, but also good diversity in the market segments that we serve. The mix of our business has also shifted very nicely towards the more profitable and recurring services component.

Our service revenues in 2008 have gone up to 58% of our total revenues. Our enterprise contracts have typically for three to five years have a great deal of stickiness and provide a substantial backlog that enhances the predictability of our future revenues.

Our consumer market in North America is large where broadband access is increasingly becoming a utility rather than a discretionary spend for a good part of this market. With thus very well positioned to quote with the external economy.

With these opening comments let me address our operating results in 2008. Hughes has another outstanding year with strong growth and revenue in the adjusted EBITDA. Revenue broke through the billion dollar mark in 2008 and reached an all time high of 1.1 billion for a growth of 9% over 2007.

Given the backdrop of the environment, I’m sure you’ll agree that this is a strong performance. In the same period, adjusted EBITDA grew by an impressive 13% to $151 million for ATI and $155 million for HNS, both new records.

We also had another strong year in terms in new order bookings. We booked new orders of $1.2 billion in 2008 and this new order performance was once again strong across all our business segments. It has resulted in a healthy and firm backlog of 841 million at December 31, 2008.

This does not include backlog in our consumer business where we generally have 24 months service commitments from our subscribers. This strong backlog continues to give us good visibility and predictability of our revenues in the coming quarters and if positioned as very well for the rest of 2009 and beyond.

In North America, our consumer business continues a solid growth. The number of gross ads in 2008 was 170 thousand subscribers which represented a 14% growth over 2007. Our pole rose to $65 compared to $62 in 2007, a 5% growth.

Consumer services revenue grew by an impressive 21% in ’08 over ’07. As you may know our strategy has been to initiate all new customers of Space-Wave and I’m delighted that we now have over 100 thousand subscribers running on Space-Wave.

This allows us to release least KU transponders for the consumer segment at the rate of 15 to 16 transponders per year and this obviously translates to significant improvements to our EBITDA margins and operating cash flows in the years ahead.

The North American enterprise business also had a solid year in revenue. Revenue increased by 8% over ’07 and the backlog at the end of the year was up by 12%. A noteworthy point in this segment is your Government’s business.

As some of you know a few years ago, we invested in a small sales and marketing group to invest a segment and this has now started to pay dividends. We signed major orders with a number of Government agencies including the Social Security Administration and we also launched a governmental crisis network to relieve the emergency needs of our local state and federal government agencies.

Our revenue from this market was $28 million in 2008 and we expect these and other successes to lead to further penetration into this large inlucritive government market. Our international enterprise group also continue to strong growth story in 2008 with a revenue growth of 10% and operating income growth of 24% over ’07.

As you know our service subsidiary in Europe, India, and Brazil do business in their local currencies and the sharp appreciation of the U.S. dollar in the last half of 2008 impacted our translated consolidator results.

Excluding the types of these exchange rate changes that is on constant dollar basis, the International Reset business showed a very healthy growth of 14% in 2008 over 2007. Operating income was less impacted because of the natural phase as a result of currency matches in revenue in costs as these service subsidiaries.

Our European service subsidiary was a key driver of this revenue growth primarily to the successful role out of the Camelot lottery project that owed 28 thousand terminal have now been installed. The revenue of HNS Europe was up by 54% and Hughes over Brazil’s revenue was up by 22% over ’07.

Both impressive success stories in our international services businesses. The telecom system segment also had a good year with revenues of 155 million a growth of 11% over ’07. Turning to the fourth quarter as you know very well this is where when the economic headwinds will end their strongest.

Despite this and pleased we were able to deliver good financial results. On a consolidated basis HCIs revenues were 2% but on constant dollar basis this translates to an impressive growth of 7%. Our press release mentions some major enterprise out the blue received in Q4, these include contracts with Conoco Phillips for management services on gas station network throughout the U.S.

Windham Hotels, Florida management (inaudible) contract to support this observation system for over 5,000 hotels across the U.S. and a contract with the Secretary of Communications and Transportation of Mexico valued at over $7.5 million for suppliers equipment to upgrade the E-Mexico system to HNS’ latest broadband technology.

Turning to the consumer business service revenues grew by an impressive 16% over Q4 ’07 as a result of adding a gross of 42 thousand new subscribers. I’m also pleased that we were able to reduce our churn to 2.4% in Q4 ’08 from the 2.6% we encountered in Q3 of ’08.

We accomplished the substantial improvements of focusing on improving that consumer’s use experience. Let me now turn it over to Grant for his presentation after which I’ll come back with some closing comments.

Grant Barber

Thank you, Pradman, and good morning. As Pradman mentioned in his comments we’re pleased to have completed another solid quarter and end 2008 in strong financial shape. At Hughes, revenues for the fourth quarter of 2008 were $285.8 million an increase of $6.1 million or 2% over the fourth quarter of 2007.

The North American V-sets segments revenue of 180.2 million in the fourth quarter of 2008 showed an increase of $15.1 million or 9% above the fourth quarter of 2007. This increase was generated equally by strong performance in the consumer business which grew by 9% to $95.4 million and the North American enterprise business which also grew by 9% to $84.8 million.

The international V-set segments revenue of 67.1 million decreased $9.3 million or 12% below the fourth quarter of 2007. As Pradmen mentioned this decrease was entirely reflection of the significant strengthening of the U.S. dollar in the fourth quarter of 2008.

Revenues from our Foreign Service companies which report in their local currencies were negatively impacted by approximately $12 million compared to the fourth quarter of 2007. The Telecom system segment which includes our mobile satellite systems, telematics (ph) and terrestrial microwave businesses delivered revenue of $38.4 million essentially flat with the 38.1 million in the fourth quarter of 2007.

From E-services (ph) hardware mixed perspective our fourth quarter growth was driven by increases in both components. Our services component was up $5.1 million or 3% above the fourth quarter of 2007 to $156.2 million.

Hardware revenues in the quarter were 129.6 million an increase of $1 million or approximately 1% above the fourth quarter of 2007. The services component continuing a trend we discussed on previous calls was 55% of our overall revenue in the fourth quarter of 2008.

Operating income was $20.5 million for the fourth quarter of 2008 or 7.2% of revenue. This compares with $32.4 million for the fourth quarter of 2007 or 11.6% of revenue. As you will recall from previous quarterly calls we started commercial service on Space-way 3 (ph) in April 2008 and as a result we began depreciating the satellite in related items.

Depreciation charges in the quarter were $18.5 million or $9 million higher than the fourth quarter of last year. Of this increase $6.6 million was related solely to the depreciation of the satellite. Operating expenses for the quarter which includes SGNA, RND and amortization of intangibles (ph) we’re $53.4 million or 19% of revenue compared to $48 million or 17% of revenue in the fourth quarter of 2007.

The main increases were in marketing costs related to the North American consumer business and DNRND (ph). Net income for the fourth quarter of 2008 was $3.4 million. This compares with net income of 19.9 million in the fourth quarter of 2007.

This decline of 16.6 million reflects increased depreciation charges of $9 million. Increased net interest charges of 5 million due primarily to the interest being capitalized in the fourth quarter of 2007 prior to the commencement of commercial service in Space-way 3 (ph) in April of 2008 and the long term incentive and retention plan charges of $3.3 million.

A table and reconciliation of both adjusted net income and adjusted EBITDA are attached in the press release. We believe that these non-GAAP measures provide useful information by excluding specific items that are not indicative of our core operating results.

Adjusted net income has been adjusted for the long term cash incentive retention program in 2008 and the equity incentive plan compensation charges in both 2008 and 2007. Non-GAAP adjusted net income for the fourth quarter of 2008 was $8.4 million compared to $21.1 million in the fourth quarter of 2007.

This decline reflects the improved volume and gross margin offset by increased depreciation operating expenses and the interest expense as previously discussed. Adjusted EBITDA was $45.2 million or 15.8% of revenue in the fourth quarter of 2008 compared to 44 million or 15.7% of revenue in fourth quarter of 2007.

Again this increase was primarily due to the increased margins and prudent control of operating costs. Turning to the year-to-date performance, we are pleased to report the revenues for 2008 were $1.06 billion an increase of 89.7 million or 9% above 2007.

This increase was driven by both the higher services revenue that increased 73.6 million or 14% above 2007 and the hardware sales which increased 16.1 million or 4% above 2007. The services component continuing the trend we discussed on previous calls closed the year at 58% of our overall revenue, an increase of 2% points versus the 2007 splits.

From a business perspective our North American V-set (ph) segment grew 8% driven by growth in our consumer business which was $44.9 million or 14% above 2007. This was driven primarily by two factors, substantial growth in the number of subs and targeted service plans with higher prices coincident with a higher broadband capacity resulting in an increase RPOO.

Our North American enterprise business increased $7 million or 2% above 2007 primarily due to an increase in our managed service offerings. Our international V-Set (ph) segment grew $22.4 million or 10% above 2007 reflecting growth in Europe and Brazil operations.

Our Telecom system segment increased $15.5 million or 11% above 2007 reflecting growth in our Telematics and terrestrial microwave groups. Gross margins increased $16.5 million above 2007 to 26% of revenue as compared to 27% in 2007.

I know it was mentioned earlier, depreciation and amortization increased by $22.8 million over 2007 of which 19.6 million was related to the depreciation for Space-Wave 3 satellite placed in service in April of 2008.

This increase in depreciation had approximately a 2 percentage point impact on year-over-year margins. Operating expenses increased $35.9 million to 20% of revenue versus 18% in 2007. As we commented on in the last quarter’s call, the main components of this increase were at $13.2 million charge related to the one time retention program in connection with April 26 – the 22, 2005 transaction between direct TV and Skyterra (ph).

Increased selling, advertising and customer service costs of approximately $8.6 million to support our growth, $6.9 million in RND primarily as a result of continued development in our North American V-Set (ph) segment and approximately $7 million of operating expenses at our new Heilious (ph) subsidiary acquired earlier this year.

Net income for 2008 was $9 million or $0.44 a share on a deluded basis. This is $34.5 million below last year’s net income of 43.5 million or $2.26 per share on a deluded basis. This reduction reflects primarily the improved operating performance off set by the $13.2 million long term retention program.

The $21.6 million in depreciation charges an increased net interest charges of approximately 12.7 million. This higher interest expense in 2008 is primarily because of interest with capitalized for a full 12 months in 2007 compared to only three months in 2008.

A partial year of interest expense in 2007 compared to a full years interest in 2008 on the $115 million term loan and lower interest earnings on our cash investments in 2008 as a result of transferring cash the safer securities in order to preserve principal. Adjusted EBITDA for 2008 was $151.4 million an increase of 17 million or 13% above last year reflecting the improved operating performance of our businesses.

Moving to Hughes Communications cash and balance sheet we generated net cash from operations of $71.7 million in 2008. We received net proceeds from equity offering in 2008 of $93 million. Capital expenditures for the year were $96.2 million and we ended the year with a cash and marketable securities position of $203.8 million compared with 151.4 million at the end of 2007.

This increase reflects our continued focus on working capital management, prudent CapEx investments and OffEx control. As I mentioned on our earlier quarterly calls, in light of the deteriorating capital market conditions, we transferred our cash investments to safe U.S. treasury and government agency securities to focus on principle preservation rather than yield.

And we continue to maintain this position. As we outlined in the press release we booked new orders of $1.2 billion dollars, revenues increased 9% to a record $1.1 billion and adjusted EBITDA increased 13% to $151.4 million.

In summary we continue to execute on our plan and deliver strong operating performance in capital management. At this time I’d like to turn the call back to Pradman for further comments.

Pradman Kaul

Thank you Grant. 2008 was a very important year for us because we put Space-Wave 3 into commercial operation. It made us the only totally vertical integrated broadband satellite based satellite source provider in the world.

We’re now able to offer many different services that we could not before. In 2008 we announced speed enhancements to our three existing subscriber plans with no increase in price. And announced three new elite plans with download speeds with up to five megabytes per second.

In addition we announced an exciting new private networking solution for small and medium businesses. In the fourth quarter we also announced a new rental offering that reduces the upfront start of these by 75% and makes a high-speed broadband offering even more affordable to our consumers.

We also announced new offerings that provide enterprise creates security and performance and back service to the small and medium business segment. In 2009, we’ll continue to offer new customer requested services and enhancements, thus SpaceWay will be the primary growth enabler going forward for our North American business both enterprise and consumers.

In addition, the lower cost of Space Segment should have a major positive impact on our margins and cash flows in the next few years. From that perspective, 2008 was a transition year with the fixed cost of the satellite operations being offset in part by the lower recurring space segment costs. Obviously going forward we expect to see this positive effect on our margins keep growing.

Our global enterprise VSAT business continues to be health, with a strong backlog going into 2009. Internationally our service subsidiaries have been more vibrant than every, and 2000 was a great year for Europe because of the Camelot program.

While it will be tough for Europe to continue on this growth path, we are seeing all the indications of this being made up by our other service subsidiaries, notably Brazil, where we have signed recently two major contracts to provide VSAT-based backhaul service to cellular service providers. Overall, between the consumer and the global enterprise businesses, we see a strong growth year in 2009 for all our VSAT businesses.

Turning to the telecom systems segment, as we said in the past, the mobile satellite development business has been opportunistic by nature and we have been able to exploit these opportunities very effectively over the last period by leveraging our technology skills and resources.

Many of these development projects are nearing completion. Also as you are aware, some of our telecom system customers are facing funding challenges as a result of the current environment. So although we have managed these projects carefully through milestone payments to minimize our balance sheet exposure, we do not expect this segment to grow as aggressive as it has in the last two years.

Before I close, let me take a moment to recap some thoughts. Despite the severe economic environment our performance in the fourth quarter continued to show robust growth across all our businesses. The diversity in our business model is clearly having the expected benefits despite the adverse external conditions.

As Grant mentioned, we have a strong balance sheet and are well positioned in terms of future finding requirements. We’ll continue to carefully watch the economic picture and take prudent steps to control our OpEx and CapEx, while continuing to invest where necessary to fuel the growth of our businesses.

I continue to be optimistic about our business going forward. Thank you and I’ll turn it over to Deepak.

Deepak Dutt

We are now ready to start the Q&A part of the call. If there are any follow up questions from the financial community, please direct them to me through our investor relations line. Members of the media should contact Judy Black, whose contact information is also available on our Web site.

We’ll take a few moments to get the Q&A process started after which the operator will take over and coordinate the session.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Jennifer Fritzsche with Wachovia.

Jennifer Fritzsche – Wachovia

I was wondering if you comment anything on SpaceWay 4? Originally you had talked about being in negotiations with vendors and possibly making an announcement before the end of ’08. I was just wondering the timing there, your thoughts there, et cetera.

Also, just in terms of the question in the lottery shipment, did you ship the remaining lottery-related hardware in the quarter or is there more to be shipped in the first quarter? And if so, could you just comment or quantify the number of units there? Thanks very much.

Deepak Dutt

Yes. Let me answer the second question first. I think we have shipped almost all of the units in Q4 of last year, so the revenues we will get from Camelot for the next nine or ten years are the service revenues that we will be recognizing as we provide the service on a monthly basis.

On your first question of SpaceWay 4, we were working very hard on trying to get the satellite out of place that you mentioned by the end of last year, but have decided to move a little more prudently because obviously of the economy going down. But having said that, I think it’s very clear based on the take rate that we are seeking on SpaceWay that our consumer business is still moving forward very, very nicely.

And as I mentioned in my remarks, we have now crossed the 100,000 subscriber a month on SpaceWay 3, so it’s clear we need to make the investment in one form or the other for a new satellite and I am hopeful that we’re investigating a couple of different scenarios that in the next couple of months we will go ahead and spend some money in ordering a new satellite.

Jennifer Fritzsche – Wachovia

Pradman, if I could just follow up, are you seeing the vendors you’re talking with being more in negotiating mode given the economy like I guess put another can waiting here help you from a cost standpoint?

Pradman Kaul

Possibly, but that’s really not been the reason for the delay, but obviously we have vendors who are very keen to build a satellite for us and it’s just that we wanted to make sure that: one, the economy didn’t affect the take rate on SpaceWay 3 today.

And I think we have now proven to ourselves that we can maintain new subscribers at a good healthy clip and having said that I think we’re in a position very soon to move forward.

Operator

Your next question comes from the line of Chris Quilty with Raymond James & Associates.

Chris Quilty – Raymond James & Associates

A question for you, of the 100,000 subscribers on SpaceWay, can you give us a sense of how many of those might be enterprise-related by consumer?

Pradman Kaul

I think essentially these are subscribers who signed up for a monthly subscription, so in addition to these 100,000 subscribers we have started now marketing SpaceWay to some enterprise corporations, but those are usually closed private networks. And we have a couple of them on board and we hope that in ’09 and ’10 we will also be able to put more enterprise customers on SpaceWay, but the 100,000 are essentially all consumers.

Chris Quilty – Raymond James & Associates

Now would SMB also fall into that sort of monthly plan?

Pradman Kaul

Yes, the SMB is certainly part of what we call the consumer and SMB segment.

Chris Quilty – Raymond James & Associates

Okay, and have you seen any uptake of that 5 megabit, $350 a month plan?

Pradman Kaul

Yes, we have some, but clearly that’s a pretty expensive plan and a very high speed plan, so the numbers aren’t huge. In fact, I don’t have the numbers right here. I don’t think we break out the number of subscribers by plan at this stage, but yes we are seeing some interest in that plan – in the elite plan. We have three elite plans that go from 2 megabits to 5 megabits and we’re seeing some interest in that.

Chris Quilty – Raymond James & Associates

And do you think you have the right channel or sales force for reaching those sort of high value SMB customers who would be interested in it?

Pradman Kaul

Yes, we do, and we’re continuing to grow that and that’s primarily being handled by the value-added resellers and sales agents; that part of our distribution channel. We’re continuing to grow that. That’s a channel that we have really have been working on only over the last 18 months or so and we are continuing to grow that and that’ll be a major area of emphasis in ’09.

Okay and in the press release you said you had 86,000 subscribers on SpaceWay. You mentioned over 100,000. If I kind of run simple math here it’s about 14,000 new subs since the end of the quarter over what’s basically a two-month period, which would indicate that run rate you will have only added gross adds of around 21,000 to 25,000 in the March quarter, which will be down a decent amount from what you did in Q4. Am I doing the math wrong here?

Yes, remember I said over 100,000. I didn’t give you an exact number.

Chris Quilty – Raymond James & Associates

How about giving me a number?

Pradman Kaul

But I think in general – I think our first quarter is meeting our expectations and we’re seeing a healthy subscriber acquisition activity in the first quarter. So I wouldn’t read anything negative in our first quarter subscriber acquisition.

Chris Quilty – Raymond James & Associates

And first quarter is – remind me – is that a little seasonally weak?

Pradman Kaul

No, it’s usually seasonally strong if you look at the ...

Chris Quilty – Raymond James & Associates

Q2.

Pradman Kaul

Q1 and Q4 are usually the two strongest quarters.

Chris Quilty – Raymond James & Associates

And second quarter is the one that’s weak?

Pradman Kaul

Second and third quarter we see some weakness – some lower subscriber acquisition. So Q1 is usually a strong quarter and continues to be strong this year.

Chris Quilty – Raymond James & Associates

Okay. And the Q isn’t out yet, but am I right here the fourth quarter net adds were about 12,300?

Grant Barber

Just 12,100. The plan Chris is we’ll have the Q up next week, probably by Friday.

Chris Quilty – Raymond James & Associates

Okay. And a question I saw on a news story yesterday that AsiaSat backed out of a Sea Launch and they’re jumping over to ILS Proton and this is sort of a prearranged deal. How come you guys can’t get your money?

Deepak Dutt

What money?

Chris Quilty – Raymond James & Associates

From the original Sea Launch cancellation.

Deepak Dutt

Yes. Remember we are in arbitration right now and we are waiting for the award from the arbitrator. The arbitrator hasn’t yet issued a ruling as to whether we are right or Sea Launch is right. This is a dispute that’s been going on for a while and we expect a decision from the arbitrator hopefully in the next month or two.

Chris Quilty – Raymond James & Associates

And Pradman, you mentioned that you don’t expect the MSS business to grow as aggressively this year. Is it more accurate to suspect that that business will be down a fair amount in 2009?

Pradman Kaul

As you know, we don’t give guidance but I think clearly as the systems reach their conclusion on the development cycle the backlog in those contracts is obviously declining significantly.

Chris Quilty – Raymond James & Associates

And are there incremental new opportunities that I’m not aware of. I mean we know what you’ve announced with regard to Global Star and Iko and others. Are there follow-on's that could be announced before the year is out?

Pradman Kaul

We’re always hopeful, but there isn’t as much new activity going on as there used to be, but there are a few opportunities that we are chasing that will be dependent also on the ability of some of these customers of ours to raise new financing.

Chris Quilty – Raymond James & Associates

And final question for now, the consumer churn – have you had a chance to go back and do some analysis and figure out what happened in the third quarter with the spike and looking ahead on a go-forward basis would you expect it to settle out in this sort of 2.3%, 2.4% range?

Pradman Kaul

Yes we have expended a lot of energy on this and clearly one of the areas that we were able to fix was the user experience. We were introducing a new system. The user experience had sort of degraded a little bit and as you know that one of the modifications we made in our SpaceWay basic plan was increasing the number of bits in the base plan.

We increased it from 700 kilobits to 1 megabit. And we took the o1 megabit plan to 1.2 and the 1.2 megabit plan to 1.5 megabits and obviously this increased capacity and speed has improved the user experience. So the element of the churn that was being impacted by the user experience quite significantly improved in Q4 and we’re continuing to see the same kind of improvements in Q1 of this year.

The other part that we don’t control as much is obviously the effect due to the economy – the bad debt and other elements of the economy and that’s continuing to be at the same level as it has been for the last three, four months.

So given that, I think, for the next few quarters I think a churn rate in the 2.3% to 2.4% range is reasonable to expect. And as the economy improves sometime in the future, we might be able to reduce it even further.

Operator

Your next question comes from the line of James Radcliff with Barclays Capital.

James Ratcliffe – Barclays Capital

A couple of questions – first off can you talk about the impact you expect the Stimulus Bill to have? Both, are you expecting to build a catch on that funding and conversely, what impact do you think it will have in terms of the build out of expanding wire line competition to you in rural areas?

Deepak Dutt

It’s a little bit premature. I’ll give you my feelings, but they’re not really – I don’t know if they’re fact. Clearly, there’s approximately $7-1/2 billion for those of you who are not familiar that has been targeted for broadband – enhancing the broadband rollout, but there’s about $2-1/2 of that $7-1/2 billion -- $2.7 billion, I think has been given to the agriculture department and then about $4.6 billion that has been given to the commerce department to be administered by the NTI. So all of that is fact.

So now the question is how are these monies going to be disbursed and what are the rules going to be for that, et cetera, and as we understand it both the Department of Agriculture and the Commerce Department are putting in places processes of rule making to decide how these programs are going to be administered.

And we are in the middle of it. We are giving recommendations and suggestions to both departments and it’s not clear at this stage exactly who will get the money and how it will be decided as to whether the funds are being disbursed.

So we have a small group of people who are actively involved in it and hoping that we will participate in these programs that these two organizations are going to be administering. And I think over the next two or three months we’ll have a clearer picture of what’s going to happen.

The one point which I think is important from our perspective is in the original versions of the bill being passed in Congress, I thought it was clear that satellites were to be included in these programs and we were fortunately, the bills that the Congress passed includes satellites explicitly, so that’s a positive .

And the second was that we build a primarily pretty neutral on the technology and speed, etc. to give us a good even playing field for the satellite industry. So the satellite industry as a whole has been treated well so far. And we’re going to have a level playing field and we should be able to get our share of this, we hope, but we’ll keep you guys informed as events develop some more.

James Ratcliffe – Barclays Capital

As a follow up to Jennifer’s question, when you look into your satellite infrastructure plans, do you feel you need to wholly own a satellite or if the economics work would the possibility exist to potentially share one. Essentially, is expanding satellite capacity the least versus buy decision, is that purely economic or are there control issues involved as well?

Deepak Dutt

I think it’s primarily economic and I certainly think we can share a satellite with somebody else and if the right partner came along we’d be very happy to look at it.

Operator

Your next question comes from the line of Scott Malat with Goldman Sachs.

Scott Malat – Goldman Sachs

Just a question on some competition, and Wild Blue. You know, they’re offering a $40 plan for the first $12 months. I know these are at lower speeds. I was just thinking overall do you think you need to respond at any point with an opening price point at these levels?

Deepak Dutt

You know we constantly look at it and sometimes we do change our mind, but it seems to use that the more important thing right now is the user experience. And when a person is spending the kind of money, $40, $50, $60 we think it’s important to give the customer the bits and the speed and they’re willing to pay the extra $10 or whatever it’ll take to do that.

And so currently that’s our belief and so our plans are designed for that. Obviously at some stage if we see a big market segment at the lower end can in a natter of days announce a plan for a lower monthly cost with Real Bits., currently we believe it’s better for us to keep the price at the base offering of $60 with the one megabit kind of speed.

Scott Malat – Goldman Sachs

So with a tough macro, you think $20 a month does not really have an impact? I’m not sure I understood your answer.

Deepak Dutt

No, it probably has. There is a market segment that will go for that but we don’t think that’s very large.

Scott Malat – Goldman Sachs

Okay, well and as I just think about your gross adds per month and just the levels you’re at right now and trying to understand what you’re happy with given the increased marketing spend. How do you think about where you were last year and where you are this year?

The marketing spend that you’ve increased and are these gross add levels per month of around 14? Are those levels you’re happy with or are those levels you’d like to it higher than that level, given the amount of spending?

Deepak Dutt

In ‘07 we had 149,000 gross adds. In ’08 we had 170,000. We certainly want to see that number higher in ’09 and we think we can get there and we have put into place quotas and targets and marketing plans for ’09 that hopefully will get us at a higher number than 170,000.

Scott Malat – Goldman Sachs

That trend rate really fell off in the fourth quarter, right? Is there a reason for that?

Deepak Dutt

If you look at the fourth quarter of ’07 we did 40,000 gross adds. And in Q4 of ’08 we did 42,000. So we clearly had a growth in Q4 ’08 over Q4 ’07, so yes I would like to see some more than the 42,000. We’d like to see 45,000, 46,000, 47,000, but I wouldn’t say that the drop was significantly lower than what we expected.

Scott Malat – Goldman Sachs

Okay and then on ARPU, you’re pretty flat year over year but you’re down from I guess over $66 in third quarter. Just given the new higher rate plans, I would have thought it would have been higher. Can you just talk about trends there? Are people lowering the plan that they’re on today?

Grant Barber

No, ARPU actually is up from the third quarter, Scott. We’re $63 in the third quarter, up to $64 in the fourth quarter of ’08. I’m sorry, $65 in the fourth quarter.

Scott Malat – Goldman Sachs

I think I’ll talk to you after the call to make sure I got the numbers right on that. And then just lastly just on India and some of the long distance learning stuff, what’s the outlook for that market?

Deepak Dutt

It looks good. We are continuing to deploy more and more kiosks and 70% of our revenue from these kiosks does come from education and distance learning and so we’re very optimistic about continuing to see growth there.

Operator

(Operator instructions) Your next question comes from the line of Matthew Barnett with Jet Capital.

Matthew Barnett – Jet Capital

I had a couple of questions: one, could you add some more color on the government business? I understand it had a $28 million in revenue. Where do you think that can go to and over what period of time? And how should people think about margins in that business?

Pradman Kaul

Well, we’re addressing the U.S. government in two fronts. One is defense and intelligence systems, which we can’t talk much about because almost everything we do there is classified and the second is the civilian part of U.S. the government.

In 2008 we had a very successful year in that segment because we were able to, first of all, get into two of the big government procurements, which are basic ordering agreements. One was the SATCOM II and the other was the networks procurement. And obviously many other companies also were selected under these two programs.

But what that did for us was give the ability for these government civilian and military agencies to order services and products from us because they were blessed by these two procurements. So that is the first major step we accomplished in ’08.

Then based on that we won the first two big awards in the government for Social Security Administration and something else called GETN, which is the Government Education Training Network.

Both of these were procurements, which were pretty significant because they were distance learning, based and allowed training and these kinds of programs for which satellites are ideal to be deployed and have generated some nice revenues for this year.

I am personally hopeful that we can maintain a good growth rate in this segment because we’re starting from very small numbers obviously, and we have a whole slew of opportunities that we are going after in both areas.

You know margins in the government are never very large, as you know, but I think pretty consistent with the overall gross margins and profitability of Hughes and I think we’ll be able to maintain those in this sector.

Matthew Barnett – Jet Capital

Thank you for that. Okay, the second question, in the past you've spoken about 20% year-on-year growth in consumer business. It doesn't sound like you're necessarily holding to that on this call, is that true? And is there new number of people you should focus on?

Pradman Kaul

I think that's still our target. I don't think you should read into our comments that we shouldn't be aiming for numbers in that range.

Grant Barber

Yes. Let me follow up just on that comment following Scott's. A piece that was driving our growth in revenue earlier was the increase in ARPU, and we're up 5% from 62%, 45% last year to 65%, 40% this year. So that funneled a big piece of our growth as we introduced the new higher-end plans and people moved up even within the home to the Pro Plans, et cetera.

We have seen that flatten out in the last part of the year, so I want to clarify something I mentioned. We've been 65%-40% is the average ARPU for this year and that has been relatively flat in Q2, Q3 and Q4 plus or minus $0.20 or $0.30, so, you may not see the ongoing kick up in ARPU that we saw from '07 to '08 continue in the future, but we're still very confident on our selling and marketing plans that will drive the number of gross consumer at.

Matthew Barnett – Jet Capital

Okay, and if you miss that in a quarter should we be disappointed or you're looking at it on actually a yearly basis?

Pradman Kaul

We are looking at it on an annual basis. We should see that gross subs increasing and generating, as Grant mentioned, the revenue is also increasing at good play.

Matthew Barnett – Jet Capital

Okay. And then – sorry I just have two more questions. Just one following up on this adds question, VSAT said on their conference call a week or two ago indicated that Wild Blue's capacity constrained again in their opinion. Are you guys noticing that and are you being able to take the benefit?

Pradman Kaul

You know I think Wild Blue has announced Sunbeam is being closed because of the capacity. I'm not directly familiar with whys and wherefore's of that, and we continue to believe that the market's big enough for both of us, and our distribution channels are working hard to keep signing up new subs.

Matthew Barnett – Jet Capital

Okay, and then just the last question is you had one question on this call about the use of capital for a new satellite. Given where the stocks are trading and also the debt, the bar seems to be being raised for their return on capital. How are you guys thinking about the use of capital or satellite versus using it to buy back debt or buy back stock?

Grant Barber

Yes, so we look at the very species of our capital structure. But if you recall what we did last year, we went to the market and raised the net at $93 million, and the use of proceeds on that was to complete and fully fund the cash requirements for the purchase of SpaceWay 4 and we're still exactly on that same execution plan.

So, at this point, we have the adequate cash plus the cash that we expect to generate in the future years to fully fund that plan. So while we look at the capital pieces, we don't have any short-term expectations to buy back either debt or equity.

Matthew Barnett – Jet Capital

And does that equation change if the economy stays like it is for six months, and you're not in a position to buy a satellite, and you're essentially saving a fair amount of cash at a certain point?

Grant Barber

Well, I think what we showed you this year that we can generate cash, we can keep our focus on the CapEx and our operating expense. If we delay the purchase of a satellite a few more months in the future, clearly it will enable us to have a higher free cash flow in the interim. But it is still our intent as we've outlined last year.

Operator

Your next question comes from the line of Rich Valero – Needham & Company.

Rich Valero – Needham & Company

Thank you. I know it's still early but I was wondering if you could give any more color on what form you think the funds being distributed, as part of the stimulus plan will take? Do you expect low cost loans to service providers like yourself, or might there be grants as well? Any color on that would be helpful.

Deepak Dutt

Yes, we certainly think there'll be grants of some kind; that 's certainly the intent of the government and the administration. Now, what form the grants will take, whether it will be to subsidize the upfront costs of the customer equipment or whether it will be other forms of subsidized service, the monthly service avenues, service costs – I don't know. We'll be discussing that and exploring that with both the Commerce Department, and the Agriculture Department.

Rich Valero – Needham & Company

That's helpful. And how do you think of the capacity of SpaceWay 3 in terms of subscribers? What do you view as the limit there?

Deepak Dutt

I think the limits about 1 million subs. As we've been saying, it's somewhere in the range of – because the function of how the beams fill up that and the speeds that people sign up for. It's somewhere in the range of 600,000 on the low end to 1 million on the high end.

Rich Valero – Needham & Company

That's helpful. Thank you.

Operator

We’re currently showing no more audio questions at this time. I would like to turn the call over to management for closing remarks.

Deepak Dutt

Okay, thank you operator. This is Deepak Dutt again. This brings us to the end of our conference call. I want to thank everybody for taking the time to listen in and have a good day. Thank you.

Operator

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day.

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Source: Hughes Communications, Inc 4th Quarter 2008 Earnings Call Transcript
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