Hughes Communications Inc. Q2 2009 Earnings Call Transcript

Hughes Communications Inc. (HUGH)

Q2 2009 Earnings Call

August 6, 2009 9:00 am ET

Executives

Deepak V. Dutt – Vice President, Investor Relations Officer

Pradman P. Kaul – President, Chief Executive Officer & Director

Grant A. Barber – Chief Financial Officer & Executive Vice President

Analysts

James Ratcliffe – Barclays Capital

Chris Quilty – Raymond James

Scott Malat – Goldman Sachs

Lawrence Harris – CL King

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 Hughes Communications Incorporated Earnings Conference Call. My name is [Tanesia] and I’ll be your operator for today.

At this time, all participants are in listen-only-mode. We will conduct a question-and-answer session towards the end of this conference (Operator Instructions) As a remainder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Deepak Dutt, Vice President, Investor Relations. Please proceed sir.

Deepak V. Dutt

Thank you and good afternoon everybody. Welcome to our second quarter 2009 earnings call. Before we begin, I would like to remind everyone that this conference call, including the question-and-answer session may contain statements that are forward-looking, as that term is 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 we file from 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 S3.

In addition to reporting financial results in accordance with 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 to comparable GAAP results, which can be found on our earnings release and on our investor relations website.

I would now like to introduce the Hughes management team joining today's call, Pradman Kaul, President and CEO; and Grant Barber, Executive Vice President and CEO. 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 this would be followed by a Q&A session.

Okay. So let me turn over the call over to Pradman.

Pradman P. Kaul

Thank you, Deepak. Good afternoon everyone. Overall, HCI had a good second quarter. From a revenue perspective, we recorded revenues of $256 million a decline of 4% over Q2 ’08, but only a 1% decline when measured on a constant dollar basis. The primary revenue drop off was in the Telecom Systems segment, a decline of 24%. As we have said before, this segment is opportunistic and a number of major contracts are nearing completion, so this reduction will probably continue for sometime.

The good news is that our core business broadband, is doing well. Revenues in this segment of $226 million were flat in relation to Q2 ’08, but a 3% growth when measured on a constant dollar basis an encouraging sign in the current economic environment. We did particularly well in North America, which is obviously the major part of our core business.

Our Broadband Enterprise business grew by 5% over Q2 ’08 with major new orders from British Petroleum, Conoco, Gtech, Barrett and Regal Cinemedia. The Consumer Subscriber business did even better, total subscriber gross ads of 50,000 was 35% higher than Q2 ’08. And with the churn at 2.3% the net ad of 18,000 subs was an increase of 103% over Q2 ’08. We ended the quarter with 473,000 subs.

Also consumer ARPU was $70 compared to $68 in Q2 ’08 a gain of $2 per sub. Our strategy to activate new subscribers on Spaceway 3 is very much on track and we had approximately a 170,000 subs on this satellite at the end of the second quarter. This is obviously beginning to help our margins as per our plan.

Our international group revenues declined relative to Q2 ’08 because of a one-time spike that we had in hardware revenues last year for the large VSAT shipment for the U.K. lottery. But this was offset by an excellent order input this quarter with major new contracts from BP Europe, Telemar and Telefonica in Brazil, State Bank of India in India, SCT Mexico, Abimata in Indonesia and many others.

Another major positive for HCI was our services revenue. It grew by 16% over Q2 ’08 with the Consumer Services business growing at 18% and the international services business growing by 24%. Clearly, we have worked over the last few years to grow our services revenue and I am very pleased to see this result. Our new order performance of $326 million an increase of 50% over Q1 ’09 was also impressive.

A significant amount of these new orders came from our Broadband business and instead of the telecom systems, reinforcing our belief in our core business. HCI adjusted EBITDA for the quarter was $40.4 million a second quarter record and an 8% increase over Q2 of ’08 in spite of the small revenue drop off. This is a result of the service revenue expansion and continued gross margin improvement driven primarily by the increasing subscriber activations on Spaceway 3 and continued focus on reducing operating expenses.

For your information, we were able to reduce another 3.5 lease transponders this quarter and intend to continue this in the near future. On non-consumer backlog at June 30 is very healthy at $879 million, an increase of 9% over the backlog at the end of the first quarter in March 31. As you many of you are aware, we do not book the 24 months service commitment of our consumers into backlog, but recognized revenues and new orders simultaneously.

Our performance for six months year-to-date has also been very good. The revenues have been essentially flat and adjusted EBITDA is $73 million of growth of 9% over the same period in ’08. Our operating cash flow performance was also good and Grant will take you through the details. However, we had one setback when Sea Launch file for chapter 11 this quarter and thus our ability to collect on the monies owed has been impacted.

We have taken a full reserve for that and are proceeding to press our claims in the bankruptcy courts. Finally, an important milestone for our company was the placing of the order with Space Systems Loral for manufacturer of our next satellite. This high throughput satellite is designed for a capacity of 100 gigabits per second and will be used primarily for our fast growing consumer business. As many of you are aware, we gave considerable thought to the second satellite decision in light of the economic environment.

However, the continued and consistent growth of our consumer business confirmed to us the demand exists in this market and that it will continue in the future. The new satellite is expected to be launched in the first quarter of 2012. In summary, I’m pleased with our performance in this quarter and now let me turn it over to Grant for his presentation, after which I will come back with some closing comments.

Grant A. Barber

Thank you Pradman and good afternoon. As Pradman mentioned in his comments, we are pleased to have completed another good quarter and ended Q2 in strong financial shape. The continued growth in our North America Broadband business and continued focused on cost control enabled us to show adjusted EBITDA growth over the second quarter of last year. At Hughes, revenues for the second quarter of 2009 were $255.8 million, a decrease of $9.8 million or 4% below the second quarter of 2008.

Revenues for the first half of 2009 were $496 million, a decrease of $6.8 million or 1% below the first half of last year. The North American Broadband business continues to be the primary growth driver as revenue for the second quarter of a $175.2 million was up $14 million or 9% above the second quarter of last year. For the first half the North America business revenue was $340.9 million, an increase of $22.8 million or 7% above the first half of last year.

This increase was once again driven by strong performance in the consumer business, which revenues grew by 12% in the quarter to a $104.2 million. For the first half, our consumer revenues were $202.9 million an increase of $18 million or 10% above the same period last year. Our North America Enterprise business had revenues of $71 million, an increase of $3.1 million or 5% above the second quarter of 2008. For the first half, our North America Enterprise business revenues were a $137.9 million, an increase of $4.8 million or 4% above the same period last year.

The International Broadband segment revenue of $50.5 million decreased $14.9 million or 23% below the second quarter of 2008. Primarily, due to the completion of the terminal shipments on a multiyear contract for large lottery operator in the U.K. and the unfavorable impact of the currency exchange of $6.9 million caused by the appreciation of the U.S. dollar.

Partially offsetting these decreases has been the continued growth in our services revenue lead by Brazil. For the first half our international revenue was $95.4 million a decrease of $14.7 million or 13% below the same period last year with this entire shortfall being a reflection of the strengthening U.S. dollar, which reduced our international revenues by $16.6 million.

The Telecom System segment delivered revenue of $29.3 million a decrease of $9.4 million or 24% below the second quarter of 2008. For the first half of 2009, revenues were $58.6 million a decrease of $15.8 million or 21% below the comparable period of last year. The decrease for both periods was primarily due to the reduction in revenue from our Mobile Satellite Systems Group, as several development contracts are reaching their completion stage.

As you recall, the revenue for this group is opportunity driven and is subject to the life cycle of customer contracts as they move from the design and development stage to the delivery and maintenance of completed networks. From a services hardware mix perspective our growth continuous to be delivered from our services. Our services component was a $173.4 million, an increase of $24.1 million or 16% above the second quarter of 2008.

For the first half of 2009, our service revenues were $335.7 million, an increase of $37.6 million or 13% above the same period last year. Hardware revenues in the quarter were $82.4 million a decrease of $33.9 million or 29% below the second quarter of 2008 reflecting the 2008 terminal shipments to the U.K. lottery operator and the Mobile Satellite contracts, as I mentioned earlier. The services component continuing the trend we discussed on previous calls increased to 68% of total revenues for both the second quarter and the first half of 2009 a reflection of our consumer business growth in both subscriber count and ARPU and continued investment and focus in our global services organizations.

Operating expenses for the second quarter of 2009 were $53.5 million, an increase of $3 million or 6% above the second quarter of last year. This increase was entirely due to higher marketing costs of $4 million primarily in our North America operations as we increased targeted spending for our consumer business. In addition to the operating expenses mentioned earlier we’ve recorded two impairment charges totaling $45.4 million in the current quarter.

As a result of our evaluation of the deposit made to Sea Launch, we concluded that the value of the deposit was impaired and we have recorded an impairment loss of $44.4 million. Additionally, in the quarter we’ve recognized a $1 million loss related to the impairment of a cost method investment. These charges significantly impacted operating income and net income for both the second quarter and the first half of 2009.

Operating income for Hughes was a loss of $31.3 million for the second quarter of 2009 compared to an operating income of $16.1 million in the same quarter last year. Net interest expense for the quarter was $15.3 million an increase of $2.3 million from the second quarter of last year primarily reflecting the interest on the new senior notes and the lower rates of return on our invested cash.

For the first half, net interest expense was $28.9 million, an increase of $8 million above the first half of last year. This increase as a result of the $4.8 million of interest in 2008 associated with the construction and launch of the satellite that was capitalized last year. The interest on the new notes, and the lower rates of return on our invested cash. The net loss for the second quarter of 2009 was $47.7 million or $2.23 of share on a fully diluted basis.

This compares with the net income of $1.8 million or $0.09 of share in the second quarter of last year. This decline is primarily made up of by the $45.4 million impairment charges, increased depreciation and net interest charges. A table and reconciliation of adjusted EBITDA are attached to 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 EBITDA was $40.4 million or 15.8% of revenue in the second quarter of 2009, an increase of $2.9 million or 8% over the second quarter of 2008. Again this increase was primarily due to the increased services business and prudent control of operating costs. Adjusted EBITDA for the first half of 2009 was $73.1 million an increase of $6.1 million or 9% above the first half of last year. For Hughes Network Systems, LLC our principal operating subsidiary adjusted EBITDA for the quarter was $41.1 million, an increase of $2.6 million or 7% above the second quarter last year.

For first half adjusted EBITDA was $73.6 million, an increase of $4.9 million or 7% above the same period last year. Moving to the Hughes Communication’s cash and balance sheet; we generated net cash from operations of $20 million in the second quarter and $37 million in first half of 2009 compared to $14 million generated in the first half of last year.

Capital expenditures for the second quarter were $30 million and $61 million for first half. In the second quarter HNS completed a private debt offering of a $150 million of 9.5% senior notes mirroring the terms of its exciting senior notes and we received net proceeds of approximately $133.6 million.

As a result, we ended the quarter with the cash and marketable securities position of $310.2 million. As we outlined in the headlines of the press release, for the second quarter we booked new orders of $326 million, revenues of $256 million, an adjusted EBITDA of $40 million. In summary, we continued to execute on our plan and deliver strong operating performance and capital management.

At this time, I’d like to turn the call back to Pradman for further comments.

Pradman P. Kaul

Thank you, Grant. Now for a few closing comments on each of our businesses. In our North American consumer business, we will continue our focus on our direct marketing programs through TV ads and continuous mailings at higher rates than in the past. This strategy has clearly produce results for us in Q2. We will also target low fill beam areas, increased coverage at call centers and boost support for key sales agents and dealers.

In the North American Enterprise business our managed network strategy is playing out very well. New initiatives include working some large opportunities in the corporate and government book markets, new business developments with Helius and expanding our small and medium enterprise business through the reseller channels. In the International Broadband business, our three service companies are growing nicely. Many of the recent orders are multiyear service contracts, and that augurs well for the future.

Before I close let me take a moment to recap some thoughts. Despite the severe economic environment, our performance in the second quarter continued to be solid across all our broadband businesses led by the consumer and North American Enterprise businesses and our service revenue continuous to grow at an impressive rate. The Telecom Systems business has been declining and we expect it will continue to do so in the near future. This is not unexpected because of the opportunistic nature of this business, as we have pointed out previously.

Our non-consumer backlog, an important leading indictor continues to show strength and is at $879 million at June 30. Our adjusted EBITDA continues to grow nicely, our result of the expanding services revenue, improved margins from Spaceway 3 and our cost reduction programs. Finally, as we have stated in the Q1 call, we continue to evaluate new strategic opportunities and I continue to be optimistic about our business going forward.

Thank you, and I’ll turn it over to Deepak.

Deepak V. Dutt

Thank you, Pradman. Okay. We’ll now start the question-and-answer part of the call. If there are follow-up questions after the call from the financial community please direct them to me through our investor relations line. Members of the media should contact Judy Blake.

Our contact information is available on the website hughes.com. We’ll take a few minutes to get the Q&A process started, after which, operator will you take over and start the session.

Question and Answer Session

Operator

(Operator Instructions) And the first question comes from the line of Mr. James Ratcliffe with Barclays Capital. Please proceed.

James Ratcliffe – Barclays Capital

Good afternoon guys. A couple of questions, first of, is part of the debt raising you mentioned in some of the commentary in the release that one possible application were I believe like strategic opportunities and the like, and further implying at least M&A prospects. Could you talk a little bit about what opportunities you see to be out there, and what your kinds of things you are looking at?

Pradman P. Kaul

Yeah, obviously, we are constantly [being] brought opportunities to look at and we investigate them, and there is always one or two in the hopper and obviously we are not at liberty because of NDA to mention specific name. But what we are looking for M&A opportunities, which would be synergistic with our business and allow us to show both revenue and margin growth because either of distribution capabilities, our technology, or product capabilities, or service capabilities that will be complementary to what we have today.

James Ratcliffe – Barclays Capital

So, these would be add-ons, not something transformational fundamentally?

Pradman P. Kaul

Yes, I don’t think they will be transformational. We don’t have enough money to buy something that is transformational.

James Ratcliffe – Barclays Capital

Fair enough. And I guess secondly, I know you don’t publish a SAC number, but can you talk about just year-on-year trends? It sounds like marketing spend was up and I don’t know how much of that $4 million was really from consumer SMB, but if it was all of that, that would be sort of $80 per unit or so. If you could just sort of talk about how marketing spend versus equipment cost are trending year-on-year on the consumer SMB space.

Pradman P. Kaul

Sure. If you look at equipment cost, they tend to be declining at the rate of about 10% to 15% a year, and over the last two years I think we’re recently close to those numbers. In terms of market the SAC per subscriber, it stays fairly constant, but for the last couple of year, but obviously we are signing up a lot more subscribers, so the absolute number will be higher.

James Ratcliffe – Barclays Capital

Yes.

Pradman P. Kaul

And I think most of that $4 million is in the consumer subscriber acquisition area.

James Ratcliffe – Barclays Capital

Great. And just one more, can you give us an update on what you are thinking in terms of the likely impact of the Broadband Stimulus Act?

Pradman P. Kaul

Yes, we have been working very actively. We have a some consultants and lobbyists and a whole team here that’s working hard on putting proposals in. Unfortunately, on the first round, it looks like the rules that had been formulated on the average they are going to make these grants, are probably not very favorable towards satellites, which is different from the congressional act that was passed which was close to make these grants very technology neutral. So we are still working hard, we do intend submitting a many few proposals, let’s say we’re still working on how many proposals both to our IUS and to NTIA and let’s see how it turn out.

James Ratcliffe – Barclays Capital

Okay.

Pradman P. Kaul

But the rules are not super favorable for satellite, they are more favorable definitely for terrestrial technology.

James Ratcliffe – Barclays Capital

Thank you.

Operator

And the next question comes from the line of Mr. Chris Quilty with Raymond James. Please proceed.

Chris Quilty – Raymond James

Good afternoon gentlemen.

Pradman P. Kaul

Hi Chris.

Chris Quilty – Raymond James

I was hoping you could perhaps give us a little bit of update on what impact if any or benefit you are seeing in the North American Enterprise business from the Spaceway satellite? I mean you had it at your disposal for about a year now, are you seeing any uptick from large enterprise customers or is it primary a tool for targeting the SME market?

Pradman P. Kaul

Yeah, I think, Chris, it is primarily a tool for targeting the SME market. As you know the large enterprise guys don’t take advantage of the mesh capability so they typically have Star networks. So the medium enterprise, it’s an ideal product either as a backup, for a terrestrial MPLS kind of network or because it saves in the backhaul costs from our share up to the data center. So I think to be fair at this stage it’s helping us a lot in the SME area, but not having much of an impact in the large enterprise area.

Chris Quilty – Raymond James

But SME not being a traditional strong suite, are you finding that you are needing to create new distribution channels in order to reach it

Pradman P. Kaul

Oh yeah…

Chris Quilty – Raymond James

Or have things been going is along your target and plan?

Pradman P. Kaul

No it is going very much but plan, in fact, slightly ahead of our plan remember in the SME segment that’s been a clear strategic target for us to grow our Enterprise business we sort of thought the large enterprise. We had a solid set of accounts, but that’s like a base, which isn’t growing much. And the growth in the Enterprise business is all coming from the SME sector. And in order to penetrate that it’s more from a sales perspective like the consumer business then the large enterprise business in that reviews by value added resellers and dealers to actually do the selling. We don’t have a direct sales force suggesting the SME market. And so it’s a different strategy, different sales group and its really taking we’re very pleased with the results we’ve had so far this year. And have a lot of hope for it in the future to help be the engine to keep the Enterprise business growing.

Chris Quilty – Raymond James

Okay. And I am assuming that any SME customers are the ones that are primarily taking up your higher price plans.

Pradman P. Kaul

Yeah. Clearly.

Chris Quilty – Raymond James

Okay. Speaking of which, can you talk to us about on the consumer side I mean the business was exceptionally strong for what I think is normally your seasonally weakest quarter. Was there anything unusual in the quarter that aided you or is this primarily a carry over the same lease option benefits that benefitted you in the first quarter.

Pradman P. Kaul

I think the lease helped. But I think this time what we decided to do as a company was to take make a significantly greater effort in breaking through the seasonality of Q2 and Q3. And in order to do that we were more aggressive in marketing costs, we were significantly higher in advertising on television the commercials. We also spent a lot more and did a lot more direct mailing almost on a continuous basis. And we wanted to see if by doing that could be break the seasonality depression that fits in Q2 and Q3. And I think a lot of that we have data that shows that there is a direct correlation between these kinds of marketing activities and the results that we’ve obtained. So, very pleased with the results to get 50,000 gross ads in Q2 is pretty dam good. So we are very pleased to that.

Chris Quilty – Raymond James

In churn I mean you have that one bad quarter back in Q3 of last year, but it’s been running pretty steady. Are you seeing any underlying trends?

Pradman P. Kaul

Yeah. We are seeing the, again this is an area of significant effort, it is no easy magic to do in this, you just have to go understand why churn is occurring and go attack each of those elements and we’ve done that and we are continuing to see improvements in terms of little bits in each item, there is not dramatic things that we are doing and I’m hoping that over the next couple of quarters we will do even better than this, but the jury still out. But we are spending a lot effort in energy in attacking this.

Chris Quilty – Raymond James

Okay. Has the lease plan helped or would that help in any way? And do you have – do you know at your fingertips sort of what percentage of new editions are choosing that option?

Pradman P. Kaul

Sure what we think for both Q1 and Q2, we’ve been slightly over 50% of all the new applications have come in the lease plans. So we do not believe that has the significant impact on churn, but it gives the consumers as we said earlier an option for those don’t want to write the check upfront have the ability to lease it.

Chris Quilty – Raymond Janks and Associates

Okay. Switching gears you indicated that the telecom systems I guess more specifically the mobile we will probably be down I am assuming not at the same order of magnitude that we saw in the second quarter or it’s going to continue to slide pretty significant on a sequential basis.

Pradman P. Kaul

Yeah, I think we don’t give guidance, as you know Chris. But I think the, what the things that we are seeing are going to be tough to maintain the levels that we were at in ’08. So when you look at Q3 ’09, and Q4 ’09 relative to Q3 ’08 and ’04, you are going to see lower– lower sales.

Chris Quilty – Raymond Janks and Associates

Okay, you have at least one funded good customer order from – from Globalstar and I presume you still see an opportunity for some Hughes Telematics in the pipeline, when might those two opportunities hit.

Pradman P. Kaul

Yeah it’s a used both of those - are good opportunities, but you saw from the Hughes Telematics 8-K they put out that their contracted Chrysler was rejected by Chrysler. Now even though they are still in negotiations with Chrysler try to get a new contract that is an element of uncertainties in the Telematics business. That Hughes Telematics size, which eventually translates to us. So we don’t know how that’s going to play out right now, but Chrysler did reject a month ago or so both the HTI contracts.

Chris Quilty – Raymond Janks and Associates

And they still do you have the Mercedes contract, though...

Pradman P. Kaul

Yeah, but the Mercedes guys, is primarily as a service contract, which will help HTI a lot, but won’t have much of an impact on HNS on Hughes Communications.

Chris Quilty – Raymond Janks and Associates

Great.

Pradman P. Kaul

So there is uncertainty about the Telematics business too and Globalstar is a great contract, and but it is over a long period of time. So you don’t get big revenues in any one quarter it’s going to be spread out over the next two to three years. As we start depleting down the backlog. So I think the story that we want you guys to know is our Broadband business is our core, it is doing great, it is healthy, and we will continue to chase opportunistic - opportunities in telecom systems. And when we land them we let you know and but it is going to be up and down over the next few years based on how this opportunities come in.

Chris Quilty – Raymond Janks and Associates

Got it. Thank you.

Operator

And the next question comes from the line of Mr. Scott Malat with Goldman Sachs. Please proceed.

Scott Malat – Goldman Sachs

Hey thanks. Good afternoon. I just wanted to follow-up on some of the consumer stuff, but actually the results once again after a good quarter, last quarter look good again. One thing that you didn’t hit on was a little bit on the competition side, wondering what you are seeing out of wild blue. It’s helped you in the past and when they run into capacity issues, kind of hurt you when pushed on the gas pedal here or there, but what you are seeing now and what’s the outlook for them?

Pradman P. Kaul

They are a private company and I hate to comment on the outlook for them and what I think the periodically they do report numbers. But as I mentioned before, Scott we don’t really directly compete with those guys anywhere. It’s really our dealer indirect channels if they. If it’s our dealer and he gets a subscriber very rarely is the subscriber considering a wild blue alternative or a Hughes alternative at the same time. So it’s a more a distribution issue and I know they have announced publicly that – I don’t know the exact number but X number of beams that have saturated, but then after a while they changed the technology and they get little more capacity on those beams, but fundamentally we are just working hard on our own business and not worrying about what they are doing.

Scott Malat – Goldman Sachs

Okay, that’s fair. The other question I just had was on the International Enterprise business, as you look at I know its lumpy from quarter-to-quarter and you sold some equipment last year, but when you look at the underlying trends and excluding currency impacts, how do you think about this business long-term growth wise? What kind of targets and what kind of growth can you put on from a 3 to 5 year kind of CAGR standpoint.

Pradman P. Kaul

You know we are generally very bullish because we have been doing this transformation for being only a hardware supplier internationally to being a service provider. And I think the transformation is taking place as we speak, we had some very healthy orders in the second quarter which were long-term four year, five-year contracts and our service revenues in Q2 internationally grew by 24%. All of that gives me confidence that our transformation of the business is proceeding reasonably well. And if we continue to do that, we should be again we don’t give our numbers on growth rates, but it should be a nice growth business primarily driven by the service companies. The products from a technology perspective we use to give us an edge in our Service business, but the service companies with these long-term contracts are really that will give us stability and growth.

Scott Malat – Goldman Sachs

Okay great. Thanks so much.

Operator

(Operator Instructions) And the next question comes from the line of Mr. Larry Harris with CL King. Please proceed.

Lawrence Harris – CL King

Yes. Thank you and good afternoon. With respect to the orders and the strength that you saw in orders was it any industry sectors where you did particularly well this quarter and any specific geographies? I think you mentioned international?

Grant A. Barber

Yeah Larry, it is Grant. We are up in both North America and International I think Pardman mentioned some of the larger ones including the BP contract that was both domestic and international. The main focus on those are really to enhance and extend our service contract or we will provide the managed network and the services to them over a multiple years. So it is always been a key part of our strategy is to focus on that service component and, continues to payoff with the growth in both North America and International this quarer.

Lawrence Harris – CL King

Yes, and any particular sectors that I guess BP, the oil area any other sectors that were particularly strong?

Grant A. Barber

The oil and gas continues to be a strong sector for us, I mentioned BP and Pradman mentioned Conoco Phillips earlier as well. So still it seems to be..

Pradman P. Kaul

I think the other sector that we are beginning to do well on especially in countries like Brazil and India is cellular backhaul. That’s turning out to be a nice application, as the cellular wireless explode in the emerging markets, their need for a quick backlog from the base station itself back to the switches is becoming a critical demand. In many places they can’t get fiber or wireless capabilities, and then a satellite link can be put in very quickly, and that’s turning out to be a nice business for us.

Lawrence Harris – CL King

Understood, thank you. And with respect to capital expenditures the number for the second quarter was very similar to the first quarter. In terms of the new satellite, would we expect to see here in the third quarter the September quarter, the beginnings of the impact related to that?

Pradman P. Kaul

Yeah. We signed the contract in the second quarter and our first payment will be made in the third quarter as you could appreciate there are milestone payments that we will make over a period of time leading up to the first quarter of 2012. We expect you are going to see, but depending on that timing of those payments that $40 to $50 million range for the balance of this year, again depending on the timing of the payments.

Lawrence Harris – CL King

I understand. And with respect to and this maybe I don’t know basic question – but with respect to the ARPU it has been raising fairly, consistently over the last few quarters or so. What’s been contributing to it? Are customers in the consumer area opting for faster access speeds?

Pradman P. Kaul

I think there are two reasons right. One is the rental plan, which gives us an extra $10 of ARPU per subscriber. And secondly is the we are offering the customers value added services like repair services, maintenance services et cetera. And we are generating revenues from those value added services. And we are finding that turning out to be a nice addendum extra $1 or $2 bucks from customers for these services.

Lawrence Harris – CL King

I understand. Okay thank you.

Pradman P. Kaul

Thanks Larry.

Operator

(Operator Instructions) And the next question comes from the line of Mr. Chris Quilty

with Raymond James. Please proceed

Chris Quilty - Raymond James

Thank you. Speaking of value added services you haven’t talk for a while about some of the enterprise applications the Helius type stuff with digital signage and other capabilities. Are you seeing any meaningful traction there, or you seeing any economic slowdown?

Grant A. Barber

Well, we have a whole bunch of opportunities that we are chasing with Helius for those kinds of opportunities in the enterprise sector. What we have been able to be successful in landing contracts so far is, in the government sector, last quarter announced our deal with social security, which is primarily a joint deal between us and Helius. In – the other one we have is a government educational training network, which is also an areas, which is very similar uses video et cetera for distance learning and that training. We have probably three or four major enterprise opportunities that we are chasing right now together with Helius, hopefully in the next quarter or two we will be able to announce them.

Chris Quilty - Raymond James

Have you…

Grant A. Barber

But there is a lot of activity in this area.

Chris Quilty - Raymond James

Have you sized the government business in the past? It was nil for the longest time, and you seemed to have gotten really good traction.

Grant A. Barber

Yes, we are beginning to – we are getting very encouraged especially in the service part of the government business. That’s going well. I don’t think we give out the...

Pradman P. Kaul

Yeah, we don’t break it out, but we included in our North American Enterprise business.

Chris Quilty - Raymond James

Okay, great. Thank you gentlemen.

Grant A. Barber

Thank you.

Operator

Ladies and gentlemen, this concludes the question-and-answer session for today’s call. I will now like the call over to Mr. Dutt for closing remarks.

Deepak V. Dutt

Well, thank you everyone for taking the time on this conference call today, and have a great afternoon. This ends the call.

Operator

Thank you for your participation in today’s conference. This concludes our presentation, you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!