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Echostar Corporation (NASDAQ:SATS)

Q2 2012 Earnings Call

August 8, 2012 1:30 pm ET

Executives

Deepak Dutt – Vice President, Investor Relations

Dean A. Manson – Executive Vice President, General Counsel and Secretary

Michael T. Dugan – President and Chief Executive Officer

Pradman P. Kaul – President and Chief Executive Officer, Hughes Communications, Inc.

Kenneth G. Carroll – Executive Vice President and Chief Financial Officer

Analysts

Amy Yong – Macquarie Research Equities

Chris Quilty – Raymond James & Associates, Inc.

Adam Spielman – PPM America

Operator

Good afternoon everyone. My name is Sara, and I’ll be the conference operator today. At this time, I’d like to welcome you all to the EchoStar Corporation Q2 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I’d now like to turn the call over to your host Mr. Deepak Dutt, Vice President of Investor Relations. You may begin your conference.

Deepak Dutt

Thank you, operator, and good day, everybody. Welcome to EchoStar’s second quarter 2012 earnings call.

I’m joined today by Mike Dugan, our CEO; Ken Carroll, CFO; Pradman Kaul, President of Hughes; Mark Jackson, President of EchoStar Technologies; Anders Johnson, President of EchoStar Satellite Services, Grant Barber, CFO of Hughes; Dean Manson, Executive Vice President, General Counsel and Secretary; and Tom McElroy, Controller.

As you know, we invite media to participate in listen-only mode on the call and ask that you not identify participants or their phones in your reports. We also do not allow audio taping, which we ask that you respect.

Let me now turn this over to Dean Manson for the Safe Harbor disclosure. Dean?

Dean A. Manson

Thank you, Deepak, and hello, everyone. All statements we make during this call that are not statements of historical facts constitute forward-looking statements, which involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from historical results and from any future results expressed or implied by such forward-looking statements.

For a list of those risks and factors, please refer to our Annual Report on Form 10-K and our quarterly report on Form 10-Q. All cautionary statements that we make during this call should be understood as being applicable to any forward-looking statements we make, wherever they appear. You should carefully consider the risks described in our reports and should not place undue reliance on any forward-looking statements. We assume no responsibility for updating any forward-looking statements.

Let me now turn it back to Deepak.

Deepak Dutt

Thank you, Dean. We will start with comments by Mike Dugan. Mike?

Michael T. Dugan

Thanks, Deepak, and welcome everybody to today’s call. We’re all pleased to have delivered a solid quarter and I’d like to highlight some important events. First a few financial highlights. Second quarter 2012 revenue was $806 million, a 38% increase over revenue of $584 million in the second quarter of 2011.

Net income attributable to EchoStar shareholders was $35.7 million compared to $18.5 million for the second quarter of 2011. Earnings per share on a fully diluted basis rose to $0.41 from $0.21 in the second quarter of 2011. From a liquidity perspective, we once again ended the quarter in strong financial shape with $1.6 billion in cash and marketable securities.

Now for a few recent highlights from our different businesses. EchoStar XVII, our Ka-band satellite built by Space Systems/Loral was successfully launched by Arianespace. The Ariane 5 rocket lifted off July 5, 2012 at from Europe's space port in French Guiana. The rocket left the space craft in a geosynchronous transfer orbiting shortly thereafter it was successfully placed into its permanent geosynchronous orbital slot of 107.1 degrees west. All deployments and transfer orbit operations have been completed successfully and payload in orbit tests have progressed nicely.

We expect to begin commercial operations by the end of September. The Satellite with JUPITER high throughput technology will enable to use fourth gen satellite Internet service, which is designed to dramatically increase Internet browsing performance and support high-bandwidth applications such as video and music.

HughesNet Gen4 customers will be able to obtain faster speeds and a very high download capacity, so they can experience Internet access at its fullest. Hughes new order input continued a strong pace in Q2. We have significant orders in our North American enterprise business including National Oilwell Varco, Row 44, ConocoPhillips, Blockbuster and Xplornet.

Key orders in the international business were received from the outset Camelot, Telemar Brazil and other entities in India. This strong order activity result in a healthy non-consumer order backlog of $960 million at the end of second quarter of 2012. These also ended the quarter with approximately 626,000 subscribers on the U.S. consumer sale.

Our Brazilian subsidiary was awarded an orbital slot in an auction conducted in August last year by Anatel, the Brazilian telecom regulator. We've since completed the prerequisites and executed the license agreement with Anatel on May 4. We’re currently at an advanced stage of negotiations with potential partners for a joint venture to provide DTH service and are looking forward to expanding our business in one of the fastest growing regions in the world.

Our ESS business secured significant orders from Harris CapRock Government Services and Americom Government Services. These bring the contract backlog in our Satellite Services business from satellites in orbit and under construction to $1.8 billion as of the end of second quarter, thus continuing our strong visibility into future revenues.

Within ETC, we launched the PrimeTime Anytime and Auto Hop features for the XIP Whole-Home DVR system recently delivered to DISH Network. These leading innovation solutions have been driving new customer acquisitions for DISH over the quarter.

We launched a new two tuner HD DVR platform leading with the latest performance features and price targets for the market in Canada. The Canadian market through Bell continues to see steady growth for our set-top box business with all shipments supporting HD broadcast at this time.

We continue to expand the SlingPlayer ecosystem of devices to view TV and DVR content remotely. Sling launch the SlingPlayer for connective device apps on Western Digital Live, the popular internet streamer plus storage product. Slingbox customers can now receive their place shifting video through the WD Live Media Streamer.

Sling also expanded its geographic distribution by launching Slingboxes in Singapore. The Sligbox Pro HD is now available online and in popular retail outlets in Singapore. Sling also released a major update to its DISH iPad apps with significant improvements to design, performance and feature set. Customer adoption and response has been very positive.

We also launched – ETC also launched the world's slimmest digital video recorder for UK's Freeview service, the highly anticipated Ultra Slim Box. A Freeview Plus HD Ultra Slim Box offers consumers subscription free TV with access to 50 high quality digital channels, plus four in HD. All of the above exciting technology and service announcement positioned us very well for revenue and margin expansion in the near and longer-term.

Finally, just a statement as you may know, there was an abnormality on Monday evening with the Proton launch of two Russian federal launches satellites. A malfunction in the upper stage appears to have left the satellites short of their intended orbits. While the investigation into what caused the malfunction of the upper stage has already commenced, it appears certain this will cause a delay of some sort in the scheduled September launch of EchoStar XVI. EchoStar XVI will therefore be placed into short-term storage at Space Systems/Loral’s Palo Alto facility pending results of the failure investigation and an understanding of the future launch date.

We are now ready for question-and-answers part of the call. And I’ll turn the call over to the operator to conduct the question-and-answers.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Amy Yong of Macquarie. Your line is now open.

Amy Yong – Macquarie Research Equities

Thanks. Pradman, I think when you were at Hughes, you talked about providing longer-term guidance with JUPITER, I think something like EBITDA doubling over a few years. Is that still the case? And then also, how close are you to inking a deal with Brazil? It sounds like a potential partner could be Viva.

Pradman P. Kaul

Yes, but we were as an independent company, Hughes, we have given long-term guidance of five-year guidance. Obviously, now that we are part of a larger corporation, those numbers don’t mean as much directly anymore. But I’m sure as we go proceed over the next few quarters, we have reexamined our policy of giving a long-term guidance and let you folks know. On the Brazilian thing, Ken you wanted to comment?

Kenneth G. Carroll

Yeah, this is Ken.

Michael T. Dugan

You’ve got to clarify her questions, talking about the Hughes Brazilian, or is she talking about…

Kenneth G. Carroll

Good point. Amy, are you talking about the Hughes Brazilian broadband venture or the EchoStar DBS venture or DTH venture?

Amy Yong – Macquarie Research Equities

If could you comment on DTH, and then maybe broadband, so both?

Michael T. Dugan

Pradman, you go ahead and comment on broadband first.

Pradman P. Kaul

As you know, currently we have a subsidiary in Brazil that focuses on the enterprise business, and that business is doing very well. We continue to look at the potential of starting a broadband consumer service business in Brazil, but at this stage have not made enough progress to publicly talk about our efforts there.

Michael T. Dugan

As to the DBS business as we talked about in my initial comment, we continue be excited about the DTH potential in Brazil, and we’ve been hard up work at several options with partnering and forming a joint venture. These options have been based around working with a partner with significant in country sales marketing distribution experience that we think will be nicely complemented by our strong set-top box and satellite systems knowledge. Due to the confidential nature of these discussions, we don’t have anything further to disclose on this call.

Amy Yong – Macquarie Research Equities

Okay, thanks.

Operator

Your next question comes from Chris Quilty of Raymond James. Your line is now open.

Chris Quilty – Raymond James & Associates, Inc.

Thank you. Just can you give us an update the status of – forgive me, if I butcher Ketsat and where you stand on the provisioning of the satellite?

Michael T. Dugan

Well, Ketsat continues to be fully functional. We hold it in reserve for various potential backup. We also will not likely deploy Ketsat until things get resolved on the Echostar XVI launch. And so for right now we’re in great share there. But unfortunately we are going to be slightly delayed, because of Echostar XVI.

Chris Quilty – Raymond James & Associates, Inc.

Okay. And switching over to the HughesNet business, it looks like subscribers were down about 8,000 sequentially. Can you talk about what you’re seeing in the business in terms of churn either on older legacy Ku-band services, SPACEWAY, competition, or general economic conditions?

Pradman P. Kaul

Okay, would you like me to handle that Mike, okay? Yeah, basically Chris, if you look at it sequentially, you’re right, we’re 8,000 subs down. But as you know on a seasonal basis, the Q2 is always the lowest quarter that we have. So we met our plan, our gross acquisitions are continuing to be on plan and strong. So we haven’t seen any slowing down of the market in that regard. And I very hopeful that once we launched the JUPITER Gen4 services that we will be able to accelerate the acquisition of subs.

Chris Quilty – Raymond James & Associates, Inc.

Right and can you give us also an update on wholesale distribution efforts with DISH and DIRECTV, where you stand in, in terms of actually deploying customers?

Pradman P. Kaul

Yeah, all of that will start once we start service with JUPITER – with the Gen4 service and at the end of September as Mike said, we have announced that DirectTV is going to be a sales agent for us. We are in the final stages of concluding a wholesale deal with DISH and everything is moving on track in terms of the distribution channels that we are setting up.

Chris Quilty – Raymond James & Associates, Inc.

Gotcha. Switching gear on the equipment side of the business, it looks like Bell Canada was up like 80% year-over-year or more than $40 million. Were there specific one-time items in the quarter, one-time shipments or is that a more sustainable rate on a go-forward basis?

Michael T. Dugan

Could you restate the question? Sorry, we had some feedback, we were trying to deal with and we missed the question. I apologize.

Chris Quilty – Raymond James & Associates, Inc.

No problem, it looks Bell was up about 80% or $40 million year-over-year. and I was just wondering whether there were one-time shipments in the quarter or is that a more sustainable level on a go-forward basis or what specifically was driving that growth?

Mark W. Jackson

This is Mark, I think the main thing that’s driving the growth, as they’re going more to DVRs than non-DVRs, which is a higher price point unit. so we hope that it’s sustainable over time, but the business fluctuates back and forth. But that’s mainly where the growth is.

Chris Quilty – Raymond James & Associates, Inc.

Okay. And I think you’ve stopped giving specific disclosure on Dish Mexico, but is that venture still moving alone?

Mark W. Jackson

Yeah. I think, we’re fairly pleased with how things are going in Dish Mexico. We’re doing a lot of different things, we haven’t announced there yet. But basically, what you’ll see is they’re going to go for a higher-end customer with more HD in the future and that’s fairly public record. so we got to look for growth in the higher end of the marketplace.

Chris Quilty – Raymond James & Associates, Inc.

Okay. And finally on the Sling product offering, you had a couple mentions of new customers there. I know you don’t break it out on sort of a line item in terms of growth. But is it fair to assume, you’re still seeing year-over-year growth in that product line? And if you can talk about where you stand in terms of chip-set solutions in customers?

Michael T. Dugan

So we’ve announced and I think some of our silicon vendors have announced that they’ve done deals with us to help facilitate licensing Sling in the chip-sets. So, we hope that we’re going to get more and more growth than other set-top box manufacturers and MSOs. We are working with MSOs, but it’s really up to them to announce when they’re going to ready for service launch. And retail product that we’re going to refresh on here in the future, and we’re excited by that. But we still see growth in the retail market also.

Chris Quilty – Raymond James & Associates, Inc.

Okay. And there’s also been some announcements by competitors of Sling like functionality. Is it your position that is basically Company patented technology and should we expect any litigation around that?

Michael T. Dugan

I would just say that Sling has a lot of IP around their technology anybody is out there that we feel is violating it, we have to look carefully of that.

Chris Quilty – Raymond James & Associates, Inc.

Okay, thank you very much.

Operator

(Operator Instructions) Your next question comes from Adam Spielman of PPM America. Your line is now open.

Adam Spielman – PPM America

Thank you. Wondering if you comment the competing ViaSat products have been announced for couple of months just interested you comment what you’ve learned, or what’s interesting to you about as you think, I think it’s upticks to maybe slower than people expected. Do you view that is any indication in the market or perhaps other issues?

Michael T. Dugan

I don’t believe we have any better insight into ViaSat's subscriber numbers than what's already available in the public domain. Certainly I would say that the Hughes team as well as the Echostar team continue to be very bullish on the need for satellite broadband within the U.S. and the JUPITER/Echo XVII foot print.

I can tell you Pradman and his entire team were incredibly focused on getting the satellite ready and rolling out in a way that we think will be very successful. We certainly are putting a lot of effort into ensuring the introduction and the launch as well as all the distribution partners are in place to make it very successful fourth quarter this year, and I don’t think I want to say anything more about our competitor’s [performance].

Adam Spielman – PPM America

Okay. And then, just one follow-on, can you just remind us, have you said anything about what you expect 2012 CapEx to fall out? Obviously I guess you’ve spent a large chunk of it with the recent launch, but there is still another launch to come later this year.

Michael T. Dugan

Well, we certainly have additional expenses, I don’t know if the guys have the details that they can provide but…

Kenneth G. Carroll

Yes, if I could interject. In the Q, we have disclosed this, Adam, it’s a 124 million to go for Echo XVI and Echo XVII.

Adam Spielman – PPM America

That was for both?

Kenneth G. Carroll

Yeah, that’s correct. About the same for each of them. I think it’s 61 and 63.

Adam Spielman – PPM America

Great, thank you very much.

Kenneth G. Carroll

You are welcome.

Operator

There are no further questions at this time. We turn the call back over to presenters for closing remarks.

Michael T. Dugan

Okay, we might as well terminate the call then.

Deepak Dutt

Okay. Thank you, everybody for participating.

Michael T. Dugan

Thanks a lot.

Operator

This concludes today’s conference call. You may now disconnect.

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