EchoStar - Earnings Call - Q2 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the EchoStar Earnings Conference Call for 2020. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker for today, Mr. Terry Brown.

Thank you, sir. Please go ahead.

Speaker 1

Thank you, operator. Good morning, everybody, and welcome to our earnings call for the 2020. I'm joined today by Charlie Ergin, our Chairman Mike Dugan, our CEO Dave Rayner, COO and CFO Pradman Paul, President of Hughes Anders Johnson, Chief Strategy Officer and President of Equistar Satellite Services and Dean Manson, General Counsel. As usual, we invite media to participate in a listen only mode on the call and ask that you not identify participants or their firms in your report. We also do not allow audio recording, which we ask that you respect.

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

Speaker 2

Thanks, Terry. All statements we make during this call other than statements of historical fact constitute forward looking statements that involve known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from historical results and from any future results expressed or implied by the forward looking statements. For a list of those factors and risks, please refer to our annual report on Form 10 ks and quarterly report on Form 10 Q filed with the SEC. All cautionary statements we make during the call should be understood as being applicable to any forward looking statements we make wherever they appear. You should carefully consider the risks described in our reports and should not place any undue reliance on any forward looking statements.

We assume no responsibility for updating any forward looking statements. I'll now turn the call over to Mike Dugan.

Speaker 1

Thank you very much, Dean. Thanks everybody for joining us in the call today, and we hope you and your family are still safe and healthy. With the COVID complexity, it was an unusual quarter with the from the EchoStar team. When our customers need us the most, we kept them connected to vital information, entertainment, social service, medical, education and business applications. Although the demand for our services continued to remain very strong, we also had to implement cost savings initiated to help preserve our margins during these uncertain times.

We're placing top priority on protecting the safety and health of our employees while effectively maintaining productivity and keeping up our pace of engineering innovation and also keeping all of our customers happy. Let me now turn it over to the management team. First, Praveen, you're up.

Speaker 3

Thank you, Mike. Despite all the uncertainty driven by the COVID pandemic, foreign exchange headwinds and the one word bankruptcy filing in Q1, we grew Hughes adjusted EBITDA by 20% over last year. The adjusted EBITDA margin for the second quarter was 41% compared to 34% last year. And our HughesNet subscriber base grew by approximately 26,000, ending Q2 with 1,542,000 subscribers, including approximately 321,000 subscribers in Latin America. Much of our U.

S. Network is operating at full capacity and we continue to stay focused on providing an outstanding customer experience while also managing churn. With the expiration of the FCC pledge on June 30, we will resume more normalized U. S. Sales activity with continued strong ARPUs in the second half of the year.

We also expect to continue subscriber growth in our international consumer markets. Regarding the Jupiter three program, we still expect the satellite to be launched in the 2021 and we are in active discussions with launch providers. Switching to our North American enterprise business, Q2 saw lower than normal installation activity in April and May due to the COVID-nineteen impact on our customers. But activity was recovering by June, and we are currently engaged in catching up on activities that had been delayed. We've also had a lot of new contract activity recently, including a multi brand restaurant company and a retail chain, each with thousands of sites.

In addition, customers in the retail petroleum space are upgrading their networks to accept credit cards with chip technology at the pump. We also secured a contract to sell network operation center systems to Telesat to upgrade two of their existing hubs with Jupiter technology. On the international enterprise side, we are pleased to announce several new awards in India with large customers in the petroleum, banking and communication industries. We've also deployed a regional KU brand broadband maritime service along the Indian coastline. Initial contracts for that service have been signed with four shipping companies.

As many of you know, the Jupiter system is already the world's de facto standard for satellite broadband systems. And today, we are pleased to announce that Signal TV in The Philippines has selected us to enable satellite broadband service to its 2,000,000 subscribers. Also in The Philippines, Speedcast is using a Jupiter system to add 2,000 locations to their community WiFi hotspot project. And Telefonica Peru has expanded their network of four g cellular backhaul by an additional 400 locations. Our government and defense business continues to build momentum.

We have significant activity with partners in addressing opportunities with the Social Security Administration. We also had two very successful demonstrations of our Through the Broker Blade HelloSat capability aboard a Black Hawk helicopter. We announced last week that we have agreed in principle to join the consortium of the UK government and Bartley Enterprises purchasing OneWeb from bankruptcy. We are excited about continuing our involvement with OneWeb as an investor as well as a technology and distribution partner. We see many strategic synergies ahead for our business as complex hybrid networks become the norm of our industry with geo satellites complemented by LEO and NEO satellites as well as terrestrial connectivity.

In this hybrid structure, GEOs can deliver ubiquitous coverage and low latency, while GEOs bring high capacity at the lowest possible cost wherever needed, especially in areas with limited or low terrestrial access. The combination will increase the size of the market we can address significantly. GEO satellite high speed services continue to be the most viable technology for cost effectively serving customers in low density areas. We believe the near term focus of LEO Networks will initially be on enterprise verticals, including selling the backhaul, aero, maritime and government applications in unserved and underserved markets. We also expect GEOS to maintain its significant cost edge in markets where the lowest possible latency is not a top priority.

We continue to monitor activity related to the FCC's rural digital opportunity fund, RDOF for short. The auction provides incentives for lower latency and high speed services, which clearly advantages fiber and to a lesser extent fixed wireless service in the denser census blocks. Given the high build out costs associated with these technologies, we believe modest Phase one funding will remain for the lower household density markets that HughesNet serves. For this reason, we do not anticipate any negative material impact to our target market due to its size and the cost challenges of serving the low density areas. Despite the technology bias of the RDOF, we have filed an application to participate in Phase one bidding, which is expected to begin in October 2020.

We see potential economic upside if we can ultimately secure funding. Although GEO has the economic advantage of all deals in the rural low density markets, the RDOF market program could potentially subsidize the deal service offering due to the latency rules. Based on our recent announcement, we have the opportunity now to augment our GEO offerings in one bed capacity and have more favorable positioning for our job funding. Overall, I'm very pleased with our performance and outlook. Our consumer business remains strong.

And although our enterprise business has slowed during the pandemic, it's both diverse and resilient, and we anticipate recovery in the second half of this year and in 2021. We are excited about the opportunities associated with all aspects of our business as it continues to evolve. Let me now hand over to Anders.

Speaker 4

Thanks, Pradman. Good morning. In Q2, ESS continuing operations revenue was $4,000,000 up slightly from Q2 of last year. We continue to pursue opportunities to lease our excess capacity during these challenging economic conditions. On the global S band front, the launches of our first pair of new satellites for our EchoStar global subsidiary delayed due to the pandemic have been rescheduled for the third quarter of this year.

Business development activities are continuing and we are gratified to see a lot of interest from a range of vertical players supporting the EchoStar global mission. Our European subsidiary, EchoStar Mobile, also continues to see strong interest in its new products and services. As pandemic travel restrictions have eased, our proof of concept activities are ramping back up and we are seeing a lot of appetite for the application of MSS technologies to emerging verticals such as autonomous platforms and five gs integration. As always, full integration of S band satellite services into five gs networks remains our longer term strategic goal. And we continue to explore ways to integrate our complementary ground component authorizations into these and other developments.

I'll now turn it over to Dave.

Speaker 5

Thank you, Anders. As in previous quarters, I will be speaking to our adjusted EBITDA measurement. The measurement excludes from EBITDA certain nonrecurring items as well as gains and losses on our investments and unrealized gains and losses on foreign exchange. More details are in the GAAP to non GAAP reconciliation on our earnings release. We believe adjusted EBITDA more closely represents our operating efficiency and financial performance.

Consolidated revenue in the second quarter was $459,000,000 relatively flat compared to the same period last year. Fuse revenue was $453,000,000 slightly higher than last year despite negative foreign exchange impact of approximately $12,000,000 The strong growth in Hughes consumer service was offset by lower equipment sales, primarily driven by the impact of the OneWeb bankruptcy and lower domestic and international enterprise services. ESS revenue in Q2 was $4,000,000 up slightly to the same period last year, while corporate and other revenue decreased about $3,000,000 due to certain real estate being transferred to DISH in Q3 last year as part of the BSS transaction. Consolidated adjusted EBITDA in the second quarter was $161,000,000 an increase of over 19% from last year. Hughes adjusted EBITDA in Q2 was $186,000,000 an increase of $31,000,000 from last year.

The margin associated with the growth in consumer revenue, lower sales and marketing spend on our domestic consumer service and lower G and A spend were the main contributors to the large increase. Corporate and other were slightly lower as a result of the reduced revenue and increases in losses in equity of affiliates. Our net loss from continuing operations was $15,000,000 in Q2 compared to a $30,000,000 loss last year. The largest components of the change were an increase of $39,000,000 in operating income, offset in part by lower gains on investments of $19,000,000 and higher income tax provision of $6,000,000 Capital expenditures in the quarter were $92,000,000 compared to $107,000,000 in Q2 last year. The decrease was primarily due to lower satellite related spend, partially offset by higher spend on CPE driven by growth in our consumer business.

Free cash flow, defined as adjusted EBITDA minus CapEx, was $69,000,000 during the quarter versus $28,000,000 last year. We ended the quarter with $2,500,000,000 of cash, cash equivalents and marketable securities. We feel very good about our cash balance given the uncertainty of the current economic conditions present. It affords us with the flexibility to explore investment opportunities that can foster growth, both organic and inorganic. And with that, I'll turn it back over to Mike.

Speaker 1

Thank you, Dave. I'm very proud of everything that was talked about earlier. During the 2020, we will remain focused on operating our existing business in a prudent manner, carefully managing the construction and delivery of the Jupiter three satellite and looking for additional growth opportunities. We continue to adapt to the challenges of COVID-nineteen pandemic, which has affirmed the need for global connectivity and communications. Let me now turn it back to the operator to start our Q and A

Speaker 0

Your first question comes from the line of Rick Prentiss with Raymond James.

Speaker 6

Glad to hear you're doing well through the COVID-nineteen pandemic, both personally and business wise. Question is for Charlie. Appreciate him being on the call today. Think it's maybe been two years since the last time on an EchoStar call when you talked about the Inmarsat offer. A lot of progress at DISH moving beyond pay TV into wireless five g, but maybe you could take the opportunity to update us on your vision for EchoStar, how you see things playing out and how it fits into your with the future.

Speaker 5

Okay. Thanks for the question. I mean, the big picture is that, obviously, the the we've been primarily a satellite company. And and in that, we've delivered the connectivity and said that's a place where the world needs to go. But and the pandemic has shown us all the connectivity and broadband access is a is a necessity.

So and that's around the world. And so EchoStar is well positioned. You know, I think the big picture is we could we'll continue down that path, but I think it may be a greater emphasis on the broadband side as well. And we're well positioned to do that. We've been patient, almost to a fault.

But now with two and a half billion dollars of cash, no net debt in the, you know, in in the company. And in a world where, at least within some of the satellite community, the the some of the businesses are gonna are are gonna be challenged for several years, you know, we're well positioned to

Speaker 1

to with a strong balance sheet, maybe one

Speaker 5

of the strongest balance sheets in the industry to move forward and take advantage of opportunities. And to the extent that opportunities don't exist, we can internally grow our business through a variety of methodologies. You see a little bit of that when when Andres talked about S band, which is an opportunity to connect the world to to a low frequency. Our our continued interest in OneWeb, which is which will come out of bankruptcy a much stronger company. We there was always a a challenging business plan, to start, but because of bankruptcy, one of those companies that comes out, we think it'll come out in a in a in a strong position.

And so we continue to maintain an interest there, a small interest financially, but a much greater commitment from the technical side.

Speaker 6

And when you think about the hybrid spectrum and hybrid network, how do you view where that's playing out? And do you envision EchoStar being able to help DISH in The US as well?

Speaker 5

Well, let me you know, a lot lot of the stuff that that, you know, EchoStar and do and DISH do because of because of my involvement in both. They end up normally, we look at things that might that might be advantageous. As an example, the next Jupiter satellite, has tremendous capability for for wireless backhaul. And if you're building out a, dish obviously has to build out a network. It's gonna as it builds up more rural sites, maybe even inside places where people aren't today, satellite back backhaul can make that economical in a way that that that that maybe hasn't been there before.

And and Jupiter, and part of the Jupiter design is is to be able to do that. So there there obviously are things that we look at between the two companies if they make sense. And, of course, there's things that don't make sense, and the companies go their separate ways. But but, when you look at s band, and how that might affect, wireless speeds around the world, it certainly is a frequency that you can make the

Speaker 1

case that you can go from a very

Speaker 5

a very small low power device, including perhaps your phone, to a satellite. So we think that the things that Andres are working on has that potential for for wireless carriers around the world. So there's a lot of on the as this becomes really experts in the wireless world, particularly in five g and o r n architecture, cloud based architecture, that's that's that that will that will pay dividends for for strategically how Hughes and EchoStar pursue opportunities as well.

Speaker 6

Great. And last one for me is, obviously, you got a great balance sheet here at EchoStar. What is it that would be of interest in the m and a world as far as what you would want or need to kind of make the EchoStar strategy play out?

Speaker 5

Yeah. I think I think anything that where there might be synergy, particularly in the connectivity broadband world with what EchoStar is doing and doing and and and and companies that can make that they can have positive cash flow in the long term. Those are the things, you know, and, you know, you'd look for other, you know, other synergies or or the potentials for for an increasing cash flow business. Do they shore up? Do they build on strengths we already have?

Do they shore up weaknesses that we have? Those are the kind of things, you know, you'd look for out there. And there's a lot of great companies out there. Some are gonna struggle in the short term just just based on the nature of the customer base. And, you as you said, a strong balance sheet, it's good spot to be.

We've been patient. We'll continue to be patient. But if there's opportunity, we certainly would take advantage of

Speaker 6

And maybe that's why not a lot of stock buybacks because clearly the stock has been undervalued in our opinion, but keep the cash on the balance sheet looking for opportunities rather than stock buybacks?

Speaker 5

Well, I always challenge management. We we look at stocks. We look at dividends. We look at stock buybacks. But the extent that we're that we that we do that, that means our management hasn't found a place to put capital to grow capital or a better return for our shareholders.

And I keep challenging management to to find a better a better use of our capital, but to the extent that we that we come to the conclusion that that perhaps that's not something we're able to do in the foreseeable future, then then I think stock buybacks, you know, can make some sense. And so I think we bought back a little bit of the they be back. It's in the q one. We bought back a little Oh, in the q one, we didn't we didn't

Speaker 7

buy anything back in q two. So

Speaker 5

you never say never, but, hopefully, we can find a better use of capital. But if not, it's it's it's something that that we we continue to do. Our board has given us the up the authority to walk to buy back, I believe, $500,000,000 of of our stock, and that remains a possibility.

Speaker 6

Great. Appreciate you being on the call today, and everyone stay well in these difficult times.

Speaker 0

Next question comes from the line of Chris Quote with Quote Analytics.

Speaker 8

I wanted to follow-up a little bit on that question of just focusing on the M and A first and then flip back over to internal investment. But when you look across the company's portfolio, and you've got international operations, you've been growing in Latin America, you've got India, you've got a LEO opportunity, you've got your traditional GEO. Is there any one of those that stands out to you as an area where with the capital on hand and given the fact you've got struggling competitors that it makes the most sense to step out and maybe perhaps do a bolt on or find something that's additive to your business in a faster growth path?

Speaker 5

Who's that question addressed to?

Speaker 2

It's I'm sorry.

Speaker 5

I'm sorry.

Speaker 8

I know what Anders will say.

Speaker 2

Know what Pradman will say.

Speaker 5

Yeah. I don't know if there's any one thing that stands out. I I I think that that you you you know, the ideal situation is something where there's synergy, something where it's in in in somewhere in the satellite connectivity business. It doesn't have to be satellite, but it that's been connectivity or broadband business. And, you know, it's something that that, you know, can generate cash flow in the long term even if it needs investment, you know, to get there.

So, you know, it's it's it's interesting time. I I you know, it I I think patience I hope our patience will be rewarded. It it hasn't been the last three, four years and and but, I mean, I can for my poker days, I can remember sitting in poker game folding for eight hours and, you know, you win the last two hands and you go home, a pretty big winner. But to you know, you didn't you didn't you didn't have to keep folding for eight hours. You just had to be patient.

And I think some of those business lessons, you know, would apply to business as well. And and the the the pandemic has certainly, changed people's business plans and and, you know, you know, things beyond people's control, you know, things are are some industries are gonna be changed for a while, not long term, but certainly, for a while. And and so, we'll see if there's things that make sense for us, and we look at it every day.

Speaker 8

And maybe just a follow-up, and I'll throw out a specific example. With the in flight connectivity market, you guys fortunately have taken sort of an arms merchant approach to that industry, which was the right approach as it turns out. But things are happening right now. Obviously, the industry has hurt pretty badly. But I think most people believe there's going to be assets available.

Is that a market that you believe in as a growth market? And is that something that you take a look at as maybe a more fulsome stake in the supply chain of what's going on in the aviation market?

Speaker 5

Well, it's certainly a long term business. And certainly, the companies are well positioned there. EchoStar approach has been and I think this is who, you know, you know, Hughes and Pradman and his team are. We've chosen to partner with with people who, need our technology or our capacity rather than compete compete with with them. And so, when as a general rule, where somebody has an asset that exists, we we we would rather if if they will are willing to partner with us, we would rather partner with them rather than duplicate that asset.

And and for the most part, that's what we've done in the in flight connectivity space where, you know, we we partner with with just about everybody. And, look, as a partner to the extent that somebody, needs help, we're I think, you know, we're we've been there to help those companies do thick and thin. And I think we, you know, we'll continue to try to do that because we have strong relationships with those companies. And and then internationally, we've done the same thing where we've chosen to partner with with companies internationally rather than to to to go with a loan or or or to compete as long as they're willing to partner with us. You know, not everybody is, but but but, you know, we have strong relationships with with a variety of companies.

We we feel a lot of loyalty to those companies, and they've been good partners for us. So I I think that's a path that we generally will continue on to the extent that people want to continue to do business with us.

Speaker 8

Understand. And final question for Charlie. The consumer broadband business has been a great steady grower for Hughes. And yet if I look back over the last ten years, the pace at which you guys have acquired and built new satellites has continuously lagged the actual demand in the market. I think that's happened with both Fuze and ViaSat, in fact.

When you look at that market, is this a time when it would make sense to perhaps step up the pace at which you replace those satellites? And do you still see a path for improved performance on GEOs? ViaSat has already talked about a ViaSat-four design. Or is it a better time to kind of step back and see what happens with LEO?

Speaker 5

Well, it's different. So I'd say a couple of things. One is on the one of the things we we built in United States because we knew exactly where we needed our capacity in The United States, And we had both DISH and DIRECTV as as had infrastructure to get to to rural customers that we didn't have to totally duplicate that. So that so that so the North American market, it's kind of unique market for us. Internationally, we've chosen to partner with people on the international side, because that's always it's a different it's a it's a different it's kinda animal.

We already had facilities in in in South America to some degree. We've we've we've now partnered with Yossat, in Brazil, and in Africa. So we're pretty gung ho on that on the on the international market. We're but we want but we don't wanna go necessarily alone due to the complexities of of of the regulatory and operating environment internationally. So we want we want strong local partners.

And as as those as as we find people who are willing to to commit to that, we're certainly willing to invest money there. On the on the future satellite side, I think we've been prudent in how we do it because there's there are two technologies that are actually, technologies that are starting to to to that will that will compete with geos, which will be neos and leos, but also terrestrial. And so based on a lot of things we've learned on the dish side and on five g and architecture, we and and and we think that the terrestrial side, there's there's opportunity that will take away some of satellites opportunity from a geo perspective. And then we think LEOs and NEOs, to the extent that you can build economical phased array antennas, that will be a game changer. Those don't exist in the marketplace yet, but they're showing an awful lot of people working on them.

And and to the extent you get a a low cost phased array antenna, you know, change the complexity of, it'll take away one of the advantages of of geo. So we've been prudent about it. We know that that, our next generation satellite that we have we know we need demand in in North America. We know where that demand use it usage is. We're we're basically full, you know, we're basically full capacity today, so we desperately need that capacity.

But it but we think there's other opportunities in addition to geo, around the rest of the world, and we think there's opportunities in The United States that don't include geo as well. So I like, the big picture is I think we think we have as good a handle on satellite as anybody in the industry, and we have a strong balance sheet to take advantage of it to the extent that there's a paradigm shift that that that starts moving the industry in a different direction.

Speaker 8

Great. Thank you for the responses, and, don't be a stranger. See you sometime sooner than the next

Speaker 5

few I promise I'll be around once a year. You know? Because I I don't have any I don't have any due during the pandemic, so they they they felt sorry for me and bothered me. Your

Speaker 0

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

Speaker 7

My first question was back on the topic of OneWeb. And I'd be interested to hear perhaps any comments on why the previous business plan didn't work and the new business plan well. That'd be my first question.

Speaker 3

Yes. I think the focus of the new business plan is to go for the mobility market and the enterprise market and the government market, as I said in my earlier comments. And I think that those markets are one of the common elements in those markets is the cost of the consumer antenna is not a big factor. Unlike the, you know, unlike the consumer market where you need a phased array antenna, as Charlie mentioned, that doesn't exist today. But will eventually come come into play.

So I think it's timing, you know, where the antenna wasn't there and the by by bringing them out of bankruptcy, obviously, you're a much stronger company because the investment in the old stuff is is no longer hurting your balance sheet. And I think in the last probably element is the two major partners are totally different types of people. You've got the United Kingdom government, which obviously has a interest size balance sheet. And then you've got one of the largest wireless service providers in the world, as the other major partner. Bharti, obviously, has over 400,000,000 subscribers.

So they're doing a lot of strength in India and Africa to to OneWeb in terms of cellular backhaul and other rural applications. And they're also very big in Africa. So they'll complement our Yaklick joint venture. So and they also obviously have raised, I think, over $14,000,000,000 so far for their wireless network. So they know how to raise money.

They're very successful. So between them and the UK government, I think they have a big leg on in their current plan than they did in the previous plan.

Speaker 7

So just picking up on that, if I remember correctly, OneWeb pivoted pretty hard from consumer to enterprise and government mobility a long time ago. That's not a new phenomenon. That happened, I wanna say, eighteen months, maybe two years ago. So I'm I I don't really understand that comment. I mean, I suppose the comment around the antenna makes a bit more sense.

Could you maybe just give a bit more color on what's your Sure. The the point is the

Speaker 3

right. The point is that previously, in the current business plan and, you know, they don't have much emphasis on the consumer market because they don't have the antenna. The previous business plan had a significant focus on the consumer market, but the antenna technology and cost was not there. So the two didn't jack. That is what that comment was all about.

And the second element is obviously the shareholders and their ability to fund to to continue funding the development of the business plan.

Speaker 7

Okay. Understood. And then just more specific I mean, if I think about that kind of antenna development, the first thing that comes to mind is phase or going back. So can you just give us your color because you've got better visibility than certainly me into into what you're seeing on the antenna side that gives you you confidence.

Speaker 3

Well, there are probably maybe five to 10 companies that are spending a lot of energy and time on trying to develop a phased array antenna at the cost level at the cost points that we need to. Now each of these two markets has different cost points. The consumer market would obviously want a phased array antenna maybe a $100, a $150 maximum. The aeronautical market, the antennas go for a $150. So when you go to some of the mobility markets and the government markets and the enterprise markets, the pressure on having an antenna at the lowest possible cost is not as strong as it is in the consumer market.

So if you look at the technology today, I think there's no question we can build phased array antenna at the low end, probably in the low $1,000 range. But nobody has figured out how to get it down to $100 But for the other markets, the technology is there for the price points that we need for those markets, for both the aeronautical maritime and the enterprise markets. So I think we are now in a position that we'll have the right economics for those markets. It's probably a few years away from having the economics of the consumer market.

Speaker 5

Okay. And this is Charlie. I just had two things a couple of things on one. One is we know that the technology works. I mean, we obviously have been heavily involved in the ground segment in terms of you know, testing the the current satellites that are up and, you know, while there's still a lot of lot of technical things to do that, you know, we know the system as as planned, originally planned can work.

Second thing is it comes out of bankruptcy, you know, you'd you would you would expect that that it comes out with a strong balance sheet, but also potentially that, you know, given the given the UK government's involvement and potentially orders, actually, revenue. It's it's a little bit like, and I'm not saying it will be as dramatic as this, but it's a little bit like Iridium where they came out of bankruptcy and they I believe they had orders in the Department of Defense. And that's a that's a that's a a well managed, very prop you know, lot of value company. I think it came in a bankruptcy at $50,000,000, and it's obviously for several billions of dollars now. So those opportunities exist in OneWeb just needs to be just needed to get over the hump.

And the second thing is that that OneWeb remains remains having a high priority in the ITUs for the use of of thousands of gig of frequency. So, our megahertz of frequency. So, they're well positioned from a regulatory point of view as as as as a company that has, you know, is is is, for lack for lack of a better word, first in line, from a regulatory position as long as they can launch continue to launch more satellites. So which will be funded well enough to do today, and they already have launch contracts, and and so it's a matter of of just building the satellite. So there's a lot of potential positive with OneWeb.

Still a long way for them to go, but they're but they're in the right structure with the right partners moving forward.

Speaker 0

Your next question comes from the line of Michael Rollins with Citi.

Speaker 2

Hi, thanks for taking the questions. Two, if I could. So first, as you think about the S band spectrum holdings, is it more likely that you can create value from those holdings through an operating model that EchoStar controls or partners with? Or is it more likely a monetization strategy of finding alternative purposes for that spectrum, for example, trying to push it to mobile or some other wireless service? And then just taking a step back, as EchoStar as a company evaluates investments for the satellite business, for IoT, five gs, Can you share with us how you're sizing the addressable revenue market given that a lot of these services and applications don't really exist today?

So if you could share with us the framework and maybe some numbers that you're using for that, that would be great.

Speaker 5

Andres, do want to take that one? Well, on the S band side, it's certainly

Speaker 4

early days. I mean, right now, our efforts are focused on getting our initial LEO satellites launched so as to crystallize our rights, which overlay the existing GEO rights. So once we have that in hand, as I mentioned in my comments, we're already in meaningful discussions with a number of potential customers that would in essence be anchor customers or partners in the development of a non geostationary F band service, which we intend, once the business plan makes sense, to invest in. I don't see us just monetizing the spectrum rights to third parties. I think I see us developing the MSS opportunity in some very unconventional ways.

And then we have a second wave of development opportunity to the extent we then pursue the co licensing of the use of the same spectrum terrestrially in areas where we don't already own that.

Speaker 0

Your next question comes from the line of Kyle Davis with Hound.

Speaker 2

I had two questions about the trends in the residential business. So the first one was, I was wondering if you guys could quantify the Keep America Connected churn issue in the quarter and what you sort of expect for that in Q3 as the pledge has ended? And then the second question is, we have to make some assumptions around how much of the FX headwinds held back the residential revenue increase, but it does look to me like your residential revenue grew faster than your subscribers, which suggests to me an ARPU growth acceleration in the quarter. And I was wondering if you could talk about what may have driven that.

Speaker 5

Yes. I'll start, and then Pradman can finish up a little bit. There's no question, certainly in North America, that the ARPU growth was significant in Q2. It was a grew over five percent from 2020. So the ARPU was certainly up, and that's really an indication, at least in part, of the higher utilization that customers had upgrading plans, buying additional capacity as they exceeded data caps.

That's what drove that in part. But the headwinds in South America are significant. Most of those are on the consumer side of the business. And as we said, the $12,000,000 revenue decline year over year as a result of those FX impacts. In terms of the number of subs in the pledge, we're going to hold back on disclosing what that number is.

The 6 ks is in the tens of thousands, and I'll let Pradman address what he thinks happens to it going forward.

Speaker 3

Yeah. I think the, you know, the pledge period has ended as of the June, And we've have found that we've converted reasonably big percentage of the customers that were in this bucket. We've converted them to regular subscribers and we start paying the the dues. So the now I think we we in in in the queue or something, clearly pointed out that the subscribers that were in this pledge bucket were counted as having churned out. So that caused our churn numbers to be slightly higher than what we had seen in the last couple of quarters.

But I think by converting them to paying customers, we should see that being recovered in the next few months as we go forward. But all in all, this pledge here agreement that we signed with the government has not been harming are numbers significantly. And in any case, it's not done and they're in normal mode at this stage.

Speaker 2

Got it. And that barcustrains that you commented on, is that something you guys would guess persists into the back half of the year? Or is it something that was particular to a lot of people being, on under stay at home orders in Q2? Or is it do you think it's more persistent than that?

Speaker 5

I'm sorry, that question was in relation to what?

Speaker 2

The ARPU boost in North America that you commented on, David.

Speaker 5

Yeah. I I think we're gonna have to see whether that continues. You know, if if people are still working from home, if there's still, classrooms from home versus returning to schools. You there's a lot of unknowns around COVID nineteen and what the impact will be on the individuals and more specifically our customers in terms of their usage patterns, and that's been a more societal, impact as we go forward. So I I it's tough to really forecast exactly what is going to happen in the usage going forward until we get more clarity on returning to work, returning to school, etcetera.

Speaker 2

Got it. Thanks.

Speaker 0

Your next question comes from the line of Brad Hathaway with Farview. Brad, your line is open.

Speaker 5

Move to the next question.

Speaker 0

You have a follow-up question from Rick Prentiss with Raymond James.

Speaker 6

Since we don't get Charlie again for another year, I figured throw a couple more at you, Charlie.

Speaker 5

Hey, you can come on the DISH call tomorrow.

Speaker 6

Exactly. Speaking of DISH, the quick easy one is any other asset swaps envisioned between EchoStar and DISH in the short term. But the more complicated question is you were early and blunt on what the trends in pay TV were and you were right. What do you think the trends are in consumer broadband? You mentioned that you think you can see the demand for Jupiter three, but as you look at the competitive dynamics of LEOs and fiber, how do you think about that demand curve and the ability to earn a return on Jupiter three over the long run?

Speaker 5

Well, I mean, because we have a lot of control over North America, and because a lot of the subscriber acquisition cost is already in place for our customers and our customers are asking for just more capacity, the math on two for three is good. And and it's it's Pradman's right answer is better than I can, but it's it's comparable to to what we've been able to earn on on on previous, you know, broadband satellite. So, and we're confident that that's a good, internal rate of return for us. The the the biggest thing that the the two things could two things are happening that will that would probably you know, if you look five years down the road and say, where where might we might go. The government obviously is subsidizing with rural development funds, and we think that's only gonna continue to grow regardless of who the next president of The United States is.

We think that that that there'll be subsidization of of of of of rural broadband connectivity. It's it's it's gonna be like electricity was, you know, at the turn of the century where, you know, you know, people had that electricity and ultimately became ubiquitous across The United States. Same thing's gonna happen to broadband. So that will play a role there. But but so will, LEOs and NEOs as as well as GEOs and so and so will Terrestrial.

So, you know, I think that's a place that that EchoStar can play to to take what they do well with geos and and and continue to be in the on the forefront of that broadband connectivity. And they have the and they have the capital to go do that in the right spot. And most and, obviously, the and obviously two things. What is what what is the cost of an antenna come down to? If you've got a Leo or a Neo, can that get low enough for consumers?

And second, you know, what is the government gonna do in terms of subsidization? So, you know, they're pretty well positioned there, but you you're certainly not gonna go do things. And then there's also things like aeronautical and maritime that you're just not gonna do any other way, than do satellite. So and commercial. So,

Speaker 7

you know, I mean, I think

Speaker 5

we do it like we always do. Look at the math. And every investment, we expect to get a return. And when in doubt, we don't do it. And when when we feel good about something and we feel like there's a there's a a vertical that we can go into and make money, then then that's where we're gonna go.

Speaker 6

Great. That helps a lot. Thanks, Charlie.

Speaker 5

By the way, I'd I'd add to it. You know, EchoStar, because of because of their they are getting knowledge from the wireless side on the DISH side. So they they get access to, you know, Dish is seeing every there there isn't anybody in the world in the in in five g, architecture, you know, new generation of how to build a network that that Dish isn't talking to at very high levels. So DISH is seeing technology in the lab long before the consumer is gonna see it. And and EchoStar, to the extent we can share information when it was privy to some of that some of that, and so it helps them in knowing where things are going.

And so I think the decision making process at EchoStar has an advantage in knowing a lot about where the terrestrial world's gonna go, both in terms of developing products that will help the terrestrial world and staying away from products that might not be competitive given the long lead cycles of building satellites. So I think they're uniquely positioned in that sense and, perhaps perhaps more so than other other other companies.

Speaker 6

And and no other asset transfers planned in the short term?

Speaker 5

I think all the material assets there there might be some assets here or there, but I think the material assets have been transferred.

Speaker 6

Great. Thank you again.

Speaker 0

Your next question comes from the line of Brad Hathaway with Farview.

Speaker 9

Hi, guys. Sorry about a minute ago and thanks for taking the question. So Charlie, I just wanted to ask you a question about kind of bigger picture. When you think about kind of larger M and A and the cost of kind of your equity capital, I mean, do you think about your share price as a potential asset? Does it kind of frustrate you that you're that EchoStar doesn't seem to attract the same valuation as a lot of your peers?

And then kinda how you think about maybe changing that perception going forward? Thank you.

Speaker 5

Well, I mean I mean, I think I don't think it takes a a great financial analyst to see that that are the the multi EBITDA multiple at at at EchoStar is materially lower than than some other companies. Yes. There's been a strong track record of performance at at EchoStar. So, you know, you know, that that would be disappointing, but it's a you know, for me, it's a challenge our management to show that they've got a that they've got, you know, future that they've got growth that that can accelerate as opposed to plot long, even though it's plotting along at a high level. You know?

And and and then then so that they actually justify higher multiple. But but clearly, eve even if you look at it today, the multiple, seems to be a little low, but it's up to management to go out there and and and convince the mark to make sure they're in markets that have growth and convince the market that those are long term sustaining growth things. You know, they got the capital to do it, and they just need challenge to do it. So we get up this call, you know, we get to talk to Pradman and Mike and Anders and, you know, we'll we'll we'll come into shape a little bit. That's that's why I wanna be on the call.

So so so that so that all of you guys should be saying the same thing to to our manager.

Speaker 9

Greatly appreciate your being on the call because I think one of the overhangs has historically been concerns over kind of long term capital allocation. And so really appreciated some some of your discussions about kind of some of your long term thoughts. So thanks. And again, congrats on the operational quarter and looking forward to seeing the strategy going forward.

Speaker 5

Operator, I think you got time for one more call.

Speaker 0

Okay. Your final question comes from the line of Michael Rollins with Citi.

Speaker 2

I just wanted to follow-up on the second question I had for Charlie. If you could talk a bit that as you're looking to invest in IoT and five gs satellites, how you're sizing this market for revenue and opportunity given that a lot of the applications and services don't exist in that form or or that way today?

Speaker 5

And, you know, I don't think it you know, we I don't think we have an exact size on the on the market that's potentially very large. So, you know, you certainly have billions of things that need to be connected that aren't in access of a terrestrial network or fiber. So, certainly, you can you can think about maritime and you can think about geography and and, and how those things might wanna connect. And you can see you can see, you know, in Marsat, Iridium, you know, doing some of that today, or comms doing that today. So you're starting to see the the beginnings of that, but it's in the first inning before that's gonna go.

And and the the the big picture is that it's billions of of units. And even if you were making the dollar a month of those connectivity, it's a it's a huge market. It you know, and as you as you think about the kind of devices you could connect, you you could you could you could get into you know, you know, you can imagine anything anything that's handheld, whether it be a phone or something else that, you know, you already you got billions of things that that that connect. And so all you need is to flee the satellites that cover the cover the planet that have a a frequency that's low enough that you don't, need an that that you get an omnidirectional antenna, and and you can imagine it with low battery power for for fixed devices, what that might be. And that's a that's a incredibly large business, assuming you could develop the the right technology to do that.

And we don't see anything in the law of physics that would prevent, you know, an s band frequency from doing that. You might have reg regulatory. You might have, you know, from each country, you might have, you know, those kinds of issues, but there's nothing in the law of physics would prevent people to be connected around the world with a omnidirectional with a an omnidirectional antenna, which could be as simple as a chip in a in a device. So it doesn't have the same kind of problems that we have with phase array antennas at the higher at the k e band frequencies. So different market, different application, but that's that's what Anders is working on and and and Anders has spent a lot of time on that with people.

We have our own ideas. Other people have ideas, and we think that's a potential big business for us, but they're still we did get our first two satellites up, which is what we're constantly hoping when I call next quarter, we'll have the first two satellites up. Thanks very much.

Speaker 1

Okay, guys. We're out of time here, so we're ready to conclude the meeting. So I'd like to thank everybody for calling in.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. I thank you for your participation. You may now disconnect.