EchoStar - Earnings Call - Q2 2021

Transcript

Speaker 0

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the EchoStar Corporation Second Quarter twenty twenty one Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. At this time, I would like to turn the conference over to your host today, Mr.

Terry Brown. Sir, please begin.

Speaker 1

Thank you. Good morning, everybody, and welcome to our earnings call for the 2021. I'm joined today by David Raynor, COO and CFO Pradman Kaul, President of Hughes Anders Johnson, Chief Strategy Officer and President of EchoStar Satellite Services and Dean Manson, General Counsel and Secretary. Mike Dugan, our CEO, unfortunately could not join the call due to an illness. 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

Thank you, Jerry. All statements we make during this call other than statements of historical fact constitute forward looking statements made pursuant to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. These forward looking statements 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 for the year ended 12/31/2020, filed on February 23 and our subsequent filings made 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 Dave Rayner.

Speaker 3

Thank you, Dean, and good morning, everyone. Mike Dugan asked that we pass on his apologies for not being able to attend today. I'll be providing a financial overview, followed by Pradman and Anders, who will provide an update on the business. As usual, we will close with a question and answer session. As usual, my narrative will include comments on adjusted EBITDA, which is reconciled to GAAP measurements in our press release.

Consolidated revenue in the second quarter was $500,000,000 up $40,000,000 compared to the same period last year, driven by our Hughes segment. Hughes equipment revenue increased $26,000,000 from higher sales activity to both domestic and international enterprise customers. Hughes service revenue increased $13,000,000 primarily due to growth of our Latin American consumer subscribers. ESS revenue in Q2 was $4,000,000 up slightly as compared to the same period last year and corporate and other revenue was $3,000,000 also up slightly. Consolidated adjusted EBITDA in the second quarter was $187,000,000 an increase of 16% from last year.

Hughes adjusted EBITDA in Q2 was $2.00 $7,000,000 higher by $21,000,000 The growth in Hughes adjusted EBITDA was driven primarily by the higher revenue as selling, general and administrative expenses remained relatively flat. ESS adjusted EBITDA was up slightly as compared to last year and corporate and other adjusted EBITDA was a loss of $23,000,000 compared to a loss of $27,000,000 last year. The primary driver of the lower loss was an improvement in earnings of unconsolidated affiliates and dividends received from certain marketable investment securities. Our consolidated adjusted EBITDA margin was 37.4%, increasing 2.4% from the same period last year. Net income increased $50,000,000 to $35,000,000 The increase primarily due to higher operating income of $31,000,000 and higher gains of investments of $37,000,000 partially offset by costs associated with litigation and higher income tax expense.

Capital expenditures in the quarter were $83,000,000 compared to $92,000,000 in Q2 last year. Free cash flow defined as adjusted EBITDA minus CapEx was $103,000,000 during the quarter, increasing $35,000,000 In the 2021, we bought back 2,400,000.0 shares of our stock in the open market at a cost of $58,000,000 We also repurchased or paid off the remaining $8.00 $9,000,000 of our 7.5 bonds, which matured on June 15. As of June 30, we had $1,600,000,000 of cash and marketable securities and debt of 1,500,000,000.0 With that, let me now turn it over to Pradman.

Speaker 4

Thank you, Dave. A few comments before I get into specifics on the second quarter. We run our business with the primary objective of growing revenue and earnings. We do track and measure ourselves against several other supporting metrics, but top and bottom line growth are our overriding goals. We've achieved both goals annually in the first six months of this year.

We grew Hughes revenue 6% and Hughes adjusted EBITDA by 17% through June 30 over the same period last year. These strong financial results are driven by our innovative products and connectivity solutions and the efficient management of our service businesses. Now let's turn to some specifics related to the second quarter. We ended 2021 with approximately 1,542,000 subscribers across The US and Latin America, down 11,000 from 03/31/2021. Our US subscriber base declined by approximately 20,000 subs.

However, growth in our US retail ARPU remained robust, driven by the strong demand for broadband capacity. This growth in US ARPU helped offset the decline in revenue due to the lower net US subs. We expect these trends to continue in the near term. As you know, our US consumer offering is capacity constrained and we continue to manage our sales and marketing efforts proactively to optimize service to our existing subs. As a result, US News again recognized HughesNet as the best satellite Internet service provider for 2021, 2022, and among the top 10 best ISPs overall across The US.

In Latin America, in q two, we grew our subscriber base by approximately 9,000. Continuing stay at home conditions throughout the region have driven usage leading to capacity constraints in certain markets. As in The US, we are balancing network utilization with subscriber levels and monitoring all aspects of our consumer operations. We anticipate ongoing growth in our Latin American consumer markets through 2021. As for our enterprise business, we are building on the momentum from q one with strong q two orders, an increase of 138% from the same quarter last year.

Our North American enterprise division remains active with deployments across multiple areas, including the franchise, retail, petroleum, and SME business sectors. We continue to invest in our market leading capabilities and have implemented further refinements in our network management portfolios including our industry first artificial intelligence for IT operations. We received recognition of our efforts in the form of a bronze Globe e award for artificial intelligence in the twenty twenty one IT World Awards, one of only two companies in The US to be so recognized. Activity is also picking up in the in flight connectivity market. Our partners have resumed installation in planes, so we have restarted equipment shipments.

Within the SES 17 program, we continue to meet the milestones in preparation for deployment of that system. Turning to our effort of gateway deployment for OneWeb, our work is proceeding well. We have now deployed seven gateway systems globally to support the initial service launch. We expect to complete all gateway shipments by the 2022. And during q two, we expanded our involvement with OneWeb by signing a multiyear contract to provide technical oversight and operations support for each of the deployed gateways.

Our international enterprise business was also extremely active this quarter. In India, we were awarded a five year contract by the Bank of India to connect 1,800 branches using satellite broadband powered by the Jupiter system. In the Asia Pacific region, we received a service agreement extension from a multi multinational oil company for managed network services to connect their retail petroleum operations. In Brazil, a major supermarket chain selected Hughes to provide managed SD WAN services to connected stores. In terms of system sales, we signed a significant new contract to provide the Jupiter system series three for an up upcoming k band satellite that requires flexibility and capacity density requirements that are well served by the Jupiter system.

In Indonesia, we signed a new operator that's using the Jupiter system to provide broadband services for the government. Also, one of our resellers in Indonesia, Abhimata Sithra Abadi, has ordered a new gateway for Teluglobal and continues to expand the business with other operators. Bank b BRI, who operate their own satellites, continue to expand their network implementation using the Jupiter system. In addition, two of our service partners have been selected to roll out satellite backhaul to over 2,000 LTE locations by a consortium of of operators. These contracts are a testimony to the efficiency, performance, and versatility of the Jupiter system, the de facto standard for satellite broadband implementations worldwide.

We remain focused on closing our joint venture agreement with Bharti Airtel in India. The joint venture will help us bring greater scale, operational efficiencies, and market reach to provide Indian customers with broadband solutions for enterprise and government networks. Bhakti will contribute its VSAT business to the JV and our existing subsidiaries for a 33% stake. As previously noted, this is subject to regulatory approvals. Finally, are working towards the launch of the Jupiter three satellite, which we expect will take place in the 2022.

As you are aware, the technology on the satellite will lower our cost per bit and significantly increase the capacity and speed of service we can offer to our customers in The Americas. Along with the manufacturer of Maxar, we are focused on recovering the schedule for delivery while ensuring that the satellite meets all of our operational specifications. Satellite technology and new users for this technology are evolving at an amazing pace with new services and applications launching constantly. Demand for connectivity continues and abated and hybrid solutions of geo, NGSO, and terrestrial networks will satisfy this need in the most cost efficient way. Thanks to our multi transport innovations and our continuing implement involvement in the implementation of LEO networks through the OneWeb system, Hughes is uniquely positioned to play a real leading role in providing the best hybrid networking solutions to meet each customer's needs.

Let me now hand it over to Anders.

Speaker 5

Thanks Pradma and good morning. In Q2 ESS revenue was $4,000,000 up slightly from Q2 of last year. We continue to pursue opportunities to lease our available Ku capacity as the market slowly continues to recover. Our third nanosat, EchoStar Global three, launched on June 30 aboard the Transporter two mission. Satellite has completed orbit raising and commissioning activities and is placed at the altitude prescribed in our license for the s band frequencies.

We have therefore satisfied the extended conditions granted to Australia by the International Telecommunications Union, an important step in perfecting our rights to this spectrum. We are excited about a broad range of potential applications being proposed for this new constellation. On the European front, we are progressing in our collaboration with Semtech, leveraging LoRa LRFHSS technology as part of our plan to use our Echo EchoStar 21 satellite to deploy and develop the first real time bidirectional satellite service delivering massive IoT services using licensed spectrum. We expect initial operations to begin in the first half of next year and are beginning to seek out potential early adopters for our lower LoRa early adopter program. In addition, working with Sequans, we have concluded development of a band 65 compliant modem and have entered into research and development and business development activities to support the development of UAV and unmanned aerial mobility applications across Europe.

On the global S band front, we are looking forward to the upcoming standards released by the wireless industry's main standard Setting Association, the third generation partnership project or 3GPP. We've already had success with 3GPP standards with our EchoStar mobile f band services, and three GPPs release 17 due out early twenty twenty two will be the first to include non terrestrial networks and to address satellite's role in the five g global communications ecosystem. We remain focused on our longer term strategic goal of full integration of S band satellite services into global five g networks and are continuing our work on multiple fronts to further that effort. We're excited to take five gs to the next level, providing truly seamless worldwide connectivity via satellite. I'll now turn it back to Dave.

Speaker 3

Thank you, Anders. We believe Equistar has delivered another strong quarter, improving financial results and advancing strategic initiatives. With that, we'll now turn the call over to the operator to start the Q and A session.

Speaker 0

Our first question or comment comes from the line of Rick Prentiss from Raymond James. Your line is open.

Speaker 6

Thanks. Good morning, guys.

Speaker 3

Good morning, Rick.

Speaker 6

Hey. A couple of questions. First, good to see the nanosatellite launch, communicate, rise into position and satisfy the regulatory hurdle and commitments. Anders, you mentioned the 3GPP. Is there any date more specific for Release 17 than early twenty twenty two?

Because that sure seems like one of the things we should be watching on the street as far as that box getting checked. And what are other milestones you suggest we watch from the outside as you guys move towards this S band strategy?

Speaker 5

Well, I think the release is due out in the first quarter. Whether that means the February or March, I don't know. 3GPP is an interesting negotiation amongst a lot of different factions, including operators as well as manufacturers and other interested relevant parties. But, you know, we're doing our best to make sure the rules that count for us are included in the release 17. Going forward, there'll be future refinements and enhancements, but, you know, that'll move us into 2022, 2023.

But I think the starting gun for us is will be 2022.

Speaker 6

Okay. Dave, you guys did some more stock buybacks in the quarter. Looking at the 10 q, the pacing was interesting to us. Looked like about 1,500,000.0 shares in April, dropping to 600,000.0 shares in May and just 300,000.0 in June. How should we think about how you pace that?

And have you done any post 2Q?

Speaker 3

Rick, we put in place a buying plan at the end of last year, and we continue to execute under that under the parameters that were established at that time. We have not changed that plan and that plan continues in place currently.

Speaker 6

Okay. And I didn't notice, was there any post 2Q stock buyback? I had one client that was asking me, he thought he had seen some.

Speaker 3

We haven't made any announcements on anything past June 30, but as I said, the plan remains in place.

Speaker 6

Makes sense. Okay. Got it. I see it either. And operationally, Pradman, you talked about stay at home orders in some of the Latin American countries.

By capacity constraints, are you talking about installation capacity? Are talking about satellite capacity? Should we think about what that capacity constraint is? Why is it happening? And how you expect it to get fixed?

Speaker 4

Yeah. I I I think I think I think the capacity constraints that we're talking about is primarily the fact that because of the COVID conditions, etcetera, the amount of bits that each subscriber was using increased dramatically. And so so the effect of that, therefore, was that the satellites were providing more data to each subscriber and resulting in fewer subscribers or the quality of service getting impacted to some extent, which then results in a higher churn, which then results in, you know, consumer unhappiness with the with the service. But as the conditions improve in South America in terms of the COVID and the political instability in some few of the key countries, we are beginning to reverse that trend and to see subscribers using the right amount of data that they should for the kind of service offering that they're selecting.

Speaker 3

In addition to that, Rick, in certain regions of South America, we have had restrictions on and or impediments on getting things installed as some countries, some regions continue to have travel restrictions. And so getting installation crews out has proven somewhat difficult on a continuing basis. So to answer your question, as Pradman said, we've got capacity restraints in some beams and we've got also restrictions on installation capacity, if you will. Right.

Speaker 6

Okay. And the JUPITER III launch still on track for a second half 'twenty two launch. When should we expect a launch date to officially get announced? What milestones are we looking for that we can monitor from outside as far as moving towards that date? And how about the rising into in service for that with any target dates?

Speaker 4

Well, I think, you know, the the schedule is still the same. We expect to launch the satellite and launch the service in the '22. There are a whole bunch of milestones in getting there and that that we should start seeing some specifics getting more accurately defined probably by the end of this year. But at this stage, are on track for that overall schedule.

Speaker 6

Alright. Well, good. Sorry to hear Dugan was ill. I hope you all stay well and healthy, and best wishes, guys.

Speaker 3

Thank you, Rick.

Speaker 4

Thank you.

Speaker 0

Thank you. Our next question or comment comes from the line of Michael Rollins from Citi. Your line is open.

Speaker 7

Thanks and good morning. You mentioned earlier good morning. In the discussion earlier you were discussing Hughes playing a leading role in hybrid networking solutions. I was just curious if you made further progress on agreements or commercially constructing a hybrid LEO GEO broadband product. And then just secondly, just curious if you have any expectations with respect to the broadband component of the infrastructure bill in terms of what kind of influence second half on your strategy and operations over time?

Speaker 4

Okay. There are two different questions. But the first one on the Neo Geo networks, we are we're doing a lot of work in that area in developing the network architecture. Now as you know, we have a investment and a partnership with OneWeb. We are developing service plans and network architectures with them for many parts of the world.

We are fortunate to have a strong geo presence with the Jupiter platform in almost every region in in on the globe. And I think now with OneWeb getting into service in '22 that we will see some of these architectures played out. So more to come in the next six months to nine months that that I think you will be making announcements in that area. Now on the second question was on sorry. What Infrastructure and broadband.

Speaker 2

Broadband bill. The infrastructure bill.

Speaker 4

Oh, the broadband bill. Yes. You know, the the the it's it's it's an area where we are very, interested. The broadband connectivity market is very large. And as you know, in any of these networks, the priorities that we have are speed, bandwidth, and price.

The great majority of traffic is video. It was 75 to 85% of the traffic on our networks is video. And video is not latency sensitive, which is the biggest disadvantage of the geo satellite. Right? So but with the hybrid architecture, we think we can solve the latency problem.

And therefore, we believe we'll be able to get some of the subsidies that the government is offering in these different programs. But at this stage, the details of these these programs are not formed up. And there's a lot of debate going on in in this area. And but we expect we'll be able to come up with an offering that meets the speed bandwidth and hopefully latency with the hybrid architecture to get a piece of that pie.

Speaker 7

Thanks. And just one other follow-up. You mentioned the opportunity for subsidies. I was just curious, are you seeing any impact to your operations from the EBV, the Emergency Broadband Benefit Program that was previously introduced?

Speaker 4

No. I don't think we are seeing any, any significant, negatives or positives at this stage. You know, we announced our participation in this program on July 8. So that means we can benefit from the subsidy if our customers are qualified for the bandwidth, for the benefit and choose to participate. So I think we have we be playing that game too.

Speaker 7

Thank you.

Speaker 0

Thank you. Our next question or comment comes from the line of Chris Quilty from Quilty Analytics. Your line is open.

Speaker 8

Thank you. Pradman, I had a question for you. I think somewhere in your script you mentioned that you expect to see international growth through 2021. Was that language supposed to indicate that after 2021, you'll find it difficult to grow, or am I reading too much into that?

Speaker 4

No. You're reading too much. So we expect to continue we expect to continue to grow, you know, in '22 and on. So so I don't think that we're we're actually working right now to make sure that we figure out how to get additional capacity that we would need in '22 and '23. With that, you know, you know, Jupiter three has a significant amount of capacity in South America.

So when we launch Jupiter three in '22 in the second half, we will get a significant amount of new capacity that we can utilize to grow our South American business. So we I expect to see us continuing to grow that business in the next few years.

Speaker 8

Understand. And prior to Jupiter three, do you anticipate needing incremental third party capacity? Or, you know, is the current capacity that you have with Telesat, Neutelsat, and YawSat sufficient?

Speaker 4

It there are probably some beams which start saturating in this time frame, but there are significant amount of capacity that we still have in other beams. We're constantly talking to people who have either launched or have capacity available over South America. And if you get the right deal and the right beam in the right geographic area, we could augment our space capacity some more.

Speaker 8

Great. And, you know, a question on international growth outside of Latin America. I know you've got your partnership with Yossat, which just went public. Are you fleshing out plans to expand into more of a global provider? And would you look to do that, you know, through a company, you know, a a huge specific satellite or something through a partnership arrangement?

Speaker 4

I think it's both. You know, we we as we go country by country in the world, we are we we decide what's the best approach right now. So, for example, we have JVs. We have The Americas, which is so which is close to us where we use use our own totally vertically integrated networks. Then we go into with the JV with Yazad, recovering Africa and The Middle East.

In India, we have the the current business, which is is the largest satellite services provider in India. We have the highest market share there. So that's going well. And so as we go into other areas, like Russia, like Southeast Asia, we we tend to basically have partnerships with existing satellite service providers and using the Jupiter platform as the standard equipment so that the customer gets the same service anywhere in the world almost using our equipment, using our partnerships, using our JVs, and using our use old, space segment. So we use all those tools to to provide service, broadband service to our customers.

Speaker 8

Great. And and how about India? Can you remind us both of the regulatory status for either, you know, Hughes receiving approval for, you know, putting a geo over the Indian region Or b, OneWeb's ability to get licensed there? And, you know, a follow on on that second point, you know, what does the relationship look like between you and Bahardi and OneWeb? Have you come into any sort of agreements about how you would address the Indian market?

Speaker 4

Okay. First, on on on the satellite, you know, we continue to we have a filing in for satellite, a geo satellite, and I think we're number one in line. But the government has the government has issued a satellite policy, which which which allows satellite ownership to be deregulated. But nobody has yet got the formal approval, and we continue to pursue that. One word is also filed for a license for an NGSO landing rights.

And considering that Barqee is a huge telecom service provider that got bumped up 400 plus million subscribers, cellular subscribers, I think they have a good shot at getting the NGSO landing rights in in India. But they've applied and they're pursuing that right now.

Speaker 8

Great. And final question for you with regard to North America. I mean, sounds like in Latin America, people are continuing to consume more capacity, more stay at home. Are you seeing any reversal of that in The U. S.

People are starting to slowly return to the office? Are they are you seeing indications that as people leave home, head to the office, they're dialing back their subscription plans?

Speaker 4

No. I don't think anybody is dialing back their subscription plans, but we are having to constantly manage the and in the shaping of the traffic to keep the customers happy, give them within their existing plans as much for flexibility as we can give and to and use that to control the churn. Now if you use this churn as a guide to see as a guide to the quality of service that the subscriber is getting, the the churn in North America is significantly better than, say, South America today where it's was it because of all the uncertainty we've talked about in in South America and all the political and COVID related problems in South America. So The US has been very, very good. The churn rates declining slowly and customers seem to be getting they seem to be happy with the quality of service they're getting.

Speaker 8

Great. And Eilat, if I can sneak in one more for Dave. Can you give us an update on the CapEx profile for the balance of this year and next year?

Speaker 3

Yes, Chris. I would expect full year 2021 CapEx to be mid-400s. Next year, probably a similar range. Obviously, we've got the completion of J3 as well as the launch contract payments going up to launch later in the year 2022 as we implement service, we'll start seeing consumer equipment and installation CapEx start increasing as we bring J3 into service and start adding subs at an increased rate.

Speaker 8

Awesome. Thank you, gentlemen. Thank

Speaker 0

you. We have a follow-up question from Mr. Rick Prentiss from Raymond James. Your line is open.

Speaker 6

Thanks. I want to follow-up on some of Chris' questions. Let's stay in India for a second. Prasman, you mentioned the Bharti joint venture. Any update, I know it takes regulatory approval, any update, one, on how COVID is doing there?

But two, what's the process to get regulatory approval? And are we thinking it could get approved before or at year end '21?

Speaker 4

Yeah. I'm I'm very hopeful that we'll get approved for the g we have a bit doubt one approval needed, and I think we are hopeful we'll get that in the next few months.

Speaker 6

And and with the COVID in India, how is that affecting business, and is that affecting the approval of the JV?

Speaker 4

No. It's not affecting the approval of the JV at all. Service because we're not in the consumer business in India. The service offerings that we have are for the enterprise and the carriers the business. So that's been impacted in terms of the speed of installation of the networks because, again, travel was difficult.

But I think things in India have improved in the last thirty days. And we we have a you know, our office is back in full operation. Our employees are back. Well, you know, attending the the jobs to their jobs. So let's keep our fingers crossed and hope that this will continue in that way.

Speaker 6

Knock on wood. That's a that's a good sign. And, Dave, a couple of quarters as we went through COVID, you had some bad debt items. Are there any onetime items in the 2Q results that we should be aware of? And how is the bad debt or collection of debt trending?

Speaker 3

Yes. Bad debt today is, I would say, is back to a normalized level pre COVID. Obviously, we've had some recoveries from those companies that declared bankruptcy last year and have since emerged, and we've collected some or, in some cases, all of the owed amounts. So I don't think there's anything from a bad debt standpoint that's unusual in the quarter. Obviously, we did have a litigation expense accrual that's called out in both the Q as well as the press release.

Speaker 6

Okay. And be remiss if I didn't also ask the supply chain question. Are you guys seeing any issues in any of the components or pricing for any of your equipment?

Speaker 4

You know, we have a we have a really good guy who runs our operations in manufacturing, and I think he's done an incredible job. That organization has done a great job, but we haven't seen any impact at at this stage. But things are tightening up, and we are, you know, trying to be very aggressive in our inventory planning and maintaining our inventory levels is the right. And so far, we haven't really been impacted, but the market is tight, and we hope we can get through the year with no impact. And today, it looks like we can.

Speaker 6

Great. Okay. Thanks, guys. Thanks for the follow

Speaker 4

ups.

Speaker 3

Thanks, Rick.

Speaker 0

Thank you. I'm showing no additional calls in the queue. I'd like to turn the conference over to Mr. Terry Brown for any closing remarks.

Speaker 1

Yes. Thank you, everybody, for joining today, and we look forward to talking to you next quarter.

Speaker 3

Thank you.

Speaker 0

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.