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EchoStar CORP (SATS)·Q2 2016 Earnings Summary

Executive Summary

  • Revenue declined 4.5% year-over-year to $757.6M while diluted EPS rose to $0.60 (vs $0.36 YoY), and EBITDA increased 3.9% to $220.6M, reflecting stronger Hughes consumer mix offset by ETC/ESS pressure .
  • Hughes posted modest growth (revenue +1.2% YoY; EBITDA +2.9%), ended Q2 with 1,030,000 broadband subscribers, and expanded enterprise backlog to ~$1.5B (+28% YoY) .
  • ESS revenue fell to $101M (vs $125M YoY) and EBITDA to $84M (vs $104M YoY), driven by DISH lease terminations (EchoStar I/VIII) in Q4’15; ETC EBITDA fell on lower equipment sales and SAGE marketing spend; SAGE was discontinued, with related charges expected in Q3 .
  • Balance sheet remained strong with ~$1.51B cash and marketable investment securities at Q2, followed by July notes offerings of $750M secured and $750M unsecured due 2026; management emphasized capacity relief and growth as EchoStar XIX (Jupiter 2) enters service in Q1’17 .

What Went Well and What Went Wrong

What Went Well

  • Hughes delivered Q2 revenue of $339M (+1.2% YoY) and EBITDA of $106M (+2.9% YoY), supported by higher consumer services and domestic enterprise equipment/services; management highlighted progress on EchoStar XIX and Brazil launch .
  • Subscriber base remained above 1M (1,030,000), with enterprise order backlog reaching ~$1.5B (+28% YoY), positioning for growth as capacity expands in 2017 .
  • Net income and EPS improved materially: net income attributable to EchoStar rose to $55.8M (vs $31.8M YoY); diluted EPS reached $0.60 (vs $0.36) on higher EBITDA, lower depreciation, and lower interest expense .

Management quotes:

  • “I’m very pleased with our performance in Q2 and we are well positioned for growth going forward.” — Pradman Kaul .
  • “In closing, I am honestly very pleased with the progress we have made in Q2 on our numerous strategic initiatives while also delivering solid results in the quarter.” — Mike Dugan .

What Went Wrong

  • ESS revenue declined to $101M (vs $125M YoY) and EBITDA to $84M (vs $104M YoY) due to DISH lease terminations; launch timing shifts (Proton off-nominal conditions) pushed EchoStar XXI to Oct/Nov’16 .
  • ETC EBITDA fell to $20M (vs $29M YoY) on lower equipment sales to DISH and increased marketing spend; SAGE was discontinued with expected charges in Q3’16 .
  • Capacity constraints led to approximately 8,200 net subscriber losses in Q2, largely in wholesale channels; G&A increased from a bad debt reserve tied to a large international customer bankruptcy .

Financial Results

Consolidated trends (oldest → newest)

MetricQ4 2015Q1 2016Q2 2016
Revenue ($USD Millions)$791 $816 $757.6
Operating Income ($USD Millions)$94.3 N/A$89.9
EBITDA ($USD Millions)$223 $223 $220.6
Diluted EPS ($)$0.71 $0.54 $0.60
Net Income Attributable to EchoStar ($USD Millions)$33.9 (Q2’15 ref) $50.7 $55.8

Q2 year-over-year and estimates context

MetricQ2 2015Q2 2016Consensus Estimate
Revenue ($USD Millions)$793.6 $757.6 N/A – S&P Global consensus unavailable
EBITDA ($USD Millions)$212.3 $220.6 N/A – S&P Global consensus unavailable
Diluted EPS ($)$0.36 $0.60 N/A – S&P Global consensus unavailable

Note: Wall Street consensus via S&P Global was unavailable due to access limits; no beat/miss determination can be made.

Segment breakdown (Q2 2015 vs Q2 2016)

SegmentRevenue Q2 2015 ($M)Revenue Q2 2016 ($M)EBITDA Q2 2015 ($M)EBITDA Q2 2016 ($M)
Hughes$335.2 $339.3 $103.4 $106.4
EchoStar Technologies (ETC)$332.0 $314.9 $29.3 $19.9
EchoStar Satellite Services (ESS)$124.6 $101.5 $103.6 $83.8
All Other & Eliminations$1.9 $1.9 $(23.9) $10.5
Consolidated$793.6 $757.6 $212.3 $220.6

KPIs and cash

KPIQ4 2015Q1 2016Q2 2016
Hughes Broadband Subscribers (000s)1,035 1,038 1,030
Enterprise Order Backlog ($USD Billions)$1.44 (approx., end-2015) $1.4 (Q1 commentary) $1.5
Free Cash Flow (EBITDA – CapEx) ($USD Millions)N/A$12 $79
Cash + Marketable Investment Securities ($USD Millions)$1,209.0 (cash 502.0 + securities 707.0) ~$1.5B ~$1.51B (cash 761.8 + securities 745.8)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent Guidance/UpdateChange
Capital ExpenditureFY 2016“Below $800M” (Q4’15) “Low 800s” with satellites/ground infrastructure driving spend Raised slightly
Capital ExpenditureFY 2017N/A prior“Step down quite significantly; sub-$400M range; maintenance ~$300M” New—lower trajectory
SAGE Home AutomationQ3 2016Product marketed in H1 Product discontinued; charges expected in Q3 Lowered/exit
EchoStar XXI (S‑band EU) launch2H 2016Q3’16 Shifted to Oct/Nov’16; service commencement by year-end to meet milestones Delayed
EchoStar XXIII (Ku BSS) launch2H 2016Q3’16 Early Q4’16 on SpaceX Delayed
EchoStar 105/SES‑11 (Ku/Ka/C)2H 2016Q4’16 Q4’16; capacity available early 2017 Maintained
EchoStar XIX (Jupiter 2)4Q 2016/Q1 20174Q’16 launch; Q1’17 service (prior) Construction substantially complete; launch Q4’16; service Q1’17 Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2015, Q1 2016)Current Period (Q2 2016)Trend
Consumer broadband capacity constraints2016 growth challenged until EchoStar XIX; beams closing; net adds moderated ~8,200 net sub losses; beams at capacity; ARPU up, SAC down on lower equipment costs Capacity tight until Q1’17; margins resilient
Brazil consumer launchGateways, distributors in place; July service target Service launched July 1 on Eutelsat 65W; state-by-state rollout Execution on plan; expansion
Aeronautical connectivity (Ka/Ku dual-mode)Strategy to expand to Ka; dual-mode antenna development; Global Eagle partnership Dual-mode terminals timed with EchoStar XIX; 700 planes equipped; Ka over U.S./Mexico; Ku elsewhere Advancing product/readiness
OneWeb LEO projectGround network studies underway; cost-method investment Gateway dev order; preliminary design review done; continued progress Program progressing
EU MSS/CGC and 3GPPBand 65 inclusion; CGC licenses in 8 countries; harmonization efforts EchoStar XXI delay but milestones intact; CGC harmonization work ongoing Regulatory path steady
DISH-linked set-top trendsHopper 3/4K Joey rollouts; Sling TV platform updates ETC sluggish set-top sales as DISH subs decline; HopperGO & Voice remote launched via DISH Demand headwinds; feature innovation
SAGE home automationLaunched March; marketing ramp Discontinued due to competitive shift; Q3 charges expected Strategic exit

Management Commentary

  • “Echo 19 Jupiter 2 satellite construction is substantially complete… scheduled for launch in the fourth quarter of this year and we expect to place the satellite into service in Q1 of 2017.” — Pradman Kaul .
  • “ESS revenue for the second quarter was $101 million… EBITDA… $84 million… launch date for Echostar XXI will likely move to October or November of 2016.” — Anders Johnson .
  • “Capital expenditures for the quarter were $142 million… we expect full year 2016 spending… in the low 800s… Free cash flow… $79 million for Q2 2016.” — Dave Rayner .
  • “We have decided to discontinue the SAGE home automation and security products…” — Mike Dugan .

Q&A Highlights

  • Equipment sales outlook: ETC set-top demand expected to remain “sluggish” with DISH subscriber declines; Hopper 3 initial shipments affected quarter-to-quarter dynamics .
  • Bad debt reserve: Tied to a large international customer bankruptcy; reserve deemed reasonable but subject to adjustment as proceedings evolve .
  • Capacity-driven sub trends: Wholesale channels drove Q2 losses; management does not expect growth to resume until EchoStar XIX enters service; note one-quarter lag between satellite launch and service .
  • EU MSS/CGC: XXI delay still allows minimal service by year-end; ongoing work toward EU-wide CGC harmonization .
  • CapEx trajectory: 2017 CapEx “sub-$400M” with maintenance near ~$300M; 2016 in the low $800Ms .
  • Strategic capital: Raised $1.5B in July; management evaluating satellite projects and opportunities, emphasizing de-risking financing .

Estimates Context

  • Wall Street consensus estimates (revenue, EPS, EBITDA) for Q2 2016 via S&P Global were unavailable due to access limitations; therefore, a beat/miss assessment versus consensus cannot be provided.
  • Company furnished preliminary HSSC ranges for Q2: revenue $432–$450M and EBITDA $190–$200M (non-GAAP), with subscribers ~1,030,000 at quarter-end; these are divisional estimates, not consolidated consensus benchmarks .

Key Takeaways for Investors

  • Near-term: Expect constrained subscriber growth until EchoStar XIX capacity comes online in Q1’17; Hughes margins continue to benefit from consumer mix and lower SAC; watch for Q3 SAGE-related charges and launch execution for XXI/XXIII/105 .
  • Medium-term: Capacity additions (XIX, 105/SES-11) and Brazil rollout should reaccelerate consumer growth and open aeronautical Ka opportunities; enterprise backlog supports visibility .
  • Segment mix: Hughes strength offsets ETC/ESS headwinds; ESS should stabilize as fleet additions enter service in early 2017; ETC tied to DISH demand trajectory .
  • Capital discipline: 2017 CapEx step-down to sub-$400M improves FCF profile post-launch cycle; maintenance CapEx ~$300M baseline supports deleveraging or reinvestment optionality .
  • Balance sheet/financing: ~$1.51B liquidity at Q2 plus July $1.5B notes adds flexibility to pursue satellite and strategic initiatives; management focused on de-risking financing .
  • Regulatory: EU MSS/CGC milestones remain a priority; harmonization would broaden EchoStar Mobile potential; monitor Brexit-related regulatory shifts (management does not foresee major financial impact yet) .
  • Risks: Launch schedule slippage (XXI/XXIII), DISH demand softness impacting ETC, international credit risk (bad debt), and capacity constraints until XIX service .