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EchoStar CORP (SATS)·Q4 2016 Earnings Summary

Executive Summary

  • Q4 2016 delivered mixed results: revenue fell 6.4% year over year to $740.4M while EBITDA rose modestly to $229.1M; diluted EPS declined to $0.40 as higher interest expense and a higher effective tax rate offset EBITDA gains .
  • Segment performance was bifurcated: Hughes grew revenue 6.9% and EBITDA 9.5% year over year, while EchoStar Satellite Services (ESS) and EchoStar Technologies (ETC) declined on lease roll-offs and lower equipment sales to DISH and others .
  • Strategic catalyst: EchoStar XIX (“Jupiter 2”) successfully launched and completed in-orbit testing; Gen5 consumer broadband rollout is on track by end of Q1 2017, positioning for accelerated subscriber and revenue growth beginning Q2 2017 .
  • Corporate simplification: exchange agreement with DISH to retire HRG tracking stock and transfer ETC assets to DISH, making EchoStar 100% owner of the Hughes retail broadband economics; near-term reported EBITDA will be impacted by removal of ~$90M ETC EBITDA and lagging Hughes EBITDA due to SAC, but longer-term margin trajectory improves with mix shift .

What Went Well and What Went Wrong

What Went Well

  • Successful launch and handover of EchoStar XIX (Jupiter 2); all user beams and gateways activated with alpha/beta testing commencing, enabling Gen5 rollout by end of Q1 2017 .
  • Hughes segment delivered its 12th consecutive quarter of year-to-year revenue growth and 13th consecutive quarter of year-to-year EBITDA growth; Q4 revenue +7% to $371M and EBITDA +10% to $110M .
  • Management highlighted Gen5 plans meeting FCC 25/3 broadband standards with enhanced features and nationwide footprint, reinforcing competitive positioning; “HughesNet Gen5 will be the first ubiquitous coast-to-coast internet service that meets the FCC 25/3 broadband standards” .

What Went Wrong

  • Consolidated EPS fell to $0.40 (vs $0.71 prior year) and net income to $38.2M, driven by higher interest expense from 2016 debt issuance and a higher effective tax rate .
  • ESS revenue and EBITDA declined year over year due to termination of two DISH leases in Q4 2015 and launch delays impacting timing of commercialization; Q4 revenue $101.7M vs $116.3M, EBITDA $83.8M vs $98.4M .
  • ETC revenue continued to soften on lower equipment sales; while Q4 EBITDA improved to $32.1M, the pending transfer of ETC to DISH removes ~$90M annual segment EBITDA from EchoStar, creating a near-term headwind to consolidated EBITDA .

Financial Results

MetricQ2 2016Q3 2016Q4 2016
Revenue ($USD Millions)$758.0 $742.0 $740.4
Net Income Attributable to EchoStar ($USD Millions)$56.1 $36.6 $38.2
Diluted EPS ($USD)$0.60 $0.39 $0.40
EBITDA ($USD Millions)$221.0 $211.0 $229.1
EBITDA Margin (%)29.1% (221.0/758.0) 28.4% (211.0/742.0) 30.9% (229.1/740.4)

Segment revenue and EBITDA (Q4 2016 vs Q4 2015):

SegmentRevenue Q4 2015 ($MM)Revenue Q4 2016 ($MM)YoY %EBITDA Q4 2015 ($MM)EBITDA Q4 2016 ($MM)YoY %
Hughes$347.1 $370.9 +6.9% $100.4 $109.9 +9.5%
EchoStar Technologies (ETC)$325.1 $266.1 -18.2% $26.0 $32.1 +23.6%
EchoStar Satellite Services (ESS)$116.3 $101.7 -12.6% $98.4 $83.8 -14.8%
All Other & Eliminations$2.0 $1.7 -18.5% $(2.1) $3.2 NM
Total$790.6 $740.4 -6.4% $222.7 $229.1 +2.9%

Key KPIs and cash metrics:

KPI / MetricQ2 2016Q3 2016Q4 2016
Hughes Consumer Broadband Subscribers (000s)1,030 1,018 1,036
Enterprise Backlog ($USD Billions)$1.5 $1.5 (up 30% YoY) $1.5 (up 6% YoY)
Capital Expenditures ($USD Millions)$142 $157 $188.7
Free Cash Flow (EBITDA − CapEx, $USD Millions)$79 $54 $40
Cash + Marketable Securities ($USD Billions)~$1.5 ~$3.0 ~$3.09

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Capital ExpendituresFY 2017~$350–$400M (Q3 commentary) ~$350–$400M, includes delayed amounts from 2016 due to launch delays Maintained
Hughes Consumer Revenue TrajectoryQ2 2017 onwardN/AExpect revenue growth to accelerate with EchoStar XIX capacity; EBITDA to lag near-term due to higher subscriber acquisition costs New qualitative indication
Segment Mix (ETC)Post-close (expected end-Feb/Mar 2017)N/ARemove ~$90M 2016 ETC EBITDA; ~$47M corporate overhead not fully eliminated immediately Structural change
Satellite Launch Timing2017Echo XXI/XXIII/105 targeted late 2016/early 2017 Echo XXI later in 2017; XXIII mid-March; 105 in Q2–Q3 2017 Updated timelines

Note: EchoStar does not provide formal forward revenue/EPS guidance .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 & Q3)Current Period (Q4)Trend
Consumer broadband capacity and Gen5XIX scheduled Q4 launch; Gen5 plans/higher speeds and data; capacity ~220 Gbps XIX launched; beams/gateways activated; Gen5 nationwide rollout by end of Q1; plans meet FCC 25/3, new features and pricing Execution advancing; launch-to-service transition
Brazil consumer rolloutService launched July; ~300 dealers; early subs; capacity constrained; target 25k H2 subs (slightly less achieved) Strong ramp in December; ~500 dealers; retail returns better than wholesale; addressable market 5–10M households; ~300k capacity on current payload Acceleration; retail-focused strategy
ESS and satellite launchesDelays from Proton/SpaceX; ESS revenue/EBITDA down on DISH lease roll-offs; additional lease expense until 105 launches XIX complete; XXI delayed by Proton grounding; regulators supportive; XXIII mid-March; 105 Q2–Q3; ESS Q4 revenue/EBITDA down YoY Gradual normalization; regulatory risk managed
Competitive positioning (ViaSat)Gen5 to offer more data and speeds; maintaining share Confident competing vs higher speed/no-cap claims; “the proof’s in the pudding,” sustained >60% share; plans can scale beyond 25 Mbps if needed Confident tone; plan flexibility
ARPU/SAC dynamicsARPU ticking up; SAC trending down; no public quantification ARPU trends consistent; SAC will pressure near-term EBITDA as retail growth accelerates post-XIX ARPU steady; SAC up near-term

Management Commentary

  • “2016 was a good year… EchoStar XIX or Jupiter 2, was launched successfully and it's going to provide capacity to resume growth in Hughes consumer business in North America.” — Michael Dugan, CEO .
  • “Q4 2016 represents the 12th consecutive quarter of year-to-year revenue growth and the 13th consecutive quarter of year-to-year EBITDA growth.” — Pradman Kaul, President of Hughes .
  • “All systems are working well, and Hughes is on track to commence service by the end of this quarter.” — Anders Johnson on EchoStar XIX rollout .
  • “We will be able to realize the full economic value of the high-growth retail consumer broadband business while divesting the less strategic set-top box businesses.” — David Rayner on the DISH exchange .

Q&A Highlights

  • Capacity allocation priorities: Focus on upgrading infield/SPACEWAY customers and adding new retail subs; minimal overlap with XVII beams; XIX heavily focused on full-beam areas, especially East Coast .
  • Competitive stance vs ViaSat: Management expressed confidence in competing with higher-speed/no-cap plans, emphasizing FCC-defined broadband (25/3) and ability to scale plans as needed while maintaining >60% market share .
  • Brazil trajectory: Addressable market of 5–10M households; retail channel preferred given better returns; ~500 dealers in place; slightly short of H2’16 25k subs target but ramped strongly in December .
  • Regulatory environment: EU regulators (COCOM) generally sympathetic to Echo XXI delays; ongoing CGC harmonization discussions with member states .
  • Near-term financial modeling: 2017 CapEx $350–$400M; ETC removal and partial overhead persistence will depress EBITDA short term; Hughes EBITDA to lag revenue growth due to higher SAC with XIX .

Estimates Context

  • Wall Street consensus (S&P Global) for Q4 2016 revenue and EPS was unavailable in our query; vs-estimate comparisons are therefore not provided. Values would normally be sourced from S&P Global consensus, but access was unavailable at this time.

Key Takeaways for Investors

  • Hughes momentum continues: sustained revenue/EBITDA growth and Gen5 launch should accelerate consumer additions and revenue from Q2 2017, with near-term EBITDA lag from SAC a transitory effect .
  • Segment mix improves post-transaction: divestiture of ETC simplifies the model; despite ~$90M EBITDA removal and some overhead persistence, longer-term margins should benefit from higher-growth broadband mix .
  • Satellite program execution de-risks capacity: XIX operational; XXIII/105 imminent; XXI delay manageable with supportive regulators—monitor launch schedules for commercialization timing and ESS recovery .
  • Competitive positioning remains solid: FCC-compliant nationwide 25/3 offering with enhanced features, flexible plans, and high market share underpins the U.S. consumer thesis .
  • Watch KPIs: subscriber growth trajectory (U.S. and Brazil), ARPU trend stability, SAC impact on near-term EBITDA, and enterprise backlog quality (steady ~$1.5B with differing YoY comps) .
  • Cash and liquidity provide strategic optionality: ~$3.09B cash/marketable securities and reduced CapEx in 2017 (ex new programs) support potential strategic initiatives without leverage pressure .

Additional Data Points

  • Consolidated Q4: Revenue $740.4M; EBITDA $229.1M; Net income attributable $38.2M; diluted EPS $0.40; CapEx $188.7M; FCF $40M .
  • Hughes Q4 subs: 1,036k (vs 1,018k in Q3); enterprise backlog ~$1.5B (+6% YoY) .
  • Segment YoY shifts: ETC revenue -18%; ESS revenue -12.6%; Hughes revenue +6.9% .
  • Balance sheet: cash & equivalents $2.571B; marketable securities $0.523B; total ~$3.09B as of 12/31/16 .