Q2 2019 Earnings Call
This time I would like to welcome everyone to the Echostar earnings conference call for second quarter or 2019 conference call.
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Hi, Good morning, everybody welcome to earnings call for the second quarter of 2019.
I'm joined today by Mike Dugan, our appeal.
Dave Rayner see all and see a full pradman kaul President of Hughes under Johnson, Chief strategy Officer, and President of Echostar 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're not identify participants or their phones in uniform.
We also do not allow audio recording which we ask that you respect.
Let me know turn this over to Dean for the Safe Harbor disclosure things people.
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-K , and quarterly report on Form 10-Q filed with the SEC all cautionary statements. We make during this call should be understood as being applicable to any forward looking statements. We make wherever they appear you should carefully consider the risks described in our reports and should not place 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 Dougan.
This is Dan good morning, everyone and welcome to our earnings call.
In May we entered into a definitive agreement with dish network spinoff Spartan Echostar satellite services.
Oh, its business and therefore.
The liability.
And merge them.
So we're pretty bullish in exchange for dish shares to be distributed to our costar share.
The transaction is currently awaiting regulatory approval and we expect that it will close later this year.
This is somewhat of a transformative transaction met all our costar to focus on the growing broker mark another way that strategic opportunity and it will resolve the best things a lot of strategic and somewhat negative growth yeah. So.
Let me now turn it over to Arbors, who will talk about your thoughts on the ml pet animal work for what they use off Dave and Dave will provide the part a natural.
I wonder.
Thanks, Mike Good morning.
Second quarter, Yes, that's revenue was 81.
Compared to the 95 million last year.
The decline being primarily a result of the termination of a lease on Echostar seven.
On the commercial FSS business front.
Our second quarter activity consisted of the addition of a new customer for multiple transponders and the renewal and some existing services at their existing rates.
Although we are seeing still seeing a difficult FSS environment and pressure on rates for U.S. government service opportunities throughout 2019 on a positive note. We are seeing an increase in activity with the potential for the demand for K, you capacity to catch up to that supply.
We continue to make progress in expanding email distribution.
We're making great progress at Onboarding rig Matt.
And we recently signed a distribution agreement with Galaxy one.
In addition, we have conversations ongoing with many other potential channel partners each of which is dominant in certain key vertical segments.
And we're seeing a lot of enthusiasm in these channels for either Melds product development roadmap.
Likewise, we continue to make progress on our longer term projects to develop new type technologies to integrate S band satellite services into Fiveg networks and dramatically reduce the cost of satellite Aiotv and am services.
We also continue to explore ways to integrate our complementary ground component authorizations into these developments.
We remain confident that overtime echostar mobile products and services will be integrated into the new global hybrid networks that leverage multiple satellite and terrestrial technologies in the meantime, our strategic focus to bring innovative MSS products to market.
And prepared and build out the next generation hybrid network for Aiotv and satellite delivered Fiveg services in the European Union.
I'll now turn it over to problem.
Thank you Andreas.
A few opening comments on our strategy before I get into our quarterly performance.
As many of you in a bad we've already established a strong services trends in the enterprise businesses in North America, Brazil, India and Europe .
In the consumer services business, we've expanded beyond North America.
Into central and South America and of course, we also provide satellites in the nascent ground equipment worldwide to local service providers.
Our objective is to couldn't is to continue to grow and remains a global leader in satellite broadband.
We continue to be the market leader, Latin America, and not making excellent progress on our expansion into central and South America.
A major new shoe to retreat.
Let you know in Q1.
On an expansion in central and South America, a major initiative was.
Our contract with extraordinary to Canada valued at approximately $250 million for the capacity and equipment on Jupiter three.
In the Africa Middle East joint venture with the asset is now operational and we have continued to build on a strong relationship with viasat by signing a joint venture agreement floaters coating satellite communication services business in Brazil.
Additionally, in India, we signed a JV agreement, there's been a feed additive for there to be said business.
We are innovating regulatory approvals on Viasat goodwill and bought the JV.
We expect these jvs will give us significant market share and capability in their respective regions.
The next step in the execution of our strategy is to expand our presence with infrastructure and systems sales to Asia Pacific and Europe .
The only supply technology to major service providers in these markets and we plan to expand the strong presence through partnerships.
This strategy will allow us to access the orbital slots landing rights regulatory approvals.
An existing distribution channels.
As the World continues to emphasize mobility mobile satellite engineering teams.
Key role for existing and new customers.
This includes developing products and services for new applications.
This group will opportunistic is gaining traction and so the new mobile AD networks and providing developing support on the internal initiatives.
The one that program is on track for that development work.
We expect this effort to continue to accelerate throughout the year.
No for performance in Q2.
Revenue was up 6% year to year, despite beams on Jupiter satellites.
Reaching saturation and filling up.
Our consumer base continues to grow in this quarter.
We ended Q2 19 with a total of approximately 1.415 million subscribers.
The net adds of approximately 26000 in this quarter.
Our international group through a big base grew to approximately 69000 subs.
In Q2, we expanded our customer service to a major South American country and no office services in six countries in Central and South America.
By the end of the year, we plan to offer use net flows in Mexico as well.
The systems the methods and experience gained from a service development in North American doesn't have gone a long way in these markets, which are relatively new markets satellite broadband.
In each of these countries, we believe that community life I.
Our sports Looses, there would be a complementary approach to reach users throughout much of the service area.
Now to our enterprise business.
Our North American Enterprise business had a strong quarter in terms of orders, including significant servicing extensions through Aggregators Sonic.
We also saw an increase in the overall level of activity, but smaller orders from a broad range of customers.
Our franchise businesses received orders from a range of alternatives, including Conoco Phillips excellent Denny's and Chevron.
In the energy sector. We saw continued upswing in exploration related networks and received an order from a new customer in the oil patch group.
In the in flight connectivity market, we extend a network operations contracts globally. He goes through the end of 2023.
Additionally, we have all the infrastructure in place to spend.
Play types, Keystone, as well, where the United States, Mexico, and the North Atlantic.
Moving on to our international Enterprise business in India. We received a major award from Harris Corporation to provide SAS problem, a group and to support the new airports authority Air traffic control management system.
As the first quarter call I mentioned that the Indian subsidiary has received the flight and maritime connectivity license from the Indian government.
On the Arrow.
Engage with multiple new service providers, who are looking to truly understand the global coverage that view through I've been capacity and managed service.
In the maritime market, we expect to service the end customers directly.
And all are also in discussions with other global service providers.
For international roaming services.
In Indonesia, our Jupiter system was chosen by all five of the service providers, who are providing satellite broadband to bust the division of the Indonesian Ministry of communication.
This project.
Been involved real blade, thousands cellular backhaul and internet access locations.
Additionally, I'm pleased to say that the PS and consortium.
Who will build and operate a new 150 gigabit satellite on behalf of data Nishan government has selected Hughes and the Jupiter satellite system as the project issue there.
Oh.
In the Middle East we see.
From a major telecom services provider.
[noise] Oh for the tubular system and several thousands remote terminals.
To provide internet services.
In the government sector, the U.S. Army awarded Hughes.
11.8 million dollar contract.
To develop a new end to end narrow band.
Luckily theme architecture and approved demonstration incorporating machine learning and artificial intelligence.
So as you can see we are active on many fronts the convenient front our expansion into central and South America continues to fuel our overall growth as these markets have sufficient satellite capacity.
For the next several years.
Our enterprise business and expand it into many exciting applications worldwide and we are making good progress in penetrating the government business.
Finally, our Jupiter three satellite construction is on track for launch in 2021 to enable us to resume growth in the North American consumer business.
Let me now hand, it over to Dave.
Thank you Pradman.
Before I get into our financial results. If you words on our adjusted EBITDA measurement that we included in our press release.
The measurement excludes from EBITDA, certain nonrecurring items as well as gains and losses on our investments.
More details.
On the GAAP to non-GAAP reconciliation in our earnings release.
We believe that adjusted EBITDA more closely represents our operating efficiency and financial performance.
The adjusted EBITDA numbers will be one I speak to throughout the call.
Now to our results.
Consolidated revenue in the second quarter was $537 million a growth of 2% over the same period last year, driven primarily by growth in Hughes consumer International Enterprise and mobile sat offset partially by Hughes domestic enterprise and FSS revenue.
Adjusted EBITDA in the second quarter was $199 million compared to $211 million last year, the reduction being primarily due to the lower DSS revenue, which has very high margins higher bad debt and strategic transaction expense, along with higher sales and marketing within the consumer business also impacted these results.
This was partially offset by the margin to the higher Hughes revenue and favorable exchange rates relative to last year, we'll talk more about some of these items in a moment.
Net income was a loss of 5 million in Q2 compared to a gain of $78 million last year. The decrease was primarily driven by the decline in adjusted EBITDA I just referenced lower net gains on investments of $53 million higher litigation expense of $25 million related to a patent case, a net gain of $10 million from the settlement with a third party vendor in Q2 2018.
And increased depreciation expense. This was partially offset by lower net interest expense and lower income tax expense.
Capital expenditures in the quarter $107 million compared to $120 million in Q2 last year. The decrease was due to the lower spend on construction and infrastructure associated with satellites.
Free cash flow adjusted defined as adjusted EBITDA minus Capex was $92 million during the quarter.
Hughes revenue in Q2 was $452 million, a 6% increase year over year, driven primarily by growth in Hughes consumer service International Enterprise mobile sat sales.
Offset partially by North American enterprise.
Adjusted EBITDA in Q2 was $156 million, a 3% increase over Q2 last year, primarily from revenue and margin growth offset partially by an increase in bad debt expense of $13 million that is primarily related to our restructuring of a single customer contract.
Marketing and promotional costs associated with consumer business and equity and losses of unconsolidated entities.
[noise] PSS revenue Q2 was $81 million.
Down 15% from the same quarter last year due to the termination of the lease on Echostar seven in June of last year and other reductions from lower satellite capacity lease revenues adjusted EBITDA was $68 million in Q2 compared to $82 million last year.
Due to the lower revenue.
Adjusted EBITDA in corporate and other segment.
Q2 was a loss of $25 million compared to a loss of $23 million in Q2 last year, the change being primarily related to higher GNS expense associated with strategic transactions.
In June we repaid the outstanding principal the 2019 senior secured notes at maturity and ended the quarter with $2.5 billion of cash and marketable securities and approximately $95 million of net debt inclusive of capital leases.
Also I'm pleased that both S&P and Moody's recently upgraded our credit ratings.
Let me now turn it back over to Mike.
Thank you Dave.
As you all heard there are exciting initiatives, which are part of our implementation of a comprehensive global growth strategy.
We are looking forward to completing the BFS fish transaction and the other joint ventures, all of which are designed to drive revenue and earnings growth.
Let me turn it over to the operator to start the question and answer session.
[noise].
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the kinross.
Again to ask a question press star did that number one on your telephone keypad.
Yeah.
Your first question is from Ric Prentiss from Raymond James Your line is now open.
Thanks, Good morning, guys.
Good morning, Rick.
Couple of questions if I could.
You mentioned, a bad debt item in the quarter restructuring, primarily one customer contract, but can you give us a little more color on that and where do you expect bad debt to trend as we look into the rest of 19 and 20.
Yeah, Rick so, but as I said the primary cause of that increase was a single customer contract, we restructured that contract in the second quarter. As a result of accounting standards. We had a considerable amount of unbilled revenue that we had recognized.
As the under the previous contract while the customer is obligated to pay those previously unbilled amounts we felt it was prudent with the restructuring of the agreement.
To take a reserve we believe that we've got an adequate reserve on that.
I would expect I would not expect to see.
Bad debt continue at those kind of levels going forward.
Makes sense and then I think you also called out that the.
Harry U.S domestic enterprise business.
I think that you also pointed out maybe down $9 million year over year at the enterprise level any update as far as what's happening there and how we should think about that trending out.
Yeah, I think I I think as you've seen in the past.
North American enterprise business has been relatively flat.
Slight growth.
And.
So in the long term I would expect that trend to continue.
We'll obviously have variances quarter to quarter because each of these.
From from major contracts with customers.
But for the long term trend flat to slight small single digit growth.
Okay.
Makes sense.
And then within the Latin American markets that you've been opening up in Central America, and South America, and you mentioned, Mexico coming by year end now.
How should we think about how those markets kind of get into the ramping of adding subscribers and helping EBITDA because clearly there's probably some costs up front getting those markets open. So how should we think about trending out as ours.
With the ads might be and then the EBITDA production in those markets.
Well as you've seen in the past.
When we open up these markets you're right in for some period of time because of the fixed cost that.
That's you have to spend to get into these markets. You will you see a negative EBITDA in the beginning.
Typically it takes us about a.
222, and a half years.
To basically.
Turning to deposits and we expect actually open each of these markets that kind of trend.
A little bit little will probably show up too.
And the initial countries that we have.
Already been in business for a year or year.
We've seen that trend and I expect Mexico will have the same characteristics.
Okay last one for me is I noticed in the 10-Q that there was a lawsuit filed by reported shareholder on.
On the dish spin transaction any update on where that pace might stand and how do you ever see Brazil, U.S. or UK approvals for that transaction yet.
Hey, Rick This is dean Manson so.
That that's been filed and.
A briefing schedule as being sorted out its just proceeding.
Proceeding.
Normally at this point as far as far as we can tell so we really don't have anything anything more specific to say about that or or the satisfaction of closing conditions on the transaction.
How about did you know something about Anatel in the 10-Q have you gotten anatel approval for the.
That particular satellite in the sense.
[noise].
Yeah again.
Do we have anything to announce.
In terms of progress toward completion of of conditions, but yes, I think Rick just to clarify I think you are talking about Echostar 23 that had been located.
At 45, West we have gotten release from and it's all in that regards.
And actually the satellite.
Is already in motion.
Moving to a different location other than 45 west.
Okay, and then so expecting closing by year end.
Yes, yes, yes, okay. Thanks, guys.
Your next question is from the line of Chris Quilty from Quilty analytics. Your line is now open.
Hi, Thanks wanted to start with a question on the broadband business and I know you don't give specific numbers, but in the north American market can you characterize sort of what's happening with churn and customer additions and promotional materials.
Given potential capacity issues and then the second question is it fair to assume that most of the net adds in the quarter came from the international operations.
[noise].
Oh, hi, some questions that Chris so.
Generally the trend in North America is also.
Consistent with the past.
John's being fairly stable.
The seeding the gross or the net adds.
No <unk>, but also a combination of both.
South America and.
And south and Central America, but pretty evenly distributed.
Yeah, Gotcha, and but shifting gears on on the S. Band can you give us an update on.
Where you are in terms of actually announcing it rolling out of service.
[noise].
Chris. This is bill are you speaking specifically of the EU.
Yes, we have had a service offering.
Up in Europe for quite some time I mean, what we've been doing is enhancing it as well as developing some additional products.
And additional hardware that will be available in the marketplace hopefully by the end of 2019.
Okay and is that the customer wins in that business or the type of ones, where you would have a press release associated with it.
We have made certain releases, yes about.
Customer relationships that we have entered into as I mentioned.
We're in the process of Onboarding Rignet.
Which has signed a multifaceted agreement with us as well as now Galaxy one.
Great and a final question I know, it's again, a large piece of the business, but the government.
Your your outlook, there and I think you did have some nice wins recently.
Yes.
Please surprises.
And last quarter too we have a.
We have one Keystone major contracts.
Besides our normal.
Opens to buy these upon contracts to develop new network management systems.
For the for the government and.
Yes, and one of them is.
It is a multi year contract with off significant value that the VM hopeful.
Develop into a much bigger business.
But looking back to the network management segment of the government's future requirements, they're coming to us more and more.
But currently.
I understand that and is there are ongoing discussions in terms of the government adopting in expanding its use of Jupiter technology.
Not density Jupiter technology, although that is at least from a marketing level a significant interest in some of the fixed some of the US network management aspects of the Jupiter technology as I mentioned earlier.
The actual may fall among the modem.
It has been said set by the government over the last 10 years, it's very difficult to change that aspect of the government systems.
Understand and.
I can't leave without making Dave answer at least one question. So.
You've had a whole bunch of Jupiter.
Hub in equipment sales in the last couple of quarters.
Is that expected to have any kind of a impact in terms of.
The margin mix that we see between equipment and.
In services, because I know in the past those systems tend to be very lumpy.
Yes, they do tend to be lumpy and they also tend to be delivered over an extended period of time.
Obviously, the equipment margins since you raise margins equipment margins do not come.
At the same level as consumer margins obviously.
But we wouldn't expect to have that.
Impact our overall margin results because obviously, we continue to grow.
Subscriber revenue as we also focus on equipment sales increases.
Got it okay. Thank you gentlemen.
Thanks, Chris.
Your next question is from Gil it's torn from Jefferies. Your line is now open.
Thank you and I have three questions. Please the first one is deliberately provocative but picking up on the news that one web find a pretty large agreement with the Canadian government.
Does this constitute in your view a.
Canary in the coal mine for Internet broadband by Geo stationary.
Second question sticking with one of my back nicely and we've had some of the early.
Outputs around speed and latency.
It'd be interesting to get your perspective on on those and.
And if oneweb will win Oneweb inbox on its next funding round would you participate.
And then the final question is on the.
Dish Mexico stake.
Can you just confirm that that is going back into dish or is that staying with yourselves and.
And the reasoning behind that decision that was made.
Thank you.
First of all let me address a couple of those and then I'll turn it over to Pradman a little bit.
I'm confused by your opening statement on Oneweb and the Canadian government, you may be referring to telesat announced a contract and funding from the Canadian government. So just how do you write Monday, but yeah. It was telesat, okay, but kind of still same principle.
No no I understand I'm, just trying to make sure that we're on the same page regarding funding of future funding in Oneweb will make those decisions when the time.
It is appropriate I'm not going to discuss future funding potential and all that that then in terms of dish Mexico no. The dish Mexico investment remains with Echostar is not part of the spin merge assets.
And I'll, let pradman answer the question regarding <unk>.
Couldn't quite hear it on the latency I heard a as well as impact on the Leo networks on G M.
Capabilities.
Yeah, I think that's all obviously a subject of great interest. These days, we strongly believe that the Leo networks have been they've come into service the complement to the existing Jewish networks.
It depends on the application.
And the function of the network architecture as to what diseases, there, but the two coexist with each other.
In terms of the fix some latency.
Proven now.
Over the last 30 is that most of the applications that for data communications.
Transcends temporarily see but then I have a whole set of applications.
Which we have not been using satellite communications for.
Latency does become an issue like gaming for example.
Oh a voice.
And so by having the video capability, we'll be able to pretty much. It address most if not all applications and data communications.
It sounds pravin that these your ounces you previously given so is it fair to say that your position has not changed at all on any risk overboard.
From familiar yeah population.
Right, that's probably a fair statement.
And was there any have you had any conversation with exploring that around the telesat EW.
Oh, you know, we obviously talk about everything is a small community, but nothing else.
Channeling funds.
And then just final question.
You Youre in this unique position of supplying some of your competitors on occasions.
With the salary of Jupiter technology into ground network and so on.
And on some occasions you've.
You co invested with a partner on others do you know what you've just been a supply.
And can you just remind us what.
Drove you to co invest in one whereby I know this is a question you you would advance it a while back but it would be it would be useful to get to a recap on that.
Yeah, Oh, you know basically you've got it right.
Very flexible is our business approach, we compete and be cooperates with us compensation, depending on you know whether it makes business sense on that and historically, we have invested in the business. There's all kinds of people. So that's that's pretty consistent with our behavior in the past.
With one bad be taught us a great opportunity for us or both and Tencent investment.
And I guess Oh.
A a company that we couldn't supply significant amounts of equipment and services.
And then spent out very very well so far.
Absolutely.
We hope that these investments will also.
Very positive in the future.
Would you have come would you have invested in one way, but if there hadn't been a supply agreement.
I think so I don't know the the evident at this stage you know it's difficult to second guess the future.
A second guess the Pos.
But Ah you know we don't have a bank obviously, so our primary objective when we make investments is too.
Couldn't do seem to have its complement our existing businesses.
Yeah.
That's it thank you very much.
Again, if you wish to ask a question. During this time simply press Star then the number one on your telephone keypad again does targeted at number one on your telephone keypad.
They are there are no further questions at this time presenters you may continue.
Okay.
Thank you operator, if there are no other questions, we'll wrap it up at this point, but before we conclude our call I would like to let you know that after 26 years at Hughes and Echostar, Deepak Dutt has decided to retire well we'd be around for a little while longer this will be the last call. He is on the lease a participant.
I end the company want to thank him for all the hard work and support he has provided the company over many years he will be missed.
With that we'll end the call. Thank you.
This concludes today's conference call.
For participating you may now disconnect.
[noise].