EchoStar CORP Q3 FY2021 Earnings Call

Good day, and thank you for standing by. Welcome to the EchoStar Corporation Conference Call for Third Quarter 2021 Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Mr. Terry Brown. Please go ahead, sir.

Thank you. Good morning, everybody, and welcome to our earnings call for the third quarter of 2021. I'm joined today by Michael Dugan, our CEO; David Rayner, COO and CFO; and Pradman Kaul, President of Hughes, Anders Johnson, Chief Strategy Officer and President of EchoStar Satellite Services; and Dean Manson, General Counsel and Secretary. 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.

Thanks, Terry. 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 materially differ 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 for the year ended December 31, 2020, which we 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 forward-looking statements. I'll now turn the call over to Mike Dugan.

Thank you, Dean, and thank you to everyone joining us for our Q3 2021 earnings call. As a management team, we continue to focus on operating the business in an efficient manner, attempting to balance short-term and long-term opportunities. I'm pleased to report that the third quarter was another strong one with increases in revenue, net income, and adjusted EBITDA compared to the same period last year. Let me now turn the call over to Pradman, Anders, and Dave to expand on our results before closing with questions and answers.

Thank you, Mike. As you know, we are focused on delivering outstanding financial results. To that end, Hughes revenue was up 7% and adjusted EBITDA increased 9% over the same period last year. Our adjusted EBITDA margin in Q3 '21 was 40.8%, a 90 basis points increase over the same quarter last year. Year-to-date through September 30, our adjusted EBITDA margin is 41.8%, 300 basis points higher than the same period in 2020. We ended Q3 of 2021 with approximately 1,510,000 Hughes subscribers across the U.S. and Latin America, down 32,000 from June 30, 2021. Our U.S. consumer offering remains capacity constrained, and we continue to manage our sales and marketing efforts proactively to optimize our service to existing subscribers. Although our U.S. subscriber base declined by approximately 24,000, our U.S. retail ARPU continued to increase, driven by strong demand for broadband capacity. Similar to the U.S., our Latin American consumer offering has become capacity constrained in certain markets and our subscriber base declined by approximately 8,000 during the quarter. We are balancing network utilization to the subscriber levels in these areas. And to improve the customer experience, we're adjusting our service plans to better match the way our customers are using our service. Despite these challenges, ARPU increased for the second quarter of 2021. We're currently focused on increasing the yield on our capacity through a mix of high-value subscribers, community WiFi, and enterprise opportunities. Now let's talk about our enterprise business. It continues to gain traction with orders up 56% on a year-to-date basis relative to last year. The in-flight connectivity market continues to improve. This resulted in an increase in deployment in new aircraft by our partners. Within the SES-17 program, we continue to meet the milestones in preparation for deployment of their system next year. Both our defense and civilian government teams were very active in Q3. The orders of our defense group are up 63% on a year-to-date basis compared to last year. Additionally, we had several key wins in the Federal and state markets with bookings from contract extensions as well as the expansion of support for state agencies. In Europe, we received a number of expansion orders for managed network services. These include upgrading our solution for British Petroleum by implementing an SD-WAN solution with robust network security at 1,100 locations, expanding our SD-WAN services with Body Shop to include new locations, and signing a term commitment or extension with Camelot lottery. In India, we continue to see strong growth in the banking sector, with the addition of more than 3,000 locations. This includes service for banks such as Bank of Baroda, UCO Bank, and HDFC Bank, as well as the expansion of services to ATM service providers like BTI, Hitachi, and Euronet. In addition, Hughes India has received a license amendment to run high throughput capacity-based services from India's GSAT multi-beam satellite. It will address low-cost services for cellular backhaul, enterprise, and SME services. We continue to work towards the completion of our joint venture agreement within Hughes India and Bharti Airtel, and we expect to make an announcement on that shortly. In terms of system sales, I would like to highlight a couple of recent orders. The first is for the EUTELSAT KONNECT VHTS satellite that expands EUTELSAT’s use of the JUPITER system beyond the KONNECT satellite, which is already in service. The KONNECT VHTS employs a sophisticated digital channelizer and utilizes Q and B-band feeder beams. Also, the National Company for Telecommunication Services of Egypt has selected the JUPITER system to deliver satellite broadband services over the TIBA Ka-band satellite. These awards underscore the JUPITER system as the de facto standard for satellite broadband. Elsewhere around the world, we've seen expansion from a number of companies including multiple operators in Indonesia, where satellite remains a critical component of bridging the digital divide. We received a number of orders from mobility equipment and services, including a dedicated network for the Indian Army to support land mobility using quick deploy antennas. And we signed an agreement with Telespazio in Italy whereby our HeloSat solution has been selected for Leonardo's helicopters. This product has unique capabilities that enable high-speed transmission through helicopter rotary blades. Our effort to support the system engineering and gateway deployment for OneWeb is progressing well. We plan to have the necessary gateways deployed to support OneWeb's additional service. We anticipate that deliveries will increase during 2022 as OneWeb’s regions expand. We've been talking about the evolution of complex hybrid networks and our multi-transport innovations for quite some time. At a jointly hosted session at the 2021 show in September, we shared a demonstration of multi-orbit connectivity in action. The demonstration featured the successful real-time seamless switching between the used JUPITER-2 geosatellite and OneWeb's cost ratio. It highlighted the advantages of each type of connectivity as Hughes’ active technology software are instantaneously evaluated the type of traffic and transmitted it over the most efficient part. We signed agreements with OneWeb that provide Hughes the ability to integrate the OneWeb service offering into our multi-transport networking portfolio, covering the United States and India. We hope to incorporate this capability into other regions around the world. To date, our business has not been materially impacted by worldwide delays in the supply of components, materials, and parts. We continue to work closely with our suppliers and monitor our inventory levels, making every effort to limit any future impact to our operations. Hybrid solutions and technologies that enable connectivity anywhere and everywhere are a hallmark of us and increasingly a rallying cry for the entire telecom industry. As we continue to celebrate our 50th anniversary as an organization in 2021, I take great pride in reflecting upon our ongoing innovation and industry leadership, including an exciting future of seamless multi-orbit, multi-transport, and multi-network connectivity that Hughes is poised to deliver. Let me now hand it over to Anders.

Thanks, Pradman, and good morning. EchoStar Satellite Services revenue for Q3 was $4 million, flat to Q3 of last year. We remain focused on pursuing revenue opportunities in the Ku-band sector as the market continues to slowly recover. On the S-band front, we are pleased to report that we brought into use our Sirion-1 ITU filing through the successful launch in operations of EchoStar Global III. We are excited about completing this milestone, and we are moving forward with planning for the next steps in the development of our global S-band capabilities. Our European subsidiary, EchoStar Mobile, also continues to make good progress in the development of new satellite IoT services. We recently completed initial testing of the LoRa protocol and have been very pleased with the performance of the waveform over our EchoStar 21 satellite. We are on track for an alpha launch of this new service in the EU in Q1 of next year. In addition, we continue to explore new and emerging applications that can benefit from our unique ability to offer high-performance, hybrid satellite terrestrial networks, leveraging our MSS/CGC authorizations. These include air-to-ground networks supporting the development of urban air mobility as well as unmanned aerial systems. We're excited to progress our development of truly seamless worldwide hybrid connectivity. To this end, we are pursuing our goal of taking 5G to the next level through full integration of S-band satellite services into global 5G networks, and we continue working on multiple fronts towards that long-term strategic objective.

Thank you, Anders. As usual, my narrative will include comments on adjusted EBITDA, which is reconciled to a GAAP measure in our press release. Consolidated revenue in the third quarter was $505 million, up $31 million compared to the same period last year, driven by our Hughes segment. Hughes' equipment revenue increased $25 million from higher sales activity to both domestic and international enterprise customers. Hughes' service revenue increased $5 million primarily due to higher Latin American consumer subscribers. ESS revenue in Q3 was $4 million, flat compared to the same period last year and corporate and other revenue was up compared to last year. Consolidated adjusted EBITDA in the third quarter was $187 million, an increase of 12% from last year. Hughes' adjusted EBITDA in Q3 was $203 million, higher by $17 million from Q3. The growth in Hughes adjusted EBITDA was driven primarily by the higher revenue and lower cost of services provided to our consumer customers. ESS adjusted EBITDA was flat as compared to Q3 of last year. Corporate and other adjusted EBITDA was a loss of $18 million compared to a loss of $22 million last year, with the primary driver of the lower loss being an improvement in earnings of unconsolidated affiliates and lower corporate overhead expenses. Our consolidated adjusted EBITDA margin was 37%, increasing 1.8% from the same period last year. Net income increased $7 million to $30 million. The increase was primarily due to higher operating income of $26 million and lower net interest expense of $20 million, partially offset by higher income taxes of $17 million, unfavorable changes in foreign currency of $13 million, and lower gains on investments of $11 million. Capital expenditures in the quarter were $90 million compared to $98 million last year. The majority of our capital expenditures are related to our consumer business and our JUPITER III satellite program and related ground infrastructure. We expect the launch of our JUPITER 3 satellite in the second half of 2022. Free cash flow, defined as adjusted EBITDA minus CapEx, was $97 million during the quarter, increasing $29 million from the same period last year. In the third quarter of 2021, we bought back 2.6 million shares of our stock in the open market at a cost of $62 million. Our balance sheet remains strong, and we continue to seek opportunities to deploy cash for growth. Let me now turn it back over to Mike.

Thank you, Dave. At EchoStar, we continue to operate in an evolving global industry and a changing marketplace. In that environment, our focus remains on providing bandwidth, networks, support infrastructure, and secure services that cross a wide range of opportunities. We continue to evaluate the risks and rewards associated with specific strategies in order to ensure prudent decisions and long-term results. Let me now turn it over to the operator so we can start a question-and-answer session.

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

Dave, you mentioned the strong balance sheet, which is indeed very robust. How should we approach investing in the business, and what segments, geographies, or skill sets are you looking at for the future?

Well, I think as both Anders and Pradman discussed their strategy for their relative segments, our focus in investment going forward is in hybrid networks at both broadband as well as narrowband, and integrating into the 5G network. So I think that's where our focus is on future expenditures and investments.

And when we think about share buyback, because clearly, you've got the ability to do that. You've been executing on that, at least to us like you maybe did another almost $900,000 in October based on the 10-Q filing. So you're doing 2.5 million to 3 million shares a quarter, it looks like. Is there the ability to accelerate that to even a higher amount per quarter? Or is it really volume limited or help me understand why not do more given where the stock price is?

Yes. I mean that's something that we discuss with the Board on a regular basis. We have the ability, obviously, given the balance sheet to do more. We're comfortable at the levels that we've been buying back. Any changes going forward will be done with the advice of the Board.

Okay. And speaking of the Board, on the DISH call, they proactively brought up and talking about their 5G network at DISH that there were opportunities to partner with sister company, EchoStar. And wondering, how do you see the potential and what might be involved and what EchoStar can offer up to DISH as we think over the medium and long term?

Rick, this is Anders. I think a lot of that overlap has to do with the fact that DISH is the license holder in the United States for the AWS-4 spectrum, which they plan on using terrestrially, but they are also a license holder for S-band from an MSS standpoint. So we're working very closely with them and evaluating how some of those rights might integrate into our global ambitions, utilizing our NGSO frequencies. It's a great opportunity for us to also understand how to integrate the satellite services into the network that they are building out terrestrially, which is using the state-of-the-art when it comes to how they're configuring that software-defined network.

Okay. And how important is latency to have that latency low versus the amount of bandwidth coverage? How should we think about what satellite spectrum brings to the table as far as advantages versus disadvantages to terrestrial?

Well, a lot of the applications that we're looking at are probably latency sensitive because we are talking about a narrowband world when we're talking about S-band. So the ability to utilize an NGSO network for reach, but then densifying that network through the use of geos that would otherwise exceed the capacity of an NGSO network is really integral to our strategy.

Your next question comes from the line of Chris Quilty from Quilty Analytics. Anders Johnson, Chief Strategy Officer and President of EchoStar Satellite Services, stated that many applications they are considering are likely latency sensitive, particularly in the narrowband realm of S-band. He emphasized the importance of utilizing a non-geostationary satellite orbit (NGSO) network for coverage, while enhancing that network's capacity through geostationary satellites (geos) to meet demand that an NGSO network alone could not satisfy. This approach is central to their strategy.

I wanted to follow up on some of the international market opportunities. And specifically, where you stand in terms of capacity access for some of your international consumer and I guess community WiFi opportunities. Are there opportunities to add additional partners or capacity and perhaps looking longer term behind JUPITER 3 where some of those plans may lie either domestically or internationally?

Pradman?

Yes, it's a good question, Chris. If you look at our global network today, we have great coverage in South America, from Mexico down to Chile, along with a rapidly growing business in Brazil. In the Americas, we have our own networks and satellites covering the area. Around the world, we also have a joint venture with Yahsat that covers the Middle East and Africa, where we not only own the joint venture satellite but also have networks offering similar services as we do in the United States. In other regions, we've established strong partnerships, particularly in our verticals and geographic regions. India is an example where private ownership of satellites is currently not permitted, but it seems like that policy may soon change publicly. This could lead to rapid developments there. In Southeast Asia, we maintain good partnerships with companies in Indonesia, Malaysia, and Thailand, ensuring we have solid coverage. Overall, through our partnerships, asset ownership, and joint ventures, we have comprehensive global coverage for broadband satellite communications.

Great. And I mean, I guess in the light of the announcement yesterday between Inmarsat and ViaSat, they also are attempting to address that sort of global market opportunity. You clearly have an infrastructure play on the gateway side, but perhaps less control over the amount of capacity that's available through your partners. Is there a strategy that you need to undertake to ensure that more partnerships can have the same type of capacity availability that prospectively a joint Inmarsat-ViaSat will have in the future?

Yes, I agree with you. We are both aiming for similar goals. However, I believe we are well ahead in terms of our distribution capabilities and the business we are conducting across various countries. Our strategy has always been to partner with local companies that have satellite assets when entering a new region. If the business develops well, we then proceed to create a joint venture. Finally, the last step is to own our own assets. If you look at our progress country by country, you can see where we stand in each stage. The entire Americas is at the final stage, where we own assets throughout the region. In other areas of the world, we are typically in the first or second stage. This approach has been effective as it allows us to optimize the deployment of our capital assets where there's existing business and significant growth potential in the coming years.

Great. And I wanted to circle back on India. I didn't catch either the name or the capacity on the GSAT satellite that you gained access to. And can you maybe detail, is this the first time that you've used, I guess, what would formally be considered ISRO as a partner for capacity?

No, we have been utilizing ISRO satellites for the past 20 years, but they were not high throughput satellites; we used more traditional 36-megahertz transponders. Recently, they launched their high throughput satellite, allowing us to deploy a JUPITER platform over India using this satellite. With the new space policy we announced a month ago, private entities, both foreign and domestic, can launch their own high-throughput satellites with the appropriate licenses. Initially, we will begin the service by the end of the year using the ISRO high-throughput satellite, and later on, we will see who else provides capacity in the country.

Great. And maybe on that high throughput satellite, first of all, you affirmed the launch date for JUPITER 3, but maybe a quick update on where you stand in terms of final assembly, testing, and sort of the process to get it on orbit. And secondarily, when you think about what comes after JUPITER 3, do you see a path forward to either increase capacity or flexibility of future satellites? I mean, what would be your priority in terms of design and investment?

Clearly, capacity is the most crucial aspect. Every time we launch a satellite, our business grows significantly, allowing us to increase our capacity, which is a positive challenge. With JUPITER 3, we plan to provide 500 to 550 gigabits of capacity across the Americas, with approximately 70 to 80 gigabits designated for South America and the rest for North America, including Canada and the United States. This will supply us with substantial capacity for several years. However, if we continue to expand, we must add more capacity, and we are currently evaluating the best approach for this, whether it involves a large satellite, a smaller one, or a hybrid network that collaborates with OneWeb and incorporates a mix of solutions. At present, our focus is on launching JUPITER 3 and making its ground network operational. Once we achieve these goals, we will implement one of the many plans we have prepared for enhancing capacity not only in the Americas but globally.

Great. And a final question for Anders. Can you give us an update of where you stand in terms of the EML business in Europe and bringing on new partners and where we might see significant hardware deliveries and service rollouts? Is that still dependent on yet to be determined 3GPP standards?

Well, that will certainly accelerate things once those standards are established. But in the meantime, we've already picked a couple of development tracks and have very recently initiated the orders for those electrical parts that have long lead times associated with them for our first set of devices utilizing the LoRa protocol. But we've got a number of things in development. But at this point, as I mentioned before, we're going to stand up sort of an alpha test in the first quarter of next year, sort of working with some partners in Europe in adapting our radio module into their devices so as to create an infrastructure that will allow a LoRa type system to be utilized across the entire EU. So we've got enough sort of a staged series of things, but I would say that once Release 17 gets adopted early next year, that should then open the door for some of the more 5G associated developments, which would be forthcoming sometime thereafter.

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

Just want to follow up on Chris' questions there. On the JUPITER 3 launch, any supply issues, labor issues? I know a couple of quarters ago, there had been some concern about how the manufacturing was going. But can you update us on kind of the status within the second half launch date? And when do you think we'll get actual announcements on dates as far as the launch and targets are in service?

The supply side issues will not affect the satellite delivery since we have all the necessary materials, and so does Maxar. Therefore, that won't be a concern. The focus is on the work, testing, and integration of most subsystems. Nearly all of them have been constructed, with one or two still being manufactured. We need to complete their production, perform testing, and integrate them. At this stage, it primarily involves work rather than material procurement.

As for when we might receive updates regarding targeting more than just a second half date, we're currently in November of '21. When do we expect to have more concrete information on the actual launch date and the potential for in-service?

This is Mike Dugan. I mean we've given you guys as much information as we really can. As you know, things are changing on a daily basis with the impacts from COVID-19. A lot of the work was going on in California, which has really struggled with getting people back in the office and so on. And we're not going to give you dates that are unreasonable. So as soon as we have more information, we'll certainly share it.

I appreciate that, Mike. There's obviously a lot of curiosity surrounding the capacity coming online. The other part of the question for you is...

You're as anxious to see that capacity online as Pradman is now. That's all I can say.

How should we consider the cash flow curve? You obviously have CapEx to spend, but there also needs to be OpEx spent in advance before the revenues start coming in. Is there a general idea of the magnitude of costs incurred at different times before the in-service date? This would help to frame the short-term impact on EBITDA as we prepare to sell that capacity.

Yes. We'll need to begin testing the ground, and we've already constructed a significant portion of the ground infrastructure. Testing the network will take place prior to the satellite's launch, and while some of that work has already commenced, it will increase in intensity in 2022.

And the team has done a great job of balancing constant updates on the satellite build versus not prebuilding the infrastructure too far in advance. And that in itself, by the way, the infrastructure has suffered some COVID-related delays. So it's not just been the satellite build, but we've made great progress on the ground infrastructure. And I think the team has done a great job of managing them to stay in sync with the satellite.

Yes, the ground infrastructure is in excellent condition. However, there are operating expenses that will begin to increase ahead of the service offering. I anticipate that we will begin to see some impact on the P&L in the first half of 2022, but I do not expect it to be significant.

Okay. That helps. And final one for me is probably can talk about the demonstration of the OneWeb and Hughes’ handoff. How should we look at what that OneWeb relationship that was signed at the teleconference could mean as far as service revenue or applications that you're going to bring to market and the timing of that as we're working with OneWeb into the go-to-market strategy?

Well, we have a first network, which should be operational for the U.S. government in a few months. So that's very, very imminent. The next area that we are going to sign definitive plans for is in India. But that's part of the main network offering, which probably is the end of next year, and then it will go on from that point on those two other regions. But there are other places where OneWeb is working, too. I'm only speaking to the areas where OneWeb and Hughes are focused. But OneWeb is a separate company on its own, and they are working in many other parts of the world.

There are no further questions at this time. I would like to turn the call over back to our presenters for closing remarks. Please go ahead.

Yes. Thanks to everybody for joining today. We look forward to talking to you here at Q4. Thank you.

This concludes today's conference call. Thank you all for joining. You may now disconnect.