EchoStar CORP Q2 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the EchoStar Transaction Announcement Webcast Presentation. Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Tim Messner. Sir, please go ahead. All right. Thanks, Chris. Good morning, everyone, and thanks for joining us. In light of today's joint transaction announcement, in lieu of the EchoStar earnings call that was originally scheduled during this time slot, we're instead going to focus on discussing the transaction and we will generally not be taking questions on either EchoStar's or DISH's quarterly results. To that end, we're joined on the call today by Hamid Akhavan, the President and CEO of EchoStar; Charlie Ergen, the Executive Chairman of both DISH Network and EchoStar; John Swieringa, the President and Chief Operating Officer of DISH; Paul Gaske, the Chief Operating Officer of EchoStar; Tom Cullen, EVP of Corporate Development at DISH; Paul Orban, EVP and CFO at DISH; Dean Manson, Chief Legal Officer of EchoStar; and Jeff Boggs, the SVP of Finance of EchoStar. Before we start, I need to remind you of the company's Safe Harbors. During this call, DISH and EchoStar may make forward-looking statements, which are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from historical results or from our forecast. DISH and EchoStar assume no responsibility for updating forward-looking statements. For more information on factors that may affect future results, please refer to the company’s respective SEC filings. Just to let you know, you can replay today's call as well as the prepared remarks and the supplementary slide deck on the EchoStar and DISH Investor Relations website following the call. As a reminder, the presentation is self-driven, so click next on your own to advance through the slides. And at the conclusion of the prepared remarks, we expect to take calls, first questions from the analysts followed by questions from the media. That's it. With that, I think I'll turn it over to Charlie Ergen to take our presentation. Go ahead, Charlie.

Thank you, Tim, and good morning. Thanks for joining us. It's an exciting day for both EchoStar and DISH. This morning we announced DISH and EchoStar have entered into a definitive agreement to combine in an all-stock merger. The combined company will be well-positioned to deliver a broad set of communication and content distribution capabilities. We're bringing together two trailblazers with complementary portfolios to create a scaled operator with a premier portfolio of wireless, satellite, and video distribution assets. At its core, this transaction is about growth and building a long-term sustainable business. This is a logical next step for both companies to realize the potential of the combined portfolio. Today I'll provide a bit of an overview of the transaction and the reasons we're excited about the merger, and then I'll hand it over to Hamid Akhavan, who will provide more detail on the strategic fit, operational synergies, and financials. Let me start by outlining why this is a strategically compelling and financially attractive combination. First, this transaction creates a scaled operator with premium capabilities across wireless, satellite, and video distribution, including global reach. It will enhance our scale by combining customer bases. Together, we have a diversified portfolio of approximately 18 million subscribers, which we can serve more efficiently with modern technology and databases. Additionally, by integrating DISH's spectrum with EchoStar's technological capabilities, we will have the ability to amplify the 5G private network. We are combining satellite communications and terrestrial communications all within the 5G cloud-native platform. Beyond the strategic benefits, it's also an attractive financial combination. We expect to generate approximately $150 million of achievable EBITDA annually through synergies, creating a more robust capital structure and providing financial flexibility for growth and value creation. Let's move to the details of the transaction structure. The merger will be an all-stock transaction at a fixed exchange ratio, which was negotiated and recommended by Special Committees and Independent Directors of both companies and unanimously approved by both Boards of Directors. At close, as outlined in the slide, EchoStar shareholders will receive shares of DISH common stock based on an exchange ratio that represents a premium to EchoStar shareholders. The majority shareholder group has approved the merger agreement, and no further action by DISH or EchoStar shareholders is required to approve this transaction. Post-close, existing DISH shareholders will own approximately 69%, and existing EchoStar shareholders will own approximately 31% of the combined company. On the leadership front, I will continue to serve as Executive Chairman, and Hamid Akhavan will be President and CEO of the combined company. Hamid brings a unique combination of experience in telecommunications, having spent 25 years in the industry including time at Deutsche Telekom. John Swieringa, President and CEO of DISH Wireless, will be President of Technology Group and Chief Operating Officer of the combined company. Erik Carlson will continue as President and Chief Executive Officer of DISH until closing of the transaction. The new management team will position itself for growth and innovation. We expect the transition to close in the fourth quarter, subject to regulatory approvals and customary closing conditions. Now, I would like to turn the call over to Hamid, who will share more about why we think this is such an exciting time for both DISH and EchoStar.

Thanks, Charlie. We are thrilled about this combination and believe this is a win-win for the shareholders and stakeholders of both companies. The combined company will be a truly scaled operator with a wide diversity of connectivity capabilities. We will serve roughly 18 million total subscribers across our offerings and enhance our services for enterprise and government customers with our complementary market-leading services. DISH's O-RAN 5G broadband network leverages thousands of sites to cover millions of Americans. By leveraging EchoStar's engineering capabilities together, we will unlock significant value from this established foundation. This transaction will create a stronger consumer connectivity leader focused on delivering value to customers. Our combined assets will allow us to effectively capture significant growth opportunities in the connectivity landscape. DISH's Pay-TV service has a high-quality customer base that benefits from optimized content cost and innovative technology which earned us high customer satisfaction ratings. Together with EchoStar's satellite broadband service strengths, we will deliver the highest quality service to all subscribers at accessible prices. Next, the greater 5G private network opportunity is a significant component of the revenue synergies we expect from this merger. By combining DISH's nationwide spectrum built for private networks and EchoStar's network management experience, we will provide a more attractive offering in this space. We believe both companies have made significant investments already that will position the combined company for future growth. We expect approximately $150 million of EBITDA synergies that will enhance free cash flow generation and create value for our shareholders. This transaction results in a stronger balance sheet and improved liquidity for the combined company. We are well-positioned to fund our growth while generating cash flow. In summary, this is an incredibly exciting milestone for both DISH and EchoStar. This benefits not only our investors but also our stakeholders from employees to customers and partners. As a combined company, we will offer a broad suite of robust connectivity services using a superior portfolio of technology, spectrum, engineering, and network management expertise. This is all about growth and building a long-term sustainable business.

Operator, we will now begin the Q&A session. And our first question will come from Richard Prentiss of Raymond James Financial. Your line is open.

Thanks. Good morning, everybody. You've been busy. I want to focus on a couple of areas. Hamid, you mentioned a cumulative CapEx in '24 to '25 of $2 billion, definitely well below the Street estimates. Help us understand, I assume that excludes capitalized interest. Does that include CDE equipment for success-based stuff? And how does that reflect the June '25, 75% buildout coverage requirement from the merger?

You can start with it now.

Yes, that does not include the CPE. The growth CapEx is not included in there in a sense that any CapEx that you spend for acquiring new customers is success-based CapEx that we appreciate. But that's not - $2 billion does not include the capitalized interest, but it does include planned build-out. Charlie, perhaps you can comment on the DISH wireless side.

On the DISH wireless side, we have opportunities on all our build-outs. It includes what we expect at the lowest level of what it would take for us to reach our milestones, continuing milestones with the FCC.

Okay. Second question, on Slide 11, you talk about the unencumbered spectrum. Can you update us a little bit on the T-Mobile spectrum option? What’s the current status of that option?

Yes, the option is still in place. As Mike at T-Mobile, we're in negotiations about the transaction there. We wouldn't leverage DISH's balance sheet for a transaction of that magnitude, but we do think that the spectrum is important.

One more quick one from me. You talked about 5G private networks being stronger with the combined company. I'm surprised you haven't done more with fixed wireless. Can you update us on your thoughts about incorporating fixed wireless into your services?

It's a fair point. I might have John talk about fixed wireless and that potential since he has been working on that. But we're a connectivity company. We think fixed wireless is part of what we do, whether that's from satellite or terrestrial. One of the potentials out there is the 12-gigahertz spectrum that we own, which is efficiently usable for fixed wireless.

On the fixed wireless side, obviously, we're keeping an eye on competition. We have our macro network deployment now with our low-band and mid-band spectrum. We'd like to see new technology like carrier aggregation on the uplink come to market. We expect to see that soon. Obviously, we have a lot on our plate with getting the retail business rolling, but fixed wireless is on the development roadmap for planning another launch.

Today, the network is capable of doing fixed wireless similar to some of our competition. It will be an economic model for us.

Our next question will come from David Barden of Bank of America. Your line is open.

Hi, guys. Thank you for taking the questions. Charlie, I have to ask you the first one. UScellular is looking at strategic options. Can you elaborate on your thoughts about that as a potential opportunity? And then a second question for John about the Amazon relationship. Can you elaborate on what's special about this relationship?

Well, the notion that they're pursuing strategic alternatives just surfaced on Friday. There's not a lot of information yet. But clearly, they have towers, spectrum, and operate in geographies that we haven't fully built out. So we'd be interested in looking at it.

On the Amazon front, we've made some progress. We hope that they're viewing it as increased confidence in us and our route to market. We run our core network on AWS, providing advantages as we load customers.

Big picture, not specific to your question. Data becomes more important, especially with AI. Our network was architected to run in the cloud, and Amazon has spent a lot of resources to make that happen.

As a follow-up, can you clarify the timeline regarding the relationship with T-Mobile? I know there was a mention of deadlines.

As long as the parties are negotiating, things will remain open. There’s no hard date at this point. We expect negotiations to continue in good faith.

Our next question will come from Walter Piecyk of LightShed. Your line is open.

Thanks. Can we go back to the CapEx? I think historically, you said it would take $10 billion. Is it lower to build than the $10 billion that you initially expected?

Based on our projections, we think we can do it. I still internally work with that $10 billion number because we're not going to stretch the balance sheet to do that if it's not the right business plan. But we've demonstrated that we can execute, and that's important.

Is there any portion of your portfolio that you would consider non-core?

Yes, there are trade-offs in spectrum. To the extent that we may get a piece that makes another piece less important, we will evaluate those options accordingly.

Our next question will come from Michael Rollins of Citi. Your line is open.

What's the customer experience today on the DISH network? How might that change by 2025?

We're at 75 million POPs now covered with commercial VoNR, with most traffic carried by our network. We are expanding our handset portfolio for competitive devices.

Customers should expect our network to function as well as the main national carriers, with future differentiation expected from our cloud-native O-RAN architecture.

Can you give us an update on the synergies expected through 2027?

The synergies primarily come from the enterprise side. We are in a unique position to deliver private networks with our existing relationships. We see a path to significant revenue growth.

Our next question will come from Craig Moffett of MoffettNathanson. Your line is open.

Can you remind us the measurement standard for FCC coverage requirements?

The drive tests must demonstrate 35 megabits downlink to customers on average. Our current build supports that and should exceed those requirements.

Our last question will come from Drew FitzGerald of WSJ. Your line is open.

If you pursue an opportunity for direct to smartphone communications, what are your options regarding your 2-gigahertz MSS spectrum?

We have flexibility to structure deals that bring in additional investment for the network. This is a unique opportunity, and we expect significant partnerships to emerge.

On the postpaid front, we're offering competitive pricing, and we'll be motivated to add compatible devices to our network.

All right. Thank you, all. Appreciate it.

Thanks, everyone.

Thanks, everybody. This concludes today's conference call. You may now disconnect and have a pleasant day.