Earnings Call Transcript - SATS Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the EchoStar Earnings Conference Call for the Fourth Quarter and Year-End 2020. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Terry Brown. Thank you. Please go ahead, sir.

Terry Brown, Chairman

Thank you. Good morning everybody and welcome to our earnings call for the fourth quarter of 2020. I'm joined today by Mike Dugan, our CEO; Dave Rayner, COO and CFO; 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.

Dean Manson, General Counsel

Thank you, Terry. 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 filed today 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 any forward-looking statements. Mike, over to you.

Mike Dugan, CEO

Thank you, Dean and thanks to all of you that decided to join us today for our Q4 2020 earnings call. By all accounts, 2020 brought a share of challenges, but the EchoStar team rose to the occasion and once again delivered solid financial results. I'm very pleased with our 2020 performance as evidenced by growth over 2019 in both revenue and adjusted EBITDA. As we enter the second year of the global pandemic, we continue to supply the connectivity on which millions of consumers, enterprise, government agencies and communities depend. I'm also proud of the EchoStar team's efforts and operational accomplishments in delivering services that have never been more vital to our customers. Let me now turn it over to the management team to expand on their business segments before closing with some final comments and then the question-and-answer period. Pradman?

Pradman Kaul, President of Hughes

Thank you, Mike. I want to express my pride in our performance and financial results. Hughes' revenue for 2020 was the highest we have ever recorded. Our adjusted EBITDA increased by 7% in the fourth quarter and by 8% for the entire year compared to last year. The adjusted EBITDA margin for 2020 was 38.9%, up from 36% in 2019. We added roughly 87,000 net subscribers this year, and we were recognized by US News & World Report as the Best Satellite Internet Provider of 2021. This recognition reaffirms our commitment to connecting underserved communities to high-performance Internet services. By the end of 2020, we had 1,564,000 subscribers. In the fourth quarter, we noticed a decline of about 27,000 subscribers in the US, primarily due to capacity constraints on our consumer offerings. Consequently, we are managing our sales and marketing efforts to ensure optimal service for our existing customers. We are also focusing on innovation to enhance customer experiences by integrating advanced technologies like artificial intelligence into our network. The ongoing strong demand for broadband services and our emphasis on additional services that improve customer experiences have led to a continuous increase in our US ARPU. We anticipate this trend will persist in the near future. In Latin America during the fourth quarter, we added around 11,000 subscribers and improved ARPU compared to the prior quarter. Sales in this market slowed relative to the third quarter as pandemic restrictions relaxed and many returned to schools and offices. We experienced an increase in churn, partly due to changes in our collections process that affected net subscriber additions. Our Community WiFi services, offered in partnership with Facebook Connectivity, remain a vital part of our offerings in Latin America. We currently have over 1,500 Hughes-expressed WiFi hotspots deployed and are working to enhance monthly ARPUs through targeted marketing efforts. We expect continued growth in these consumer markets throughout 2021. For our North American enterprise sector, our team has successfully increased orders compared to the first half of 2020. We finalized upgrades and extensions with several large clients and noted a significant rise in field deployment activities. The volume of enterprise deployments in 2020 surpassed that of 2019. Additionally, the enterprise group gained significant recognition in industry reports from analysts, validating our capabilities in the managed services market. We will continue our investments in expanding our market-leading abilities and fostering innovation within our managed services portfolio. Our artificial intelligence investments have enabled us to automate the identification and resolution of network issues, benefiting our North American and international enterprise clients as well as our internal consumer operations. In the international enterprise sector, we see projects starting up again and new opportunities emerging. One prominent financial entity has renewed its service agreement with us for managed services across the Americas, Asia, Africa, and the Middle East. In India, we've secured a contract to implement over 4,000 ATMs for the State Bank of India, raising our total to over 50,000 ATMs serviced there. We also received expansion orders from Reliance Jio for 4G backhaul services in seven states and to add more than 600 VSATs as part of the BharatNet initiative to connect villages nationwide. In the Asia Pacific area, we won a project with a major maritime service provider to deliver a Jupiter system and an initial order of 500 modems. In Africa, we are working with one of the region's largest national governments through a service provider to deliver a Jupiter system for government vehicles. We are also progressing towards finalizing our joint venture with Bharti Airtel in India, pending regulatory approvals. For our defense division, 2020 was an exceptional year for sales, especially in the fourth quarter, where we received follow-on orders from major prime contractors and classified customers. Our government enterprise group was selected as a qualified provider by the Georgia Technology Authority under its GTA Direct program, facilitating broadband connectivity procurement for eligible agencies. The team continues to implement networks for four state agencies at around 500 locations in Pennsylvania. We anticipate ongoing momentum in these business areas throughout 2021. Our Jupiter 3 satellite is making headway with Maxar, and we contracted for its launch in December 2020. We now expect to launch in the second half of 2022 due to COVID-19 restrictions and production challenges with some components. We are working closely with Maxar to address these issues and explore ways to recover the timeline without jeopardizing the satellite. Furthermore, our launch vehicle is expected to reduce the time required for satellite arbitration, aiding our in-service schedule. Although we are disappointed by the delay, we remain enthusiastic about Jupiter 3, as it will significantly enhance our market capacity and enable us to offer higher-speed service plans. Additionally, we are beginning to look into the potential designs for the next-generation Jupiter satellites. Our role with OneWeb has expanded, as we've secured a contract to develop and manufacture vital ground system technology for their new LEO broadband satellite constellation, valued at approximately $250 million over three years. Hughes will produce the gateway electronics and the core modules for every user terminal. Designed by Hughes, this adaptable core module will serve fixed, aeronautical, and maritime mobility terminals for both electronically and mechanically steered antennas. OneWeb recently resumed its satellite constellation deployment with the launch of 36 satellites, marking its first major step since emerging from Chapter 11 bankruptcy. Our industry is continually evolving, and we have adapted effectively over the past 50 years. For example, we have learned that speed, bandwidth, and pricing are the top priorities for HughesNet customers. Moreover, we observe that the majority of Internet traffic consists of video, which is not sensitive to latency but requires substantial capacity. This makes geostationary satellites a perfect fit for the rural consumer and business markets we serve, offering superior economics and high capacity precisely where needed. Given the size of our addressable consumer market and the costs of alternative technologies in areas with low household densities, we see immense growth potential for our HughesNet service. With the upcoming launch of Jupiter 3 and the introduction of 100 megabit service plans, we aim to maintain our leading market position in rural and underserved areas. The demand is palpable and increasing. The satellite broadband connectivity market is large enough to accommodate various service providers using multiple technologies. Even with new constellations and future launches, we anticipate that demand in our primary markets will outstrip capacity for the foreseeable future. Alongside our robust consumer business, our diversified enterprise organization is increasingly relied upon for our engineering expertise within the industry. Through all these markets, our multi-transport innovations will provide optimal technology solutions for our customers. We have made significant strides in adapting and innovating in response to market changes and have thrived as we always have. Overall, it was a very successful quarter and year, and I am eager for another productive year as we mark a half-century of satellite leadership in 2021. Let me now hand it over to Anders.

Anders Johnson, Chief Strategy Officer

Thanks, Pradman. Good morning. In Q4, ESS revenue was $4 million, down slightly from Q4 of last year. We continue to pursue opportunities to lease our excess Ku-band capacity. The overall FSS market continues to be soft and declines in demand for IFC capacity have obviously impacted the current environment. We are staying focused on these markets and we are ready to react when the rebound occurs. We mentioned last quarter that the first pair of NGSO S-band satellites for our EchoStar global subsidiary were in the commissioning phase. Unfortunately, both satellites have experienced technical anomalies that preclude them from fulfilling their intended regulatory milestone missions. Although, I would like to note that our AG1 satellite is still operational and we are using it for testing. We intend to seek regulatory milestone relief due to the force majeure events. And despite this setback, business development activities continue, and we've been pleased with the interest the EchoStar Global mission has received from a range of vertical players. Our third nanosat is expected to launch in either Q2 or Q3 of this year and we are evaluating options for additional spacecraft. With respect to developments in Europe, EchoStar Mobile has successfully launched its new synergy service, a hybrid offering that seamlessly integrates satellite and terrestrial LTE roaming services in a single small low-cost mobile terminal, using a single subscription and management portal. We continue to see strong interest from our distribution partners in all of EchoStar Mobile's new products and services, and we are excited to see many new opportunities for the application of MSS technologies to a variety of emerging verticals, including autonomous platforms and 5G integration. Additionally, we have launched several initiatives to deploy new hybrid satellite and terrestrial technologies and services on our E XXI platform. On the satellite IoT front, we are working with ProEsys and others to develop and deploy the first real-time bidirectional satellite delivered LoRaWan services, which will leverage next-generation technology that fully integrates satellite and terrestrial services on a single chip. We expect the initial operations of the LoRaWan service to begin in the second half of this year. We are also working with Sequans and others to develop hybrid services leveraging our complementary ground component licenses in Europe. These new services will focus on industrial enterprise applications such as utilities, transportation logistics and maritime as well as emerging verticals, such as unmanned aerial systems and urban air mobility. Finally, as always, we remain focused on our longer-term strategic goal of full integration of S-band satellite services into the emerging global 5G network. I'll now turn it over to Dave.

Dave Rayner, CFO

Thank you, Anders. My comments this morning will be primarily on Q4 results and include comments on adjusted EBITDA, which is reconciled to GAAP measurements in our press release. Consolidated revenue in the fourth quarter was $489 million, down $10 million compared to the same period last year. Hughes revenue was $482 million, down $9 million compared to the fourth quarter last year. Higher consumer revenue from increased ARPU and growth in Latin American subscribers were offset by lower equipment sales to enterprise customers primarily due to the impact of the OneWeb bankruptcy in Q1 2020. In addition, we experienced negative foreign exchange impacts of approximately $10 million, principally related to revenue in Brazil. ESS revenue in Q4 was $4 million, down slightly as compared to the same period last year, and corporate and other revenues were $3 million, also down slightly compared to last year. Consolidated adjusted EBITDA in the fourth quarter was $167 million, an increase of 7% from last year. Hughes adjusted EBITDA in Q4 was $188 million, higher by $12 million. Hughes adjusted EBITDA margin increased by 3.2 percentage points, largely as a result of growth in the higher margin of the consumer broadband business. ESS and corporate and other were primarily flat as compared to last year. Net loss from continuing operations was $3 million in Q4, an improvement of $54 million from last year. This change was primarily due to higher operating income of $7 million, lower net interest expense of $47 million driven primarily by $50 million of interest expense accrued in the fourth quarter of 2019 related to our fee dispute with the Government of India, improvement in foreign currency transactions of $6 million, and higher gains on investments of $6 million. This was partially offset by a higher income tax provision of $10 million. Capital expenditures in the quarter were $114 million compared to $104 million in Q4 last year. The increase was primarily due to spending associated with our J3 ground infrastructure as we start to prepare for the service launch. Free cash flow defined as adjusted EBITDA minus CapEx was $53 million during the quarter. In 2021, we are targeting both revenue and adjusted EBITDA growth. We plan to manage our U.S. consumer activity to maximize profitability and expect continued growth in our LatAm consumer markets. We foresee meaningful recovery in our enterprise equipment sales and services. With the lingering impact from the pandemic in this segment of the business, we believe the second half of 2021 will be stronger than the first especially internationally. The new agreement with OneWeb should provide incremental growth. We will continue to prudently manage all expenses including those associated with the Jupiter 3 launch readiness. In December 2020, we bought back 1.7 million shares of our stock in the open market at a cost of $38 million. Through February 11, 2021, we had repurchased an additional 2.9 million shares for a cost of approximately $65 million. Our cash and marketable security balance at 12/31 was $2.5 billion and our 7.5% senior unsecured notes of $900 million are due in June and our intent at this time is to repay them out of current cash. With that I'll turn it back over to Mike.

Mike Dugan, CEO

Thank you, Dave. As you can all see, we've had a successful year and I remain extremely excited about our position within the satellite communications industry. Demand for global connectivity continues to outpace supply and we remain well positioned from a technology and financial standpoint. Let me now turn it over to the operator to start the question-and-answer session.

Operator, Operator

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

Rick Prentiss, Analyst

Thanks, good morning guys.

Mike Dugan, CEO

Good morning, Rick.

Rick Prentiss, Analyst

First I know I'm glad I think the market is also to see you put your balance sheet to work on stock buybacks. It looks like maybe close to $400 million left on the authorized plan compared to your $2 billion market cap. I just want to confirm that that's right. And we think the best M&A opportunity is to buy your own stock where it's at. But what other M&A opportunities might be out there that you'd be interested in and might want?

Dave Rayner, CFO

Well as you know Rick, I mean we've been looking at a lot of different opportunities over a period of several years. And I think we remain interested in transactions that make sense where it grows our customer base, grows our technology base and provides for incremental growth. That's where we remain focused.

Rick Prentiss, Analyst

Okay. And on the buyback it's about $390 million maybe left that ballpark?

Dave Rayner, CFO

Yes. I'm sorry you had the numbers right. That's approximately correct as of the filing.

Rick Prentiss, Analyst

Okay. The Jupiter three has experienced a slight delay with Maxar. Are there any options for recovering costs from them due to this delay? Also, as you consider growth leading up to the Jupiter three launch, should we view this quarter's subscriber decline as indicative of what we might expect until the launch? While increases in ARPU could help mitigate that, I'm trying to understand the delay and its potential impact.

Mike Dugan, CEO

Well we're working all the options as far as the contract with Maxar. And I don't think I'm going to say anything more about that. We still need the spacecraft and we're very disappointed in the delays. It's that simple. The issue with the US subscriber count is that with the continued growing demand of each consumer in the Jupiter 2 and Jupiter 1 field, we try to manage the number of customers we can support along with the capacity constraints. We try to make sure the capacity is what our customers need. And therefore at times we do in certain beams, allow the subscriber count to go down to ensure that we've got solid support of the plans that people are buying. So I can't totally predict it. As more and more people hopefully return to office and the work-from-home demand goes down, I would think that will have a positive impact on our ability to add subscribers, but I can't say for sure. I don't know what things are going to look like for the next six months. So yeah, I don't expect major changes either up or down as we manage through customer requirements in turn.

Rick Prentiss, Analyst

And as we think of the Jupiter 3 getting in service Pradman, I think you mentioned that the launch vehicle choice would reduce the time from launch to in-service. Can you give us an idea of how fast that might be? And I know people are very interested in knowing how much capacity will the Jupiter 3 bring on? And what that might do for growth as we look beyond the launch in-service dates?

Mike Dugan, CEO

Well I think we've talked capacity in the past and I don't see any reason to keep going over that. Nothing's changed as far as the spacecraft as it's gone through the design. The deliver capacity is expected to be pretty close to spec. As to the launch vehicle, the time through in-orbit testing and getting into service, I've got to be honest with you, we're working it every day. And that is one area with the delay in the production of the satellite that there's a possibility of gaining back some in-service time. However, the opposite of that is we do not want to rush through in-orbit testing in a way that might have a negative impact on the spacecraft or our ability to meet specifications as we get going. So it's a very precise activity we got to be careful of, but we're going to shave off every possible day from the time we launch till the time we're in service. But again, that's a work in progress.

Rick Prentiss, Analyst

Okay. Last one for me. Another work in progress has been the JV in India. A lot of business happening in India. Can you help us understand what you think of a reasonable time frame is that that deal might close as it continues to wait approval?

Pradman Kaul, President of Hughes

Yeah. We're aiming for somewhere in the middle of the year.

Rick Prentiss, Analyst

So mid-2022?

Pradman Kaul, President of Hughes

Yeah. We need to get through a lot of steps.

Mike Dugan, CEO

No, no. Mid 2021.

Rick Prentiss, Analyst

Sorry. Mid 2021. I misspoke.

Pradman Kaul, President of Hughes

Mid of 2021. Sorry. Yes. We're actually working through some regulatory approvals. Everything is all set. As soon as we get the last couple of regulatory approvals, we should be ready to close the deal.

Rick Prentiss, Analyst

And then hit the ground running pretty fast?

Pradman Kaul, President of Hughes

Yes. Yes.

Rick Prentiss, Analyst

Great. Thanks guys. Stay well.

Mike Dugan, CEO

Thank you.

Operator, Operator

Your next question comes from the line of Chris Quilty from Quilty Analytics. Your line is open.

Chris Quilty, Analyst

Thank you. Pradman I wanted to follow up on the consumer ARPU which you indicated was up both in the US and international. In the US market, is the increasing ARPU more a function of existing customers stepping up their plans, or is it simply a mix issue of some lower-value subscribers dropping off?

Pradman Kaul, President of Hughes

Well it definitely is the existing customers stepping up. As this COVID crisis has been obviously spreading all over and increasing the demand for the services so people are stepping up going up to higher plans etc., which has a good effect on the ARPU but obviously has an impact on the number of subscribers you can accommodate over these satellites. So that's one part of it. The other part of it is we're selling some additional ancillary services which adds to the ARPU. For example, repair services, people don't want their unit down and are willing to pay extra money to have quick repair services and we sell tokens for extra capacity. So there's a whole bunch of little things that add $1 or $2 to our ARPU for these subscribers which is very good money because the costs against that are very little.

Chris Quilty, Analyst

As more people return to work, the COVID period has led to different demand patterns compared to the past, especially regarding the time of day. If there is a return to normal patterns with increased service usage after 5:00 p.m., do you have enough capacity in your current setup to avoid needing to reduce customers' plans?

Pradman Kaul, President of Hughes

Yes, the situation is constantly changing, making it challenging to predict demand accurately. We are continually refining our plans and reallocating resources among different subscribers to keep a balance between customer satisfaction and capacity. This adjustment process happens every day as we adapt. We need to observe how the return to normalcy unfolds, which may not align with our expectations as has been the case with other aspects of COVID. Our goal is to optimize continuously.

Chris Quilty, Analyst

Understand. Shifting to the enterprise market and if we can set aside OneWeb and as a standalone and then look at the balance of the enterprise business, it appears that for the past couple of years, the enterprise revenues and installations have been struggling. As we come out of COVID, do you see any prospects for the enterprise business, putting up a year of growth, again excluding the OneWeb business?

Pradman Kaul, President of Hughes

Yes, we are optimistic about the enterprise business. We have been pleasantly surprised and excited about developments in the market. Major corporations are looking to expand their service offerings, including both new and existing customers with new requirements. In the enterprise sector, we see a distinction between the United States and international markets. In the U.S., our focus is on Fortune 1,000 companies primarily utilizing terrestrial technologies. Meanwhile, internationally, especially in countries like India, Brazil, and others in the Far East, we still see a significant reliance on satellite technology. Our leading position in VSAT technology affords us a strong market share in those regions. We expect both international and domestic markets to perform well in 2021.

Chris Quilty, Analyst

Great. And back to OneWeb, can you give us any sense of how much of that $250 million you had burned through prior to the chapter 11 bankruptcy? And how do you see that rollout progressing for the balance over 2021?

Pradman Kaul, President of Hughes

This is a brand-new $250 million after bankruptcy. When they went bankrupt, we had to terminate the old contract and we got paid for all the work we had done at that time. And so we started off after bankruptcy from zero and this is a brand-new $250 million from that time for the next three years.

Chris Quilty, Analyst

And will it be equally distributed over the next three years, or is it upfront loaded?

Pradman Kaul, President of Hughes

Well, I think the first two years will take most of it and then there'll be probably six months' worth of stuff left in the third year. And then it goes fairly linearly because we ship gateways to 42 sites all over the world almost on an equal timing basis.

Chris Quilty, Analyst

Got it. And one question for Anders on the failed small sats. Have you been able to trace back the cause of those failures to payload design issues or were these simply bus-related issues?

Anders Johnson, Chief Strategy Officer

They weren't related to the payload at all. We experienced an issue with the propulsion system, which, due to the orbit specified in our filing and the points where rideshare and standard launch vehicles deliver to in the SSO orbits, required us to adjust our altitude and inclination. In both cases, the propulsion system on the spacecraft failed.

Chris Quilty, Analyst

And you indicated that you will look for a force majeure in order to replace those satellites and continue testing. And were you able to get any testing done with the satellites prior to their failure?

Anders Johnson, Chief Strategy Officer

One satellite completely failed. We are still in communication and conducting tests on the other one. The third satellite, which is scheduled to launch on a rideshare mission in June, has a completely different design from the first two, including the bus and propulsion system, although it shares the same radio payload. The payloads on the first two satellites were operational and functioned well.

Chris Quilty, Analyst

Understand. All right. Thanks very much.

Pradman Kaul, President of Hughes

Thanks, Chris.

Operator, Operator

Your next question comes from the line of Ric Prentiss from Raymond James. Your line is open.

Ric Prentiss, Analyst

Hey, guys. Thanks for taking a couple of follow-up questions. I want to follow Chris' line there on OneWeb. I think there had also been some discussion that maybe you could be a distribution or services or some other kind of partner besides just the equipment. Can you elaborate if there's other potential for working with OneWeb what it might entail?

Pradman Kaul, President of Hughes

Yes, absolutely. We are a service provider all over the world. And in the different service offerings that we have we expect to be leasing depending on the market requirements some capacity from OneWeb and bundling it into the other services we offer to our existing customers and new customers.

Ric Prentiss, Analyst

And when can that start given the OneWeb timing for their constellations to go up?

Pradman Kaul, President of Hughes

As soon as their constellations are operational and tested, we will begin. We currently have customers who are eager for us to provide not just the GEO services we typically offer but also LEO services and a combination of LEO/GEO services. We believe that a LEO/GEO combination is an excellent approach to meet the needs of our customers, as each provides unique advantages for different applications. Once they are prepared, we will be ready to lease capacity, particularly in markets where we have service operations like India, Brazil, Europe, Africa, and the Middle East.

Ric Prentiss, Analyst

And obviously, Bharti is one of the ones that helped bring OneWeb out of bankruptcy as well as the UK government. What time frame do you think that constellation will be ready to help you do bundling in India say for instance?

Pradman Kaul, President of Hughes

I think approximately two years from now.

Ric Prentiss, Analyst

And other topic, I want to make sure obviously, we're finally out of the quiet period from the RDOF auction. You guys didn't get much there. ViaSat didn't get any, but SpaceX did get a lot. Can you just share with us kind of your thoughts on what happened in the RDOF auction and how that impacts the future dynamics?

Pradman Kaul, President of Hughes

SpaceX received about $80 million a year for 10 years. While that sounds like a substantial amount, it's not particularly large when you consider the number of subscribers it will help subsidize. The calculations suggest it could support around 40,000 subscribers annually. We already have 1.5 million subscribers, so 40,000 a year isn't a huge number in the grand scheme of things. They would likely be aiming for around one million subscribers, so 40,000 annually isn't going to make a significant impact.

Ric Prentiss, Analyst

Okay.

Pradman Kaul, President of Hughes

I think they received a favorable ruling from the FCC, which we didn't expect, but it happened. That's likely a reason we may not have performed as well as we could have.

Dave Rayner, CFO

Yes. I mean, we're fully reserved on that and that was really earlier in the year in the midst of COVID. I mean you obviously have OneWeb. You've obviously got Global Eagle. It was a customer. So there's a number of retail customers. We're working with those customers going through the bankruptcy process and fully reserved. And hopefully we end up being over-reserved that we get some proceeds out of the final conclusion. But we're pretty comfortable in all the positions on the companies that have filed bankruptcy. It slowed some growth that impacted revenue recognition for a while and certainly some of those customers downsized their orders from us. But I don't know that we've lost one entirely among those various customers that filed.

Ric Prentiss, Analyst

And also the India AGR ruling got resolved. How was that reserve? And how is that going to play forward over the next 10 years?

Dave Rayner, CFO

Good question. There's still a lot of rulings to come down from the India DoT and Supreme Court. We believe that we are fully reserved for it and hopeful. I can't say optimistic, but hopeful that we get some rulings in our favor that indicate that we're over-reserved. But right now we're under-reserved. And if we've got to pay it out under the most current rulings, you got to be paid out over 10 years.

Ric Prentiss, Analyst

Okay. Thanks for the follow-up guys.

Operator, Operator

There are no further questions. I'll now turn the call back to Terry Brown for closing remarks.

Terry Brown, Chairman

Okay. Thank you everybody for joining today and we look forward to talking to you next time.

Operator, Operator

That concludes today's conference call. Thank you everyone for joining. You may now disconnect.