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EchoStar Corp (NASDAQ:SATS)
Q1 2019 Earnings Call
May. 8, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the EchoStar Earnings Conference Call for First Quarter of 2019. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Deepak Dutt, Vice President of Investor Relations, you may begin your conference.

Deepak V. Dutt -- Vice President, Treasurer and Investor Relations Officer

Thank you, and good morning, everybody. Welcome to our earnings call for the first quarter of 2019. 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 (ph) Joe Torres , Associate General Counsel. 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 call over to Joe for the Safe Harbor disclosure. (ph) Joe ?

Unidentified Speaker -- Vice President, Treasurer and Investor Relations Officer

Thank you, Deepak. All statements we make during this call, other than statements of historical facts, 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 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 report 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 Dugan.

Michael T. Dugan -- Chief Executive Officer and President

Thank you, Joe. Good morning, everyone, and welcome to our call. We had another strong quarter financially with Hughes once again leading the way. We also announced a number of exciting initiatives recently that you will be interested in as we continue to deliver on our global expansion plans.

So now let me turn it over to Anders, who will talk about ESS, Pradman will follow with Hughes update, and then Dave will provide a financial overview. Anders?

Anders N. Johnson -- Chief Strategy Officer, President EchoStar Satellite Services

Thanks, Mike. Good morning. Q1 ESS revenue was $81 million compared to $97 million last year and adjusted EBITDA was $69 million versus $64 million last year. Although we are still seeing a difficult FSS environment and pressure on rates for both commercial and US government service opportunities, as expected throughout 2019, we were able to renew several of these services at their existing rates.

The continued 2019 focus of the EchoStar Mobile team is on expanding MSS operations across the EU, bringing innovative MSS products to market, and preparing to build out our next-generation hybrid network for IoT and 5G services in the European Union. Last week we announced an agreement between EchoStar Mobile Limited and RigNet, a provider of ultra-secure intelligent networking solutions, for Rignet to promote and distribute IP-based MSS for voice and data to its European customer base. Equipment for that mobile network will be designed and manufactured by Hughes. I'm truly excited about this partnership with a world-class leader in digital transformation and look forward to a positive impact on our financial results due to this initiative.

EchoStar Mobile distribution partners have expressed substantial interest in the lower cost mobile terminal optimized for M2M and IoT services that is in development for launch later this year. And we're also made progress in the expansion, new platforms and services which empower our distribution partners to rapidly grow their offerings in the same verticals, longer-term projects for the EchoStar Mobile team includes developing new technologies to integrate S-band satellite services into 5G networks and dramatically reduce the cost of satellite IoT Services and leveraging technology developed by our affiliate DISH network that will enable exciting new hybrid services using our CGC authorization. Over time we expect that EchoStar Mobile products and services will be integrated into a new global hybrid network that will leverage satellite and terrestrial technologies.

I'll now turn it over to Pradman.

Pradman P. Kaul -- Chief Executive Officer and President, Hughes Network Systems

Thank you, Anders. It's been a long time since we've seen so much excitement about the space industry. In a recent report, Morgan Stanley estimates that the global space industry could exceed $1.1 trillion or more in revenue in the year 2040, and that the most significant short- and medium-term opportunities may come from satellite broadband Internet access. And that satellite broadband represents 50% of the projected growth. Satellite broadband is precisely the sweet spot that we operate in.

At Hughes, our business is growing at a healthy rate because these opportunities exist in every market sector: consumer, enterprise, and government. And while much headroom for growth exists, I'm proud to say that we are the largest satellite-based Internet service provider in the world and as COMSYS reports, we continue to be the number one global VSAT provider.

Our award winning JUPITER system is the world's most deployed satellite networking platforms powering services we operate in the Americas, Europe, and India, as well as those leading operators around the world from enterprise and government networks, the community Wi-Fi Hotspots, to cellular backhaul.

So let me elaborate on these in relation to our performance in Q1 2019. First, I'm very pleased to report that Hughes had a strong first quarter. Revenue was up 11% and adjusted EBITDA was up 18% over the same quarter last year. Our adjusted EBITDA margin in Q1 of 2019 grew to 36%, a 200 basis points increase over the same quarter last year.

Now let me talk about our consumer Internet service business. We continue to grow revenue and earnings despite many beams on JUPITER 1 and 2 filling up. We ended Q1 of 2019 with approximately 1.388 million subscribers, an increase of 121,000 over the same quarter last year and 28,000 sequentially over Q4 of 2018.

North America's retail ARPU continued at the high level and churn went down in Q1; we believe a result of continued customer satisfaction. With the launch of the Hughes 63 West and Telesat T19V we hosted payloads, we expanded our international service footprint beyond Brazil to Colombia, Peru, Ecuador and most recently Chile, levering the knowledge, experience, and infrastructure that we built in North America and Brazil. We now have over 150,000 Hughes net subscribers in South and Central America.

The JUPITER 3 satellite is currently under construction with an anticipated in-service date in 2021. It will leverage the latest satellite and system technology to lower our cost per bit and provide additional capacity to power the continued demand for service. We expect to provide over 100 megabits per second of download speeds to the individual user with JUPITER 3.

Now to our enterprise business. An important element of our strategy is to expand connectivity in emerging markets, focusing on large populations and businesses either unserved or underserved by terrestrial broadband services. Two initiatives that are part of this strategy are community Wi-Fi and cellular backhaul.

Community WiFi is an approach to reach rural and unserved markets by means of a broadband VSAT installed at very remote locations. These hotspots allow governments to bridge the digital divide and also allow local retailers to sell data access to end users at an affordable price. We and our partners have deployed over 32,000 VSAT-enabled hotspots in Brazil, Mexico, Russia, and Indonesia.

Recent exciting initiatives include a partnership with Facebook to launch Wi-Fi hotspots throughout Brazil and Mexico supported by the Facebook Express Wi-Fi platform. Deployment of the 2,000 community hotspots in Indonesia in a partnership with PSN and deployment of 1,300 community Wi-Fi hotspots across Russia in partnership with AltergroSky and KB Iskra.

Another exciting market that we are pursuing is cellular backhaul. An example is our recent announcement that SpeedCast, a leading provider of remote communications and IT solutions shows our JUPITER system to power cellular backhaul over satellite and VPN services for a leading mobile operator in Nicaragua.

Our Indian subsidiary received the Flight and Maritime Connectivity license from the Indian government to enable high-quality broadband services to ships and aircrafts within the Indian territory. It was also awarded a large order for setting up two JUPITER basebands and 5,000 VSATs for the government of India's BharatNet program.

Another exciting development is that Eutelsat selected our JUPITER system to enable services on its Konnect, new-generation, high-throughput satellite for Europe and Africa, which is expected to launch this year. The agreement also lays the foundation for use to provide the ground system for Konnect very high throughput satellite Eutelsat's next-generation satellite in Europe in 2022.

Finally, we signed an agreement with Xplornet of Canada valued at approximately $250 million over 15 years for use of approximately 50 gigabits of capacity on JUPITER 3, CPE equipment, and OSS services in connection with their continued role as a provider of Internet access to the Canadian market. Some of this activity has contributed to growing our backlog at March 31 to $1.65 billion, excluding our consumer business, a 14% sequential increase over the prior quarter. This all-round strong performance further enhances our position as a leader in both market share and earnings and positions us for continued growth.

We've also been looking at opportunities for commercial and strategic alliances with local partners to expand the list of service providers using our platform. At the end of the year, we commenced our joint venture with Yahsat to provide services in Africa and the Middle East. This month we entered into another agreement with Yahsat where Yahsat will contribute its current satellite communications service business in Brazil to us in exchange for a 20% partnership interest in our existing Brazilian subsidiary. The combined business will provide broadband Internet and enterprise solutions in Brazil. It will have more than 65 gigabits of Ka-band capacity using our existing payloads on the Telesat T19 and Eutelsat 65 West satellites. And Yahsat's Al Yah 3 satellite. I look forward to building on the success we've had thus far in growing the consumer business in Brazil.

We also entered into an agreement with Bharti Airtel, India's leading telecom services provider, where Bharti will contribute its VSAT business in India to our existing Indian subsidiaries. The combined entity will bring greater scale, operational efficiencies, and market reach to provide Indian customers with secure and reliable broadband solutions for enterprise and government networks. Bharti will have approximately 33% of the ownership interest in the combined entity.

These two joint ventures continue our strategy of expanding and strengthening our position throughout the world in partnership with leading service providers, while also leveraging the strong acceptance of our JUPITER platform worldwide.

Satellite technology is evolving at an amazing pace with new services and applications launching constantly. Demand for connectivity continues unabated and hybrid solutions of GEO, NGSO, and terrestrial networks will satisfy these needs in the most efficient way. Houston is uniquely positioned to play a leading role in providing these solutions.

Let me now turn it over to Dave.

David J. Rayner -- Chief Operating Officer, Chief Financial Officer and Treasurer

Thank you, Pradman. Before I get to our financial results, I would like to mention a change that we made starting with this earnings release. As you know, ASC 321, which was adopted in Q1 of last year, requires that all equity investments, with some exceptions, be measured at fair value with changes recognized through earnings. This has resulted in significant volatility in our earnings. Many of you suggested that we present an adjusted EBITDA measurement that excludes those gains and losses and more closely represents our operating efficiency and financial performance. Accordingly, we introduced an adjusted EBITDA measurement this quarter in our press release, and I will utilize it in my comments going forward.

Consolidated revenue in the first quarter was $531 million, a growth of 6% over the same period last year, driven primarily by Hughes consumer and international enterprise, offset partially by Hughes domestic enterprise and ESS. Adjusted EBITDA in the first quarter was $206 million compared to $202 million last year, the change being primarily from the revenue changes. Net income was $15 million in Q1 compared to a loss of $21 million last year, also driven primarily by the higher net gains on investments and a higher interest income offset by higher tax expense.

Capital expenditures in the quarter was $120 million -- was $112 million compared to $51 million in Q1 last year. The increase was primarily a result of $77 million payment that we received last year on Echo 105, offset partially by lower spending on consumer CPE and satellite infrastructure. Free cash flow defined as adjusted EBITDA minus CapEx was $94 million in Q1 this year compared to $151 million last year, primarily due to the payment received last year on Echo 105.

Turning to the segments. Hughes revenue in Q1 was $445 million, an 11% increase year-over-year, driven primarily by growth in the Hughes consumer service and international hardware sales, offset partially by North American enterprise business. Despite Q1 being historically the lowest revenue growth quarter, revenue in Q1 this year was slightly higher than Q4 last year. Hughes's adjusted EBITDA in Q1 was $162 million, an 18% increase over last year, primarily from revenue and margin growth, offset partially by an increase in marketing and promotional costs associated with our expansion into South American consumer markets.

ESS revenue in the quarter was $81 million, down 16% from the same quarter last year, primarily due to the termination of the lease on EchoStar 7 in June last year and other smaller reductions from lower satellite capacity leased revenues. Adjusted EBITDA was $69 million in Q1 compared to $84 million last year, primarily due to the lower revenue.

Adjusted EBITDA in Corporate and Other segment for the quarter was a loss of $25 million compared to a loss of $19 million in Q1 last year, the change being primarily from our share of losses of unconsolidated affiliates and FX rate losses.

Our balance sheet continues to be very strong with $3.3 billion of cash and marketable securities as of the quarter end and approximately $242 million of net debt inclusive of capital leases. In the quarter, we repurchased in the open market another $8 million of our secured notes that mature in June of this year, bringing the total repurchased notes in the last two quarters to $77 million. Our intent at this time is to repay any remaining outstanding balance on these notes out of current cash.

With that, let me turn it back over to Mike.

Michael T. Dugan -- Chief Executive Officer and President

Thank you, Dave. Thank you, Pradman and Anders, too. To summarize the quarter, Hughes once again led the way in terms of strong earnings growth and we initiated creative solutions like community Wi-Fi, the partnership with Facebook, the joint ventures in Brazil and India, and the ESS agreement with RigNet for distributing IP-based mobile satellite services. These initiatives will undoubtedly position us much better for the future.

We are now ready for the question-and-answer session. So let me turn it back over to the operator.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And we have a question already in the queue from the line of Ric Prentiss with Raymond James. Please go ahead.

Richard Prentiss -- Raymond James & Associates, Inc. -- Analyst

Thanks. Good morning, guys.

Michael T. Dugan -- Chief Executive Officer and President

Good morning, Ric.

Richard Prentiss -- Raymond James & Associates, Inc. -- Analyst

Hey. A couple questions. First, glad to see you guys providing the split between total Hughes subscribers and those in Latin America. Can you give us some color about how many Latin American subs you might have had a quarter ago or a year ago, just so we can gage the -- looks to be nice ramping business there?

Michael T. Dugan -- Chief Executive Officer and President

Ric, I will say we have less than what we have now. But the reality is the majority of the net growth that we had in Q1 was coming out of South America. We had growth in North America. You've got a lot of background noise going on.

Richard Prentiss -- Raymond James & Associates, Inc. -- Analyst

Yeah, I'm sorry.

Michael T. Dugan -- Chief Executive Officer and President

Nice growth in North America, but largely offset by the continued wholesale arrangement we've got with DISH with those subs churning off.

Richard Prentiss -- Raymond James & Associates, Inc. -- Analyst

That makes sense. Also really glad you guys made the EBITDA change, taking out the gains and losses in investments. Can you help us think through unconsolidated entities? You've done some more now with minority interest with Yahsat and Bharti on the other side where you're consolidating. How should we think about that unconsolidated line? It seems to bounce all over the place modeling and since it is still in EBITDA?

Michael T. Dugan -- Chief Executive Officer and President

Yeah, I understand that's tough. Obviously those are -- we have influence over those subsidiaries, but we don't have control. Some of it tends to be a little bit seasonal in some of the subsidiaries. Others -- historically just given the timing of when we get financial statements, Q1 we tend to get adjustments from their year-end results. We don't get them in time to incorporate into our year-end results. So Q1, frankly, sometime we get surprises from those subsidiaries.

And certainly starting this quarter, we've got the Africa JV now starting to report. And given that it's an early stage retail operation, it's going to generate some losses for a period of time. So that's going to have negative -- some negative impact to that line item on our financial statements. Obviously, we expect that to be hugely successful over time.

Richard Prentiss -- Raymond James & Associates, Inc. -- Analyst

Right. I think we're going to stay looking at Hughes and ESS and then kind of treat these minority interest maybe on a different way. Last one for me. We noticed the $7 million investment it looks like into new or expanded non-controlling interest. Was that maybe for the Tarana Wireless?

Michael T. Dugan -- Chief Executive Officer and President

No. I believe what you're talking about is we repurchased some minority interest, specifically in our Indian subsidiaries.

Richard Prentiss -- Raymond James & Associates, Inc. -- Analyst

Okay, thanks.

Operator

(Operator Instructions) And we have a question from the line of (ph) Chris Lytle with Northsound . Please go ahead.

Unidentified Participant

Hey, guys. Thanks for the color on the international subs. A question on follow-up to Ric's on Tarana Wireless, I believe it was a much more substantial investment. I thought I heard it was $40 million. You have one of your senior executives go on to run the company and Charlie is going on to the board. Could you kind of expand a little bit? It's my understanding that that technology is more of a suburban fixed wireless play that takes care of non-line-of-sight issues. And what I'm wondering is, is this potentially signaling an expansion of your addressable market for broadband in the US and other markets, number one? And then secondly, could you see synergies between you guys using a slice of DISH's spectrum and that technology to again expand the overall broadband market? Thanks for your feedback.

Michael T. Dugan -- Chief Executive Officer and President

Look, first of all, we're not going to comment on the number, but Tarana has some -- it's a start-up. They've got some exciting ideas. We did lend one of our most senior technology leader to them to help through it. We think it's got great potential. Pradman and his guys continue to look at the way to take advantage of all their infrastructure, all their engineering, and so on and so forth and other areas of broadband other than satellite. So that's why it made a lot of sense for us to get involved with Tarana. And if they're successful in the initial trials and so on, we're sure that equipment will help us around the world with some of the challenges that are out there. So that's about all I'm going to say about it.

Unidentified Participant

Thank you.

Operator

(Operator Instructions) And it looks like there are no further questions in the queue.

Deepak V. Dutt -- Vice President, Treasurer and Investor Relations Officer

Okay. This brings us to the end of the call. Since there are no questions. So thank you everybody who participated and good day. Operator you may continue.

Operator

Thank you.

Deepak V. Dutt -- Vice President, Treasurer and Investor Relations Officer

Thank you.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 27 minutes

Call participants:

Deepak V. Dutt -- Vice President, Treasurer and Investor Relations Officer

Unidentified Speaker

Michael T. Dugan -- Chief Executive Officer and President

Anders N. Johnson -- Chief Strategy Officer, President EchoStar Satellite Services

Pradman P. Kaul -- Chief Executive Officer and President, Hughes Network Systems

David J. Rayner -- Chief Operating Officer, Chief Financial Officer and Treasurer

Richard Prentiss -- Raymond James & Associates, Inc. -- Analyst

Unidentified Participant

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