Deepak V. Dutt - Vice President, Treasurer, Investor Relations Officer and Member of Disclosure Committee Cleo V. Belmonte - Assistant Secretary Michael T. Dugan - Chief Executive Officer, President and Director Markus Wayne Jackson - President of EchoStar Technologies LLC Anders N. Johnson - President Pradman P.

Kaul - President, Hughes Network Systems David J. Rayner - Chief Financial Officer, Executive Vice President and Treasurer Kenneth G. Carroll - Executive Vice President of Corporate and Business Development.

Jason B. Bazinet - Citigroup Inc, Research Division Andrew Spinola - Wells Fargo Securities, LLC, Research Division Andrew DeGasperi - Macquarie Research Timothy J.

Quillin - Stephens Inc., Research Division Chris Quilty - Raymond James & Associates, Inc., Research Division Walter Piecyk - BTIG, LLC, Research Division Anthony Francis Klarman - Deutsche Bank AG, Research Division.

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2014 Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Deepak Dutt. You may begin..

Thank you, operator, and good day, everybody. Welcome to our Second Quarter 2014 Earnings Call.

I'm joined today by Mike Dugan, our CEO; Dave Rayner, CFO; Pradman Kaul, President of Hughes; Mark Jackson, President of EchoStar Technologies; Anders Johnson, President of EchoStar Satellite Services; Ken Carroll, EVP, Corporate and Business Development; and Cleo Belmonte, Associate General Counsel.

As you know, we invited media to participate in listen-only mode on the call and ask that you not identify participants or their firms in your reports. We also do not allow audio taping, which we ask that you request -- respect. Let me now turn this over to Cleo Belmonte for the Safe Harbor disclosure.

Cleo?.

Thank you, Deepak, and good day, everyone.

All statements we make during this call that are not statements of historical facts constitute forward-looking statements, which 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 such forward-looking statements.

For a list of those factors and risks, please refer to our annual report on Form 10-K and our quarterly report on Form 10-Q filed in connection with our earnings. All cautionary statements that we make during this call should be understood as being applicable to any forward-looking statements we make, wherever they appear.

You should carefully consider the risks described in our reports and should not place undue reliance on any forward-looking statements. We assume no responsibility for updating any forward-looking statements. Let me now turn the call over to Mike Dugan..

Thank you, Cleo. I would like to point out that although Cleo's done an excellent job, we're missing Dean Manson this morning. He's on vacation, and don't worry, he's still with us. So let's go on. All in all, our financials for Q2 are positive and continue to be consistent with our expectations and forecast.

EchoStar revenue in the second quarter of '14 was $880 million for a growth of 6% over Q2 last year, and EBITDA was $233 million for growth of 50% -- 56% over Q2 last year. Dave Rayner, our CFO, will address our financials in more detail a little bit later in the call.

This call, we are changing our format, and we're going to have our 3 major business segments and their presidents report on their own results and give you their first-hand perspectives. Today, we'll start with Mark Jackson, President of ETC; who then will be followed by Anders Johnson, President of ESS; and then, Pradman Kaul, President of Hughes.

Finally, Dave Rayner, our CFO, will then give you a better overview of the financials. As usual, we'll end the call after a brief question-and-answer session.

Mark?.

Thank you, Mike. We are pleased to announce that once again we have extended our exclusive equipment partnership with Bell Canada through the end of 2015. Bell has been a long-time partner, and we are thrilled to continuing to offer our superior products to their DTH service. Our joint venture with DISH Mexico continues to see solid growth.

Their complete channel lineup with local TV rebroadcasting continues to drive customer acquisition, control churn and drive demand for EchoStar's set-top box equipment. We are continuing to work with them on enhancing jurs [ph] and services that will help them respond to the competitive pressures in Mexico.

We're excited with the improved trends at DISH Mexico and look to drive substantial growth for both companies. Q2 is an extremely eventful period with respect to product launches to our customers. Specifically, DISH Network launched the highly anticipated Wi-Fi Joey to their customer base.

Wi-Fi Joey is a wireless version of the Whole-Home DVR client that offers installations of DISH Network programming in areas of the home where a wired install is not preferred or cannot be achieved.

This best-in-class solution offers a quality of service experience that is second to none and leverages the latest 802.11ac wireless standard that delivers throughput speeds that are optimal for HD video distribution in the home.

Obviously, this product is consistent with our commitment to ensure DISH Network customers enjoy a outstanding television video experience.

Additionally, to follow our Q1 announcement of the flash-based DVR+ product for our customer, Channel Master, we expanded this product line in Q2 by offering a 1-terabyte hard drive version that significantly expands the DVR capabilities of this product and now offers storage to enhance the customer experience.

Customers are now able to record live content on to the hard drive that helps expand the functionality offered to the consumers. Channel Master has also expanded their distribution partnership to include Amazon and Best Buy Online for their products.

We also announced 2 new Sling retail TV Anywhere solutions that dramatically strengthen our offerings in this consumer space. The new Slingbox M1 and SlingTV solutions were launched in mid July to our retail and online partners.

These new products, along with just-launched It's On [ph] advertising campaign and the redesign of our Sling website, will help enhance Sling's leadership position in the consumer market as the ultimate entertainment solution for those customers who desire a no-compromise experience and consuming their home TV content on PCs, remote televisions and mobile platforms.

With an MSRP of 149, the Slingbox M1 offers tremendous values, as well as improved feature set that now includes wireless connectivity to our entry-level products.

At price of 299 MSRP, the advanced SlingTV offering positions Sling as a great living room TV solution, with a highly graphical on-screen programming guide that exploits social media feeds for a powerful, personalized viewing experience, as well as a platform for future entertainment-based streaming applications.

The early result of these new products has been very promising from a sales standpoint and from a review standpoint from all the industry trade racks. Finally, on our Sling OEM business, through our partnership with ARRIS and our MOXI Whole Home Solution, we have just launched the MS4000 with 2 cable MSOs, Service Electric and Comporium.

With many other cable operators trailing this fully integrated TV Anywhere user experience, we expect solid growth over the remainder of the year for this business line. So with that, let me turn it over to Anders Johnson..

Thank you, Mark. Our financial results for the quarter were very strong and obviously impacted by the 5 satellites we acquired from DISH in the first quarter, which we then leased back to them. We're continuing to move forward with a number of initiatives that we've mentioned on previous calls.

We currently have 3 satellites under construction for EchoStar, plus EchoStar XVIII, which we are managing for DISH. EchoStar XXI, also referred to previously as TerreStar-2, is an S-band satellite planned for use by our Solaris Mobile venture in Europe with a planned launch in the first quarter of 2016.

EchoStar XXIII, which we announced in the second quarter of this year, is a very flexible Ku BSS satellite that could fulfill multiple mission capabilities, including the deployment at the 45-degree west slot for Brazil, and that is planned the right now for launch in the third quarter of 2016.

Probably, we'll be commenting later on EchoStar XIX, also known as JUPITER 2. But all the satellites that are under construction, plus the 65-degree west payload hosted an Eutelsat satellite, we've obviously got a very full agenda on the [indiscernible]. All of the satellites are progressing according to their original construction timelines.

And at this time, the launch for those satellites are all nominally on target. One of the launches on our manifest is on an ILS Proton.

And although, to date, no commercial launches have been impacted by the situation between the U.S., Russia and complicated by the Ukrainian activities, we're very closely following those developments and considering alternative launch platforms.

Finally, our service arrangements for AMC-15 and AMC-16 satellites with SES are scheduled to expire at the end of the year and early 2015, respectively. We are currently working with SES on an extension to these arrangements, as well as a long-term replacement solution for the 105 west orbital location.

Until we have an agreement in place, we potentially will be impacted with regards to our ability to grow the revenue on these satellites. Now I'd like to turn the call over to Pradman Kaul..

Thank you, Anders. Here's a very strong second quarter in all our business segments. In addition, our key strategic goal of expanding our Ku-band JUPITER platform all over the world continued to achieved unprecedented success.

Consumer service revenues showed strong double-digit growth in Q2 '14 over Q2 '13, as well as for the 6 months ending June 2014 over the 6 months ending June 2013. Gross adds continued to be strong in Q2 despite the traditionally low seasonality of the second quarter, reflective of continued strong demand in the market.

Our churn across all channels was higher than we would have liked, especially in the wholesale channel, and it's an area where we can improve. The impact of churn on a larger subscriber base obviously had an impact on our net adds. We ended Q2 '14 with 935,000 subscribers for net adds of 22,000 in the quarter.

Also, as we start seeing some of our beam spilling, growth in those beams will be slow. As a result, we're adjusting our marketing efforts in the likely full beams in order to maintain our growth momentum. ARPU and margins continued to be strong and contributed to the strong consumer service revenue and EBITDA.

This quarter, we also achieved a significant milestone by shipping our 1 millionth JUPITER term loan in slightly less than 2 years after we started, a record first in 2-way data broadband business. Our enterprise business had a record quarter for order input.

We booked orders in Q2 of over $373 million for a growth of 81% over the second quarter of 2013. Let me highlight now some of the major orders we booked.

Xplornet Communications, Canada's largest rural broadband provider, committed to a lifetime lease for all of the Canadian satellite broadband capacity on EchoStar XIX, but next gen -- a next-generation high throughput satellite due for launch in mid-2016.

In addition to satellite capacity, Xplornet will take delivery of satellite gateways, operational and support services and consumer user terminals in a program that's expected to be worth more than $200 million. GTECH, the U.S.'s largest lottery provider, extended their service agreement with us by 7 years through September 2022.

Services include space segment, hub operations and maintenance for over 100,000 sites. Continued expansion and extension of contracts within our franchise-oriented markets, particularly the Yum! brands, which is KFC, Taco Bell, Pizza Hut and Chevron. Most of these new contracts include hardware upgrades and 36 months service commitments.

Our international enterprise business also had a strong quarter. We signed contracts with Ka-Internet and Ka-Satellite in Russia for the supply of gateway infrastructure to be deployed on the RSCC AM5 Ka-band satellite.

Based on JUPITER High-Throughput Technology, this is the first-of-its-kind of network, delivering affordable satellite broadband for the eastern part of Russia. Our Brazilian subsidiaries signed a contract extension with Telmar for provision of broadband services for approximately 3,200 sites.

Our Indian subsidiary continued to expand their rural bank and ATM network. We now have over 100,000 sites in service in India.

In the mobile side business segment, Globalstar signed an agreement with us to develop additional features to their Radio Access Network, and we also signed an agreement with Boeing to develop and build user terminals for the MEXSAT mobile sat system.

So in the 6 months ending June 2014, we booked new nonconsumer orders of $563 million, an increase of 72% over the same period in 2013.

The strong and balanced all-around growth in our orders contributed to a backlog growing to $1.4 billion as of the end of June, a 32% growth over the backlog as of June 30, 2013, and a trivial growth of 17.6% over the backlog as of March 31, 2014. As usual, these backlog numbers do not include our consumer business.

Backlog is a leading indicator of future revenues and we are very excited about its impact on our future. Our Ka-band technology and platform is now deployed, with service available through us directly or through our partners in a large part of the world.

This includes the United States, Canada, Central and South America with Telefónica Media, Europe and Africa with Avanti, Middle East and Africa with Yahsat, and to be deployed shortly in Russia with RSCC. In addition, we have a couple of other deals that will be announced in this quarter.

The strategic advantage of being able to offer our customers global service on the same platform is obviously very important. Now regarding our satellites. JUPITER 2/Echo XIX, construction is proceeding as planned. We expect to launch this satellite in early 2016 to augment capacity for our consumer business.

Another key development this quarter was that we signed a 15-year contract with Eutelsat to lease the entire Ka-band capacity, connect it to the Brazilian service area on Eutelsat 65 West A satellite.

Slated to be launched in early 2016, Eutelsat 65 will host the Ka-band payload with 16 spot beams which have covered a significant portion of the Brazilian population and generate approximately 25 gigabits of throughput. High-Throughput JUPITER Technology from Hughes will deployed for the ground system and customer premise terminals.

Eutelsat 65 will be our springboard in Brazil for broadband services to consumers and businesses. I'll now hand the call over to Dave Rayner..

Thank you, Pradman. As Mike mentioned, EchoStar revenue in second quarter was $880 million compared to $830 million in the second quarter of 2013, a growth of 6%.

EBITDA was $233 million in the second quarter, up 56% over the second quarter of 2013, with all 3 segments contributing to the growth, partially offset by onetime gain we recorded last year as a result of the sale of a certain investment.

Net income attributable to EchoStar common stock was $33.8 million compared to a net loss of $9.8 million in the second quarter of 2013, and diluted earnings per share were $0.36 this year compared to a net loss of $0.11 in the second quarter last year. EchoStar's capital expenditures for Q2 were $156 million compared to $86 million last year.

The spending increase was related to satellite constructions, primarily EchoStar XIX, EchoStar XXI and the 65 West satellite, and to a lesser extent, early spending on EchoStar XXIII.

I'm currently expecting our full year CapEx to be in the $750 million to $780 million range, down from previous indications as a result of delays in some start dates on certain satellite programs.

Free cash flow, which we define as EBITDA minus CapEx, was $77 million in the second quarter of 2014, an increase of $13 million, or 29%, over the same quarter last year, driven primarily by the strong EBITDA growth, partially offset by the higher CapEx. Now regarding EchoStar business segments.

EchoStar technology's revenue in the second quarter 2014 was $416 million compared to $426 million last year. The small decline primarily due to lower revenue from equipment sales and uplink services to DISH somewhat offset by a higher equipment sales to DISH Mexico.

ETC EBITDA this year was $42 million, growing 32% over last year in the second quarter, driven primarily by higher professional services billing, higher margins on equipment sales and decreased SG&A expenses. Sequentially, ETC EBITDA grew 8.5% and EBITDA margin expanded to 10.2% in the second quarter compared to 7.5%.

Hughes revenue in the second quarter of 2014 was $330 million for a growth of 5% over the second quarter last year. The growth was primarily from increases in consumer international service revenue.

Hughes EBITDA in the second quarter was $90 million, an increase of 23% over last year, primarily due to the strong revenue growth and improving margins in consumer enterprise business. The year-over-year EBITDA margins at Hughes increased over 4 percentage points and increased 1.4 percentage points from Q1 of this year.

EchoStar Satellite Service revenue was $129 million in the second quarter, a growth of 52% over the same quarter last year, primarily a result of additional lease revenue from the 5 satellites acquired from DISH effective in -- on March 1, and the lease of EchoStar VIII to DISH, which wasn't in place for the full second quarter last year.

ESS EBITDA in Q2 was $112 million, an increase of $79 million from last year as a result of the increased revenue, in addition to a $35 million impairment charge last year.

In the all other segment, where we record gains on sale of securities, eliminations for intersegment sales and other corporate transactions, EBITDA in the second quarter was a negative $11.9 million, primarily due to lease cost to DISH associated with the Echo XV satellite, which is positioned at the 45-degree Brazilian slot.

EBITDA was $10.1 million last year due primarily to a sale of certain investments in the second quarter of last year. In summary, our revenue is strong with generally increasing margins and EBITDA across all 3 business segments. We continue to have a very robust balance sheet with approximately $1.7 billion of cash and marketable securities.

Let me now turn it back over to Mike Dugan..

Okay. So before we go to the question and answers, I thought I should speak to a couple of other important activities that is on previous calls I mentioned in the latest Qs. We've modified our arrangement with DISH Network for the evolution and operation of the DISH Digital service that's known as over-the-top.

Under this new arrangement, EchoStar will continue to provide engineering and platform operation services to DISH Digital development, but we will no longer have an obligation to fund 1/3 of the ongoing cost of evolving and growing this important service.

We continue to believe that real opportunity exists in the future of the platform, and I believe the new structure will allow us, EchoStar, to focus on involving the best technology and solution while gaining the ability to utilize broader areas of EchoStar operations.

In the new arrangement, we also retained a right to 10% of the value created by the growth of DISH Digital. The Solaris project that developed S-band, MSS and terrestrial spectrum in EU continues to move forward.

As Anders reported, the EchoStar XXI satellite, previously known as TerreStar-2, continues towards completion and is currently scheduled for 2016 launch. We continue our focus on meetings with the EU and member states to more concretely define and harmonize the regulations, around both the MSS and terrestrial spectrum.

Our Hughes organization continues to develop the required ground infrastructure technology and business plans for Hughes in this key initiative. In regards to our Brazil Pay-TV project. As previously discussed, we have located Echo XV to the 45-degree slot for ongoing development.

Our approach remains to partner with a local company to provide Pay-TV service while we provide a set-top box, the satellite capacity and related technology and services. Finally, a couple of quick comments on strategy.

We continue to -- we intend to continue to explore opportunities for expansion in international markets through partnerships and joint ventures with reputable and established local companies and through acquisitions.

DISH Mexico, the Brazil Pay-TV and broadband initiatives currently underway, as well as the Solaris acquisition, are prime examples of this strategy. We arguably have the best set-top box and satellite broadband product lines in the industry, along with world-class operating platforms that will help us achieve this expansion.

Our Hughes business continues the expansion of their Ka-band JUPITER technology and perform all over the world -- and platform all over the world. As Pradman mentioned earlier, we have already deployed this directly and through our partners in a large segment of the world with more to come.

Our business development group is very busy looking at opportunities to expand our product capabilities and -- in the international market.

We have an outstanding management team in place to -- well, did I say that?.

Well, you did. Pradman and I recorded it..

Yes. You helped me with this. Anyway -- we have an outstanding management team in place to execute on these strategies, and I feel very confident we will accomplish them. It's now time for question and answers.

So operator, would you please start that process?.

[Operator Instructions] Our first question comes from the line of Jason Bazinet with Citigroup..

I guess, a 2-part question. It seems like when you guys first separated from DISH, I think it's back in '08, it was a little slow coming off the blocks. And it feels to me like the number of initiatives that you have working now is sort of accelerating. And if you could just confirm that, that's true.

And then second, on the -- when you did the transaction with DISH in May earlier this year, I think you talked about it giving you a bit more strategic flexibility.

Would you say that, that flexibility is sort of encapsulated in terms of all of initiatives that you just went through in the preamble to the call or are there more things that you are considering pursuing?.

Well, obviously, from the list of projects we're trying to manage, we certainly are looking at a ton of different things, both within the Hughes Group and then within the legacy EchoStar group. So yes, we definitely are accelerating our focus on new business.

Could you clarify the second part of your question as to the initiative that you were talking about?.

Sure. When you did the transaction with DISH, I think you said -- at least when I think about it in simple terms, you gave EchoStar more EBITDA and more cash flow in the near term maybe in exchange for a long-term call option on revenue and cash flows from the retail broadband business.

And so my question was, is that incremental flexibility that you've got required to pursue all of the initiatives that you just outlined on the call or is there something else above and beyond that you have your eye on? That's all..

Jason, this is Dave. No. I think, certainly, the initiatives that we have identified to date and that is publicly identified to date certainly could be accomplished within the existing structure prior to the HRG transaction. So with that HRG transaction, we continue to have greater capability to pursue other initiatives as we see fit..

Your next question comes from the line of Andrew Spinola with Wells Fargo..

On the increased churn in the quarter, can you give a little bit more color about what's driving this? Is this competitive losses to other technologies, things like that or is it really just sort of concentrated in the wholesale channel for maybe distribution that's not working out, et cetera?.

Well, I think, first of all, there's been a lot of discussion in the industry. I think most, if not all, broadband providers are struggling with churn. Their customers certainly are trying different initiatives. There's competition. There's a lot of factors including Q2 that have an effect.

Yes, we aren't terribly happy with the amount of wholesale churn that's added into the numbers, but we're not happy with any churn.

And we're -- I can only tell you that because of the focus that we've got in place, we're going to continue to do anything and everything we can possibly do to make customers happy and to sell to the right areas and ensure that we make positive progress on churn.

So it's not unique to the satellite broadband, but everybody is focused on it across the industry, and that includes us, so..

Is it your sense that the problem with churn for you specifically is related to you distributing the product to people that might not be appropriate for, i.e.

people that aren't familiar with the data caps? Or do you have any sense whether it's price competition from the RLX or any other sort of pressure that's driving the churn?.

Well, I think we've got David that says, "Yes, some segment of it, it's related to the caps and maybe a little bit of mid-selling." And we're certainly suffering through that as we launched the service and took off so quickly.

But again, I think a fair amount of the churn is related to customers trying other options, and I wouldn't say necessarily, it's just price competition. But yes, there's a lot of competition out there..

Okay. And then just related to the issue around sort of some capacity starting to fill up on some of the beams.

Is there any way to think about JUPITER 1 in terms of how much capacity is currently in use and how much is remaining? Or with spot beams, is it too difficult to sort of look at it that way?.

Yes, this is Pradman. It's difficult to look at it that way because you have to almost look at it beam-by-beam. If you look at the aggregate capacity of JUPITER, we're probably at about 60% full, but there's 40% still remaining to be filled up over the next time.

But if you look at it beam-by-beam, there are some beams that are, obviously, already saturated or close to saturation. And more beams will be hitting that state over the next 6 months or 9 months. But then there are some other beams that are very lightly loaded that'll take a long time to fill up.

So it's very difficult to talk about it in the aggregate. You almost have to go beam-by-beam to discuss that..

Your next question comes from the line of Amy Yong with Macquarie Capital..

It's Andrew for Amy. I just had a question on -- first, on Mexico. Strategically, can you comment on what's going on after América Móvil said they wouldn't exercise their option for a majority stake? Secondly, on Brazil. Obviously, Telefónica made a bit for GBT. Just wondering if anything's changed there as far as you're looking for a partner.

And lastly, the CapEx in Brazil.

Would that slightly go up as you're putting in JUPITER technology on the Eutelsat satellite?.

Well, I think Telemax publicly announced in response to the recent changes in the Mexican regulatory environment and tends to sell certain assets and waive certain rights, and that included the right to acquire 51% in DISH Mexico. We're currently working with DISH Mexico and Telemax on evaluating how such a waiver might be implemented.

And I don't know whether there's surely that much more to talk about. It was driven heavily by the changes of the regulation and what Telemax has required to do related to that. Brazil, yes, we talked about the CapEx on the payload for broadband, I guess.

And although I can't give you a specific outlook on that, we are focused on it, and we're certainly going to invest what we have to, to get that service up and running. It's a longer-term strategy, but....

Yes. Outside of the satellite payments in 2014, we won't be spending any significant CapEx in Brazil in 2014. Obviously, the majority of that, in terms of ground infrastructure, will start happening more next year..

Great. And just one more question, on your net adds for the quarter.

Just wondering, you talked a lot about the churn on the wholesale side, but what about gross adds? Are you seeing strength on both wholesale and retail?.

Yes. I think we had a good quarter in Q2 for gross adds when you compare it to Q2 of last year. But obviously, as the beam starts filling up, we expect that the gross adds will start declining over the next year.

And when you compare it to the corresponding quarter in the last 2 years, the filling up of beams is definitely going to add an impact on gross adds going forward. And that will obviously then result in lower adds -- lower net adds when you compare it to the comparable quarters in previous years.

So that's probably the single most important factor impacting gross adds over the next 3 or 4 quarters..

Yes. The other thing we want to make sure you understand is the same discussion you've heard from other providers, and that is as the base grows, the calculation for churn have to -- you got to take into account the size of the base that you're working across.

And every provider with large bases, whether it's DISH or whether it's now, the JUPITER high-speed service, as that base grows, churn becomes a bigger issue, and we're focused on it..

Your next question comes from the line of Tim Quillin with Stephens Inc..

With regards to the churn, is the churn within your retail business still similar to where it was 4 or 5 years ago when Hughes was reporting as a public company around, let's call it, 2% to 2.4%? And is the wholesale churn then north of 2.5% now?.

We don't really -- we don't publicly disclose in our actual churn numbers, but -- and they do vary quarter-to-quarter, but they're -- and generally, in those regions, in those areas..

Okay. And then on the ETC business on the margins. So the margin profile is clearly changed here over the past year. And maybe talk about what's driving the improved margins and how sustainable is a 10% EBITDA margin in that business..

Yes, this is Dave. Let me make some comments and then Mark can expand on it if he wants. I think, overall, we've got a little bit of a product mix change, a little bit more service-oriented, and in some revenue areas, which is contributing to higher margins.

In some cases, we've got R&D spending that we're able to bill to customers, which is, obviously, helping the EBITDA profile. So overall, we've got a number of things impacting margin -- gross margin improvements.

And on top of that, the ETC management is focused on eliminating expenses, whether or not producing revenue or won't produce revenue in the future, and that's why the SG&A is going down. Mark, I don't know if you want to expand on any of that..

Yes, Dave, I think the only other thing I would add is that we've been fairly aggressive in getting cost-reduction on our product lines to help improve our margins also..

Okay. Yes. And then Dave, on the CapEx. I mean, your new CapEx guidance still implies much higher spending in the second half than the first half. But maybe if you could talk about, as we get into it, more specifically about what's driving that CapEx ramp-up and what slipped out that made you revise down the full year CapEx guidance..

Yes. I mean, the second half is still going to be driven highly by satellite spending. All the programs that we've got in place are going to continue to accelerate. You've got Echo XXIII that started only very recently here in the second quarter. So as that ramps up, you're going to have increased spending.

You'd start to get into the guts of what's getting spent on EchoStar XIX. So all the programs are ramping up. What's really driven it down from previous estimates, we had some delayed starts not only in the program that we've announced, but also some programs that we're still anticipating may be coming and they'll be spending on that.

But very clearly, the increased spending pretty much across the board is going to be satellite related that's really going to drive the increased first half to second half..

And just to play devil's advocate, I guess, on the Brazil Pay-TV venture. But if you-I think you've been discussing it for a while, positioning it for a while. And as you said, you have Echo XV that's already position. You're building a satellite, albeit a flexible one, that could be used for Brazil.

But is it -- maybe part of the difficulty of identifying a joint venture partner is that maybe that market is not obviously needing another Pay-TV provider..

I think the market needs a provider. I think the reality is that you've seen the dramatic changes in the market, whether it's the recent proposal on GBT and some of the other things going on. It's certainly a very fluid situation right now. And to be honest, we're trying to be very cautious and not make a misstep. And it's changed so much.

We've kind of taken a short pause and tried to make sure we clearly understand the options for partnerships. So that's about the best I can say right now..

Okay. And then just 2 last quick questions. One, Dave, could you talk about any runoff of depreciation that we should think about as we model depreciation, amortization over the next couple of quarters? I'm thinking maybe Echo VII will be fully depreciated.

And then on R&D, remind me, there's some pretty significant declines this year -- but remind me, is that largely an ETC or where you're able to -- where are you able to get that R&D efficiency?.

I mean, the R&D is in both -- obviously, we have R&D spending primarily in Hughes, as well as ETC. The spending, as it gets reported on the face of the financial statements, is not really reflective of all of the R&D that we do. If we're doing research and development work, and were getting paid by a customer, that cost ends up in cost of goods sold.

It's still R&D work. We still own the intellectual property that gets developed and the technology. But it may, from time-to-time, get reflected as R&D spend is down. We're actually, as a company, very focused on increasing our overall R&D spend and increasing our engineering staff and looking at more advanced products.

Hopefully, in some cases, we'll get customers to pay for some of that, in which case, it'll continue to show up in cost of goods. If we don't have an identified customer to fund this, then, I'll sharpen the R&D lines. But I wouldn't read too much into a P&L that says R&D is down.

I think, clearly, as a company, our R&D spending is actually on the rise..

And depreciation?.

I don't have those schedules in front of me, unfortunately. I apologize, Tim. I can follow up later and help you with your model..

Your next question comes from the line of Chris Quilty with Raymond James..

I wanted to follow up on the Hughes business, both the enterprise side. Any changes or growth opportunities you see going there? And I'll follow up with the retail side of the business..

Yes. I think a lot happening in the enterprise world. Globally, as I mentioned in my initial remarks, we are expanding the deployment of the JUPITER platform in all -- in many, many regions of the world.

And that's generating not only revenues by selling equipment, but we also offer services, either operation -- operating services or maintenance services. So both the hardware sales and the services revenues are increasing nicely with that.

Our international business, with our 3 subsidiaries in Brazil, Europe and India, are also doing very well, showing growth, a lot of opportunities. So we're very excited about our enterprise business.

And obviously, it's leveraging off our consumer business, because the volumes that we generate in our consumer business in the United States gives us a significant advantage as we use the same platform in other parts of the world..

And I missed the beginning part of the call, but was the step-up in the backlog entirely enterprise applications or was there anything in there on the mobile satellite side?.

It's primarily the enterprise..

Okay.

On of consumer side of the business with a churn issue, are do you see any signs of churn between yourself and ViaSat? Or can you track that? And is almost entirely going to terrestrial or wireless solutions?.

I think it's anecdotal. We don't have some information on that. But from the anecdotes, I would say that there's not much churn between us and ViaSat with each other. I think it's more people just deciding that we could break it up into collections and performance.

On the collection side, people deciding that they don't want to pay that kind of money for broadband is not really necessary. So they decided to churn out or they can afford to pay, which is the second element. And there is a small piece that people move to cable or fiber in regions where it's available..

Okay.

And are you seeing with the economic backdrop any kind of an increase or an improvement in customer's ability to pay, sort of issues with the consumer pocketbook?.

I don't think we see a significant change there..

We wish it was that way..

I think it's been relative -- we track it every month. And I don't think we are seeing much movement in that aspect of it..

Yes. I think what we've seen on nonpay churn, if you will, is the impact is more seasonal that anything else, and we haven't seen a lot of impact there.

I mean, it's interesting, though, what we are seeing is an increased ARPU, as Pradman mentioned in his comments, that ARPU, obviously, on the retail customer, say, is exceeding what we really had planned. And I think it's a positive sign..

And what's important with what Dave just said, even though we have higher churn than we would like, our revenues and EBITDA in the consumer business, because of the increased ARPU and low and improved margins, are really doing very, very well..

I would agree there. A question on the ETC segment. It looks like for the first time in a couple of years, you actually saw an uptick in non-DISH customers, Bell TV in your international business.

Is that anything other than just a long overdue recovery or there are other trends at play? And do you see potential for new customers?.

This is Mark. Basically, what we're seeing is with the launch of local stations on DISH Mexico, DISH sales of -- and Mexico have done it fairly substantially. And we're working hard with them to try to continue that upswing but we'll have to see how that goes longer term.

And then, yes, we are definitely working aggressively to get more customers in the set-top box business, primarily overseas. And we're also looking at a couple of new business segments that we could possibly get into..

Okay. And the -- I think you mentioned during the call, Mike, that you changed the relationship on that DISH Digital, which, I know DISH, on your call, was now promoting that. If I recall, you had a higher equity stake in that business, previously.

Was it stepped down to 10% from a higher level?.

Yes. So it was stepped down. What we ended up doing effectively is going to a very similar structure to the way Mark does virtually all his development for Dish Network whether it's set-top box or infrastructure. We just pretty much adopted that relationship on the DISH Digital development.

And there's a lot of synergies there between the infrastructure Mark's doing for Sling, the infrastructure that has the -- continue to enhance the Hopper platform and the applications and all of the things going on there with the infrastructure. There's a fair amount of commonality there.

So we went to back to a similar structure to that where there's a bit of margin on the development and delivery that we made to DISH. And in exchange for that -- the difference is we don't necessarily have a 10% ownership in all the other businesses that Mark supports. So we're pretty pleased with the changes there..

Got you. And final question on Brazil. It sounds like you're committed to a partnership and will not greenfield something there.

But is there something that you think is going to change in the marketplace, maybe it's the post-World Cup environment where expectations are set lower? Or what dynamic is going to change where it's been a pretty long slog in trying to find a partnership?.

Yes. I would say it's been long, and we can't pretend that it hasn't been. On the other hand, I've been involved with EchoStar for over 20 years, and I -- one thing I've learned is I never say never about anything. So we're going to continue to do our very best to monetize that investment, and we're going to work all our avenues.

Partnership is highly preferred because we learned that you really need a strong presence on the ground with experienced people that fully understand the market.

The only caveat there is the Hughes organization has a good on-the-ground presence already in Brazil, so it's a little bit different than some of the other areas of the world, but we're going to continue to focus on partnership..

Okay.

But you are going to end up building out a retail infrastructure to support the broadband with the Eutelsat payload, correct?.

That's true. It's a hosted payload. It's not a -- as Pradman talked about actually on previous calls, there's opportunity for consumer, but there's also opportunity for wholesale or enterprise use of the payload. So we think that's a pretty safe investment..

And Chris, I mean, there are significant differences behind a Pay-TV operation and a broadband operation. And as we look at Hughes and their ability to do retail sales on broadband, you can do that without having to get programming agreements and without necessarily having the same scale that is necessary to make money on a DTH platform.

So there are some significant business differences and business model differences between the 2, where we're comfortable that the Hughes current personnel and infrastructure have the ability to manage a broadband business, whereas, the marketing and the program requirements on a DTH, we continue to believe we're better served with a local partner..

Your next question comes from the line of Walter Piecyk with BTIG..

Just want to get an update on Solaris. I don't know if you pay attention. I'm sure you have on what Inmarsat is doing as far as -- I guess, they're trying to -- I forget the words that you'd -- extend the value or retain the rights on that spectrum.

What have you guys been doing? And maybe you can comment on what Inmarsat's been doing? And is there a possibility you could, at a minimum, partnership with them and their plans to do this ground-to-air program with that spectrum?.

Yes, I'm going to let Ken and Anders field your question..

Yes. So I think -- yes, obviously, Inmarsat has come out and stated that they're looking willing to do and air-to-grounds type effort with their S-band. They are building an S-band or have announced they're building an S-band satellite, but seems their focus is on using the terrestrial for air to ground. Our focus is twofold.

I think, right now, we are very focused. As Anders mentioned, we've got a satellite under construction. We're working with the Hughes mobile sat group to develop the ground infrastructure for an MSS service. We're looking at multiple alternatives there, including voice-type applications and data-type applications.

In addition, we're really working with the EU and the member states on the regulatory front to get the CGC, which is the complementary ground component, or the terrestrial spectrum, getting that harmonized across all the member states.

So those are the focuses in really -- we're planning to have an operational business by kind of mid-2016 for the regulatory requirements..

So do you not think there's an opportunity maybe? I think the Inmarsat, the long-term plan is they can ultimately get some type of terrestrial use of that spectrum, maybe initially air to ground but then, ultimately, just through terrestrial.

Obviously, you guys have been -- or not you guys, but DISH has been successful in something similar in the U.S. Do you not see that this is a similar opportunity? I mean, I understand it's more complex because you're dealing with, whatever, 26 different countries.

But are you just ruling that out as a possibly at this point?.

We're not necessarily ruling it out, but the applications that Inmarsat appears to be pursuing with regards to their segment of the MSS allocation may be mutually exclusive to some of the development plans that we have on our roadmap. We just don't know enough about it now.

There are a number of technical analyses that are ongoing in the various regulatory bodies in Europe, insofar as examining how a aero use of the spectrum might coexist with an LTE terrestrial use of the adjacent spectrum.

So pending the outcome of those technical exercises, we're not quite sure that there is a synergistic approach there to the extent that they're solely focused on aero use and we're more focused on leaving our options open..

Okay. And then at the end of the call, I think you talked about you're looking around the world for strategic opportunities. Obviously, there was a change in the structure of the company as it relates to DISH that makes that a little bit easier. If I just look at Latin America, obviously, there's plenty of things going on in Brazil and Mexico.

Would you consider maybe a more direct market strategy, given some of the assets there -- they're either distressed or going to be coming up for sale as a result of, excuse me, regulatory actions? Is that a possibility in the context of what you were talking about at the end of the call?.

Well, I -- again, that's an awfully broad question. We consider the stress purchases -- certainly, if you look at the Solaris investment, that's exactly what it was. We're certainly going to look at other areas where people have thought about decommiting or run out of cash and can't move forward.

We are financially very stable and very capable even more....

I was thinking about nonexisting businesses, the perhaps, complementary businesses.

For example, would you ever be a wireless operator in Mexico or Brazil, terrestrial wireless operator?.

That's a very focused question. The answer is I don't think so. But again, I'll never say never..

Your next question comes from the line of Anthony Klarman with Deutsche Bank..

Most of my questions were asked and answered. I just had 2 follow-ups maybe for Dave.

On ESS for the quarter, is this the right run rate to be thinking about as we think about what the financial impact was of the deal that you signed with DISH or are there other puts and takes that happens sort of throughout the year as kind of the new contracts come online?.

Yes. Obviously, things are going to change as the satellite arrangements get modified going forward. But as I look at Q2, I think it's a pretty good indicator of run rate going forward in the near term..

And so when we look at obviously the margin impact in sort of 2Q '14 versus 2Q '13 in ESS, the margin's up obviously pretty significantly.

Is that just attributable to how the new 5 satellites were priced with DISH versus the legacy satellites or are there other sort of variables that impact that?.

I think it's 2 things. One, obviously, the 5 satellites came in at very, very, very high margins, just given that all the operating expenses were already being incurred associated with those satellites. Plus, when you compare it to Q2 last year, you need to remember that there was a $35 million impairment charge in the second quarter of last year.

And so as you look at Q2 versus Q2, you need to take that one into consideration..

And then maybe just a different sort of attack on the strategic question.

Obviously, with the liquidity that you have and the additional cash flow that you have that you're able to relever, if we were to sort of think about your capital structure, the way it is now and the confines that you have around leverage, is it safe to say that sort of we're talking about things that are not transformational in nature or they're more complementary in nature? And then what is the right time horizon to think about around when you sort of expected to deploy that $1.7 billion? I know it's obviously dependent upon opportunities, but how long will you sort of sit with that cash -- excess cash on the balance sheet as opposed to just deploying it back into the operations of the business?.

Let me take a piece of that and then Mike can add on to it. I mean, in terms of how long we will sit on the cash, I can say we won't sit on the cash past 2019 when the first tranche comes [indiscernible].

But in terms of expectations of timing, yes, we would have -- in an ideal world, we would have deployed that, not have the negative carry that we've got on that cash. And opportunities have come up in the past to deploy some of that capital, but at the same time, we're not going to do something just for the sake of doing something.

It's got to be the right opportunity and it's got to make sense to us. And so we're going to be patient. We're not going to move before we're ready to move, and when we move, we're going to be certain that it's the right move to make. I think we have borrowing capacity above that $1.7 billion.

I think we have considerable borrowing capacity beyond that $1.7 billion for the right opportunity. And that was the reason we did the HRG transaction back in May to give us that flexibly, not only to the increased cash flow that we immediately got, but also the ability to lever that cash flow, to increase our capabilities..

And one last question. DISH is -- if you sort of do some probably not-that-difficult speculation, DISH has been involved in some fairly significant M&A discussions when you look at the public proxies that have been filed on a few deals, including, obviously, I think they were even public yesterday that they have had discussions with DirecTV.

Can you just remind us what your rights are under your agreements with DISH as it relates to the services agreement back and forth, and if -- how that sort of contemplates potential changes of control in DISH over time?.

That is a multilayer and complicated answer. And frankly, any answer I gave, we covered by about 1,000 thousands of different hypothetical conditions. Let's leave it at that. We are a key provider to DISH.

When you look at almost any different aspect, what you think of as DISH Network is really provided by EchoStar Technologies and EchoStar Satellite Services. We own most of the key satellites. We own all the uplink facilities. We own the conditional access and we control all those assets, the benefit of DISH Network.

So transactions and with the impact -- and in transactions at DISH and the potential impact on EchoStar, you give me a specific scenario and tell me x is going to happen. I can try and predict what -- why the outcome in EchoStar is. But beyond that, it becomes very hypothetical..

Yes. The key thing is even the DISH -- over-the-top, we're doing all of the infrastructure build. We're doing all the technology. We'll have access to that to use elsewhere in the world just as we deploy the technology for Bell and Dish Mexico and so on and so forth.

We'll continue to be a key vendor and a key partner of whatever the future structure of DISH Network is. I'm confident on that. But as to every stipulation and every agreement, that's pretty difficult..

Yes.

I think I was actually leaning more towards the positive potential outcomes in the sense that given that you are an essential part of the piece of the infrastructure, if someone were to acquire DISH for the DBS business, you would -- they would almost have to then sort of figure out how you figured in, in that relationship, given that you are the critical piece of the infrastructure for them, I guess.

It sounds like you....

Absolutely..

Absolutely. I think we should try and close the call now..

Okay. I'd like to turn the call back over to Mr. Dugan for any closing remarks..

Yes. I think we've pretty much reached our allotted time. So let me just close the meeting by saying thank you, all, for participating today, and good day..

Again, thank you for your participation. This concludes today's call. You may now disconnect..