Good day and thank you for standing by. My name is Leigh, and I'll be your conference operator today. At this time, I would like to welcome everyone to the EchoStar Earnings conference call for Second Quarter of 2019 Conference Call. [Operator Instructions] Thank you. Sir, Deepak Dutt, you may begin your conference..

Thank you, and good morning, everybody. Welcome to our earnings call for the second 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 Dean Manson, General Counsel.

As usual we invite in media to participate in a listen only mode on the call. And ask that you to not identify participant or their firm on the report. We also do not allow audio recording, which we ask that you respect. Let me now turn this over to Dean for the safe harbor disclosure..

Thanks, Deepak.

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 and quarterly report on Form 10-Q filed with the SEC. All cautionary statements we make during this call should be understood as being applicable to any forward-looking 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. I'll now turn the call over to Mike Dugan..

Thank you, Dean. Good morning, everyone, and welcome to our earnings call. In May, we entered into a definitive agreement with DISH Network to spin-off certain EchoStar Satellite Services, ESS business, and ancillary assets and liabilities and merged them within DISH in exchange for DISH shares to be distributed to our EchoStar shareholders.

The transaction is currently awaiting regulatory approval, and we expect that it will close later this year. This is somewhat of a transformative transaction that will allow EchoStar to focus on the growing broadband market and other related strategic opportunities. And as a result, we have the best strategic and somewhat negative growth ESS business.

I will now turn it over to Anders who will talk about ESS and EML, Pradman will then follow up with the Hughes update and Dave will provide the financial overview.

Anders?.

Thanks Mike. Good morning. Second quarter ESS revenue was $81 million compared to $95 million last year. The decline being primarily a result of the termination of a lease on EchoStar 7.

On the commercial FSS business front, our second quarter activity consisted of the addition of a new customer for multiple transponders and the renewal of some existing services at their existing rates. Although we are still seeing a difficult FSS environment and pressure on rates for U.S.

government service opportunities throughout 2019, on a positive note, we are seeing an increase in activity with a potential for the demand for KU capacity to catch up tin the supply. We continue to make progress in expanding EML distribution.

We're making great progress at onboarding RigNet, and we recently signed a distribution agreement with Galaxy1. In addition, we have conversations ongoing with many other potential channel partners, each of which is dominant in certain key verticals and segments.

And we're seeing a lot of enthusiasm in these channels through EML's product development roadmap. Likewise, we continue to make progress on our longer-term projects to develop new technologies to integrate S-band satellite services into 5G networks and dramatically reduce the cost of satellite IOT and end-to-end services.

We also continue to explore ways to integrate our complementary ground component authorizations into these developments. We remain confident that over time, EchoStar Mobile products and services will be integrated into the new global hybrid networks that leverage multiple satellites and terrestrial technologies.

In the meantime, our strategic focus to bring innovative MSS products to market and prepare to build out the next-generation hybrid network for IOT and satellite-delivered 5G services in the European Union. I'll now turn it over to Pradman..

Thank you, Anders. A few opening comments on our strategy before I get into our quarterly performance. As many of you are aware, we have already established a strong services presence in the enterprise businesses in North America, Brazil, India and Europe.

In the consumer services business, we have expanded beyond North America into Central and South America. And of course, we also provide satellite-related ground equipment worldwide to local service providers. Our objective is to continue to grow and remain the global leader in satellite broadband.

We continue to be the market leader in North America and are making excellent progress on our expansion into Central and South America.

Our major initiative, which we let you know in Q1, on our expansion in Central and South America, a major initiative, was contracted explorement of Canada valued at approximately $250 million for capacity and equipment on Jupiter 3.

In the Africa Middle East, the joint venture with the Yahsat is now operational, and we have continued to build on our strong relationship with Yahsat by signing the joint venture agreement for its current satellite communication services business in Brazil.

Additionally, in India, we have signed a JV agreement with Bharti Airtel for the VSAT business. We are awaiting regulatory approvals on the Yahsat business and Bharti India JVs. We expect these JVs will give us significant market share and capability in their respective regions.

The next step in the execution of our strategy is to expand our presence and infrastructure and system sales to Asia-Pacific and Europe. We already supply technology to major service providers in these markets, and we plan to expand this strong presence through partnerships.

This strategy will allow us to access orbital slots, landing rights, regulatory approvals and existing distribution channels. As the world continues to emphasize mobility, our mobile satellite engineering teams play a key role for our existing and new customers. This includes developing products and services for new applications.

This group, while opportunistic, is gaining traction as we saw in the new mobile networks and providing development support on EML initiatives. The OneWeb program is on track with our development work. We expect this effort to continue to accelerate throughout the year. Now for our performance in Q2.

Revenue was up 6% year-to-year, despite beams on our Jupiter satellite reaching saturation and filling up. Our consumer base continues to grow in this quarter. We ended Q2 '19 with a total of approximately 1.415 million subscribers. The net add of approximately 26,000 in this quarter. Our international customer base grew to approximately 169,000 subs.

In Q2, we expanded our customer service to a major South American country and now offer services in 6 countries in Central and South America. By the end of the year, we plan to offer Hughes net service in Mexico as well.

The systems, the methods and experience gained from our service development in North American business has gone a long way in these markets, which are relatively new markets for satellite broadband.

In each of these countries, we believe that community Wi-Fi, hotspot services will be a complementary approach to reach users throughout much of the service area. Now to our enterprise business. Our North American enterprise business had a strong quarter in terms of orders, introduced significant service expansions with Rite Aid and sonic.

We also saw an increase in the overall level of activity, with smaller routers from a broad range of customers. Our franchise businesses will see broadness from a range of operators including ConocoPhillips, Exxon, Denny's and Chevron.

In the energy sector, we saw a continued upswing in exploration-related networks and received an order from a new customer, the Oil Patch Group. In the in-flight connectivity market, we extended our network operations contract to Global Eagle through the end of 2023.

We, additionally, have all the infrastructure in place to support the technology service over the United States, Mexico and the North Atlantic. Moving on to our international enterprise business.

In India, we received a major award from Harris Corporation to provide satcom equipment support the Indian Airports Authority air traffic control management system. At the first quarter call, I mentioned that our Indian subsidiary has received the flight and maritime connectivity license from the Indian government.

On the Aero, we are engaged with multiple aero service providers, who are looking to include India in their global coverage where we'll provide the capacity and manage service. In the maritime market, we expect to service the end customers directly, and are also in discussion with other global service providers for international roaming services.

In Indonesia, our Jupiter system was chosen by all 5 of the service providers who are providing satellite broadband to BAKTI, a division of the Indonesian Ministry of Communications. This project will involve over 8,000 cellular backhauls and internet assesses locations.

Additionally, I'm pleased to say that the PSN consortium, who will build and operate a new 120-gigabit satellite on behalf of the Indonesian government, has selected Hughes and the Jupiter satellite system as the project will drag on.

In the Middle East, we've received [Indiscernible] from a major telecom services provider about the Jupiter system and several thousand remote terminals to provide internet services. In the government sector, the U.S.

army awarded Hughes an $11.8 million contract to develop a new end-to-end narrowband and architecture and a product demonstration incorporating machine learning and artificial intelligence. So as you can see, we are active on many fronts.

On the consumer front, our expansion into Central and South America continues to fuel our overall growth as these markets have sufficient satellite capacity for the next several years. Our enterprise business is expanded into many exciting applications worldwide, and we are making good progress in penetrating the government.

Finally, our Jupiter 3 satellite construction is on track for a launch in 2021 to enable us to resume growth in the North American consumer business. Let me now hand it over to Dave..

Thank you, Pradman. Before I get into our financial results, a few words on our adjusted EBITDA measurement that we included in our press release. The measurement excludes from EBITDA certain nonrecurring items as well as gains and losses in our investment, more details on the GAAP to non-GAAP reconciliation are in our earnings release.

We believe that adjusted EBITDA more closely represents our operating efficiency and financial performance. The adjusted EBITDA numbers will be what I speak to throughout the call. Now to our results.

Consolidated revenue in the second quarter was $537 million, a growth of 2% over the same period last year, driven primarily by growth in Hughes consumer, international enterprise and mobile sat, offset partially by Hughes domestic enterprise and ESS revenue. Adjusted EBITDA in the second quarter was $199 million compared to $211 million last year.

The reduction being primarily due to the lower ESS revenue, which has very high margins. Higher bad debt and strategic transaction expense along with higher sales and marketing within the consumer business also impacted these results.

This was partially offset by the margin of the higher Hughes revenue and favorable exchange rates relative to the last year. We'll talk more about some of these items in a moment. Net income was a loss of $5 million in Q2 compared to a gain of $78 million last year.

The decrease was primarily driven by the decline in adjusted EBITDA just referenced, lower net gains on investments of $53 million, higher litigation expense of $25 million related to a patent case, a net gain of $10 million in the settlement with a third-party vendor in Q2 2018 and increased depreciation expense.

This is partially offset by lower net interest expense and lower income tax expense. Capital expenditures in the quarter were $107 million compared to $120 million in Q2 last year. Decrease was due to the lower spend on construction and infrastructure associated with satellites.

Free cash flow, defined as adjusted EBITDA minus CapEx, was $92 million during the quarter. Hughes revenue in Q2 was $452 million, a 6% increase year-over-year, driven primarily by growth in Hughes consumer service, international enterprise and mobile sat sales, offset partially by North American enterprise.

Adjusted EBITDA in Q2 was $156 million, a 3% increase over Q2 last year, primarily from revenue and margin growth, offset partially by an increase in bad debt expense of $13 million that is primarily related to the restructuring of a single customer contract, marketing and promotional costs associated with the consumer business and equity and losses of unconsolidated entities.

ESS revenue in Q2 was $81 million, down 15% from the same quarter last year due to the termination of a lease on EchoStar 7 in June of last year and other reductions from lower satellite capacity lease revenues. Adjusted EBITDA was $68 million in Q2 compared to $82 million last year due to the lower revenue.

Adjusted EBITDA incorporating other segments in Q2 was a loss of $25 million compared to a loss of $23 million in Q2 last year, the change being primarily related to higher G&A expense associated with strategic transactions.

In June, we repaid the outstanding principal of the 2019 senior secured notes at maturity and ended the quarter with $2.5 billion of cash in marketable securities and approximately $95 million of net debt inclusive of capital leases. Also I'm pleased that both S&P and Moody's recently upgraded our credit ratings. Let me now turn it back over to Mike..

Thank you, Dave. As you all heard, there are exciting initiatives which are part of our implementation of a comprehensive global growth strategy. We are looking forward to completing the BSS DISH transaction and the other joint ventures, all of which are designed to drive revenue and earnings growth.

Let me now turn it over to the operator to start the question-and-answer session..

[Operator Instructions] Your first question is from Ric Prentiss from Raymond James. Your line is now open..

Thanks. Good morning, guys. So a couple of questions if I could. You mentioned bad debt out into the quarter, restructuring primarily one customer contract.

Can you give us a little color on that? And what do you expect bad debt to trend as we look into the rest of '19 and '20?.

Yes. Ric, so as I said, the primary cause of that increase was a single-customer contract. We restructured that contract in the second quarter.

As a result of accounting standards, we had a considerable amount of unbilled revenue that we had recognized as -- under the previous contract, while the customer is obligated to pay those previously unbilled amounts, we felt it was prudent with the restructuring of the agreement to take a reserve.

We believe that we've got an adequate reserve on that. I would expect -- I would not expect to see bad debt continue at those kinds of levels going forward..

Makes sense. And then I think I also called out that the Hughes domestic enterprise business, I think that Hughes also probably down -- maybe down $9 million year-over-year at the enterprise level.

Any update as far as what happened there and how we should think about that trending out?.

Yes. I think as you have seen in the past, Ric, North American enterprise business has been relatively flat to a slight growth. And so in the long term, I would expect that trend to continue. We'll obviously have variances quarter-to-quarter in each of deals are considered -- are done from major contracts with customers.

But the long-term trend is flat to slightly small, single-digit growth..

Okay. Makes sense. And then within the Latin American markets that you've been opening up in Central American and South America and you mentioned Mexico coming by year-end now.

How should we think about how those markets kind of get into the ramping of adding subscribers and helping EBITDA? Because clearly, there's probably some cost upfront getting in those markets.

So how should we think about trending out as what the adds might be and then the EBITDA production in those markets?.

Well, as you've seen in the past, when we open up these markets, you're right, for a certain period of time because of the fixed costs that you have to spend to get into these markets, you see a negative EBITDA in the beginning.

Typically, it takes us about 2, 2.5 years to basically turn EBITDA positive and we expect, as we open each of these markets, that kind of trend will probably show up, too. And the initial countries that we have already been in business for a year or 1.5 years, we've seen that trend, and I expect Mexico will have the same characteristic..

Okay. And last one for me is, I know it's in the 10-Q that there was a lawsuit filed by a supported shareholder on the DISH spin transaction. Any update on where that case might stand? And how do you receive Brazil, U.S. or U.K.

approvals for that transaction?.

Ric, this is Dean Manson. So that's been filed and a briefing schedule is being sorted out. It's just proceeding normally at this point as far as we can tell. So we don't have anything more specific to say about that or over the satisfaction of closing conditions on the transaction..

How about -- you guys talked about Anatel in the 10-Q, have you gotten Anatel approval for that particular satellite in the spin?.

Yes. Again, I don't think we have anything to announce in terms of progress towards completion of conditions but --.

Yes. I think, Ric, just to clarify, I think you're talking about EchoStar 23 that has been located at 45 West. We have gotten release from -- on that regards and actually the satellite is already in motion, moving to a different location other than 45 west..

Okay.

And you're still expecting closing by year-end though?.

Yes..

Yes..

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

Thanks. I wanted to start with a question on broadband business and I know you don't give specific numbers.

But in the North American market, can you characterize sort of what's happening with churn, in customer additions and promotional materials, given potential capacity issues? And then the second question, is it fair to assume that most of the net adds in the quarter came from the international operations?.

Both good questions, Chris. So generally, the Central and North America is also consistent with the past, churns being fairly stable. Let's see the growth -- the net adds, no, it was also a combination of both North America and South and Central America pretty uniquely distributed. Yes..

Got you.

And shifting gears on the S-band, can you give us an update on where you are in terms of actually announcing and rolling out a service?.

Chris, just on the amount, are you speaking specifically of the EU..

Yes..

We have had a service offering up in Europe for quite some time. And what we've been doing is enhancing as well as developing some additional products and additional hardware that will be available in the marketplace hopefully by the end of 2019..

Okay.

And is that -- the customer wins in that business, are they the type of ones where you would have a press release associated with it?.

We have made certain releases, yes, about customer relationships that we have entered into. As I mentioned, we're in the process of onboarding RigNet, which has signed a multifaceted agreement with us as well as now Galaxy1..

Great. And final question, I know it's, again, not a large piece of the business.

But the government, your outlook there, I think you did have some nice wins recently?.

Yes. We are being pleasantly surprised in the last quarter or 2. We have won at least 2 major contracts besides our normal equipment supply. These are contracts to develop new network management services for the government. And one of them is a multiyear contract of significant value that we are hopeful will develop into a much bigger business.

For outlook side, there was network management segment of the government's future requirements that are coming to us more and more in the country..

Understand.

And are there ongoing discussions in terms of government adopting and expanding its use of Jupiter technology?.

Not necessarily Jupiter technology. Although, there is, at least, on marketing level a significant interest in some of the network management aspects of the Jupiter technology as I mentioned earlier.

The actual rate form and the model have been set by the government over the last 10 years, very difficult to change that aspect of the government systems..

Understand. And I can't leave without making Dave answer, at least, one question. So you had a whole bunch of Jupiter -- having equipment sales in the last couple of quarters.

Is that expected to have any kind of an impact in terms of the margin mix that we see between equipment and in services? Because I know in the past, those systems tend to be very lumpy..

Yes. They do tend to be lumpy and they also tend to be delivered over an extended period of time. Obviously, the equipment margins, since you raise margins, equipment margins do not come at the same level as consumer margins, obviously.

But we wouldn't expect to have that impact on our overall margin results because, obviously, we continue to grow some subscriber revenue as we also focus on equipment sales increases..

Your next question is from Giles Thorne from Jefferies. Your line is now open..

Thank you. I have three questions, please. The first one is deliberately provocative, but picking up on the news that OneWeb signed a pretty large agreement with the Canadian government.

Does this constitute in your view a canary in a coal mine for internet broadband by geostationary? Second question, speaking with OneWeb actually, we've had some of the early outputs around speed and latency.

It would be interesting to get your perspective on those? And if OneWeb or when OneWeb embarks on its next funding round, would you participate? And then the final question is on the DISH Mexico stake.

Can you just confirm that, that is going back into DISH or is that staying with yourselves and the reason behind the decision that was made?.

So let me address a couple of those, and then I'll turn it over to Pradman a little bit. Confused by your opening statement on OneWeb and the Canadian government. You may be referring to Telesat announced a contract and funding from the Canadian governments. So just to -.

Absolutely right. My mistake. Yes, it was Telesat or kind of same principle..

No, no, I understand. I'm just trying to understand that we're on the same page. Regarding funding of -- future funding on OneWeb, we'll make those decisions when the time is appropriate.

I'm not going to discuss future funding potential, and I'll let -- then in terms of DISH Mexico, now the DISH Mexico investment remains with EchoStar is not part of the spend and merge assets. And I'll let Pradman answer the question regarding -- I couldn't quite hear on the latency I heard as well as impact on the LEO networks on GEO capabilities..

Yes. I think that's, obviously, a subject of great interest these days. We wish -- we strongly believe that the LEO networks, the mix, come into service, will complement the existing GEO networks. It depends on the application and the function of the network architecture as to what we used where, when the tools coexist with each other.

In terms of the effects of latency, we have proven now over the last 30 years that most applications that -- for data communications are not sensed in for latency. But there are a whole set of applications, which we have not been using satellite communications for, that latency does become an issue like gaming, for example, voice.

And so by having the LEO capability, we'll be able to pretty much address most if not all applications in data communications..

It sounds, Pradman, that these -- your answers you've previously given.

So is it fair to say that your positions are not changed at all on any risk or reward from a LEO constellation?.

Yes. Right. That's probably a fair statement..

And was there any -- have you had any conversation with Xplornet around the Telesat news?.

We, obviously, talked about everything; it's a small community, but nothing of chafing at the bit..

And then just final question. You are in this unique position of supplying some of your competitors on occasions and with the sale of Jupiter technology into ground networks and so on. And on some occasions, you've co-invested with a partner and others you've not, you've just been a supplier.

And can you just remind us what drove you to co-invest in OneWeb? I know this was a question you would have answered a while back, but it would be useful to get a recap on that..

Yes. Basically, you've got it right. We are very flexible in our business approach. We compete and we cooperate with our competition, depending on whether it makes business sense or not. And historically, we have invested and -- with all kinds of people, so that's pretty consistent with our behavior in the past.

With OneWeb, we thought it was a great opportunity for us both in terms of investments and a company that we could supply significant amounts of equipments and services and then panned out very well so far. We hope that the investment will also be very positive in the future..

Would you have -- would you have invested in OneWeb if there hadn't been a supply agreement?.

I think so. I don't know the -- at this stage, it's difficult to second-guess the future or second-guess the past. But we don't have the time obviously. So our primary objective where we make investments is to continue to have it complement our existing businesses..

There are no further questions at this time. Presenters, you may continue..

Thank you, operator. If there are no other questions, we'll wrap it up at this point. But before we conclude our call, I would like to let you know that after 26 years at Hughes and EchoStar, Deepak Dutt has decided to retire. While he'll be around for a little while longer, this will be the last call he is on, at least as participant.

I and the company want to thank him for all the hard work and support he has provided the company over many years. He will be missed. With that, we'll end the call. Thank you..

This concludes today's conference call. Thank you, everyone, for participating. You may now disconnect..