EchoStar Corporation (NASDAQ:SATS) Q3 2023 Earnings Call Transcript November 6, 2023
EchoStar Corporation misses on earnings expectations. Reported EPS is $0.04 EPS, expectations were $0.32.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the EchoStar Corporation Third Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers are presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today ares conference is being recorded. I would like now to turn the conference over to Dean Manson, Chief Legal Officer. Please go ahead.
Dean Manson: Thank you, Michelle. Hello, everyone. And welcome to our earnings call for the third quarter of 2023. I’m joined today by Hamid Akhavan, our CEO and President; Paul Gaske, our Chief Operating Officer; Jeffrey Boggs, Senior Vice President of Finance; and Veronika Takacs, our Chief Accounting Officer. 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. All statements we make during this call, other than statements of historical fact, constitute forward-looking statements made pursuant to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements 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 list of those factors and risks, please refer to our annual report on Form 10-K for the year ended December 31, 2022, filed on February 23rd, and our subsequent filings made with the SEC. All cautionary statements we make during the call should be understood as being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our reports and should not place any undue reliance on any forward-looking statements.
We assume no responsibility for updating any forward-looking statements. We refer to adjusted EBITDA during this call, the comparable GAAP measure and a reconciliation there too are presented in our earnings release. I will now turn the call over to Hamid.
Hamid Akhavan: Thank you, Dean, and good day, everyone. Our agenda for the call today is as follows; first, will provide a brief overview of financial activity from the third quarter; after that, we will discuss our business strategy, which includes the three parallel work streams that I call Horizons; and our progress on all three. We will then move to a question-and-answer session. But before we jump into the third quarter results, let me briefly highlight the announcement of our contract award with Delta Air Lines signed in the fourth quarter that will star among the leading in-flight connectivity providers. Delta is known to be an industry leader with in-flight connectivity service and for conducting extensive competitive procurements.
We are thrilled to have earned their confidence in being selected as a new Delta partner. This new order is a major opportunity within the in-flight communications market that will increase our backlog and diversify our business. This is consistent with my statements in prior earnings calls regarding our continued focus on diversification and growth of our enterprise business. In addition, our Jupiter 3 Satellite is in its final stages of in-orbit testing and the satellite is on a schedule for service launch in December. Now let ares turn to our financials. As we have anticipated nearing the end of Horizon 1, the third quarter marks are low point as we enter our historically strong fourth quarter. Our revenue in the third quarter of 2023 was $413 million lower by $84 million compared to the same period of the prior year.
The revenue decrease in the third quarter was partially driven by our consumer broadband business, which continues to be impacted by capacity constraints and other factors as we wait for our Jupiter 3 Satellite to be in service. We also had a decrease in our enterprise revenue primarily due to lower domestic and international deployments and shipments, which we expect to recognize in the fourth quarter and beyond. As I have shared before, most enterprise orders are recognized over several years, which we can create some variation or irregularity in our revenue profile as we saw with the low point in the third quarter. We remain excited about opportunities within the enterprise market, a market that we believe will continue to allow us to better diversify our business both domestically and internationally, and provide cash generation through low capital investment and a scalable operating leverage.
We are enthusiastic about our recent performance and a number of near-term prospects in the enterprise market and see that leading to an estimated enterprise backlog approaching $2 billion. Our adjusted EBITDA in the third quarter was $126 million, a decrease of 21% from last year, primarily driven by the lower revenue. We continue to focus on managing our costs to align with the change in the revenue mix to preserve our ability to generate cash. Capital expenditures net of receipt of refunds in the quarter was $79 million, compared to $61 million in Q3 of last year. The increase was primarily due to increase in expenditures on the J3 Satellite program. Operating cash flow, defined as adjusted EBITDA minus CapEx was $47 million during the quarter, $51 million lower than Q3 of last year.
We ended the quarter with $2 billion of cash and marketable securities. I remain confident about our strategic direction and expectation and execution plan, and our ability to generate healthy returns and cash to execute on many opportunities that are ahead of us. Let me now turn the call over to Paul, who will provide some additional specifics on the quarter and our Horizon 1 and 2 activities.
Paul Gaske: Thank you, Hamid. Under our Horizon strategy that we have previously explained is dividing our strategic focus into three periods of time, near-term Horizon 1, mid-term Horizon 2 and transformational Horizon 3, we are about to enter our Horizon 2 as Jupiter 3 comes into service later this quarter. We will begin to focus on deploying the next-generation HughesNet service across the Americas and continue the expansion of our global enterprise business, including the government sector and our managed services portfolio. During this mid-term period, we also expect to be launching our hybrid LEO-GEO enterprise solutions, as well as leveraging our own manufactured products to pursue growth and further diversification. Jupiter 3 reached its orbital slot earlier in Q3.
The Maxar team has fully deployed all of its antennas and Jupiter 3 is on track to begin transmission testing with our extensive ground system shortly and we expect the satellite to enter into service in December. Once in service, Jupiter 3 will deliver new broadband services in North and South America, and will allow us to focus quickly on addressing the continued demand for high speed broadband service throughout the region. In preparation for the start of Jupiter 3 service, our consumer team is finalizing the development of new service plans with higher speeds and extension of our HughesNet Fusion for the ultimate high speed, low latency satellite Internet experience. We believe the market is eager for these robust offerings and we continue to compete with an attractive portfolio of service plans that will be simple to understand aligned to our customer ares needs.
The market has reacted well to our Fusion service offering. We continue to see considerable percentage of our new subscribers select Fusion service, which is available on our highest ARPU plans. The HughesNet Fusion plans have been well received by existing and new subscribers, and we expect to expand the service to help attract new customers and improve our overall economics as we launch Jupiter 3 service. While preparing for the launch of Jupiter 3, we remain focused on operational efficiencies, yield optimization of our North America satellite capacity and further optimization of our subscriber acquisition strategies. Additionally, we continue to improve our cost and performance through the deployment of AI and ML automation, improved processes, supply efficiencies, of course, not compromising the end user experience.
Moving to our North America enterprise business. We are entering Horizon 2 with a very significant achievement. As Hamid mentioned, we are thrilled to have completed a contract with Delta Air Lines to deploy our Hughes in-flight connectivity solution to deliver WiFi and video services to passengers on more than 400 Boeing 717 and regional jet serving North America. Our solution utilizes the Jupiter Satellite assets in a very innovative way to provide outstanding in-cabin communication service. We have been working extensively with Delta Air Lines team for a number of months and planned initial installations in mid-2024. This program marks a change in business strategy. After more than 20 years supporting numerous in-flight communications providers with our equipment support, we are now expanding to offer our unique in-flight communication solutions directly to commercial airlines.
Regarding the Q3 North America enterprise results, we received several expansion and renewal orders from retailers and upgrade orders in the U.S. retail petroleum market. In addition, Explorer placed a significant order for the terminals that will support their broadband services in Canada using Jupiter 3. In our WebWeb -- OneWeb program, during the third quarter, we continued deliveries of production gateways and systems to meet the OneWeb service implementation plan. We have shipped more than 23,000 satellite subscriber modules for inclusion in OneWeb modems. We are seeing significant interest in our previously announced electronically steered antennas or ESA, from resellers, distribution partners and direct customers. We expect factory shipments to begin this quarter with initial units going to OneWeb for their customers, as well as to customers of our managed LEO service offering featuring OneWeb capacity.
Our government and defense segment had a strong third quarter with follow-on orders from the U.S. Postal Service for broadband services in a number of their rural offices, the State of Pennsylvania for broadband services and Boeing for their PTS program along with add-ons to our DoD contracts supporting the Navy for 5G systems enhancements for the Whidbey Island Naval Air Station advanced flight line program, which we had previously delivered in the first half of the year. We also received an order from prime contractor SES Space and Defense in support of a new Air Force multi-orbit LEO and GEO program for our airborne based communications with software-defined networking, opened a new era for our defense-based communications products. Now to our international operations.
We expect opportunities in cell backhaul and digital inclusion projects to continue to expand Horizon 2 as companies and governments extend their reach to underserved communities. We believe our Jupiter system remains the de facto standard in broadband GEO satellite communications globally and our new LEO ESA for use on OneWeb allows us to strongly compete for these new opportunities going forward. In Latin America, the new Jupiter 3 capacity will allow us to expand our enterprise services for a number of upcoming such projects. In Mexico, we have seen continued expansion of cell backhaul and digital inclusion projects with additional locations, as well as additional capacity. Throughout Latin America, we have added over 1,300 schools, leveraging our equipment and Jupiter capacity.
In Asia, we also see similar opportunities for cell backhaul and digital inclusion projects. As an example, in last quarter in India, we fulfilled the second order from Airtel for 4G backhaul supporting a significant USO project in Maharashtra. We are also upgrading the Indian Army ares Battlefield Surveillance System to Jupiter technology. While in Central Asia, we are -- we were awarded and have delivered a Jupiter system that will provide Internet services to remote communities. And in Southeast Asia, we have received an order for a Jupiter system for use on a high throughput satellite. Lastly, in Latin America consumer business, we look forward to the commencement of services on Jupiter 3, which is expected in the first quarter of next year.
This will allow us to serve additional customers in areas with high demand as well as to enhance the user experience for both new and existing customers. Now let me turn the call back to Hamid.
Hamid Akhavan: Thank you, Paul, for the summary of our Horizon 1 and 2 activities from the third quarter of this year. Even though Jupiter 3 has launched successfully, we continue working on all our work streams, Horizon 1, 2 and 3 in parallel. As for Horizon 3, it is our longer term strategy to expand into new markets through organic innovation and potential acquisitions. To that end, earlier today, we filed an update to our S4 registration statement with the SEC in relation to our pending merger with DISH. We expect the S4 to go effective in the coming days and are on track to close the transaction this year. In addition, we continue evolving our S-band prospects as we announced during the first quarter, construction of our EchoStar Lyra LEO constellation is underway.
We continue to be on track to launch the first LiDAR satellites in late 2024 or early 2025 to begin offering store and forward Internet of Things, machine-to-machine and other data services. At the same time, we are developing opportunities for our global S-band assets. For example, we continue to bring on new customers in Europe for our EchoStar Mobile LoRa-enabled IoT service and are investing in the development of 3GPP Release 17 to complement the existing LoRa technology. Let me now turn it over to the Operator to start the Q&A session.
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