EchoStar Corporation (NASDAQ:SATS) Q4 2023 Earnings Call Transcript
EchoStar Corporation (NASDAQ:SATS) Q4 2023 Earnings Call Transcript March 1, 2024
EchoStar Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the EchoStar Corporation Fourth Quarter and Year-End 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dean Manson, Chief Legal Officer. Thank you. Mr. Mason, you may begin.
Dean Manson: Thank you, and welcome, everyone, to EchoStar's fourth quarter and full year 2023 earnings call. We will begin with opening remarks from Hamid Akhavan, President and CEO; followed by Paul Orban, EVP and Principal Financial Officer; and Gary Schanman, EVP and Group President of Video Services; John Swieringa, President of Technology and COO; and Paul Gaske, COO of Hughes. Also present with us is Tom Cullen, EVP, Corporate Development. As usual, we requested any participant producing a report, not identify other participants or their firms in such reports. 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 a list of those factors and risks, please refer to our annual report on Form 10-K for the year ended December 31, 2023, filed on February 29th 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 OIBDA during this call. The comparable GAAP measure and a reconciliation, thereto, is presented in our earnings release. With that, I'll turn it over to Hamid.
Hamid Akhavan: Thank you, Dean. Good morning, everyone. This is my first earnings call as the CEO of the new EchoStar. You may notice that we are using a format that we have been using at EchoStar, which is different from the traditional DISH format. I find it more to my style of providing helpful scripted information upfront, which attempts to answer some of the questions you may have. The merger was an important milestone in both companies shared history. It brings us closer to our goal of providing ubiquitous connectivity to people, enterprises and things everywhere. It will enable business opportunities that we intend to realize in cost and revenue synergies as we continue to position EchoStar in the market with a superior portfolio of brands, technology and services.
This merger combined DISH Network satellite technology, streaming services, engineering expertise, retail wireless business and nationwide 5G network with EchoStar's premier satellite communication solutions, enterprise go-to-market capabilities and US based manufacturing. Collectively, it creates a new kind of athlete in global telecom and for EchoStar to be a leader in terrestrial and non-terrestrial wireless connectivity and entertainment services exceeding any other company. When we merged EchoStar and DISH, both companies were at a crossroads as each was transitioning from building capabilities to commercializing them. At DISH, we build the world’s first standalone 5G Open RAN cloud-native wireless network. At EchoStar, we launched the largest ever commercial broadband satellite.
Over the past 90 days, we have sharpened our focus on taking our newly combined capabilities to market and leveraging synergies across our diverse portfolio of products. Work is well underway to improve our capital structure, reset our retail wireless business and grow customer traffic on our network, taking full advantage of our unique combination of assets. For now, I would like to first comment on our efforts to improve our capital structure. Let me begin by stating that we have a value-generating business with a strong potential for growth. We have an asset-rich balance sheet with significant capacity to support additional debt. That said, in the short term, we need to provide additional liquidity to fund the growth of our business and address near-term debt maturities.
To this end, we have enacted an operating plan for 2024 with the goal to achieving positive operating free cash flow, defined as free cash flow minus debt service payments. This includes a reduction in our annual total operating expenses by $1 billion between synergies and other cost measures. As part of our work towards an improved capital structure, including a longer maturity runway and opportunity to deleverage our balance sheet, the strategic asset transactions we conducted in January enhance our flexibility to implement various balance sheet initiatives, including opportunities to raise new financing. Following those transactions, we launched two exchange offers designed to address our near-term debt obligations and to reduce our overall debt.
The exchange offers we launched were not accepted by our existing investors, while discussions with some stakeholders are ongoing we are prepared to continue good faith discussions with all of our stakeholders and arrive at solutions that are in the best interest of the company and all involved parties. With this as background, let us now address the going concern qualification noted in our 10-K, which I'll have Paul Orban cover in addition to several key financial metrics and onetime items. Paul?
Paul Orban: Thank you, Hamid. As Hamid mentioned, I'll start with addressing the going-concern qualification. Please read the financial statements contained in our 10-K to see the precise disclosure. This evaluation is a technical accounting determination that, importantly, did not consider the potential mitigating effect of a range of operating and financing plans we're currently pursuing. To provide more color, the accounting rules require us to consider our current cash position and project our cash position one year from our filing and do not allow us to consider any new funding sources unless that financing is committed at the point of our filing. We are in active discussions with numerous parties to secure committed financing to meet our future obligations and have received significant inbound interest from reputable counterparties looking to provide such financing in various forms and had various positions in our capital structure, all of which we are carefully evaluating.
If sufficient financing is committed, the going concern qualification will be alleviated. As of the end of the year, we had $2.4 billion in cash and marketable securities. We intend to pay our March 2015 debt maturity with cash on hand. Financing will be required to pay off our November 24, $2 billion debt maturity. We believe we have significant new financing capacity using the unencumbered assets that include our spectrum holdings as well as through the newly formed unrestricted sub holding approximately 3 billion DISH TV subscribers. As we evaluate all of our options, we are focused on operational flexibility and long-term financial stability. With the ramp down of network CapEx, coupled with the reductions that Hamid discussed, we're expecting operating free cash flow to find as free cash flow, excluding debt service payments to be positive in 2024.
As Hamid mentioned, this is our first call since finalizing the merger. It is also the first time we are reporting as a consolidated company. With that, our financial statements are presented for all periods as if we have always been consolidated. You will see the legacy EchoStar business recorded under Broadband and Satellite Services segment and the legacy DISH Network business presented in the Pay TV, Retail Wireless and 5G deployment segments. Now let's review our financial performance. First, we recorded two significant one-time non-cash items in the fourth quarter of 2023. The first, non-cash item is the impairment of goodwill in the amount of $758 million in total. The accounting rules require a company to test goodwill at least annually, which we did in the fourth quarter.
In our assessment, as a result of our market cap being suppressed for a prolonged period of time, we impaired goodwill in various -- varying amounts across all of our segments. The non-cash impairment charge is recorded in impairment of long-lived assets and goodwill on our income statement and as a reduction to operating income and OIBDA. The second non-cash impairment was a $1.6 billion reduction to the fair value of our 800 megahertz purchase option. Due to the relatively short time period remaining prior to the options expiration, coupled with not having a definitive financing agreement in place, we have reduced the value of the purchase option to zero, resulting in a non-cash charge of $1.6 billion to other income. Other income does not affect operating income or OIBDA, but that does impact total net income.
Next, consolidated revenue for 2023 was $17 billion. That's down roughly 9% year-over-year, due primarily to subscriber declines mainly in PayTV. Removing the non-cash goodwill impairment, operating expenses before depreciation were $14.9 billion. That's roughly 2% lower year-over-year. Operating expenses improved as we have fewer subscribers, primarily in PayTV. The improvements were offset by continued increases in programming costs and PayTV as well as higher operating costs for our stand-alone 5G open RAN network as we brought more sites into service. OIBDA was $2.1 billion, excluding the impact of the non-cash goodwill impairment. That's down $1.3 billion year-over-year, fueled by the ramp-up in operating expenses for the network as well as reductions in subscribers, both mentioned previously.
CapEx was roughly flat year-over-year as construction activity for the network was similar in 2023 versus 2022. However, the CapEx spend for the wireless buildout decreased in the fourth quarter and should continue to decrease in 2024. You can expect CapEx for network deployment in 2024 to be less than half of what we recorded in 2023. Free cash flow was a negative $1.8 billion for 2023, down $1.4 billion from 2022, similar to OIBDA. The decrease is driven by expanded network OpEx and a reduction in subscribers. For 2023, operating free cash flow was a negative $390 million. With that, I'll turn it to Gary to discuss our Pay-TV unit.
Gary Schanman: Thank you, Paul. On the Pay-TV side, we finished the year with approximately 8.5 million customers. In regards to DISH TV, our DBS satellite TV service, we finished the year with approximately 6.5 million subscribers, a loss of approximately $945,000 from 2022. Year-over-year ARPU grew 3.3% primarily from price increases across both DISH and Sling. And on a full year per subscriber basis, Pay-TV drove an OIBDA increase of 3% over 2022. Our 2023 subscriber numbers for DISH TV were negatively impacted by a series of local broadcaster group disputes and also due to our Q1 cyber incident. We will always look to protect our largely rural customer base against unreasonable rate increases. Unfortunately, we've resolved most of these programmer disputes and look forward to a less disruptive year in 2024.
In 2023, we saw opportunities to increase the yield on our video subscriber base, while also seeking both investment and team efficiencies. First, we consolidated the DISH and Sling organizations into one video services team, driving significant efficiencies across product, marketing, sales and operations. We also increased the focus on customer experience better address customer pain points and improve their products. In addition, we shifted investment to profitable growth areas across the business, specifically in enterprise video, media sales, marketing analytics and loyalty efforts. We'll continue these initiatives into 2024 as well as integrating with and cross-selling our Hughes and Boost products. On the Sling TV side, we finished the year with approximately 2.1 million subscribers down approximately 280,000 from 2022.
It is important to note that Sling is and has been a profitable business, which is rare among screening services. Our Q4 results were impacted by an increasingly competitive streaming market. Programmers continue to spend less on their core linear TV product, which we pay for and continue to shift investment into their own direct-to-consumer services, even though these efforts have been largely unprofitable. In particular, the Warner Bros. discovery decision to make TNT and TBS sports available free through MAX and the increasing simulcasting and sports programming on ESPN Plus for Disney and Peacock from NBCU has added more confusion to an already fragmented market. Regardless, we continue to invest in experiences to delight our customers and increase engagement.
Including new loyalty program that gives our subscribers a chance to win valuable prices, the more they use our service. Recent improvements to our experience drove monthly viewership for sub up over 15% year-over-year. And we're also really pleased with the growth of Sling Free stream, our free ad-supported service, which recently launched the industry's first free DVR. In 2024, we'll continue to innovate on the platform to ensure we're delivering the content, features and experience are paid and free customers want. I'd like to now turn it back to Hamid, who will cover Retail Wireless.
Hamid Akhavan: Thank you, Gary. With the departure of Mike Kelly, I will take the helm of our retail wireless business while we search for Mike's successor. This will consist of overseeing the strategy and operations as well as repositioning the business to take advantage of our owner economics with the arrival of our network. In regard to recent wireless, we have put the majority of the building blocks in place to become the nation's fourth facilities-based wireless carrier, but we have not yet optimized our marketing and acquisition tactics, particularly with postpaid customers. We pushed -- we finished the year with approximately 7.4 million subscribers, down approximately 8% from 2022, which was partly due to our focus on higher-value subscribers with better devices as evidenced by lower subscriber churn in 2023.
We also took steps to optimize our sales channels and programs, which, in some cases, reduced unprofitable offerings and underperforming dealers. We do see positive trends to build upon, including higher attachment of value-added services such as our Boost protect device insurance offerings and higher auto pay penetration resulting in lower churn. The availability of mobile devices compatible with our network has until now been limited. We have made great strides in this area over the past six months, adding the iPhone 15 lineup, the all-new Samsung Galaxy S24 devices and the Motorola Razr, all of which we expect will help our economics going forward. In January, Boost got off to a fast start launching seven new devices compatible with our network.
As we shift our device mix to 5G network compatible handsets, we are seeing higher unit cost which we expect will be more than offset from the savings arising from the use of our own network. In addition, we will focus our efforts to profitably expand our current target customer segments through competitive offers, flexible service options and outstanding customer experiences that exceed the current industry levels. It is our goal to ramp up significant positive momentum by the end of 2024, as we shore up our branding, marketing and operations for the business unit. Let me now hand the call over to John to cover network deployment.
John Swieringa: Thank you, Hamid. We met our June 2023 coverage milestone by offering broadband service to over 70% of the US population. As confirmed by the FCC covering more than 240 million Americans with connectivity through the latest technology. Today, our network provides 5G broadband coverage, to over 73% of the US population and 5G voice coverage, to more than 200 million Americans with a competitive device portfolio and domestic and international roaming partners. This milestone not only marks an expansion of the world's first 5G Open Ran network, but also affirms our steadfast commitment to advancing America's technology leadership in wireless. We continue to expand, optimize, meet milestones and advance the Boost wireless network build-out in alignment with our network development plan.
During our last call, we indicated that we launched over 20,000 on-air sites by the end of the year and we exceeded that mark. The Boost wireless network, as recently noted by Signals Research Group, offers a very good user experience and fast speeds. We have firm plans in place to continue to move Boost customers with compatible devices to our network to take advantage of owners' economics. I'd like to turn it over to Paul Gaske, who will cover broadband and satellite services.
Paul Gaske: In Satellite Services segment, operates in both the consumer and enterprise markets. In line with our strategy, we expect a gradual shift in mix of the revenues from consumer to enterprise, and we anticipate that in 2024, our enterprise revenues will surpass consumer revenues for the first time. Our consumer business under the HughesNet brand ended the year with approximately 1 million satellite broadband subscribers, down approximately 224,000 from 2022, due primarily to our capacity limitations, competitive pressure and more selective customer screening as we focus on more profitable subscribers evidenced by our historically high ARPU. Jupiter 3 commenced operations in late 2023. This satellite provides significant additional capacity, allowing us to be more competitive and responsive to customer demands for greater speeds and higher data allowances.
Early feedback from customers is quite positive and will help us reverse the subscriber loss trend of 2023. Our Hughes enterprise business consists of many diverse systems and service components. We finished 2023 with a multiyear backlog of approximately $2 billion. And our order bookings in the fourth quarter of 2023 came in strong at $694 million. Of note, in the fourth quarter, we announced the receipt of a major contract from Delta Airlines to provide in-flight communications to over 400 Boeing 717 and regional jets. This weight optimized high-performance aeronautical solution utilizes advanced artificial intelligence to power the Hughes in-flight management system that includes a multi-orbit antenna and Hughes Jupiter Ka-band satellite capacity.
This order marks a change in strategy for Hughes as we begin to directly serve airlines around the globe. Turning to our OneWeb business. We began initial shipments in December of a Hughes manufactured user terminal based on our unique flat panel electronically steered antenna technology, manufactured in our U.S.-based facility. In parallel, we continued to deliver gateways to OneWeb for the global network. As for our managed services business, which focuses on highly -- providing highly reliable and secure communication services to enterprises. He was named by Gartner as a leader in the 2023 Gartner Magic Quadrant. This recognizes us as one of the few companies that has the ability to deliver best-in-class enterprise services on a global scale.
With that, I'll turn it back over to Hamid.
Hamid Akhavan: Thank you, Paul. As noted, we have work to do to strengthen our capital structure achieve sustainable and profitable customer growth and develop as an integrated new athlete in global telecom. We will utilize the experience and resources from within our established business units to realize the growth opportunity of our newer businesses. As a newcomer in wireless industry, naturally, we have significant challenges ahead, but we also see opportunities, which the incumbents are unable to capture due to their legacy obligations, whether it be protecting their higher prices for existing base or being tied to inflexible operation systems. We will focus on identifying and leveraging these advantages wherever possible in each of our market segments.
We will also find new ways to bundle our diverse products across the new EchoStar family to provide innovative solutions and services customers want. We are only about 60 days into the merger, but as mentioned, we have already put significant improvement initiatives in motion to increase our momentum across all business units of the new EchoStar. With that, we'll open it to Q&A.
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