Filed by HEC Holdings, Inc.
Subject Company - General Motors Corporation
and Hughes Electronics Corporation
and EchoStar Communications Corporation
Pursuant to Rule 425 under the Securities Act of 1933
and Deemed Filed Pursuant to Rule 14a-12
under the Securities Exchange Act of 1934
Commission File No.: 333-84472
The following is a transcript of a conference call made available on Hughes'
website beginning July 17, 2002. Certain text contained within the transcrtipt
has been bracketed because it was inaudible.
In connection with the proposed transactions, General Motors Corporation ("GM"),
HEC Holdings, Inc. ("Hughes Holdings") and EchoStar Communications Corporation
("EchoStar") have filed amended preliminary materials with the Securities and
Exchange Commission ("SEC"), including a Registration Statement of Hughes
Holdings on Form S-4 that contains a consent solicitation statement/information
statement/prospectus. These materials are not yet final and will be further
amended. Holders of GM $1-2/3 and GM Class H common stock are urged to read the
definitive versions of these materials, as well as any other relevant documents
filed or that will be filed with the SEC, as they become available, because
these documents contain or will contain important information. The preliminary
materials, the definitive versions of these materials and other relevant
materials (when they become available), and any other documents filed by GM,
Hughes Electronics Corporation ("Hughes"), Hughes Holdings or EchoStar with the
SEC may be obtained for free at the SEC's website, www.sec.gov, and GM
stockholders will receive information at an appropriate time on how to obtain
transaction-related documents for free from GM.
GM and its directors and executive officers, Hughes and certain of its officers,
and EchoStar and certain of its executive officers may be deemed to be
participants in GM's solicitation of consents from the holders of GM $1-2/3
common stock and GM Class H common stock in connection with the proposed
transactions. Information regarding the participants and their interests in the
solicitation was filed pursuant to Rule 425 with the SEC by EchoStar on November
1, 2001 and by each of GM and Hughes on November 16, 2001. Investors may obtain
additional information regarding the interests of the participants by reading
the amended preliminary consent solicitation statement/information
statement/prospectus filed with the SEC and the definitive consent solicitation
statement/information statement/prospectus when it becomes available.
This communication shall not constitute an offer to sell or the solicitation of
an offer to buy, nor shall there be any sale of securities in any jurisdiction
in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such
jurisdiction. No offering of securities shall be made except by means of a
prospectus meeting the requirements of Section 10 of the Securities Act of 1933,
as amended.
Materials included in this document contain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
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 or from any future results expressed or implied by such
forward-looking statements. The factors that could cause actual results of GM,
EchoStar, Hughes, or a combined EchoStar and Hughes, to differ materially, many
of which are beyond the control of EchoStar, Hughes, Hughes Holdings or GM
include, but are not limited to, the following: (1) the businesses of EchoStar
and Hughes may not be integrated successfully or such integration may be more
difficult, time-consuming or costly than expected; (2) expected benefits and
synergies from the combination may not be realized within the expected time
frame or at all; (3) revenues following the transaction may be lower than
expected; (4) operating costs, customer loss and business disruption including,
without limitation, difficulties in maintaining relationships with employees,
customers, clients or suppliers, may be greater than expected following the
transaction; (5) generating the incremental growth in the subscriber base of the
combined company may be more costly or difficult than expected; (6) the
regulatory approvals required for the transaction may not be obtained on the
terms expected or on the anticipated schedule; (7) the effects of legislative
and regulatory changes; (8) an inability to obtain certain retransmission
consents; (9) an inability to retain necessary authorizations from the FCC; (10)
an increase in competition from cable as a result of digital cable or otherwise,
direct broadcast satellite, other satellite system operators, and other
providers of subscription television services; (11) the introduction of new
technologies and competitors into the subscription television business; (12)
changes in labor, programming, equipment and capital costs; (13) future
acquisitions, strategic partnership and divestitures; (14) general business and
economic conditions; and (15) other risks described from time to time in
periodic reports filed by EchoStar, Hughes or GM with the Securities and
Exchange Commission. You are urged to consider statements that include the words
"may," "will," "would," "could," "should," "believes," "estimates," "projects,"
"potential," "expects," "plans," "anticipates," "intends," "continues,"
"forecast," "designed," "goal," or the negative of those words or other
comparable words to be uncertain and forward-looking. This cautionary statement
applies to all forward-looking statements included in this document.
HUGHES ELECTRONICS CORPORATION
MODERATOR: JON RUBIN
JULY 15, 2002
1:00 PM CT
Operator: Good day everyone and welcome to the today's Hughes Electronics
Corporation 2002 Second Quarter Earnings Results conference call.
Today's call is being recorded. At this time for opening remarks and
introductions, I would like to turn the conference over to the Vice
President of Investor Relations Mr. Jon Rubin. Please go ahead.
Jon Rubin: Thank you operator and thank you everyone for joining us for
our second quarter 2002 earnings conference call. With me today on
the call are Jack Shaw our President and CEO, Eddy Hartenstein,
Chairman and CEO of DIRECTV, Roxanne Austin, President and COO of
DIRECTV, Mike Gaines our CFO, Kevin McGrath, Chairman of DIRECTV
Latin America, Pradman Kaul, Chairman and CEO of Hughes Network
Systems, Pat Doyle, our Controller and Treasurer and the CFO's from
our major businesses.
Before we proceed I would like to remind you that the use of the
words expect, anticipate, project and similar expressions are
intended to identify forward-looking statements. While these
statements represent our current judgment on what the future may hold
and we believe that they are reasonable actual results may differ
materially due to important factors including those described in our
SEC filings and in General Motors SEC filings.
And now I would like to turn the call over to Jack Shaw for a few
opening comments.
Jack Shaw: Thanks, Jon. I would like to spend a few moments discussing
some of the key results from the quarter, as well as give you some
thoughts about where we are heading in the second half of the year.
The second quarter results are testament to the fact that we are
doing a lot of things right at Hughes.
The DIRECTV US operating performance and outlook is healthy, and we
are on target to hit Hughes full year guidance for revenue and
EBITDA. While overachieving on our cash guidance. To be balanced,
however, we did have to reduce our full year guidance in other areas,
which I will address in a moment.
Looking at the quarter, I was very encouraged to see that demand for
DIRECTV in the U.S. continues to be strong. During the quarter, our
gross subscribers added were comparable to prior record levels for
second quarter, and our net adds were 50% greater than last year's
second quarter.
The monthly average revenue per user, or ARPU, that we generated also
was a pleasant surprise. The quarter over quarter increase reverses
the trend of declining ARPU that we have seen in past quarters and
has given us the confidence to increase DIRECTV 2002 full year
revenue guidance by $100 million to $6.3 billion. And perhaps most
importantly, the DIRECTV US economic model remains strong. As a
result of our continuing efforts to reduce costs and the improved
outlook for revenues we are increasing our full year EBITDA guidance
for DIRECTV US to a range of $525 million to $545 million.
I was also happy to see the nice ramp up in DIRECTV set-top box
shipments by Hughes Network Systems. HNS shipped more than 500,000
boxes during the quarter, nearly 25% increase over last year. Given
the year to date shipments, HNS is on track to ship well over 2
million boxes this year.
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Also worth noting were the solid results that PanAmSat posted,
especially the 72% EBITDA margins. Hopefully, many of you were able
to listen to the PanAmSat earnings call last Friday where they gave
the full details behind their turnaround story.
However, as I mentioned the quarter was not all positive. Certainly
we were disappointed that we fell short of our target for DIRECTV net
subscriber additions in the United States. However, I think it is
important to note that these second quarter results do not reduce our
confidence in achieving our full year subscriber guidance of 1.2
million.
It also became clear that we needed to revise guidance for selected
metrics at some of our businesses. Both DIRECTV Latin America and
DIRECTV DSL will not be able to achieve their prior full year
guidance for net subscribers and EBITDA. And HNS is now forecasting
to achieve the low end of their prior ranges for overall revenue and
DIRECWAY consumer subscribers.
In some cases, the reasons behind the revisions in guidance are
difficult for us to control. Like the economic turmoil and
devaluation of several local currencies in Latin America. You can be
sure that we are working around the clock trying to mitigate the
negative impact from this instability in Latin America.
For our consumer broadband businesses, it is clear that we need to
find a way to make these services more compelling and profitable. If
we are not able to do this, we will take the necessary actions to
stem the losses and change the course. Kevin McGrath and Pradman Kaul
will provide more complete update on these topics later in the call.
Importantly, I would like to stress that because of the improved
guidance from DIRECTV US we are able to maintain the consolidated
Hughes guidance for revenue and EBITDA in 2002. And as Mike will tell
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you in a moment we are improving our cash forecast for the year by
some $300 million.
Before wrapping up my comments, I would like to provide a brief
update on the status of the transaction with EchoStar. As you may
have heard last week, General Motors received a favorable ruling from
the Internal Revenue Service confirming that the split off of Hughes
and merger with EchoStar would be tax-free.
This was an extremely important milestone, and we are pleased to get
it behind us. We continue to spend a lot of time in our nation's
capital, working diligently with the regulatory agencies. The
regulatory review is a long process as we indicated when the deal was
announced. But we believe we are making progress.
We are now fully engaged with the FCC and the DOJ, having produced
numerous documents and continuing to respond to their questions. The
review is at a more detailed level and it is moving in a constructive
manner. We are pleased with this and continue to believe that we can
get a satisfactory result and complete the transaction before the end
of the year.
So, in summary, while we clearly made good progress in many areas of
our business, the second quarter also highlighted some areas where we
still have some unfinished work. Nonetheless I believe the key
takeaway from the quarter is that we are holding Hughes full year
revenue and EBITDA guidance. And our major value driver DIRECTV in
the United States remains on track to meet and, in most cases, exceed
all of the key metrics for the year.
The fact that DIRECTV US is raising its full year revenue and EBITDA
guidance is the best evidence that we have that DIRECTV continues to
improve its operational performance. And we expect these efficiencies
to continue in the future. That concludes my opening remarks. Now I
would like to turn the call over to Mike Gaines.
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Mike Gaines: Thank you Jack. I will start with a quick overview of our
consolidated financial performance and in a few minutes our business
unit leaders will provide a detailed discussion of their revenues and
EBITDA results in the quarter.
Hughes revenue for the second quarter came in at more than $2.2
billion, which is more than 11% better than the second quarter of
last year. EBITDA was $123 million or 50% better than last year. The
primary drivers of our revenue and EBITDA growth continue to be the
improving operating performance of DIRECTV in the US.
The use of EBITDA as a performance metric has been given heavy media
attention lately so I thought I would spend a few minutes helping you
understand how we report EBITDA. And, in particular, our treatment of
expense versus capitalized costs. In the interest of time, my remarks
will focus on our DIRECTV US operation.
If you have any additional questions about Hughes other businesses
please feel free to bring them up during the Q&A period or any other
time after the call. Before going any further, I think it is
important to understand what EBITDA is. We define EBITDA as simply
operating profit plus depreciation and amortization.
At DIRECTV US, we have a business model whereby approximately 99% of
the gross customers we obtain in a given period purchase their own
receiving equipment. For these customers that own their equipment,
all subscriber acquisitions costs, or SAC, are charged to selling
expense, which is included in EBITDA.
Our SAC for a basic box is expected to be around $525 this year.
While no SAC is capitalized for customers that own their own
equipment, a portion of SAC related to dealer commissions, which is
5
about $275 per customer, is expensed over a 12 month period as the
commission is earned by the dealer.
For the roughly 1% of customers that choose to lease the DIRECTV
equipment, an average of approximately $500 per customer is
capitalized and depreciated over four years. These capitalized costs
are associated with the set-top boxes and installation of the
equipment.
Since most of DIRECTV competitors have a much larger percentage of
customers leasing equipment, the result is that these companies
capitalize a much larger percentage of their costs and as a result
are able to report much higher EBITDA. The major costs that DIRECTV
capitalizes relates to long term assets such as constructing and
launching satellites, maintaining and upgrading broadcast centers,
and infrastructure costs related to such things as delivery of local
signals and information technology systems.
As a result of our DIRECTV US business model and the accounting
practices I have just outlined, we believe DIRECTV reported EBITDA is
a relatively more conservative financial metric compared to our
competition, cable.
Now let's review Hughes balance sheet and liquidity position. As of
the end of the second quarter, our cash balance was $836 million or
$278 million less than the balance as of the end of the first
quarter. Total debt was nearly $3.5 billion, which increased almost
$100 million during the quarter. The major use of cash in the quarter
were for satellite and capital expenditures as well as the cash
payment of $180 million associated with the final settlement of the
contractual dispute with General Electric Capital Corporation.
Through the first half of the year, cash requirements have totaled
approximately $700 million. For the remainder of the year, our
current forecast calls for an additional cash requirement of $500 to
$700 million, bringing total 2002 cash requirement to $1.2 to $1.4
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billion. This is an improvement of approximately $300 million from
our prior cash guidance and is due to lower capital expenditures and
improved working capital management, as well as the change in the
expected timing of the resolution of our purchase price dispute with
Boeing.
We now expect any such resolution with Boeing to occur in 2003. In
addition to cash on hand, the company has access to $500 million of
revolving credit facility from GMAC and a $1.2 billion bank revolver.
As of June 30, we have drawn approximately $100 of the GMAC facility
and $1.2 billion revolver is completely available, giving us more
than sufficient liquidity to fund our businesses to the anticipated
close of the merger with EchoStar.
We anticipate that Hughes and/or EchoStar will access the debt market
prior to the expected closing of the merger. The capital raised will
be used to help pay the dividend to General Motors. And if the merger
transaction is delayed, the debt raised by Hughes will be used for
refinancing existing facilities that mature in December 2002. That
concludes my comments. With that I now would like to turn the call
over to Roxanne for comments on DIRECTV US.
Roxanne Austin: Thanks, Mike, I appreciate that. Before jumping into the
details of the second quarter results, I would like to make some
general observations about DIRECTV and the state of our business. It
has been just over a year now since the new management team has been
at the helm. And during the last four quarters we have made
tremendous progress in getting the business back on track.
While we still have much work to do, I can say without a doubt
DIRECTV is now a leaner more cost conscious and customer focused
business today than it was a year ago. Importantly, our DIRECTV
economic model is extremely healthy with subscriber returns
continuing to show improvement each quarter, including this past
second quarter.
7
As we sit here at the halfway point of the year we are seeing healthy
trends concerning our key metrics, and I believe we are on track to
hit our full year subscriber growth target. And, because of better
than expected ARPU and ongoing cost reductions, we believe we will
deliver more revenue. And we are increasing our EBITDA range for the
year compared to our prior expectations. In other words, we expect to
continue to see subscriber financial returns increase during the
second half of the year.
Now let's take a closer look at the second quarter results. Overall,
our business is performing well financially as evidenced by our
overachievement in both revenue and EBITDA expectations. Our revenues
were up 15% over a year ago and our EBITDA doubled. Importantly, we
turned an operating profit loss of $38 million in the second quarter
of last year into an operating profit of $52 million this year. A $90
million improvement.
Our focus on cost and margins are definitely paying off. On the
subscribers growth side, the 202,000 net subscribers additions fell
short of our guidance of 225 to 250. We are disappointed that we did
not meet our subscriber's growth guidance as Jack said earlier for
the quarter, but we were very focused on improving our financial
returns and were implementing a number of new initiatives.
I believe all of our initiatives are good for the long-term financial
health of the business, but they had a one-time effect on our
subscriber performance this quarter. The two primary initiatives that
affected our subscriber growth was implementing a new certificate
program at certain retailers and eliminating our lowest tier
programming package, Select Choice, for new customers and
implementing new pricing for existing customers taking this package.
With respect to growth additions, we began transitioning to the
certificate program at some of our national retailers last quarter,
which temporarily disrupted sales at some of their stores. We are
confident that as a result of the certificate program, which creates
a more simplified sales process for the retailer and eliminates their
8
need for inventory, it enables us to better control the end user
experience.
The sales will start to rebound in these stores this quarter. Going
forward you can expect us to continue to work closely with our entire
network of distributors to aggressively promote and sell our service
while always focusing on acquiring quality, committed customers.
I am encouraged though by the fact that our gross additions, as Jack
said, of 654,000 were comparable to our prior record levels for a
second quarter. And our net additions were 50% better than the net
additions of DIRECTV owned and operated subscribers achieved in the
second quarter last year.
The strong demand continues to be driven by many of the same reasons
we highlighted last quarter. Namely programming packages that compare
favorably to our competition's from a price value perspective,
expanded local channel service, and consumer offers that make
equipment installation very affordable.
The second major factor impacting our net subscribers additions
during the quarter is churn. For the quarter monthly churn was about
1.7%. As part of our new programming package initiatives in the
second quarter, we eliminated our lowest tier-programming package for
new customers and existing customers subscribing the package were
given the choice of either upgrading to a higher programming tier or
accept a $3 price increase.
Our churn rate for these customers was higher than normal, adding
about one tenth of one percent to our churn rate. In other words,
excluding this churn we would have had about 1.6% churn in the
quarter, equal to our first quarter. Of course, for those customers
who accepted the $3 price increase, we are realizing better margins
and that bodes well for us in the long term.
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Additionally, approximately 15 to 20% of these customers upgraded to
higher price packages, another healthy ARPU trend we saw during the
quarter. And while I certainly hate to see any customers leave
DIRECTV, the silver lining is that these new programming packages are
really driving our ARPU and programming margin improvement and these
are key to increases in full year revenues guidance.
We remain confident in our ability to keep churn at 1.6% or lower
range for the balance of the year, due to the increasing number of
subscribers with annual commitments. And most importantly, we also
remain confident that we will be able to achieve our guidance of 1.2
million net new customers this year.
For the second quarter, SAC for basic boxes came in at about $530 per
gross subscriber addition, bringing our year to date SAC average to
$525. SAC for advanced and lease boxes averaged an additional $6. The
slight increase in SAC compared to the first quarter is due to the
higher equipment and installation cost associated with our second
quarter offer that promoted two room systems and the ever increasing
percentage of new customers purchasing multiple set-top boxes.
Considering the profile of customers with two or more boxes in their
home, an increase in SAC for this reason is an investment, quite
frankly, that we are happy to make. Our experience with multi-room
homes demonstrates that these customers generate approximately $15
higher ARPU and higher margins than single set homes. In addition,
the churn rate for these customers is more than five tenths of a
percent better than our average churn rate. And importantly, the $5
mirroring fee alone maintains our existing internal rate of return
for the subscriber, while the improvement in revenue, margin and
churn drive the internal rate of return more than ten percentage
points higher than a single room home.
10
During the quarter some 50% of our gross additions purchased multiple
boxes, yet another healthy trend. We expect this trend to continue as
more and more customers, in particular in our local channel markets,
find DIRECTV a true replacement for cable. At this point, we are
maintaining our SAC guidance of $525 for the year plus another
approximately $10 for leased and advanced boxes.
If the percentage of customers taking multiple set-top boxes
continues to increase, this could put upward pressure on our full
year SAC. However, if there is such a thing as good SAC this is it.
Excluded from our reported SAC are marketing expenses associated with
maintaining our existing subscriber base. These retention marketing
costs total $116 million in the quarter, which is approximately $30
million more than we ran in the first quarter.
As with our SAC, the primary driver behind the higher retention
marketing costs were costs from existing customers purchasing
additional set-top boxes. We believe the significant number of
customers rushing out to buy multiple set-tops was driven by our
ability to now provide a full cable replacement in our now 44 local
channel markets.
As I indicated previously, we have seen significantly enhanced
subscriber value associated with our multiple set-top homes. In
addition, in order for an existing customer to acquire a DIRECTV
subsidized set-top, whether at retail or directly from us, he or she
must make an annual commitment.
And as a result, we believe it makes substantially more economic
sense to subsidize the equipment upgrade to secure the loyalty of
existing customer than it does to lose that customer and have to
replace them at an acquisition cost of $525. We expect our retention
marketing cost to total approximately $100 million per quarter for
the balance of the year.
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Pre-marketing cash flow was 40% of revenue for the quarter, about 1%
higher than the first quarter results. This slight increase was
primarily due to additional cuts made to our G&A expenses and higher
programming margins driven by our continued success of our new
packages. We continue to believe that pre-marketing cash flow will
remain in the 39 to 40% range for the remainder of the year.
Now lets move on to revenue. As I indicated earlier DIRECTV second
quarter revenue of nearly $1.55 billion beat expectations. The strong
performance was due primarily to higher than anticipated take rates
of the Tyson-Lewis fight coupled with continued success of our new
programming packages.
For the quarter, ARPU was $58.10. We expect ARPU to remain at this
level for the balance of the year due to the NFL Sunday TicketTM and
other sports packages starting in the third quarter, our programming
repackaging strategy, continued higher penetration rates of local
channel programming and the improving mix of customers with multiple
set-top receivers in their homes.
As a result, we are increasing our full year revenue and ARPU
guidance. We now expect revenue to be about $6.3 billion for 2002
compared to our previous guidance of $6.2. And we are increasing our
full year ARPU guidance to about $58 per month from our prior
guidance of $57 to $58.
Due to the higher than expected ARPU, slightly lower growth
subscribers additions and continued focus on lowering our cost
structure, we were able to significantly overachieve our EBITDA
projections. For the quarter DIRECTV reported EBITDA of $148 million
compared to our guidance of $110 to $120 million.
We expect to continue to see EBITDA continue at this level for the
balance of the year, not withstanding significantly higher growth
additions in the second half. As a result, especially due to the
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strong performance this quarter, we are increasing our EBITDA
guidance to a range of $525 to $545 million.
So in summary, I would like to stress we are on track to meet and in
many cases exceed our full year guidance for all of our key metrics.
We are seeing healthy trends in several key metrics and the results
we posted in the first half of the year have given us confidence to
increase our full year expectations for revenue and our range for
EBITDA, leading the way to improved subscribers financial returns
during the second half of the year.
We are maintaining our focus on improving financial returns for every
customer we add to DIRECTV. And with that, I will turn the call over
to Kevin McGrath for an update on DIRECTV Latin America.
Kevin McGrath: Thank you, Roxanne. Obviously we are dealing with a
significant amount of economic and political instability in Latin
America. However, I thought I would start with a quick overview on
some of the progress made this year on reducing our cost base. Year
to date, we have reduced our SG&A by approximately $50 million which
we project will result in approximately $100 million on an annualized
basis.
In addition in the area of programming costs, we have already
achieved an excess of $70 million in annualized programming cost
savings. Now, turning to the region's economic and political
difficulties, we find ourselves operating in an increasing
challenging environment. Several of our major markets are in the
midst of economic turmoil.
Argentina continues to face the economic crisis and the peso
continues to devalue although the pace of decline has slowed in the
last quarter. In contrast to our last call when Brazil appeared
isolated from the turmoil in Argentina, Brazil now faces strong
pressure due to the uncertainty surrounding the upcoming election and
the contagioun effect from Argentina.
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The political events of Venezuela have also lead to further
significant volatility in the Bolivar. We are even seeing the Mexican
peso devalue faster than originally planned. We have and we continue
to follow the predictions of the economists and their forecasts of
the exchange rates going forward in these markets.
Having said that, given the significant volatility of the market it
has been difficult to predict the patterns of these exchange rate
movements. In light of the economic conditions, DIRECTV Latin America
has consciously slowed subscribers growth in order to conserve cash.
We are focused on obtaining quality subscribers, reducing churn and
rolling out more competitive offerings in order to profitability grow
our subscribers base.
In the second quarter of 2002, DLA grew by 27,000 subscribers. The
increase is significant given the level of economic and political
instability in Latin America just mentioned and in light of the
decrease experienced by many, if not all, of our competitors.
There is no doubt that we could stimulate additional sales, but we
are instead choosing a conservative approach given the volatility of
the region. The FIFA World Cup 2002 soccer event had a significant
impact on DLAs quarter two results. As you recall, DLA distributed
the World Cup rights in Argentina, Columbia, Mexico, Venezuela, Chile
and Uruguay.
The results of the World Cup were devastated by the economic
situation in the region, with the greatest impact from Argentina. The
total 2002 World Cup advertising dollars spent in Argentina was 13%
of the amount spent during the last World Cup in 1998. The reduced
market size in Argentina, coupled with the devaluation, negatively
impacted Argentina World Cup revenues by approximately $25 million.
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Second quarter revenue was $227 million versus $175 million for the
same period in 2001. The growth in the quarter is primarily the
result of $55 million in World Cup revenues. Net subscribers growth
of 238,000 over quarter two of 2001, which represents a 17% increase,
added approximately $26 million revenue for the quarter. This
increase was offset by devaluation throughout the region, most
significantly in Argentina. DLA continues to aggressively increase
prices to mitigate the negative impact of the devaluation in every
country throughout the region.
Second quarter EBITDA was negative $99 million versus negative $35
million in the same quarter in 2001. The $75 million loss in the
second quarter for the World Cup and the additional impact of the
devaluation were partially offset by a larger sub base and reduced
SG&A. It should be noted that almost all of the 2002 World Cup
revenues and costs were accounted for in the second quarter.
Our April earnings call forecasted the impact of Argentina's
devaluation to be a negative $133 million in revenues and a negative
$95 million in EBITDA. While the devaluation in Argentina has held
within the forecast established in April, the economists did not
foresee the economic and political instability being felt in
Venezuela, Brazil and Mexico. In the second quarter alone,
Venezuela's currency devalued by 34%, Brazil by 17% and Mexico by 9%.
Given the current instability in Latin America, we have revised our
forecast to incorporate the current actual devaluation as well as the
predictions of the economists for the exchange rate changes for the
balance of the year. As a result we have lowered full year revenue to
a range of $745 to $765 million from a range $800 to $850 million.
We have increased the EBITDA loss for the full year to a range of
$135 million to $155 million from a loss of approximately $100
million. Net adds for the year have been lowered to a range of
120,000 to 140,000 from a range of 150,000 to 200,000.
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Our goal in this environment is to mitigate as much as possible the
effects of these devaluations through aggressive price increases,
program provider renegotiations and further reductions in operating
expenses, while continuing to profitability grow our subscribers base
by adding premium quality subscribers onto our service.
Unfortunately, the mitigation actions tend to take time to implement
because of regulations and or market conditions, so the benefits of
these actions will not be entirely felt for several months.
Not withstanding the challenges in the business, we have become the
largest pay TV provider in the region in the last year. More
importantly, we have made huge strides in reducing our cost structure
and refocusing our organization so that when conditions stabilize, we
will be well positioned to take full advantage of rapid profitable
growth. With that, I will turn it over to Pradman Kaul.
Pradman Kaul: Thank you, Kevin. HNS generated second quarter 2002 revenues of
$254 million, which was in line with our guidance and 16% lower than
the prior year. The decline was primarily due to lost sales in our
Carrier segment. As we mentioned when we originally provided guidance
for the year, comparisons for the segment are expected to be negative
throughout the year, primarily due to substantial completion in 2001
of large projects for XM Satellite Radio and the Thuraya Satellite
Telecommunications Company. Business in the Carrier segment is
project driven and affected by the current downturn in the telecom
carrier segment.
HNS continued to demonstrate its strength in the set-top box market
having shipped 512,000 DIRECTV units in the second quarter of 2002. A
24% increase compared to the 413,000 units shipped during the second
quarter of 2001. During this quarter we also passed the milestones of
shipping our nine millionth DIRECTV receiver system since HNS began
production in 1996. This continued a favorable trend in our set-top
box business, as we continue to meet the needs of DIRECTV's growing
subscribers base. As a result, second quarter revenues in our set-top
segment grew by 8% compared to the prior year.
16
Sales to global satellite broadband customers were slightly down from
prior year. However, we believe that we continue to win the majority
of contracts and solidify a leading market position with enterprise
customers. Year to date, our domestic enterprise broadband business
has booked quality orders covering more than 15,000 sites.
For example, during the second quarter HNS booked the following
contracts. Casey's General Store, where we will provide broadband
equipment and network services to approximately 13,000 convenience
stores in nine Midwestern states. Aldi Foods where we will provide
broadband upgrades and additional remote VSAT terminals at over 500
discount grocery stores throughout the East and Midwest.
Marsh Supermarkets, where we will be providing broadband satellite
service to over 280 supermarkets and convenience stores across the
United States. Verizon, which will resell our DIRECWAY products and
services to extend coverage for their enterprise broadband customers.
Bridge Broadband, a wholesale distributor of high-speed Internet
access to small and medium sized enterprises in the United Kingdom,
where we will provide broadband access to ISPs and broadband
distributors.
And E-Cast, a rapidly growing interactive media network in the US
where we will extend E-Cast's existing broadband network to
geographical areas underserved by terrestrial cable and DSL
providers.
The number of consumers at single site SOHO DIRECWAY subscribers grew
to over 123,000. An increase of nearly 11% over the prior quarter and
66% compared to the prior year. During the quarter we implemented
several initiatives aimed at enhancing DIRECWAY subscribers broadband
experience. For example, we launched the "My DIRECWAY" web site to
provide customers with high quality streaming audio, local weather,
account and technical support and a test to confirm their actual
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communications speeds. We view this as a low cost way to build
relationships with consumers and are encouraged by the number of
eligible users that have already registered for this service.
We expanded direct marketing efforts to target potential customers
through direct mail promotions, DIRECTV advertising, emails, print
collateral and point of sale materials. We are also encouraged by new
promotion whereby the customer initially pays only $99 but then
remits a higher monthly fee over the first year.
Based on the performance to date, we are estimating year-end
subscribers at the low end of the previous range and expect to finish
the year with roughly 200,000 subscribers. HNS' second quarter
operating EBITDA was minus $30 million, a $6 million improvement
compared to the second quarter of last year.
All segments posted improvement for the quarter other than Spaceway,
where spending increased slightly as we move closer to launch, and
the Carrier segment, where cost reductions could not fully offset the
margin impact of the sales decline.
Looking forward to the third quarter, we expect sales performance
largely resemble what we experienced up to this point of the year and
for which we have provided guidance at the beginning of the year. The
satellite broadband and set-top segments should grow but continue to
be offset by negative comparisons for the Carrier segment.
Given the continued softness in the telecommunication sector, we
consider it prudent to focus our full year sales estimate at the
lower end of the previous guidance or approximately $1.3 billion. We
expect to continue seeing EBITDA benefits throughout the year from a
growing consumer DIRECWAY subscriber base and focus on reducing both
product and operating costs.
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We project third quarter EBITDA as flat to slightly down versus the
prior year but remaining negative due to investments in the consumer
DIRECWAY and Spaceway businesses. Consistent with our previous
guidance, we anticipate full year EBITDA of minus $50 to $75 million.
Before concluding, I would like to take a minute to update you on
Spaceway. We remain keenly focused on completing the development of
this important program. Progress continues on numerous fronts. We
continue to collaborate with Boeing on satellite construction, with
launch scheduled for July 2003.
This will lead to commencement of commercial service in early 2004.
Development of the ground segment and terminals continues as well.
You may recall that we formed the Hughes Broadband Alliance during
2001 to encourage leading corporations to develop applications that
take advantage of Spaceway's superior functionality.
Intel and Sony signed on with the alliance through the second
quarter, joining existing partners such as Hewlett-Packard, Sun
Microsystems, EMC and Polycom. We believe that this involvement by a
broad array of leading companies illustrates Spaceways unique appeal
and potential. We remain as committed as ever to Spaceway and
continue to be excited about its prospects. With that I will turn the
call back to Jon.
Jon Rubin: Thanks Pradman. Now let's move on to questions you may have
about Hughes second quarter results. Keep in mind that we have
members of the media on the call in a listen only mode. I would like
to remind the media that they are not authorized to quote any
participants on this call either directly or in substance other than
the representatives of Hughes.
In addition we are Webcasting this call live on the Internet and an
archived copy will be kept on our site. Finally, I would like to ask
callers to limit your questions to only one or two until everyone has
19
had a chance to ask their question. At that point feel free to ask
additional questions. Operator we are ready for the first question.
Operator: Thank you, Mr. Rubin. Today's question and answer session will be
conducted electronically. If you would like to ask a question please
press the star key followed by the 1 on your touchtone telephone.
Once again if you would like to ask a question press star 1. And we
will take our first question today from Karim Zia with Deutsche Bank.
Karim Zia: Thanks, I just have two quick ones for Roxanne. Could you talk
about the Radio Shack environment from a marketers standpoint versus
EchoStar? What you are seeing and what your expectations are over
time. And then secondly could you just give an update on the status
of the renewal negotiations for NFL Season Ticket and what you think
the timeline is there? Thanks.
Roxanne Austin: I will take the last one first. On the NFL we continue to
discuss with the NFL. We continue to remain positive about our
ability to continue that very successful relationship. And I think,
Karim, it will continue over the next several months.
If you look at where we are in Radio Shack, we are not going to
comment specifically on market share on any particular retailer. We
continue to feel strongly that we will be able to compete in Radio
Shack along with EchoStar side by side. We haven't seen any
significant effect this quarter.
Karim Zia: Do you feel comfortable with Circuit City and Best Buy
relationships remaining on an exclusive basis at this point?
Roxanne Austin: Yes I do.
Karim Zia: Okay thanks.
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Operator: Our next question comes from Marc Nabi with Merrill Lynch.
Marc Nabi: Good morning, how are you? Just a couple of questions. One,
Roxanne, could you talk about Adelphia and the woes, unfortunately,
they have been having and how it relates to DIRECTV business? And I
have been reading of course in the press and I am sure, as you
already know since you are doing it, increased expenditures in those
markets. Are you seeing people switch over and maybe you could talk a
little bit about that?
Roxanne Austin: Well it is a little early Marc. We just started a campaign in
Los Angeles in the last several days. It was right around the fourth
of July. So we have an aggressive campaign going on in the Los
Angeles area currently. We will roll it out to additional Adelphia
markets based on the traction we are getting here.
We are focused on a multi-room solution offer to those customers
where for $50 or less they can get a two-room system installed. We
are going out with aggressive radio and print media. We are doing
door hangers etc in Adelphia markets basically saying Adelphia
customers come to DIRECTV. And that aggressive tactic will continue
throughout the quarter.
Marc Nabi: Okay also with respect to ARPU, I was very impressed by the
meaningful lift I saw. How much of that relates to the fight versus
the initiatives you have done such as what I will call the
simplification programs announced in February? How the elimination of
lower tier and how it is going to become a higher prices tier that
you had talked about earlier. Maybe you can - can you break that down
somewhat so we can see what that lift is?
Mike Palkovic: Yes, Marc it is Mike. First of all on the Tyson side we
can't disclose the specific buy rates. But that contributed
significantly to our being able to overachieve revenues in the
quarter. You can probably argue that that was a big chunk of the
overachievement. However, also contributing to that was continued
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success in the local markets driving higher margin revenue coming
from those packages, which we talked about consistently about new
packaging strategy
Marc Nabi: Okay, also another question that relates to your - the premium
penetration rates. Obviously with the economy doing what it has been
doing have you seen a drop off as far as people taking the take rates
for HBOs and the other premium networks relative to say even a
quarter ago? Maybe you can talk a little bit about that.
Roxanne Austin: We won't make any specific comments on that Marc, but I will
tell you we haven't seen any significant decline. In fact, that has
been relatively constant. What we do see is that our new pick
strategy, where a customer can pick and choose the premium packages
they want. And each one they select, in addition to the one they
already have, they get a discount on every new one they select going
up the tier. That has had a very favorable response from consumers.
So we think that is contributing as well in the ARPU area. So I think
we are pretty pleased with where we are on both the premium side and
on the package penetration side. I think our total Choice Plus with
locals, being the focus of our entry point in most of our media
campaigns, has been really positive. We're seeing a lift on initial
customers coming in the door at a higher ARPU than one might expect,
given the mass market that we are now in for customers. So overall we
are pretty pleased with what we are seeing so far on the revenues
side.
Marc Nabi: Okay and just one last question. I am sorry, this is for Jack.
Just out of curiosity, when do you and the management team decide
that DSL is not working out? Or that we need to have a strategic
partner potentially in Latin America. I know obviously there are
talks, but when do you throw in the towel particularly on the DSL
front?
Jack Shaw: Marc, I guess I can't comment on when you throw in the towel. I
can tell you that each one of these businesses that you have
mentioned is kind of under continuous review and we are looking at
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all of our options, all of the time. It is no secret that we do need
a partner in Latin America and figure out how to come up with an
economic model that makes sense.
Similarly, there is no question about DIRECTV broadband, the Telocity
venture, but I don't think I should telegraph punches there. Just to
make sure everybody understands, we are making conscious decisions
with the best information we have and we are reviewing all of the
options all of the time.
Marc Nabi: Okay thanks very much for your time.
Jack Shaw: Thank you Marc.
Operator: Our next question comes from Vijay Jayant with Morgan Stanley.
Vijay Jayant: Good afternoon, most of my questions have been answered but
the FCC has still stopped the clock on the merger process. Can you
tell us, have you filed required documents and, (the clock) why
hasn't that started?
Eddy Hartenstein: Vijay, this is Eddy Hartenstein, we have been providing
documents for an ongoing and evolving set of questions. We believe
the end of those questions is coming to a close and we are wrapping
up our response. There is sometimes a few days or even a few weeks
time involved in us getting the response. We feel that the timetable
that we have indicated - as Jack indicated here fourth quarter, is on
track and that the 180 day period of review - the clock period as it
were, will come within that period.
I think that we have made a number of presentations. We can't get
into the specifics of those while the FCC will make public certain of
the information that we have shared. The matter at the Department of
Justice is a more private set of issues between EchoStar and us. But
23
we are responding, we are getting all of the data in, that has been
requested, and expect that phase of the review to be completed in the
next few weeks.
Vijay Jayant: The second question on refinancing - given the debt
maturities in December. If the merger is not completed and the
financial ((inaudible)) is not consummated by then, should we be
nervous about the refinancing? Or can you tell us what you're
thinking on that front?
Mike Gaines: This is Mike Gaines, I don't think you should be nervous.
First of all, we do believe in the unlikely event of no deal that the
sale of PanAmSat and receipt of the breakup fee would be received.
In the event of that not happening though, we are working today
looking ahead with EchoStar to arrange the merger financing - but do
it in a way that would allow Hughes liquidity if there was no deal to
help us refinance those December maturities.
Vijay Jayant: One final question, this is probably more for Jack.
Philosophically, in terms of some of your negative NPV businesses,
which continue to have a weighing on the value of the shares even
though you may have meaningful success as direct to viewer. Just
following up on Marc Nabi's question, what is the process and when do
you really pull the plug, philosophically not telling us when you are
going to do what, but what does it take for you to decide it is time
to call it quits on a business?
Jack Shaw: Vijay, I guess I have to come back to what I said to Marc. I
don't think that you talk publicly about when you pull the plug or
when you turn something down. I guess mostly what I can say to you is
that it is important for me to make sure that you folks know that
these are conscious decisions and we are working on them.
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It is not something that has a definite timeline although I have
timelines in my own head. I believe that in the end you would say
that the timeline probably squares with the completion of the deal at
the end of the year. As to what decisions are made and where we go
forward with what.
You probably know all of these things when you are talking about
philosophy or you are talking about DIRECTV Latin America they need
to be made in conjunction with EchoStar. So I've probably talked too
much but the bottom line is, we are working on them and we are
working as quickly as we can.
Vijay Jayant: Okay thank you very much.
Operator: We will take our next question from William Kidd with Lehman Brothers.
William Kidd: Good afternoon. I guess the first question relates to really
the DIRECTV subscribers base and I was wondering if it's possible -
can you give us an idea of how much -- without numbers just rough --
what the impact of the certificate program was as well as the
Cablevision YES dispute and the change in the Radio Shack
distribution channel?
Roxanne Austin: Radio Shack as I said earlier didn't really have a
significant impact on the quarter. If you look at the certificate
program, we were down on both particular overall sales where we were
implementing that program, William. It probably caused us to miss
growth by about 20,000 or so - 25,000 subs.
The remainder of the effect related to, again, the fluctuating price
increases when we saw about a tenth of a point churn and the primary
reason driven by the price increase.
William Kidd: On a go forward basis, I guess from the discussions I have with
Radio Shack retailers, it seems like the impact of that channel is
quite significant. And I am wondering how much have you allotted or
25
are you expecting EchoStar to represent something like 50% of sales?
Or can you give us some idea of how much impact that you are
currently factoring into your numbers based on the change in Radio
Shack distribution?
Roxanne Austin: No I won't talk about those numbers specifically but what I
will say is that we have looked at that. I think we have been
reasonably conservative at looking at what we think the performance
will be for the balance of the year. And we believe that we have very
strong performance coming out of other distribution that will more
than offset it.
William Kidd: With respect to the transaction Hughes/EchoStar timing, Jack I
guess right now you are saying fourth quarter, but I think the
inclination has been September/October was the time that I thought I
had seen on a number of Hughes presentations. And so I am wondering,
are we still comfortable with October as we have been a couple of
months ago? Or is it more uncertain so generally it is the fourth
quarter now.
Jack Shaw: William I am as comfortable with October as any time I have
talked to you. But in order to give a window I think we are saying
the fourth quarter. And I think a lot of people have been saying that
for a long time. But October - the reason we selected October is that
it is 12 months from when we announced the merger.
And that is really the calibration that we all thought was reasonable
based upon all of the input we could get. So that is where October
comes from. But now I don't think anything has changed. It is just
that - to estimate within a month or two of when something like this
can happen is not an easy thing to do.
William Kidd: I am going to go to a Pradman question but when trying to get a
handle on Hughes free cash flow generation of the out years it is
easy to get a handle on the improvements in DIRECTV because that
business is fairly predictable.
26
But the problem that I seem to have is what is the broadband or
satellite related cap ex with Spaceway beyond its implementation. And
so I am wondering in 2004, 2005 Pradman, what should we be pricing in
as operating costs and how much exposure do we have there?
Pradman Kaul: You know the Spaceway capital expenditures continue into 2003
and about half of 2004. After that, the capital expenditures of
Spaceway are very very small. So we expect to start seeing cash
generation in our business from 2005 - from mid 2005 onwards.
William Kidd: But you know a number of start ups for the sector whether it be
PanAmSat Net-36 where it was on track to lose $100 million in EBITDA
when it was around. Or if you look at even the satellite radio
companies, which lose $300 million in EBITDA in their start up years,
do you think that that type of operating loss is something that we
should expect from Spaceway?
Pradman Kaul: No I don't think so because unlike both of those examples
William we have an existing business, which is generating significant
revenues and some margins. And that business will just transition
into using the Spaceway satellite platform. And obviously I think you
will appreciate the fact that when we own the satellite platforms the
gross margins of the space segment also now becomes part of our
business.
So it really starts generating heavy margins and significantly
positive cash flow when we start putting customers on Spaceway rather
than leasing transponders in our present business. So the fact that
we have hopefully by then at least $4 to $500 million a year of
existing revenue customers generating reasonable profits and margins
and new customers transitioning to where we have the spacecraft
(leasing) economics in our favor too. It makes that business generate
margins and cash flow very very rapidly unlike the other two
businesses you mentioned.
27
Jack Shaw: William, as I discussed with you and others we commit to you
folks that we are going to roll out the Spaceway business plan and
come up to New York and talk to you all about it so you get a real
good review of where we are going.
William Kidd: Great I appreciate that thank you so much.
Operator: Our next question comes from Ty Carmichael with CS First Boston.
Ty Carmichael: Hi, I just wanted to touch base on the retention
marketing cost where they increased about 38% sequentially. Yet the
guidance you gave us was for flat to down in the back half of the
year. And given the trend that you talked about, where you are seeing
increasing take rates from multiple set-top box households. What
gives you the confidence that that number - how do you get your arms
around it - that cost - and gives you confidence that is going to be
flat to down on a quarterly basis.
Roxanne Austin: Well I think we saw such a rush Ty in the second quarter
because again it was the first full quarter coming off of the first
quarter. We did a number of advertising etc where it really raised
awareness about what was going on with our local channel and the
availability of them. We did a number of things on air with
((inaudible)) also to raise awareness of customers about local
channels.
We have done direct marketing through our bill stuffers etc. So we
really raised the awareness in the existing base about the
availability of local channels. And now if they can truly cut the
cord and get rid of cable. And I think that we saw a real run on
second sets and multi sets in the second quarter because of that.
I do think the trend will continue, which is why we are saying
approximately $100 million for the third and fourth quarter. It is an
estimate, so you could potentially see an even higher numbers of
28
customers wanting to take second and third and fourth sets. But that
is our best guess based on where we sit here today.
Ty Carmichael: Okay is there an, okay, assumption on the line that
estimate - particularly what percent of your customers base you see
upgrades per quarter?
Mike Palkovic: Ty what we saw in the second quarter was approximately 3%
of our installed base going out and buying boxes. As Roxanne said, we
are estimating that it won't continue that high. But right now until
we have a couple of quarters of experience we just kind of estimating
what that impact will be going forward.
Roxanne Austin: So we have increased our number, from where we originally
thought it would be more in the $85 million range. So we have added
about $15 million there.
Ty Carmichael: And can you talk a little bit about your PVR effort,
particularly TiVo, and how that went in the second quarter and if
there are any updates on the second-generation product that is coming
out. Just your plans on that front? Is it kind of a holding pattern
here until we get some certainty on the merger or are you going to
continue to?
Roxanne Austin: No actually we are aggressively going after - because you
know we signed a new agreement with TiVo which allows us to price and
package and market the PVR service and brand it however we choose to
do so. That will be rolling out in the last half of this year.
You will see us become very aggressive with that. Once that is
available and on track to meet our expectations of being probably of
being close to rolling out at the beginning of the fourth quarter.
29
Ty Carmichael: Okay if your existing customers want to get that TiVo box
are you going to subsidize that box as well if they agree to a full
year agreement?
Roxanne Austin: We will have some promotions related to existing customers. I
think one of the things that we do see is the opportunity of our
existing base is our retention effort to have PVR - more penetration
of PVR boxes in particularly our high end homes. So we will do some
customization of that. We have factored that into our numbers for the
rest of this year.
Ty Carmichael: Okay and then lastly is there any plans to expand the
certificate plan beyond the retailers that you are offering it in
today?
Roxanne Austin: I think we will if we believe that it works effectively. I
think we have some learning to do. Obviously, we are just getting it
started and we are trying to understand it. We will need to get it up
running and then testing the - first of all what is happening at
retail and second of all what is happening in a similar environment.
And assuming that goes well we certainly would consider it at other
retailers. We talked - we actually had a test at one and we have
talked with several others about it. I think many have an interest in
it. I think we want to be sure that we have it right before roll it
out more broadly.
Eddy Hartenstein: Yes and Ty it is unlikely that there would be any
significant additional converts until after the end of the year given
the kind of IT changes and sales floor retraining that has to occur
with an individual retailer.
Ty Carmichael: Thank you very much.
Roxanne Austin: Thanks Ty.
30
Operator: Our next question comes from Armand Musey with Salomon Smith Barney.
Armand Musey: Hi good afternoon guys, when I look at your ARPU year over
year second quarter last year was $58 and this quarter it is $58.10.
You had identified some effects of the price increase as well as more
local to local. That doesn't imply much year over year growth. How
shall we think about long term ARPU growth for DIRECTV? Is it 1%, 3%
or what? How fast do you think you can grow ARPU?
Roxanne Austin: Well again Armand I think if you look at where we were
headed. We had about three quarters when we saw ARPU decline. And we
were concerned about that and I think we have turned that decline
around with our repackaging effort. Our focus on local channels, the
mirroring fees that we are seeing on the multi-set take rates and of
course the Tyson fight this quarter.
But if you look at it I think we see an incredibly healthy trend
going there which is why we upped the guidance from $57 to $58 for
the full year. It is now $58 for this year. And I think future
periods will be determined on a number of things. What is happening
overall with price - potentially with price increases, what may
happen with PVRs and other advanced set-tops.
But those will be the types of things that will drive revenue
increases I think in the future as well as continuing to see what
happens beyond - I won't give any specific guidance beyond '02 since
we don't give guidance beyond '02.
Armand Musey: Okay the second question is for Pradman, in the HNS how do you
see the VSAT market shaking out right now. Obviously one of your big
competitors there, Gilat, is undergoing some challenges. Are you
seeing HNS picking up more market share? And if so can you please
explain the year over year revenues decline?
31
Pradman Kaul: Yes I think when the numbers come out for 2002 it will show
that we have increased our market share. But I think the reason that
you see the numbers not growing as fast as the market share is that
the cost per VSAT of the cost of service per site has been going down
significantly faster than the rate at which we are selling more
terminals.
So for the long term I think that is good because we have a much
larger customer base and we can now start offering additional
services to increase our revenues per site. In the short term, it is
impacting enterprise revenues from growing at the rate we would like
to see it grow.
Armand Musey: Okay and very quickly has Boeing actually started bending
metal for the Spaceway satellites and how long have they been doing
that for?
Pradman Kaul: Oh yes if you go - it has been going through system integration
as we speak right now. And a significant amount of the hardware for
the first satellite is built. In fact, if I am not mistaken, I would
estimate probably 80 to 90% of the hardware of the first satellite is
built at this stage.
They have been building - bending metal as you say - for at least
nine months at this stage approximately. I was there about a month
and a half ago and personally saw a significant amount of first
satellite being put together as we spoke.
Armand Musey: Thank you very much.
Operator: Our next question today will come from John Stone with Ladenburg
Thalmann.
John Stone: Hello my first question is kind of circling back to an earlier
question asked about Cablevision and I didn't hear anything so I
wanted to try to get some ideas to what sort of benefits you thought
you received from the disagreements between YES and Cablevision.
32
Roxanne Austin: Well before the start of the season and right at the start of
the season obviously we saw some significant improvement in the New
York area. We believe that as the Pennant race potentially heats up
here later on, that there will be some more opportunity there. But
obviously it is slowed from its initial just because of the fact that
we are up and running in the season.
John Stone: Do you have any estimate in terms of how many subscribers that
it effected in terms of your growth this quarter?
Roxanne Austin: No but we did see - again we continue to see growth in our
large markets like Los Angeles, New York, Chicago, Miami, San
Francisco and those continue to be strong market for us. And New York
is performing very well for us.
John Stone: Okay shifting gears a little bit, my next question is my
personal feeling is that part of the competitive environment that is
being countered in the Radio Shack channel has to do with the fact
that EchoStar offers both purchase and leasing plans and DIRECTV has
been focused on purchase plan for customer equipment. Does DIRECTV
plan on offering a leasing plan? And can you give us some idea on
when we might be seeing one?
Roxanne Austin: I am not so sure I would characterize the competitive
environment as lease versus purchase. Actually we offer a lease plan
in our direct channel and very few customers elect to take it. And if
you look at what I believe competitively, our competition has offered
a multi-room solution. But if you look at what has happened, relative
to the number of television households with multi-sets, the average
number of TVs in a household in the US today is 2.4. And the average
number of TVs in a DIRECTV household today is roughly 3.
So you will see that now that we have a price point that is very
attractive of one box installed at $49 or less at various retailers,
a two box installation at $99 or less and again installed and I think
33
that is very cost effective. And customers are looking at that
saying, "That is very attractive to me, why lease?"
And so from an economic standpoint as I said earlier if you look at
our internal rates of return, first of all we pay - with the
mirroring fee alone - we pay the cost of offering that box - assuming
the customer again signs an annual commitment for a multi solution
or an existing customer signs an annual commitment. And we drive
higher ARPU because those tend to be higher revenue homes.
So again we think the economic model works very well and we have as
the purchase model. And I don't think that that is any issue relative
to competition.
John Stone: Okay my last question, this would be more for Kevin related to
results in the last quarter at DTVLA can you give us some idea of
what is happening in terms of churn? And also since some of your
subscribers acquisition costs are priced in local currency those
should presumably be benefiting from the devaluations. Can you give
us some visibility as to what is happening on the SAC front?
Kevin McGrath: John, the churn for the quarter was 3.1% but if you exclude
Argentina from that, you end up with a number of about 2.6%. The -
clearly the number is significantly affected by the situation in
Argentina. And you are absolutely right with regard to the SAC cost.
On a number of fronts we have been able to manage the SAC costs down.
Some of it is a result of devaluation but also some of it is a result
of just being very tough about the advertising dollars that were
spent. Our out of pocket SAC costs, which was running about $180, is
around $130 now. And I expect it will remain at that level or go
lower for the balance of the year.
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John Stone: Just to clarify when you say out of pocket SAC cost could you
give me a definition for that term?
Kevin McGrath: Yes it excludes the box cost which, as I think you know we
have a lease model, and one of the things that we have done, which is
a real success over the course of the last year is we have
significantly increased our recovery of churned receivers including
receivers that have been out there for a while. So where last year we
consumed almost 700,000 in receivers, this year we are going to
consume - we purchased almost 700,000 in receivers.
This year we are going to purchase only 100,000 and we are going to
make up the difference associated with churn and with new customers,
simply out of the inventory we have. And frankly we think that that
will continue forward into next year. So in quoting the $130 price
because we don't need to go out and buy a new box we really do have
an acquisition cost per subscriber of about $130.
John Stone: Great thanks a lot.
Operator: We will take our next question from Blaine Marder with Iridian Asset
Management.
Blaine Marder: Hi, I was wondering how we might think about cash burn in
2003. Just from your existing business just forget about the merger
for a second. With what you are doing now how might we think about
cash burn? I see analysts looking for almost kind of a double in
EBITDA. And how much of that do you think will actually fall down to
free cash flow? Thanks.
Mike Gaines: This is Mike Gaines I think we believe that for 2003 we
expect free cash flow to basically be break even. That will be driven
by improvements in DIRECTV and cash flow and I think reduced capital
expenditures. So that is where we see '03 going.
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Blaine Marder: And how much might it cost you in your estimation to get out
of some of these business should you choose to do that? I mean are we
talking about restructuring and severance and the like that could
show up on the cash flow?
Mike Gaines: Well I think as Jack alluded to we are not to that point yet so we
don't have estimates for those to go over with you.
Blaine Marder: Thanks.
Operator: Our next question comes from Mitch Julis with Canyon Capital
Advisors.
Mitch Julis: Yes, on the set-top box issue I was wondering when do you
envision a solution whereby a household doesn't have to deploy
multiple boxes so that it would be cheaper for the household and also
cheaper for you since it has been a marketing strategy for you guys
to subsidize those boxes.
Eddy Hartenstein: I think what you are looking at - there are two answers
there is the technical solution, which could be more illusive than
not, in terms of price efficiency, and then there is the marketing
solution. Right now, as Roxanne indicated, the offer out there is $49
or less or $99 or less for a one or two set solution. If you are
talking about a wireless solution within a household those are second
and perhaps even third generation incarnations of a home server type
of unit that would distribute on a wireless basis inside the house.
There are working breadboard models of that amongst some of our
manufacturing partners, is indeed even internally, that we are
looking at. It is not clear - there is not a map yet - a product map
that we have decided on internally.
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And as the merger and transition - I should say the pre-merger
transition meetings are proceeding between us and EchoStar, we are
both learning a lot of information on where that might go and how
quickly it might proceed. Right now, it is the more relative brut
force solution that we are proceeding with.
Mitch Julis: Okay and then I also wanted to follow-up on two other items.
One, being status of the NRTC some of the stats that you gave I guess
flat subscribers - are there any other contacts that you want to give
us on the NRTC situation. And then the last question is just on
Blockbuster and whether that as a channel has continued to show
itself as important to you in terms of what it added to the quarter.
Eddy Hartenstein: This is Eddy, I will take the first one. We don't have
anything to report on the status of NRTC or any of their affiliates -
their primary one being a publicly traded company, Pegasus. They will
have their own analyst call I presume in the coming weeks or months.
Mitch Julis: But in your press release you show that as flat essentially is
that right? Is that the subscriber count? Am I wrong in the way I
interpret that?
Mike Palkovic: Yes this is Mike, their results, which we can see in the
billing system, are effectively flat for the second quarter.
Mitch Julis: Okay and then on Blockbuster?
Roxanne Austin: Blockbuster continues to be a strong distribution channel for
us. And will continue to do so. We are seeing strong results there.
They did have a light slowdown sales this quarter solely due to the
fact that we had the certificate program implemented there.
Mitch Julis: Thanks a lot.
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Operator: Our next question comes from Patty Reali with Gartner Data Quest.
Patty Reali: I think my question has been answered thank you.
Operator: We will go next to Sturgis Woodbury with Oppenheimer Capital.
Sturgis Woodbury: Yes I apologize if somebody has already asked this
question. But I am curious about the churn because Roxanne in the
first quarter conference call the words I had from the transcript
were - the churn was 1.6%, which favorably compared with the fourth
quarter we experienced. And while - the statement was while we always
feel there is room for improvement. We felt very good about how churn
was looking. That was back in April and how it would look for the
rest of the year.
Yet the churn looked like it ticked up in spite of that comment. And
I am just wondering why you guys didn't really broadcast the up tick
in churn given you knew the pricing - lowest tier pricing package was
on the way out. And what should we expect for churn and how can we
have confidence in that expectation going forward.
Roxanne Austin: Well it was a one-time effect in the select choice price
increase. And while we do...
Sturgis Woodbury: When was that put into effect?
Roxanne Austin: It started in this quarter.
Sturgis Woodbury: But when in this quarter?
Roxanne Austin: In April.
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Sturgis Woodbury: But I mean you knew that when you made that prior
prediction about churn?
Roxanne Austin: Yes and we were looking at churn being roughly flat. We
thought we could perhaps do some things to off set it. Actually it
was slightly higher and had more customers than we expected to have
in terms of churn related to it.
But overall if you look at it from a margin improvement standpoint we
still have very strong margin improvement from the move. So we are
confident that was a one-time blip. We saw that in sort of middle to
late April and May timeframe. Starting to slow as we went into June.
So we think it was a one-time effect that again has now stabilized.
And we will have a net margin improvement as we go forward.
Sturgis Woodbury: So your expectations on churn for the remainder of the year
would be?
Roxanne Austin: I think we will be roughly flat in the third quarter at 1.6%.
Again being within our range of...
Sturgis Woodbury: Was the churn actually 1.6% for the quarter? What I
calculated it looked like it was closer to 1.7%.
Roxanne Austin: It was 1.7% for the quarter, taking out the one time effect
it would be 1.6%.
Sturgis Woodbury: So you are forecasting an improvement then in the third
quarter.
Roxanne Austin: Compared to the second quarter yes.
Sturgis Woodbury: And you hope to finish the year at that level as well?
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Roxanne Austin: At that level or perhaps a little better.
Sturgis Woodbury: Okay let's hope so thank you.
Eddy Hartenstein: Sturgis I think in - I apologize because I am not sure
what you heard during the call here but there were other things that
Roxanne pointed out such that every month that we proceed more and
more people are on a 12-month commitment that has been going on. And
more and more second set boxes and more and more local channels.
So those three factors in combination I think are what give Roxanne
and her team the confidence that the 1.6% number or better perhaps is
achievable for the balance of the year.
Sturgis Woodbury: Great thank you Eddy.
Operator: We will go now to Victor Hawley with Reed Conner & Birdwell.
Victor Hawley: Yes most have been asked but I do have a question regarding
the World Cup deal that you guys had. What have you guys learned from
it in terms of your willingness to take on big event - one time event
type things like this in the future?
Kevin McGrath: Well clearly this is not the type of thing we should be doing.
Victor Hawley: I kind of take it then you wouldn't be doing that in four years?
Kevin McGrath: Well no unfortunately we own the rights for the next World
Cup in 2006. As you probably know from seeing some of the public
documentation virtually everybody in the world is going to have to
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renegotiate with Kirch and FIFA as to the 2006 World Cup based on the
results of 2002 and obviously that will include us.
Victor Hawley: Okay thank you.
Operator: We will go now to Leon Cooperman with Omega Advisors.
Leon Cooperman: Thank you. I am trying to find the right way to phrase
this. I read all of these research reports where basically endless
that cover the sector. And they all seem to say the same thing that
you ought to bet with EchoStar because EchoStar is managed with a
superior fashion and that they have all to gain and nothing to lose.
If the deal doesn't go through they have kind of mobilized us you
know in this critical period of time. And if the deal goes through it
is a major win obviously for both companies. I kind of look at
ourselves we have a superior balance sheet. And I am just wondering
what steps are we taking to close the perceived gap between the
management teams of Gemstar and EchoStar?
Are people's comments regarding quality management backward looking
and not in fact forward looking. It is obviously a subjective comment
on your part. But I am curious kind of how you see the response to
these observations where everybody seems to come out and say that you
bet with the space you bet with EchoStar you don't bet with GMH.
Jack Shaw: Thank you very much, this is Jack. We obviously don't
necessarily agree with that perception. We believe in the past that
people coming to that conclusion were very well founded because we
weren't doing as good a job as we should have. But going forward we
think we know what makes the business tick, we think we know the
issues that are important.
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We have had four straight quarters in DIRECTV where we have done what
we said we would do or within 20,000 subscribers this quarter. So I
think that we have this business under control. I also think that the
issues remaining within this business - let's focus on DIRECTV - are
issues that are quite understandable. They are issues that we have a
lot of room to improve on.
And when people say that an EchoStar is kind of in a win/win position
obviously we believe that the two companies are better off merged
together because we are going to be a more formidable competitor to
cable. But I believe that Hughes' DIRECTV in the United States will
be a very formidable competitor on its own rights.
The issue is that either EchoStar and ourselves can only compete
totally with cable where we are offering local channels and all local
channels. And because of the spectrum issues we can't really do that
unless we are put together. But I believe that should the merger not
occur if you would look at our balance sheet - at the Hughes balance
sheet and that you look at our performance over the past year. And
hopefully by then it is five or six quarters.
And you look at what we have done and what we can do to improve our
performance I like our hand pretty well. And I think our management
team can stack up against anyone now. And I certainly would not have
said that to you a year ago.
Leon Cooperman: So I guess the answer is a backward look as opposed to
forward-looking comments.
Jack Shaw: That is my feeling yes. But obviously I am a little bit biased.
Leon Cooperman: Well I suspect you would be, that is good to hear that you
feel that way though, thank you very much.
Jack Shaw: Thank you.
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Operator: We will go next to Steve Mather with Sanders Morris Harris.
Steve Mather: Good afternoon with respect to a non-merger could you give us
a little guidance on the timing of the PanAmSat transaction?
Jack Shaw: Larry Hunter, are you there?
Larry Hunter: Yes.
Jack Shaw: Larry Hunter is our assistant general counsel who is in Japan
right now. But we put him on this phone call exactly for those kinds
of questions.
Larry Hunter: Great, the PanAmSat transaction - again we expect the merger
to occur. So we are not looking at a PanAmSat transaction. But if it
were to occur it would be shortly after the regulatory denial. So
within a month or two.
Steve Mather: And then some time period for it to actually to close.
Larry Hunter: Yes.
Steve Mather: Six months or so.
Larry Hunter: Yes.
Steve Mather: Okay that seems pretty fast one to two months. Let's see that
is great, my second question is just with regard to expansion to
local service. Roxanne can you give us the latest?
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Roxanne Austin: Yes we had announced you know earlier in the year that we
would have ten new markets launched this year. We are now in 44
markets. We will be adding Oklahoma City, Buffalo, New York, Grand
Rapids, Michigan and Norfolk, Virginia will launch this summer.
Knoxville, Tennessee will launch in September.
And we will have two additional markets to be named and launched
before year-end. But we haven't publicly disclosed those yet.
Steve Mather: And then I would imagine more in '03 - and especially after
the launch of the DIRECTV 7S?
Roxanne Austin: Yes we have to wait for the launch of DIRECTV 7S before we
can launch any additional local markets.
Steve Mather: Beyond 50?
Roxanne Austin: That is correct.
Steve Mather: Or 51?
Roxanne Austin: yes 51.
Steve Mather: And my last question possibly for Pradman. Pradman the
DIRECWAY residential SOHO group, we talked a little bit about the DSL
and things like that earlier in the call. But these folks that have
the DIRECWAY residential, how easy are they to transition to
Spaceway? I mean transition without new equipment or would you supply
some kind of discounted equipment and hold those folks around for a
year and a half until the system was fully operational.
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Pradman Kaul: Well - yes I think our plan currently is that we will be
keeping those customers - most of the existing customers in the
residential segment on Ku-band satellite unless they wanted to
migrate to Spaceway. In which case, we would charge them for the
migration. And take on new subscribers on Spaceway. Now in terms of
the equipment beginning I think in September, all new terminals that
we will be shipping - the antennas will be Ka compatible so you won't
have to change the dish, if we choose to transform subscribers from
existing Ku band system to Spaceway.
But the rest of - the actual transmitter - the transceiver - would
have to be changed. And the indoor modem would have to be changed.
Steve Mather: Okay the only reason I ask this is a lot like the DSL
business it is not yet a money winner and I was just thinking about
how much it would cost to convert those.
Pradman Kaul: I think our strategy is to keep those folks that have
((inaudible)) on the Ku band. I don't think that would apply.
Steve Mather: Okay thank you. My last question is just briefly on the
potential final payment regarding Boeing. Is there any - you did
mention that it would be pushed back into '03. Is there any range? I
know the top end is $750 million as far as I understand.
Mike Gaines: We certainly don't think it is anywhere near that number but
that will be something that is subject to the arbitration. But I
don't see anything in the magnitude of $750 that is for sure.
Jack Shaw: The low end is?
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Mike Gaines: Well we do know that we owe them $165 million plus interest
for the basic kind of calculated price adjustment. But then there is
a dispute beyond that. And that is what we will be going to
arbitration over.
Steve Mather: I see all right thank you very much.
Operator: That does conclude today's question and answer session. Mr. Rubin I
would like to turn the call back over to you for any additional or
closing remarks.
Jon Rubin: Thank you all for joining us today. If you have any further
questions, please contact me or our investment relations department
at Hughes or PanAmSat. Thank you and have a great afternoon.
Operator: This concludes today's conference. You may now disconnect at this
time.
END
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